06/24/2025
$SNA Q2 2023 Earnings Call Transcript Summary
The Snap-on Incorporated 2023 Second Quarter Results Conference Call has begun and Sara Verbsky, Vice President of Investor Relations, is on the call. Nick Pinchuk, Snap-on's Chief Executive Officer, and Aldo Pagliari, Snap-on's Chief Financial Officer, will provide their perspectives on the company's performance. Slides to supplement the discussion can be accessed online and any forward-looking statements made during the call are subject to change. Non-GAAP measures of financial performance are also included.
In the second quarter, Snap-on saw a 4.8% increase in sales, with organic activity up 5.6%. Earnings increased 12.3%, and Nicholas Pinchuk discussed the headwinds and obstacles that Snap-on faced in the quarter. He also highlighted the success of the company in continuing to grow beyond pre-pandemic levels. Additional information about the quarter can be found in the earnings release on the website.
In the second quarter, Snap-on saw a strong overall consolidated operating margin of 26.8%, up 130 basis points from last year, and an increase in EPS to $4.89, up 14.5% from last year's $4.27. The automotive repair market is also favorable, with miles driven, spending on vehicle maintenance, technician count, and technician wages all increasing. This increase in demand is leading to a competition for technicians and higher wages. Customers have expressed enthusiasm for Snap-on's services, as seen at the NHRA Thunder Nationals.
The C&I group is taking the business out of the garage and into sectors where custom tools are often required and there is a high penalty for failure. The U.S. is seeing progress in the aerospace, military, natural resources, and industrial transportation sectors, while there are tepid spots across the globe due to the Ukraine war and weaknesses in some of the agent Pacific operations. Despite this, the general rise of critical industries is a large positive in the period.
Snap-on's industrial division is performing well and taking advantage of their ability to customize products for a variety of applications. They are continuing to capitalize on potential opportunities, engaging with customers, creating new products, and increasing franchisee selling capacity and manufacturing capacity. The C&I Group reported a 1.4% increase in sales, with organic volume up 3%, though there were some shortfalls in certain areas. Margins are strong and rising, and OI was up 12.4%.
Snap-on's operating margin was 16%, a gain of 160 basis points over last year, and the industrial division saw significant sales progress. The military business also recovered, capturing long-term contracts due to Snap-on's product line and U.S. production. The specialty tools operation also advanced, offering precision torque products and automated tool control (ATC). ATC scans toolboxes and drawers, recording which tools are required and removed, and helps prevent leaving behind tools in tight tolerance mechanisms.
The Tools Group had a positive quarter with substantial profitability, driven in part by the rise of Snap-on critical industries and the release of the next generation of ATC. The franchisees and customer feedback suggest that vehicle repair is robust, and the Tools Group's operating earnings and margin were up significantly compared to pre-pandemic levels. Hand tools, a high margin item, also saw an increase in the period.
The Tools Group at an Elizabethton, Tennessee plant developed a 3D tool, the SWR5 90-degree special Crowfoot Wrench, to help diesel technicians access sensors on Class 8 semi-trucks without risking damage. Additionally, they designed two new adapters to integrate with their existing ball joint press to reduce repair time per procedure at Subaru dealerships. The Tools Group is constantly innovating to solve new repair challenges, such as those posed by internal combustion, plug-in hybrids, and EV platforms.
The Tools Group had a successful quarter due to the growth of big ticket sales, which was likely due to the KMP1023ZLT7, a 72-inch Master Series Roll Cab painting with a unique green envy scheme. The box has 14 drawers, 5 power outlets, 2 USB ports, and a 2-inch speed drawer for organizing small parts. Additionally, RS&I Sales increased 8.4%, due to gains in equipment and OEM essential programs as well as the successful rollout of a new handheld diagnostic platform.
Snap-on's operating income in the second quarter was up 14.7%, and the operating margin was 24.4%. This was largely due to the launch of their new SOLUS+ diagnostic platform, which has features such as a two second boot up and 8-inch colored touch free with higher resolution. Additionally, Snap-on's undercar equipment division has been a key driver of their success, as their Challenger Lift Operation in Louisville offers thousands of SKUs to meet the specific challenges of EV lifting. This approach has driven Snap-on's gains, and they expect it to continue.
In the second quarter of 2021, Snap-on experienced strong growth and profitability due to their efforts to improve relationships with repair shop owners and managers, expand their product offerings, and weld RCI everywhere. Consolidated net sales increased 4.8%, with 5.6% organic growth, and gross margins improved 200 basis points from 48.7% to 50.7%. Operating expenses as a percentage of net sales increased 40 basis points, while operating earnings before financial services grew to $277 million from $246.6 million in 2022.
In the second quarter of 2023, the C&I Group saw a 3% organic sales gain with double-digit growth in sales to customers in critical industries. Gross margin improved 220 basis points to 39.5%, largely due to increased volumes in the higher gross margin critical industry sector, pricing actions, lower material and other costs, and RCI initiatives. Operating margin before financial services was up 23.3%, including 30 basis points of unfavorable foreign currency effects, and the operating earnings margin was 26.8%. Net earnings of $264 million or $4.89 per diluted share, including $0.09 share impact from unfavorable foreign currency, represented a 14.5% year-over-year increase in diluted earnings per share.
Operating expenses as a percentage of sales increased 60 basis points in the quarter, while operating earnings for the C&I segment increased and the operating margin improved. Sales for the Snap-on Tools Group increased 1.1% organically, with gross margin improving 300 basis points due to higher sales volumes and pricing actions, and operating expenses increasing. The RS&I Group saw an 8.5% organic sales gain, partially offset by unfavorable foreign currency translation.
The RS&I Group reported an organic increase in sales of undercar and collision repair equipment, sales to OEM dealerships, and diagnostic and repair information products to independent shop owners and managers. This increase in sales resulted in a 180 basis point improvement in gross margin to 45%. Operating expenses as a percentage of sales increased 40 basis points, resulting in an operating margin of 24.4%. Revenue from financial services increased $7 million to $93.4 million, with financial services operating earnings of $66.9 million, including $200,000 of unfavorable foreign currency effects. Provisions for credit losses increased due to the growth of the portfolio and a return to pre-pandemic rates, but decreased sequentially by $500,000.
In the second quarter of 2023, the average yield on finance receivables and contract receivables were 17.6% and 8.6%, respectively, and loan originations increased by 6.1%. The 60-day plus delinquency rate of 1.3% for U.S. extended credit is down 20 basis points from 2022. Trailing 12-month net losses of $46.4 million represented 2.45% of outstandings at quarter end. Cash provided by operating activities was $270.3 million, and net cash used by investing activities included net additions to finance receivables of $68.6 million and capital expenditures of $25.8 million.
RCI reported strong performance in vehicle repair, with growth in both dealerships and independent shops. They also reported advances in helping customize shops to new vehicles, and an operating income margin of 24.4%, up 140 basis points from the prior quarter. Net cash used by financing activities was $136.5 million, and the company had a cash position of $871.3 million and a net debt-to-capital ratio of 6.5%. Capital expenditures for the year are expected to be around $100 million, and the effective income tax rate is expected to be in the range of 23-24%.
Snap-on achieved strong results in the quarter, with overall performance being "attention-getting" and organic sales rising 5.6%. Operating income (OI) was almost double pre-pandemic levels, with OI margins of 26.3%, up 240 basis points, and an EPS of $4.89, both new levels. This success was attributed to the power of their approach, which focused on safety, quality, customer connection, innovation and rapid continuous improvement. The results demonstrate the strength and reliability of the Snap-on team, and the company expects to continue its upward trajectory throughout the remainder of this year and into 2024. The CEO congratulated and thanked the associates and franchisees for their unwavering focus and extraordinary achievements.
Nick Pinchuk explains that the decline in Power Tools in the quarter was due to the mix of products they got exceeding their capacity. This was partially due to people anticipating the launch of new power tools in the future. Hand tools and tool storage had their biggest quarters ever, with the tool storage factory supplying both the Tools Group and the critical industries that needed boxes. This put a lot of pressure on the factories.
Nicholas Pinchuk states that the sell-through of their products was better than expected in the quarter, and that customers are confident enough to purchase big ticket items and longer payback items. Expansion of their tool storage and hand tool plants are scheduled to be completed by the end of the third and fourth quarters respectively, and the diagnostics numbers were also good.
The gross margin was very strong due to supply chain clearing, with spot buys still coming through. The biggest issue was paying 2-3x the original price for items, leading to inventory buildup. This has now cleared, allowing new value products and RCI to shine through. The expansion of SOT over the past few years has increased the actively serviced technicians, and this may open the gate to add franchisees and increase the US franchisee count.
Nicholas Pinchuk and Christopher Glynn discuss the stability of Snap-on Tools' franchisees. Pinchuk states that there has been a slight decrease in franchisees this quarter, but that the company has 3,400 franchisees around the country and does not plan to add any more. He also notes that the turnover rate is about 10%, with 5% of that being retirements. Aldo references the raw material benefit that has resulted in huge incremental margins in both Snap-on Tools and C&I.
Nicholas Pinchuk and Aldo Pagliari of Snap-on discussed the unexpected good margins that were reported, and Pagliari explained that most of the pricing actions had already been incurred and that the benefit of material cost reductions had accrued to the margin. Pinchuk added that Snap-on prices generally don't go down, and MacGregor asked if the margin benefit was a result of capacity constraints forcing the mix towards more customized tools. Pinchuk suggested that this could be part of the reason, but the main factor was the benefit of material cost reductions.
Nicholas Pinchuk explains that improvements in material costs and customized products have helped abate some of the issues with capacity constraints and SG&A costs, but the main factor is RCI. Despite this, organic growth was only 1% and the gross margin increase was likely due to cost reductions rather than revenue growth.
Nicholas Pinchuk and David MacGregor are discussing the trend in the total number of active stops across the Snap-on system in the U.S. Pinchuk believes the trend is moving upwards, but they are more focused on the number of technicians than the number of stops. Luke Junk then asks a question about capacity constraints and supply chain issues in the Tools Group, to which Pinchuk responds that they expect to be in a better position in the fourth quarter.
Nicholas Pinchuk comments on the trends in RS&I, C&I, and power tools for Europe and Asia-Pacific. He notes that the U.K. and the Tools Group have come back from their slump last year, and that critical industries in C&I are doing well. However, other businesses in Europe are affected by concerns over the war, and Asia-Pacific is having difficulty creating a recovery from COVID. He notes that China is holding its own.
Nicholas Pinchuk from Snap-On Tools Group discussed the capacity constraints they are facing in the tool storage and hand tool product segments. He noted that certain versions of the stock are at an all-time high, which has caused issues with promotion and the inability to meet the demands of certain packages. He believes that Asia will work its way out of the issue more quickly than Europe.
In this quarter, the industrial business encountered a "Gordian knot" of shipments due to an increase in demand for tool storage and hand tools. These hand tools were not standard-standard products, but rather shorter production run hand tools that require machines to be stopped and started, making it difficult to meet demand. This shift in the mix towards hand tools and tool storage was due to people waiting for the new products.
Nicholas Pinchuk of Snap-on indicated that collision repair accounts for 20-25% of the company's RS&I equipment business, which is one-third of the total business. This percentage is growing, as the equipment business has seen double-digit growth and increased margins. The conference call ended with Sara Verbsky thanking the participants and noting that a replay of the call would be available shortly on the Snap-on website.
This summary was generated with AI and may contain some inaccuracies.