The operator welcomes participants to the Snap-on Incorporated 2024 Second Quarter Results Conference Call and introduces Sara Verbsky, Vice President of Investor Relations. Nick Pinchuk, CEO, and Aldo Pagliari, CFO, will discuss the company's performance. Slides are available for reference and non-GAAP financial measures will be discussed. The presentation may include forward-looking statements and SEC filings should be consulted for more information.

The speaker, Nick Pinchuk, provides an overview of the company's second quarter results and highlights the success of their Repair Systems & Information (RS&I) and commercial and industrial (C&I) groups. He also mentions the challenges and uncertainties faced by their technician customers but emphasizes the company's resilience and ability to adapt to different industries and markets. The North American market had mixed results, while Europe showed signs of recovery and the Asia Pacific markets made progress despite challenges in China.

In the second quarter, the company's sales were slightly lower than last year, but still had a strong operating income margin. The financial services sector also saw growth. The market for automotive repair remains favorable due to increasing complexity in design and technology, as well as an aging car park. Vehicle OEMs, dealerships, and independent shops are investing in tools and equipment to keep up with the demand for repairs.

In the fourth quarter, the RS&I Group of Snap-on expanded their reach into OEM dealership programs and strengthened their position in independent garages. Repair shop owners and managers are in a strong position and the outlook for Snap-on is positive. The demand for technicians is strong and their wages are healthy, but their confidence in the future is still poor due to factors such as economic uncertainty and political issues. Technicians are focusing on quick payback purchases and are hesitant about larger, long-term investments.

The Tools Group is focusing on developing products and selling efforts that match customer preferences. The C&I group operates in critical industries, with a significant international presence. In the past quarter, the critical industries segment saw growth in military, aviation, and education, but Europe and Asia Pacific were mixed. Demand for customized solutions is increasing, and C&I is well-positioned to meet this demand. Sales for C&I were $372 million, with a 1.2% organic sales gain, driven by higher activity in critical industries and gains in Asia.

The C&I division of the company had a strong performance, with a record-breaking OI margin thanks to the success of their International division. The addition of a new building for industrial custom kitting has paid off, with the division seeing double-digit growth and profitability. The company continues to invest in critical industries and expand capabilities, such as their custom tool machine in Kenosha, which has allowed them to design and produce specialized tools for specific tasks, such as visiting oil drilling sites. This has resulted in increased efficiency and success for the company.

In the second quarter, Snap-on introduced a special oil rig pipe wrench that reduced rework and increased efficiency in the oil and gas sector, further solidifying their reputation in the industry. They also launched a new line of 14.4-volt micropower drills for aviation and general manufacturing, with different RPM ranges for different tasks. The industrial micro drills have a 2-stage design for accuracy and reliability, and have received positive feedback from customers. The C&I sector also had a strong quarter, expanding into new industries and maintaining profitability. In the Tools Group, sales decreased by 7.7%, but gross margins remained almost flat due to new products, manufacturing efficiencies, and RCI.

The company is focused on developing quick payback solutions that improve productivity, based on insights gained from observing technicians at work. They have designed a new torque adapter for Ford E-Series commercial vans that makes brake repair easier and quicker. They have also observed difficulties in removing a canister tap on Super Duty trucks and are working on a solution.

The team at the Milwaukee plant created a low-profile socket that makes it easier to remove clamps and complete repairs. They also developed a compact 4.5-inch flyer set with multiple models for versatility. These new tools save time and effort for technicians and have been well-received, contributing to the company's success during the downturn.

The company has shown strong support for franchisees and maintained their training and programs despite the turbulence and downturn in sales. RS&I group sales had a slight increase due to higher activity with OEM dealerships, but were partially offset by unfavorable currency translations. The BOI margin also improved, reflecting the strength of RS&I products and programs. The company has also made progress with OEM pores, designing steel floor plates to accommodate the changing lift points for EVs and hybrids. This innovation has been well received by both OEMs and repair shops.

The ProX1HD was a successful release for heavy-duty vehicles like buses, fire engines, and semi-trucks. It eliminates imperfections and abrasions on brake rotors without the need for replacement parts. The new ProCut design saves time and effort for mechanics and is projected to become the industry standard. In the collision market, a low profile frame bench was released that makes it easier for technicians to work on damaged vehicles. It integrates with existing solutions and reduces user fatigue. The collision market is growing and Carline is taking advantage of it with their new bench.

RS&I reported a strong second quarter with Tools Group sales down due to uncertainty and C&I and RS&I recording strong profitability. The company launched new products and maintained its network. Sales were flat, but the operating income margin was one of the highest and EPS reached a new high. Net sales were slightly lower than last year, but gross margin and operating expenses as a percentage of net sales improved. Sales were impacted by a decline in the franchise van channel, but activity with customers in critical industries remained strong.

In the second quarter of 2024, the company reported a $11.2 million benefit for final payments received from a legal matter, resulting in a 60 basis point improvement in the operating expense ratio. Operating earnings before financial services were $280.3 million, including a benefit from the legal payments. Financial services revenue and operating earnings also increased compared to the same quarter last year. The effective income tax rate decreased slightly, resulting in net earnings of $271.2 million. In the C&I group, sales increased by 1.2% organically and $7.3 million from acquisitions, but were partially offset by unfavorable foreign currency translation.

The organic increase in sales for the company's C&I segment was primarily driven by a double-digit increase in sales to customers in critical industries, offset by declines in the hand tools and power tools businesses. Gross margin and operating earnings improved due to increased sales and cost savings, but operating expenses also increased. In the Snap-on Tools Group, sales and gross margin declined, while operating expenses increased, resulting in a decrease in operating earnings and margin compared to the previous year.

The RS&I Group saw a 1% increase in sales due to higher activity with OEM dealerships, but a decline in sales to independent repair shops. Gross margin improved due to RCI initiatives and operating expenses decreased. Financial services revenue increased by 7.6%, primarily due to loan portfolio growth. Operating earnings also increased, but expenses were higher due to provisions for credit losses. Loan originations decreased by 5.6%, mostly due to a decline in extended credit originations. This is in line with the sales activity in the Snap-on Tools Group.

The company's balance sheet showed a decline in originations in the U.S., but growth internationally. The delinquency rate for extended credit increased slightly, but remains stable overall. Cash provided by operating activities increased, while cash used by investing and financing activities decreased. Trade and other accounts receivables and inventories decreased from the previous year.

The second quarter of 2024 was marked by uncertainty and turbulence in the market, but Snap-on's value-creating mechanism and strong business model allowed them to remain profitable. The Tools Group in particular showed strength in driving product value and operating efficiency, resulting in stable gross margins despite lower volumes.

The Tools Group, RS&I, and the overall enterprise have shown resilience in the face of uncertainty, with flat sales, strong OI margins, and high EPS. Snap-on is confident in its business model, market opportunities, and experienced team to continue making progress and achieving success in the future. The strength and success of the company is credited to the franchisees and associates, who are admired and congratulated for their capabilities and achievements.

The speaker thanks the audience for their unwavering belief in the team's future and then turns the call over to the operator for questions. The first question is about the progress of facility expansion projects and how they can be leveraged to focus on quicker payback items. The speaker mentions that Algona has already added space and is starting to use it, but it will take time to become more efficient. The expansion in Milwaukee is also underway, with some machines already in place and others being delivered to adjust to a pivot. The speaker expects to see more efficiency as the expansion continues.

The company is expanding its plating line and increasing capacity for wrenches and ratchets due to high demand. This has resulted in a 25-35% increase in capacity in various locations. The company has also seen improvements in gross margin and efficiency due to these expansions. However, tool storage sales were down in the quarter, with big ticket sales being a smaller percentage of the Tools Group's overall decline.

The company Diagnostics had a big impact on the quarter due to the launch of their SOLUS+ last year. Tool storage is also playing a role in increasing sales, as it allows for the sale of accessories and benches. However, technician uncertainty has affected sales and may continue to do so. The company's approach to the SFC may be adjusted in response to the current uncertain environment. The SFC serves three purposes: training, promoting smaller ticket items, and supporting the Tools Group and their network.

The company is planning to hold a tool show where customers can touch and try out different tools. They will focus on promoting quicker payback items and also emphasize the importance of the SFC. The RS&I business is strong in dealerships due to strong OEM programs, but there is some softness in the independent shop market. The company is seeing growth in the OEM dealership business thanks to new models and capabilities.

The company's electronic parts catalog business is facing some challenges, particularly with the Diagnostics division which is dependent on information from other RS&I products. This has led to a decline in sales to the Tools Group. However, sales to dealerships and direct sales to independent shops have shown growth. The company believes that the decline in sales through distributors may be due to them reducing their inventories. Overall, the company is still performing well in the independent shop market.

The Tools Group has seen a decrease in volume due to lower priced items, but the introduction of new tools with higher margins has helped maintain gross margins. The company has also continued to support franchisees despite lower volumes, demonstrating confidence in future growth. Overall, the corporation's gross margins have only decreased slightly.

The speaker discusses the positive impact of C&I and RS&I Boeing on the Tools Group, noting that the overall business looks healthy at the gross margin level. They also mention the decrease in corporate expenses due to a legal settlement and reduced stock-based compensation and bonuses. The speaker predicts that corporate expenses will be around $20-25 million in the back half of the year. They then address the slowdown in diagnostic equipment purchases and how it may eventually affect technicians and shops if they do not upgrade their equipment.

The speaker discusses the launch of a new product in the second quarter and the technicians' aversion to bigger ticket items. They mention speaking with franchisees and garage owners who expressed concern about the economic situation and a conservative approach to spending. The speaker acknowledges that eventually, people will have to rely on diagnostic units to understand their cars due to their increasing complexity. The company's proprietary database can accurately identify trouble codes and diagnose car issues, which will become more important as cars become more complex.

In the future, decoding trouble codes will become more complex and require new hardware and software. The company expects to launch new diagnostics and subscriptions are increasing due to the value of the tools. Second quarter saw negative organic growth in Snap-on tools, but this was not a challenging comparison. It is difficult to predict second half growth due to various factors.

The speaker is uncertain about the impact of macroeconomic uncertainty on the company's sales in the second half of the year. They mention that sales off the van have been bigger than sales to the man, but this may change. They believe that operational improvements and new products could lead to positive results, but the current macroeconomic climate is uncertain. The only thing they can control is to pivot and take advantage of opportunities. The speaker also mentions that the model has been successful in RS&I and C&I, and that operating expenses in the Snap-on Tools segment deleveraged in the second quarter.

In the paragraph, the speaker discusses their company's expenses and how they plan to continue supporting their business in the second half of the year. They mention that they will not be increasing their expenses significantly, but rather adjusting them to match the current situation. They also mention that the destocking of their trucks was consistent throughout the quarter, with less destocking events towards the end. However, they note that this could be a last month phenomenon and not necessarily indicative of a trend.

The speaker, Nick Pinchuk, states that it is difficult to predict sales for the next month, but based on the previous quarter, they have remained consistent except for land sales. He also mentions that it is too early to tell the impact of the Super 7 program and that there has not been a significant increase in RA transfers for credit. The decline in tool sales may be due to limited production capacity.

Nick Pinchuk, CEO of Dick's Tools, is discussing the company's current capacity and bottlenecks. He mentions that they are currently at 50% of the expand they wanted in Flex stock in Milwaukee, and that they are trying to fill up the bucket on smaller kit items. He predicts that the third and fourth quarters will be better than the second, but it is difficult for him to give a specific number. When asked about competitors, he admits that he does not hear much about them from shop guys or techs.

The speaker is unsure if their competitors are a threat to their business, as they have not seen an increase in their presence. They focus on addressing uncertainty and their own issues rather than worrying about competitors. They regularly analyze their competitors' products and pricing, but do not see them as the main problem. The company's cash position has changed, and they prioritize fully funding their business and maintaining their dividend.

The CEO discusses the company's plans for the future, including potential lease renewals, acquisitions, and stock buybacks. He also addresses the impact of the current economic climate on the company's business, noting that there is uncertainty across different regions and industries. However, there has not been a significant difference in the company's operations in different areas, and they are continuing to analyze and adjust as needed.

The speaker discusses the lack of difference between getting information from text and other sources, and mentions that small businesses, such as garages, may face more regulatory and compliance costs. They also mention that critical industries, including avionics, military, and education, have been performing well, with education being a particularly strong area for Snap-on products.

The speaker discusses the strong performance of the aviation and military industries, as well as the overall industry, which is driven by a desire for efficiency and customized products. The company's custom kitting services are in high demand due to a lack of competitors. A replay of the call will be available on the company's website.

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This summary was generated with AI and may contain some inaccuracies.