Earnings Call Transcript - SNA Q1 2023

Operator, Operator

Hello, and welcome to the Snap-on Incorporated 2023 First Quarter Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, today’s event is being recorded. I would now like to turn the conference over to your host today, Sara Verbsky, Vice President, Investor Relations. Ma’am, please go ahead.

Sara Verbsky, Vice President, Investor Relations

Thank you, Keith, and good morning, everyone. Thank you for joining us today to review Snap-on’s first quarter results, which are detailed in our press release issued earlier this morning. We have on the call today, Nick Pinchuk, Snap-on’s Chief Executive Officer; and Aldo Pagliari, Snap-on’s Chief Financial Officer. Nick will kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we’ll take your questions. As usual, we have provided slides to supplement our discussion. These slides can be accessed under the Downloads tab in the webcast viewer as well as on our website, snapon.com, under the Investors section. These slides will be archived on our website along with a transcript of today’s call. Any statements made during this call relative to management’s expectations, estimates or beliefs or that otherwise discuss management’s or the Company’s outlook, plans or projections are forward-looking statements, and actual results may differ materially from those made in such statements. Additional information and the factors that could cause our results to differ materially from those in the forward-looking statements are contained in our SEC filings. Finally, this presentation includes non-GAAP measures of financial performance, which are not meant to be considered in isolation or as a substitute for their GAAP counterparts. Additional information regarding these measures is included in our earnings release issued today, which can be found on our website. With that said, I’d now like to turn the call over to Nick Pinchuk. Nick?

Nick Pinchuk, CEO

Thanks, Sara. As usual, good morning, everybody. I’ll start the call by covering the highlights of the first quarter, and I’ll give you my perspective on what it all means. And then Aldo will provide a detailed review of the financials. Along the way, we’ll cover the markets, which are robust. We’ll also give you a view of our momentum. It’s been unbroken and vibrant. Once again, the story of our quarter is continued resilience. Our ability to navigate the complex while knowing that the flip of a calendar will bring new challenges. You could pick up any significant publication or listen to any business show and encounter a barrage of concerns, measures of adversity and contraction. But we know we can resist those difficulties, as we have for the past three months and for quarter after quarter. We are armed with significant advantages. Our market is displaying resilience, born out of criticality; our brand stands tall, delivering quality and reinforcing personal pride; our products clearly move the world forward by making the critical easier; and finally, our people, our team, experienced, capable, and confident. We are encouraged by this quarter, and I’ll tell you why. Our reported sales in the period were $1,183 million, up versus last year by $85.2 million or 7.8%, including $24 million or 240 basis points of unfavorable foreign exchange. Organic sales were up 10.2%, with increases in every group, marking our 11th consecutive quarter of year-over-year operating expansion. Our operating income for the quarter was $259.8 million, which includes $7.6 million of unfavorable foreign currency, increasing by 16.5%. The operating margin was 22%, rising 170 basis points over last year. In financial services, operating income was $66.3 million compared to last year’s $70.4 million. Combined with OpCo, this resulted in a consolidated operating margin of 25.6%, an 80 basis-point improvement. The first quarter’s EPS was $4.60, up $0.60 or 15% from last year’s $4. We believe our confidence and ongoing optimism are clearly justified by the numbers. Now, let’s look closer at our markets. The automotive repair environment remains strong, with demand across all disciplines. We continue investing in new products to address the repair challenges of newer models, matching the increased complexity. As platforms change, modifications require new tools to accomplish the task, and we’re keeping pace. Whether internal combustion engines or electric vehicles, technicians need assistance, and we’re ready to provide it. The updates create a range of challenges, from accessibility issues associated with confined spaces requiring new designs of varying geometries, to tighter engineering challenges fueling the need for precision torque instruments, to the increasing number of fasteners necessitating power tools for efficient part removal and installation. More electronics mean a greater need for handheld diagnostics and special software for communication with and management of the network of computers and sensors. We’re seeing strength in OEM dealerships. As new models enter the market, we need new arrays of essential tools, equipment, and diagnostics to service the different and unique characteristics of each vehicle. For independent repair shops, business is booming. If you’ve taken your vehicle in for service recently, you’ve likely witnessed this firsthand, as the bays are full and the parking lots are crowded. When I speak with our franchisees, they express enthusiasm, indicating demand is robust. It’s evident in the numbers; garages are scheduled further out for all types of shops. Owners recognize the growth and the necessity for technicians. This rise in technician count is notable, and wages are increasing. This is all music to our ears. We believe that with new vehicle models, automation, and increasing complexity, we may be entering a golden age of vehicle repair, which our numbers support. The tools landscape is a great place to operate for our Tools Group and our Repair Systems & Information Group, and we believe it is only getting better. Now, let’s talk about the critical industries where Snap-on operates beyond the garage, solving consequential tasks, representing our most significant international presence. It’s an area where we are subject to global headwinds, but the news remains reasonably encouraging. Critical industries continue to rise across various sectors, aviation, education, heavy-duty fleets, general industry, and natural resources have all shown growth. The military, previously down, is now rebounding with high demand. Geographically, North America was strong, Europe showed improvement despite the ongoing war in Ukraine and revenue disruptions from Brexit, while Asia Pacific remained mixed with variations across the landscape. Overall, critical industry markets are showing significant and broad positives across every sector. The first quarter was marked by substantial strides in this arena, and we see even more opportunity on the horizon. We believe there is abundant potential for growth by enhancing the van network, expanding with repair shop owners and managers, penetrating critical industries, and developing in emerging markets, leveraging our product line, our strengthening brand, and our increasing understanding of the tasks at hand. We connect with our customers face-to-face in the workplace, observing tasks and translating insights into innovative new products for professionals. We amplify this effort by applying a generous dose of rapid continuous improvement, or RCI, as we call it, driving our productivity and margin upwards. So, that’s our view of the market. Let’s turn to the groups. In the C&I Group, sales were $363.8 million, including $12.5 million of unfavorable foreign currency, reflecting an increase of 7% over last year. Organic sales were up 11.1%, with double-digit gains in critical industries and specialty torque leading the way. C&I’s operating income of $55.8 million, including $2 million of unfavorable foreign currency, represents a 22.1% increase over last year, and the operating margin was 15.3%, up 190 basis points from 2022 levels; promising numbers. C&I demonstrated substantial growth, despite ongoing geographical uncertainties. Previously, supply chain turbulence attenuated C&I growth. You heard me mention on calls that customized kits with many different products are vulnerable to availability disruptions. Improvements along the supply chain have driven some of C&I’s growth. We started to alleviate the logjams and reduced impacts. The first quarter is a testament to that progress. Demand in critical industries remains strong, continuing into the first quarter, rooted in innovative products designed to make a significant difference. One example is our new ATECH 1/4 inch drive flex-head TechAngle micro torque wrench. While a mouthful, it’s a great product, directly aimed at the aircraft repair sector, where precision torque is increasingly vital. The need for power in repair and work in tight spaces is becoming more common. This new unit is almost a foot long but less than an inch in diameter, designed for accessibility deep within engine compartments. It features a 15-degree flex-head design for maneuvering around obstacles and our durable 72-tooth gear mechanism for operation with minimal rotations, critical when space restricts motion. The ATECH provides significant power, reaching 300-inch pounds and expanding its scope by 20% while consolidating multiple devices into one unit, providing a productivity gain by eliminating changeover time. It has four alert modes—LCD, LED, vibratory, and audible—to prevent over torquing in low visibility or tight spaces. Combined with an accuracy of plus or minus 2%, it maintains fastening right on spec, protecting throughout the aviation sector. This product was a hit, driving C&I's success this quarter. Now let’s move on to the Tools Group. Sales reached $537.0 million, up $24.9 million, which includes $7.1 million of unfavorable foreign currency, registering a 6.3% organic gain with high single-digit increases in the U.S. and a low single-digit rise in the international network. The operating margin was 24.5%, up 180 basis points despite the 80 basis points of unfavorable currency impact; this is a great result for us. We feel optimistic and encouraged by this. The vehicle repair markets are strong and resilient, tracing an ongoing path of abundant opportunity. Once again, our tools numbers support this sentiment. Beyond quantitative evidence, I was recently with some of our van drivers, and their views were incandescently positive—without equivocation. They say shops are busy, all of our product lines are in high demand, and their technician customers are brimming with confidence. It seems that those in vehicle repair, from top to bottom, have great expectations for the future. This positivity is reflected in the continued enthusiasm for big-ticket items, longer payback items, diagnostics, and tool storage boxes, which remain major contributors to our results. You can see it in the success of our top-of-the-line ZEUS+ handheld diagnostics units and the reception of our latest addition to the EPIQ tool storage lineup, the 68-inch EPIQ limited edition toolbox, known as the Neon Stinger. It’s generated substantial excitement with its eye-catching gloss black body and vibrant new tool storage trim color. Even in dim lighting, it stands out, allowing technicians to make a statement. Beyond its appearance, it provides functionality, featuring a speed drawer for customizable organization, a power drawer with secure charging space, and an LED power top that fully illuminates the drawers and tools, making them shine like the jewels they are. The Stinger is a million-dollar product from Snap-on in no time. The Tools Group shows robust demand across all product segments, and the momentum continued throughout the quarter. Now, let’s discuss RS&I. Sales reached $446.6 million, up $48.4 million or 12.2%, including $6 million in unfavorable foreign currency. Organic activity advanced 13.9%, driven by robust increases in undercar equipment and the OEM business. RS&I's operating earnings were $104.6 million, rising 14.2% over last year, with an operating margin of 23.4%, up 40 basis points. For another quarter, software products and subscriptions were significant positives. Our Mitchell 1 division, which provides repair information software to independent shops, continues to succeed through customer connection and innovation, introducing improvements that enhance shop efficiency. For example, at this year’s meeting of the Heavy-Duty Technology and Maintenance Council in Orlando, Mitchell 1 introduced powerful wiring navigation features specifically for trucks. It became clear to truck professionals that our new software would expedite navigating electrical challenges on today’s increasingly complex vehicles, whether powered by gasoline or battery. This feature saves technicians significant time and enhances productivity. Mitchell 1 also released an automated work package function for its collision repair software, centralizing all relevant information needed for collision jobs in one interface. This system guides technicians through effective repair processes, eliminating the need to search across varying categories of vehicle documentation. This expedited access significantly reduces the time required to compile a comprehensive guide for collision repair tasks. We believe this software will substantially contribute to Mitchell 1’s growth. As vehicle automation and sensor networks grow, collision repair's importance rises, aligning our new features with market demands. We continue to expand RS&I’s position, offering more solutions and leveraging customer connection and innovation as essential components of Snap-on value creation. We are confident in this successful formula, and the results for RS&I reinforce that perspective. Those are the highlights of our quarter: Continued momentum, the 11th straight period of year-over-year operating growth, C&I showing strength despite supply turbulence, RS&I remaining robust with the contributions from software and hardware, and a healthy Tools Group. Organic sales increased 10.2%, our operating margin stood at 22%, and EPS reached $4.60, up 15% from last year, a significant improvement. It all adds up. It substantiates clear evidence and testimony that Snap-on has emerged from the challenges of COVID stronger than before, and our enterprise continues this upward trend with capability and conviction. It was an encouraging quarter. Now, I’ll turn the call over to Aldo.

Aldo Pagliari, CFO

Thanks, Nick. Our consolidated operating results are summarized on slide 6. Net sales of $1.183 million in the quarter increased 7.8% from 2022 levels, reflecting a 10.2% organic sales gain, partially offset by $24 million or 240 basis points of unfavorable foreign currency translation. The organic sales increase this quarter reflects broad-based gains across all segments. From a geographic perspective, we experienced double-digit year-over-year organic sales growth in North America and low single-digit organic gains in Europe. Consolidated gross margin of 49.8% improved 110 basis points from 48.7% last year. Contributions from increased sales volumes, pricing actions, and benefits from the Company’s RCI initiatives more than offset the effects of higher material and other costs as well as 20 basis points of unfavorable foreign currency. While the supply chain environment has somewhat improved, we believe the corporation continues to navigate effectively costs and other challenges associated with the ongoing conditions. Operating expenses as a percentage of net sales of 27.8% improved 60 basis points from 28.4% last year. Operating earnings before financial services of $259.8 million in the quarter compared to $223.1 million in 2022. As a percentage of net sales, operating margin before financial services of 22% improved 170 basis points from last year’s first quarter. Financial Services revenue of $92.6 million in the first quarter of 2023 increased 5.6% compared to $87.7 million last year. Operating earnings of $66.3 million decreased $4.1 million from 2022 levels and included a return to what we believe to be a more normal level of provisions for credit losses than those recorded last year. Consolidated operating earnings reached $326.1 million in the quarter compared to $293.5 million last year. As a percentage of revenues, the operating earnings margin of 25.6% improved 80 basis points from last year. Our first quarter effective income tax rate was 23.1% compared to 23.7% last year. Net earnings totaled $248.7 million or $4.60 per diluted share, including $0.12 of unfavorable impact associated with foreign currency, increased $31.3 million or $0.60 per share from 2022 levels, representing a 15% increase in diluted earnings per share. Now, let’s turn to our segment results for the quarter. Starting with C&I on slide 7. Sales of $363.8 million increased from $340.1 million last year, reflecting a $36.2 million or 11.1% organic sales gain, which was partially offset by $12.5 million of unfavorable foreign currency translation. The organic growth primarily reflects double-digit gains in sales to customers in critical industries and in the segment's specialty torque business, as well as low single-digit increases in the segment’s European-based hand tools business. Regarding critical industries, the sales gains were broad-based in the quarter, with robust sales to military clients, as well as higher activity across general industry, technical education, aviation, and natural resources. Gross margin of 38.8% improved 240 basis points from 36.4% in the first quarter of 2022, primarily due to higher sales volumes including increased activity and the higher gross margin in critical industries, pricing actions, and benefits from RCI initiatives. These improvements were partially offset by effects of higher material and other costs. Operating expenses as a percentage of sales of 23.5% in the quarter increased 50 basis points from 23% in 2022, mostly due to increasing sales and higher expenses. Operating earnings for the C&I segment of $55.8 million increased 22.1% from $45.7 million last year. The operating margin of 15.3% improved 190 basis points from 13.4% last year. Turning now to slide 8. Sales in the Snap-on Tools Group of $537 million compared to $512.1 million a year ago, reflecting a 6.3% organic sales gain, partially offset by $7.1 million of unfavorable foreign currency translation. Organic sales growth reflects a high single-digit gain in our U.S. business and a low single-digit increase in our international operations. Sales in the quarter were up year-over-year across all product lines. Gross margin of 47.3% in the quarter improved 180 basis points from 45.5% last year, primarily due to higher sales volumes and pricing actions. Lower material and other costs and benefits from RCI initiatives partially offset 80 basis points of unfavorable currency effects. Operating expenses as a percentage of sales of 22.8% were unchanged from last year. Operating earnings for the Snap-on Tools Group of $131.7 million, including $6.1 million of unfavorable foreign currency effects, increased $15.7 million from last year, while the operating margin of 24.5%, including 80 basis points of unfavorable currency effects, improved 180 basis points from 22.7% in 2022. Turning to the RS&I Group shown on slide 9. Sales of $446.6 million increased 12.2% from $398.2 million in 2022, reflecting a 13.9% organic sales gain, partially offset by $6 million of unfavorable foreign currency translation. The organic gain is comprised of double-digit increases in sales of undercar and collision repair equipment and in activity with OEM dealerships, alongside a mid-single-digit increase in sales of diagnostics and repair information products to independent shop owners and managers. Gross margin of 43.5% declined 110 basis points from 44.6% last year, primarily due to increased sales in lower gross margin businesses and the effects of higher material and other costs. This decline was partially offset by benefits from pricing actions and savings from our RCI initiatives along with 30 basis points of favorable foreign currency effects. Operating expenses as a percentage of sales of 20.1% improved 150 basis points from 21.6% last year, primarily driven by benefits from sales volume leverage and higher activity in lower expense businesses, plus savings from RCI initiatives. Operating earnings for the RS&I Group of $104.6 million compared to $91.6 million last year, with an operating margin of 23.4%, compared to 23% reported a year ago. Now turning to slide 10. Revenue from financial services of $92.6 million increased from $87.7 million last year, primarily reflecting growth in the loan portfolio. Financial Services operating earnings of $66.3 million, including $700,000 of unfavorable foreign currency effects, compared to $70.4 million in 2022. Financial services expenses of $26.3 million increased $9 million from 2022 levels, including $8.1 million of higher provisions for credit losses. The year-over-year increase in provisions reflects both the growth of the portfolio as well as a return to what we believe to be a more normal pre-pandemic rate of provision. For reference, provisions for finance receivable losses in the quarter were $14.2 million compared to $6.3 million in the first quarter of last year. In the first quarters of 2019 and 2018, provisions for losses were $12.5 million and $15.8 million, respectively. Additionally, the gross worldwide extended credit or finance receivable portfolio has increased 7.5% year-over-year, and we believe the delinquency and portfolio performance trends currently remain stable. As a percentage of the average portfolio, financial services expenses were 1.1% in the first quarter of 2023 compared to 0.8% last year. In the first quarters of 2023 and 2022, respective average yield on finance receivables were 17.7% and 17.6%. In the first quarters of 2023 and 2022, the average yield on contract receivables were 8.7% and 8.5%, respectively. Total loan originations of $300.9 million in the first quarter increased $55.3 million or 22.5% from 2022 levels, reflecting a 25.1% increase in originations of finance receivables and a 9.2% increase in originations of contract receivables. The increase in finance receivable origination reflects the continued strong demand for big-ticket products sold by our franchisees during the quarter. Moving to slide 11, our quarter-end balance sheet includes approximately $2.3 billion of gross financing receivables, including $2 billion from our U.S. operation. The 60-day plus delinquency rate of 1.5% for U.S. extended credit compares to 1.6% in 2022. On a sequential basis, the rate is down 10 basis points, reflecting the seasonal trend we typically experience between the fourth and first quarters. Regarding extended credit or finance receivables, trailing 12-month net losses of $45.1 million represented 2.46% of outstandings at the end of the first quarter. While this was up 12 basis points from a year ago, it is 45 basis points lower than year-end 2019. Turning to slide 12, cash provided by operating activities of $301.6 million in the quarter compared to $193.9 million last year. The increase from the first quarter of 2022 primarily reflects lower year-over-year increases in working investment, improved net earnings, and lower cash taxes and compensation payments. Net cash used by investing activities of $72.9 million included net additions to finance receivables of $49.6 million and capital expenditures of $23 million. Net cash used by financing activities of $152.1 million included cash dividends of $86.1 million and the repurchase of 356,000 shares of common stock for $87.2 million under our existing share repurchase programs. As of quarter-end, we had remaining availability to repurchase up to an additional $345.4 million of common stock under existing authorizations. Turning to slide 13, trade and other accounts receivable increased $20.7 million from 2022 year-end. Days sales outstanding of 62 days compared to 61 days at 2022 year-end. Inventories increased $16 million from 2022 year-end. On a trailing 12-month basis, inventory turns of 2.4 compared to 2.5 at year-end 2022. The increase in inventory primarily reflects higher demand, including inventories to support new products as well as critical industry projects. Additionally, to better assure availability given the dynamics of the current supply chain situation, our levels of safety stocks and in-transit parts, components, and raw materials are all higher, as are our year-over-year costs associated with finished goods. Our quarter-end cash position of $833.8 million compared to $757.2 million at year-end 2022. Our net debt to capital ratio of 7.4% compared to 9% at year-end 2022. In addition to cash and expected cash flow from operations, we have more than $800 million available under our credit facilities. As of the quarter-end, there were no amounts outstanding under the credit facility, and there are no commercial paper borrowings outstanding. That concludes my remarks on our first quarter performance. I’ll now briefly review a few outlook items for 2023. We anticipate that capital expenditures will approximate $100 million. In addition, we currently anticipate that our full year 2023 effective income tax rate will fall between 23% to 24%. I’ll now turn the call back to Nick for his closing thoughts.

Nick Pinchuk, CEO

Thanks, Aldo, for that detailed financial review. At Snap-on’s first quarter, we have an encouraging performance, demonstrating the breadth, depth, and length of our extraordinary advance. The breadth covers progress across each of our operating groups. C&I is gaining despite challenges with customized kits amidst supply turbulence and is rising above geographic troubles during uncertain times. The Tools Group continues its upward trajectory, capitalizing on the strong, resilient vehicle repair market and reaching a new margin high. RS&I is riding the wave of vehicle complexity and the introduction of new models, registering another quarter of profitable growth. The positive trends permeate our entire enterprise. The depth of this quarter is marked by strong results throughout the P&L. C&I experienced an 11.1% organic growth with an operating income margin of 15.3%, up 190 basis points. RS&I observed organic sales rising 13.9%, with an operating income margin of a strong 23.4%, up 40 basis points from last year. The Tools Group showed organic activity increasing 6.3%, with high single digits in the U.S. We mentioned the remarkable performance of the Stinger toolbox—it really does stand out, and the Tools’ operating income margin of 24.5% is worthy of note, up 180 basis points against 80 basis points of unfavorable currency impacts. All of this culminated in overall strength across the corporation, with organic sales advancing 10.2%, an operating income margin of 22% representing a rise of 170 basis points, and a final EPS of $4.60—significantly higher than any prior comparisons. Moreover, our performance is characterized by longevity; this marks our 11th consecutive quarter of year-over-year operating growth. The world is evolving as anticipated, introducing new equipment and software driven by speeding model changes and new technologies. The vehicle repair market appears to be approaching a golden age with more technicians, rising wages, and collective optimism permeating the sector. Our momentum has persisted in the quarter, corroborated by our franchisees' feedback. As we proceed, we are confident in our capacity to leverage abundant opportunities for growth and improvement. We have consistently achieved this in each period, as evidenced once again in the first quarter. Our product offerings are crafted through customer connection and innovation, easing essential tasks and establishing a clear difference for professionals. We take pride in our brand, which represents professionalism and commitment, and we are bolstered by our dedicated team. We believe that resilient markets and our substantial advantages will empower Snap-on to sustain our momentum and continue our ascent into the second quarter, throughout 2023, and well into the future. Now, before I conclude and pass to the operator, I want to address our franchisees and associates who may be listening. This quarter has been encouraging, and those who question the reasons—look to all of you. I commend you on the vital roles you’ve played in our performance. Your extraordinary dedication to our team deserves my admiration. Thank you for your unwavering confidence in Snap-on’s future. I’ll now turn the call to the operator.

Operator, Operator

Thank you. And this morning’s first question comes from Christopher Glynn with Oppenheimer.

Christopher Glynn, Analyst

Thank you. Good morning, everyone. Nick, I wanted to ask about the commercial and industrial sector showing some increased organic growth. You mentioned that the supply chain is easing a bit. Are you noticing a reduction in past due backlog, and where do we stand in that regard? Is the overall backlog still growing, as it seems the demand is becoming quite strong?

Nick Pinchuk, CEO

Backlog is still pretty strong. The 11.1% increase—by the way, it was bigger than that in critical industries. So that wasn’t driven by backlog. The backlog is still present. What you’re seeing is our efforts on repairing challenges. I’m not declaring complete victory over supply turbulence, but conditions look considerably better this quarter than in the past. We also have the military coming back into the fold. That combination is driving critical industries upwards, and overall, the backlog still remains quite solid.

Christopher Glynn, Analyst

Okay. And in the press release, you mentioned the period continues the Snap-on value creation process, and you referred to considerable capacity for improvement. Could you elaborate on some specifics undergirding that statement?

Nick Pinchuk, CEO

We could be significantly more efficient in selling off the vans. This is one of the reasons that have contributed to our growth in the Tools Group—the principal components driving it upwards. Efficiency can be enhanced in our factories, which are currently operating at high capacity. We're working on expansions, helping those efforts, and integrating RCI practices along the way; this will bolster productivity. In many respects, RCI applies across the Tools and Product business because as repair complexity increases, the demand for new products necessitates a keen focus on customer connection and innovation. We believe we have substantial opportunities for continuous improvement.

Christopher Glynn, Analyst

Great. If I could ask one more question, I want to delve a bit deeper into the military sector, which has experienced some softness for a while, and it seems like there's been a significant reset in levels there. I'm interested in your insights on how lumpiness plays into the military story and how we should consider that aspect.

Nick Pinchuk, CEO

We’re seeing an encouraging situation. The military sector was quite a negative influence in previous quarters but has notably rebounded with several projects, albeit smaller in scale. I interpret this as the opening of the spigot. Every time a new administration comes in, there’s a shift in procedures that often require tools—this is what we’re currently witnessing.

Bret Jordan, Analyst

I think you called out strength in some of the higher-ticket items. Could you give us more color on that, like what the hand tools versus high ticket and then storage versus diagnostics within that mix?

Nick Pinchuk, CEO

Hand tools contributed significantly to growth this period. Regarding product mix, it's not really a mixing story among our product lines; hand tools have kept pace with our overall growth. Big-ticket items, particularly diagnostics, are stronger than tool storage due to the recent successful launch of the ZEUS+—a high-end handheld diagnostic priced at $12,000—which has been selling robustly. Tool storage has also done well, but diagnostics have outperformed here.

Bret Jordan, Analyst

Okay. And then a question on the credit business. I mean, obviously, underlying rates have come up and I'm pretty sure your yield was 17.7. Is there the potential to bring your yields up? I mean, can you pass through some of the higher base rates on those loans?

Nick Pinchuk, CEO

I would like to address this question, but I believe Aldo should answer it.

Aldo Pagliari, CFO

Bret, probably not. Our rates are reflective of the credit profile of the customers we serve. They aren’t the lowest rates, but they’re competitive. For a decade, we’ve held our rates steady, and since our funding is long-term, we don’t experience upward pressure on our cost of funds. Consequently, we prefer to maintain our program as is. The uptick you see now is likely due to the marginally improved profiles of customers compared to a year ago, but it’s very slight.

Bret Jordan, Analyst

Okay. One last question regarding input costs. What is the trend you're observing? Specifically, are you noticing changes in metals pricing or labor? Shipping costs have decreased, but how are the input costs trending overall?

Aldo Pagliari, CFO

The cost environment has shown slight pockets of improvement, but we must remain agile and ready for new challenges daily. So, modest improvement exists, but we have to leverage all our resources effectively.

Gary Prestopino, Analyst

I have a question for Aldo, so the second question.

Nick Pinchuk, CEO

Oh no.

Gary Prestopino, Analyst

Well, I got one for you, too. In the other category, Aldo, there was a positive $15.2 million and you tax effect that, it’s about $0.20 of earnings, what exactly is that?

Aldo Pagliari, CFO

Believe it or not, on the cash we have on hand, we can earn a much higher level of interest income now than what we did last year. A year ago, the returns were nearly nonexistent, now the corporation earns about 4.75% on idle cash.

Gary Prestopino, Analyst

Okay, all right. So that explains that. And then just want to get a question on the diagnostics and the software. Nick, it’s growing. Are you finding that there are shops that— I can’t believe this is possible—that did not have any diagnostic capabilities that are rapidly adapting it because of the electronics in the models, or are entities just looking to upgrade and buy a more powerful machine?

Nick Pinchuk, CEO

There are, indeed, shops that still lack diagnostics. These operations can perform repairs, but they often take longer. Most experienced technicians believe they can manage without diagnostics, particularly in truck shops. Nevertheless, many businesses are working to upgrade what they currently have. For example, as mentioned, the more sophisticated ADAS setups necessitate more advanced software and hardware. This is why the ZEUS+ has been such a hit. It offers significant advancements, including bigger displays and enhanced software features.

Gary Prestopino, Analyst

And just lastly, do you foresee a situation where as more EVs proliferate through the car park that you would develop a diagnostic tool that is specific to EVs?

Nick Pinchuk, CEO

Yes, that may occur down the line, but initially, what we envision is a diagnostic unit to cover both internal combustion and EVs as they will share the marketplace for a significant time. Our diagnostic software and tools will need to accommodate the increasing visibility of EVs as the market evolves.

Elizabeth Suzuki, Analyst

First, I wanted to ask about the financing arm. In terms of your outlook, do you see risks to originations if your customers start shifting from some of these bigger ticket items to smaller ones, and as credit conditions more broadly tighten, what impact does that have on your customers’ ability to take on debt for large purchases?

Nick Pinchuk, CEO

Actually, I don’t foresee that risk right now. Customers seem robust in their investments in big-ticket items, which reinforces the optimism we've observed. This situation appears to present a dual economy—the financial economy and the physical economy. In the context of the latter, we are witnessing strong demand for big-ticket items as technicians express confidence in their spending. In previous downturns, it hasn’t been our rates influencing technician decisions; the ultimate factors have often skewed toward their psychological outlook.

Scott Stember, Analyst

Nick, you’re talking about how collision is booming. I just wanted to flesh that out a little bit. How much of it is just from a volume standpoint at the collision level, which could lead to increased purchases of equipment and diagnostics for ADAS?

Nick Pinchuk, CEO

Both factors are contributing to growth. The collision sector is becoming increasingly focused on ADAS requirements, necessitating more calibration tools. There’s a larger push toward specialized software in collision repair, particularly with the introduction of new materials used in vehicles, transitioning from simple metal repairs to carbon fiber and specialized components. This is perpetual demand, and collision jobs are increasingly time-intensive, adding to the volume of work.

Scott Stember, Analyst

Got it. And just housekeeping in the Tools segment, sell into the van channel versus sell-through—were they pretty much in line?

Nick Pinchuk, CEO

They were pretty aligned this quarter. There may be slight fluctuations from quarter to quarter, but in this instance, they're matched up well.

Scott Stember, Analyst

All right. And just last question, returning to Bret’s inquiry regarding the Tools Group composition—it seems hand tools were up in line with the overall segment. Can you touch on new products or modifications to your approach?

Nick Pinchuk, CEO

There are many factors at play. The standout in the Tools Group this cycle is ZEUS+, our big-ticket diagnostic device, priced at $12,000. Additionally, the Neon Stinger toolbox has become a rapid best-sellerat our kickoff events. The tool storage area has introduced engaging designs while diagnostic tools continue to drive excitement. In hand tools, new offerings, particularly pliers, have generated significant interest among our franchisees—these products provide robust functionality that technicians appreciate. Lastly, we continue to innovate by bundling certain products, like impact sockets, targeting specific niches such as truck shops, which further solidifies our competitive edge.

David MacGregor, Analyst

Let me start off by just asking about the revenue mix overall. Are you seeing a shift in the percentage of revenues from technicians versus independent garage owners and dealerships?

Nick Pinchuk, CEO

Not particularly. I don’t observe any significant shift within the Tools Group. While it's logical to think garage owners and technicians overlap, this is only true for the purchase of big-ticket diagnostics like ZEUS+. So overall, I don’t see a distinctive change in the revenue mix.

David MacGregor, Analyst

Staying on garage owners for a moment, your contract receivable is up 9.2%. Do you sense that garage owners are facing more difficulty securing credit, returning to Snap-on credit as an alternative?

Aldo Pagliari, CFO

For contract receivables, we are referring to franchisees, especially with van leases and inventory.

David MacGregor, Analyst

Yes. So, let’s include them together. Is this group facing any challenges concerning securing credit?

Nick Pinchuk, CEO

David, it’s a reasonable assumption, but I would not say we’re seeing that currently. Technicians are reporting strong balance sheets and are not expressing that concern. While shifts can happen, presently, we perceive this sector remains robust.

David MacGregor, Analyst

Okay, thanks for that. As for storage and any categories with significant backlogs, can you share how far back those backlogs are extending?

Nick Pinchuk, CEO

Unfortunately, the backlogs for tool storage and other categories are extensive, longer than we would desire. We continue to enhance factory output, addressing backlogs across virtually all product lines. Tool storage in particular has proven to be in high demand, with clients frequently indicating a need for more volume.

David MacGregor, Analyst

Is there a reason then, Nick, why at the regional kickoffs you were offering discount packages on storage? It seems odd that you'd be discounting something with backlog.

Nick Pinchuk, CEO

We offer discounts routinely, including package deals. This strategy encourages action and offers value. While we don’t necessarily need to discount for volume, our franchisees often prefer sales structured around such deals. Actually, I don’t worry too much regarding hand tools. Historically, hand tools exhibit resilience through market fluctuations. Longer payback items may create hesitation if market mentalities change, as I discussed with Liz. However, I see significant optimism among our dedicated technicians, contrasting with large companies experiencing very different sentiments. Overall, I’m confident that hand tools will remain steady.

Luke Junk, Analyst

Thanks for getting me in here. I know we’re maybe a little limited for time, so I’ll just ask one question today. Can either Nick or Aldo unpack the gross margin gains we just saw in both the Tools Group and C&I this quarter?

Nick Pinchuk, CEO

In C&I, stronger performance is primarily due to critical industries, which deliver the highest margins. Major factors included increased activity and pricing adjustments with RCI initiatives helping further the gross margins. For Tools Group, while we’re benefiting from improving commodity costs, RCI initiatives also remain highly effective, driving productivity and margins. I believe the trends are sustainable, especially with RCI contributing above and beyond our current expectations.

Operator, Operator

Thank you. This concludes the question-and-answer session. I would like to return the floor to Sara Verbsky for any closing comments.

Sara Verbsky, Vice President, Investor Relations

Thank you all for joining us today. A replay of this call will be available shortly on snapon.com. As always, we appreciate your interest in Snap-on. Good day.

Operator, Operator

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.