Earnings Call Transcript
Snap-on Inc (SNA)
Earnings Call Transcript - SNA Q2 2024
Operator, Operator
Good day and welcome to Snap-on Incorporated 2024 Second Quarter Results Conference Call. All participants will be in a listen-only mode. After today's remarks, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Sara Verbsky, Vice President Investor Relations. Please go ahead.
Sara Verbsky, Vice President Investor Relations
Thank you, Cole, and good morning, everyone. We appreciate you joining us today as we review Snap-on's second quarter results which are detailed in our press release issued earlier this morning. We have on the call, 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 provided slides to supplement our discussion. These slides can be accessed under the Downloads Tab in the webcast, as well as on our website, snapon.com, under the Investors section. These slides will be archived on our website along with the transcript of today's call. Any statements made during this call relative to management's expectations, estimates or beliefs or 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. Good morning, everyone. I will begin by highlighting our second quarter results and sharing my insights on our performance, markets, and future direction. In the second quarter, we faced challenges, particularly as uncertainty persists among our technician customers. However, our Repair Systems & Information Group and our Commercial and Industrial group made significant progress, capitalizing on opportunities while adapting to the changing technology landscape. Our second quarter results clearly demonstrate that Snap-on's core value creation strategy—observing work in real-time and leveraging insights to develop products that simplify and enhance efficiency—applies across diverse industries and settings. This underscores that our business is not reliant on a specific customer segment. Looking ahead, we believe we will continue to grow with increased resilience and broader opportunities, making our enterprise more robust than ever. Like in previous quarters, we encountered headwinds, with varying opportunities across different groups and regions. In North America, we saw mixed results but notable gains in key industries. Internationally, our consolidated outcomes were diverse but generally showed positive trends. Europe displayed some recovery despite sporadic economic disruptions, while the Asia Pacific market made strides in overcoming the slower recovery in China. Now, let's talk about the results. Second quarter sales of $1,179.4 million was slightly down from the $1,191.3 million of last year. On an organic basis, excluding $5.7 million in unfavorable foreign currency and $7.3 million from acquisitions, our sales were lower by 1.1%. The OpCo operating income or OI margin for the full quarter was 23.8%, up 50 basis points. With that said, that level included the benefit of a final payment from our recent legal win. Excluding that addition, the OI margin was 22.8%, down from 2023 but still among our very best, surpassed only by the record-setting second quarter of last year. For financial services, the OI grew to $70.2 million from the $66.9 million recorded in 2023. A number that, when combined with our OpCo results, raised the consolidated OI margin to 27.4%, up 60 basis points over the 26.8% of 2023 and EPS was $5.07, which included a benefit from the legal payment of $0.16. Again, excluding that legal item, EPS was $4.91, still above last year and representing a new Snap-on level for any quarter, showcasing strength and progress against the winds. So those are the overall numbers. Now for a view of the market. The second quarter once again highlighted that the opportunities in automotive repair continue to be favorable, marked by the ever-expanding complexity of design, new and diverse powertrains. More interlocking systems advance driving autonomy, arrays of drive-by-wire sensors, new body materials, and an aging car park now averaging 12.6 years. The opportunity in vehicle repair exists industry-wide and appears unwavering. The vehicle OEMs, the dealerships, and the independent shops recognize the positive trend and continue to invest in tools and equipment that will expand their capabilities to support the influx of new models and the ever-rising complexity of repairs. In the quarter, our RS&I Group expanded our reach into OEM dealership programs and strengthened our position in independent garages with our repair management software packages and great new hardware products. The possibilities with repair shop owners and managers are strong, and the outlook moving forward is quite positive, positioning Snap-on well to seize the opportunities. Now let's shift to the technicians. These are the folks who turn the wrenches to make the diagnoses and execute the repairs. Again this quarter, I had multiple occasions to meet with the franchisees, the garage owners, and the techs, and it reconfirmed that the shops and the technicians are prospering. The micro data says it's true; repair hours are up, tech wages are healthy, the demand for tech is strong and the number of technicians is increasing. It makes sense, as new systems, rising complexity, and the aging car park make what the techs do more difficult and valuable. So the economic trajectory of vehicle repair is quite positive. It's an attractive place to be. But it's also clear that, while the techs are busy and have cash, their confidence in the way forward is still poor. Every day there is bad news. Two wars with no end in sight, the border unsettled, shipping lanes disrupted, tit-for-tat with China, lingering inflation, and the election seems to get more unpredictable with every morning news cycle; the hits just keep coming for bad news for breakfast. It's almost like the grassroots technicians have a fear of what may happen. Paraphrasing the movie 'Dune', fear is the outlook killer. The franchisees also confirmed to us that, with general uncertainty, the techs are leaning toward purchases that provide quick paybacks while making the work easier right away. They're somewhat hesitant on longer-term bigger ticket items. Knowing that, the Tools Group continues to focus on near-term product development, manufacturing changes, and selling efforts that match those preferences. Now let's talk about the critical industries, where Snap-on rolls out of the garage, solving tasks of significant consequence. This is where the C&I group operates, and it has our most significant international presence. The area where we're most subject to global headwinds, but the news was still reasonably encouraging. The critical industries kept rising in the period; the military, aviation, and education segments led the way. For geographies, Europe was mixed, with several countries in recession, and ongoing impacts from the Ukraine war. Asia Pacific will also remain mixed; China was weak, driven by delayed financial recovery and Southeast Asia also faced difficulties. But both regions for C&I and for the corporation in total were positive in the quarter despite the variations. Now speaking more about the critical industries, the demand for customized solutions to drive reliability and productivity keeps rising, and C&I continues to show significant and broader advantages in that arena, with more coming. So that's the market; vehicle tech, cash-rich but confidence-poor, preferring quick payback products. Repair shop owners and managers moving upward to match the car park, and the critical industry is booming outside the garage. In C&I, sales were $372 million, representing an organic sales gain of 1.2%, excluding $7.3 million of acquisition-related sales and $3.8 million of unfavorable foreign currency. Higher activity with customers based in those critical industries and gains in Asia more than offset declines in our power tool and European-based hand tool operations. From an earnings perspective, C&I OI of $62.2 million improved $4.1 million or 7.1% above last year. The OI margin was 16.7%, up 70 basis points, representing a new record for that group; great performance all around. The big driver was our International division, continuing its upward trajectory with a double-digit rise and very strong profitability. About 18 months ago, we expanded our capability to make customization easier outside the garage by adding another building for industrial custom kitting, serving a range of critical segments, and it's paid off big. Since then, that business has been on a tear, cranking out more bespoke product bundles and sophisticated solutions like our automated tool control units that have become the standard for a range of industries. Custom kit offerings aimed at specific applications and at making the critical work easier and more reliable have driven significant gains globally. We believe we see many more possibilities in that arena. So, we continue to invest in critical industries, expanding capabilities like in our custom tool machine in Kenosha, producing low volume, high reward items for the most essential tasks. For example, visiting an oil drilling site, we saw that adding a section of pipe on the rigs requires technicians to move around the circumference constantly, repositioning the turning tool. It's a slow and clumsy effort. Our custom team tackled the problem, designing both a new bespoke wrench and enabling a new Kenosha machine shop configured for a special machining process to produce it, and it all worked. The special oil rig pipe wrench greatly reduced the rework associated with misalignment and substantially decreased the task time, getting the job done more efficiently and reliably, thus expanding the Snap-on reputation in the critical oil and gas sector. Also in the quarter, we introduced a new line of 14.4-volt micropower drills aimed specifically at diverse applications in aviation and general manufacturing. Testing in all sectors varies from inserting wood screws to drilling accurate holes in airframes to high volumes on production lines. To span the variety, each tool in the new line, and there is a range of them, is set to a different RPM range, enabling the tech to fit the speed to the job, substantially reducing rework or irreversible damage. The drill is also designed for 2 operating states, the first slower, allowing the tools to bite into the materials, securing a position for the serious drilling, and the second stage, performing that serious drilling at the predetermined RPM, making a quick and clean cut. Our new industrial micro drills, with their 2-stage design, matched to the tasks, bring new levels of accuracy, consistency, and reliability to the work; it's a superior tool for the very tasks of those sectors, and customers have noticed. C&I in the quarter is launching customized solutions, maintaining its strong momentum in the critical industry and extending out of the garage, reaching new heights in profitability. Now for the Tools Group, sales in the second quarter are $482 million, including an organic decrease of 7.7%. The group's OI margin in the period was 23.8%, down 250 basis points due to the lower volumes. However, gross margins held down by 20 basis points, almost flat. The benefits of new products, manufacturing efficiencies, and rapid continuous improvement are evident in those numbers. During the quarter, we continued to focus our product development, redirecting our plans and guiding our selling programs toward innovative quick payback solutions that drive productivity. A cornerstone for pivoting is rooted in customer connection, standing side-by-side with the technicians, observing the work, witnessing the difficulties of modern and complex repair, and using insights to create tools that make especially difficult tasks much easier. In the second quarter, those insights led the Tool Group to design a new torque adapter for use on Ford E-Series commercial vans. The standard procedure for basic brake repair on that model requires the rear caliper bolts to be torqued at over 160-foot pounds, which is not easy and doubly difficult as the bolt is obstructed, making it impossible to access the area with standard tooling without removing auxiliary parts, a big hurdle. So we've specifically configured a 21-millimeter, 12.6-inch flat adapter with a half-inch hex drive to make the work easier and to specification. The device nestles perfectly between the particular obstructions on the model, engaging the fastener, turning a time-consuming task into one of just seconds, freeing the tech to tackle the next repair order. It's made in our Elizabethton, Tennessee plant and brings great value to the techs working on the E-Series, and there are a lot of them. Another example we observed when removing a canister tap that houses the fuel filter on Super Duty trucks; access to the 32-millimeter hex on top of the cap is blocked by other components. Standard sockets are out. Our team created a special low-profile socket, tapered to slide into position under the blocking hoses and, using a standard ratchet and extension, easily removes the clamp of the tap, completing the complicated repair easily. Produced in our Milwaukee plant, it's another quick payback item that makes significant differences for technicians. A final example comes from observing technicians walking to and from the workpiece; back and forth from their work to achieve standard pliers for basic tests. A compact design seemed to be the solution, so we expanded our joint plier line to develop a small 4.5-inch plier set with 3 models: a combination along with a flank drive slip joint version for versatility. They are all pocket-sized, allowing easy access for repairs or inspections. The new units save steps and make work easier in tight spaces and are offered in two handle models: one with a cushion grip to reduce hand fatigue and for the first time, our bare metal diamond plate texture that provides a superior grip even with sweaty or oily hands. Cold-forged in the U.S., the new pliers are a game changer. The rollout was incredibly successful, making our million-dollar hit product status just during the initial launch. And that's the Tools Group, pivoting to technicians' preferences, producing innovative, quick paybacks, making work easier, with new tools matched to the task and guided by customer connection, bringing quick value to the technicians, which you can see in the gross margins, almost flat during the downturn. You can also see our unwavering support for franchisees; operating expenses were about flat even in this turbulence and with lower sales. We'll maintain our training, our programs, and our efforts in the field even amidst this turbulence. We believe the uncertainty will subside, and we want our network to be strong and fully loaded when that occurs. Now for RS&I; group sales of $458.8 million in the quarter represented a $4.3 million or 1% organic increase, which was partially offset by $1.5 million of unfavorable foreign currency translations. Those gains reflected higher activity with OEM dealerships, attenuated by lower sales in the diagnostics division. OI margin was an even 25%, rising 60 basis points and among the group's best. The numbers reflect the strength of RS&I products and programs for repair shop owners and managers as we help them match the evolving challenges of the car park. Speaking of product evolutions and our progress with OEMs, the traditional method for lifting vehicles is becoming more complex with the onset of new hybrid and EV platforms. The batteries require changes in lift points to adjust for the different center of gravity on EVs. We have designed steel floor plates matched to particular models to assist in positioning vehicles in the exact locations for properly lifting, ensuring a safe procedure. The shops have enthusiastically embraced this innovation as another in the long line of necessary modifications to match the evolving car park. Another successful product release was the ProX1HD on-vehicle brake lathe, specifically for heavy-duty platforms like buses and semi-trucks, which restores components supporting optimized brake performance without needing a replacement. Previously, heavy-duty brake repairs required disassembly or ordering new parts, a laborious process. The new ProCut design avoids both the need for heavy lifting and eliminates the cost of new parts, presenting another game-changing opportunity. Garage owners recognize the value, and we project the ProCut will become industry standard. In RS&I, C&I serves the vehicle collision market with several heavy-duty items. A recent release during the quarter was our low-profile frame bench, innovatively designed to hold the workpiece at an optimal height, simplifying interaction with damaged vehicles. The bench is rugged for heavy collision work and integrates with existing policy solutions to torque the chassis back into position, effectively reducing fatigue on the user and making the process significantly easier. The collision space is quite robust and changing vehicles product offerings are doing very well, continuing on a positive trajectory. The RS&I quarter was notably strong. So those are the second quarter results: Tools Group down, impacted by uncertainty pivoting to customer preferences; launching new products, holding gross margins, and maintaining the network. C&I and RS&I providing the multi-sector power of customer connection and new product innovations; strong profitability balancing the headwinds of technician uncertainty and the overall corporation. Launching a broad range of products from tapered sockets to industrial power tools to collision benches. Sales were about flat; OI margin was 22.8%, excluding the legal benefits, one of our highest, with EPS at $5.07 and $4.91 excluding the legal item, setting a new high for performance achieved against the wind. 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 $1.1794 billion in the quarter compared to $1.1913 billion last year, reflecting a 1.1% organic sales decline and $5.7 million of unfavorable foreign currency translation, partially offset by $7.3 million of acquisition-related sales. Sales activity was similar to what we experienced in the first quarter, while our franchise van channel revenues continue to be dampened by affected technician confidence; however, our sales to repair shop owners and managers increased year-over-year. Encouragingly, activity with customers serving critical industries remained robust. Consolidated gross margin of 50.6% compared to 50.7% last year, reflecting the lower sales volumes largely offset by savings from the company's RCI initiatives. Operating expenses as a percentage of net sales were 26.8%, compared to 27.4% last year. In the quarter, as noted in our press release, operating expenses included an $11.2 million benefit for the final payments received associated with the legal matter. The 60 basis point improvement in the operating expense ratio is primarily due to the benefit from the legal payments, partially offset by the effects of lower sales volumes. Operating earnings before financial services of $280.3 million in the quarter included a benefit from the legal payments compared to $277 million in 2023. As a percentage of net sales, operating margin before financial services was 23.8%, including a 100 basis point benefit from the legal payments compared to 23.3% last year. Financial services revenue of $100.5 million in the second quarter of 2024 compared to $93.4 million last year, while operating earnings of $70.2 million compared to $66.9 million in 2023. Consolidated operating earnings of $350.5 million, including the legal benefit, compared to $343.9 million last year. As a percentage of revenues, the operating earnings margin of 27.4%, including the legal payments, compared to 26.8% in 2023. Our second quarter effective income tax rate was 22.6% compared to 22.9% last year. Net earnings of $271.2 million or $5.07 per diluted share, including an $8.7 million or $0.16 per diluted share after-tax benefit from the legal payments, compared to $264 million or $4.89 per diluted share in the second quarter of 2023. Now, let's turn to our segment results for the quarter. Starting with the C&I group on Slide 7. Sales of $372 million compared to $364.2 million last year, reflecting a 1.2% organic sales gain and $7.3 million of acquisition-related sales, partially offset by $3.8 million of unfavorable foreign currency translation. The organic increase is primarily due to a double-digit gain in sales to customers in critical industries, partially offset by a low single-digit decline in the segment's European-based hand tools business. With respect to critical industries, defense-related sales are strong, as is activity in the aviation sector. Gross margin improved 220 basis points to 41.7% in the second quarter from 39.5% in 2023. This was largely due to increased sales volumes and a higher gross margin in the critical industry sector, savings from RCI initiatives, and a 50 basis point benefit from acquisitions. Operating expenses as a percentage of sales rose 150 basis points to 25% in the quarter from 23.5% in 2023, primarily due to investments in personnel and other costs and a 60 basis point impact from acquisitions. Operating earnings for the C&I segment of $62.2 million compared to $58.1 million last year. The operating margin of 16.7% compared to 16% in 2023 and represented a new milestone of achievement for the segment. Turning now to Slide 8. Sales in the Snap-on Tools Group of $482 million compared to $543.1 million a year ago, reflecting a 7.7% organic sales decline, and $800,000 of unfavorable foreign currency translation. The organic decrease reflects a high single-digit decline in our U.S. business, partially offset by a low single-digit gain in our international operations. Gross margin of 48.8% in the quarter declined 20 basis points from 49% last year, primarily due to lower sales volumes. Operating expenses as a percent of sales rose 230 basis points to 25% in the quarter from 22.7% in 2023, largely due to the effects of lower sales volume. Operating earnings for the Snap-on Tools Group was $114.8 million compared to $137.7 million last year, with the operating margin of 23.8% compared to 26.3% in 2023. Turning to the RS&I Group shown on Slide 9. Sales of $454.8 million compared to $452 million in 2023, reflecting a 1% organic sales increase, partially offset by $1.5 million of unfavorable foreign currency translation. The organic gain includes a high single-digit increase in activity with OEM dealerships, partially offset by a mid-single-digit decline in sales of diagnostic and repair information products to independent repair shop owners and managers. Gross margin improved 50 basis points to 45.5% from 45% last year, primarily due to savings from RCI initiatives. Operating expenses as a percentage of sales of 20.5% improved by 10 basis points from 20.6% last year. The operating earnings for the RS&I Group of $113.6 million compared to $110.4 million last year. The operating margin of 25% compared to 24.4% reported last year. Now turning to Slide 10. Revenue from financial services increased $7.1 million or 7.6% to $100.5 million from $93.4 million last year, primarily reflecting the growth of the loan portfolio. Financial Services operating earnings of $70.2 million compared to $66.9 million in 2023. Financial services expenses were up $3.8 million from 2023 levels, including $3.5 million of higher provisions for credit losses. Sequentially, the provision for credit losses was lower by $1.3 million. In the second quarter of 2024 and 2023, the respective average yield on finance receivables were 17.7% and 17.6%. In the second quarter of '24 and '23, the average yield on contract receivables were 8.9% and 8.6%, respectively. Total loan originations of $308.1 million in the second quarter represented a decrease of $18.2 million or 5.6% from 2023 levels, primarily reflecting a high single-digit decline in extended credit originations, partially offset by higher originations of contract receivables. Consistent with the sales activity in the Snap-on Tools Group, extended credit origination to the U.S. declined but were only partially offset by growth in originations internationally. Moving to Slide 11. Our quarter end balance sheet includes approximately $2.5 billion of gross financing receivables, with $2.2 billion from our U.S. operation. For extended credit or finance receivables, the U.S. 60-day plus delinquency rate of 1.6% is up 30 basis points from the second quarter of 2023 but down 20 basis points sequentially from the 1.8% reported last quarter. Twelve-month net losses for the overall extended credit portfolio of $58.6 million represented 2.94% of outstandings at quarter-end. Considering the current environment, we believe the delinquency and portfolio performance metrics remain relatively stable and are consistent with pre-COVID experience. Now, turning to Slide 12. Cash provided by operating activities of $301.1 million in the quarter represented 108% of net earnings compared to $270.3 million last year. The increase as compared to the second quarter of 2023 largely reflects decreases in working investment and higher net earnings. Net cash used by investing activities of $60.2 million primarily reflected net additions to finance receivables of $41.2 million and capital expenditures of $23.2 million. Net cash used by financing activities of $127.9 million included cash dividends of $98 million and the repurchase of 174,000 shares of common stock for $47.4 million under our existing share repurchase programs. As of quarter end, we had remaining availability to repurchase up to an additional $271.1 million of common stock under our existing authorization. Turning to Slide 13. Trade and other accounts receivables decreased $7.8 million from 2023 year-end. Days sales outstanding of 60 days were unchanged from year-end. Inventories decreased $40.9 million from 2023 year-end. On a trailing 12-month basis, inventory turns of 2.4 compared to 2.3 at year-end 2023. Our quarter end cash position of $1.2327 billion compared to $1.15 billion at year-end 2023. In addition to cash and expected cash flow from operations, we have more than $900 million available under our credit facilities. As of quarter end, there were no amounts outstanding under the credit facility and there were no commercial paper borrowings. That concludes my remarks on our second quarter performance. I'll now briefly review a few outlook items for 2024. For the full year, we expect that capital expenditures will be in the range of $100 million to $110 million, and we currently anticipate that our full year 2024 effective income tax rate will be in a range of 22% to 23%. I'll now turn the call back to Nick for his closing.
Nick Pinchuk, CEO
Thanks, Aldo. Wow! That's our second quarter, a period of continuing turbulence borne out of uncertainty in the grassroots detect, with uncertainty about the near-term environment. Customers, techs that are cash-rich and confidence-poor. But it was also a period where our value-creating mechanism, observing work right in the workplace, connecting with customers, and translating insights into innovations that can make critical tasks easier, showcases our business model's efficacy that stretches well beyond our technician customer base, and does so quite profitably. It was an interlude in which our Snap-on value creation processes displayed ongoing strength, particularly visible in the Tools Group, where it drove product value and operating efficiency, which bolstered gross margins that remained about flat despite lower volumes. You can see that written all across the quarter. The Tools Group demonstrated an uncertainty-driven decline in volume while continuing its unreduced support for the franchise network. They offer profitable, quick payback products with RCI keeping gross margins reasonable, offsetting some of the volume impact. RS&I seized the opportunity to assist shop owners and managers in matching rising vehicle repair complexity successfully, achieving an OI margin of 25%, one of its best. C&I rolled out of the garage to critical industries, overcoming recessions in Europe and turbulence to grow in each sector, including continuing the upward trajectory of its customized kitting business, achieving an OI margin of 16.7%, marking its highest ever. All of these elements came together for a positive performance for the overall enterprise: sales about flat against uncertainty, OI margins at 23.8%—22.8% excluding the legal payment, one of our strongest—and EPS at $5.07—$4.91 without the legal payment, the highest for any Snap-on quarter. It was an encouraging period, and we believe that with the strength of our business model, with the opportunities inherent in our broad markets, and with the considerable experience of our team, Snap-on will remain resilient amid turbulence, making the most of abundant possibilities in the market while advancing through 2024 and well beyond. Now, before I turn the call over to the operator, I'll speak directly to our franchisees and associates. I know a lot of you are listening. The strength Snap-on has demonstrated amid uncertainty and the associated advantages we carry into the days ahead have been created by all of you. The considerable capabilities you bring to bear every hour have my admiration. For the significant success you've achieved in the quarter and for many periods before, you have my congratulations; and for the unwavering belief you hold in our team's future, you have my thanks. Now, I'll turn the call over to the operator.
Operator, Operator
And our first question today will come from Luke Junk with Baird.
Luke Junk, Analyst
To start with, just hoping we could get an update on the facility expansion projects that you have going on right now, both in terms of progress incrementally, timing, and how things are progressing versus your expectations? And to what extent you can leverage that to pivot the mix and really focus on those quicker payback items that folks are looking for?
Nick Pinchuk, CEO
It is concerning what the...
Luke Junk, Analyst
I think both Milwaukee facility expansions are progressing well.
Nick Pinchuk, CEO
Algona has added some space that is now operational. While it's being utilized, the focus is on improving efficiency. Just because the space is in use does not guarantee high efficiency. However, it has helped alleviate some bottlenecks and allowed us to create new products, such as a smaller 36-inch Epic toolbox at a lower price point, enabling quicker payback. In Milwaukee, we are expanding our operations by 25%, with machinery being installed and others expected to arrive soon to support our pivot. We've partially expanded some of our flexible socket impact line and bit line, which will continue to improve throughout the quarter. As we advance, we will enhance our efficiency. In the fourth quarter and first quarter, we are adding capacity to the plating line in Elizabeth, where we produce wrenches. This line has already been expanded and is operational, with additional machines being integrated to further increase our capacity for ratchets. We are also boosting the capacity for adjustable wrenches due to high demand. Overall, these expansions are expected to provide around a 25% increase in capacity. Some expansions are operational while others are not yet fully functional. These efforts have helped eliminate some of the previous challenges we faced. The improvements in gross margin reflect the efficiencies gained from the completed partial expansions that are now in operation.
Luke Junk, Analyst
That's very helpful. Could you maybe comment on tool storage, specifically in the quarter the benefit, I think, already in the first quarter of you having the capacity in place and flexing it like you just spoke to, did the growth continue in the second quarter?
Nick Pinchuk, CEO
Every product line in this quarter was more balanced, but every product line was down some. Big ticket, you saw the originations; I think originations were down more originations, which is a surrogate for big tool—big ticket sales. Diagnostics was probably the big player in that because diagnostics were comparing to a launch of the SOLUS+ in the last year. Non-launch quarters can lead to differing comparisons. Generally, tool storage, if you're talking about the efficacy of tool storage, this is allowing us to sell accessories, benches, and cards that technicians are more receptive to in this situation. That will accrue to us; it's just a question of how quickly we can get that burned into the Algona production process.
Luke Junk, Analyst
And then lastly, just given the uncertainty in terms of tax right now, do you meter or change your approach to the SFC all this year, just in terms of promotions and positioning? Could it be a venue to refine your approach in this more unsettled environment kind of exiting this year into '25?
Nick Pinchuk, CEO
Yes, yes. The overall thing, the SFC serves 3 purposes. First, we have a training seminar; we're going to train the heck out of things we think need training. Some are smaller ticket diagnostic units, some are handles and so on. So we're working on those things in the SFC. We're going to continue that because we want a full sprint on fully loaded when we come out of this difficulty with the Tools Group and our network. Then we have kind of a tool show which is several football fields long, and you want to let the people touch the tools. We'll have some change because we'll be trying to prioritize quicker payback items. For example, one of the warm-up promotions for the SFC was the Super 7, filled with hand tools, wrenches, and torque units. It did go pretty well, almost as a sellout. We're going to try to push in that situation, emphasizing physical presentation and verbal urging for quicker payback items, not completely neglecting further diagnostic tools. The other thing about the SFC is that it's an essential contact point with our franchisees—we want to reinforce that they have their economic future in a strong and robust business.
Operator, Operator
And our next question will come from Bret Jordan with Jefferies.
Patrick Buckley, Analyst
On the RS&I, could you talk more on the dispersion between the OEM dealer customers and the independents? Is that independent shop softness similar to what you're seeing in the Tools Group? Just more cautious given the backdrop? Or is there something else?
Nick Pinchuk, CEO
We are strong in the dealerships because the OEM programs have been strong. That was the purpose of the Lyft discussion; the OEMs are raising their game to match different drivetrains and autonomy. The OEMs are launching programs accordingly, and that is underpinning our business. That business grew high single digits this quarter. It also includes our electronic parts catalog with software benefiting the business. If you pivot, it's a little more complicated situation with the independents because flowing through RS&I is the diagnostics division, which has seen a decline due to dependence on information integral to RS&I products. Diagnostics, like big ticket, was down in the Tools Group and dragged down some RS&I volume. Overall, we report organic increases in RS&I, but directly selling to independent businesses is doing well. We still see progress in independent shops, particularly with direct sales businesses. We note that while we can sell directly to customers, we still sell through distributors, and there's a pull-off in that business, especially with some RS&I businesses. The independent shops are doing well, but intermediaries are a bit more reluctant right now.
Patrick Buckley, Analyst
Got it. That's helpful. And then within the Tools Group, could you talk about how pricing compared to units during the quarter? Or maybe just additional color around how successful these lower payback items are and how that mix is affecting things?
Nick Pinchuk, CEO
The price per unit is much lower. You've got to sell a lot more wrenches to make up for a tool storage box; that's crucial. And that can weigh on your volume. But I would offer you to look also at gross margin. Margin is down by just 20 basis points amid a 7.7% organic sales decline. How does that happen? It happens because the new tools we bring out are selling at good margins, doesn't mean we're pricing existing businesses poorly, but many of these new tools are picking up significant margins. The Tools Group has done a good job of holding margins; we kept spending even at lower volumes, and while we prepared for unpredictable situations, we don't believe the sun is completely gone yet. New tools with great margins are playing out positively in the financials.
Operator, Operator
And our next question will come from Gary Prestopino with Barrington Research.
Gary Prestopino, Analyst
Just wanted to address the corporate expenses; they look like they were down, and I would assume that's the impact of the legal settlement, right?
Nick Pinchuk, CEO
Yes, down about $18 million or something like that—possibly equal changes. This pains me, but you got to look at it; there's an $11.2 million benefit from the legal settlement and a reduction in management stock-based compensation and bonuses estimated for the quarter.
Gary Prestopino, Analyst
Right. And I could also see the stock comp was down. Looking forward in the back half of the year, should it be without the impact of legal settlement? Should it be somewhere between $20 million and $25 million a quarter?
Nick Pinchuk, CEO
I would think more at the top end of that range.
Gary Prestopino, Analyst
The other question I want to ask you is quite obvious that there's a slowdown here in buying diagnostic equipment. Some of it deals with the fact that you just had a great year last year. But when does it get to the point where the technician or the shop starts falling behind without upgrading their diagnostic products?
Nick Pinchuk, CEO
Sure. It does. I think you have 2 things going on. I hate to say comparison, but it's true; we launched a new product last second quarter, so you're comparing against that. But there's a clear aversion among technicians against bigger ticket items at this point. They seem to be less likely to engage in larger financial commitments. I was with franchisees and garage owners lately, and they shared concerns about uncertainty affecting spending. So while they have cash to spend, they’re hesitant to delve deeper into commitments for larger items. Your overarching point is quite valid; the increasing complexity of modern vehicles requires tools capable of diagnosing that complexity. Eventually, technicians will need hardware upgrades to stay current.
Operator, Operator
Our next question will come from David MacGregor with Longbow Research.
David MacGregor, Analyst
Nick, let me just ask you about sort of the second half and expectations here. I mean given second quarter negative organic growth in Snap-on tools, does that suggest second half growth should be negative as well? And I mean, 2Q was not a challenging compare. How much forward visibility do you have given the truck inventory levels and pre-SFC order growth?
Nick Pinchuk, CEO
I wouldn't say that Q2 last year is an entirely good comparison; it was somewhat tepid. However, when you look back, the sequential movement between the first quarter and the second quarter isn't that much different compared to last year. So it's not inconsistent. I cannot assure you that the second half will see negative performance; we have plans to offset that. For several quarters now, sales off the van have been more sizable than sales to the man on a year-over-year basis. We saw that change toward the end of the quarter. So I can't predict where it goes. From an operational point of view, it's reasonable to believe that things should play out more positively based on the initiatives we're investing in. However, given the global uncertainty is a tough call to make.
David MacGregor, Analyst
Right. Nick, the operating expenses in the second quarter in the Snap-on Tools segment were reduced in relation to revenue. You described that mainly as being related to volume. It seems like you're planning to focus more on training and possibly on advertising and promotions. What are your expectations for operating expenses to keep decreasing in the second half?
Nick Pinchuk, CEO
My view on the second quarter is that we maintained spending rather than reduce. We kept spending the same and possibly spent a bit more. So we're not planning to cut expenses significantly but, rather, we're aligning support to meet current conditions. I didn't mean to indicate that we're going to open the purse strings and spend a lot more. I intend to hold our ground while we support the existing frameworks.
David MacGregor, Analyst
Got it. Can you just talk about cadence within the quarter? You mentioned earlier that your trucks were destocking right up until late in the quarter.
Nick Pinchuk, CEO
Cadence was consistent throughout the quarter. Toward the end, we had fewer destocking events in the last month or so, which is a positive sign, however, some of that can happen just because it's the end of the quarter. It's challenging for me to interpret whether that's a lasting trend or if it's simply an anomaly. Overall, I believe the quarter moved in a fairly stable manner, with relationships between earlier activities holding steady.
David MacGregor, Analyst
And your early July experience wouldn't give you a framework for interpreting?
Nick Pinchuk, CEO
No. It's too early; there are still many factors in July we can't fully assess yet. We did have the Super 7 program launch and it seems to be received very well, close to expectations, maybe even sellout status. That however doesn't signify a clear trend into future performance. We hope for growth, but acknowledging potential volatility remains.
David MacGregor, Analyst
Last question for me. Just on credit, what are you seeing in terms of RA transfers? And how would originations look without those RA transfers?
Aldo Pagliari, CFO
The mix of activities is pretty much similar to last quarter. They have not pivoted to RA transfers as a means of funding activities.
Operator, Operator
And our next question will come from Scott Stember with Roth MKM.
Scott Stember, Analyst
Nick, is there a way to assess how much of the tool sales decline is simply due to the inability to manufacture product? If you can't address that, could you provide an idea of when we might expect to have full capacity to meet demand?
Nick Pinchuk, CEO
It's difficult for me to quantify definitively how much capacity impacts that, but we anticipate an improvement with every day as we ramp up full capacity. Some machines are in; we're at about 50% capacity improvements on the Flex side. It's helping, but not enough. We aim to address more demands with full production capabilities by the third and fourth quarters. While I can't provide specific revenue forecasts, we believe each quarter will show improvement. The translation into revenue and profit will take some time.
Scott Stember, Analyst
Last question; what are you hearing from shops regarding how your competitors are faring at the shop level? Wants to gain insight into potential market share loss or gains?
Nick Pinchuk, CEO
Competitors don't tend to come up in conversations with franchisees or technicians, so I can't provide detailed insights in that regard. When I converse with our franchisees and regional sales developers, it seems competitive market share concerns aren't very prevalent. I've not noticed increased presence from competitors; it seems uncertainty and our own execution impact the performance more than external competitive pressures.
Operator, Operator
And our next question will come from Christopher Glynn with Oppenheimer.
Christopher Glynn, Analyst
Could you provide insight on your net cash position? Remaining repurchase authorization is a small proportion of your liquidity, which suggests a different financial structure than in past years.
Nick Pinchuk, CEO
We need to think carefully about our cash usage moving forward; making sure our business is fully funded is essential. Secondly, we'll assess our dividend, which we've paid every quarter since 1939 and have never reduced, so we're considering its status carefully. We also have acquisition opportunities that we're always evaluating; we guide with caution. Stock buybacks will factor in, but overall, we need to reassess how we allocate our capital to best support our strategic goals.
Christopher Glynn, Analyst
Any interesting geographical dispersion trends in your business performance lately?
Nick Pinchuk, CEO
In the last six months, I met with franchisees across various regions, and the overall story doesn’t vary significantly. There is uncertainty, and while the repairs market remains robust, technicians often reflect a cash-rich but uncertain mindset. I don't observe notable disparity among regions, although we analyze for differences when we can. Overall, the concerns seem to be universal among technicians.
Christopher Glynn, Analyst
Do you believe tax law compliance has a substantial impact on administration costs?
Nick Pinchuk, CEO
I don't think it's heavily impacting technicians directly, though it’s worth mentioning that small businesses, in general, experience higher compliance costs. Thus, even small shops might be affected, while technicians don't seem to pinpoint tax burdens as an issue.
Operator, Operator
And our next question will come from Tom Hayes with CL King.
Tom Hayes, Analyst
Could you provide color on the critical industries showing some positive signs? Any insights regarding avionics, military, or natural resource sectors?
Nick Pinchuk, CEO
Yes, the critical industries, particularly defense and education, have shown strength, with education experiencing notable growth. This showcases the hunger for Snap-on products among younger audiences. Aviation remains stable, especially due to current situations in the military sector, which have increased demand for our documentation and accuracy in repair solutions. With our custom kitting being well-received, we're well-positioned to maximize opportunities across these sectors.
Operator, Operator
This will conclude our question-and-answer session. I'd like to turn the conference back over to Sara Verbsky for any closing remarks.
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
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.