Earnings Call Transcript
Snap-on Inc (SNA)
Earnings Call Transcript - SNA Q4 2022
Operator, Operator
Good day, and welcome to the Snap-on Incorporated 2022 Fourth Quarter and Full Year Results Conference Call. I would now like to turn the conference over to Sara Verbsky, Vice President of Investor Relations. Please go ahead.
Sara Verbsky, Vice President of Investor Relations
Thank you, Cole, and good morning, everyone. Thank you for joining us today to review Snap-on's fourth 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 the 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?
Nicholas Pinchuk, CEO
Thanks, Sara. Good morning, everybody. Wow, it's been some year and quite a quarter. China knee-jerking from Zero COVID and strict lockdowns to living with COVID in an unprecedented virus explosion, diminished but still continuing spikes in the supply chain, the ongoing Ukraine war, the reemergence of Brexit and now the rising shadow of the recession, echoing in almost daily public pronouncements. And through it all, Snap-on delivered another in a long line of encouraging performances. We'll go through it. Starting with the highlights of the quarter and the year, I'll give you my perspective on the results, the market environment and our progress. And after that, Aldo will move into – as usual, Aldo will move into a more detailed review of the financials. The fourth quarter was encouraging. We believe it emphatically demonstrates the continuing resilience of our markets and the capability of our operations to achieve in the face of difficulty, wielding the power of our product, our brand, our people and our strategic position. It all combines to serve as clear evidence of what we already know. Snap-on is a unique and extraordinary operation. The results for the fourth quarter serve as more testimony to that fact, and they are an unmistakable demonstration of our continuing momentum. Of course, we dealt with differences from group to group and within the operations, but we believe the overall results are compelling. Fourth quarter sales of $1.159 billion as reported, up 4.3% from 2021 included a substantial impact from unfavorable foreign currency of $37.7 million, a 370 basis point headwind, and an organic sales increase of 8% over last year, representing a 22.7% rise over 2019. This now represents the corporation's tenth consecutive quarter above pre-pandemic levels. It's a trend of, I think, some significance in uncertain times like these. From an earnings perspective, our operating income for the quarter, including the impact from unfavorable foreign currency, was $248 million, up 6.8% compared to 2021 and 44.7% above the 2019 pre-pandemic level. The OI margin for the quarter was 21.5%, improving by 50 basis points over last year and 360 basis points over 2019. It's the same resiliency that's been demonstrated over the years as we paid dividends every quarter since 1939 without a single interruption or reduction. In fact, in November, our dividend was raised by 14.1%, marking the 13th straight year of increases. It's more a testimony of Snap-on's consistent performance through varying environments. This is just another one of them. For Financial Services, operating income of $63.9 million was down from the $67.2 million in 2021. That decrease reflected our forecast to return to more historical provision levels, but all the while keeping delinquencies flat to last year. And our overall quarterly EPS reached $4.42, $0.32 or 7.8% above 2021 and up 43.5% compared with 2019. Those are the numbers. Now to the markets. We believe that automotive repair remains very favorable. It makes sense. The average age of vehicles continues to increase. The complexity of repairs is rising steeply as new platforms enter the vehicle park, and enter they have, starting in dealerships. And we have seen a resurgence in dealership projects despite a still recovering supply chain. Changes in internal combustion, the rise of electric vehicles and the expansion of vehicle autonomy have made dealerships eager for new equipment to support complex repair tests of the evolving vehicle park, and we see it. Projects and powertrains aside, dealerships continue to see healthy demand in repair and maintenance and in warranty, driving the need for shop expansion and more technicians. You can see it in the macros. Repair spending, technician numbers, technician wages, all up. Our dealership segment is expanding. And for independent repair shops, confidence remains sky-high across the board. Shop owners and managers confirm that demand for repairs for technicians over complex skills are all rising, and our sales growth in that sector mirrors that enthusiasm. We believe we're moving into what we can call the golden age of vehicle repair, and our Tools Group and RS&I group are uniquely positioned with the product, the brand and the people to take full advantage, even in the midst of turbulence. You can see it. Now for the critical industries, where our Commercial & Industrial Group, or C&I operates. We continue to see progress, but the group spans wide jurisdictions. And as such, various headwinds across the geographies and the industries have attenuated some of those gains. For geographies, Europe with the war and the reemergence of Brexit and China impacted by COVID chaos was a stark contrast to relatively strong North American markets; a lot of variation. The range in variability among sectors also continues to be a challenge. Natural resources, heavy-duty fleets, general industries and international aviation were robust, but the military area remains challenged. Overall, however, order demand for most of the critical industries has been strong, and we believe that's a great signal for C&I's future. So C&I does have challenges across geographies and the segments, but we have made advancements, and we see opportunities for tomorrow. Going forward, we believe we'll keep moving down our wide runways for growth. And as we proceed, we're also fortified, as all of you have heard before, by our Snap-on Value Creation processes, safety, quality, customer connection, innovation and rapid continuous improvement, or RCI. They're the core processes that drive our ongoing progress, especially customer connection and innovation, growing our product line. You see, our franchisees and our direct sales force puts us in a strategic advantage, standing face-to-face with professional techs, understanding their individual challenges, showcasing the solutions created by our powerful product and demonstrating their use. Our resilient markets do represent a significant opportunity, and we are there to take advantage up close and personal, like no one else, right where the jobs are done. And it's working. 2022 was a year of substantial headwinds, but our team prevailed with the year achieving new heights. Sales up $4 billion, $492.8 million, up 5.7%, reflecting an organic gain of 8.7% compared to 2021 and a 20.2% organic increase versus 2019. The opco margin for the year was 20.9%, up 90 basis points from '21 and exceeding the pre-pandemic margins by 170 basis points. As reported, earnings per share for the year were $16.82, up 12.7% from '21 and represented a rise of 35.5% from 2019. It's all evidence of the decisive and ongoing momentum that marked the year and the quarter. Now the operating groups. Let's start with C&I. Fourth quarter sales of million for the group were down $15.5 million versus last year, including $21.2 million in unfavorable currency and a 1.7% organic gain. Our Specialty Tools division was a clear positive with double-digit gains. Precision is becoming essential every day, and our torque products are putting us right in the middle of that rise. Our critical industries also showed strength, especially in North America, propelled by growth in natural resources, general and heavy-duty, partially attenuated by lower military activity. Outside North America, it was a different story. SNA Europe was down and China was diminished. OI for C&I was $47.9 million, down $2.2 million, primarily from the $2.3 million in unfavorable foreign currency. The group's operating margin was 14%. It was flat to last year, but still represented an advance of 120 basis points over the pre-pandemic level in 2019, and that was against 50 basis points of negative currency and acquisition dilution. The specialty torque business within C&I really is making significant strides. Torque is hot, and Snap-on is widening its array of new offerings to prominently participate in that trend. Products like our new series of digital torque checkers. It's from our Norbar engineering team. You might remember we acquired Norbar a few years ago. Our Norbar engineering team in England, more compact and easier to use, helps technicians validate the accuracy of torque instruments close to the workplace, saving a lot of time. Our new checkers accommodate torque measurements from 5-inch pounds to 1,500 foot pounds and rent from a quarter inch to 1-inch covering jobs from precision fasteners and a jet cockpit to a heavy-duty bolt on a giant oil rig, a wide range of applications. And it's compact steel housing easily mounts in a variety of convenient locations at the point of issuing or in the pathway of the workflow, like tool cribs, aviation hangars and manufacturing cells, making torque checking an easy exercise. With an accuracy of plus or minus 1%, our new checker increases process quality without work interruption, raises consistency in assembly activity and, with a streamlined documentation feature, greatly improves the management of fastening in any application. The initial launch was well received by any operation that relies on precision torque, and there are a lot of them. As you can imagine, the new checker is right on track to be a Snap-on hit product with sales of $1 million in the first year. So it looks like it's a pretty strong product for us. C&I mixed progress challenged with headwinds, but it did have significant areas of improvement paving the way for future growth. Now on to the Tools Group. Quarterly sales of $542.7 million, up $37.9 million, including 9.5% in unfavorable currency and a 9.6% organic increase, gains in the U.S. operation and continued expansion in the international networks. And it was all led by big ticket items, tool storage and diagnostics both with double-digit gains. Operating earnings for the Tools Group were $116.1 million in the quarter, $5.6 million above 2021, and that included $4.5 million in unfavorable currency. The operating margin was 21.4%, 50 basis points below last year, but that was impacted by currency and by product mix, but it was still a result of considerable strength. Tools Group again represents the ongoing power and market leadership of our van network. It's written across the financials. And that positivity is clearly an boldly echoed in the voices of our franchisees. I can tell you, I was just at one of our annual kickoffs. It's unmistakable that they're enthusiastic and confident. They know they are growing, and they firmly believe there's more to be had. Our franchisee health metrics confirm all of that to be true. The quantitative trajectory delays in that data supports every bit of the positivity – of the positive attitude. And the franchisees expressed their excitement in more formal ways. During the quarter, we were recognized by the Franchise Business Review, which surveys franchisee satisfaction. And it's the latest ranking that publication, once again, listed Snap-on as a top 50 franchise, marking the 16th consecutive year we received that award. And internationally, Snap-on was ranked #1 in Elite Franchisees Magazine's Top U.K. Franchises for 2023, finishing not only above the U.K.-only franchise systems but also coming in ahead of a number of popular global brands. Now that type of recognition reflects, I think, the fundamental strength of our brand business, and it would not have been achieved without a continuous stream of innovative new products. As part of that, Snap-on continues to lead the industry with great tool storage innovations designed to improve productivity and allow techs to personalize their workspace. We're the first to market with the LED power top, rightly lighting Snap-on tools like special jewels as each drawer is accessed. It's quite a sight. It enables the techs to show the pride in their work. And building on that feature, in December, we started shipping the first of our new IRIS tool storage units. It's a 68-inch special edition epic roll cab, which allows the technician to adjust the drawer lighting with an infinite array of color selections. It is an eye-catcher coated in great paint paired with red trim; and it also features, for the first time, a specially lit Snap-on logo nameplate. It's innovative, striking. And as for all epic boxes, all of them, it streams functionality. The power top and the power door provides 10 electrical outlets and 4 USB ports throughout the road that ensures that all the cordless tools, the lights, and the accessories are charged and at the ready. It also features our unique speed drawer for smart, customizable tool organization. It's a very popular and productive feature in the shops. Convenience, productivity and distinction, the IRIS received an overwhelming reception, helping to drive the landmark tool storage quarter we had just recently. It shows that pride really is a powerful salesman. You show that every day. Well, that's our Tools Group, booming in the U.S. progressing internationally, continuing the stream of new products, building the brand, enhancing the brand channel and moving forward with momentum. Now for RS&I. In the fourth quarter, our RS&I Group results confirmed what we've been saying all along. Snap-on is well positioned for the ongoing rise in vehicle repair. RS&I sales in the quarter of $437.9 million increased 11.6%, including $9.5 million in unfavorable currency and a 14.3% organic gain, 14.3%. That rise was authored by a great performance, and that rise was authored by double-digit increases in OEM dealerships as manufacturers continue to release new models, invest in new equipment and implement essential tool programs. But our business in the independent garages also expanded nicely with double-digit growth in our undercar equipment and in our diagnostics and repair information products, twin pillars of strength. Shop owners need upgrades to follow the changing car park, and they now have confidence regarding their futures to act on that imperative and Snap-on is ready to help. RS&I operating earnings for the quarter were $110.6 million, up 13.8%. And again, the operating margin was 25.3%, rising 50 basis points over 2021, exhibiting our team's ability to navigate the turbulence, welding Snap-on value creation, connecting with customers, launching innovation executing RCI and doing what they're expected to do: keep raising profitability. One example is our diagnostic business, double-digit growth led by new products. Last quarter, we mentioned the launch of our game-changing handheld diagnostic unit, Zeus Plus. It's selling at a record pace, in hardware and in software subscriptions. It's a great unit that again raises the bar for advanced repair, providing technicians with powerful health and troubleshooting and diagnostics for the most complex of vehicle repairs. Zeus Plus makes those special challenges take up so much shop time appear quick and easy, and the technicians are noticing. RS&I, the repair shops are confident seeing a great future, and RS&I has the products to pave their way. Well, that's our fourth quarter. Opco organic sales rising 8%, 10 quarters of consecutive growth from pre-pandemic levels. Tools Group, demonstrating strength. Organic sales up 9.6% over last year, rising 33.2% from pre-pandemic levels. RS&I products to meet the needs of the vehicles of today and of tomorrow, activity up 14.3% organically, gains in both OEM dealerships and independent shops, C&I showing potential for growth despite international headwinds, strong momentum in the critical industries with much more to go. And it all drove a 21.5% operating margin for the overall enterprise, rising 50 basis points from last year and an EPS of $4.42, up over every comparison. It was another encouraging quarter. Now I'll turn the call over to Aldo. Aldo?
Aldo Pagliari, CFO
Thanks, Nick. Our consolidated operating results are summarized on Slide 6. Net sales of $1.559 billion in the quarter increased 4.3% from 2021 levels, reflecting an 8% organic sales gain, partially offset by $37.7 million of unfavorable foreign currency translation. The organic sales increase this quarter reflects double-digit gains in the Repair Systems & Information Group, high single-digit growth in the Snap-on Tools Group and low single-digit gains in the Commercial and Industrial group. From a geographic perspective, double-digit sales growth in both North and South America more than offset weaker demand in Europe. Consolidated gross margin of 48.5% improved 40 basis points from 48.1% last year. Contributions from the increased sales volumes and pricing actions, 40 basis points of favorable foreign currency effects and benefits from the company's RCI initiatives more than offset higher material and other costs. Again, this quarter, we believe the corporation through pricing and RCI actions continues to navigate effectively the cost and other supply chain dynamics of the current environment. Operating expenses as a percentage of net sales of 27% improved 10 basis points from 27.1% last year. Operating earnings before financial services of $248 million in the quarter compared to $232.2 million in 2021 as a percentage of net sales, operating margin before financial services of 21.5% improved 50 basis points from last year's fourth quarter. Financial services revenue of $88.3 million in the fourth quarter of 2022 compared to $86.9 million last year. Operating earnings of $63.9 million decreased to $3.3 million from 2021 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 of $311.9 million in the quarter compared to $299.4 million last year. As a percentage of revenues, operating earnings margin of 25.1% was unchanged from last year. Our fourth quarter effective income tax rate of 22% compared to 22.3% last year. Net earnings of $238.9 million or $4.42 per diluted share increased $15.2 million or $0.32 per share from last year's levels, representing a 7.8% increase in diluted earnings per share. Now let's turn to our segment results for the quarter. Starting with C&I group on Slide 7. Sales of $343.2 million decreased from $358.7 million last year, reflecting a $5.7 million or 1.7% organic sales gain, which was more than offset by $21.2 million of unfavorable foreign currency translation. The organic growth primarily reflects double-digit gains in the segment specialty torque business as well as a low single-digit increase in sales to customers in critical industries. These gains were partially offset by a mid-single-digit decline in the segment's European-based hand tools business. With respect to critical industries, gains in sales to heavy-duty fleets, mining and general industry more than offset lower activity with the military. Gross margin of 37.7% improved 120 basis points from 36.5% in the fourth quarter of 2021. This was primarily due to increased sales volumes and pricing actions, benefits from RCI initiatives and 20 basis points of favorable foreign currency effects, partially offset by higher material and other input costs. Operating expenses as a percentage of sales of 23.7% in the quarter increased 120 basis points from 22.5% in 2021, mostly due to reduced sales and lower expense businesses. Operating earnings for the C&I segment of $47.9 million compared to $50.1 million last year. The operating margin of 14% was unchanged from last year. Turning to Slide 8. Sales in the Snap-on Tools Group of $542.7 million compared to $504.8 million a year ago, reflecting a 9.6% organic sales gain, partially offset by $9.5 million of unfavorable foreign currency translation. The organic sales growth reflects a double-digit gain in our U.S. business and a low single-digit increase in our international operations. The quarter benefited from robust demand for our recently launched diagnostic platform as well as our tool storage product line. Gross margin of 43.2% in the quarter declined 70 basis points from 43.9% last year. The year-over-year decrease is primarily due to 40 basis points of unfavorable foreign currency effects, increased sales of lower gross margin products and higher material and other costs. These declines were partially offset by benefits from the higher sales volume and pricing actions. As a reminder, the Snap-on Tools Group serves as a distributor for products such as diagnostics, which is made by our RS&I Group. Operating expenses as a percentage of sales of 21.8% improved 20 basis points from 22% last year. Operating earnings for the Snap-on Tools Group of $116.1 million compared to $110.5 million last year. The operating margin of 21.4% compared to 21.9% in 2021. Turning to the RS&I Group shown on Slide 9. Sales of $437.9 million increased 11.6% from $392.5 million in 2021, reflecting a 14.3% organic sales gain, partially offset by $9.5 million of unfavorable foreign currency translation. The organic gain is comprised of double-digit increases in sales of undercar and collision repair equipment in activity with OEM dealerships and in sales of diagnostics and repair information products to independent shop owners and managers, including those diagnostic sales affected by the Snap-on Tools Group. Gross margin of 45% declined 110 basis points from 46.1% last year, primarily due to higher material and other input costs and increased sales in lower gross margin businesses. These declines were partially offset by benefits from pricing actions and savings from RCI initiatives as well as 80 basis points of favorable foreign currency effects. Operating expenses as a percentage of sales of 19.7% improved 160 basis points from 21.3% last year, primarily due to benefits from sales volume leverage, higher activity and lower expense businesses and savings from RCI initiatives. Operating earnings for the RS&I group of $110.6 million compared to $97.2 million last year. The operating margin of 25.3% improved 50 basis points from 24.8% reported a year ago. Now turning to Slide 10. Revenue from Financial Services of $88.3 million, including a $1.2 million of unfavorable foreign currency translation compared to $86.9 million last year. Financial Services operating earnings of $63.9 million, including $900,000 of unfavorable foreign currency effects compared to $67.2 million in 2021. Financial Services expenses of $24.4 million were up $4.7 million from 2021 levels, mostly due to $4.8 million of higher provisions for credit losses. While provisions have increased versus the historically lower provision rate experienced last year, we believe that the loan portfolio trends remain stable. For reference, provisions for finance receivable losses in the current quarter were $12.8 million as compared to $8.4 million in the fourth quarter last year, yet lower than the $14.1 million and the $16 million recorded in the fourth quarters of 2019 and 2018, respectively. As a percentage of the average portfolio, Financial Services expenses were 1.1% and 0.9% in the fourth quarter of 2022 and 2021, respectively. In the fourth quarter of 2022 and 2021, the respective average yield on finance receivables were 17.6% and 17.7%. In the fourth quarter of 2022 and 2021, the average yield on contract receivables were 8.6% and 8.5%, respectively. The blended yield for the portfolio was 15.7% in the fourth quarter of 2022, which is the same as last year. Total loan originations of $299.7 million in the fourth quarter increased $43.4 million or 16.9% from 2021 levels, reflecting a 17% increase in originations of finance receivables, a 16.7% increase in originations of contract receivables. The increase in finance receivable originations reflects the continued strong sales of big-ticket items by our franchisees during the work. 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 total global gross portfolio is up 3.4% year-over-year. The 60-day plus delinquency rate of 1.6% for U.S. extended credit was the same as in 2021 and compared to 1.8% in the pre-pandemic period of 2019. On a sequential basis, the rate is up 10 basis points, reflecting the seasonal trend we typically experience between the third and fourth quarters. As it relates to extended credit or finance receivables, trailing 12-month net losses of $43.8 million represented 2.4% of outstanding at year-end. While this was up 6 basis points from a year ago, it is 47 basis points lower than year-end 2019. Now turning to Slide 12. Cash provided by operating activities of $210.6 million in the quarter compared to $222.7 million last year. The decrease from the fourth quarter of 2021 primarily reflects a $36.5 million increase in working investment, partially offset by improved net earnings. Net cash used by investing activities of $67.9 million included net additions to finance receivables of $47.3 million and capital expenditures of $22.7 million. Net cash used by financing activities of $145.8 million included cash dividends of $86 million and the repurchase of 284,000 shares of common stock for $65.3 million under our existing share repurchase programs. As of year-end, we had remaining availability to repurchase up to an additional $362.4 million of common stock under existing authorizations. Turning to Slide 13. Trade and other accounts receivable increased $79.4 million from 2021 year-end. Days sales outstanding of 61 days compared to 58 days at 2021 year-end and to 67 days as of the pre-pandemic year-end of 2019. Inventories increased $229.3 million from 2021 year-end. On a trailing 12-month basis, inventory turns of 2.5 compared to 2.8 at year-end 2021 and the 2.6x as of year-end 2019. The growth in inventory primarily reflects higher demand, including inventories to support new products. Additionally, given the dynamics of the current supply chain situation, our level of safety stocks and in-transit parts, components and raw materials are up, as are year-over-year costs associated with finished goods. Our year-end cash position of $757.2 million compared to $780 million at year-end 2021. Our net debt to capital ratio of 9% compared to 9.1% at year-end 2021. In addition to cash and expected cash flow from operations, we have more than $800 million available under our credit facilities. As of year-end, there were no amounts outstanding under the credit facility, and there were no commercial paper borrowings outstanding. That concludes my remarks on our fourth quarter performance. I'll now briefly review a few outlook items for 2023. We anticipate that capital expenditures will be in the range of $90 million to $100 million. In addition, we currently anticipate, absent any changes to the U.S. tax legislation, that our full-year 2023 effective income tax rate will be in a range of 23% to 24%.
Nicholas Pinchuk, CEO
Thanks, Aldo. Well, that's our quarter and our year. I would say we can characterize particularly the fourth quarter as a period where the hits just kept on coming: sporadic supply shortages, war, Brexit, lockdowns, virus explosion and a constant drumbeat of recession warnings that served up bad news for breakfast every day. You can also describe the recent path of the time when Snap-on clearly demonstrated the resilience of its markets and the power of its businesses. C&I engaging the full range of challenges across sectors and geographies but overcoming, growing 1.7% organically, registering an OI margin of 14%, flat to last year, reflecting the turbulence of the moment but up 120 basis points from pre-pandemic levels. The Tools Group, big ticket items surging, organic sales growing 9.6% overall, OI margin at 21.4%, up big from pre-pandemic levels, down from last year but primarily due to 40 basis points of negative currency and a similar impact from less favorable product mix. Still strong. RS&I, success in both OEM dealerships and independent shops, sales of 14.3% organically and an OI margin of 25.3%, up 50 basis points from last year. We said we're well-positioned for the comeback in repair shops, and RS&I is showing just that. And the credit company, OI down, but finance originations growing a strong 17%, and all of it authored strong numbers for the corporation. Organic sales up 8% versus last year, 22.7% versus pre-pandemic levels. OI margin of 21.5%, 21.5%, up 50 basis points compared with 2021 and 360 basis points over 2019. Full year organic sales were up; the OI margin for the year was 20.9%, a rise of 90 basis points. And finally, EPS for the quarter of $4.42, up 7.8% versus last year and 43.5% versus pre-pandemic levels. The hits did just keep coming, but Snap-on overcame. We exited the year stronger than when we entered, and we left the quarter in December with a greater position and strength than we had in early October. We do have momentum, and you can see it in the numbers. We believe our markets will remain resilient, offer ongoing and abundant opportunities, and with our inherent advantages, the breadth and quality of our products, the unique and aspirational nature of our brands, and the considerable capabilities of our experienced team, we believe we will maintain the momentum and extend our ongoing positive trajectory throughout 2023 and well beyond. Now before I turn the call over to the operator, I want to speak directly to our franchisees and associates. I know that many of you are listening. You are the people of work, the individuals whose contributions collectively fostered these results. As I look back over the quarter, over 2022 and, in fact, over the past 3 years, it's clear your efforts, as you met the justifiable fear with extraordinary vigilance, helped keep our society and our company from disintegrating while we engaged and prevailed against COVID. We often say that Snap-on people are unique, special and consistently make a difference. The past 3 years have clearly proved it so. For your ongoing achievement in the past quarter and many others, you have my congratulations. For your continued dedication in enabling the work of our society, you have my admiration. And for your confident commitment to Snap-on and its 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
I apologize if any of this has been covered in the prepared remarks, joining the call a little late this morning. First question...
Nicholas Pinchuk, CEO
It was good.
Luke Junk, Analyst
That's helpful summary. I'll dive into a margin-related question to start with. And what I'm wondering is, now we've got several commodities, including steel that are off of their highs that we saw in 2022, and can you just help us understand how that might start to flow into your P&L this year, especially in the Tools Group? I know that typically, there's at least a couple quarter time lag that's associated with that? Is that still a good way to think about it? And at the same time, still broader inflationary pressures out there. If you could also comment on your approach to pricing as we begin 2023.
Nicholas Pinchuk, CEO
I'll address the last question first. Our pricing approach will depend on the situation and timing within individual quarters, leading to a mixed outcome. You correctly noted that there are delays in how pricing impacts our profit and loss statements. Looking back, there is a mixed picture, particularly with steel; for instance, hand tool steel has declined but not to pre-pandemic levels, whereas tool storage steel has dropped closer to those levels. There's some variation, and it doesn’t seem likely that prices will rebound. If they return to pre-pandemic levels, that might be where we find equilibrium, but if they stay above those levels, we expect a downward trend. This will gradually help us moving forward, though the timing remains uncertain due to the lag you've mentioned. The primary supply chain impact for us has been the availability of specific items. Even now, despite improvements in the supply chain, there are certain items that are hard to find, necessitating spot market purchases, which particularly affects our C&I segment. The Tools Group is affected less, although there are still occasional impacts on the RS&I segment. I would say that while the negative effects of the supply chain are diminishing, they aren't completely resolved yet, making it difficult to forecast potential supply issues that could arise at any moment. Thus, we're navigating a complex situation.
Luke Junk, Analyst
My follow-up question is about credit. If we examine credit performance, it has been very good, particularly when we consider delinquency rates in the latter half of the year compared to normal seasonality, especially in light of the increasing macro risks. Originations are trending higher. How do you manage the balance between assessing risk and pursuing what appears to be a potential growth driver for the Tools Group in 2023, given our current position?
Nicholas Pinchuk, CEO
We maintain our risk policies and do not adjust our credit standards based on external factors like sales needs. Our approach to customers remains consistent as we move forward. The increase in originations is not directly linked to customer credit. Professional technicians have maintained strong balance sheets for a while. What we are witnessing is a combination of attractive products and technicians recognizing significant opportunities, with rising demand, wages, and repair services. The overall economic environment is encouraging investment in major purchases. The rise in originations stems from these larger investments rather than credit policy adjustments; our credit use will depend on product sales in the market. Currently, the robust quarter led by major purchases is very encouraging, indicating strong consumer confidence. Historically, when economic conditions seem challenging, technicians tend to favor shorter-term repayment options over large purchases, as seen during the financial crisis. Thus, the current surge in big-ticket items instills confidence in our future.
Operator, Operator
And our next question will come from Elizabeth Suzuki with Bank of America.
Elizabeth Suzuki, Analyst
The automotive repair industry has likely benefited from the rise in used vehicle values, which has resulted in older vehicles remaining on the road longer and owners spending more on maintenance. Now, as used vehicle values decline and more new vehicles begin to enter the market and dealerships, is Snap-on unaffected by this change in vehicle aging?
Nicholas Pinchuk, CEO
Yes, I think we serve the dealerships effectively as well. While one could argue that older cars require more repairs and may be entitled to that, in reality, it's a longer-term trend. The situation with new cars and the fact that used cars are being retained longer doesn't seem to make much difference. We've tracked this for years, and whether scrappage rates go up or down doesn't seem to impact the numbers significantly. If we assume the car park will age over time, that could exert some pressure on repairs, but the car park has been getting older every year since 1980, so I don't anticipate much change. I wouldn't consider the shift to used cars a significant factor in the strength of the automotive repair market from our viewpoint. Any variations from that won't have a considerable impact. We do serve the dealers, and our revenues in the Tools Group closely align with dealership repair activity as a percentage of total repairs in the country. Therefore, we are neutral regarding dealerships and independent repair shops.
Elizabeth Suzuki, Analyst
Got it. Okay. That makes sense. And then just a question on capital allocation. And I'm curious to get your thoughts on the company's current appetite for M&A and which segments you feel are potentially more fragmented and where Snap-on could continue to roll up smaller businesses and what the pipeline might look like currently.
Nicholas Pinchuk, CEO
We have a pipeline and are constantly evaluating various prospects for growth. Our focus is on enhancing the van channel, expanding with repair shop owners and managers, extending into critical industries, and building our presence in emerging markets. We prioritize opportunities in sectors where the stakes are high, specifically in professional spaces rather than DIY. While the Tools Group is in a strong position and doesn't require much, we see potential in emerging markets as they start to stabilize. Our key areas for growth include expanding our reach among repair shop owners and managers, as well as critical industries. We look for products that enhance our offerings to these customers or introduce new technologies that are valuable to them. For example, we acquired Norbar to strengthen our position in torque technology, which has proven to be a success. Similarly, our acquisition of Dealer-FX enhanced our software capabilities in dealerships, providing both profitability and strategic advantages in visibility for new product entries in the market. We are committed to pursuing acquisitions that align with our growth strategies and are financially prudent in our approach, seeking coherent additions that will drive growth. While we assess many opportunities, we remain selective and sometimes decide against initiatives that do not align with our objectives. In instances like Norbar and Dealer-FX, we felt positively about the acquisitions.
Operator, Operator
And our next question will come from Scott Stember with MKM Partners.
Unidentified Analyst, Analyst
And Nick, you talked about the big ticket items really driving the show for the Tools Group, but how did the hand tools perform in the quarter?
Nicholas Pinchuk, CEO
Hand tools were stable. They experienced significant growth last year and in the early part of this year, being the highest margin segment within hand tools. Although their performance has leveled off slightly, they remain strong. Tool storage, on the other hand, performed exceptionally well, showing robust double-digit growth and achieving record highs. A sales representative mentioned that he could sell every tool storage unit produced. Our backlog for tool storage is increasing rapidly, allowing for substantial sales without much impact on margins. The primary driver of margin concerns was diagnostics. While diagnostics is quite profitable for the company, the Tools Group has to share those margins with RS&I, which manufactures and sells them to the Tools Group. Consequently, the flat performance of hand tools combined with the increase in diagnostics caused some margin pressure in this quarter. However, we believe this situation is positive; it's part of the reason we reached 21.5%, and one factor behind RS&I's 50 basis point increase, as diagnostics perform well for them. Additionally, I want to highlight that strong big-ticket sales are a promising indicator for the future. Although diagnostics had a unique boost from the launch of the Zeus, which has received great feedback, the healthy sales in tool storage reflect a strong underlying confidence among our customers, which bodes well for our business outlook.
Unidentified Analyst, Analyst
Got it. And then just last question. What's the relationship of sell-in versus sell-through of the event?
Nicholas Pinchuk, CEO
Yes. Look, we look at these things. They're about in the range where we like to see it, about sort of equal. So when you look back from sell-in to sell-out, we see that being about balanced. Now it always goes up and down a little bit every quarter, but this is kind of in the range. I think this quarter, it's about equal.
Operator, Operator
And our next question will come from David McGregor with Longbow Research.
David MacGregor, Analyst
Nick, you're continuing to expand the lexicon of the contemporary CEO. Boom shakalaka, that's...
Nicholas Pinchuk, CEO
Gee, that's special.
David MacGregor, Analyst
Listen, let me ask you about your balance sheet. Your working capital investment continues to grow. I can appreciate you've got more inventory in transit and safety stock. But can you talk about your plans to harvest that cash? And is the inventory accumulation concentrated within specific lines of business or specific products? And how much of that is tool segment versus the other 2 segments?
Nicholas Pinchuk, CEO
I have confidence in our inventory due to our optimism about the future, but I'll let Aldo address this question. Aldo, why don't you share your thoughts?
Aldo Pagliari, CFO
Well, David, if you're looking year-over-year, yes, the Tools Group makes a major portion of it, but it's not all of it. But actually, the Tools Group has their inventories kind of reflective of the fact that they've had very consistent organic growth. And therefore, I think it's suitable. If you look at some of the other areas where we're investing, I mentioned in my prepared remarks, it's not insignificant the amount of money that's tied up in in-transit inventory and safety stocks. Again, Snap-on has made a strategic decision to err on the side of availability. So that is priority #1. So a long answer to your question, we think the inventory is appropriate given the opportunities we see in front of us and the fact that we don't want to miss the opportunities that present themselves as we go forward and not have disruption from the supply chain. Now again, Snap-on is blessed, for lack of a better word, with we're not a typical consumer retail-oriented company, and therefore, we're not subject to the fashion sense, I like to say, many other companies have to be concerned about. So our product doesn't really obsolete on the shelf, so to speak. I mean, yes, you have to update the algorithms in a diagnostic unit or an alignment machine, but pretty much we feel pretty confident that making an investment in inventory is going to pay off and being able to capture sales in projects or programs that manifest themselves as we go forward.
David MacGregor, Analyst
I can appreciate that you need that inventory to support the sales activity, but it continues to grow. And I guess the question is, at some point, do you have enough? And at what point, if any, is there an opportunity to harvest that cash? Or is this kind of a structural step-up?
Aldo Pagliari, CFO
There's probably opportunities to harvest that, David, you're absolutely right, but I wouldn't model it that way. In other words, I just told you what our strategic decision is. And trust me, you have even more inventory. You will never have exactly the right thing at the right time. So you have to be prepared to have a flexible factory and a flexible distribution center because of 80,000 different SKUs, and it's impossible to forecast with the accuracy you would like. And then you multiply the statistical probability of having them when you have to put arrays of SKUs that could have 100 to 200 pieces together, and you can see what drives the need for a lot of products. And then on top of it, you have spare part requirements sometimes imposed by regulations. So if you're going to sell machines that have a life of 10-plus years such as lifts and linear machines, tire changes, wheel balances, there's obligations behind the scenes to keep ample supplies of spare parts on hand. So you put that all together, and again, we will err in favor of availability. There could be opportunities to harvest. In just saying that we don't model ourselves cash flow growth from a reduction in inventories, even though that certainly is theoretically possible.
David MacGregor, Analyst
Good. Let me ask you about growth, and you mentioned the improving supply channels. How much of the growth in each segment would you estimate is driven by shipping from backlog orders rather than new orders?
Nicholas Pinchuk, CEO
Our backlog continues to grow significantly due to ongoing supply chain disruptions, particularly in the critical industries. I want to emphasize that our backlog remains strong. In the Tools Group, our backlog for tool storage has reached an all-time high, and we are expanding two plants in this group this year to address the demand. In contrast, Europe seems to be facing some challenges, while the U.S. market appears to be thriving. We have a strong confidence in the future, which is why we are enhancing our capabilities. If I could expand tool storage further, I would do it right away. One of our top salespeople mentioned that he could sell everything we could provide him. Overall, our situation seems robust, and the book-to-bill ratio in the U.S. looks healthy, although there is some turbulence in Europe.
David MacGregor, Analyst
Last question. Okay. Yes. Nick, last question for me. Just the 10-Q is not out yet, so, Aldo, maybe if you could just give us the finance receivable charge-offs. And then just how were overrides this quarter?
Aldo Pagliari, CFO
Overrides are not as dynamic as what they've been in the past. Again, that decision is made with the franchisee. They've been a little bit more conservative compared to the 2016 to 2019 window. We still think personally that it's a good bet because we have a lot of metrics behind in process that kind of gives a higher sense of collectibility on things like that as compared to other companies that might be more upstart, so to speak, when it comes to lending to the credit profile of mechanics. But to directly answer your question, our returns are not as high as what they've been in the pre-pandemic world. And the charge-offs, I think I made a remark in my prepared remarks. The charge-offs, if you look at the provisions, they're actually narrower. I think we're about a $4.4 million difference in the rate of provisions. The differential between charge-offs is actually less than that. What drove the provision up a little higher is actually with the significant increase in originations. We, from experience, have to book extra reserve provisions because of that because while everything starts out well, you know there's going to be a need for some reserves. So the fact that you have high originations in the quarter actually drives a higher provision as well. So probably the increase year-over-year is about $1.1 million or so of higher provisions just associated with higher originations.
Operator, Operator
And our next question will come from Bret Jordan with Jefferies.
Unidentified Analyst, Analyst
This is Patrick Buckley on for Bret Jordan. In the C&I business, are there any other areas internationally to highlight? You've spoken about a bit here with the European hand tools. But is the weaker economic environment the main drag there? Or is something else driving that?
Nicholas Pinchuk, CEO
The economic situation is challenging. The U.K. is facing numerous issues, including a series of prime ministers, which complicates matters further. The Northern parts of the business seem to be particularly impacted. In the fourth quarter, there were significant pressures from banks in Europe regarding the fuel situation, which weighed heavily on consumers. The looming threat of a recession has also affected people’s mindset. In China, the situation is chaotic; after strict lockdowns, many individuals are now back at work despite having COVID, with estimates suggesting that a large portion of the population has contracted the virus. This has led to a standstill due to both lockdowns and widespread illness. It's uncertain how quickly to expect recovery in that region. Other international markets, particularly in Southeast Asia, appear to be performing better. The challenges in Asia, especially in China, combined with fears of a recession, concerns over fuel prices in the U.K., the lingering effects of Brexit, and the ongoing war in Europe, have cast a shadow on the region. However, I recently came across data suggesting that GDP growth in Europe may outpace growth in other areas, although I remain skeptical about the strength of the European economy.
Unidentified Analyst, Analyst
Got it. That's helpful. And then maybe could you talk a bit more on the subscription side of the RS&I business? How sizable is that today? And how does the growth outlook there compare to the other segments?
Nicholas Pinchuk, CEO
The growth outlook is quite promising. Subscriptions are significantly increasing. It's important to note that historically, we offered titles instead of subscriptions. Every six months, we released a new software version that technicians could purchase for their diagnostic units, but we're now shifting to a model where customers pay monthly. There's a balance in this transition. Software is expanding, and we're seeing positive trends that are benefiting our RS&I margins. It's essential to focus more on this moving forward as it presents a significant opportunity. We recognize potential in dealership software and independent repair shop software. Additionally, the Mitchell 1 business continues to grow steadily with strong profitability, even though it hasn't reached double-digit growth; the subscription business is doing well.
Operator, Operator
And our next question will come from Ivan Feinseth with Tigress Financial Partners.
Ivan Feinseth, Analyst
Congratulations again on another great year and a great quarter.
Nicholas Pinchuk, CEO
Thank you.
Ivan Feinseth, Analyst
I have two questions. First, regarding new product development, how do you see advancements in car onboard ADAS systems impacting diagnostic and calibration capabilities within Apollo and Zeus? Second, the CEO of General Motors has frequently mentioned the potential for $50 billion in revenue from software and subscriptions, particularly as cars gain more software-defined functionalities. How do you envision this benefiting dealerships and Snap-on?
Nicholas Pinchuk, CEO
I believe this greatly benefits us because while it's not a $50 billion example, we do have relevant cases related to what you mentioned, such as advanced driver assistance systems and the necessary calibrations. This is supported by our diagnostics tools like Zeus and Apollo, as well as our undercar equipment business, both of which have seen significant growth. The integration of software and calibration in undercar equipment and the input related to ADAS systems in Mitchell 1 and our diagnostic systems has enhanced their value. As these products continue to be integrated, they will become increasingly essential for technicians. Looking at the total vehicle market, currently about 45% of repairs require a diagnostic unit, but for new vehicles, that figure jumps to 80%. As software becomes more prevalent, our expertise in repair information and software linking to that information and calibration will be crucial for our success, which is already proving to be profitable for us. The more this expands, the more we stand to gain. We're also developing products aligned with this trend. In collision repairs, for example, modern cars are equipped with numerous sensors, and if a minor issue occurs, such as a dent in the bumper, it necessitates significant effort to recalibrate and reset these sensors. This has been driving a lot of our undercar activities. We're observing these trends and focusing on them, with a substantial part of our current development centered around software, which will continue to be a priority moving forward.
Ivan Feinseth, Analyst
I believe software sales is going to be an increasing opportunity for you, so I'm excited for it.
Nicholas Pinchuk, CEO
Yes. We're going to make sure we get big focus on it. But I think we already have a pretty good position in it. We just see as it develops, these are going to create opportunities that are going to lay out there in front of you.
Ivan Feinseth, Analyst
Congratulations again.
Nicholas Pinchuk, CEO
Thanks a lot. Take care.
Operator, Operator
And 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 of 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.