Earnings Call Transcript
Snap-on Inc (SNA)
Earnings Call Transcript - SNA Q2 2023
Operator, Operator
Good morning, and welcome to the Snap-on Incorporated 2023 Second Quarter Results Conference Call. All participants will be in a listen-only mode for the duration of the call. Please also note that this event is being recorded today. I would now like to turn the conference over to Sara Verbsky, Vice President of Investor Relations. Please go ahead, ma'am.
Sara Verbsky, Vice President of Investor Relations
Thank you, Joe, 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've 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. Today, I'll start the call as usual, by covering the highlights of the second quarter, and I'll give you my perspective on the environment and the trends we're seeing. A long way we'll cover the markets. They're actually encouraging. And I'll take you through the segments and the advancements we've made. Then Aldo will provide a detailed review of the financials. We see the second quarter as a period of significance. Sometimes you see a performance where you break through into new heights. And this is one of those times. I'm going to tell you why we believe that to be true. In some ways, though, it was similar. This period was similar to many periods we've seen over time, as we continue to have significant headwinds. And there's always turbulence variation from market to market. But we believe it's our job to confront and overcome these obstacles, and we did just that in the second quarter by wielding the strength of our advantages, executing on our strategic runways for growth, making the most of our runways for improvement, and by relying on the skills and dedication of our people. And once again, it paid off. The numbers screen sold, but here they are. As reported, second quarter sales of $1,191.3 billion were up 4.8% from 2022, including the impact of $8.3 million of unfavorable foreign currency translation. Organic activity was up 5.6%. The 12 straight quarter of year-over-year expansion beyond pre-pandemic levels. That's a trend that demonstrates our belief in solid consistency during rather uncertain times. Now let's talk about the earnings. Operating Company operating income for the quarter, including the effects of unfavorable foreign currency was $277 million, up 12.3%. And our operating margin was 23.3%, up 160 basis points from last year. When I said new levels, I mean it. For financial services, the operating income of $66.9 million represented an increase of $1.6 million, and it all combined to author an overall consolidated operating margin of 26.8%, up 130 basis points from last year. And the second quarter EPS was $4.89, up $0.62 or 14.5% from last year's $4.27. I think I'll say it again, $4.89, up 14.5%. The productivity and profitability of Snap-on operations shine through as the supply chain viscosity diminished. We believe Snap-on is stronger now than ever before, and the quarter's profitability makes that crystal clear. Well, those are the overall numbers. Now let's speak to the market, auto repair. Again, this quarter, it's favorable. Miles driven are up. Spending on vehicle maintenance is up. Technician count is up. Technician wages are up. Consistently positive year-over-year trajectory across all these central categories. Drivers in vehicle repair are fairly understood. Car parks are growing, getting older every year, and every year, the tasks involved in maintaining and repairing the vehicle park get increasingly complex, requiring more hours, greater scale, increased wages, and more sophisticated tools, whether hands-on or powered or data-driven tools. There's a significant need for more technicians and greater capabilities. The competition for that talent is growing, and it's being reflected in rising wages at an everyday level. You can see this demand when you're trying to schedule a maintenance appointment or just by visually seeing an abundance of cars and trucks in the repair bays or parked outside, crowded around the shops waiting for their turn to get in. In fact, just this month, as I was with a group of franchisees and customers in Bristol, Tennessee, at the NHRA Thunder nationals, the drag races, they energetically expressed their enthusiasm during our conversations. You can feel their optimism resonating with an appreciation for our products, our solutions, and how we make work easier. So we expect that the trajectory of vehicle repair is solid. And we'll continue through the quarters and on into the years ahead. We believe that vehicle repair is a great place to operate and our Repair Information Group and our Tools Group are well-positioned to take advantage of that. Now on to the critical industries, or our commercial and industrial group, C&I takes our business out of the garage and addresses consequences where the penalty for failure is high in a wide range of sectors, where custom tools are often required to get the job done. This is also the segment where we have the most significant international presence, and the variations from country to country with many versions of economic and social headwinds. In the U.S., the landscape is actually quite positive. We see progress across a number of sectors. Aerospace is strong. Increased demand in commercial aviation and momentum within space exploration. The military business had another strong quarter of growth now better matching actual needs. Natural resources continue to advance in oil and gas and wind after the uncertainty of last fall, energy repair is a positive place to be. We also begin the period with industrial transportation. Supply chain turbulence, I think has raised attention on rail and heavy-duty fleets, society now more than ever sees the essential need to keep commercial supply moving, and it's accruing positively for us. Now there are tepid spots across the globe, places traumatized by the Ukraine war, where we see weaknesses in some of the Asia-Pacific operations. But one of the clear and large positives in the period is the general rise of critical industries. Our industrial division is well positioned and is capitalizing on this capability to customize products for a large number of applications, and it's working. Our critical industry teams are on an upward trajectory utilizing their capability and the enhanced capacity to capture significant gains. Overall, the story of Snap-on outside the garage looks quite promising. As we move forward, we'll continue to capitalize on abundant potential. As part of that, we'll keep engaging in Snap-on value creation, customer connection, and innovation, developing profitable new products and solutions delivered by the insights and knowledge gained while standing next to customers right in the workplace and will drive Rapid Continuous Improvement (RCI) all over the enterprise, including in the Tools Group. We will keep working to increase our franchisee selling capacity with efficient processes, advanced training programs, social media and digital content, and expanded manufacturing capacity to meet rising demand—all combining to take full advantage of the opportunities and continue the positive trends we've seen into the future. Well, that's a market overview. Now let's move on to the segments. For the C&I Group, as reported, sales rose 1.4%, including $5.6 million of unfavorable foreign currency. Organic volume was up by 3%. A quite strong performance in the industrial division was attenuated by shortfalls in some of our more challenged areas. Power tools had smaller volumes as customers anticipated the arrival of new products in the third quarter. Our Europe-based hand tool business, SNA Europe, experienced growth in several markets, but softness in Eastern Europe and currency pressure in Japan, where the yen was weak, was some offset. But our industrial division isn't just growing in volume. The margins are strong and rising. Customized product is a remarkable advantage. So C&I's operating income was $68.1 million, a 12.4% increase over last year, and the operating margin was 16%, one of the highest ever for the group, representing a gain of 160 basis points over the second quarter of last year. The industrial division, wielding the capacity provided by our new building in Kenosha, registered significant sales progress. In April, we discussed the recoveries of the military business in the military segment. In this quarter, we continued that momentum, capturing significant long-term contracts; our product line, wide and effective produced in the U.S. made the difference. We believe things look promising for the military business and for all our industrial segments. Beyond the industrial division and C&I, our specialty tools operation continues to advance, meeting the need for precision with new torque products, covering a vast spectrum of clamping forces for challenging applications. Torque accuracy is rising in importance, and Snap-on is ready to capitalize. We are confident and committed to extending in critical industries, and that conviction is anchored by the ongoing expansion of our lineup of innovative products, explicitly designed for particular tasks, offerings like our automated tool control (ATC) enabled by proprietary digital imaging technology that scans toolbox drawers, recording in real-time which tools are required, removed, or replaced. It's an increasingly crucial feature for aerospace, industrial manufacturing, and commercial transportation operations. Imagine working out of a plane or a locomotive engine and unknowingly leaving a tool behind in the workplace. Not good. This is a mistake that could result in a tighter tolerance mechanism failure; one small item can be a huge problem. ATC has an answer, keeping track of the tools, identifying missing items, tracing who signed them out and where they are to be used, and giving the all-clear when everything is returned. So the plans can take off. Snap-on critical industries are on the rise, and ATC is part of the reason. In the quarter, we released our next generation of ATC, a larger touchscreen to improve shop productivity and upgraded processes with the latest technology for seamless integration with any central IT system. And as you might expect, our customers were enthusiastic about this sophisticated product for complex products; it's a winning combination for C&I, and you can see it in the quarter's results. Now on to the Tools Group. Organic sales grew 1.1%, which includes 60 basis points of unfavorable foreign currency. Growth in the international markets and a slight improvement in the U.S. network based on our franchisees and customer feedback indicates that vehicle repair is robust. In the period, our record demand met capacity constraints before our plant expansion, so we were fully operational, limiting some of the potential possibilities and somewhat attenuating the volumes. Operating earnings in the quarter were up by $13.3 million or 10.7%, reaching $137.7 million. That's almost double the pre-pandemic level. The operating margin was 26.3%, a rise of 240 basis points against 50 basis points of negative currency. Let me say that again, Tools Group operating income margin was 26.3%, an eye-popping number. The Tools Group had another positive quarter with substantial profitability. We are confident in the strength of our van network, a belief borne out of quantitative evidence and franchisee health metrics which we monitor regularly every quarter. And again, this quarter, they remained strong. So when talking to the franchisees at Thunder Valley or looking at the numbers, vehicle repair does appear robust and continues to be so. When you think of the Tools Group profitability, which is a pretty important subject this time, you think about hand tools—our high margin lineup was up during the period. New products led the way. One example of successful innovation that came from customer connection insights is that a number of franchisees observed that diesel technicians were struggling to access sensors on Class 8 semi-trucks to change the part without risking damage. The path had to be cleared by removing several other blocking components, and believe me, that's a time-consuming process. So armed with customer connection insights, our engineers developed an innovative design, quickly produced a 3D prototype, and confirmed that it solved the problem. This 3D tool, SWR5 90-degree special Crowfoot Wrench, is being made right now at our Elizabethton, Tennessee plant, and it's getting a lot of attention. It really does make truck repair easier. The technicians love it, and we kind of like the margins. Profitable customer connection is one of the drivers behind the Tools Group's success. Another example this quarter is our two-piece horizontal bushing adapter set, the BJP1 BKS2; these names are something else. Technicians at a Subaru dealership were taking a lot of time to remove and store control arm bushings from suspension setups on the newer models. Our team assessed the procedure and designed two new adapters to integrate with our existing ball joint press, enabling the fit for the new suspension and saving two hours in repair time per procedure. That's a big savings in the garage generated by customer connection and innovation. SNL a while ago said, it's always something. And it's true; there are always new repair challenges, whether the powertrain is internal combustion, plug-in hybrids, or EV platforms. Vehicle architecture is getting tighter, packed with more devices, creating additional accessibility constraints; it's all music to our ears. Our franchisees and engineers observe the work, identify complications, and simplify the complex and multifaceted tasks to raise efficiency and keep the world moving. The attendant value is considerable. You can see that in the Tools Group profits. One of the highlights of the quarter was the continuing growth of our big-ticket sales. A sign of technician confidence in the vehicle repair shop driving some of that trend was our latest tool storage unit, the KMP1023ZLT7, a 72-inch Master Series Roll Cab painting with a unique appearance scheme we call green envy—a bright green body paired with black trim. It stands out and makes a statement in any repair shop, but beyond the eye-popping optics, the box is also a productivity-enhancing powerhouse of equipment. It has 14 drawers, including three spanning the full width of the unit, putting the most important tools of any size right at hand. It also offers our popular power drawer and dedicated space equipment, five power outlets, and two USB ports for charging a full array of core accessories. For the hard-to-manage small parts, our 2-inch speed drawer makes for easy organization with green envy color-coordinated dividers and custom slots for components of various sizes. The box is already one of our hit products. It really energizes franchisees and has been well received by our customers. And as I said, it helped keep the big-ticket train rolling. Well, that's the Tools Group—strong profitability built on the solid foundations of innovative products and franchisee success, mixed with a considerable portion of RCI gain that is now clearly visible as the supply chain turbulence recedes. Now let's go on to RS&I. Sales as reported reached $452 million, representing a $35.2 million or 8.4% increase. Gains in the equipment and OEM essential programs paired with gains in equipment and OEM, along with our successful rollout of our new handheld diagnostic platform contributed to this. The operating income in the period was $110.4 million, up $14.7 million or 15.4%, and the operating margin was 24.4%, a rise of 140 basis points. Nice. As we said, the vehicle repair environment is strong, offering significant opportunity, and the second quarter results for C&I confirm this. The recent launch of our new SOLUS+ diagnostic platform was a big key to that success. Great new features include a two-second boot-up, the fastest in the industry, and an 8-inch colored touchscreen with 60% higher resolution, making it much easier for technicians to view in brighter lighting. It supports the latest communication protocols and offers access to SureTrack, our library of vehicle-specific real fixes, repair tips, and commonly replaced parts that wheels our proprietary database of 2.5 billion repair records and 325 billion vehicle events. The franchisees have been positive about SOLUS+, customers have been excited, and the sales have been robust. New powertrains are driving the need for extending product lines, including vehicle lifts, enabling independent shops and dealerships to accommodate the new models. Meeting this opportunity with advantage, part of RS&I's success has been our undercar equipment division. It's one of the drivers behind RS&I's strong growth. Take our Challenger Lift Operation in Louisville. The plant offers thousands of SKUs matched to separate lifting tasks, and the numbers have been growing to meet specific challenges of EV lifting. In the quarter, that facility hosted Chief Executive magazine's Smart Manufacturing Summit, and the event underscores the power of product customization, driving expansion and the extraordinary ability of RCI to render low-volume production quite profitable. It's that approach that drove RCI's gains. Operating income is up 140 basis points in the quarter and we expect that it will keep doing just that as we go forward throughout the group and all across Snap-on. RS&I is improving its position with repair shop owners and managers, growing OEM relationships, expanding the product offerings, welding RCI everywhere, and it all combined to deliver substantial growth and strong profitability. The Snap-on second quarter revealed continued opportunities in vehicle repair and critical industries, progress along our runways for coherent growth, and advancements down our runways for improvement. Overall sales increased organically by 5.6%, margins were strong in every segment, and operating company income margin was 23.3%, up 160 basis points, overcoming unfavorable currency impacts. EPS was $4.89, up from all comparisons. 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 $1.191 billion in the quarter represented an increase of 4.8% from 2022 levels, reflecting a 5.6% organic sales gain, partially offset by $8.3 million or 80 basis points of unfavorable foreign currency translation. From a geographic perspective, we experienced year-over-year organic sales growth in North and South America as well as Europe, while sales in Asia-Pacific were down low single-digits, mostly due to weakness in the yen contributing to less activity in Japan. Consolidated gross margin improved 200 basis points at 50.7% from 48.7% last year. As gross margins expanded across all our operating segments, contributions from increased sales volumes and pricing actions, lower material and other costs, and benefits from the company's RCI initiatives were partially offset by 30 basis points of unfavorable foreign currency effects. Operating expenses as a percentage of net sales are 27.4% compared to 27% last year. The increase of 40 basis points is primarily due to increased investment in personnel and other costs. Operating earnings before financial services of $277 million in the quarter compared to $246.6 million in 2022. As a percentage of net sales, operating margin before financial services up 23.3%, including 30 basis points of unfavorable foreign currency effects, reflects an expansion of 160 basis points over last year. Financial services revenue of $93.4 million in the second quarter of 2023 compared to $86.4 million last year, while operating earnings of $66.9 million compared to $65.3 million in 2022. Consolidated operating earnings of $343.9 million in the quarter compared to $311.9 million last year. As a percentage of revenues, the operating earnings margin of 26.8% reflects an improvement of 130 basis points from 2022. Our second quarter effective income tax rate of 22.9% compared to 23.8% last year. Net earnings of $264 million or $4.89 per diluted share, including $0.09 share impact from unfavorable foreign currency, reflected an increase of $32.5 million or $0.62 per share from 2022 levels, representing a 14.5% year-over-year increase in diluted earnings per share. Now let's turn to our segment results for the quarter. Starting with the C&I Group on Slide 7. Sales of $364.2 million increased from $359.1 million last year, reflecting a $10.7 million or 3% organic sales gain, which was partially offset by $5.6 million of unfavorable foreign currency translation. The organic growth primarily reflects a double-digit gain in sales to customers in critical industries, partially offset by declines in power tool volumes. With respect to critical industries, sales to the military were robust, as was activity in the aviation and heavy-duty sectors. Gross margin improved 220 basis points to 39.5% in the second quarter from 37.3% in 2022. This increase is largely due to increased volumes in the higher gross margin critical industry sector, pricing actions, lower material and other costs, and benefits from RCI initiatives. These improvements were partially offset by 40 basis points of unfavorable foreign currency effects. Operating expenses as a percentage of sales increased 60 basis points to 23.5% in the quarter, from 22.9% in 2022, mostly due to increased sales and higher expense businesses. Operating earnings for the C&I segment of $58.1 million compared to $51.7 million last year. The operating margin improved 160 basis points to 16% from 14.4% last year. Turning now to Slide 8. Sales on the Snap-on Tools Group of $523.1 million compared to $520.6 million a year ago, reflecting a 1.1% organic sales gain, partially offset by $3.2 million of unfavorable foreign currency translation. The organic sales growth reflects a mid-single-digit gain in our international operations and slightly higher sales in our U.S. business. Higher sales of hand tools and big ticket items in the quarter were partially offset by lower sales of Power Tools. Gross margin improved 300 basis points to 49% in the quarter from 46% last year. This increase is primarily due to higher sales volumes and pricing actions, lower material and other costs, and benefits from RCI initiatives, partially offset by 50 basis points of unfavorable foreign currency effects. Material costs benefited from reduced expenses for various steel types used in our product offering. Operating expenses as a percentage of sales went up by 60 basis points to 22.7% from 22.1% last year, primarily due to increased investment in personnel and other costs. Operating earnings for the Snap-on Tools Group of $137.7 million, including $3.6 million of unfavorable foreign currency effects, compared to $124.4 million last year. The operating margin of 26.3%, including 50 basis points of unfavorable foreign currency effects, compared to 23.9% in 2022, reflecting an improvement of 240 basis points. Turning to the RS&I Group shown on Slide 9. Sales of $452 million compared to $416.8 million in 2022, reflecting an 8.5% organic sales gain, partially offset by $300,000 of unfavorable foreign currency translation. The organic increase comprises a double-digit gain in sales of undercar and collision repair equipment, a high single-digit increase in activity with OEM dealerships, and a mid-single-digit gain in sales of diagnostic and repair information products to independent shop owners and managers. Gross margin improved 180 basis points to 45% from 43.2% last year, primarily due to increased sales volumes and pricing actions, lower material and other costs, and savings from RCI initiatives. Operating expenses as a percentage of sales went up by 40 basis points to 20.6% from 20.2% last year, primarily due to increased personnel and other costs. Operating earnings for the RS&I Group of $110.4 million compared to $95.7 million last year. The operating margin improved 140 basis points to 24.4% from 23% reported last year. Now turning to Slide 10. Revenue from financial services increased $7 million to $93.4 million from $86.4 million last year, reflecting the growth of the loan portfolio. Financial services operating earnings of $66.9 million, including $200,000 of unfavorable foreign currency effects compared to $65.3 million in 2022. Financial services expenses were up $5.4 million from 2022 levels, including $4.9 million of higher provisions for credit losses. The year-over-year increase in provisions reflects both the growth of the portfolio as well as a return to what we believe to be a more normal pre-pandemic rate of provision. Sequentially, the provision for credit losses decreased by about $500,000. Provisions for finance receivable losses in the current quarter were $13.7 million as compared to $9.1 million in the second quarter last year. In the second quarters of 2019 and 2018, provisions for losses were $11.9 million and $13.6 million, respectively. Additionally, our gross worldwide extended credit of finance receivables portfolio has increased 9.1% year-over-year, and we believe the delinquency and portfolio performance trends currently remain stable. In the second quarters of 2023 and 2022, the respective average yield on finance receivables was 17.6% and 17.5%. In the second quarters of 2023 and 2022, the average yield on contract receivables was 8.6% and 8.5%, respectively. Total loan originations of $326.3 million in the second quarter represented an increase of $18.7 million or 6.1% from 2022 levels reflecting a 5.7% increase in originations of finance receivables and an 8.3% increase in originations of contract receivables. Gains in extended credit originations in the U.S. were led by franchisee sales of diagnostic products, including our recently launched SOLUS and ZEUS platforms. Moving to Slide 11. Our quarter-end balance sheet includes approximately $2.4 billion of gross financing receivables with $2.1 billion from our U.S. operation. The 60-day plus delinquency rate of 1.3% for U.S. extended credit compares to 1.4% in 2022. On a sequential basis, the rate is down 20 basis points, reflecting the seasonal trend we typically experience in the second quarter. As it relates to extended credit or finance receivables, trailing 12-month net losses of $46.4 million represented 2.45% of outstandings at quarter-end, which is down slightly from the 2.46% reported at the end of the last quarter. Now turning to Slide 12. Cash provided by operating activities of $270.3 million in the quarter compared to $140.8 million last year. The improvement as compared to the second quarter of 2022 primarily reflects lower year-over-year increases in working capital investment and higher net earnings. Net cash used by investing activities of $94.6 million included net additions to finance receivables of $68.6 million and capital expenditures of $25.8 million. Net cash used by financing activities of $136.5 million included cash dividends of $85.9 million and the repurchase of 359,000 shares of common stock for $94.8 million under our existing share repurchase programs. As of quarter-end, we had remaining availability to repurchase up to an additional $336.7 million of common stock under our existing authorizations. Turning to Slide 13. Trade and other accounts receivable increased $25.1 million from 2022 year-end. Days sales outstanding of 61 days was the same as the 2022 year-end. Inventories increased $13 million from the 2022 year-end. On a trailing twelve-month basis, inventory turns of 2.4x compared to 2.5x at year-end 2022. Our quarter-end cash position of $871.3 million compared to $757.2 million at year-end 2022. Our net debt-to-capital ratio of 6.5% compared to 9% at year-end 2022. In addition to cash and expected cash flow from operations, we have more than $800 million available under our credit facilities. As of quarter-end, there were no amounts outstanding under the credit facility, and there were no commercial paper borrowings outstanding. That concludes my remarks on our second quarter performance. I'll now briefly review a few outlook items for 2023. We anticipate that capital expenditures will approximate $100 million. In addition, we currently anticipate that our full-year 2023 effective income tax rate will be in the range of 23% to 24%. I'll now turn the call back to Nick for his closing thoughts.
Nicholas Pinchuk, CEO
Thanks, Aldo. Well, that's the quarter. RCI shining through as the supply skies clear to show the new levels of performance. Vehicle repair continuing its strength, critical industries are accelerating, RS&I growth increasing in both dealerships and independent shops, and advances in helping customize shops to new vehicles. Operating income margin of 24.4%, up 140 basis points. Tools Group growth has been attenuated, but strong new products are solving specific problems, creating extraordinary value, and an operating income of $137.7 million—almost double pre-pandemic levels—and operating income margins of 26.3%, up 240 basis points, overcoming 50 basis points of unfavorable currency. C&I is extending in critical industries. We're opening new capacity, achieving broad growth, and an operating income margin of 16%, which is 160 basis points over last year, also overcoming unfavorable currency impacts. Snap-on credit profits are up, originations are rising, indicating broad confidence in vehicle repair, and it all came together for an attention-getting overall performance. Snap-on's organic sales are rising 5.6%, an operating company income margin of 23.3%, up 160 basis points, and an EPS of $4.89—a new level indeed. It was an encouraging quarter. We believe that these results, representing new heights, highlight the opportunities in our markets. They are essential, demonstrating the power of our approach. They create extraordinary value by solving critical needs. Most of all, they confirm the strength and reliability of our team, capable and battle-tested reliability of that team to wield our Snap-on value creation processes: safety, quality, customer connection, innovation, and rapid continuous improvement—all to overcome challenges and drive the corporation higher. We expect that our decisive advantages, those sets of advantages and our opportunities and our approach and our people will author a continuing upward trajectory even beyond these levels throughout the remainder of this year and on into 2024. Now before I turn the call over to the operator, I want to speak directly to our associates and franchisees, the Snap-on team. I know many of you are listening. These results do represent new heights. But more than that, they are a ringing testimony to your unwavering focus on moving our enterprise forward. Your extraordinary achievements are hard-won. Yes, my congratulations on the capability you demonstrate every day, you have my admiration. And for the unshakable confidence you hold in our path forward, you have my thanks.
Operator, Operator
We will now begin the question-and-answer session. At this time, we will take our first question, which will come from Scott Stember with ROTH MKM. Please go ahead.
Scott Stember, Analyst
Good morning and thanks for taking my questions. Nick, you talked about in tools that there was, I guess, it sounded like your ability to meet demand in certain areas was not met because of production. Can you maybe talk about that and maybe tie that into the decline that you talked about in power tools?
Nicholas Pinchuk, CEO
Sure. Look, I think they're semi-related, but here's the thing. I think we started—I probably said 12 times in this pitch—we think the market is robust. So you're not seeing the market in those numbers. The situation simply here is rooted in hand tools and tool storage primarily, where generally, the mix of products we got exceeded our capacity. We expected a certain mix. We got a different mix. And part of that was the people saying, well, power tools are going to launch new products in the future, so power tools are not so popular, and it was down in the quarter, anticipating those power tools. Therefore, we bumped up against capacity, particularly around the more customized models, which are more difficult to build and turn out. So that's pretty much it. I mean fundamentally, if you look at power tools—hand tools in the quarter, the biggest ever—and you look at tool storage, not only does the tool storage factory have to supply the Tools Group, but as you see the acceleration associated with the critical industries, they have boxes as well. And they were expanded. So we put a lot of pressure on those factories. So we were unable to follow the market. That said, we had anticipated expansion. Those expansions are starting to be ready now. The hand tools plant in Milwaukee has about two-thirds of the expansion ready this month. The Elizabethan hand tool plant will have its expansion at the end of the third to fourth quarter. The expansion along our tool storage business is starting to get in place by the end of this month. So we are expanding capacity; in this quarter, the mix of products, somewhat reflective of power tools being down, and therefore, filling that in with customized products bumped us up against demand.
Scott Stember, Analyst
Got it. Okay. And as far as sell into the van sell-through, it sounds as if probably...
Nicholas Pinchuk, CEO
Pretty good; it was above our numbers like it has been for a couple of periods. We like to say that over time, that's all going to even out. But in this quarter, the sell-through that fell off the van, we say, was better.
Scott Stember, Analyst
Okay. And you would expect that to balance out as you were surprised?
Nicholas Pinchuk, CEO
It always balances out. A quarter doesn't mean that much in that situation. But what I'm trying to say is that we still think that demand is pretty strong. You see that when you talk to franchisees and customers themselves. The whole idea, Scott, is big-ticket items are an indication of confidence usually in this market. I mean I suppose it isn't for sure. But generally, in our history, when we've seen big-ticket items sell—and they did—originations were up and tool storage had, I think, one of its best quarters ever. If you put industrial and tools together, that indicates that customers are willing to enter into those longer payback items. We also saw a nice range of diagnostics numbers this quarter. Those big-ticket items really look good—positive sell-through—and that indicates because technicians are willing to enter into those longer payback items, at least because they think the market is good.
Scott Stember, Analyst
And just to be clear, sales off the van are stronger right now than into the channel. Got it. All right, that's all I have for now. Thank you.
Nicholas Pinchuk, CEO
Okay.
Operator, Operator
Our next question will come from Christopher Glynn with Oppenheimer. Please go ahead with your question.
Christopher Glynn, Analyst
Yes, thanks. Good morning. I had a question on the gross margin, which was very strong. You mentioned supply chains clearing. Is that more or less recovered now? Or does supply chain...
Nicholas Pinchuk, CEO
Well, every time I have a review, if somebody brings up something that says they got some spot buys still coming through. But in general, like I said, the skies have cleared, and we're going to get a little more benefit, but most of it is out now. Our big problem was, of course, everybody saw commodity prices go up and freight prices go up. But the big problem for a company like us is we had spot things in many situations, for which we were paying 2x or 3x sometimes what the original price was. This ends up going into inventory. Just think about it. If you have trouble getting stuff, you tend to overbuy it sometimes because you want to have it in stock since you want to deliver as the first priority. You get yourself in that situation, and so you're seeing that clear. What happens in that situation is the advances in new valuable products and the RCI we've been doing all this time starts to shine through.
Christopher Glynn, Analyst
Great. Thanks for that. And given the expansion at SOT over the past few years and your bandwidth capacity to sell, you've grown your actively serviced technicians. I'm wondering, does that reopen the gate to add franchisees? Were franchisee counts stable in the U.S.?
Nicholas Pinchuk, CEO
It's pretty stable. We're down a few franchisees this quarter, but not many. It's not a factor for government work, Chris. We're probably not going to add people. We believe that our franchisees sell more because we tell them, you're our guys. If we do well, so do you, and we believe that subdividing their opportunity probably isn't the best alternative. We think we have the world covered. We have about 3,400 franchisees around the country. We think we have most places covered. I suppose there's the odd place that we might find we could add one or two. But really, that's not going to be a program for us. Our way up is to get the guys to be more aggressive and we need to—we're expanding our capacity, so that should relieve some of the problem.
Christopher Glynn, Analyst
Yes. And is franchisee turnover still stable?
Nicholas Pinchuk, CEO
It's still about the same; I think it's about 10%. About 5% of that is retirements. You'd say 5% is guys, pretty much. Every year, you'll get that, and so 10% is stable. It had been higher sometimes, but now, the last multiple quarters have been stable, about that number.
Christopher Glynn, Analyst
Great, thanks.
Operator, Operator
Our next question will come from David MacGregor with Longbow Research. Please go ahead. David MacGregor, your line is open.
David MacGregor, Analyst
Here we go. Sorry about that, I was on mute. Good morning, everyone.
Nicholas Pinchuk, CEO
Good morning.
David MacGregor, Analyst
I guess I wanted to—maybe a question for Aldo, but obviously, some huge incremental margins in both Snap-on Tools and in C&I. You referenced the raw material benefit. So I mean we were expecting to report good margins, but these were certainly above what we were anticipating. How much of this price cost carries forward into Q3 and Q4? Can you just talk about kind of the trajectory?
Nicholas Pinchuk, CEO
I could let Aldo answer. Okay, Aldo agreed. Go ahead.
Aldo Pagliari, CFO
No. I think, David, most of the pricing actions occurred in the rearview mirror. What you have now, as Nick has mentioned already, is the attenuation of the incremental cost of those spot buys have not gone completely, but they are greatly reduced. Steel, different grades of steel at different prices, but particularly cold-rolled steel, which is used in our tool storage products, has come down, and we're able to hold on to the price that was set before; therefore, the benefit of material cost reductions accrue to the margin. That's what you're seeing, and yes, I think with a brand like Snap-on and the power of our approach to the market and the demand that Nick described out there, I expect that we'll be able to retain these types of margin performance moving forward. Nothing's guaranteed, of course.
Nicholas Pinchuk, CEO
I was watching a show last night and somebody said on the show, it was a movie, and said, electronic prices only go down, Snap-on prices only go up. We don't drop our prices. I mean, it's because you've got all the promotions and everything. It's hard to pinpoint it. But generally, I don't see us surrendering that too easily.
David MacGregor, Analyst
Can I just ask how much of that margin benefit that incremental margin was a result of the capacity constraints forcing the mix towards more customized tools because that sounds fair. New capacity.
Nicholas Pinchuk, CEO
I don't know. It could be. There could be some of that in there. Certainly, the big factor, though, is the improvements in the face of the idea of no more spot buys, no more of those huge spot buys. So you're seeing that. We've been making improvements even better than we have been showing for some time because of the material cost. So what you see that is abating. You have a lot of customized products. We did sell a lot of customized products. That works, but we don't necessarily want to back off it. And so when you do have capacity constraints, you do tend to go to that. But on the other hand, when you have capacity constraint, you spend a little more money, and you're looking at the SG&A and so on—SG&A is up a little bit. It takes a bit to manage through that. You got some things in and out there. But there's a factor. But the big pack is Rapid Continuous Improvement (RCI).
David MacGregor, Analyst
So let me just ask you about the organic growth of Snap-on tools because you report 1% organic growth. When you were talking about the Snap-on tool gross margin, you say both volume increases and price gains as drivers. So how do we reconcile the volume increases and price gains that you referenced in the gross margin story with the 1% organic growth and essentially flat in the U.S.? Do we just take away from that that the gross margins were essentially all cost reduction as opposed to revenue growth?
Nicholas Pinchuk, CEO
Well, look, I mean, some of this can be plant to plant and production line to production line, but I think you can say in aggregate, that's probably true. That's probably true. You don't get much wind in your sales from that increase. It's not zero, though—not zero increase. You have some international businesses that came back in this situation, so we had some things happen in that situation. But that's got to be the case, right? You didn't get that much volume.
David MacGregor, Analyst
Yes. Last question for me because we're getting at the top of the hour here. But what's the trend in the total number of active stops across the Snap-on system in the U.S.?
Nicholas Pinchuk, CEO
Active stops, meaning what?
David MacGregor, Analyst
Stops. I mean a number of actual customer locations. I know you track that, so I'm just wondering what's the trend there in terms of the total number of stops?
Nicholas Pinchuk, CEO
It's—I don't have that number right here, but my feeling is it's moving upwards. But we don't really count the stops so much as we count the technicians, and the technicians are growing. So we're getting more technicians.
Luke Junk, Analyst
Okay, I will leave it there. Thanks, Nick.
Operator, Operator
This concludes 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 at snapon.com. As always, we appreciate your interest in Snap-on. Good day.
Operator, Operator
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.