Earnings Call Transcript - SNA Q2 2022

Operator, Operator

Good day. And welcome to the Snap-on Incorporated 2022 Second Quarter Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Sara Verbsky, Vice President, Investor Relations. Please go ahead, ma’am.

Sara Verbsky, Vice President, Investor Relations

Thank you, Mary, and good morning, everyone. Thank you for joining us today to review Snap-on's second 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 will 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 Investor 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. Any additional information and the factors that could cause our results to differ materially from those in the forward-looking statements are contained in our SEC filings. Finally, this presentation includes non-GAAP measures of financial performance, which are not meant to be considered in isolation or as a substitute for their GAAP counterparts. Additional information regarding these measures is included in our earnings release issued today, which can be found on our website. With that said, I’d now like to turn the call over to Nick Pinchuk. Nick?

Nick Pinchuk, CEO

Thanks, Sara. Good morning, everybody. As usual, I will start the call by covering the highlights of our second quarter. Along the way, I will give you my perspective on our results; once again, they are encouraging. Our market is robust, resilient, and promising, and I will talk about our progress. We believe we are now stronger than ever and we will also speak about what it all means, and we believe it means that we are better positioned for more, a lot more. Then Aldo will go into a more detailed review of the financials. All you have to do is follow the news and you know that we live today in the midst of turmoil: inflation, variants, supply continuing unpredictable outbreaks, precipitous lockdowns, and a war in Ukraine, and Snap-on has shown through it all, wielding our advantages in product and brand, and in people, progressing down our runways for growth, engaging our Snap-on value creation, driving improvement, making the most of our resilient markets, and extending our positive trajectory, piercing the turbulence. The story of our second quarter is simply one of rising momentum. We have been meeting the challenges quarter after quarter, and we are simply getting even better at overcoming the difficulties, and going forward, we are confident in our capabilities to continue to advance and here are the numbers that say we should be confident. Our reported sales in the quarter were $1 billion, $136.6 million, up versus last year by $55.2 million or 5.1%, including $32.4 million or 330 basis points of unfavorable foreign exchange. Organic sales growth was 8.4% with gains in every Group. Compared to the pre-pandemic levels of 2019, our upward drive is clear as a bell; versus 2019, sales in the quarter rose 19.5% as reported and 18.7% organically. This is now eight straight quarters of being above pre-pandemic levels. We believe we are continuing an ongoing trend of accelerating expansion and are building momentum with emphasis, increasing higher and higher, demonstrating that we are only getting stronger every day. The Opco operating income of $246.6 million was up $29.5 million and the operating margin was 21.7%, up 160 basis points from last year and 170 basis points from 2019. For financial services, operating income of $65.3 million compared to the $68.9 million of last year; that result combined with Opco for a consolidated operating margin of 25.5%, up 100 basis points from last year and 130 basis points from 2019. And EPS was $4.27, up 13.6% from last year and 32.6% above the comparable pre-pandemic level recorded in 2019, up $3.22. I have been saying this since the third quarter of 2020. I will say it again; we believe Snap-on is stronger now than when we entered this great withering and the second quarter numbers say it so. Now let’s talk about the markets. Auto repair remains positive. Most, if not all, of our key indicators are quite favorable: spending on vehicle maintenance and repair is up, the number of technicians is up, mechanic wages are up. The technicians are optimistic about their prospects and about the greater need for the skills as new technologies and new complexities advance across the car park. We saw a confirmation of that broadly held belief for several quarters now as the number of automotive repair technicians continues expanding upward, period after period, higher now than any of the last three decades. When I speak with shop owners or managers, as I often do, it’s clear that there is a need for more, many more, and that Snap-on loves it. Vehicle repair is a strong and resilient market, a feeling that’s also reinforced by our franchisees. You can see it in our numbers and you can hear it in their voices. We believe they are more prosperous than ever. Besides franchisees and technicians, there are vehicle repair shop owners and managers in this RS&I arena. Demand for new and used cars is high, but supplies are limited; it’s a well-known story. The pandemic has impacted the auto supply chain, sure, but it doesn’t matter. Whether there are lots of new cars or scarcity of new vehicles, the car park is large, aging, getting more complex, and demand for repair remains strong. Come back to high water and the shops are seeing this clearly and starting to invest to meet the current need and prepare for the future. The variety of drivetrains is expanding: internal combustion, hybrid, plug-in electric, full electric, and every day there are more driver assistance and more vehicle automation, increasing vehicle complexity. Shops now have a greater need for new and upgraded equipment and they are becoming increasingly reliant on service and repair information to guide them through the galaxy of new requirements and procedures; it’s all music to our ears. Snap-on makes great tools and equipment, and it’s clearly repair and information headquarters. RS&I has taken advantage of that trend, creating new equipment offerings and advanced database solutions. We now have a strong array of products in those vital areas: Mitchell 1 repair information software, shop management software, SPX electronic parts catalog, our dealer shop management technologies, electric vehicle health check solutions, and our heavy-duty and fast track intelligent diagnostics hardware. These are big databases and getting more powerful and easier to use, helping the shop to fix it right the first time and efficiently. The repair shop is changing, rising in complexity, and ours has the products to match it. Finally, let’s talk about critical industries. At Snap-on, we say Snap-on rolls out of the garage solving tasks of consequence, and we do. This is C&I territory, our most international operation, and it’s where we see the most continuing impact of the pandemic. It’s in supply chain disruption and inflation, where customers have been slower to accommodate, where headwinds are still persisting, and where our multi-SKU product offerings are particularly impacted by supply chain challenges. Everybody knows about the two-month lockdown in Shanghai; that area is a significant C&I business center and is also a key transportation hub for our China factory, so the lockdown was an obstacle. Beyond that focused event, C&I is particularly challenged by its considerable geographic reach, adjusting to varying impacts and protocols and economic turbulence from countries with varying virus impacts and protocols and economic turbulence from country to country. But I would say, if you look at the quarter, the C&I team rose to the occasion, and in the quarter, we gained in North America, in Europe, and in Asia, despite the difficulties. So I’d describe our C&I markets as representing continuing opportunity, and coupled with automotive repair, we believe our overall markets are robust right now and there is considerably more opportunity ahead as we move along our runways for growth. And I can leave this section about robust progress in abundant possibilities without once again speaking of the engine of our advanced Snap-on value creation, particularly in customer connection and innovation, developing new products and solutions born of the observations gathered right in the workplace, insights that create great new offerings, and at the same time, help guide the expansion of our franchisee selling capacity with better processes, more effective training, and more powerful communication, all of that helped drive our progress, overcoming the difficulties, accommodating the virus, taking full advantage of the market opportunities, starting a continuing positive trend moving forward. We are going to keep it going. Well, that’s the overview, now let’s move to the segments. In the C&I Group, sales in the quarter were up 2.5% as reported or $8.6 million versus 2021, and that includes $25.3 million or a 7.6% organic gain driven by progress across all our divisions. From an earnings perspective, C&I income was 51.7 million, a decrease of $3.8 million compared to 2021; $2 million of that was unfavorable foreign currency, and the rest represents the impact of supply chain turbulence on the multi-SKU C&I products. The OI margin was 14.4%, down 140 basis points from 2021, but did represent progress. It’s a 100 point sequential improvement from the last quarter. When compared with the pre-pandemic 2019 periods, sales were up 7.4% organically, and the OI margin of 14.4% was down 20 basis points, but that included an 80-point impact from acquisitions and unfavorable currency. Now, continuing bright spot in C&I this quarter and again this quarter was SNA Europe; it delivered yet another quarter of growth, expanding double-digit year-over-year and well beyond pre-pandemic levels. All against the winds in Europe with innovative solutions of our Bahco Erle tool management system leading the way, tailoring products specific to customer needs. Europe is a varied market, and SNA Europe is making increasing gains by matching the products to the specific tasks. That positive SNA Europe was joined in C&I by a valuable contribution from recovering areas in critical industries like aerospace, in general industry, and from countries in Asia-Pacific like India, Japan, and South Korea—all combining to overcome the decline and slower-to-recover sectors like the military and natural resources. We do remain confident and committed to extending in critical industries and that commitment is confirmed with great new products. Speaking of product, last quarter we strengthened our 14.4 Volt MicroLithium power tool lineup with the new Snap-on CT761 3/8-inch Impact Wrench. It’s a very attractive but also quite functional tool. Featuring a compact design to reach tight spaces, a nylon-based housing for rugged durability, and a special toggle switch trigger for precise control. The new unit also includes a bright headlight for broad illumination of the entire work area; that's a feature that makes complex multi-point jobs much easier in the low-light conditions that often occur in the workshop or when on the road. The Impact Wrench delivers a robust 225-foot pounds of breakaway torque, controlled by a variable speed drive, allowing the operator to apply just the right torque for each job. The 14-volt battery with its 2.5 amp hours ensures consistent output and extended run time, making for a lot more efficient workday. The CT361 began shipping early in the quarter and it was right on target, quickly becoming a million-hit product and selling out in what seemed like a blink of an eye—great product. Well, that’s C&I: a promising quarter, volume up nicely, starting to overcome the turbulence, moving down its runways for growth. Now for the Tools Group, sales of $520.6 million, up $36.5 million, including $7.7 million of unfavorable currency and a 9.3% organic gain, and the operating margin was 23.9%, up 250 basis points compared with pre-virus 2019 sales. The Tools Group grew $114.8 million, including a 28.1% organic gain, and this quarter’s 23.9% operating margin was up 630 basis points compared with those pre-virus numbers, coming out of the pandemic stronger indeed. Another positive quarter for the Tools Group, with growth across all product lines, and further indications of continuing strength. Other data, like the franchisee health metrics which we monitor every quarter, remain quite favorable and on a clearly positive trend. We do believe our van network remains quite strong, and it’s not just the numbers. Just a few weeks ago, I spent time with a couple of dozen franchisees representing regions on our U.S. and Canadian national franchisee advisory councils, and they were motivated, prosperous, and enthusiastic about current performance, positive about the trajectories of the other vans in various areas they represent, and very optimistic about prospects for even more going forward. They believe in their opportunities and they are confident about their future. The Tools Group is strong quantitatively and qualitatively, and that positivity was not just internal. Once again this quarter, it was reinforced by the external view. Snap-on was recognized again this year among the top 50 in the franchise industry by Entrepreneur Magazine. Once again, in that ranking, we were rated at the top of the Tools Distribution category—a place we have held for some time. This type of recognition reflects the fundamental, contemporary strength of our franchisees and of our overall mobile van network. It is a powerhouse business, and that momentum would not have been achieved without a continuous stream of unique new products—and one of those that helped drive our hand tools up again this quarter was our new Long Nose Slip Joint Pliers. It’s a special tool with our patented 3-Position joint, precisely machined for effortless switching and control, which allows the pliers to keep the jaws parallel, increasing the contact with the workpiece. With its indicated relocated joint, optimized handle shape, and unique Talon Grip serrated jaws, our new pliers provide over 50% more pulling power. The machined and hardened teeth are sharp and strong, presenting three different gripping geometries from heavy serrations at the base to fine grooves at the tip, offering great variability for multiple applications. You can apply different parts of the jaw. They are manufactured right here in our Milwaukee factory from special cold-forged allied steel for greater durability and strength. These pliers were launched at the beginning of the past quarter and have been very well received. When I talk to the franchisees of the NFAC, they say they're flying off the truck, and they are right. The sales have already made a hit product strategy just in one quarter. Our new offerings are making a difference in the Tools Group; you can’t miss it in the numbers—eight straight quarters above pre-pandemic levels. The Tools Group is moving onward and upward with eye-catching momentum, and if you look at the numbers or spend any time with the team, you'd believe it’s all systems go, and it is. Now on to RS&I; sales were up 4.6%, or $18.2 million versus last year, including $27.4 million, or a 7% organic uplift, with double-digit growth in undercar equipment and diagnostics and information advancing, and with dealership activity flat from an earnings perspective. RS&I operating income of $95.7 million represents a rise of $9 million, or 10.4%, and the operating margin was 23%, up 120 basis points from last year. Compared with 2019, sales were up 19.5% as reported, and the organic growth was $58 million or 16.8% with strong advances in undercar equipment and diagnostics and information products. For profitability, the OI margin of 23% was down 240 basis points versus 2019, pretty much reflecting a 110-point impact just from acquisitions and the effect of margin dilutions from the higher sales of undercar equipment that we have been seeing. We believe RS&I has great opportunities, and we are fortifying its way forward with new products like our Hofmann 609 aligner, specifically designed for independent or general repair shops where alignment is not currently a primary focus, and the space is short. The new offering allows those all-purpose garages to keep the low-volume alignment business in-house; with its compact footprint and portability kit enabling easy storage when not in use and efficient deployment when alignment is actually needed, it saves a lot of space but gets the job done. With our latest 3D system offering OEM-approved accuracy, the 609 enables handling of even the most complex alignment systems by those general repair shops. It generates a high return on the investment, doesn’t occupy space needed for other repairs often required, and it fortifies the garage’s reputation for technical capability. It’s a great value for general repair shops and they are noticing. Our equipment business has been on a roll with strong double-digit growth for several quarters, and the Hofmann 609 aligner is a big player in that mix. RS&I is improving its position with repair shop owners and managers, growth in undercar equipment and diagnostics and information products, bolstered by an array of innovative new products and product lines leading the way. Well, those are the highlights of our quarter! Tools Group: strong progress everywhere, unmistakable strength; C&I: recording positive performance against the variation across industries and geographies; and RS&I: expanding profitable volume with repair shop owners and managers. Snap-on overall sales rising markedly, both compared to last year up 8.4% organically and up 18.7% organically compared with pre-pandemic levels, continuing clear positive trajectory. Opco operating margin are strong at 21.7%, rising again in this quarter, up 160 basis points. EPS of $4.27, up versus last year, up versus last quarter, and up versus pre-pandemic levels. It was an encouraging quarter. Now I will turn the call over to Aldo. Aldo?

Aldo Pagliari, CFO

Nick, thanks. Our consolidated operating results are summarized on slide six. Net sales of $1,136.6 million in the quarter increased 5.1% from 2021 levels, reflecting an 8.4% organic sales gain, partially offset by $32.4 million of unfavorable foreign currency translation. The organic sales gain this quarter reflects high single-digit growth in each of the company’s segments and compares to an 8% year-over-year organic increase recorded last quarter. Consolidated gross margin of 48.7% remained the same as last quarter but declined 150 basis points from 50.2% last year. Higher material and other costs were partially offset by contributions from the increased sales volumes and pricing actions, as well as from benefits from the company’s RCI initiatives and 30 basis points of favorable foreign currency effects. Again this quarter, we believe the corporation, through pricing and RCI actions, continues to navigate effectively the costs and other supply chain dynamics of the current environment. Operating expenses as a percentage of net sales of 27% improved 310 basis points from 30.1% last year. The improvement is primarily due to higher sales volumes, savings from RCI initiatives, and lower costs associated with stock-based expenses. Operating earnings from financial services of $246.6 million in the quarter, compared to $217.1 million in 2021. As a percentage of net sales, operating margin before financial services of 21.7% improved 160 basis points from last year and was up 140 basis points sequentially. Financial services revenue in the second quarter of 2022 was $86.4 million, compared to $86.9 million last year. Operating earnings of $65.3 million, a decrease of $3.6 million from 2021 levels, primarily as a result of higher provisions for credit losses than those recorded last year. Consolidated operating earnings of $311.9 million, compared to $286 million last year. As a percentage of revenues, the operating earnings margin of 25.5% improved 100 basis points from 24.5% in 2021. Our second quarter effective income tax rate of 23.8% compared to 23.3% last year. Net earnings of $231.5 million, or $4.27 per diluted share, increased $23.5 million, or $0.51 per share, from last year’s levels, representing a 13.6% increase in diluted earnings per share. Now, let’s turn to our segment results, starting with the C&I Group on slide seven. Sales of $359.1 million increased from $350.5 million last year, reflecting a $25.3 million or 7.6% organic sales gain, partially offset by $16.7 million of unfavorable foreign currency translations. The organic growth primarily reflects double-digit gains in the segment's European-based hand tools business and Asia-Pacific operations, as well as a mid-single-digit increase in sales to customers in critical industries. Within critical industries, solid gains in general industry and international aviation more than offset lower sales to the military. Gross margin of 37.3%, although improving sequentially, declined 220 basis points from 39.5% in the second quarter of 2021. This is primarily due to higher material and other input costs being partially offset by the benefits from higher sales volumes and pricing actions and savings from the segment’s RCI initiatives. Operating expenses as a percentage of sales of 22.9% in the quarter improved 80 basis points from 23.7% in 2021, primarily due to the effects of higher sales volumes. Operating earnings for the C&I segment were $51.7 million, compared to $55.5 million last year. The operating margin was 14.4%, compared to 15.8% a year ago. Turning now to slide eight, sales in the Snap-on Tools Group of $520.6 million increased 7.5% from $484.1 million in 2021, reflecting a 9.3% organic sales gain, partially offset by $7.7 million of unfavorable foreign currency translations. The organic sales growth reflects a double-digit gain in our U.S. business and a low single-digit increase in our international operations. In the U.S., sales were up across all product lines and include a particularly robust sale of full storage in the quarter. Gross margin of 46% in the quarter compared to 45.5% in the first quarter of this year but declined 80 basis points from 46.8% last year. The year-over-year decline is primarily due to higher material and other costs, and 10 basis points of unfavorable foreign currency effects, partially offset by benefits from higher sales volumes and pricing actions. Operating expenses as a percentage of sales were 22.1%, improving 330 basis points from 25.4% last year, reflecting the benefits from higher sales volumes and savings from RCI initiatives, and including the effects of lower expenses associated with the company’s franchisees' stock purchase program. Operating earnings for the Snap-on Tools Group were $124.4 million, compared to $103.5 million last year. The operating margin of 23.9% improved 250 basis points from 21.4% a year ago. Turning to RS&I Group, shown on slide nine, sales of $416.8 million compared to $398.6 million a year ago, reflecting a 7% organic sales gain, partially offset by $9.2 million of unfavorable foreign currency translation. The organic gain is comprised of a double-digit increase in sales of undercar equipment and a low single-digit gain in the sale of diagnostics and repair information products to independent shop owners and managers. Activity with OEM dealerships was essentially flat. Gross margin of 43.2% declined 150 basis points from 44.7% last year. This is 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 from 50 basis points of favorable foreign currency effects. Operating expenses as a percentage of sales of 20.2% improved 270 basis points from 22.9% last year, primarily due to benefits from sales volume leverage, including higher activity and lower expense businesses and savings from RCI initiatives. Operating earnings from the RS&I Group of $95.7 million, compared to $86.7 million last year. The operating margin of 23% improved 120 basis points from 21.8% reported a year ago. Now turning to slide 10, revenue from financial services of $86.4 million, including $800,000 of unfavorable currency translation, compared to $86.9 million last year. Financial services operating earnings of $65.3 million, compared to $68.9 million in 2021. Financial services expenses of $21.1 million were up $3.1 million from 2021 levels, mostly due to $2.4 million of increased provisions for credit losses. While provisions have increased versus a historically lower provision rate experienced last year, loan portfolio trends remain stable. As a percentage of the average portfolio, financial services expenses were 1% and eight-tenths of 1% in the second quarter of 2022 and 2021, respectively. In both the second quarters of 2022 and 2021, the average yield on finance and contract receivables was 17.5% and 18.5%, respectively. Total loan originations of $307.6 million in the second quarter increased $21.8 million or 7.6% from 2021 levels, reflecting an 11% increase in originations of finance receivables, partially offset by a decrease in the origination of contract receivables. Moving to slide 11, our quarter-end balance sheet includes approximately $2.2 billion of gross financing receivables, including $1.9 billion from our U.S. operations. The 60-day plus delinquency rate of 1.4% for the U.S. extended credit is the same as the comparable pre-pandemic period of 2019 and reflects the seasonal improvement we typically experience in the second quarter. Regarding extended credit or finance receivables, the trailing 12-month net losses of $40.4 million represent 2.33% of outstandings at quarter end, which is down slightly from the 2.34% reported at the end of the last quarter. Now turning to slide 12, cash provided by operating activities of $140.8 million in the quarter compared to $238.2 million last year. The decrease in the second quarter of 2021 primarily reflects an $87.7 million increase in working investment. The change in working investment dollars is largely driven by greater demand, including increases in receivables and higher levels of inventory this year. In addition to demand-based requirements, the inventory increase also reflects higher in-transit inventory amounts, as well as incremental buffer stocks associated with the supply chain dynamics in the current macro environment. Net cash used by investing activities of $73.8 million included net additions to finance receivables of $53.5 million and capital expenditures of $21.3 million. Net cash used by financing activities of $112.2 million included cash dividends of $75.7 million and the repurchase of $251,000 shares of common stock for $53.8 million under our existing share repurchase program. As of quarter-end, we had remaining availability to repurchase up to an additional $420.8 million of common stock under existing authorizations. Turning to slide 13, trade and other accounts receivable increased $46.8 million from 2021 year-end. Days sales outstanding of 60 days, compared to 58 days at 2021 year-end. Inventories increased $89.5 million from 2021 year-end, and on a trailing 12-month basis, inventory turns of 2.7 compared to 2.8 at year-end 2021. Our quarter-end cash position of $812.9 million compared to $780 million at year-end 2021. Our net debt to capital ratio of 8.3% 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, and 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 will now briefly review a few outlook items for 2022. We anticipate that capital expenditures will be in the range of $90 million to $100 million. In addition, we currently anticipate that absent any changes to U.S. tax legislation, our full-year 2022 effective income tax rate will be in the range of 23% to 24%. I will now turn the call back to Nick for his closing thoughts.

Nick Pinchuk, CEO

Thanks, Aldo. Well, that’s our second quarter. Markets that are resilient and getting more robust by the day. These are interesting times in the pandemic: inflation, supply interruptions, a war, and pop-up lockdowns, but Snap-on brings to this turbulence considerable advantages in product, brand, and people. It’s enabled our team to cut through the turbulence, continuing a positive trajectory, and you can see it in the performance. C&I on a growth path again, with a 7.6% organic increase, despite being our most impacted business. RS&I is gaining with repair shop owners and managers, driven by hardware and its expanding information portfolio, sales up 7% organically and an NOI margin of 22%, up 120 basis points from last year. The Tools Group achieved gangbuster results, sales up 9.3% organically versus last year and up 28.1% versus 2019, with eight straight quarters above pre-pandemic levels and an NOI margin of 23.9%. And it all came together for overall Snap-on organic growth of 8.4%, an NOI margin of 21.7%, and an EPS of $4.27—all high watermarks despite the turbulence. It was an encouraging quarter, and we emerge from that period with rising momentum. It is a turbulent time, but Snap-on is driven by attractive markets, unique strengths, and an experienced and capable team that has achieved clear and consistent performance and, period-by-period, has become stronger and stronger in navigating the issues of the day. We believe these inherent advantages will continue to prevail as we go forward on a clear upward trajectory through the remainder of this year and well beyond. Before I turn the call over to the operator, I would like to speak directly to our franchisees and associates. I know they listen in. The corporation is an organization where people come together to create a benefit for themselves and others that they could not alter individually. You have done just that again this quarter. For your success in that endeavor, you have my congratulations. For the energy and the skill you bring to our efforts, you have my admiration, and for the commitment you unfailingly demonstrate to our team, you have my thanks. Now I will turn the call over to the operator.

Operator, Operator

We can take our first question now from Scott Stember of MKM Partners. Please go ahead.

Scott Stember, Analyst

Good morning and congrats on the very strong results.

Nick Pinchuk, CEO

Thanks, Scott.

Scott Stember, Analyst

Can we talk about Tools? You mentioned that everything was up, and it sounded like Tool storage had another very strong quarter. Was that related to the new mobile cart and maybe just try to size up how big tools storage was in the quarter and trying to figure out...

Nick Pinchuk, CEO

I don't want to focus too much on quarter-to-quarter results, Scott, because things can vary based on different models. However, I will note that Tool storage performed very well with double-digit growth this quarter, especially as we started releasing more of the larger boxes like the EPIQ and the Master Series. We had some exciting new products, such as our Supernova Masters Series in electric blue with copper trim, which were very well received. Overall, it was a strong quarter. Carts remained robust, but the larger boxes and regular tool storage solutions, which we can refer to as Roll Cabs, made a significant impact. The Tools Group had an impressive quarter, and I should mention that the Tools Group's NOI margin was 23.9%. This highlights our strong performance. Additionally, hand tools showed significant growth this quarter, but the major impact came from...

Scott Stember, Analyst

And then…

Nick Pinchuk, CEO

Yeah.

Scott Stember, Analyst

Go ahead. I am sorry.

Nick Pinchuk, CEO

Go ahead. Go ahead.

Scott Stember, Analyst

I was going to ask about the selling to the van and off of the van the inventory situation right now on the van?

Nick Pinchuk, CEO

Yeah. Look, the inventories are up; the guys are crying for more inventory when they go out there and their inventory turns are substantially below pre-pandemic levels. So the inventory turns are higher at this time and not below pre-pandemic levels, they are above pre-pandemic levels. So they are substantially higher at this time. And the sell-through was better this quarter than it was last quarter. When you look at it overall, it seems to be right in line with our overall sales. So we think it’s moving along nicely. I do believe our guys want more inventory. I do believe they want more. And I would say in our business, there’s still—we got a little better at delivering, but we still like, we still have a pretty good backlog. People are clamoring for our products still.

Scott Stember, Analyst

Got it. And then lastly in RS&I, you talked about undercar doing really well. Is that related to the collision part of the business, or is that just across the board?

Nick Pinchuk, CEO

Yeah. Well, it’s across the board, but the collision business has been a star in this situation. We acquired Car-O-Liner a few years ago, and we anticipated that collision with the deployment of the neural network around the sensors, around the sort of driver assist systems would make collision a very lucrative area, and it seems to have played out. So collision is among the top four undercar equipment, but generally it’s all rolling pretty well. The independent repair shops are optimistic. They are seeing, well, I said it in my call, investment is up, spending is up, technicians are up, wages are up; they can see it all coming through. So they are white-hot in terms of their optimism regarding the situation. So it gets them to invest more. That’s what you are seeing in undercar equipment.

Scott Stember, Analyst

Got it. Thanks for taking my questions.

Nick Pinchuk, CEO

Sure. Thanks.

Operator, Operator

We can now take our next question from Luke Junk of Baird. Please go ahead.

Luke Junk, Analyst

Good morning. Thanks for taking the questions. First, I wanted to ask about originations; it's positive this quarter, up nicely both year-on-year and up really strong sequentially following some fits and starts recently. Can you just give us a peek under the hood there in terms of what’s driving that? Do you think it’s sustainable, and what if any impact did last quarter’s system breach have on the numbers this quarter?

Nick Pinchuk, CEO

Last quarter, I don’t think had any impact on this quarter. But it was mostly in the last quarter where you saw it might have had some impact on originations, because last quarter you—from a sales point of view, there was a skewing towards the back end of the quarter, because the breach was in the early parts of the quarter, so you saw that going out. And as I said, last time we thought we had pretty robust sales in some of the big-ticket items, but they hadn’t made their way through the vans yet necessarily, and that probably worked out this quarter. I think the big driver, though, Luke, is the product. I think the optimism of the technicians and the product itself. I think what drives originations is the view of people saying, 'Wow, I really like these EPIQ boxes I got,' and we had more available now. We are getting better at delivering them. During the pandemic, we had some fits and starts, so we are pushing a little more carts, and now we have a little bit more of the basic roll cabs. So I think that’s what drove the higher originations this time. We still see pretty good RA; the finance by the franchisees seemed pretty solid. That wasn’t down in the course, so that was pretty strong. As I said, hand tools were up. So I think it’s pretty much product-driven. What you see in the Tools Group, I mean, the Tools Group is on a pretty big momentum. If you look back over the pre-pandemic levels, they were up 9%, and what was that, Q4 2020 then 15%, then 17%, then 21%, then 22%, then 24%, and 28% this quarter. And by the way, they came through the quarter; they exited the quarter stronger. They are on the mail train. They have given momentum rolling. And so I feel pretty good about that, and that’s playing out in some of the now broader product lines in Tool Storage. We did, as I said in the last call, that doesn’t mean that carts were down any; they were still strong in the quarter; just that the low cash got bigger.

Luke Junk, Analyst

That’s very helpful. Thanks for that, Nick. And then second question within RS&I; I'll ask on undercar equipment again. It’s been an area of consistent strength in that business going all the way back to the start of 2021. We count six straight quarters of double-digit growth overall. Where do you think we are in the investment cycle there, realizing that growth has been weighing on RS&I gross margins, and looking forward to some point when that starts to normalize? How quickly would you anticipate higher software margins starting to come through at that point as well?

Nick Pinchuk, CEO

Well, look, I think higher software margins are going to emerge. You are going to see, one of the things you are seeing in our—remember we said, we are pivoting away from titles, where we sold updates—we call it titles, but they are basically updates on software every six months. We are pivoting to a subscription business. So that tends to stretch out your revenue a little bit—it affects revenues in the quarter. But our subscriptions are up deep; our subscribers are up deep double digits in this quarter year-over-year. So that seems to be working for us. So we are pretty pumped about the possibilities in that, but you know you have some, I guess, I would say, recognition questions as you go through this period. So you don’t quite see it coming through, but I can see it coming through in the future. And as I said, with the array of electronic products we have around software, from the diagnostic software to the Mitchell 1 software, to Dealer-FX, to electronic parts catalogs, to vehicle checks, we feel we are repair information headquarters and it’s going to become bigger, and we are going to see it roll through that business earlier. Now if you ask me to expect to see the equipment business attenuate, I hope not. I am not hoping for it; just because it’s low margin doesn’t mean I don’t want the profits; I do. So, and I could see that go—that was down—you might remember it was down; it was pretty much flat on its back for a couple of quarters, a couple of three quarters earlier and it’s bouncing back from that. We have seen a lot in independent repair shops, and I would figure after the dealerships start to get used to the situation, I think they will be discombobulated by the low supply and what they are doing associated with this sort of a little bit—little more reluctant in situation. When they come online, I think that will be even greater.

Luke Junk, Analyst

Then if I could just sneak one more in, maybe this one would be good for Aldo to tackle? Could you just remind us of how rising interest rates affect the credit company, both in terms of funding, if at all, in the rates that you charge, and in particular, I am just wondering if there is anything that you think is misperceived that you would want to address about a rising interest rate environment? Thanks.

Aldo Pagliari, CFO

Thanks for the question, Luke. Actually, it has a little effect; if anything, it might create a more favorable environment. And why do I say that? Again, we fund long. So if you look at Snap-On’s balance sheet, we don’t fund day-to-day. So the rising interest rates do not have a foreseeable immediate impact on our borrowing capability, because as you could see, there’s plenty of cash on the balance sheet and there is nothing that’s coming due for quite some time. So we are stable in terms of the cost of our funds going into that business. Our stated rates have been pretty consistent really for a decade plus. So they are not the lowest rate out there, but they are lower than what might be available to people that are on a credit card format and things of that nature. So we think our rates are appropriate for the credit profile of the customers that we serve; we think that they recognize that. So we are kind of the lender of choice if they do decide to engage in any type of lending activity. And I think because we provide that stability, it gives a little bit of reassurance, so as interest rates go up for competitors' rates, if they were ever considering them, and when I say competitors, I am thinking of things like credit cards. So as interest rates are going to be going up for people that are in the subprime category, we are going to be pretty stable; our approach is going to be pretty consistent. Yeah, I think the competition’s rates might be going up, which you could argue maybe creates a slightly more favorable environment.

Luke Junk, Analyst

Okay. I will leave it there. Thank you for all the color this morning.

Operator, Operator

We can now take our next question from Bret Jordan of Jefferies. Please go ahead.

Bret Jordan, Analyst

Hey. Good morning, guys.

Nick Pinchuk, CEO

Good morning.

Bret Jordan, Analyst

When you think about the organic growth, and obviously it’s a pretty inflationary environment, could you talk about sort of the contribution from units versus the contribution from price? And then, I guess, as a follow-up, I think, you called out, I think, in C&I and RS&I sort of inflation in some of the cost of goods. And could you sort of talk about where you are seeing, is it metals, labor; where are you seeing inflation, what you can do to sort of pass that through and the timing of that?

Nick Pinchuk, CEO

And by the way, just, Bret, before the Tools Group will execute—Tools Group guys will execute if I leave this conference call, not saying that it also has inflationary impacts on it and prices are going up. So it’s not just RS&I and C&I; they also have to deal with that, and I got to give them credit for that. But look, here’s the thing: it’s hard for us to determine, because we know we have some pricing, but it isn’t the majority of it. Looking at our factories, we know we have products in demand. There are rolling off there and our guys are up to their eyeballs in demand. So we know that’s a positive situation. The other thing is it’s hard, because you know we have list prices, but the list prices don’t—are varied from product to product and they come out on an average; you might say you’re raising sales by 3.5% or something like that, but products— and then overlaying on top of that, we have a lot of new tools; we keep rolling out new tools. In fact, million-dollar tools; we have dozens a quarter rolling out and then across the network. And then we have promotions that occur week to week, and they can be lean or rich, and can take up the big effect. So it’s hard for us to say. I would say the minority of the increases in pricing, and the majority is in volume for us. We think that’s the situation in our environment. Now, that varies from Group to Group and so on. Now if you talk about where we are getting the biggest impact, our biggest inflationary impact, Bret, is trying to buy on the spot market, because we have said we want to deliver the best we can. We have demand; we want to deliver. We are not keeping up with all the demand, but we are buying like chips on the spot market. And I can go—that can fluctuate wildly. We buy components for power tools and other things on a spot market, that can move wildly. If you look at commodities, I would say, look, we buy several, many grades of steel, but if you look at steel for tool storage and steel for, let’s say, lifts, hot rolled and cold rolled; they are both coming off a little bit. They are getting a little better. They are coming down. If you look at steel for hand tools, it’s at its top and now they are still not back to the steady state levels, but they backed off a little bit. The steel for hand tools, which we call rod steel, that’s pretty much reached the top level and it’s flattened out, but it hasn’t abated for us yet, and we are not seeing too much abatements in freight; you see those kinds of things flowing through. I would expect this stuff, as I believe that as the COVID turbulent start—the micro viscosity starts—stop happening, you are going to see the stuff start to drift downwards, because you are not going to have the interruptions in supply and therefore it’s going to get more regular, and therefore the prices are going to come down. But I don’t have a crystal ball on that; that’s sort of our view of the situation.

Bret Jordan, Analyst

Okay. If you were to think about your price inflation, your sticker price inflation year-to-date, I guess, how would you— is it up, mid-low, mid-single digits on pricing?

Nick Pinchuk, CEO

It’s hard for me to say because it changes. It’s all over the map depending on where you are. In the Tools Group, you have a list price, and the other places you are pricing product by product, and it depends on the size of the product and a lot of different things. So all I am saying is, I think if you wanted to step back and you look at our pricing, it’s the minority of our growth.

Bret Jordan, Analyst

Okay. Great. Thank you.

Nick Pinchuk, CEO

Hopefully get share, get volume out of it, Bret. Okay.

Operator, Operator

And we can now take our next question from Christopher Glynn of Oppenheimer. Please go ahead.