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. [Operator Instructions]. 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.

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?

Thanks, Sara. Good morning, everybody. Today, I'll start the call by 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 encouraging actually. 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 breakthrough 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 it's 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 that we believe it is a solid consistency during pretty uncertain times. Now let's talk about the earnings. OpCo operating income for the quarter, including the effects of unfavorable foreign currency was $277 million, up 12.3%. And our OpCo operating margin, the operating margin -- it was 23.3%,…

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 of 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%…

Thanks, Aldo. Well, that's the quarter. RCI shining through as the supply sky is clear to show the new levels of performance. Vehicle repair continuing its strength, critical industry is accelerating RS&I growth, both in -- growth in both dealerships and independent shops, advances in helping customize shops to new vehicles, OI margin, 24.4%, up 140 basis points. Tools Group growth attenuated. But strong new products, solving specific problems, creating extraordinary value and an OI of $137.7 million, almost double pre-pandemic levels and OI margins of 26.3%, up 240 basis points, overcoming 50 basis points of unfavorable currency. C&I extending in the critical industries. We're opening new capacity, achieving broad growth and an OI margin of 16%. 160 basis points over last year, also overcoming unfavorable currency and Snap-on credit, profits up, originations rising indicating broad confidence in vehicle repair, and it came together for an attention getting overall performance. Snap-on organic sales rising 5.6%, an OI margin of 23.3%, up 160 basis points and an EPS of $4.89, new levels indeed. It was an encouraging quarter. And we believe that these results, representing new heights highlight the opportunities in our markets. They're essential, demonstrate the power of our approach. It creates extraordinary value solving the critical. And most of all, confirms 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. And we expect that our decisive advantages -- those sets of advantages and opportunities and approach. And then 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, there are ringing testimony to your unwavering focus on moving our enterprise forward. Your extraordinary achievements, hard one. Yes, my congratulations. For 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?

We will now begin the question-and-answer session. [Operator Instructions] At this time, we will take our first question, which will come from Scott Stember with ROTH MKM. Please go ahead.

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?

Sure. 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 is going to launch in the future new products. And therefore, power tools is not so popular, and it was down in the quarter, anticipating those power tools. And so we bumped up against capacity, particularly around the more customized models, which are more difficult to build and more difficult to turn out. So that's pretty much what it was. I mean fundamentally, if you look at power tools, I mean, tools in the quarter, hand tools, biggest ever, biggest ever. And you look at tool storage, not only does the tool storage factory have to supply some -- and hand tools are some of this, but tools storage, not only does the tool storage factory, you have to supply the Tools Group. But when you see the acceleration associated with the critical industries that they have boxes as well. And they were expanded. So put a lot of pressure on those factories. So we couldn't able -- we weren't able to follow the market. But -- we had anticipated expansion. Those expansions are starting to be ready now. So the hand tools plant in Milwaukee. We have about two-thirds of the expansion will be ready this month. And in the fourth quarter, the rest of it will be ready. The Elizabethan tool storage -- not tool storage, but the hand tool plant in Elizabethan will have its expansion in the end of the third quarter to fourth quarter, expanding space and the expansion along our tool storage business is starting to get in place sort of the end of this month. So we're expanding the capacity just that in this quarter, the mix of the products pretty much somewhat reflective of power tools being down and, therefore, filling that in with customized products bumped up against demand.

Got it. Okay. And as far as sell into the van sell-through, it sounds as if probably...

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 was -- fell off the van, we say, was better.

Okay. And you would expect that to balance out as you were surprised?

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. And 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 it's 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. And we also saw a nice range of diagnostics numbers this quarter. So those big ticket items really look good, positive sell-through. And so that indicates because the technicians are willing to enter into those longer payback items. And that as they think at least, that the market is good.

And just to be clear, sales off the van [ph] are stronger right now than into the channel. Got it. All right, that's all I have for now. Thank you.

Okay.

Our next question will come from Christopher Glynn with Oppenheimer. Please go ahead with your question.

Yes, thanks. Good morning. I had a question on the gross margin, which was very strong. You mentioned supply chain clearing. Is that more or less recovered now? Or does supply chain...

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 to go up and freight price to go up. But the big problem for a company like us is we had spot things in a lot of situations, which we're paying 2x or 3x sometimes what the original price was. And so that ends up going in inventory. Just think about it. If you have in trouble getting stuff, you tend to overbuy it sometimes because you want to have it in stock because you want to deliver as the first priority. And so you get yourself in that situation. And so you're seeing that clear. And so what happens in that situation, the advances in new value products and the RCI we've been doing all this time starts to shine through.

Great. Thanks for that. And given the expansion at SOT over the past few years and your bandwidth capacity to sell, you've -- I think, grown your actively serviced technicians. I'm wondering, does that reopen the gate to add franchisees and were franchisee -- was U.S. franchisee count? Is that pretty stable, as I understand it to be?

It's pretty stable. We're down a few franchisees this quarter, but not many. It's not a factor for government work, Chris. But -- and we're not -- we're probably not going to add people. We believe that our franchisees sell more because we tell them, you're our guys. And if we do well, so you, and so we believe that subdividing their opportunity probably isn't the best alternative. Now we think we have the world covered. We have, what, 3,400 franchisees around the country. So we think we have most of the places covered. I suppose there's the odd place that we might find that we'd 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 in this instance, to be able to deliver better. We need to -- we're expanding our capacity, so that should relieve some of the problem. But it's a happy problem actually that people saying we're waiting for your tool storage products.

Yes. And is franchisee turnover still stable?

It's still about the same -- it's about the same. It's about -- I think it's about 10% and you'd say, Chris, what 5% of that is retirements. You'd say 5% is guys pretty much every year, you'll get that. And so 10% is pretty stable. It had been higher sometimes, but now last multiple quarters has been stable, about that number.

Great, thanks.

Our next question will come from David MacGregor with Longbow Research. Please go ahead. David MacGregor, your line is open.

Here we go. Sorry about that, it was on mute. Good morning everyone.

Good morning.

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. And 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 3Q and 4Q? Can you just talk about kind of the trajectory?

I could let out. Okay. Aldo agreed. Okay, you can answer the question, Aldo. Go ahead.

No. I think, David, I think most of the pricing actions a lot of incurred in the rearview mirror. So what you have now, as Nick has mentioned already, when you attenuate the incremental cost of spot buys have not gone completely, but they're greatly reduced. And 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 and therefore, the benefit of material cost reductions accrue to the margin. So that's what you're seeing. And yes, I think that with a brand like Snap-on and the power of our approach to the market and the demand that Nick described that's out there, I expect that we'll be able to retain these types of margin performance as we move forward. Nothing's guaranteed, of course.

I was watching a show last night and somebody said on the show, it was movie and said, electronic prices only go down, Snap-on prices only go up. We don't drop our -- I mean it's because you've got all the promotions and everything. It's hard to put your finger on it. But generally, I don't see us surrendering that too easily.

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 like that's fair -- new capacity.

I don't know. It could be -- there could be some of that in there. Certainly, that -- the big factor, though, is there could be some of that. You're probably right. There's some of that. But the big factor, I think 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. Actually, we've been making improvements better than we have been showing for some time because of the material cost. And so what you see that is abating. So you're seeing a lot of that. So basically, I don't know where I put it on the foot of more customized product. We did sell a lot of customized products. So 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 got capacity constraint, you spend a little more money. You're looking at the SG&A and stuff like that, SG&A is up a little bit. And it takes you a little bit to manage through that. So you got some goes ins and goes out there. But there's a factor. But the big pack is RCI.

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?

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 kind of increase. It's not zero though, not zero increase. And so you get some of that. 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.

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.?

Active stocks, meaning what?

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?

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.

Great, thanks very much. Thanks for taking the questions.

Yes.

Our next question will come from Luke Junk with Baird. Please go ahead with your question.

Good morning. Thank you for taking the questions. Nick, Aldo, good to talk. Nick, first question, I'm just wondering the capacity constraints you ran into the Tools Group this quarter, how that might play out in the near term versus the mix of business that you'd expect in the third quarter and what would typically be little bit of a seasonal decline sequentially. And if I listen to the cadence in terms of things coming online either end of this month or into the early part of the fourth quarter. It sounds like you think you'll be in a better position in the fourth quarter overall from a supply chain standpoint. Am I hearing that right now?

Yes. We think that -- we think the fourth as I've said, probably on every one of these calls in the second quarter, that the third quarter is always kind of squarely because you've got the franchisee conference, then you got vacations, which if franchisees take long vacations that can affect it a little bit or they take short vacations also can affect it. So you have that in place what the Snap-on franchisee conference occurs. Now we might be seeing some little bit of anticipation for that as we did in the power tools. Certainly, power tools is not going to be affected by capacity. I don't think. So that's not going to be. Those new launches shouldn't be affected by capacity. And the capacity is coming online. And so we'll see how efficacious that is. We tend to be pretty good in putting these things in place. So I think you'd be right that the fourth quarter would be -- where we'd be hitting on more cylinders.

And then for my follow-up, just hoping you could comment on the trends that you saw in C&I. You mentioned Europe briefly and Asia, you highlighted the weakness that you saw in Japan hoping you could just expand on Europe more broadly in Asia-Pacific, excluding?

Actually, the European business was up in RS&I and interestingly, the U.K. and the Tools Group came off of probably -- it was flat on its back last year, I think. So it came back some. But the C&I business was kind of a little bit up and down in Europe. And so you -- one of the things that was positive was critical industries. So the critical industry in C&I, boy, volumes and margins, new capacity in place smoke, but the other business is up and down, European hand tool based business in a number of different environments like the Nordics and so on, probably affected by concerns over the -- over the war and so on. That is a little bit up and down and not very robust. And I don't know where that's going to tell you. Your guess is as good as mine. I think we're well positioned, but I do think there are macros there that are hard to predict. In Asia-Pacific, boy, it's hard to find too many areas that aren't -- maybe India, I would say is doing well. But generally, a lot of areas seem to be having trouble creating a recovery from the COVID for a number of reasons. China, I think it's well documented. Everybody talks about China. We're holding our own in China. But Japan, the currencies make a little different. The Yen is pretty weak versus the U.S. dollar and has been for a while, and it's weakened recently versus the RMB. So products into Japan are not so competitive in some cases. So that weakens that. And the market itself is down somewhat. So you're seeing those kinds of things play out. I think Asia will start to work its way out because I don't think it has a long-term problem like the war or like some concerns over -- or where they're going to get their fuel or energy. So I think that fixes itself more quickly than Europe by in Europe, I'm not sure where it's going. Now the auto repair business in Europe in terms of the repair shop owners and managers is pretty good, particularly collision. The industrial business, pretty good, the critical industries business. But the basic up and down the street business and our tools business kind of.

Okay, I will leave it there. Thanks, Nick.

And our next question will come from Gary Prestopino with Barrington Research. Please go ahead with your question.

Hey, good morning everyone.

Good morning, Gary.

Nick, I know we've talked about this [indiscernible], but I'm really -- I'm a little bit confused here about what's going on in the Tools Group. Could you maybe just talk about the product segments where you had these capacity constraints? I think you mentioned tool storage, but what other products were you having or segments where you're having issues with capacity installers?

Hand tools. Hand tools is at an all-time high. And some particular products are at over all-time high, like certain versions of the stock. And so when you got those stock, it sometimes your promotion is ready to go on a particular array of sockets as kind of a new package that will address a certain promise and you just don't have the capacity for, say, half of the package. And so that's open to us in a situation. So it's basically those guys bumping up against it and then over the top in tool storage, the industrial business starting to expand its capacity and being able to source more of other products from other people and so on, and break basically, the industrial business have been bound up in a kind of Gordian knot of shipments. I talked about it many times in the quarter. They cut that Gordian knot this quarter and started to ship more and that created more demand on the tool storage and hands tool plant as well.

Okay. And then as we work through the year, you're bringing on capacity and this should alleviate as we work through that?

Yes. I mean we've been saying this for a long time. It's just the particular ordering -- this ordering pattern in this quarter kind of bumped us up against it quicker than we thought. That's simply it.

Were the hand tools typical run-of-the-mill hand tools? Or were they more, like you said, customized? I'm just trying to understand how...

No, they were not so much standard-standard. But there's a lot of lower run. I mean, by that I mean shorter production run hand tool in these kinds of mixes. And when you get into them, they eat up a lot of capacity. You see what I mean because you got to stop and start the machines and so on. So it's not a linear thing necessarily. If it was just standard-standard products, we probably could have shipped out of inventory if we needed to. But these other products make it difficult. But we saw it coming. It was just this particular one with the policy, the idea that people weren't buying as many power tools because they're waiting for the new stuff kind of shifted the mix towards these -- even more towards hand tools and power tools. I mean tool storage.

Okay. I just want to understand what's going on there. And then over time, as things have evolved here, could you maybe -- do you have any numbers or metrics you can circle around? What percentage of what you're doing in the tools or even across the whole company is going into collision repair versus mechanical repair?

It's -- well, let's put it this way. I would say collision repair is about -- let me think about this. Equipment, the undercar equipment business is about one-third of RS&I, and I would say about maybe 20% to quarter of that is collision repair. That kind of ballpark and growing, though because equipment has been growing double-digits for some time. It was up double-digits again, and its margins were up nicely again.

Okay, thank you.

This concludes our question-and-answer session. I'd like to turn the conference back over to Sara Verbsky for any closing remarks.

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.

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