Snap-On Incorporated

Ladies and gentlemen, good day and welcome to the Snap-on First Quarter 2020 Results Investor Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sarah Verbsky, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Abby, and good morning, everyone. Thank you for joining us today to review Snap-on's First Quarter Results, which are details in our press release issued earlier this morning. We have on the call today Nick Pinchuk, Snap-on's Chief Executive Officer, and Aldo Pagliari, Snap-on's Chief Financial Officer. Nick will kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we'll take your questions. As usual, we have provided slides to supplement our discussion. These slides can be accessed under the Downloads tab in the webcast viewer as well as on our website, snap-on.com, under the Investor section. These slides will be archived on our website along with a transcript of today's call. Any statements made during this call relative to management's expectations, estimates, or beliefs, or otherwise state 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, including a reconciliation of non-GAAP measures, is included in our earnings release and in our conference call slides on pages 14 through 16. Both can be found on our website. With that said, I'd now like to turn the call over to Nick Pinchuk. Nick?

Thanks, Sarah. Good morning, everyone. Well, as some say, these are interesting times. There's considerable turbulence in business and all across the everyday landscape, but I believe We can be confident that Snap-on will navigate through it all and come out stronger than when it all started, just as we have done in the past. Before we get going, I think it's appropriate for all of you listening in, investors, associates, franchisees, customers, retirees, analysts, you have our best wishes that you and your families weather these times safely and without harm. Now let's speak of Snap-on. Firstly, We're keeping our teams safe. Stop-on people are working from home. And where that's not possible, and there are a number of these instances, we're proceeding using government-prescribed guidelines. In the United States, those put forward by the Center for Disease Control, the CDC, physical distancing, the use of personal protection equipment, cleaning of facilities deep and often, staggered shifts and break, and quick attention to those who have symptoms. For our franchisees, we're active and helping. providing a playbook for staying safe. The people of the Snap-on team are a great advantage. We're working hard to preserve them as we move through the difficult. Having said that, it's clear our operations are essential. Snap-on plays an important role in the underpinning of our society, supporting vital activities like the military, transportation infrastructure, our critical vehicle repair, the areas we all depend on for emergency services, for food delivery, for distribution of medical supplies and for a variety of essential needs. Government bodies including the U.S. Department of Homeland Security and multiple states have deemed it so. And there have been clear examples of that critical role from the United States to Italy to the U.K. And as such, our factories and distribution centers have pretty much remained active doing their part, keeping the world going. Consistent with that, Our sourcing teams have been able to maintain our supply chain, supporting both our factories and our kitting centers. Overwhelmingly, our sourcing partners have recognized the criticality of our needs and have remained active to provide support. Now in this arena, particularly in the US, we do have an advantage because we make in the markets where we sell. Our supply chain is fine. As you might expect, the impact of the virus varies across our operating landscape. Asia in general, and China in particular has seen the impact for some time. But now, particularly in China, it's showing some rays of light. Restaurants are opening and people are driving in mass. Europe has seen weak economics for several quarters, and COVID-19 has made it worse pretty much all over. It's a region that seems particularly hard hit. Of course, there's a lot being written about the United States. We do see a mix. There are points of light, primarily in the middle of the country, where franchisees have set personal positive records. And there are places, particularly in the Northeast, where activity has been significantly restricted. And there are locations, not that many at this point, where we've seen green shoots of recovery. If you view the world by business segment, most seem quite impacted. Oil and gas, of course. Education. and vehicle OEM projects, but there are other places, like the military, like general industry, and like trucking, that appear more positive. Regardless of the current landscape, we believe we have the resilience and the strength to navigate the downturn as Snap-on has done so many times before. The fact that since 1939, over all those years, encountering several periods of significant challenge, Snap-on has paid a dividend every quarter and has never reduced it. That record stands as evidence of our resilience. So in that regard, we believe our longer-term prospects have not been impacted. While the timelines are uncertain, we are confident on a positive outcome to this interlude. You can see it in the last recession in 2009. Remember how uncertain it was? Bad news for breakfast, people thinking about putting their money in the mattresses, the idea of mortgage default seeming okay without stigma. Well, if you look at Snap-on's record during that withering, We navigated the turbulence and came out stronger. We believe that reflects the essential nature of our business, the strength of our position in that business, and the experience and capability of our team. That wasn't our first rodeo, and neither is this. Because we believe in that recovery, we're keeping up with the elements of Snap-on Value Creation. Safety, quality, customer connection, innovation, and rapid continuous improvement. It's particularly evident in customer connection and innovation. Even in the turbulence, we're continuing with a stream of new products. The green shoots will grow, and we're going to be ready. Well, that's the overview. Let me turn to the results. First quarter, as reported, sales were $852.2 million, down 7.5%, including a $10.3 million or 100 basis point impact from unfavorable foreign currencies. Organic sales declined 6.9%, reflecting the ongoing weakness in Europe and the impact of the global economic uncertainty associated with COVID-19. From an earnings perspective, OPCA will lie for the quarter of $138.9 million, including $7.5 million of restructuring charges, principally focused on Europe, and $3.3 million of unfavorable currency effect was $48.5 million lower than 2019, which included $11.6 million benefit from the settlement of patent-related litigation matters. Now, that's a mouthful, but the 2020 as-adjusted OPCO I of $146.4 million, excluding restructuring, was down 16.7% from last year's as-adjusted level. And if you consider the sequential impact of the turbulence caused by the pandemic, the first quarter sales of $852 million were down organically from the fourth quarter of 2019 by 10.5%, while the period's as-adjusted OI of $146.4 million was down 14.6%. Regarding OPCO's OI margin, the as-adjusted 17.2% recorded in the first quarter compared with the as-adjusted 19.1% and the 17.9% registered in the prior year and in the prior quarter, respectively. For financial services, operating income of $56.9 million was down from last year's $62.1 million, including a $2.6 million higher credit reserve as a result of the economic uncertainty associated with the virus. Overall EPS on an as reported basis was $2.49 and it compared to $3.16 last year. The as adjusted EPS was $2.60 and that compared with last year's $3.01 down 13.5%. Now let's move to the groups. CNI saw mixed progress at the end of February, attenuated by significant declines in March. Volume in the first quarter, $299.9 million, including $5.3 million of unfavorable foreign currency translation, went down versus last year's $322.5 million, primarily on double-digit declines in Asia Pacific and in Europe. reflecting the longer impact of the virus in Asia and the ongoing economic weakness in Europe combined with the later period effect of COVID-19. From an earnings perspective, CNI operating income of $31.5 million decreased $15 million from 2019, including $4.4 million of restructuring and $1.2 million of unfavorable foreign currency effects. Now, critical industries did show variations. with relatively favorable performance in the military, trucking fleets, and general industry. You can see the essential nature of those areas in our activities. As we supported the production and the maintenance of the F-35 fighter, and as our critical tools helped keep the London ambulances on the road, that positive activity was offset by weakness in natural resources, education, and aerospace. commercial customers struggled to respond to the pandemic and the resulting lower oil prices and technical school shutdowns and reduced flights and generally lower capital spending. Overall, however, the critical industries reflecting in part the essential nature of those tasks were flat in the turbulence. We do remain confident in and committed to extending in the critical industries. As a matter of fact, We're continuing to strengthen our product line, enhancing our position even in the attenuated environment. A great example, just introduced this quarter from the Power Tools Division, is the new CT9100 3-quarter-inch cordless impact wrench. It's equipped with a market-leading combination of power and durability. The 3-quarter-inch drive anvil makes the unit great for essential tasks, for big industrial applications, for power generation, for heavy-duty fleets, And for the military, where fastener sizes are larger, torque values are higher, and reliability and consistent performances are pretty critical. With its 5-amp-hour lithium battery, the CT-9100 provides 1,000 pound-feet of bolting and 1,300 pound-feet of breakaway torque. That's real power. And beyond the strength, the tool has considerable versatility. Three torque settings in forward and three in reverse. optimizing performance for a wide range of applications. And it has a built-in brake, preventing that powerful wrench from throwing fasteners or sockets around when you use it. That's a significant safety feature. The tool is built in our Murphy, North Carolina plant, and it uses best-in-class components for superior toughness, substantial strength, and long service life. The new impact was just released in February in a limited distribution, but it's already on track to become a hit $1 million product. It's been quite well received. CNI, navigating the turbulence with customer connection and innovation, serving the essential. Now on to the tools group. Sales were $375.9 million in the quarter, reflecting $31.8 million organic decline and $2.5 million of unfavorable foreign currency translation. The progress we saw in the U.S. van channel early in the quarter was erased, and the continuing weakness of the international operation was amplified as the virus spread more widely. The operating earnings of $48.6 million, including $1.4 of unfavorable foreign currency, compared to $67.2 million in 2019. One advantage. We believe our franchisees entered the difficulties with a strong underlying position. And that base will come in handy during the immediate future. And as I said before, van activity is mixed. There are points of light. We saw a great record-setting franchisee performance in Iowa. Even in New York, some have adjusted well, turning in strong results. But there are places where the network is attenuated. The vans are seeing variation, but we have considerable and our ability to adjust and return to full strength. We've done it before in disasters like Superstorm Sandy and hurricanes, Marie and Harvey. And the tools team is working again in this difficulty with focus to make sure our franchisees weather the storm and emerge with advantage. We're supporting the franchisees with tailored programs, targeted promotions, and with, again, great new product. Products like the new line of quarter-inch drives, stubby ratchets, boasting the shortest length on the market. The fixed head at 2 1⁄2 inches and the flex head at 3 1⁄4 inches both offer improved accessibility in constrained spaces. Like all our quarter-inch drive ratchets, the new stubbies include Dual 80 technology for convenient ratcheting arc of 5 degrees and for more power and less lateral space. They each have sealed heads, which ensure a long tool life, and a screw-style joint design that enables very easy repair, all while maximizing strength. The new ratchets, they were launched regionally again in March, and initial sales were nearly a million dollars, a significant success for a hand tool in a regional introduction, especially in the storm. Now let's talk about tool storage, holding its own in the face of the pandemic. helped in part by the 100th Anniversary Limited Edition Epic Roll Cap with centennial-themed panels and medallions. The 68-inch Epic with the LED lighted power tool top features a gunmetal clear coat paint scheme and new brush red trim color, darker and richer than our standard. That first-time color combination highlights our continued innovation and emphasizes our capacity to expand color choices for consumers and it captures the attention of technicians who want to declare they are a very special professional. Only 1,920, we were founded in 1920, only 1,920 were built, and the numbered medallions showcase each box's place in Snap-on's history. Reception was strong. The box sold out. Well, that's the tools group. Navigating the challenge is underpinned by strong product. Now let's speak of RS&I. The RS&I group finished the quarter at $314.6 million in sales compared to $327.9 million last year, reflecting a $12.9 million organic sales decrease. The growth through February, showing an improvement in all businesses with the exception of our automotive OEM-facing operation, was overcome by slippage in March. Deeper decreases in the OEM area and End-of-quarter weaker volume in undercar equipment for both automotive dealerships and independent repair shops. Arsenite operating earnings of 77.3 million decreased 6.3 million, including 3.1 million of European-focused restructuring. Operating margin was 24.6%, including 100 basis points from the restructuring. And compared to the 25.5% recorded last year, excluding restructuring, the OA margin was 25.6%, up 10 basis points for RS&I despite the pandemic. Now, while the overall growth was impacted by continuing weakness in OEM programs and the equipment volumes, our diagnostics and repair information businesses did advance in the quarter. And we're working to keep that momentum going with innovative new products and features, attractions like our I recently introduced interactive truck wiring diagrams. It's an enhancement to the Mitchell One heavy-duty repair information system. Now, just like for light vehicles, technicians with the Mitchell One system can click on any picture component in a truck. When it looks at a wiring diagram, it can retrieve a pop-up menu with specifications, physical locations, connector views, and guided component tests. The new productivity-enhancing truck wiring diagrams were introduced in late February. It was at a press conference attended by the industry's top publications, and the reception was great. It's one of the reasons why Mitchell One kept growing in the quarter. Also during February, we launched our new Solus Legend diagnostic scan tool. It's quick. A 10-second boot-up in the ability to display scan results in as little as 30 seconds. It also offers a best-in-class 8-inch touchscreen touchscreen color display, and it combines full diagnostic capabilities for both standard vehicles and for motorcycles into one platform. That's a very popular feature. The new handheld also provides access to our SureTrack vehicle-specific reel fixes, repair tips, and commonly replaced parts, all derived from our proprietary database of 1.3 billion repair actions. Solus Legend has the look of a very successful addition to our lineup. We're confident in the strength of the RS&I product line, and we keep driving to expand its position with repair shop owners and managers, making work easier with great new products, even in the days of the virus. Well, that's a snap on first quarter. Some momentum in the beginning, checked by the virus. Making sure our team is safe. Maintaining our operations. They're essential to society. Navigating the mixed effects of the virus across our geographies and industries, knowing we can weather the difficulties, not knowing the exact timeline, but confident that our position is positive going forward, and keeping our company strong. Snap-on value creation and a continuing string of new products. Now I'll turn the call over to Aldo.