Snap-On Incorporated

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

Thank you, Emma, and good morning, everyone. Thank you for joining us today to review Snap-on's Third Quarter Results, which are detailed in our press release issued earlier this morning. We have on the call today Nick Pinchuk, Snap-on's Chief Executive Officer, and Aldo Pagliari, Snap-on's Chief Financial Officer. Nick will kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we'll take your questions. As usual, we have provided slides to supplement our discussion. These slides can be accessed under the Downloads tab in the webcast viewer, as well as on our website, 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.

Thanks, Sarah. Good morning, everybody. Today I'll start with the highlights of our third quarter. I'll give you a perspective on how the virus environment is playing out and on the trends we see today and going forward. And I'll speak on our physical and financial progress. And now, though, we'll provide a more detailed review of the financials. We see the third quarter as another encouraging period. The metrics clearly confirm Snap-on's resilience, showing the ability to continue its trajectory of positive results, moving from the initial shock of the virus and the associated interruption of activity to accommodation, developing safe and effective ways to support the essential nature of our business, and in some segments, starting to look towards psychological recovery where customers begin regaining confidence in the future and resume a full buying participation. The quarter's results back that all up, demonstrating significant elements of advancement. Sales and profitability improved sequentially across our operations despite the virus. The Snap-on team continued to make progress by increasing our ability to accommodate to the threat and pursue our essential commercial opportunities safely, moving along upward trajectories consistent with our general perspective on how the days of the virus are unfolding. Geographically, the impact of the COVID continues to be varied across our operating landscapes. Asia Pacific remains virus-challenged. Southeast Asia and India are still in deep turbulence. And at the same time, Europe saw some signs of recovery. For business segments, certain areas, education, oil and gas, aviation, experienced greater and more prolonged difficulties. You might expect that. In fact, the speed at which our customers are accommodating to the environment does vary by segment, but leading the way upward are our vehicle repair technicians, supporting the essential mobility of our society and our direct selling vans, our franchisees providing extraordinary face-to-face value. Both are taking full advantage of the opportunities and the numbers show it. And as we go forward, we see considerable additional opportunities as society pivots towards suburban locations and to more individual transportation. I'll tell you, it's music to the ears of the vehicle repair operation. We believe we do have abundant opportunities on the road ahead. And because of that, we're keeping our focus on snap-on value creation, safety, quality, customer connection, innovation, and rapid continuous improvement, or RCI. And in this area, that emphasis, this era, that emphasis is particularly important in Customer Connection Innovation. We're following that focus to create a continuing stream of great new products, positioning our operations to monetize the accommodation and the psychological recovery that outlines the path to the future. And in the third quarter, Snap-on Value Creation, Customer Connection Innovation drove growth in the face of the uncertainty and led to significant additions to our long line of product and innovation awards. Snap-on was prominently represented with three Motor Magazine Top Tool Awards, and we were further honored with five Professional Tool and Equipment News, or P10, Innovation Awards. But most significant of all, we were also recognized with 18 P10 People's Choice Awards, where the technicians, the actual users, make the selections. Eighteen is a big number. It ties our record that was set just a few years ago. You see, an essential driver of our growth, with or without the pandemic, is innovative product that makes work easier. It's always been our strength and the awards. Hard won. Our testimony that exceptional Snap-on products just keep coming, matching the growing complexity of the tasks and maintaining our forward progress, even in turbulence. Well, that's the overview. Now for the results. Third quarter, as reported, sales. of $941.6 million, we're up $39.8 million or 4.4% from 2019, including a $34.6 million or a 3.8% organic increase, $4.2 million of favorable foreign currency translation, and $1 million of acquisition-related sales. From an earnings perspective, for the quarter of 185.7 million, including 1.5 million in direct costs associated with the virus, and a $4.5 million hit from unfavorable currency compared to 167.7 million last year. The operating margin, it was 19.7%, up 110 basis points. For financial services, operating income of 65.6 million increased from 2019, 61 million, all while the 68 delinquencies improved year over year. And that result combined with OPCO for a consolidated operating margin of 24.5%, 130 basis point improvements. The overall EPS was $3.28, and that compared to $2.96 last year, an increase of 10.8% in a somewhat challenged environment. Those are the overall numbers. Now the groups. In C&I, volume in the third quarter of $308.4 million, including $2.2 million of favorable foreign currency, was down 8% as reported, 8.6% organically, reflecting decreases in sales to our customers in critical industries, I named a few, and in Asia Pacific. Now, our European-based hand tool business was essentially flat to last year, a positive result given the twin headwinds of COVID-19 and the economic turbulence that now inhabits that region. From an earnings perspective, C&I operating income of 43.1 million decreased 5.2 million, including 1.4 million of unfavorable foreign currency effects and eight-tenths of COVID-related expenses. Now, C&I sales were down 8.6%. OI was down 10.8%, a reasonable ratio. highlighting that RCI and cost containment went a long way in offsetting the impact of lower volume at CNI. In addition, the group did show significant sequential progress. The decline in sales and OI both narrowed considerably compared to the second quarter, reaffirming the positive upward trend that started after April. Regarding critical industries, military and And international aviation again continued to register growth while activity and education, oil and gas, and U.S. aviation were particularly impacted. You might expect that given the state of those particular industries. But we do remain confident in and committed to extending in the critical industries. And we see growing opportunities moving forward. And the principal path to that possibility is customer connection and innovation combining to create growth. Powerful new products. Our European hand tools business showed resilience in the quarter, yes, and it was aided by a good dose of innovation. Products like our all-new line of Baca Urgo insulated cutting and holding pliers. We redefined the steel mill and refined our heat treat process, developing a new metallurgy that strikes the perfect balance between strength and reliability. With those special material advantages, the edges were redesigned and improved. Progressive blades that cut both soft cables at the tip and hard wires close to the joint. Tremendous versatility. The new pliers have longer jaws and are aligned with more precision, better access, and more accurate work. The installation meets the IEC 60900 international standard for working with live systems up to 1500 volts DC. Substantial protection, safety in vehicle repair, or in an industrial environment. Strength, reliability, flexibility, accessibility, and safety, the ErgoPlier is a powerful addition to the Baco lineup of insulated tools now numbering 250 strong, all focused on electrical work. The new pliers were launched just this quarter and I'll tell you, the reception was quite enthusiastic. We also continue to introduce attractive new entries in our lineup of 14.4 volt the compact cordless power tools. This quarter, two strong additions, effective in the repair shop or around the production line. The new CGRS861 or the CGRR861, incline and right angle grinders, high torque, longer run time, extended motor life, all in a compact, lightweight, and easy to move your body. The new units both feature a dual collar system accommodating both eighth-inch and quarter-inch bits, allowing for a wide range of accessories and a feature that, when combined with our built-in spindle lock, makes for very quick changeover. That's a popular time saver. The new tools also include variable speed control, a key to handling a wide variety of servicing jobs. We launched in August. The technicians clearly have noticed, and the grinders are already two of our million-dollar hit products. CNIs. Demonstrating, encouraging sequential progress, serving the essential. Each of the businesses generating ongoing improvement and exiting the quarter stronger than when they entered. And product investment authored a big piece of that progress. Now on to the tools group. As reported, sales up 16.8%. to $449.8 million, including $1.8 million of favorable foreign currency, and a $62.8 million, or a 16.2% organic increase. Same store sales, with the U.S. and international businesses all growing at double digits. The operating earnings, $87.1 million, including $0.4 million of virus-related costs, and $2.9 million of unfavorable foreign currencies. That compared to $53 million last year. The tools group operating success was a clear confirmation on our view of the COVID-19 trajectory, on the resilience of the vehicle repair business, and on the strength of our direct face-to-face van model. As we entered the quarter, we saw our franchisees seeking increasingly effective ways to accommodate the pandemic. pursuing the support of the essential. And we've helped in that effort with time-saving aids, including further automation in the customer collection process, remote diagnostic software renewals, and multi-franchisee data bundling. New technology aids aimed at making it easier to operate in a virus environment and saving scarce franchisee time under any conditions. Also, as I'm sure... Many of you are aware the third quarter is when we hold our annual Snap-on Franchisee Conference, the SFC. No surprise. This year was different than any held before. The in-person gathering was canceled, and our 100th anniversary celebration plan for that meeting was postponed to 2021. Instead of the usual event, we came together over the weekend, ordinarily reserved for the SFC, at a virtual conference live from the forge. More than 3,800 van drivers participated at a distance. representing nearly 98% of the North American network. Following what was, I think, a rousing Friday night kickoff, we had presentations on significant offerings, training on unique product advantages, and seminars on effective selling techniques. After that Friday show, 180 individual videos featuring products and programs and training were posted on demand. And through the course of the weekend, franchisees racked up over 43,000 views of the content. The Live from the Forge action was concluded on Sunday afternoon, and I'll tell you, it was a clear success. Continuing the SFC tradition, highlighting new product, strengthening our franchisee capabilities with great training, and reinforcing our brand with a positive message and a lot of fun. It was abundantly evident at Live from the Forge that new product is a big driver for franchisee excitement. We do have considerable confidence in the power of our product line, and there are real reasons for that belief. You heard about the product awards. Well, beyond that, as our franchisees saw, there's a continuing stream of other great new offerings, candidates for next year's recognition, attention-getters that make repair work easier and really help the technicians meet the challenges of increasing vehicle complexity as the model years roll by. Just one example unveiled at the conference was our new steel Titan roll cab. with a new color combination, eye-catching dark titanium paint brushed in blue trim, special details in bright blue, the snap-on nameplate, the S-Wrench logo located on the cab face, and a special S-Wrench imprint on each interior liner. The Titan is visually striking, I can tell you, but it's also work-enabling. Three extra-wide drawers for easy access to most commonly used tools, a speed drawer, improved organization for a variety of small items like drill bits, and a power drawer. for power tool charging using a Snap-on exclusive power strip design with five offset AC outlets and two USB ports. Vehicle repair is moving towards psychological recovery, gaining confidence, starting to invest in longer payback items. And the Steel Titan is just the ticket. It's product excitement, even in the pandemic, and it was a success. The customers loved it. Also introduced in this quarter was the new eight-piece power steering and alternator pulley master set, a hands-on, helping technicians to more easily remove and install pressed-on pulleys in most GM, Ford, and Chrysler engines. The unique reversible dual-yoke design that this hand tool has includes multiple adapters, allowing for quick model changeovers and increased productivity. Pretty important in a garage. The master set is a necessity for smooth installation and removal of power steering pump, alternator, and vacuum pump pulleys in a large range of vehicles. It's manufactured in our Elkmont, Alabama plant right here in the USA. I was just there last week, and I could tell you it's a great team. It's no wonder the initial response to the master set was very positive. It made our list of hit million-dollar products in just the first month. Well, that's the tools group. Accommodating the pandemic, taking advantage of the psychological recovery, furthering innovation, and strengthening for the future. Now let's speak of RS&I. The RS&I group also posted significant sequential improvement from the second quarter, narrowing the shortfall to 1.6%. You may recall that in the second quarter, the sales were down 29.8%. That's a big move. Volume in this period in the third quarter was $317.5 million, including $800,000 of favorable foreign currency and $1 million from recent acquisitions. The slightly lower activity reflected continued growth in the sales of diagnostics and repair information products to independent repair shops, and flat capital spending on undercar equipment, all balanced by improved but still decreased activity in vehicle OEM projects. RCIA operating earnings of $80.1 million decreased $3.2 million, reflecting the lower volume. OI margin was 25.2%, down 60 basis points, including a 10-point hit from currency. So while the overall group was somewhat impacted, Diagnostics and information-based operations continue to grow, and once again, new products led the way. Among the new offerings launched in the quarter was our latest intelligent diagnostic unit, the Apollo D9, ergonomically designed. It's a new handheld, and it features ultra-fast two-second startup time, a larger nine-inch touchscreen, and a number of preloaded training videos installed directly on the tool for instant use. The platform's powered by our intelligent diagnostic software. Over 1 billion repair records and over 100 billion unique diagnostic events, all organized to help technicians fix cars much faster. Now, we've been talking about shortening the selling cycle for our complex diagnostics and increasing the sales capacity of our franchisees. Well, Live from the Forge features a detailed seminar on operating and selling the new Apollo, And to make that distance training extra powerful, each franchisee was provided with a new demo unit to follow right along live, hands-on with the program. In addition to the special training, the unit could also be used immediately the next week to demonstrate the new Apollo's compelling advantages right in the field. Seems to be working. Although it was introduced at the end of the quarter, our on-the-street feedback says our new handheld will go a long way to advance our our strategic trust into intelligent diagnostics. We're confident in the strength of RS&I, 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 our third quarter. Absorbing the shock, following the accommodation, moving on to psychological recovery. keeping our people safe while we serve the essential, continuing to improve sequentially on a positive trend, a successful SSE at a distance, confirming the power of our direct selling van model. Results above last year. Sales up 4.4%. OI margin 19.7%. 110 basis points higher. Financial services navigating the virus era with strength and an EPS of $3.28. All achieved while maintaining and investing in our strengths of product, brands, and people. It was an encouraging quarter. Now I'll turn the call over to Aldo. Aldo?