Snap-On Incorporated

Ladies and gentlemen, good day and welcome to the Snap-on Incorporated 2020 Fourth Quarter Results Investor Conference Call. Today's call is being recorded, and at this time, I would like to turn the call 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 Fourth 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 the 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, everybody. Today I'll start with the highlights of our fourth quarter. I'll give you my perspective on how the virus is playing out, on the trends we see today and going forward, and I'll speak about our physical and financial progress. Then Aldo will give you a more detailed review of the financials. To start with, I'll just say we are encouraged by the quarter. It was strong, but we believe we can reach even higher. This year was a lot of unusual events, but when you look through it all, snap-on saw headwinds, but we met those challenges, absorbed the shock, developed accommodations to the environment, moved forward on a clear recovery, And we believe we exited the year stronger than ever. We did have disparities from group to group and within each group, but our overall sales and profitability improved both sequentially and year over year for the second straight quarter, achieving new heights despite the virus. Through the year, the Snap-on team continued to make progress, accommodating to the threat, pursuing our essential commercial opportunities safely. and moving along upward trajectories consistent with our general projections on how the days of the virus would unfold. Geographically, the impact of the COVID continues to be varied for us. Asia Pacific remains virus challenged. Southeast Asia and India are still in deep turbulence. And while the US and Europe actually seem to be further ahead in accommodation and are moving on to what we call psychological recovery. For the business segments, We saw the essential nature of our markets rising through the turbulence along our runways for growth. Demand for vehicle repair technicians to our franchisee network directly selling off the vans. It was robust. Again this quarter, it was robust. Volume of repair shop owners and managers continued to gain. And activity in critical industries advanced despite certain sectors like education, oil and gas, U.S. aviation not returning to growth yet. But you would kind of expect that. Going forward, we are convinced that we're well positioned on a strong base. But we know we have much more work to do. The environment throughout the world is still impacted by the virus, and many of our businesses have not yet fully recovered against the great withering. But having recognized these headwinds, however, we're also convinced that there will be abundant opportunities as the skies clear and society pivots toward suburban locations and to more individual transportation. This is great news for the vehicle repair industry, I got to tell you. And because of that, we're keeping focus on Snap-on value creation, safety, important in these times, huh? Safety, quality, customer connection, innovation, and rapid continuous improvement, or RCI. We've been unrelenting in advancing our advantage in products. that solve the most critical of tasks, in brands that serve as the outward sign of the pride and dignity working men and women take in their profession, and in our people, who are deeply committed and very capable. Snap-on team is a great asset, and we've maintained it through these days of the virus. We've advanced each of these strengths in the turbulence, and it's enabled Snap-on to achieve new heights, and the numbers show it. That's the overview. Now the results. Fourth quarter, as reported, sales of $1,074,000,000 were up 12.5% from 2019, including $9.6 million of favorable foreign currency translation and $7.5 million of acquisition-related sales. Organic sales rose 10.6%. volume gains in the van channel, in OEM dealerships, in diagnostics and repair information, in our European hand tools business, all demonstrating the abundant opportunities on our runways and our increased ability to take advantage of those opportunities. From an earnings perspective, operating income, OPCO OI from the quarter of $216.2 million, including $2.8 million of direct costs associated with the virus, $1 million of restructuring charges, for actions outside the United States, and a million and a half hit from unfavorable currency was up 26.1%. And the opco operating margin? It was 20.1%. Up 220 basis points, overcoming 30 basis points of unfavorable currency, 30 basis points, 30 points of COVID cost impact, and 10 basis points of restructuring. For financial services, operating income of $68.5 million increased 10.1% from 2019, all while keeping 60-day delinquencies flat to last year in the midst of the pandemic stress test. And that result combined with OPCO for consolidated operating margin of 24.4%, 190 basis point improvement. The overall quarterly EPS was... $3.82, including a $0.02 charge for restructuring, and that result compared to $3.08 last year, an increase of 24%. I did say new heights. Now, for the full year, sales were $3 billion, $593 million, a 3.8% organic decline, principally on the first and second quarter shock of the virus before the sequential gains of accommodations took hold. OPCO OI is $631.9 million, including $12.5 million of restructuring charges, $11.9 million of direct costs associated with COVID-19, and $13.1 million of unfavorable currency, compared to $716.4 million in 2019, which benefited from $11.6 million legal settlement and a patent-related litigation matter. OPCO OI margin including a 30 basis point impact associated with restructuring. 30 points of direct pandemic expenses, 30 points of unfavorable currency with 17.6%, and compared with 19.2% in 2019, which incorporated 30 basis points of the non-recurring benefit for the legal settlement. That's a mouthful, right? But what it says is that despite the great disruptions, Our full year OI margin was down only 40 basis points, apples to apples, demonstrating the special snap-on resilience that has enabled us to pay dividends every quarter since 1939 without a single reduction. For the year, financial services registered OI of $248.6 million versus the $245.9 million in 2019. Overall, EPS for the period of $11.44 was down 7.8%, from the 1241 reported last year, 2019. Adjusting for the restructuring in the current year and the one-time legal benefit in the prior year, 2020 EPS as adjusted reached $11.63, down 5.1%. So now, let's go on to the individual operating groups. In C&I, volume in the fourth quarter of $364.4 million, including $7.5 million from acquisitions, and 6.5 million of favorable foreign currency was up 3.3% as reported. The activity was essentially flat organically, but represented a continuing sequential CNI rise all the way back to the early shock. Notably in these numbers, the CNI year-over-year sales were marked by a strong double-digit rise in our European-based hand tool business, growing broadly across Western Europe against the twin challenges of COVID and the Brexit disruptions. They're also offsetting decreases in sales to our customers and critical industries in Asia-Pacific. But both these operations joined the overall group and registering substantial quarter-to-quarter sequential improvement. They're still down, but they're clearly recovering. From an earnings perspective, from an earnings perspective, C&I operating income of $56.2 million increased 11.2%. including $1.3 million of unfavorable foreign currency effects and a million of COVID-related costs. With sales up 3.3%, as reported, flat organically, OI grew 24.9%, a nice operating improvement. And the OI margin for the group was 15.4%, up 260 basis points from last year, overcoming 70 basis points of unfavorable currency and 30 points of direct COVID costs. The benefits of RFDI and margin gains in the critical industries made all the difference. Speaking of the critical industries, we did see selective gains. International aviation and heavy-duty registered double-digit improvements. But as you might expect, and I referenced before, education, oil and gas, and U.S. aviation continue to be down. And in the quarter, our military sales were also impacted by the wind-down of one of our major kitting programs. But we do remain confident in and committed to expanding in the critical industries, and we see growing opportunities moving forward. And a principal path to that possibility is customer connection and innovation, creating powerful new products. You heard about our European hand tool business. It showed significant resiliency in the quarter, and it was aided by a good dose of innovation, products like our recent expansion of our Baco custom kitting system, extending our direct-to-user possibilities. Our new fit-and-go product line allows buyers to quickly develop semi-bespoke kits in foam tool control. It consists of more than 200 pre-configured different tool sets designed around a 26-inch wide Baco roll cap available in three standard foam configurations, one-third drawer, two-thirds drawer, and a full drawer. Customers can choose the particular box. draw configuration, and the tool array needed right from our BACO.com website, reaching end users without distributor interaction. And if a wider range of specialization, and sometimes it is, specialization is required, our sales reps can help develop just the right unit using the full breadth of the BACO system. We've had great success with our new fit and go. It's an important extension of our hand tool presence in Europe. And in the quarter, it helped boost S&A Europe to achieve the double-digit growth In a very challenging environment, I think everybody would agree. CNI, demonstrating further accommodation with continued sequential gains, serving the essential. Each of the businesses generating a positive trajectory and exiting the quarter stronger than when they entered, and product authored a big piece of that progress. Now on to the tools group. As reported, sales up 20.2%, to $494.9 million. including 2.2 million of favorable foreign currency, and an $81 million, or 19.6% organic increase, the second straight quarter of strong gain, with the U.S. and international businesses both growing at double digits. And the tools group operating earnings, 93.6 million, including 1.2 million of virus-related costs. That 93.6 included 1.2 million of virus-related costs, and that $93.6 million compared to last year's $54.3 million, an over 70% improvement. Actually, the tools group recovered to positive territory for the full year. Sales were up 2% organically, with OI rising almost 9%, and OI margins up 110 basis points. The continue operating Operating gains of the toolstrip are further affirmation of our view of the COVID trajectory on the resilience of the vehicle repair business and on the strength of our direct face-to-face van model. It turns out that deep and direct connection with the customers is a differentiator, even in a pandemic. And in the quarter and throughout the year, the toolstrip confirmed the market-leading position of our van network. We believe the franchisees are growing stronger. That's clear in the franchisee health metrics. We monitor each period. They continue to trend favorably. And that was acknowledged by a number of respective public patients, all listing Snap-on as a franchise of choice. One was the Franchise Business Review, where we were again recognized in the magazine's latest rankings for franchisee satisfaction as a top 50 franchise, marking the 14th consecutive year that Snap-on received that award. This type of recognition reflects the fundamental strength of our franchisees and our van business in general, and it would not have been achieved without a continuous stream of innovative new product developed through our strong customer connections. Throughout the storm, we've added every day to our already considerable insight and experience in a changing vehicle environment, and because of that, we're able to bring forward innovation after innovation, great products, like our newly released 8-inch Talon Grip Flank Jaw Pliers. We call it the HJ47ACF, with a unique design for significant versatility in both removing and tightening fasteners. First, our unique flank jaw, formed with a specially designed smooth and uncerated mating area, allows the user to grip a hex shape only on the flat surface, positioning the load away from the corners. That's similar to our flank drive systems on sockets, 30% more torque applied to the fastener while still minimizing damages, eliminating rounded edges. Second, when the fasteners have already been heavily rounded and are tough to grip, our Talon grip, diamond serrated jaws, located at the plier's tip, generate unparalleled clamping forces, up to a 57% increase in turning power. With the Snap-on Talon, technicians can remove even the most damaged and rounded hex fasteners. And for the icing on the versatility cake, the new pliers also feature a patented three-position slip joint design for easy changes to the grip position. The HD-47 ACF is manufactured right here in our Milwaukee plant in the U.S., and it's been very well received, putting it on a clear path to becoming another one of our hit products, million-dollar selling products, just in one quarter. We also worked hard during the COVID to maintain and further strengthen our brand, celebrating our 100th year, continuing our presence in racing, and most importantly, I think, servicing our customers every day, reinforcing that what they do really is essential and that the display of the Snap-on brand confirms that it's so. For some time, the tools group has also been working to expand franchisee selling capacity. And that effect continued with focus through the pandemic. In the days of the early shock, access to the shops and to the technicians varied widely, and the tools group worked to engage social media in bridging the gap. This turned into a powerful tool for pre-briefing customers on products and promotions, reserving the actual face-to-face interaction for closing the deal, providing significant franchisee opportunity for selling more products and reaching new customers. Why do you think we're up? The tools group also made strides in redeploying the time saved from restricted travel. Everybody stayed at home more today. Streamlining the van sales process through RCI and developing more concise customer presentation. So important in pitching products of ever-rising complexity. Social media engagement, RCI selling, and more effective trading. It made the difference. Raising franchisee selling capacity to match the strength and capacity of our new product. And the results back it up. Well, that's the tools group, moving through a V-shaped recovery, recording two straight quarters of double-digit expansion, continuing to stream new products, building the brand, raising selling capacity, and strengthening for the future. Now let's speak of RSI. The RSI group, continuing the accommodation and extending its positive trend, sales at $361.1 million in the fourth quarter, up 7.8%, 7% organically, excluding $2.4 million of favorable foreign currencies. A steep recovery from the depths of the pandemic. The rise was due to double-digit gains in OEM dealerships as auto manufacturers began to release new models and launch more essential programs. A high single-digit gain in the sales of our powerful diagnostics and repair information products to independent repair shop owners and managers. and an offsetting low single-digit decline in sales of undercar equipment, where garage owners haven't developed sufficient confidence to yet invest broadly in upgrading or expanding their facilities. R&I operating earnings of $90 million improved $2.8 million as the mix of lower-margin OEM project sales diluted the volume improvement, and as the group recorded $1 million in charges for small European-focused restructures. Our diagnostics and information-based operations have recorded continuous growth for some time. The sales to independent repair shop owners and managers, they've had continuous growth for some time, and innovative new products are the key to that success. And the fourth quarter was no exception. We just began shipping our new 20.4 software update for our diagnostics platforms in North America, full coverage for the 2020 vehicles. additional reprogramming facility, increased functional test capabilities, and an expansion of our unique advanced driver assistance or ADAS content, so critical these days for engaging vehicle automation. This software represents another move forward in our already powerful, already market-leading intelligent diagnostics and repair information product lines. It's being well received. Thousands of technicians all across the U.S. and Canada will be upgrading to this very capable new addition before the next update is released in May. And then we'll start again. RS&I is building a powerful position in vehicle repair software that meets the changing mobility environment, and the 20.4 is another step in that direction. 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. And that's our fourth quarter. Absorbing the shock. Driving accommodation. Moving on to psychological recovery. Keeping our people safe while we serve the essential. All of that is working. Building Snap-on's advantage and the results show it. Sequential gains. from the third quarter and significant growth from last year. Sales up 12.5%, 10.6% organically. OI margin 20.1%, 220 basis points higher. Financial services continuing to deliver, navigating the virus with strength and without disruption. An EPS of $3.82, up 24%. All achieved while maintaining and expanding our advantages in product, brands, and people. Ending the year stronger. ready for more opportunities to come. It was an encouraging quarter. Now I'll turn the call over to Aldo.