Snap-On Incorporated

and welcome to the Snap-on Incorporated First Quarter 2021 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sarah Verbsky, Vice President, Investor Relations. Please go ahead.

Thank you, Nick, 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 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 Investors 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, everybody. As usual, I'll start the call by covering the highlights of our first quarter. And along the way, I'll give you my perspective on our results. They are encouraging. On our markets, they're standing firm. And on our progress, it's made us stronger than ever before. And we'll also speak about what it all means. We believe it means we're getting better and better positioned for more, even while we're still in the midst of a once in a hundred year pandemic. And after all that, Aldo will move into a more detailed review of the financials. We believe our first quarter is clear confirmation of Snap-on's ability to continue its trajectory of positive results, further accommodating to the virus environment, overcoming period to period variations from business to business, dealing with macroeconomic headwinds, and advancing along our runways for both growth and improvement. Our reported sales in the quarter of 1,024,600,000 were up 20.2%, including 19.2 million of favorable foreign exchange and 11.3 million of acquisition-related sales. Organic sales growth was 16.3%, gains in every group. It's our third straight quarter of being above our pre-pandemic levels. And ongoing contributions from our Snap-on value creation processes, the principles we use every day, safety, quality, customer connection, innovation, and rapid continuous improvement, or RCI, they all combine to drive that progress. Progress there was. Opco operating income of $200.9 million was up $62 million from last year, which included $7.5 million of restructuring charges. OPCO operating margin was 19.6% up from the 2020 level of 16.3% or 17.2% as adjusted for restructuring. For financial services, operating income of 65.3 million increased 14.8% and the delinquencies were down. Even in the midst of a pandemic stress test during commercial trial of what we would call extraordinary proportion, And that result, combined with OPCO, for a consolidated operating margin of 23.9%, a 300 basis point improvement as reported, and up 220 basis points as adjusted. First quarter EPS was $3.50, up 40.6% from last year's 240, and excluding the 2020 restructuring charges, EPS grew 34.6%. I've said it before and I'll say it again. We believe Snap-on is stronger now than when we entered the Great Withering. And we also believe that our first quarter results testify to just that, especially when we compare them to 2019, before the virus. So let's do that. Versus 2019, our sales in the past quarter grew 102.9 million, or 11.2%, and that reflects 15.3 million of acquisition-related sales, $11.6 million of favorable foreign currency, and a $76 million, or 8.1% economic gain. The 2021 OPCO operating margin of 19.6% was up 50 basis points from the 2019 level, as adjusted for a legal settlement in that earlier period. And that 50-point gain was achieved against 80 points. of unfavorable currency and acquisition impacts, all while still absorbing the COVID. Now to our markets. Auto repair remains quite resilient. The technicians are rolling. They know they've weathered the depths of the COVID shock and have learned to accommodate the virus environment and are moving to psychological recovery. There's still some air of vigilance. But their activities are robust, and they know they won't be shocked again by a spike. They're quite positive regarding the future of driving as people pivot from shared mobility to individual transportation. And it's vehicle repair with the technicians. It's a strong and resilient market. You can hear it. You can hear it in our franchisees' voices, and you can see it written clearly across our double-digit numbers. Also in auto repair, there are shop owners and managers. There are signs that the auto business is rising. Demand for new and new cars is high, but dealership repair and maintenance and warranty is still attenuated, so there is a gradual gain, and we're positioned to take advantage with a broader and stronger product line with innovations like our Triton D10 diagnostics and new acquisitions like DealerFX. putting us deeper into dealerships than ever before, and providing us a clearer view of the future repair trends, new technologies, and evolving vehicle platforms. Dealer FX puts us at the right place at the right time as things change. Finally, let's talk about critical industries, where Snap-on rolls out of the garage, solving tasks of consequence. This is where CNI operates, the most international of our operations. And these are the customers that have been most impacted by the virus. They're slower to accommodate and to recover, but they have been recovering. And in the quarter, the results showed that trend, despite some significant headwinds, including the continuing impact of the virus, the February freeze in Texas, some challenged business sectors like oil and gas, and troubled geographies like Southeast Asia. Despite that variation, we did see growth in critical industries, improvement in a number of areas, in aviation, in education, in heavy-duty fleet. They all combined to overcome the continuing turbulence in natural resources. Also in C&I, S&A Europe. S&A Europe. Another quarter of double-digit growth, with broad strength across its geographies, in places like France, Spain, Italy, Germany, and the Nordic region. And from our Asia-Pacific division, up double digits as well with solid increases in key countries like China and India and Japan. So overall, I describe our CNI markets as improving and representing clear opportunity. And coupled with our auto repair-related businesses, we believe there's clear overall progress along our runways for growth, enhancing the van network, expanding to repair shop owners and managers, extended critical industries and building in emerging markets, leveraging our broadening product line, wielding our strengthening brand, and deploying the increasing understanding of the work. Understanding of the work that is the hallmark of Snap-on people, even in the throes of the pandemic shock. About a year ago, as we entered the virus, we recognized the resilience of our markets and the strength of our model, projecting a V recovery. And that's how it played out. You can see it in the results. So now let's turn to the segments and discuss those results. In the CNI group, on a reported basis, including 9.2 million favorable foreign currency translation and 7.3 million of acquisition-related sales, first quarter volume rose 15.3% compared to last year. Organic sales were up 9.5%. Double-digit growth in our European hand tool business and a mid-single-digit rise in critical industries led the way. From an earnings perspective, CNI operating income of $50.7 million, including $1.4 million of unfavorable currency, represents a rise of $19.2 million compared to the $31.5 million registered in 2020, which included $4.4 million of restructuring. That all means, on an adjusted basis, an adjusted increase of over 40%, an as-adjusted increase of over 40%, and the operating margin was 14.7%. an as-reported increase of 420 basis points and 290 as-adjusted. Now, when compared with 2019, the pandemic-free measuring stick, sales were up 7.2%, and that included 10 million or 3.1% organic gain, 8 million of acquisitions, and 5.2 million from favorable foreign currency. Once again, CNI demonstrated sequential improvement. If you go back and look at their numbers, they keep getting closer and closer, and now they're above pre-pandemic levels, despite the ongoing uncertainty. It's one of the things I think we want to remember. The virus isn't gone. We're still bearing it, and we didn't have it in 2019, and CNI is above that level. As part of the trend, we remain committed to extending in critical industries. That's the CNI sweet spot. So we'll keep strengthening our position to capture those opportunities as they arise and enabling that intent is our expanding lineup of innovative new products, developed specially to make critical work easier. One example is our CT9010, 3-inch drive, 18-volt brushless impact wrench, the newest member of our monster lithium family, aimed at tight spaces, sustained power, rugged durability, and precise control. The 9010 features 320 pound-feet of bolt breakaway torque and 240 pound-feet of working torque, all the power a technician needs when they're working in confirmed quarters. It offers a variable speed trigger and three speed selections and forward and reverse. That means greater control, adaptable to any applications, and no over-torquing important. The 9010 advanced design also reduces motor temperature rise, delivering a higher durability and great power-to-weight ratio. And it's fitted with a 100-lumen headlight that helps technicians work in dark environments, just what's needed for those close jobs. And the 18-volt battery with five amp hours ensures consistent output and extended run time, which translates to less charging and more efficient workday. And all of this comes, and this is the best part, I think, all of this comes in an extremely compact size, only six and three-quarter inches in overall length. It'll fit into the tightest of workspaces. The CT9010 is a great tool. It's had strong demand. And it's already one of our $1 million hit products. I don't want to leave CNI without mentioning S&A Europe. Double-digit sales growth again. Progress by the Baco Ergo Tool Management System. Expanding product customization to the needs of the task. Driving progress against the twin headwinds. of a difficult COVID environment. You know, Europe is not so easy these days. And the uncertainty of Brexit. No small feat. Well, that's CNI. Continuing sequential improvement and positions for more. Now on to the tools group. Sales of $478.3 million, up $102.4 million, including $6.7 million of favorable currency, and a $95.7 million, or 25% organic gain. Double-digit growth, both in the U.S. and the international operations. The operating margin was 20.7%. Yes, 20.7%, up 780 basis points. Compared with pre-virus 2019, Tools Group sales grew 68.1 million, 16.6%, including 5.2 million favorable currency translation and 62.9 million, or a 15.1% organic gain. And this year's 20.7 operating margin was up 430 basis points compared with pre-pandemic 2019. The Tools Group is responding to the challenges of the day. increasing its product advantage, fortifying its brands, and further enabling its franchisees. And the results show it, huh? We do believe our runway for coherent growth, enhancing the franchise network represents a continuing opportunity. And there's evidence that we're realizing some of that potential across the VAN channel in our franchisee metrics, the financial and physical indicators that we monitor closely. Again, this quarter, they remain clearly favorable. And based on those metrics, we believe the franchisees have never been stronger. And they say so in our direct interactions at events like this past January's kickoff meeting held this year at a distance. It was a great affair. Well attended, strong orders, visible commitment to our brand, watch parties all over the country. I zoomed into several myself and they were brimming with enthusiasm and optimism. Our franchisees, entrepreneurs and professionals all are pumped, confident, and reaching higher. The tools group quarter, that's a strong advantage for us. The tools group quarter was also marked with Snap-on value creation, customer connection and innovation, offering new products, sometimes just an improvement on an established line, but clearly making work easier, solving problems, delivering productivity gains. All of these are born out of observing the changing work in shops on an everyday basis. We're in those shops every day. We watch the work. We author the products. One such ad is our KERN 681 7-Drawer Single Bank Epic Series Roll Cab, configured entirely with extra-wide 62-inch drawers, greater flexibility and capacity, and a standard footprint, making the most of limited shop space. Our franchisees are amazing. are already calling it uninterrupted storage. It's the first large capacity roll cab with a full complement of extra wide drawers in the industry. It's made in our Algona, Iowa plant. I saw some of them being made there just last month. The local team is proud of them. It comes with two swivel and two rigid casters located right on the corners of the box. It doesn't seem like much of a change, but that's a clever innovation that provides mobility in tight spaces while also greatly enhancing box stability. That's a very important feature for a high-capacity unit. The KER681, epic strength, styling, and styling. 8,000 pounds of low capacity and more than 45,000 cubic inches of storage space. The franchisees are saying it's been a clear hit, and they're right. We spent some time over several quarters working to expand franchisee selling capacity, harnessing social media, improving product training, and RCI-ing van operations, and it's paid off. Selling capacity is up, and you can see it clearly in the three straight gangbusters quarters for our tools group. I don't need to say any more about them. Now let's speak about RS&I. First quarter, organic sales rose 7.6% with... with varying gains across the board. Undercar equipment coming back, delivering double-digit rise. Diagnostics and information products, independent repair shops growing at mid-single digits. And the business focused on OEM dealerships advancing low single digits. Operating earnings of $81.4 million, including $1.5 million of unfavorable foreign currency effects, increased $4.1 million from 2020, which included $3.1 million of restructuring costs. Compared with 2019, sales grew 19.7 million, or 6%, including a 10 million, or 3.1%, organic gain. 7.3 million from acquisitions and 2.3 million of unfavorable foreign currency. We clearly see the potential in our runways for growth in the RF&I group, expanding Snap-on's presence in the garage with coherent acquisitions and a growing line of powerful products. Arsenized organic growth in the quarter was broad-based, but the double-digit rise in undercar equipment was a specially welcome turn and was led by innovative products like our newly introduced TruePoint ADAS calibration system. Advanced driver assistance systems, or ADAS, are active and passive aids to keep vehicle passengers safe. Things like collision avoidance, lane departure warnings, automated automatic parking, and crosswind stabilization. These new features are great. But what's really music to our ears is that they require periodic calibrations to make sure they're working with precision. And calibrations can be complicated. Sensors and cameras vary considerably across vehicle makes and models. And if you get a faulty recalibration, it leads to rework, and it's not good for safety. So our new John Bean 2.80S calibration system is the fix. making sure the vehicle is physically aligned correctly, guiding calibration of the sensors, and documenting that the procedure was performed appropriately. And it does so for the multitude of makes and models seen regularly in OEM and aftermarket shops. The new TruePoint is easy to use. It requires minimal training. It compensates for the floor irregularities that are so common in garages and bedevils alignment and calibration. is quick and efficient, and is OEM compliant. It's a powerful product, right in the crosshairs of automated vehicle technology that's so prominent today. Progress in diagnostics and information with independent repair shop owners and managers was also clearly evident in our diagnostics business, in our RS&I activity. And in this quarter, the launch of a new Triton D10 handheld helped author that positive. The new Triton is ultra-fast, a two-second boot-up, and it has a best-in-class 10-inch touchscreen. It's geared to the more capable technician, offering a one-touch full diagnostic code scan, scope capabilities for performance display, and guided testing of suspect components that you may want to replace, but you want to make sure they're the problem. It's loaded with our fast-track intelligence diagnostics, rooted in our proprietary database of over $200 billion Vehicle events, a snap-on only feature that enables quick and accurate diagnosis of even the most difficult and unusual repairs, ensuring an efficient and effective solution for those very, very time-consuming problems. Just what the capable and senior technician needs. Now, as I've said before, we've spent considerable effort working to help franchisees sell the complex tools of today efficiently, and it's paying off with Triton. Each of our franchisees received a demonstration unit facilitating the hands-on training guided by the video presentations that were a prominent part of our network's February sales meetings. Following that initial instruction, the demo unit could then be put immediately in the hands of a technician to physically showcase the great benefits of our powerful new tool, and it worked. The launch has been a success. Our franchisees are comfortable selling a new and complex tool, and many are now calling The Triton D10, the best diagnostic unit ever. Finally, RS&I got a nice boost in the quarter, as often is the case, by new technologies and OEM dealerships, helped by some significant essential tools and equipment programs supporting the new electric vehicle launches. We're quite positive about RS&I's future with repair shop owners and managers. as the vehicle industry evolves. It plays to our strengths. So that's the highlights of the quarter. Continued and strong progress. Our third straight period, exceeding pre-pandemic levels. CNI, sequential improvement, sequential advancement. Arsenide solid, the tools group strong and pumped. Organic sales rising 16.3%, operating margin 19.6%, EPS $3.50, a big rise. And most important, most important, more testimony that Snap-on has emerged from the turbulence much stronger than when we entered. It was an encouraging quarter.