This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: and welcome to the Snap-on Incorporated Second Quarter 2021 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Sarah Verbsky, Vice President, Investor Relations. Please go ahead.
spk01: Thank you, Stephanie, and good morning, everyone. Thank you for joining us today to review Snap-on's second 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 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 and 15. Both can be found on our website. With that said, I'd now like to turn the call over to Nick Pinchuk. Nick?
spk03: Thanks, Sarah. Good morning, everyone. As usual, I'm going to start the call by covering the highlights of our second quarter. Along the way, I'll give you my perspective on our results. Once again, they were encouraging. On our markets, robust and promising. And our continued progress and strength amidst the pandemic. The pandemic isn't over, but we believe we're stronger right now than when it all started. Of course, we'll also speak about what it all means. Then Aldo will move into a more detailed review of the financials. We believe that our second quarter, again, demonstrates Snap-on's ability to continue its trajectory of positive results, overcoming a variety of ongoing headwinds, accommodating to the lingering virus environment, meeting the challenges of the day across the business world, and advancing along our runways for growth and for improvement. Our reported sales in the quarter were $1.81 billion, and they were up versus last year. 357.1 million, or 49.3%, including 20.6 million of favorable foreign currency exchange and 19.6 million in acquisition-related sales. The organic sales were up 42.5%, with significant gains in every group, our fourth straight quarter being above pre-pandemic levels, a V-shaped trajectory that defines resilience and flexible capability. The OPCO operating income of $217.1 million was up $126 million from last year, which included $4 million of restructuring charges. OPCO operating margin was 20.1%, up from the 2020 level of 12.6% or 13.1% as adjusted for restructuring, representing a 700 basis point as adjusted improvement. The financial services operating income of $68.9 million increased 19.6%, higher originations. lower losses, delinquencies below pre-pandemic levels, our finance company passing the greatest stress test of our time with flying colors. And that result, combined with Opco for a consolidated operating margin of 24.5%, up 560 basis points as adjusted. Quarterly EPS was $3.76. up 103.2% from last year. And excluding the 2020 restructuring charges, EPS grew 96.9%. Versus the pre-pandemic levels of 2019, the EPS grew 16.8%, clearly tracing an ongoing positive trend. I've said it before, but it bears repeating. We believe Snap-on is stronger now than when we entered this great withering, and we believe our second quarter is emphatic evidence of that fact. Compared with 2019, our sales in the past quarter grew 130.1 million, or 13.7%. That reflects 23 million of acquisition-related sales, 17.2 million of favorable foreign currency, and 89.9 million or 9.3% organic gain. The 2021 operating margin of 20.1% was up 10 basis points from 2019, but that gain was achieved against 70 basis points of unfavorable currency and acquisition impacts, all while absorbing the lingering effects of the virus. It's not gone. So those are the numbers. From a macro market perspective, it's clear that our automotive repair sector remains favorable. The technicians across the map are still at their posts, repairing cars and trucks, keeping the world running, and they are busy. And as expected after the COVID, it appears that people are leaning more toward personal transportation and are holding on to their vehicles longer every year. Auto repair is a strong and resilient market. You can hear it from our franchisees, and you can see it in our numbers. As we look forward, we see greater opportunities as vehicle techs encounter even more complex repairs, new technologies, alternative powertrains, greater proliferation of driver assistance electronics. It's all music to our ears. And then there's the repair shop owners and managers, RS&I territory. A little more mixed, particularly in Europe, but a return to growth in repair garages and dealerships. They're starting to invest. Undercar equipment and OEM programs are coming back, and RS&I is taking advantage of that trend with new equipment offerings and advanced database solutions, continually improving our software products and our diagnostic releases. Products like Mitchell One repair information software and shop management software and electronic parts catalogs and our dealer FX shop management technology and our heavy duty and our intelligent diagnostic units, big databases, and getting more powerful. And easier to use, helping the shop fix it right the first time, efficiently. Repair shop is changing, rising in complexity, and RS&I has the products to match. Finally, let's talk about critical industries, where the step-on rolls out of the garage, solving tasks that consequence. This is where the CNI group operates, our most international operations, where the customers have endured the longest impact of the virus and have been slower to accommodate it and be recovering it what I call varied rates, segments like oil and gas and aviation, to geographies like Southeast Asia and India, still down. But despite the variation, we did see growth in critical industries, improvements in education. The students are coming back, and in power generation and heavy-duty fleet, all combining to offset that continuing turbulence. So overall, I describe our CNI markets as healthy and representing clear opportunity. And coupled with auto repair, we believe our markets are robust now And there's considerable opportunity ahead for us as we move along our runways for growth and improvement. And I can't leave this section about robust progress and abundant possibilities without speaking on the engine of our advance. Snap-on value creation. Customer connection innovation. Developing new products and solutions. Born out of insights and observations gathered right in the workplaces. And RCI. guiding the expansion of franchisee selling capacity with better processes, more effective training, and a new focus on social media. It will all help drive our progress, overcoming the difficulties, accommodating the virus, and enabling us to take full advantage of the opportunities and chart a continuing and positive trend forward. That's the overview. Now let's move to the segments. In the C&I group, Sales in the quarter were up 33.8% or $88.6 million versus 2020, including a $71.3 million or 26.3% organic uplift, with double-digit progress across all of the divisions. From an earnings perspective, CNI operating income of $55.5 million, including $1.1 million of unfavorable foreign currency, represents a rise of $32.6 million compared to 2020, which included a $2 million of restructuring. That all means an as-adjusted increase of over 122.9%. And the operating margin was 15.8%. An as-reported increase of 710 basis points. A rise of 630 basis points as-adjusted. And an uplift of 120 basis points from the pre-pandemic level in 2019, despite 90 basis points of unfavorable currency. When compared with pre-pandemic 2019, sales were up 4.6%, including a 0.4% organic gain, about flat. Now, continuing bright spot for CNI, S&A Europe did deliver yet another quarter of growth, expanding beyond pre-pandemic levels against the wind, with a spot-orgo tool management system leading the way, tailoring products specific to customer needs. Europe is a varied market environment, But S&A Europe is defying economic gravity again. And that positive was joined by contributions from recovering areas and critical industries like heavy duty, power generation, and as I said before, education, who's come to the party just now. And from Asia-Pacific geographies like China and Japan. And those gains were balanced by declines in attenuated sectors like the military, aerospace, and natural resources, all still weak. We do remain confident in and committed to extending in critical industries, and we're committed with great new products. Speaking of product, in the last quarter, to help solve challenging tasks across aviation and other critical industries, we launched a new snap-on 14.4-volt micro-lithium cordless right-angle mini-drill with a 6,000 RPM, making it ideal for drilling a variety of materials, plastics to aluminum to fiberglass. The unit has a compact 90-degree head, which provides easier access to combined spaces and reduces worker fatigue. It's a big factor. In addition, it also offers a higher quality chuck that achieves precise drilling with minimum run out, ensuring tight tolerances are met with considerable reliability. To top it all off, our drill also utilizes a double ball bearing supported spindle shaft and spiral beveled gears. Now that's a mouthful, but it all means that the new power tool has a clear superiority in durability. The cordless right angle MIDI is a great innovation with an array of advantages and the techs are noticing. So that's CNI, a promising quarter, moving down its runways for growth with strong profitability. C&I OI margin, 15.8%. Now on to the tools, Cooper. Sales of $484.1 million, up $160.8 million, including $154 million, or 46.7% organic gain. Double-digit growth both in the U.S. and the international operations. And the operating margin was... 21.4%, up 930 basis points. Compared with pre-virus 2019, sales grew 78.3 million, including 70.7 million, or 17.1% organic gain. In this quarter's 21.4% operating margin was up 380 basis points compared with the pre-virus numbers. Coming out of the pandemic, stronger indeed. Another power point. Another, I was going to say powerful, I guess I could say that, but another positive quarter with double-digit expansions across all geographies and all products. We do believe our van network remains quite strong. Just a few weeks ago, I spent time with a dozen franchisees on our U.S. National Franchisee Advisory Council at our Algona, Iowa, tool storage plant. And they were pumped and prosperous, excited by their current positions, positive about the other vans in the regions they represent, and very optimistic about their prospects for even more. Beyond the windshield surveys, we see other indications of continuing strength, like the business health metrics. They remain quite favorable. Qualitative and quantitative indicators, both very positive. And that positivity was not just internal. It was reinforced by the external view. Snap-on was recognized again this year among the top 50 in the franchise industry by Entrepreneur Magazine. And once again, we scored highest in the tools distribution category. The place was held for quite some time. And now this type of recognition, this kind of positivity, reflects the fundamental and contemporary strength of our franchisees and of our overall van business. And it would not have been achieved without a continuous stream of unique new products. Hand tools were up in the quarter, and part of that, torque is rising in importance as more mechanical precision becomes necessary to support vehicle automation. And we're riding that wave with great new products, like our new ATEC micro-torque wrench with a quick-release head. The quarter-inch drive quick-release has a positive locking mechanism to retain the sockets solidly and securely in place, and at the same time, it offers a push button for easy tool disengagement. It holds and it ejects, both important under the hood, and it's a time saver. It's quite a time saver in close clearance applications like valve cover removals and spark plug replacements that happen every day in the garage. The tool also offers visual, audible, and vibrational alerts to confirm that the proper torque has been applied. and it has a wide torque range, 12 to 240 pound inches, and the new micro also includes a 15 degree flex head ratchet for better access to fasteners, a 72-tooth quarter-inch drive socket, a ratchet enabling efficient operation in tight areas, and a plus or minus 2% accuracy. Our microtech takes precision fastening to the next level. Tool storage is also strong in the core, and part of that success was our KTL 1023 A3 roll cab, a wide 72-inch triple-banked tool storage box. It offers three extra-wide drawers for longer and larger tools, giving the technician more organizational options. Our patented lock-and-roll latch mechanism, which prevents drawers from drifting open, and our ISO ride casters providing a smooth ride, smooth rolling, and excellent weight capacity, plus, plus. It adds our LED-lighted power top, which spans the full width of the cabinet for better illumination and great eye appeal. It includes 10 offset AC outlets and 4 USB ports for charging a large array of the tech's electronics. The KTL1023A3, storage efficiency in a box that captures sharp attention in any shop. Sales of the unit? Well, it's a sellout. Our new products are, in fact, making a difference in the tools group. You can't miss it in the numbers. They also, and the group also registered its fourth straight quarter above pre-pandemic levels. The tools group, unmistakably, is moving onward and upward. Now on to the RS&I group. Sales were up 62.7% or $153.6 million versus last year, including $135.7 million or a 54.1% organic uplift with double-digit growth weighted toward our undercar equipment and our OEM project businesses. But with our diagnostics and information product businesses still delivering strong double-digit increases in addition to the weighting toward undercar equipment and OEM projects. From an earning perspective, Aris and I Operating income of 86.7 million represents a rise of 36.1 million or 71.3% compared to 2020, which included 1.4 million in restructuring. And the operating margin was 21.8%, an increase of 110 basis points from last year, 60 basis points as adjusted, but against an 180 basis point impact of unfavorable currency and acquisition effects. When compared with 2019, sales were up 14.2% as reported, and organic growth was 29.7 million, or 8.4%, with double-digit advances in undercar equipment, OEM projects, diagnostics and information in North America. All of that being attenuated by a general weakness in Europe. For profitability, the OI margin was 21.8%. The OI margin of 21.8% was down 360 basis points, with a 150-point impact from unfavorable currency and acquisition effects, and with a further drag from the higher sales of undercar equipment and OEM projects, both at the lower end of RS&I margins. Having said that, RS&I has great opportunities, and we're fortifying its way forward with more new products. We just introduced our new Zeus mobile work centers, giving the technicians the ability to use the full capabilities of our top-of-the-line diagnostic information systems including our exclusive fast-track intelligent diagnostics from anywhere in the service bay. It has a compact footprint for great mobility, reaching all over the shop. It also incorporates a lockable tool drawer, tool storage cabinet, and a large 27-inch touchscreen display. The New Zeus workstation offers significant improvements in convenience, in security, and in visibility, combined with the power of our most sophisticated databases. It's just the ticket for those shops that want to want to solve the most difficult repair challenges, and want to visibly display their advanced capability for all the customers to see as they come in the shop. And the new workstation is making a difference, attracting attention, and it's setting new volume levels for this category. So to wrap up RS&I, improving position with repair shop owners and managers, strong growth across all the divisions, recovering areas of undercar equipment and OEM projects, and expanding product lines to lead the way forward. Well, those are the highlights of the quarter. Tools Group, strong progress everywhere. Unmistakable strength. CNI, recording a positive performance with significant profitability against variations across industry and geographies. And RS&I, expanding volume in independent repair shops and OEM dealerships. Gains in the U.S., overcoming weakness in Europe. Overall, sales increasing for the corporation up nicely, both versus last year at 42.5% up and compared with pre-pandemic levels at 9.3% up, continuing our V-shaped recovery. Opco operating margin is strong, 21% up again in the face of 70 basis points of unfavorable currency and acquisition effect. EPS, $3.76 in the quarter for the... Up for the fourth quarter in the row. Up versus last year. Up versus last quarter. Up versus pre-pandemic levels. It was another encouraging quarter. Now I'll turn the call over to Aldo.
spk02: Aldo? Thanks, Nick. Our consolidated operating results are summarized on slide six. The second quarter of 2021 exhibited solid financial performance, particularly as compared to last year's heavily pandemic-impacted second quarter. The results also compared favorably with the second quarter of 2019, which being a pre-COVID-19 time period, may serve to be the more meaningful baseline. Net sales of $1,081.4 million in the quarter increased 49.3% from 2020 levels. reflecting a 42.5% organic sales gain, $19.6 million of acquisition-related sales, and $20.6 million of favorable foreign currency translation. Sequentially, organic sales improved by 4.5% as compared to the first quarter of 2021. Additionally, net sales in the period increased 13.7% from $951.3 million in the second quarter of 2019, including a 9.3% organic gain $23.0 million of acquisition-related sales, and $17.2 million of favorable foreign currency translations. Consolidated gross margin of 50.2% improved 310 basis points from 47.1% last year, which included 30 basis points from restructuring costs. The gross margin contributions from the higher sales volumes and benefits from the company's RCI initiatives were partially offset by 20 basis points of unfavorable foreign currency effects. Operating expenses as a percentage of net sales of 30.1% improved 440 basis points from 34.5% last year, which included 20 basis points from restructuring costs. The improvement primarily reflects the benefits of higher sales volumes partially offset by higher stock base costs. Excuse me. And 70 basis points of unfavorable acquisition effects. Operating earnings before financial services of $217.1 million compared to $91.1 million in 2020.
Disclaimer