Snap-On Incorporated

Good day and welcome to the Snap-on Incorporated third 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, Olivia, 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 states management's or the company's outlooks, 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 regarding these measures is included in our earnings release issued today, which 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 third quarter, and along the way, I'll give you my perspective on our results. They are encouraging. On our markets, they are positive and more than resilient, and I'll speak about our progress. It's been considerable. Each period is demonstrating increasing strength, even when in the midst of seldom-seen headwinds. And we'll also speak about what it all means for our future. It's incredibly promising. And then Aldo will move into a more detailed review of the financials. Our reported sales in the quarter were $1,037,000,000. They were up 10.2%, including $9.6 million of favorable foreign currency and $19.5 million of acquisition-related sales. Our organic sales growth was up 7%, with 7%. Gains in every group. It was our fifth straight quarter of above pre-pandemic performance. And Snap-on Valley creation processes, safety, quality, customer connection, innovation, and rapid continuous improvement, or RCI as we call it, all combined to drive that progress. And progress there was. Opco operating income of $201.3 million was up $15.6 million from last year. The OI margin was 19.4%, down 30 basis points, impacted negatively by acquisitions, but still very strong at a strong level. For financial services, operating income of $70.6 million increased 7.6%, and the delinquencies were down, even below the 2019 pre-pandemic levels. A continuing testimony to our unique business model and its ability to navigate the most threatening of environments. First quarter EPS was $3.57, up 29 cents, or 8.8% from last year. And as I said before, we believe Snap-on is stronger now than when we entered this great withering. And our third quarter results testifies to just that. Compared with 2019, before we ever heard of the virus, our sales grew 135.9 million, or 15.1%, which includes 21 million from acquisition-related sales, 13.6 million of favorable foreign currency, and 101.3 million and a 101.3 million or 11.1% organic gain. And that 2021 operating margin of 19.4% was up 80 basis points from the pre-pandemic levels, even while absorbing the impact of new acquisitions and while meeting what we could call a considerable disruption of these days. Now let's talk about the markets. Auto repair remains quite resilient. The technicians are prospering. They know they've weathered the depths of the COVID shock, learned to accommodate the virus environment, and are well along to psychological recovery. Techs are resilient. They've been at their post for the last 18 months undaunted, and they won't be shocked again. And they are optimistic about the future of their profession, about the outlook of individual transportation, and about the greater need for their skills as the vehicle park changes with new technology. Vehicle repair is a strong... and resilient market. You can hear it in the franchisees' voices, and you can see it written clearly across our numbers every quarter. Also on auto repair, there are shop owners and managers, different from the techs. That's where our repair systems and information group, RS&I, applies its trade. Demand for new and used cars is high despite limited supply, and dealership repair and maintenance and warranty is rebounding, and dealers are starting to invest again. And we've been able to make... We've been able to take advantage with groundbreaking products like our award-winning two-point advanced driver assistance calibration system, our new diagnostic Triton D10 intelligent diagnostic unit, and our acclaimed Mitchell One Pro Demand Repair Estimating Guide, all representing new technologies and data deployed to make work easier in the shop. Vehicle repair looks more promising than ever, and Snap-on is poised to capitalize. Now let's talk about critical industries, where Stapon rolls out of the garage, solving tasks of consequence. This is where commercial industrial, or CNI, operates. The virus had a much longer impact on these customers. They were slower to accommodate, but they are recovering. And in the quarter, our results showed that trend. Gains in North America, Europe, and in Asia, all over the globe. So overall, I'd describe our CNI markets as improving. And coupled with the strength of the auto repair sectors, our markets are beyond resilient, and we're ready and well-positioned to make progress along those runways of our color. At the same time, it's clear that we have ongoing potential on our runways for improvement, the snap-on value creation processes. They've never, never been more important, helping to counter the turbulence of the day, especially important with customer connections. understanding the work of professional technicians and innovation, matching that insight with technology, driving new products. And just this quarter, Snap-on was prominently represented with nine professional tool and equipment news, we call it P10, People's Choice Awards, where the actual users, the technicians, make the selections. We're also recognized with two P10 Innovation Awards, and we're honored with two Motor Magazine Top Tool Awards. An essential driver of Snap-on growth is innovative product that makes work easier, and the awards are the one. are a testimony that great Snap-on products just keep coming, matching the growing complexity of the task, becoming more essential to technicians, and driving our forward progress. Bless the environment. Pretty positive. Now we'll move to the operating groups. In C&I, volume in the quarter rose 13.9% or 42 million versus 2020 on significant growth across all divisions. It reflected a $32.9 million or 10.6% organic uplift and $7.5 million from our auto crib acquisition and double-digit growth in our European hand tool businesses and a high single-digit rise in critical industries led the way. C&I operating income of $53.6 million was up $10.5 million or 24.4%. and the operating margin was 15.3%. That's an increase of 130 basis points versus last year. I'd say that's an attention-getting rise against the wind. Now, compared to the pre-pandemic 2019 results, sales were up 4.8%, including a 0.9% organic gain. And that OI margin of 15.3% was up 90 basis points against the 70-point impact of acquisitions and unfavorable currency. Once again, S&A Europe delivered double-digit growth beyond pre-virus levels against a complex and varied marketing environment, propelled by the customization power of their BACO or Girl 2 management system. And our industrial division rose in critical industries, recording nice gains in general industry, heavy-duty education, and U.S. aviation. A number of positive sectors overcoming weakness and continuing weakness in the military and natural resources. CNI is rising, and we're enthusiastic about the possibilities. We'll keep strengthening our position to capture those opportunities, and enabling that intent is our expanding lineup of innovative new products. And the third quarter did see some great new offerings, like our 14.4-volt, 3-inch drive brushless ratchet, the CTR-61. It's already popular, and it's no wonder. It's a powerful combination of strength and speed, high torque, 60-foot bounce to bust loose, very stubborn bolts, and rapid operations, 275 RPM for getting those fasteners off in quick time. It's made in our Murphy, North Carolina plan, and it features a full-frame brushless motor for longer run time and durability. It includes a safety switch that shuts down the tool after two minutes of continuous use. That's eliminating the chance of overheating. It also has a super bright 18-lumen front-facing light that stays illuminated after the trigger is released, allowing easy and immediate inspection of the work. This ratchet also features a built-in brake that stops the tool from throwing or fasteners, which seems like not much, but it's an important safety feature for technicians. And it also offers a great cushioned grip that makes for more comfortable tool control, even during extended use. The CTR861, power, speed, and comfort It's in a very compact package. It's a mighty mic for accomplishing critical tasks, and the professionals love it. Well, that's CNI. Continuing upward, exceeding pre-pandemic volumes, strong profitability, and positioned for more. Now on to the tools group. Sales of $471.4 million, up $21.8 million, including $4.9 million of favorable currency and a $16.9 million or 3.7% organic gain. Growth both in the U.S. and the international operations. And the operating margin? It was 20.8%, one of our highest effort and up 140 basis points from last year. Compared with the pre-virus 2019 level, the organic gain was 80.4 million or 20.6%. And the 20.8% operating margin was up 700 basis points compared with the pre-pandemic level. 700 basis points in the midst of operating turbulence. Tools Group is responding to the challenges of the day, increasing its product advantage, fortifying its brand, and further enabling its franchisees, giving them more selling capacity. It's all working. Five strong quarters. of above pre-pandemic performance says it so. Now the third quarter is when we hold our, most of you know this, the third quarter is when we hold our annual Snap-on Franchisee Conference, our SSC. This year we're back again in person at the Gaylord in Orlando, Florida. Over 9,000 attendees, a record. We had training seminars in sales growth and intelligent diagnostics. They were well attended and well received. And we had several football fields of products so our franchisees could get up close and personal with our latest innovations. For the franchisees, the SFC is an opportunity for learning, for touching and ordering new products, and for recharging their snap-on batteries. And believe me, they are charged. For the company, the SFC is an opportunity to gauge the franchisee's outlook on the business. One quantitative way is orders. Well, they were up. Strong double digits over last year's virtual live from the Forge event and from the 2019 SFC live in Washington, D.C. And when I say up, I mean all of our product categories showed substantial gains over both of those events. So that's the quantitative look at it. Qualitatively, I spoke with many of our franchisees, and I can attest that they were beaming. showing a lot of confidence in our business, and declaring considerable optimism on their future days and decades ahead with Snap-on. We do believe our franchisees are continuing to grow stronger each quarter, and we continue to invest in their future. And if you were with us in Orlando, you would have seen it unmistakably. And we are investing, building a franchisee's ability to use the direct interface with technicians, enabling them to better communicate their unique capability and growing technology of Snap-on product lines. We have great confidence in the power of our products, and there are real reasons for the confidence. You heard about the product awards. Well, beyond that, there's a continuous stream of terrific new offerings. During the SFC, the tools group unveiled its new KHP415 portable 40-inch substation power card. It's targeted at entry-level technicians, the ones working on a narrow scope of repairs. It's built in our Algona, Iowa factory, and the new cart enables young mechanics to invest a step on storage at a value price while at the same time getting some very attractive professional features, a lockable top compartment, four full drawers of storage, an adjustable power tool rack that holds up to 10 tools, and a power strip with five outlets and two USB ports for battery and device charging. New cart, Yeah, it was well received. And it's quickly reaching what we call hit product status, over $1 million of sales. It's racing upward on a steep trajectory. Beyond products, we've spent time working to expand franchisee selling capacity, harnessing social media, improving product training, and RCI-ing the van operations, and it's working. Selling capacity is up, and you can see it clearly in the five straight gangbuster quarters for our van network. The tools group is on a very positive trend, ascending and leaving pre-pandemic levels way behind. Now onto RS&I. Sales were up 14.8% or 46.9 million, including a 31.7 million or 9.9% organic uplift. Growth was weighted toward undercar equipment, but our diagnostics and information businesses also chipped in with double digit increases. Versus 2020, RCI operating earnings were 83.3 million, representing a rise of 3.2 million. Comparing with 2019, sales grew 41.7 million, or 12.9%, including 24.2 million, or a 7.4% organic grain. Nice growth. The RSI-OI margin was down versus the last two years, attenuated by business mix, acquisitions, and currency, but it was still a strong 22.9%. We clearly see the potential of our runway with RS&I, expanding Snap-on's presence in the garage with coherent acquisitions and a growing line of powerful products. Third quarter annual growth was broad-based, but a strong double-digit rise in undercar equipment was an especially welcome turn. That's a nice turnaround, and it was led by innovative products like our 15K four-post alignment lift. It's really taken a hold in the repair shops. as they've resumed investing. This new 15K provides professional-grade alignment lifting for a variety of vehicle sizes with open front columns, best-in-class ultra-wide 26-inch runways, and integrated 100-inch long rear plates. It's suited to accommodate vehicles from compact passenger cars to big pickup trucks. And its low, easy-on-approach angle makes it great even for low-profile sports cars that are often a challenge for other lifts. Made in our Louisville, Kentucky plant on an assembly line. It's made in our Louisville, Kentucky plant on an assembly line I'm very familiar with. I participated in an RCI event for that process. Our new 15K has helped drive the recovery for undercar equipment and it's driven the rise in RS&I volumes. We're quite positive about RS&I's possibilities with repair shop owners and managers as the vehicle industry evolves. It's got a great future. So that's the highlights of our quarter. continued in strong progress. Our fifth straight period exceeding pre-pandemic levels. CNI on track with strong sales and increasing profitability. RS&I, undercard, coming back. Tools Group, strong, pumped and moving vertically. The credit companies, solid in a storm and profitable. The overall corporation, organic sales rising 7%. Opco operating margin, 19.4%. And EPS, $3.57, a considerable rise. And most important, More testimony that Snap-on has emerged from the turbulence much stronger than we entered. It was an encouraging quarter. Now I'll turn the call over to Aldo. Aldo?