Snap-On Incorporated

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

Thank you, Christina, and good morning, everyone. Thank you for joining us today to review Snap-on's Fourth Quarter and Full Year 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 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 our 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 those 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. Today, I'll start with a view of our fourth quarter, give you an update on the environment and the trends we see, and I'll take you through some of the turbulence we've overcome and the advancements we've made. And Aldo will then, as usual, give you a more detailed review of the financials. The fourth quarter was encouraging. It affirmed the characteristics that make Snap-on the company we know it to be, the resilience of our markets, the power of our strategic position, and the consistent and capable execution of our teams. It all added up to momentum, cutting through the challenges, and the numbers testify to just that. Our reported sales in the quarter of $1,108.3 million were up 3.2%, including $12.2 million from acquisitions being offset by $3 million of unfavorable foreign currency exchange. Organically, our sales grew by 2.3%. Importantly, if you compare to the pre-pandemic levels of 2019 before the period-to-period variability of last year, you see a clear and unmistakable upward drive. Versus 2019, sales in this past quarter were up 16% as reported and 13% organically, continuing an ongoing trend of accelerating expansion, increasing higher and higher over pre-COVID levels. Porter also bears the marks of the step-on value creation processes, safety, quality, customer connection, innovation, and rapid continuous improvement, or RCI as we call it, all combining to author significant progress. And progress still was. Opco operating income of $232.2 million was up $16.16 million from last year. And the OI margin was 21%. an all-time high, up 90 basis points from last year and 310 basis points from 2019, all achieved by overcoming the challenges of this day. For financial services, operating income of $67.2 million was down from the $68.5 million of last year, but delinquencies in the quarter were below both 2020 and those of 2019, an ongoing testament to our unique business model and its ability to navigate through the most threatening of environments. And the combination of the results from OPCO and financial services offered an overall consolidated operating margin of 25.1%, up from the 24.4% of last year and the 22.5% recorded in 2019. Our quarterly EPS was $4.10. well over the $3.82 of a year ago, which included a $0.02 charge for restructuring. And that $4.10 was up 33.1% over 2019, a considerable gain in my book. Well, those are the numbers. Now let's speak about the markets. We do believe the auto repair environment continues to be favorable. In the areas serving vehicle OEMs and dealerships, we do see some turbulence. New car sales around the world remain mixed, with China generally progressing, but both North America and Europe having a tough fourth quarter. Overall volume remained below the 2019 levels, and some new model releases and features were delayed by supply chain constraints, and that impacted the associated essential tool programs that we are involved in. OEM projects aside, however, Dealership, repair, maintenance, and warranty are all healthy. Techs are seeing good times, and the dealers are looking to support their expansion in their shops. In effect, the OEM market is mixed, but technicians are quite positive. There's a growing appetite for repair shop equipment, but essential tool programs are attenuated. Now, in the independent repair shop, it's a horse of a different color. Confidence is uniformly sky high. Based on what we hear from our franchisees, shop owners, and technicians, optimism in independent repair shops continues to be strong. And our sales in that sector, they reflect that confidence. So we believe, on balance, vehicle repair is a great place to operate for our tools group and for our repair system information or RSI group. For the critical industries, where our commercial industrial group plays, or C&I plays, we are seeing areas of progress, but the lingering effects of virus have created headwinds, and the results in the quarter showed that trend with variations from country to country, a recovery in Asia and emerging markets, but Europe being quite mixed. There are also differences from sector to sector. Education, natural resources, and general industry showing improvement, while the military spending continues to experience a, you know, what I'd say is substantial challenges. Overall, however, I would describe our C&I markets as holding their own against the turbulence, but with variation. We do believe we're well positioned, and I think the numbers say this, to confront the challenges of this time, advancing along the runways for growth. We're also confident that we have continuing potential on our runways for improvement. The snap-on value creation processes, they're a constant fuel for our progress, especially customer connection. Understanding the work of professional technicians and innovation. matching that insight to technology. We believe our product lineup just keeps getting stronger every day, and we keep investing to make it so. Vehicles are rising in complexity, technicians need assistance, and so products are becoming more sophisticated to match the changing requirements, and Snap-on is keeping pace. In 2021, we had more hit $1 million projects than ever before. We've endeavored through the virus era to maintain our products, Our brand, I've spoken of this before, in the virus area, we've endeavored to maintain our product, our brand, and our people. And we believe that continuing commitment has served us well, authoring positive results and creating substantial momentum for the days ahead. And that momentum is apparent in our full-year results. Sales of $4,252,000,000, up 18.4%. including an organic increase of 15.1% compared to last year, and a 14% organic gain over 2019. Strong numbers. The as-reported OPCO OI margin for the year was 20%, a new high, up from the 17.6% of 2020 and exceeding the 19.2% of pre-pandemic 2019. As-reported earnings per share for the year were $14.92. Up 30.4% or 28.3% as adjusted for the non-recurring restructuring in 2020. And up 21.7% as adjusted from 2019. All clear signs of ongoing momentum. Now for the operating groups. Let's start with C&I. Fourth quarter sales at $358.7 million for the group were down $5.7 million, including $4.1 million of unfavorable currency, versus 2019 sales grew $5.8 million, reflecting primarily acquisition volume and currency impact. The period saw a recovery in Asia with Indonesia. In the quarter, we did see a recovery in Asia with Indonesia, India, Japan, South Korea, and China rising. Europe and North America were more impacted by the environment and were down slightly in the quarter. Looking at the sectors, nice progress was achieved in our precision torque line, but that progress was more than offset by lower critical industry activity, attenuated in those critical industries primarily by lower U.S. military spending and by supply chain-driven constraints in the custom kitting area. CNI operating income was $50.1 million, down $6.1 million, including $1.2 million of unfavorable currency. The gains in Asian and torque were more than offset by the reduced military activity and the industrial kitting constraints. As I mentioned, however, specialty torque, the specialty torque operation did register continuing progress, driven by innovative new products developed through customer connection and observational work. Great offerings like our recently released QB4R line of three-quarter-inch drive break-over torque wrenches. This wrench is capable of accurately fastening from 450 to 750 pound-feet. It's designed specifically for heavy-duty applications, tough jobs such as torquing lug nuts on big trucks. The new unit combines our Norbar, our recently acquired Norbar industrial torque technology, with the robust ratchet designs produced in our Elizabethan Tennessee factory. Those original light vehicle ratcheting mechanisms of our Tennessee plant were re-engineered for higher tension, heavy requirements, and were directly matched to our unique Norbar breakover device, which provides a clear indication that the torque target has been reached, ensuring reliable accuracy every time. The ratchet design with our patented seal head is rugged, capable of withstanding very high stresses, and has an easy-to-read adjustment mechanism that reduces the possibility of error and is virtually maintenance-free. The new wrench also has a quick-release feature for easy disassembly, compact storage, and great portability. The Snap-on QB4R, we like to say strength, accuracy, and convenience. And as you might expect, sales have been strong. As the need for precision increases, torque products are becoming more prominent, and Snap-on is playing an active role in that rise. C&I, mixed results, but significant areas of progress voting well for its future. Now let's go on to the tools group. Sales of $504.8 million, up $9.9 million, including favorable currency, and a $7.9 million organic rise from continued expansion in the U.S., a positive that was somewhat attenuated this quarter by low single-digit decline in the international networks. But versus 2019, a more comparable base, the tools group rose 21.5% and has been up now from pre-pandemic levels for six straight quarters. And the operating margin? was 21.9%, easily one of the highest ever, up 300 basis points from last year, all despite the ongoing challenges of this day. We have continued to invest in product, brand, and people. And the tools group has used that focus to advantage. The expanding and considerable gains from the time before the virus makes that clear. In the quarter and throughout the year, the tools group Results continue to confirm the leadership position of our VAN network. We believe the franchisees are growing stronger, and that's evidenced in the franchisee health metrics we monitor each period. They're on an unmistakably favorable trend, and that positivity was acknowledged by multiple publications. All these things snap on as a franchise of choice. This quarter, we were once again ranked among the top franchise organizations both in the U.S. and abroad, recognizing recognized by the Franchise Business Review, which in its latest ranking for franchisee satisfaction listed Snap-on as the top 50 franchise for the 15th consecutive year. We're also featured as number three among all franchises in Entrepreneur Magazine's 2020 list of top franchises for veterans. And abroad, Snap-on was ranked number two in elite franchise magazines' top UK franchises. The judges in that ranking stated, that the durability in an innovation shown in the face of unimaginable circumstances are what has decided this year's top ten. And the panel was right on. Durability and innovation are what makes the tools group, what marks the tools group in this storm. It's clear. Now, this type of recognition is a point of pride for us. but it reflects the fundamental strength of our franchisees and of our van business in general. But it would not have been achieved without a continuous stream of innovative new products developed through our strong customer connections, leading to multiple new problem-solving innovations and the result of our insight and experience in the changing universe of vehicle repair. Customer connection gives us a great window on that changing universe, and we put it to good use. Our sales of hand tools were up nicely in the quarter. And, of course, new products led the way there. Our innovative 30, LS, DM, half-inch drive impact sockets were a significant contributor. Born out of customer connection, observing the work in automotive shops, the special sockets, they range from 17 to 22 millimeters, come with an extra deep hex. up to three-quarters inch deeper, accommodating the lug nuts with decorative caps that are becoming so common on the latest models. The new sockets provide the clearance needed to fit right over those nut covers without damage, grab the lug, and enable quick removal without having to remove the caps. It saves tech significant time over a day of repair activity. Made right here in our Milwaukee plant, they were released just this past quarter, and initial sales have been gangbusters. I'm telling you. And making those sales have made that new socket line a hit product just in the volume in the fourth quarter. Accelerated sales. Well, that's the tools group. Expanding the success in the U.S., balancing the international operations, continuing to innovate, building on our underlying advantages, stronger than ever performance, all achieved against the wind. Now, for ours and I. volume for the fourth quarter was $392.5 million, up 8.7%, including acquisitions, and 5.5% of organic growth, with gains in sales of undercar equipment, increased volume of handheld diagnostics, and the rise of information and data subscriptions being partially offset by a decrease in our business focused on the vehicle OEMs and dealerships. Arsenic operating margins of 97.2 million rose 7.2 million, or 8% versus 2020. And that number in 2020 included a million dollars of restructuring costs. Compared with the pre-pandemic levels of 2019, sales grew 57.5 million, 17.2%, including a 43.7 million, or 13% organic gains. and the R&I gross OI margin of 24.8% compared with the 24.9% and the 26% registered in 2020 and 2010, respectively, with the impact of acquisitions attenuating a generally positive balance for the operations. Again, software products and subscriptions. For Arsene, we're a significant plus. Along those lines, our Mitchell One division, providing software to independent shops, continue to succeed, pursuing customer connection and innovation, launching great new products to improve shop efficiency. Arsene just added more powerful and exclusive features to its award-winning Mitchell One ProDemand auto repair information software. You see, as auto electronics have expanded, wiring diagrams have become of rising importance in vehicle diagnosis and repair. And the new pro-demand significantly advances what is already a clear lead for Mitchell 1 in diagram navigation, offering new features that provide interactive drop-downs, display connection data, allow easy movement to the next diagram on the diagnostic trail, and enable the seamless recall of previous viewed circuits should a look-back be needed in the repair process. And as you might expect, the initial reaction to the new updates has been quite enthusiastic from both the shops and from the technicians. It's all music to our ears. We keep driving to expand RSI's position with repair shop owners and managers, offering them more and more solutions for their day-to-day challenges, developed by our value creation processes or added by our strategic and coherent acquisitions. And we're confident it's a winning formula. So those are the highlights of the quarter. Doing what we expect to do. Achieve ongoing progress against the storm. A continuing rise versus the pre-pandemic levels. Up more each quarter now for several straight periods. Gains forged through our snap-on value creation processes. strengthening our business and driving to a 21% operating margin, up 90 basis points, a new record. EPS, $4.10, a considerable rise to new heights, overcoming all headwinds and demonstrating continued confirmation that Snap-on has emerged from the pandemic much stronger than when we entered, with a momentum that we're confident will propel us to even higher heights as we move forward. Now I'll turn the call over to Aldo.