Snap-On Incorporated

Good day and welcome to the Snap-on Incorporated 2022 Second Quarter 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, ma'am.

Thank you, Mary, and good morning, everyone. Thank you for joining us today to review Snap-on 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 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 that otherwise discuss 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. Any 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 second quarter. along the way. I'll give you my perspective on our results. Once again, they are encouraging on our markets. They're robust, resilient, and promising. And I'll talk about our progress. We believe we're now stronger than ever. And we'll also speak about what it all means. And we believe it means that we're better positioned for more, a lot more. And I'll go into a more detailed review of the financials. All I have to do Follow the news, and you know that we live today in the midst of turmoil, inflation, varying supply, continuing unpredictable outbreaks, precipitous lockdowns, and a war in the Ukraine. And Snap-on has shown through it all, wielding our advantages in product, in brand, and in people, progressing down our runways for growth, engaging our Snap-on value creation, driving improvement, making the most of our resilient markets, and extending our positive trajectory, piercing the turbulence. The story of our second quarter is simply one of rising momentum. We've been meeting the challenges quarter after quarter, and we're simply getting even better at overcoming the difficulties. And going forward, we are confident of our capabilities to continue to advance, and here are the numbers that say we should be confident. Our reported sales in the quarter were $1,136.6 million. up versus last year by 55.2 million, or 5.1%, including 32.4 million, or 330 basis points of unfavorable foreign exchange. Organic sales growth was 8.4%, with gains in every group. And compared to the pre-pandemic levels of 2019, our upward drive is clear as a bell. Versus 2019, sales in the quarter rose 19.5% as reported and 18.7% organically. This is now eight straight quarters of being above pre-pandemic levels. We believe we're continuing an ongoing trend of accelerating expansion and are building momentum with emphasis, increasing higher and higher, demonstrating that we're only getting stronger every day. The operating income of $246.6 million was up $29.5 million. And the operating margin, it was 21.7%, up 160 basis points from last year and 170 basis points from 2019. For financial services, operating income of $65.3 million compared to the $68.9 million of last year. And that result combined with OPCO for a consolidated operating margin of 25.5%, up 100 basis points from last year and 130 from 2019. And EPS was $4.27, up 13.6% from last year and 32.6% above the comparable pre-pandemic level recorded in 2019. of $3.22. You know, I've been saying this since the third quarter of 2020, and I'll say it again. We believe that Snap-on is stronger now than when we entered this great withering, and the second quarter numbers say it's so. Now let's talk about the markets. Auto repair remains positive. Most, if not all, of our key indicators are quite favorable. Spending on vehicle maintenance and repair, spending on vehicle maintenance and repair, up. Number of techs, up. Mechanic wages, up. The techs are optimistic about their prospects and about the greater need for their skills as new technologies, new complexities advance across the car park. And we saw a confirmation in that broadly held belief for several quarters now as the number of automotive repair technicians continue expanding upward period after period, higher now than in any of the last three decades. And when I speak with shop owners and managers, as I often do, It's clear that there's a need for more, many more. And at Snap-on, we love it. Vehicle repair is a strong and resilient market, a feeling that's also reinforced by our franchisees. You can see it in their numbers, and you can hear it in their voices. We believe they're more prosperous than ever. Besides franchisees and technicians, there's vehicle repair shop owners and managers. This is ours and I's arena. Demand for new and used cars is high, but supplies are limited. It's a well-known story. The pandemic has impacted the auto supply chain, sure, but it doesn't matter. Lots of new cars or scarcity of new vehicles. The car park is large, aging, getting more complex, and demand for repair remains strong come heck or high water. And the shops are seeing this clearly and starting to invest to meet the current need and get ready for the future. The variety of drive trains is expanding, internal combustion, hybrid, plug-in electric, full electric, and every day there's more driver assistance and more vehicle automation, increasing vehicle complexity. Shops now have a greater need for new and updated equipment, and they're becoming more and more reliant on service and repair information to guide them through the galaxy of new requirements and procedures. It's all music to our ears, actually. Because Snap-on makes great tools and equipment, and it's clearly repair information headquarters. RS&I has taken advantage of that trend, creating new equipment offerings and advanced database solutions. We now have a strong array of products in that vital area. Mitchell One Repair Information Software and Shop Management Software, SBX, SBF, Electronic Parts Catalog, our Dealer FX Shop Management Technologies, Electric Vehicle Health Check Solutions, and our Heavy Duty and Fast Track Intelligent Diagnostic Hardware. These are big databases, and getting more powerful and easier to use, helping the shop to fix it right the first time and efficiently. The repair shop is changing, rising in complexity, and ours and I has the products to match it. Finally, let's talk about critical industries. We say Snap-on rolls out of the garage, solving tasks of consequence, and we do. This is C&I territory, our most international operation, and it's where we see the most continuing impact of the pandemic. And it's children, like supply chain inflation, and it's supply chain disruption and inflation, where customers have been slower to accommodate, where headwinds are still persisting, and where our monthly SKU product offerings are particularly impacted by supply chain challenges. I suppose everybody knows about the two-month lockdown in Shanghai. That area is a significant CNI business center, and it's also a key transportation hub for our China factory. So the lockdown was an obstacle. And beyond that focused event, CNI is particularly challenged by its considerable geographic reach, jousting with the varying impacts and protocols and economic turbulence from country, with the varying virus impacts and protocols, and the economic turbulence from country to country. But I would say, if you look at the quarter, the CNI team rose to the occasion, and in the quarter, we won games in North America, in Europe, and in Asia. despite the difficulties. So I describe our CNI markets as representing continuing opportunity. And coupled with automotive repair, we believe our overall markets are robust right now. And there's considerably more opportunity ahead as we move along our runways growth. And I can't leave this section about robust progress and abundant possibilities without once again speaking of the engine of our advanced Snap-on value creation, particularly in customer connection and innovation. Developing new products and solutions born of the observation gathered right in the workplace. Insights that create great new offerings and at the same time help guide the expansion of our franchisee selling capacity with better processes, more effective training, and more powerful communication. All of that helped drive our progress, overcoming the difficulties, accommodating the virus, taking full advantage of the market opportunities, charting a continuing positive trend moving forward, and we're going to keep it going. Well, that's the overview now. Let's move to the segments. In the C&I group, Sales in the quarter were up 2.5% as reported, or 8.6 million versus 2021, and that includes 25.3 million or a 7.6% organic gain driven by progress across all our divisions. From an earnings perspective, CNI income was 51.7%, a decrease of 3.8 compared to 2021. Two million of that was unfavorable foreign currency, and the rest represents the impact of supply chain turbulence on the multi-SKU CNI products. The OI margin was 14.4%, down 140 basis points from 2021, but did represent progress in that it's 100-point sequential improvement from the last quarter. When compared with the pre-pandemic 2019 periods, sales were up 6%. Sales were up 7.4% organically, and the OI margin of 14.4% was down 20 basis points, but that included an 80-point impact from acquisitions and unfavorable currency. Now, a continuing bright spot in CNI this quarter, and again this quarter, was S&A Europe. it did deliver yet another quarter of growth, expanding double digits year over year and well beyond pre-pandemic levels, all against the wind in Europe with innovative solutions, with the innovative solutions of our Baco Ergo tool management system leading the way, tailoring products specific to customer needs. You know, Europe is a varied market, and S&A Europe is making increasing gains by matching the products to the specific tasks. And that positive S&A Europe was joined in CNI, by valuable contribution from recovering areas in critical industries like aerospace and general industry, and from countries in Asia Pacific like India, Japan, and South Korea, all combined to overcome the decline in slower-to-recover sectors like the military and natural resources. We do remain confident in and committed to extending in critical industries, and that commitment is confirmed with great new products. Speaking of products, last quarter, to help solve crucial tasks Across both critical industries and automotive repair, we strengthened our 14.4-volt micro-lithium power tool lineup with a new snap-on CT861 3-inch impact wrench. It's very attractive, but it's also quite functional, featuring a compact design to reach tight spaces, a nylon-based housing for rugged durability, and a special toggle switch trigger for precise control. The new unit also includes a tri-beam headlight, for broad illumination in the entire work area. Now, that's a feature that makes complex multipoint jobs much easier in the low-light conditions that often occur in the workshop or in road repair. You can imagine it. The impact wrench also delivers a robust 225 foot-pounds of bolt breakaway torque, and it's controlled by a variable street drive, so the operator can apply just the right force for each job. And a 14-volt battery with its 2.5 amp hours ensures consistent output and an extended runtime, which makes for a lot more efficient workday. The CT361 began shipping early in the quarter, and it was right on target, quickly becoming a million-dollar hit product, and it sold out in what seemed like a blink of an eye. Great product. Well, that's CNI, a promising quarter, volume up nicely, starting to overcome the turbulence, moving down its runways for growth. Now... for the Tools Group. Sales of $520.6 million, up $36.5 million, including $7.7 million of unfavorable currency, and a 9.3% organic gain. And the operating margin, 23.9%, up 250 basis points, compared with pre-virus 2019 Compared with pre-virus 2019, sales grew 114.8 million, including a 28.1% organic gain. And this quarter's 23.9% operating margin was up 630 basis points compared with those pre-virus numbers. Coming out of the pandemic stronger indeed. Another positive quarter for the tools group with growth across all product lines. And beyond this, we see further indications of continuing strength. Other data, like the franchisee health metrics, which we monitor every quarter, they remain quite favorable and on a clearly positive trend. We do believe our VAN network remains quite strong. And it's not just the numbers. Just a few weeks ago, I spent time with a couple of dozen franchisees representing their regions on our U.S. and Canadian National Franchisee Advisory Councils. And they were motivated and prosperous. Enthusiastic about their current performance. Positive about the trajectories of the other vans in their various areas that they represent. And very optimistic about their prospects for even more going forward. They believe in their opportunities and they are confident of their future. The tools group. Strong quantitatively and qualitatively. And that positivity was not just internal. Once again, this quarter, 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 in that ranking, we rated at the top of the tools distribution category, a place we've had for some time. And this type of recognition reflects fundamental contemporary strength of our franchisee and of our overall mobile van network. It is a powerhouse business. And that momentum would not have been achieved without a continuous stream of unique new products. And one of those that helped drive our hand tools up again this quarter, again this quarter, was our new long-nose slip joint pliers. It's a special tool with our patented three-position joint, precisely machined for effortless switching and control. It allows the pliers to keep the jaws parallel, increasing the contact with the workpiece. It's got a relocated joint, optimized handle shape, and unique talon grip serrated jaws. With all of that, our new pliers provide over 50% more pulling power. The machined and hardened teeth are sharp and strong and present three different gripping geometries, from heavy serrations at the base to fine grooves at the tip. Great variability. For multiple applications, you can apply different parts of the joint. They're manufactured right here in our Milwaukee factory, and they're fashioned from special cold-forged allied steel for greater durability and strength. These pliers were launched today. At the beginning of the past quarter, and they've been very well received. When I talked to the franchisees at the NFAC, they said they're flying off the truck. And they're right. The sales have already made a hit product status just in one quarter. Our new offerings are, in fact, making a difference in the tools group. You can't miss it in the numbers. Eight straight quarters above pre-pandemic levels. The tools group is moving onward and upward with eye-catching momentum. And, you know, if you look at the numbers or spend any time with the team, you believe it's all systems go, and it is. Now on to RS&I. Sales were up 4.6% or $18.2 million versus last year, including $27.4 million or 7% organic uplift with double-digit growth in undercar equipment, with diagnostics and information advancing, and with the dealership activity flat. From an earnings perspective, R&I operating income of $95.7 million represents a rise of $9 million, or 10.4%, and the operating margin was 23%, up 120 basis points from last year. Compared with 2019, sales were up 19.5%, as reported, and the organic growth was $58 million, or 16.8%, with strong advances in undercar equipment and in diagnostics and information products. For profitability, the OI margin of 23% was down 240 basis points versus 2019, pretty much reflecting a 110-point impact just from acquisitions and the effect of the margin dilutions from the higher sales of undercar equipment that we've been seeing. We believe RS&I has great opportunities, and we're fortifying its way forward with new products like our Hoffman 609 aligner, specifically designed for independent general repair shops where alignment is, you know, it's not currently a primary focus, and the space is short. The new offering allows those all-purpose garages to keep the low-volume alignment business in-house with its compact footprint and portability kit, enabling easy storage when not in use and efficient deployment when alignment is actually needed. It saves a lot of space, but it gets the job done. With our latest 3D system authoring OEM-approved accuracy, The 609 enables the handling of even the most complex alignment systems by those general repair shops. It generates a high return on the investment, doesn't occupy space needed for other repairs, often needed for other repairs, and it fortifies the garage's reputation for technical capability. It's a great value for the general repair shops, and they're noticing. Our equipment business has been on a roll with strong double-digit equipment growth for double-digit quarters for some time, and the Hoffman 609 aligner is a big player in that mix, RS&I. Approving its position with fair shop owners and managers, growth in undercar equipment and diagnostics and information products, and an array of innovative new products and product lines to lead the way. Well, those are the highlights of our quarter. Tools group, strong progress. Everywhere. Unmistakable strength. CNI recording a positive performance against the variation across industries and geographies. And RS&I expanding profitable volume with repair shop owners and managers. Snap-on overall sales rising markedly, both versus last year at 8.4% organically and up 18.7% organically compared with pre-pandemic levels, continuing a clear positive trajectory. Opco operating margin, a strong 21.7%, rising again this quarter, rising again this quarter, up 160 basis points. EPS, $4.27, up versus last year, up versus last quarter, and up versus pre-pandemic levels. It was an encouraging quarter.