Snap On Incorporated : Q2 2023 Transcript

Snap-on Incorporated

Second Quarter and Full Year Results

July 20, 2023 at 11:00 a.m. Eastern

CORPORATE PARTICIPANTS

Sara Verbsky - Vice President, Investor Relations Nicholas Pinchuk - Chairman and Chief Executive Officer

Aldo Pagliari - Senior Vice President, Finance and Chief Financial Officer

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PRESENTATION

Operator

Good morning, and welcome to the Snap-on Incorporated 2023 Second Quarter Results Conference call. All participants will be in a listen-only mode for the duration of the call. Should you need any assistance at that time, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please also note that this event is being recorded today.

I would now like to turn the conference over to Sara Verbsky, Vice President of Investor Relations. Please go ahead, ma'am.

Sara Verbsky

Thank you, Joe and good morning, everyone. We appreciate you joining us today as we review Snap-on's Second Quarter results, which are detailed in our press release issued earlier this morning. We have on the call 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've 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 snapon.com under the Investor section. These slides will be archived on our website along with the 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. 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?

Nicholas Pinchuk

Thanks, Sara. Good morning, everybody. Today, I'll start the call, as usual, by covering the highlights of the second quarter, and I'll give you my perspective on the environment and the trends we're seeing. Along the way, we'll cover the markets. They're encouraging, actually. I'll take you through the segments and the advancements we've made. Then Aldo will provide a detailed review of the financials.

We see the second quarter as a period of significance. Sometimes you see a performance where you break through to new heights and this is one of those times. I'm going to tell you why we believe that to be true. In some ways, though, it was similar, this period was similar to many periods we've seen over time. We continue to have significant headwinds and there's always turbulence, variation from market- to-market, but we believe it's our job to confront and overcome these obstacles. We did just that in the second quarter by wielding the strength of our advantages, executing on our strategic runways for growth,

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making the most of our runways for improvement and by relying on the skills and dedication of our people. Once again, it paid off. The numbers scream it so, but here they are.

As reported, second quarter sales of $1,191.3 billion were up 4.8% from 2022, including the impact of $8.3 million of unfavorable foreign currency translation. Organic activity was up 5.6%. The 12th straight quarter of year-over-year expansion beyond pre-pandemic levels. That's a trend that demonstrates, we believe, a solid consistency during pretty uncertain times.

Now let's talk about the earnings. OpCo operating income for the quarter, including the effects of unfavorable foreign currency, was $277 million, up 12.3% and our OpCo operating margin, the operating margin, it was 23.3%, up 160 basis points from last year. BOFFO! When I said new levels, I meant it.

For financial services, the OI of $66.9 million represented an increase of $1.6 million. It all combined to author an overall consolidated operating margin of 26.8%, up 130 basis points from last year. The second quarter EPS, it was $4.89, up $0.62 or 14.5% from last year's $4.27. I think I'll say it again- $4.89, up 14.5%. The productivity and profitability of Snap-on operations shining through as the supply chain viscosity diminished. We believe Snap-on is stronger now than ever before and the quarter's profitability makes that crystal clear. Well, those are the overall numbers.

Now let's speak to the market. Auto repair, again, this quarter, it's favorable. Miles driven are up. Spending on vehicle maintenance, up. Technician count, up. Technician wages, up. Consistently positive year-over-year trajectory across all the essential categories. The drivers in vehicle repair are fairly understood. The car parc is growing, getting older every year, and every year the tasks involved in maintaining and repairing the vehicle parc get increasingly complex, requiring more hours, greater skill, increased wages and more sophisticated tools, hand or power or data-driven tools. There's a significant need for more technicians and greater capabilities. The competition for that talent is growing and it's being reflected in the rising wages. At an everyday level, I think you can see this demand when you're trying to schedule a maintenance appointment, or just by visually seeing the abundance of cars and trucks in the repair bays or parked outside, crowded around the shops waiting for their turn to get in.

In fact, just this month, I was with a group of franchisees and customers in Bristol, Tennessee, at the NHRA Thunder Nationals, the drag races, and they energetically expressed their enthusiasm during our conversations. You could feel their optimism resonating with an appreciation for our products, our solutions and how we make work easier.

So we expect that the trajectory of vehicle repair is solid and will continue through the quarters and on into the years ahead. We believe that vehicle repair is a great place to operate and the repair information- our Repair Information Group and our Tools Group are well positioned to take advantage of that.

Now on to the critical industries where our Commercial and Industrial Group, or C&I, takes our business out of the garage and solves tasks of consequence where the penalty for failure is high, in a wide range of sectors, where custom tools are often required to get the job done. This is also the segment where we have the most significant international presence and the attendant variations from country-to-country with many versions of economic and social headwinds.

In the U.S., the landscape actually is pretty positive. We see progress across a number of sectors. Aerospace is strong. Increased demand in commercial aviation and momentum within space exploration. The military business was another strong quarter of growth, now better matching the actual needs. Natural resources continued to advance in oil and gas and wind after the uncertainty of the last fall. Energy repair is a positive place to be. Also big in the period was industrial transportation. Supply chain

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turbulence, I think, has raised the attention on rail and heavy-duty fleets. Society, now more than ever, sees the essential need to keep commercial supply moving and it's accruing positively for us.

Now, there are tepid spots across the globe. Places traumatized by the Ukraine war. We see that. Weaknesses in some of the Asia-Pacific operations. But one of the clear and large positives in the period is the general rise of critical industries and our industrial division is well positioned and it's taking advantage with its capability to customize products to a large number of applications, and it's working. Our critical industry teams are on an upward trajectory, utilizing their capability and the enhanced capacity to capture significant gains.

Overall, the story of Snap-on outside the garage looks quite promising and as we move forward, we'll continue to capitalize on that abundant potential. And as part of that, we'll keep engaging Snap-on value creation, customer connection and innovation, developing profitable new products and solutions, delivered by the insights and knowledge gained standing next to the customers right in the work place, and will drive RCI all over the enterprise, including in the Tools Group.

We will keep working to increase our franchisee's selling capacity with efficient processes, with advanced training programs, with social media and digital content, and expanded manufacturing capacity to meet the rising demand, all combining to take full advantage of the opportunities and continue the positive trends we've seen into the future. Well, that's the market overview.

Now let's move to the segments. For the C&I Group, as reported sales rose 1.4%, including $5.6 million of unfavorable foreign currency. Organic volume was up by 3.0%. A quite strong performance in the Industrial Division was attenuated by shortfalls in some of our more challenged areas. Power Tools had smaller volumes as customers anticipated the arrival of new products in the third quarter. Our European- based hand tool business, SNA Europe and our Asia-Pacific operation demonstrated growth in several markets, but softness in Eastern Europe and currency pressure in Japan, the Yen was weak, was some offset.

But our Industrial Division isn't just growing in volume. The margins are strong and rising. Customized product is a wonderful thing. So C&I OI was $68.1 million, a 12.4% increase over last year and the operating margin was 16%, one of the highest ever for the group, representing a gain of 160 basis points over the second quarter of last year. The Industrial Division, wielding the capacity provided by our new building in Kenosha, registered significant sales progress.

In April, we discussed the recovery of the military business. In the military segment, in this quarter, we continued that momentum, capturing significant long-term contracts. Our product line, wide and effective, produced in the U.S., made the difference. So we believe things look promising for the military business and for all of our Industrial segments.

Beyond the Industrial Division, in C&I, our Specialty Tools operation continues to advance, meeting the need for precision with new torque products, covering a vast spectrum of clamping forces for challenging applications. Torque accuracy is rising in importance and Snap-on is ready to capitalize.

We are confident and committed to extending in critical industries and that conviction is anchored by the ongoing expansion of our lineup of innovative products, explicitly designed for particular tasks, offerings like our automated tool control, or ATC, enabled by proprietary digital imaging technology that scans toolbox drawers, recording in real time, which tools are required or are removed or replaced. It's an increasingly crucial feature for aerospace, for industrial manufacturing and for commercial transportation operations. Imagine working on a plane or a locomotive engine and unknowingly leaving a tool behind in the workplace. Not good, not good. This is a mistake that could result in a failure in any tight tolerance

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mechanism, one small item can be a huge problem. Well, ATC has an answer- keeping track of the tools, identifying missing items, tracing who signed them out and where they're to be used and giving the all clear when everything is returned, so the planes can take off.

Snap-on critical industries are on the rise and ATC is part of the reason. In the quarter, we released our next generation of ATC, a larger touchscreen to improve the shop productivity and upgraded processes with the latest technology for seamless integration with any central IT system. As you might expect, our customers were enthusiastic. Sophisticated products for complex problems. It's a winning combination for C&I and you can see it in the quarter's results.

Now on to the Tools Group. Organic sales grew 1.1%, which includes 60 basis points of unfavorable foreign currency, growth in the international markets and a slight improvement in the U.S. network. Based on our franchisee and customer feedback, like I said already, vehicle repair is robust, but in the period, our record demand met capacity constraints before our plant expansions were fully operational, limiting some of the potential possibilities and somewhat attenuating the volumes.

But for operating earnings, they rose in the quarter by $13.3 million or 10.7% reaching $137.7 million. That's almost double the pre-pandemic level. The operating margin was 26.3%, a rise of 240 basis points against 50 basis points of negative currency. Let me say that again, Tools Group OI margin was 26.3%. Boomshakalaka. This is an eye-popping number.

So the Tools Group had another positive quarter with substantial profitability. We are confident in the strength of our van network and that belief is born out of quantitative evidence, franchisee health metrics. We monitor them regularly, every quarter. And again, this quarter, they remained strong. So whether you're talking about- talking to the franchisees at Thunder Valley or looking at the numbers, vehicle repair does appear robust and continues to be so.

Now when you think of the Tools Group profitability, which is a pretty important subject this time, you think about hand tools. That high margin lineup was- that was up in the period and new products led the way. One example of successful innovation that came from another customer connection was a number of franchisees observed that diesel technicians struggled to access sensors on Class 8 semi- trucks- they were struggling to do that. So, to change the part without risking damage, the path had to be cleared by removing several other blocking components. Believe me, that's a time-consuming process and so, armed with customer connection insights, those customer connection insights, our engineers developed an innovative design, quickly produced a 3D prototype and confirmed that it solved the problem. That new tool, the SWR5 90-degree special crowfoot wrench is being made right now at our Elizabethton, Tennessee plant and it's getting a lot of attention. It really does make truck repair easier. The techs love it and we kinda like the margins.

Profitable customer connection is one of the drivers behind the Tools Group success. And another example authored this quarter is our two-piece horizontal bushing adapter set, the BJP1, BKS2, these names are something. Techs at a Subaru dealership were- they were taking a lot of time to remove and install control arm bushings from suspension setups on the newer models. Our team assessed the procedure and designed two new adapters to integrate with our existing ball joint press and that enabled the fit for the new- a good fit for the new Subaru suspension and saved two hours in repair time per procedure. That's a big savings in the garage generated by customer connection and innovation.

A while ago, SNL's Roseanne Roseannadanna said, "It's always something," and it's true. There are always new repair challenges, whether the powertrain is internal combustion, plug-in hybrids or EV platforms. Vehicle architecture is getting tighter, packed with more devices, creating additional accessibility constraints. It's all music to our ears. Our franchisees and engineers observe the work,

Snap-on Incorporated July 20, 2023 at 11:00 a.m. Eastern