Snap On Incorporated : Q4 2022 Transcript

Snap-on Incorporated

2022 Fourth Quarter and Full Year Results

February 2, 2023, at 10:00 a.m. Eastern

CORPORATE PARTICIPANTS

Sara Verbsky - Vice President, Investor Relations

Nick Pinchuk - Chief Executive Officer

Aldo Pagliari - Chief Financial Officer

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PRESENTATION

Operator

Good day, and welcome to the Snap-on Incorporated 2022 Fourth Quarter and Full Year Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, 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. Please note that this event is being recorded.

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

Sara Verbsky

Thank you, Cole, and good morning, everyone. Thank you for joining us today to review Snap-on's fourth 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, snapon.com, under the Investors 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?

Nick Pinchuk

Thanks, Sara. Good morning, everybody. Well, it's been some year and quite a quarter. China knee- jerking from zero COVID and strict lockdowns to living with COVID in an unprecedented virus explosion, diminished but still continuing spikes in the supply chain, the ongoing Ukraine war, the reemergence of Brexit and now the rising shadow of a recession, echoing in almost daily public pronouncements. And thru it all, Snap-on delivered another in a long line of encouraging performances.

We'll go through it. Starting with the highlights of the quarter and the year, I'll give you my perspective on the results, the market environment, and our progress. And after that, as usual, Aldo will move into a more detailed review of the financials.

The fourth quarter was encouraging. We believe it emphatically demonstrated the continuing resilience of our markets and the capability of our operations to achieve in the face of difficulty, wielding the power of our product, our brand, our people, and our strategic position. It all combined to serve as clear evidence of what we already know: Snap-on is a unique and extraordinary operation. The results for the fourth quarter serve as more testimony to that fact, and they are an unmistakable demonstration of our

Snap-on Incorporated February 2, 2023, at 10:00 a.m. Eastern

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continuing momentum. Of course, we did witness differences from group to group and within the operations, but we believe the overall results are compelling. Fourth quarter sales of $1 billion, $155.9 million as reported, up 4.3% from 2021 included a substantial impact from unfavorable foreign currency of $37.7 million, a 370 basis point headwind, and an organic sales increase of 8% over last year, and that represented a 22.7% rise over 2019. This now represents the corporation's tenth consecutive quarter above pre-pandemic levels. It's a trend of, I think, some significance in uncertain times like these.

From an earnings perspective, our opco operating income for the quarter, including the impact from unfavorable foreign currency, was $248 million, up 6.8% compared to 2021 and 44.7% above the 2019 pre-pandemic level. The OI margin for the quarter, it was 21.5%, improving by 50 basis points over last year and 360 basis points over 2019. It's the same resiliency that's been demonstrated over the years as we paid dividends every quarter since 1939 without a single interruption or reduction. In fact, in November, our dividend was raised by 14.1%, marking the 13th straight year of increases. It's more testimony of Snap-on's consistent performance through varying environments. This is just another one of them.

For Financial Services, operating income of $63.9 million was down from the $67.2 million in 2021. That decrease reflected our forecasted return to more historical provision levels, but all while keeping delinquencies flat to last year. And our overall quarterly EPS reached $4.42, $0.32 or 7.8% above 2021 and up 43.5% compared with 2019. Well, those are the numbers.

Now to the markets. We believe that automotive repair remains very favorable. It makes sense. The average age of vehicles continues to increase. The complexity of repairs is rising steeply as new platforms enter the vehicle PARC, and enter they have, starting in dealerships. And we have seen a resurgence in dealership projects despite a still recovering supply chain. Changes in internal combustion, the rise of electric vehicles, and the expansion of vehicle autonomy have made dealerships eager for new equipment to support complex repair tasks of the evolving vehicle PARC, and we see it.

Projects and powertrains aside, dealerships continue to see healthy demand in repair, in maintenance and in warranty, driving the need for shop expansion and more technicians. You can see it in the macros: repair spending, technician numbers, technician wages, all up. Our dealership segment is expanding. And for our independent repair shops, confidence remains sky high across the board. Shop owners and managers confirm that demand for repairs, for technicians, and for complex skills are all rising, and our sales growth in that sector mirrors that enthusiasm. We believe we're moving into what can be called the golden age of vehicle repair, and our Tools Group and RS&I group are uniquely positioned with the product, the brand, and the people to take full advantage, even in the midst of turbulence. You can see it.

Now for the critical industries, where our Commercial & Industrial Group, or C&I operates. We continue to see progress but the group spans wide jurisdictions. And as such, various headwinds across the geographies and the industries have attenuated some of those gains. For geographies, Europe with the war and the reemergence of Brexit and China impacted by the COVID chaos were a stark contrast to relatively strong North American markets, a lot of variation. And the range in variability among sectors also continue to be a challenge. Natural resources, heavy-duty fleets, general industries and international aviation were robust, but the military area remain challenged. Overall, however, order demand for most of the critical industries has been strong, and we believe that's a great signal for C&I's future. So C&I does have challenges across the geographies and the segments, but we have made advancements, and we see opportunities for tomorrow.

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Going forward, we believe we'll keep moving down our runways for growth, our wide runways for growth. And as we proceed, we're also fortified, as all of you have heard before, by our Snap-on Value Creation processes, safety, quality, customer connection, innovation and rapid continuous improvement, or RCI. They're the core processes that drive our ongoing progress, especially customer connection and innovation, growing our product line. You see, our franchisees and our direct sales force possesses a strategic advantage, standing face-to-face with professional techs, understanding their individual challenges, showcasing the solutions created by our powerful products and demonstrating their use.

Our resilient markets do represent a significant opportunity, and we are there to take advantage, up close and personal, like no one else, right where the jobs are done. And it's working. 2022 was a year of substantial headwinds, but our team prevailed, with the year achieving new heights. Sales up $4 billion, $492.8 million, up 5.7%, reflecting an organic gain of 8.7% compared to 2021 and a 20.2% organic increase versus 2019. The opco OI margin for the year was 20.9%, up 90 basis points from '21 and exceeding the pre-pandemic margins by 170 basis points. As reported, earnings per share for the year were $16.82, up 12.7% from '21 and represented a rise of 35.5% from 2019. It's all evidence of the decisive and ongoing momentum that marked the year and the quarter.

Now the operating groups. Let's start with C&I. Fourth quarter sales of $343.2 million for the group were down $15.5 million versus last year, including $21.2 million in unfavorable currency and a 1.7% organic gain. Our Specialty Tools division was a clear positive with double-digit gains. Precision is becoming essential every day, and our torque products are putting us right in the middle of that rise. Our critical industries also showed strength, especially in North America, propelled by growth in natural resources, general industries, and heavy duty, partially attenuated by lower military activity.

Outside North America, it was a different story. SNA Europe was down, and China was diminished. OI for C&I was $47.9 million, down $2.2 million primarily from the $2.3 million in unfavorable foreign currency. The group's operating margin was 14%. It was flat to last year, but still represented an advance of 120 basis points over the pre-pandemic level of 2019, and that was against 50 basis points of negative currency and acquisition dilution.

The specialty torque business within C&I really is making significant strides. Torque is hot, and Snap-on has a widening array of new offerings to prominently participate in that trend, products like our new series of digital torque checkers. It's from our Norbar engineering team. You might remember we acquired Norbar a few years ago, our Norbar engineering team in England, more compact and easier to use, it helps technicians validate the accuracy of torque instruments close to the workplace, saving a lot of time. Our new checkers accommodate torque measurements from 5-inch pounds to 1,500-foot pounds and wrenches from a quarter inch to 1-inch, covering jobs from precision fasteners in a jet cockpit to a heavy-duty bolt on a giant oil rig, a wide range of applications. And its compact steel housing easily mounts in a variety of convenient locations at the point of issuing or in the pathway of the workflow, like tool cribs, aviation hangars and manufacturing cells, making torque checking an easy exercise.

With an accuracy of plus or minus 1%, our new checker increases process quality without work interruption, raises consistency in assembly activity and with a streamlined documentation feature, greatly improves the management of fastening in any application. The initial launch was well received by any operation that relies on precision torque, and there are a lot of them. And as you can imagine, the new checker is right on track to be a Snap-on hit product with sales of $1 million in the first year. So it looks like it's a pretty strong product for us. C&I, mixed progress, challenged with headwinds, but it did have significant areas of improvement paving the way for future growth.

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Now on to the Tools Group. Quarterly sales of $542.7 million, up $37.9 million, including 9.5% in unfavorable currency and a 9.6% organic increase, gains in the U.S. operation and continued expansion in the international networks. And it was all led by big ticket items, tool storage and diagnostics both with boffo double-digit gains. Operating earnings for the Tools Group were $116.1 million in the quarter, $5.6 million above 2021, and that included $4.5 million in unfavorable currency. The operating margin was 21.4%, 50 basis points below last year, but that was impacted by currency and by product mix, but it was still a result of considerable strength.

Tools Group again represents the ongoing power and market leadership of our van network. It's written across the financials. And that positivity is clearly and boldly echoed in the voices of our franchisees. I can tell you; I was just at one of our annual kickoffs, it's unmistakable that they're pumped, enthusiastic and confident. They know they are growing. And they firmly believe there's more to be had. And our franchisee health metrics confirm all of that to be true. The quantitative trajectory relayed in that data supports every bit of the positivity-of the positive attitude.

And the franchisees expressed their excitement in more formal ways. During the quarter, we were recognized by the Franchise Business Review, which surveys franchisee satisfaction. And in its latest ranking in their publication, once again, latest annual ranking, that publication once again listed Snap-on as a top 50 franchise, marking the 16th consecutive year we received that award. And internationally, Snap-on was ranked #1, #1 in Elite Franchise Magazine's Top U.K. Franchises for 2023, finishing not only above the U.K.-only franchise systems, but also coming in ahead of a number of very popular global brands. Now that type of recognition reflects, I think, the fundamental strength of our van business, and it would not have been achieved without a continuous stream of innovative new products.

As part of that, Snap-on continues to lead the industry with great tool storage innovations designed to improve productivity and allow techs to personalize their workspace. We're the first to market with the LED PowerTop, brightly lighting the gleaming Snap-on tools like special jewels as each drawer is accessed. It's quite a sight. It enables the techs to show the pride in their work.

And building on that feature, in December we started shipping the first of our new IRIS tool storage units. It's a 68-inch special edition EPIQ roll cab, which allows the technician to adjust the drawer lighting with an infinite array of color selections. It is an eye-catcher, coated in storm gray paint paired with red trim, and besides its appearance, it also features for the first time a specially lit Snap-on logo nameplate. It's innovative, striking. And as for all EPIQ boxes, all of them, it screams functionality. The PowerTop and the PowerDrawer provide 10 electrical outlets and 4 USB ports throughout the roll cab that ensures that all the cordless tools, the lights, the accessories are charged and at the ready. It also features our unique speed drawer for smart, customizable tool organization. It's a very popular and productive feature in the shops. Convenience, productivity and distinction, the IRIS received an overwhelming reception, helping to drive the landmark tool storage quarter we had just recently. It shows that pride really is a powerful salesman. We show that every day.

Well, that's our Tools Group, booming in the U.S., progressing internationally, continuing the stream of new products, building the brand, enhancing the van channel, and moving forward with momentum.

Now for RS&I. In the fourth quarter, our RS&I Group results confirmed what we've been saying all along: Snap-on is well positioned for the ongoing rise in vehicle repair. RS&I sales in the quarter of $437.9 million increased 11.6%, including $9.5 million in unfavorable currency and a 14.3% organic gain. 14.3%, boomshakalaka! It was a great performance, and that rise was authored by double-digit increase in OEM dealerships as manufacturers continue to release new models, invest in new equipment, and implement essential tool programs. But our business in the independent garages also

Snap-on Incorporated February 2, 2023, at 10:00 a.m. Eastern