Snap on Incorporated : Q2 2021 Transcript

Company:	SNAP-ON INCORPORATED
Conference Title: Snap-on Incorporated Second Quarter 2021 Results Call
Conference ID:	1537142
Moderator:	Sara M. Verbsky
Date:	July 22, 2021

Operator: Good day, and welcome to the Snap-on Incorporated Second Quarter 2021 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Sara Verbsky, excuse me, Vice President, Investor Relations. Please go ahead.

Sara Verbsky: Thank you, Stephanie, and good morning, everyone. Thank you for joining us today to review Snap-on's 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 Web site, snapon.com, under the Investors section. These slides will be archived on our Web site 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 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, including a reconciliation of non-GAAP measures, is included in our earnings release and in our conference call slides on pages 14 and 15. Both can be found on our Web site.

With that said, I'd now like to turn the call over to Nick Pinchuk. Nick?

Nick Pinchuk: Thanks, Sara. Good morning, everyone. As usual, I'm going to start the call by covering the highlights of our second quarter. And along the way, I'll give you my perspective on our results. Once again, they were encouraging. On our markets, robust and promising. And on our continued progress and strength amidst the pandemic. The pandemic isn't over, but we believe we're stronger right now than when it all started. Of course, we'll also speak about what it all means. Then Aldo will move into a more detailed review of the financials.

We believe that our second quarter, again, demonstrates Snap-on's ability to continue its trajectory of positive results, overcoming a variety of ongoing headwinds, accommodating to the lingering virus environment, meeting the challenges of the day across the business world and advancing along our runways for growth and for improvement.

Our reported sales in the quarter were $1,081.4 million, and they were up versus last year's $357.1 million or 49.3%, including $20.6 million of favorable foreign currency exchange and $19.6 million in acquisition-related sales. The organic sales were up 42.5%, with significant gains in every group, our fourth straight quarter being above pre-pandemic levels, a V-shaped trajectory that defines resilience and flexible capability.

The OpCo operating income of $217.1 million was up $126 million from last year, which included $4.0 million of restructuring charges. OpCo operating margin was 20.1%, up from the 2020 level

of 12.6% or 13.1% as adjusted for restructuring, representing a 700 basis point as adjusted improvement.

The Financial Services operating income of $68.9 million increased 19.6%, higher originations, lower losses, delinquencies below pre-pandemic levels, our finance company passing the greatest stress test of our time with flying colors. And that result combined with OpCo for a consolidated operating margin of 24.5%, up 560 basis points as adjusted.

Quarterly EPS was $3.76, up 103.2% from last year. And excluding the 2020 restructuring charges, EPS grew 96.9%. Versus the pre-pandemic levels of 2019, the EPS grew 16.8%, clearly tracing an ongoing positive trend.

I've said it before, but it bears repeating, we believe Snap-on is stronger now than when we entered this great withering, and we believe our second quarter is emphatic evidence of that fact. Compared with 2019, our sales in the past quarter grew $130.1 million or 13.7%, that reflects $23 million of acquisition-related sales, $17.2 million of favorable foreign currency and $89.9 million or -- and an $89.9 million or 9.3% organic gain.

The 2021 OpCo operating margin of 20.1% was up 10 basis points from 2019, but that gain was achieved against 70 basis points of unfavorable currency and acquisition impacts, all while absorbing the lingering effects of the virus, it's not gone. So those are the numbers.

From a macro market perspective, it's clear that our automotive repair sector remains favorable. The technicians across the map are still at their posts, repairing cars and trucks, keeping the world running. And they are busy. And as expected after the COVID, it appears that people are leaning more toward personal transportation and are holding on to their vehicles longer every year. Auto repair is a strong and resilient market. You can hear it from our franchisees and you can see it in our numbers.

As we look forward, we see greater opportunities as vehicle techs encounter even more complex repairs, new technologies, alternative powertrains, greater proliferation of driver assistance electronics. It's all music to our ears.

And then there's the repair shop owners and managers, RS&I territory, a little more mixed, particularly in Europe, but a return to growth in repair garages and dealerships. They're starting to invest…undercar equipment and OEM programs are coming back…and RS&I is taking advantage of that trend with new equipment offerings and advanced data-based solutions, continually improving our software products and our diagnostic releases. Products like Mitchell 1 Repair Information software and shop management software and electronic parts catalogs and our Dealer-FX shop management technology and our heavy-duty and our intelligence diagnostic units, big databases and getting more powerful and easier to use, helping the shop fix it right the first time, efficiently. The repair shop is changing, rising in complexity and RS&I has the products to match.

Finally, let's talk about critical industries, where Snap-on rolls out of the garage, solving tasks of consequence. This is where the C&I group operates. It's our most international operation where the customers have endured the longest impact of the virus and have been slower to accommodate it, recovering at what I'd call varied rates, segments like oil and gas, and aviation, to geographies like Southeast Asia and India, still down. But despite the variation, we did see growth in critical industries. Improvements in education - the students are coming back - and in power generation and heavy-duty fleet, all combining to offset that continuing turbulence. So overall, I'd describe our C&I markets as healthy and representing clear opportunity. And coupled with auto repair, we believe our markets are robust now and there's considerable opportunity ahead for us as we move along our runways for growth and improvement.

And I can't leave this section about robust progress and abundant possibilities without speaking on the engine of our advance, Snap-on Value Creation. Customer connection and innovation, developing new products and solutions, born out of insights and observations gathered right in the workplaces, and RCI, guiding the expansion of franchisee selling capacity with better processes, more effective training and a new focus on social media. It all helped drive our progress, overcoming the difficulties, accommodating the virus and enabling us to take full advantage of the opportunities and chart a continuing and positive trend forward.

That's the overview. Now let's move to the segments.

In the C&I group, sales in the quarter were up 33.8% or $88.6 million versus 2020, including a $71.3 million or 26.3% organic uplift with double-digit progress across all of the divisions. From an earnings perspective, C&I operating income of $55.5 million, including $1.1 million of unfavorable foreign currency represents a rise of $32.6 million compared to 2020, which included $2.0 million of restructuring. That all means an as adjusted increase of over 122.9%, and the operating margin was 15.8%, an "as reported" increase of 710 basis points, a rise of 630 basis points as adjusted, and an uplift of 120 basis points from the pre-pandemic level in 2019 despite 90 basis points of unfavorable currency. When compared with pre-pandemic 2019, sales were up 4.6%, including a 0.4% organic gain, about flat.

Now a continuing bright spot for C&I, SNA Europe did deliver yet another quarter of growth, expanding beyond pre-pandemic levels, against the wind, with the Bahco ERGO Tool Management System leading the way, tailoring products specific to customer needs. Europe is a varied market environment, but SNA Europe is defying economic gravity again, and that positive was joined by contributions from recovering areas in critical industries like heavy duty, power generation, and as I said before, education - who's come to the party just now - and from Asia Pacific geographies like China and Japan, and those gains were balanced by declines in attenuated sectors like the military, aerospace and natural resources, all still weak.