Snap on Incorporated : Q4 2021 Transcript

Conference Title: Snap-on Incorporated 2021 Fourth Quarter and Full Year Results Conference Call

Moderator:	Sara Verbsky
Date:	Thursday, February 3, 2022

Operator: 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. Sara Verbsky, Vice President of Investor Relations. Please go ahead.

Sara Verbsky: 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 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 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.

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Nick Pinchuk: Thanks, Sara, 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 testified to just that. Our reported sales in the quarter of $1 billion $108.3 million were up 3.2% including $12.2 million from acquisitions being offset by $3.0 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. This quarter also bears the marks of the Snap-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 it was. OpCo operating income of $232.2 million was up $16.0 million from last year, and the OI margin, it 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, considerable gain in my book. Well, those are the numbers, now let's speak about the markets.

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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 repairs are a great place to operate for our Tools Group and for our Repair Systems and Information or RS&I group.

The critical industries where our Commercial and 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 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 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

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product line-up 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 project than ever before. We've endeavored through the virus era to maintain our product, our brand, I've spoken of this before, in the virus era, 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 billion, up 18.4% including an organic increase of 15.1% compared to last year and a 14 point - 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 saw - we did see 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 with our precision - was achieved in our precision torque line. And that progress was - 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 and in the custom kitting area.

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C&I operating income was $50.1 million, down $6.1 million, including $1.2 million of unfavorable currency. The gains in Asia and torque were more than offset by the reduced military activity and the industrial kit 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 observation of work, great offerings like our recently released QB4R line of three-quarter inch drive break-over torque wrenches. Capable of - 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 Elizabethton, 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's 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 boding 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

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