Snap On Incorporated : Q1 2023 Transcript

Snap-on Incorporated

2023 First Quarter and Full Year Results

April 20, 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

Hello, and welcome to the Snap-on Incorporated 2023 First Quarter Results Conference Call. All participants will be in 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 on your touchtone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded.

I would now like to turn the conference over to your host today, Sara Verbsky, Vice President, Investor Relations. Ma'am, please go ahead.

Sara Verbsky

Thank you, Keith, and good morning, everyone. Thank you for joining us today to review Snap-on's first 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 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. 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. Good morning. As usual, I'll start the call by covering the highlights of the first quarter, and I'll give you my perspective on what it all means. And then Aldo will provide a detailed review of the financials. Along the way, we'll cover the markets, they're robust, gangbusters. We'll also give you a view of our momentum: it's been unbroken and vibrant.

Once again, the story of our quarter is continued resilience. Our ability to navigate the complex while knowing that the flip of a calendar will bring new challenges. You could pick up any significant publication or listen or watch any business show and you will encounter a barrage of concerns, messages of adversity and contraction. But we know we can resist the difficulties, and so we have for the past three months and for quarter after quarter.

You see, we're armed with significant advantages. Our markets, displaying resilience, born out of criticality; our brand, standing above, delivering quality and reinforcing personal pride; our products,

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they clearly move the world forward by making the critical easier; and finally, our people, our team, experienced, capable and confident. We are encouraged by this quarter, and I'll tell you why.

Our reported sales in the period were $1.183 billion, up versus last year by $85.2 million or 7.8%, including $24.0 million or 240 basis points of unfavorable foreign exchange. Organic sales, they were up 10.2%, increases in every group, our 11th consecutive quarter of year-over-year operating expansion. Our OpCo operating income for the quarter was $259.8 million, including $7.6 million of unfavorable foreign currency, increasing by 16.5%. And the operating margin-the operating margin, it was 22%, rising 170 basis points over last year.

For Financial Services, operating income of $66.3 million compared to last year's $70.4 million. And that combined with OpCo resulted in a consolidated operating margin of 25.6%, an 80 basis-point improvement. And the first quarter's EPS, $4.60, up $0.60 or 15% from last year's $4.00. So, we believe our confidence and our ongoing optimism is clearly justified by the numbers.

Now, let's look closer at our markets. The automotive repair environment remains hot, demand across all disciplines. We continue investing in new products and accommodating the repair challenges of newer models, matching the increased complexity. As platforms change, the modification requires new tools to accomplish the task and we're keeping pace. Whether it's an internal combustion engine or an electric vehicle, the techs need an assist, and we're ready to bring it.

The updates create a range of challenges, new challenges, from accessibility issues associated with confined spaces requiring new designs of varying geometries, to tighter engineering challenges fueling the need for precision torque instrument, to the increasing number of fasteners enlisting our power tools to remove and install parts efficiently, to the rise of drive by wire. More electronics-the more the electronics, the greater the need for handheld diagnostics and special software that can communicate with and manage the neural network of computers and sensors.

We're seeing strength in OEM dealerships, as new models break on to the market, new arrays of essential tools, equipment and diagnostics are needed to service the different and unique characteristics of each vehicle. For independent repair shops, business is booming. If you're taking your vehicle in for service recently, you've witnessed this firsthand, the bays are full, and the parking lots are chockablock. And when I speak with our franchisees, they are enthusiastic, saying demand is robust. It's written all over the numbers. Garages are scheduled further out for shops of all types. Owners see the growth. They know they need technicians. And as you might expect, the rise in the tech count is substantial and the wages are moving up. And of course, this is all music to our ears.

We believe that with the new vehicle models, the rise of automation, the growing need for precision and the increasing vehicle complexity, we may be entering the golden age of vehicle repair and our numbers say it may be so. So, vehicle repair, it's a great place to operate for our Tools Group and for our Repair Systems & Information Group, RS&I. And we believe it's only getting better.

Now, let's talk about the critical industries, where Commercial & Industrial, or C&I, takes Snap-on out of the garage, solving tasks of consequence, representing our most significant international presence. It's an area where we're, I suppose, most subject to global headwinds, but the news is still reasonably encouraging. The critical industries kept rising across sectors, aviation, education, heavy-duty fleets, general industry and natural resources, all up. And the military, once down, is now rebounding with high demand.

And for geographies, North America was strong. Europe was improved even in the face of the ongoing war in Ukraine and the revenue disruption of the Brexit, and Asia Pacific remained mixed, variation

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across the landscape. But overall, the critical industry markets of C&I showed significant and broad positives, every sector. The first quarter is marked by substantial strides in that arena, and we see more opportunity on the horizon.

We believe there's abundant and ongoing potential all along our runways for growth, enhancing the van network, expanding with repair shop owners and managers, extending to critical industries and building in emerging markets, leveraging our expansive product line, wielding our strengthening brand and deploying the increasing understanding of the task, connecting to the customer, standing face-to-face in the workplace where the tasks are performed, observing the work, turning that insight into innovative new products and summoning the future for professionals. And we amplify that endeavor by applying a generous helping of rapid continuous improvement, or RCI, as we call it, driving our productivity and our margin upwards. So, that's our view of the market.

Now, let's turn to the groups. In the C&I Group, sales of $363.8 million, including $12.5 million of unfavorable foreign currency, increased 7% to last year. Organic sales were up 11.1% with double-digit gains in critical industries and specialty torque, that precision leading the way. C&I's operating income of $55.8 million, including $2.0 million of unfavorable foreign currency, represents an increase of 22.1% over last year, and the operating margin was 15.3%, up 190 basis points from the 2022 level, promising numbers.

C&I demonstrated considerable growth, despite the ongoing uncertainty across geographies. One of the factors that's been attenuating C&I in the recent past was the impact of supply turbulence. You heard me say it on the calls, the customized kits with many different products are vulnerable to availability disruption. And one of the drivers behind the C&I rise were the improvements along the supply chain. During the period, we started to clean the logjams and reduced the impacts. The first quarter is evidence of that progress.

For some time, we've said that the demand in critical industries have been strong. It continued in the first quarter. And that positive is rooted in innovative products designed specifically for making a difference in critical tasks. One example is our new ATECH ¼-inch Drive Flex-Head TechAngle Micro Torque Wrench-it's sure a mouthful, but it's a great product. It's aimed directly at aircraft repair where the necessity for torque precision is rising, the need for power is increasing, and repair in tight spaces is becoming more common. Our new unit works on all three fronts.

The new wrench is almost a foot long, but less than an inch in diameter, configured to facilitate access deep inside engine compartments. It's also equipped with a 15-degreeflex-head design, allowing it to avoid obstacles. And it uses our durable 72-tooth gear mechanism, enabling the tool to operate with small rotations when the barriers restrict motion, making it tough to wrench. The new ATECH has power, significant power, reaching 300-inch pounds, expanding the range by 20% and increasing the number of applications that a tool can cover, consolidating tasks from multiple devices into one convenient unit and eliminating changeover time. That's providing a nice productivity gain.

The unit has four alert modes, LCD, LED, vibratory and audible. Those four prevent over-torquing, even when the visibility is low, and the space is constrained. And when combined with the unit's accuracy of plus or minus 2%, the features serve to keep the fastening right on spec. The ATECH, accessibility, power and accuracy projects throughout the aviation sector. It's another hit product that helped drive C&I upward in this quarter. Well, that's C&I, on the rise, higher sales, stronger profits, powerful products and more to come.

Now on to the Tools Group. Sales of $537.0 million, up $24.9 million, including $7.1 million of unfavorable foreign currency, registering a 6.3% organic gain with high single-digit increases in the U.S.

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and a low single-digit rise in the international network, and the operating margin-the operating margin was 24.5%, up 180 basis points against 80 basis points of unfavorable currency, boomshakalaka! This was a great number for us. We're really optimistic and encouraged by this. The vehicle repair markets are strong and resilient, and they trace an ongoing path of abundant opportunity. And once again, the Tools numbers back it up.

But beyond the quantitative evidence, I was just with some of our van drivers last week, and their view was incandescently positive. That's the only word I can use, without equivocation or without question, they say shops are busy. All our product lines are in high demand and their technician customers are brimming with confidence. It seems like the people of vehicle repair from top to bottom have great expectations for the way forward. And that positivity is evident in the continuing enthusiasm for big tickets, longer payback items, diagnostics and tool storage boxes. They continue to be major contributors to our results. You can see it in the success of the top of the line ZEUS+ handheld diagnostics units. You can find it in the reception of our latest addition to the EPIQ tool storage lineup.

The 68-inch EPIQ limited edition box, toolbox, we call it the Neon Stinger. It's generated considerable excitement with its eye-catching look, a gloss black body with the newest color in tool storage trim, neon hi-viz. I mean, this baby pops. Even at a less than bright light in, say, the corner of a shop of a repair shop, it stands out any place, giving the techs a chance to make a statement. And it's not just the glow. It also offers a range of powerful functionality. The speed drawer providing customizable organization, a power drawer with securable charging space, an LED power top spanning the entire length of the box, fully illuminating the drawers and the tools making them shine like the jewels they are.

The Stinger, it also offers 15 power outlets and 6 USB ports, all to ensure the tech's cordless tools, lights and accessories are always charged and ready to go. I'll tell you; demand was strong, and the Stinger was a Snap-onmillion-dollar hit product in the blink of an eye. So, the Tools Group, robust demand in all product segments and the momentum train just kept running throughout the quarter.

Now let's speak of RS&I. Sales reached $446.6 million, up $48.4 million or 12.2%, including $6.0 million in unfavorable foreign currency. Organic activity advanced 13.9% with double-digit increases in undercar equipment and OEM businesses is driving the gain, two big contributors. RS&I operating earnings were $104.6 million, rising 14.2% over last year, and the operating margin was 23.4%, up 40 basis points. Once again, this quarter software products and subscriptions were a significant plus. Along those lines, our Mitchell 1 division responsible for providing repair information software to independent shops, continued to succeed, pursuing customer connection and innovation by bringing great new improvements to shop efficiency.

And an example is at this year's meeting of the Heavy-Duty Technology and Maintenance Council in Orlando, Mitchell 1 introduced our powerful wiring navigation features specifically for trucks. It was immediately clear to large truck professionals that our new software would make it much easier and quicker for technicians to navigate the challenges of electrical issues on today's ever more complex vehicles, whether powered by internal combustion or battery cells. The feature makes a real difference. It's a significant aid to the truck repair world, enabling quick transition from one wiring diagram to another, following the wire without interruption between views. This is a significant time saver for the techs across the industry and the shops are noticing.

Mitchell 1 just released another great product. It's an automated work package function for its collision repair software. The new system gathers into one screen all the relevant information needed for collision jobs, overhaul procedures, illustrations and diagrams, all retrieved with one click of the button. One of the difficulties in collision repair is the multifaceted nature of the task. You need part details,

Snap-on Incorporated April 20, 2023, at 10:00 a.m. Eastern