Nick Pinchuk - Chief Executive Officer Aldo Pagliari - Chief Financial Officer Sara Verbsky - Vice President, Investor Relations

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

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

Thanks, Sara. Good morning, everybody. 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 and our markets, robust and promising and 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 with the 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 runaways for growth and for improvement. Our reported sales on the quarter were 1,081.4 million and they were up versus last year, $357.1 million or 49.3%, including $20.6 million of favorable foreign currency change 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 million of restructuring charge. 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…

Thanks Nick. Our consolidated operating results are summarized on slide six. The second quarter of 2021 exhibited solid financial performance, particularly as compared to last year's heavily pandemic impacted second quarter. The results also compared favorably with the second quarter of 2019, which being a pre-COVID-19 time period may serve to be the more meaningful baseline. Net sales of $1,081.4 million in the quarter increased 49.3% from 2020 levels, reflecting a 42.5% organic sales gain, $19.6 million of acquisition related sales and $20.6 million of favorable foreign currency translation. Sequentially organic sales improved by 4.5% as compared to the first quarter of 2021. Additionally, net sales in the period increased 13.7% from $951.3 million in the second quarter of 2019, including a 9.3% organic gain, $23.0 million of acquisition-related sales, and $17.2 million of favorable foreign currency translation. Consolidated gross margin of 50.2% improved 310 basis points from 47.1% last year, which included 30 basis points from restructuring costs. The gross margin contributions from the higher sales volumes and benefits from the company's RCI initiatives were partially offset by 20 basis points of unfavorable foreign currency effects. Operating expenses as a percentage of net sales of 30.1% improved 440 basis points from 34.5% last year, which included 20 basis points from restructuring costs. The improvement primarily reflects the benefits of higher sales volumes, partially offset by higher stock based cost and 70 basis points of unfavorable acquisition effects. Operating earnings before financial services of $217.1 million compared to $91.1 million in 2020, reflecting 138.3% year-over-year improvement. As a percentage of net sales, operating margin before financial services of 20.1% improved 750 basis points from 12.6% last year, which included 50 basis points for restructuring costs. Financial services revenue of $86.9 million in the second quarter of 2021 compared to $84.6…

Thanks Aldo. Well, at the beginning I said I would speak on what this all means, I want to try. First, it means that Snap-on and its markets are resilient. The virus, probably the greatest threat to our society and to business and in many decades it was a great shock. Miles driven down big dealerships, many furloughed, no travelers, aviation, no travelers, oil and gas and free-fall [ph] and education, virtually little need for equipment, nobody is in the classrooms, and yet we weathered this shock without trauma. The credit company stepped in with just the right bridging at just the right place for customers and franchisees and our direct selling vans kept rolling, quickly accommodating to the environment. Snap-on kept investing in our product, our brands and our people, and we accommodated and recovered to post four straight quarters of above pre-pandemic results, tracing a B shaped recovery and emerging from the height of the storm stronger than we entered, resilience against the greatest business threat in memory. But it's more than resilience, more than bounce back, it also demonstrates great flexibility. As the world passed through this shock, through accommodations of psychological recovery, change was the order of the day and Snap-on adjusted. Fuel by our fortified advantages and product brand and people, we accommodate it. The pandemic limited face-to-face interaction. We expanded virtual contact and came away with some long term social media tools that will enable our franchisees for some time. When technicians focused on shorter pay back items, we gave them hand tools and power tools and torque. When repair leaned away from maintenance to complex repairs and the shock, we provided ADAS calibration tools and intelligent diagnostics and helped our franchisees expand their selling capacity to manage those more complicated offerings efficiently. When…

[Operator Instructions] Our first question comes from Bret Jordan with Jefferies.

Hey! Good morning guys.

Good morning.

When you think about the mechanic in the tool segment, you know I guess demand has been very strong, we're hearing a lot about labor rate inflation. Are you seeing a real change in their buying patterns that they are more liquid than they have historically been, and you know more biased to pay cash for higher ticket items I guess?

I think it's a combination of that. I think they are. I think they are and our franchisees are more flush and therefore they are able to underwrite the shorter payback that even for bigger, even for a medium ticket items which might have going on EC before the franchisees are willing to underwrite it and let them pay RA. I do think the technicians are kind of – have good cash, because the business has been going well for quite a long period of time and they are interested in continually investing in tools, so you see that as a factor. I mean that's certainly a factor in the business. And one of things we see is, is that you'll notice that RA is very strong versus EC in this quarter and we see that as you know the technicians are buying and still have capacity to buy more in the future, because they have borrowing capacity under our EC.

When you think about the technicians as they relate to this next round of stimulus on the child tax credits, do you have any demographic color as to whether they are more or less likely to have kids that are going to give them a stimulus check?

You know, I don't know, the technician population is pretty spread. I wouldn't say they are more or less. In fact I think they are – I think they are the kind of the average, the every man. There are old technicians and young technician, so I don't think there's any particular concentration. You know you don't go into a garage and see all young people. You don't go see all old people either, so I don't think there's any particular position in that and they have some kids, but not different than the regular population. By the way, you know Aldo has to apologize for his voice. He was at the Deer District overnight at the Bucks game, so he's a little under the weather.

Thanks guys.

Sure.

Thank you. Our next question comes from Curtis Nagle with Bank of America.

Thanks very much. Just a quick one. You just – I got to ask this, because you brought it up a couple of times in the prepared remarks about new social media tools. Could you expand on what you're talking about, what these tools are, your targeting new customers? [Cross Talk]

They are no so much – sure, they target new customers, but what I’m really referring to hear without – I didn't want to get into in the remarks because there’ll be a lot to say and I don't. Really what this is we used social media before, but in the pandemic we realized a more effective way to use them was to pre-brief customers, in other words to contact them. You know at first we started out by saying, okay, we want to stay in touch with our customers via social media or any electronic means that could do it at a distance, but then we realized, Boy! It's a powerful tool for making for sales efficiency when you're actually in front of them. Because what you can do is contact them on the social media, you have a relationship with them, you can pre-brief them about how a great new prod – what the elements of a particular new product is, like the 14.4V power tool I talked about or the Techwrench I talked about and then you can also pre-brief them on any promotions we might have. And so then when you're actually spending the time in front of the technician, you can spend your time closing the deal. This kind of shrinks the time and so it takes some of the pre-sell out of the face time and makes it more efficient, that's what we're talking about here. We learned how to do that very well in this – in the pandemic and that's going to serve us well. And as part of the idea, remember I always said that the pacing element for sales through the tools group has been the franchisees time where they are hitting new limits. They are up 17% versus pre-pandemic levels and it's because we've expanded their capacity.

Got it, okay. And just you know a follow-up, just any general comments in the U.S. tools group in terms of competition with your – well your close competitors Matco and anything – any notable changes relative to your last quarter?

Jeez, I don't know. I can tell you – you know I just spent. We were – Aldo and I were just in California talking to our franchisee. You know we were out there visiting plants and we visit franchisees and I was at the NFAC at our Algona plant and I was like, those guys think they're crushing it. So I don't know what that means in terms of market share, but it sounds good to me.

Got it, okay. Fair enough. Thanks very much.

Thank you. Our next question comes from Scott Stember with C.L. King.

Good morning, guys and congrats on the Bucks win.

The Bucks, yeah this is NBA Championship Headquarters right here.

Just talking about in tools you guys said that everything was up pretty much. It sound like tools led the way, hand tools. Can you talk about the diagnostics? [Cross Talk]

Excuse me Scott, I didn't actually say that. Hand tools did not lead the way this quarter. It was up big, but actually the best year-over-year number was tool storage.

Oh okay.

Yeah, but they were all big. I mean when you compare it to 2020, everything looks great you know. I mean it's all great, that was the nature of downturn. But there is no doubt, what I tried to say with that, all products, all geographies, just our way of saying that tools group had a gangbusters quarter.

Got it. And any comments on tools, I mean on sales off of the van versus sell-in. The last couple of quarters you had sounded like it was pretty much in line.

Yeah, I think Aldo said – yeah, they are generally holding in line and like Aldo said, it was what, you know we were up 17% versus pre-pandemic levels and sales of the van were up 21 I think or something like that. So I think you know it's going pretty well, just rolling through the van.

Good. And lastly on Europe, European within Snap-on tools, tremendous growth there. Maybe just speak to what's been driving the recovery there and did you give – for Europe at least, are we back to pre-pandemic levels for tools?

Yeah, Europe is above pre-pandemic levels. Now, okay to be fair you know, Europe wasn't all that hot you know in 2019, but it's still clearly above the pre-pandemic levels. In other words it's offset whatever the impact of the pre-pandemic was. The tools group is pretty much across all geographies, which is kind of interesting, because there ain’t no stimulus in the U.K. and Australia and Canada.

Got it. Thanks again for taking my questions.

Sure.

Thank you. Our next question comes from Luke Junk with Baird.

Good morning Nick, Aldo. Good talking this morning.

Hi Luke.

So first question I had, a near term question. As we get further into the psychological recovery post the onset of COVID, we saw an increase in originations both year-over-year and sequentially this quarter. Nick, as you put your finger on the pulse of bigger ticket purchases, tool storage especially, do you feel like we're getting closer to or may be already at an inflection point in terms of mechanic attitudes around discretionary spend right now?

Yeah, I think we are. I mean I don't know. Who – you know it could be famous last words Luke you know. You got a lot of people talking about the delta variant and all this stuff, I don't think so. I think the people of work, the people in the factories and the people in the garages, like I’ve said on other calls, are kind of thinking you know they've weathered the storm you know and they're not going to get shocked again no matter what, and so I think they kind of changed their level, they are starting to recover, and so you start to see people – you know we saw it in our tool storage numbers. One of the reasons why we took the franchisees, you know the franchise council to Algona, our tool storage plant, is everybody is screaming for more tool storage. Now, one of the effects was that when we entered the COVID they sold down their used inventory – their used boxes that they had taken in trade you know, so they had a lot of that rolling out, but still they are looking for boxes now, so I think things have turned. The question is, are the franchisees so flush with cash that they want to finance some of those boxes or some of them, sometimes they sell them a locker, which is not quite as expensive as a box and they can afford to finance those kinds of things. But I do think, when I talk to franchisees, they are telling me that they’ve kind of turned the corner. They’ve turned the corners probably to – maybe too binary a word for it you know. We were coming back though. Things are pretty optimistic in the shops.

Good, that’s helpful. And second, wondering, looking forward here, how we should think about the impact of the franchisee conference this year. What I'm wondering is both in absolute terms, i.e., what is that event going to look like this year, and also in relative terms given the unique nature of last year's virtual conference.

Yeah, look it's going to be bigger than any of the conference, we think, who knows? We still got a few weeks ago, but registrations are higher than they've ever been. When I talk to the franchisees, they are really excited about going, no matter who I talked to. I heard – they were always kind of optimistic about it, but this one is really big, because it's – you know we're celebrating our 100th really and they’ve been kind of – and they’ve been away for – they didn't have it last year, so they are really, really talking about it, so it’s going to be bigger I think, and so what will the effect be. I’ve said for dogs age on these calls that the third quarter can be a little bit variable, because there's a lot of wind – you know how many people go to the franchise conference, do they take more weeks, what happens in Europe and so on, but I'm telling you, I am not forecasting any weakness or anything like that. I'm just telling you, you never know how those things are going to turn out, but I like how we’re entering the quarter, I like our moment you know. So I think whatever happens, we'll make the best of it. We're in a great position to navigate the quarter. Hello? Okay, he was – he had to go to the Bucks celebration, so okay, don’t ask right.

Thank you. Our next question comes from Christopher Glynn with Oppenheimer.

Thank you.

Okay Chris.

Aldo, feel better.

Yeah, I got it Chris, I got it covered.

Alright. So you know great commentary on the momentum and the overall buzz around the operations. The counts are kind of binary into the back half and you know your language around tools is that the momentum is so robust, you know storage sold out. So you know I think you were a little more hedged the last couple quarters about what current run rates mean for continued growth, but what I'm hearing is you're very confident and you can continue to compound not just overall, but at SOT. So I just wanted to bounce that off you, if I’m kind of hearing you right.

You know you're not going to get me to forecast the quarter, you know what I mean. I'm not going to say you know we're going to build on a 17 – they were upward over 17% increase over pre pandemic levels. But all I'm saying is the tools group, the reason why we say all products all geographies is we can't find anything wrong with it, and we always can find warps in some places you know, this is a good, you know what I mean, so we like our moment. How that plays out in the third quarter, I'm not sure. You know you've been on the call. We’ve been on these calls a long time and I've always said that the third quarter is not – I'm saying I like our momentum. I think we're going into the quarter really strong. We feel stronger than last quarter, but I will add that I've always said that the third quarter is not necessarily a trend indicator, whether it's way up or way down, it has to do with all that windage, you know how many how many vacations to people take in Europe is one big thing, and the franchisees are allowed to take the same vacation as last year or more, I don't know, but I do think I haven't seen the tools group this strong.

Okay, great. And just a more pointed question. Are you seeing an increased uptake in interested and franchisees adopting second associates over the past couple months.

Yeah well, if you – you know I don’t know. I think – look it’s starting to come out of the thaw, because I think you can imagine why people are a little more reluctant in the COVID. There’s a lot of interaction questions, a lot of viscosity and that kind of thing. I think they grew by 2% to 2.5% sequentially, so that's not bad I think. So whether that has to do with the thaw or actually people getting more excited, I don't know. I do think when I talked to franchisees, they do more quickly go to the conversation. Gee! May be I ought to get a – I’m doing so many, so much business, maybe I better get a franchisee. The guy in California was just talking about that. This guy just started like a few years ago. He signed up for a competitor and then he was talking to the guy and he said, you ought to go – the guy was sold him the thing. He wanted to go to the best, so he came to Snap-on and the thing is this guy is so pumped, he is going up so far, he's talking about, gee, maybe I could do more with an assistant. I need an assistant and a lot more and more people are doing that. So we would expect some expansion in this area.

Great! Thanks.

Sure.

Thank you. Our next question comes from David MacGregor with Longbow Research.

Hey! Good morning everyone. And Nick, congratulations on a really strong quarter. Just outstanding growth, outstanding results across the enterprise. So I guess I wanted to understand, just a couple of housekeeping questions. What was the changer of provisions? If you mentioned that, I missed it.

Change? Sorry Dave, change of provisions?

Yeah, a question for Aldo. Didn’t you…

Specifically David, we said that the charge offs were lower by $2.8 million. But the charge-offs are just one of the indicators. When you look at your overall provision for losses, its down about $9 million to cut to the chase, but that's based on an assessment of what is the reserves side that we think we need for expected losses over the duration of the portfolio, which runs a little over four years on average, so that's the change of order. But again as you’ll see – you'll get more information obviously when the Q comes out, but if you look at charge offs are lower, the 60 plus day delinquency rate is lower, the net trailing 12 month losses are lower. The recoveries are better, the non-performing loans number are lower, the amount of past due accounts are lower. So you’ll put that all together and that what’ll arrive – lets us arrive at the conclusion that the reserves were able to be reduced somewhat.

Sure, that makes sense. But $9 million is the number, that’s what I was looking for. I guess my question is, I guess going back to the whole discussion around originations and Nick, you talked about the fact that the technicians are just in better shape today than they've been in a while. I guess you know a lot of stimulus and a little wage growth will do that. But I just wondered right now to what extent you think the slower origination growth may be attributed to technicians. Again, because they're in better shape, just qualifying for lower cost credit from alternative sources and they are just going on.

Well I, you know I have a tougher time figuring that out. I don't think so though, because it might be, it might be in the U.S. I don't think – I actually don't think David, I don't think stimulus is a much of a factor, maybe some, because you know we have pretty good growth in international operations. We don't see as clear a pumping of the money into the economy. So when we look at it across the world, it doesn't seem as though that specific characteristic of America is a factor. I don't know – maybe, but I tend to think it's more a combination of the franchisees feeling more flush. You know you kind of got an interesting interaction. You have people who at first were leaning toward shorter payback items, and maybe that expands to away from hand to you know past handled tools up into lockers or spiffier [ph] tops for tools storage boxes which are more, which are more fundable by the franchisees over time. Franchisees like to build their shorter term credit, so they like that, and it is true that the technicians do have more cash. I mean they've been working all through the pandemic, and so that that's kind of built up in a relative cash. It could be eligible for other credit, we have no way of knowing that. I don't hear anybody mention it though. Now, I talked to a lot of franchisees and they may not necessarily mention, but we haven't heard, we have heard that particular thing come up in any environment, so I don't know.

Yes, it’s an interesting dynamic. I guess we’ll watch and see where it goes. You talked about the strength in storage, which I guess was surprising to hear and certainly strength to me is counterintuitive given – it's hard to think of another product you sell that would be more carbon steel intensive, and given you know cold rolled steel now hitting $2,000 a ton this week, you know there has been an awful lot of inflation which I'm assuming you past through. So is there just no elasticity there in storage or are legacy storage sales kind of flat and what were you seeing the growth on – why this new product introductions?

Yeah, no it was a strong quarter in storage. I think somewhat, I'd like to think our offerings are kind of spiffier than they have been. You know I talked about this extra wide, the 72 inch master series in the call with the lighted top, those things are statement makers in garages, and I think that having refrained from some this for a period of time, technicians are getting more anxious to buy them and they have the money and they get are getting a little more confident, so they go out and look at them. That’s really – I think that's the situation. I wouldn’t say there is no elasticity, but I think you know – I mean is there elasticity with new cars. I mean the thing is people are buying new cars and reused cars and so on. I mean so I think when people want something in this category, which is I’ve often said, I think you and I have had conversation that a tool storage box like car, so people tend to want them and they’ll pay a little bit more. It’s not no elasticity, but people will go up and pay from them, that's my analysis. It's really the psychology and the need. A combination of need and psychology and our biggest cycle – the product we have, which is the biggest psychological factor in people buying is tool storage. Now, all I can tell you is, our tool storage plant is sold out, sold out.

Yeah, that’s fantastic, that’s great. I guess, you talk about the strong growth in storage. How much of that growth was from some of the new products? I guess what was the legacy product growth looking like?

Well look, I think when I say – I don't know, I don't have that number at my fingertips, but there's a lot of wrinkles you can put in tool storage you know. Like we wouldn't necessarily call a new color a new product. On the other hand, if you roll out a new color, remember when we rolled out purple, there was an explosion you know, so some of that happens. It just has to do with the wrinkle that makes it, oh! This is the best box in the shop or it’s the newest thing, that's really what happens. So we are constantly doing that stuff.

I just want to wrap up, one last question, and I guess you know you kind of touched on this earlier in your conversation, so maybe I'll ask the question in a slightly different way, but I’m just thinking about tool segment growth sort of going forward and prior to the pandemic tools were struggling with growth for a rather extended period of time, and certainly we are coming short of that 4% goal that you’d set for the segment. Now, you know through the last four quarters, you know just sort of the easy compares are behind you, but you deliver remarkable growth through that period of time, including on a two year basis just to be fair. I guess if we think about the growth potential for the business now that you know you have four easy compares that are behind you, I guess what has changed the support or sort of growth going forward and what gives you confidence that the segment can track forward at greater than 4% when you were having so much [Cross Talk].

Okay, I’ll tell you, it is this way, a simple statement. We figured out new ways to expand the selling efficient of the franchisees. This has happened before, there's a precedent for this. If you go back and you look before that term which you told, you know you said that they struggled for growth, and it’s a fair characterization in some ways, between 11 and 16 the compounded annual growth rate was 7.2% and that was fueled by the expansion of the capabilities we found artifices [ph] would do that, the vans, the Rock 'n Roll Cab and so on, and in this case, we believe we’ve broken through another ceiling to a new level and it's provable by the absolute amounts that are flowing through the vans at this point. So that's certainly true for us and so we keep – we've always said, keep pounding that and we can sell more. We're not bound by the market; we are bound by our ability to sell. And so that's part of it, that's part of getting those franchisees to be able to deal with these more complex products, and we think we've made a step change over the last – now we’ve been investing in it for like three years or something. You know trying to get that, but we think we've done it, and we think this is probable by the absolute amounts. Whatever the source of that volume is, it proves that the franchisees can accommodate it, they couldn't before.

Thank you. Our final question comes from Gary Prestopino with Barrington Research.

Hey! Good morning everyone.

Hey Gary!

Most of the questions have been answered, but I guess I just wanted to pick up on some of the things the last questioner was asking, as it relates to the margins. You know it looks like your tool and C&I margins from Q2 ‘19 have expanded fairly significantly, particularly the tools group. I mean is there anything that's inherently changed in the business or is that just the function of, that's just the leverage of the business with the sales growth?

Well look, I think there is leverage you know in that situation, so that's good. I think it would be a mistake to overlook the idea that embedded in there is some pricing to offset. You know we’ve got a whole bunch of – we've got material costs in there. I don't want to get in as its documented, but we got a great dollar for material costs. Anybody who's reading the press sees that the varying levels of steel we use from steel rod to plate steel to sheet steel and on have gone up tremendously. The costs of freight are up tremendously, yet through pricing and RCI we shove them aside and we got that 20. So yes, there's leverage, but there's also great RCI in there that’s dealing with the material cost, that’s one thing to think about. So you got a combination of those and you have some other costs in there. I think we talked about it, I think you will see some of it when you see in the Q, but I do think it's a combination of those working very well. 21.4 I think might be the highest we've ever seen in the tools group, I don't know, but we kind of hope to get the highest every quarter actually. So I don't like to say that, but we're pretty pleased with that.

Okay, thank you.

Sure.

Thank you. This concludes today's question-and-answer session. I'd like to now turn it back to our presenters for any closing remarks.

Thank you all for joining us today. A replay of this call will be available shortly on snapon.com. As always, we appreciate your interest in Snap-on. Good day!

Thank you ladies and gentlemen. This concludes today’s presentation. You may now disconnect.