Snap-on Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 2, 2022

There are 8 speakers on the call.

Operator

Good day, and welcome to the Snap on Inc. 2021 4th Quarter and Full Year Results Conference Call. Today's At this time, I would like to turn the conference over to Ms. Sarah Verbsky, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, Christina, and good morning, everyone. Thank you for joining us today to review Snap on's 4th 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.

Speaker 1

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 otherwise state management's or the company's outlook, plans or projections conference call are forward looking statements and actual results may differ materially from those made in such statements.

Speaker 1

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 conference call is 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?

Speaker 2

Thanks, Sarah. Good morning, everybody. 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. Conference call was encouraging. It affirmed the characteristics that make Snap on the company we know it to be.

Speaker 2

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 testify to just that. Our reported sales in the quarter of $1,108,300,000 were up conference call is 3.2%, including $12,200,000 from acquisitions being offset by $3,000,000 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 conference call is a clear and unmistakable upward drive.

Speaker 2

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 conference call

Speaker 3

is being recorded over pre COVID levels.

Speaker 2

The quarter also bears the marks of the step on value creation processes, Safety, quality, customer connection, innovation and rapid continuous improvement or RCI as we call it, all combining to offer significant progress. Progress it was. OpCo operating income of $232,200,000 was up $16,000,000 from last year and the OI margin conference call was 21%, an all time high, up 90 basis points from last year and 3 10 basis points for 2019 all achieved by overcoming the challenges of this day. For Financial Services, operating income of $67,200,000 was down conference call is from the $68,500,000 of last year, but delinquencies in the quarter were below both 2020 and those of 2019, conference call is an ongoing testament to our unique business model and its ability to navigate through the most threatening of environments. Conference call and the combination of the results from HFOTCO and Financial Services offered an overall consolidated operating margin of 25.1%, 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.

Speaker 2

Well, those are the numbers. Now let's speak about the markets. We do believe the auto repair environment continues to be favorable. Conference call is being recorded. In the areas serving vehicle OEMs and dealerships, we do see some turbulence.

Speaker 2

New car sales around the world remain mixed with China generally progressing, call is a very strong quarter. Overall volume remained below the 2019 levels and some OEM projects aside, however, dealership repair, maintenance and warranty are all healthy. Techs conference is uniformly sky high. Based on what we hear from our franchisees, shop owners and technicians optimism and independent repair shops continues to be strong and our sales in that sector may reflect that confidence. So we believe on balance, vehicle repair is a great place to operate for our Tools Group conference call and for our repair system information or RS and I Group.

Speaker 2

For the critical industries where our commercial and industrial call has 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 and I markets as holding their own against the turbulence, step 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.

Speaker 2

We believe our product lineup 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 conference call is more hit $1,000,000 projects than ever before. We've endeavored through the virus era to maintain our product, conference call is being recorded. In the virus area, we've endeavored to maintain our product, our brand and our people.

Speaker 2

And we believe that continuing commitment has served us well, offering positive results and creating substantial momentum for the days ahead. Conference call is a parent in our full year results. Sales of $4,252,000,000 up 18.4%, including an organic increase of 19.2 percent of the of pre pandemic 2019 as reported earnings per share for the year conference call were $14.92 up 30.4 percent or 28.3% as adjusted for the non recurring restructuring in 2020 and up 21.7% as adjusted from 2019, conference call is now for the operating group. Let's start with C and I. 4th quarter sales of $358,700,000 for the group were down 5 call is $7,000,000 including $4,100,000 of unfavorable currency versus 2019 sales grew 5,800,000 conference call is reflecting primarily acquisition volume and currency impact.

Speaker 2

The period saw a recovery in Asia with Indonesia. In the quarter, we saw we did see a 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 conference was achieved in our Precision Torque line and that progress is but that progress was more than offset by lower critical industry activity, is $6,100,000 including $1,200,000 of unfavorable currency. The gains in Asian and torque were more than offset by the reduced military activity and the industrial kitting constraints.

Speaker 2

As I mentioned, however, specialty torque operation did register continuing progress, conference call is driven by innovative new products developed through customer connection and observational work, great offerings like our recently released QB4 RO line of 3 quarter inch Drive Breakover Torque Wrenches. This wrench is capable of accurately fastening from 4.50 to 7.50 pound feet. It's designed specifically for heavy duty applications, conference call is being recorded. The new unit combines our Norbar, our new recently vehicle ratcheting mechanisms of our Tensea plant were reengineered for higher tension heavy requirements and were directly matched to our unique Norbar conference call is a breakover device, which provides a clear indication that the torque target has been reached, ensuring reliable accuracy The ratchet design with our patented steel head is rugged, capable of withstanding very high stresses conference call 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.

Speaker 2

The Snap on QB4R, we like to say strength, conference call is now open. And as you might expect, sales have been strong. As the need for precision increases, C and I mixed results, but significant areas of progress boding well for its future. Now let's go on to the Tools Group. Sales of $504,800,000 up $9,900,000 including favorable currency and a $7,900,000 organic rise from continued expansion in the U.

Speaker 2

S, a positive that was somewhat attenuated this quarter by low single digit conference call is being recorded. The Tools Group rose 21.5% and has been up now

Speaker 3

call is from pre pandemic levels

Speaker 2

for 6 straight quarters and the operating margin was 21.9%, easily one of the highest ever, up is 300 basis points from last year, all despite the ongoing challenges of this day. Conference call is being recorded. In the quarter and throughout the year, the Tools Group results continue to confirm the leadership position of our van network. We believe the franchisees are growing stronger and that's evidenced in the franchisee health metrics we monitor each period. Conference call is on an unmistakably favorable trend and that positivity was acknowledged by multiple publications, all listing Snap on as a franchise of choice.

Speaker 2

This quarter, we were once again ranked among the top franchise organization both in the U. S. And abroad, recognized by the Franchise Business Review, which in its latest ranking for franchisee satisfaction listed Snap on as the top 50 franchise for the 15th consecutive year were also featured at number 3 among all franchises in Entrepreneur Magazine's 2020 list of top franchises for veterans. And abroad Snap on was ranked number 2 in Elite Franchise Magazine's Top U. K.

Speaker 2

Franchises. Conference call. The judges in that ranking state that the durability in an innovation shown in the face of unimaginable circumstances are what has decided this year's top 10 and the panel was right on. Durability and innovation are what makes the Tools Group conference call is clear. This type of recognition is a point of pride for us, reflects the fundamental strength of our franchisees and of our van business in general, but it would not have been achieved without a continuous stream of innovative new products developed through conference call is being recorded and the result of our insight in experience in the changing universe of vehicle repair.

Speaker 2

Customer connection gives us a great window on that changing universe and we put it to good use. Call, our sales of hand tools were up nicely in the quarter and of course new products led the way there. Our innovative 30, LS, DM, half inch drive impact sockets were a significant contributor, born out of customer connection, observing the work in automotive shops, conference call. The special sockets, they range from 17 millimeters to 22 millimeters come with an extra deep hex, conference is up to 3 quarters inch deeper accommodating the lug nuts with decorative caps that are becoming so common on the latest models. The new sockets provide the clearance needed to fit right over those conference call.

Speaker 2

Without damage, grab the lug and enable quick removal without having to remove the caps. It saves Teck significant time over a day of repair activity that made right here in our Milwaukee plant. They were released Just this past quarter and initial sales have been gangbusters, I'm telling you. Making those sales have made that new socket line a hip product just in the volume in the 4th quarter, conference call. Now for RS and I.

Speaker 2

Volume for the Q4 was $392,500,000 up 8.7% including acquisitions and 5.5 will be offset by a decrease in our business focused on the vehicle OEMs and dealerships. RS and I operating margins of $97,200,000 rose included $1,000,000 of restructuring costs. Compared with the pre pandemic levels of 2019, sales grew 57,500,000 17.2%, including a $43,700,000 or 13% organic gain. Conference call is the RS and I gross OI margin of 24.8% compared with 24.9% and 26% registered in 2020 2010 respectively with the impact of acquisitions attenuating a generally positive balance for the operations. Conference call is being recorded.

Speaker 2

Again, software, products and subscriptions for RS and I were a significant plus. Along those lines, our Mitchell 1 division, providing software independent shops continue to succeed, pursuing customer connection and innovation, launching great new products to improve shop efficiency. Arce and I just added more powerful and exclusive features to its award winning Mitchell 1 ProDemand Auto Repair Information Software. As auto electronics have expanded, wiring diagrams have become of rising importance in vehicle diagnosis and repair. And conference call.

Speaker 2

The new Pro demand significantly advances what is already a clear lead for Mitchell 1 and diagram navigation, conference call is offering new features that provide interactive drop downs, display and connection data, allow easy movement to the next conference call will enable the seamless recall of previous viewed circuits should a look back be needed in the repair process. And as you might expect, the initial reaction to the new updates has been quite enthusiastic from both the shots and from the technicians. Conference call is all music to our ears. We keep driving to expand RSI's position with repair shop owners and managers, offering them more and more solutions for the day to day challenges developed by our value creation processes or added by our strategic and coherent acquisitions, and we're confident is a winning formula. So those are the highlights of the quarter.

Speaker 2

Doing what we expect to do. Continuing rise versus the pre pandemic levels, up more each quarter now for several straight periods, continued confirmation that StaffOn has emerged from the pandemic much stronger than when we entered with the momentum that we're confident will propel us to even higher heights as we move forward. Now I'll turn the call over to Aldo. Aldo?

Speaker 4

Thanks, Nick. Our consolidated operating results are summarized on Slide 6. During the Q4 of 2021, the resilience and continued strength of our business model enabled Snap on to close the year with another period of robust financial performance. The quarter also compared favorably with the Q4 of 2019, which being a pre COVID-nineteen time period, in some cases may serve to be the more meaningful baseline. Net sales of $1,108,300,000 in the quarter increased 3.2% from 2020 levels, reflecting a 2.3% organic sales gain and a $12,200,000 of acquisition related sales partially offset by $3,000,000 of unfavorable foreign currency translation.

Speaker 4

Additionally, call. Net sales in the period increased 16 percent from $955,200,000 in the Q4 of 2019, call is now available for the Q4 and full year results conference call. Today's conference call is now available for the Q4, including a 13% organic gain, dollars 20,900,000 of acquisition related sales and $7,100,000 of favorable foreign currency translation. In both comparisons, the organic gains more than offset lower sales for the military. Consolidated gross margin of 48.1% improved 10 basis points was 48% last year.

Speaker 4

The gross margin contributions from the higher sales volumes, pricing actions, 30 basis points of favorable foreign currency effects and benefits from the company's RCI initiatives offset higher material and other costs. For the quarter, the corporation continued to navigate effectively conference call is being recorded in the supply

Speaker 3

chain dynamics associated with the

Speaker 4

global pandemic. Operating expenses as a percentage of net sales of 27.1% improved 80 basis points conference call was 27.9% last year, which included 10 basis points of cost from restructuring actions. The improvement is primarily due to higher sales volumes, was partially offset by 40 basis points of unfavorable acquisition effects. Operating earnings before Financial Services is $232,200,000 compared to $216,200,000 in 20.20 $171,400,000 call is now open for 2019, reflecting an improvement of 7.4% and 35.5%, respectively. As a percentage of net sales, operating margin before Financial Services of 21% improved 90 basis points from last year is 3.10 basis points from 2019.

Speaker 4

The operating company margin of 21% represents the highest quarterly level of profitability in Snap on's modern day history. Financial Services revenue of $86,900,000 in the Q4 of 2021 compared to $93,400,000 last year, which included an extra week of interest income associated with the 53rd week 2020 fiscal calendar. Operating earnings of $67,200,000 decreased $1,300,000 from 2020 levels, reflecting the lower revenue, is partially offset by lower provisions for credit losses. Consolidated operating earnings of $299,400,000 increased 5.2% from $284,700,000 last year and 28.2 percent from $233,600,000 in is in 2019. As a percentage of revenues, the operating earnings margin of 25.1% compared to 24.4% in 2020 and 22.5 percent in 2019.

Speaker 4

Our 4th quarter effective income tax rate of 22.3% compared to 21.8 percent last year, which includes a 10 basis point increase related to the restructuring actions. Call is now open. Net earnings of $223,700,000 or $4.10 per diluted share increased $14,800,000 or $0.28 per share conference call is from last year's levels representing a 7.3% increase in diluted earnings per share. As compared to the Q4 of 2019, net earnings increased $53,100,000 or $1.02 per share, representing a 33.1% increase in diluted earnings per share. Now let's turn to our segment results.

Speaker 4

Starting with the C and I Group on Slide 7. Sales of $358,700,000 decreased from 300 The organic decrease primarily reflects a low single digit decline in sales to customers in critical industries. Within critical industries, improved sales into oil and gas applications. As a further comparison, net sales in the period increased 1.6% from 2016 levels, call is now expected to be approximately $8,700,000 of acquisition real sales and $3,800,000 of favorable foreign currency translation, was partially offset by a $6,700,000 organic sales decline. As compared to 2019, sales in our European based hand tools business were off mid teens.

Speaker 4

Gross margin of 36.5 percent declined 130 basis points from 37.8 percent in the Q4 of 2020, is primarily due to the higher material and other costs partially offset by benefits from RCI initiatives. While pricing actions have been taken in this segment to help offset the operating expenses as a percentage of sales of 22.5% in the quarter compared to 22.4% last year. Operating earnings for the C and I segment of $50,100,000 compared to $56,200,000 last year. The operating margin of 14% compared to was 15.4 percent a year ago. Turning now to Slide 8.

Speaker 4

Sales in the Snap on Tools Group of $504,800,000 increased 2% from $194,900,000 in 2020, reflecting a 1.6% organic sales gain and $2,000,000 of favorable foreign currency translation. The organic sales increase reflects a low single digit gain in our U. S. Business, partially offset by a low single digit decline in our international operations. Net sales in the period increased 22.6 percent from $411,700,000 in the Q4 of 2019, Reflecting a 21.5 percent organic sales gain and $3,900,000 of favorable foreign currency translation.

Speaker 4

Sales gains in the quarter were led by our hand tools category with strong performance sequentially as well as versus both the 4th quarters of 2020 2019. Gross margin of 43.9 percent in the quarter improved 100 basis points from last year, primarily due to the higher sales volumes, pricing actions conference call is expected to be a record record quarter and 60 basis points from favorable foreign currency effects, which offset higher material and other costs. Operating expenses as a percentage of sales 22% improved from 24% last year, primarily reflecting the higher sales and benefits from ongoing RCI and cost containment efforts. Operating earnings for the Snap on Tools Group of $110,500,000 compared to $93,600,000 last year. Operating margin of 21.9 percent improved 300 basis points from 18.9% last year.

Speaker 4

Turning to the RS and I Group shown on Slide 9. Sales of $392,500,000 compared to $361,100,000 a year ago, is reflecting a 5.5 percent organic sales gain and $12,200,000 of acquisition related sales, partially offset by $500,000 of unfavorable foreign currency translation. The organic gain is comprised of a double digit increase in sales of undercar equipment and a mid single digit gain in sales of diagnostic and repair information products to independent shop owners and managers, partially offset conference call is being recorded for

Speaker 3

its aftermarket and dealership repair shops.

Speaker 4

As compared to 2019 levels, net sales increased $57,500,000 from is $335,000,000 reflecting a 13% organic sales gain, dollars 12,200,000 of acquisition related sales and $1,600,000 is a favorable foreign currency translation. Gross margin of 46.1% was unchanged from last year conference call is expected to be a result of higher material and other costs. Operating expenses as a percentage of sales were 21.3% compared to 21.2% last year, primarily due to 150 basis points of is now available acquisition effects, partially offset by the impact of higher sales and 30 basis points from lower expenses related to conference call is $1,000,000 of restructuring costs that were recorded in the Q4 of 2020. Operating earnings for the RS and I group of 97 call is $200,000 compared to $90,000,000 last year. The operating margin of 24.8% compared to 24.9% a year ago.

Speaker 4

Now turning to Slide 10. Revenue from Financial Services of $86,900,000 decreased $6,500,000 from $93,400,000 last year, is primarily as a result of an additional week of interest income occurring in the 53rd 2020 fiscal year. Financial services operating earnings of $67,200,000 compared to $68,500,000 in 20.20. Financial services expenses of $19,700,000 were down $5,200,000 from 20.20 levels, primarily due to 5 point will support lower forward looking estimated reserve requirements. As a percentage of the average portfolio, financial services expenses were 0.9% conference call is at 1.1% in the 4th quarters of 2021 2020, respectively.

Speaker 4

In the 4th quarters of both 2021 2020, conference call is the average yield on finance receivables was 17.7% and the average yield on contract receivables was 8.5%. Total loan originations of $256,300,000 in the 4th quarter decreased $16,100,000 or 5.9 percent from 2020 levels, is reflecting a 3.6% decrease in originations of finance receivables and a 16.6% decrease in originations of contract receivables. Last year's extra week in the quarter contributed approximately $10,000,000 of finance receivable originations. As a reminder, revenues in the quarter are generally dependent on the average size of the financing portfolio rather than originations in any one period. Moving to Slide 11.

Speaker 4

Our quarter end balance sheet includes approximately $2,200,000,000 of gross financing receivables, including 1,900,000,000 from our U. S. Operation. The 60 day plus delinquency rate of 1.6% for U. S.

Speaker 4

Extended credit compared to 1.8% in the Q4 of 2020. On a sequential basis, the rate is up 20 basis points, reflecting the typical seasonal increase we experienced between the 3rd 4th quarters. As it relates to extended credit or finance receivables, trailing 12 month net losses of $41,100,000 represented 2.38 percent of conference call is at quarter end, down 24 basis points as compared to the same period last year. Now turning to Slide 12. Cash provided by operating activities of $222,700,000 in the quarter reflects 97.2 percent of net earnings and compared to was $317,600,000 last year.

Speaker 4

The decrease from the Q4 of 2020 primarily reflects higher cash payments for income and other taxes, conference call is an $85,000,000 increase in working investment, partially offset by higher net earnings. The change in working investment is largely driven by conference call increased receivables and higher levels of inventory this year versus a reduction of inventory in 2020. The increase in inventory primarily reflects higher demand as well as incremental buffer stocks and expanded levels of in transit inventories associated with the supply chain dynamics in the current macro environment. Net cash used by investing activities of $23,800,000 included net additions to finance receivables of $9,700,000 $16,300,000 of capital conference call is being recorded. Net cash used by financing activities of $154,100,000 included cash dividends of $76,100,000 and the repurchase conference call is being recorded for the Q4 and full year results conference call.

Speaker 4

Today's conference call is being recorded for the Q4 of $355,000 shares of common stock for $75,500,000 under our existing share repurchase programs. As of year end, we had remaining availability to repurchase up to an additional $454,900,000 of common stock under existing authorizations. The 2021 full year free cash flow generation of $872,600,000 represented about 104% of net earnings. Turning to Slide 13. Trade and other accounts receivable increased $41,600,000 from 2020 year end.

Speaker 4

Conference call. On a trailing 12 month basis, inventory turns of 2.8x compared to 2.4x at year end 2020. Our year end cash position of $780,000,000 compared to $923,400,000 at year end 2020. Expected cash flow from operations, we have more than $800,000,000 available under our credit facilities. As of year end, call is now available.

Speaker 4

There were no amounts outstanding under the credit facility and there were no commercial paper borrowings outstanding. That concludes my remarks on our 4th quarter performance.

Speaker 3

Conference call. I'll now briefly review a few outlook items for 2022.

Speaker 4

We anticipate that capital expenditures will be in a range of $90,000,000 to $100,000,000 In addition, we currently anticipate, absent any changes to U. S. Tax legislation, that our full year 2022 effective income tax rate will be in a range of is 23% to 24%. I'll now turn the call back to Nick for his closing thoughts. Nick?

Speaker 4

Thanks, Aldo.

Speaker 2

In these times of turbulence, we continue to rise based on the resilience of our markets, vehicle repair expanding at the shop level, conference call is being recorded. We are optimistic overcoming the postponement of essential OEM programs. Critical industries mixed, but with promising areas, Gains in general industry, natural resources and education and progress in emerging markets. Difficulties are in the air, conference call is being recorded. We're able to prosper nonetheless on the power of our strategic position, controlling the customer interface with our conference call is a wide product line and unique brand.

Speaker 2

And perhaps most importantly, we rose on the consistent and capable execution by our team, is spotlighting and as always our ongoing RCI. It's a combination that authored another positive performance and it's all is spelled out clearly in our numbers. Sales rising organically over pre pandemic levels by 13% with the last four periods conference call is up organically 8%, 9%, 11% 13%, expanding the gain over 2019, demonstrating

Speaker 3

call is now in the midst

Speaker 2

of multiple challenges, up 90 basis points from last year and up substantially more from 2019. And it all came together for an EPS of $4.10 call is up 7.3% from last year and 33% from the pre pandemic period, leading to a full year EPS of $14.92 new heights Despite the storm, it was an encouraging quarter and a year. The period clearly had challenges, conference call is being recorded. We were able to overcome maintaining our progress, extending our upward trend, and we believe that Snap on exits 20 team will continue to track progress throughout 2022 and well beyond. Now before I turn the call over to the operator, conference call.

Speaker 2

I'll speak directly to our franchisees and associates. Many of them are listening to this call. My friends, conference call is being recorded. You are the base of

Speaker 5

the success we've registered this quarter and this year.

Speaker 2

For the extraordinary progress you achieved, you have my congratulations. For the unique individual and collective capabilities you brought to bear against the challenges you have my admiration. And for the commitment you bring to our now and the conviction you hold in our future, you have my thanks. Now I'll turn the call over to the operator. Operator?

Operator

Will reach our equipment. We'll take our first question from Scott Stember with CL King.

Speaker 4

Good morning, guys, and thanks for taking my questions.

Speaker 2

Okay, Scott.

Speaker 4

To better frame things out, obviously, as The comparison is getting more difficult. Can you maybe talk about in the Tools Group in the U. S. On a 2 year stack and maybe also further flesh it out by tools and some of the other segments?

Speaker 2

Well, look, I think the Tools Group is demonstrating itself. I mean, if you look at the pre pandemic levels, it's been up now 6 straight quarters and it was up over 21% in this quarter. I think it was 21.5%. So it seems to be moving upwards. Strategic advantage of being with wide product line and unique brands to control the interface with the end customer, that's exactly what the Tools Group does in It's able to price.

Speaker 2

It's able to bring value new value products that don't look like price increases because people are paying for more features. And so that's a very strong position they have. Also, they can market agilely. So if you have supply chain problems, They can pitch their promotions to move people toward what we have a lot of and have a wage somewhat from things we have less of. At the same time, they're working pretty well in their factories because they're vertically integrated.

Speaker 2

So you see their kind of numbers at 21.9%, I think we were very encouraged by when we saw it. And so you see the Tools Group doing well in sales in terms of profitability. And if you look back to 2019, what's happened is, I think I said call is that we have figured out over the period, we were investing in SG and A in say like 2018 2019 to try to figure out how to expands the Tools Group's selling capability, and it seems to have worked. Our selling capability of our franchisees has gone up Each quarter over that, you can see the expansion. 2nd derivative looks pretty good.

Speaker 2

So you're seeing that play out. What we're doing now is we're, of course, plumbing the conference call. We don't know how far those things we've understood in terms of social media, in terms of being able to train more effectively will bring us, but we're pretty optimistic about it. I thought I conference call is pretty clear about our views about momentum going forward in this period. If you look at RS and I, RS and I is starting to come back.

Speaker 2

I mean, the thing is It's had some good quarters, but it's had some quarters where the margins were down. But this quarter, 23.8%, down 10 basis points. And that's against Multiple decade much more like 80 or 90 basis points of acquisition impact. And what you see in RS and I conference is continuing positivity around the independent repair shops, particularly diagnostics and information products And the rise of subscriptions and software keeps ticking up because we keep emphasizing that, particularly things like the innovation you heard about Mitchell in terms of Navigating the wiring diagrams in the car, that's a big deal in those kinds of situations. So you see that playing out.

Speaker 2

Is another very positive quarter. C and I is more vulnerable to the turbulence of the days because you have a lot of mixed markets. Conference call. C and I is in a lot of sectors, a lot of countries. And in that cocktail, you see some countries that are down, particularly in Europe in this quarter, which was difficult for you.

Speaker 2

And then C and I and some of their businesses, I did say the customized toolkits, well, these customized toolkits are great, just great margins on them, But you have in those kits sometimes a couple of 100 tools. And in the sourcing situations today, when When you're going to deliver those, all many of them from individual sources, you can get disruptive in terms of when you're going to be able to deliver and create some problems and then on top of it for C and I. A big piece in the Critical Industries, the military business is pretty weak. We always we expect that to come back and we expect C and I to come forward, but we see Tools Group's We see RS and I coming back from they've been they haven't been weak, but they're getting better. They're heating up.

Speaker 2

You can see that number. And you see C and I kind of holding its own, kind of flat sales. But we figure as we get better at managing the situation, we have a challenge tested team that does pretty well in this, C and I is going to keep coming back. So we like our momentum going forward.

Speaker 4

Got it. And just last question. This seems to be the Q1 that we've You heard about meaning or any quasi meaningful impact from supply chain. Can you maybe talk about that? And Any further mitigation efforts that you guys can put through, whether it's RCI or anything else?

Speaker 2

Well, let me just say though, I didn't say, I said, when I burrowed down on C and I, I mentioned supply chain. But our view of this is, it's always something. It's always something. And if you look at our numbers, 13% over pre pandemic levels, 21% OI margin. I don't know if you look at the numbers, you can see any turbulence in those numbers.

Speaker 2

So I think we're managing through it. Yes, of course, it will get better As we go forward, I mean, it's hard for me to predict, but as you get into the moment, you get better at managing it. Right now, we're pretty good at agile marketing. We're good at managing or redesigning our products. We're good at spot buying, so we don't get disruptive in general.

Speaker 2

We have certain nodules of disruption that we'll figure out and we'll solve, but you don't really get that kind of problem going forward. Now some of our businesses, Like for example, you could look at tool storage. We could sell more tool storage if we could turn some more out, and we're working on that. So you may see some of that going forward. But I don't

Operator

will take our next question from Bret Jordan with Jefferies.

Speaker 4

Hey, good morning guys. Good morning. Hi, Bret.

Speaker 5

You called out, I guess, some of the pricing contracts in C and I as obviously costs So everything have gone up versus the prices you received. Could you talk maybe about the magnitude and the timing of some of the pricing resets that you have coming forward?

Speaker 2

Yes, I don't they're all over the map in terms of that situation and they're by segment. But look, C and I is I just our point there was C and I is a longer wave business. So you have commitments with some customers, not all customers. So you see some impact on that and you price associated with that. We're getting some pricing in C and I, some, but not as much conference call is not other things.

Speaker 2

Our big thing isn't so much about pricing, it's managing those costs. And so the idea of I think our disruption is mostly associated with what I pointed out in terms of the custom kitting situation, trying to deliver those things. That's been more probably the biggest impact on this, attenuating some of their volumes, particularly in critical industries.

Speaker 5

Okay, great. And then within the OE business, was there any improvement in cadence as we got through the quarter? Obviously, some of the OEs on the auto side are talking about some improvement in supply chain, but did you see any change in their buying patterns as the quarter progressed?

Speaker 2

You got to be kidding. Their 4th quarter was terrible, wasn't it? I thought the 4th quarter for those guys was brutal. So We didn't see much if you're talking about projects, we didn't see much cadence difference. I mean, actually, there's a lot of new models coming out that are going to come out new features.

Speaker 2

And I don't think we saw any cadence change in the quarter. Now I'm on shaking ground a little bit about saying that there might have been some of it, but my macro view of it, Brett, is it was a tough quarter for the auto companies. So I think conference call is going to get better. They're going to shake loose some of those and so we're going to get because we're already involved in some of those products. We're just waiting for them to come That's what I see.

Speaker 2

I think the if you look at the dealerships, if you go like I thought I tried to make clear, at the dealerships level, the repair is conference call is great at that situation. So we're seeing dealerships buy equipment. And one of the upticks and we didn't I don't think I mentioned it here, but one of the upticks is a rise, a nice rise in repair shop under car equipment, collision and But if you're talking about the programs out of the OEM, your guess is as good as mine when that breaks loose. All we know is they've got a backlog in there that's going to be good for us when it breaks.

Speaker 5

Okay, great. And one final question, I guess, you called out hand tools as strong in the tools group a couple of times. Did you say what the spread was sort of hand tools Relative to storage and diagnostics?

Speaker 2

I did not.

Speaker 4

Want to?

Speaker 2

And the reason is I want to get away from Talking about the numbers by product line in the Tools Group, to us it doesn't matter. We skin the cat many ways. So the point about the Tools Group is 21.9 percent margin. Now hand tools were a nice piece of that. But I will tell you that big ticket items were also up in that period.

Speaker 2

The tool storage and diagnostics were up. The hand tools conference call is Capital and Labor, boom. So it was but it's been strong for a number of different periods. So I don't really want to get down that road. Just say hand tools was a nice product, a nice, but as was diagnostics in the period, And we had increases in tool storage as well.

Speaker 5

Okay, great. Thank you.

Speaker 3

Sure.

Operator

And we'll take our next question from Luke Junk with Baird.

Speaker 6

Good morning. Thanks for taking the questions. First question, Nick, I wanted to ask a follow-up on something that conference call, you mentioned a couple of callers ago, and that's regarding the investment spending posture as we begin 'twenty two conference call. And you referenced plumbing the depth of these capacity creation initiatives from here. Just wondering if you're able to talk about any new focus areas Or within the capacity creation initiatives where we might see the company push a little incrementally in 2020?

Speaker 2

Well, look, I think this, we have of course, we're taking a look at where how we source and where we need more capacity in the factories and those kinds of things, But I don't see it distorting our financials in that regard. I think a couple of things. When I said that, I didn't mean that The OE was going to explode or anything like that. Fundamentally, our OE was higher before because we were spending a lot of effort in a lot of different corridors trying to figure out what would actually resonate with the Toulouse Group and make a difference. ROE is in a nice place now.

Speaker 2

And of course, as you come out, How you say this, you're kind of loosening your belt a little bit when you've had a downtick in the COVID. Conference call is at a nice level, may go up a little bit, but not that much. We're not going to but the areas where we're going to spend, I think, would be we're going to push more on social media because we've learned more about that. Boy, you know what, we've got a lot of data conference call is on our franchisees and our customers. We got oodles of data and we could do a better job in terms of predictive So we're spending time looking at that right now.

Speaker 2

I don't have anything to report other than that boy, it's obvious to us, conference call. And so we think we'll be able to wield that to make the Tools Group even more effective so our guys can make better choices when they engage customers. That's probably another area we're looking at right now. Okay.

Speaker 6

And then I want to ask a bigger picture conference call. I don't know if you could speak to progress in year 1 under the company's ownership. And looking forward, more importantly, should We expect to hear more about this business in the future as a complementary software platform sitting alongside Mitchell 1 in that dealership environment. Thank you.

Speaker 2

Sure. I mean, look, I think that's why we bought it for two reasons. 1, from a financial point of view, it is a twin of Mitchell 1. And I don't know if you're familiar with Mitchell 1, but if you pay I know you are, we've been paying we've been talking about the growth in our Diagnostics and software in independent repair shops almost every quarter since I've been here. They just keep going upwards, boom, boom, boom.

Speaker 2

And So Mitchell 1 knows how to handle that interface. And so we're using that knowledge that, I would say, challenge tested understanding of the business to apply to dealer FX and in the fullness of time that's going to work its It's going to be a good business, so you're going to see it from a financial point of view. But it's also important from us strategically because as you know, it has a window on what happens with these new technologies and the new technologies are going to be the drivers of the future and it's going to call it help us call in the air strikes for conference call is a very important question. What product we develop because we're going to see it first in dealer FX. So you're going to hear us talking about that.

Speaker 2

But these are early days. It's the first conference call. There's a lot of turbulence, these kinds of things. In terms of Canada, I think Justin Trudeau just got the COVID himself. So this impacts the activity in Canada.

Speaker 2

But I believe, certainly, Dealer FX was up in the quarter, and we're making we're sort of making our expectations in this, but you'll hear more of it as we go forward because it's going to be a big factor on us in terms of early warning also financially. We'll

Operator

will take our next question from Liz Suzuki with Bank of America.

Speaker 7

Great. Thank you. So this one is for Aldo. I guess, could you just talk about the inflation impact that you expect through conference call is the course of the year and how the cadence of that could work out with the dynamic of cost and price and how that would impact the P and L.

Speaker 4

Well, certainly, of course, everybody's talking more about inflation than in the past, and NAPA is not immune from that. However, Liz, I think this is something we manage and strive. First, we always look for alternative ways to reduce costs, whether that be alternative sourcing, alternative component conference call is a very rapid continuous improvement to get some productivity. And of course, if we can't cover that, then we look for pricing actions to help us out. We do believe we have pricing power conference call is being recorded in light of the fact that they have longer term customer agreements.

Speaker 4

So we don't immediately just put pen to paper and say, oh, it's got to be this pricing. We try and strive is to see what we can offset internally. At the same time, we're cognizant of the new features we always bring to market. So rather than bring a price increase to market, conference call is, can we bring a higher featured product to market and talk more about that feature even though it might cost more to the customer, we try to create That vision that there's more productivity being brought to market. So that's kind of our broad based approach.

Speaker 4

So yes, there's more inflation, conference call. Well, we'll continue to try to bring more innovation and more value added for the customer.

Speaker 2

Now to put in perspective, Liz, just I'd add on that. If you just look at our hit products, we bring couple, three dozen new products every quarter to the market. So that's a big factor for us.

Speaker 7

Great. Thank you. And I guess second question is just on priorities for capital. I mean, your net debt to capital ratio came down about 3 finish point since last year is at a historically low level. What are you thinking about for this upcoming year and beyond in terms of where your priorities lie?

Speaker 2

Look, I think our priorities are still in line. I think we believe the best return on capital for our people

Speaker 4

for our

Speaker 2

I would say pipeline of acquisitions that we keep looking at. And I kind of think, call me crazy, but I think in the turbulence, the Acquisitions may be more available in this situation. So we're kind of hoping that we're kind of focused on a few things that we may have some ability to move and we're not afraid to take Big ones are small ones in that situation. And we have our Board just reloaded our share buyback situation, I think now another $500,000,000 And we have our dividend, which we look at and we're kind of I think it's been a is kind of a frontispiece for Snap on where we have paid a dividend every quarter for since 1939 and we've never reduced it. So we hold it in perpetuity in terms of our policy and we always look to seeing if it's appropriate to upgrade it.

Speaker 2

So those are the kinds of things we're looking at. I think every year changes and this year it's marked by the idea there's a lot of turbulence out there, maybe there's some opportunities for

Speaker 3

conference call.

Operator

And we'll go to our next question from David MacGregor with Longbow Research.

Speaker 3

So I think that has the potential to move the needle. So congratulations on that initiative. I guess to start off with, what do you think sales off the truck were up

Speaker 2

I think about the same I think roughly the same as the Tools Group, I would say, in the same ballpark. In fact, if you look over David, if you look over 2 years' worth, There's differences from quarter to quarter. But if you look back over 2 years, they've been about the same. Like we conference call. And this quarter was the same kind of thing.

Speaker 2

It was a little bit annoyed with the 53rd week in the franchisees probably Doing a little more than they would order from us. But I think generally, it's roughly the same. They're in practically lockstep. So we see the inventory kind of on the Tools Group holding pretty flat.

Speaker 3

Got it. And then just still on the Tools Group, you talked about the 300 basis points of operating margin improvement. About 200 basis points of that came out of SG and A and 60 basis points was FX. So Clearly, it feels like the price cost pressures that everybody else in the world seems to be feeling are coming home to roost at Snap on as well. I'm just trying to get it to kind of the price cost

Speaker 2

I think, look, I think, yes, we have pressures on a lot of different things. There's a lot of things that go in that gross margin And there are a lot of things that go in the SG and A. I think our view is on the OI margin in general, the up to 300 basis points, we I think I've said this on other calls long ago that we're kind of agnostic between those two numbers. We kind of focus on the OI margin, Up 300 basis points, not bad. Now you could say, okay, well, the gross margin is up less than the OE.

Speaker 2

But if you look back conference call is being recorded. The pre pandemic levels, they're both up reasonably well. I think 100 basis points and 200 basis points. And I don't think that's chopped liver in this environment. Yes, there are pressures associated with supply and sourcing, but we're able to manage it such that we don't give up anything.

Speaker 3

So I guess my question on this is really just as you look forward to 2022, Nick, you talked about was the opportunity to raise our Aldo referenced the opportunity to raise pricing within the Tools segment, but also to bring kind of better margin products or better incremental margin products To the marketplace and cover your costs that way, your costs and productivity that way. Can you give us a sense of how you're thinking about the split Do you think you'll be leaning a little more onto the pricing side and then supplementing that with a better margin product? Or are you leaning a little more towards the better margin product and supplementing that with pricing?

Speaker 2

Well, generally, I think of it as the latter. I think that we would rather have it with our new products and then be foolish around those. I think it isn't isn't so ball faced. I mean fundamentally, I just want to come back to your original question. It would be a mistake to think that the costs conference call and we're holding our own against those with pricing and with those like I said, people I think sometimes people don't realize how many new products we bring out.

Speaker 2

If you just look at the hit products and they're the ones that are the incandescent ones, dollars 1,000,000 in the 1st year, we have 2 to 3 dozen every quarter. And so we have a lot of opportunity in both those areas. Conference call. And I think that's what allows us to maintain this. And our this ain't our first rodeo.

Speaker 2

So we know how to manage this. I think our Not me. I'm just a trained dog at the top of the heap here. But the thing is the guys know how to manage this such They can bring with the combination of direct pricing, plus promotions, Plus the new products, they can manage that interface very well. That's what I meant about the strategic position.

Speaker 2

So we're not bringing our hands on this at all, David.

Speaker 3

Right. Okay. Well, thank you for that offer, that answer. I guess I wanted to also ask about the origination is down 6%. And I noticed the yield is coming down a little bit on the portfolio as well.

Speaker 3

Are you just seeing changes in patterns in terms of how New Techs are using credit? Or How much of this is maybe just substitution of RA credit? You're just losing share to your franchisees on the credit front? Or How much of it might just be alternative sources of credit as some others have talked about?

Speaker 2

I don't think I was just with the franchisees at the kickoff In Omaha. Yes, I got to go to Omaha. Algo got to go to Orlando. You figure that one out. In January.

Speaker 2

But I was with the group. Our franchisees don't think

Speaker 4

we're losing any share to other alternative sources.

Speaker 2

They just think, look, these guys are flush. So they're willing to pay. I mean, if you looked at the numbers, the BLS data sets that investment in repair are up double digits on year over year basis in both nominal and real basis, and the technician wages are up conference call is over 5% year over year, and the number of technicians out there are growing. So I think you see this kind of a growing flush group of people and they're not they're staying with RA. They don't want to pay the interest.

Speaker 2

We like we think it's great because Fundamentally, the guys have that capacity available when they need it. The other factor is, I think, in this is that I never wanted to say this. I said it wouldn't last time. But if you look at the is 53rd week last year. Generally, our stuff cuts off.

Speaker 2

But even if the franchisees go out for a day or 2 or 3, They're going to generate more year over year originations because it happens in the field at some point. I don't know how much that accounts for, but You can knock down some of that. So I don't think that's an unusual situation.

Speaker 3

And then the credit origination is down 16.6. What can you talk a little bit about what might have been happening there?

Speaker 4

Well, this is Al Desolto. I'd say if you take into account $10,000,000 conference call, we would have probably been up slightly, I'd say, in the U. S. Environment, down a little bit in international. International is not quite as robust as U.

Speaker 4

I think we mentioned that as well that we were up in the U. S. In terms of our sales versus international. And then if you look at the Even the contract originations. In 2020, we had more new startups.

Speaker 4

So it's a little bit more stable environment now with the franchisees. So there was less startups in International arena in particular and when you start up franchise, David, many of the franchisees tend to like to lease vans and borrow from Snap on Credit. So that could affect it. So it's really I don't want to dismiss it. And I always try to remind people that you're still not a completely certain environment I think tool storage has been as robust as you see in the revolving credit accounts, and therefore, you see more revolving action on the hand tool side.

Speaker 3

That makes sense. Last question for me is just with respect to the share repurchase activity. And you talked about the fact that you just had another authorization from the Board. Activity in the Q4 really didn't change much year over year, roughly about $75,000,000 a good number for the full year by the way, so good activity there. But How do we think about share repurchase here?

Speaker 3

And why wouldn't you step up and just get a lot more aggressive here in terms of buying back your stock at these notes?

Speaker 4

Conference call is being recorded. Well, we always think of things like that, but if you look at the tunnel of time, it averages between 2% and 3% of the outstanding share count more or less. And It's hard to be an expert in this market. I have no idea if the advertising revenues of Facebook will impact Snap on the next day when I get up Things of that nature, and I'm being extreme in that example, but we try to take a measured approach to it. It has its role.

Speaker 4

It's not the only solution in terms of how to use cash.

Operator

Concludes today's question and answer session. Ms. Vrtski, at this time, I will turn the conference back to you for any additional or closing remarks.

Speaker 1

Conference

Operator

call. This concludes today's call. Thank you for your participation. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Snap-on Q4 2021
00:00 / 00:00