Snap-on (SNA)

Q3 2011 Earnings Call

October 20, 2011 10:00 am ET


Aldo J. Pagliari - Chief Financial Officer and Senior Vice President of Finance

Nicholas T. Pinchuk - Chairman, Chief Executive Officer and President

Leslie H. Kratcoski - Vice President of Investor Relations


David Leiker - Robert W. Baird & Co. Incorporated, Research Division

James C. Lucas - Janney Montgomery Scott LLC, Research Division

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Jarrod Rapalje - Longbow Research LLC



Good day, everyone, and welcome to the Snap-on Inc. 2011 Third Quarter Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. And now your host for today's conference, Ms. Leslie Kratcoski, Vice President of Investor Relations. Ms. Kratcoski, please go ahead, ma'am.

Leslie H. Kratcoski

Thanks, Rufus, and good morning, everyone. Thanks for joining us today to review Snap-on's third quarter 2011 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. You can find a copy of these slides on our website, next to the audio icon for this call. 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 on the factors that could cause our results to differ materially from those in the forward-looking statements are contained in our SEC filings. With that said, I'll now like to turn the call over to Nick Pinchuk. Nick?

Nicholas T. Pinchuk

Thanks, Leslie. Good morning, everyone. Well, I would characterize our third quarter as an extension of the broad progress that we're making for quite some time. I would say that the continuing trend is especially encouraging in light of the generally negative macroeconomic news we seem to be hearing almost every day. Overall, our sales in the quarter were up 6.8%. Excluding currency, organic volumes increased 3.6%. Now last year's third quarter did create some tough year-over-year optics, because we were in the midst of a fairly robust recovery, and there really wasn't any of the normal 5% seasonal sequential decline we usually see in the third quarter.

From that perspective, this year's sequential downtick of 3.5% was a bit better then usual. So this period's volume is a positive indicator. Operating income for the quarter rose by over 37%, and our operating margin of 15.8% was up from 12.5% last year. Now those numbers include $15.8 million in higher earnings from Financial Services, and that's the result of the continuing ramp up of our on-book portfolio.

Looking at the results before Financial Services. The third quarter operating margin of 13.5% was up 140 basis points, in part aided by that favorable mark-to-market adjustments highlighted in our release. But even excluding those adjustments,

Opco operating income in the period represents a new record high for Snap-on third quarter.

We believe the advancements we're making a great testimony to the effectiveness of the Snap-on Value Creation Processes, the principles and processes we apply everyday in moving the company forward: safety, quality, customer connection, innovation, Rapid Continuous Improvement or RCI. It's that framework that enables our progress and it's driving our strong profitability.

As usual, I'll now review some of the highlights for the quarter, provide my perspective on the market environment and offer a view on the strategic areas we've identified as being decisive for our future, extending to critical industries, building in emerging markets, enhancing the franchise network and expanding in the garage.

Regarding overall environment, I'll just comment that based on our various businesses, it can be characterized as generally unchanged from the past several quarters. I view that as a real positive, because if you pick up the paper or watch the news on any given day, you'll get the feeling that there's been a decided turn for the worst, but we've just not seen it. That said, I do think the well-documented troubles in Europe are creating a bit more uncertainty, and therefore, less visibility. But we had a high level of European uncertainty as well as a headwind in Southern Europe for quite a while, and we've managed through it by taking advantage in other places where opportunities are expanding like in emerging markets and in critical industries and in automotive repair. So there is some uncertainty as there has been for some time. But we're not seeing any overriding downturn.

Probably the best summary measure I can give you is this. In the third quarter, our volumes, excluding the effect of currency movements, were above the third quarter levels of both 2007 and 2008, the strongest periods before the recession took hold. That same comparison for the first 2 quarters of this year showed 2011 slightly below those earlier year levels. So recapture of pre-recession level is your measure of recovery momentum, our third quarter was another favorable data point, and it occurred despite the bad news all over the press.

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