Snap-on Management Discusses Q2 2012 Results - Earnings Call Transcript

Snap-on (SNA)

Q2 2012 Earnings Call

July 19, 2012 10:00 am ET


Leslie H. Kratcoski - Vice President of Investor Relations

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

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


Michael J. Wherley - Janney Montgomery Scott LLC, Research Division

Dax Vlassis - Gates Capital Management, Inc.

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

Richard J. Hilgert - Morningstar Inc., Research Division

Emily Schwarz - Moody's Corporation, Research Division



Welcome to the Snap-on Inc. 2012 Second Quarter Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Leslie Kratcoski, Vice President, Investor Relations.

Leslie H. Kratcoski

Thanks, Rica, and good morning, everyone. Thanks for joining us today to review Snap-on's second quarter 2012 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 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 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, today's discussion and presentation include reference to certain non-GAAP financial measures that exclude an $18 million arbitration settlement gain recorded in the second quarter of last year. Please refer to our earnings release issued this morning and to the slides accompanying this webcast for a reconciliation of these non-GAAP financial measures to those most directly comparable GAAP financial measures.

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

Nicholas T. Pinchuk

Thanks, Leslie. Good morning, everybody. As we normally do on these calls, I'll begin with some of the highlights of our second quarter and I'll provide my perspective on the business and on the various markets in which we operate. Then I'll turn the call over to Aldo for a detailed review of the financials.

I will say that we were encouraged by the results. EPS of $1.30 represents a rise of 14% from last year's comparable $1.14. Organic sales were up 4.5% despite the clear headwinds of Europe. The OpCo operating margin of 14.2% increased 60 basis points, overcoming an $8.3 million in higher restructuring charges. And Financial Services added $25.6 million in operating earnings, up from a comparable $17.5 million in 2011.

I'll remind you that in the second quarter of last year, we resolve the dispute with our former Financial Services joint venture partner and recorded at that time a one-time $18 million pretax arbitration settlement gain. That settlement was worth $0.19 a share. And given the nature of the item, I've excluded it, as we believe it's appropriate from the FinCo earnings and the EPS comparisons I just referenced.

On balance though, that the quarter was another positive point, extending an encouraging growth trend. That continuing trend demonstrates significant progress along our clearly defined runways for growth. Extending into critical industries, building in emerging markets, enhancing the franchise network and expanding in vehicle repair shops.

And the operating margin expansion is a reflection of our Snap-on Value Creation Processes at work. As I said before, these are crucial set of principles that we apply everyday. Our focus on safety, on quality, customer connection, Rapid Continuous Improvement or RCI and on innovation. It's a powerful framework and it is helping to fuel our results. I mentioned that the OpCo operating margin expanded by 60 basis points from last year, but I'll also point out that this year's restructuring charge in the second quarter included $6.8 million for the settlement of a pension plan related to our Canadian tools storage facility, which we closed last year. But for that item, the margin expansion would have been 150 basis points. That increased profitability is a strong testimony that the positive contributions of Snap-on value creation.

Now regarding sales growth. The numbers appeared to validate that we are building advantage in each of the 4 areas we've identified as being decisive for our future. Critical industries where the penalty for failure is high. Another double-digit gain for our industrial division, with the growth rate in the aerospace sector leading the way.

Emerging markets. In addition to strong double-digit gains in China, as you probably would expect, we also saw a particularly large uplifts in places like Indonesia and Russia.

The franchise channel what we call auto mechanics or auto technicians, volume is up 10% in the quarter with strong operating margin.

And finally, in vehicle repair shops, we saw growth in categories that are quite important to those shop owners and managers. Sales in the RS&I business that provide diagnostic units, repair information and shop management systems were up high single digits.

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