實耐寶 (SNA) 2015 Q3 法說會逐字稿

Good day and welcome to the Snap-on Incorporated 2015 third-quarter results conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Leslie Kratcoski. Please go ahead, ma'am.

Thanks, Kevin, and good morning, everyone. Thanks for joining us today to review Snap-on's third-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 will 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 under investor information. 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.

With that said, I will now turn the call over to Nick Pinchuk. Nick?

Thanks, Leslie. Good morning, everybody. As usual, I will start with the third-quarter highlights, provide an update on the environment, and speak a bit about our trends. Aldo will then provide a detailed review of the financials.

In the third quarter, we again showed progress along our runways for growth and for improvement and we saw those gains across our operating segment. Organic sales were up 7.3% from last year. Opco operating margin, it reached 17.5%, up 130 basis points. If we add the $43.5 million in operating earnings from financial services, up from $37.7 million in 2014, the consolidated operating margin was 21.2%, an increase of 160 basis points.

In EPS, EPS was $1.98, up $0.22 or 12.5% from the $1.76 of last year. Our reported sales increase was 1.9%, including the impact of unfavorable foreign currency. And in this quarter, that total was $42.6 million, about the same as the second quarter. Adding the incremental $2.1 million in sales from our third-quarter acquisition of Ecotechnics, the total reported sales for the period were $821.5 million.

For automotive repair businesses, the environment continues to be favorable. Actually, it has been that way for a while and our tools group and repair systems and information, our RS&I group, are both well positioned to take full advantage. You can see it in the performance: another quarter of solid gains for both groups, advancing along our runways for growth.

Clearly, the tools group demonstrated enhancements to the franchise network. Gains in all its markets; continuing to take advantage of the opportunities that are so abundant in a changing vehicle fleet, not only in the United States, but in places like the UK and Australia.

In RS&I, with strong sales across North America and parts of Europe, double-digit growth in the US and modest gains in Western Europe, offsetting the continuing softness in Eastern Europe and particularly in Russia. RS&I progress achieved with independent repair shop owners and managers and with OEM dealerships, advanced by our latest diagnostics and under-car product offerings.

For the commercial and industrial, or C&I group, we overcame some increased headwinds, with the overall organic sales rise offsetting mixed environments across industries and across geographies. That said, in the third quarter, our European-based hand tool businesses and our Asia Pacific operations recorded high single-digit gains, overcoming the turbulence within their particular markets.

Now, our industrial division did have some headwinds in the period, impacted by weak US military volume and slowdowns in our oil and gas activity. We have consistently mentioned the uncertainty associated with the military. In the third quarter, that caution materialized and our results included a double-digit decrease, measured spending and budget constraints making in the present tight and the future even more difficult to predict.

Within our natural resources segment, volume in oil and gas was down substantially. You see it in oil prices and you read about it in the newspapers. And despite our small share and opportunities for penetration, we were impacted.

But that said, saying that, there will always be headwinds. They have been a factor in other quarters and they were present in the third quarter and we overcame. Because we are well positioned to confront the challenges and proceed down all our runways for growth, enhancing the franchised network, expanding our repair shop owners managers, extending to critical industries, and building an emerging market. These do represent avenues for advancement and there has been consistent progress along each of those paths.

At the same time, those growth drivers are joined and supported by the benefits of Snap-on value creation. Safety, quality, customer connection, innovation, and rapid continuous improvement, or RCI. These are the processes; the tools we use each and every day to drive improvements. But this quarter, we especially benefited from customer connection and innovation.

Customer connection. Snap-on's continuing pursuit of understanding of work derived from the hours and the days we spend with professionals. Innovation: taking that practical insight and matching it with the possibilities of modern technologies.

And in the quarter, those processes have resulted in more prestigious product awards for the corporation. We were again honored with two Motor Magazine Top 20 Tool awards. The winners this time are 3/8 inch drive steering rack socket and our SOLUS Edge diagnostic held handheld.

Let's talk about the steering rack sockets. The S6229 was developed from a customer connection drive from direct observation of work and from conversations with multiple technicians. This innovative tool allows the tech to replace power steering O-rings without removing the whole steering assembly, saving up to an hour of labor, clearly making work easier and professional repair more productive.

In addition, also created out of deep insight in the repair process: the innovative SOLUS Edge. Coverage for hundreds of vehicles systems, including hybrid, TPMS, steering, and clean diesel. And it all comes loaded with our fast-track troubleshooter database with its vehicle-specific tips, tests, and timesavers.

The SOLUS Edge is enhanced coverage for over 40 car makes, without the cost or complexity of factory scan tools. And for all its power, for all its strength, it is easy to use. The large 8-inch touchscreen display is an aid to visibility and the software provides accurate results in as little as 30 seconds. Quick.

I mention these awards because they are just the most recent recognitions of a growing list of very popular products that provide unique advantages, created by the observations of our franchisees and direct salespeople who are committed to translating that insight into productivity innovation. And that broad value creation is reflected in the positive results registered across all our operating groups. And again this quarter.

Now let's focus on those individual groups, starting with commercial and industrial. Organic sales were up 3.4%; operating margins reached 14.3%, up 60 basis points from last year's 13.7%. Growth along with the benefits of Snap-on value creation.

Now I said, as we said, there are headwinds. But our industrial direct salesmen have been expanding their reach, nevertheless, into sectors like railroads -- up double-digits, growing our presence, offering a wider variety of tools and tool control solutions.

We have spoken in the past about building our understanding of work in critical industries, expanding our customer connection. But one way that is happening is by using our experience in RCI. Participating in customer Lean events -- participating in customer-sponsored Lean events, our team was able to assist in improving railroad operations while at the same time, gaining a better understanding of their work processes, their product requirements, their business needs, and the overall -- their overall industry direction. All key customer connections gained through Lean event participation.

One of the tools can see from those insights was our special extendable line of tube wrenches. Great for heavy-duty work on railroad cars and tracks. Made in our Elizabethton, Tennessee, plant, these tube wrenches replaced the traditional slugging wrenches in railroad applications, allowing the operator better access, eliminating the need for costly two-person slugging procedures, and making work easier, safer, and more productive.

Let's speak about SNA Europe. Now, eight quarters in a row of year-over-year growth, navigating through some of the most difficult geographies and tepid economies. SNA Europe activities continues to be encouraged -- activity continues to be encouraging.

But its profits. Its profits are even more positive: now up significantly for 10 straight quarters. And we believe there is much more room for further gains.

And related to our Asia-Pacific operations, the environments are mixed. But we had overall gains, with upward movement in places like Thailand, Indonesia, and Vietnam. Actually, it is nice to see progress in Vietnam, that emerging Southeast Asian nation.

So that provides a bit of color on C&I. Now onto on to the tools group. Organic sales up 11% -- 11%. Significant growth in the US and internationally. Operating income: $56.3 million compared to $49.5 million in 2014. Operating income margins of 14.8% rose 90 basis points from last year's 13.9%. The additional volume as well as operating improvements from RCI translated into significant margin improvement and that 90 basis point gain overcame 120 basis points of negative currency.

When you consider the tools groups a success, you see the power of Snap-on value creation and the benefits of our award-winning innovative new products. Besides the Motor Top-20 award, the tools group also received recognition from the readers of Professional Tool & Equipment News, gaining five People's Choice selections for new tool innovations -- products. Once again, born at the intersection between customer connection insight and advanced technology wielded by our innovation teams.

Products like the KRL, a 72-inch roll cab with its power tool organizer system. The powerful and light CT8850 18-volt cordless impact wrench. Our new brake caliper press. Our new advanced battery system tester with its print capability. And our new [EEP2] full-view welding helmet. All selected by the readers of P10 magazine and by our technician customers as great new products. Products that make work easier and products that provide further evidence of Snap-on innovation.

You might remember that third quarter is also when we hold the annual Snap-on franchisee conference -- our SFC. This year it was in Washington, DC, with more than 8,000 attendees: franchise and family members from over 3,000 routes. 3 days of showcasing the opportunities to enhance the franchise channel, to amplify the power of our van space and of our franchisees' time.

And based on the optimism and the confidence of our franchisees, it was a strong success. And oh, by the way: orders were up once again, beating the record level achieved in 2014.

When we speak of the van channel, we also have to consider the strategic -- very strategic contributions of Snap-on Credit. Our financial services arm helps create opportunities across our organization but especially within the tools group. And Credit had a strong presence at the SFC, supporting franchisees with unique programs, enabling sales of those big-ticket items which are so essential to franchisees' success. And in the third quarter, financial services OI was up $5.8 million or 15.4%. Another period of powerful contribution to the organization.

Let's move to RS&I. Organic sales were up 8.2%. The operating margin up 24.6%. It increased 130 basis points from 23.3% just last year. RS&I was charged with expanding our presence with repair shop owners and managers and in the quarter, it did just that.

We once again had growth in our businesses providing repair, information, and diagnostics to independents. In fact, we appear to be gaining traction across many dimensions in automotive and in medium and heavy-duty garages, serving both OEM dealerships as well as those independent shops. All fueled by our expanding product offering.

And one of those great RS&I products came from our diagnostics division, demonstrating its continuing innovation. Our diagnostics team launched its new VERUS Edge handheld, an enhanced top-of-the-line offering. Thinner, lighter, including important features like five-second ready-to-use capability, five-hour battery life, a solid-state hard drive for increased durability. And of course, access to our unique integrated SureTrack real-world fixes, based on masses of actual repair data. All features guided by effective customer connection inputs.

And the VERUS Edge. We believe we have a winner. Advancing the state-of-the-art and addressing the most serious of repair challenges. And initial sales are breaking records and exceeding our expectations.

Also in the third quarter -- and with a focus on heavy-duty shops -- RS&I introduced the latest generation of its proprietary vehicle interface: the NEXIQ USB-Link 2. Now with Wi-Fi connectivity. It extends our leading position by adding wireless capabilities to the already successful family of NEXIQ heavy-duty diagnostics products.

The USB-Link 2 is compatible with heavy-duty diagnostic applications for engines, transmissions, ABS, in instrument clusters, and much more. It supports virtually every standardized vehicle network protocol. And nearly every software application in vehicle sectors like construction, agriculture, and of course, heavy-duty truck.

5 times the speed of its predecessors, with 16 times the memory, the USB-Link 2 is perfect for dealership, fleets, and truck shops. It speeds the repair times of these particularly mission-critical vehicles and it improves technician productivity. It is a great upgrade to an already successful product from our RS&I group.

Also in the third quarter, our equipment division registered high single-digit growth, with strong volume in North America, helping to offset the Russian market, which is our primary headwind in Eastern Europe. Overall, undercar gains in the US were quite solid, with especially impressive increased sales -- sales increases at our Challenger lift division.

Challenger has been a great addition to our Snap-on team and it improved again this quarter. And we believe there is much more to come, helping RS&I to expand with repair shop owners and managers. RS&I -- great new product with demonstrated growth in diagnostics, heavy-duty, and undercar equipment, and all that played out in the third-quarter results.

Well, that's the highlights of our quarter. Organic sales up 7.3%, gains across all groups, clear progress along our runways for growth, Snap-on value creation at the forefront of our activities, customer connection, leading to innovation, creating powerful new products. RCI driving improvement. And it all shows in the results -- OI margin to 17.5%, up 130 basis points. It was an encouraging quarter.

Now I will turn the call over to Aldo. Aldo?

Thanks, Nick. Our third-quarter consolidated operating results are summarized on slide 6. Net sales of $821.5 million in the quarter were up 7.3% organically. On a reported basis, net sales, including $42.6 million of unfavorable foreign currency, increased 1.9%.

As you know, Snap-on has significant international operations and is subject to foreign currency fluctuations. Largely due to the strengthening of the US dollar, foreign currency movements adversely impacted our Q3 sales comparisons by 570 basis points.

Net sales in the third quarter also included $2.1 million of sales from our July 2013 acquisition of Ecotechnics, a designer and manufacturer of automatic vehicle air-conditioning maintenance equipment for OEM dealerships and independent repair shops.

Consolidated gross profit of $406.9 million increased $13 million from 2014 levels, primarily due to higher sales and savings from RCI initiatives, partially offset by 30 basis points of unfavorable foreign currency effects. The gross margin of 49.5% in the quarter improved 60 basis points from 48.9% a year ago.

Operating expenses were $263.3 million in both the third quarters of 2015 and 2014. The operating expense margin of 32% improved 70 basis points from 2014 levels, primarily due to benefits from sales volume leverage, partially offset by higher pension expense. No restructuring costs were included in operating earnings in the third quarter of 2015. Last year, we incurred $2 million of such costs.

As a result of these factors, operating earnings before financial services of $143.6 million in the quarter, including $11.9 million or 50 basis points of unfavorable foreign currency effects, increased 10% and, as a percentage of sales, improved 130 basis points to 17.5%.

Financial services revenue of $61.1 million in the quarter increased 14% from 2014 levels and operating earnings of $43.5 million increased 15.4%. These increases primarily reflect the continued growth of the financial services portfolio.

Consolidated operating earnings of $187.1 million in the quarter, including $12.7 million of unfavorable foreign currency effects, increased 11.2%. And the operating margin of 21.2% improved 160 basis points from 19.6% a year ago. Our third-quarter effective income tax rate of 31.6% compared with 31.8% last year.

Finally, net earnings of $116.8 million or $1.98 per diluted share increased $13.1 million or $0.22 per share, representing a 12.5% increase in diluted earnings per share. Now let's turn to our segment results.

Starting with the commercial and industrial, or C&I, group on slide 7, sales of $288.5 million in the quarter were up 3.4% organically, driven primarily by high single-digit gains in both the segment's European-based hand tools business and Asia-Pacific operations and a double-digit increase in the segment's power tools operations. These sales increases were partially offset by a mid single-digit decline in sales to customers in critical industries, primarily reflecting lower sales to the military and to customers in the oil and gas sector.

Gross profit in the C&I group of $109.5 million in the quarter decreased $2.3 million from 2014 levels. While the gross margin of 37.9% improved 50 basis points, principally due to savings from RCI initiatives and lower restructuring costs. Operating expenses of $68.2 million in the quarter decreased $2.8 million from 2014 levels and the operating expense margin of 23.6% improved 10 basis points from 23.7% last year.

As a result of these factors, operating earnings for the C&I segment of $41.3 million, including $2.9 million of unfavorable foreign currency effects, increased $0.5 million from 2014 levels and the operating margin of 14.3% improved 60 basis points.

Turning now to slide 8, third-quarter sales in the Snap-on Tools group of $380.6 million increased 11% organically, reflecting continued double-digit gains in both the Company's US and international franchise operations. Gross profit of $166.5 million in the quarter increased $11.7 million from 2014 levels and the gross margin of 43.8% improved 20 basis points.

Benefits from the higher sales and savings from RCI initiatives were largely offset by 110 basis points of unfavorable foreign currency effects. Operating expenses of $110.2 million in the quarter increased $4.9 million from 2014 levels and the operating expense margin of 29% improved 70 basis points, principally due to sales volume leverage.

As a result of these factors, operating earnings for the Snap-on Tools group of $56.3 million increased $6.8 million and the operating margin of 14.8% improved 90 basis points, including $6.8 million of unfavorable foreign exchange currency effects.

Turning to the repair systems and information, or RS&I group, shown on slide 9, sales of $282.9 million in the quarter increased 8.2% organically. The organic sales increase primarily reflects a double-digit gain in sales to OEM dealerships, a high single-digit increase in sales of undercar equipment, and a mid single-digit gain in sales of diagnostics and repair information products to independent repair shop owners and managers.

Gross profit of $130.9 million increased $3.6 million over 2014 levels. Gross margin of 46.3% in the quarter decreased 60 basis points from 46.9% last year, primarily due to a shift in sales that included higher volumes of lower gross margin products, including increased essential tool and facilitation sales to OEM dealerships, partially offset by lower restructuring costs.

Operating expenses of $61.2 million in the quarter decreased $2.8 million from 2014 levels. The operating expense margin of 21.7% improved 190 basis points, mostly due to sales volume leverage, including benefits from the sales shift noted above.

Third-quarter operating earnings for the RS&I group of $69.7 million, including $2.2 million of unfavorable foreign currency effects, increased $6.4 million from prior-year levels. And the operating margin of 24.6% improved 130 basis points.

Now turning to slide 10. In the third quarter, operating earnings from financial services of $43.5 million on revenue of $61.1 million compared with operating earnings of $37.7 million on revenue of $53.6 million last year. The average yield on finance receivables of 17.9% in the quarter compared with 17.6% last year and the average yield on contract receivables was 9.5% in both years. Originations of $257.6 million increased 16.2% from 2014 levels.

Moving to slide 11, as of quarter end, our balance sheet includes $1.53 billion of gross financing receivables, including $1.33 billion from our US Snap-on Credit operation. Approximately 80% of our US financing portfolio relates to extended credit loans to technicians.

During the quarter, our worldwide finance portfolio grew approximately $62 million. As for our finance portfolio losses and delinquency trends, these continue to be in line with our expectations.

Now turning to slide 12, cash provided by operations of $113.7 million in the quarter increased $25.7 million from comparable 2014 levels, primarily reflecting higher net earnings in 2015 and net changes in operating assets and liabilities. Net cash used by investing activities of $86.9 million included $55.9 million to fund a net increase in finance receivables.

Third-quarter capital expenditures of $18.5 million in 2015 compared to $22.3 million last year. Cash used in investing activities in the quarter also included $13.1 million for the acquisition of Ecotechnics.

Turning to slide 13, days sales outstanding for trade receivables was 61 days at both quarter end and 2014 year end. Inventories increased $52.2 million from 2014 year-end levels, primarily to support continued higher customer demand and new product introductions as well as inventories related to the Ecotechnics acquisition. On a trailing 12-month basis, inventory turns of $3.4 million (sic - see slide 13, 3.4 turns) compared with 3.6 turns a year ago.

Our quarter-end cash position of $119.2 million decreased $13.7 million from 2014 year-end levels. The net decrease includes the impact of funding $629.2 million of new finance receivables, the repurchase of 670,000 shares for $101.6 million, dividend payments of $92.5 million, and capital expenditures of $64.3 million.

These cash decreases were largely offset by $476.6 million of cash from collections of finance receivables; $352.1 million of cash from operations, net of $30 million of discretionary cash contribution to the Company's domestic pension plans; and $39.7 million of cash proceeds from stock purchase and option plan exercises.

Our net debt to capital ratio of 25.7% compared with 26.3% at 2014 year end. In addition to our $119.2 million of cash and expected cash flow from operations, we have more than $700 million in available credit facilities and our current short-term credit ratings allow us access to the commercial paper markets. At quarter end, we had $45.2 million of commercial paper borrowings outstanding.

This includes my remarks on our third-quarter performance. I will now briefly review a few outlook items for the balance of 2015. We anticipate that capital expenditures in 2015 will be in the range of $80 million to $85 million, of which $64.3 million was incurred through the end of the third quarter. We continue to expect our 2015 full-year effective income tax rate will be at or below our 2014 full-year rate of 32.1%.

Now I will turn the call over to Nick for his closing thoughts. Nick?

Thanks, Aldo. Snap-on's third quarter: sales up organically 7.3% against some significant headwinds. Of course, as we say often, there will always be headwinds; always be challenges. But in the midst of that, we believe our runways for growth are wide with abundant opportunities and you can see it in the operating groups.

C&I, in the center of the turbulence: sales up 3.4%. Profits up 60 basis points. RS&I, wielding software and hardware with repair shop owners and managers: activity rising 8.2% and OI margin of 24.6%, up 130 basis points.

Tools -- an established and storied business. Reaching higher; capturing more customers. Sales up 11% and a greater than 6% increase in 21 of the last 22 quarters. OI margin up 90 basis points despite 120 basis points of unfavorable currency.

And besides that growth, we see the effects of Snap-on value creation. Paving our runways for improving, helping to drive our Opco margin to 17.5%, up 130 basis points, including 50 basis points of currency headwind. And rolling it all together with financial services, our EPS was $1.98, up 12.5%.

We believe that the third-quarter results, extending our positive trends, is continuing confirmation of the Snap-on possibilities for both growth and for improvement. And we believe, as demonstrated this past quarter, we can continue on those positive runways as we proceed forward.

Now before I turn the call over to the operator for questions, I think it is appropriate to speak to our franchisees and associates. I know many of you are listening in again. The encouraging results in the third quarter and our positive trends are a direct reflection of your capability and your effort.

For the gains that you have achieved, you have my congratulations. And for your commitment and your extraordinary contribution to our team, you have my thanks.

Now I will turn the call over to the operator. Operator?

(Operator Instructions) Bret Jordan, Jefferies.

A question on RS&I. You mentioned specific strength in undercar, and a service chain reported this morning it had 11% comp in alignment. Is there something structurally going on in that space driving growth or is yours tied to new product introduction? Is this road deterioration is secular shift or --?

I think structurally, it is not something happening -- I don't think this particular quarter, but I think structurally the whole automotive repair business has got a nice tailwind in terms of changes in vehicles. And in fact, as you have more vehicles that want to do more things automatically -- self-driving and so on -- the precision of calibration becomes more and more important.

And therefore, the more accuracy and -- more accuracy, things like alignment become more important. Therefore, the speed of that alignment becomes important. Therefore, the need for new product.

And so I think it is nice times for automotive repair in general and in particular for undercar equipment. And I think ours is being pushed by both that tailwind and some nice new product that is in place as well.

Okay. And I guess on that speed of change in technology is sort of the next question. The software upgrade cycle, as you are looking in the handheld units and replacing software, is that accelerating at all? Or is the new code basically the same cadence?

I think it is expanding. I think we are finding -- I don't know if we are introducing any faster, necessarily, upgrades, but I think the upgrades are more attractive. You hear me talk about SureTrack, and if I had a little more time to talk about VERUS Edge, I would talk about the fact that it has technical service bulletins involved.

And so those products are more attractive and they are more liberating and they are more productivity advancing to customers. And so that is driving part of that. You can see it -- you can see it -- I'm sure you have looked at the trends and you can see that I think the numbers are something like -- somewhere under 50% of cars today require -- in all garages require diagnostics repairs and all garages require diagnostics units. But something like 7 of 10 repairs in new cars require diagnostics units. So you see the demand for that.

And our software is the best available. One of the things you see in our -- one of the things we are really excited about in our business, when we did independent surveys of technician preferences, 63% said they preferred Snap-on diagnostics. Number two was 7%. [I hope this has helped].

Thanks. And one question specifically to C&I, on the US military, you talk about it being particularly weak. When they are weak, are they buying less premium product or not buying at all? I mean, they going to Harbor Freight for what they would have purchased from you or do they just step out?

No. I don't think they are buying that stuff. I am not sure, but I am pretty sure that they are not buying this stuff. Because when the 50-caliber bullets are flying overhead, I think this is the ultimate critical application, and I don't think anybody wants anybody being disadvantage under those circumstances.

So what really has happened by and large is the fact that there is uncertainty in where to deploy budgets around that. We have seen it before. Actually, C&I -- if you go back and look at the late -- in late 2013, the critical industries again was bedeviled by a reduction associated with the military. And that was directly associated with the word sequestration.

And so you are starting to see those kind of things now. In Washington, people are talking about government shutdowns and so on and it is making the military nervous and they are spending less. We feel we're pretty well positioned, though, to take full advantage when they are ready to spend.

Okay, great. So it is not trading down, it is just not spending.

No. No. Not any significant way.

Okay. Great. Thank you.

Liam Burke, Wunderlich.

Nick, you talked about railroad as being an interesting growth segment in C&I. Are there any other areas that saw a particular strength during the quarter in the C&I?

Yes. Look, we were -- amazingly, we were up pretty well in mining. Like I said, lots of the -- we are still starting to penetrate these things. So you can't -- we are finding that we are affected sometimes by the -- somewhat by the environment, but not -- we can overcome it at times. Mining was one of those. Heavy truck was up fairly well in the quarter. So that was a good entry.

General -- if you just look at general production, the kinds of stuff that things that are associated with grinders and so on, we had that kind of thing. So we had some fairly reasonable positive point. The US aviation -- aviation in US was okay. That kind of thing.

So we had some positives. And we had oil and gas, international aviation, and the military, which were negatives.

Okay. And with your van channel being supported now with Rock 'N Roll vans, are you seeing any step-up in average ticket item per franchisee during the quarter?

No. Big ticket was still reasonably strong, but I think we are not seeing any particular -- if the question is associated with the rise in the size of the, let's say, the purchases, the size of the purchases, I would say no in the quarter, necessarily. Not anything particularly big in the quarter. Nothing that would change the trends.

We are still seeing a robust demand, though, for things like tools storage and of course our diagnostic units and other things that we would roll into big ticket.

Gary Prestopino, Barrington.

A couple of the questions have been answered, particularly on industrial. But let me just ask in terms of seeing pretty good growth year over year in the credit portfolio, is that still indicative of that there is a healthy appetite for the toolboxes, bigger ticket items?

Yes, there is a healthy -- I think there is a healthy attitude. Generally, it directly reflects the motion of the tools group in general. If you look back at originations and look at tools group growth over the last three quarters, there is sort of the same. So that is pretty much what is driving it.

I think it is not just toolboxes, though. You will get things like big diagnostics, like the VERUS Edge. I mean, the new VERUS Edge is a product that will run in several thousands of dollars and that can be financed on that kind of thing. So you will see a number of things like that.

So it is not just toolboxes. But the big-ticket items were I think this quarter just slightly below -- somewhat below the tools group in general. But over three, four quarters has been better than the tools group.

Okay. And then in terms of the Rock 'N Roll vans and the Techno-Vans, are you at capacity where you want to be right now in the US?

You know, I don't know. I think Rock 'N Roll cab -- we added -- I think we added maybe like five in the last quarter in the Techno-Vans. And we didn't add any Rock 'N Roll cabs. Rock 'N Roll cabs have been solid for some time.

Having said -- have been the same number for some time, but I wouldn't necessarily sign up to the idea that I wouldn't add more going forward. Rock 'N Roll cabs were introduced somewhere in 2011. And I have to tell you, Gary, we have been learning about how to use them better and how effective they are and where they are most effective and how to do that each quarter. But for now, they are pretty much where they are going to be.

The Techno is something else. So we have added quite a few. I think, actually, year over year for Techno, we have added 21 Techno vans. And I think we will be probably trying to see how that 21 plays out for a little while. And then we will make a decision whether we need more or not going forward.

But it is a mistake to think that tools storage sales is directly proportional to the number of Rock 'N Roll cabs. That is not true. What we have found is they got more and more and more productive. More and more liberating every time. Every quarter. And same thing for Techno-Vans.

Right. Well, it basically expands your store floor selling space, right?

Correct. It does. But then we find out how to -- then actually what we find out is how to amplify the Rock 'N Roll space. I mean, it is kind of a multilayered thing. It does help that, though. I mean, in one sense, it expands on a timesharing basis the space, but the effect of that space, I would say, over the four years we have had it, the ones that we installed first are helping a lot more than they did when they first occurred.

And last question. Is this just a US phenomenon or is this just in other countries where mechanics own the tools that you have these kind of vans.

It is in other countries. I mean, I think -- I guess we have seven international Rock 'N Roll cabs. And so we have used them in different places, things like the UK and Canada and some in Australia. And we (technical difficulty) critical and extended to critical industries and (technical difficulty) the van channel. And with repair shops [more] and emerging markets. So we keep investing in it.

David MacGregor, Longbow Research.

Nick, congratulations on a great quarter. Let me start off with just continuing on the point we were just discussing. And you talk about the fact that there wasn't a lot of belt-tightening in this, but then you cite RCI progress in each of the individual segments.

So help me reconcile this. It seems as though there has been some cost-cutting. I am looking specifically at the C&I segment, where you had a negative 5% incremental margin. In other words, revenues were down, but EBIT was up.

And I know you have said repeatedly in the past that your RCI would allow you to grow the margins in a flat revenue environment. Help me understand the answer you just gave to the last question versus these points.

Sure. First of all -- first of all, we view -- you may not like this either, but we view as-reported sales as arithmetic. Organic sales are up for us, so the bits and the bites and the metal and the mechanisms: we sell more of that, we are happy. We are encouraged by that.

So even in C&I, which was down, that 3.4% organic is what we follow because that looks to us to be customer gain. That is one. Two is, is that what you see in this situation is what I am talking about -- when I am talking about RCI, I am talking about things like being able to make the product less expensive -- less expensively.

We reduce the setup times in the factory, which is a big deal for us. We find ways through customer connection and our innovation process to wield new technologies that allow us to develop new product cheaper.

Remember, in C&I, for example, last year in aviation, we brought -- last year in oil and gas, I think we -- or heavy truck, let's say, we brought out 859 new products, and aviation was 996. And one of the things that allows us to do that better is new technology like 3D printing and finite element analysis and so on. And that cuts costs in the design cycle and allows us to bring out those new products with lower costs than before. Those are the kinds of things we do.

So even if we have lower as-reported revenues, our costs get driven down because of some of that. And it doesn't happen every quarter. It happens -- if I reduce the cost of one particular product, well, maybe that product sells well this quarter and I get some good benefit out of it. That may not sell so well next quarter and I don't quite get the same benefit. Anyway, that is my --.

Okay. I appreciate the clarification. Thanks. On the originations, it was up 16%. Once again, it was kind of a up 9% number last quarter. Is that really just timing (multiple speakers)?

Yes, it is pretty much. Yes, there is a lot of timing flowing through there. Remember that originations have to do with the franchisees selling the products.

Right.

Right. And you got -- you also got an SFC that flows through this. So in originations are things like loans that go through for the franchisees themselves. Like van loans and things like that that are occur. And so there is that noise in the originations in the month. So when we have a particularly great SFC, that can distort that as well.

But when you step back and you look at the trend of everything, it really is -- there is a lot of noise from quarter to quarter. You kind of got to look back at it. If you look at (technical difficulty) because we entered there first because it made sense. Just as I said before, when the bullets are flying overhead -- I can assure you this from personal experience -- when the bullets are flying overhead, people kind of want to make sure things work.

And so we figured it was the most critical of industries. We invested in it more. And it is bigger. So if you take our revenues, which is somewhere north of $450 million or something like that, let's say, and you divide them by 6 and you take one of the bigger ones, that would be the military. And oil and gas would be more in the middle someplace.

So if that helps. I think that should give you some ballpark view of this. You got one big guy who is down strong double-digits, it can put a little overhang on you.

Okay. Let me just ask one other question. Just we're late in the call here, and this is kind of a big-picture, high-level question, but if you could just walk us through with some quick comments on each of the four segments and just discuss in a recessionary environment how much downside would you expect in revenues.

And also, with all the progress in RCI initiatives and the new product introductions and the much richer portfolio, how much better, if at all, would margins be in the trough than what we saw last time around?

Last time around, we started at 12$ and went to 10% -- 12.3%. If I remember, 2008, the OI percentage was like 12.3% and it went to 9.9%. And that was -- the 9.9% was, I would say, artificially depressed by the fact that we had the credit company in transition -- somewhat. Not huge, but that is a factor there a little bit.

And so you can say, all right, it impacted some, but maybe not much. But okay. We had that transition going on in the tools group and so on. Maybe arithmetically, it didn't affect us, but down there, we had some turbulence. And so then the big difference there is now is we are starting at 17.5%. So I wouldn't expect it to be worse than that deterioration.

The other factor I'd offer is this. Two factors. One is, I believe we are stronger in our market positions, therefore even more resistant. Number one. Number two, and -- number three, and this is harder to predict. Last time, our customer base, which was principally the 70% of customer base, the automotive repair technician, I spent a lot of time talking about the fact that they were cash rich and confidence poor. They were getting up every day and reading bad news for breakfast. It was the worst recession of our lifetime. People were talking about putting dollars in mattresses.

Well, I am not sure -- and so therefore, they didn't buy big-ticket items, even though they had a lot of cash. That would happen again, but I am not sure it would be the same extent. I don't know. That is a judgment call, of course.

And we are more experienced at RCI than we were. And the other thing is we are just better at RCI. And so we would probably step that up. If you can't -- you only have 24 hours in a day, so you can't -- if you think the prospects for growth are less, you turn more toward improvement.

Tom Hayes, Northcoast Research.

Just as it relates to the tools group, certainly positive results from both the domestic and international businesses. Nick, I was wondering if you could maybe give a little additional color in regards to the contribution from the international franchise business in the tools group?

The international franchise business is about -- is also up double digits. The US is up strong double digits -- up double digits in the US. The international is up just about the same. I would say that in order -- the strength -- Australia and UK were actually up more than the US. Canada was up somewhat less. So you put those together in a cocktail and I think it all came to about the same as the US.

Okay. And I guess looking a little bit bigger picture, I think you have kind of touched on some components so far today. Clearly, an opportunity for you is to get a larger percentage of the shop-related spending. Just what are your thoughts on where you are on the penetration rates when you look at complete shop spending and some of your initiatives to expand that?

Well, look, let's look at it this way. I would say that we are less than half of where we are in terms of our position with tools. And so if you think of it that way, yes, people respect our brand -- shop owners respect our brand as much as technicians. So I would view that as kind of a view of the opportunity.

We think we have runway in the tools itself for the technicians. And we are well behind that in terms of shop penetration. So I think we have got quite a bit of runway there. I would say if you want to use baseball terms, we are in the third or fourth inning.

And it appears we have no further questions at this time. I will turn it back to Leslie Kratcoski for any closing remarks.

Thanks, everyone, for joining us this morning. A replay and transcript of the call will be available shortly on our website. And as always, we thank you for your interest in Snap-on. Good day.

This does conclude today's teleconference. You may now disconnect. Thank you and have a great day.