實耐寶 (SNA) 2015 Q4 法說會逐字稿

Good day everyone and welcome to today's Snap-on Incorporated 2015 fourth-quarter and full-year results conference. Just as a reminder, today's call is being recorded. At this time I would like to turn the call over to your host for today, Leslie Kratcoski. Please go ahead.

Thanks Sarah and good morning everyone. Thank you for joining us today to review Snap-on's fourth-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 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. The 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.

Thanks Leslie. Good morning everybody. I will start with the highlights of our fourth quarter and our year. As usual, I will give you my perspective on the results, on the environment, and on our progress. And after that, Aldo would move into a more detailed review of the financials.

The Snap-on fourth quarter. Organic sales up and profits well above last year. The period continued on a positive trajectory of performance. Again this quarter, we had opportunities and we had headwinds. We took advantage of the opportunities and we overcame the headwinds. Organic sales grew 3.1%.

If we include the impact of $33.2 million of unfavorable foreign currency translation, overall sales in the quarter were $851.7 million, a small decrease from last year. Our EPS was $2.22, up 12.7% from the $1.97 in 2014. And that rise reflects an operating, OPCO, operating margin of 19.1%. An increase of 220 basis points.

Financial service earnings of $45 million in the quarter were also up, leading to a consolidated operating margin including both financial services and OPCO of 22.7%, an improvement of 230 basis points. The results were encouraging. Our markets, the automotive repair-related segments, they continue to be favorable. Changing technologies and aging vehicles are requiring new tools and more repairs. Our tools group and our repairs systems and information, or the RS&I group, took advantage of those opportunities and grew us across our franchise network and with repair-shop owners and managers.

Now for our commercial industrial group, or C&I group, markets were mixed. Headwinds a bit more pronounced in the quarter impacted by a few down sectors and macro-economically challenged geographies leading to organic volume just under 2014. A couple of those difficult environments were natural resources and the US military, both substantially lower in the fourth quarter.

Oil and gas. A market we have identified as a long-term strategic growth opportunity for us. And we continue to see it that way, but in the quarter we experienced similar issues to those businesses with more prominent exposure in that arena and we saw a deep decline.

The military sales. Ongoing troop draw downs and budget restraints led to a substantial year-over-year drop, but we continue to maintain our presence in that segment and we are poised to increase our position when the variability subsides.

C&I is also the most international of businesses and was also challenged in the quarter by economic turbulence across the globe in some of the European markets and in parts of Asia-Pacific. That said, C&I progressed through the quarterly headwinds, taking advantage of the opportunities in critical industries like, critical industries like aviation and the national markets like Japan and Germany and Mexico and emerging markets like India and Indonesia.

So overall, our businesses, I would characterize, overall across our businesses I would characterize our markets as mixed. We have tailwinds in automotive repair, and we have pockets of turbulence in some afflicted critical industries and in challenged geographies. Having said that, we believe that our businesses are well positioned to capitalize on the possibilities, opportunities that do exist along our runways for growth, enhancing the van network, expanding with Snap-on's presence with repair shop owners and managers, extending into critical industries, and building in emerging markets.

These are the strategic initiatives we see as decisive for our future and we will continue to strengthen our position along those runways as we go forward. And looking ahead, and also looking ahead, we also seek their runways for improvement. Snap-on value-creation processes, safety, quality, customer connection, innovation. Rapid continuous improvement, or RCI, driving significant progress. And our fourth-quarter and our full-year results confirmed those ongoing improvement possibilities.

Let's speak about the full year. Snap-on's EPS in 2015 was $8.10, an increase of 13.4%. Driving those earnings was an OPCO earnings margin of 17.7%, up 140 basis points for the full year. And when we include the income from financial services of $170.2 million, which rose $21.1 million, the consolidated operating margin for the Corporation in the year was 21.3%, up 170 basis points.

That performance came on sales for the year of $3.4 billion, reflecting a 7.1% organic increase. Broad growth. Tools group up 10.9%. RS&I increasing 4.9%. C&I rising 5.8%. All performances in the year reflecting significant advances down our runways for growth and for improvement.

Now let's move to the groups and their fourth-quarter results. C&I. Sales were down in the period 5.5% from 2014, impacted by 490 basis points of unfavorable currency. Organic sales were slightly lower than last year with varied results across the group.

Gains by SNA Europe, our European hand tools business, and that the power tools operation, and decreases at the industrial division. From an earnings perspective, C&I operating income was $41.9 million. That represents an operating margin of 14.9%, a rise of 130 basis points.

Encouragingly, SNA Europe posted a sales increase, again, in the midst of significant European headwinds, continuing its progress now, nine quarters in a row of year-over-year growth. And the profits? Rising even higher, now up eleven straight quarters, reflecting RCI and Snap-on value creation. New products and new processes, positive trends in some difficult geographies.

Also in C&I, our power tools division advanced in the period. Both survived an array of new products. Innovations like our CDR 8815 18-volt lithium cordless drill, launched in the quarter. It is our latest in a successful line of cordless tools. An oversized variable-speed trigger, less finger stress and more accurate torque control. A heavy duty gearbox, reducing operating wobble and run-out, important for power tools. A precision single-sleeve keyless chuck with carbide jaws, increasing grip and torque and enabling one-handed bit changes. A nice time saver for professionals. And all those features contained in a powerful but compact design. With the CDR 8815, we believe we have a winner and the early results confirm it.

Now the industrial division had weaker sales in the quarter, as we mentioned, and there were difficulties in military and oil and gas. That said, we've maintained our growth strategies of extending in critical industries, even during this turbulence. We remain committed to ongoing advancements made possible by Snap-on value creation, especially in customer connection and innovation, offering new products specifically aimed at customers facing critical challenges.

One of those new products, designed for the natural resource sector, is the Snap-on gas meter wrench. Custom engineered for a safer and more efficient service of gas meters. Rugged and lightweight with an aviation grade aluminum body, five interchangeable heads for maximum versatility, and a 19-inch handle to more easily generate the full range of force required. You know, over 500,000 gas meters are replaced annually in New York City area alone, and 20% to 30% of all injuries in the utility sector are attributed to the gas meter service.

This innovative new Snap-on wrench was guided by customer connection, direct observation of the work, and it includes an improved ergonomic design for better grip and less hand stress. And of course it incorporates our Snap-on Flank Drive wrenching system, eliminating slippage and requiring less force to complete the job. It is more versatile. It ends the need for a technician to carry a heavy bag of assorted pipe wrenches, and it's safer and more effective. We believe the Snap-on gas meter wrench will be a big seller, a must-have for service technicians throughout the power generation industry. It is just another example, another example of customer connection and innovation strengthening the C&I position in critical industries.

Now onto the tools group. An 8.7% rise in organic sales. An encouraging increase again this quarter. The operating earnings of $71.9 million represented a margin rate of 17.5%, up 100 basis points from last year. And that gain included a 70 basis impact from negative currency.

We speak quite a bit about runways for coherent growth. Strategic avenues of sales advancement, and clearly large among those opportunities is enhancing the franchise network. The tools group once again demonstrated significant progress along that runway. You can see it vividly in the financial numbers for the quarter and for the full year. And it is evident in the health metrics we monitor each period whether it is franchise profitability, turnover, or delinquencies.

The measures of franchise health are all trending upward, and that speaks to the growing strength and to the widening advantage, the widening advantage of our van network in the robust vehicle-repair arena. But beyond the numbers this qualitative, but clearly observable evidence of forward momentum. I can tell you that the franchisees at our fourth-quarter national franchise advisory council, and more recently at the 2016 kickoff events held earlier last month, demonstrated the enthusiasm and confirmed the optimism that has marked the tools group from route to route for some time now.

And as more evidence, we continue to be recognized as a franchise of choice. Again this year Snap-on ranked among the top 25 in Entrepreneurs Magazine's list of top 500 franchises. And the franchise business review, which collects franchisee satisfaction feedback, listed Snap-on as a top 50 franchise in its latest ranking, marking the ninth consecutive year we received that award.

It also goes without saying that the tools group's performance would not have been possible without the benefits of Snap-on value creation. Particularly innovation and customer connection, creating an assortment of exciting new products, born from our unique customer interactions. And for the sixth straight year, the tools group increased its number of hit products, million-dollar sellers developed from that direct customer observation, from our on-site experience in the workplace.

Let's consider our new SPBS series of striking pry bars. An upgrade in performance, in durability, and most importantly, in safety. These next generation tools include a precision ground blade with angled design for maximum lift. It also features a new grip material which performs in extremely low temperatures, an important place like Chicago today and has greater resistance to common-shop chemicals.

And it's got a new, and it features a new ergonomic handle that not only offers a more comfortable grip, but the flared designed provides technicians' hands greatly improved protection from off-center hits. Not a small feature. It is an exceptional design, made possible from customer connection, and it represents progress even in a long-established product line.

Finally, I would be missing a huge contributor to our van channel and a major strategic advantage, if I did not mention Snap-on Credit. Financing the networks big-ticket items. As you would expect, the credit operation was well represented at our kickoff meetings, at our recent kickoff meetings and held in the first part of the year, and they were working to increase the power of credit and making our franchise operations -- making our finance operations an even greater strategic contributor. Snap-on is wielding its tools network more effectively every day. And the support of our credit company is a major element in that progress.

Moving to RS&I. Sales in the fourth quarter were $280.6 million, with organic gains of 2.2%, reflecting a rise in diagnostics and repair information products to independent repair-shop owners and managers, a low single-digit increase to OEM dealerships, and essentially flat sales of under-car equipment. Operating earnings of $72.1 million rose $6.9 million. And the OI margin? It was 25.7%, up 260 basis points from last year's 23.1% with RCI paving the way.

RS&I advanced in the quarter, expanding with repair-shop owners and managers, but particularly with the independents. Mitchell 1, Walkers independent shops leading shop management software. Innovative marketing services to gain more repair customers and the most comprehensive and capable repair information anywhere. And based on customer connection, it has thousands of customer contacts every year.

Mitchell 1 keeps improving its advantage, adding repair information for new vehicles, improving the ease of navigating its pro-demand system, building on the millions of actual repair events it all already catalogues, making its unique SureTrack big data repair base even more powerful. And customers, shop owners and managers, have taken notice. The quarter saw more fleet placements, more attention to industry shows like APEC, and more penetration of shops around the country.

From our diagnostics division, also selling to independents, another solid quarter, including positive results from our newest hand held units, the VERUS Edge. I mentioned it last quarter, it was in the midst of its introduction. While the enthusiasm continued from our customers and from our franchisees, it is our most successful launch. Customer satisfaction is high, and we regularly receive testimonials. When I go out and visit with franchisees and customers and technicians, we receive testimonials like the VERUS Edge, it helps my shop fix cars faster and be more profitable.

VERUS Edge is quite a product. Faster, easier, smarter. Technical service bulletins at hand, comprehensive diagnostics, and the power of SureTrack big-repair data. Simply the best hand held in vehicle repair, and it is another winner with independent shops, it is clear. And speaking of diagnostics, this time in the heavy-truck area, we continue to expand our coverage. More engines, more power train combinations. The PRO-LINK Ultra, already the go-to diagnostics in truck shops across the nation got stronger again.

Finally in the period, RS&I equipment division recorded essentially flat activity, impacted particularly by Eastern Europe. That said, we keep driving to expand our position in equipment with repair shops with innovative new products like the B1200 P wheel balancer system, designed for more sophisticated independent shops, with specialty or dealer-like operations. A series of customer connections with those locations helped us highlight the need for features like fast run-out measurement, automatic data entry via scanners and smart sonar, a pinpoint laser light for positioning the adhesive weights on the wheel, and a highly intuitive and rapid touch-screen interface.

The B1200, faster and more accurate. It is now available in European markets and a North American introduction is scheduled for later this year. So that is RS&I, using Snap-on value creation, offering innovative new products, capturing opportunities, and securing an expanded presence with shop owners and managers.

And that is our fourth quarter. Organic sales rising 3.1%. EPS $2.22 in the quarter up 12.7% against $0.11 of unfavorable currency. Progress along our runways for coherent growth and clear advancements down our runways for improvement, safety, quality, customer connection, innovation, and rapid continuous improvement driving a 19.1% operating margin, 220 basis points higher than last year. It was an encouraging quarter. Now I'll turn the call over to Aldo.

Thanks Nick. For our fourth quarter, consolidated operating results are summarized on slide 6. Net sales of $851.7 million in the quarter were up 3.1% organically, reflecting increases in our businesses servicing automotive repair, notably the Snap-on tools group as well as our diagnostics and repair information business. Partially offset by some headwinds in our C&I segment.

On a reported basis, net sales which included $33.2 million of unfavorable foreign currency translation, decreased $5.7 million or 0.7% from 2014 levels. 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 Q4 sales comparisons by 400 basis points.

Consolidated gross margin of 48.4% in the quarter improved 40 basis points, primarily due to a higher organic sales and savings from RCI initiatives, partially offset by 20 basis points of unfavorable foreign currency effects. Operating expenses of $250 million yielded an operating-expense margin of 29.3% in the quarter, an improvement of 180 basis points from last year, primarily due to organic sales volume leverage and savings from RCI initiatives as well as lower performance-based and stock-based compensation expenses.

No restructuring costs were incurred in the quarter. We incurred $1.1 million of such cost in the fourth quarter of last year. As a result of these factors, operating earnings before financial services of $162.3 million in the quarter, including $9.2 million of unfavorable foreign currency effects, increased 11.8% as compared to the prior year. And as a percentage of sales, improved 220 basis points to 19.1%.

Financial services revenues of $63.1 million in the quarter increased 6.2% from 2014 levels, and operating earnings of $45 million increased 6.6%. These increases primarily reflect the continued growth of the financial services portfolio.

Consolidated operating earnings of $207.3 million in the quarter, including $9.9 million of unfavorable foreign currency effects, increased 10.6%. And the operating margin of 22.7% improved 230 basis points from 20.4% a year ago.

Our fourth-quarter effective income tax rate of 31.1% compared to 32.1% last year. Finally, net earnings in the quarter of $131.4 million, or $2.22 per diluted share, increased $15.2 million or $0.25 per share from 2014 levels, representing a 12.7% 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 $281.8 million in the quarter decreased 0.6% organically. Primarily due to a high single-digit decline in sales to customers in critical industries. Largely reflecting deep declines in sales to the military and to customers in the oil and gas sector.

These organic sales declines are partially offset by a low single-digit gain in the segment's European-based hand tools business, and a double-digit increase in the segment's power-tool operation. Gross profit in the C&I group was $107.6 million in the quarter. The gross margin of 38.2% increased 20 basis points as savings from RCI initiatives and lower restructuring costs were partially offset by a shift in sales that included lower volumes of higher gross margin sales to customers in critical industries and an increase in lower gross margin sales from the power-tool operations.

Operating expenses of $65.7 million in the quarter compared to $72.9 million last year. The operating expense margin of 23.3% improved 110 basis points, primarily due to a 70 basis point gain from the sale of a former manufacturing facility as well as benefits from the sale shift already mentioned. As a result of these factors, operating earnings for the C&I segment of $41.9 million, including $1.5 million of unfavorable foreign currency effects, increased 3.5% from 2014 levels and the operating margin of 14.9% improved 130 basis points.

Turning now to slide 8. Fourth-quarter sales for the Snap-on tools group of $411.2 million increased 8.7% organically, reflecting continued strength in sales both in the US and internationally. Gross profit of $173.7 million in the quarter increased $7.3 million from 2014 levels.

The gross margin of 42.2% decreased 70 basis points, primarily due to unfavorable foreign currency effects. Operating expenses of $101.8 million in the quarter decreased slightly, and the operating-expense margin of 24.7% improved 170 basis points, principally due to sales volume leverage. As a result of these factors operating earnings for the Snap-on tools group of $71.9 million, including $4.8 million of unfavorable foreign currency effects increased 12.5%, and the operating margin of 17.5% improved 100 basis points from 16.5% last year.

Turning to the repair systems and information, or RS&I group, shown on slide 9. Fourth-quarter sales of $280.6 million increased 2.2% organically. The organic sales increase primarily reflects a mid single-digit gain in sales of diagnostic and repair information products to independent repair-shop owners and managers, and a low single-digit increase in sales to OEM dealerships. Sales of under-car equipment were essentially flat year over year with continued weakness in East European markets including Russia. Gross margin of 46.7% improved 20 basis points from 46.5% last year.

Operating expenses totaled $58.9 million in the quarter, and the operating expense margin of 21% improved 240 basis points, primarily due to organic sales volume leverage and savings from RCI initiatives. Fourth-quarter operating earnings for the RS&I group of $72.1 million, including $2.9 million of unfavorable foreign currency effects, increased 10.6% from prior-year levels. And the operating margin of 25.7% improved 260 basis points from 23.1% last year.

Now turning to slide 10. In the fourth quarter, operating earnings from financial services of $45 million on revenue of $63.1 million, compared with operating earnings of $42.2 million on revenue of $59.4 million last year. The average yield on finance receivables were 17.8%, compared with 17.6% last year, and the average yield on contract receivables was 9.5% in both periods. Originations of $252 million in the quarter increased 8.5% from 2014 levels.

Moving to slide 11. Our year-end balance sheet includes approximately $1.6 billion of gross financing receivables, including $1.4 billion from our US operation. Approximately 80% of our US financing portfolio relates to extended credit loans to technicians. In 2015, our worldwide financial services portfolio grew $206 million. As for 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 $144.4 million in the quarter increased $47.2 million from comparable 2014 levels, due in part to higher 2015 net earnings and lower growth in working investment as compared to the prior year. Net cash used by investing activities of $74.6 million included $66.8 million to fund a net increase in finance receivables. Capital expenditures of $16.1 billion in the quarter compared with $17.3 million last year. For the full year, capital expenditures totaled $80.4 million.

Turning to slide 13. Days sales outstanding for trade receivables of 60 days, compared with 61 days at 2014 year end. Inventories increased $22.3 million from 2014 year-end levels, primarily to support continued higher customer demand in the auto-repair sector and new product introductions. As well as the addition of inventories related to the acquisition of [Echo Techniques].

On a trailing twelve-month basis, inventory turns of 3.5 compared with 3.7 turns at 2014 year end. Our year-end cash position of $92.8 million decreased $40.1 million from 2014 year-end levels. The net decrease includes the impacts of funding $844.2 million of new finance receivables, dividend payments of $127.9 million, the repurchase of 723,000 shares for $110.4 million, $80.4 million for capital expenditures, and $11.8 million for the acquisition of Echo Techniques. These cash decreases were largely offset by $624.8 million of cash from collections of finance receivables and $496.5 million of cash from operations.

Our net debt-to-capital ratio of 24.6% compared with 26.3% at 2014 year end. In addition to our $92.8 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 to access the commercial paper markets. At 2015 year end we had no commercial paper borrowings outstanding.

This concludes my remarks on our fourth-quarter performance. Now I will briefly review a few outlook items for 2016. We anticipate that capital expenditures in 2016 will be in the range of $80 million to $90 million. We also expect that our full-year 2016 effective income tax rate will be comparable to our 2015 full-year rate of 31.7%. With that I will now turn the call over to Nick for his closing thoughts. Nick.

Thanks, Aldo. Snap-on's fourth quarter. An encouraging period. Taking advantage of tailwinds, overcoming headwinds, growing organically, improving performance significantly, again.

There is turbulence. Deep decreases in the military and oil and gas and difficulties across the geographies. But there are tailwinds. The aging and changing of vehicles continues vehicle repair remains robust.

In this environment, we keep driving down our strategic runways for growth, launching innovative new products and advancing our position. And despite the difficulties, we continued moving down our runways for improvement, Snap-on value creation, safety, and quality. Customer connection and innovation working better and better. We had more new hit products in 2015 than ever before, not just for the tools group, but for the Corporation overall. Runways, growth and improvement, authored 3.1% organic growth in the quarter against the wind.

EPS of $2.22, up 12.7% over last year's fourth quarter against $0.11 of unfavorable currency. And a 19.1% OPCO operating margin, a rise of 220 basis points, all extending our ongoing upward trend that is continued for some time. And we believe that the strength of our business model, the power of our brand, and the capabilities of our Team, position us well to continue that positive trend as we go forward.

Before I turn the call over to the operator, I will say a word to our franchisees and associates. I know many of you are hearing this call. The encouraging results of our fourth quarter in the year and our potential for continuing the encouraging trends reflect your capability and your dedication. For the success you have achieved, for your contribution to our future, and for your commitment to our Team. You have my congratulations. You have my admiration. And you have my thanks.

Now I will turn the call over to the operator for questions. Operator.

(Operator Instructions)

Tom Hayes, Northcoast Research.

Good morning gentlemen.

Good morning.

Nick, I wondered if you could talk a little bit more, provide more detail on the critical industry side? Certainly, military and oil and gas has been the challenge of the year. Can you talk about the cadence as it went through the quarter and the outlook for 2016?

I think we are seeing deep declines in both of those places. We are talking multiple double-digit declines in the military again, and in oil and gas in particular. You are talking about the outlook we've said, for some time that military, those two businesses are driving C&I in general. If you look at C&I beyond those businesses, it grew by about just over 5%. So you see how much they influence the situation. So, you say to yourself what is going to happen with those businesses? And we've said for the military for a long time that it's uncertain.

And so you say to yourself, well that uncertainty is dependent on the government situation, and so we are poised to take advantage, and it could come back in the short term, or it could continue for a while. In terms of oil and gas, I think we are seeing a historic downturn, 70% decline in the business, I mean in the oil price, just in the last, in recent times. We haven't -- we saw that big recession in 2009, we saw the Iran Iraq war, so it is an unusual situation. When it comes back I expect oil and gas to come back.

Okay.

On the other hand, as we said in our in our release, in our comments, aviation was pretty good for us in the quarter. So you see some goes in and goes outs, but the dominant factor in those businesses are the oil and gas and the military.

Okay. A question on the expense line, the operating expense was down meaningfully, how much of the decline was tied to, you called out less stock-based comp, how much of that contributed to the decline?

I would say about 20 basis points.

20 basis points. The big thing, if you're looking at operating expenses, there is quite a few goes ins and goes outs, but a lot of that is RCI. If you step back, last year in the fourth quarter, we talked about the, there was a 53rd week, a 53rd week in general, if I look at it from the trajectory of the corporation it was kind of not significant.

It was not significant. It should not change your view of where we are going. But if you start to look at it by an account to account, it of course becomes an issue associated with the operating expenses, because you have that extra week of operating expenses. You start to look at accounts, you had an extra week of sales: 1.7% of extra sales last year.

So that would not be in this year. But if you step back and look at it we don't think we don't think the 53rd week was significant in general, or change your view of the corporation. If you look at an account, like operating expense, it really is a factor. And you have currency in operating expenses as well. So you have those things rolling through: RCI, currency, and things like the special events of last year.

Thank you.

David MacGregor, Longbow Research.

Good morning.

Nick, can you talk about demand patterns in January and any deterioration that may be visible be time beyond critical industries?

We almost traditionally never talk about the current quarter. We never give guidance. But I will say, look I will say, I was just on a van, just on a van in Addison, and I have to say that when I talk to the people in the field, both our franchisees and the customers, you know, you get on a van and you go from shop to shop, they all seem very positive. And that might stop with the positiveness and the optimism that I saw at the kickoff meeting. You know, we have a lot of these around the country, and I was at one of them and the rest our staff were at others and they come back and certainly we are seeing a qualitative view of optimism. And so I can offer that.

Okay. Just within the SG&A pullback, notwithstanding it was 70 basis points in the C&I business, I get that, how much of that was just attributed to the weaker military and oil and gas business versus what may have been in that number in terms of structural cost takeouts, and also can you say to what extent there may have been cost items that were pushed forward into 1Q or pulled back into last quarter?

I don't think we did that. If you look at, if you are talking about, are you talking about the 130 basis points of margin improvement in C&I?

The $16 million of SG&A drop, which was great, but I am trying to get a sense of what the nature of that was.

The $16 million is overall. That is not just for C&I.

What is in there, I said you had, you had currency, a big number currency where the currency year-over-year effects the SG&A and shrinks it. You have RCI. You've got as somebody mentioned before, you have some goes ins and goes outs in terms of pension going the other way, compensation going one way. And you also have the 53rd week last year which was an extra week of operating expenses. Like I said and so therefore the comparison issue is unfavorable and you get paid back at the sales line for that because the sales end up being a little bit smaller. But if you look at it, I don't want, I want to focus that if you look at that one account, you start to see the effects of the 53rd week. If you look at it in total it was not much of an effect for us.

Last question, if you can talk about the trends you are seeing in tool storage and whether you are seeing any deceleration in demand patterns?

No, our big tickets items in total, our big ticket items in total, were up a little bit more in the quarter and I don't see that really. I really don't see it. You know, we have not identified any particular cooling of that activity. From quarter to quarter, these things always change, but I don't see a downturn, like I said our big-ticket items continued.

Thank you.

Liam Burke, Wunderlich Securities.

Good morning.

Good morning.

Nick, can you give us a sense, you did had a good year in new product introductions and hit products. What can we, are you continuing to see growth in that area, with more hit or more new introductions to create more hit products?

Yes, I am. I hate to pin myself to the rack of continual increases in million-dollar hit products. I am trying not to do that but that is our drive. I can tell you, we are getting better and better at customer connection and innovation.

And if you think about it, a complex product line of cars, 65,000 SKU is asymmetrically enabled by new technology, like 3-D printing and finite element analysis and some of the other things like x-ray defectometers, which is new to us, and electron microscopes and so on. So, from a design point of view, we are getting better, so we don't have to put as much up front into every product. And from a call in the air strikes point of view, reacting to customer connection, we are getting better and that has authored the continual improvement of our hit products. This year was up again.

I'm not, I would be aiming to bring it up next year, but you know, we, it is not something we always report about, but I think every year our new products become more impactful and more effective. Just look at the VARUS Edge. It is simply the best product available, in diagnostics, and diagnostics is a rising category. It's faster, smarter, easier to use, and it gives you hand-held access to our unique millions of records, and database of millions of records, that allows technicians to shortcut the repair process.

This is revolutionary. That is just one thing.

We pointed out the prybar today. Now we as the prybar for a reason. The prybar is a prybar, yet customer connection and innovation showed us how to make that long-standing category so much better. That's what's happening in Snap-on.

That is what is driving the business for us. It works in the tools group and we're confident it is going to work for critical industries, although there is turbulence as you can see in critical industries with oil and gas. Oil and gas, I think oil and gas and military, we always said that our penetration was low and we would not see an impact. But we did not contemplate going from $115 oil to $30 oil, which is cataclysmic.

With the end markets and automotive repair continuing to grow, are you seeing any change in the competitive front?

You know. I don't think so.

I listen to the same publicity that you listen to, and people -- I think it is a robust market, so there is room for everybody to have some good news in the market. But, when I go out and I checked this the other day with our people, when I go out in the -- to the franchisees around the vans, they don't talk about the competitors.

They talk about our Business, and how we can make it better. So I don't think we're seeing any change of presence. I just went -- I rode on a van where the guy talks about the numbers of competitors that left his route, in other words gave up the business and went out. He keeps track of it, but that's all.

He does not worry about the competition, he worries about himself. He worries about things like, questions like, our power tool is actually a lot better than our old power tool, the one replaced it. Or, maybe it is not as good and we need to make a little bit better. Those are the kind of things we talk about.

Or how much our productivity advancements, like providing for the vans, providing a mobile tablet for van drivers, a couple of mobile tablets for a van. 570 of our van drivers have assistants, and the mobile tablet allows them to spread both the principal and the assistant out into different areas, greatly increasing their reach. They talk about that, and the efficacy of that. They don't talk about the competitors.

Great. Thank you.

Gary Prestopino, Barrington Research Associates

Good morning, everyone.

Good morning.

A couple of questions. I know somebody asked this about million-dollar products, but Nick could you maybe quantify what was the growth in million plus products that you put out this year versus last year?

I will not actually quantify. I have tried to avoid quantifying that, and I am not going to change that in this call. But I would say, it was up this year by a reasonable margin. In fact, you might even call it a substantial margin in terms of what was launched. So we had a pretty good year in terms of in terms of new products. And remember, what I have said is that the number is now five or six times what it was in 2006. That's a pretty good number. Pretty good increase.

That is helpful. And you would anticipate that, obviously, you will continue to try and strive to put out more new products?

Sure. The whole point, is yes, I'm probably not going to slit my wrists if it does not increase as much next year, you know what I mean. But certainly we do target that and that's part of our plan. We would expect that to happen, we put the capabilities and the elements in place to make that happen. It's simply, we are getting better at it, we are getting better at it. You can see it in the tools group numbers.

Right.

8.7% against 1% or 2% GDP.

Can you maybe, at least we think that you had a recovery here, we are going into year seven, especially the US and the automotive market. Is there anything different that you are experiencing in this recovery versus maybe prior recoveries in your experience with Snap-on?

Actually, no, I don't think so. Actually the recovery has been going on since 2009, and so I don't think so. I do think automotive repair, which is 70% plus of our business is relatively robust, determined by the aging of the vehicles and the changing of the vehicles which isn't interrupted so much by economics.

And so I think automotive repair is in a good place, and makes us resistant to these, not immune to these kind of changes, but resistant. I don't see any change there. Look I think, if you look at other geographies and industries, we have -- they go up and down, like oil and gas and military, like anybody else. But I don't see anything different about those that I have not seen in a number of different ups and downs, except that maybe the oil and gas --

Hello?

Please stand by while we reconnect with our speakers. One moment. Ladies and gentlemen, please stay on the line. Please stand by as the speakers are joining, give us just one moment. You have rejoined, please continue.

Hello, Gary, are you still there?

Gary, your line is open.

What did you hear last? Sorry, we got cut off.

That was fine. I think we were talking about the differences in the recovery, what you are seeing.

I don't think that much. Certainly oil and gas is a bigger downturn than anyone has seen in a while, it is unusual, right? But, other than that, I don't think so. This is not our first rodeo, and automotive repair seems to be chunking along I think. Doing pretty well.

Okay. One last question for Aldo, in terms of your international sales, they run what about 25% of your business, right? Somewhere around there?

I think you have, Europe is about 18% of the mix and the emerging markets add another 10.

That is what I am getting at in terms of currencies, the currencies that really impact you would probably be the pound, the euro, and then what else?

You have it pretty much right. If you are looking at the sales line, Gary, the most important currency that creates a headwind is the euro. In addition to the euro, you have the Canadian dollar, a lot of people forget about that, the British pound would be the next most significant one. When it comes to the bottom line, we have more natural hedges throughout the continent of Europe, so the euro has less of an impact on the bottom line. The biggest impact to our profitability is actually the Canadian dollar, the British pound.

So the Canadian dollar and the pound.

That is why you see most of the impact manifesting itself in the tools. The good thing about the tools group, it is largely a sales footprint so they don't have a lot of cost and enjoy the benefit of the haircut in the weaker currencies in the United Kingdom and in Canada or Australia for that matter. So they don't enjoy the protection that you get where you have a euro-based organization that has a lot more cost decrease in US dollar terms.

The tools group was up 17.5%. It was up 100 basis points, but that was 70% basis points of negative currency, so you can see where that affects.

Thank you.

David Liker, Robert Baird.

This is Joe (inaudible) for David. The one slice of C&I that I don't believe you commented on yet, was Asia. Any updates on growth rates or trends from the Asia-Pacific region?

It was mixed in the quarter. China was weaker than we have seen in a while, and so we had China being weak and we had some, where Indonesia had been weak before, Indonesia was up, India was up so we had a balance there, in terms of our mix. In Asia-Pacific. China being more difficult in this quarter. We see a lot of variation from quarter to quarter in Asia-Pacific.

In China, is it possible to determine, this will sound strange but if a slow down in new vehicle demand, which may actually cause the fleet to age a bit, ultimately ends up being more beneficial to Snap-on?

I don't know. I don't think so. I kind of think the cars that are there in the park, they are going to age anyway. I don't think that the cars, the new cars being purchased are making the old cars go away. That's what I think.

I don't think they are shipping those overseas to any big extent. Now I could be wrong about that, but that is our general impression. About China, it is a lot of different markets and a lot of different areas. I think the slow down would probably help some, but I don't think it would be as big a factor as you might think. It's usually the size of the park.

One last one on C&I. Is there any correlation in the military business for Snap-on to the wheeled vehicle programs getting rolled out? If JLTV production starts ramping at Oshkosh, does Snap-on typically see a benefit in their defense business?

I don't know if we tied it to particularly Oshkosh or something like that, but certainly, wheeling out of new programs help us a lot. For example, the F-35 is a help to us, the fighter vehicle, the fighter, because we have a lot of business associated with supporting that for both production and for repair.

So that kind of program is an underlying program, but across the programs in the Defense Department, particularly around the projects around with the new products, that business is very weak, was very weak this quarter. If they launch new products, like you say a wheeled vehicle product out of Oshkosh, that provides an opportunity and we are well positioned to take advantage of that. So those kind of programs, new vehicles do help us. I don't know if you can just trace it to an Oshkosh program.

No, no, I was thinking more broadly on the programs that you commented on. And so, is it maybe fair to say the duration of this pullback in military spending might be shorter than what Snap-on dealt with in 2012, 2013 around the sequester?

I don't know. I think the government business is uncertain. We've said, the military business was up in the quarter, up in the first two quarters, and we said we knew it was going to be uncertain, and now when it is down, I still say the same thing. Certainly the things you are talking about, new programs are going to help and would shorten the cycle, that is true. Stabilization of the budget would help, it may be not as chronic as the control or the prior cycle. I cannot really say for sure.

Okay. I will leave it there. Thank you.

Thank you.

Bret Jordan, Jefferies LLC.

This is David Kelley in for Bret. Thank you for taking my questions. A couple of quick follow-ups on RS&I here. Regarding the flat under car sales you mentioned. I know a US service chain reported a fourth-quarter comp decline, largely due to some mild winter conditions along the East Coast. Just wondering if you saw some weather-related headwinds in the quarter, and how was domestic under car performance, and how do we think about that segment going forward, given the robust auto repair market we are talking about and really some of the significant miles driven gains?

There is a lot that goes ins and goes outs in the under car equipment business. First and foremost, that flatness is impacted by Eastern Europe. Among all our businesses, the under car equipment business had the strongest position in Eastern Europe and Russia. The dips in those places impacted that business, as you squeeze down to a smaller place the most, that is number one. In terms of the, in terms of the other businesses, you know of course, weather can be a factor in under car and it may have been, you may be entitled to some of that in the fourth quarter and some of that bad weather.

And the other thing is, it was up, quite, an under car business, our under car business is a longer wave business. It is not just a quarter business, and we have a good quarter like we had in the third quarter, sometimes you will have resources devoted to installation of those new products flowing into the next quarter, which will put a weight on the next quarter. So you see those three things rolling through it.

I would expect, to your question about the longer-term, I expect that under car repair will follow along with the generally robust repair, vehicle repair market in the US and in Europe as the cars get older. By the way, as the cars get lighter, and need more fuel economy, the precision of balancing and alignment needs to be stronger.

So we are very positive about the long-term future of that business and we have a major, major share of it.

Great. Quickly.

If you can provide some may be color around the 260 basis points margin expansion for RS& I? Just wondering how much of that is just basic blocking and tackling around the RCI initiatives that continue to provide you tailwinds.

RCI is a big dollop of it. And you have about, of the 260, I would say, you got, you got a little bit of negative currency and you got about 70 basis points or so, what I will call favorable mix. As you follow us over time, you will see that RS&I has quite a variation from business to business, in terms of operating margin. It could be thousands of basis points and so what happened in this quarter, is we had a strong, another strong quarter of diagnostics and Mitchell. The business to independents, which are high-margin business and a reduction of the hardware business, which is equipment, so that generated that 70 or so basis points of help from business mix. So that is what you are seeing. RCI and business mix.

Great. Just a final one from me, and this is more a big picture thought question. You mentioned sales to OEM dealerships were up again single-digits and as we think about maybe being on the backend of a cyclical recovery in new vehicle sales, do you think there might be a shift in dealership ordering patterns of equipment? Either they are focusing more on parts and service retention, or maybe they're spending less due to a flat retail sales market? How do you think about the dealership channel over the next --?

Having worked in the auto industry for 11 years myself, I would say that is a hard call. I don't think you can make a lot out of this. I guess we were saying mid single or low single digits in the OEM dealership business this quarter. I don't think you can make a conclusion on one quarter. Some of that was driven by programs out of OEM manufacturers, the essential diagnostics and so on.

I do think you make a point that as new car sales attenuate, they tend, dealerships tend to focus a little bit more on parts and service. I think that is true, to the extent that the time constants in which that rules into our business I'm not sure.

Great. Thank you.

David MacGregor, Longbow Research

Just a follow-up, Nick. Somewhere within your portfolio, there has got to be a line of business or a product or some franchise that serves as a pretty reliable leading indicators for you. And I just wondered if you could talk a little bit about where you are seeing leading indicators in your business and basically what they are telling you? There is obviously some concern here about your ability to sustain growth in 2016. I just wanted to give you an opportunity to talk about why you are feeling confident over the first half of 2016.

Our leading indicators are pretty much what we hear from our franchisees. And what we see about the programs in terms of the changing of the vehicles and what we hear from our franchisees about their outlooks for the demand in their business.

You can go out and talk to them and the leading indicators are, C, are we providing the kinds of tools that will solve the new problems that are coming on the horizons in the independent garages? This is not a quantitative leading indicator but it has been pretty reliable for us. So what we see as the optimism coming out from them saying, I think things are good and the fact that our new product portfolios, our innovative new products are solving more problems than ever.

Those are the kind of things and that has not abated. So I feel pretty good about that business. And in terms of the other businesses, I just think we also feel good about our growing strength in the critical industries, it's just that you see some very big headwinds in some of those critical industries and I can't predict where they're going.

Can you just remind us again --

On the other hand, I would just offer that, we have seen up-and-down before, and we have been able to grow profitability against the wind. Not every quarter, necessarily, but in terms of a trend. We view this, our situation as a trend. If you go back and you look at our numbers, from 2006 onward, sales and profits, the trend continued and even through the recession and the dip in recession the trend continued.

So you are seeing continuing growth in your future-dated orders?

We don't have future-dated orders. We are not a future-dated order business, so we don't have much of an order backlog. We don't have that kind of thing. We have to rely on the kinds of things we talked about.

Just last question, can you remind us what critical industries represents as a total percentage of C&I?

It represents about, I would say 40%. David, you can say, for government work it is $450 million business roughly.

Right. Thanks Nick.

Richard Hilgert, Morningstar.

Congratulations on a great quarter.

Thank you.

I just wanted to get your feel for what you are seeing in terms of puts and takes with some of the issues that we're facing right now on the new car side of the business? We're seeing diesel being a big issue right now, we're seeing hybrids being a big issue, we're seeing active safety coming into play over the next couple of years.

I would imagine that with more and more electronic control, there will be more opportunities for diagnostics maybe? But also I am wondering on the tools side, if there is any opportunities there. What is some of the puts and takes you are seeing with all of these changes coming down the pike?

All of those things are positive for our Business. When the vehicles change, that requires new tool loads, new electronics, new under car equipment to deal with the changes. If you just take one and you think about self driving vehicles and things like that, the more people rely on internal mechanisms inside the car, the more precise calibration has to be. And therefore, the more careful and more detailed the mechanical job is, the mechanics have to be.

And so, if it gets more electronic, there is opportunities for diagnostics. If it gets more, attended to onboard computers to control the car, more equipment and more diagnostics. And ironically, during the time in which the cars have electrified, it has gone from in the 90s it went from 50 to 60 engine codes for a car, to now thousands of engine codes. In that time, demand for hand tools has only increased, because the reparability of the car is so far down in terms of the design considerations, that the cars have become more and more difficult to physically repair, let alone diagnose associated with the electronics.

All of those things are good for us. We see a very positive future and trend and we're confident that continues the trend that you see in our numbers. If you look at our numbers and you see over periods of time, sales and OI margin, continual trends in good times and challenged times.

Great. Thank you.

It appears there are no further questions at this time. I would like to turn the call back over to Leslie Kratcoski for closing remarks.

Thank you everyone for joining us today. A replay of today's call will be available shortly on Snap-on.com and as always we thank you for your interest in Snap-on. Good day.

That does conclude today's conference, we thank you all for joining.