實耐寶 (SNA) 2016 Q2 法說會逐字稿

Good day, everyone, and welcome to the Snap-on Incorporated 2016 second-quarter results conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Leslie Kratcoski, Investor Relations. Please go ahead, ma'am.

Thanks, Tony, and good morning, everyone. Thanks for joining us today to review Snap-on's second-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 provided slides to supplement our discussion. These slides can be accessed under the downloads tab in the webcast viewer as well as on our website, Snapon.com, under 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.

This presentation includes non-GAAP measures of financial performance, which are not meant to be considered in isolation or as a substitute for their GAAP counterparts. Additional commission regarding these measures is included in our Q2 earnings release issued today, which can be found on our website.

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

Thanks, Leslie. Good morning, everyone. I will start this call with some of the highlights of our second quarter. I will speak about the general environment and the trends we see and I will take you through some of the progress we've made. Then Aldo will move into a more detailed review of the financials.

Our second quarter was encouraging and we believe it once again offered evidence of clear advancements along our runways for both growth and for improvement. Reported sales were up 2.4%, or to $872.3 million and that included unfavorable foreign currency translation this quarter, an impact of $10.2 million. It also reflected an incremental $5.9 million from last year's Ecotechnics acquisition.

Now, organic sales for the quarter rose 2.9%. Opco operating margin expanded by 140 basis points and earnings per share, they reached to $2.36, up 16.3% compared with the $2.03 of last year. The Opco operating margin reached 19.1%, up from 17.7% in 2015. That 140 basis point increase reflects the higher sales but it also represents the power of Snap-on value creation.

For financial services, operating income grew to $49.5 million from last year's $41.4 million, combining with Opco to drive our consolidated operating margin to 22.9%, up 180 basis points.

From an overall macro perspective, the automotive repair arena remains strong and that can be seen clearly in the businesses serving that sector, the tools group and the repair systems and information, or RS&I group. They continued to make progress in the quarter both in and outside the United States.

The tools group organic activity increased 5.8%, once again demonstrating its ability to expand on our already strong position, leveraging a stream of new products and innovative solutions, capturing more business by helping technicians keep pace with changing vehicle technologies and with the aging fleet.

In RS&I, organic gains of 5.2%, higher sales of diagnostics and repair information products to independent repair shop owners and managers, increased volumes with OEM dealerships, expanded activity in undercar equipment and broad progress in most regions.

For the commercial and industrial group -- for commercial and industrial, our C&I group, organic sales were down 2%. Results were mixed across our industrial sectors and geographies. In critical industries, headwinds surrounding our military business remain. Spending stagnation from Washington continued in the quarter. We also witnessed ongoing inactivity within the Middle East. Aviation customers delaying project work due in part to the turbulence throughout that area, that region.

That said, the more positive industrial sectors in places like US aviation and power generation, where we made progress based on our understanding of the task, our increasing understanding of the task, and our extending product lines that enable that work. Also a positive for C&I, SNA Europe advanced. SNA Europe, our European hand tools business, delivering positive results. Broad strength across the core of Europe in places like the UK, Germany, and Spain, in a period when the word Brexit entered our vocabulary accompanied by uncertainty.

The overall results remain positive. Strength in vehicle repair, mixed performances from critical industries and advancements against the wind in Europe. Opportunities outweighing the challenges and the sales growth confirms it.

The operating income clearly demonstrated the leverage and the power of Snap-on value creation. Our Snap-on value creation processes in safety, quality, customer connection, innovation and rapid continuous improvement. In this quarter, special note should be made of customer connection and innovation, keeping pace with the aging car parc and the changing technologies across the workplaces of the world.

Another broad trend as we move toward automatic control and more drive by wire is the growing need for more precision and mechanical adjustments and more insight into data trends. Snap-on innovation is responding to that opportunity and the products that support the need for precision and insight help drive our sales and our margins in the quarter. Customer connection and innovation and, in fact, all the Snap-on value creation processes helped us advance down our runways for improvement every day, driving our 140 basis point OI gain and overcoming the challenges.

Well, that is the overview. That is the macro overview. Now let's turn to the groups. Let's move to the groups.

We'll start with C&I. As I just said, a 2% organic sales decrease with lower critical industry activity and higher volume at SNA Europe and our Asia-Pacific and power tools operations. The operating income margin was 13.8%, a 50 basis point decrease, impacted principally by the reduced sales in the higher margin critical industry businesses.

For the industrial division, we had headwinds. But as we said, we also had sectors of growth. US aviation sales were higher, bolstered by innovative new product like our latest in the tool control solutions, the Automated Tool Control locker.

You may remember our ATC smart toolboxes, visually keeping track of workplace hand tools. Well, the new ATC locker brings that asset control to irregularly shaped items like extension cords, toolkits, and plastic or fabric carrying cases, personal protective equipment, all common in aviation shops.

The new ATC locker makes tracking those nonstandard tools easy and reliable, and like the smart box, the ATC locker is fully networkable. It enables tracking from a central site, displaying the tool control status for easy surveillance and avoidance of foreign object damage.

Avoiding foreign object damage, a really important feature in those critical aviation applications. We can all relate to that. Based on early reception, we believe we have a winning extension to our flagship tool control line with this locker selling well.

Now we often speak about customer connection, direct observation of the work, and guiding new product innovation based on that observation. The industrial division is constantly introducing new products born out of that value creating process.

One example is our SGDE series of electrostatic dissipative screwdrivers, great for places like avionics maintenance shops or any critical application where static discharge can damage sensitive equipment, special conductivity to dissipate static and a rotating handle mechanism that is ideal for precise detailed electronics work. Safety and precision, two special needs made clear by direct observations at aviation MRO back shops across the world. Customer connection in action, making work easier the aviation sector. That's what these screwdrivers are.

Another customer connection, this time, the offset Crowfoot adapter for the specially configured fasteners at power generation sites. It replaces homemade welded tools that frequently break and damage those high-volted insulators -- we have all seen them on the top of transformers, damage that equals critical failure.

Visiting those substations, observing the work, we also saw Frankenstein-like modified tools welded out of multiple tools, trying to do the transformer tasks, and we knew we could do better. So we designed a Snap-on professional tool that is more durable, safer and easier to use. It is a great attraction in power generation and it's products like that that are behind this quarter's positive results in that sector.

Now let's speak about SNA Europe. During the double dip in Europe, we said we would use RCI energetically, and we did. But we also said we would not reduce capacity. Well, that faith is paying off.

SNA Europe registered in its 11th straight quarter of year-over-year sales growth, a positive trend in a very uncertain economic environment of Europe. And profit? Q2 marked the 13th straight quarter of margin improvement. SNA Europe up again in sales and in profit.

Our Asia-Pacific operations also contributed positively and we kept investing in that region, more products, more distribution, more capabilities, positioning to take advantage of that building potential. That is the C&I story, turbulence in certain critical industries, partially offset by progress in other divisions.

Now let's move to the tools group. Organic sales were up 5.8%, reflecting mid-single-digit gains in the US and internationally. Operating margin of 18.3%, up 120 basis points, overcoming 80 basis points of unfavorable currency. That 18.3% and 120 basis point rise, it is a clear demonstration of our improving position and progress along one of our more -- most important runways for growth, enhancing the van channel.

The advancements are evident in the sales and in the margins and perhaps most importantly, in the overall franchisee health metrics, which are all trending positively again this quarter. We believe our franchisees are growing stronger, armed with an array of innovative products.

Products like the new quarter-inch drive extra long flex head ratchet. At 10.5 inches it allows technicians to work in difficult-to-reach spots, under the dash, in tight engine compartments, or anywhere that access is limited. It combines our patented dual pawl system with a finely machined 72 tooth gear, more power in less lateral space at a distance.

It's manufactured in our Elizabethton, Tennessee, tool plant and it's the next in a series of extra long handled tools, designed specifically to make the technician's toughest jobs much easier. We believe it does just that and early sales have been robust.

We have been making torque products for some time. In the second quarter -- but in the second quarter we launched the heavy-duty half-inch drive mechanical torque wrench. We call it the Brutus, the Brutus 300, targeted at technicians servicing larger vehicles. It solves a critical need, making it possible to torque a wide range of fasteners using a single tool in places where a number of special tools would normally be required.

Today, the trend I described, many larger vehicles, large SUVs and pickup trucks, responding to the need for more precise specifications, require a wider range of torque, some in tight places, some on buried components, some above 250 foot pounds, big components, like brake calipers, pitman arms and wheel hubs. Previously a technician would go through a time-consuming, multi-tool procedure, or sometimes just torque by judgment.

The Brutus uses Snap-on's unique metallurgical capability to reach in the farthest places, fit in the smallest spaces, but have the strength necessary for larger torque values, all in a relatively light package for less fatigue. It's manufactured at our plant in City of Industry, California. It's long, small, light and strong, responding to a growing need for precise torquing in larger vehicles.

Along with the innovative product, the tools group has another special advantage, our financial services arm, Snap-on Credit. Strategic program aimed at supporting those essential big-ticket percentages, the credit company is focused on enhancing our van network and again this quarter, it did just that. That's the tools group, new products guided by customer connection driving sales growth and strong margins.

Now on to RSI. Solid across the group. Organic sales growth of $14.2 million, or 5.2%. Operating margin 25.2%, rising 80 basis points, broad-based progress, operation by operation, the diagnostics and information businesses selling to independent sales shops, driven by our award-winning handheld diagnostics products and by our extensive database of repair solutions.

Whether it is the top-of-the-line VERUS Edge, with its comprehensive diagnostics, technical service bulletins, and the power of SureTrack big repair data for advanced professionals and working on those really difficult repair, whether it is that big VERUS Edge or advanced professionals or, for the entry level technician, the ETHOS Tech, with its considerable functionality and attractive price point, the Snap-on lineup of handhelds makes work easier across the garage.

Some of today's vehicles now have over 100 electronic control units, all requiring service, so the demand for diagnostic tools and data insight is rising. To support those growing complexities, our Mitchell 1 team continues to refine its ProDemand product, expanding make and model coverage, adding the most recent vehicle platforms, broadening search results, improving navigation, providing even more shortcuts to a quick fix with its SureTrack big database. All of it saving technician time. The Mitchell 1 solution gets better every quarter and we see it in the results.

Sales of undercar equipment also up mid-single digits, with growth registered in the US and our international markets. The US gains included particularly strength by a pair of our recent acquisitions, the Challenger Lifts and Pro-Cut brake lathes, both expanding the Snap-on presence in the garage and both progressing well in the quarter with products like Challenger's versatile CL12 lift, three-stage, low-profile arms for more flexibility, and Pro-Cut's new X9 on-car brake lathe.

More precision in rotor matching, more repeatability, it'll stay calibrated over thousands of cuts. The trend in vehicle repair, more precision. That means more wheel alignments and more rotor matching and Snap-on has the products that make it easier.

Speaking about hit products and alignment, last quarter I mentioned the launch of the V3300 Wheel Aligner. I said it was a game changer and so it was. Based on -- and so it was based on the enthusiastic reception from many prominent dealer networks. Now with a full quarter in the book, the results are in and the sales have been strong, and it is no wonder.

We've spoken about the trend to more precision and that means more frequent alignments, enabling some of the new features like lane departure systems or adaptive cruise control and the V3300 fits that trend. More alignments are in the future and the speed and the accuracy of the V3300 is a great asset.

To wrap up RS&I, we see it as a confirmation, together with the tools group, of the strength of the auto repair market. RS&I, great diagnostics, new repair information and expanded offerings of undercar equipment, all driving positive trends and improving our position with repair shop owners and managers.

Well, that is the highlights of the quarter, growth and improvement, progress along our runways for coherent growth and clear advancements down our runways for improvement. When you step back and you look at these numbers, sales increasing organically by 2.9%, Opco operating income margin of 19.1%, up 140 basis points, EPS $2.36 in the quarter, 16.3% higher than last year. It was another encouraging quarter.

Now I'll turn the call over to Aldo. Aldo?

Thanks, Nick.

Our second-quarter consolidated operating results are summarized on slide 6. Net sales of $872.3 million were up 2.4%, including $10.2 million of unfavorable foreign currency translation and $5.9 million of acquisition related sales. Excluding foreign currency translation and acquisition related sales, organic sales increased 2.9%, primarily reflecting higher sales in our businesses serving automotive repair, partially offset by lower sales to critical industries in our C&I segment.

Due to the strengthening of the US dollar, foreign currency movements adversely impacted our Q2 sales comparisons by 120 basis points. Consolidated gross margin of 49.4% improved 20 basis points from 2015 levels as benefits from higher sales and savings from RCI initiatives were partially offset by 40 basis points of unfavorable foreign currency effects.

Operating expenses of $264.9 million yielded an operating expense margin of 30.3% in the quarter, an improvement of 120 basis points from 31.5% last year, primarily due to benefits from sales volume leverage and savings from RCI initiatives, as well as lower stock-based mark-to-market compensations and other expenses and a lower pension expense. As a result of these factors, operating earnings from financial services of $166.4 million, including $6.1 million of unfavorable foreign currency effects, increased 10.3% as compared to prior year and as a percentage of sales increased 140 basis points to 19.1%.

Financial services revenues of $69.3 million in the quarter increased 18.1% from 2015 levels. Operating earnings of $49.5 million increased 19.6%. These increases primarily reflect the continued growth of the financial services portfolio. Consolidated operating earnings of $215.9 million, including $6.4 million of unfavorable foreign currency effects, increased 12.3% and the operating margin of 22.9% increased 180 basis points from 21.1% a year ago.

Our second quarter effective income tax rate of 31% compared to 32% last year. For the full year, we continue to anticipate that our 2016 effective income tax rate will be comparable to our full-year 2015 rate of 31.7%. Finally, net earnings of $140.1 million, or $2.36 per share, increased $20.1 million, or $0.33 per share, from 2015 levels, representing a 16.3% 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 $285.7 million in the second quarter decreased 3.4%. Excluding $4.2 million of unfavorable foreign currency translation, organic sales declined 2%, primarily due to a double-digit decline in sales to customers in critical industries, largely in the military and international aerospace market segments. This decline was partially offset by mid-single-digit increases in the segment's Asia-Pacific and power tools operations and a low single-digit gain in the segment's European based hand tools business.

Gross profit in the C&I group of $111.4 million compared to $112.9 million last year. The gross margin of 39% increased 80 basis points, mostly due to savings from RCI and other cost reduction initiatives. Operating expenses of $72.1 million in the quarter compared to $70.7 million last year.

The operating expense margin of 25.2% increased 130 basis points from 23.9% last year, primarily as a result of unfavorable sales volume leverage and 70 basis points of higher cost, including cost associated with continued expansion initiatives in Asia. As a result of these factors, operating earnings for the C&I segment of $39.3 million, including $1 million of unfavorable foreign currency effects, decreased $2.9 million from 2015 levels. The operating margin of 13.8% compared to 14.3% last year.

Turning now to slide 8, second-quarter sales in the Snap-on tools group of $416.7 million increased 4.5%. Excluding $4.7 million of unfavorable foreign currency translation, organic sales increased $22.7 million, or 5.8%, reflecting similar gains in both the Company's US and international franchise operations. Gross profit of $182.1 million compared to $176.5 million last year. Gross margin of 43.7% decreased 60 basis points, largely due to 80 basis points of unfavorable foreign currency effects.

Operating expenses of $105.8 million in the quarter compared to $108.5 million last year. The operating expense margin of 25.4% improved 180 basis points, primarily due to sales volume leverage and savings from RCI initiatives and 20 basis points of lower stock-based costs associated with the Company's franchisee stock purchase program. As a result of these factors, operating earnings for the Snap-on tools group of $76.3 million, including $4.1 million of unfavorable foreign currency effects, increased $8.3 million and the operating margin of 18.3% improved 120 basis points from 17.1% last year.

Turning to the repair systems and information, or RS&I group, show on slide 9, second-quarter sales of $295.2 million increased 6.4% from 2015 levels. Excluding $5.9 million of acquisition related sales and $2.3 million of unfavorable foreign currency translation, organic sales increased 5.2%. The organic sales increase reflects a mid-single-digit gain in sales of diagnostic and repair information products at independent repair shop owners and managers, as well as mid-single-digit gains in both sales of undercar equipment and sales to OEM dealerships.

Gross profit of $137.8 million compared to $129.6 million last year. Gross margin was 46.7% in both periods. Operating expenses of $63.3 million in the quarter compared to $61.9 million last year. The operating expense margin of 21.5% improved 80 basis points, principally due to sales volume leverage and savings from RCI initiatives.

Second-quarter operating earnings for the RS&I group of $74.5 million, including $1 million of unfavorable foreign currency effects, increased $6.8 million from prior-year levels. The operative margin of 25.2% improved 80 basis points from 24.4% last year.

Now turning to slide 10, operating earnings from financial services of $49.5 million on revenue of $69.3 million compared to operating earnings of $41.4 million on revenue of $58.7 million last year. The average yield on finance receivables of 17.9% in the quarter compared to 17.8% last year and the average yield on contract receivables of 9.3% in the quarter compared to 9.4% last year. Originations of $281 million increased 10.9% from 2015.

Moving to slide 11, our quarter-end balance sheet includes approximately $1.7 billion of gross financing receivables, including $1.5 billion from our US operation. Approximately 82% of our US financing portfolio relates to extended credit loans to technicians. In the first half of 2016, our worldwide financial services portfolio grew $121.3 million. As for finance portfolio loans and delinquency trends, these continue to be in line with our expectations.

Now turning to slide 12, cash provided by operations of $162.1 million in the quarter increased $1.8 million from comparable 2015 levels. This higher net earnings and improvement in working investment were largely offset by the timing of cash tax payments. Net cash used by investing activities of $95.3 million included $76.9 million to fund a net increase in finance receivables. Capital expenditures of $20.6 million in the quarter compared with $27.7 million last year.

Turning to slide 13, days sales outstanding for trade receivables of 60 days was unchanged from 2015 year-end levels. Inventories increased $9.3 million from 2015 year-end levels, mainly to support continued higher customer demand and new product introductions. On a trailing 12-month basis, inventory turns of 3.4 compared with 3.5 turns at 2015 year end.

Our quarter-end tax position of $119.9 million increased $27.1 million from 2015 year-end levels. The net increase includes $341.4 million of cash from collections of finance receivables and $303.7 million of cash from operations. These cash increases were largely offset by the funding of $475.1 million of new finance receivables, dividend payments of $70.9 million, the repurchase of 377,000 shares for $58.5 million, and $40.1 million for capital expenditures. Our net debt-to-capital ratio of 23% compared with 24.6% at 2015 year end.

In addition to our $119.9 million of cash and expected cash flow from operations, we have more than $700 million in available credit facilities. Our current short-term credit ratings allow us to access the commercial paper markets. As of second-quarter end, we had no commercial paper borrowings outstanding.

This concludes my remarks on our second-quarter performance. With that, I will now turn the call over to Nick for his closing thoughts. Nick?

Thanks, Aldo.

Well, that's the Snap-on second quarter, continuing a trend of positive performance with ongoing year-over-year gain, runways for growth, enhancing the van channel and expanding with repair shop owners and managers. Vehicle repair, a space with strong tailwinds, aging car parcs, changing technologies and a need for more precision. Abundant opportunity and you can see it in the results.

The tools group growing 5.8% organically and an OI margin of 18.3%, up 120 basis points, something we have not seen. It was achieved against 80 basis points of unfavorable currency.

RS&I in the vehicle repair space, broad gains growing at 5.2% organically. OI margins of 25.2%, up 80 basis points. Tools and RS&I up again, clear evidence that vehicle repair is strong and that it has abundant opportunity and that Snap-on knows how to take full advantage.

C&I battling the difficulties in the military and international aviation but proving it can extend and advance in sectors like US aviation, power generation and in geographies like Europe, where our efforts with SNA Europe are paying off. All of it combined to author organic growth of 2.9%.

The second quarter also bears the mark of Snap-on value creation. Customer connection and innovation creating a growing list of new products to provide higher value, matching the needs for greater precision in performing the work of today and of tomorrow. And RCI, people all of the Corporation getting up every day and making our complex business more efficient. Snap-on value creation drove our Opco operating margin to 19.1%.

Again, stepping back and looking at the performance and at the numbers, growth up 2.9% organically, performance Opco operating margin of 19.1%, up 140 basis points, a significant rise again this quarter. EPS of $2.36, a 16.3% increase. It was another encouraging quarter and we believe that we have the abundant opportunity and the demonstrated capability to continue that positive trend on through the remainder of 2016 and well beyond.

Before I turn the call over to the operator for questions, I will directly speak to our franchisees and associates. I know that many of you are once again listening to this call. The encouraging results in this quarter reflect the special capability, energy and dedication you bring to our effort every day. For your clear achievement in this period, you have my congratulations and for your contributions and your commitment to our team unfailing, you have my thanks.

Now I'll turn the call over to operator. Operator?

(Operator Instructions) Scott Stember, CL King.

Good morning.

Good morning.

Can you maybe just talk about the overall industry backdrop for the automotive aftermarket? It doesn't seem to have that much of an impact on your quarter, but just specific to weather and whether you saw any mechanics or end markets that were backing off on tool purchases somewhat in the quarter.

Not really. I think, look, I think every quarter is different and there are ups and downs in every quarter in terms of the growth, in terms of the types of products that sell and so on. Big ticket was very strong.

I was just on a van within just a little over a week ago and the franchisees in the garages we visited were all very, very optimistic. So I did not get any feeling from that from an anecdotal point of view.

During the quarter, I met with a group of our franchisees several times, from the United States and Canada and so on, and they seemed uniformly positive. When I look at the numbers, I think this market looks like it has looked to us for multiple quarters now, for a long time. So empirically with the numbers and anecdotally from what I get from talking to franchisees and technicians, I think this is pretty positive.

Okay. Focusing on the tools group, maybe just talk about the -- some of the higher priced electronics versus traditional tools and power tools, maybe how that trended in the quarter.

Big-ticket items, diagnostic sales were strong in the quarter for the tools group. You have kind of a secular trend in the market, what I characterized in my remarks as a tailwind, the need for more diagnostics because 40% to 50% of repairs in the parc today need a diagnostic to effect it efficiently and new cars are 80%, so there is a growth toward everybody needing a diagnostic. We see that in our everyday sales and trends in the market.

But in this particular quarter, big-ticket items were fairly strong. High-value, some of the things I talked about, high-value tools that attack precision like the Brutus 300, strong seller. The idea -- hand tools, in fact, were also up very strong. We saw, I think, pretty wide strength.

But again, in this quarter, big ticket led the way. That is what we expect because our marketing aids around Rock N Roll Cabs and we have just done a major refurb on the TechKnow van, have -- kind of support those purchases.

Got it. Last question on currency, when you would expect to start to see some of the easier comparisons with the --

For your information, for example, you can look at it this way. In the second quarter the numbers were in sales, we had about $16 million and $0.09 of currency impact between transaction and translation. This quarter, we had $10 million and $0.07. $10 million, just north of $10 million in currency and sales and I think that's 1.3% or something like that and about $0.07 of currency impact on profitability, 50 basis points in the OI -- affecting the OI margin.

If you go forward, if everything stayed where it is, for us the pound is kind of a big deal. I think you would say that in the third quarter, the comparisons are such that there would be a slight easing if everything stayed the way it was; and then the fourth quarter would get easier, I think, for us.

That's the way we'd see the year going on, an easing of the pressure of currency, but I think that happens more in the fourth than the third, primarily because of the pound. And the pound does carry uncertainty around the exchange rate today, anyway, in that situation. But if it stays the way it is today, that's how it will be.

Okay. Just a quick follow-up. Sales that are bound by pound, what percentage of your total sales are coming from that region?

About 8%, 8% or 9%. About 8% or so. No one knows what Brexit is going to do. The roll-up to Brexit was, I think, a time of uncertainty. We did not really see much change.

But we are selling into a very basic critical, critical industry. So our people are going to -- I think our people buy. We even saw in a deep recession people bought the small -- the low payback -- the short payback items, even in the deepest of recession. It remains to be seen what effect Brexit will have, but we are optimistic about it, okay?

Got you. Thanks for taking my questions.

Sure.

(Operator Instructions) Gary Prestopino, Barrington Research.

Hey. Good morning, everyone.

Good morning, Gary.

Nick, what -- you did not give a percentage on the European hand tools in the quarter. Can you share that with us? Maybe I missed it.

It was up low-single digits in the quarter.

Okay.

We usually do not give percentages, but we have given it in those kinds of terms, mid-single digits, low-single digits, high single digits.

Right.

It was up more in profitability. We are pretty encouraged by that, though. Like I said, it's the 13th straight quarter of growth and what is really encouraging, I think, is the growth in core Europe. We have not seen growth in the core of Europe like this before uniformly. I am a little encouraged by UK, Germany, and places like that. France, it was encouraging for SNA Europe.

The previous caller asked a question about currency. Did you say that currency comparisons for the pound should get easier as we go through the back half of the year?

I said -- what I said -- well, hard to predict. You've got the cocktail of what you sell and all that stuff. But if all things remain equal, what will happen is, is that currency in general will get -- currency in general, the pound becomes more difficult I think as you roll out through the year, but then the other currencies abate.

So if you look at the total, if everything stays the way it is and the mix stays the way it is, you end up having a little softening in the third quarter and more softening in the fourth quarter. I think that is the way to think about it. The pound actually stays pretty problematic and in fact, might be more problematic, yes.

So it would be the Canadian dollar and the euro where you would be --

Canadian dollar, Aussie dollar, the euro, the SEK, those kinds of currencies, the comparisons simply get easier later.

Then did you see any disintermediation in Europe post Brexit for the first couple of weeks of this quarter, can you discuss that at all?

We don't comment on the forward quarter, but I don't really think so. Certainly I will say this, there was a lot of uncertainty going -- I was in Europe just before the Brexit vote and there was a lot of uncertainty floating around, around that. We didn't see it impact then. I do not know what will happen going forward.

But again, I say we sell items that solve critical tasks; that tends to be less affected by the economics. It can go up and down in a short period, but I think over time it does not get affected. I do not really think we expect, in that situation, if the exchange rate changes dramatically, that would have a transactional effect, of course. If it affects interest rates, that would have another thing around -- in other parts of the Corporation, but I do not really, we didn't see anything so far.

Then in terms of the Snap-on Credit, it keeps growing in excess of the sales of the tools group. Are you seeing more of an appetite or more products being financed by the technician that (multiple speakers)?

Not really that. The thing is, fundamentally what is happening in the tools group, if you look at it from our perspective, and we look at it, you can't look at any one quarter because there is a secondary market and there's a lot of -- that's actually the franchisee sales, not our sales, so it doesn't match up. There's a lot of noise from quarter to quarter.

But if you look at overall the last year, the originations are roughly the same as the sales of the big-ticket items. It is being driven by the sale of those big-ticket items.

If you have been a student of Snap-on, you know that we have been energizing big-ticket sales through, we think, better product, of course, in diagnostics and tool storage but also in terms of the marketing, in terms of the marketing, the Rock N Roll Cabs and the TechKnow vans. If I didn't know anything I would say Snap-on puts Rock N Roll Cabs and TechKnow vans in and it makes clear-coat boxes, I'm going to see higher originations because it's going to have a higher big-ticket sale.

Okay, thank you. Thank you, Nick.

Sure.

David MacGregor, Longbow Research.

Good morning, everyone. Thanks for taking the call. Nice quarter, Nick.

Thank you.

Just talking about the growth, though, in the tools segment, you guys peaked out in the first quarter of 2015 at about 13% organic growth and just because of the comping process, obviously that's not a sustainable level and you're going to be coming down. But that organic growth has been sort of settling back down for six consecutive quarters now. You are back to 5.8% this quarter.

You talked many times in the past about the long-term growth in the tools segment is probably closer to about 4%. I just wonder, are we on our way back to that level here on the second half of the year or is there something you could --

I think what I said is -- I will make two comments about that. One is, is that all through, there has been periods when we grew at 6% or 5%. During the string of 23 out of 24, I think year before, in 2013 I think we grew it -- we threw a bunch of 6%s during the period. So it goes up and down. There is fluctuation.

I said this. I think, look, I think the tools group grows in the 4% to 5% range based on the tailwinds. That is a great market. Automotive repair is the market, one of the markets -- in our model, is one of the business models that fell from [settled] and automotive repairs is one of the great markets. You've got aging of the parc and you've got a changing in technology, you've got more precision, and that will drive us in a 4% to 5% range.

Things like Rock N Roll Cab and TechKnow Express and the assistant program drives us up into higher levels depending on how effective that unleashes, how much more effective that makes the van business. So from time to time we get above this. I think our ability to grow above the 4% to 5% depends on our ability to keep coming up with those things. That does not mean we can grow at every quarter.

So I think that is how I view it. I think we were at a solid 4% to 5% but I think if we can keep coming up with ways to amplify our business, the technicians are there. There is 1.3 million technicians. We're calling on 850,000 of them. A lot of them are hiring every year, so we see a great market there. The other thing I will offer about the quarter, yes, it was 5.8%, but 18.3% OI margin.

The incremental margins were fantastic and you said --

Try to find one of those in the tools group history.

Yes. But you said --

That was against 80 basis points.

Right.

I guess the less than 6% sales or 7% sales did not affect the profit. They're still bringing the money to the bottom line.

Right. You've said repeatedly that during that period of superb growth that you are not too focused on cost. You are really more focused on just bringing in the business. But that at some point, that growth would ease and that's where we would see the margin improvement.

There was a lot of low hanging fruit, which is part of why I asked the question. Now you are starting to see the margin growth, which would confirm as a milestone that maybe we are at that point where the growth starts to ease.

But you also said earlier that call that you are starting see strong double-digit growth in originations, and originations tracks big-ticket. So I guess the question I would next ask is, what is easing within tools? What do you see that -- if big ticket's holding up, what is easing on you?

Look. I did not say in the quarter that was -- I did not match the double-digit growth of big ticket to the -- or double-digits of originations in the quarter because you can't do that. You've got to look at it over a longer period. What I did say was the double-digits of originations in 2015 matched almost, pretty close, dead on, the growth of the big-ticket items in 2015. In any quarter it is hard to say that.

I do not think -- in the quarter the more robust businesses were around diagnostics, around hand tools. I think we had a dynamite hand tools quarter, but maybe we had possibly less of a power tools quarter than we did in the prior quarter. That's the kind of characteristic we had. We had some goes ins and goes outs if you want to look at by product.

Yes. You are not getting any more Tech or Rock N Roll Cab Express so I presume that the storage part of this is starting to level out a little as well. Is that correct?

Yes, but we actually did add one in the quarter. We went from 66 to 67. I mean, okay, it is not much.

Look, I don't -- I think it is one quarter. I am not saying that -- we don't give any guidance, I'm just saying it's one quarter. So I think it's a little wrong to view it totally as, what were the mix in one quarter and will tool storage go down. I don't think so.

Okay. Last question was you talked on the last call about extending a little more credit to your most discerning franchisees, guys with the strongest track at dispensing credit. I am just wondering, where did that credit get put to work in the quarter and where does that show up in the segment numbers, if in fact it did get put to work?

It shows up in the originations and in the tools group. Those are the big-ticket items. Those guys are wielding big-ticket items. So that is part of the support system that allows us to sell those big-ticket items.

Big-ticket is basically -- and it has been for tools. This has been 30 years of this, or 50 years, I don't know how long, but it has been since the 1980s at least that they have been, and I think longer, that they have been financing big-ticket items in this way.

What we did, as you said, is what we did was we just bring striping to the franchisees where we listen more to some guys and listen less to other guys depending on their record to call in the air strikes about appropriate credit. I think in the quarter, that kind of was relatively stable but over the last 18 months, we've striped more guys that have been better at credit and they have been able to aid the credit process more effectively.

Right. Thanks very much.

Sure.

Bret Jordan, Jefferies.

Good morning, guys.

Good morning.

Just to follow up, your comment on the secondary market on the credit side, I am just trying to line up the growth in the finance book relative to the growth of sales. Has anything, and I guess we have decided that there is not an increase in penetration of credit on a transactional basis. You are not lending at a higher rate. It has been more a growth of high-value sales.

But then you had a comment about the secondary market sort of creating some volatility there. Is that when you're lending on a transaction where a franchisee is selling a used tool they took on trade?

Yes. Let's take it this way. Yes. That is essentially what it is.

But what I meant was, what I offered that comment for is, it is harder to take one quarter's numbers in origination and relate it from originations, the credit action, to the actual sale which is a movement of product from us, from Snap-on tools to the franchisee.

The product moves from Snap-on tools to the franchisees. It might go into inventory, it might sell directly. And it might ignite, say, okay I sold you this Mr. Big Box. It's 15-feet wide and I took your 7-foot box in trade and I am selling that. Both transactions would be financed.

So while the net, you get a discount from the original for the amount in trade and then that would be on sell; the total amount tends be sort of the same. The timing of those two things can be very different.

So a franchisee might end up in his garage might have three boxes, used boxes waiting there and in one quarter might roll them all out, might find a seller for them. Do you see what I mean?

Yes, I do.

That tends to distort the timing. Not the amount, but the timing.

Okay. Then to go back on the tools, on the contribution from RCI versus leverage, did you discuss sort of what the RCI impact was in the prepared remarks? I didn't hear it.

Sure. The tools group is more or less like this. The OI margin is up 120 basis points and they had 80 basis points of negative currency. The principal offset is RCI.

Okay. Then one question on C&I. You talked about US aviation and power generation being highlights. Did you say anything -- are you seeing any shifting trends?

Energy was a category you used to call out as being challenged. Is there any sign of improvement at some of the other big pieces like energy or mining that have been lagging in C&I?

Mining, I do not think so. Energy, generally oil and gas still lagging but not by the mammoth proportions we saw in the first quarter and the fourth quarter of last year. That came back a little bit. That got better.

For C&I in general, as we go into the third and fourth quarter, we start to get into, I will say, less demanding comparisons in military and in international aviation as well. You see that kind of effect going on.

In terms of the quarter-to-quarter business, I think we saw rays of hope in places like US aviation, in power generation, and general industry seemed to be fairly nice in the quarter. So we are encouraged by that but I am not -- given the fact that we are down 2% in the quarter, and down more in the critical industries, I am reluctant to predict any turnaround till I actually see it.

Okay. Then one final question on RS&I just to cover all the bases. In the mix of software versus hardware, are you seeing a shift where you have got this great penetration of diagnostics and you're selling software upgrades and that's increasing as a percentage of the mix? Or is that business kind of stable? It would seem like the software margins should be pretty good.

Software margins are pretty good but I'd say in the quarter it was relatively stable. From time to time we can see a bump from software based on we will issue a -- issue 18.4 will come out in a quarter and that will bump the software sales. But generally I would say our software sales go up with the general push of diagnostics.

Remember, when we're looking at RS&I, we're looking at -- the sales we show you have quite a bit of software in it in Mitchell 1. Mitchell 1 is a pure software business: repair shop information and repair shop management, that's where that SureTrack business is.

Generally, though, I do not think we have seen a big change in the mix yet. You might be entitled to the idea that going out in the future as we get more installed base, you may see some improvement in that. I tend to think as we get more installed base we will see both, because people will buy in the first.

The entry technician will buy in at the bottom level for that ETHOS. Then when he starts to get more experience, he'll want to trade up and he'll buy both software and hardware as he trades up.

Okay, so the penetration rate of hardware is still growing. It is not just -- you don't have a cycle where you get to sell a lot of very high-margin software to a large installed base of hardware.

We eventually will. But I think now we are still seeing a growing of the penetration.

Okay. All right. Thank you.

David Leiker, Baird.

Hi, good morning. This is Joe Vruwink for David.

Hi, Joe.

I just want to circle back on your C&I comments. I think it was last year in Q3 when military took its first step down and then energy followed in Q4. So when you look at spending levels in those two businesses as we head into this year's Q3, do you think you could actually get to the point where the comparisons flip around and C&I reports a positive comp in Q3?

As I said, I think the comps get easier. Clearly the military comp gets easier, the international aviation comp gets easier, the oil and gas comp is starting to get easier now. I think those get better.

Whether I can predict a turnaround in the military business, the oil and gas business, or the Middle East loosens up, hard to say. They do loosen up and I think you'll see favorable comps.

Like I said, I am positive about our mechanism there, our proof of concept. We keep investing in those businesses. If you look at the C&I SG&A or OI this quarter, you see quite a bit of investment. That is because we invested in Asia. We kept investing in these markets because we believe in them.

We obviously believe a turnaround. Whether that's the third quarter or not is another question, but these comparisons do get softer.

Great. Then shifting back to the tools group, not to belabor this question but growth slowed more than 2 points sequentially and your comparisons versus a year ago got easier, so by saying that hand tools were good in the quarter and big-ticket items were strong in the quarter, there just seems to be a missing link in the equation that would explain why growth ultimately did decelerate.

As I said, I don't really want to go through all the items, but power tools is down and so on. I do not necessarily recognize that the comparison was necessarily soft versus last year. I am not really sure about that.

But the thing is, is that from our view we are not seeing -- all I can say is we're not seeing anything in the market that is different. So the 5.8%, yes, it is down from the 8.1%. But we still see it as a pretty strong quarter and we do not have any other view of the future of the tools group or the auto repair market based on that.

In terms of how the numbers work out, like I said, big ticket still strong, sold better than the average. Hand tools sold better than the average. The other ones were obviously, if you talk about arithmetic, they were lower than the average.

Okay. Fair enough. My last question, with Fortive being its own company, Matco has been a little more visible and it looks at -- their van count has grown pretty dramatically in recent years. But it doesn't really seem to be diluting Snap-on's growth at all and so is it the case where the two of you, or really the three of you, in this market coexist? Is there any deterioration or things that you are concerned about? Just maybe an update on the competitive dynamics.

The scions of Danaher are strong managers and so Fortive is a formidable competitive with Matco and so is Mac, but I have not heard their names mentioned on the last several -- and many, many van rides now. So -- and including the last one, which was just a little while ago. You do not seem to be seeing them impinging on us. Whatever they are doing, they are doing it invisible to most of our people.

I tend to think people decide to buy Snap-on tools as they look at others. They make that choice. It is kind of a binary decision. You buy Snap-on because that's the best. If you don't want that, you look at a bunch of others.

Generally if you think about the numbers of people that we have in the field, the 3,487 vans versus even the advanced Matco numbers, we're -- our people are much more focused and spend more time with a certain amount of customers and calling on those customer bases. The Matco and Mac guys must chew a lot more dirt.

Very good. Thank you.

That concludes today's question-and-answer session. Ms. Kratcoski, would like to turn the conference back to you for any additional or closing remarks.

Thanks, everyone, for joining us today. A replay of the call be available shortly on Snapon.com and as always, we appreciate your interest in Snap-on. Good day.

This concludes today's conference. We do thank you for your participation. You may now disconnect.