實耐寶 (SNA) 2016 Q3 法說會逐字稿

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

Thanks, Rachel, and good morning everyone. Thanks for joining us today to review Snap-on's third-quarter results, which are detailed in our press release issued earlier this morning. We have on the call today, Nick Pinchuk, Snap-on's Chief Executive Officer, and Aldo Pagliari, Snap-on's Chief Financial Officer. Nick will kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides 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, Snapon.com, under investor information. These slides will be archived on our website, along with a transcript of today's call.

Any statements made during this call relative to management's expectations, estimates or beliefs, or otherwise state management's or the Company's outlook, plans or projections are forward-looking statements, and actual results may differ materially from those made in such statements. Additional information and the factors that could cause our results to differ materially from those in the forward-looking statements are contained in our SEC filings.

Finally, 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 information regarding these measures is included in our Q3 earnings release issued today, which can be found on our website. With that said, I would now like to turn the call over to Nick Pinchuk. Nick?

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

In the third quarter, we again showed progress along our runways for growth and for improvement. And we saw those gains across all our operating segments. Total reported sales were $834.1 million, up 1.5%, and that included $9.7 million of unfavorable currency. It also included the incremental $1.1 million in sales from last year's acquisition of Ecotechnics.

Organic sales were up 2.6%, and the OpCo operating margin, it was up 140 basis points, reaching 18.9%. When you add in the $50.6 million of operating earnings from financial services, and that was up from $43.5 million in 2015, the consolidated operating margin was 23%, an increase of 180 basis points. Our EPS was $2.22, up $0.24, a double-digit increase, rising 12.1% from last year.

Let's consider the environment. Let's look at that environment. Automotive repair continues to be favorable, and we believe our tools group and our repair systems and information, or RS&I group, they're both well positioned to take full advantage of that opportunity.

The tools group clearly demonstrated enhancements to the franchise network, gains in both the North American and European markets, continuing to make the most of the opportunities, so abundant in an aging and changing vehicle fleet. At RS&I, serving repair shop owners and managers, sales progress was mixed, the volume of diagnostics and repair information products to independent shops was up mid-single digits. For the OEM side, activity with individual dealers was up, while programs commissioned by the OEM manufacturers, a historically lumpy space, was down. Undercar equipment was flat, with variations from product line to product line.

For commercial and industrial, or C&I, the group was up organically, 1.5%. Snap-on Europe, SNA Europe was higher again, making progress against the turbulence of Brexit and the other uncertainties across its markets. The industrial business was flat, reflecting the challenges we have seen now for a year.

Significantly however, the critical industry activity recorded its second straight quarter of sequential growth, following more than a year of decreases. Reductions driven by the difficult macro environment in areas like oil and gas, military and the Middle East.

Now, there will always be headwinds across our operations. They have been a factor in other quarters, and they were present in the third quarter.

But we did overcome, we did keep growing, because we are well-positioned to confront the challenges, and continue to proceed down our runways for growth, enhancing the franchise network, expanding with repair shop owners and managers, extending to critical industries, and building in emerging markets. These do represent our growth strategies, and we continue to make progress along those corridors.

At the same time, those growth drivers are joined and supported by the benefits of Snap-on value creation, safety, quality, customer connection, innovation, rapid continuous improvement, or as we call it, RCI. Together, these are the processes, the tools we use each and every day, to drive improvement, and improvement is written all over our results, especially customer connection, understanding the work of professional technicians, and innovation, matching that insight with technology to make work easier.

Snap-on value creation once again led to more prestigious awards. We were recently honored with two Motor Magazine Top 20 and with five Professional Tool and Equipment News, or PTEN innovation awards. But those winners represent only a fraction of a wide array of new products, borne out of insight of our franchisees and our direct sales people, translating workplace observations into productivity solutions. And in the quarter, those customer connections were a big factor in our results.

To see some of that, let's move to the individual groups. Commercial and industrial, organic sales up, with an operating margin reaching 15.1%, an increase of 80 basis points from last year's 14.3%. The benefits of Snap-on value creation evident in the ongoing stream of innovative new products developed for the critical industries.

One of those products, launched in the third quarter by our industrial division, is the PWZ5 pliers wrench. This wrench is the latest and the largest model in the popular Snap-on PWZ series. It is long, 41.75 inches. It can handle jobs that would traditionally require a pipe wrench, but with much less slippage, for better overall performance and for better safety.

It features inwardly angled teeth, fine at the back, large at the front, for a stronger and more secure grip on objects of all sizes, and a narrow jaw design gives improved accessibility in tight compartments and in those cramped corners. It is perfect for applications in tie rods and other areas that are hard to reach, in industries like railroad, oil and gas, for servicing fleets. Actually, any heavy-duty application. You heard me speak in the past about our growing industrial product line. Well this wrench is another great addition to our hand tool lineup for critical industries.

Now SNA Europe, 12 quarters in a row of year-over-year growth, navigating some difficult geographies and some tepid economies. SNA Europe sales activity continues to be positive, but its profits are even more encouraging, now up for 14 straight quarters, and we believe there is still more opportunity. In the Asia-Pacific operations, mixed environments across the regions, we continue to invest in building our physicals and the Asia operation had gains contributing to the progress in the quarter. So that is C&I.

Now on to the tools. Organic sales up 5.6%. Significant growth, both in the US and internationally. Operating income of $64.6 million, compared to $56.3 million in 2015. The operating income margin of 16.3% rose 150 basis points from last year's 14.8%.

Volume gains, as well as operating improvements from RCI, translated into a significant margin rise. And that 150 basis point gain, it overcame 60 basis points of negative currency. When you consider the tools group's success, you can see the power of Snap-on value creation, of customer connection and innovation. The Motor Top 20 and the PTEN award represent just a few examples of the recognition our products continue to receive. Awards from industry publications, but also awards from the professionals that use our tools every day.

Innovation is consistently -- innovation it's consistently been a key contributor to our tools group, and in the third quarter, more new products. Like our reversible ratcheting combination wrench, the latest in a lineup of Snap-on wrenches, adding a reversible feature to our patent ratcheting mechanism, utilizing our Dual 80 technology, combining dual pawls with thin walls, box end design, smooth operation, more torque transfer in tight spaces, and of course, it incorporates the iconic Snap-on flank drive profile, biting into fasteners without rounding corners, preventing slippage.

The new reversible ratcheting combo wrench has more turning power, enhanced durability, compact design, and built stronger to last longer. This is the core of Snap-on value creation: customer connection and innovation solving specific problems in the shop.

Take the new 20 millimeter 12 point impact socket, born from hours of observation in the workplace, hours of observation in the workplace. This socket is designed to remove head bolts in large industrial engines, long enough to reach the deepest of inset bolts, and strong enough to remove the toughest fasteners. A unique combination.

It is produced in our Elkmont, Alabama plant, and it is essential for servicing large off-road equipment. It may not be needed often, but when it is, it is critical, and Snap-on has it. It's just another example of our commitment to make work easier, solving our technicians' most challenging problems.

The third quarter is also when we hold the annual Snap-on franchisee conference, our SFC. This year it was in Orlando with more than 8,700 attendees, franchisees, and family members from over 3,000 routes.

Three days of showcasing the opportunities to enhance the franchise channel. And I can report to you, because I was there, that based on the optimism and the confidence of our franchisees, it was a big success. And orders, because we take orders at these events, and orders, well they were up once again, beating the record levels of [2015].

When we speak of the van channel, we also have to consider the strategic combination of Snap-on Credit. Our financial services arm helps create opportunities across the organization, but especially within the tools group. It has been an ongoing partnership for over 50 years.

And our credit company had a strong presence at this year's SFC, supporting franchisees with unique programs. 270,000 of our approximately 875,000, about 30% of our technician customers in the United States have credit company contracts, enabling those big-ticket items. The credit company has been a key part of the franchisee success, and the third quarter was no exception to that.

Now, let's move to RS&I. Organic sales were up 1.7%. The operating margin of 25.1%, it increased 50 basis points from the 24.6% registered last year. As I mentioned, RS&I clearly showed progress in providing repair information and diagnostics to independent shop owners and managers.

Certainly, a portion of that growth came from innovative new products. Several were launched at the SFC. Products like the MODIS Edge, our latest diagnostic offering, an enhanced industrial design, improved ergonomics, reduced weight and code scan capability that allows the tech to scan all of the vehicle's computer systems with a push of a single button.

It also contains fast access to oil change and reset information, automatic vehicle identification, and our unique SureTrack expert database. All features specifically designed to save the technicians significant time. This new handheld is lighter, faster, and smarter, and simply based on the excited crowds of franchisees at the SFC that carved out precious time to attend MODIS Edge hands-on training, we expect it to be a very popular item.

Another exciting SFC launch was our diagnostic thermal imager. This completely new Snap-on offering is a breakthrough in pinpointing problems, with a graphical display illustrating service data, temperature data, and a reference library of nominal and out of spec thermal images, for a variety of auto parts found in brakes, emission systems, and in vehicle electrical equipment. We believe we have a winner with the diagnostic thermal imager, and orders at the SFC prove it. It sold out.

In RS&I, innovation wasn't just in diagnostics products. Take the brand-new Polartek air-conditioning unit, from our recent acquisition, Ecotechnics. Developed and manufactured specifically for the North American market, meeting a very aggressive launch, both our US and our Canadian customers have affirmed the strength of the unit's design and performance. It has been a real testament to the capability of the Ecotechnics team.

Speaking of products, of getting more to sell to repair shop owners and managers, this week, we entered into a definitive agreement to acquire Car-O-Liner, based in Gothenburg, Sweden, but reaching around the globe. Car-O-Liner's product offering and its special expertise are important additions to the Snap-on team, providing extraordinary capabilities in collision repairs, a segment where change is now offering opportunity.

It's an operation that strengthens our position, both in auto and in heavy-duty. Car-O-Liner is another coherent business, and we believe that matched with the Snap-on team, it offers substantial possibilities for both growth and for improvement. All of that, great opportunity going forward.

That is the highlights of our quarter. Organic sales up 2.6%, gains across all groups, progress along our runways for growth, Snap-on value creation, turning our customer connection insights into innovative new products, and along with our ongoing RCI initiatives, driving margin improvement, and it all shows in the results.

OpCo OI margin rising to 18.9%, up 140 basis points. EPS of $2.22, up 12.1%. It was an encouraging quarter. Now, I will turn the call over to Aldo. Aldo?

Thanks, Nick. Our third-quarter consolidated operating results are summarized on slide 6. Net sales of $834.1 million were up $12.6 million, or 1.5%.

Due to the strengthening of the US dollar, foreign currency movements adversely impacted our Q3 sales comparisons by 120 basis points. Excluding $9.7 million of unfavorable foreign currency translation, and $1.1 million of acquisition-related sales, organic sales increased 2.6%, reflecting continued progress in serving the vehicle repair sector, as well as improvements in sales in our commercial and industrial segment.

Consolidated gross margin of 50.2% improved 70 basis points from 2015 levels, primarily due to benefits from higher sales and savings from RCI initiatives. Operating expenses of $261.5 million yielded an operating expense margin of 31.3% in the quarter, an improvement of 70 basis points, primarily due to sales volume leverage and lower pension expense. As a result of these factors, operating earnings before financial services of $157.6 million, including $4 million of unfavorable foreign currency effects, increased 9.7% and as a percentage of sales, improved 140 basis points to 18.9%.

Financial services revenue of $71.6 million in the quarter increased 17.2% from 2015 levels, and operating earnings of $50.6 million increased 16.3%. Consolidated operating earnings of $208.2 million, including $4.5 million of unfavorable foreign currency effects, increased 11.3%, and the operating margin of 23% improved 180 basis points from 21.2% a year ago.

Our third-quarter effective income tax rate of 31.2%, compared to 31.6% last year. For the full year, we now anticipate that our 2016 effective income tax rate will be slightly below our full-year 2015 rate of 31.7%. Finally, net earnings of $131.7 million or $2.22 per diluted share increased $14.9 million or $0.24 per share from 2015 levels, representing a 12.1% 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 $289.3 million in the third quarter increased modestly over 2015 levels. Excluding $3.5 million of unfavorable foreign currency translation, organic sales increased 1.5%, primarily due to a mid-single-digit increase in the segment's European-based hand tools business and a low single-digit increase in both the segment's power tools and Asia-Pacific operations.

Organic sales to customers in critical industries were essentially flat, as a decline in the aerospace market segment was largely offset by a gain in sales to the military, and increases in both the technical education and natural resources market segments. Despite the continued presence of certain headwinds in the industrial space, we were encouraged that sales performance has improved from what we had seen earlier in the year.

Gross profit in the C&I group of $112.7 million, compared to $109.5 million last year. The gross margin of 39% improved 110 basis points, primarily due to savings from RCI initiatives, and 40 basis points of favorable foreign currency effect. Operating expenses of $69 million in the quarter compared to $68.2 million last year.

The operating expense margin of 23.9% increased to 30 basis points, primarily as a result of higher cost, including costs associated with continued expansion initiatives in Asia, and 10 basis points of unfavorable foreign currency effects. As a result of these factors, operating earnings for the C&I segment of $43.7 million, including $0.3 million of favorable foreign currency effects, increased $2.4 million from 2015 levels, and the operating margin of 15.1% improved 80 basis points from 14.3% last year, representing a recent high for C&I, and up 130 basis points sequentially.

Turning now to slide 8. Third-quarter sales in the Snap-on tools group of $397.2 million increased 4.4%. Excluding $4.6 million of unfavorable foreign currency translation, organic sales increased $21.2 million or 5.6%, reflecting mid-single-digit gains in both the Company's US and international franchise operations.

Gross profit of $173.3 million compared to $166.5 million last year. Gross margin of 43.6% declined 20 basis points, as benefits from higher sales and savings from RCI initiatives were more than offset by 60 basis points of unfavorable foreign currency effects.

Operating expenses of $108.7 million in the quarter compared to $110.2 million last year. The operating expense margin of 27.3% improved to 170 basis points, primarily due to sales volume leverage and savings from RCI and other cost reduction initiatives. As a result of these factors, operating earnings for the Snap-on tools group of $64.6 million, including $3.2 million of unfavorable foreign currency effects increased $8.3 million, and the operating margin of 16.3% improved 150 basis points from 14.8% last year.

Turning to the repair systems and information, or RS&I group, shown on slide 9. Third-quarter sales of $286.1 million increased 1.1% from 2015 levels. Excluding $2.8 million of unfavorable foreign currency translation, and $1.1 million of acquisition-related sales, organic sales increased 1.7%.

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. In the quarter, sales of both undercar equipment and sales to OEM dealerships were essentially flat. As Nick mentioned, sales to OEM dealerships this quarter were particularly impacted by the timing of essential tool and facilitation program sales. For example, sales in Q3 of last year benefited from a refrigeration-related facility action program, which has since lapsed.

Gross profits of $133.1 million compared to $130.9 million last year. And the gross margin of 46.5% improved 20 basis points, primarily due to savings from RCI initiatives, partially offset by 10 basis points of unfavorable foreign currency effects. Operating expenses of $61.3 million in the quarter compared to $61.2 million last year. The operating expense margin of 21.4% improved 30 basis points, principally due to savings from RCI initiatives.

Third-quarter operating earnings for the RS&I group of $71.8 million, including $1.1 million of unfavorable foreign currency effects, increased $2.1 million from prior-year levels. And the operating margin of 25.1% improved 50 basis points from 24.6% last year. As we announced earlier this week, and as Nick mentioned in his remarks, we have entered into a definitive agreement to purchase Car-O-Liner.

Car-O-Liner's annual sales are approximately $95 million, and we expect them to generate operating income margins somewhat similar to those of RS&I's undercar equipment business, which are typically in the low teens. We expect to complete the acquisition of Car-O-Liner within the next month. Our plan is to fund the transaction with a combination of cash on hand and approximately $125 million in issuances of commercial paper.

Now turning to slide 10. Operating earnings from financial services of $50.6 million on revenue of $71.6 million, compared to operating earnings of $43.5 million on revenue of $61.1 million last year. Financial services expenses in the quarter included some additional headcount-related expenses, to help better serve our growing portfolio. But as a percentage of the average portfolio, financial services expenses were 1.2% in both periods.

The average yield on finance receivables of 18% in the quarter compared to 17.9% last year, and the average yield on contract receivables of 9.4% compared to 9.5% last year. Originations of $269.8 million in the quarter increased 4.7% from prior-year levels.

Moving to slide 11, our quarter-end balance sheet includes approximately $1.8 billion of gross financing receivables, including $1.6 billion from our US operations. Approximately 81% of our US financing portfolio relates to extended credit loans to technicians. In the first nine months of 2016, our worldwide financial services portfolio grew $190.3 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 $111.9 million in the quarter decreased $1.8 million from comparable 2015 levels, as higher net earnings were more than offset by $11.4 million of higher cash tax payments, and $5.4 million of higher US pension contributions. Net cash used by investing activities of $69.2 million included $56 million to fund a net increase in finance receivables, and $16.5 million of capital expenditures.

Turning to slide 13, trade and other accounts receivable increased $26.6 million from 2015 year-end levels, reflecting both higher sales and an increase in days sales outstanding from 60 days at year end to 63 days at third-quarter end. Inventories increased $25.8 million from 2015 year-end levels, primarily to support continued higher customer demand, and new product introductions. On a trailing 12-month basis inventory turns of 3.3 compared with 3.5 turns at 2015 year end.

Our quarter-end cash position of $117.5 million increased $24.7 million from 2015 year-end levels. The net increase includes $501.7 million of cash collections from finance receivables, and $415.6 million of cash from operations. These cash increases were largely offset by the funding of $691.4 million of new finance receivables, dividend payments of $106.3 million, the repurchase of 492,000 shares for $76.4 million, and $56.6 million for capital expenditures.

Our net debt to capital ratio of 22.6% compared with 24.6% at 2015 year-end. In addition to our $117 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.

As of third-quarter end, we had $8 million of commercial paper borrowings outstanding. That concludes my remarks on our third-quarter performance, and I will now turn the call back over to Nick.

Thanks, Aldo. Stepping back and looking at the Snap-on third quarter, we believe a number of things are apparent. Our part of the auto repair market is solid. As we have seen in the past, it follows a different trajectory than new car sales. It was reliable even in the withering recession of 2009, and it is strong today.

And we believe our ability to take advantage of that opportunity grows every quarter. And you can see it in the results. Tools group, sales up 5.6% organically, the franchisees more prosperous and stronger, the group's OI margin up 150 basis points against 60 basis points of unfavorable currency.

The credit company, continuing to serve as the tools group's strategic partner. Enabling franchisees and technicians, as it has done for five decades, through recession after recession, without disruption.

RS&I. Selling to repair shop owners and managers, mixed growth, encountering the usual ups and downs of OEM sponsored programs, but showing real progress with individual shops, both independents and dealers.

And C&I, amidst turbulence but now growing again, showing year-over-year and sequential gains despite the difficult macros, and despite the difficult macros, registering an operating margin of 15.1%, up 80 basis points. Showing what we believe is confirmation of the great value it offers as a runway for coherent growth.

And finally in the results, you can see the effects of Snap-on value creation, more new products driving gains, and the engine of rapid continuous improvement offering efficiency. It all came together for organic sales growth of 2.6%, and an OpCo operating margin of 18.9%, up 140 basis points. And an EPS of $2.22, an increase of 12.1%, a double-digit gain, again.

And the Car-O-Liner acquisition giving us more to sell, more opportunities for coherent growth, and providing more possibilities for Snap-on value creation to drive progress. It's a great opportunity. It was an encouraging quarter, and we believe it clearly confirms the future of continuous Snap-on growth and improvement, as we move through the end of this year, and into 2017 and beyond.

Before I turn the call over to the operator for questions, I will speak directly to our franchisees and associates. I know many of you are listening, or will listen to this call. Once again, you should know the encouraging performance of our corporation is only possible because of your capability, your energy, and your dedication. For your extraordinary contributions to our progress, you have my congratulations, and for your unfailing commitment to our team, you have my thanks.

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

(Operator Instructions)

David Leiker, Baird.

This is Joe Vruwink for David. I wanted to discuss the deceleration in origination growth this quarter. So maybe for context, can you revisit the driver of the double-digit origination growth, that has been seen in recent quarters? And then maybe comment on whether demand conditions or other items change for those same drivers, or those same products in the current quarter?

Sure, look, a couple of things. First of all, big ticket, the idea of Snap-on tools, Snap-on tool storage and diagnostics were strong in the quarter, in fact stronger than, somewhat stronger than the overall Snap-on tools growth. And incidentally, just as aside, hand tools were also pretty strong in the corner. So it is still a good quarter for big-ticket items, which are the principal driver for these things.

Secondly, and the reason that is the case, the reason why big-ticket has been the case is because we have been investing in products, great new tool storage products, and a number of huge features and a number of great attractive products that get customers excited. The fact that diagnostics are more important in the repair shops than ever before, and technicians are trying to caliber up, to have better and bigger diagnostics to take care of those products, it is natural that big-ticket items would be stronger, so you would see that.

So I think that looking at the tools group and seeing that lead the way is just a consequence of our investment in the marketplace, with the kinds of products we have had, and the demands of the markets, associated with the shift in the market, it's associated with more diagnostics. And also our investment in enabling events that break through the original structural barriers of the bands, that is the space and time, the rock 'n roll cabs, which we have talked about quite a bit, which helped tool storage, and the Technovans, we have 67 of them now, the Technovans we have 49 of them, and that drives fairly robust bigger ticket item sales.

In terms of higher double digit before -- double-digit originations before and the somewhat less originations now, you can't trace quarter to quarter, because there isn't a perfect one-for-one correlation. Remember that when you are looking at ordinations, you're looking at franchisee sales. When you are looking at the tools group, you're looking at our sales. So we sell to the franchisees, so the timing is different.

Then you have on top of that the franchisees' margin, and then you have on top of that, the idea that a tool storage sale or a diagnostic sale may ignite a couple of trade-in type sales, which would also be somewhat supported by the credit company. So you put those altogether, and that shows the landscape. But when we step back and we look at the 2015 numbers, when we look at the 2015 numbers about origination, and the tools group big-ticket sales, they seem pretty much the same. This year, we are starting to see year-to-date the same kind of thing.

So I'm sure you know, in the market, there seems to be this idea that tools group growth is only strong because origination growth is strong. This quarter, you actually maintained a strong rate of growth, organic growth, stable quarter over quarter, originations came down. That either to me seems like the hand tool category may be strengthened quarter over quarter, or this whole relationship of painting tools group as a byproduct of the credit business maybe isn't the most accurate relationship.

No, it isn't the most accurate. The tools group is a strategic partner, the credit company is a strategic partner of the tools group. But if you think about it, okay, but only 270,000 of our 875,000 customers have a credit company contract. That is only about 30%.

So, if you think that the tools group growth is being driven exclusively by the credit company mojo, think again. It just isn't that wide. Of course it has grown because the market has, the customers have turned that way, and we have invested into support that with new products. And also, part of the way we have figured out how to enable the van has been associated with that segment. But it is a natural thing, I have been talking about the rock 'n roll cabs for multiple quarters, and that would naturally drive a little bit more credit company activity. Okay?

And then my last question if I can, the comps were difficult, so to do the growth you did this quarter was positive. I'm just thinking, you took 3,000 routes down intra-quarter for the franchisee conference. Is there any indication based on just vans coming back online, and your order activity, that the pace of sales is going to strengthen year-over-year in Q4?

I'm not in the business of projecting out. I will only say just what I said on the call. Look, the franchisee conference was boffo, it was really good and the enthusiasm was good. So I can tell you anecdotally and anybody who was there will tell you anecdotally, I was just with the national franchisee advisory board, they are all positive.

And a quantitative piece is, the orders were up over the record that we set last year at the SFC. Now they don't translate one-to-one in sales, they were up significantly. It doesn't translate one-to-one, but what it says is our guys saw the new products, they were confident in the future, they invested in it, they ordered, so they think good things are coming.

Thank you.

Liam Burke, Wunderlich.

Aldo, in your prepared statement, maybe you can answer, you talked about the physicals, the investment in emerging markets of C&I. Are you seeing any kind of significant revenue growth there to begin absorbing that upfront investment?

Emerging markets tend to have their own volatility and lumpiness, so to speak, for lack of a better word. But we believe the secret to penetrating the emerging markets is to establish a physical presence, people, place, products, that suit those markets and those environments. So through thick and thin, we are continuously looking for opportunities to expand our footprint, because we know that what we have today can still be improved upon, so that is basically our philosophy when it comes to that, Liam.

We are investing in things like more Blue-Point stores, more products, you try to expand your product line, and more sales outlets. For example, we just opened another sales outlet in Vietnam this quarter. That is the kind of investment we are doing, because in the 11 years I lived in Asia, I know, I am confident that the building of the physicals allows you to take advantage of the market as it matures.

And, staying with C&I, on the new product introductions, you talked about that being a big driver of incremental growth. Are there any particular verticals that you, this quarter, saw opportunity to put new product into the market?

Well, we talked about a couple of those. I think in this particular market, the natural resources, I can only say that actually we are trying to play the long game. We believe we are trying to build our activity in each of these markets. So for example, not in this particular quarter because we wouldn't make product adjustments for a quarter. We see opportunities, we build out, our goal is to build up in each of the markets.

For example, last year we brought out 920 new products, just for aviation. 313 for oil and gas, even though it was having probably one of the most difficult times. 313 for the military, even though it was difficult times. So we just keep adding, not so much targeting.

Now we saw some great opportunities, as you saw, in heavy duty, the substitute for the pipe wrench, that is a great new product. We see things like that all the time. We see enhancements to our visual control system, our tool control system, which we have seen now. Amazingly, we have seen the tool control systems morph and go bleed into oil and gas. We had a major sale in Canada associated with oil and gas, as opposed to when we had been using it just for aviation, we can see it rolling into railroads, so with small enhancements, that is the kind of thing we are doing.

Great, thanks Nick, thanks Aldo.

David MacGregor, Longbow Research.

Congratulations, Nick, on a good quarter. The question is on the tools group and your margin is up 150 basis points, including 60 bps of negative FX. You have just come through a period where you had a couple of years of really hypergrowth, if that term might be applied to this particular category. That growth seems to be slowing now.

Obviously, there is a lot of cost opportunity, cost out opportunity that is out of reach when you're getting that kind of a growth, but now that the growth is easing a little bit, maybe that cost out opportunity becomes a little more accessible. I guess the question is just how sustainable are these kind of year-over-year margin progression numbers, given that you now have a cost out opportunity that you may not have had for the last couple of years?

I think there is some truth in what you say there. I don't think you can predict quarter by quarter in this kind of situation. Of course we won them with your eyeballs looking for, trying for double-digit growth, that kind of thing. You maybe pass up some efficiency opportunities but we like to believe we take full advantage of those kinds of things.

I think, though, if you look at our overall numbers, if you look at the OI margin growth for the Corporation, and you take a look at the year-over-year OpCo margin, and you go back and see it, you will see that it has been triple digits an awful lot of times, awfully far back. In big sales growth and small sales growth. So I think we have been able to grow that margin in a lot of different situations on an overall basis. Now in the situation of the tools group, it does give you a little more advantage, a little opportunity to look at that, but I would not allow the characterization that 5.6% is low, look, I think that is pretty good growth. We're talking about 5.6% organically in GDP's that are throwing between 1% and 2% all over the world. I think it is pretty good.

If I could just follow up with a couple of other quick ones. The slower growth in the origination, how much of that was just the flat undercar?

Say that again please?

The slower growth in originations, I'm just wondering how much of that might have been due to lack of growth in undercar.

I don't think it is that much. The thing is that of course, there is some undercar equipment that gets sold into the tools group space, but primarily when you're talking EC, primarily about the originations, the primary driver is tool storage and the second driver is the big-ticket diagnostics. So there is some of it in there floating around, but I don't think that's much of a factor.

Last question, we think of you going to market through your franchisees, but you have a pretty substantial distribution arrangement, as well. Was destocking within your distribution partners, how much of a growth inhibitor was that for the quarter?

I am sure there was some of it, but I would have to say it might have been -- it would have shown up in the industrial business, that was flat. Like I said, it was up sequentially, which gave us some positives. I don't think it was a huge factor this quarter. It might have been some of the whole thing.

Thanks very much.

Tom Hayes, Northcoast Research.

On the RS&I group, Nick, your organic growth rates have been bouncing around the last couple of quarters. I just wondered if maybe you could provide a little bit of clarity digging into that a bit. Maybe the growth trajectory of the diagnostic equipment, versus the undercar that is in there as well.

Like we said in the statements here, the formal statements, is that diagnostic information products, and diagnostics, so that would be like Michelin diagnostics, the software and the handheld hardware to independent repair shop owners and managers was up mid-single digits and it has been up that kind of number, gee, I think, every quarter for a long time. I can't attest to it exactly, but I think it has been most quarters, it has been bouncing around mid to high single digits.

Okay.

I think that is doing pretty well. The big thing about diagnostics this time -- not diagnostics, but RS&I this time, as I tried to make clear in the quarter, we have this business in RS&I which produces, which takes contracts, OEM commission contracts to distribute, you can talk essential tools or facilitate a project.

So for example you might have somebody that Aldo referred to this, to do some air-conditioning, provide an air-conditioning reclaim system for all its dealers. One of the manufacturers say, I want you to provide an air conditioning system, I want you to get it to my dealers, I want there to be two per dealer, and I want it to be rolled out in the next four quarters or three quarters, we roll it out. That is a pretty big piece of sales business.

You might have another one that does an essential tool for a particular new product or a new technology that rolls out on a new truck. And that rolls through in a quarter. But what happens is these are driven by the view of the OEM and the technology and the differences that are rolling through their new models, so they tend to be quite lumpy.

And what happened in this quarter for that particular type of business, this was kind of a stall quarter in that business, and that created the overhang -- one of the overhangs in RS&I. The stuff we sell to individual dealers was pretty good.

On the Car-O-Liner acquisition, that was roughly $95 million in revenue. Is that -- maybe just a little bit of geographic clarity, is that all Europe, or is it spread across your markets?

No, no, no, no, no. It is like this, it's about 45% the US, about 30% in Europe, and the rest in the rest of the world, but there is a big piece of that, like 20 points or 25 points in Asia. That is the way it works. 275 people, 100 in the factories, 150 selling, 50 engineers and the rest doing other things.

Last one if I could, for Aldo, fourth quarter last year on the operating expenses, it took a pretty big step down versus Q3 2015. Was there anything in there that maybe you held back last year that we need to think about this year?

I mean, the top of the mind, the only thing I can think about that creates a little bit of volatility is if there is changes in market to market, depending on stock price movement one way or the other.

Okay, thanks.

Bret Jordan, Jefferies.

This is David Kelley in for Bret. Just a quick follow-up on RS&I, and specifically the undercar business being flat. We have heard similar commentary from other aftermarket retailers and installers, and they mostly have been referencing the residual impact from last year's mild winter weather. Just thinking about some of the industry fundamentals and miles driven being up, it feels like it's a bit surprising that segment is still lagging. The question is, do you think there is some pent-up demand there, or some real opportunity for you as we lap last winter, and slowly inch to 2017?

I don't know. For us, the winter thing is a double-edged sword. I have heard people say winter is tough and therefore we don't sell balancers. Or we don't do tire service, wheel service, winter is mild so we don't do as much tire service. On the other hand I have heard people say people are crashing into each other left and right. There's a lot of repair, we need more lifts, we need more alignments going on. People are running into bumpers or bouncing into potholes. So it's a double-edged sword.

I'm not so sure for us. I do think there is opportunity in our business, what we saw there was variation from product to product, we saw kind of a stronger quarter in alignment, and a couple of the other product lines were a little bit weaker. We didn't really think it was very significant or indicative of anything actually for us. We do think there is opportunity for the equipment business going forward, though, because we like our products.

Okay, great. So you don't see any real structural issue for whatever reason?

I don't think so. We don't see it anyway, and we are in the garages, every -- we have people in the garages for hours every week.

Sure, sure. And a follow-up on the strong tools organic growth, I was just wondering if you could talk about some of the drivers there, are there specific product segments that are just really outperforming as of late? Or even regional trends, are you seeing some specific region or part of the US?

There can be regional trends, but they tend to vary quarter to quarter, to tell you the truth. The thing is, I can tell you, I was just with a bunch of franchisees from all over the country. The National Franchisee Advisory Council, they all seemed positive, and they're representing their regions. So I didn't run into a single person who was saying this is tough. They weren't saying that, they were positive.

At the SFC, I can't emphasize enough how important it is when people order more year-over-year. What it means is they are putting their money on the line, they are committing to taking product that they think things are going to be positive, so they have got a positive outlook, so we feel good about that. What is driving our business I think are maybe three factors.

One is our new products are pretty robust, you heard me talk about a couple of them. Hand tools, hand tools were up in the quarter, tool storage was up in the quarter. Diagnostics was up in the quarter. You talk about that product line because our thing about customer innovation is better than ever before. We have more hit products than we have ever had.

Secondly our franchisees are stronger. They are stronger, and despite the fact they're stronger, they seem to be hungrier for more product. And thirdly, we have invested in things in the vans, like the rock 'n roll cabs, the Technovans, and our franchisees are so confident they're taking on assistants, so the model itself is getting better.

Said another way, this is a great market, auto repair is a great market, and like I said, every quarter, we know how to take better advantage of the opportunity. You can see it in the numbers.

Okay, great, thanks. One more for me, and thanks again for taking my questions, I will pass it along. You referenced the jump into the US collision market with the deal. How do we think about US collision here?

My understanding is you didn't have a ton of exposure to that market, and I know the US collision sector from talking to the LKQs and Coparts of the world, has certainly been strong, and feels like it is going to be strong for the next few years. What do you think you opportunity is in US collision?

We like it for a few reasons. One is, we believe Car-O-Liner is a great brand but we smear the Snap-on patina over it, it's even stronger. Secondly, this is a space which is changing, different materials are requiring different modes of collision repair, and Car-O-Liner's at the out front on that regard with their product line, and our research and engineering can augment those 50 or 45 engineers at Car-O-Liner to make them better.

Thirdly, we think, we think that repair is starting to become more important in collision shops, because there is intelligence distributed around the cars. You get a dent, you have to repair things, and so we can bring the repair aspect to collision shops, something no one else can do in this space. Our product in terms of our physical product and our database associated with repair, so we think it is a great coherent acquisition.

All right, great. Appreciate the color, thanks again.

Scott Stember, CL King.

Can you maybe talk about Brexit, your initial observations, whether you have seen any impact on the UK market? And either from a sales or a currency perspective? And then, maybe just talk about your expectations for currency. It looks like we still have some headwinds. I know initially before Brexit there was a thought that later in this year, that the comparisons would start to flatten out. Can you maybe talk about those two things?

Look, Brexit, of course, as I referenced is a challenge for us, it's part of the turbulence in Europe. But in fact, if you look at the three pieces of our businesses in Europe, if you look at the tools group, up strong in the UK. You look at RS&I, up nicely.

You look at SNA Europe, and SNA Europe was up in the quarter again. I think it was the 12th straight quarter of growth, that was down slightly. So Brexit might have hurt them a little bit.

But generally overall volumes it was a great market for Snap-on, UK was one of our better markets. The problem is in the currency. So it becomes a big dinger in terms of -- it becomes a big effect in terms of sales, translation effects on our sales because we have pretty good sales in pounds, and secondly, remember we are selling into the British market, selling in pounds, but we are making in dollars. So we have a transactional impact.

If you step back and you look at our currency overall for the Corporation, at $2.22, $2.22, it had $0.05 of currency impact, and a lot of that was the UK. A lot of it was the UK. Of course, there were some other factors in there. And then looking forward, when you start to look at it, the UK started -- went down in the quarter, so we think like from a sales perspective looking forward, we probably don't see as much pressure from translation, but the profitability will be about the same, maybe a little bit more impacted going forward, because of the pound.

Going out beyond where we are now, that is based on where we sit today in terms of the pound. If the pound gets weaker, it will impact us more. But that is the major factor. We think our products and our improved capabilities overwhelm the sales factor, the selling factor. It's just the currency tends to impact us.

Got it. And just a last question on weather again, taking a different slant, the record warmth that we have had this summer, maybe for air-conditioning related products, have you seen any jump in demand for any tools that are related to any AC repair?

I don't, I'm sure that has happened, but I can't quote you any figures on that. I haven't sliced the tools by virtue of AC repair, that is one of the things that does happen. Every year there is a new story about that, it's a hard winter or a short winter, and people have different tools to sell. But the cool thing about Snap-on is, we have the widest product line, so whatever the conditions, we have something to sell into those conditions.

Got it, that is all I have. Thanks so much for taking my questions.

Gary Prestopino, Barrington Research.

A couple of questions. Did you call out what the European hand tools business was up on a percentage basis this quarter, Aldo?

I did not. It is mid-single digits.

Sorry, go ahead.

I was just going to say that is about where it has been all year, right?

Yes, it has been around that level, it is still, I hate to say this, but it's still got headroom. It is still below where it was at its peak, maybe 15% or so below where it was, so we think it has got headroom. And profitability, up 14 straight quarters, we know that has runway.

Right, okay.

So good things for it.

Right. And then, could you give us some idea of what Car-O-Liner's growth has been historically, and where you think you can take that? Its top line growth?

I don't think we are looking backwards in terms of growth, we like to look forwards and we see this as in the 5 plus, the RS&I type. When you think of the RS&I type business growth, that is where we see it, the 5-plus type business. I think it is a fool's errand to be too definitive looking forward, but I can tell you that we think looking at it, that is a solid projection.

Okay. That is good. And then in terms of, it looks like year-to-date the corporate expenses are down about $13 million. Your SG&A is down as well. Is that all dealing with the pension expense on the mark to market on the stocks?

It is, Gary, the pension this year, the way the accounting rules work, we have a savings per quarter of about $1.9 million, so you can multiply that by 3, and you get a year to date amount. Then the noise is created by how the stock price moves, not just this year, but remember you have to look at the movement relative to last year. So this particular quarter, there is really no change in mark to market, it is very benign. So most of the change in corporate expenses this quarter is related solely to pension expense.

How we look at it is the quarter is down year-over-year like $1.2 million. Something like that, $22.5 million versus $23.7 million but the penalty for currency was well more than offsetting that. That good news out of pension so we think we ended up on the short end of that combination.

Okay. That is all I have, thank you.

Richard Hilgert, Morningstar.

All of my questions have already been asked, congratulations on a great quarter, good to see the continued improvement and the profitability across the group still, and still seeing that nice growth in the financial services area. And, appreciated that little bit of color earlier on the differentiation between what is going on in hand tools, and the growth in financial services.

Just the final question remaining for me was, I noticed that on a percentage basis, if you take a look at your intersegment number, on the breakdown for revenue with the segments, it has gotten a little bit larger, compared to history. It is running now above a 14% number as a percentage of the total, of the segment revenues. And on an absolute basis, now up to $139 million. Just curious what is driving that and should we be expecting that percentage to be a higher amount of the total going forward?

Yes, no, no kidding. It will grow because the tools group has been growing. You see, if you think about it, the tools group, it has got its own factories, but it has got that great distribution. So inside C&I, there are factories like the power tools factory and so on like other places that sell externally, but they also sell to the tools group. SNA Europe does that, RS&I has some divisions that do that. We have torque wrenches in C&I that do that out in California, so sell in both places. So as the tools group grows, you will see intercompany sales grow. It is a natural outcome of that.

Okay great, thank you very much, and again, congrats on the quarter.

Okay, sure.

That concludes today's question-and-answer session. At this time, I would like to turn the conference back to Leslie Kratcoski for any additional or closing comments.

Thanks everyone for joining us today. As usual, a replay will be available shortly on Snapon.com, and as always, we appreciate your interest in Snap-on. Good day.