實耐寶 (SNA) 2016 Q4 法說會逐字稿

Good day and welcome to the Snap-on Incorporated 2016 fourth-quarter and full-year results conference call.

Today's conference is being recorded.

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

(Inaudible) and Aldo Pagliari, Snap-on's Chief Financial Officer. Nick will kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts we will take your questions.

As usual, we have provided slides to supplement our discussion. These slides can be accessed under the downloads tab in the webcast viewer, as well as on our website, 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.

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 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, everybody. I will start with the highlights of our fourth quarter and of our year, and I'll give you my perspective on the results, on the environment and on our progress. After that, Aldo will move into a more detailed review of the financials.

The Snap-on fourth quarter -- sales increases and broad profit gains, marking another period of encouraging performance. Again this quarter we had opportunities and we had headwinds. We took advantage of those opportunities and we overcame the headwinds.

Overall sales in the quarter were $889.8 million, 4.5% higher than last year. That total included acquisition-related volume from Car-O-Liner and from Sturtevant Richmont. And it also included the impact of $15.2 million of unfavorable foreign currency.

Our organic growth in the quarter was 3.6%, with gains registered across every group. EPS was $2.47, up 11.3% from the $2.22 registered in 2015.

Our OpCo operating margin reached 19.8%, an increase of 70 basis points. And those profits include $3.7 million of adverse foreign currency. Financial services earnings of 51.6% were also up, leading to a consolidated operating margin, including both financial services and OpCo of 23.6%, an improvement of 90 basis points in the quarter.

In our markets, the automotive repair segment continues to remain favorable -- changing technologies, aging vehicles requiring new tools and more repairs. Our tools group -- progress in all geographies, gains throughout the franchise network. And repair systems and information, our RS&I group -- advancements across our businesses serving repair shops, owners and managers, all of them. Taken together, these businesses confirm the ongoing strength of the repair market and clearly demonstrate the opportunity available.

Now for commercial and industrial group, or C&I, the markets were mixed but overall positive. There were, of course, headwinds in some still recovering industrial sectors and a few macro economically challenged geographies, but in total progress was across that group. US military sales were robust. Budget restraint loosened and we were on point to take advantage. And we are ready to act in the future as further opportunities arise in that area.

C&I is also the most international of our businesses. And in the period, our overall activity in the regions outside the US increased, overcoming the economic turbulence that exist in Europe, the Middle East and some parts of Asia.

So, across the Corporation, I would characterize our environments as mixed but positive, with ongoing strength in automotive repair and some improvement in the afflicted critical industries and the challenged geographies. And we remain confident that our businesses are well-positioned to capitalize on the possibilities, on the opportunities that do exist along our runways for growth, enhancing the van network, expanding our presence with repair shop owners and managers, extending in critical industries, and building in emerging markets.

And looking ahead, we also see clear runways for further improvement. The Snap-on value creation processes, safety, quality, customer connection, innovation, and rapid continuous improvement and RCI, continuing to drive significant advantages. Our fourth-quarter and our full-year results clearly confirm that progress. And our new acquisitions, they provide more opportunity to apply those processes and create value.

Now, for the full year, sales were $3.43 billion, an as reported increase of 2.3%. The organic volume gain was 2.9%, with the tools group up 5.6%, RS&I rising 4.7%, and C&I slightly ahead of last year. Our EPS in 2016 was $9.20, an increase of 13.6%. And driving those earnings was an OpCo operating margin of 19.1%, up 140 basis points for the full year.

And when we include the income from financial services of $198.7 million, which rose $28.5 million, the consolidated operating margin for the Corporation was 23%, up 170 basis points. Results achieved by taking advantage of the opportunities on our runways for growth and by driving down our runways for improvement.

Now let's move to the groups and their fourth quarter. In C&I sales increased 1.6% from 2015, impacted by $6.2 million of unfavorable currency and helped by $4.2 million in acquisition-related volume. Organic sales were up 2.4%, the second straight quarter of increases for C&I, but with varied results across the group, including gains by SNA Europe and by industrial, and decreases in the power tools.

And in places like India and Indonesia, C&I operating income was $43.9 million. That represents an operating margin of 15.3%, a rise of 40 basis points. That's our second quarter of 15%s.

Encouragingly, SNA Europe again posted increased organic sales, up high single digits, continuing its progress, now 13 quarters in a row of year-over-year growth. And the profit climb for SNA Europe was even steeper, now up 15 straight quarters. Snap-on value creation at work, with innovative new products and improved new processes, creating those extended trends in some, what I would call, fairly challenging geographies.

Also in C&I, our industrial division moved forward, as I mentioned before, on strong US military sales, and also on an array of new products -- innovations like our radiator cap removal for the railroad sector, a specially designed offering used on locomotive engine and radiator caps, replacing field cobbled sockets which were prone to early failure. The Snap-on solution incorporates deep machine grooves, which provides the ample engagement and the strength necessary to remove what you might imagine are those very stubborn railroad caps.

The new adapter can be paired with a standard ratchet, eliminating the need for the previously used long T-handled tool, and therefore requiring less clearance to perform the task, making the job easier in those tight engine quarters. Another productivity solution borne from a long list of customer connection made everyday, this one for the rail industry.

And for the aviation segment, our industrial division launched the Versatorq 2 torque data acquisition system, designed to verify and record torque ratings in tight and even hazardous environments, places like aircraft fuel lines. The Versatorq 2 allows easy torque measurement deep inside airframes where access is difficult. And it includes explosive-proof electronics, making it safe even in combustible environments.

This unique Snap-on offering enables technicians to record critical information, storing and recalling up to 3,500 torque readings. The product is UL compliant for safety, and ATEX certified for use in potentially explosive atmospheres. And based on that, we believe we have a clear winner in the Versatorq.

Our power tools division recorded lower sales in the quarter, as I said. That said, it did launch some promising new product -- product like our CTR 714, a 14.4-volt quarter-inch drive cordless ratchet. It was launched in December, so it didn't drive the quarter but it has a great future.

This latest tool in the Snap-on cordless family includes a tapered head designed for better accessibility; 35 foot-pounds of torque output, perfect for applications with 10 millimeters, with fasteners 10 millimeters or smaller that are delicate and difficult; a variable speed trigger for that all-important control with those small fasteners; a built-in LED light to illuminate any work area; and new drive materials for increased strength -- size, power and durability. Terrific for small fasteners in tight spaces. Because of the size, power and durability, and the applicability to tight spaces for small fasteners, we believe we have another best-in-class product with our cordless ratchet.

So, that's C&I. Now on to the tools group. A 3% rise in organic sales, operating earnings of $73.5 million, a margin rate of 17.6%, up 10 basis points, a gain which includes the 70 basis points impact from negative currency. So, overcoming that fairly significant negative currency hit.

Now, the volume growth in the tools group was not what we've seen in recent periods. The full-year average for the group is 5.6%. But, importantly, based on what we see in the shops, and what we hear from our franchisees, we don't believe there's been any significant change in the overall auto repair market. It is still robust and offers abundant opportunity. And we don't believe there's been any change in the positive trajectory of the tools group growing strength.

We often speak of our Snap-on runways for coherent growth, strategic avenues of sales opportunities. At the top the list is enhancing the franchise channel. And we believe we are positioned to continue that positive trajectory. Throughout the year and even in the recent quarter, the tools group demonstrated significant progress along that runway -- financials trending positively, the franchisee health metrics consistently gaining, both clearly representing a strengthening vehicle repair sector and an improved proposition for our franchisees.

But beyond the numbers, there is a great deal of optimism throughout the network. You can see it if you talk to these people. The franchisees attending our 2017 kickoff events held early last month all over the country displayed a great deal of enthusiasm about the vehicle repair sector in general and about their individual businesses in particular. I participated in the kickoff and I believe the level of excitement and confidence surrounding the van channel is stronger than ever.

That optimism was acknowledged by multiple publications listing Snap-on as a franchise of choice. Again this year Snap-on was ranked among the top 50 in Entrepreneur magazine's list of top 500 franchises, finishing number one in the professional tools and equipment category. And the Franchise Business Review, which collects franchisee satisfaction feedback, was that Snap-on as a top 50 franchise, marking the 10th consecutive year we received that award.

Finally, and my favorite, the Military Times included Snap-on on its best-for-vets annual ranking, coming in at number five, and representing the only mobile tool franchise on the list. This type of recognition would not have been achieved without a continuous stream of innovative new products, many developed from insights from our customers, guided by Snap-on customer connection and invested with Snap-on technical insight and innovation.

And in 2016, for the seventh straight year the tools group increased its number of hit products, those million-dollar sellers developed from direct observations gained in the field. Take, for instance, the [ATEC] 300 electronic torque wrench launched in the fourth quarter. This latest torque offering solves an important customer problem. Many light vehicles today, pickups and SUVs now use fasteners requiring between 250 and 300 foot-pounds of torque.

And specifications for accurate measurements of those higher torques are increasing in number. The Snap-on ATEC 300 is the first light-vehicle half-inch electronic torque wrench to rate at 300 foot pounds. It's lighter, more accurate and it eliminates the need to add heavy-duty tools just to accommodate the new pickup and SUV torque requirements.

Designed and manufactured in our City of Industry facility in California, the ATEC 300 incorporates the same great features as our other ATEC models -- a reduced profile for better accessibility, a longer handle for easily applying extra torque, power interruption technology to prevent power resets and protect the data, and a large LCD screen for greater visibility. Franchisee feedback -- we launched it late in the year and it is selling out.

We said this growing opportunity -- we said, I think, in many forums, including this one, that there is growing opportunity in vehicle precision, in torque measurement. As vehicles become more automatic, there's more need for more precision. Even in the fourth quarter we saw confirmation in that trend.

Our torque line grew nicely. It's one of the reasons why we acquired the torque skills of Sturtevant Richmont. And we expect good things going forward in that growing product line.

Now let's move to RS&I. Volume in the fourth quarter was $319.8 million, with an organic rise of 8.9%. Significant gains in diagnostics and repair information products to independent repair shop owners and managers. A mid single-digit increase to OEM dealerships and a low single-digit rise of under-car equipment. Operating earnings of $82.5 million increased $10.4 million to 25.8% of sales, up 10 basis points, overcoming the impact of the newly acquired operations.

RS&I expanded across the repair shop owner and manager sector, across the full sector but particularly with independents. Our diagnostics and repair information businesses recorded double-digit volume growth with those important customers. Our Mitchell 1 operations offers independent shops leading facility management software, innovative marketing services, and the most comprehensive repair information anywhere.

Using the Snap-on value creation principles of customer connection and innovation, our Mitchell 1 team utilizes thousands of customer contacts every year. And in repair information for new vehicles, improving the speed to solution of its pro-demand product and expanding the literally hundreds of millions of actual repair events in its unique sure-track big database. And in the fourth quarter the RS&I results clearly show the effect of the Mitchell 1 progress.

For our diagnostic division, another encouraging quarter, led by ongoing success of recent product launches. We mentioned a couple of these in the third quarter. The MODIS Edge handheld scanner, a very sophisticated handheld scanner. And our thermal imager, a whole new category of vehicle diagnostics. Both continued to exceed expectations, and both drove the diagnostic division to strong double-digit gains.

RS&I also advanced its workstation product line in the quarter, introducing the new Epiq diagnostic workstation. The Epiq workstation combines two of Snap-on's top-of-the-line products, matching our sophisticated VERUS handheld with our Epiq tool storage box into one custom platform. This enhanced workstation is targeted for shops desiring capability. This combo will address the most challenging repairs.

Convenience -- everything a technician needs is right at hand. And confidence -- the visible presence of the workstation tells the customer that this shop is serious and sophisticated and able to tackle the most difficult of repairs. Workstation sales are up nearly 40% year over year, and a new Epiq combo was part of that success.

The RS&I group also includes progress with OEM dealerships. Over the years Snap-on business solutions, SBS, has developed an extraordinary level of insight and capability in developing and running electronic parts catalogs for dealerships. The skills paid off in the quarter as SBS captured the contract to provide a state-of-the-art EPC for another major vehicle OEM, another win and more growth for Snap-on in the OEM space.

Finally, in the period, the RS&I equipment division registered low single-digit organic increase, with mixed results across our North American and international under-car operations. That said, we keep driving to expand our position with repair shops, with new products to sell and with strategic and coherent acquisitions.

And in the fourth quarter, RS&I made an important addition to the equipment division with the acquisition of Car-O-Liner. The Car-O-Line business brings greater capabilities in collision repair, and strengthens our overall position in the heavy-duty segment. Given the trends in the collision space, the higher emphasis on shop efficiency, and the power of matching Car-O-Liner with our other RS&I divisions, we believe this acquisition will create even more opportunities to expand with repair shop owners and managers going forward. We are excited.

That's our fourth quarter. Organic sales growing 3.6%. EPS, $2.47 in the quarter, up 13.6%. Progress along each of our runways for coherent growth. Acquisitions that progress us along those runways for coherent growth. And acquisitions that will give us more to sell and make those runways even wider.

And clear advancements that are runways for improvement -- safety, quality, customer connection, innovation and rapid continuous improvement driving a 19.8% operating margin, 70 basis points higher than last year. It was an encouraging year, encouraging quarter. Now I'll turn the call over to Aldo.

Thanks, Nick. Our fourth-quarter consolidated operating results are summarized on slide 6. Net sales of $889.8 million in the quarter increased $38.1 million or 4.5% from 2015 levels, reflecting a $30 million or 3.6% organic sales gain, $23.3 million of acquisition-related sales, and $15.2 million of unfavorable foreign currency translation.

Due to the strengthening of the US dollar, foreign currency movements adversely impacted our Q4 sales comparisons by 190 basis points. The organic sales gain reflects continued process in serving the vehicle repair sector, as well as sales improvements in our commercial and industrial segment.

Consolidated gross margin of 49.9% improved 150 basis points year over year, primarily due to sales leverage and savings from RCI initiatives. Operating expenses of $267.8 million yielded an operating expense margin of 30.1% in the quarter, an increase of 80 basis points, primarily due to higher acquisition-related and other expenses including operating expenses for Car-O-Liner and Sturtevant Richmont, which were both acquired in the fourth quarter, as well as a 30 basis point benefit in the fourth quarter of 2015, primarily from a gain on sale of a former manufacturing facility. As a result of these factors, operating earnings before financial services of $176.1 million, including $3.7 million of unfavorable foreign currency effects, increased 8.5%, and as a percentage of sales improved 70 basis points to 19.8%.

Financial services revenue of $74.2 million in the quarter increased 17.6% from 2015 levels. And operating earnings of $51.6 million, including $0.6 million of unfavorable foreign currency effects, increased 14.7%. Consolidated operating earnings of $227.7 million, including $4.3 million of unfavorable foreign currency effects, increased 9.8%. And the operating margin of 23.6% improved 90 basis points from 22.7% a year ago.

Our fourth-quarter effective income tax rate of 30.8% compared to 31.1% last year. For the full year, our 2016 effective income tax rate of 31% compared to 31.7% last year. Finally, fourth-quarter net earnings of $146.3 million, or $2.47 per diluted share, increased $14.9 million or $0.25 per share from 2015 levels, representing an 11.3% increase in diluted earnings per share. For the full year 2016, earnings per diluted share of $9.20 increased 13.6% as compared to $8.10 in 2015.

Now let us turn to our segment results. Starting with the commercial and industrial, or C&I, group on slide 7, sales of $286.3 million in the fourth quarter increased $4.5 million or 1.6%, reflecting a $6.5 million or 2.4% organic sales gain, $4.2 million of acquisition-related sales, and $6.2 million of unfavorable foreign currency translation. The $6.5 million organic sales increase primarily includes a high single-digit gain in the segment's European-based hand tools business, and a low single-digit increase to customers in critical industries, largely as a result of higher sales to the military.

During the quarter, our European-based hand tools business benefited from broad-based sales growth, with particular strength in countries including Sweden, Spain and France. These organic sales gains were partially offset by a mid single-digit decline in the segment's power tools operations and lower sales in certain emerging markets.

Gross profit in the C&I group of $115.4 million compared to $107.6 million last year. The gross margin of 40.3% improved 210 basis points, primarily due to benefits from higher sales and savings from RCI initiatives, and 100 basis points of favorable foreign currency effects.

Operating expenses of $71.5 million in the quarter compared to $65.7 million last year. The operating expense margin of 25% increased 170 basis points, primarily as a result of higher costs, including operating expenses for new acquisitions, 10 basis points of unfavorable foreign currency effects, and a 70 basis point benefit in the fourth quarter of 2015 from the gain on sale of a former manufacturing facility. As a result of these factors, operating earnings for the C&I segment of $43.9 million, including $1.8 million of favorable foreign currency effects, increased $2 million from 2015 levels, and the operating margin of 15.3% improved 40 basis points.

Turning now to slide 8, fourth-quarter sales in the Snap-on tools group of $417.5 million increased $6.3 million or 1.5%, reflecting a $12.2 million or 3% organic sales gain and $5.9 million of unfavorable foreign currency translation. The $12.2 million organic sales increase includes a low single-digit gain in the Company's US franchise operations and a mid single-digit gain in the Company's International franchise operations. Gross profit of $175.5 million compared to $173.7 million last year. Gross margin of 42% declined 20 basis points, as 60 basis points of unfavorable foreign currency effects were partially offset by benefits from higher sales.

Operating expenses of $102 million in the quarter were essentially flat compared to last year. The operating expense margin of 24.4% improved 30 basis points primarily due to sales volume leverage. As a result of these factors, operating earnings for the Snap-on tools group of $73.5 million, including $3.8 million of unfavorable foreign currency effects, increased $1.6 million, and the operating margin of 17.6% improved 10 basis points.

Turning to the repair systems and information, or RS&I, group, shown on slide 9, fourth-quarter sales of $319.8 million increased $39.2 million or 14%, reflecting a $24.6 million or 8.9% organic sales gain, $19.1 million of acquisition-related sales, and $4.5 million of unfavorable foreign currency translation. The 8.9% organic sales increase primarily reflects a double-digit gain in sales of diagnostic and repair information products to independent repair shop owners and managers, a mid single-digit increase in sales to OEM dealerships, and a low single-digit gain in sales of under-car equipment.

Gross profit of $153 million compared to $131 million last year. And the gross margin of 47.8% improved 110 basis points, primarily due to benefits from higher sales and savings from RCI initiatives.

Operating expenses of $70.5 million in the quarter compared to $58.9 million last year. The operating expense margin of 22% increased 100 basis points, primarily due to a 90 basis point impact from the Car-O-Liner acquisition. Fourth-quarter operating earnings for the RS&I group of $82.5 million, including $1.7 million of unfavorable foreign currency effects, increased $10.4 million from prior-year levels, and the operating margin of 25.8% improved 10 basis points.

Now turning to slide 10, operating earnings from financial services of $51.6 million on revenue of $74.2 million compared to operating earnings of $45 million on revenue of $63.1 million last year. As a percentage of the average portfolio, financial service expenses of 1.3% in the quarter compared with 1.2% last year. The average yield on finance receivables of 18.2% in the quarter compared to 17.8% last year. And the average yield on contract receivables of 9.3% compared to 9.5% last year. Originations of $260.3 million in the quarter increased 3.3% from prior-year levels.

Moving to slide 11, our year-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 2016 our worldwide financial services portfolio grew $224 million or 14.1%.

As for finance portfolio losses and delinquency trends, these continue to be in line with our expectations, including a seasonal rise in delinquencies. In this fourth quarter, we experienced a slightly higher seasonal increase in delinquencies and the allowance was increased accordingly. Overall profitability in the financial services segment rose by 14.7% in the quarter, reflecting both continued growth of the overall portfolio and higher average yield on finance receivables.

Now turning to slide 12, cash provided by operations of $151.7 million in the quarter increased $7.3 million from comparable 2015 levels. This higher net earnings were partially offset by net changes in operating assets and liabilities, including $20 million of discretionary US pension contributions.

Net cash used by investing activities of $229.3 million included $160.4 million for the combined acquisitions of Car-O-Liner and Sturtevant Richmont, $53.6 million to fund a net increase in finance receivables, and $17.7 million of capital expenditures. For the full year, capital expenditures totaled $74.3 million.

Turning to slide 13, trade and other accounts receivable increased $36.3 million from 2015 year-end levels, reflecting higher sales, $21.5 million of receivables related to acquisitions, and an increase in days sales outstanding from 60 days at 2015 year end to 63 days at 2016 year end, partially offset by $13.8 million of foreign currency translation. Excluding acquisitions, days sales outstanding were 61 days.

Inventories increased $32.7 million from 2015 year-end levels, primarily to support continued higher customer demand and new product introductions, and $21.5 million of inventories related to acquisitions, partially offset by $17.8 million of foreign currency translation. On a trailing 12-month basis, inventory turns of 3.3 compared with 3.5 turns at 2015 year end. Excluding acquisitions inventory turns were 3.4.

Our year-end cash position of $77.6 million decreased $15.2 million from 2015 year-end levels. The net decrease reflects the funding of $915 million of new finance receivables, acquisitions of $160.4 million, dividend payments of $147.5 million, the repurchase of 758,000 shares for $120.4 million, and $74.3 million for capital expenditures. These cash decreases were largely offset by $671.7 million of cash collections from finance receivables, $567.3 million of cash from operations, and $134.2 million of proceeds from a net increase in notes payable and other short-term borrowings. Our net debt to capital ratio of 26.3% compared with 24.6% at 2015 year-end.

In addition to our $77.6 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 2016 year end, we had $130 million of commercial paper borrowings outstanding. Since year end, on January 17 we repaid $150 million of 5.5% senior notes at maturity with available cash and commercial paper.

That concludes my remarks on our fourth-quarter performance. I'll now briefly review a few outlook items for 2017. We anticipate that capital expenditures in 2017 will be in a range of $80 million to $90 million.

We also expect that our full-year 2017 effective income tax rate will be comparable to our 2016 full-year rate of 31%. This assumes no major changes in existing US federal tax regulations. Should there be definitive legislation on corporate tax reform, we will assess the effects of such at that time. With that, I'll now turn the call back to Nick for his closing thoughts. Nick?

Thanks, Aldo. We have heard about our year and our fourth quarter. I believe they represent continuing confirmation of the opportunities along our runways for growth, and testimony to the possibilities inherent in Snap-on value creation and our runways for improvement.

C&I growing again in a very turbulent environment, finding the opportunities where they exist in critical industries, continuing the upward trend in Europe in difficult and uncertain economies, reaching an OI margin of 15.3%, one of its highest, up 40 basis points. The tools group growing -- not equal to recent periods but still displaying the hallmarks of continuing achievement, a robust vehicle repair sector, positive franchisee help, strong product introductions, and a continuing enthusiasm across the franchisees and the customers. And through it all, profit growth, OI margin of 17.6% despite -- up 10 basis points, despite a 70 basis point headwind from unfavorable currency.

In RS&I, 8.9% organic growth, confirming the strength of vehicle repair, progress with independent shops and with dealerships. Exciting new products spearheading those advancements. And OI margins reaching 25.8%, up despite the impact of Car-O-Liner and its lower profit levels.

And the acquisitions -- Car-O-Liner and Sturtevant Richmont, adding more product fuel for growth and providing more opportunity for improvement. It all came together to bring our OpCo operating margin to 19.8%, up 70 basis points. And when we add financial services, the overall operating margin was 23.6%, up 90 basis points.

It was an encouraging quarter and an encouraging year. And we believe we have the market and the position and the team to continue the trend of extended positive performance through 2017 and beyond.

Before I turn the call over to the operator, I'll speak directly to our franchisees and associates. I know, again, many of you are listening. The progress accomplished is a direct reflection of the capability and perseverance you contribute to our efforts. For your achievements in the quarter and the year, you have my congratulations. And for your continuing commitment to our team, you have my thanks.

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

Bret Jordan, Jefferies.

Good morning, guys. It's David Kelley on for Bret this morning. Just a couple quick questions. First, on RS&I, strong organic growth in the quarter. I just wanted to drill down on the double-digit diagnostics growth you pointed out. Was there something specific to the quarter that drove the robust performance there, given some of the favorable --

Yes, there was. The thing is, as we said, we launched two dynamite new products. And, actually, the thermal imager for us is a whole new category of diagnosing a vehicle, not data-driven but physically-driven by looking at a vehicle.

Like, for example, if you're looking for a bad cylinder, it's tough to tell from the electronic diagnostics, but you can tell if you focus the thermal imager on it and see which one is hot. That changed everything. That created a lot of volume in that situation, a lot of attention for diagnostics.

And then the MODIS Edge was another extension of our already pretty robust line, but a pretty good tool. So, those two really drove the business into that 8.9%.

Then the Mitchell 1 had its usual strong performance in terms of selling to shops. And then we had some comeback with dealerships, which can be lumpy. The lumpy side can be dealerships. But mostly the story is new products.

Great. Appreciate the color. Given the favorable secular tailwinds that should benefit that sector, how do we think about maybe longer term organic growth opportunity in RS&I looking out over the next two to three years?

We always say, it's 4% to 6%. That's what we are targeting in most environments. We expect RS&I to be in the middle of that. And the RS&I numbers on the last three years are 4.9%, 4.9%, 4.7%. With these new products we feel pretty positive

Okay, great. Thanks. And then one more for me and I'll pass it along. Just on the tools growth, I was wondering if maybe you'd be able to give us a feel for cadence in the quarter. I was wondering if there was any pickup late in December or any uptick you've even seen in January year to date that's contributing to that confidence in a rebound in 2017 here.

Okay, the tools group was not equal to its normal trend, but 3% isn't a poke in the eye with a stick in a 1.9% economy, so we still feel okay about that. But you could reasonably expected more. But everything we look at, the enthusiasm of the market, the strength of our products, our franchisees, how they react, we feel pretty positive about that. So, what I'm saying is you look at those numbers and you may say below trend, but in anything you look at from a physical point of view or a conversational point of view, or seeing a product pipeline point of view, you feel confident.

Okay, great. Again, appreciate the color. Thank you.

David Leiker, Baird.

Good morning Just a follow-up on that last question on the tools side. Is there anything -- obviously that number is a lot weaker than what we've been seeing here for actually quite a while. Is there anything from a timing perspective or regional perspective, or anything as you dig down inside there that could give us a little bit more color?

No, I don't think so. The timing is not really -- we have up weeks and down weeks. It's hard to make any interpretation in that, David. I think, simply stated, I had to use an analogy like this but sometimes your clean up hitter hits a single and a double and doesn't hit a home run and you still win the game.

And that's the way we see this quarter. I wouldn't use the word weaker (inaudible) 3%. I hate to use that word because I think it's a reasonable growth. But, again, it is below trend and we are unsatisfied with that number.

I know you don't talk about numbers on a go-forward basis, but can you give us any sense of what a proper expectation should get zeroed on as we look at 2017 for that business?

We always say our growth is going to be in the 4% to 6% range. And that's the thing we think of. And tools group grew at 5.6% last year. So, I don't think we see anything to interrupt our trajectory, let's put it that way.

Okay. The second item here is on the credit company. When you dig down into the credit stats, some of them at the margin are getting a little bit weaker. The losses are up,. The delinquencies, there's some seasonality there. The originations growth, which I'm sure is tied into the tools number.

But can you talk a little bit about what you're doing there? Your allowances you said you took up a little bit but it looks like the losses are little bit. Is this something that is just an adjustment or do you think this is a start of a trend?

I'll speak to the originations. Originations for the tools group (inaudible) is large. It follows the tools group. And fundamentally in the quarter, what you see is high growth in the diagnostics area.

The diagnostics products were the hottest, and particularly the thermal imager which tends to be at the bottom end of the diagnostics range. We would still classify it as big ticket. But the origination, the credit penetration in that area of diagnostic, tends to be lower.

Fundamentally when you look at the characteristics of the diagnostics sales, and we shake our heads and say, yes, lower administration, makes a lot of sense based on what we sold in the tools group. So, that is our view. It's perfectly explainable in those kinds of situations, and seeing what happens with the tools group. It's liable to change next quarter because of the characteristics of what sells and what new products come out. In terms of the reserves I'll let Aldo talk about that.

David, if you look at the cash flow statement, you'll see that our provision, if you looked year over year, is up about $4.4 million. Just to give you a little color on that, if you look at would I would call the normal sized growth in the portfolio, that would account for about one-third of the provision. So, you have, yes, two-thirds of extra growth in the provision relates to the delinquency and characteristics of the trends.

So, at the end of the quarter we think the reserves adjusted accordingly and it reflects that. And as we move forward, we are not alarmed by any of the statistics. These are within the range of deviation that we've seen over recent times so we are comfortable.

Okay. Because there's some -- I got a few emails this morning and there's some who are saying that's a sign that the end-market, that your customer is weakening, and that the credit company is the canary in the coal mine.

We don't see the end-market weakening, actually. That was the whole point of half my script here. I don't think we see that.

Anything we see -- I was just on a van the other day, two days ago, and it didn't seem that way. It was in the garage and those guys seem pretty robust in their view of the world, talking about how they had to turn away business, in fact. This is a windshield service.

The kickoffs were three weeks ago. We all go out all over the country and everybody came back saying our guys are more pumped than ever before. So, we don't see that, anyway. We don't see the end-market weakening at all.

Okay. And then just one quick housekeeping question, Aldo. On the acquisitions, it looks like the revenue contribution there was more than just what you would think given the calendar and the timing of the acquisitions. Is there some seasonality in there that skewed the contribution?

There is a bit. If you look at the collision business itself, the fourth quarter tends to be one of their better quarters. We owned Car-O-Liner, practically speaking, for a full two months. Sturtevant Richmont, to a lesser extent, was really about a little over five-, six-week ownership period. But, yes, the collision business does skew a bit to the fourth quarter.

Okay, great. Thank you very much.

David MacGregor, Longbow Research.

Good morning, everyone. Just a question on the tools segment. Can you just talk a little bit about the growth you saw in big-ticket versus smaller ticket business?

Big ticket was up. When we say big ticket, you can classify it into three general pieces, David.

You've got the tool storage boxes. They're the biggest of the big ticket. Almost all of them get financed. And then you've got diagnostics that goes through a range. And you have some other drips and drabs, like we'll sell welders and things like that are big-ticket items.

Big ticket grew faster (inaudible) but the lion's share of that growth was in the diagnostic product, the MODIS Edges, which are expensive. They are, maybe list price probably $6,000, $5,999, something like that. And then you've got the thermal imager, which is at the bottom of the range. The list price is somewhere, I think it's around $1,300, $1,400. So, the thing is, you've got a lower end at that level.

So, your big ticket was greater than the tools group but more anchored in the lower end of big ticket than in maybe the quarters we've been used to lately. Tool storage was slightly off this quarter. So, the tool storage representation was not as strong in this. Thus, the smaller originations that it is used to because thermal imagers, the penetration, the need for financing is a lot lower than for tools storage box

You're talking about stronger diagnostics. I realize in response to an earlier question, you said timing wasn't an issue here. But I know you ran a storage promotion in late third quarter. Is it possible you just pulled forward some storage out of 4Q into 3Q and that's accounting for the slower growth?

No, maybe, there's a lot of things. I think -- I don't know. Fundamentally these kinds of things are fairly judgmental in that situation. That's certainly a possibility although we try not pull ahead those kinds of things. But certainly launches of new products really affect this kind of thing.

And, remember, you're talking about a difference between 3% growth and 6% growth in the tools group. You are talking about one set of sockets once a week for every franchisee. It's a difficult thing, when you're talking about those differences, it's a difficult thing to pin down exactly the result. I would say, if you're talking about tool storage, the biggest effect was hot diagnostics taken a lot of attention.

Second question, your net income margin continues to grow. You're now up to pretty impressive 16%. Just given the operating leverage in the business, is there upside to this number in 2017 when materials cost are going to be re-inflating and maybe big-ticket growth in tools may be slowing?

Yes. There is. I think we say that (technical difficulty) keep driving up the margin. There's a lot of reasons for this. Fundamentally we see a lot of opportunity, even today, from improvement in Snap-on in every division. That's number one.

Number two is, yes, material prices are rising but we don't buy that much. You've never heard me explain on this call variance relative to material costs. And we made a couple of acquisitions now that gives us more grist to look for the Snap-on value-creation mill. So, I see lots of opportunity there, still. So, by no means have we hit the top anywhere.

Last question for me, just on the balance sheet., you ended another year with roughly one times net debt to EBITDA. You're doing bolt-on transactions. They've obviously been successful in augmenting growth. But just given the strength of your free cash flow, is there capacity here to continue bolt-ons and grow the dividend while also accelerating your share repurchase activity?

David, it's Aldo. Our principal focus for free cash flow is to look for investment opportunities, whether that be organic or by way of acquisition. That is what we look to. Again, our strategy along share repurchases is still more or less to offset dilution. And, again, we continue to make contributions into our pension plan. As we go forward and things change we will re-examine those on a quarterly basis but that is the pecking order right now.

Thanks a lot.

Gary Prestopino, Barrington Research Associates.

Good morning, everyone. A lot of the questions relating to the tools group have been answered. But, Nick, with the Rock N' Roll express vans, which I understand are the ones that are selling these big-ticket storage items, have you been increasing that on an absolute basis? Or year over year is it pretty steady in terms of the units that are out there?

Bingo. It was flat but we increased the techno vans which sell diagnostics. We moved those up 10% in the quarter, 20% year over year. So, that's a relevant question. I didn't add that before but that's one of the things that helped drive the diagnostic business. It all came together, new product and more power in the field marketing of all this.

Now, as I've said in the past, I'm not so sure that has an effect. The fact that we didn't increase Rock N' Roll vans doesn't necessarily have an effect because we think we get better every he quarter at using them. But the fact is, we haven't increased them for some time.

Okay, that helps. And then the other thing you mentioned in your commentary, that it was a record number of hit products this year, which I assume the hit product is one that generates over $1 million in sales.

Exactly.

Could you give us an idea of the magnitude of that growth on a percentage basis, or just the absolute number of hit products?

I don't like to talk about the absolute number because I don't want to get pinned to the cross of reporting on hit products every year. But I'll just tell you this. Versus 10 years ago, we've reached more than six times. And we keep growing on a regular basis.

All right, thank you.

Scott Stember, CL King.

Good morning and thanks for taking my questions. Can you maybe talk about currency? I know that heading into the back part of the year, before Brexit we were hoping that we would get some balancing out or some flattening of currency, but with the sterling falling off the way that it did, certainly started to hurt. But we've seen the pound actually rebound somewhat. Can you maybe just give us an idea of what your reset expectations are for 2017 for when we could start to see a bottom with impact from currency?

Just to ground ourselves, in the fourth quarter we took about a $15 million hit in revenue from currency and about $0.05 or $4 million on the bottom line in currency. For the full year we had about $50 million, just north of $50 million, $51.5 million and $0.26 or $23 million in currency.

Looking forward, this is the darndest thing, at the end of the year, we would've said same stuff, it would've been the same numbers. When we looked at it we figured we're going to see more or less the same currency effect we had last year. You can roll that out, maybe a little different in calendarization.

But since the year end, things have changed. And we think the currency number is half, for ballpark numbers. You can look at a half type currency look, maybe a little bit more than that early. Right now, if rates stay right where they are today, we think it ends up being about half.

And the interesting thing about this is, we talked about delinquencies and provisions in the credit company, the effect of currency, the $23 million, is humongous compared to our noise around that. And of course currencies can always change. So, tomorrow I may wake up and this may all be different. But if you took them today, we'd expect some relief, and that relief would be big. It would be nice.

Got it. And going with RS&I, you broke out some of the categories. I missed the growth for the independent shop owners. Can you give that number again?

We are saying double-digit growth for the independent shop owners, the repair diagnostics and software for the independent repair shop owners. Mitchell 1 sells the software in terms of SureTrack with hundreds of millions of dollars of records of repair. And then diagnostics is the hardware- and software-based sales, things like thermal imager or a hand-held diagnostic that will decode everything a car wants to say. So, if you take that together it's like double digits.

All right. And then just last question, you talked about the under-car equipment business being, I think you said low single digits. Could you just maybe flush that out whether weather-related products, tire aligners, wheel aligners --?

I don't know. I hear all that but I'm not sure I believe it. The thing is, every time I go in a garage, sometimes the guys will tell me the weather has shafted us, and other people will say the snow will make it bad for us because people can't get in. Other people say the snow makes it good because they have a lot more procedures. So, I'm not so sure how to play with that.

What I will tell you about is the Europeans tend to follow this, and the European business was much more sluggish compared to the North American business in this particular area. And Eastern Europe hasn't been too good to us in the equipment business either.

Got it. That's all I have. Thanks again.

Liam Burke, Wunderlich.

Thank you. Good morning, Nick. Nick, on C&I you've invested a fair amount in emerging markets. Are you seeing any meaningful move there to help absorb some of that upfront investment?

I wish I could say that I was but the problem is, it seems like when we take one step forward we take a step backwards in another place.

For example, we were up in China this year, India, difficult. I'm sure you're probably familiar with the demonetization in India and people ran out of cash. And a lot of our smaller distributors do a cash business so our business weakened in the third quarter.

So, we are seeing that balance. The turbulence has bedeviled us lately in terms of Indonesia being down and Thailand being up. So, we see progress from a physical point of your view. I feel better about the business. But we haven't been able to monetize it yet.

I'm confident we will but it hasn't been a meaningful contributor to us. It will be, though. I'm confident it will be but it hasn't been yet because managing over all those differences.

Okay, got it. And on RCI, you talk about obviously the internal processes. You've moved that out to the van channel, Rock N' Roll van, are some of the examples. Do you have any RCI programs pushed out to the van channel beyond the Company-owned vans?

The thing is -- a couple of things. Increasingly the van -- the franchisees are deciding on their own to add assistance. Now we have about 20% of them up with assistance. I think there's 695 or something like that, up about 20% year over year. And that gives them more -- in effect, adds times to each van.

And what we've done is we've put programs in place to support them. New computer systems, tablets that allow them to have two people wandering around a garage, or separated off the van and can still have a cash register in their hand. That has been a positive event. That's one thing I can think of for sure.

And then, of course, just this quarter we extended the techno vans, another 10% growth quarter over quarter, 20% year over year. And that saves time because it puts an expert at the beckon call of a franchisee for a short period of time, and it also gives him and expands his selling space. So, the techno vans both amplify the time and allow him to timeshare more space for selling.

So, you have those two things going on. And there's a number of smaller things, which we focus on in terms of how they're going to manage their inventory, how they're going to do other things.

Great. Thanks, Nick.

Last question from Richard Hilgert, Morningstar.

Thanks. Good morning, guys, and thanks for taking my questions. Just wanted to ask about future technologies in the industry. We are hearing more and more about hybrids coming sooner, battery electrics coming sooner. And obviously some of these things are already out there today, along with autonomous features of vehicles.

Are you already developing tools for some of these areas? And, if so, what are some of the areas that you are already seeing coming through for new tooling and electronics?

We are developing. Actually, remember, change is our friend. It requires the mechanic to change his tool set and to get new implements to allow him to repair these cars. And, make no mistake about it, they need repair. So, we are working on this.

But, just to be clear, unfortunately for us it ain't happening next Thursday. There are 300 million vehicles on the road in North American and a very micro percentage of them are really hybrids and electronic, even today. But we are going new things.

For example, hybrids and electronics, we have a whole line of insulating tools. If you're poking around inside those engine compartments, whether electric or hybrids, there's a lot of voltage in there. You don't want to get fried. And, in fact, there's a lot of danger, so a whole set of tools has to be used to particularly do that, and we have them available.

In terms of automated cars that's what I was talking about in terms of torque. Anytime a car becomes more reliant on a system, it requires more calibration, more precise adjustment. And torque is one of the things that is more important. Of course, there's a whole bunch of other things, like alignment and tire balancing and a number of things that emanate from precision that opens up a whole new range of opportunities for us.

So, as cars become more automatic, we're investing in torque. You heard me talk about the AT300. Because of the need for that precision, that's why the SUVs and light trucks are requiring the precise torques of such large numbers. They didn't use to do that. And in terms of things like lane departure systems or self park or adjusting automated cruise control, they all need more of this, and that means precision.

That is why we are buying in the torque sector, because we believe this is a natural emanation of it. And one of the bright spots of the tools group in the fourth quarter was torque was up substantially, verifying that, confirming that view of the world.

Okay, great. My other question, it deals with some of the questions I'm getting from investors with respect to the finance operations. Aldo, I was wondering if you could talk a little bit about the credit policy there and how it works.

Some of the pushback I get is that there's concerns that the franchisees are given too much credit authority, and that collecting it back might be more difficult for them. Is there any comments you can make about the credit policy standards right now and the fact that the business isn't necessarily growing because policies are getting weak, it's just a matter of the business and its natural growth rates?

Richard, I think that last word is a good one. The business policy, of sorts, is to rely heavily on our experience. And when I say our experience, that also includes the experience curve of the franchisees themselves.

We have a traditional database that you get reports from various agencies and credit bureaus and things of that nature. We have our own internal history, which means a lot, and we keep that as a reservoir of information at the credit company. And we actually strife and monitor the progress that our franchisees make along their path through a career in this business, and track trends, and are able to instill in them some training. We provide training when we go to the periodic conferences.

But they are in a position to meet their customers up close and personal each and every week, for the most part, and offer back to the credit company an informed credit decision that might not be apparent in the bureaus or in the database, such as what's the peer group feedback on that technician in the garage. What is the garage itself doing? Is there a stream of work or does it look like a garage vulnerable to a downturn?

My point is that there is a lot of information resident in the franchisees and their own employees, because some of them do have employees, and we try to incorporate that into our final decision when we make a credit choice. So, as the model evolves, it's always enhanced. As the franchisees attempt to grow, they reach into new spaces, they meet new customers, those customers will have different credit profiles. And you adjust accordingly along the way.

Very good. Thanks again for taking my questions.

Thank you. It appears we have no further questions at this time. I'd like to turn it back over to Ms. Leslie Kratcoski for any additional or closing remarks.

Thanks, Savannah. We appreciate everyone joining the call today. A replay will be available on snapon.com shortly. And, as always, we thank you for the interest in the Company. Good day

This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a great day.