實耐寶 (SNA) 2017 Q2 法說會逐字稿

Good day, and welcome to the Snap-on Incorporated 2017 Second Quarter Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Leslie Kratcoski. Please go ahead, ma'am.

Thanks, Anna, and good morning, everyone. Thank you for joining us today to review Snap-on's second quarter results, which are detailed in our press release issued earlier this morning. We have on the call today, Nick Pinchuk, Snap-on's Chief Executive Officer; and Aldo Pagliari, Snap-on's Chief Financial Officer.

Nick will kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we'll take your questions. As usual, we've 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'd now like to turn the call over to Nick Pinchuk. Nick?

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

On an overall basis, our second quarter was encouraging. We believe it once again offered evidence of advancements along our runways for both growth and for improvement. Reported sales were up 5.6% to $921.4 million, and that included unfavorable foreign currency translation this quarter, an impact of $12.5 million. It also reflected an incremental $38.4 million from acquisitions, last year's Car-O-Liner and Sturtevant Richmont operations and this year's BTC and Norbar businesses. Now organic sales for the quarter rose 2.7%, with varying increases recorded by every group. The opco operating margin reached 19.9%, up from 19.1% in 2016 and that 80 basis point increase, it reflects the higher sales, but it also represents the power of Snap-on Value Creation to drive earnings growth.

For financial services, operating income grew to $54.6 million from last year's $49.5 million, combining with opco to offer our consolidated operating margin of 23.9%, up 100 basis points. Our earnings per share, they reached $2.60, up from the $2.36 of last year, a rise of 10.2%. Those are the numbers.

Now for the markets. From an overall macro perspective, we do believe the automotive repair arena remains favorable. The Tools Group organic activity was up slightly, smaller gains than in previous periods. That said, we don't believe the second quarter results indicate a softening marketplace. We're not hearing or seeing that. Rather, it reflects specific headwinds like a sales decrease around our tool storage product line.

Now the other side of our automotive repair operations. RS&I had strong volume in the second quarter, organic sales growth with both independent repair shop owners and managers and with OEM dealerships. This marks RS&I's third straight quarter of high single-digit progress in organic sales, representing what we believe to be an affirmation of the positive auto repair environment.

Now for the Commercial & Industrial Group or C&I. Organic sales were up mid-single digits, the highest for some time. With progress across most of the industrial sectors and geographies in critical industries, gains posted in nearly every second -- segment, both in the U.S. and internationally. Strength in sectors like natural resources, heavy-duty fleet and in particular progress in places like the U.K. and Mexico.

Also positive for C&I was SNA Europe. SNA Europe, our European hand tools business, delivering another quarter of solid results in places like Spain, France, Denmark and Sweden, broad gains across the core of Europe. So overall, the results remain favorable. Growth was slim in the Tools Group, but advancements with auto repair shops were strong in RS&I. There was a clear recovery in critical industries and there were continued gains in Europe, opportunities still outweighing the challenges and the sales growth confirms it. And the operating income demonstrated -- it demonstrated once again the leverage and the power of Snap-on Value Creation, safety, quality, customer connection, innovation and Rapid Continuous Improvement. Innovation and customer connection, the principles guiding our organization in the ongoing development of productivity solutions, borne out of the insights and observations gathered out of customer workplace, and together with RCI, once again, this quarter, helping to drive an 80 basis point OI margin gain.

Well, that's the sort of macro overview. Now let's move to the groups. Let's start with tools. Organic sales were up 0.5%. There were 2 primary drivers attenuating tool activity: tool storage sales and destocking. Tool storage was simply not the ever upward strength that it's been in the past. We believe there's still abundant market opportunity. The segment isn't saturated. However, our product line wasn't as compelling as we've had in recent periods. The second quarter enhancements we tried, they worked somewhat, but they weren't enough. We need to do more. And the upcoming Snap-on franchisee conference will be the initial venue for a round of that new product.

Also, it appears that the Rock 'N Roll Cabs, our special tool storage van, have lost some of their excitement. We'll have to retool them. We'll have to retool them to get customer attention, and we will. And finally, we regularly refine our credit programs to match franchisee practice and performance. This time, we re-striped our credit platinum levels and that change had some initial effect on tool storage. So we saw a weaker tool storage activity in both our sales and in the franchisees volume, the sales off the truck. We're aiming to recover with new product and with the revitalized set of Rock 'N Roll vans.

The other product lines, our tools story. Sales off the van, sales from franchisees to technicians, are up nicely for products besides tool storage. They were near the top of our targeted range. Our sales of those products, that is the Tools Group sales of these products to franchisees were mixed and tepid in total. It appears that the traditional destocking that proceeds the buying opportunities of the Snap-on Franchisee Conference, or SFC, and always takes place in July and early August, well, that contraction crept into part of June. The franchisees were selling robustly off the van with those products, but drawing down their positions and ordering less new product. You see, recent SFCs have been bigger than ever, offering more exciting products. Franchisees have been ordering more in that one big weekend. And this year, we're getting ready earlier, clearing the decks.

That said, even with the modest volume increase, Tools Group operating margins rose 120 basis points to 19.5%. That 120 basis point improvement demonstrates clear progress to benefits of Snap-on Value Creation, more effective higher-margin products, streamline product development and nice volume leverage internationally. Advancements in the Tools Group are evident in the overall OI improvement and they're apparent in our franchisee health metrics. The financial and physical indicators, we monitor and evaluate continuously. They remain favorable in important categories like franchisee turnover.

We believe our van network is growing stronger. I just visited several franchisees in the field and I can assure you that the confidence of those entrepreneurs was quite encouraging. And besides those interactions, during more formal discussions, like our National Franchise Advisory Council meetings, I heard similar comments. The people I spoke to are upbeat, very confident of their opportunity going forward. That's the Tools Group.

Now on to C&I, a 4.7% organic sales rise with higher critical industry activity and increased volumes at SNA Europe and at our Asia Pacific operation. For several quarters now, the C&I businesses have demonstrated sales acceleration. C&I operating margin was 13.8%, flat versus 2016, with volume and RCI gains being more or less offset by the impact of our recent acquisitions.

Importantly though, the industrial division showed strength, broad -- showed strong broad-based progress across the critical industries, with most those sectors advancing in the quarter. We believe the improving macroeconomic conditions, coupled with our array of great new products aimed at solving critical tasks, is driving those favorable results.

Speaking of new products in the C&I Group, in the quarter, C&I acquired Norbar Torque Tools, headquartered in the U.K. Norbar is a leading manufacturer of torque products, offering a full range of wrenches, multipliers and calibrators. That acquisition complements and expands our existing torque line of extending our range up all the way to 220,000-foot panels, more for the C&I team to sell to our customers in critical industries. Norbar offers both the powered torque and strong line of manual torque multipliers.

The latest in that line introduced in the second quarter is the [MTMB 740] compact manual torque multiplier. This tool, it features compact design with the multiplier head just 2.6 inches in diameter, enabling excellent access and easy handling while still providing 5 to 1 multiplication ratio, up to 740-foot panels. In its Norbar tradition, the construction is robust, delivering a long life and minimal maintenance and is ideal for use in tough environments like oil and gas, mining, power generation, railroads and heavy-duty fleets in a range of critical industries.

Now C&I has been in torque for some time with our manufacturing facilities in the City of Industry, California and more recently, with our Sturtevant Richmont acquisition in Carol Stream, Illinois, producing great products, selling to automotive, aerospace and other industrial customers. And in the second quarter, our City of Industry team launched its ATech Micro TechAngle 1/4" Drive Torque Wrench, the smallest electronic torque wrench in the market, compact steel body, less than a foot in length and less than an inch in diameter and it weighs just under a pound. That compares with our -- by comparison to our standard ATech 1/4" wrench at 16.5 inches in length and 1.9 inches in diameter and weighing nearly 2 pounds.

Engine compartments, they continue to get smaller and tighter with each model year, limiting the access and reducing the workspace. The slim design of our new ATech allows technicians to reach fasteners that are recessed or obstructed, reducing the need to remove components and saving considerable time in the repair shop. And the short -- and the product's short overall length enables a compact swing arc. That's very important in the tight spaces of modern machinery. We're excited about the compact 1/4" ATech, access and accuracy in one package. We believe it's a clear winner, and early results support that view.

Now let's speak about SNA Europe, positive trends in the uncertainty that is Europe. SNA Europe registered its 15th straight quarter of year-over-year sales growth and profit. Quarter 2 marked the 17th straight quarter of margin improvement, defying the challenges over multiple geographies, roughly 4 straight years of favorable performances, helping the C&I Group advance in both sales and profitability. And in the quarter, Asia Pacific operations had sales growth in countries like China and Taiwan, lower volume in places like India, mixed results by country, but positive results overall. C&I, turning in a promising quarter on broad gains and accelerating sales.

Now on to RS&I. Organic sales rose 8.3%, high single-digit gains of diagnostics and repair information products to independent repair shop owners and managers, a high-single digit increase with OEM dealerships and a mid-single-digit advance in undercar equipment, growth across the board. And on a reported basis, including RS&I's $22.5 million of acquisition-related sales, volume grew 14.5% in the second quarter. Operating earnings of $81.9 million increased $7.4 million. The operating margin of 24.2% was down 100 basis points, but that was impacted by 120 basis points of lower margin in the acquisition. The broad organic growth was strong with independents and with dealerships, and innovation and new product paved the way.

From the diagnostics division, our newest handheld offering, ETHOS Edge, enhanced industrial design, faster response time, configured to match specifically the needs of new techs, those just starting out and working on a more routine maintenance task and light repair. The initial feedback on ETHOS Edge is quite enthusiastic and early sales, they exceeded our expectations. So the OEM dealerships in the quarter, RS&I introduced a new -- latest version of the NEXIQ branded Electronic Data Link, or EDL 3. It's specifically designed for the needs of agricultural repair technicians across the service network of a large OEM. This essential tool responded to a need to connect ag equipment in the field to the OEM's diagnostic software. To access repair information in any environment, Snap-on solved the problems and made it happen. The EDL 3 is just one example of our essential diagnostics program aimed at OEM dealerships, and those were a nice part of RS&I's quarter. And undercar equipment, it was also up mid-single digits with particular strength internationally, solid liner growth in Europe and broad gains in lifts and balances. Undercar equipment, another positive quarter.

So to wrap up RS&I, substantial achievement across the divisions, improving our position with repair shop owners and managers, continuing a very favorable trend, but that's the highlights of our quarter. Tools Group, lagging in sales, but C&I and RS&I both recorded strong performances, progress along our runways for coherent growth and clear advancements then are runways for improvement; overall sales increasing organically 2.7%; Opco, operating income margin of 19.9%, up 80 basis points; EPS, $2.60, a rise of 10.2%. It was another encouraging quarter.

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

Thanks, Nick. Our consolidated operating results are summarized on Slide 6. Net sales of $921.4 million in the quarter increased $49.1 million or 5.6% from 2016 levels, reflecting a $23.2 million or 2.7% organic sales gain, $38.4 million of acquisition-related sales and $12.5 million of unfavorable foreign currency translation. Foreign currency movements adversely impacted our Q2 sales comparisons by 160 basis points. The organic sales gain reflects ongoing progress in serving the vehicle repair sector as well as more broad-based sales growth to industrial market segments in our C&I Group, more than we've seen in some time.

Consolidated gross margin of 52.2% improved 80 basis points, primarily due to benefits from higher sales and savings from RCI initiatives, partially offset by 20 basis points of unfavorable foreign currency effects. Operating expenses of $279.3 million yielded an operating expense margin of 30.3% in the quarter, unchanged from a year ago. As sales volume leverage and other benefits were offset by 70 basis points of operating expenses for acquisitions. As a result of these factors, operating earnings before financial services of $183.7 million increased 10.4% and improved 80 basis points to 19.9%, despite the 70 basis point impact from acquisitions and 20 basis points of unfavorable foreign currency effects.

Financial services revenue of $77.7 million increased $8.4 million from 2016 levels and operating earnings of $54.6 million, including $0.5 million of unfavorable foreign currency effects, increased $5.1 million. Consolidated operating earnings of $238.3 million, including $4.9 million of unfavorable foreign currency effects, increased 10.4% and the operating margin of 23.9% improved 100 basis points from 22.9% a year ago. Our second quarter effective income tax rate of 30.6% compared to 31.0% last year. Finally, net earnings of $153.2 million or $2.60 per diluted share increased $13.1 million or $0.24 per share from 2016 levels, representing a 10.2% increase in diluted earnings per share.

Now let's turn to our segment results. Starting with the C&I group on Slide 7. Sales of $310.0 million in the quarter increased $24.3 million or 8.5%, reflecting a $13.3 million or 4.7% organic sales gain, $15.9 million of acquisition-related sales and $4.9 million of unfavorable foreign currency translation. The organic sales increased primarily includes a high single-digit gain in the segment's European-based hand tools business and a mid-single-digit increase in sales to customers in critical industries, which was generally wide ranging across the industrial end markets that we serve.

Gross profit in the C&I Group of $120.8 million compared to $111.4 million last year and gross margin was 39% in both years. Operating expenses of $78.1 million in the quarter compared to $72.1 million last year. The operating expense margin of 25.2% was the same in both years, primarily due to sales volume leverage, offset by increased costs including higher cost for research and engineering activities and 30 basis points of operating expenses for acquisitions. As a result of these factors, operating earnings for the C&I segment of $42.7 million increased $3.4 million from 2016 levels, and the operating margin was 13.8% in both the second quarters of 2017 and 2016.

Turning now to Slide 8. Second quarter sales in the Snap-on Tools Group of $413.8 million decreased $2.9 million or 0.7%, reflecting $2.1 million or 0.5% organic sales gain and $5.0 million of unfavorable foreign currency translation. The organic sales increase reflects a double-digit gain in the international franchise operations, largely offset by a low single-digit decrease in the U.S. franchise operations. Gross profit of $183.6 million in the quarter compared to $182.1 million last year. Gross margin of 44.4% improved 70 basis points, primarily due to benefits from sales of higher gross margin products and savings from RCI initiatives, partially offset by 50 basis points of unfavorable foreign currency effects.

Operating expenses of $103 million in the quarter compared to $105.8 million last year. The operating expense margin of 24.9% improved 50 basis points, primarily due to sales volume leverage in the international franchise operations. As a result of these factors, operating earnings for the Snap-on Tools Group of $80.6 million, including $3.2 million of unfavorable foreign currency effects, increased $4.3 million and the operating margin of 19.5% improved 120 basis points.

Turning to the RS&I Group shown on Slide 9. Second quarter sales of $338.1 million increased $42.9 million or 14.5%, reflecting a $24.1 million or 8.3% organic sales gain, $22.5 million of acquisition-related sales and $3.7 million of unfavorable foreign currency translation. The organic sales increase was, again, comprehensive this quarter, reflecting high single-digit gains in sales to OEM dealerships and in sales of diagnostic and repair products to independent repair shop owners and managers, as well as a mid-single-digit increase in sales of undercar equipment. Gross profit of $158.6 million in the quarter compared to $137.8 million last year and the gross margin of 46.9% improved 20 basis points as a result of 80 basis points of benefit from acquisitions, partially offset by a shift in sales that included higher volumes of lower gross margin products.

Operating expenses of $76.7 million in the quarter compared to $63.3 million last year. The operating expense margin of 22.7% increased 120 basis points, principally due to 200 basis points of unfavorable impact from acquisitions, partially offset by benefit of sales volume leverage. Operating earnings for the RS&I group of $81.9 million, including $1.2 million of unfavorable foreign currency effects, increased $7.4 million from prior year levels. The operating margin of 24.2% decreased 100 basis points, including a 120 basis point impact from acquisitions.

Now turning to Slide 10. Operating earnings from financial services of $54.6 million on revenue of $77.7 million compared to operating earnings of $49.5 million on revenue of $69.3 million last year. Financial services expenses of $23.1 million increased $3.3 million, primarily due to changes in the size of the portfolio and an increase in the provision for credit losses. While total provision expense of $13.4 million in the second quarter is up $2.9 million year-over-year, it decreased slightly from $14.3 million incurred in Q1. As a percentage of the average portfolio, financial service expenses were 1.2% in both the second quarters of 2017 and 2016.

In both the second quarters of 2017 and 2016, the average yield on finance receivables was 17.9%. The respective average yield on contract receivables was 9.1% and 9.3%. Total loan originations of $270.6 million in the second quarter decreased $10.4 million or 3.7% year-over-year due primarily to a $12.4 million or 5.1% decline in finance receivables originations, resulting principally from lower year-over-year tool storage sales by the Snap-on Tools Group in the second quarter.

Moving to Slide 11. Our quarter-end balance sheet includes approximately $1.9 billion of gross financing receivables, including $1.7 billion from our U.S. operation. Approximately 82% of our U.S. financing portfolio relates to extended credit loans to technicians. In the second quarter, our worldwide financial services portfolio grew $50.9 million or 2.7%. As for finance portfolio losses and delinquency trends, these are tracking somewhat higher year-over-year but continued to be in line with our expectations, in view of the appropriate risk-reward balance in this segment of our business.

As it relates to extended credit or finance receivables, the largest portion of the portfolio, trailing 12-month net losses of $40.4 million represented 2.61% of outstands at quarter-end, up 51 basis points year-over-year and 14 basis points sequentially. However, net losses related to finance receivables of $10.8 million in the second quarter sequentially improved by $0.4 million from $11.2 million in the first quarter. In addition, finance receivables more than 90 days past due stood at 0.9% of outstanding as of second quarter end, which was also a sequential improvement from 1.1% at the end of the first quarter. 60 days delinquency rate of 1.4% in our U.S. extended credit portfolio increased 30 basis points year-over-year, but it remains stable compared to the first quarter. Overall, profitability in the financial services segment rose by 10.3% year-over-year and improved $2.1 million sequentially.

Now turning to Slide 12. Cash provided by operating activities of $127.1 million in the quarter decreased $35 million from comparable 2016 levels, primarily due to higher working investment, partially offset by higher 2017 net earnings. During the quarter, we also elected to make $15 million in discretionary contributions into our domestic pension plans, an increase of $5 million as compared to Q2 2016. Net cash used by investing activities of $138.6 million included additions to finance receivables of $231.8 million, partially offset by collections of $179.1 million. Capital expenditures of $15.8 million in the quarter compared with $20.6 million last year.

During the second quarter, we also acquired Norbar Torque Tools. Based in the United Kingdom, Norbar included in the C&I segment, is a leading European manufacturer of a full range of torque products and has a strong presence in the critical industries. Net cash used by financing activities of $23.4 million included dividend payments to shareholders of $41.1 million and the repurchase of 535,000 shares of common stock for $86.7 million under our previously announced share repurchase program. We saw opportunity in the quarter to step up share repurchase, and did so in higher levels than usual. Year-to-date, share repurchases totaled 745,000 shares for $122.5 million. These uses of cash were partially offset by higher short-term borrowings, principally commercial papers.

Turning to Slide 13. Trade and other accounts receivable increased $46.5 million from 2016 year-end levels, including $15.4 million of foreign currency translation and $7.1 million from acquisitions. Days sales outstanding of 66 days is up from 63 days at year-end, including the impact of acquisitions, which increased DSOs by about 1 day. Inventories increased $70.9 million from 2016 year-end, primarily to support continued higher customer demand and the new product introductions. Foreign currency translation contributed $16.6 million of the increase as did $4.8 million from acquisitions. On a trailing 12-month basis, inventory turns of 3.2 compared to 3.3 at year-end.

Our quarter-end cash position of $89 million increased $11.4 million from 2016 year-end levels. Our net debt-to-capital ratio was unchanged from 26.3% at 2016 year-end. In addition to our $89 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 quarter-end, we had $83.5 million of commercial paper borrowings outstanding.

That concludes my remarks on our second quarter performance. I'll now turn the call back to Nick for his closing thoughts. Nick?

Thanks, Aldo. The Snap-on second quarter. Tools Group, tepid growth but having the advantages going forward of a strong franchise network and a robust market. C&I, accelerating growth, up mid-single digits, broad gains in the critical industries and the continuing upward march of SNA Europe. And RS&I, another high single-digit quarter up 8.3% organically, each division contributing to that rise, confirming both the opportunities in automotive repair and our progress with repair shop owners and managers. The positives of C&I and RS&I combining to overcome the challenges in Tools, making for overall organic growth of 2.7%, and Snap-on Value Creation, driving improvement, customer connection, innovation and RCI authoring margin progress again.

Opco OI margins of 19.9%, a rise of 80 basis points against currency and acquisitions. And acquisitions, presenting near-term margin dilution but also offering further landscape for Snap-on Value Creation and margin improvement going forward, it was a quarter in which we saw challenges, but overall, we overcame and demonstrated growth and improvement again. EPS of $2.60, up 10.2%, it was an encouraging quarter and we're confident. We're confident that our markets have the opportunity, our businesses have the position and our team has that capability to continue our ongoing positive trend in performance going forward.

Now before I turn the call over to the operator, I'll speak to our franchisees and associates listening to the call. The encouraging results of the second quarter reflect your capability and your commitment. For your ongoing achievements, you have my congratulations and for your extraordinary dedication to our team, you have my thanks.

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

(Operator Instructions) And we'll now take a question from Liam Burke with FBR Capital.

Nick, can you give us some color on diagnostics sales and what the innovation or new product pipeline would look like in that area of the business?

Well, we don't like to give away the secrets that we're going to rollout, say, at the SFC or so on because we like to electrify the people who will go there. I just talked to our franchisee in California who said he likes to get the fever when he goes on the floor, so we want to have that. But look, our thermal imagers are still selling well. That's still got legs. That's the new category. That's going well. Overall, in the Tools Group, the diagnostics category was up, I think it's mid-single-digits in the U.S. The U.S. numbers, I have those. So that wasn't part of this, say, malaise. And even in that, we saw a destocking. So it would have been up bigger without what we perceived to be destocking. So you have that and you have the ETHOS, which is the next level. We keep refreshing the platform. Remember, there are 4 levels of platforms: ETHOS, for the entry-level tech; SOLUS for the guy who kind of works on brakes and there's a whole bunch of other little bit more sophisticated jobs; MODIS for the guy who really works on the more complicated jobs; and VERUS for the guy who works on those things that only happen on alternate Mondays. So we're going to -- we rolled out the ETHOS and we're bringing out some new wrinkle in the SFC. But the ETHOS has just come out, very early days. We have it in the script here, but that's only been selling for a little while, but the first numbers are pretty good. It was up nicely in the second quarter.

Okay. And on the Rock 'N Roll van, you said you were going to go back and do some things differently. What would you anticipate doing to improve the space constraints that the van drivers would have on some of the products?

Sure. One of the things is, when we saw these results, I decided to talk to a bunch of franchisees. So in the last couple of weeks, I don't know when we got the results, but let's say a couple of weeks ago, right away I met with guys from Illinois, Wisconsin, Indiana, rode some vans in Arkansas and Texas, talked to guys in New Hampshire, Florida and California, and almost everybody said that the Rock 'N Roll Cab had lost some of its excitement. So it's a matter of -- it's not really the function, Liam, it's having people get on the van and saying, "Oh, this is something different, it's an experience." I want to get on the van and experience because that's what they did before. So we'll do stuff like we'll wrap it differently with some of our new facilities. We'll reorganize the tool boxes. We'll try to put some more spiffier stuff on in terms of the boxes on the van. So as to say it, it's a matter of this, when the technicians were getting on, they would -- what we would get feedback on, they we're getting on and say, "Oh, I saw this." Now some of the guys who bought because they look at the boxes, but other guys were kind of saying like, been there, done that. So we're going to try to make it a different experience, move around some of the floor plan, maybe kind of put on some -- a little better computer aid, things like that. So I think it's really to change the -- I want to say the cosmetics of it more than anything else, so people feel as though they're getting a different experience.

We'll now move to David Leiker with Baird.

A couple of things I'm trying to -- I guess I'm trying to slice the business up a little bit to get a little deeper understanding on some of the pieces. Can you talk within -- first of all, you said on the tools side that the destocking -- is there a way to characterize what the selloff the truck volume was during the quarter?

Well, look, I don't think we want to get pinning down that variable, but what I'll tell you is sort of like this. You think about it this way, tool storage was down fairly significantly even off the trucks, but less so than we had, okay. So that's why we say tool storage, the product line, we believe it needs to refresh. We need the marketing, the Rock 'N Roll vans, we need something that helps and so we're working on that. If you look at everything else, if you take everything else like the -- 2 types, you're very familiar with this, EC, the finance stuff and the RA stuff, the stuff that -- what we know is the stuff that the franchisee sells on his own credit like hand tools and power tools and shop and pack and some portions of diagnostics, that was up fairly significantly towards the top of the ranges that we expect to see from the Tools Group. So we would have classified that as a fairly robust quarter looking at the sales off the van, that didn't translate into our sales though. Our sales were quite mixed in those categories and quite tepid. So what we -- and you talk to the franchisees and what they said was, and it makes sense, is that always July is our worst -- our lowest quarter because people are getting ready. But what's happened over the years is more and more of the ordering is taking places in these bursts. That doesn't mean the second quarter becomes the incandescent, but they're taking place at these bursts. And so I think they're being more aware of the need to kind of get ready for those orders. Last year, the orders in the SFC we're up quite strongly, and the year before as well. So what's happening is, is that they're bleeding out of July into June, that's what happened. We saw a significantly weaker tail end of June than we have seen in the past.

And then the other item, you'd mentioned it a couple of times in your call and obviously, it's a topic going on in the marketplace today, but can you talk about the changes to the terms you did with your franchisees on the credit side. How frequently you make those changes? Just some additional story behind that.

We make them pretty much every year, some kind of changes. And I think since 2009 or 2010, we made significant changes in most of the year, in a lot of years, so that happens. What you do is you look at how people are performing. You say how is the business? How are the franchisees, who are big active part. You try to restructure the program so it guides them to get the best out of their opportunity, and that's what we did. And so that had some initial impact because we identified some customers who are weaker and we said some of the franchisees aren't having some of the greatest results in that, so we strapped -- strike it so that those franchisees would be focused on those guys and really couldn't deal with them as much. Whereas other guys, we have lots of faith and we let them deal with that same category. That was the restriping pretty much.

And then the last item here, again, on the credit side. If we could talk a little bit about -- I mean, you can tell by the yield that, clearly, if you go back a couple of years, you took in some higher-risk customers and some of that was after CIT exited funding the credit company. Recently, that seems to have backed off a little bit. Can you talk a little bit about what those credit losses are in that pool of higher-risk customers? When we'll see those flow through the credit losses in terms of peak lost period.

David, it's Aldo. I think you're seeing that now when you look at the year-over-year differences in the rate of provision and the rate of charge-offs. And I don't think that you're going to see a decline in those rates, so to speak, but I don't think you'll see an acceleration either. And I think if you look at since the start of the year, there's been rather a good amount of stability, so a rather constant amount. So the portfolio constituents are more or less where they're at right now. I don't see that changing very much. I think the franchisees are always adjusting, as Nick suggested, to the fact and circumstances that they face on The Street each and every day. But the portfolio losses right now are more or less stable throughout the year, at least year to date.

Is it fair then to say -- I'm going to jump to conclusion, but is it fair to say, with that commentary, that the credit profile, credit risk profile, the people who are coming into the credit side on the origination side are similar to what the overall pool is today?

It's a hard question to answer because you have a -- half the portfolio whose customer FICO scores are improving and the other half of the portfolio that actually might be a little bit less than improving. So if you look at the mix overall, the average FICO score of the portfolio has been rather consistent. But there are goes in and goes out, there'll be change and flex over time, but not dramatically.

We'll now take a question from Scott Stember with CL King.

Could you maybe talk about the timing of when comparisons in the Tools Group get a little bit easier and most notably with regards to tool storage? And then maybe secondarily, just talk about some of these changes in the vans, making them a little bit more exciting, increasing traffic into the vans for tool storage, when that will actually start to take place?

Sure. Look, I don't know. Look, I don't think we ever think we have easy comparisons. I think we kind of look -- I mean, okay, the comparisons are easier, but they're up 0.5%. This is the best second quarter ever in terms of sales. I mean, the increase wasn't the best, but -- and the profitability is the best ever, so I don't think we think in those terms. I think the question is, how are you going to restart? It's clear to us that the primary factor in this say like slim situation in tools was tool storage. So first is product. Tool storage is among the most discretionary things. You've got to excite people. They got to want it. They got to aspire to have it. We're working at -- the SFC will come up in early August will be launching a whole bunch of new product at the SFC will try to roll people and excite them. We tried some of that in the second quarter. Some of it worked, it wasn't enough. And then the tool storage and the vans, the Rock 'N Roll cab, there are, I think, 67 of them. So what we will do over the next, say, quarter, we'll be developing a -- or in this quarter, let's say, we'll be developing possibilities for the new van. We'll probably test some of them and then we'll roll them out whatever works best. So it will be a test period, develop period, a test period and a rollout period. And you tend to roll them out, so you should start seeing some of that as, well, I don't know, toward the later end of the year, things like that. But first is product. The first factor is product. First factor is product.

Got it. And just last question. Yes, sure, you talked about the sell-through on the vans, I guess outside of the tool storage of being relatively strong or actually to the high-end of your, which you look for. Can you maybe just give us a flavor of how high that was? Just give a comfort level to how strong the rest of the business is doing?

Look, I'd say that Snap-on should grow at 4% to 6%. I've said this for a dog's age. That's my range. So I'm talking to the end of that range. That's the kind of thing we talk about, right?

We'll now take a question from Gary Prestopino with Barrington Research.

A couple of questions. On the C&I Group, I think you said that you had some pretty good sell-through there in hand tools and then across various markets. But I'm wondering, were all of the markets within the C&I Group, is this one of the first times where you've really seen upsales year-over-year? And I'm particularly interested if some of those laggard groups like military and energy are starting to energize.

Look, natural resources was up. Natural resources, in general, that sort of natural resource segment was up. International aerospace, which had been a laggard, was up. We're very pleased to see that. Military, actually, was flat. I kind of viewed that -- kind of flat, it was up a little bit. I kind of view that as a positive, Gary, because the thing is military, as you know, it's kind of lumpy and it had been dominating our quarters. So actually, last quarter was sort of the same kind of thing, we had broad growth. This time with military, not as much a factor in the growth situation. And this time, the same thing was the case. So this was a very healthy quarter and you're seeing acceleration in industrial. C&I's numbers, if you go back and look at them, you'll see that we threw, 4 quarters ago, 1.5%, 2.4%, 3% and 4.7%. So people, if you look at this, other people have looked at the segment and say, well, there's some deceleration. Well, this is acceleration. And so that's pretty positive, and the nature of that's been pretty good. And industrial has been up higher than that.

Okay. And then some of the strength you're seeing in the RS&I Group with diagnostic equipment and other equipment, I'm really more pertaining to diagnostic, do you feel that, that's a function of really rolling out some of these newer products? And in conjunction with that, you're starting to get some cars that are 4 or 5 years old that had maybe a higher technological content than cars that were 10 years old, flowing through in the -- to the independent repair shop market?

Sure. There's a -- I don't want to short change some other factors in there. But if you look at the diagnostics, it's a great tailwind. The increasing need for diagnostics to create repair, you know it as well as I do, is that 40%, 50% of repairs on cars today require diagnostic. But new cars, that's all the cars 11.5-year-old average car fleet, but if you look at new cars, it's 80% of the repairs. So there's an increasing demand. You hear it in the shops when you go around. We have the best alternatives. So you see our new products rolling out, exciting customers, solving their problems against the backdrop of their needs, that's partially what you're seeing, and diagnostics was up nicely in that quarter. But I wouldn't want to short change Mitchell, which is a purely short, purely software business, which provides repair shop management and provides repair shop -- repair information, our Sure Track database with the 1 billion record that only we have of repair, shortcutting repairs. That was up big in the -- nicely in the quarter. So you take those 2 things, I think diagnostics is in -- I mean, RS&I, in general, is in a situation where the tailwinds are only intensifying and we're the best game in town.

Right. And then the last question really pertains to tool storage and you say you refreshed the product, refreshed the vans. When was the last time that you actually did something like this? And then how long after you refreshed did the sales start reinvigorating themselves?

I don't know. We didn't refresh. We launched the tool storage vans and this is -- you got the first -- when you launch, you probably -- I think it's fair to say we had some periods where we're adjusting. But really, they've been pretty much the same since we launched like 5 years ago. So we haven't had that information in this kind of fleet. We haven't had this kind of fleet. This was a brand new idea. You remember I said it's the kind of idea that came to the Tools Group guys. We thought it was brilliant. It accelerated tool storage sales. But now, it's kind of run out of mojo. Now we're still generating some sales, but franchisees are telling me that what they used to generate is now half of what they generated when they get these guys in a route, so we need to pump them up. But this is why we have managers to figure this out, that's what we do.

Yes. I guess, what I was getting at, Nick, is there something on the product side that you -- do you refresh every 5 years understanding like...

No. No, I think we try to -- what happens is, Gary, we try to roll out new product at the SFC or the kickoffs every year. This year, we're particularly energized to do it. So you can see sales, you can see ordering pretty quickly from the franchisees. And you can get a feeling for that pretty quickly at how good that worked. The question is, is it going to play out into the marketplace? So there are 2 levels, getting the franchisees interested and then having the technicians look at it and say, "Hey, I got to have that box. I already got a box, but I got to replace mine."

So I guess the question I would have is relative to new products or product refreshes that you bring into this annual meeting that you have. On the tool storage side, have you done more in terms of maybe intro or refreshing product than you would usually do?

We're doing more and we're certainly going to do more in tool storage at the SFC this year than we have been in the past. So think about the SFC though, no matter how much the SFC orders are, remember, they're ordering for like 6 months, so it doesn't happen immediately, right? Okay. But we're doing more. Sure, this is the whole thing. We think the product line is weak. If it's not doing, we got to pump it up.

We'll take our next question from David MacGregor from Longbow Research.

Just a few questions here for you. Nick, could you just talk about the destocking in the extent to which that may be related to some of the changes you made in the credit business?

We don't think it's that. We think the credit is -- while the destocking is something completely different. The destocking is, we think -- I think I try to -- this is my view, David, is that, look, and I think it's our view here. There are 2 factors we're talking about on the Tools Group, destocking and the weakness in tool storage. Destocking is a completely different thing. The destocking is there driven by the size of the orders that are occurring in the SFC and the feeling that our people want to clear the decks. This is happening in every product line, not just tool storage. So from our perspective, that's not really a factor there. If you come back to the tool storage sales, you could argue -- and I think I did say that it's a tertiary effect, so we don't believe it's the primary driver. But re-striping had some initial effect on this, for sure, but we don't think it's the primary driver when we look at the numbers.

Okay. Second question is on margins in the tools segment, which were pretty darn good. I guess, could you just talk about the strength at 19.5%, I guess given the flat top line, then how we should think about your ability to maintain this level of margin progression heading into the second half of the year?

I think a couple of things are in there. The first is that if you go back and you look at our numbers, it's not -- if you look at our numbers by division, it's not unusual to see that kind of growth. It isn't necessarily directly proportional to the volume. I mean, we have RCI products and new products that rollout that are a lot more, a lot more capable and a lot more value, and therefore, higher margins as they rollout to the industry. So it really plays out how long those new products and how many new ones we rollout, and how effective they are. And then in this particular -- so in this quarter, in that area, we have things like the PT850. I think I talked about it last time, our new 1/2" impact wrench, very, very popular product. In the atmosphere of tepid sales, that one sold very well, nice margins. I talked about the long handle ratchet's that have the flex heads and were -- gave great leverage and also gave great access, that sold better than -- great margins. And these margins transformed our categories in terms of margins. What happened in the destocking in a lot of situation is some of the more standard and core product didn't sell as much because they were products that were already on the van. And so that was, perhaps, lower margin so it's skews the thing towards there. And then we had good leverage in the way our businesses were stronger internationally than they were in the U.S. and the compensation in the international is a little bit different so we can to get a little bit more leverage and drop through volume leverage out of the volume, so that's what made for that. I think it's hard to say what the sustainability is of this, but we believe, I've said this over and over and over and over again, that we believe we can drive margins up absent volume increases. And if you look at our numbers, 19.9% ain't chopped liver. It's our highest ever. And so you go back and you look at this quarter, for example, this quarter is very similar to last 20 quarters, 9 quarters were similar to this and we grew 100 basis points or more. So I really believe maybe the 19.5% isn't sustainable every quarter, but it's an indication we can reach that level and we keep going off those levels, that's our history.

Just a couple of quick follow-ups here. The storage growth, I don't want to beat this thing to death, but Aldo, in his discussion, the originations mentioned that there have been $12.4 million decline in the originations related to storage, 5.1%. Is that a good proxy for how we should think about the extent to which storage was down year-over-year?

No. Storage is down more than that.

Can you quantify that for us?

Well, storage is down double digits. I don't want to get confused here because I spoke probably for the first time on this call about sales off the van. Don't get confused about sales off -- I'm talking about our sales. Storage was down double digits. And so that played out into a different lower originations. But remember, in originations, originations are the franchisee sales. Their storage was down but not as much. And then you also have in that, you have other products like diagnostic units and other things like that so it's hard to make that characterization. But I just thought tool storage was painful.

Last questions just on the originations. With originations maybe set to go through kind of a negative growth pattern here for at least the foreseeable future. This would presume that you got a little bit more free cash, sort of discretionary use of free cash flow. You were jacking up your share repurchase activity this quarter, which was good to see. Do we expect to see that pattern maintain going forward? Do you sort of lean a little harder into the repurchase as use of cash?

No. I think we're always discussing the use of cash and we've always said, I think, that you have investment in your business and you have acquisitions and you have dividend, and of course share repurchase is part of that. So we always consider that in the context of the cash availability, the authorizations we have from the board and the attractiveness of the pricing.

And we'll take our next question from Bret Jordan with Jefferies.

A question on the destocking discussion. I guess the franchisees have a minimum balance requirement anyhow. How close does the average franchisee runs to his minimum balance? I mean how much more potential for destocking is there? Or are we really sort of out of -- are we going to find some base relatively soon?

Look, I think this, I think we're going to see destocking through July then they're going to come up to the SFC. This destocking, I don't think -- it wasn't -- I don't think it was driven so much by people saying I got too much inventory. It was driven more by the idea that the ordering patterns are migrating toward big orders, more toward big orders at the -- twice a year events. And they order these things because they, like I said, the franchisees get on the floor and they get the fever and they're able to, for the first time, touch the product and they order the packages, they see the new product and they tend to order more. And these things, Bret, get delivered for like 6, 8 months after that. So the lower they are, the better -- the more stabilized they are going into that. They're starting to realize, the better off they are to manage that 6, 8 month delivery pattern that they've signed up for when they go into these places. That's what's happening. So there's a little more ordering happening at the big events and less maybe on whatever the monthly events are. We have monthly events. And so, I think, that's what you're saying. And because these SFCs have been so -- that's what I'm hearing, because the SFCs have been so successful, people are bringing it down. I don't think they're thinking that, oh, I'm choking on inventory.

I guess in your inventory, you talked about growth around new programs and future customer demand, can you talk about the categories that you're growing? Is this RS&I inventory that you're building up because you're seeing so much strength there? Or is this some increase in your inventory as you've seen a little bit of a destock, but you're building inventory with the expectation that they pick it up in the current quarter?

Yes. The answer is for both of those. Look, I think we saw some destock, but we're kind of confident that as the SFC rolls out, that inventory is going to be quite useful. That's what we're building for, building toward. The RS&I business, hey, it's smoking. It is doing well. So I mean, the thing is, in RS&I, in some cases, we can sell -- we want to have inventory because we have quite a good demand. And even in the Tools Group, really. I mean, we sold -- I believe, we sold every PT850 we could build this quarter. So I mean the thing is, you do have this kind of thing, so we're happy to have some inventory going into the SFC for the kind of thing.

Okay. And then on the last quarter we talked about running a special sort of tool color program that was going to drive incremental demand. Have we rolled that out yet? Or is that something that is coming in the current quarter around this big event?

No. No. We rolled it out and it worked, but it didn't have enough effect. We rolled out a special color and we had a couple of split top boxes, a couple of minor changes. We did it as quick as we could because we -- second quarter, we weren't quite ready for it. So we rolled that out and it worked pretty well. It was a purple box. Now we have a number of different things, things like different mechanisms for the box, different power configurations for different product lines, so different -- an array of more colors that come out in like an SFC. So it's a much more comprehensive thing.

Okay. And a housekeeping question for Aldo. On corporate expense, I think a couple of years ago maybe you guys have given some -- a range of guidance like 90 to 100, and we keep coming in below that. Should I think about future corporate expense being closer to what we're seeing this quarter or does that old guides still hold?

I think the guide holds, Bret. But this year, we're trending towards the low end of that range, so 90 is about a good target. The reason we have made a little bit of progress this quarter is every second quarter, we true up our pension calculations working with our actuaries. We got a little bit of good news that accounts for most of the year-over-year improvement this quarter when it comes to that. And as you roll forward, you don't have quite the benefit of that onetime adjustment. So anyway, corporate expenses trending maybe more towards 90-ish.

We'll now take our next question from Christopher Glynn with Oppenheimer.

On the tightened credit a little, during the quarter, saw that in originations in tool storage, I think, there's probably a relationship there. Would we expect a bigger impact in the third quarter with the full period of the tighter credit practices?

Well, you'll have -- I think we have 2 months' worth in this quarter, you'll have 3 months then. On the other hand, you have offsetting that. Anytime you make a change in credit, people tend to be -- take a little time to try to understand the new rules with more clarity. This is just a fact. So I don't know. You could because you've got 1 more month. On the other hand, you'll have people operating with more clarity, so I'm not so sure. In any case, we don't suspect a huge impact.

On the inventory, it sounds like you're sort of anticipating a tail off of that. Do you think that the tools growth rate has probably put in a bottom here?

Well, I can never comment -- I hate to do that because many times I've been humiliated by saying I thought that things were over. But look, we're not -- this is a very slim quarter for the Tools Group, and I know they're going to work pretty hard to try to energize the tool storage business. And we think the market is strong, so we'll see how that plays out. I guess I can't make any predictions, but I think this is what we do. We revitalize product. We change marketing. This is the kind of thing the Tools Group does. And over the years, they've been pretty good at it, so I'm confident in them. But I can't make any productions on a quarter-to-quarter basis, that's difficult to say. I'm pretty confident though that the Tools Group is, over time, in that range of 4% to 6%. I'm very confident of that.

Okay. And last one, I was going to ask about, to Aldo, how long he thinks that it might cycle through this sort of increasing trend of charge-offs? But it sounded, Aldo, like you thought that, that trend has kind of matured at this juncture.

Yes. I think the kind of level of charge-offs and provisioning we're seeing right now will be reflective of what we'll likely see in the second half. You never know with certainty, of course. But like I said, the movement among the credit companies' portfolios have been rather stable at this point in time. So will we go back to the level of provisions and what we had a year or so ago, probably not. At the same time, I don't see it accelerating.

And that concludes our question-and-answer session. I'd like to turn the conference back to Ms. Kratcoski for any additional or closing remarks.

Okay. Thanks, Anna, and thanks, everyone, for joining us today. A replay of the call will be available later on the snapon.com. And as always, we appreciate your interest in the company. Good day.

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.