實耐寶 (SNA) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the Snap-on Incorporated 2017 Third Quarter 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.

Thanks, Alan, and good morning, everyone. Thanks for joining us today to review Snap-on's third quarter results, which are detailed in our press release issued earlier this morning.

We have on the call today, Nick Pinchuk, Snap-on's Chief Executive Officer; and Aldo Pagliari, Snap-on's Chief Financial Officer. Nick will kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides 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 and replay 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, including a reconciliation of non-GAAP measures, is included in our earnings release and conference call slide deck, 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, everybody. As usual, I'll start with the highlights of our third quarter, giving you an update on the environment and the trends we see. And then I'll take you through some of the headwinds we've encountered and speak about our progress. Aldo will then provide you a more detailed review of the financials.

In the third quarter, we again made overall advancements along our runways for both growth and improvement. Total reported sales were up 8.4% to $903.8 million, including $5.9 million of favorable foreign currency translation and a boost from acquisitions, including last year's Car-O-Liner and Sturtevant Richmont operations and this year's BTC and Norbar businesses. They combine for an incremental $44.3 million in sales.

Overall organic sales were up 2.3% with varying results across the group. It's worth noting, I think, in this period that the major hurricanes, which struck Houston, Florida and Puerto Rico did impact our results. We estimate that the sales in the quarter were reduced by about $8 million, principally in the Tools Group but with some smaller impacts in the other businesses. Now the operations in the affected areas have generally returned to normal, except for Puerto Rico. But as in the case of superstorm Sandy in 2012, timing of both further disruption and rebuilding are unclear, so they could extend to the upcoming quarters.

We also had a -- besides the hurricane, we also had a onetime legal charge in the period, $15 million to OI and -- or $0.16 to EPS, reflecting a California state court judgment and an employment-related litigation brought by an individual that's being appealed. Excluding the legal charge, opco operating margin was 18.6% of sales, down 30 basis points, a 90 basis point impact from acquisitions and unfavorable currency, offset in part by operating improvements. For financial services, operating income of $56 million compared to last year's $50.6 million. Excluding the legal charge, earnings per share as adjusted reached $2.45. That's an increase of 10.4%.

Now let's speak about the markets. We believe the automotive repair environment continues to be generally favorable. We saw mixed results from our businesses in that arena, but based on what we've been hearing from our franchisees, from technicians, from shop owners and managers, we believe vehicle repair remains a favorable place to operate, and over time, Snap-on's position will take full advantage. But the critical industries, verticals like aviation, oil and gas, mining and heavy duty, we're seeing recovery. Our activity was strong almost across the board. We like the way the critical industries are sounding and trending.

We have further confirmation of that positive outlook from our European-based hand tool business, SNA Europe, solid results with substantial growth across the European continent, broad strength, another sign of a favorable environment. We do have challenges, but there will always be headwinds. They've been a factor in other quarters, and this past one was the same. But our markets do offer attractive runways for growth, and we believe we're well positioned to confront and offset the challenges and continue enhancing our van channel, expanding repair shop owners and managers, extending to critical industries and building in emerging markets.

At the same time, those growth run rates are joined and supported by the benefits of Snap-on Value Creation: safety, quality, customer connection, innovation and rapid continuous improvement, or RCI, as we call it. They are a constant driver of our (inaudible), especially customer connection, understanding the work of professional technicians; and innovation, matching that insight with technology. And in this quarter, Snap-on Value Creation, customer connection and innovation led to more prestigious product awards than we've had, more recognition than in any single year.

Snap-on was prominently represented with 9 Professional Tool & Equipment News' PTEN People's Choice Product Awards, where the actual users, the technicians, make the selections. That's great endorsement. We were also recognized with 3 PTEN Innovation Awards and with 3 MOTOR Magazine Top 20 Awards. And all 3 of our groups, Tools, RS&I and C&I, were part of those achievements. And the central driver of Snap-on growth is innovative product that makes work easier. It's always been our strength. And those third quarter awards are testimony that great Snap-on products just keep coming. That's the market overview.

Now let's move -- we'll move to the individual operating groups. Let's start with Tools. Organic sales, down 1.6%. Growth internationally, more than offset by declines in the U.S. Operating income in the quarter of $56.3 million, including $2.3 million of unfavorable foreign currency, compares to $64.6 million in 2016. OI margin of 14.3% versus last year's 16.3%, with the decrease -- with that decrease reflecting lower volume and unfavorable mix and a 70 basis point impact of unfavorable foreign currency.

The third quarter, the third quarter is when we hold our annual Snap-on Franchisee Conference, our SFC, as we call it. This year was in Dallas with more than 8,200 attendees, franchisees and family members from over 3,000 routes. It's an opportunity for franchisees for training and for ordering new product, and it's a chance for the company to gauge our franchisees' outlook on the business.

Now the order story this year was mixed. Tool storage was up. Other products were down, and orders were down overall from last year's record level. But I can attest that the franchisees displayed confidence in our business and optimism in the future, and that positive outlook is reinforced by the advancements evident in our franchisees' health metrics. The financial and physical indicators we monitor and evaluate regularly, they remain favorable and robust. We do believe our franchisees continue to grow stronger. And at our most recent National Franchisee Advisory Council Meeting, held just a few weeks ago, I heard the same positive outlook and optimism that was the prevailing mood of the Dallas SFC, and there are real reasons for the confidence. The market remains robust, and our product line is getting stronger.

You heard about the product awards. Well, beyond that, there's a continuous stream of winning offerings going forward, attention-getters, like our new tool storage power drawer in our masters and classic tool storage series. The power drawer gives technicians the ability to organize their cordless tool battery chargers, multiplying these days in the shop, all in one 16-inch wide drawer with 510-volt outlets for battery charging and 2 USB power ports for quick charging of cellphones and other electronic devices. It's configured in a tapered device to allow easy access for all 7 ports. Power and convenience packaged into traditional Snap-on tool storage line, and early reports indicate it's a win, helping to restart the tool storage line.

Also new is our 12-volt inverter-driven Engine Starter+, engineered in Kenosha, Wisconsin -- in our Kenosha, Wisconsin labs and manufactured in Murphy -- in our Murphy, North Carolina plant. [Arcless] connection technology that prevents reverse polarity activation that does bad things when you hook a negative up to the positive; and a dual circuit feature accommodating both high-current jumpstarting and standard charging of small devices, the benefits of inverter drive. Launched in September, it's been received with the kind of enthusiasm that will make another of our hit products.

Well, that's the Tools Group. Now let's move to RS&I. Sales increased $47.4 million, including $21.6 million of acquisition-related sales and $2.1 million of favorable foreign currency translation. Organic growth was $23.7 million or 8.2%, the fourth straight quarter that RS&I has grown organically by high single digits. Operating earnings of $83.4 million increased $11.6 million. The operating margin was close to flat with last year, 25% compared to 25.1%. The acquisitions had an unfavorable impact of 140 basis points, but that headwind was pretty much offset by the benefits of RCI and volume.

The robust RS&I growth represents progress across all our businesses in that group, with double-digit increases in diagnostics and repair information products sold to independent repair shops, owners and managers; high single-digit increases to OEM dealerships; and a low single-digit rise on our undercar equipment. And again, in RS&I, customer connection and innovation stood tall, offering compelling new offerings, taking advantage of a favorable vehicle repair environment. Innovative new products like our latest handheld, the Zeus, which joins our award-winning diagnostics lineup as the new flagship platform. The Zeus was launched following the SFC in late August and surpasses our highly acclaimed VERUS Edge, building on the capabilities of that popular product but further incorporating our intelligence -- intelligent diagnostics software, providing the technician with pinpoint guidance for repair. Intelligent diagnostics is made possible by Snap-on's proprietary big data that guides the technicians in solving those very unusual problems, hard to analyze, those very unusual hard-to-analyze vehicle repair problems, and as a consequence, saving a lot of time. It's no wonder the Zeus has been well received, and in just a short time, it helped drive strong RS&I progress in the quarter.

Diagnostics are becoming increasingly central to vehicle repair. Snap-on is the gold standard, and you can see it in the numbers. So to wrap up RS&I, substantial achievements across the division, improving our position with repair shop owners and managers, continuing a very favorable trend and reinforcing our belief in the strength of the vehicle repair market.

Now onto C&I. The sales of $314.6 million in the quarter increased 8.7%, including $22.7 million of sales related to acquisitions and $2 million of favorable foreign currency. Organic growth was 0.2%, but that was a result of significant gains in critical industries, higher activity SNA Europe and the decline in the sales of power tool products to the Tools Group. Operating margin reached 15.9%, up 80 basis points from last year's 15.1%, improvement reflecting an ongoing stream of innovative new products for critical industries and a robust effort in RCI. They combined in the quarter to more than offset a 40 basis point impact of our recent acquisitions and a 10 basis point decrease from unfavorable foreign currency.

Just a word here on our acquisitions. Great additions to our product lines. At this point, though, they're dilutive to our profit ratios. But going forward, we see them as landscapes for improvement. As we apply Snap-on Value Creation to their operations, they're a great future opportunity.

Now back to C&I progress. The industrial division showed broad-based gains across most of the critical industries with -- across -- as I said, most of the critical industries, with strong year-over-year performance now accomplished for 3 straight quarters. Critical industries are coming back, and when we couple that favorable environment with innovative new product aimed at solving critical tasks, we get very, very encouraging results. Advancements driven by innovation, by products like our automated tool control unit, or ATC, our smart toolbox. In critical industries, tool use needs to be controlled, safe and productive. Snap-on ATC is the top-of-the-line solution, fully automated organization, tool visibility access control and asset management. And our recent enhancement had made it even better. New options like zoom ID and fast flag. Zoom ID, providing individual tool recognition with special tool tagging, essential for serialized, certified or calibrated tools that need individual documentation like torque ranges or gauges, all important items for accomplishing critical tasks. And our fast flag feature display, giving the user quick visual feedback on the status of the box, whether it's locked with all the tools accounted and unlocked with the tools issued and used or prompts exist such as wrong tools returned. It's products like these, aimed at industry needs, that are helping to drive our progress across the critical industries, and we believe the advancements will only continue.

Now let's speak about SNA Europe. 16 quarters in a row of year-over-year growth in sales, navigating through some difficult geographies and economies. SNA Europe's volume continues to be positive, but its profits are even more encouraging, now up for 18 straight quarters, and we believe there's still abundant opportunity. One of the ways SNA Europe has been capturing customers is our new Bahco ERGO Tool Management System, the BETMS. It provides the ability to customize the product to specific needs. Actually, BETMS demonstrates the keychains behind SNA Europe's positive trend, reaching directly to end users, increasing customer connection, configuring just the right toolkits from the broad SNA Europe lineup and matching customers' specifications particularly. This new customer direct approach is transforming SNA Europe and helping to drive its ongoing trend of encouraging results.

C&I, third quarter, maintaining its momentum, extending in critical industries and building both sales and profitability. So that's the highlights of our quarter. Tools Group, working to the reunite the van channel. RS&I, clearly continuing its strong and expanding profitability, which -- repair shop owners and managers. And C&I, now establishing its own positive trend of growth and profitability, extending across critical industries. Progress along our runways for coherent growth and advancements down our runways for improvement. Overall sales increasing organically by 2.3% despite the multiple hurricanes. And excluding the legal charge, as-adjusted EPS of $2.45, up 10.4% in a turbulent environment.

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

Thanks, Nick. Our consolidated operating results are summarized on Slide 6. Net sales of $903.8 million in the third quarter increased 8.4%, reflecting a 2.3% organic sales gain, $44.3 million of acquisition-related sales and $5.9 million of favorable foreign currency translation. The organic sales gain reflects ongoing progress in serving repair shop owners and managers in the vehicle repair sector as well as solid growth in sales to customers in critical industries and in our European-based hand tools business.

Consolidated gross margin of 49.6% declined 60 basis points, primarily due to a 40 basis points of unfavorable foreign currency effects and lower gross margins on acquisition-related sales, partially offset by savings from RCI initiatives. Operating expenses of $295.5 million included the $15 million charge related to the judgment that, as Nick has mentioned, is being appealed. The operating expense margin of 32.7% was 140 basis points higher as 170 basis points for the legal charge and 30 basis points of operating expenses for acquisitions were partially offset by sales volume leverage.

Operating earnings before financial services of $153.1 million or 16.9% of sales included $1.9 million of unfavorable foreign currency effects and the $15 million legal charge and compares to $157.6 million or 18.9% of sales last year. Excluding the legal charge, operating earnings before financial services as adjusted was $168.1 million or 18.6% of sales.

Financial services revenue of $79 million and operating earnings of $56 million increased $7.4 million and $5.4 million, respectively, as compared to last year.

Consolidated operating earnings of $209.1 million or 21.3% of revenues compared to $208.2 million or 23% of revenues last year. Excluding legal charge, consolidated operating earnings as adjusted was $224.1 million or 22.8% of revenues. Our third quarter effective income tax rate of 30.1% was reduced by 60 basis points as a result of the legal charge. The effective tax rate in the third quarter of 2016 was 31.2%.

Finally, net earnings of $133.4 million or $2.29 per diluted share compared to $131.7 million or $2.22 per share a year ago, representing a 3.2% increase in diluted earnings per share. Excluding the legal charge, on an after-tax basis, net earnings as adjusted of $142.7 million or $2.45 per share represented a 10.4% increase in diluted earnings per share as adjusted.

Now let's turn to our segment results, starting with the C&I group on Slide 7. Sales of $314.6 million in the quarter increased 8.7%, reflecting a 0.2% organic sales gain, $22.7 million of acquisition-related sales and $2.0 million of favorable foreign currency translation. The organic sales increase includes a high single-digit gain in sales to customers in critical industries and a low single-digit increase in the segment's European-based hand tools business. These increases were substantially offset by a double-digit increase in the sales of power tools and a mid-single-digit sales decline in the segment's Asia Pacific operations.

Gross margin of 40.3% increased 130 basis points from 39% last year, primarily due to favorable business mix and benefits from the company's RCI initiatives. The operating expense margin of 24.4% increased 50 basis points from 23.9% in 2016, primarily due to 40 basis points of operating expenses for acquisitions. Operating earnings for the C&I segment of $50.1 million increased $6.4 million from 2016 levels, and the operating margin of 15.9% improved 80 basis points.

Turning now to Slide 8. Third quarter sales of the Snap-on Tools Group of $392.7 million decreased 1.1%, reflecting a 1.6% organic sales decline, partially offset by $2 million of favorable foreign currency translation. The organic sales decrease includes a mid-single-digit decrease in the company's U.S. franchise operations, partially offset by a double-digit sales gain in the international operations. Gross margin of 41.8% decreased from 43% -- 43.6% last year, primarily due to a year-over-year shift in product mix and 70 basis points of unfavorable foreign currency effects. The operating expense margin of 27.5% increased 20 basis points from 27.3%, primarily due to the effect of the lower sales. Operating earnings for the Snap-on Tools Group of $56.3 million, including $2.3 million of unfavorable foreign currency effects, decreased $8.3 million, and the operating margin of 14.3% compared to 16.3% last year.

Turning to the RS&I group, shown on Slide 9. Third quarter sales of $333.5 million increased 16.6%, reflecting an 8.2% organic sales gain, $21.6 million of acquisition-related sales and $2.1 million of favorable foreign currency translation. The organic sales increase is once again solid and broad-based, reflecting double-digit gains in sales of diagnostic and repair information products to independent repair shop owners and managers, a high single-digit sales increase to OEM dealerships as well as a low single-digit increase in sales of undercar equipment. Gross margin of 47.3% improved 80 basis points as a result of 40 basis points of benefit from acquisitions and savings from RCI initiatives.

The operating expense margin of 22.3% increased 90 basis points, principally due to 180 basis points of impact from acquisitions, partially offset by benefits of sales volume leverage. Operating earnings for the RS&I group of $83.4 million increased $11.6 million from prior year levels. The operating margin of 25.0% compared to 25.1% last year, including a 140 basis point impact from acquisitions.

Now turning to Slide 10. Operating earnings from financial services of $56.0 million on revenue of $79 million compared to operating earnings of $50.6 million on revenue of $71.6 million last year. Financial services expenses of $23 million increased $2 million, primarily due to an increase in the provisions for credit losses. While total provision expense of $13.6 million in the third quarter is up $2.3 million year-over-year, it is fairly comparable with the $13.4 million incurred in Q2. As a percentage of the average portfolio, financial service expenses were 1.2% in both the third quarters of 2017 and 2016.

In the third quarter, the average yield on finance receivables was 17.9% in 2017 compared to 18.0% in 2016. The respective average yield on contract receivables was 9.2% and 9.4%. Total loan originations of $271.8 million in the third quarter increased $2.0 million or 0.7% year-over-year as higher originations of contract receivables were partially offset by a decline in originations of finance receivables, due in part to lower year-over-year tool storage sales by the Snap-on Tools Group.

Moving to Slide 11. Our quarter-end balance sheet includes approximately $1.97 billion of gross financing receivables, including $1.71 billion from our U.S. operation. In the third quarter, our worldwide financial services portfolio grew $59.4 million or 3.1%. As for finance portfolio losses and delinquency trends, these are, as expected, tracking higher year-over-year. We believe these trends, however, continue to reflect our view of an appropriate risk reward balance in this segment of our business.

As it relates to extending credit or finance receivables, the largest portion of the portfolio, trailing 12-month net losses of $43.7 million represented 2.77% of outstandings at quarter end, up 61 basis points year-over-year and 16 basis points sequentially. However, net losses related to finance receivables of $11.1 million in the third quarter were up sequentially by only $0.3 million from $10.8 million in the second quarter. The 60-plus-day delinquency rate of 1.7% for U.S. extended credit increased 30 basis points sequentially as compared to a more typical seasonal increase of about 20 basis points. Overall, operating earnings in finance services segment rose 10.7% year-over-year and 2.6% sequentially.

Now turning to Slide 12. Cash provided by operating activities of $95.5 million in the quarter decreased $16.4 million from comparable 2016 levels, primarily due to higher working investment. During the quarter, we also elected to make a $30 million discretionary contribution into our domestic pension plans, an increase of $20 million as compared to Q3 2016. Net cash used by investing activities of $62.1 million included net additions to finance receivables of $35.2 million.

Capital expenditures of $22.9 million in the quarter compared with $16.5 million last year. Net cash used by financing activities of $29.5 million included dividend payments to shareholders of $40.7 million and the repurchase of 603,000 shares of common stock for $90.1 million under our previously announced share repurchase programs. Year-to-date, share repurchases totaled 1.35 million shares for $212.6 million. These uses of cash were partially offset by higher short-term borrowings, principally commercial paper.

Turning to Slide 13. Trade and other accounts receivable increased $76.4 million from 2016 year-end levels, including $22.2 million of foreign currency translation and $9.1 million from acquisitions. Days sales outstanding of 67 days was up from 63 days at year-end, including the impact of acquisition and currency, which, combined, increased DSOs by about 3 days. Inventories increased $119.4 million from 2016 year-end, primarily to support continued higher customer demand and new product introductions resulting from, as an example, increased penetration into critical industries and emerging markets. In addition, foreign currency translation and acquisitions contributed $24.1 million and $6 million of the increase, respectively. On a trailing 12-month basis, inventory turns of 3.1 compared to 3.3 at year-end. Our quarter-end cash position of $94.1 million increased $16.5 million from 2016 year-end levels. Our net debt-to-capital ratio increased to 27.6% from 26.3% at 2016 year-end. In addition to our $94.1 million of cash and expected cash flow from operations, we have more than $700 million in available credit facilities. As of quarter end, we had $170 million of commercial paper borrowings outstanding.

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

Thanks, Aldo. Well, that's the third quarter, sales growth and expanded profit and turbulence. We feel quite positive regarding our position. Our market, vehicle repair, remains attractive, and the critical industries are recovering. Our businesses, RS&I is expanding with repair shop owners and managers, strengthening its already extraordinary hardware and software product lines, with the Zeus breaking new ground in vehicle diagnostics. RS&I registering its fourth straight quarter of high single-digit growth and a profitability that keeps improving, offsetting the dilution of the acquisition.

C&I, extending to critical industries. The industrial division achieving broad growth. The third straight quarter of positive performance, driven by new products that match the needs of professionals. And SNA Europe, ongoing growth trend. Sales up for 16 straight quarters, and profits rising 18 straight in a difficult environment with more to go. And C&I profitability, 15.9%, up 80 basis points against the 50 basis impact of acquisitions and currency.

In the Tools Group, undergoing some tuning, but still a strong business in a strong market. The Tools Group is a combination of market, brand, business model and team that we believe are natural advantages and that we believe will author positive trends going forward. And our acquisitions, dilutive now, but as we apply Snap-on Value Creation, we see abundant possibilities for gain. And all of that added up in the quarter to growth and improvement. Sales up 8.4% as reported, 2.3% organically against 80 basis points of hurricane. And excluding the legal charges, adjusted EPS of $2.45, a rise of 10.4%.

Going forward, we believe we have wide runways for growth and improvement, and we have the business models, the processes and the capabilities to take full advantage and continue our progress on into the fourth quarter and beyond.

Before I turn the call over to the operator, I'll speak to our franchisees and associates. The advancements we've made and the headwinds we've overcome are a direct result of your energy, your capability and your dedication. For your success in authoring our progress, you have my congratulations, and for your dedication to our team, you have my thanks.

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

(Operator Instructions) We'll take our first question from Gary Prestopino.

A couple of things. Aldo, could you just go through, on the RS&I, the percentage increases that you cited there in terms of the sale with the various broad-based product categories? I couldn't write quick enough.

Well, again, I think I framed it this way is that they were solid really pretty much across the board. They're up high single digits if you look at the diagnostics and repair information sector. They were up in sales to OEM dealerships mid-single-digits. And also, I think they are low single digits in sales of undercar equipment. So a pretty solid performance across the board.

Okay. And then, Nick, did I hear you say right that the franchisees -- the conference that you had that tool storage sales were up, but other sales were down? Is that correct?

That's what you heard. Now I want to make sure that everybody who's listening just understands. The SFC -- when we talk about the SFC, we talk about orders, not sales. These are orders that occur off the SFC floor. It's a big floor that shows products. And so they're orders, and those orders can be distributed over several quarters. Some of them are for the third quarter. Some are for the fourth, and they stretch out into the first quarter, maybe even into the second quarter of next year, so spread out over a period of time. So SFC orders aren't necessarily a direct indicator of what's to come in any particular quarter or even in total, but that's the characteristics of it. Our tool storage product -- remember, we said we were going to try to adjust the tool storage product line, make it more attractive. I think it looks attractive, and the orders on the SFC floor seems to make -- say so.

Can you give us an idea of the magnitude of the increase and the decrease? Or not?

Well, I think we're talking about mid-single-digits, that kind of thing, not -- but if you remember, last year was record -- I said in my remarks, last year's SFC was a record performance for orders. Now, again, I want to emphasize, nobody should get overheated about orders off the SFC. They're just indicative of things. They're not necessarily definitive about things, but better than a poke in the eye with a sharp stick.

We'll take our next question from David Leiker.

Aldo, just 2 numbers questions first. On the acquisition, I know you went through by segment. You talked about how much dilutive they were along the way. But can you -- at a corporate level, at the EBIT line, the acquisitions were dilutive by what kind of a number?

Sure. If you look at the overall corporation, the acquisitions depressed the earnings by about 50 basis points, if you look at the opco operating margins as a percent of sales. And again, that's strictly the ratio that the acquisitions start with an OI percentage that's lower than the average of the business units that they've been subsumed into. And over time, we expect to be able to add some value creation tactics into those results and approval.

Is there an intent to ascend those businesses to get them to -- within each of those segments to their -- the segment level margins? Or is there room for further -- something further than that?

I think each acquisition stands on its own and is unique, as you know, whether they're acquisitions of recent times. There is a small one that was software related. Our hardware-related business such as undercar equipment is not going to reach the levels of a software business, but we think there's opportunity to improve.

And then you had mentioned that transactional item in Snap-on Tools segment. I'm guessing that's exports out of the U.S. with the weaker dollar into Canada and U.K.

Sure. So if you look at it, again, you still have the dilemma of -- not dilemma. It's just that we manufacture tools in the United States and sell them internationally. So you look at the timing of when currency changes in Canada and in the United Kingdom, particularly in the United Kingdom, you have timing differences related to inventory, but that's where most of the transaction negative effect occurs.

And then if we take a look at the storms, and I know this is -- we're not dealing with hard data on this, but if you look at what happened in Texas and Florida and you talked about the sales impact of that, can you flesh that out just a little bit in terms of what kind of an impact there might have been at Snap-on credit in terms of originations, delinquencies, losses at all? Any color you could share there?

Sure. We took some, I'd say, still rather nominal increases in the provision within the quarter. So the provision is up specific a bit to some of the effects of the hurricanes. Now, traditionally, when we look back over events in the past like Katrina and superstorm Sandy, over time, there's no clear evidence that storms such as these result in permanent disruption to the credit business. Having said that, certainly, Puerto Rico is a bit of a different animal, so we'll look into the future and see how that develops. But to give you some dimensions, David, is that if you look at the portfolio on these areas, if you look at Texas that was affected, and Florida, a little bit of Georgia and into the Caribbean, you're looking at probably 9.8% of the U.S. easy portfolio, just to give you a dimension. Now if you look within that, about 2.6% of the whole U.S. portfolio, people have asked for extensions. We have a process where people can ask -- if they're in good standing, they can ask for an extension, and we certainly honor that request if they're in a distressed situation. So it gives you a little bit of the dimension as to what is out there. As we go forward in Q4, we'll see what the impact is on collection activity and remittances, but it's certainly too early to tell. So we took some provisions in Q3. I think Q4 will be a little bit more telling. If you go back to superstorm Sandy, we didn't see the full effects of Sandy really until 1 or 2 quarters after.

And then 2 or 3 quarters beyond that, you should see a positive impact, I would guess?

There's a potential. Obviously, most of us, I think, would expect it to be rebuilding. Certainly, it's going to be auto repair if your car has been damaged, and garages will have to replace equipment that's been underwater or adversely impacted. And I think that's been the tradition. Again, Puerto Rico could be a little bit longer for it to return and how we return (inaudible). Our activity in Puerto Rico is we sell annually in Puerto Rico $5 million maybe.

Okay. And then one last item. Nick, if you could talk a little bit about the power tool weakness. That's something that we hadn't really even seen. It's been more of a growth driver for your business, but if you could give some color on what's going on there.

I think -- look, I think part of this has to do with attention. One of the things we talked about in the second quarter was that the profitability of the Tools Group was very strong. And a lot of that was driven by the introduction of new power tools, particularly our PT850, and that really had a big spike in the second quarter, driving both the profitability and some of the sales through that business. And I think we have some of the -- one of the big factors here was just sort of like a giveback for that strong power tools quarter in the second quarter. That's the primary situation. And David, every one of our quarters, if we gave you the -- if you want to focus on these things, there will always be ups and downs. And so this is -- it was down in the order of our power tools. And those power tools come out of Asia and our Murphy, North Carolina, and our Kunshan factories. So that's what -- and they were both in C&I.

And then just one follow-up on that one. If you look at future kind of Q2, Q3 together with power tools, would that have been consistent with what the pattern had been?

Yes, I think so. I think this might be a little weaker, but nothing to get in a twist -- nothing really to get our attention.

Our next question comes from David MacGregor.

Nick, I wonder if you could just talk about the deterioration in Tools segment operating margins. And I'm guessing some of this may have been attributable to the storms. But it also looks it's kind of working through the numbers, so maybe you had some weakness in some of the small ticket sales as well. I wonder if you could just sort of...

That's right. That's certainly right. What happened was -- is that the deterioration of the -- if you might remember what drove the good, strong margins in the second quarter was -- I think we cited 2 particular products, the power tool, the 850, and particularly some of the new offerings, sort of the long-handle flex-head ratchet, which sold very well. Well, one of the things that drives profitability in the Tools Group are the products they make themselves. You see, they make tool storage and they make hand tools. And when those are weak, it tends to put a pretty strong headwind -- when those are weak in combination, it puts a pretty strong headwind on their profitability. And that's really what you're seeing in this -- what you were seeing in this quarter, you saw some weakness in tool storage, although it wasn't as weak as the second quarter, and you saw weakness in some of the hand tool business. Diagnostics was up because of the Zeus, but diagnostics -- the margin is shared between the Tools Group and RS&I, so it doesn't accrue. And that's what you saw. And you saw, of course, its lower volume. You have volume effects, and then you do have the hurricane. So those things combined for that kind of weakness.

What should we be thinking about that business for 4Q and into first half of '18?

Well, I think every quarter is a different situation, and I'll only say that I've said for dogs age that the third quarter is kind of squarely and isn't any indication of things going forward, I think we feel pretty positive about where the business is going. I mean, tool storage in the SFC, it seems as though maybe we've kind of solved some of the product, and that's a very good indication. We're retooling the Rock 'N Roll Cabs. About 50% of them will be retooled by the end of the fourth quarter. And so we see that kind of coming back in that situation. So we're pretty positive about it, sort of hit a time for tuning. And that's what we're doing, refurbishing the product line. That applies a little bit to hand tools. We're going to be coming out with some new hand tools that will shake people up a little bit and get that restarted. So it all has to do with product. But I think we're optimistic going forward.

Call that out, could you just say if you'd expect the drag on the Tools segment growth to be less pronounced with each quarter from this point forward from storage?

It's hard for me to say that, but I would expect -- I was encouraged by the -- even though the orders were down overall in the SFC, I was encouraged by the tool storage results, which tends to be a kind of bellwether. Hand tools can move up, and hand tools and power tools can move up and down, depending on how the bundles are made in the SFC and so on and how people get excited about it. And the franchisees tend to have a broad array of hand tools on their vans. And so that can move up and down, depending on when you install new products. So I'm pretty optimistic. I think the drag goes down. You think we're recovering from the product line malaise in tool storage, and we're retooling the Rock 'N Roll Cabs. And I think we have some exciting new products like I talked about coming out.

Great. Last question, just on competition. I guess Matco and MAC will talk about adding trucks to the fleet, and you've talked about holding your truck count constant. I guess, on the surface, it would seem that your share is being at least threatened. Can you talk about what Snap-on is doing maybe to defend and even grow its share while your percentage of the industry fleet is being diluted by competitor expansion?

Well, it comes down to trying to expand -- enable the vans with new product. New product is -- first and foremost, we think we have the best products. Zeus is the best. Zeus is going to change everything. In other words, you heard our idea about SureTrack. For example, SureTrack allows a guy to look at the car and say, 92% of the time this was solved by changing the mass airflow sensor. That helps for the high volume. But every once in a while, something comes up, that comes up on alternate Tuesdays, and it takes forever to fix. Intelligent diagnostic guides them through this like no one else can. And so those kind of things help. Secondly, we're expanding space on the vans. One of the reasons you see -- in a lot of cases, you can see it reflected in franchise finance, is that the van drivers are buying or leasing bigger trucks, 20-foot trucks, not the 16-foot trucks, giving them more retail space. And we believe these kinds of things, better product, more space and then we're working on helping them with their time so they have more time to sell, that's what wins for us.

Our next question will come from Liam Burke.

Nick, in the C&I division, you've made some significant investment upfront in emerging markets. Could you give us a little color on the Asia Pacific and what happened during the quarter?

Sure. Asia Pacific, in the overall result, the local sales, the sales into the Asia Pacific was up, particularly good quarters in China and India. They're always mixed. So China and India were good quarters year-over-year. Indonesia was down, for example. But in the region overall, those sales, external sales, rose in the quarter. So we're pleased with that. The sales in supplying the Tools Group principally, basically, power tools coming out of the Kunshan factory were down relatively sharply. And therefore, that tended to overwhelm the growth, and it made it down somewhat in the quarter. That's how that works. So if you look at the local activity, I think a quarter of progress. If you're looking at it as a supplier to the divisions in the west, principally the Tools Group, it was a down quarter.

Got it. Okay. And Nick, you pointed out both inventory and receivables were off based on acquisitions. If you net out acquisitions, would you anticipate those ratios to be normal? And...

The ratios are fairly similar to the working capital ratios in total for the corporation. What I did say, Liam, is that 1 day, more or less, is what impacts DSOs as it relates to the acquisitions. But the inventory turnovers are similar to our core business.

And you wouldn't anticipate any change with that going forward? I mean, within reason? I mean, of course, you'll get quarter-to-quarter variability, but...

Yes, I think as we move forward, we look at the opportunities that the inventories present. We expect there to be a return on our inventories. We're not unwilling to invest in them if we think the returns are there. So I don't like to get ahead of myself on the conclusion that the inventory is not required because so far, the acquisitions have been performing nicely with respect to our expectations.

I think we'd say that necessarily -- working capital isn't necessarily a source of cash going forward. And our overall return on assets, when you adjust for the acquisitions, the [rolling] bit is up 80 basis points. So I think we feel okay about that. Now that doesn't mean it doesn't move.

We'll take our next question from Bret Jordan.

To follow up on that Matco and MAC question, are you seeing any increasing price competition out of those guys as they're building up the franchisee base a bit? And I guess, how do you see Craftsman entering the market in 2018? Obviously, with some broader distribution under new ownership, is that a price competitor? Or is that just really not in the same product set?

Let me ask -- and let me answer them in the reverse order. I mean, Craftsman has been ubiquitous for a long time, of course, not on a van, but ubiquitous. And people have -- they've been in fliers all over the place and every Sunday morning paper. So people are well aware of the price difference. So I don't see the balance of -- balance changing with Craftsman. It may work for -- in some instance, but those people may not be our customers to begin with. Secondly, for the other guys, they've been expanding, but I'm not hearing competition on price from them -- from our franchisees. I don't hear that. Actually, I continue to hear questions turning in on ourselves. Gee, this is a great diagnostic unit. It's better than everybody else. Gee, I'd like to have the power tool with a little different features because other people might have those. This was better than a -- this was -- it wasn't as good as our old power tool or not enough better than our old power tool. Those are the kinds of things I hear. Tool storage, I hear, gee, the tool storage line isn't catching our imaginations. It isn't getting technicians to come out and say, I got to have that box. By the way, I think we had some of that at the SFC. So those are the kinds of things I'm hearing. Now maybe there is that. Of course, you would think, as MAC and Matco declare a better performance, they will be doing -- they will be gaining -- they will be at least growing their sales and, therefore, taking business that theoretically could be ours even if it's maybe not our business to begin with. But I'm not hearing it from the rank-and-file. From the...

Okay. Another question. And I think, Aldo, maybe you addressed this, but the U.S. tools growth versus U.S. credit originations growth, did you break out what was in credit, what was in the U.S.? It would seem like maybe we're going to be ticking back up since you're putting -- you're seeing more strength in some of the high-value product.

No, I mean, growth in originations, if you look at the cash flow statement, you'll see that finance receivables were down a little over 2%, which is pretty consistent with what you see in the performance of our activity in the United States. So they are fairly similar in that regard. This time of the year, we pick up some additional originations at the SFC, in particular, the Snap-on Franchisee Conference, where we have higher contract receivables. Again, it's a seasonal item, but it was up year-over-year, which I find as a nice indicator of the franchisee willingness to invest in their business. So in particular, we saw them expanding their investment in vans. In particular, some of them getting new vans, which are larger than the old ones, and people making upgrades. So I don't know if I've gotten an answer to your question, but they were pretty similar, I'd say, in terms of the performance in quarter.

And we'd expect maybe some -- a better percentage of high-value product sales into the second half of the year, so maybe a tick up on the loan to the mechanic as well?

Well, I'm not going to predict the Q4 mix of sales going forward. Nick said that tool storage orders, orders at the show, were positive. That -- if that follows through with sales of tool storage, no doubt Snap-on credit will be a beneficiary.

And next we'll go to Christopher Glynn.

Just wondering if we could take a look at the Snap-on tools linearity in the quarter. It was kind of interesting you had the destock in June and then the order softness at the trade show. We heard about maybe less discounting. Did you see a pickup in the normal flow of orders outside the trade show as the quarter drew to a close?

Yes, because -- look, I think this -- Chris, it's like -- at the trade show last year, at the -- we don't -- at the franchise conference, we launched that thermal imager, which was incandescent in terms of product. Everybody got excited, and we sold a lot. I remember I said -- I think I might have said that it adds the new version of diagnostics. And it sold quite a bit. That was launched at the show. Now we didn't launch the new Zeus until after the show, 10 days, 2 weeks afterwards. So in terms of the product offering, if you just look at diagnostics for one, it wasn't quite as compelling in the show. We had a number of reasons to do that. But what happened is the Zeus launched in late August and sold out through September. So you did see a pop from that. And to the extent the tools -- to the extent that diagnostics from the Tools Group was up in the quarter, that was on the back of that late selling. And you have all kinds of things around tool storage. Sometimes the SFC, you have different offerings that more or less appeal or don't, and people say, okay, I'm going to wait for later to take advantage of some of the product that inevitably comes out on a monthly basis.

And are you starting to see any replenishment into the vans on the hand tool set?

Well, I think I see nothing that -- I'm not saying I don't see that, but I'm saying to you, this is an effect that we're coming off the third quarter. The third quarter is hard. It's a tough quarter to find any directional idea because it can result in -- you can have blips with technicians coming back from vacation. Our franchisees, to the extent they've been doing well, take longer vacation, and that can create perturbations in the third quarter. So I don't know. I think we're positive going forward, though. I think we like our product line. We like where we are. We like the reception of the franchisees. We like what they say about the market. So you would think you would see some recovery in that situation.

Okay. And then on -- delinquencies up in tools, not growing right now. Wondering if you're seeing more volume on collateral resale.

The residual value has been pretty steady. Again, there's variation. And I don't know if the hurricane is going to cause -- I'm not saying it did in Q3, but it's going to be harder to repossess things that have been washed away. That could be, but residual value has been pretty steady, Chris. We don't see a lot of variation in that.

Okay. And lastly, you're not implementing or contemplating any changes to your pricing models?

Well, I wouldn't say that going forward. I mean, I -- we're always reviewing situations. For example, steel costs are going upwards. We could look at pricing associated -- we've always said we can price for visible steel. We kind of make those kind of decisions on a regular basis, maybe monthly.

I kind of meant outside the normal reactions to commodity costs and things like that.

No, I don't think so. You mean, just move our prices up or down? No, I don't think so.

And we'll take our last question from Richard Hilgert.

I just wanted to follow on to the delinquency question there. We were headed downwards from the December numbers on the delinquency, looking to improve a little bit, and then we ticked back up all above the December delinquency rates. And I was just curious, would that cause you to rethink any of your credit policies at this point?

Richard, just a reminder, this is Aldo, first off, there is always a seasonal effect. The delinquencies tend to creep up in Q3 and Q4 as you approach the holiday season. They tend to improve a bit as people get close to tax refund dates in and around March and April. So there is that underlying seasonal trend. And as what I'm trying to point out, usually, you see a creep upwards of about 20 basis points historically in the delinquency metric. This time, it's up 30. So it is up. And we are up year-over-year in terms of -- to a higher level of delinquency performance. I expect that to kind of continue. It's been fairly stable, looking at factoring off the seasonal trends since Q4. So again, will it affect our thinking? We're always looking at it. However, this is still pretty good business. If you look at this at a high level, remember, it's there to support sales of the Tools Group principally. 95% of what the credit company does is for that purpose. And Tools Group makes decent margins when they sell tools. And if you look at the yield on these receivables, despite the bad debt and SG&A, it's a pretty good return to the bottom line. So we look at it, but we're pretty comfortable that it's performing as expected.

Okay. Great. On the acquisition dilution, how soon would you expect that dilution to reverse itself? And what are the measures that you needed to take in order to do this? Is this a matter of gaining some type of distribution synergies or cost reductions? What are the actions there?

All of the above. Look, here's the schedule. I think we acquired Car-O-Liner on October 31 of last year, so we'd lap that. So going to the base as of October 31. Sturtevant Richmont goes in, in November. So 2 of the 4 acquisitions we talk about here start -- will have a partial effect on the fourth quarter and then disappear in the -- in January. And then the BTC and Norbar were some time last year. I think Norbar was acquired in May or something like that. So you have that kind of schedule where they cycle off. If you're talking about how we're going to improve them with Snap-on Value Creation, 2 things. One is, of course, we acquire it from product primarily to give us a position with customers we were accessing or to give us more to sell to either repair shop owners and managers or people in critical industries. And they do that, so we'll gain from selling their products, Norbar to critical industries, Car-O-Liners to repair shop owners and managers and so on. And -- but there's another factor. Snap-on Value Creation authors improvement, margin improvement, doing things better every day like we have in the operations throughout Snap-on. So you'll see both of those working in tandem in the acquisition. It usually takes a while to get an acquisition on board and integrate and then you start finding traction for those processes.

Okay. Very good. Last question. The R -- or excuse me, the SFC, you mentioned that the orders for new tool storage equipment, those orders would get filled over time.

Yes.

That -- have you already ramped up production of the new tool storage equipment? Or is this a matter of it's going to take time to ramp that up and then get the product out?

No, it's not a production problem. It's not a production problem. But like I said, it's a long way thing. I mean, the SFC echoes through several quarters, through -- it's in the third, fourth and in the first quarter. So we have time to recover, depending on what those orders are. And then remember, every month, people order and it overlays on top of that, but we don't see a production problem.

So when you go into SFC, you've already got the new product that you're showing at the conference in production and it's ready for the franchisees to order immediately.

Almost always. But in fact, not that much gets ordered immediately. They don't walk away with the tool storage. But they can, so we're ready for that. We have models that kind of say, this is likely the distribution of these products, depending on the particular product, depending on the size of it, depending on the cost. And so we model it in a fairly complex way. So we're ready to go.

That's all the time we have for questions. So at this time, I'd like to turn the conference back over to Ms. Leslie Kratcoski for any additional or closing remarks.

Thanks, Alan, and thanks, everyone, for joining us today. A replay of the call will be available shortly on snapon.com. And as always, we appreciate your interest in the company. Have a good day.

That does conclude today's conference. We thank everyone again for their participation.