Q3 2019 Earnings Call
Ladies and gentlemen, good day and welcome to the snap on third quarter 2019 results Investor Conference call.
Today's conference is being recorded.
At this time I would like to turn the conference over to Sarah Burps Ski Vice President of Investor Relations. Please go ahead ma'am.
Thanks.
Good morning, everyone.
Joining us today, it's reduced third quarter results, which are detailed in our press release issued earlier this morning.
On the call today, Nick Pinchuk snap on Chief Executive Officer, and although probably Ari.
Financial Officer.
Nick will kick off our call. This morning with his perspective on our performance.
I will then provide a more detailed review of our financial results.
After next provide some closing thoughts well take your question.
As usual, we have provided slides to supplement our discussion. These slides can be accessed under the downloads tab in the webcast fewer as well as on our website snap on dot com under the Investor section.
Slides will be archived on our website along with a transcript of today's call.
Any statements made during this call relative to management's expectations estimates or believe or otherwise state management or the companys outlook plans or projections or forward looking statements and actual results may differ materially from those made in such statements.
Additional information and the factors that could cause results to differ materially from those in the forward looking statements are contained in our assay see filing.
Finally, this presentation include non-GAAP measures of financial performance, which are not meant to be considered in isolation or as a substitute for their gap counterpart additional information, including a reconciliation of non-GAAP measures is included in our earnings release and in our conference calls slide on pages 14 through 17.
Both can be found on our website.
I'd now like turn the call over to Nick Pinchuk Nick.
Thanks Sara.
Good morning, everybody.
But I'll start with the highlight to let third quarter.
Give me up data update on environment in the trends, we see I'll take you through some of the turbulence we remain calm.
I'll speak about our physical and financial progress.
I will then provide a more detailed reviews the financials.
He believes that our third quarter again demonstrated snap ons ability to continue its trajectory positive results were coming periodic Kim and regional variation.
The full third quarter results, demonstrating purging elements and progress that we're somewhat attenuated by turbulence.
Alice geography by the impact once favorable foreign currency.
The last quarter.
We had continuing progress in the U.S. overall, 3.2% with clear growth across our operations on a cost startups.
And again this quarter that advancement was muted by continuing ports in the in Europe , primarily in UK, but also on punch in the Nordic countries in Germany, and Italy several of Us bellwether markets.
And that's what's it.
It was also a.
Meaningful impact from currency translation and transaction.
Sure. So we have significant headwinds, but once again, our advantages prevail organic sales were 1.4% sales gains and the critical industries in OEM dealerships in diagnostics and information for independent repair shop owners.
And continued growth in the U.S. van channel.
Vantage at hand tools diagnostics repair information customize tool sets.
Okay.
It all combined to meet the turbulence in the variation and it moved forward again.
Opco operating income before financial services of Ah.
167.7 million compared to 173.1 million last year and they didn't quoted.
4.4 million of unfavorable foreign currency.
See I was evident in the quarter, but it was not it wasn't able to offset the negative foreign currency weakness in Europe , and the investments that we're making in the field.
In field support and training for the children that aimed at enabling their powerful new products.
Well financial services operating income of 61 million grew a 1.7 million from last year's 59 point Threemillion every vote combined with I've called for a consolidated operating margin of 23.2% compared with 23.7 last year quarterly P.S. and to 96 $2 and.
Any success was up 11 cents or 3.9%, but last year.
Last but last year was $2, an 85 cents or 2.8% above last years, adjusted EPS, which exclude the one time U.S. tax legislation transition charge that was in the 2018 third quarter results.
Well, let's speak about the Mark.
We believe the automotive repair environment continues to be favorable.
Tools group.
It's registered a similar performance for the second quarter with a rise in the U.S. being offset by turbulence in international geography.
We believe.
We occupy position of significant potential with the tools.
Vehicles are getting more complex our products are clearly keeping pace the face to face positioning of our franchisees are perfect. The guy technicians in wielding most powerful device effectively it's a great advantage in is changing environment and a considerable opportunity as we train our franchisees to provide that special guidance sufficient.
Right.
Any other side of automotive repair of water repair were perfectly information or the arsenide encouraging progress in the quarter expanding snap ons presents what repair shop owners and managers with a broad range of continually improving products.
More intelligent.
More comprehensive and more capable shops or change in and upgrading both dealerships and independence and arsenide capitalizing on that trend, helping to shop fix vehicles right.
The first time and it's paying off.
For the critical industries.
Verticals like military education Aerospace important segment, we see significant progress we like the core critical industries, we like the way the sound and we like the way the threatening.
We do believe we're well positioned to confront the challenges and make progress along our runways for growth at the same time, though it's clear that we have ongoing potential on a runways for improvement.
The snap on value creation process safety quality customer connection innovation rapid continuous improvement and RCR. They never been more important than any periods of multiple headwind or a constant driver or a product of our progress helping collar the turbulence, especially.
Customer connection I understand the work of professional technicians, and intubation matching that insight with technology and in this quarter snap on value creation customer connection and innovation drove growth in the face some challenges and led to more prestigious product awards just in this quarter.
Most prominently represented with 13 professional tools and equipment News Pete 10 People's Choice Award. These are the awards for the actual users the technicians make the selection. We had 13 were also recognize wouldn't six Pete kind of innovation Award and we were honored with three Motor magazine Top 20 Award.
Total driver snap on growth snap on power is innovative products product that makes work easier it's always been a spring.
And these award hardened want our testimony that great snap on product just keep coming matching the growing complexity of the task maintaining for progress.
That's the environment now, but to the individual operating groups, let's start with Cnine sale to 335.3 million in the quarter increased 5.5 million, including a 1.1 million from acquisitions and 5.5 million a been favorable foreign currency translation.
Organic growth was 9.5 million or 2.9% and that was gains pretty much across all divisions.
Operating margins were lower 14.4% versus a 16.1% recorded last year, that's primarily reflecting critical into critical industry sales being more weighted in this quarter towards the lower margin military sector.
From a broad perspective, cnine focused on critical industries outside the vehicle garage show brought these gains with another year over year increase now accomplished for 13 straight quarters.
We continue to rise in critical industries.
You see it has a very positive it's a favorable market a market environment and work for dressing it with innovative new products aimed at solving passbook consequence, and result encouraging.
Third quarter.
The third quarter did see advancements and new product like like our new power tool on C.T. 90, 75, homepage cordless impact rent best balance of power and weight in the market a five amp.
Why they have our lithium battery 900 foot pounds of state Bolting Fortune 1250 pounds of breakaway toward that's big power.
Beyond the power. The 15 90 75, it's been designed and manufactured for for long service like with with best in class T. components high torque high torque brushless motor.
All body impact hammer and a very robust.
But anvil with both the hammer in the Anvil G components for any power tool any impact power tool manufactured in our Murphy North Carolina plant using special alloy steel immaterial employed when when superior toughness and superior strength are Paramount we believe.
And testing shows that are new impact as a clear durability advantage holding its power for many more cycle, even when removing them most tightly torque fasteners. When the work is critical CTG 90, 75 is the answer faster more powerful hopper.
Now.
We only released into a few of our region.
But where it's been available it's been a huge kit.
We're travel flat and technicians all over the country are packed they want this tool it's already hit a 1 million dollar product within its on its way too much much more customers come in customer connection.
Showed us what we needed to make a difference speed durability in power and the seeking 90 75 as all that in the market reception confirmed.
And this quarter from our fast torque acquisition, we also added to our industrial torque intention in key product wise.
Penetrating industrial industrial the critical industries walk, we had it offerings by it potentially important mentioning offerings by introducing the nomadic spin torque 360 degree torque wrench.
Utilizes double in developing worm gear design, it's unique its unique and focused product developed for critical industries and offering a significant speed advantage over standard ratcheting hydraulic wrenches, because the spin torque continually rotates the passenger.
Yeah, well, rather than turning what hydrology <unk>, rather than doing what hydraulics, turning a few degrees ratcheting back and forth and then repeating bolting time with the spin torque is greatly reduced.
It's a new wrench, not only faster, it's all swap rates and higher accuracy, a built in short control stall system delivers a bolting pension within plus or minus 5% to 5% uncommonly narrow range.
Also safer.
The secondary trigger design focus is a focus as operator forces operators to keep their their hands a away from pinch points avoiding serious accidents that can happen, it's especially effective in oil and gas power generation and mining were downtime is critical and a higher traveled distances for fasteners can be a significant time channel.
Once we launch spin torque in July and as expected the reception critical industries has been strong.
Products like these.
Aimed at tasks of increasing complexity that helped drive our progress across the critical industries, and we'll keep working customer connection and innovation. So the advancements cheap common.
You know maintaining its momentum extending and critical industries moving snap on outside of the garage and it's working.
Now onto the tools group.
Organic sales flat.
0.3%.
Can you rolled in the U.S. up low single digits continued growth in the U.S. is well up low single digits was offset again by variation internationally operating income in the quarter of 53 million, including the effects of negative foreign currency and the cost of investing in was within was affected by the was up.
Acted like negative currency, a negative foreign currency and the cost of investing in more field support and training that compares to 59.3 million in 2018.
As a third quarter is.
Is when we hold our annual snap on franchisee conference or SFC.
This year was in Washington, more than 8000 people were there franchisees certain yes, and the snap on team, we get sales and profit growth seminars and extensive training and intelligent diagnostics and it was all combined with a 141000 square foot product gaps Expo show paid showcasing our latest innovation for the French.
I'd.
It's a it's an opportunity for learning for touching in ordering product and for recharging their snap on batteries.
And for the company, it's an opportunity engage our franchisees outlook on the business.
Well one measure order volume was up mid single digits off the SFC with most product categories showing gains over last year and I spoke you know I spoke to with many of the franchisees during the weekend and I can attest they displayed a lot of confidence in our business and considerable optimism in their future with snap on we do.
We believe our franchisees continue to grow stronger and we're continuing to invest in their future and if you are with us that D.C. you can see clearly.
We're investing in.
It's important training, we're investing in building our franchisees ability to use their direct you're faced with technicians to communicate the unique capability of the snap on product line. We did that that's the SFC and the diagnostic training session well attended and will appreciate it and it was a clear success.
We have confidence in the power of our product line and there are real reasons for the confidence.
Heard about the product awards, well beyond that there's a continuous stream of other great new offerings attention getter set make that make repair easier.
And most of the challenges and and attention getter does that make repairs easier and meet the challenges of increasing complexity.
It's a business when you see the innovations like our our snap on FJ 175, and exclusive one of the three quarter ton high performance alumina, Jack manufactured and help on L. NRF mouth, Oakmont, Alabama facility, it's only 47 pounds.
One of the benefits of having aircraft grade aluminum chassis component that lightweight it's very portable perfect for <unk> on the road repairs outside the garage, it's capable of getting up to 3500 pounds.
The it elevates up to 18 inches and features a low entry point of 3.4 inches. It can accommodate the range of vehicles low ride to hard right a real low rider hi ride. The challenge is the repair shops today.
Got a premium pump improved hydraulics and higher pay compound ritual. So it works effectively even with one hand, a considerable field advantage actually the diamond neural handle improves the grip and the units portable design makes a great for a wide variety of situation.
Now, let's talk about tool storage among the new products launched the epilepsy efficacy was the highly anticipated double bank epic utility vehicle.
Both a massive storage capacity of over 128000 cubic inches, except the movie. It's a giant block that includes our signature school Doron power locker features that they are aimed at making it easier for customers Peter grew as organized and their power tools fully charged with five outlets and who you with report.
The new unit has clear visual appeal is that it's a design that a books of rigs team pit wagon everybody wants one striking 17, it's got striking 17 inch wheels, and a number of unique customer pills like especial snap on local center wheel cap a distinction that's only available I mean, I mean, it's available.
Several colors and it is a mobile monster.
And it's still like.
It's designed to handle the very large tool loads by reinforcing the standard corner Gsis and have seen construction with additional top bottom and side support it's our strongest ever roll habit I kind of test. It was a center of attention at the epilepsy tools you though.
Innovation and by appeal, winning combination lots of tools enthusiasm newsy has to get to see continued growth in the U.S. and innovative new products driving the way forward.
Now arsenide organic sales were up 3.2% with mid single digit increases.
In both sales to OEM dealerships and sales of diagnostics and repair and from sales to diagnostics and repair information to independent shops.
Those gains were partially offset by a low single digit decline in sales of under Undercar equipment, particularly reflecting weaker sales in Europe .
Despite the higher mix of sales in OEM essential programs, which are which which tend to have a lower operating margin in the group average our survey or a wide margin was 25 a 25.8%.
Strong.
Arrived at 10 basis points from last year once again, our CIO innovation and software drove the progress and overcame headwinds.
Our mature one division continued to expand its array of industry, leading productivity solutions are releasing.
Latest edition of our pro demand repair information software, which includes new enhancements to wiring components diagrams select the replacement part pull demand now open some specific components diagram of that item no need to scroll through multiple pages Timesaver New software also clearly highlights related wires and surrounding harm.
More time save both of those productivity features are interesting first and they're quite popular.
We also launched other great products in the period products like our and five to five enhanced digital multi meter another of our next generation horizontal multi meters units.
Larger forage color display for easier reading it quicker symbol identification today interrupting a wide range of electrical impulses is necessary for diet diagnosing that circuit component problems of today's vehicles.
The new enhance multi meter measures owns an AC AC DC voltage into RMS AC AC DC average frequency and capacitive at a rate covering most automotive electrical needs and its sake, it's safe for use on hybrids as confirmed by its cadthree thousand Volte and cat four six other full hybrid safety ratings.
In addition is catching some clever special operating convenience is like a test leads storage and built in so Stan initial product launch was US was strong in may the multimeter another of our hit products. So to wrap up our arsenide growth in New York in OEM dealerships.
Thus improving position with repair shop independent repair shop owners and managers expanding product lines, maintaining and improving strong margins.
Well, that's the highlights of our quarter.
Gina continuing its positive trends.
Spending across critical industries tools group matching the rise in vehicle complexity on Tonight, expanding in the shop building sales and profitability progress along our runways for coherent broken advancements down our runways for improvement as $2, a 96 cents in the quarter, 2.8% higher than last year.
Progress hard won against turbulence.
Purging.
Now I'll turn the call over to help them although.
Our consolidated operating results are summarized on slide six.
Sales of $901.8 billion in the quarter world, 0.4%, reflecting a 1.4% organic sales gain $2.9 million of acquisition related sales and $11.7 million of unfavorable foreign currency translation.
The organic sales gain this quarter reflected low single digit growth in both commercial and industrial and the repair systems and information segments sales in the snap on tools segment were essentially flat, but included low single digit gains in the U.S. franchise operations.
Similar to last quarter, a year over year basis sales to customers in United States increased across all segments, while sales in Europe , particularly the United Kingdom continue to exhibit weakness.
Consolidated gross margin of 49.7% compared to 50.5% last year.
The 80 basis point decrease primarily reflects increased sales and lower gross margin businesses 20 basis points of unfavorable foreign currency effects, partially offset by savings from our spy initiatives.
The operating expense March 31.1% improved 10 basis points from 31.2% last year.
Operating earnings before financial services, it's $167.7 billion, including $4.4 million of unfavorable foreign currency effects compared to $173.1 million last year.
As a percentage of net sales operating margin before financial services of 18.6%, including 20 basis points of unfavorable foreign currency effects compared to 19.3% last year.
Financial services revenue of $84.1 million, an operating earnings of $61 million increased 2.6% and 2.9% respectively from 2018.
Merely reflecting year over year growth in our financial services portfolio.
Consolidated operating earnings of $228.7 million, including $4.7 million and favorable foreign currency effects compared to $232.4 million last year.
As a percentage of revenues the operating earnings margin of 23.2% compared to 23.7% last year.
Our third quarter effective tax income tax rate of 23.5% compared to 24% last year.
During Q3 of 2018, our tax rate included a 90 basis point charge related to the implementation of tax legislation in the United States.
Finally, net earnings of $164.6 million at $2, a 96 cents per share, including a six cents unfavorable impact associated with foreign currency compared to $163.2 million work $2 at 85 cents per share a year ago.
In Q3, 2018, excluding a three cents per share charge related to taxes adjusted earnings per share was $2.88.
Now, let's turn to our segment results starting with the Sina group on slide seven.
Sales of $335.3 billion in the quarter increased 1.5%, reflecting a 2.9% organic sales gain and $1.1 billion of acquisition related sales, partially offset by $5.5 million unfavorable foreign currency translation.
The organic growth included a mid single digit gain in our specialty tools business as well as low single digit increases in both the segments European based hand tools business and to customers and critical industries, particularly sales to the us military.
Gross margin of 37.9% decreased 170 basis points year over year, primarily due to increased sales and lower gross margin businesses, including the aforementioned sales to the military.
The operating expense margin of 23.5% was unchanged from last year.
Operating earnings for the CDAI segment of $48.3 million decreased $4.7 million from last year, and the operating margin of 14.4% compared to 16.1% 20 team.
Turning now to slide eight.
Sales in the snap on tools group of $385.2 million decreased 1.2%, primarily due to $3.3 million of unfavorable foreign currency translation.
Organic sales were essentially flat, reflecting a mid single digit declined internationally, partially offset by a low single digit increase in the United States.
Gross margin of 43.4%, including 60 basis points of unfavorable foreign currency effects decreased 20 basis points from last year.
Operating expense margin of 29.6% increased from 28.4% last year, primarily due to higher field support investments.
Operating earnings for the snap on tools group of $53 million, including $2.7 million of unfavorable foreign currency effects decreased $6.3 million from last year, while the operating margin of 13.8%, including 50 basis points of unfavorable foreign currency effects compared to 15.2% 2018.
Turning to the Arsenide group shown on slide nine.
Sales of $322.7 million increased 2.6%, reflecting a 3.2% organic sales gain and $1.8 billion of acquisition related sales, partially offset by $3.6 million of unfavorable foreign currency translation.
The organic sales increase includes mid single digit gains in both sales to OEM dealerships and and sales of diagnostics and repair information products to independent repair shop owners and managers.
These increases were partially offset by a low single digit decline in sales of undercar equipment, reflecting weaker sales in Europe .
Gross margin of 47.7% decreased 100 basis points from 48.7% last year, primarily due to the increased sales to OEM dealerships to the equipment solutions operation.
Which tend to have lower gross margins and lower operating expenses associated with such activity.
The operating expense margin of 21.9% improved 110 basis points from 23% last year, primarily due to the aforementioned effect of higher sales to OEM dealerships and benefits from our initiatives.
Operating earnings from the Arsenide group of $83.3 million increased $2.6 billion from last year, and the operating margin of 25.8% compared to 25.7% the year ago.
Now turning to slide to.
Operating earnings from financial services of $61 million increased 2.9% versus the third quarter of 2018.
Revenue of $84.1 million was up 2.6% from year ago.
Financial services expenses of $23.1 billion compared to $22.7 million last year as a percentage of the portfolio financial services expenses were 1.1% in the third quarters of both 2019 and 2018.
The average yield and finance receivables was 17.7% in the third quarter of 2019 ended the third quarter 2018, the average yield on contract receivables was 9.2% in both periods.
Total loan originations of $253.5 billion decreased $13.5 million were 5.1% primarily due to a decrease in originations of finance receivables, resulting from lower year over year snap on tools franchisees sales of big ticket items that utilize extend credit.
Moving to slide 11.
At quarter end balance sheet includes approximately $2.1 billion of gross financing receivables, including $1.8 billion from our us operation.
Our worldwide gross financial services portfolio grew $12.3 million in the third quarter.
The 60 day, plus delinquency rate of 1.7% for US extended credit remained stable reflects the seasonal increase we typically experience in the third quarter.
As it relates to extend the credit or finance receivables the largest portion of the portfolio trailing 12 month net losses of $49.9 billion represented 2.97% of Outstandings at quarter end down three basis points sequentially supporting continued stabilization in the portfolios credit metric performance.
Yeah.
Now turning to slide 12.
Cash provided by operating activities of $131.1 billion in the quarter increased $1.3 million from comparable 2018 levels, primarily due to higher net earnings.
Net cash used by investing activities of $76.8 million included net additions to finance receivables of $15.4 million capital expenditures of $29.6 million at $29.6 million for the acquisition of COGNA trend, which specializes in flexible modular and highly scalable software as a.
Thanks for OEM customers and their dealers.
Net cash used by financing activities of $49.5 million included cash dividends of $52.3 million and the repurchase of 400000 shares of common stock for $59.7 million under our existing share repurchase programs.
So the end of September we have remaining availability to repurchase up to an additional $390.6 million of common stock under existing authorizations.
Turning to slide 13.
Trade and other accounts receivable decreased $7.8 million from 2018 year end.
Day sales outstanding of 66 days compared to 67 days in 2018 year end.
It's always increased $79.7 million from 2018 year end, primarily to support higher levels of demand across critical industries, including demand for us manufactured hand tools, new products as well as to improve service levels to our customers.
Our trailing 12 month basis inventory turns of 2.6 compared to 2.9 at year end 2018.
Our quarter end cash position of $167.5 million increased 26.6 million from 2018 year end levels.
Net debt to capital ratio decreased to 23.5% from 24.2% at year end 2018.
In addition to cash and expected cash flow from operations, we have more than $800 million and available credit facilities as we entered into a new five year $800 million Multicurrency revolving credit facility on September 16, which of men's and restates the previous facility.
As of quarter. It we had $218.8 billion of commercial paper borrowings outstanding an increase of $41.7 million since year end 2018.
That concludes my remarks on our third quarter performance and I'll now turn the call back that Nick for his closing thoughts Nick.
Thanks, Alex.
Well, that's our third quarter.
The results demonstrate encouraging elements of progress attenuated by turbulent geographies and by unfavorable currency.
Overall organic growth.
1.4% results of progress in the us growing at 3.2% challenged by slippage in Europe , where sales decrease and slide in the list slides in the UK the Nordic countries in Germany.
Tools group about flat decreasing 0.3% continued modest growth in the us offset by international turbulence, increasing vehicle complexity matched by powerful new products and investment in training, making it possible for the franchisees to seller enhanced offerings offerings and the unique capabilities that they have.
Effectively.
Enabling franchisees to leverage their face to face advantage.
Cnine up 2.9% organically with each division contributing to the continuing extension critical industries and arsenide rising 3.2% organically further progress in expanding with OEM dealerships and independent shop hardware and software driving growth.
Overall, Hawaiian margin of 18.6% down 70 basis points, but still strong given the turbulence.
All came together for an EPS in 2096 cents up 2.8% as adjusted despite challenges.
Our markets vehicle technicians critical industries emerging economies repair and repair shop owners and managers whopper ongoing opportunity and we believe we had the position that capability in the focus to take advantage of those possibilities and to continue our positive trend through the end of this year and on into 2020 and beyond.
Before I turn call over to the operator, I'll talk directly to our franchisees and associates.
I know many of you are listening.
When I speak a position.
Capability in a focus I speak to view the.
The gains we've made in the advancements we anticipate reflect your extraordinary contributions for the progress you've achieved you have my congratulations and for your unfailing commitment and dedication to our team.
You have my thanks.
Now I'll turn the call over the operator operator.
Thank you.
I would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure. Your mute function is turned off to a lot of your signal to reach our equipment.
Again, it is star one if he would like to ask a question and we will take our first question from Gary Prestopino with Barrington Research.
Hey, good morning, everyone.
Hi, good morning, Gary.
Thanks, Hey, Nick.
Could you maybe just give us your best guess that your thoughts on on if we get a Brexit deal.
How that is how that impacts your UK as well as your European business.
And when it's hard to judge but.
It's like this the the pound just talk about the pound, it's worth 40% of the profit impact and about 30, plus about a third of the sales impact now UK is if you think about it the way our business is the Reg we have a number of businesses in the UK, but it's a place where technicians on their own tools. Some tools group has a particularly.
Strong position there so of all the markets were kind of exposed in the UK I think it might be the second or third largest market for it.
So with that if it gets better first of all hit the currency goes positive. That's one good thing for us.
And then secondly, secondly, I think.
My view is that there hasn't been in organized areas and unorganized economy uneconomic or commercial Inc.
That equals Brexit and a long time.
So you can see you can hear it from the marketplace that people are worried about the future what's going to happen commercially and therefore, they focus more on items that only have short payback that gets resolved all that changes.
So I think there if you think about it it's our second or third largest market. It comes back to normal I don't know I don't know the time constants, the which it comes back to normal, but I have I have to believe it's pretty good.
Okay great.
Okay fair enough.
Could you maybe just comment on.
What kind of did you see any growth in the two storage area year over year, given that youve put out a whole bunch of new slew of new products out there yeah, while the tool storage.
What you want to look at as the the tool storage out of the SFC and we did see growth out of the SFC. So thats the big events in this quarter.
I've always say the third quarter Squirrely, you can't you cant figure any you can't extrapolate any trends out of the third quarter, particularly because we have people coming back from vacations and the distributors in Europe are off for part of it but also because we have the SFC and that creates variations in the behaviors of the franchisees that usually wait for this and.
A lot of it has to do in the success of tool storage tested what how it came out of the SFC and it came out okay. Yes.
Okay. Thank you. Thank you so much.
We will take our next question from David Leiker with Baird.
Hi, good morning, everyone.
Good morning.
Right.
Nick or although on and that's tools growth.
We've talked about this but I just wanted to dig through as a higher spending levels that driving revenue and.
Yes, that's a missing part of the equation of the story, so I guess.
Is the issue there that that spending.
How do you measure the effectiveness of that spending if thats working.
Well I hear what I think hey, you know actually it's pretty simple you're looking for more sale today.
So I think that's certainly yet so the ultimate measures the Seymour sales and we did see diagnostics.
The the this sort of we had we had pretty good focus on on diagnostics SFC. Those seminars were well attended the feedback we got I got personally we got generally from the people in the surveys is very good about the attendance and the and the roll out of the SFC. The take up out of the SFC was pretty good now what happens is.
The SFC product this.
Ends up being late in the quarter. So you can't really judged by the third so very happy thing and it rolls into the the the fourth quarter insulin. So it's hard to judge whether that particularly had an effect on sales or not but thats the ultimate.
Ted So we're doing it so sales go up.
Yes.
Yes.
We're convinced though.
That part of this has to do with the products are getting more complex and it takes unless you're very very practiced at selling it eats up time.
And I've been saying four dogs age how much the time of the franchisees are scarce resource.
So it bumps up against our selling capacity.
Actually the motion in the market bumps up again, and that's what we're trying to do we're trying to unleash that.
But sales.
Basis for it.
Yes, so several ways.
Yes. So this spend I think is predominately in north and it Didnt us market right.
Pretty much pretty much.
Because because if we look.
Like the fewest market, we think it's okay. The other markets are kind of afflicted.
Yes. So if you look at the US market remain low single digits here I think you might have been mid single digits a quarter before does that imply that spend is working the way you on it are you trying to get sales higher.
We're trying to get sales higher sales were also low single digit in Q.
Yes, there were low single digit we're trying to get sales quarter. That's so I mean, that's that's the whole thing this is the situation.
That that we believe the market is there we believe we have the products that can take that market, we see those products having some.
Friction in the way our business operates in terms of the way they sell and so we have to make it more efficient that's why we're spending on this but we're pretty confident that that's going to work and by the way the franchisees tell us I just had a franchisee tell me that.
Got training and then he conducted for training for technicians, it's all about telling that technicians had a wheel these products and he sold a lot of diagnostics. So we hear a lot of when she will serve as about this kind of what's working for us and the training having positive effect, but it hasnt played out in the numbers yet because I don't think we saw after the SFC. The we haven't got.
For result at the SFC based on a calendarization.
So let me let me ask I wasn't.
One other piece on the same same topic, so the spenders and driving the sales is that because theres a lag between those and we're still waiting on that is that because of what you're doing isn't working you need to continue to tweak it in buying something else.
What's your thought no I think look I think I think we think are it's working better we will continue to tweak it.
Every quarter will continue this week, we get this kind of thing you need to keep making it better and better that that's the thing, but it's not because we don't think the current we actually were very encouraged by the results by the by the feedback we got after the yet Pepsi.
You bought.
Reporting we got to see the sale and we don't see the sales were certainly going again, and we'll probably be tweak in any way like we tweak the rock and roll cab all that time was growing wasn't static.
Okay, and then just one other item although on the working capital you went through some of the comments as it relates sequentially quarter to quarter. If you look at the year to date number even year over year, there's about $100 million at what in the working capital.
Some of that's going to be currency, some as can be acquisitions, but can you talk about what the pieces of that are and break that apart for us.
Sure David actually you indicative of talking about a big piece of it actually if you look at the year over year variance, 65% of the increase is attributable to snap on tools that if you look at in the quarter, 85% of the variances related to snap on tools group. So one thing.
We think there's more opportunities to be at the inventory is there to try to capture those opportunities that they manifest themselves second what Nixon the orders taken at the SFC were well above the sales that we had in terms of the quarter. So while orders not necessarily equal sales, we like having stronger orders coming out of the SFC. That's why we.
I feel pretty good that inventory, we have built has a home to go to as we roll through the future quarters.
Okay.
Okay. Thanks.
Sure.
We will take our next question from Bret Jordan with Jefferies.
Hi, good morning, guys.
Good morning.
Nick I guess, all those questions for you on corporate expense and obviously a controlled number this quarter should we be we're thinking about sort of a lower corporate expense overtime I think used to sort of guide to that and that number was north of 90, but.
It's something structure, we are now right.
I think the right ongoing pace of corporate expense. If you look at it runs between $20 million to $23 million per quarter. So we're under that.
I hate to say the reason were under this because variable compensation is down significantly actually accounts for most of the differential. So obviously, if we start to achieve the type of sales targets, you've heard us talk about an operating performance.
We would expect that to return to more normal level and so I'm not going to give you a quarter by quarter estimate.
We still hold true to our long term run rates at corporate would be in the $90 million to $95 million range would be more appropriate.
This year, we just don't targets.
Okay and then on question on sort of follow up question on the inventory the working capital a question.
I think in the prepared remarks, you talked about it being higher for anticipated critical industry demand, but then that last response, you're talking about a fair amount of the working capital growth being tools related do you have visibility on this critical industry ordering that the inventory that you are building is going to get sold out is there sort of up to build of inventory in advance of a sale or is this sort of.
More speculative inventory growth.
Actually on the critical industry side, it's less speculative is actually more made to order. The promise you have guessing say through the factory manager I hope, it's a happy probably are difficult problem Hansel volume in the tools group has never been higher.
That's putting a lot of demand for all the resources that we have in our manufacturing plants that are dedicated to animals. In addition, the projects that are very specific better in the hands of our industrial division that serves a critical industries have a lot of handful content. It's the nature of the timing of how these projects on for many times you bid them as much as a year earlier.
When they're finally awarded and get funding sometimes takes quarters of leg. So what you have is doubled down on demand at the same time coming out of our hand tool factories. So to answer your question on the industrial side, it's not spec. It was if you can always argue that as a tool side.
While we try to control the pace of demand to some extent with our product offerings in our promotions and what we tend to offer is a little bit more short term and that we live hand to mouth and the tools group right in terms of the order book.
The critical industry side, there is more of a backlog. So we know what we what we know what our customers walk me path. The tools group that has actually has to supply to bulk industrial group itself doesn't have factors. The tools group is the key supplier to the industrial.
Yes, okay. Thank you.
We'll take our next question from David Macgregor with Longbow Research.
Good morning, everyone.
Just to pick up on the inventory discussion what we're on that topic.
How does this 2.6 times turnover compared with targeted levels with what is how should we be thinking about kind of normalized number there.
Well I think the question is the question is more like this is that I don't think we kind of look at ourselves to make sure that we have the appropriate inventory in place and it's not so much at target I wouldn't say the target as an independent variable what we what we targeted return on net operating assets because.
In a situation, where we keep expanding our product our product offerings, so that keeps adding to inventory our principal primary drivers the rona bit calculation as opposed to the inventory turn calculation.
Okay.
Conspicuous.
I guess conspicuous its absence from the discussion the tools segment this quarter was our CFO .
And.
I guess.
The question is do you feel you kind of approach limits, what's achievable in the near term.
No I think I said and I know you can't cover everything and he's call. So having the thing is like this is that generally RC eyes operating pretty well, but this is a time of periodic challenge. There are a lot of things going on for example, you have currency you.
You have some of these higher costs and investing in the tools group both of those are in in great.
Great.
Great Great factor in the post on the and as well you do have some material costs flowing through normally we don't mentioned material cost, but they're not matched with such other challenges. So our c. I didnt really offset those so we didn't talk about RC I was that was a with a counter balanced out to some of them. I mean, if you look at the tools. We are one of things Thats kind.
Interesting about the tools group you look at the gross margin the gross margins down 20 basis points against 60 basis points of unfavorable foreign currency. So at the gross margin level you can see if you if you're just hone in on that you can see the effects of our Psi.
Yes.
On the operating expenses I guess, you've talked about higher field support investments I guess a question for all though how long will take these investments to to leverage in the margins.
But the good questions I don't want to give you a quarter by quarter guys. The kind of indirectly answered this or indirectly answered it I guess earlier on we believe in what we're doing.
Doesnt mean, we meet with immediate success, what key differentiator David for snap on as you well know is we're up close and personal.
That's what we're all about that differentiates us from the crowd in turn in terms of our franchisees that means have to be onsite delivering great expertise to help customers solve problems out of the variety of 42000 skews that they represent in the backdrop, which means we have to make sure that our guys are trained to be effective and delivering that message and do it within a very nice.
Arrow time constantly only have so many minutes businesses expense. So we find that is better ways to do and thats holes and bracing we.
Accentuated that'd be SFC and we're very pleased that we had I think well over 1200 attendees at our as an example, our diagnostic training session, which tends to be a complicated product. So we believe the franchisees recognize the importance of ongoing training for themselves and when they have assistance their teams.
And we're going to continue to reinforce that and we're not going to abandon our approach to differentiate snap on that basis. So I hope we get the returns very quickly I can't guarantee that.
We'll continue to invest in that channel to make sure that they are par excellence as opposed to the competition. So we see them as it has a kind of strategic advantage one of the things about its cars or get more complex the way to fix some are with these very elaborate products, but the elaborate products cannot actually be effectively wheel did.
Without face to face guidance and training and coaching that our franchisees are well positioned to do the problem is if they're not really good at it will eat up a lot of their time Thats why were so high on this training and focus while taking advantage of that strategic.
Yes. Thanks for that detailed last question for me is just.
We keep talking about organic growth from the tools segment and that's been a real challenge and frustrating for Im sure I guess I'm trying to understand some of the structural underpinnings behind the situation I Wonder if you could just talk about the extent to which you feel franchisee attrition.
Is that headwind and achieving that 4% goal.
Okay, a lot, but a lot of waste to think about this I mean franchisee attrition can be a headwind I mean, certainly to the extent debt retirement, where the people have been in place for a long time, sometimes it's hard to distribute two to three placed so certainly in one point in time, if you have more turn in.
Yes, even if you like this quarter, we basically had turn ins and we didn't lose any franchisee we filled up those routes immediately but there is a startup period. So that'll that'll set you back a little bit but any other hand in many cases, when you put a fresh para hands in and enthusiastic fresh per handset starting out they are smoking and the.
Numbers go up.
So I think you kind of balance those two I'm not sure you can say for sure it might be a temporal situation for a short period of time, but I kind of think wondering replace people. It's it's okay.
Thanks, guys.
Sure.
We'll take our next question from Curtis Nagle with Bank of America.
Hi, good morning, gentlemen, thanks very much.
Partnered recall.
Good.
We're survive a buddy.
Okay.
So you're just just two quick ones on capital.
It looks like your Capex are you picked up a little bit just curious what that's accounted for.
Got new product I mean, the thing is is that we're expanding product. So you heard I think we both mentioned that hand tools are pretty strong in the quarter until you're expanding that and all that new product I went through in my discussion that is often backed up by factory positioning, but particularly the hansel business, which is very highly integrated.
So that's what's driving that a lot and then also we invest because we turn out so many new products, we tend to invest in the ability to just to sign those products in the figure out how we can prototype faster and so on things like a direct mail laser metal sintering, and and three D three d. and selling and Mitchell one.
We are expanding and Mitchell one we're putting them in a bigger building because they're so profitable links and has done so well Mitchell one has been if you've been listened to the costs have been every quarter doing very well and there are a high profitability company. So we want to enable them as much as possible.
Okay understood.
And then he has to kind of on a related topic.
In terms of a executions for buybacks looks like it's a good bit below.
Last year in at least through Threeq here, So I guess, how should we think about that.
A pickup in Fourq yours or something else, it's a wholly back at the moment.
Actually I'll answer that curtains actually is a little bit more similar to realize if you look back in Q3, there was a lot of share option exercise that occurred in the quarter. So if you look at the net share repurchase actually is very similar was $15 million this year versus $59.9 million last year. So actually similar in that regard, having said that we're looking at share opportunities and.
Terms or repurchase.
Effort, we look at where the stocks at relative to the market what does the backdrop, how much volatilities in the marketplace and things of that nature. So it's hard to say with exactitude one's going to buy in any quarter, but it was an opportunity to buy in the quarter and we did and if you look on a trailing 12 month basis, we've been on pace to buy a little over 2%.
Standing shares of the company. So it's something we look at each and every quarter and talk to the board about what we should devoted to this activity and we have authorization to be flexible. So at this point time were pretty good shape.
Okay. Thanks very much.
We will take our next question from Christopher Glynn with Oppenheimer.
Yes, good morning. Thanks.
Wondering.
Where you might be seeing macro impacts of.
So well known economic slowdown there.
There I know many of your markets sink to their own two into little bit of a degree but you are diversified so wondering where you're seeing some of those impacts.
Say that again, where you're seeing the impacts of economics on the market does.
The slower macro there you know with the caveat that I know some of your.
Access to markets.
Operate a little independently of short term macro fluctuations just.
Okay I got it I think we think the U.S. is pretty good.
I think I think the U.S. businesses.
If you look at if you look at the macros in the us in terms of technician.
Technician.
Wages were up 3.6% year over year and investments anomalous investment in cognizant of the real investment the car repair went up 2.5% so and the milestone went up so I think thats pretty positive on where we kind of feel that we we grew the windshield surveys out in the in the marketplace. So we think thats a good business I mean, the industrial business and.
The U.S. was was okay for us in the quarter.
It again was very good I think when you talk to people in industrial and the bigger companies are a little more muted in there in the reviews of the world, but still we think thats, Okay, I think Europe , UK, and Germany were particularly more difficult I don't know I think thats, all Brexit related actually though both of those are related in terms of Brexit in Asia.
The Pacific.
China is a kind of.
I would say squarely market. These days with kind of flattish this quarter, maybe down just a little bit but to see China, having a little bit more difficulties in terms of I suppose in psychology of commercial advancement. These days. So I think you see that I think Australia, we've seen Australia come off the bubble I think commodity related and so on the latest commodity downturn.
Okay and on the so t. margins.
Yes, yes, as it's been sort of flattish or below target for some times is just address.
I'm wondering if you're you know, there's maybe a structural reset in the margins we should anticipate as you.
To create a cost structure to.
See the next succession of higher organic.
Compounding in maybe the channel investment you're putting in now is maybe a step in that direction. Just curious wanted to flip that concept value well I think look I think Chris the gross margins now pay generally I mean, it has a lot of variation.
Like I said those margins mental K, we're investing a little bit in the business and so I do believe we're going to stay at that level for some time, even even if sales contract. The plan is we're investing in that we're enabling the franchisees the sales go up.
As a percent of sales they don't they kind of fall away and of course profitability goes up.
That's the idea I don't think we're looking to.
That is that as of AD, which we were going to keep for awhile, but we are.
That's what we think is going to work.
And so you're not looking at a fundamental re sizing of the SGN a side necessarily.
No no no no because we think we think we know the problem.
Okay, great. Thanks again.
Yes.
And we will take our next question from Scott Stember with C.L. King.
Good morning, Thanks for taking my questions.
Hi, Scott.
Algos you made a comment about within tools that.
The hand tool demand was never been higher can you maybe just give us.
Some of the sub segments within tools, how hand tools dates.
Tool storage power tools, and all that kind of and diagnostics.
Sure will add tools is and has been the biggest category for the snap on tools group and again, it's at a very robust year.
Hi, designed to some extent I mean, because we've introduced a lot of new products in that area. We've put together a lot of nice promotional packages in that area. It's resonated with the franchisees that seems to be resonating in the uptake of their customer base. So again, the hand tools has not dissipated whatsoever, even with the advent of more complexity and cars.
Import product typically is a tool storage in diagnostics in a tool storage tends to be right up there and does this quarter diagnostics was actually better diagnostics did quite well off the tools group, but again, even hear us talk a little bit about emphasis so any quarter Scott you get variation depending on what the team is emphasizing and this particular quarter diagnostic.
This was a little bit more.
Accentuated training that we've talked about already and things of that nature and power tools more initial autonomy power tools was not as big in the quarter for sales to the tools group, but the order book for power tools looks pretty good and Nick talked at length on some of the new product features on the half inch impact and we expect that's going to have.
Hi, good fourth quarter, even though we don't give guidance going into future quarters. So that's kind of the lay of the land.
Just thinking about handfuls, it's been up strong for several quarters. So thats what leads to the how those comments that demand is very very robust because that's been that's been pretty steady higher and higher it's going fairly well because of the expanses things like the fdx the flank drive extra spreading out over the over the wrenches.
People to say, Oh, I need a new set of wrenches because.
This is a new wrenching system and it's much more effective so they they sign up for that so the antal product line has been particularly robust and has has resonated with customers and it's been for several quarters. That's what leads to the the question of the factory.
Yeah, and just can you just give us.
Some commentary up mid single high singles and maybe for a couple of the other sub segments as well.
So actual numbers.
You're talking about total for the other groups, though within tools were maybe how to answer it will the up mid singles High singles.
Oh.
Up mid single digits, and diagnostics is up strong even stronger than that powerful. This it was down for them in the quarter and pull storage was more reflective of timing down a bit but again the order book for tool storage looked pretty good at the show so again orders not necessarily equal sales with a nice order book coming out of the SFC related to tool.
We'll storage and third quarter. The general General view is more or less what happens in the orders out of the out of the SFC and generally they were mostly in fact I think they were all those categories. We talked about were up mid.
Mid lower mid mid single digits, so came out.
Relatively strong I think the SFC itself was up mid single.
Alright, and within arsenide could you maybe I'm just.
Quantify how sales were intercompany versus outside of the tubing.
You know twos outside whether it was a dealerships just quantify what the numbers work.
Well I think thats, the intercompany sales principally sales of diagnostic.
There is some equipment that sells through there too I think the diagnostics were up reasonably strong in the quarter reasonably reasonably strong in the quarter. They get sold correct, but not exclusively but principally to the tools group and they were up I.
I think mid single digits in the quarter. So so we had that and then and then and then outdoor we already told you that the sales Gotta tools group was positive. So that's it that's a nice balance and then and then equipment I think was flat to down a little bit down in the quarter tools group and those are the primary intercompany sales the rest of the stuff like I said you had actually.
Great.
I think about.
Our us an eye as is the sales to the OEM businesses generally tends to be a little bit lower margin, Laura Martin and lower lower SNA that was up double.
Double digits, I think clearly rail the sales to the independent repair shops in the software diagnostics were also up mid single digit so any equipment business was down a little bit driven by weakness in Europe .
Got it and lastly on FX that last quarter last couple of quarters, you gave what the earnings impact was sort of bottom line what was it this quarter and also.
Go ahead I'm sorry.
It was about six cents, yes previous quarter, Scott was eight cents a bad news this quarter. It got a little better success and I expect that trend is kind of what I'd look at Q4 again currencies, there were stay where they're at but they do it will be slightly less headwind. The bottom line in Q4 currency stay where they are at the end of the quarter here.
Got it.
Thats all I have thanks again.
Right here.
And with no additional questions I would like to turn the call back to Sarah Burps keep for any additional or closing remarks.
Thank you all for joining us today, a replay of this call will be available shortly on snap on dotcom as always we appreciate your interest in snap on good day.
Ladies and gentlemen, this concludes today's call and we thank you for your participation you may now disconnect.