Q4 2019 Earnings Call
Ladies and gentlemen, good day in welcome T.V. snap on fourth quarter and full year 2019 results Investor Conference call Today's conference is being recorded.
At this time I would like to turn the conference over to Sarah verbs Ski. Please go ahead ma'am.
Thank you ever younger morning, everyone.
Q for joining us today to review stamp on fourth quarter results, which are details in our press release issued earlier this morning.
We have on the call today, Nick Pinchuk snap on Chief Executive Officer, and although probably already snap on Chief Financial Officer.
Nickel kick off our call. This morning with his perspective on our performance, although all them provide a more detailed review of our financial results. After Nick provides him closing thoughts will take your question.
As usual we are provided slides to supplement our discussion piece wise can be accessed under the downloads tab in the webcast viewer as well as on our website snap on dot com under the investors section.
Piece wise, we archived on her website along with a transcript of today's call any statements made during this call relative to management's expectations estimates or belief or otherwise state management's or the company's outlook plans or projections are forward looking statements and actual results may differ materially from.
Was made in such statements additional information and the factors that could cause her results to defer materially from those in the forward looking statements are contained in R.S.P.C. bilings.
Finally, this presentation includes nongaap measures of financial performance performance, which are not meant to be considered in isolation or as a substitute for their gap counterparts additional information, including a reconciliation of nine gap measures is included in our earnings release and in our conference call slides on pages 14 through so.
<unk> both can be found on our website with that said I'd now like to turn the call over to neck Pinchuk Nick.
<unk> Oh.
Everybody.
So what else or.
<unk> with a view of our quarter or fourth quarter, given an update on the environment and the trends, we see and I'll take it through some of the turbulence we've encountered in the and the advancements we've made.
<unk> provide a more detailed review the financial.
The comparative results for the quarter in the full year. Each include special non recurring events that affected or as reported levels sort of provide greater clarity as we have in the past.
We will refer to the amounts excluding the one times effect as an as adjusted number to make everything comparable and when you look through it all similar to the third quarter snap on did see external headwins in a number barriers.
What we met those challenges and move forward.
Yes, you know we did have disparities from group to group and within each group, but overall were encouraged by our position in our possibilities.
Fourth quarter demonstrated elements will progress that were.
Some would attenuated by economic turbulence and challenge geography somebody impact of unfavorable foreign currency.
That's one recent past.
We show progress in the U.S. with growth across most of our operations in that area. So volume in the U.S. continue on upward trajectory, but her operations in Europe. They show countervailing weakness in several major countries and I thought that there was also a media meaningful impact from currency translation and transaction. So we had to.
Nipigon headwinds, but once again I think are advantages correct.
Organic sales <unk>.
6% sales games and critical industries and repair information.
And independence and equipment for independent repair shop owners and managers and and continuing growth at the end.
Continued growth in the B.U.S. van channel.
Yeah, the advancements in power tools and told scores and customize tools that.
It all combines a circumnavigate the variations in move us forward overall.
Uncle operating income before financial services of 171.4 million, including unfavorable foreign currency compared to 182.1 million in 2018, which included a 4.3 person 4.3 million one time benefit from the settlement I'm unemployed related litigation matter, excluding that legal matter.
Fourth quarter as adjusted Oh, why was 177.8 million.
Yeah, I was evident in the quarter, but it wasn't able to offset the negative for a foreign currency and the the economical weakness of Europe.
For financial services operating income of 62.2 million was it increase from last year is 56.1 million that results combined with off go for a consolidated overall operating margin of 22.5% compared with 23% last year or 22.6% 22 point.
5% this year compared to the 22.6% as adjusted excluding the legal benefit last year.
Quarterly E.P.S. of $3, an eight cents was above the 2018 has adjusted <unk> $3 in three cents.
As reported to for 2018, he P.S., including the one time legal matter, which $3.09.
So those are the numbers in general what speak about the markets.
We believe we what we believe the automotive repair environment continues to be generally favorable having said that in the areas serving vehicle <unk> and dealerships we have seen some pause.
Lower new car salesman ears did impact dealer buying habits and the number of projects continued commissioned by the vehicle of Williams decreased.
For independent repair shops, or the things look different.
Based on what we've herb what we're hearing from franchisees from technicians from shop owners the optimism in the independent repair shops, and strong and on affected by new car sales and our sales in that sector in the U.S. have been positive and they continue to be so so we believe vehicle repair remains a favorable place to operate for the critical industries, which things progress strong.
Activity in the U.S. aerospace military heavy duty set forth sectors somewhat offset by softness in the international area centered on general industry International Aerospace.
But our overall activity trend continues to look quite promising and the trajectory of critical industry of our critical industry business is clearly positive.
Oh industrial division demonstrated the opportunities and critical industries.
Overcoming the headwinds and <unk> and the general softness in Europe registering games, driven by it's a customized product kids matching the product to the task.
We do believe we're well positioned to confront the challenges of this particular period, making progress along or runways for growth. Despite the turbulence. We also have confidence that we have continuing potential in our runways for improvement.
To snap on value creation process safety quality custom connection innovation and rapid continuous improvement <unk> constant fuel for our progress, especially customer connection understanding the work of professional technicians and innovation matching that inside with technology.
We believe our product line up is getting stronger every day and we keep the best thing to make it so.
You see you see vehicles are getting more complex technicians need assistance and sore products are getting more sophisticated to match the rising requirements.
And snap on products are keeping pace.
R. and R. franchisees are in our direct sales force face to face with technicians are in the perfect position for showcasing are powerful little offering <unk> demonstrating their use right in the workplace, it's a great opportunity and the changing environment. It today and we're working hard to take full advantage.
So cross the corporation I would characterize our market six minutes mixed positive with significant potential yet turbulent from period a period in place to place.
Now for the full year.
Sales a a 3.73 billion representative of organic increase at 1.2% of similar stories of the quarter growth in the U.S. buffeted by Europe. The U.S. franchises rising particular turbulence in the U.K. band channel critical industry is growing against the wind and string with independent repair shop owners and managers.
Balancing the shortfall and O.M. dealerships.
As reported <unk>, Oh, why margin per year was 19.2% compared with last year's 19.4%.
21, <unk>, the one time benefits in both years.
For your as adjusted opt go away margin was 18.9%, including 20 basis points of foreign currency drag compared with the the has adjusted 19.3% in 2018.
And it won't include the operating income financial services, a 245.9 million withdrawals 15.8 million, but consolidated operating overall <unk> overall margin for the corporation was 23.7% or at or as adjusted 23.4% flat with last year's ads adjusted.
After the level so reported earnings per share for the year was $12 in 41 sense, 4.5% and excluding the non recurring of in the P.S. was $12 and 26, it up 45 cents, a 3.8% compared to last year as as adjusted number.
So those are the numbers.
Mallets.
About the individual operating groups, let's start with so you're not.
Fourth quarter reported sales for the group, including a $900000 of acquisition related volume and 3.5 million of unfavorable foreign currency grew 9.2 person 9.2 million or 2.7%.
Organic sales for the group increased 11.8 million or 3.5%.
The period, so strong performance from our power close division upped double digits.
That are innovative new product tools are resonating would automotive technicians.
Beyond that the industrial division registered low single digit growth with mixed results across the industry is in the geography as I said military with strong and U.S. and aerospace heavy duty also rose overcoming decline in the international sector.
For the first time in a while.
No longtime actually.
Volume for S., an A. Europe, our European based hand tool business was off in the quarter driven by weakness in several major arenas, including Germany, the Nordic countries in France.
Operating margin was 45 million down 5.8 million, including point 6 million of unfavorable currency that reflected primarily the industrial games being more weighted toward the lower military sector diluting the groups operating income down to 12.8% compared to the 14.8% recorded.
Last year when when there was a more typical balance of customers.
I mentioned earlier that our power tools operation registered a strong quarter sales are up the whole uses.
Gain was on the strength of our new portals products products like the new 14.4 bolt C.D.R. 762, three h. <unk>, we call it the brute.
As a name would or would imply it was designed specifically for automotive.
<unk> automotive jobs that require substantial muscle task like exhaust manifold removal break caliber replacement in general suspension work 760 to ratchet combined semantic like power.
70 pounds <unk> output with the convenience of a cordless platform and the racket mechanism. The head and then they're strong robust enough to handle even more force.
158 pounds feed a manual toward it is a route and the technicians recognize the new Ratchet also has a variable speed trigger for improved control and it can reach 175, ARPM repeat that means quick fashion or removal.
<unk>.
Well, we should even as easily one of our hit million dollar products also in C.N.I.R. torque product lines, making great strides like we said it was driven in part by our whitening array of new offerings for customers and critical industries like our new powerful 18, bold cordless evil torque line.
Railroads and when turbans, a natural resources, another critical industries, where remote.
<unk> and make a remote repair and maintenance is is the norm.
<unk> covers pork range of 150 pound feet. The 4000 pound and comes in six basic model three single speed and three.
Auto up to speed.
And I didn't significantly it's the result of the synergies made possible by nor bars reashure additions to the snap on family. The evils innovative design what makes its power is the combination of a powerful and robust nor bar gearbox, and a nor bar being transducer with an ergonomic handle handle.
Where the never Gonna ergonomic handle and an 18 volt battery platform for much snap on power tools Division.
Result is a torque wrench, that's compaq portable and accurate plus or minus three per cent. While similar tools are much less precise generally within a plus or minus 5% industry feedbacks when quite positive in the sales are pretty brisk now, let's turn to the industrial division focused on critical industries outside the vehicle garage games now.
Accomplished gains now accomplished for 13 straight quarters, despite a weakening in Europe and the ongoing positive friend has been given by customer connection extending or understanding of critical work and that progress can be measured in the number a new tools solutions. We offer each year will last do we entered almost 5700 new products. It's a crew.
<unk>, it's it's art it's critical.
Tour industry critical industry line up.
That's quite a few products 5700, if the design and logistics challenge to be sure, but it's a large advantage with critical industry customers were rolling the snap on bread out of the garage.
Increasing string.
Critical industries is a great opportunity and we're addressing the possibilities with new products aimed at solving the task like <unk> that tests consequence that inhabit that critical arena.
[noise] now onto the tools.
Organic sales are up 1.3% with you know continued growth in it in the U.S. operation up little single digits, a positive that was again this quarter offset by declining international operations principally in the U.K.
Operating income in the quarter was 54.3 million and compares to 57 million or 2018, the away margin was 13.2% and 80 basis point decrease including 40 basis points of unfavorable currency the turbulence in the U.K. and the investments were making in training and feel support to expand franchise.
Selling capacity to match the demands who are more more sophisticated product and to capture the opportunity and the changing repair environment in the quarter and throughout the year.
The tools group did confirm the underlying market leading position of our man network. We believe the franchisees are growing stronger.
That's clear in the franchisee help metrics, we moniker each period. They continue the trend favorably and that positivity was acknowledged by multiple publications all listing snap on as a franchise a franchise of choice.
This quarter up.
This quarter snap on was once again ranked among the top franchise organizations. Both in the U.S. and abroad. We were again recognized by the franchise business view review within which in its latest ranking for franchisee satisfaction listed snap on as a top 50 franchise, marking the third teams consecutive year.
We we see that awards were also rank number two among all franchises in entrepreneurs magazine magazines 2019 list of top franchises are veterans and abroad.
Snap on was ranked number one in the lead franchise magazines top you chafe franchises rising three spots from last year and finishing above.
Finishing above many well known international brand in the publications largest ever competition. So despite the difficulties in the U.K. economy are franchise remains very positively regarded.
To me that's good news for the future.
No. This type of recognition reflects the fundamental strength of our franchise franchisees of our van business in general and would not have impossible. It would not have been achieved without a continuous stream of innovative new products developed through our strong customer connection.
Leading the.
Leading to a customer connection leading to a multiple.
Multiple new innovations as a result of our inside and experience in the changing vehicle repair environment. One of the latest additions to our line up. An example is is our Milwaukee manufactured G.M. head bold socket developed from connections with a loyal snap on a snap on technician the half inch drive 13 millimeters socket and unable.
<unk> efficient hit bolt removal and installation on general Motors light truck Genfive beat engines, the socket special drive design someone's a torque necessary to break free even heavily corroded head bullets and the four inch socket height.
Allows technicians to clear the rock her arms and the G.M. engine design, making repairs easy even in the difficult G.M.V. eight engine compartment and believe it.
[noise] another Great example of customer connection and believe me just as another subject and believe me, we're working hard to strengthen our tools storage lineup.
The effort is bear in the effort is a bearing fruit to storage is up in the quarter and up in the year. We originally added the the care a c. 430, a professional grade shop car to draw a line up a mobile tools to tool solutions. It's a new 40 inch cart that makes it easy to move even.
Very heavy tools from beta big and it offers a sliding split top split lip, which which allows quick access to frequently frequently used tools manufactured in our in our I'm going to Iowa plan right in the Heartland heavy duty car body is entirely welded with a double all designed for lasting strength. It also features interchangeable.
Doors customization to fit any job. The initial launch went quite well and it's clear the new car will be another one of our hit products well, that's the tools group expanding its success in the U.S. balancing the international operations continuing to develop innovative new product building underlying string.
Now Ferraris Tonight.
Volume and the fourth quarter was 335 million.
That's down organically, 1.5% with games in sales of Undercar equipment, and diagnostic couldn't repair information products being more than offset by decreases in the business focused on vehicle Williams and dealership.
It was another turbulent period for that lumpy project, driven O.M. sector arson I operating earnings in the quarter 87.2 million down.
$200000 from last year, including $200000 of unfavorable foreign currency.
Oh I margin Oh, I margin for the group was a strong 26% up 30 basis points from from last year is level in with basically driven by growth information Plata growth and information products paving the way to that 26% along those lines.
In terms of innovation products are Mitchell, one division, which provides a software independent shops continues to succeed pursuing customer connection in innovation green, great new products to improve shop efficiency. We just launched are.
We just launched or Mitchell, one just launched our new online appointment scheduling capability. In addition to are already extensive repair shop management software vehicle owners can now request an appointment with just a few clicks on the shops website automatically alerting garage schedulers up their request.
It's a great efficiency tool as part of our Mitchell one shot management for independent garages, and that's another example, about how snap on value creation is altering the the continuing upward trend that Mitchell one.
Speaking of Mitchell one.
We just opened a new facility for that information business and enhanced operating in design environment, We're investing in Mitchell, one and we expect more success.
Arson I also launched in the quarter, our new pro link edge heavy duty diagnose it's a heavy duty.
Diagnostic handheld a bigger screen easier to use interface faster B. connection times updated software and increased media coverage, it's not one's already the leader in heavy duty diagnostics, the paroling edge will expand that advantage.
It was just introduced at the end of the year and so far it's looking.
We keep driving to expand our us and eyes position with repair shop owners and managers offering Ah more new products to sell developed by by value creation drive Who's are added bar strategic incoherent acquisition and we're confident.
That's a winning formula.
Well, that's our fourth quarter.
Arenas areas of both challenge in an advancement.
We believe we <unk>, we <unk>, we leave the year stronger than when we entered.
And in the in an E.P.S. for the quarter $3 at $3, an eight cents up from the ads adjusted $3 in three from last year and for the full year as a jump to the P.S. 12, 26 rising from the ads adjusted 11 81.
Overall progress hard won against turbulence.
Now trying to call over to <unk> <unk>, Arkansas elevated operating results are summarized on slide six.
<unk> sales with $955.2 million in the quarter up three tenths of a percent, reflecting a six tenths of one per cent organic sales gained $3.5 million of acquisition related sales and $6.3 million of unfavorable foreign currency translation.
Organic feels game this quarter reflected low single digit growth in both the snap on tools and commercial and industrial segments, partially offset by a low single digit decline in the repair systems and information <unk>.
Similar to the trends we experienced been two three of 2019 overall on a year over year basis sales to customers in the United States increased while seals in Europe continued to exhibit weakness.
Consolidated gross margin of 47.2% compared to 48% last year.
80 basis point decrease primarily reflects increase sales and lower gross margin businesses and 10 basis points of unfavorable foreign currency effects, partially offset by savings from RCR initiatives.
You are printing expense margin of 29.3% increase 40 basis points from 28.9 per cent last year.
Two 420 18 included a 4.3 million dollar or 40 basis point benefits associated with the legal settlement the big mentioned earlier.
Operating earnings before financial services of $171.4 million, including $2.5 million of unfavorable foreign currency effects compared to $182.1 million in 2018 or $177.8 million as adjusted for the legal settlement.
As a percentage admits sales operating margin before financial services up 17.9% upsales compared to 19.1% last year or 18.7% as adjusted.
Financial services revenue or maybe $3.9 million, an operating earnings of $62.2 million increased 1.5% and 10.9% respectively from 2018.
Primarily reflecting you're over your growth in our financial services portfolio and improve portfolio performance, resulting in lower provisions for credit losses.
Consolidated operating earnings of $233.6 million, including $2.6 million of unfavorable foreign currency effects compared to $238.2 million last year or $233.9 billion as adjusted.
[noise] as a percentage of revenues yeah operating earnings of 22.5% compares to 23% last year.
Versus last year's fourth quarter as adjusted operating earnings margin of 22.6%, which reflected a 40 basis point benefit from illegal settlements. This years operating margin was lower by 10 basis points.
Fourth quarter effect of income tax rate of 22.3% compared to 22% last year.
Finally.
Earnings at $170.6 million or $3, an eight cents per share, including a four cents unfavorable impact associated with foreign currency compared to $175 million with $3, a nine cents per share a year ago.
2018.
Excluding a six seven per share benefit from illegal settlements adjusted earnings were $3.03.
For the for your 2019 fully deluded earnings per share of $12 and 41 sense increased 4.5% over $11 at 87 cents per share as reported last year.
Well it started to our segment results.
[noise], starting with the C. and I group on slide seven.
Sales of $352.9 million in the quarter increased 2.7%, reflecting eight 3.5% organic seals game and $9.9 million of acquisition related sales, partially offset by $3.5 million of unfavorable foreign currency translation.
You're again a growth included a double digit gain in our power tools business mid single digit increase in our Asia Pacific operations at a low single digits gain in sales to customers and critical industries.
Particularly sales for the U.S. military.
These increases were partially offset by a low single digit decline and our European B.'s Panfuls business.
Gross margin of 35.5% decrease 300 basis points year over year, primarily due to increased sales and lower gross margin businesses, including sales to the military.
Sales in the fourth quarter to the military were up significantly both the year over year and sequentially.
The operating expense margin of 22.7% improve 100 basis points from 23.7% last year, primarily due to higher volumes and lower expense businesses.
Operating earnings for the C.I. segment of $45 million decreased by point $8 million from last year.
Operating margin of 12.8% compared to 14.8% and 20 Jean.
Starting noticed flighty.
Sales in the snap on tools group of $411.7 million increased 1.1%, reflecting at 1.3% organic sales game, partially offset by $1 million of unfavorable foreign currency translation.
You're giving sales increase includes the low single digit gain or U.S. franchise operations, partially offset by a low single digit decline internationally.
Gross margin of 40.2%, including 40 basis points of unfavorable foreign currency effects remained unchanged from last year.
Yeah operating expense margin of 27% increase from 26.2% last year, primarily due to higher field support investments.
Operating earnings for the snap on tools group of $54.3 million, including $1.7 million of unfavorable foreign currency effects decrease the $2.7 million from last year or the operating margin of 13.2%, including 40 basis points of unfavorable foreign currency effects compared to 14% and 2018.
[noise] 30 to the arsenide group shown on slide nine.
[noise] sales of $335 million decreased 1.4%.
Looking at 1.5% organic sales decline and $2.3 million of unfavorable foreign currency translation, partially offset by $2.6 million of acquisition related sales.
The organic seals decrease includes a high single digit decline in sales to overcome dealerships through our equipment solutions business, partially offset by low single digit gains a boat sales of undercar equipment and its sales of diagnostics and repair information products to independent repair shop owners and managers.
Gross margin of 47.7 per cent increase 20 basis points from 47.5% last year or the operating expense margin of 21.7% improved 10 basis points from 21.8% and 2018.
Operating earnings for the Arsenide group of $87.2 million compared to $87.4 million, a year ago, and the operating margin of 26% increase the 30 basis points from 25.7% last year.
No turning disliked up.
Operating earnings from financial services of $62.2 million increased 10.9% versus the fourth quarter of 2018.
Revenue of $83.9 million was up 1.5% from a year ago financial services expenses of $21.7 million decreased $4.9 billion from last years levels, primarily due to the increases the the provision for credit losses, reflecting improved portfolio performance as well as lower variable compensation that other costs.
As a percentage there'll be average portfolio financial services expenses were 1% at 1.3% and the fourth quarters of 2019 and 2018, respectively.
The average yield on finance receivables in the fourth quarter.
What do you 19 was 17.5% compared to 17.7% last year, principally reflective of the credit quality of customers originating loans over the past several months.
The respect of average yield on contract receivables was 9.2% in both periods.
Total load originations of $262.4 million decrease $4.7 billion or 1.8%, primarily do two or 3.7% decrease in originations or finance receivables, partially offset by higher originations of contract receivables principally franchise minutes.
Moving to slide 11.
Oh, you're over your your and balance sheet includes approximately $2.1 billion of gross financing receivables, including $1.86 billion from our U.S. operation.
Are worldwide gross financial services portfolio grew $24.3 million in the fourth court.
The 60 day, plus delinquency rate of 1.8% for U.S. extended credit remain stable.
The season will increase we typically experience in the fourth quarter.
As it relates to extend the credit or finance receivables the largest portion of a portfolio trailing 12 month net losses of $49.4 million represent a 2.91% about standings, a urine down six basis points sequentially supporting continued stabilization portfolios credit metric performance no turning to slide.
Well.
Cash provided by operating activities of $196.7 million in the quarter decrease $19.2 million from comparable 2018 levels, primarily due to increased isn't working investment and cash paid for taxes.
Cashews by investing activities are $41.4 million included net additions to finance receivables $24.6 million and capital expenditures of $21.6 million.
The cash used by financing activities of 139.2 million included cash dividends are $59 million and the repurchase of 435000 shares of common stock for $71.2 million under our existing share repurchase programs.
School year 2019 share repurchases total 1.495 million shares for $238.4 million.
<unk>, we had remaining availability the repurchase up to an additional $359.6 million of common stock under existing authorizations.
Turning to slide 13.
Trade another accounts receivable increased $2 million from 2018 <unk>.
They sales outstanding of 67 days were unchanged from 2018 year it.
Even toys increased $86.6 million from 2018, you're in primarily to support the introduction of new products.
Her levels of demand across critical industries, including demand for U.S. manufactured hand tools as well as to improve service levels to our customers.
A thrilling 12 month basis.
He turns of 2.6 compared to 2.9, you ran toward the 18.
Oh, you're in cash position of $184.5 million in Greece $43.6 million from 2018, you're in levels.
Our net that the capital ratio decreased to 22.1% from 24.2% the urine 2018.
In addition to cash unexpected cash flow from operations, we have more than $800 million and available credit facilities as of your end, we had $193.6 million of commercial paper borrowings outstanding.
That concludes my remarks on her fourth quarter performance I'll briefly look at a few outlook items were 2020, we anticipate the capital expenditures will be in the range of 90 million to $100 million.
Currently anticipate that are full year 2020 effective income tax rate will be in a range of 20, 324%.
They'll turn the call back the Mic for is closing thoughts <unk>. Thanks, L., though.
Snap on fourth quarter.
Near term uncertainties unfavorable foreign exchange of downdraft in Europe in particular <unk> difficulties in U.K.
Progress against those headwinds significant progress overall advancement hard one begins to Edwin.
[noise] uncle organic sales, 0.6%, Oh, I margin, it's 17.9% down 80 basis points from a 2018 as adjusted result impacted by the mix of critical industry sales being more weighted lower margin military sector by unfavorable currency and by spending to enhance the franchise network.
Overall advances continuing strengthen our it's an eye on the repair information business, 26% March.
[noise] favorable trends in the industrial business games in the U.S. band channels and there were significant strides in strengthening our product line across the organization more customization more sophistication to match the opportunities are the changing repair environment and the finance company recording gains in the in O.Y., which combined with the up with optical.
To regional why margin, a 22.5% on the quarter compared with an AD adjusted 22.6% of last year E.P.S. for the quarter or $3, an eight cents above the as adjusted 3003 sentences recorded last year.
Overall.
We believe firmly that our business is strong and we're confident that going forward, we have the opportunity.
Position.
The product and the team to confront the headwinds and continue on our positive trajectory through 2020 and beyond.
That'd be for trying to call over to the operator, I'll speak directly to our associates and franchisees I know many of you are listening.
So the entire snap on team, we recognize the results of the quarter and over the year authored by your individual and collective efforts prude dedication to our progress and for your commitment to our corporation you have my thanks.
Now turned the call over the operator operator.
Thank you if he would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your meat function is turned off to like your signal to reach our equipment.
Again, it is starting to ask a question and we will take our first question from Curtis May go with Merrill Lynch.
Oh good morning, Thanks, very much for for taking no questions. So I guess first make a question for you how would you describe like if the operating environment tools, if you're ever since last you know in terms of things like a roller competition underlying fundamentals product grow up you guys.
Do you expect you know we're going across to be higher kind of stay the same.
And that optimism you'd mentioned in the call <unk> would you say, that's perhaps higher than.
A year ago.
I would say so I think looking I I I believe I set it right at the beginning I I believe we we leave 2019 stronger than we entered our product line is stronger than ever we are seeing progress in the <unk> you know not as fast as maybe we would like in the U.S. van channel, but it is moving upwards.
This was a stronger quarter than in the past on a year over year basis, and so we feel pretty positive about that I think when we talk to wear franchisees. We we understand in it and then the technicians, we understand or underlying strength. The simple point is can we can we arm our franchisees with enough efficiency the wheels that complex proud.
It's a sophisticated products to sell in the environment. They are as opposed to being capacity bound or time bound I've talked about the time bound nature. The the van business for a long time, that's why we're investing in it and we're starting to see the results against that though we see turbulence in the U.K.U.K. was actually will worse this quarter on the other hand.
Brexit didn't get signed and so therefore without any inside information about the timeline that should make it better going forward. So I feel okay about that.
<unk>.
<unk> I guess I should be thinking about the balance of product can cost or Miller, a mix alright 2020 in C.N.
In terms of how this could.
Impact the gross margin you know, perhaps we see.
Because you know military.
Maybe that's a one off you know could could that reserve or perverse in terms of.
But.
In fact, <unk> the military a occurred but so are you in the quarter is probably the highest sales with a one particular job in the middle to that we've talked about before you can call. The G.M.T.K. The general mechanic school get so actually it was up at a double digit in your over your comparison as well as sequentially as I mentioned.
It's <unk> it'll be a significant contributor and Q1, however, not probably to the same level as it was in Q. for.
On top of it what was lacking in two four were some of our international sales in the critical industries. They tend to be pretty good margin contributors. So if they come back to what I called more normal levels, you'll get a little bit more cover and get a more traditional gross margin mix. So we welcome the sales to the military don't get me wrong and they'll move forward.
Over time, but they should have less of a mix effect as you get a little bit more normalized impact in the overall critical industries.
Okay.
Thanks very much.
[laughter].
Well take our next question from Christopher Glen with Oppenheimer.
Thank you can morning had a question about the snap on tools may or June.
And the seasonality they used to see that always ramped three q. into four q. and last year seemed anomaly at an anomaly at the time, but that repeated this year into the seasonal volume ramps. So <unk> women, what's changed theirs is that this elude dynamic would kind of sequential gross margin pressures.
Three q. to four Q. for us so tea.
Actually I it may be a new dynamic what I was wasn't just last year I think there have been two years or this kind of move down with some of that may be driven by you know we have robust Christmas promotions and they sometimes they tend to be a little bit lower margin I I think the thing that you might ask okay. It's it's 40 per cent the the gross.
And was 40 per cent, 40.2% was flat with last year and last year, we had significant discounting associated with the with the diagnostics business you might be ask well you might ask why isn't that up and I think I think the story is this last year. We had we had that discounting we had some effect of currency, but not as much and we had does some small.
Affect some effect of the U.K. This year, we got 40 basis points, a currency and 20 basis points of the U.K. effect.
And and so so you you put those in and you you end up having 60 negative and so we had margin improvement actually year over year in the quarter, just that higher currency impacts in the quarter associated with the tools group transaction effect and the U.K. still being a problem for us so they overcame that and flatten the gross margin.
Oh, Okay <unk>, taking this year in isolation, what causes the declined sequentially.
While I think we've seen generally a decline sequentially and what what has happened in the decline with drives the decline we're seeing more and more into this is our factories tend to be tend to be seeing it like for example, when you roll into the fourth quarter, especially if as the hand tool business has risen.
Become a higher portion of our of our product to hand, the factories, which is you know the most integrated product in the United States, you see things like over Thanksgiving and over Christmas you see the effects those expanded handle factories the effects of those weighing a little bit more than the third quarter in terms that a days off they have so you have worse absorbed.
In in this quarter fundamentally your sales are going up what's your absorption is going down because of the days worked.
That's I think what's what we've seen if you go back to quarters. When we didn't have this this this this discounting in the in this this legacy sales in the in the fourth quarter that was really the effect and I think we're going to see that going forward and this kind of calenderization.
Okay, and just one wondering if they're looking at the inventory increase in the lower returns wonder if there was any reserving the corridor for access or obsolete inventory or if you know, possibly that something that might be an <unk>.
Oh, the higher inventory levels at some point.
I don't I don't think anything more than normal Chris <unk>.
The nature of room retort is such that when you get the lower market cost or market criteria, we feel pretty good about war levels of salability or at I think the biggest increasing limits are actually is new product introduction and the pickup pace was not as rigorous as we would like for that we're comfortable looking for the future, but for as you know, we keep targeting a higher level of sales growth.
And when we go to achieve it the product is there are in available, but it's an inventory rather than the sales line.
Okay, and then last one for me the.
The C.F. I was down a bit. Your we are from you are very high levels last year with with a fair amount of inventory pressure just wondered if that's a good set up for pretty strong.
So growth in 2020 that we could expect.
Well certainly I see there's no reason that a majority has to grow to the same degree did in 2019, we try to pick a measure of look at that something to the characteristics and 2019 or that we have more sophisticated kids among our critical industries customers as I said, we had a heavy dose of new product introductions.
We'll have elements of that and twentytwenty, but as you're suggesting there's no reason that the increase in inventory has to be the same magnitude is what we saw in 2019.
Great. Thanks Miguel.
[laughter] it'll take our next question from David Laker with Faired.
[laughter] and David Your line is open please check your mute button.
[laughter] carry no response from David we will move to <unk> Jordan with Jeffrey's.
It's hard to guys.
Pardon.
Could you talk a little bit about diagnostics in the U.S. band Channel I know you guys were doing some educational work at the franchise event back in August and you know maybe an update as to how we're doing with the zoo set up all up.
I you know I, Okay, I can give you.
Versions of that you know the the we had a strong call. We we've had we continue to train the people and we're working with our field force our diagnostics sales developers and the technical bands and so on and you know that the field source to try to just as you say try to expand the capabilities associated with that.
We had.
It was.
Double digits in a it was up very strongly in the in the third quarter diagnostics was down in the fourth quarter selling to the franchisees, but the movement from the franchisees to the to the end user kind of followed more traditional pads. So I would figure that the die. If you if you step back and they look at it and you say, okay up in the third quarter kind of down in the.
Down in the fourth quarter, it's kind of.
Continuing the same level as before so therefore, we would say we have more work to do in trying to get our franchisees to understand how to sell this product. It it's kind of moved forward and Zeus had a good quarter by the way. So that was an encouraging data point for us so with the zoos good quarter, we feel we feel that there is some.
Progress because that's the most difficult thing to sell so now we're going to have to make sure. We we we work on Apollo in Triton to get those stronger and so I suppose when you know one of the lessons we get out of this is we we may have cracked some of the case for zoos, but we need to do a little bit more on Apollo and Triton.
Okay, Great and then other U.K., you talked about it being turbulent, but maybe getting better with <unk>.
Is there any change in the vad count over there you know given that challenges that those yeah distributors yeah.
Yeah, there had been a change but not it's very small actually you know moves up and down I think I think in the middle of the Cry you know in the middle of the downside I was down a little bit but would bounce right back up so I would say not more than ordinary motion really it hasn't really changed that much I mean, you. K. is is is has been a.
Headache for us really.
And it it punches above its weight in terms of on the on the on the margins of of our our performance, but you know we're working hard to try to get it under control. We're working with the products were trying to train the franchisees. So they can make the most of things generally it's small low short payback items or silence of the big payback items that tend to come.
Down and uncertainty with Brexit.
Unsigned I don't know, but I think as people understand what's gonna happen in post wrecks at the certainty returns and the automotive repair market staffs back in the U.K. I I pretty much believe that's the way it's gonna play out we're just happy that they sign breaks in January 31st.
And although one question I guess <unk> around the credit book Oh, the loan terms as the as the credit quality is going up and obviously replied didn't lower rates are you seeing shorter alone terms as well.
Oh, no with generally speaking with a higher price point the products generally speaking across the board franchisees <unk> up to five your terms and I don't see that actually is trend that slightly upward. The the migration has been more to a little bit north of four years is the average and the overall portfolio. So I haven't seen really.
I have a change in that.
Okay, great. Thank you.
Sure.
[noise] well take our next question from David like or with Baird.
[noise] good morning can hear me.
Good morning, we can here.
[laughter].
Let's just talk that went up the user okay.
<unk> two two things.
Yeah, I look at the the snap on tools field support spending I think we're probably on two full years about right now is that.
Bear.
I know I don't think so I think we started it maybe in the fourth quarter last year I don't think it's two full years actually you know I <unk> that's.
Memory about it yeah, and we've kinda wrapped it up here you know so.
So how do you can you talk a little bit about how you you know determine calculate the if if that's working and driving incremental returns of kind of return on investment or some kind of metrics of up how do you gauge the success and you know of executing and delivering on that.
Well you know there I think there are twin axes on this day, but I think one is the overall you know we're focused on the U.S. really of course on this I think we made that clear you know there's a separate efforts going on to remediate in U.K. I think.
Our number one effort is what happens with sales in the U.S. van channel and it's been moving upwards. So this quarter was better than the last and you know on Johnson a year over year basis. So we can feel it moving upwards, maybe not as fast as everybody would like it maybe not as fast as we would like but that's an indication as we're moving the.
The Boulder upwards, you know, we're expanding the capacity to sell and that's that's one issue. Then there are the local issues. You know just like question recently, if we're focused on diagnostics what happens with the individual diagnostic platforms. Because after all this training gets done platform by platform by platform by platform and types of.
Customer bike types of customer types of customers. So we kind of segment it that way platforms by customer and so the the success in the in those nodules or how we.
How we how we evaluated.
And it's not just training. It's also things like we're we're adding a new set of vans, we call. The total shop solutions, we've been expanding and we were at nine last quarter and 15 this quarter not associated with diagnostics, but this is associated with with other more longer longer or payback sales like hand spin tire.
Balancers and and and diagnostic workstations, which include full storage box and so on so we evaluate how those things are occurring in each of the territories. So I I think I think I've said for a long time that one of the boundaries of the the the tools. The the band is the time.
And so what we're doing is trying to make the time more effective.
Best thing is a sales you know you figure that happens you know for sales goes up that's the best thing to do but we also have a sub.
Sub sub analysis. So that's how we do it and we think it's it's working I'd sure like to see work faster.
But we believe it or we just.
Go ahead sorry.
So if you look at that in terms of the absolute spend versus the the driving through a rubber news is there a point you know, whereas the break point, where you got revenues growing faster than the than the spend than that and and is there point in time, if that's actually can come back down at all somehow.
How do you see that playing out.
Well look I I see it playing out when we start to get up around our target.
To experiment about cutting back I think the way the world works for US It it's always work this way.
As we spend to capture sales growth and then as we establish ourselves to that sales growth level and that sales growth level is defined by capacity. This this the capacity of the franchise used to sell once we hit that we try to improve and become more efficient and supporting that behind that wave of capture.
So once we get to like X.X. percent growth, we say, okay. We're there that's our level, we kind of try to figure out how to do it more efficient so we'd like to be in the territory, where we feel comfortable that that's unacceptable growth that's commensurate with the market.
With the opposite so with that what we do that without running Mac.
So if that running at low single digits in the U.S., you're getting close to that growth metric them.
Yeah, but not as close as I'd like you know yeah, <unk>, yes, yes, yes, yes, that's true yeah. They you know, it's it's arts, but that's our that's our method day, but you know we we we capture the territory and then we make it more efficient.
[laughter].
And then just one one item for you all though <unk> you didn't mention and we've had some conversations on this but is there any updates on the the provision the change in accounting there and a framework you can give us. The you know <unk> have a sense of what that's going to me when you adopted in Q1.
Well say this the the official in final recording of that will be in our K., which is not so far away I mean, we plan on releasing or K. at the before the end of next week actually so I'll leave that out there is a statement, but I'll say this to work around that's been.
Fairly intense and well done.
And I'm pleased with the energy, we put into it so far and you're talking about Cecil for others on the calls at the reference to the adoption of Cecil which becomes effective for the corporation in January of 2020.
The true reporting over it occurs at the end of the quarter actually but I'll say this is that right now David I'm expecting that our overall adjusting it would be something less than $10 billion would be that order of magnitude, but the final number will be solidified within about a week start.
Okay, great. Thank thank you much.
<unk>. Thanks.
Well take our next question from Scott Stember with C.L. King.
Oh Morty guys.
<unk>.
Oh can you guys give a little bit more color on some of the other areas within tools Sars growth like a power tools and a hand tools.
Sure sure this quarter.
<unk> down some power tools up double digits. So like I said power tools at it had a terrific quarter and principally toll storage up diagnostics down. Some so you know every by the way I encourage people not to get to overheated about these quarterly numbers, because they move up and down depending on depending.
And what happened last quarter and what when the new products hit for example of power tools a strong this quarter, because we have a great new product and everybody's been waiting for it.
And so it rolls out.
And so that's one of the reasons why it's strong now you know it because.
Remember our view of the World is the franchisees our capacity limited we're building up that's why the franchise businesses in the U.S. is growing again, but it's kind of you get a new product it tends to squeeze out some of the other products, but that's the that's the rolled out I you know handles down this quarter after up for the year, but.
But power tools up fairly robust Lee till storage up again diagnostics down at sort of that story. This quarter was a different story last quarter.
Yeah, it moving over to our son I I know that we've had a few really get quarters of of you know sales comps part of it was the only in business was coming back, but we see a return of Choppiness. There. How did you do an R.S. tonight for the full year again on on or.
Basis.
And giving your your commentary about some of the reluctance to some of the dealerships because of the the weaker car sales.
You expect to get back to positive comps in 2000, a 20.
Well I think I think we're not sure what happens with the O.G.M. dealership business you know that that's the thing that you know, we we we say well.
You know, that's a lumpy business and having worked for fourth.
[noise] Ford myself, you know I can tell you that you know they this is a business that changes cash flow every month for five years. So I mean, they they they change their attitudes every month. So we're not sure if I looked down at looking at the I.H.S. forecasts are forecasting down one I didn't want you know one to two per cent next year I would think we'd kind of see the same.
Same kind of stuff out for a little while now arson I was up you know low single digits for for the year I think in interestingly, though 26% for our son I think is the highest ever rose from Hawaiian margin.
So they had okay quarter from that perspective, it's just just sales were down because of that O.M. business, but the information business to <unk> independent repair shops was up again, which was what drove that 26% because it's it's high high margin business and Mitchell. One is is it has been a consistent grower for us. So if you look at the R.S.I. businesses I'll step.
Back and talk about Mitchell, one seems to grow consistently we just invested in new building, we didn't do so.
Without thought and therefore, we think that's got a great future diagnostics tends to go up and down but we're training. We're training. The the franchise you used to it'd be more comfortable with a new groundbreaking product of intelligence diagnostic we expect that to go for the only m. businesses, which is about a third of the businesses. You know it's hard to predict that can be lumpy and significantly they lost in a sway.
Here is the equipment business showed a positive this quarter for for ours, and I and it hasn't been positive for awhile. So we've used that as a fairly even in a a turbulent quarter. We've used that as one sign of good news so going forward I think we think.
The only and business uncertain, maybe it'll be the same as this quarter for awhile, but the rest of the businesses have good opportunity.
Oh.
Right and just last question. Your your view of the business longer term or you may tend to your expectation if the the company company longer term to be a mid single did you grow or on organic sales business.
Yes.
Yes, I I think the market's there I think we got the product and state I think we're capacity bounds I've set it.
You listen to us.
For years, we've said that one of the boundaries associated with the bandshell space and time.
We're up against the time boundary. It's clear you can see it the way the world works and so we have to break through that like we did in previous years went to come up with ways to make those franchisees uses time better and we can do that we thing and then in the industry in the in the in the sand I business. If you 13 straight quarters for industrial and were 57 more 5700.
New products now that gets more and more complex and it drives inventory, but <unk>. The dogs are buying the dog who they're the only thing is in this particular core or one of the big business was all hard I come to happen for.
Oh God it thanks a lot.
Yeah.
We'll take our next question from David Mcgregor with one bow research.
Yeah, good morning, everyone.
A couple of course is first of all just given the amount of time, we spent talking about the oh. So you'll support can we put a number on what the impact was margins although.
Well I don't call all the fields for specifically, obviously, the an investment that we make along with other internal metrics up you have David but I can see the drag that creates in the in the Oh. He's section of the financial of them go snap on tools group, but we're not going to mention it exactly.
So we could we could you can't give us some order of magnitude or <unk>.
No Oh click so okay.
I guess, what percentage of your franchisees or up your over your on the fourth quarter.
[noise] or what.
What percentage of your franchisees would have seen growth in the fourth quarter.
Well I don't think mean I don't think we know that sat necessarily directly to the U.S. is up for you to low single digit as we've said and you'll get a mixed within that portfolios. Some of course will be higher so we'll be lower than that but we're not going to parse among the number of franchise.
That are offers numbers that are down.
Generally we parse them by Quintiles and it you know if you if you see the business up and generally tends to be uniform across that so what you find is is that roughly.
60% of the 60 to 65, maybe two thirds of franchisees will be sort of in the and the same direction has this to the overall business. That's usually what happens at any one quarter and those those numbers swap in and out it doesn't change that much from quarter to quarter really.
Okay, and then it seems like that we've got to a point in in our World were you know people are buying online and I'm sure. The technicians are no exception to that rule, you're selling tools on your on your website you just talk about it and maybe this is a way to sort of tie in with the whole notion of you know the the time.
Pounder you reference them in answering the less colds question, but what's the opportunity to develop online sales here, maybe find a way to to pass a credit back to the appropriate franchise you their customers register to but but talk a little about the opportunity to grow online.
I think people I think our customers don't we <unk>, we a lot we offer them online, but generally our customers value the presence of face to face presence or the franchisees.
That is I think that is the point the idea of providing up close and personal counselling and guidance on howdy explanation of the tool, which are getting more more more I guess more complicated more sophisticated and the guidance on how to use. It then the idea of propriety and credit up close and.
Oh, and then the idea of having a.
A a replacement.
Right there is what our franchisees franchisees and our customers seemed to like they could go online, but they don't necessarily dullness latelies avail themselves of that now if we thought we were getting getting pushed by that we would be we would be looking at a little bit more but hand tools are off and you would think that would be the number one.
Product line that would be bought on line since it's less complicated and people tend to know handles but the handles are up for the year in fact, they've been more robust over the past couple of years. So that's what kind of you have it.
We try to use the capabilities to enhance it's one of the things we try to do to enhance the efficiency of the franchisees in terms of their collections in terms of the way they communicate with their customers on specials and those kinds of things those are the opportunities. We see we see that connection either this from social media or tradition.
In a lot line, you to Twitter, you know, either and or a tasteful or or Twitter or or in fact, you know texting or or just email not that many people use email anymore and and pour franchises to communicate and make our customers aware of things. That's part of the that's part of our view of on line and.
Enabling the franchise needs to be more efficient.
How would online growth war for you right now.
Mm.
Wow I think <unk> is not well simultaneously.
Pardon me off a small base, obviously, but I'm just trying to get a scam [laughter]. It it's probably up some but not not theirs.
Suffers because online online for off our customers are looking at the idea to support they get from the franchise age. So all we try to do is keep that franchise need support in in place to get as part of our manager and secondly try to use whatever you know the the electronic media is to enable a franchisees more.
Just as I say, okay, well, maybe I could fall off line with you. It's an interesting topic. Thank you.
Sure.
[laughter] and at this time I would like to turn the conference back to Sarah verbs ski for any additional are closing remarks.
Thank you all for joining us today I replay of this call will be available shortly on snap on dot com.
Ways, we appreciate your interest and snap on good day.
[laughter], ladies and gentlemen, this concludes today's call and we thank you for your participation you may now disconnect.
Mm.
[music].