Q1 2020 Earnings Call
Ladies and gentlemen, good day and welcome to de snap on first quarter 2020 results Investor Conference call.
Today's conference is being recorded.
This time I would like to turn the conference over to syrup ski Vice President of Investor Relations. Please go ahead ma'am.
Thank you Abbey and good morning, everyone. Thank you for joining us today to review snap on first quarter results, which are detailed in our press release issued earlier this morning.
We have on the call today, Nick Pinchuk snap on Chief Executive Officer, and although probably Ari snap on Chief Financial Officer.
Nick will kick off our call. This morning with his perspective on our performance. Although will then provide a more detailed reviews our financial results.
After next provides in closing thoughts, we'll take your questions [noise].
As usual, we have provided slides to supplement our discussion. These slides can be accessed under the downloads tab in the webcast the work as well as on our website snap on dotcom under the Investor section the 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 beliefs, or otherwise think management or the company's outlook planned or projections are forward looking statements and actual results may differ materially from those made in such statements additional information and the factors that could cause our results could differ materially from those.
In the forward looking statements are contained in our FCC filings.
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 counterparts.
Additional information, including a reconciliation of non-GAAP measures is included in our earnings release and in our conference calls slides on pages 14 through 16, both can be found on our website.
That said I'd now like turn the call over to Nick Pinchuk, Nick Thanks, Sara.
Good morning, everyone.
Well.
Some say.
These are interesting times.
There's considerable turbulence in business and all the cross the everyday landscape, but I believe.
We can be confident that snap on will navigate through it all and come out stronger than when we when it all starts justice we haven't done in the past.
Before we get going on.
I think it's appropriate for all here listening in investors associates franchisees customers retirees analyst.
Have our best wishes that you and your family families whether these times they usually.
Without harm.
Oh speaker snap on personally.
We're keeping our team shake.
Now when people are working from home and where that's not possible in or a number of one of these instances where proceeding we're proceeding using a government prescribed guidelines in the United States. Those put forward by that the center for disease control the CDC physical distancing they use a personal protection equipment cleaning up facilities deep and often.
The average Gibson break and quick attention to those who have symptoms for our franchisees were active in helping providing a playbook, saying six the people up the snack products of the snap on team are a great advantage.
Working hard to preserve and them as we move through the typical.
Having said that.
It's clear operations are essential somewhat plays an important role in the underpinning of our society supporting vital activities like the military transportation infrastructure are critical vehicle repair theory as we all depend on for emergency services for full delivery through distribution of medical supplies and for a variety of a central needs.
Government bodies, including the U.S. Department of Homeland security and multiple space deemed itself.
And there have been clear examples of that critical role from the United States to Italy to the UK.
And as such.
Factories and distribution centers have pretty much remained active during that doing their part keeping the world color.
Consisting consistent with that our sourcing teams have been able to maintain or supply chain chain supporting both our factories and our kitting centers overwhelmingly are sourcing partners have recognized the criticality of our needs and have remained active to provide support now in this arena, particularly in the U.S., we do have an advantage.
As we make in the markets, where we sell.
Our supply chain is fine.
As you might expect.
The impact the virus varies across the our operating landscape.
Asia in general and China in particular has seen the impact for some time, but now.
Definitely try and showing some raise a light light restaurants are opening and people are driving it matters.
Europe has seen week economics for several quarters and Cobot 19 has made it works pretty much all over its a region that seems particularly hard hit.
Of course, there's a lot being written about the United States, We do see a mix there are.
22 point.
Primarily in the middle of the country, where franchisees upset personal a positive records and there are places, particularly in north east where activity has been significantly restricted and there are locations not that many at this point where are we seeing green shoots of recovery.
If you didn't give you the world by business segment.
Segment.
No seem quite impact oil and gas of course education and people OEM projects, but there are other places like the military like general industry like trucking that appear more positive.
Regardless of the current landscape, we believe we have the resilience and the strength to navigate the downturn as snap on has done so many times before.
The fact that since 1939, all those years encountering several periods of significant challenge snap on its paid a dividend every quarter.
And it's never reduced it.
That record stands as evidence of a resilient.
So in that regard, we believe our longer term projects prospects have not been impacted well. The timelines are uncertain. We are confident on a positive outcome to the Santa Lucia.
You can see it in the last recession in 2009 remember how one certainly was bad news for breakfast people think about putting their money in the mattresses. The idea of mortgage deep well seeming okay without stigma well. If you look at snap was record during that withering, we navigated a turbulent came out stronger we believe that are that reflects the essentially.
Drove our business the strength of our position in that business.
And the experience and capability of our team.
That wasn't our first rodeo.
Neither is this.
Because we believe in that recovery, we're keeping up with the elements of snap on value creation safety quality customer connection.
Innovation at rapid continuous improvement, it's a particularly its particularly evident in customer penetration innovation, even on the turbulence, we're continuing with the stream of new products. The green shoots will grow.
And we're going to be ready.
Well, that's the Orbio, let me turn to results first quarter as reported sales were 852.2 million down, 7.5%, including a 10.3 million or 100 basis point impact from unfavorable foreign currency.
Organic sales declined 6.9%, reflecting the ongoing weakness in Europe, and the the impact of the global economic uncertainty of so associated with coal with 19.
From an earnings perspective, our goal I for the quarter of a 138.9 million, including 7.5 million or restructuring charges, principally focused on Europe, and <unk> and 3.3 million of unfavorable currency effect was 48.5 million lower than 2019, which included 11.6.
The million dollar benefit from the settlement of patent related litigation matters, and that's a mouthful, but the 2020 as adjusted Op goal line of 146.4 million, excluding restructuring was down 16.7% from last years as adjusted level.
And if you consider the sequential impact of the turbulence caused by the pandemic. The first quarter sales of 852 million were down organically from the fourth quarter 2019 by 10.5%.
While the periods as adjusted or why of 146.4 million was down 14.6%.
Regarding our goals or why margin.
The as adjusted 17.2% recorded in the first quarter compared with the as adjusted 19.1% in a 17.9% registered in the prior year in the prior year and in the prior quarter respectively.
For financial services operating income of 56.9 million was down from last year's 62.1 million, including a 2.6 million dollar higher credit reserve as a result of the economic uncertainty associated with the virus.
Overall EPS on an as reported basis was two hours and 49 cents.
And it compared to 3016 cents last year, you as adjusted EPS was 2060 cents and that compared with last years $3.01 down 13.5%.
Now, let's move to the groups.
Seen I saw mix progress through the end of February opinion attenuated by significant declines in March buying the first quarter 299.9 million, including a 5.3 million unfavorable foreign currency translation, which down versus last years 322.5 million, primarily on double digit declines in Asia Pacific.
And in Europe.
Reflecting the longer impact of the virus in Asia, and the ongoing economic weakness in Europe combined with the later period effect of a corporate 19.
From an earnings perspective see an eye operating income of 31.5 million decreased 1.5 to 15 million from 2019, including 4.4 million, a restructuring and 1.2 million of unfavorable foreign currency effects.
Now critical industries did show variation.
With relatively favorable performance in in the military trucking fleet and general industry.
You can see the essential nature of those areas in our activities as we supported the production in the maintenance of the F 35 fire and as our critical tools help keep the London ambulances on the road.
That positive activity.
Was offset by weakness and natural resources education in aerospace as some of our commercial customers struggled to respond to the pandemic and resulting lower oil prices and technical school shutdowns and reduced flight and generally lower capital spending overall however.
The critical industries, reflecting in part the essential nature of those tasks were flat in the turbans.
We do remain confident in and committed to extending into critical industries as a matter of fact, we're continuing to strengthen our product line enhancing our position even in the attenuated environment. A great example, just introduced this quarter.
From the power tools Division is the new Cts 90, 103 quarter inch cordless impact wrench equipped with a market leading combination of power unduly durability three quarter inch drive Ambled makes the unit great for a central passed for big industrial applications for power generation for heavy duty fleets and for the military where fasteners.
Is there a larger port values are higher and reliability and consistent performances are.
Pretty critical.
With its five Mpower lithium battery the C.D. and 9100 provides a a thousand pound feet of bolt thing and 1300 pound Peter breakaway torque, that's real power and beyond the strength.
The tool has a considerable versatility three torque settings in forward and three in reserve reverse optimizing performance for a wide range of applications and it has a built in brick.
Preventing the pop that powerful rent from throwing fasteners are soccer's sockets around when you use it that's a significant safety feature it's built in arm the tools built in our Murphy North Carolina plant and it uses best in class components.
For superior toughness of span substantial strength than.
Long service like.
The new impact was just released in February and then in a limited distribution, but it's already on track to become a hit $100 product, it's been quite well received.
Cnine navigating the turbulence with customer connection and innovation serving the essential.
Now onto the tools group.
Sales were 375.9 million in the quarter, reflecting 31.8 million, a or 31.8 million dollar organic decline in 2.5 million of unfavorable foreign currency translation. The progress we saw in the U.S. Van channel early in the quarter was erased and the continuing weakness in the international operations.
Is amplified by the virus as the virus spread more widely.
The operating earnings of 48.6 million, including 1.4 of unfavorable foreign currency compared to 67.2 million in 2019.
One advantage.
We believe our franchisees entered the difficulties with a strong underlying position.
And that base will come in handy during the immediate future and as I said before ban activity is mixed there our points of like we saw great record setting franchisee performance in Iowa, even in New York Some have adjusted well turning in strong results, but there are places where the network is attenuated.
The vans are seeing variation, but we have considerable look confidence in or ability to adjust and returned to full strength. We've done it before in disasters like Superstorm Sandy in Hurricanes Marine harvest and the tools team is working again in this difficulty with focus to make sure our franchisees weather the storm and.
Merge with advantage.
We're supporting the franchisees with tailored programs targeted promotions and.
Again, great new product products like the new line of a quarter inch drive stubby ratchets.
Hosting the shortest links on the market.
The fixed had at two and a half the inches and the flex set a training during the quarter inches, both lover improved accessibility and constraint spaces like last quarter inch drive Ratchets and new studies include dual leading technology for convenient rat ratcheting arc five degrees and for more power and less laterals space.
They each have sealed heads, which ensure long tool light and a scroll screw style joint design that enables very easy repair all while maximizing strength the new Ratchets. They were launched regionally again in March and initial sales were nearly a million dollars.
Significant success for a hand tool in or in a regional introduction, especially in the storm.
Now, let's talk about tool storage.
Holding its own in the face of the pandemic.
Helped in part by the 100 anniversary limited edition epic roll cab with Centennial been panels and medallion. This the 68 inch epic with the lead the lighter power to a pop features that gunmetal clear co payment scheme, and new rush red trim color darker in richer than our standard at first time colored combination.
Highlights our continued innovation emphasizes our capacity to expand color choices for.
And it captures the attention of technicians, who want to declare they are very special professional.
Only 91920, we were founded in 1920, only 1920 were built.
And number of mid town in the numbered medallions our showcased each boxes place in snap on history reception was strong but.
The Bucks sold out.
Well, that's a tools navigating the challenge is underpinned by strong product now let's speak of Arsnine.
Arsenide group finished the quarter at 314.6 million in sales compared to 327.9 million last year, reflecting a 12.9 million organic sales decrease the growth through February showing an improvement in all businesses with the exception of our automotive OEM facing operation was overcome by slippage in March deeper decreases.
In the OEM area and end of quarter witness in.
This quarter weaker volume and Undercar equipment for both automotive dealerships and independent repair shops.
Martin I operating earnings of 77.3 million decreased 6.3 million, including 3.1 million of your European focused restructuring.
Operating margin of the was 24.6% including.
100 basis points from the restructuring and compare to the 25.5% recorded last year. Excluding these restructuring the away margin was 25.6% up 10 basis points for arsenide. Despite the pandemic.
Now while the overall growth was impacted by continuing weakness in OEM programs any equipment bonds, our diagnostics and repair information businesses.
Did advanced in the quarter.
And we're working to keep that momentum going with innovative new products and features attractions like our our recently introduced interactive truck wiring diagrams, it's an enhancement to the Mitchell one heavy duty repair information system now just like for light vehicles technicians with the Mitchell one system can click on any picture component in a truck.
Retrieving.
When looked at wiring dynamic diagram of can retrieve a pop up many would specifications physical locations connector views and guided component test the new productivity enhancing truck wiring diagrams were introduced in late February was that a press conference.
Tended by the industry's top publications and reception was great. It's one of the reasons why Mitchell one kept growing in the quarter also during February we launched our our souls, our new Solus legend diagnostic scan tool it's quick.
10 second boot up in the ability to display scan result in as little as 30 seconds and also offers a best in class eight inch touch touchscreen polar display and it combines a full diagnostic capabilities and combined full diagnostic capabilities for both standard vehicles.
For motorcycles into one platform, that's a very popular feature.
Handheld also provides access to our suretrack vehicle specific real fixes repair tips and commonly replace part all derive from from our proprietary database of 1.3 billion.
Repair actions.
Solus legend has the look of a very successful addition to our lineup.
We're confident in the strength of ours and not the arsenide product line, we keep driving to expand its position with repair shop owners and managers, making work easier with great new products, even in the days as a virus.
Well, that's a snap on first quarter.
The momentum in the beginning checked by the virus.
Making sure our team is safe maintaining our operations there are essential to society navigating the mix effects of the virus across our geographies and industries, knowing we can whether the difficulties not knowing the exact timeline, but confident that our position is positive going forward and keeping our company strong snap on value creation and a continuing.
String of new products.
Now I'll turn the call overvalued Algo exit our consolidated operating results are summarized on slide six.
Net sales of $852.2 million in the quarter compared to $941.7 million last year, reflecting a 6.9% organic sales declined $10.3 million of unfavorable foreign currency translation and $3.5 million of acquisition related sales.
Unit sales decreased this quarter, primarily reflected the impact of economic uncertainty associated with the cobot 19, pandemic, which sales declines at all three operating segments across most geographies.
Through the month of February with the exception of Asia Pacific in certain European geographies sales were up by the year over year basis as the effects of Copel 19 spread across Europe, and the United States in March and as further government actions were put in place demand slowed and access to some customers when it was interrupted resulting in the.
Lower year over year sales for the quarter.
During the quarter as a result, the continued economic slowdown in Europe as well as effects of Cobot 19, we recorded $7.5 million of restructuring costs for actions primarily associated with our European operations.
These costs were recorded in both the commercial industrial group and the repair systems and information.
Consolidated gross margin of 49.5% compared to 51.2% last year, which is one of the highest quarterly gross margins reporting snap on recent history.
The 170 basis point decrease primarily reflects 60 basis points for restructuring costs.
The impact of lower volumes cost associated with cobot 19 related operating disruptions in 10 basis points of unfavorable foreign currency effects. The decrease was partially offset by savings from Marci I initiatives.
Despite the cost of restructurings in the impact of Cobot 19, the first quarter. The gross margin rate of 49.5% improved sequentially from 47.2% in the fourth quarter of 2019.
Operating expense margin of 33.2% increased 230 basis points from 30.9% last year.
The first quarter 2019 included in $11.6 million or 120 basis point benefit associated with the legal settlement Nick mentioned earlier.
The remaining increase primarily reflects the impact of lower sales volumes 30 basis points from restructuring actions and 10 basis points of unfavorable foreign currency effects.
Operating earnings before financial services of $138.9 million, including 7.5 million to restructuring cost and 3.3 million of unfavorable foreign currency effects compared to $187.4 million in 2019, which included 1.6 million dollar legal settlement.
As a percentage of net sales.
Operating margin before financial services of 16.3% compared to 20.3% last year.
On an adjusted basis for both years, excluding the impact of restructuring and the benefit of the legal settlement.
Operating earnings before financial services of $146.4 million or 17.2% of sales.
Decreased 16.7% from $175.8 billion or 19.1% of sales in 2019.
Financial services revenue of $85.9 million in the first quarter 2020, compared to $85.6 million last year, while operating earnings of 56.9 million compared to 62.1 billion in 2019, primarily reflecting a $4.5 million increase in provisions for credit losses.
Included in the higher provisions under the recently adopted accounting standards update topic 326 on credit losses, often referred to as Cecil there was $2.6 million of higher reserve requirements, resulting from the economic uncertainty caused by Copel 19.
Consolidated operating earnings of $195.8 million, including $7.5 million of restructuring charges $2.6 million of higher credit reserve requirements at $3.5 million of unfavorable foreign currency effects compared to $249.5 million last year, which included the legal settlement.
As a percentage of revenues the operating earnings margin of 20.9% compares to 24.8% last year.
On an adjusted basis in both years, excluding restructuring and the legal settlement.
Operating earnings of 203.3 million or 21.7% of revenues decreased 14.5% from $237.9 million at 23.6% of revenues in 2019.
Our first quarter effective income tax rate of 24.2% compared to 24.3% last year. The effective rate in both periods were increased by 10 basis points from the restructuring charges and Twentytwenty legal settlements in 2019.
Finally, net earnings of $137.2 million or $2.49 per share, including an 11 cents charge for restructuring a four cents impact from the covert 19 related credit provisions and a five cents unfavorable impact associated with foreign currency compared to 177.9 million dollar.
We're $3 in 16 cents per share a year ago.
Adjusted basis, excluding the restructuring charges this year and the 15 cents benefit from a legal settlement in 2019 net earnings of 143.2 million or 2060 cents per share compared to $169.2 million, a 3001 cent per share last year.
No starting with the group on slide seven.
Sales of $299.9 million compared to $322.5 million last year, reflecting a 5.7% organic sales decline in a $5.3 million of unfavorable foreign currency translation, partially offset by point 7 million of acquisition related sales.
The organic decrease primarily includes double digit declines in sales in both segments Asia Pacific operations, and European based hand tools business, partially offset by a high single digit gain power tools operations.
Gross margin of 36.8% decreased 360 basis points year over year, primarily due to 150 basis points from $4.4 million of restructuring charges the impact of lower sales volumes as well as higher sales and lower gross margin businesses, including sales to the military and cost associated with cold at night.
Related operating disruptions.
These decreases were partially offset from savings from the company's ours initiatives.
Operating expense margin of 26.3% increased 30 basis points from 26% last year.
Operating earnings for the CDAI segment of $31.5 million, including $4.4 million of restructuring charges and $1.2 million of unfavorable foreign currency effects compared to $46.5 million last year.
The operating margin of 10.5%, including the 150 basis point charge for restructuring compared to 14.4% a year ago and 12.8% in the fourth quarter of 2019.
Turning now to slide eight.
Sales of snap on tools group of $375.9 million compared to $410.2 million in 2019, reflecting a 7.8% organic sales decline and $2.5 million of unfavorable foreign currency translation.
Youre getting sales decline includes a mid single digit decrease in our us franchise operations and a double digit decline internationally as.
As Nick mentioned sales in United States were up year over year through February before the wider government restrictions impact that access to certain customers a locations during March.
Gross margin of 42.7% declined 190 basis points, primarily due to the impact of lower sales volume cost associated with cobot 19 related operating disruptions at 20 basis points of unfavorable foreign currency effects.
Operating expense margin of 29.8% increased from 28.2% last year, primarily due to the impact of lower sales volumes and 10 basis points of unfavorable foreign currency effects.
Operating earnings for the snap on tools group of $48.6 million, including a $1.4 million of unfavorable foreign currency effects compared to $67.2 million last year, while the operating margin of 12.9% compared to 16.4% a year ago and 13.2% in the fourth quarter of 29.
Okay.
Turning to the arsenide shown on slide nine.
Sales of $314.6 million compared to $327.9 million, a year ago, reflecting a 4% organic sales decline and $3.2 million of unfavorable foreign currency translation.
Partially offset by $2.8 million of acquisition related sales.
Organic sales decrease includes double digit decline in sales to OEM dealerships and a low single digit decrease in sales of Undercar equipment, partially offset by a low single digit gain and sales of diagnostics and repair information products that independent repair shop owners and managers.
Gross margin of 47.9%, including 20 basis points of cost from restructuring decreased 30 basis points from 48.2% last year.
Operating expense margin of 23.3%, including 80 basis points of costs from restructuring increased 60 basis points from 22.7% in 2019.
Operating earnings of or the arsenide group of $77.3 million compared to $83.6 million, a year ago, and the operating margin of 24.6%, including 100 basis points of cost for restructuring decreased 90 basis points from 25.5% last year.
Now turning to slide.
Revenue from financial services of $85.9 million compares to $85.6 million last year.
Financial services operating earnings of $56.9 million compared to $62.1 billion in 2019.
Financial services expenses of $29 million increased 5.5 million from last years levels, primarily due to $4.5 million of increases in the provision for credit losses, which included $2.6 million under topic 326, or Cecil for the impact of Copel 19.
Excluding the $2.6 million associated with Cobot 19 provisions for credit losses increased $500000 from those recorded in the fourth quarter of 2019.
As a percentage of the average portfolio financial services expenses were 1.4%, 1.1% in the first quarters of 2020 and 2019, respectively.
Average yield on finance receivables in the first quarter of 2020 was 17.7 present compared to 17.8% last year the respective average yield on contract receivables was 9% and 9.1.
Total loan originations of $255.6 million increased $3.1 billion or 1.2%, primarily due to 1.1% increase in originations of finance receivables and a 2% increase in originations of contract receivables principally franchise finance.
In the United States extended originations were up 2%, largely reflecting higher franchisee sales of big ticket products.
Moving to slide 11.
Our quarter end balance sheet includes approximately $2.1 billion of gross financing receivables, including 1.9 billion from our us operation.
Worldwide gross financial services portfolio decreased $19.8 million in the first quarter, primarily due to $26 million of unfavorable foreign currency effects.
The 60 day, plus delinquency rate of 1.7% for the United States extended credit is up 20 basis points from a year ago, but remains well below those levels seen in 2008 to 2010 and improved 10 basis points sequentially.
As it relates to extend the credit or finance receivables the largest portion of the portfolio trailing 12 month net losses of $50.4 million represented 2.99% of Outstandings at quarter end up eight basis points sequentially of which approximately four basis points as as a result of the unfavorable foreign currency effects on the portfolio.
Oil.
Now turning to slide 12 cash provider.
Operating activities of $213.4 million in the quarter increased $12.1 million from comparable 2019 levels, primarily reflecting net changes in operating assets and liabilities, including decreases in working investments, partially offset by lower net earnings net cash used by investing activities of 49.
Point $8 billion included capital expenditures of $17.2 million and net additions to finance receivables of $22.1 million.
Additions to collections of finance receivables were consistent with that of the prior year.
In the quarter, our free cash flow from operating company of $143 million improved $10.7 million as lower working investment largely offset the change in year over year net earnings. Additionally, first quarter 2019 cash flow reflected the settlement the legal matter, which resulted in a decrease in accrued liabilities.
$11.6 million in that prior year period.
Total free cash flow or cash flow from operating activities less capital expenditures in the net change in finance receivables up $174.1 million represented 123% of net earnings.
Net cash used by financing activities of 157.1 billion included cash dividends of $59 million and the repurchase of 349000 shares of common stock for $50.5 million under our existing share repurchase programs.
As of quarter end, we have remaining availability to repurchase up to an additional $313.3 million of common stock under existing authorizations.
Turning to slide 13.
Great and other accounts receivable decreased $59.4 million from 2019 year end, including $21.9 million from unfavorable foreign currency translation.
Days sales outstanding of 62 days compared to 67 days, a 2019 year.
Inventories decreased $3 million, including 25.1 million of unfavorable foreign currency from 2019 year end on a trailing 12 month basis inventory turns of 2.5 compared to 2.6 at yearend 2019.
Our quarter end cash position of $185.8 billion compared to $184.5 million at year end 2019.
Our net debt to capital ratio of 21.7% compared to 22.1, a year end 2019.
At the end of the quarter, we had $150 million of short term borrowings under our $800 million revolving credit facility that terminates in September 2024.
These funds were largely utilized to pay down commercial paper outstanding at year end 2019, as such there were no commercial paper borrowings outstanding at the end of the quarter in our net debt levels were similar to year end.
As of the ended the quarter, we were well within the permit it ranges set forth in the credit facilities financial covenants.
Despite the uncertainty in the credit and financial markets. We currently believe we have sufficient available cash and access to both committed and uncommitted credit facilities to cover expected funding needs in both the near term and on long term basis that concludes my remarks on our first quarter performance I'll now briefly review a few updated outlook items.
While we do not generally provide quarterly sales or earnings projections in the near term, we anticipate no improvement in the macroeconomic environment and as a result expect sales credit originations in earnings in the second quarter 2020 to be lower than those of the same period last year.
We now anticipate that capital expenditures will be in a range of $70 million to $80 million as compared to our prior estimate of $90 million to $100 million. Additionally, we currently anticipate that our full year 2020 effective income tax rates will be in a range of 23% to 25% I'll now turn the call back to Nick for his closing thoughts Nick.
Thanks out.
Snap on first quarter.
Progress interrupted.
Time of multiple headwinds the ongoing economic weakness in Europe, the continually impact of coven 19 in Asia and the spread of the virus in Europe and North America.
All in this quarter.
As I've said our team has experienced this isn't our first encounter with deep difficulty and in this.
We are keeping our people safe working from home and when we can't distancing using PB, where appropriate and cleaning deepen often what we do is essential to society and we're acting accordingly, maintaining operations to keep the world going supporting the professionals performing critical tasks the impact of the virus is mixed across our businesses.
Some sliding deeper some flattening some getting better all the same time, but we're confident that the continuing and essential nature of our mission the advantage of our position the strength of our balance sheet extraordinary experience a capability of our team will carry us through the turmoil.
Our long history, navigating disruption our dividend record and our performance in the last great recession, all say so.
We don't know the timeline or the shape of the disruption, but we do know will resume our upward trend with surety and because of that we're confident we're confident.
Because of that confidence, we're working to preserve our strengthen our advantages will keep driving the elements of snap on value creation building, our capability expanding our product nurturing our networks and we believe will emerge from this turbulent stronger than when when we entered.
As we have as as we have so often before.
Before I turn the call over to the operator, I want to speak directly to our associates and franchisees.
Snap on front line.
I know you're listening today.
We will all pass through this challenge together and in this difficulty there is no other team I would rather be standing with.
For your courage and meeting the difficulties you have my admiration.
For your capability and navigating the challenges of the day, you have Mike Congratulations and for your dedication and filling your essential role in supporting our society you have might things now I'll turn the call over to up to the operator operator.
Thank you.
A question please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure. Your mute function has turned out to allow your signal to reach our equipment.
Again it is start wanted to ask a question and we will take our first question from David Leiker with Baird.
Good morning. This is Erin Wilson back on for David.
So my first question is about the sale of big ticket products based on the finance receivable originations in your commentary it sounds like.
Well then.
Got it and maybe expected so I guess Im wondering if you can give any color on.
How that shaped up I guess throughout the quarter and expectations of back given the weaker economic conditions in Q2.
I think when yet when you talk about looking forward I think we think we're going into a little more turbulence is going to be extended remember that the the first California shelter at home was only done I think March 20 seconds. So we're only talking about a relatively short period of time in this kind of situation. So it's hard to make any extrapolation side.
But if you look at the quarter, Here's what happened I think I've said it tool storage held its own diagnostics is pretty good. So you had the underpinning of those things, but remember.
That you know originations and sales tools group sales don't necessarily match up there's a timing difference and ended the quarter.
In the quarter the sales off the truck exceeded were positive actually exceeding the tools group sales. So perhaps you have some of that mismatch there, but as I said, we're kind of pleased with the tool storage business held its own.
Okay. That's helpful. And then Nick I think you had mentioned that you were doing some things to support the franchisee. During this time can you provide some more color on some of the actions you're taking.
Well first and foremost you know what we're doing is we're trying to give them a playbook I don't think many people have seen us before so we're trying to we did this actually in Superstorm Sandy that's why I mentioned this stuff in marine and so on each disaster is a little bit differently. What we're trying to tell them how to how to conductor business server serving essential in critical tasks in that in the in the in atmosphere of distances.
And so we have a playbook to help them and then we're kind of working with them and other things in terms of working with their financials and they're working with their business managers and each of their locations to try to find a path and the particular prescription that will help them and their individual franchisees move for like I said, what I'm just trying to say as the world. This mix. So if guys in Iowa.
Kicking it in other words there were there was there was it was a guy and I also had a weekly couldn't believe and even in New York and then in the New Rochelle area had but any other hand other people are having difficulty so we try to where it we're adjusting to each person.
Each franchisee.
Okay, and then finally on Asia Pacific You mentioned, a better trajectory coming on to the ended the quarter at higher miles driven Im wondering what do you think is driving the miles driven recovery. There is it your some pent up demand are you seeing some at least anecdotes about structural shift in terms of consumer consumer behavior or kind of a preference toward.
Vehicle ownership.
Well I don't know this it's early days you know and the thing is I Didnt say necessarily I said, we see green shoots or recovery there.
But.
Do you want to be right in the subway now.
I don't know right.
Do you want to be taken a bus do you want to be ride sharing.
I think this is I think this is a change it's going to EQT goal for awhile, and we're seeing that Beijing Beijing snapped back.
In terms of in terms of traffic I think people can see this and our anecdotal evidence about shanghai's. The same so I think you're at least temporarily sand people say I don't want to get thinking there.
So I think I think are actually taking my questions people ownership I mean, when you go through that you think I don't know I want to be selling real estate, New York now or for the next for the future.
Okay.
And we will take our next question from Gary Prestopino with Barrington.
Good morning, everyone.
Hey.
Could you maybe tell us.
Don't want to do that that's fine, but what was the slide in sales over the last two weeks of March.
Across all your businesses on an aggregate basis.
Even though I would say what you'd be let me put it this way coverage you Gary.
Let's say look and you can be confident it was double digits, okay for sure that.
It was it was we're down single digits. We said we were up already we had a reasonable quarter and going particularly in the tools group U.S. seem pretty reasonable for us. So there was a significant slight but I don't think look I guess I don't think I don't think you can make a conclusion at that because remember it's only a month.
You got individually right you've got into we'll just.
These or trying to figure out how to deal with this so it's hard to make any conclusions about that those weeks I think that's what we're thinking it's going to play out in the future of course, we're going to live with it longer but I'm not sure those weeks or extrapolation for the future.
No. Okay like I said I'm, just trying to get an idea the magnitude here.
Yes, yes, if you look across your customer base really worldwide I mean, how much of that do you still have access to.
Well, let's put it this way I think in the commercial industrial group.
If you're talking about the people like.
The critical industry generally we have access.
Okay that business. Some of those people are getting hammered you know like oil and gas or or some of the aerospace businesses are getting hammered. So businesses are attenuated by other places and so when we talk to our people. It's a mix some of them are calling directly on the people summer dealing at a distance through through.
Social media or or email or things like that our phone calls our phone call. It return if you're talking about the the franchisee same kind of thing it's a mix, depending on where you live and where you're at in the size of the dealership and they're there and their requirements one of the things that that's true is generally we pretty sure that critical.
Pairs are happening if somebody needs if somebody's got to check engine like they're bringing it in.
If somebody if somebody insulin for oil changes it doesn't seem like it's happening. So we can tell that and so some of the some of the some of the businesses that focused on that are a little less receptive having people come in if you if your transmission guy probably doing okay.
And your it's okay, our people don't.
Quite a mix and then.
Okay and then then lastly could you maybe just go back to 2008 2009, obviously every situation is different but we did have one hell of a recession has that period what were the what would the indicators to you that the business was coming back and we would which segments started to really show.
You know significant I guess lack of a better award green shoots in and that you felt that hopefully targets.
Given the different deal of course, but big ticket items coming back was the big thing generally it was the attenuation of bad news for breakfast I think people where people were get scared by what they were being told about the banking system that wasn't that was affecting it. So generally it was big ticket in that situation because people only we're buying I remember talking about incessantly people.
We're only buying short payback items and if you looked at that when we have recession. If you look at it we came out of it and by the time you've got to 2011.
Our trajectory was still a healthy double digits in profit growth, including amortization.
Yes, I do remember that okay. Thanks.
Sure.
We will take our next question from Bret Jordan with Jefferies.
Hey, good morning, guys.
All right.
When you looked at the service channel I mean independent volume seemed lifted out 30% to 50% here in a pretty short period of time.
I guess you looking at the credit book in the Love. These guys getting paid on piece, where do you think that in the short term, we're going to see delinquencies exceed what you saw no eight or nine just given that.
Magnitude and the relatively.
Quick speed of the shrink and then I guess follow up question on franchisee health I mean, obviously you hear about a lot of small businesses. The didnt have liquidity of go into this type of.
Dramatic contraction in a short period of time as well I guess are you doing much across the board you talked about a couple of franchisees that are that are doing particularly well, but if you think about average franchisee liquidity.
Are you going to need that stepping in to help them a little bit in the second quarter, assuming volumes remain down pretty dramatically.
I think first of all I think the jury's out on the on the norm delinquency rates I'm not so sure how it will behave you remind me remember that losses improved.
Didnt went up 100 basis points in recession last time and delinquencies did go up I think there is there is a question of the shock of this all that I think there's going to be sort of like timelines that work its way through this situation where people get shocked and then figure it out and then and then deal with it for a while I don't know.
I don't know what those timelines are in terms of helping our franchisees like I said.
It depends on that on a segment of the country. For example, if you look at the northeast the franchisees are little more attenuated. If you look at places like the central region or the North Central region, where we're living in where we're sitting and now it's not so bad northwest seems to be coming back a little bit. If you look at certain if you look at certain indicators. So we would look at franchisee by franchisee and that Weve.
We talk about things like well loan lawn extensions for them and and some help in terms of their their position and we.
We did that in the past we did in Superstorm Sandy we did it and Maria we did in Harvey and it all worked out very well for us because our business managers highlight those guys need help.
And we get out there and helped of course, our government programs. They can access to although I don't think it's not easy to do at these days, but in general we've seen this we've seen this movie before in a more narrow away.
Puerto Rico in the East coast and in the Houston area, and our actions around having the business managers deal with the franchisee and help them in some cases, giving them extensions or deferral has worked very well for us.
Okay, great. Thank you.
Sure.
We will take our next question from Scott Stember with CL King.
Good morning, Thanks for taking my questions.
Sure.
You talked about how big ticket items, such as storage held its own.
In the quarter, but could you just give us your expectations I know you don't really guide by month or quarter, but.
Yeah, it's safe to assume that we're going to start seeing some elevated.
Declines in big ticket items at least and.
In April.
Yes, I'm trying to I'm trying to say Scott is sure I think if you're going to add it would have Blake bets now I laid bets that the second quarter is worse than last year, and I and I lay bets that we have more weeks UV ink in the second quarter than we had in the first quarter. The shape of that is what I don't know because I don't.
No I think there was a lot of experience I think you know if you think about it and practical sense. Okay got it okay, guys, who are working on essential everybody recognizes what we do is essential.
Everybody recognizes this were the department of Homeland security talked about automotive repair. So every state every state proclamations.
Our people are worried about how they deal with the customers a customers are trying to figure out how they apply them essential trait and our people are trying to figure out a deal with them and so it's hard to figure out how thats going to play out.
I don't know Im not sure, but we see a lot of variation in our situation you have big ticket. If you say loved the recession create eggs and people are worried about uncertainty big ticket tends to go down like it did in the last in the last environment because people say I don't want I don't want to I've got a husband my own cash.
But my suggestion is what's going to happen eventually is people come out of that will work to get their cars repair. It's one of the first things that happens.
No I don't know the timeline for that.
So that's why I'm being a little bit you know I can't really predict so much about second quarter, except that we're going to.
I can't tell you anything that you don't know really these kind of things none of those fair enough.
And.
Just maybe just give us a little bit more commentary, what you're hearing from the van channel what they're seeing.
The repair shop level as far as they help.
The employment picture with their mechanics and just.
I know there were miles driven the been off obviously a lot, but just the general commentary about what they're seeing.
Generally I again, I'm, sorry, it's like it's mix in all summer slackening team or summer flattening. So we're getting better that's what I hear but I will tell you. This.
I think now if you look at the BLS data.
The the BLS data says that the nominal.
Spending of households on automotive repair and February year over year was up 88% change.
So I would suggest that the just like our franchisees.
Garage as entered it not bad shape. So I think the resilience is probably pretty good.
And this situation. So I don't suffer some are probably some we know some are closed some are operating at reduced hours.
Summer going gangbusters.
It just depends I think in this situation I.
I can't I can't say I know, that's not very helpful to building a model running but I can't really give me anything like that I think the one piece of data I do think is worthwhile is that both both the nominal repairs. The household spending and the technician wages were up in the in February year over year, So I think they yet.
Sure.
Pretty good.
Got it and last question just remind us what just going back to away through 2000, and what the 60 day delinquency numbers went up to from a percentage standpoint and.
Losses, the total losses in the portfolio on a trailing 12 month basis. Thanks, I'll, let out we'll answer so Scott I don't have the exact delinquency numbers in front of the but they would be not so the similar to what you're seeing today, but the losses, what up about 100 basis points as I mentioned earlier on the call. They hit a peak in a negative sets in Q4 of old.
And then move from around the 3% over the portfolio to around 4% in the decline back to below 3% until recently so.
Well if it gives you a range I guess or feel for what it might be like.
Got it thank you.
Sure.
We will take our next question from Christopher Glynn with Oppenheimer.
Thanks, Good morning lots been asked spread.
Just a around the outlook lacking guidance. So I was curious what your senses of.
What among your three operating segments might see.
The biggest pain as you look at it should we use the one Q magnitudes as a guide or.
If you look I think I know my own view is Europe as Vic.
It was weak going that it was weak coming in here about 18% of our business in Europe Thats. The big It's got a big dollop in.
In.
In Cnine.
And so thats.
That's probably the place I think is going to be tougher you look at Spain, and Italy, the preclinical and asked us to get back in business in Italy ill, because we were essential in that place, but I just think I, just think Europe's going to have a tougher time coming out of this Asia, it's spread through the the I think China starts to come back.
Japan, I think as resilient I think southeast Asia.
I don't know, Indonesia seems to be Syncon, Philippines seems to be a trouble and India has completely shut down. So I don't know about the southern age I think China, and Korea and May be Japan start to start to excel United States you guys know as best as best as I do I kind of think so that in our business.
Our people will learn we will adjust it is the garage is we'll adjust and it'll kind it will be there will be adapting to this and we're going to help.
The question is how quickly does that happen and we know it's going to be for more weeks in a second quarter. So I can't give me much more guidance than that but I think we're better off in the United States in Europe for sure.
Okay, and then was just curious on the costs to manage supply chains people safety through.
Hi, good experience.
What is that layer of cost.
Like in terms of magnitude or what do you have to spend for continuity.
Well I don't think it's so much about continuity is you have lower volumes. So you have more people on the payroll and so on it thing I think the question is what do you do about that as you go forward at the lower volumes get smaller I think I've said, many forum that that we're looking at this carefully we have we have two sets of of.
Of what we call profit assurance actions that will take actions, depending on how long things going sort, but we're not going to take precipitous action based on a few weeks, we have forced doesn't the standard stuff like reduce reduced travel and and done other things and I would expect that any other hand working from home tends to be a little less efficient I think.
And so you have that floating I would I don't think we have a real number on the cost to clean and so on and generally though our cases.
I'd say knock on wood seem to be stabilizing so we seem to be in reasonable shape and that in that area. So I don't I don't think we have you can look at the for the the first quarter to make any conclusions about extrapolating those costs going forward because if it gets worse, we'll we'll have to take other actions to reduce our costs.
Thank you.
Sure.
So we'll take our next question from Curtis Nagle with Bank of America.
Good morning, Thanks very much.
Understood.
For numbers that are you doing.
Okay.
Good Okay. So shouldn't just quick about TV.
Tools group and then.
Franchise network.
Just.
Oh, the 3500 to show.
How many are actually operating right now were there any that or mandated not to run because of social distancing and things like that and good luck.
So.
We pretty much by phone talked every franchisee everyday.
And I would say a relatively small number.
Pretty small number are not running.
But theres with dayton's of that all the way up we would say, we would say up out a lion's share them, our operating on a relatively normal but attenuated activity because if they spend an hour they're not getting as much return from some of the people because maybe they're not buying big ticket items, where it's taken longer to get them.
People or there have to set up an organization and in between there. There's a there's a bunch of good daishin people might be working.
Small number maybe working on partially powerful ships are partial date. Some people are not even taken out the trucks are putting it they're putting to stuff in the current are driving around other people are spending will have to date setting up appointments and going out, but the lions share of the business and way over the majority is working as norm.
Our mall, maybe not getting that returns as normal.
Now I'm not so when I say working as normal im not saying there the rolling into every garage or anything like that some drag is that going into other devices are putting the stuff on the outside other people, bringing them on the band one by one we had a guy when a customer event really hate brought people on it yet food on the van but limited the number of people on enforced.
Thank you had a great that.
Okay understood.
And then.
Kind of thinking about sure.
Again vehicle repair is essential service will get cars back on the road to some are more should be at some point, but.
I would think activities and become a shorter maybe a medium term there might be some.
No negative impact on.
Repair demand, just because corrosion been driven to moment.
Only works trying to figure out.
Is that the can be the case, what the till that can be what would be a residual impact to the bid just seems not just related to look I think definitely things like I said I think a couple of things I can tell you first of all trucks are being repair.
Right 90, 494 out here it seems like Theres many trucks on I 94 has there ever was.
Kind of makes sense right people are getting deliveries, maybe more deliveries now than before so so trucks are wildly well I'm sure that truck shops, 'cause it a lighter trucks, maybe our attenuated a lot a structure still roll up so I think that they're probably doing okay, continuing you're talking about regular vehicles like I said, I think our monitoring and we get a pretty.
You could monitor of this is that generally maintenance is drying up and repair continuing at a somewhat reduced rate, but still at a reasonable rate I would expect that after this starts to.
Play out Youre going to get a rush on a garage is with maintenance, there's got to be a snap back as maintenance tends to come like death and taxes.
We need to have your oil changed every once in awhile, so thats going to happen.
Okay sure no question Doug Thanks.
All right. Thanks, a lot Kurt.
Yes.
And we'll take our next question from David Macgregor with Longbow Research.
Yeah, good morning, everyone.
Hi, Nick.
Good morning.
A couple of questions on credit I guess, we've got mid teens unemployment this country's small businesses are on the ropes.
500000 dollar provision seems a little light I wonder, although if you could just discuss.
The key assumptions that were underlying that your provision decision, particularly like the fact that you're calling second.
Half of March down double digits switch.
Would have relatively negative implications for what might happen in the second quarter.
We got to understand some of the key assumptions underlying that provision decision.
Well sure actually so Dave or big at our accounting adjustments effective at the end of fiscal quarters. So that's more so you have to keep that in mind as well.
And performance off the back of in performance for extended credit originations in general were pretty good.
Yes, there were stronger at the beginning of above the word the evitable, but the performance was pretty good the performance of collection activity was pretty good. So it wasn't quite as good as Q1 of last year, which we actually saw lower levels of provisions and charge offs, but there was actually a better performance than what you would.
It seems as a normal run rate so we.
We took that into account when we increased the reserve and then on top of.
We have to take a forward look under Cecil.
It gets to be a little bit more judgmental, certainly because weve pressuring us as the portfolio. The idea of circumstances are preparing for cecil's adoption.
And actually there's not any single variable that correlate so perfectly with so we look at a myriad of different things and we have to play some judgment, having said all of that we came to conclusion that.
We thought it was appropriate increased reserve by about $2.6 billion I'd say, it's more specifically for the forward look so it's not like it was nothing at this space in the 500000, just the reference the sequential movement, but the seasonal adjustment actually within the quarter was about 2.6 million. Then if you look at the level of reserves at the end of March as compared with the ended December.
Actually you're up 15% in total so it's not like it's nothing.
Right.
I guess just further on the credits.
I didn't hear you mentioned in your prepared remarks about the 90 day payment deferral plan that began in March.
We saw rather parabolic upturn and you see filings and.
Guessing, although you guys have you confirm it one way or the other if this was just technicians refinancing and franchisees rolling there are a balances in DC, but.
Can you just I guess under this 90 day deferral plan, how much forbearance has been granted at this point to end customers franchisees.
Well people thinking at first off the it's early days. It was launched on March 20, Threerd. We've had programs like this before so it timing is even better with the advent of Cecil you could look at this is not as seasonal but the corporate 19. So you can look at this is a form of being able to help customers, though but.
Doug programs like this in the past so it's not like it's something radical in any way shape or form. So we'll see what the uptake is but as of the end of March was only in the in the field for about the but less than seven days I guess, because it gives our fiscal cut off I think was March 29.
Yes, but now you have a separate program, where we grant forbearance or can allow extensions to certain people. That's on a case by case basis is for a limited number of weeks, we try to work one thing that snap on his personal and Thats not a bad were some people shied away from the word personal these days with a pandemic.
But we're pretty intimate with our customers and we know our customers both our franchisees and they know their and mechanics, and where we have to reach out and help them, but it was a relatively small presents I think it will increase going into Q2, but jeez I think at the end of the quarter might have been less than 5% of people had asked for some type of forbearance.
Not to use that word.
Great.
It is the originations growth at 1.2% does that include refinancings of VC and revolving balances and if so can you say would originations growth might have been based purely on purchases of merchandise unrelated to the deferred payment offer.
Hey, we measure originations to save each and every quarter doesn't change because of what's going on so.
Extended credit could include both add ons as well as sale of brand new products, but to be able to do so customers have to be in good standing snowbirds. If you want to add onto a contractor via customer that one has vishal credit capacity. So we measure people's credit limits in that regard and then it's got to be a minimum dollar sale. In addition, which is.
Typically I think $300 it up a remember the cut offs usually is more dollars in that book Thats. The at least 300, so thats one of the determinants of so when people add on and add onto a contract they already have in place.
Great.
Finally, you mentioned you got 300 million left on your share repurchase authorization program, I guess, where the stock hasn't been.
Sold off your rather hard.
What would be your plans or how would you think about capital allocation here and maybe the priority of share repurchase operations within that.
Well first and foremost you want to support the ongoing operations I think thats kind of obvious you're in a moment here, where I think people will be careful with their cash I.
I think no one has perfect visibility when you look forward. So the forecast with precision is not easy in normal times, let alone rockier timed so you're going to want to keep an eye on cash inflows and of course cash outflows and what are the more discretionary items actually would be share repurchase I mean look at share repurchase I would put.
That on the list of one of the more discretionary items. So first and foremost I look at what's the cash position of the corporation and how does that fit into the equation I thought that snap I was a great bargains at $150 per share, it's even a better bar. It today does that mean I can't buy it at a lower price tomorrow I, just don't know with certainty so.
Again, we have to apply judgment.
All right well, thanks for taking the questions and good luck everyone.
Thank you.
And at this time I would like to turn the conference back to Sarah Burps key for any additional we're closing remark.
Thank you all for joining us today, a replay of this call will be available shortly on SAP on dotcom as always we appreciate your interest in snap on good day.
Ladies and gentlemen, this concludes today's call. Let me. Thank you for your participation you may now disconnect.
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