Q2 2020 Snap-On Inc Earnings Call
[noise] please standby.
Good day, ladies and gentlemen, and welcome to the snap on second quarter 2020 results Investor Conference call. Please note that today's call is being recorded and at this time it wed like to turn the conference over to show from ski VP of Investor Relations. Please go ahead.
Thank you Kathy and good morning, everyone.
Thank you for joining us today to review snap on second 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 we will then provide a more detailed review our financial results.
After Nick provide some clothing side, we'll take your question.
As usual, we provided slides to supplement our discussion these slides can be accessed under the downloads cabin, our webcast fewer as well as on our website snap on dot com under the Investor section. These 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 state management or the company's outlook plants or projections or forward looking statements and actual results may differ materially from those made in such statements.
Additional information and the factors that could cause our results to differ materially from those in the forward looking statements are contained in our SEC filings.
Finally, this presentation include non-GAAP measures of financial performance, which are not meant to be considered an 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 enter conference call slides on pages 14 through 16, both can be found on our website with that said I'd now like to turn the call over to Nick Pinchuk, Nick Thanks Sara.
Before we get going.
I want thank the members of the snap on team.
It's clear when this turbulence that they are among the special contributors, who keep society is intact, when our days or dark.
And then that a central challenge, we're prioritizing the health safety and well being of our associates franchisees customers and community.
Working from home and when that's not possible and there's a number of those instances.
Distances.
Using personal protective equipment cleaning deep and often staggering ships and breaks paint quick attention to symptoms and pursuing contact freezing.
We worked hard to Stacy.
But throughout this time, we're also invested in a investing in a in a continuing stream of a central in products.
We've also invested in a continuing stream at the same from a product reinforced our brands and strive to maintain our team the people of snap on.
Alright, great advantage.
We're working hard to preserve them in the turbulence and we'll continue to do so far franchisees.
Hello.
Reach out on a regular basis to understand the needs and those are the customer when the virus path.
We know they'll be even more opportunity, we want our associates and our franchisees oh strength to capitalize on the possibilities.
We now project that the the virus plays out in three phases.
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The initial shock.
A substantial interruption of activity opposed to franchisee and the customer level. This was evident in late March and April.
Second.
Accommodation period.
Its operations and individuals developed more and more waste safe, we pursue their opportunities against the cold with 19 environment. In fact, we appear to be seeing that effect through May June and onward and of course, we back to actively participated in that process broadcasting best practices working hard to accelerate the comeback.
Finally, the third stage.
Psychological recovery following a return to normal customers will need to regain confidence in the future before they resume full buying participation.
Let me Copley, we see great opportunities as driving is restored it becomes even more popular even more essential. This overall construct represents what we considered to be the general shape of the way forward.
It does represent a continued upward trend, but the slope of the ascension isn't clear.
Of course, the psychological recovery phase will be greatly influenced by the ongoing evolution of the virus.
Nobody knows the future for sure.
But we are encouraged by what we've seen so far.
Looking back April was it the nature.
But as the quarter progress we show continued recovery our businesses did learn to better accommodate the pandemic both sales and profitability improves sequentially in May and June although the virus is still with US. It appears that the situation maybe evolving just as we project.
He said at the end of April the impact of Oh, 19 varies across our operating landscape.
Asia remains virus challenged Japan, South Korea, and China do appear to have weathered the worst but southeast Asia, India are still in between.
He turbulence.
And in Europe.
The overall economic weakness present before the pandemic in combination with the virus.
Has made for the deepest distressed.
Beyond geographic differences.
We're also seeing that our face to face business.
The mobile vans and the direct Salesforce is our parents somewhat better compared with other models that wants to traditional strike personal selling appears to be in effect the foundation for limiting the difficulty.
And that blip in that way.
We believe we have the resilience of resources to whether this challenge at snap on has so many times in the past.
Actually over the years.
We've seen this movie before.
Actual disaster, Superstorm, Sandy Hurricane Harvey and Katrina and the great recession of 2009, and each time, we learn to accommodate emerge stronger and we've taken the lessons of those disruptions and apply that with positive effect to this time of the virus.
No I love to say.
That was paid a dividend every quarter since 1939 on its never reduce it and this quarter was no different.
That record stance is evidenced or ongoing resistance to challenge.
And beyond just maintain we believe our continue investment in new products in our franchisees and then our team in the midst of <unk> in the midst of the storm once again make a stronger as the environment recovers, we don't believe and the opportunities going forward because of that we're keeping our focus on SAP one.
Value creation.
50 quality customer connection innovation, a rapid continuous improvement.
San Francisco, particularly evident customer connection innovation, we're continuing with a stream of new products. We believe the green shoots of accommodation and psychological recovery will grow.
I want to be ready.
Well that's the that's the.
Overview now, let's turn to the results.
Second quarter as reported sales were up 724.3 million down 23.9%, According 14.4 million or.
<unk> hundred 20 basis points impact impact from unfavorable foreign currency and then organic sales declined 22.9%.
From an earnings perspective, Opco alive for the quarter 91.1 million, including 5.8 million of a direct costs associated with the virus 4 million up restructuring charges, principally focused on Europe, and 3.8 million of unfavorable foreign currency effects compared to 189.9 million in 2019.
Opco operating margin was 12.6% and he hasn't shifted level, excluding restructuring charges was 13.1% for financial services.
Operating income of 57.6 million was down from last year's 60.6.
Overall EPS on an as reported basis was $1.85 compared to $3, a 22 cents last year, excluding the restructuring charges. The ads adjusted EPS was $1.91.
Well those are the overall numbers now, let's turn to the groups and Cnine.
Volume in this volume in the second quarter of about 261.9 million, including a 6.9 million of unfavorable foreign currency was down versus last years 335, primarily on double digit declines in all of the segments operations, reflecting.
The effect of Cobot 19, and the I am the ongoing economic weakness in Europe from an earnings perspective see an eye operating income of 22.9 million decreased 26 million, including 3 million a virus related costs 2 million restructuring and 1.9 million of unfavorable foreign currency effects.
There was.
A clear point of licensing and I.
Our direct sales to customers on the critical industries, they'll still down what is less affected than other areas across the group military and international Aviation continue to register girls and heavy truck as you might expect was down but was reasonably resilient, while other segments, such as oil and gas and education No surprise there were no students.
Both those industries were significantly impacted by the pandemic an experienced substantial contraction.
Well, we do remain confident in a committed to extending and the critical industries and we do see growing opportunity there moving forward.
Speaking of the future, let's talk about creating new products. Just this quarter. We introduced another one of our great 14.4 bolt units I know Cdis 825, Formacek X cordless screwdriver, our breakfast powertrain mix for higher toward more one time longer motor like the driver at 9.9 position clutch.
Given the Texas, just a proper amount at torque for the job all package, where the dual range gearbox and a built in break that prevents this powerful tool from throwing fasteners, that's a significant pig safety feature.
The news scroll gone also features ergonomically designed and ergonomically designed Cushe group handle for great take comfort in twin like twin Elie de likes to clearly in illuminates the work area.
After only a couple of months, it's already essential will work is critical.
It was launched in April but.
A top from want.
But it's already one of our hit million dollar products.
Nipigon success.
Cnine navigating the turbulence and customer connection and innovation, serving the essential now onto the tools group.
Sales were 323.3 million in the quarter, reflecting a 79.2 million organic decline and 3.3 million of unfavorable foreign currency. The operating earnings were 38.4 million, including 1.9 million a virus related costs 1.1 million of unfavorable foreign currency and 600000.
No restructuring charges compared to 71 point Threemillion recorded in 2019, the tools group.
With a clear demonstration both of the coldest nine the covert trajectory across our business.
And the strength and resilience of our direct face to face model.
As a virus roles in late March and April the network was shot.
Individually and collectively the impact vary by region, but all geographies or effective April was that deep.
However, moving from that point, our franchisees in collaboration with the snap on team file increasingly effective ways to accommodate the pandemic and pursue their supported the essential and each subsequent.
Each subsequent month the fans have shown significant gains in fact, the tools group sales in June were down just 3.1%.
Nicely after a tough start to the quarter.
Beyond the beyond the.
The ongoing accommodation.
You hear from the field.
That the direct interface with our customers is dramatically highlighting the bond that snap on its always had was working men and women through thick and thin.
In many franchisees report that the the relationship forged a new relationships forged a new in the pandemic have never been stronger there's nothing like working together in difficulty and we believe this bodes really well for our market position.
And for capturing future opportunities so despite suppliers.
We're still quite positive about our business.
And it's a few clearly affected reflected outside snap on it back once again this year, we're being recognized in the top 50 of entrepreneurs magazines annual best of the best franchisee franchises. The entrepreneur ranking at rates a 500 companies on cost size growth franchise support brand power financial strength in organization.
Funnel stability and we again scored highest in the tool distribution category category.
That's a distinction we've held for quite some time.
As we move forward, our associates and franchisees are clearly becoming more effective against the when it's a continuing process.
Born out of the snap on team working in developing action plans sharing best practices for say selling supporting wood pellet promotions at launching targeted promotions. This is a processes that's been successful in hurricanes recessions and the threats of 911 and it's working again.
And of course the effort includes also a healthy array of innovative new products to solve the critical everybody knows we have Greek ratchets and guided by uninterrupted customer connection we've been expanding that powerful line up almost every quarter and we didnt again, when we introduced the X.M.R. seminal for 12 point blank drive double flex.
Matching box rich said.
No that's a milestone.
But this unit has a lot to offer.
It combines a 180 degrees flexible headwind that with aren't Aero women love design, allowing work in the tightest stuff spaces. Our patent ratcheting utilizes duly be technology, minimizing swing arc, and making jobs and restricted areas, even easier and our unique youre paying configuration prices stay.
Longer some most durable flex it anywhere the new Latin for the new for piece that is built in our Elizabethton, Tennessee plant right here in the USA.
It's just there again.
And I can testify the snap on people in that plant or a special team turning outbreak product and even in the current environment. The technicians have noticed driving the flex two civil war on its way to be another million dollar product.
Well, that's the tools group.
Accommodating the pandemic pandemic, furthering innovation and strengthening for the future.
Now, let's speak of arsenide.
The Arts and I group finished the quarter with 245 million in sales, including 4.8 million of unfavorable foreign currency 2.3 million from recent acquisitions and that level compared to 348.9 million recorded last year to the 349 million recorded last year, the lower volumes reflect the decline.
Over 30% and the activity associated with the vehicle OEM projects and then the capital like spending relating to our Undercar equipment operations, both areas that were deeply attenuated with the uncertainty.
Sales of diagnostics and repair information products independent shops will also negatively impacted but to a lesser degree garage has continued to subscribe and invest in meeting new repair challenges vehicles needs fixing even in a pandemic.
Hi, operating earnings of 50.6 million decreased $38 million, including 1.4 million of European focused restructuring 800000, a month favorable foreign currency and 700000 of direct coal costs.
So while the overall group was impacted information based operations were not as effective and new products were a driver in that once again, we generated repair exciting innovations like the latest enhancements to our Mitchell one prodemand repair information system, which in response to the needs of large national account customers now include.
A range of vehicle points and it's quick reference menu.
Proto Mad men menu links directly to visit vehicle illustrations, which identify designate listing points as well as listing all the important manufacturer recommended safety procedures, you see conditions in a hurry sometime failed to follow the correct lift procedures injuries in vehicle damage can follow but those whoever pro demand.
System can now find the critical information only one click away from the home screen, it's a significant convenience and a clear safety enhancement.
Also in the quarter, we launched our technician 2.0 designed specifically for heavy duty trucks, it's the most comprehensive and powerful diagnostic software in the market. It provides the data in the support required to stay competitive in today's trucking industry heavy duty diagnostics whenever this good that eat technician 2.0 combines the extensive coverage from everything.
From a commercial vehicles to write downs, a light and medium heavy duty trucks diagnostic capability for an expanded array of engines transmissions Blake body and chassis systems in more than the 2.0 also adds.
He cloud based fleet wide vehicle history, giving users access to every diagnostics session for every vehicle in their fleet regardless of location.
Up on continues to show the way in truck repair and eat technician 2.0 is another step along that path.
You know we're confident.
And the strength of our arsenide group and we keep driving to expand its position where repair shop owners and managers, making work easier with great new products, even in the days of the virus.
Well, that's the second quarter.
Snap on second quarter shop, moving to accommodation, it's what we believe will be psychological recovery, keeping our teams safe as we pursue the essential applying the lessons or experience, helping our customers our franchisees and our team whether the difficult days.
And bill the capability, whether those days and build the capability to operate in the virus and environment driving month by month improvement engaging the power of our direct selling capabilities being confident in our future opportunity now amplified by the virus pursuing snap on value creation all.
So not only whether the turbulence.
But to emerge stronger and ready to take full the full advantage.
On the days are clear.
Now I'll turn the call over to Algo for a detailed discussion of the financials. Thanks, Nick our consolidated operating results summarized on slide six net sales of $724.3 million in the quarter compared to $951.3 million last year, reflecting a 22.9% organic sales decline.
$14.4 million of unfavorable foreign currency translation and $2.3 million of acquisition related sales. The organic sales decreased primarily reflected the impact of the cobot 19 pandemic with sales declines in all three operating segments in the quarter. While there were some variability from location to location the declines in Europe were.
More pronounced.
As anticipated with government measures in place throughout the world sales in the month of April were heavily impacted and were down significantly on a year over year basis.
Locations began to reopen and as our operations and those of our franchisees adjusted to the virus environment, which included accommodations for various government imposed restrictions we began to see sequential improvements in activity as we move through May and June.
Similar to last quarter, we accrued for restructuring costs associated with certain of our European based operations. During the second quarter, we recorded $4 million such costs, which were reflected in each of our operating segments.
Additionally, in the quarter, we've identified $5.8 million of direct cost associated with covert 19.
These costs include direct labor and under absorption associated with temporary factory closures wages for quarantined associates event cancellation fees as well as other cost to accommodate the current enhanced health and safety environment.
Consolidated gross margin of 47.1% compared to 49.8% last year.
270 basis point decrease primarily reflects the impact of the lower volume.
Including cost to maintain manufacturing capacity and workers Skillsets 40 basis points of direct cost associated with cobot, 19, and 30 basis points of restructuring costs.
The decreases were partially offset by savings from RC.
Sure.
The operating expense margin of 34.5% increased 470 basis points from 29.8% last year.
This increase primarily reflects the impact of lower sales as well as 40 basis points of direct covert 19 related costs at 20 basis points from restructuring actions.
These items were partially offset by savings from cost containment actions in response to the lower volumes.
Operating earnings before financial services of $91.1 million, including $5.8 billion of direct cost associated with corporate 19.
$4 million of restructuring costs, and $3.8 billion of unfavorable foreign currency effects compared to $189.9 million in 2019.
As a percentage of net sales operating margin before financial services of 12.6% compared to 20% last year, excluding the restructuring charges operating earnings before financial services of $95.1 million or 13.1% of sales decreased 49.9% from 2018 19 levels.
Financial services revenue of $84.6 million in the second quarter 2020, compared to $84.1 billion last year, while operating earnings of $57.6 million compared to 60.6 million in 2019, primarily reflecting a 3 million dollar increase in provisions for credit losses.
Consolidated operating earnings of $148.7 million, including $5.8 billion of direct cobot related costs $4 million of restructuring charges and $4.1 billion of unfavorable foreign currency effects compared to $250.5 million last year.
As a percentage of revenues the operating earnings margin of 18.4% compares to 24.2% last year.
On an adjusted basis, excluding restructuring.
Operating earnings of $152.7 million or 18.9% of revenues decreased 39% from 2019 levels.
Our second quarter effective income tax rate of 24.1%, including a 20 basis point increase from the restructuring charges compared to 23.6% for the second quarter of last year finally, net earnings of $101.2 million or $1.85 cents per share, including a six cents.
George for restructuring compared to $180.4 million or $3.22 per share a year ago.
Excluding the restructuring charges net earnings as adjusted for $104.5 million or $1.91 per share now, let's turn to our segment results starting with the Cnine group on slide seven.
Sales of $261.9 million compared to $335 million last year, reflecting a 20.2% organic sales decline and a $6.9 million of unfavorable foreign currency translation.
Organic decrease includes mid teen declines in both sales to customers and critical industries and in the power tools operation.
Cross the critical industries gains on sales to various government related agencies were more than offset by declines and natural resources, including oil and gas as well as a lower technical education sales with the latter being impacted by school and campus closures.
Gross margin of 34.4% decreased 420 basis points year over year, primarily due to the impact of decreased sales, including lower utilization of manufacturing capacity as well as 80 basis points from $2 million of restructuring charges 70 basis points direct cost associated with cobot, 19, and 50 basis points of under.
Favorable foreign currency effects.
These decreases were partially offset by material cost savings benefits from the company's RCR initiatives.
The operating expense margin of 25.7% increased 170 basis points from 24% last year, primarily due to the lower sales and 50 basis points of direct cobot 19 related costs.
These items were partially offset by savings from cost containment efforts.
Operating earnings for the CSG segment of 22.9 million, including $3 million of direct cobot 19 related cost $2 million of restructuring charges at what point $9 million unfavorable foreign currencies effect compared to $48.9 million last year.
Operating margin of 8.7%, including the 80 basis point charge for restructuring compared to 14.6% the year ago.
Turning now to slide eight.
Sales in the snap on tools group of $323.3 million compared to $405.8 million in 2019, reflecting a 19.7% organic sales decline and $3.3 million of unfavorable foreign currency translation.
Organic sales decrease reflects a mid teen decline in our us franchise operations and a nearly 40% decline in the segments International operations as Dick mentioned sales in our direct customer facing businesses like the snap on tools group had the most dramatic year over year decreases in April with notable sequential improvements in activity in may.
Andrew.
Gross margin of 41.7% declined 340 basis points, primarily due to the impact of lower sales volumes, including cost to maintain manufacturing capacity as well as 30 basis points of direct cost associated with cobot 19, and there were 20 basis points of unfavorable foreign currency effects.
The operating expense margin of 29.8% increase from 27.5% last year, primarily due to the impact of lower sales 30 basis points of direct covert 19 related costs and 20 basis points from $600000 of restructuring charges. These costs were partially offset by savings from cost containment actions operate.
Any earnings for the snap on tools group of $38.4 million, including $1.9 million of direct cobot 19 related costs $1.1 billion of unfavorable foreign currency effects at $600000 of restructuring charges compared to $71.3 million last year.
The operating margin of 11.9% compared to 17.6% a year ago.
Turning to the Arsenide group shown on slide nine.
Sales of $245 million compared to $348.9 million, a year ago, reflecting a 29.5% organic sales decline and $4.8 million of unfavorable foreign currency translation, partially offset by $2.3 million of acquisition related sales.
Organic sales decline includes a mid teens decrease in sales of diagnostic information products to independent repair shop owners and managers as well as declines of over 30% in both sales of Undercar equipment and sales to OEM dealerships.
The lower sales of Undercar equipment includes significantly lower sales of collision repair products or the lower sales to OEM dealerships largely reflect decreases in OEM facilitation projects.
Gross margin of 47.4% improved 110 basis points from 46.3% last year, primarily due to the impact of reduced sales and lower gross margin businesses and savings from our Shiite activities.
Operating expense margin of 26.7% increased from 20.9% last year, primarily due to the lower sales and 50 basis points for $1.4 million of restructuring charges, partially offset by savings from our spy and other cost containment actions.
Operating earnings for the Arsenide group of 50.6 million, including $1.4 million of restructuring charges $700000 of direct carbonite team related costs at $800000 of unfavorable foreign currency effects compared to $88.6 million last year.
The operating margin of 20.7% compared to 25.4% year ago.
Now turning to slide.
Revenue from financial services of $84.6 million compared to $84.1 billion last year.
Financial services operating earnings of $57.6 million compared to 60.6 million in 2019.
Financial services expenses of $27 million increased $3.5 million from last years levels, primarily due to $3 million of higher provisions for credit losses as compared to 2019.
The second quarter 2019 included lower provisions as a result of nonrecurring favorable loss experience at that time.
As a percentage of the average portfolio financial services expenses were 1.3% and 1.1% in the second quarters of 2020 and 2019, respectively.
The average yield on finance receivables was 17.6% in the second quarters of both the Twentytwenty in 2019.
Respective average yield on contract receivables was 8.2% and 9.1 person.
The lower yield on contract receivables in the second quarter of Twentytwenty, primarily reflects the impact of approximately $20 million of lower interest business operation support loans for our franchisees.
These loads were offered during the second quarter to help accommodate franchisee operations and dealing with the cobot 19 environment.
Total loan originations of $255.8 billion decreased $7.6 million, a 2.9% and included an 8.5% decrease in originations of finance receivables. This decline in finance receivables was partially offset by a 26.1% increase in originations of contract receivables reserve.
I think from the business operation support loans offer to franchisees mentioned earlier.
Moving to slide 11.
Our quarter end balance sheet includes approximately 2.2 billion of gross financing receivables, including 1.9 billion from our us operation.
Our worldwide gross financial services portfolio increased $54.3 million in the second quarter.
Collections of finance receivables in the quarter of a $166.8 million compared to collections of $191.6 million during the second quarter of 2019.
This years quarter reflected the greater use of deferred payment plan sales programs and short term payment relief or forbearance to some of our franchisees qualifying customers.
Order trends elsewhere in our business, we saw the greatest number of request for payment relief on extended credit or finance receivables in April this lessons in may and as of the end of June forbearance was granted for approximately 2.5% of the portfolio. Historically those accounts, having forbearance terms are below 1% of the finance receivable port.
Polio.
Trailing 12 month that losses on extended credit or finance receivables of $50.4 million represented 2.93% of Outstandings at quarter end down six basis points sequentially. The 60 day, plus delinquency rate of 1% for us extend the credit is down 40 basis points from year ago. This improvement prime.
Merely reflects the aforementioned programs, which took place during the quarter as well as the effective credit and collection practices executed by snap on in our franchisees throughout this period.
Total charge offs within the quarter totaled $15.1 million as compared to $14.9 million during the second quarter of 2019.
Now turning to slide 12.
Cash provided by operating activities of $253.6 million in the quarter increased $108.1 million from comparable 2019 levels, primarily reflecting net changes in operating assets and liabilities, including $61.5 million and lower tax payments $75.7 million in decreases in working in.
Restaurant, partially offset by lower net earnings net cash used by investing activities of $45.6 million included net additions to finance receivables up $35 million and capital expenditures of $11.8 million in the quarter, our total free cash flow or cash flow from operating activities less cap.
Total expenditures in the net change in finance receivables was $206.8 million.
This reflected an improvement of $118.3 million from last year and represented 195% of net earnings.
Net cash provided by financing activities of $208.5 million included the proceeds from the April sale of $500 million of 30 year senior notes, partially offset by $148.1 billion of repayments of notes payable and other short term borrowings and cash dividends of $58.7 billion.
While there were no repurchases of common stock under our existing share repurchase programs during the quarter as of quarter end, we had remaining availability to repurchase up to an additional $334.4 million of common stock under existing authorizations.
Turning to slide 13.
Trade and other accounts receivable decreased 131.1 million from 2019 year end.
Days sales outstanding a 59 days compared to 67 days at 29 team Europe. This reflected a reduction in days outstanding across all of our operating segments inventories increased $23.6 million from 2019 year end, primarily to support the critical industries trailing 12 month basis inventory turns of two point.
Compared to 2.6 at year end 2019.
Our quarter end cash position of $686.2 million compared to $184.5 million at year end 2019, our net debt to capital ratio of 17.9% compared to 22.1 present at yearend 2019.
In addition to cash and expected cash flow from operations, we have more than $800 million in available credit facilities as a quarter end there were no outstanding amounts under the credit facility and there were no commercial paper borrowings outstanding.
Despite the uncertainty in the current environment. We believe we have sufficient available cash and access to both committed and uncommitted credit facilities to cover expect expected funding needs in both the near term in a long term basis.
That concludes my remarks on our second quarter performance I'll now briefly review a few updated outlook items.
Giving the improving trends experienced in the second quarter in the near term. We believe there will be continued sequential improvements, reflecting increasing levels of accommodations to the virus related environment.
However, we cannot provide assurance on the rate of progress through to the uncertain, an evolving nature and duration of the pandemic, we anticipate that capital expenditures will be in a range of 75 million to $85 million as compared to our prior estimate of $70 million to $80 million. Additionally, we continue to anticipate that our full year 2020 effective income tax.
Gary will be in a range of 23% to 25%.
Now I'll turn the call back to Nick for his closing thoughts Nick.
Thanks, Alex.
Snap on second quarter sales were down.
Of course, we don't like.
But you know.
Yep go margin was 12.6%, 13.1% as adjusted approaching the mid teen level that we long held as an aspiration of hard.
EPS of $1.91 has adjusted also down but still higher than any quarter before the end of 2014.
The numbers are decreased but we believe that demonstrated significant resilience and perhaps the greatest withering of our time.
You see we have seen this movie for that and that experience helped guide us through the depth of the shock and onto the continuing positive trajectory. The combination April is dark, but the rise from that point was evident across the corporation from operations operations. The tools group demonstrating the value of our direct model with sales in June.
Reaching within 3.1% of last years level.
The future is not known.
Well, we believe our learning and accommodation assures that we won't get shot again any future impact will be attenuated.
And looking at the way the viruses affected everyday life, we believe abundant opportunities emerging for snap our emerging for snap on in recovery. It appears that vehicles are going to be even more important you can see already in China and in the U.S northeast and Thats music to our ears, and we are preparing launching new products enhancing our brand reinforcing our franchise network.
And maintaining the capabilities of our team.
Now all of this represents a cost in the turbines, but it ensures that will be fully enabled in stronger when the opportunities arise and we believe what we're doing in these days are the buyers will position snap on for continuing growth increasing profitability and ongoing prosperity for years to come.
Before I turn the call over the operator I once again I once again speak to our franchisees and associates.
It has never been clear.
That all of you are extraordinary people, playing a very special role in our world.
So your ongoing success and surviving the shock in accommodating the turbulence you have my congratulations.
We are significant contributions in maintaining our society you have my admiration.
For your unfailing believed in the future of our enterprise you have Mike. Thanks, now I'll turn the call over the operator operator.
Certainly thank you and ladies and gentlemen ask a question that is star one on your telephone keypad. Please note that if you're on his speakerphone. Please pick up the handset or do you press your mute function.
At the signal can reach our system again that is star one to ask a question and we'll go first to Scott Stember C.L. King.
Good morning, and thanks for taking my questions.
Morning, Scott.
Thank you give a lot of good color on whats happening recovery within the businesses. It seems like the tools group is probably experiencing the greatest recovered maybe talk about arsenide and cnine how.
The cadence of sales recovery and how you should expect the quarter coming up.
Sure well look of course, we don't give guidance, but I'll tell you that generally course, everything what I'd say, it's never to everywhere and snap on of course, but generally we're seeing accommodation across the vast majority of our operations April May June.
There was a progression of improvement through those periods. So don't get me wrong. The fact that I called out the tools group because they had done particularly well there are there was a combination across every one of those groups, so thats still particularly and industrial where we see I called out the direct selling they had some nice progression through that period in the direct selling activity if you.
If you step back to I think you would say across Cnine are generally.
In the in Rs denying the sales were down what were they down like 29.8% in as reported 20 29.5 or.
For as as adjusted but.
Generally you see a couple of pieces one the vehicle OEM projects are quite lumpy and we see that in this period at.
Very hard to project that future any in the equipment business, which generally sell and after all selling to kind of a bifurcated situations or sell into to small businesses.
Which needs psychological recovery at the covenants to invest in the capital like projects, which are equipment now the other piece of the what I've just talked about is there's there's a big dollop associated with the Oems and really that comps psychological view of the dealerships do they think the fact that maybe with are going to sell new cards.
Less new cars. This year means they should pull in their warrants or as an other times should they started investing because they had needed depend more and more on used car and repair parts flow. If it's the latter there should be an uptick in those businesses.
Got it and moving over to the financial services side.
Your originations were really not dental, but much but I guess that was explained by loans to the franchisee maybe just talk about.
The health of the franchisees and.
What you're seeing at the repair shop level.
Yes look I was just out with some franchisee last week and other they seem pretty strong I mean, I talked a lot of on the phone conversations I cant travel as much as I used to around the country and they seem all quite positive I would say that the originations.
One other things I will tell you that I think speaks values.
As we talked about the recovery.
Combination of the tools group as as as shown in the 3.1% well I'll tell you that in the quarters true. This this period the sales off the van could be viewed as art art were better than our sales to the vans. So fundamentally what just.
I see a little bit in that in that in that originations situation is some of our franchisee selling out of their inventory big ticket items, particularly tool storage, which they tend to have an engine and inventory to try to accommodate the the pace of the technicians and therefore, you see that but we see it it's a great thing because fundamentally the the sale.
The sales off the banner outpacing the sales of the tools group and the sale to the tools group showed a combination.
So that being said the sale in June if you were down only modestly selwyn.
You were up off the than in June I.
I didn't say anything I said it was better than the 3.1.
What I said I'd say, we've got better than the three.
I think during that I said significantly better but.
That's what I'm willing to say in a situation clearly better that's that's what leasing originations.
Got a good enough thanks for taking my questions sure.
And now we'll take your questions from Gary Prestopino Barrington Research.
Hey, good morning, everyone.
Hi, Dan.
Couple of questions here next.
First of all you.
Well first of all our all your markets now open, especially on the van side, I mean, you're able to sell in the northeast.
Some of these area really been everything everything to open it would.
Theres a lot less variation now.
In terms of opening.
When that when the virus hits a shock kit.
There was variations between between between regions. So the northeast jet a lot of people with attenuated activity.
Not as much say in southwest.
I was talking about the swaps between that as much but still attenuation now they've kind of altogether, Canada I don't know by talked on the call. The Canada was like a basket case for a while people who are people were really shocked and UK were shocked and all of those businesses Thats all of those areas have started to come together.
There is some arithmetic difference between them, but not enough to shake a stick at I think in this situation. So so the guys are coming back now that's happened through the quarter at varying levels part of the accommodation process.
Okay.
And then you keep mentioning are you mentioned opportunities.
For your company.
Given this cobot 19 situation.
Are those opportunities really stemming from the fact that cars are getting older.
And that also.
Well at processor dramatic both processes that.
More individuals are going to want to own cars.
Rather than taking public transportation or are there other areas, where you're looking on to capitalize that you didn't really talk about.
Well I think I think those at a two big things I'm talking about but I think as I think a couple of things I think through I would say three things one.
Of course cars getting older they've gotten older every year and the fact that that's a lower Saar. This year, probably probably cars will accelerate getting older. We think and so that that's one thing and that does keep driving cars keep changing and so the virus is kind of frozen people and so we we expect to see abuse lot of up new technologies, both now and that drives our situation.
Secondly, I think you and I don't want to get on the Hell to go down in Chicago I don't think people are going to want to jump on a subway so much anymore and or at least depend on that.
And so what we see in China, and we started seeing in the northeast has increased driving because people don't want it depends on collective transportation because they know that things can go long and installation on top of which if you read commercial real estate cities are going down and I think residential real estate I think people are moving out to the suburbs and that means more driving and finally.
We think that this kind of pause gives more time for new technologies like ads.
Advanced driver assistance systems, which changed a lot of things and play right into our more complicated product and maybe even more electric vehicles, which changes the changes the car park and helps us sell more tools. We have we haven't kits that we specially made 53 tools just for electric vehicles. So when they rollout will be ready enrolling.
Okay.
Okay and then my last question if you want to answer this I'm just trying to get an idea when you said that.
Sequentially there was an improvement in sales throughout the quarter are you still seeing did you still see sequential improvement.
The early part of Q3.
Hi related seasonality there, we don't give we don't give guidance you know and look Q3.
It.
Is is a score linked quarter. However.
Therefore, you got vacations in Europe, you get the SFC you got a lot of things flowing through there. However, I did say May June onwards, that's that's about what I'm willing to say.
Okay. That's fine thank you.
Sure.
Next we have Christopher Glynn Oppenheimer.
Hey.
Just to press on your.
Willingness tolerance, there a little bit more.
Was the May June onward, dynamic for us and I see in.
Material or negligible.
Material.
It, but but look I don't want to get overheated on these kinds of thanks, everybody I said already that that nobody knows how the futures kind of go but what I did say.
As we are stronger against this kind of direct to disruption by virtue of the accommodation and we will we don't believe we will get shot to again.
So if the if the world rises maybe we would volumes a little bit more I. We expect we were saying we saw that onward motion.
And I think in implicit in accommodation is we get better and better at dealing with the environment. The shape of the curve is unclear and I've already said the third quarters, but we I'd like I said also I like what I see.
Okay and then.
You've had some restructuring you may have some temporary cost actions going away.
Is there a way to think about.
Quite to leverage on whatever uptick we choose to model.
Well, we havent restructuring because it was in its mostly focused on Europe, I think six tenths of vis vis times $4 million is kind of North America and that to an all not necessarily it's kind of European focus we say, mostly in general we say that because while we saw we've been we've been watching the Europe evolve for awhile.
And the weakness of the economics, so even prepared for this and write raising through our CIO capacity. So we can deal with higher volumes with less in Europe. That's why we have this restructuring I would say this only.
There's a lot I think implicit.
And we saying we are investing in product enhancing our brand and maintaining our.
Our team.
That means we're holding the people because we actually believe that our people are capable and I don't know about other people, but we think these people are hard to duplicate so we're holding on to them for deer light.
Okay last one from me on as to see.
Yes, Im wondering if it's some of the the charge offs relatively light in the quarter considering all that's going on you talked about some consolidations.
There are any implications for the back half did did some of the mechanical count so provisioning.
Tend to get deferred and this dynamic or is it kind of a mark.
Annuity talking about provisioning for the.
Look I'll, let Alan yes.
And about the financial performance.
So that is today that.
I'll just say this.
I feel better now than I did.
In the in the prior in April.
I feel better now.
I'll, let out I'll comment versus say that.
Just to refresh everyone's memory Q2, typically does see seasonal improvement as we progress from Q1 superior to time when people get their tax refunds that obviously, you probably got a little bit of a bump up with the stimulus checks coming in but a reminder, not everybody got their tax refund yet because if you didnt submit your tax return electronically you're still probably havent.
Being reviewed by the IRS, so there might be some.
Tailwind that still occurs in Q3 from tax refunds, having said that.
The deferred payment programs at forebears, they help a bit with the calculation. So if you look at the.
Progress from Q1 Q2 normally we expect that tend to 20 basis point sequential improvement. This time, we saw a 70 and year over year was better by 40, I'd say, if you look year over year. This probably 2030 basis points associated with the fact that you have deferred program. So by definition customers on deferral couldn't be delinquent.
So that'll that'll go away a bit so I think you'll get more traditional levels, but to use it looks a lot like a natural disaster from our history in the rear view mirror. So far so we'll see how the remainder plays out but still a pretty volatile environment, but like I said, we were pleased with the charge offs in the quarter.
Thanks.
And now we'll go to David Macgregor of Longbow Research.
Yes, good morning, everybody.
Hi, David.
Yes, good morning, I Wonder just for the sake clarity rather than try to follow through a bunch of numbers, but just for the sake of clarity can you just see with your originations would have been excluding loans to the franchisees.
All the contract receivables were up 26% in the quarter. So that's clearly broken out if you look at contract receivable source, Nick as mentioned.
See was down 8.5% David.
Right.
All right, maybe I'll take that up with you offline I just want to make sure we're getting to an accurate number here.
And then can you quantify the extended the return.
It easy the most of the franchisees has nothing to do with DC has nothing to do with DC at all so the easier stations I.
I understand that I I'll take it up with the offline thats okay.
Returns I Wonder if you could quantify the extent of the returns in the quarter and the extent I know they are treated as a contra revenue accounts. So the extent to which they were a headwind for tools group organic growth.
Do I don't think those any anything no I don't think there's anything I don't think does anything notable in the quarter in that regard I mean I from our perspective. It was just a regular.
Regular quarter in terms of the returns, which we tend to look look at so I mean, I think I think that our guys didnt necessarily plus a lot back into the system more than they do all of them in any regular quarter to some back and forth, but that didn't that didnt affect things in this situation, where franchisees that we think are pretty good shape.
Well I guess I was my next question is just.
I think I think I think the thing is some people might think something people might think franchisees are on hold.
That but thats not really.
Actually actually there's a record for holds this.
It's the all time low.
Or could you clarify that for me the record whats yet so it's a number of franchisees that are not paying that are better and duress they get to be on hold.
So ill just where the record barrels.
The combination officer adds came way down at the end that accordingly.
Okay and then.
Overall.
I wanted to ask about franchisee credit worthiness, because this whole slowdown in mid April Jim right. After the regional kick offs. When you guys would have had really high levels inventory, which makes it a little surprising to hear that you didn't see any kind of the inflection and returns but that being the case.
How do you feel about credit worthiness overall right now.
Well, we think there we think actually we think they are in pretty good shape I mean their sales off the van our route.
I think when you when you look at them from a year over year view and you look at them for this situation. They describe what I, what I talked about in terms of shock accommodation and as I said they are pacing ahead.
Of the tools group.
It's a pretty positive from a quantitative from a quantitative point of view on the qualitative point of view.
When you talk to a a broad group of them you get you kind of get some very positive feedback in terms of course honestly you also maybe I do get feedback, but you hear experiences when I'm in the garage is the graduate seem to be work and yes technicians dipped in the in the shock, but they came sort of pretty back pretty quickly.
And the glasses or Hamann every garage I would that be as is the the parking lot characterized was mine.
Do you think you're going to be need for any route consolidation.
No I don't think so but you know we.
You look at everything David but I don't think so I don't think so.
Last question for me is just on the operating expenses.
Had a little bit of a pullback here you are reduction so.
Yes, congratulations on that but I'm guessing in large measure that may have been associated with the volume reductions. So I guess the question is if we end up with the w. shape recovery rather than the V shape that you seem to be assuming.
What's the opportunity to take more of the DNA and the operating expense line going forward.
I think first of all first of all I.
I don't know would you call travel volume related or not.
I'm not sure so volume related but you get traveling a lot of different things and in other words you have some reductions in this interim while you keep while you do things. For example, you are not renting a hall our equipment a meal when you bring people together on a zone situation now, it's maybe not as effective but the thing is you do you do work on that so it's not all Bob.
Okay and related and I think I've already said, though that we're determined to maintain our franchisees maintain our brand invested in new product and keep our team intact.
And I would suggest that we see that going forward because a we believe we have great opportunities on four so why principal view my principle.
Approach to this is our principal approaches to weather the storm and I think we're doing that pretty good given the levels of where we are and you look at the cash flows on the absolute numbers of the returns and then come out stronger because we're pretty sure have big opportunities.
Yes, so even if it if it's not an upward slope, if it's not an upward slope of its down some we won't get shocked again, we'll get over into will come out stronger.
Just one last quick one if I could you mentioned that record low credit holds for franchisees is that due to an increase in franchisee attrition.
No no no no no.
No.
And we'll go together said attached.
Yep.
And that question will come from Bret Jordan of Jefferies.
Hey, good morning, guys.
Yeah.
A question on inventory I guess, you commented that turns were down at 2.3 times to support critical industries and I guess the longer term trend has gone from North, Florida, North the too is there something structurally different in the working capital model or.
What you're committing to for the critical industry customers as far as holding inventory and I guess.
Given sort of an idea what kind of products profile. This is that's building in the inventory.
Yes, right, although up certainly we are continuously adding products to cater to the critical industries. There is unique requirements, sometimes are lower volumes. So it doesn't have the same level of an addition, as what a new products introduced to the tools group, but if you ought to be a serious player in oil and gas and natural resources and aviation there are certainly.
Unique products that do not selling to the mechanics space that you have to have there. So we've been doing that as well and addition, theres a lot of projects that we call kidding activity and that Iran. Kitting activity. As an example, you might have 100 different items and the kit as you stated as you prepare for the requires higher levels of inventory as you prep and wait for.
Other income and guidance because not everything comes from a snap on facility oftentimes the military or an aviation customer might like certain things that do not come from snap on that they want that kid in arrayed would a tool storage cabinet that we might prepare for though and we have a variety of different products that do that and therefore accommodating those requests as force.
To expand both for space AD inventory when it comes to these things and we like that business.
Okay Theres been a target turns number I guess X Cove, it where the sales obviously evaporated, but is there a ballpark we should be shooting for as far as.
So as far as that number.
We think it could be better we'll have an exact target that I'm going to delineate here today, but we think it could be better I mean, obviously the current situation puts a depressant on turnover tactics, but we've been getting a pretty good return on our inventory at a low interest rate environment were more than willing to make investments and inventory. If we truly believe it will generate incremental sale, we don't see inventory.
Not necessarily as an independent variable we like to see return on it we're going to return on it we are happy.
Okay and then one question I guess the franchise event that usually is held in August I assume is probably not as a as I'm alive are you going to do anything sort of virtually or with any be sales promotion to offset what would have been they they get together.
Yes, we havent event, we have an event, we're going to call live from the four inch from R&D affords here in nine can osha and so we're going to go through a virtual event trying to create the selling opportunity.
The ability to see new product and different vary in different different forms like franchisees with get when they when they journey to places like Florida and went to the football fields. So we'll have that and so we won't habit in August we will have it.
Went up and we will happen in August probably at the same time, but but.
It's kind of geared at giving the franchisees a similar opportunity from a new product point of view from a product ordering point of view. Unfortunately, we won't be able to get as much of the training or the I guess the cultural.
Bonding that occurs at the other franchisees. So we're going to have an event that replaces it.
Okay, great. Thank you.
Okay.
And now we'll go to Ivan Sanchez Tegra financial partners.
Hi, Thank you for taking my questions.
Sure I view, how are you guys doing.
Hey.
The average age of the vehicles on the road have no touch to a record high of almost 12 years do you track that to see I mean.
We do Nichols age are you selling more tools or when new car sales are increasing which we don't know they actually item. We don't we don't we don't have a direct relationship to new car sales.
It's the aging of the vehicles and it's the changing of the vehicles that drives our requirements, we can be it in directly affected by.
A downturn and what are what are they going to sell 12 million. This year 11, and a half which is a downturn and the psychological impact on.
Dealerships and end to end the Oems themselves can ripple through some of that project business or some of the willingness to dealerships to just.
Embark on capital projects, but it isn't a direct relationship where aging of the vehicles and the new and the new technologies in a vehicles, our direct relationships requiring technicians to deal with either more more more volume or newer types of systems, where they have to have different tools.
And then one of the amazing things in the pandemic is that the CEO from.
Polaris.
Earlier in the week that they are experiencing unprecedented demand for off road vehicles and motorcycles. This has shockingly I guess created.
Sales are on fire for all kinds of wave runners and Eightv some side by side, some even motorcycles and even though hardly had a tough quarter I think they're going to turn and we'll see strength as well.
How do you are franchisees kind of penetrate the mechanics in that area also in a number of those places they have a shortage of mechanics.
Sure I think thats been a shortage mechanics, and a lot of places for a long time I think that deal is that the graduating 77000, a year from technical schools and they need 105000, a year by retirement. So there is been a shortage and certainly happy it's been for some time to try to get that our people are in our franchisees are some of those places but these are the.
Advantages, we think we led the opportunities. We think we have we say, there's 1.3 million technicians in the United States and we only call one 850000 of them in some of those are the places like that the off road vehicles, where we may not get too and so we have an opportunity we think coming out of this we've got tremendous opportunities, particularly.
If you are saying that people turn to instead of going to.
Instead of maybe taking more collective transportation turned to rvs and other things we think thats good good for us and are confident.
RV sales are on fire TV sales are on fire everybody all kinds of personal transportation used car sales have been on fire.
New car sales the factories were shut down for a while because of the pandemic, but I'm sure that that will pick up so yes, I think people.
Who are going to move away from cities if they worked at home.
And they don't have to be near cities. They can be anywhere and then I think that will drive the need for personal transportation cars.
It's a tvs most recreational type stuff.
So.
Is there are going to be focus on developing specific tools for those types of vehicles and then one last question Brad.
53 specific tools for E. B can you give us some idea of what specific EBITA what would be.
Well a lot of 'em would be great category would be we qualify insulating tools. You know you put yourself you poke around that I need to electric car your level of prior itself. So we have we have these are these are tools, which specifically create installation between the point of contact and the and the and the and the user.
And so we have an array of those and we should we think we'll be very efficacious in this situation and so I think they're going to be used and we have other other tools as well it that deal with a specific.
Mechanisms under under an electric vehicle car and electric vehicle, but we think you point out his point out there's always opportunities for change is our brand and we think changes coming in a situation.
I love it.
Okay again, Steve Air permit the talk with you too.
There.
And now that does conclude today's question and answer session I would like to turn things back to Sarah first key for any additional or closing comments.
Thank you all for joining us today, a replay of this call will be available shortly on snap on dotcom as always we appreciate your interest and snap on good day.
And with that ladies and gentlemen that does conclude today's call we'd like to thank you again for your participation you may now disconnect.
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