Q2 2019 Earnings Call
The snap on Twoq earnings call.
Thank you May I have your name please.
Yes, Conor C O and O R.
Mick did M.C.D.A.D.
Thank you and Mr. Mcdaid, which company are you with.
Era a I.
I I eat Ari.
Right.
Okay. Thank you I'll play should do for the conference and you have a wonderful day.
Thanks.
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You're welcome.
Good day and welcome to the snap on second quarter 2019 results Investor Conference call. Today's conference is being recorded at this time I turn the conference over to snap ons, Vice President of Investor Relations Sarah Burps feet. Please go ahead ma'am.
Thank you David 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 to Chief Financial Officer.
Nick will kick off our call. This morning with his perspective on our performance.
Although he will then provide a more detailed review of our financial results.
After Nick provides some closing thoughts we'll take your questions.
As usual, we are providing slides to supplement our discussion. These slides can be accessed under the downloads tab in the webcast viewer as well as on our website snap on dotcom under the investors 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's or the company's outlook plans or projections are forward looking statements and actual results may differ materially from those made in such statements.
Additional information and the factors that could cause our results to differ materially from those in the forward looking statements are contained in our SEC filings.
Finally, this presentation includes non-GAAP measures of financial performance, which are not meant to be considered in isolation or as a substitute for their GAAP counterparts additional information, including a reconciliation of non-GAAP measures is included in our earnings release and in our conference call slides on pages 14 through 17, both can be found on our website.
With that said I'd now like to turn the call over to Nick Pinchuk, Nick Baxter.
Oh, good morning, everybody.
I will start with the highlights for our quarter will speak about the general environment. So the trends, we see some of the headwinds weve encountered.
I'll talk about our progress.
Then I will give you more detail.
Financials.
We believe that our second quarter again demonstrate snap on disability and continue the trajectory of positive results overcoming both ongoing headwinds and a period to period variations variations of the current environment.
We are encouraged by the results like every quarter, we get turbulence from geography to geography from operation to operation.
North American North America.
It was a positive when cleared worlds in that region across our operations and our groups and this quarter that progress was attenuated by slowdown in Europe , and the UK, but also in the other some important markets like Germany.
An example that variation was evident in the tools group, where overall overall organic sales were about flat.
We had gains in the U.S. that were offset by organic decrease in international markets.
There was also a.
A meaningful impact from currency in the quarter translation and transaction significant headwind for there was variation, but once again.
I think you can say or strength to prevail.
Now as a result.
Second core as reported sales were 951.3 million flat down 1.3%.
But it included a 19.5 million or 200 basis point impact from unfavorable foreign currency and an incremental 1.1 million from acquisition on organic basis sales grew 1.6%.
Yep go why was 189.9 million a decline of 3.2 million more than accounted for by $5.9 million and negative foreign exchange uncle <unk> percent for the quarter.
Which is 20%.
Down 20 basis points from last year again through the neighborhood negative currency, but still representing the second highest level recorded by the corporation in its current configuration.
For financial services operating income grew to 60.6 million from last year's 57.8 million that results are combined with the opco to regular consolidated operating margins of 20 point to 24.2% basically flat with 2018.
EPS was $3.22.
Tencent.
So those are the numbers.
From an overall macro market perspective, we don't believe the automotive repair arena remains favorable for the tools group. The technicians, we did see headwinds in certain economically impacted geography, like the UK and Australia, but we also saw continued gains in the U.S. and and as we report we do see further opportunities for advancement said vehicle Texan counter even more complex repairs.
The other side of auto repair repair systems, and information or the arsenide group encouraging progress in the quarter expanding our snap on presence with repair shop owners and managers capitalizing on a broader product line I returned to growth with a rise in the OEM programs, we like arsenide potential moving forward the repair shop, it's changing upgrading both dealership and independent shops, and our son I is capitalizing on that trend with database solutions, great software products like our continually improving and gaining Mitchell one car and truck repair information software.
Powerful databases that are easy to use helping the shop fix it right the first time and efficiently.
For the commercial industrial group the other piece versus the other markets, we plan or the Sina group sales were up across a number of sectors and geography in the critical industries significant growth in the military and our specialty torque division and ongoing upward trend meeting the need which we always said for increased precision authored by more automated systems and growing momentum in new markets in Cnine in markets like India, which has become a real strong strength for us.
So overall the results remain favorable tools group continued improvement in the U.S. offset by headwinds in international markets arsenide, resurgence and OEM dealerships and continued strength and repair information offerings and gains in multiple sectors and geographies across cnine that progress.
Outweighed the challenges.
And results confirm.
And the strong operating income margin clearly demonstrated once again, the leverage and the power of snap on value creation safety quality customer connection innovation and rapid continuous improvement.
Snap on creation, developing new products and solution born out of insights and observations gathered at our customers were places, which together with our Cie.
Helped again drive the progress and overcame the current difficulties.
Well, that's a macro overview, let's let's move to the segments and the Cnine group organic sales were up $6.2 million or 1.9% now, including $10.1 million of unfavorable foreign currency and then an additional 1.1 million of accurate from our acquisitions second quarter as reported volume declined $2.8 million from an earnings perspective, seeing my operating income was $48.9 million about the same as last year operating margin was 14.6% 10 basis points better.
We mentioned in April the pieces of this or this as a mentioned in April the importance of tours in a world of increasing autonomous operation and precision.
Well that makes the positive performance of our specialty specialty torque division a high single digit increase in volume in the quarter, particularly encouraging.
Europe overall was challenged but SNA Europe delivered yet another quarter of sales growth achieved in a difficult environment in critical industries variation across the segments, but overall it was up showing positive progress and and a promising outlet.
Our outlook.
We're confident and committed to extending in critical critical industries, 11th straight quarter 11 straight quarters of growth authored buyers are strengthening lineup.
Lineup of innovative new products matched to the past.
Our military segment had a strong quarter.
Capturing significant long term contracts.
And product breadth and strength was different.
And as I said, our truck business has been marching upward, becoming a clear success story in our recent innovation played a big part of that innovation evident in great new products like the Tech Fr 125, electronic torque wrench launched early it was launched early in the quarter. It's got an extended range up to 125 foot pump and it's enabled with our new torque angle adjustment capability.
These these days.
Automotive repair and maintenance procedures require toric above 100 foot pounds and the new Atech won 25 produced in our city of industry, California plant. The covers that was expanded requirements.
But beyond the torque capabilities and the unit unit has a stronger pivot point utilizes the.
A rugged dual 80, you ratchet design combine both of those the the pivot point in a ratchet design 82 threats resigned.
Combining for for more durability.
It also comes with our patent pending is a cool thing multi axis gyro compensation system, so that automatically adjust torque results when the ratchet head as angle. So.
Provides and produces significantly greater accuracy, when making measurements.
Accuracy.
Versatility.
Durability all in one technicians all over are looking to replace multiple mechanical wrenches with a single Atech won 25 snap on is already the leader in electronic torque and the Atech won 25 makes us stronger and that will become more important as we go forward. The first shipments were delivered in April and the sales have been robust.
Also last quarter, helping to mitigate some of the.
Geographic turbulence, we launched a new window scale torque wrench in Europe , the backhaul 70 74 w.
Its aim.
Specifically yet.
European to the preferences of our European customers.
It's produced by our recently acquired norm, our operation and that's in the UK, where the chemical resistance. It's got its chemical resistant soft touch handle using the well regarded bako ergonomic design keeps makes for really a comfortable feel when you use the ranch. Each rents also features a durable and accurate clicking mechanism that provides the tactical inaudible signals and is capable expanding 100000 cycle. So it's quite durable.
Consistent with the present consistent also consistent with the preferences of Europe's tax settings on a 74 w. can be quickly adjusted using a built in window showing a dual scale for new meters or foot pounds is quite different than what we use in the us in terms of the way, we see toward affording greater clarity and ease when reading torque value sales of the overall European torque line have increased double digits since the launch.
74, W. is shaping up to be quite a success for us Cnine CNS, let's see eni promising quarter moving down the runways for growth.
And delivering profitability.
Now onto the tools group.
Organic sales flat down I guess, 0.2%, reflecting lower said pretty much reflects lower sales in the in the international operations predominantly in the UK and Australia being partially offset by gains in the us.
It's a pattern similar to last quarter really operating earnings were 71.3 million down $7.7 million, including $3.8 million of unfavorable foreign currency or a margin.
Why margin of 17.6% compared to 19.2% from last year.
That margin includes 70 basis points of unfavorable foreign currency and higher investment in field support activities, enabling the demand for our hand tools that are underpinning the training for intelligent diagnostics.
So the tools group another positive quarter in the U.S. balancing international turbulent.
We do believe our van network remains quite strong.
In late June I spent.
Some time with dozens of franchisees at the enter any Jari nationals and your Chicago.
They Hannah.
Quite positive outlook on their position and on their prosperity.
But beyond the windshield surveys like that we see other indications and continuing strength like the franchisee health metrics, we monitor those the the numbers, we monitor and evaluate regularly in this quarter. They remain favorable so qualitative and quantitative indicators both positive and the positivity is just not from our own internal Len.
It's reflected in external view in fact this year will once again be acknowledged by the out by an outside publication snap on was recognized as number 18 and entrepreneurs magazine's best of the best for 2019, the annual franchise 500 ranking.
That evaluates companies for more than on more than 150 data points in areas of cost and the size and growth franchise support brand power financial strength and organizational.
Stability among others.
Our position in this year's ranking represents a substantial rise over last year and once again once again, we scored highest in the tools distribution category. In fact, we've held that top spot for some time.
Now this type of recognition I think.
We flex the fundamental and contemporary.
Contemporary fundamental contemporary strength of our of our franchisees and of overall van business and it would not have been achieved we wouldn't have the enthusiasm for the franchisees without a car with the franchisees without the continuous stream of unique new products hand tools were up in the quarter.
And it was driven by.
Great new products like our Epay DMP multi position ratchet.
Teachers ahead that indexes in 16 positions across 240 degrees a number of different much much variability getting it much better and that gives it much better access to fasteners around blind corners, and it's also tune one unit functions, both as an offset fixed head ratchet and its a speeder with a 360 degree crank for quickly tightening or loosening fasteners. It's quite versatile sales have been strong and we already have plans for additional drive sizes different handle grips and more call is it's going to expand into a full line and other product impact was the snap on as our PCR series, It's a snapper imply online.
Launched this quarter showcasing a significant design improvements and I'm wondering pliers.
Our virtual units that can be used on both internal and external ring switching from compression to expansion mode accommodating a variety of repair and removal in assembly debt. This new design allows technicians to execute that compression to expansion conversion up to 80% faster utilizes a quick release push button rather than the thumb screw mechanism thats common on competitor products and is on our previous model.
Flyers their manufacturing our Milwaukee plant. So we can do this because of advanced forging tech coal forging techniques and high alloy steel creates the strength and durability require to required to enable that new design.
And support that speed.
Beyond push button system. The new unit also features the extended jaws, making it easier to access hard to reach retaining rings in that top it all off it's got an ergonomic cushion for considerably more comfort and control the wonder its popular our new tools are in fact, making a difference with the franchisees and the tools group.
Now on to our Tonight.
Sales of 348.8 $348.9 million up five 1 million, reflecting reflecting a 1.7.
Million or 3.5, or 3.5% organic gain primarily due to the return of the OEM dealerships higher sales in the OEM dealership business the essential tools business unfavorable foreign currency translation of $5.9 million as an offset we have the as reported rise to 1.7%.
Now our son I operating earnings are $88.6 million in the quarter, including an offset a one including an offset a 1.2 million of unfavorable foreign currency effects compared with 88.7 and 2018.
The operating margin was 25.4% down 50 basis points from last years pretty strong 25.9% the variance primarily effects reflects that.
The higher sales of OEM, a central programs, which should boost of the sales tend to have lower operating margins than the the average Rx and I activity still good Mart, having said that.
We continue to clearly see abundant runways for growth than ours.
And we're working to take advantage. In addition to the diagnostics and repair information offerings. We have we recently introduced the V. 2000, John being aligner.
It replaces the traditional workstation designed with a with a more compact device utilizing an ordinary tablet and new camera a beam configuration to start considerable speed and ease of use and we put it in a small overall footprint. It introduces imaging alignment to the compact segment of the market and the reception been pretty enthusiastic.
Also in the quarter, we introduced our new unique calibration Oh, we're really excited about this and calibration array for advanced driver assistance systems or eight D.A.
One of the one of the prominent trends in late is 80 years as one of the prominent trends and later model vehicles with.
And developed by our diagnostics team and especial target operators each option recalibrating collision avoidance systems after bottoming, Paris glass replacement or even a wheel aligner for all makes and models for base station cameras. The Ats Calibrations has already is calibration system is ideal for general repair locations and for collision shops, enabling those independent facilities. So now finalized to repair without having to visit the OEM dealerships.
That's a great advantage.
When operating in more complex world is more complex sensor enable later.
Operating on more complex sensor enables later model vehicles.
Sorry, Pablo it's going to be more Bob.
So to wrap up our asinine, improving position with repair shop owners and managers growth in OEM dealerships driving organic sales gain expanding product lines margins down some but still quite strong.
Well those are the highlights of the quarter.
Tools group mix us up international Dan Cnine reporting an overall positive performance, especially in tour and our son I expanding strengthened critical repair information and raising its OEM project activity progress along the runways for coherent growth in advancements down our runways for food.
Overall sales increasing organically 1.6%.
Total operating income margin, a strong 20% the second highest level ever recorded by the Corporation.
As 3022 cents up again, despite the headwinds.
It was another encouraging quarter.
Now I'll turn the call over to Aldo Aldo Thanks, Nick our consolidated operating results are summarized on slide six.
Net sales of $951.3 million in the quarter were down 1.3%, reflecting a 1.6% organic sales gain $1.1 million of acquisition related sales and $19.5 million of unfavorable foreign currency translation.
The organic sales gains this quarter, principally reflect the double digit growth in sales to OEM dealerships and the repair systems and information segment and low single digit growth in the commercial and industrial segment.
Sales in the snap on tools segment were essentially flat, but included low single digit gains in the us franchise operations.
Overall sales to customers in the United States increased across all segments, while sales in Europe , particularly the United Kingdom continued to exhibit weakness on a year over year basis.
Consolidated gross margin of 49.8% compared to 51% last year.
120 basis point decrease primarily reflects increased sales and lower gross margin businesses 20 basis points of unfavorable foreign currency effects, partially offset by savings from our spy initiatives.
The operating expense margin of 29.8% improved 100 basis points, primarily due to organic sales volume leverage, including higher volumes and lower expense businesses lower performance based compensation costs in our CIO seeds.
Operating earnings before financial services of $189.9 million, including $5.9 million of unfavorable foreign currency effects compared to $193.1 million last year.
As a percentage of net sales operating margin before financial services of 20.0%, including 20 basis points of unfavorable foreign currency effects compared to 20.2% last year.
Financial services revenue of $84.1 million and operating earnings of $60.6 million increased 2.6% and 4.8% respectively from 2018.
Reflecting a year over year growth in our financial services portfolio as well as lower provisions for credit losses.
Consolidated operating earnings of $250.5 million, including $6.3 million of unfavorable foreign currency effects compared to $250.9 million last year.
As a percentage of revenues the operating earnings margin was 24.2% in both periods.
Our second quarter effective income tax rate of 23.6% compared to 23.8% last year.
During Q2 2018, our tax rate included a 20 basis point benefit related to the implementation of tax legislation in the United States.
Finally, net earnings on a reported basis of $180.4 million, a $3 or 22 cents per share included a nine cents unfavorable impact associated with foreign currency compared to $178.7 million or $3.12 per share a year ago.
In Q2, 2018, excluding a one cents per share benefit related to taxes adjusted earnings per share was $3. An 11 cents now, let's turn to our segment results.
Starting with Cnine group on slide seven.
Sales of $335.0 million in the quarter decreased 0.8%, reflecting a 1.9% organic sales gain and $1.1 million of acquisition related sales, which were more than offset by $10.1 million of unfavorable foreign currency translation.
The organic growth included a high single digit gain in our specialty tools business as well as low single digit increases in both the segment's European based hand tools business and to customers in critical industries.
Gross margin of 38.6% decreased 80 basis points year over year, primarily due to increased sales and lower gross margin businesses, including higher sales to the us military and to customers in India.
The operating expense margin of 24% improved 90 basis points, primarily due to benefits from organic sales volume leverage, including higher sales and lower expense businesses and from Marci I savings.
Operating earnings for the CDAI segment of $48.9 million compared to $49 million last year and the operating margin of 14.6% increased 10 basis points from 14.5% in 2018.
Turning now to slide eight.
Sales in the snap on tools group of $405.8 million decreased 1.5%, primarily due to $5.1 million of unfavorable foreign currency translation.
Organic sales were essentially flat, reflecting headwinds in the United Kingdom and higher sales in the United States.
The organic sales included a mid single digit decline internationally, nearly offset by a low single digit increase in the United States.
Gross margin of 45.1% decreased 80 basis points from last year, primarily due to 60 basis points of unfavorable foreign currency effects.
The operating expense margin of 27.5% increase from 26.7% last year, primarily due to higher field support investments and 10 basis points of unfavorable foreign currency effects.
Operating earnings for the snap on tools group of $71.3 million, including $3.8 million of unfavorable foreign currency effects decreased $7.7 million from last year.
While the operating margin of 17.6%, including 70 basis points of unfavorable foreign currency effects compared to 19.2% in 2018.
Turning to the Arsenide group shown on slide nine.
Sales of $348.9 million increased 1.7%, reflecting a 3.5% organic sales gain partially offset by $5.9 million of unfavorable foreign currency translation.
The organic sales gain includes a double digit increase in sales to OEM dealerships, principally through the segments equipment solutions operation.
Weakness in Europe , again impacted arsenide overall sales growth in the quarter.
Gross margin of 46.3% decreased 100 basis 180 basis points from 48.1% last year. This is primarily due to the increased sales to OEM dealerships and higher material and other costs, partially offset by our CIA savings.
Sales to the equipment solutions operation tend to have lower gross margins and lower operating expenses associated with such activity.
The operating expense margin of 20.9% improved 130 basis points from 22.2% last year, primarily due to the aforementioned effect of higher sales to OEM dealerships and the benefits from our spy initiatives.
Operating earnings for the Arsenide group of $88.6 million compared to $88.7 million last year, while the operating margin of 25.4% compared to 25.9% a year ago.
Now turning to slide 10.
Operating earnings from financial services of $60.6 million increased 4.8% versus Q2 of 2018.
Revenue of $84.1 million was up 2.6% from a year ago financial services expenses of $23.5 million decreased point 7 million.
Primarily due to lower provisions for credit losses, partially offset by higher expenses related to the growth in the portfolio.
As a percentage of the average portfolio financial services expenses were 1.1% in the second quarter of 2019 and 1.2% in the second quarter of 2018.
The average yield on finance receivables in the second quarter of 2013 was 17.6% as compared to 17.7% last year.
The average yield on contract receivables was 9.1% in both periods.
Total loan originations of $263.4 million decreased $12.7 million or 4.6%, primarily due to a decrease in originations of finance receivables, resulting from lower year over year snap on tools group sales of big ticket items.
Moving to slide 11.
Our quarter end balance sheet includes approximately $2.1 billion of gross financing receivables, including 1.8 billion from our us operation.
Our worldwide gross financial services portfolio grew $15.2 million in the second quarter.
The 60 day, plus delinquency rate of 1.4% for the United States extended credit remains stable and reflects the seasonal improvement we typically experienced in the second quarter.
As it relates to extended credit or finance receivables the largest portion of the portfolio trailing 12 month net losses of $50.4 million represented 3.0% of Outstandings at quarter end, that's down nine basis points sequentially supporting continued stabilization of the portfolios credit metric performance.
Now turning to slide 12 cash provided by operating activities of $145.5 million in the quarter decreased $41.4 million from comparable 2018 levels, primarily reflecting net changes in operating assets and liabilities, including payments related to last quarter's legal settlement.
Net cash used by investing activities was $65.2 million included net additions to finance receivables of $29 million capital expenditures of $28 million and $8 million for the acquisition of power Hawk, which provides rescue tools and related equipment for a variety of military governmental in fire rescue emergency operation.
Net cash used by financing activities of 73.1 million included cash dividends of $52.5 million and the repurchase of 365000 shares of common stock for $60.1 million under our existing share repurchase programs.
As of the end of June we had remaining availability to repurchase up to an additional $445.3 million of common stock under existing authorizations.
Turning to slide 13.
Trade and other accounts receivable decreased $8.5 million from 2018 year end days sales outstanding of 66 days compared to 67 days at 2018 year end inventories increased $52 million from 2018 year end, primarily to support higher levels of demand across critical industries, including demand for us manufactured hand tools, new products as well as to improve service levels to our customers.
Trailing 12 month basis inventory turns of 2.7 compared to 2.9 at year end 2018, and 2.7 in Q1 of 2019.
Our quarter end cash position of $164 million increased $23.1 million from 2018 year end levels.
Our net debt to capital ratio decreased to 22.5% from 24.2% a year end 2018.
In addition to cash and expected cash flow from operations, we have more than $700 million in available credit facilities and as of quarter end, we had $154.6 million of commercial paper borrowings outstanding a reduction of $22.5 million since year end 2018.
That concludes my remarks on the second quarter performance I'll now turn the call back to Nick for his closing thoughts Nick Thanks out.
Well, that's our quarter.
Encouraging.
Progress.
I think you could describe it is we would describe it as encouraging and progress achieved against variation a headwind.
Challenges for sure.
European operation down.
With a particular.
Macro related difficulty in the us and and the strong headwinds of unfavorable currency.
We overcame with the with some encouraging positive North American volume up the tools grew up in the U.S., new hand tool products driving enthusiasm and gain at cninety investments in toward paying off with robust performance matching the move to autonomy and precision and advancements in critical industries, gaining new military business in long term contracts and arent Tonight, a return of the OEM programs for vehicle dealerships continuing strength in Mitchell one shop software. It all came together.
Overcoming the considerable difficulties of the current environment.
Sales up organically, 1.6% a wide margin at 20% clearly among our best so far and EPS up again.
To $3.22.
And we believe we have the capabilities the brand the product and the opportunities to maintain that approach.
Earnings trajectory throughout the year and on into the quarters that bottles.
Before I turn the call over to the operator.
Ill speak directly to our associates and our franchisees.
Snap on team.
I know many of you are listening in oral human call later.
Once again, we made progress against the headwinds and that advancement reflects your energy and effort your extraordinary contribution to our enterprise.
Fair achievement on accomplishment in prevailing.
You have my congratulations.
And for your dedication.
Your commitment to our team.
You have my thanks.
Now I'll turn the call over to the operator operator.
Thank you the question and answer session will be conducted electronically. If you would like to ask a question. Please do so by pressing the star key followed by the digit one on your Touchtone telephone.
If you use the speaker phone please be sure. Your mute function is turned off to allow your signal to reach our equipment. Once again. Please press star one to ask a question and we'll take our first question from Scott Stember with K.L. King and associates.
Good morning, and thanks for taking my questions.
Just going over to the tools group.
Low single digit increase in the US I think we were mid single digits in the first quarter, but it seems.
Like some of the the Delta there is related to higher ticket items that said could you just give us a break out of what.
What tool storage hand tools and specifically what some of the other categories that in the quarter.
Yeah, you got it got it said I mean, the thing is if you look at the originations originations are down so that says that the big ticket items were weaker I think the originations were down like 4.4%, 4.6% a quarter, but but generally it's around diagnostics.
If you look at that that view.
The diagnostics were lower than year over year. The Apollo launch was much bigger it launches into a a broader category of customers than the Triton, which we launched the train launch was successful versus its come versus its prior people, but its prior iterations of that particular segment and so we are pleased with the launch plan, what we learn what we learn with launching intelligent diagnostics is.
Our franchisees tend to focus on it and it tends to be a time intense pensive sale. So it has on certain results for the rest of the diagnostics lineup and that's what happened in this time. There also is a pretty strong.
Activity around.
Panfuls Handfuls was up again in the quarter and I think one of its highest levels ever. So handles is pretty good so thats sort of the story of that quarter that kind of balance in that situation.
Now you can look at the numbers and you can see the the.
The margins and so on so you had gross margins of the tools group I think they were down 80 basis points as about 50 60 basis points of currency. So fundamentally gross margin that gross margins. The profitability was defined by what happened internationally, where are you in one of your levers around pricing can't use anymore gross margin in the us were actually up a little bit.
Okay, and just going over the pond over to the UK because it seems like Thats, where the lion's share of the tools weaknesses abroad.
Seems like it's getting a little bit worse and I.
We've all know about Brexit and some of the impact over there, but maybe just talk longer term about the business over there as it compares to hear the automotive repair market and.
Yes.
With that I can.
Oh, sorry, sorry, not going to.
Yeah look I can do that yet so it depends how you look at the UK UK was down higher percentages year over year in this quarter.
Now it's down I think it was down high single digits in the in the first in the last quarter, the first quarter and down.
Double digit somewhat double digits in the second quarter, but actually sequentially. The number was about the same.
So.
I'm not sure how to really react to that you understand what I mean, so it may be it should have been higher because it was the second quarter or not we don't think there's anything structurally wrong with that business. It had been over the UK just recently myself talking to people and I've talked a number of people who are in the government there and they say that.
People are quite uncertain and on one of the things we know about uncertainty in our business. We saw this in the big recession.
In 2009 is the technicians have are cash rich, but confidence for that they start getting attractive are discouraged by this bad news for breakfast with the macro issues. They start backing away from longer payback items, and that's exactly what's happening in the UK.
You are seeing a lot of you're seeing a lot of backing away from tool storage and diagnostics. So that's what's ailing the UK really you can see it I mean, you can see it in the originations originations down to us, but the down bigger in international and so that's really the situation. So when the confidence come back comes back we believe we've got a robust business there.
Got it and then just last month the problem with that is I don't know when the carpet is going to come back, but I think people feel like the Brexit situation is going to get solved.
And I think it doesn't even have to be south people had to believe that they see a way forward and that will bring it back I don't have any better answer than that for you.
Got it thanks, a lot and just the last question before I jump back into queue is Rs and I.
Nice bounce back Oh, we dealership business up could you just flush out how some of the.
The software products did I'm, just trying to frame that out.
As well I think diagnosed.
Sure.
Well diagnostics is down in the tools group and diagnostics and.
In.
Arsenide tends to follow that and also had some external sales in the UK and the UK is kind of shut down a little bit. So you see some of that in a record sales around the in addition to the tools group itself diagnostic sell some direct to certain elements of the UK government that is a weakness from year over year. So diagnostics was down in the quarter, but Mitchell want Bob Hope. So Mitchell one is a great business and all we see is excelsior ever upward in the repair assist the repair information products current truck repair that's what I was trying to say in my my my message. There is that repair information for the garage is seems to be going pretty well, we believe that our diagnostics business goes well once we get our franchisees and the technicians comfortable with the huge power eight of intelligent diagnostic tell just died and that's a great product just more complicated to sell because we've got so many nuances of.
Features.
So you saw kind of it so that all played out I guess I'm, giving you the teachers, but that all played out repair says diagnostic information in that goes in the independent shops to be about flat about flat.
In that and the OEM business of source was up hastily and equipment was sort of flattish I think it was up a little bit.
So thats, how diagnostics rolled rolled out in the quarter, I mean, not ours and I wrote down in the quarter.
Got it thanks again.
Sure.
And next we'll go to Christopher Glynn with Oppenheimer.
Thanks, Good morning.
Right.
Had a question about the.
Progressive trait and if we go into a little more detail Im curious about.
The interplay of channel fill in to sell through how the.
Staging of regional Rollouts goes and if that's fair either in the second half. It was it was it now it was a national launch, but one thing that's happened in the first two quarters of this year is the we call. It the first time Activations basically they we can see when a technician activates the software and when the technician not the franchisees. So we sell to the franchisee he sells it into the into the industry into the into that marketplace and that the technician who buys it gets it activated.
Well Activations are actually running ahead of our sales.
So in fact, this is kind of a positive triton itself.
Oh up to the franchisees.
That met our expectations, it's not it's not the segment that Apollo, which saw met that expectation.
And in fact, a little bit better than the last launch the activations and the Activations always follow any activations. So far are running ahead of our expectations.
So we think thats kind of a positive sign although you know.
Who knows what will happen tomorrow, but the thing is that seems to be positive. So triton itself I think worked pretty well we've seen this phenomenon when we launched the intelligent diagnostics now it tends to draw the attention of the franchisee Lonely has set 24 hours a day and they tend to spend more time selling it because they love the product everybody loves the software harder to explain.
Little more expensive and so it tends to diminish what happens in the other product. That's what happened. This time, that's why we have the downturn. So we had a good launch, but yet the other products and sell it.
The way they sold and other periods of the way we expected.
Okay, and then what we are doing it and what we're doing is I should add what we're doing is is that one of the things you see the OE in the tools group one big component of that is the training seminars in the end the end and the support systems for the franchisees to sell and to train the technicians in how to use this stuff and to realize how truly important it is and how they can't live without it.
Okay, and then kind of a broad question on the second half.
We generally kind of banking on a kind of a holding pattern with the demand trends in mixed trends in the first half where do some mix naturally kind of revert or unwind.
You know look.
I don't think anybody.
We wouldn't be.
Happy with continued sales in the us at 1% for an extended period of time, we wouldn't be happy with that of course.
Yet we do get variation from period to period. So thats why we think this is not a bad thing in this situation with these with these economics, but we would we stick to our view that this is a 4% growing business said absent huge turbulence like is happening in the UK I would I would call UK a singularity.
I would call Australia being under economic duress at least in our sector. So I kind of come out for those and say there isn't it really is in our business. We would expect that to get better now the third quarter is always kind of scarily ill because we have the SFC and saw him.
And I'm, not saying anything I haven't said.
10 times before but we still feel pretty confident I think one of the challenges for us is to get that intelligent diagnostics down to an easier sale a more a more natural sale.
And to get it out there so it doesn't doesn't weigh down.
On our business and then of course, you know to keep coming with a new price. The hand tools are hotter than heck. If we can keep up the momentum that's got Thats got to it's got to accrue to US you know if you look at our capital expenditures, we raise capital expenditures and part of this is making the hand tool delivery is much more smooth much smoother, because we're investing in and new facilities in our distribution system and Crystal Lake and other places and our handful factors like Milwaukee and other places.
And some of our expenses in the quarter that field support expenses was to support that distribution handles which rolls through that distribution.
Thanks, Tony.
So.
Yes go ahead.
Yes, just had a last one.
Any updates on capital allocation or strategic levers in particular as you look at valuations have been a little lower for a little while here.
Any benefits to going private what kind of board level discussions do you have in some of those respectively. We have discussions about this kind of thing all the time, you know and so on I think I think are we feel that we talk about cap capital allocation. We say we think this business has a lot of runway and also we think we can keep the best use of our capital is to invest in the business and you can see it now we are investing in the hand tools were investing in the training of the of the.
Of the franchisees to be able to sell this new diagnosed this transformative diagnostic product better. So we see that and we say as we say we have a dividend we want to preserve the dividend and make sure it keeps going.
We never reduce that over years and then we look at share buyback. We bought we bought back a significant number of shares in the quarter I mean, I guess it supposedly can be a.
Can be everybody can have a different view of what's a significant number of what we think was more than before and and we take advantage of when the stock price and appropriate place and we're not in a blackout period and then we look at acquisitions and we're looking at acquisitions as we speak. So we have all of those discussions at all of those things are discussed at the board level.
Board level and our level constantly probably the board the board Anna talks about it regularly.
Thank you.
Sure.
And next we'll go to David Leiker with Baird.
Hi, good morning, everyone.
Good morning, David.
I guess, a couple of things that the circle back around on.
You did a great job and talking about some of the headwinds and some of the things that you're facing and we've talked about them.
As well.
You may have.
Yes as part of this question is why that wouldn't do that having said that we talked about in the past and this if there is any change in your view on it but.
We're we're 10 years into an economic recovery.
People have most everything that they need.
You've talked about in the past about other.
Use of money from your customers' pockets.
Any update any thoughts on whether some of that might actually be behind the headwinds that you're facing right now from a demand perspective.
No I don't know.
I mean, the thing is I don't think so.
I don't think anything different now than before.
Maybe our technicians get a little more ease of credit, but I continue to feel David that this is on us.
Whatever's happening here is on us.
When I go out into the talk that of franchisees that again I just like I said I thought I was just on a truck the other day and I talked to a number of franchisees across the country one in Texas, one in California, and one in the Midwest and.
They don't seem to see it that way that those it does a shrinking of demand. It Lee it's on us to try to allocate their time, the best and get products that will attract them I think that is the solution. We don't see a back office technicians now that can be had an interesting discussion right. There can be a little bit of a little bit period to period variation in one of the franchisee said I live in the Nm beer and Budweiser beer Budweiser and fireworks culture in other words around the fourth of July everybody gets goes on vacation and they they invest in fireworks and Budweiser. That's how we talk about the sales get down a little bit slower than spirit, that's what he said.
But I don't think he said it always comes back so I don't.
I think.
We don't see any indication of saturation or missed direction.
Could be wrong.
But you know none nothing quantitatively or qualitatively said that certainly qualitatively. We are not seeing is quantitatively, we're seeing the south the salaries of the I think the salaries. The trailing 12 months grew by 4% for technicians. The technicians itself year over year grew by 1.7%. So that's BLS data. So we don't think this and and nominal spending on repair moved upwards. A couple of percent no real spending was up with a couple of percent.
Year over year. So I think I just think it's still robust it's it's execution and one of the things I tried to mention here is boy trying to support that launch of intelligent diagnostics. It's a revelation, it's a revolution and when I talk to franchisees they need help on it. So that's what we're working on to try to boil things down to just be the quick seven minute pitch that will convince people.
Okay, and then just two numbers related questions. One is on the working capital, although if you could and I'm looking at.
Q2 versus Q2 year over year.
The cash flow statement and if there's a way.
You could break that down I know currency is going to be a play a role in there is probably some acquisitions, but.
Just.
The drivers behind the increase in working capital here year over year.
So the biggest increases if you look at our divisions the biggest increases inventory associated with the snap on tools group, our European based hand tools operation in industrial those are the ones that.
We have been adding by the way the most I'd say you across the range. Most new products, we have new product additions is certainly one of them industrial more specifically is been pleasantly engaged in more project based activity in assembly of kids and they've been compiling more inventory to service those customers as an example of us military being a significant one.
And though we're trying to improve our service levels words, when you have such a variety of skews that we offer across the board and you're somewhat dealing with an environment, where people can use discretion to buy maybe a little bit of an impulse element in there as well last thing you want to do is not be able to meet demand. If you will of inventory on the shelf. So we are willing to err on the side of having adequate levels of inventory across those broad number of skews at this you've got a couple of product ramp ups that are occurring. So for example, we're developing new lips in some of our factories and that requires some ramp up investment and our inventories and rod what brought up as well, but again. So we're trying to take advantage of of the situation, where we can buy smartly invest in essence is what drives the.
Operating variance David is about $52 million, if you look year over year taken out the effects of currency and acquisitions to give you a number.
No.
Okay, and then and then secondly, you'd called out in the corporate expense line there.
Yes, a little bit of a variance there you referenced are in particular incentive comp was any of that reversal from what might have been accrued in Q1.
Oh, there's an element of that but you have a lot of performance based compensation that runs through CNL. Some of it is related actually to the stock price performance, which accreted more in Q2 of last year it actually than it did in Q2 of this year as you get some variation there, but also the timing of certain expenses some of them related to legal matters silver. So other this corporate spending yes.
Those are accounted essentially so if you look at the back half of the year My expectation, we typically spend in the quarter more typical quarterly spending in the range of 22 to 24 million.
I see no reason that that would not be a good forecast as we look to the back half of the year in terms of our spend.
Okay, great. Thank you.
And next we'll go to Curtis Nagle with Bank of America Merrill Lynch.
Good morning, Thanks for taking my questions.
Hi, guys, just starting off Hey, Aldo how are you doing.
So I guess, starting now just thinking about the gross margin for tools.
It looks like currency was a fairly decent size headwind.
How do we think about that.
We ended the year is that primarily Canada or something or is that Europe .
No. It's it's look it's the big the Big Kahuna is there are you said, Canada, but the UK and Australia. Those are the big players and the transactions there they pretty much dominate that 80 basis points of currency of gross margin change and so it's pretty much outside the United States and how this works out is normally when currency has happened to us in the past.
We've had our CIO and the lever and we have two methods of offsetting Rcs and pricing.
Local pricing, but when you're down.
Several quarters in a row and Weve got double digit deterioration in the UK and you've got you've got some downtick in sales in Australia. Your your appetite to prices a lot lower in order. So therefore, you're seeing that roll through and that that's really what's happening. The fact that the currency is visiting on the places where it's much more much more reluctant to test the waters or to push the pricing because we want that we want we want the volume backup.
Got it that's really what's dominating at situation us as I said I know a lot of people have been talking about discounting and promotions and also but actually it's up again in the U.S. because.
Our people in the tools group, our masters of making heat and light out of programs and really they don't by and large don't change their margins the programs come out and they they have different phases, and the same names and and all kinds of things, but they're out there at the idea is to generate enthusiasm both with the franchisees and the customers and that and I think.
Give us sometimes they often do but that doesn't mean, we're actually net net discounting.
Got it.
And perhaps not to extrapolate too much but.
Just just kind of focusing on the comment about.
Spending behavior, and maybe shifts to things like fireworks and Budweiser, which theoretically you might be a reference the fourth of July was was that a forward comment in terms of what's going on demand or actually it was fourth of July .
It was it was about look it was a it was kind of like.
He says look when it gets warm.
Hi Tech technicians are thinking about other things and repairing cars as simple as kind of a.
Anecdotal comment it wasn't meant to.
To be a forecast of any kind I was just trying to give you a view David asked me, if there was variation and appetite for buying or people.
Decided to focus elsewhere, and I said I Didnt think so except for this kind of very very temporal thing that that one of my franchisees are several new franchisees say when the weather gets good and vacations common.
People may not buy as much then but they make it up later.
That's all I understood Thats, all I understood.
Great. Thanks very much appreciate your.
And next we'll go to David Macgregor with Longbow Research.
Yes, good morning, everyone.
Good morning.
I guess I wanted to sort of go back to.
A couple of kind of bigger picture questions Andrew.
Credit has always been kind of a very important part of your value proposition to the marketplace and.
So if you advance from the premise that.
People are using less credit now.
Does that leave you a little more exposed to price elasticity on the tools and you've always had pretty high quality tool no debate about it but also a premium price tool and I'm wondering if maybe as credit becomes people become maybe a little less credit dependent this late in the cycle.
If people, just becoming more price sensitive and you're feeling that.
I don't think were ceiling price sensitivity.
Any more than we always have I mean, as you say everybody is always known.
That if you buy a snap on tool, it's going to be more expensive.
And I wouldn't characterize I think the characterization you are saying is a little bit not the way we would we would say.
People aren't using aren't buying big ticket items from.
Right not that they're not you, but when they're buying big ticket items are using credit and our array is credit itself remember that remember that when a guy when a guy buys a set of wrenches or a powerful 600 walk power tool, he's probably paying 50 Bucks a week and that stretched out over 12 weeks, you know or may be may be even sometimes 10 weeks or 15 weeks, depending on how the franchisee doesnt. So everything is about credit and they are a business is up.
So I wouldn't I wouldn't say that credit it doesn't appear to us David that credit is.
Now as a question people are reluctant to take it now if you're saying if you tell me the UK.
And I don't know and now.
I think I think the UK, they could be saying Wow I don't know what's going to happen next week.
So maybe I'm not going to it.
That's that's where my comment is about longer payback items I think we find win win pessimism or uncertainty seizes the psyche of the working men and women, including the technicians they tend to invest in shorter payback things like power tools.
Handfuls and shy away from the longer payback stuff.
Great. Thank you just talked about but not you start seeing that that's not a phenomena here.
No I appreciate you addressing that next thanks.
Yes, sorry about that.
Can you just talk with field inventory levels inventory on the truck clearly.
In terms of your reported numbers Youre inventory numbers are up but just talk about what you're seeing out there and.
Look I think as David I think inventory if anything I think our numbers say that down slightly per truck.
But you will have some might be a blip I'm not sure that relevant but haven't gone up I mean, the sales off the banner have matched I think the the sales up to the van.
So there's not we're not seeing any kind of.
Buildup.
In in.
In in recent they aren't buildup, we've seen over time has been a build up associated with the sales of the van network, but in general. The recently, we're not seeing that kind of build up so I wouldn't say the one thing I would say that I will say that I did I did say about diagnostic it and I don't know what to make of this yet because its not we don't have of course, but it appears as though there's more.
There's been more Activations then there by another with sales off the truck diagnostic bodies and software activation than we have sold to the drug so from an inventory point of view that would tend to be a diminishment of that you would think.
Can you reconcile that Vance and event you would think sure you would think.
Yes, how do you square, how do you square that with originations being down again, I guess as a couple of quarters in a row now where you sell in has exceeded your originations and I understand there's a timing difference, but that would have happened last quarter, we would have seen that correctly normalized yet I.
Yes, David there is a timing difference in relation to the down because the sales of diagnostics in the quarter were in aggregate.
That's why and tough as I tried I tried to.
Laid that out a little bit maybe I was unsuccessful, but thats the thing our one of our one of our two major <unk> the big ticket item of diagnostics wasn't as strong as in prior quarters and so yes, there are timing differences and so on but that account diagnostics accounts for the lion's share of the variation year over year and originations.
So I think.
Yes sure I understood last question for me is just you referenced in your prepared remarks to franchisee health metrics remained favorable in other words I guess, they're still in the in the Green zone. So to speak. It can you just talk to the second derivative on those metrics since but just maybe give US. An example of one or two that you could.
A higher level of emphasis on in terms of driving comfort that theres still in good shape.
Yeah look the second derivative of let's say, let's say.
Oh, let's say.
Terminations lead people, leaving the system.
Really the first or it's been pretty flat. So I think generally the second derivative has been generally stable.
It's not moving either way that in fact, I think that improved a little bit of got slightly better in this quarter. So you would say the second derivative I don't know I'm trying to think of how that would work in terms of polarity, but anyway was favorable in this particular quarter now I really small amount you know, but generally that's been about the same for several quarters now it had been going I think.
I don't know I want to thank.
Back about.
Three quarters ago, it had been up to them that have been going upwards going Nate going the other way it had been rising and maybe even maybe even up to the fourth quarter that have been rising a little bit and so now it's kind of going back the other way in terms of second derivative. So I don't know what to make of that whether that's positive or negative generally those things get driven by retirement the difference between the what drove it upwards was retirements by people who had put spent more time is on the van and they want to do go to Hawaii or something at all for a vacant for for the retirement and so those are the kinds of things, which are making a difference we saw more of those I think this quarter, we saw a rather less.
Still up from say slightly from say 18 months ago.
But down from say five years ago.
Okay.
If I see one last question if I could just diagnostics returns was that a meaningful headwind organic growth the tools segment this quarter.
We turn.
You mean, you mean people given its back diagnostic units or something.
Correct I already.
You know you don't but I don't necessarily check all these things, but I don't think so I haven't heard of that no one's mentioned that to me. So I don't think it was actually I think it actually originally was didnt, we sold enough Triton. So we didnt sell enough of the other stuff.
Got it good luck in the second half.
Sure. Thank you.
And next we'll go to Gary Prestopino with Barrington Research.
Hi, good morning, everyone.
Morning.
Net net net DNS product that you talked about.
Yes is that does that targeted specifically to the independent shop.
Versus the franchise dealer.
Yes, yes, yes.
It is okay, typically target and in a chat because the idea the idea of Gary is to make and versatile. So it can accommodate the specificities of systems that are authored by different Oems.
It is it's pretty well, we see the whole Ada Es thing is becoming very important for us. So one of the things we like isn't Mitchell one we have a particular adss.
Suite, where when people are repairing the HTS systems. They are they are able to go in a particular section of that repair information and can deal with HTS systems and in the end the terms in which describes Ada es and so thats one thing Thats driving Mitchell one upwards Mitchell one was very strong in the quarter excellent.
Is that would that be considered.
You know a big ticket item must have for the independent repair shops going forward I mean relative to the other diagnostic equipment. So yes, if I don't know I think it's certainly as expensive as a diagnostic unit. So it's a big ticket item, but the independent repair shop is a slightly different they may in sometimes independent repair shops pay cash or credit card for these kinds of things. They don't always borrow from us necessarily so it wouldn't necessarily impact the originations it might but I don't think so in this case.
The so it wouldn't do that the same thing about this is just to make sure it's clear.
Everything now when you when you hit your bumper now you need to worry about the system.
You know it's a it.
It becomes.
It.
You upset the the the sensors that are in the bumper and you have to recalibrate just if you put on the bumper. So that's why there's more and more demand of this the more there was the peripheral peripheral sensors the more they have to deal with it.
So that's why we're pretty enthusiastic about the sense that help us I think.
Okay, and then just to be clear a lot of talk here is the headwind that you saw in the U.S. If there was a headwind was really revolving around diagnostics it wasn't around tool storage and the bread and butter.
Well start to start just kind of flattish is okay. We thought towards okay is up it was up versus last time quite a bit sequentially. It was up so we felt pretty good about that it's not it's not till stores diagnostics.
The only you know I'm sure we'd like to have looked power tools is down too, but that had to do with the launch which is coming and people are waiting for like there are lot of things I'd like to I would say there are some things I would like to have better of course, but if you ask me to say what a what do you have the fix to make to get back to where you are I think it has to do with making sure the diagnostics works.
Okay. Thanks, and last question I don't know if you have now.
Although if you have this what was the.
The negative impact of currency on EPS in Q3, and Q4 of last year for each quarter you have that handy.
I think it was positive I mean, I think it was positive life.
Or maybe.
I think it's I think Gary so it's still going to be a headwind if we get into the back half of the year not as bad if currency rates stay right, where they're at right now we're supposed to see some negativity in Q3 and a little bit in Q4, so it's gotten worse.
What we would have talked about on our April call with you.
But.
Currencies for them to be a headwind over the balance of the year. It was it was really flat in Q3 of last year and it was about six cents negative in Q4 of last year.
Okay, because I look I look back on the sales impact was about a negative 12, and a half million in Q3 and a negative 17 10 in Q4. So that's why I was just wondering so you are saying it would be flattened.
The impact in Q3 was flat overall from currency, even with the negative sales Dan yes.
Sometimes the sales not the indicators won't get to the bottom line rates transaction, particularly in the tools group in the United Kingdom, Australia, Canada is embedded within the activity that you see at the gross margin line not the sales line. All we're saying is lastly, there was no EPS impact there is actually it was it was probably point to Oh I think in the last year and this year are expected to be negative.
If rates stay where they're at today, what happens areas sales gets driven by the euro and the pound and the Canadian dollar and then and then when you're talking about profitability, you'll see a much bigger influence of the pound and the Aussie dollar and the Canadian dollar. So there are different currencies that impact us for sale for.
As example, typos running from 1.24 to 1.25, it's worse than where it was that last year.
Right, Okay, alright, thank you.
Thank you Gary.
Okay and that does conclude today's question and answer session I'll now turn the call back over to Sarah Burps ski for any additional for closing remarks.
Thank you all for joining us today, a replay of this call will be available shortly on snap on dotcom as always we appreciate your interest in snap on good day.
And that does good today's conference. We thank you for your participation you may now disconnect.