Leslie Kratcoski - VP, IR Nicholas Pinchuk - Chairman & CEO Aldo Pagliari - SVP Finance & CFO.

Liam Burke - Wunderlich David Leiker - Baird David Kelley - Jefferies David MacGregor - Longbow Research Gary Prestopino - Barrington Research Richard Hilgert - Morningstar.

Good day and welcome to today's Snap-on Incorporated 2016 First Quarter Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Leslie Kratcoski. Please, go ahead..

Thanks, Lindy, and good morning, everyone. Thanks for joining us today to review Snap-on's first quarter results which are detailed in our press release issued earlier this morning. We have on the call today, Nick Pinchuk, Snap-on's Chief Executive Officer; and Aldo Pagliari, Snap-on's Chief Financial Officer.

Nick will kick off our call this morning with his perspective on our performance. Aldo 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've provided slides to supplement our discussion.

These slides can be accessed under the downloads tab in the webcast viewer as well as on our website under investor information. These slides will be archived on our website along with the 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. With that said, I'd now turn the call over to Nick Pinchuk.

Nick?.

Thanks Leslie. Good morning, everyone. As usual, I will start the call by covering the highlights of our first quarter and along the way I'll give you my perspective on our results, on our markets, on the progress we made, and on what we believe it all means. Then Aldo will move into a more detailed review of the financials.

We believe that our first quarter provided confirmation of Snap-on's ability to continue its trajectory of positive results, overcoming headwinds, advancing along our runways for both growth and improvement. Our EPS in the quarter was $2.16, up from last year's $1.87.

That rise includes an opco operating margin of 18.6%, an increase of 190 basis points. When you combine those opco gains with earnings of $47 million from financial services, it bring Snap-on's consolidated operating margin to 22.5%, up from the 20.1% in 2015. And that EPS, $2.16, it represents an increase of 15.5% over last year.

That improvement came on an organic sales growth of 2.5% and the continuing contributions from our Snap-on value creation processes, the suite of principles we use every day around safety, quality, customer connection, innovation and rapid continuous improvement or RCI.

Once again, you can see it in the results, those processes contributed strongly to the earnings climb. Our reported sales in the quarter of $834.2 million were up 80 basis points, and that gain included 200 basis points of unfavorable foreign exchange.

Now currency has been a headwind for some time, both to sales and profit, but we've been able to overcome with the help of Snap-on value creation, especially with innovation and with RCI.

Innovation; taking practical insight and matching it with the latest technology, generating product excitement while making work easier for professionals with an array of new products. You see, that's been part of our DNA from the very beginning in 1920, and we are only getting better at doing it. There are more new products than ever before.

RCI; ongoing improvement, finding operating efficiency and achieving cost reduction, up and down and across the corporation. Innovation in RCI; overcoming the challenges, extending the trend of rising profits again. Now let's consider the markets, the markets we serve.

The first quarter once again highlighted the extensive opportunities of the auto repair segment, more solutions to service the growing complexities of new vehicles requiring advanced solutions.

And an aging fleet, driving more repairs, both factors in play not only in the United States but worldwide and the numbers of our quarter reflect those tailwinds. They show and -- they not only reflect the tailwinds, they show our ability to take advantage to progress down our runways for growth.

Consider the tools group; organic sales up 8.1%, clearly enhancing the van channel, providing innovative new tools to engage continually changing tasks, making work easier for technicians and our franchise team more prosperous and more powerful.

And repair systems information, or our RSI group, expanding Snap-on's presence in the garage, capitalizing on a broader product line, growth across all the divisions but most notably in diagnostic and repair information businesses, in the diagnostic and repair information businesses serving independent repair shop owners and managers.

C&I; it includes the businesses that serve critical industries and is the most international of our groups. And in the quarter the results showed the challenges of turbulent industrial sectors and the difficulties of a few trouble geographies. In critical industries, the headwinds from the fourth quarter continued and they were a bit more pronounced.

Sales to the US military and to oil and gas customers were down significantly with both segments showing the impact of ongoing measured spending and budget constraints.

At the same time, we saw dips in some international markets, specifically the Middle East, where aerospace project activity was down due in part to macro development in that turbulent -- in that region, pretty turbulent there. That said, all that said, C&I did demonstrate strength.

SNA Europe delivered mid-single digit growth in places like the UK, Spain and the Nordic region, while Asia Pacific registered double-digit increases in countries like India, Thailand and Indonesia. So overall I'd describe our C&I market as mixed turbulence and strength.

Deep challenges, but we're also encouraged by the advancements, taking advantage of the opportunities that are available.

And when coupled with the string of positive performances surrounding our auto repair related businesses, on a whole, we believe there is clear progress along our runways for growth -- enhancing the van network, expanding repair shop owners and managers, building in emerging markets, and yes, extending to critical industries.

Even in this quarter, we can see progress in our growing product line, in our increasing understanding of the work, all of that creating confidence in our forward trajectory across those critical sectors. That's the overview of the markets. Now let's move to the segments.

In the C&I Group, organic sales were down 1.3% with declines in the critical industries attenuated by gains in SNA Europe, Asia Pacific and the power tools division.

From an earnings perspective, C&I operating income was $41.1 million, representing an operating margin of 14.3%, a decrease of 50 basis points, pretty much authored by lower sales in our higher margin critical industry business.

But as I said, we do remain committed to extending in critical industries and we'll keep strengthening our position to capture new business as the segment improves. You can see this particularly in our innovative new products, fortifying our ability to make work easier outside the garage in a range of industrial settings.

One new product family in that category is -- in our collection is the Snap-on three-quarter inch flank drive 12 point impact socket.

You pick these up, they are a handful, big, but effective and durable, aimed at power generation, mining and oil and gas sectors; perfect for turning large bolts on wind turbine engines, earth-moving equipment, oil wells, multiple other places, anyplace where heavy work gets done.

They are ideal for pneumatic or hydraulic bolting systems and they incorporate Snap-on's flank drive which move stresses away from fastener points, delivering more turning power right in the field without slipping or rounding off a fastener.

Those sockets are made down in Alabama at our Elkmont plant, and they are a great addition to our tool line, they fill a vital need for our critical industry customers. Now in past quarters, I'm sure you may remember that we discussed Snap-on's lineup of tool control solutions, safeguarding the assets and improving productivity.

I've spoken about our innovative and sophisticated automated tool control system, or AGC, the smart tool storage unit which electronically keeps track of the who, the when, and the where of individual tool usage, it's popular.

In the quarter, our industrial division introduced its latest and another version of tool control, the Snap-on 5S Dual Visual Control Cabinet. The 5S Dual, off-the-shelf or custom-built, utilizes visible control trays to quickly identify missing tools with the help of custom cut foam or with CAD-designed tool silhouettes.

It's the perfect addition to any place where work is performed within the site of tool storage, like assembly line, and where the shop is aiming to drive improvements through 5S or RCI.

And I mentioned the strength of SNA Europe and the continuing new advancement there was clearly evident in its mid-single digit sales gains, marking now ten straight quarters of year-over-year sales progress across several challenged geographies. And once again, sales rose but profits were up more, now the 12th straight quarter of margin improvement.

And speaking of gains, our Asia Pacific division, an area of strong potential and these days of significant variation, we're building our physical capabilities and we saw progress in the quarter with sales rising compared to last year. So now onto the tools group; organic sales increased 8.1%.

The operating margin of 16.6% was up nicely versus the 15.8% recorded last year. The tools group, the results continue to speak for themselves, ongoing progress along their runway for coherent growth enhancing the franchise channel.

And there is abundant evidence of growing strength and of ongoing positive trajectory across that channel, all on display in our franchisee metrics, important financial and physical indicators like cash, like turnover, we monitor those metrics very closely and again this quarter they are favorable across the Board and they continue to trend upward.

There is also evidence in sort of anecdotal and direct interaction with the franchisees at events this year like our January kickoff meetings held all over the network, orders were up considerably, and atmosphere, enthusiasm and optimism and a team marked by commitment and energy.

When you meet our franchisees, you clearly see they are brimming with confidence, reaching higher and expecting to achieve and grow. The tools group was marked by growth, but it was also driven by Snap-on value creation.

It's always a critical component of the group's progress, offering [ph] innovative new products, sometimes just an improvement on an established line but making work easier, solving new problems, delivering productivity gains from observing the work in shops on a daily basis.

An example of that is our Snap-on 312 CF heavy-duty diagonal cutters manufactured up the road in our Milwaukee plant, the next generation of our most powerful diagonal cutting pliers, utilizing Milwaukee sophisticated cold forging technology.

They've been redesigned for better overall strength, substantially increased cutting performance, and longer life, more precise cutting edges and a repositioned pivot point for increased leverage.

The 312, using both those edges in a new leverage, the 312 CF cuts material ranging from plastic cable ties to hardened spring steel, tremendous versatility. And the pliers head has been improved.

Our designers better pinpointed the failure points, added material in those places, reducing the breakage, tip breakage, even when these pliers are engaged in the toughest task. And we matched it all with the latest in Snap-on cushion grips.

Our customer connections showed that there was a great need for pliers with improved versatility, durability, and comfort. The 312 CF provides just that, and we expect strong sales, even in an established category. Also in the quarter, the tools group introduced the low-profile swivel impact socket set.

Now we've been selling sockets for a dog's age, a long time. But this new set expands our line of confined space solutions with a reduced height, provides better -- that reduced height provides better access to fasteners, great for tight engine compartments, underneath dash spaces and any difficult to reach area.

The new design also features laser welded pivot points and the weld beads are machines flushed to the socket for improved appearance and safety. It adds a smooth full 30 degree swivel action for more efficient power. Power and access, just what's needed for the tight spaces and the challenging tasks of today's more complex engine compartments.

Snap-on innovation; a tradition in Snap-on since 1920, but we believe getting much better helping technicians perform their work more efficiently and enabling solutions in a rapid changing environment. But the tools group is not just product, it's also based on amplifying the capability of our franchisees and the power of our network.

The Rock n Roll pads and the Techno Express are great examples of that. But now we are also enabling our team with the Chrome Express Plus System, supporting multiple mobile terminals. A number of our franchisees have chosen to add an assistant to the route.

While Chrome Express Plus enables that add, making it possible to multiply selling time and to reach more customers, it's another clear opportunity for more growth.

And we can't talk about tools group without speaking of its strategic partner, our financial services team, tapping the power and insight of our franchisees, financing big ticket sales, serving as a great assist to our tools business and you can see it in the strategic relationships playing out vividly in the quarter's results.

Now let's speak of RS&I; first quarter organic sales rose 3.1% led by sales to independent shop owners and managers, operating earnings of $69 million, up $5.1 million from 2015. The operating margin, 24.7%, a rise of 120 basis points.

RS&I; we're clearly seeing the power of RS&I -- RCI, rapid continuous improvement, driving margin expansion, it's evident again in this quarter in the strong earnings. I often speak of this, the successful handheld -- our successful line of handheld diagnostic units, well received in the market, driving growth throughout independent repair shops.

In the first quarter, that advantage was again highlighted publicly. Our SOLUS Edge and our ETHOS Tech handhelds were honored by Undercard Digest, both recognized by that magazine as a Top 10 tool. The SOLUS Edge, faster processing, larger screen, the power of Mitchell 1 SureTrack, all combining for the fastest fixes.

It's the tool for experienced technicians. And the ETHOS Tech with its considerable functionality and attractive price point, great for the first-time diagnostic buyer. Both handhelds were selected by the votes of technicians and shop owners who use these tools every day and who read Undercard Digest.

One clear reason why the RS&I margins have continued to climb all these quarters is the ongoing stream of innovations made possible by customer connections with professional tool users. An example of that in this quarter, RS&I launched its shift -- launched and shipped its new advanced touchscreen diagnostic workstation.

It features our most powerful diagnostic tool, the VERUS Edge handheld, and it's paired with a custom roll cart for easy mobility and a large 27-inch touchscreen monitor for increased readability and productivity.

This workstation, all of this visibly reinforcing independent repair shops capabilities, building that customer confidence, so important in an environment of rising vehicle technology.

In addition this quarter, our equipment division launched what we believe to be a game changer, the V3300 wheel aligner, a next generation unit targeted specifically at specialty shops and dealerships, faster readings, real-time data to the technician and a significant reduction in cycle time.

We've already received enthusiastic feedback in just a few weeks from a wide range of potential customers and we are confident it's another share taker.

Finally, RSI continued its expansion into the heavy-duty segment, strengthening the Snap-on Pro-Link Ultra's position as the go-to handheld in big truck shops, adding coverage, enhancing functionality and building and expanding presence in the heavy-duty repair shops across the U.S. So that's the highlights.

Continued progress; organic sales rising 2.5%, gains achieved through Snap-on value creation processes, especially innovation in RS&I, strengthening our businesses and driving to an 18.6% opco operating margin, up substantially. And in the face of currency and industry headwinds, EPS of $2.16, up 15.5%, it was an encouraging quarter.

Now, I'll turn the call over to Aldo.

Aldo?.

Our first quarter consolidated operating results are summarized on Slide 6. Net sales of $834.2 million were up 2.5% organically, primarily reflecting increases in our businesses serving automotive repair, partially offset by lower sales to critical industries in our C&I segment.

On a reported basis, net sales, which included $16.4 million of unfavorable foreign currency translation and $2.6 million of acquisition related sales, increased $6.4 million, or just under 1% from 2015 levels.

Largely due to the strengthening of the US dollar, foreign currency movements adversely impacted our Q1 sales comparisons by 200 basis points.

Consolidated gross margin of 49.8% improved 30 basis points from 2015 levels as benefits from higher sales and savings from RCI initiatives were partially offset by 50 basis points of unfavorable foreign currency effects.

Operating expenses of $259.9 million yielded an operating expense margin of 31.2% in the quarter, an improvement of 160 basis points from last year, primarily due to benefits from sales volume leverage and savings from RCI initiatives, lower stock-based mark-to-market compensation and other expenses as well as lower pension expense.

As a result of these factors, operating earnings before financial services of $155.4 million, including $7.7 million of unfavorable foreign currency FX, increased 12.7% as compared to the prior year, and as percentage of sales, increased 190 basis points to 18.6%.

Financial services revenue of $66.3 million in the quarter increased 15.5% from 2015 levels and operating earnings of $47 million increased 16.6%. These increases primarily reflect the continued growth of the financial services portfolio.

Consolidated operating earnings of $202.4 million, including $8.1 million of unfavorable foreign currency effects, increased 13.6%. And the operating margin of 22.5% increased 240 basis points from 20.1% a year ago. Our first quarter effective income tax rate of 31% compared to 32% last year.

For the full year, we continue to anticipate that our 2016 effective income tax rate will be comparable to our full-year 2015 rate of 31.7%. Finally, net earnings of $128.3 million or $2.16 per share increased $17.8 million or $0.29 per share from 2015 levels, representing a 15.5% increase in diluted earnings per share.

Now let's turn to our segment results. Starting with commercial and industrial, or C&I, group on Slide 7, sales of $287 million in the first quarter decreased 1.3% organically primarily due to a double-digit decline in sales to customers in critical industries.

This decline was partially offset by a double-digit increase in the segment's Asia-Pacific operations, a high single-digit gain in the segment's power tools operations, and a mid-single-digit sales increase from the segment's European-based handtools business. Gross profit in the C&I group of $110.5 million compared to $116.5 million last year.

The gross margins of 38.5% decreased 70 basis points primarily due to a decrease in higher gross margin sales to customers in critical industries and 40 basis points of unfavorable foreign currency effects partially offset by savings from RCI initiatives. Operating expenses of $69.4 million in the quarter compared to $72.5 million last year.

The operating expense margin of 24.2% improved 20 basis points from 24.4% last year. As a result of these factors, operating earnings for the C&I segment of $41.1 million, including $2.2 million of unfavorable foreign currency effects, decreased $2.9 million from 2015 levels and the operating margin of 14.3% compared to 14.8% last year.

Turning now to Slide 8, first quarter sales in the Snap-on tools group of $402.5 million increased 8.1% organically, reflecting a high single-digit gain in the company's U.S. franchise operations and a mid-single digit increase in the company's international franchise operations.

Sales gains continue to reflect strong demand, including for big-ticket items such as tool storage and diagnostics. Gross profit of $173.2 million compared to $166.3 million last year. The gross margin of 43% decreased 100 basis points for the most part due to unfavorable foreign currency effects.

Operating expenses were $106.5 million in both the first quarters of 2016 and 2015. The operating expense margin of 26.4% improved 180 basis points primarily due to sales volume leverage and savings from RCI initiatives as well as 50 basis points of lower stock-based cost associated with the Company's franchisee stock purchase plan.

As a result of these factors, operating earnings for the Snap-on tools group of $66.7 million, including $4.2 million of unfavorable foreign currency effects, increased $6.9 million and the operating margin of 16.6% improved 80 basis points from 15.8% last year.

Turning to the repair systems information or RS&I group, shown on Slide 9, first quarter sales of $278.8 million increased 3.1% organically.

The organic sales increase primarily reflects a mid-single digit gain in sales of diagnostic and repair information products, a low single-digit increases in both sales of undercar equipment and sales to OEM dealerships. Gross profit of $131.6 million compared to $127.3 million last year.

Gross margin of 47.2% improved 40 basis points, primarily due to savings from RCI initiatives. Operating expenses of $62.6 million in the quarter compared to $63.4 million last year. The operating expense margin of 22.5% improved 80 basis points, primarily due to sales volume leverage and savings from RCI initiatives.

First quarter operating earnings for the RS&I group of $69 million, including $1.3 million of unfavorable foreign currency effects, increased $5.1 million from prior year levels. And the operating margin of 24.7% improved 120 basis points from 23.5% last year.

Now turning to Slide 10, operating earnings from financial services of $47 million on revenue of $66.3 million compared with operating earnings of $40.3 million on revenue of $57.4 million last year. The average yield on finance receivables of 17.9% in the quarter compared with 17.7% last year.

And the average yield on contract receivables was 9.5% in both periods. Originations of $264.6 million in the quarter increased 14.7% from 2015 levels. Moving to Slide 11, our quarter-end balance sheet includes approximately $1.6 billion of gross financing receivables, including $1.4 billion from our U.S. operation.

Approximately 81% of our US financing portfolio relates to extended credit loans to technicians. In the first quarter of 2016, our worldwide financial services portfolio grew $53.3 million, continuing to reflect the previously mentioned higher sales of big-ticket items like the Snap-on tools group.

As for finance portfolio losses and delinquency trends, these continue to be in line with our expectations.

Now turning to Slide 12, cash provided by operations of $141.6 million in the quarter increased $63.5 million from comparable 2015 levels due in part to higher 2016 net earnings and lower growth in working investment as compared to the prior year.

Net cash used by investing activities of $79.6 million included $56.8 million to fund a net increase in finance receivables. Capital expenditures of $19.5 million in the quarter compared with $18.1 million last year. Turning to Slide 13, days sales outstanding for trade receivables of 61 days compared with 60 days at 2015 year-end.

Inventories increased $13.8 million from 2015 year-end levels primarily to support continued higher customer demand in the auto repair sector and new product introductions. On a trailing twelve month basis, inventory turns of 3.4 compared with 3.5 turns at 2015 year-end.

Our quarter-end cash position of $106.3 million increased $13.5 million from 2015 year-end levels. The net increase includes $174.1 million of cash from collections of finance receivables, and $141.6 million of cash from operations.

These cash increases were largely offset by the funding of $230.9 million of new finance receivables, dividend payments of $35.4 million, the repurchase of 157,000 shares for $23.1 million, and $19.5 million for capital expenditures. Our net debt capital ratio of 23.6% compared with 24.6% at 2015 year-end.

In addition to our $106.3 million of cash and expected cash flow from operations, we have more than $700 million in available credit facilities and our current short-term credit ratings allow us to access the commercial paper markets. As of the first quarter end, we had no commercial paper borrowings outstanding.

This concludes my remarks on our first quarter performance. With that, I'll now turn the call over to Nick for his closing thoughts.

Nick?.

Thanks, Aldo. That's our first quarter, performance against the wind. We believe it's a period that authors strong confidence going forward, authoring or auguring progress along our runway for both improvement and growth. Enhancing the van channel, the tools group grew 8.1% organically and the OI margin reached 16.6%, up 80 basis points.

Franchisees confident and committed, a stream of exciting new hit products and a continuing line of ways to wield the van channel more powerfully, the Rock n Roll CADs to the Techno Express and now the Chrome Express Plus enabling the franchisees to reach more customers. Expanding repair shop owners and managers. Sales up 3.1%.

OI margin rising 120 basis points to 25.7%, great products. The V3300 aligner, the ETHOS and the SOLUS handheld meeting the growing complexity of vehicle repair. Building in emerging markets, expanding the physicals, sales increasing in a varying landscape. And finally, extending to critical industries. Turbulence, but we still see progress.

Clear to us in terms of expanding product lines aimed at solving the critical in those sectors outside the garage. And you can't look at our quarter without seeing the hallmarks of Snap-on value creation, driving improvement against the difficulties, authoring an OI margin of 18.6%, up substantially versus last year, again.

And when you add that opco performance to our financial services progress, it rolls together for an EPS of $2.16, up 15.5%, extending our trend of rising profitability, a 15.5% rise in what most would call a turbulent environment.

We believe it was an encouraging quarter, and one which points clearly to continued and significant gains as we move forward. Now before I turn the call over to the operator, it's appropriate that I say words to our franchisees and associates.

Once again, I know many of you are listening, the progress of our first quarter most clearly reflects your extraordinary capability and your unique dedication. For the skills you bring to our company, for the energy you devote to our efforts and for the commitment you give to our team, you have my admiration and you have my thanks.

Now I'll turn the call over to the operator.

Operator?.

[Operator Instructions] We'll go first to Liam Burke with Wunderlich. Please go ahead, your line is open..

Thank you. Good morning, Nick. Good morning, Aldo. The auto repair and maintenance end market seems to be working in your favor. The macro trends seem to be strong now and sustainable.

Are you seeing any change in the competitive environment?.

Not really. I'm sure -- you know, we have a fairly strong position in these markets, as you know. And generally, as I've said many times on these calls, built on I think the overwhelming capability of our van network and the skill of our franchisees, and the ongoing understanding of the repair shop, we generally reflect back on ourselves.

So when I talk about franchisees, they almost never really mentioned the competition although I'm sure is formidable. They mention about how we can improve back on ourselves. And I'm seeing no change in that really. And I think the tools group numbers seem to say that. Their numbers look pretty good. They continually make this up.

They've been up 6% or greater 23 of 24 quarters. One of the things I like to say about that, I think one of the investment theses about Snap-on is that Snap-on is a company that is so much more -- so much more to do, so many more places to grow and improve.

And the tools group, the van channel, has been around for decades, and yet they have been able to do this by creating a bigger plume and being able to expand so dramatically by creating a greater plume of new product and figuring out through things like these Rock 'n Roll cads and Techno Express and now Chrome Express Plus, how to wield those vans more effectively.

That's what's happening with us in the market..

Thanks Nick. And also on the diagnostic side, you mentioned the handheld as some of the key product introductions and innovation you're getting there.

If you look at the diagnostics business in general, is most of the growth coming out of handheld or do you have some innovative products coming into the service station owner and manager?.

If you look at RS&I; we are getting growth in a broad range. Diagnostic stuff is growing very strongly. If you look at big-ticket items in the tools group, which is the bigger diagnostics and the tool storage and so on, they are up higher than -- they're growing faster than the tools group. So that looks pretty strong.

We keep innovating around handhelds, and that's of course some of the spiffy stuff people like to talk about because people want more diagnostics as the cars get more complex. But also if you look at equipment, you will see that in terms of the new aligners we brought out. And behind the aligners, there's an array of new balancers and so on.

And then finally, we keep enhancing our software product like this SureTrack, which accesses hundreds of millions of actual repair events and allows technicians to pinpoint the possible repair and shortcut to that repair through big data. That's an exciting product which is going into the garage at the same time..

Great. Thanks, Nick..

Sure..

[Operator Instructions] We'll go next to David Leiker with Baird. Please go ahead, your line is open..

Good morning everyone. A couple of things I want to walk through. In C&I, you still have I think at least another quarter here of tough comps year-over-year.

Is that right?.

Yes, look, I think at C&I if you look at this, I think you could say you'd be allowed to the fact that oil and gas gets -- it wasn't as we did in the first quarter last year, if you remember, in oil and gas. The second quarter started tail off. So I think oil and gas tends to get a little easier moving into the second quarter.

But military was strong and international aviation was strong in the second quarter. So we still have another quarter of batting up against that. It tends to get easier in the third and fourth quarter. I don't want to say easier, but it tends to be less high of a bar..

Yes, and if I remember correctly, your fourth quarter for oil and gas, energy, military, that Q4 tone was slightly weaker than Q3.

What does it look like in the first quarter versus Q4?.

It's weaker. Both of those are weaker in the first quarter than they were in Q4. I think marginally. I'd say marginally weaker. It's somewhat weaker though. It's hard to say, David, because you've got fourth quarter over first quarter. You might have some mild seasonality flowing through that, but I would say mildly weaker..

Do you think when we get to that point through these comps in the second half that they are more normalized, that those businesses are down single digits instead of double digits?.

I'm not in the business of forecasting that, but certainly we'd come back to substantially lower comparisons. And so that by arithmetic changes the whole situation. And then remember, we keep investing in those businesses.

We brought out -- I just want to point out, we had a tough year in the military, and we brought out over 700 new products aimed at the military. So, we keep positioning ourselves for this, so we are ready to go. We are all dressed up. When the party comes, we are ready to dance..

And then Aldo, just a question for you on currency, a lot of details you split out there.

Is there a way that you can, on the EBIT line, split out how much of that currency effect was translation versus transactional currency? Could some of these cross-currency relationships seem to be a little bit out of balance with what we normally would see?.

We do.

I don't want to actually give the internal calculus around that number, but I think, to help you out, as you look forward looking at today's currency rates, transaction will be the greater burden that affects the EBIT calculation so to speak and translation abates a little bit as you go forward using today's rates if you march forward in time..

Okay, great. Thank you very much..

And our next question comes from Bret Jordan with Jefferies. Please go ahead, your line is open..

Good morning everyone, this is David Kelley in for Bret. Thanks for taking my questions. And a couple ones, and first I guess a follow-up to an earlier question. The US franchisee base posted really another excellent quarter here.

And I know there's been some discussion of a sequential slowdown through Q1 from an aftermarket distributor that reported earlier this week.

Is that something that impacted you at all either from your franchisees or let's say RS&I sell-through to the non-dealer channel? And I guess to that point, could you give us maybe a general feel for cadence and tools and RS&I performance throughout the quarter?.

I don't think we want to give you cadence throughout the quarter, I don't think – look, I think we are not seeing -- I wouldn't say we are seeing any marked change in the auto repair related businesses. When we go, either in our numbers or when I go out and visit the garage, when I ride these vans.

One of the interesting things about our view of the economy is this, is when we look at -- we parse it between auto related and the industrial. We did it in my remarks. But you know, I think one of the fascinating it's about today's environment is it's big to small -- I mean small-to-big.

If you're out in the small garage, if you're out in these garages, they are feeling good. They are confident. They are great. So those businesses, the small businesses, to us in our sectors seem uniformly to be enthusiastic and confident and doing very well. As you rise in the size of business, the amount of cautiousness increases.

And you can see that in our businesses as well. So when we are selling to the garage from garage to garage, from dealership to dealership, we see good things. When we are engaging with let's say the OEMs or the manufacturers, that's a little bit more tepid.

But to answer your question directly, at the grassroots level, we are not seeing any abatement in this. In fact, our franchisees are only getting more confident as far as I can tell..

Great. I really appreciate that color. And I guess just a quick follow-up.

As you talk about the grassroots movement and the strength at the garage level, what do you see as the better opportunity in 2016? Are we selling more to the mechanics or the shop owners with some of diagnostic equipment?.

Well, actually, it merged a little bit because what's happening is that it used to be that much of the bigger diagnostic equipment was sold to the shop, and it was spread around. It was shared between technicians.

What's happening now is while 40% to 50% of the repairs in a -- of the car-park, the 300 million car, vehicle car-park, 40% or 50% of those repairs require a diagnostic unit. 80% of the new car repairs require a diagnostic unit.

So every technician is going to need a diagnostic unit from that ETHOS read and reset to all the way up to our VERUS PRO that will solve the most puzzling of problems. And so we are seeing more sales now to individuals. But we are also seeing -- that's the market situation.

But RS&I has only within the last, let's say within the last five or six years started -- five, six, seven years -- started to focus on repair shop owners and managers as a particular customer base. So, you see that opportunity unfold for us as we learn what they need, and we arm our quiver with more products. We give us more to sell to those guys.

So I would say the market is going really robustly for the technicians. Shop owners and managers are still buying but we have a particular share gain opportunity with owners and managers..

Okay, great. Thank you. And then one more for me and I'll jump back into queue here. Can you maybe give us some color on the impact of the lower stock-based compensation and pension expense on corporate expense? And then if we think about the last few years, you've run I think roughly $100 million annualized corporate expense.

How do we think about the full-year run rate for 2016?.

I think we kind of give guidance around $25 million a quarter or so on. So it's interesting. Last year in the quarter, we had a particularly expensive mark-to-market event that drove corporate expense up. I think it was $29 million and change. This year, we had a particularly favorable one which brought it down to $21 million and change.

Really the $21 million compares to a $25 million run rate if you really want to think of it in those terms. If you talk about operating expense, yes. In operating expense, there's that mark-to-market and the pension expense that's in there that's making some of the improvements in operating expense.

What we do is when we look at our numbers, we say this, yes, we've got good news from mark-to-market but we got bad news from currency. They about balanced, mark-to-market and pension currency, and we still grew EPS at 15.5%..

Great, I appreciate the color. Thanks again..

And we'll take our next question from David MacGregor with Longbow Research. Please go ahead, your line is open..

Good morning, everyone. You caught my attention with the observation of franchisees adding help on the van, and that should drive sales productivity. Do you have a count on -- I know you've got 3,500 trucks running in the United States..

That's a ballpark, it's 3,475. I don't know that number. It's written on might shorts here. That's why I see it every morning..

Do you have a figure on growth, just to what extent you are selling….

No, I don't want to get in the business of reporting that, but let's just say that that is a small number so far. In the 15% to 20% range of the franchisees have those as systems. As you know, most of them -- and it's a franchisee's choice to make the decision. We enable it with things like Chrome Express Plus and other things.

But what I see when I go to these kickoffs or go to the National Franchisee Advisory Council and talk to these, the more the franchisees see the success of other people with these assistance, the more they say, hey, maybe I could do this. I could hire new guys. I could reach more customers. I can increase my sales.

And they are looking at that because, now, having grown for 23 out of 24 quarters 6% or greater, they want this growth. They expect it and so they are looking for things which could make their businesses better..

The other question I had for you was just the disparity in growth rates between your originations on the credit business and the tools growth. And I'm just wondering if you can talk were there any changes within the credit model and the extent to which this has helped you with your most creditworthy customers, drive….

Look, I think there are lots of things floating through here. It depends how long wave you want to look at it. If you look at it in any one particular quarter, you are talking -- first of all, you are talking big ticket items.

So, big ticket items in this particular quarter, tool storage, big diagnostic and so on, they grew faster than the tools group, so it's hard to match that. Plus there's a timing question and then a sales tech on top of it. So there is a lot of things that goes on in the individual quarters.

If you are saying have we wielded credit more effectively or more broadly, we have, because what we've done is we've spent a lot of time determining, determining, determining who are our best franchisees, and how they are good at credit. There's been no change in the credit model really. There's been no change in the credit model.

But we have done a great job I think of using those franchisees who have the best instincts and insight and capability around credit, and enlisting them in the credit company to advance this kind of activity..

You have a history of managing credit very effectively, so I was more focused on the extent to which this may put more purchasing power in the hands of your customers to buy bigger ticket items going forward..

There is some of that, but we haven't really changed it. It can make it possible for certain people who couldn't get credit before, who happen to be in a route that's superintended by one of the people that we now think is a great credit guy, what we call a Platinum Elite guy. That could make that change. But generally we've kind of held it.

We've kind of held that model I think, except for this engaging the knowledge of the franchisee..

Got it. Thanks very much..

Sure..

And our next question comes from Gary Prestopino with Barrington Research. Please go ahead, your line is open..

Good morning everyone. Nick, is the Chrome Express Plus, is that the program of putting assistance on the vans? I'm a little confused there..

You know what it is? The Chrome Express Plus is an adjunct to our new computer system. Several years ago, we rolled out a new computer system, point-of-sale system, for the van. And then more recently, we have added Chrome Express Plus, which allows mobile, tablets, multiple tablets to roll out from the van.

And what I am saying is the franchisees, the franchisees have looked at their situation and realized that, boy, they would like to add selling time. So they have made the decision, on an individual basis pretty much, it has been a grassroots effort, to try to pick up assistance. And then this Chrome Express Plus is a response to that help enable them.

We don't have a program to bring on assistants. We are not sponsoring a program or anything like that. It's fundamentally the franchisees themselves because after all these are independent businessmen who make these decisions.

But we have created Chrome Express Plus that really leverages -- if you have an assistant, chrome express plus really helps you. And it really helps the assistants that is there. That's what I was trying to say..

Okay. I was just a little confused on that. And then on the diagnostic side, interesting comments about -- you are saying number of cars or amount of cars that now need some kind of diagnostic usage and repair.

But is there something within these diagnostic products that you are putting out that make older ones more obsolete? Is it just computing power, amount of information they can show? I'm just trying to get an idea of how long one of these techs can use a diagnostic tool effectively before he or she has to switch….

In a way, Gary, it's a little bit like a TV. You could still be using a tube, I suppose, but every time there are two pieces here. One is software, we keep updating software. I want to say a couple of times a year we keep updating software.

Then we bring out so you could be having an existing handheld and keep updating the software, keep updating the software. Eventually that software might not be run so effectively on some of the older models. That is one, so you would want to change. Secondly, again, it's like a TV.

We bring out the newer models, and they have features, touchscreen feature. The new SOLUS, you turn it on, it comes on in like seconds, five seconds. The older one was slower. VERUS Edge, you can get technical service bulletins. You go out on the Internet and you get SureTrack on it, different capabilities.

By the way, it's about -- it's substantially lighter and better ergonomics than it was. So you have these two things going on.

So if you behold one of these new diagnostics, and this happens all of the time, because people say, gee, I'd really like to use this; it is a lot lighter; it would be effective for me; it's a lot quicker; it's more easy with a touchscreen. So people tend to want to upgrade. So we keep enhancing those. And there is software on top of it..

Thanks.

And just for Aldo, did I hear you right that you said currency has negatively impacted net earnings by about $8.1 million this quarter?.

That's correct. That's the bottom-line impact..

Okay.

So in terms of translation, which currency is going to have more impact as we go forward? Is it the euro or the pound?.

The euro historically would be the biggest currency, and in 2015 was the biggest decrement to sales. That is starting to wane now as the euro has stabilizes. So as you go forward I think you look at the pound and the Canadian dollar will start to factor in, but I would say that's my best description right now, Gary.

I think you'll see less translation negative impact coming from the euro, yet within the Company, there is still some transaction drag that's created from the currency mix that we have..

Alright, that's what I thought. Okay, thank you..

And our next question comes from Richard Hilgert with Morningstar. Please go ahead, your line is open..

Good morning, Nick. Good morning, Aldo.

How are you?.

Good morning.

How are you?.

Doing well, thanks. And thanks for taking my questions this morning..

Sure..

I just wanted to go back to a couple of things. The corporate expense line for coming to operating earnings, that was an $8.4 million reduction from last year to this year. And did I hear you right, this is related to pension expense but it sounded like you were talking about currency too. So am I to assume that this is the….

No, there is couple pieces to that, one is of course pension expense, it's between -- I think that's between $1 million and $2 million, something like that. And the rest is principally marked-to-market around the stock-based compensation. So basically when the stock price goes down, you get good news. When it goes up, you get a mark-to-market.

So what happened last year is a little bit misleading because last year -- that difference is versus last year, and last year the stock price went up in the quarter. So we had bad news in mark-to-market. And so you are comparing the bad -- the good news this year with the bad news last year, and so you get an expanded number in the $6 million range..

Okay, got you. So mark-to-market on the stock compensation expense..

Yes..

Alright. And then on receivables in the finance group, you guys did a great job bringing on receivables that were up 17% in the quarter. So really good loan origination going on. I'm curious. You mentioned earlier about Premium Elite status franchisees.

Is this because of their efforts to increase the credit portfolio, or is this driven because there is a different mix in what loans are being originated or….

No, no, no. What this means is this is the kind of framework which we've had for some time. The broader characterization is Platinum. These are people who are engaging in the credit program. They are spending time thinking about how to deal with credit. And the better guys, the top end guys, are what we call the Platinum Elite.

And what this really means, Richard, is certain franchisees can judge credit, can add to our credit model. We have -- our credit process is like this.

Okay, great. And it sounds like these guys, being more adept at credit policy, are better able to identify potential risks that even though you're penetrating your market more so on the finance side, the risk that you are taking on hasn't changed.

Is that a fair statement?.

Any other -- most other credit facilities, through the eyes of these people, we actually know the borrower very, very well, and that's the essence of how we keep the losses down so low..

Okay, very good. Thanks again for taking my questions..

Okay..

And this concludes our Q&A session. I'd like to turn the call back over to Leslie for closing remarks..

We appreciate you joining us today. A replay of the call will be available shortly on Snapon.com. And as always, we thank you for your interest in the company. Good day..

And this does conclude today's program. You may disconnect at this time. Thank you and have a great day..