Good day, ladies and gentlemen, and welcome to the Snap-on Second Quarter 2020 Results Investor Conference Call. Please note that today's call is being recorded. And at this time, I would like to turn the conference over to Sara Verbsky, VP of Investor Relations. Please go ahead..

Thank you, Kathy, and good morning, everyone. Thank you for joining us today to review Snap-on's Second 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 our webcast viewer as well as on our website, snapon.com, under the Investors section. 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. 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 16. Both can be found on our website. With that said, I'd now like to turn the call over to Nick Pinchuk.

Nick?.

First, the initial shock. A substantial interruption of activity at both the franchisee and the customer level. This was evident in late March and in April; second, a combination period. As operations and individuals develop more and more ways to safely pursue their opportunities against the COVID-19 environment.

In fact, we appear to be seeing that effect through May, June and onward. And of course, we've actively participated in that process, broadcasting best practices, working hard to accelerate the comeback. Finally, the third phase, psychological recovery.

Following a return to normal, customers will need to regain confidence in the future before they resume full buying participation. And in that recovery, we see great opportunities. As driving is restored becomes even more popular, even more essential. This overall construct represents what we consider to be the general shape of the way forward.

It does represent a continuing upward trend, but the slope of the ascension isn't clear. And of course, the psychological recovery phase will be greatly influenced by the ongoing evolution of the virus. Nobody knows the future for sure, but we are encouraged by what we've seen so far. Looking back, April was the nacre.

But as the quarter progressed, we showed continual recovery. Our businesses did learn to better accommodate the pandemic. Both sales and profitability improved sequentially in May and in June. Although the virus is still with us, it appears that the situation may be evolving just as we projected.

As we said at the end of April, the impact of COVID-19 varies across our operating landscape. Asia remains virus challenged. Japan, South Korea and China do appear to have weather the worst, but Southeast Asia and India are still in deep turbulence.

And in Europe, the overall economic weakness present before the pandemic in combination with the virus has made for the deepest distress of all. Beyond geographic differences, we're also seeing that our face-to-face businesses, the mobile vans and the direct sales forces are faring somewhat better compared with other models.

Snap-on's traditional strength, personal selling appears to be an effective foundation for limiting the difficulty. In that way, we believe we have the resilience and resources to weather this challenge as Snap-on has so many times in the past.

Actually, over the years, we've seen this movie before natural disaster, Superstorm Sandy, Hurricane, Harvey and Katrina and the Great Recession of 2009 and each time we learned to accommodate and emerge stronger and we've taken the lessons of those disruptions that apply them with positive effect to this time of the virus. I love to say this.

Snap-on has paid a dividend every quarter since 1939 and it's never reduced it and this quarter was no different. That record stands as evidence of our ongoing resistance to challenge.

And beyond just maintaining, we believe our continuing investment in new products and our franchisees and in our team in the midst of the storm will once again make us stronger as the environment recovers.

We do believe in the opportunities going forward and because of that, we're keeping our focus on Snap-on value creation, safety, quality, customer connection, innovation and rapid continuous improvement. That emphasis is particularly evident in customer connection and innovation. We're continuing with a stream of new products.

We believe the green shoots of accommodation and psychological recovery will grow and we're going to be ready. Well, that's the overview. Now let's turn to the results.

Second quarter, as reported sales were $724.3 million, down 23.9%, including $14.4 million or a 120-basis-point impact from unfavorable foreign currency and an organic sales declined 22.9%.

From an earnings perspective, OpCo OI for the quarter of $91.1 million, including $5.8 million of direct costs associated with the virus, $4 million of restructuring, principally focused on Europe and $3.8 million of unfavorable foreign currency effects compared to $189.9 million in 2019.

Optical operating margin was 12.6% and the as-adjusted level, excluding restructuring charges, was 13.1%. For financial services, operating income of $57.6 million was down from last year's 60.6%. Overall, EPS on an as-reported basis was $1.85 compared to compared to $3.22 last year. Excluding the restructuring charges the as-adjusted EPS was $1.91.

Well, those are the overall numbers. Now let's turn to the groups.

In C&I, volume in the second quarter of $261.9 million including $6.9 million of unfavorable foreign currency, was down versus last year's $335 million, primarily on double-digit declines in all of the segment's operations, reflecting the effect of COVID-19 operations, and the ongoing economic weakness in Europe.

From an earnings perspective, C&I operating income of $22.9 million decreased $26 million, including $3 million of virus related of costs, $2 million of restructuring and $1.9 million of unfavorable foreign currency effects. There was a clear point of light in C&I.

Our direct sales to customers in the critical industries, though still down was less effective than other areas across the group. Military and international aviation continue to register growth. And heavy truck, as you might expect was down, but was reasonably resilient while other segments such as oil and gas and education, no surprise.

There were no students. Both those industries were significantly impacted by the pandemic and experienced substantial contraction. But we do remain confident in and committed to extending in the critical industries, and we do see growing opportunity there moving forward. Speaking in the future, let's talk about creating new products.

Just this quarter, we introduced another one of our great 14.4 volt units. The new CTS 825 quarter inch Hex Hex Cordless screw driver. Our brushless powertrain makes for higher torque, more run time, longer motor life.

The driver as a nine-position clutch giving text just a proper amount of torque for the job, all packaged with a dual range gearbox and a built-in break that prevent this power tool from throwing fasteners that's a significant safety feature.

The new screw gun also features ergonomically designed cush grip handle for great tech comfort and twin lights, twin LED lights to clearly illuminate the work area. After only a couple of months, it's already essential where work is critical. It was launched in April, a tough month.

But it's already one of our hit million dollar products, a significant success. C&I, navigating the turbulence of customer connection and innovation serving the essentials, now on to the Tools Group.

Sales were $323.3 million in the quarter, reflecting a $79.2 million organic decline and $3.3 million of unfavorable foreign unfavorable foreign unfavorable foreign currency.

The operating earnings were $38.4 million, including $1.9 million of virus-related costs, $1.1 million of unfavorable foreign currency and $600,000 of restructuring charges compared to $71.3 million recorded in 2019.

The Tools Group was a clear demonstration both of the COVID trajectory across our business and of the strength and resilience of our direct face-to-face model. As the virus rose in late March and April, the network was shocked individually and collectively. The impact varied by region, but all geographies were affected. April was the deepest.

However, moving from that point, our franchisees in collaboration with the Snap-on team file increasingly effective ways to accommodate the pandemic and pursue their support of the essential. And each subsequent month, the vans have shown significant gains.

In fact, the Tools Group sales in June were down just 3.1%, up nicely after a tough start to the quarter. The ongoing accommodation, you hear from the field that the direct interface with our customers is dramatically highlighting the bun that Snap-on has always had with working men and women through thick and thin.

And many franchisees report that the relationship forged to new and the pandemic have never been stronger. There's nothing like working together in difficulty, and we believe this bodes really well for our market position and for capturing future opportunities.

So despite the virus, we're still quite positive about our business, and as a view clearly reflected outside Snap. And in fact, once again, this year, we're being recognized in the top 50 of entrepreneurs Magazine's annual best of the best franchisee -- franchises.

The entrepreneur ranking rates 500 companies on cost, size, growth, franchise support, brand power, financial strength and organizational stability. And we again scored highest in the Tool Distribution category. That's a distinction we've held for quite some time.

As we move forward, our associates and franchisees are clearly becoming more effective against the win, it’s a continuing process born out of the Snap-on team working and developing action plans, sharing best practices for safe selling, supporting with tailored promotions and launching targeted promotions.

This is a process that's been successful in hurricanes, recessions and the threats of 9/11, and it's working again. And of course, the effort includes also a healthy array of innovative new products to solve the critical. Everybody knows we have great ratchets. And guided by uninterrupted customer connection, we've been expanding that powerful line-up.

Almost every quarter, and we did it again when we introduced the XFR704 12-point Flank Drive Double Flex Ratcheting Box Wrench Set. Now that's a mouthful. But this unit has a lot to offer. It combines 180-degree flexible head with our narrow width and low-height design, allowing work in the tightest of spaces.

Our patented ratcheting gear utilizes Dual 80 technology, minimizing swing arc and making jobs in restricted areas even easier. And our unique Yoke/tang configuration provides the strongest and most durable flex head anywhere. The new four-piece set is built in our Elizabethton, Tennessee plant right here in USA.

I was just there again, and I can testify. The Snap-on people in that plant are a special team turning out great product, and even in the current environment that technicians have noticed, driving the Flex to 704 on its way to be another $1 million product.

Well, that's the Tools Group, accommodating the pandemic, furthering innovation and strengthening for the future. Now let's speak of RS&I.

The RS&I group finished the quarter with $245 million in sales, including $4.8 million of unfavorable foreign currency, $2.3 million from recent acquisitions and that level compared to $348.9 million recorded last year.

The lower volumes reflected a decline of over 30% and the activity associated with vehicle OEM projects and in the capital like spending relating to our undercar equipment operations, both areas that were deeply attenuated with the uncertainty.

Sales of diagnostics and repair information products, independent shops were also negatively impacted, but to a lesser degree, garages continue to subscribe. And invest in meeting new repair challenges, people's need fixing even in a pandemic.

RS&I operating earnings of $50.6 million decreased $38 million, including $1.4 million of European focused restructuring, $800,000 of unfavorable foreign currency and $700,000 of direct COVID costs. So while the overall group was impacted, information-based operations were not as effective and new products were a driver in that.

Once again, we generated repair excitement with innovations like the latest enhancements to our Mitchell One prodemand repair information system, which in response to the needs of large national account customers now includes a range of vehicle lift points in its quick reference menu.

The new pro menu links directly to vivid vehicle illustrations, which identify designated listing points as well as listing all the important manufacturer recommended safety procedures. You see technicians are in a hurry, sometimes fail to follow the correct lift procedures. Injuries and vehicle damage can follow.

But those who have our pro demand system can now find the critical lift information only one click away from the home screen. It's a significant convenience and a clear safety enhancement. Also in the quarter, we launched our e-Technician 2.0 designed specifically for heavy-duty trucks.

It's the most comprehensive and powerful diagnostic software in the market. It provides the data and the support required to stay competitive in today's trucking industries. Heavy-duty diagnosis were never this good.

The e-technician 2.0 combines extensive coverage from everything from commercial vehicles to write-down to light and medium heavy-duty trucks, diagnostic capability for an expanded array of engines, transmissions, brakes, body and chassis systems and more.

The new 2.0 also adds a cloud-based, fleet-wide vehicle history, giving users access to every diagnostic session for every vehicle in their fleet, regardless of location. Snap-on continues to show the way in truck repair and e-technician 2.0 is another step along that path. We're confident in the strength of our RS&I group.

And we keep driving to expand its position with repair shop owners and managers, making work easier with great new products even in the days of the virus. Well, that's the second quarter, the Snap-on second quarter.

Shack, moving to accommodation into what we believe will be psychological recovery, keeping our teams safe as we pursue the essential, applying the lessons of our experience, helping our customers, our franchisees and our team, whether the difficult days.

And build the capability, whether those days and build the capability to operate in the virus environment, driving month-by-month improvement, engaging the power of our direct selling capabilities, being confident in our future opportunities now amplified by the virus, pursuing Snap-on value creation, all to not only weather the turbulence, but to emerge stronger and ready to take full advantage when the days are clear.

Now I'll turn the call over to Aldo for a detailed discussion of the financials..

Thanks, Nick. Our consolidated operating results are summarized on slide six. Net sales of $724.3 million in the quarter compared to $951.3 million last year, reflecting a 22.9% organic sales decline, $14.4 million of unfavorable foreign currency translation and $2.3 million of acquisition-related sales.

The organic sales decrease primarily reflected the impact of the COVID-19 pandemic, with sales declines in all three operating segments. In the quarter, while there was some variability from location to location, the declines in Europe were more pronounced.

As anticipated, with government measures in place throughout the world, sales in the month of April were heavily impacted and were down significantly on a year-over-year basis.

As locations began to reopen and as our operations and those of our franchisees adjusted to the virus environment, which included accommodations for various government-imposed restrictions, we began to see sequential improvements in activity as we move through May and June.

Similar to last quarter, we accrued for restructuring costs associated with certain of our European-based operations. During the second quarter, we recorded $4 million of such cost which were reflected in each of our operating segments. Additionally in the quarter, we've identified $5.8 million of direct costs associated with COVID 19.

These costs include direct labor and under-absorption associated with temporary factory closures, wages for quarantine associates, event cancellation fees as well as other costs to accommodate the current enhanced health and safety environment. Consolidated gross margin of 47.1% compared to 49.8% last year.

The 270 basis point decrease primarily reflects the impact of the lower volumes, including costs to maintain manufacturing capacity and worker skill sets, 40 basis points of direct cost associated with COVID-19 and 30 basis points of restructuring costs. The decreases were partially offset by savings from RCI initiatives.

The operating expense margin of 34.5% increased 470 basis points from 29.8% last year. This increase primarily reflects the impact of lower sales as well as 40 basis points of direct COVID-19 related costs and 20 basis points from restructuring actions.

These items were partially offset by savings from cost containment actions in response to the lower volume.

Operating earnings before financial services of $91.1 million, including $5.8 million of direct costs associated with COVID-19, $4 million of restructuring costs and $3.8 million of unfavorable foreign currency effects compared to $189.9 million in 2019.

As a percentage of net sales, operating margin before financial services of 12.6% compared to 20% last year. Excluding the restructuring charges, operating earnings before financial services of $95.1 million or 13.1% of sales, decreased 49.9% from 2019 levels.

Financial services revenue of $84.6 million in the second quarter of 2020 compared to $84.1 million last year, while operating earnings of $57. 6 million compared to $60.6 million in 2019, primarily reflecting a $3 million increase in provisions for credit losses.

Consolidated operating earnings of $148.7 million, including $5.8 million of direct COVID related costs, $4 million of restructuring charges and $4.1 million of unfavorable foreign currency effects compared to $250.5 million last year. As a percentage of revenues, the operating earnings margin of 18.4% compares to 24.2% last year.

On an adjusted basis, excluding restructuring, operating earnings of $152.7 million or 18.9% of revenues decreased 39% from 2019 levels. Our second quarter effective income tax rate of 24.1%, including a 20 basis point increase from the restructuring charges compared to 23.6% for the second quarter of last year.

Finally, net earnings of $101.2 million or $1.85 per share, including a $0.06 charge for restructuring compared to $180.4 million or $3.22 per share a year ago. Excluding the restructuring charges, net earnings as adjusted were $104.5 million or $1.91 per share. Now let's turn to our segment results. Starting with the C&I group on slide seven.

Sales of $261.9 million compared to $335 million last year, reflecting a 20.22% organic sales decline and a $6.9 million of unfavorable foreign currency translation. The organic decrease includes mid-teen declines in both sales to customers in critical industries and in the power tools operation.

Across the critical industries, gains in sales to various government-related agencies were more than offset by declines in natural resources, including oil and gas, as well as the lower technical education sales with the latter being impacted by school and campus closures.

Gross margin of 34.4% decreased 420 basis points year-over-year, primarily due to the impact of decreased sales, including lower utilization of manufacturing capacity, as well as 80 basis points from $2 million of restructuring charges, 70 basis points of direct costs associated with COVID-19 and 50 basis points of unfavorable foreign currency effects.

These decreases were partially offset by material cost savings and benefits from the company's RCI initiatives. The operating expense margin of 25.7% increased 170 basis points from 24% last year, primarily due to the lower sales and 50 basis points of direct COVID-19 related costs.

These items were partially offset by savings from cost containment efforts. Operating earnings for the C&I segment of $22.9 million, including $3 million of direct COVID-19 related cost, $2 million of restructuring charges and $1.9 million of unfavorable foreign currencies effects compared to $48.9 million last year.

The operating margin of 8.7%, including the 80 basis point charge for restructuring compared to 14.6% a year ago. Turning now to slide eight. Sales in the Snap-on Tools group of $323.3 million compared to $405.8 million in 2019, reflecting a 19.7% organic sales decline and $3.3 million of unfavorable foreign currency translation.

The organic sales decrease reflects a mid-teen decline in our US franchise operations and a nearly 40% decline in the segment's international operations.

As Nick mentioned, sales in our direct customer-facing businesses like the Snap-on Tools had the most dramatic year-over-year decreases in April, with notable sequential improvements in activity in May and June.

Gross margin of 41.7% declined 340 basis points, primarily due to the impact of lower sales volumes, including cost to maintain manufacturing capacity as well as 30 basis points of direct costs associated with COVID-19, and there were 20 basis points of unfavorable foreign currency effects.

The operating expense margin of 29.8% increased from 27.5% last year, primarily due to the impact of the lower sales, 30 basis points of direct COVID-19 related costs and 20 basis points from $600,000 of restructuring charges. These costs were partially offset by savings from cost containment actions.

Operating earnings for the Snap-on Tools group of $38.4 million, including $1.9 million of direct COVID-19 related costs, $1.1 million of unfavorable foreign currency effects and $600,000 of restructuring charges compared to $71.3 million last year. The operating margin of 11.9% compared to 17.6% a year ago.

Turning to the RS&I group shown on slide nine. Sales of $245 million compared to $348.9 million a year ago, reflecting a 29.5% organic sales decline and $4.8 million of unfavorable foreign currency translation, partially offset by $2.3 million of acquisition-related sales.

The organic sales decline includes a mid-teens decrease in sales of diagnostic and information products to independent repair shop owners and managers as well as declines of over 30% in both sales of undercar equipment and sales to OEM dealerships.

The lower sales of undercar equipment includes significantly lower sales of collision repair products, while lower sales to OEM dealerships largely reflect decreases in OEM facilitation projects.

Gross margin of 47.4% improved 110 basis points from 46.3% last year primarily due to the impact of reduced sales and lower gross margin businesses and savings from RCI activities.

The operating expense margin of 26.7% increased from 20.9% last year, primarily due to the lower sales and 50 basis points from $1.4 million of restructuring charges partially offset by savings from RCI and other cost containment actions.

Operating earnings for the RS& I group of $50.6 million, including $1.4 million of restructuring charges, $700,000 of direct COVID-19 related costs and $800,000 of unfavorable foreign currency effects compared to $88.6 million last year. The operating margin of 20.7% compared to 25.4% a year ago. Now turning to slide 10.

Revenue from financial services of $84.6 million compared to $84.1 million last year. Financial services operating earnings of $57.6 million compared to $60.6 million in 2019.

Financial services expenses of $27 million increased $3.5 million from last year's levels, primarily due to $3 million of higher provisions for credit losses as compared to 2019. The second quarter of 2019 included lower provisions as a result of non-recurring favorable loss experience at that time.

As a percentage of the average portfolio, financial services expenses were 1.3% and 1.1% in the second quarters of 2020 and 2019 respectively. The average yield on finance receivables was 17.6% in the second quarters of both 2020 and 2019. The respective average yield on contract receivables was 8.2% and 9.1%.

The lower yield on contract receivables in the second quarter of 2020 primarily reflects the impact of approximately $20 million of lower interest business operation support loans for our franchisees. These loans were offered during the second quarter to help accommodate franchisee operations and dealing with the COVID-19 environment.

Total loan originations of $255.8 million decreased $7.6 million or 2. 9% and included an 8.5% decrease in originations of finance receivables.

This decline in finance receivables was partially offset by a 26.1% increase in originations of contract receivables resulting from the business operations support loans offered to franchisees mentioned earlier. Moving to Slide 11.

Our quarter-end balance sheet includes approximately $2.2 billion of gross financing receivables, including $1.9 billion from our U.S. operation. Our worldwide gross financial services portfolio increased $54.3 million in the second quarter.

Collections of finance receivables in the quarter of $166.8 million compared to collections of $191.6 million during the second quarter of 2019. This year's quarter reflected the greater use of deferred payment plan sales programs and short-term payment relief or forbearance to some of our franchisees qualifying customers.

Similar to the trends elsewhere in our business, we saw the greatest number of requests for payment relief on extended credit or finance receivables in April. This lessened in May, and as of the end of June, forbearance was granted for approximately 2.5% of the portfolio.

Historically, those accounts having forbearance terms are below 1% of the finance receivable portfolio. Trailing 12-month net losses on extended credit or finance receivables of $50.4 million represented 2.93% of outstandings at quarter end, down six basis points sequentially. The 60-day plus delinquency rate of 1% for U.S.

extended credit is down 40 basis points from a year ago. This improvement primarily reflects the aforementioned programs, which took place during the quarter as well as the effective credit and collection practices executed by Snap-on and our franchisees throughout this period.

Total charge-offs within the quarter totaled $15.1 million as compared to $14.9 million during the second quarter of 2019. Now, turning to slide 12.

Cash provided by operating activities of $253.6 million in the quarter increased $108.1 million from comparable 2019 levels, primarily reflecting net changes in operating assets and liabilities, including $61.5 million in lower tax payments, $75.7 million in decreases in working investment, partially offset by lower net earnings.

Net cash used by investing activities of $45.6 million included net additions to finance receivables of $35 million and capital expenditures of $11.8 million. In the quarter, our total free cash flow or cash flow from operating activities less capital expenditures in the net change in finance receivables was $206.8 million.

This reflected an improvement of $118.3 million from last year and represented 195% of net earnings.

Net cash provided by financing activities of $289.5 million included the proceeds from the April sale of $500 million of 30-year senior notes, partially offset by $148.1 million of repayments of notes payable and other short-term borrowings and cash dividends of $58.7 million.

While there were no repurchases of common stock under our existing share repurchase programs during the quarter. As of quarter end, we had remaining availability to repurchase up to an additional $334.4 million of common stock under existing authorizations. Turning to slide 13.

Trade and other accounts receivables decreased $131.1 million from 2019 year-end. Days sales outstanding of 59 days compared to 67 days at 2019 year-end. This reflected a reduction in days outstanding across all of our operating segments. Inventories increased $23.6 million from 2019 year-end, primarily to support the critical industries.

On a trailing 12-month basis, inventory turns of 2.3 compared to 2.6 at year-end 2019. Our quarter end cash position of $686.2 million compared to $184.5 million at year-end 2019. Our net debt to capital ratio of 17.9% compared to 22.1% at year-end 2019.

In addition to cash and expected cash flow from operations, we have more than $800 million in available credit facilities. As of quarter end, there were no outstanding amounts under the credit facility, and there were no commercial paper borrowings outstanding.

Despite the uncertainty in the current environment, we believe we have sufficient available cash and access to both committed and uncommitted credit facilities to cover expected funding needs in both the near-term and a long-term basis. That concludes my remarks on our second quarter performance. I'll now briefly review a few updated outlook items.

Given the improving trends experienced in the second quarter in the near-term, we believe there will be continued sequential improvements reflecting increasing levels of accommodations to the virus-related environment. However, we cannot provide assurance on the rate of progress due to the uncertain and evolving nature and duration of the pandemic.

We anticipate that capital expenditures will be in a range of $75 million to $85 million as compared to our prior estimate of $70 million to $80 million. Additionally, we continue to anticipate that our full year 2020 effective income tax rate will be in a range of 23% to 25%. I'll now turn the call back to Nick for his closing thoughts.

Nick?.

Thanks, Aldo. The Snap-on second quarter, sales were down. Of course, we don't like it. But - the OpCo margin was 12.6%, 13.1% as adjusted, approaching the mid-teen level that we long-held as an aspirational target. EPS of $1.91 as adjusted, also down but still higher than any quarter before the end of 2014.

The numbers are decreased, but we believe they demonstrated significant resilience and perhaps the greatest withering of our time. You see we have seen this movie before. That -- and that experience helped guide us through the depth of the shock and on to the continuing positive trajectory of accommodation. April is dark.

But the rise from that point was of evident across the corporation from operation to operation. The tools group demonstrating the value of our direct model with sales in June reaching within 3.1% of last year's level. The future is not known.

What we believe our learning and accommodation assures that we won't get shocked again and any future impact will be attenuated. And looking at the way the virus has affected everyday life, we believe abundant opportunities emerging for Snap - are emerging for Snap-on in the recovery. It appears that vehicles are going to be even more important.

You can see already in China and in the U.S. Northeast, and that's music to our ears. And we are preparing launching new products, enhancing our brand, reinforcing our franchise network and maintaining the capabilities of our team.

Now all of this represents a cost in the turbulence, but it ensures that we'll be fully enabled and stronger when the opportunities arise. And we believe what we're doing in these days of the virus will position Snap-on for continuing growth, increasing profitability and ongoing prosperity for years to come.

Before I turn the call over to the operator, I once again -- I'll once again speak to our Franchisees & Associates. It has never been clearer that all of you are extraordinary people, playing a very special role in our world.

For your ongoing success in surviving the shock and accommodating the turbulence, you have my congratulations for your significant contributions in maintaining our society, you have my admiration. And for your unfailing belief in the future of our enterprise, you have my thanks. Now I'll turn the call over to the operator.

Operator?.

Certainly. Thank you. [Operator Instructions] We'll go first to Scott Stember with C.L. King..

Good morning and thanks for taking my questions..

Good morning, Scott..

Nick, you gave a lot of good color on what's happening at recovery within the businesses. It seems like the Tools Group is probably experiencing the greatest recovery. Maybe talk about RS&I and C&I, how the cadence of sales recovery and how we could expect the quarter coming up..

Sure. Well, look, of course, we don't give guidance, but I'll tell you that's generally, of course, - what I say is never true everywhere in Snap-on, of course. But generally, we're seeing a combination across the vast majority of our operations, April, May, June, there was a progression of improvement through those periods.

So don't get me wrong, the fact that I called out the Tools group, because they had done particularly well. There was a combination across every one of those groups. So, that's particularly in industrial, where - I called out the direct selling. They had some nice progression through that period in their direct selling activity.

If you step back to -- and I think you would say across C&I, in general, you're seeing that. In RS&I, the sales were down, what were they down? Like 29.8% as reported, 29.5% or 29.4% as adjusted. But generally, you see a couple of pieces.

One, the vehicle OEM projects are quite lumpy, and we see that in this period, and it's very hard to project that future and the equipment business, which generally is selling - after all selling to kind of a bifurcated situation they're selling to small businesses, which need psychological recovery to have the confidence to invest in the capital-light projects, which are our equipment.

Now, the other piece of what I've just talked about is, there's a big dollop associated with the OEM and really that comes psychological view of the dealerships.

Do they think the fact that maybe they're going to sell new cars - less new cars this year means they should pull in their horns, or as in other times, should they start investing, because they had need to depend more and more on used car and repair and parts flow? If it's the latter, there should be an uptick in those businesses..

Got it. And moving over to the financial services side, your originations were really not down all that much. But I guess that was explained by loans to the franchisees. Maybe just talk about the health of the franchisees and what you're seeing at the repair shop level..

Yeah. Look, I was just out with some franchisees last week, and they seem pretty strong. I mean, and I talked to a lot of them on the phone these days since I can't travel as much as I used to around the country. And they seem all quite positive.

I would say that the originations - one of the things I will tell you that I think speaks volumes is we talked about the recovery, the accommodation of the Tools Group as shown in the 3.1%. Well, I'll tell you that in the quarters through this period, the sales off the van could be viewed as our work better than our sales to the bands.

So fundamentally, what you see a little bit in that origination situation is some of our franchisees selling out of their inventory, big-ticket items, particularly tool storage, which they tend to happen in and inventory to try to accommodate the taste of the technicians. And therefore, you see that, but we see it as a great thing.

Because fundamentally, the sales off the van are outpacing. The sales of the Tools Group showed a combination..

So that being said, the sale in June, if you were down only modestly sell in, are you saying you were off the van in June?.

I didn't say anything. I said it was better than the 3.1. That's what I said. I said it was better than the -- I think -- and I said significantly better. But that's what I'm willing to say in this situation. It clearly is what leads to the originations..

Got it. Good enough. Thanks for taking my questions..

And now we'll take a question from Gary Prestopino of Barrington Research..

Hey, Good morning everyone..

Hi, Gary..

A couple of questions here, Nick. First of all, you -- well, first of all, are all your markets now open, especially on the van side, I mean, are you able to sell in the Northeast some of these areas….

Oh, yes. Everything is open. It was -- there's a lot less variation now in terms of opening. When the virus hits, the shock hit, there was variations between regions. So the Northeast, you have a lot of people with attenuated activity, not as much say Southwest, as we’re talking about the swap between, not as much, but still attenuation.

Now they've kind of come together. Canada, I don't know if I talked on the call, but Canada was like the basket case for a while. People were really shocked and U.K. was shocked and all of those businesses have -- all of those areas have started to come together.

There is some arithmetic difference between them, but not enough to shake a stick at, I think, in this situation. So the guys are coming back. Now that's happened through the quarter at varying levels, part of the accommodation process..

Okay. And then you keep mentioning or you mentioned opportunities for your company, given this COVID-19 situation.

I mean, are those opportunities really stemming from the fact that cars are getting older and that also thought process or the thematic thought process is that more individuals are going to want to own cars rather than taking public transportation.

Are there other areas where you're looking on to capitalize that you didn't really talk about?.

Well, I think those are the two big things, I'm talking about. But I think as -- I think a couple of things. I think -- I would say three things. One, of course, cars are getting older. They've gotten older every year. And the fact that it's a lower SAAR this year, probably cars will accelerate in terms of getting older, we think.

And so that's one thing and that does keep driving. Cars keep changing and so the virus is kind of frozen people in. And so we expect to see a few slot of new technologies closed now, and then that drives our situation. Secondly, I think you and I don't want to get on the L to go down in Chicago.

I don't think people are going to want to jump on a subway so much anymore and -- or at least depend on that. And so what we see in China, and we start to see that in the Northeast has increased driving, because people don't want to depend on collective transportation, because they know that things can go wrong in the situation.

On top of which, if you read commercial real estate and cities are going down and I think residential real estate, I think people are moving out for the suburbs, and that means more driving.

And finally, we think that this kind of pause gives more time for new technologies like advanced driver assistance systems, which change a lot of things and play right into our more complicated product and maybe even more electric vehicles, which changes the car park and helps us sell more tools.

We have a kit that we've especially made, 53 tools just for electric vehicles. So when they roll out, we'll be ready to roll with them..

Okay. And then my last question, if you want to answer this. I'm just trying to get an idea. I mean, you said that sequentially, there was an improvement in sales throughout the quarter. Are you still seeing – did you still see a sequential improvement at the early part of Q3. I realize the seasonality there..

We don't give guidance. And look, Q3 is a squarely quarter. However, so therefore, you've got vacations in Europe. You got the SFC, you got a lot of things floating through there. However, I did say, May, June onwards, that's about what I'm willing to say..

Okay. That’s fine. Thank you..

Sure..

And next, we have Christopher Glynn of Oppenheimer..

Nick, just to press on your willingness tolerance there a little bit more.

Was the May-June onward dynamic for RS&I and C&I material or negligible?.

Material. I mean it's – but look, I don't want to get overheated on these kinds of things. Everybody – I said already that nobody knows how the future is going to go. But what I did say is we are stronger against this kind of disruption by virtue of the accommodation, and we don't believe we will get shocked again.

So if the world rises, maybe we bow it a little bit more. I – we expect – we're saying we saw that onward motion, And I think implicit, and accommodation is we get better and better at dealing with the environment. The shape of the curve is unclear. And I've already said the third quarter is. But we – like I said also, I like what I see..

Okay. And then you've had some restructuring. You may have some temporary cost actions going away.

Is there a way to think about sequential leverage on whatever uptick we choose to model?.

Well, we have had restructuring because it was in – it's mostly focused on Europe. I think six-tenth of this times $4 million is kind of in North America and the two, or not necessarily. It's kind of European focused, we'd say, mostly in general.

We'd say that because while we saw – we've been watching Europe evolved for a while and seeing the weakness of the economics. So we've been prepared for this and raising through RCI or capacity. So we can deal with higher volumes with less in Europe. That's why we have this restructuring. I would say this only.

There's a lot, I think, implicit, and we saying we are investing in products, enhancing our brand and maintaining our team. That means we're holding the people because we actually believe that our people are capable. And I don't know about other people, but we think these people are hard to duplicate. So we're holding on to them for dear life..

Okay. And last one for me. On SFC, I'm wondering if it's – some of the charge-offs were relatively light in the quarter, considering all that's going on. You talked about some consolidations.

Are there any implications for the back half, did some of the mechanical calc of provisioning kind of get deferred in this dynamic? Or is it kind of a more continuity?.

Look….

Yes, just wanted to know about the financial performance to....

I'll just say this, Chris. I feel better now than I did in the prior call in April. I feel better now. And I'll let Aldo comment..

Yes. Chris, I'd just say that just to refresh everyone's memory, Q2 typically does see seasonal improvement as you progress from Q1. It's a period of time when people get their tax refunds, and obviously, we probably got a little bit of a bump up with stimulus checks coming in.

But a reminder, not everybody got their tax refund yet because if you didn't submit your tax return electronically, you're still probably have it being reviewed the IRS. So there might be some tailwind that still occurs in Q3 from tax refunds.

Having said that, the deferred payment programs forbearance they help a bit with the calculation, so if you look at the progress from Q1 to Q2, normally, we expect a 10 to 20 basis point sequential improvement. This time, we saw 70 and year-over-year, it was better by 40.

I'd say, if you look year-over-year, there's probably 20, 30 basis points associated with the fact that you have deferred programs. So by definition customers on deferral couldn't be delinquent. So that will go away a bit. So I think you'll get more traditional levels.

But geez, it looks a lot like a natural disaster from our history in the rearview mirror so far. So we'll see how the remainder plays out. It's still a pretty volatile environment. But like I said, we're pleased with the charge-offs in the quarter..

Thanks..

And now we'll go to David MacGregor of Longbow Research..

Yes, good morning everybody..

Hi, David..

Good morning.

I wondered just for the sake of clarity rather than trying to fumble through a bunch of numbers, but just for the sake of clarity, can you just say what the originations would have been excluding the loans to the franchisees?.

Well, the contract receivables were up 26% in the quarter. So that's clearly broken out, if at contract receivables. So as Nick has mentioned, EEC was down 8.5%, David..

Right. All right. Maybe I'll take that up with the off line. I just want to make sure we're getting to an accurate number here. And then can you quantify the extent of the return from….

To make it easy, the loans to the franchisees has nothing to do with EC. It has nothing to do with EC at all. So the EC originations….

I understand that. I I'll take it up with the off line, if that's okay. Returns, I wonder if you could quantify the extent of the returns in the quarter and the extent, I know they're treated as a contra revenue account.

So the extent to which they were a headwind for Tools Group organic growth?.

I don't think there was anything notable in the quarter in that regard. I mean, I - from our perspective, it was just a regular quarter in terms of the returns, which we tend to look at. So I mean, I think that our guys didn't necessarily flush a lot back into the system more than they do in any regular quarter, there's some back and forth.

But that didn't affect things in this situation..

Our franchisees, we think, are in pretty good shape..

Well, I guess that was my next question is just, I mean....

No, I think the thing is some people might think franchisees are on hold or things like that, but that's not -- it's not really -- actually, there's a record for this all-time loan..

And could you clarify that for me, the record, what's the….

Yes, it was the number of franchisees that are not paying, that are direct, they get to be on hold. For the record there....

In that combination….

Parents came way down at the end of the quarter..

Okay. And then, I guess, overall, I wanted to ask about franchisee creditworthiness because this whole slowdown in mid-April came right after the regional kickoffs when you guys would have had a really high level of inventory, which makes it a little surprising to hear that you didn't see any kind of inflection in returns.

But that being the case, how do you feel about credit worthiness overall right now?.

Well, I – we think – actually, we think they're in pretty good shape. I mean, the sales off the van are, I think when you look at them from a year-over-year point of view and you look at them for this situation, they describe what I talked about in terms of shock accommodation. And as I said, they are pacing ahead of the Tools Group.

So that's a pretty positive from a quantitative point of view. From a qualitative point of view when you talk to a broad group of them, you get – you kind of get some very positive feedback in terms of, of course, I'm the CEO. So maybe I do get feedback. But you hear experiences and when I'm in the garages, the garages seem to be working.

Yeah, technicians dipped in the shock, but they came sort of pretty back, pretty quickly and the garages are humming, every garage I was at, the parking lot from garage was marked..

Do you think there's going to be any need for any route consolidation?.

No, I don't think so. But you look at everything, David, but I don't think so. I don’t think so..

Last question for me is just on the operating expenses. You had a little bit of a pullback here, a reaction. So I guess, congratulations on that. But I'm guessing a large measure of that may have been associated with the volume reductions.

So I guess the question is, if we end up with W-shape recovery rather than the V shape that you seem to be assuming, what's the opportunity to take more out of the SG&A and the operating expense line going forward?.

Well, look, I think first of all – first of all, I don't know what you call travel volume-related or not. I mean, I'm not sure it's so volume related, but you can travel and a lot of different things.

And in other words, you have some reductions in this interim while you keep – while you do things, for example, you're not renting a hall or putting on a meal when you bring, you're not people together on a zoom situation. Now it's maybe not as effective, but the thing is you do work on that. So it's not all volume related.

And I think I’ve already said though, that we’re determined to maintain our franchisees, maintain our brand, invest in new product and keep our team intact and I would suggest that we see that going forward because we believe we have great opportunities going forward.

So my principal view – my principle approach to this is – our principal approach is to weather the storm, and I think we're doing that pretty good, given the levels of where we are and you look at the cash flows, I mean, the absolute numbers of the returns and then come out stronger because we're pretty sure we're going to have big opportunities.

So if it's not an upward slope -- if it's not an upward slope, if it dips down some, we won't get shocked again. We'll get over it. It will come out stronger..

Just one last quick one, if I could. You mentioned that record low credit holds for franchisees.

Is that due to an increase in franchisee attrition?.

No, no..

And we'll go on to our next question….

We talk of percentage….

And next question will come from Bret Jordan of Jefferies..

Hey. Good morning, guys..

Hi, Bret..

Good morning..

A question on inventory, I guess. You commented that turns were down to 2.3 times to support critical industries. And I guess the longer-term trend has gone from north of 4% to north of 2%.

Is there something structurally different in the working capital model? Or what you're committing to for the critical industry customers as far as holding inventory? And I guess, can you give us sort of an idea what kind of product profile this is that's building in the inventory?.

Yes, Bret. Aldo. Certainly, we are continuously adding products that cater to the critical industry. There is unique requirements. Sometimes they're lower volumes, so it doesn't have the same level of addition as when a new product introduced to the Tools Group.

But if you want to be a serious player in oil and gas and natural resources and aviation, there are certainly unique products that do not sell into the mechanic space that you have to have there. So we've been doing that as well.

In addition, there's a lot of projects that we call kitting activity and that array in kitting activity, as an example, you might have 100 different items in the kit. As you stage it as you prepare for it, it requires higher levels of inventory as you prep and wait for other incoming items because not everything comes from a Snap-on facility.

Oftentimes, the military or an aviation customer might like certain things that do not come from Snap-on, and they want that kitted in a rate with a tool storage cabinet that we might prepare for them, and we have a variety of different products that do that.

And therefore, accommodating those requests forced us to expand both floor space and inventory when it comes to these things and we like that business..

Okay.

Is there sort of a target turns number, I guess, ex-COVID, where the sales obviously evaporated, but is there a ballpark we should be shooting for as far as that number?.

We think it could be better. We don't have an exact target that I'm going to delineate here today, but we think it could be better. I mean, obviously, the current situation puts a depressant on turnover tactics.

But we've been getting a pretty good return on our inventory and in a low interest rate environment, we're more than willing to make investments in inventory, if we truly believe it will generate incremental sales..

We don't see inventory necessarily as an independent variable, but we like to see a return on it. If we get a return on it, we're happy..

Okay. And then one question, I guess, the franchise event that usually is held in August, I assume, is probably not as a live.

Are you going to do anything sort of virtually? Or would there any be sales promotion to offset what would have been the get together?.

Yes, we have an event. We're going to call live from the forge -- from the our IdeaForge here in Kenosha.

And so we're going to go through a virtual event, trying to create the selling opportunity the ability to see new products and different -- in different forms like franchisees would get when they journey to places like Florida and went through the football field, so we'll have that. And so we won't have it in August, we'll have it coming up.

We will happen in August, probably at the same time. But it's kind of geared at giving the franchisees a similar opportunity from a new product point of view. From a product ordering point of view, unfortunately, we won't be able to get as much of the training or the, I guess, the cultural bonding that occurs at the other franchisees.

But we're going to have event that replaces it..

Okay. Great. Thank you..

Okay..

And now we'll go to Ivan Feinseth of Tigress Financial Partners..

All right. Thank you for taking my questions.

How are you guys doing?.

Safe..

The average age of the vehicles on the road have now touched to a record high of almost 12 years.

Do you track that to see -- I mean, when vehicles age? Are you selling more tools or when new car sales are increasing, which would be down the average age?.

We don't have a direct relationship to new car sales. It's the aging of the vehicles, and it's the changing of the vehicles that drives our requirements. We can be indirectly affected by a downturn. And what are they going to sell? $12 million this year, $11.5 million, which is a downturn.

And the psychological impact on dealerships and the OEMs themselves can ripple through some of that project business or some of the willingness of the dealerships to embark on capital projects.

But it isn't a direct relationship, where aging of the vehicles and the new technologies in the vehicles, our direct relationships, requiring technicians to deal with either more volume or newer types of systems where they have to have different tools..

And then one of the amazing things in the pandemic is that the CEO from Polaris said earlier in the week that they are experiencing unprecedented demand for off-road vehicles and motorcycles.

I mean this has, shockingly, I guess, created -- sales are on fire for all kinds of like wave runners and ATVs and side-by-side and even motorcycles, and even though Harley had a tough quarter, I think they're going to turn and they'll see strength as well.

How do you or franchisees penetrate the mechanics in that area? Also, in a number of those places, they have a shortage of mechanics..

Sure. I think there's been a shortage of mechanics in a lot of places for a long time. I think the deal is that they're graduating 77,000 a year from technical schools, and they need $105,000 a year by retirement. So there has been a shortage, and so we have to -- it's been for some time. So you try to get that.

Our people are in – our franchisees are in some of those places. But these are the advantages we think we – the opportunities we think we have. We say there's 1.3 million technicians in the United States and we only call on 850,000 of them. And some of those are the places like the off-road vehicles, where we may not get to.

And so we have an opportunity. We think coming out of this, we've got tremendous opportunities, particularly if you're saying that people turn to, instead of going to -- instead of maybe taking more collective transportation, turn to RVs and other things. We think this is good for us, and the fact that we're confident..

RV sales are on fire, ATV sales are on fire, everybody -- all kinds of personal transportation. Used car sales have been on fire. New car sales, the factories were shut down for a while because of the pandemic, but I'm sure that, that will pick up.

So yes, I think people who are going to move away from cities, if they work at home then they don't have to be near cities, they can be anywhere, and then I think that will drive the need for personal transportation, cars, boats, ATVS, recreational type of stuff.

So is there going to be a focus on developing specific tools for those types of vehicles? And then one last question, you have….

That's right..

53 specific tools for EVs.

Can you give us some idea of what specific EV tool would be?.

Well, a lot of them would be -- a great category would be, we call them insulating tools. You poke yourself -- you poke around underneath an electric car, you level up fry yourself. So we have -- these are tools, which specifically create insulation between the point of contact and the user.

And so we have an array of those, which we think will be very efficacious in this situation. And so I think they're going to be used. And then we have other tools as well that deal with the specific mechanism under an electric vehicle car -- an electric vehicle. But we think -- you point out, you just point there's all these opportunities for us.

Change is our friend, and we think change is coming in this situation..

I love it. Thanks again. Stay well..

Good to hear from you..

Good to talk with you. You too..

Take care..

And now that does conclude today's question-and-answer session. I would like to turn things back to Sara Verbsky for any additional or closing comments..

Thank you all for joining us today. A replay of this call will be available shortly on snapon.com. As always, we appreciate your interest in Snap-on. Good day..

And with that, ladies and gentlemen, that does conclude today's call. We'd like to thank you again for your participation. You may now disconnect..