Snap On's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.17.14 | About: Snap-on, Inc. (SNA)

Snap On Inc. (NYSE:SNA)

Q1 2014 Earnings Conference Call

April 17, 2014 10:00 AM ET

Executives

Leslie Kratcoski - IR

Nicholas Pinchuk - CEO

Aldo Pagliari - CFO

Analyst

Joe Vruwink - Robert W. Baird & Co.

Liam Burke - Janney Montgomery Scott LLC, Research Division

Gary Prestopino - Barrington Research Associates, Inc., Research Division

David S. MacGregor - Longbow Research LLC

Richard J. Hilgert - Morningstar Inc.

Operator

Good day, and welcome to the Snap-on Incorporated First Quarter Investor Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Leslie Kratcoski. Please go ahead.

Leslie Kratcoski

Thanks, Sarah, 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 and 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. You can find a copy of these slides on our website next to the audio icon for this call. These slides will be archived on our website along with the transcript of the 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 like to turn the call over to Nick Pinchuk. Nick?

Nicholas Pinchuk

Thanks, Leslie. Good morning, everyone. As usual I'll start today’s call with the highlights of our quarter. I'll give you my perspective on the results, on our markets and on our progress. Then Aldo will move into a more detailed review of the financials.

Our first quarter results were encouraging. They demonstrate clear progress along our runways for both growth and improvement. Our sales were up 6.2% from last year. The operating margin expanded by 100 basis points and the earnings per share increased 15.7% to $1.62. The organic sales increase was 5%.

Challenger Lifts, which you'll recall, we acquired in the second quarter last year, added another 15.2 million which along with an 80 basis point impact from unfavorable foreign exchange rates brought our total sales for the quarter to 787.5 million.

The EPS rise included an opco operating margin expansion to 15.5%, up from 14.5% in 2013. Financial services operating income increased to 34.4 million from last year’s 30.5, driving the consolidated numbers to -- operating margin to 18.6%, also up 100 basis points. Both the operating margin and the total margin were up 100 basis points.

From a macroeconomic standpoint, our automotive repair related businesses, the Tools Group and the Repair Systems & Information or RS&I Group, they’ve enjoyed a reasonably favorable environment for quite some time. And I'd say there is no real change. Now RS&I overall organic activity was up only slightly. But that primarily reflects the wind down of a major OEM program rather than any real change in market dynamics. You’ll also remember that C&I is where the majority of our headwinds have been concentrated. So that’s an area where I think is worth more -- a more discussion is warranted.

And as you can tell from the group's, 10.4% organic rise, there were encouraging gains backed by some evolution of the environment. In Europe, one of the big highlights of our fourth-quarter was the lessening of our headwinds. And in conjunction with that, the first upturn in sales we've seen in some time for our European-based hand tool business, SNA Europe.

Encouragingly, our first quarter was up again. So that’s a real positive. And SNA Europe is a solid contributor to C&I’s current growth. But I would characterize the C&I performance this quarter less about market improvement and more about day-to-day business progression. For example, we did see some important advancement in our extension to critical industries. It’s an area we've been focusing on, and it’s paying off.

At the same time, we’ve moved past the most difficult comparisons related to the reduced military spending and that's allowing the European contributions in critical industry gains to shine through, without as much year-over-year military offset to mask the progress. So many of our markets remain strong and the headwind of Europe is abating. But headwinds do remain. The current situation in Eastern Europe does create an overhang and that did have an impact on our businesses.

And while the military comparisons are not as challenging, the absolute spending in that sector remains depressed without any near-term indication of a return to past levels. But generally at the end of the day, there will always be headwinds. And we do believe that, no matter the market environment, we're well-positioned to continue advancing down our four defined runways for growth enhancing the franchise channel, extending into the critical industries, expanding Snap-on’s presence in the garage and building in emerging markets.

And along with that progress, that advancement, we believe that the Snap-on value creation processes of safety, quality, customer connection, innovation and rapid continuous improvement or RCI will extend our positive performance trend and continue to drive us down our ample runways for improvement.

And as I speak of the segment results, I’ll highlight some of the advancements in both growth and in net improvement. Let’s start with C&I. Sales in the quarter were up organically by 10.4%, the operating margin reached 13.5%, up significantly from last year’s 11.5%. Related to those sales, there were gains in each of the group’s operating units and as I already mentioned, one of the real highlights was a second consecutive quarter of growth for SNA Europe. We’re starting to see a trend in Europe and we also saw a double digit rise in our industrial division where we have our primary focus on the spending to critical industries. And in that area, we had some big wins particularly in aviation. Also noteworthy in Asia was solid growth in important markets like India and the Philippines, much of that was driven by our expanding undercar equipment line-up that was made possible by the further significant ramp up of the production at our Kunshan plant.

The C&I quarter saw benefits both from higher sales and from RCI. You can see it in the rise of the OI margin, up 200 basis points. Regarding the margins, SNA Europe deserves mention. Even before the volume started coming back late last year, that operation was contributing some noticeable profitability increases and that improvement continued again this quarter now amplified by the aid of volume.

As for the industrial division and the robust growth in that business, the activity this quarter with customers and then critical aerospace sector clearly demonstrates traction. That area has been a primary focus of our extension into critical industries and the results are showing through with some large win. I said for quite some time that there is a bit of learning curve in understanding the customers in critical industries with the same level of insight we have with automotive technicians.

Now we are making progress with customer connection spending time in the work places, launching innovative new products based on those observations, for example -- and for example we’re participating side by side at customer sites in RCI events and in safety training, becoming more familiar with the work, with the challenges and with the needs of our customers. You see RCI and safety are often directly related to making the work easier and safer with the right tool, and that’s our business.

Speaking to the right tool, I want to highlight a couple of new products that demonstrate customer connection and innovation applied to (south) [ph] critical test. We recently launched a new design of cutters called the cushion throat cutter. They were designed specifically for use in aviation where aero tools or material commonly referred to as foreign object damage, they can cause big problems in an engine. While we took our standard power edge cutters but added a feature that catches wire other material that was cut -- that other material that gets cut preventing it from flying off and causing troubles. This is a good example of job insight offering new tools and building our presence. In this case in the critical aviation sector a simple idea based on customer connection that makes a great difference.

Oil and gas another area of focus and we have an expanding offering for applications in the oilfields, in power plants and in offshore rigs. Our visits to those sites recently highlighted the field technicians' struggle with making valve adjustments on the natural gas engines that are prevalent in that environment. As a result of that observation, we developed our new pass through socket to solve that particular problem creating just the special geometry that ends the struggle, another clear example of customer connection and innovation coming together to make work easier in a critical application.

So that’s a bit of colour on the C&I progress. Now on to tools, the tools group. Sales were up 6% organically, operating margin up 14.3% compared to 14.4% last year, including in the quarter 50 basis points of unfavourable currency impacts from our operations in Canada and Australia. Our organic growth for the past four years of 9%, 9.2%, 10.7% and 7.6%, certainly speaks to the improved position of the tools group. And the growth this quarter following on the heels of that kind of sustained trend demonstrates the success we’ve had on this decisive runway for growth, enhancing the franchise channel.

But the enhancement is not just about sales, we see the progress in many places in the metrics we track, in the low franchisee turnover, in the high enthusiasm, in the external validation by independent surveys of our franchisees, they all confirm substantial progress. Much of the strength we've seen could be tied to the great innovative new products that Snap-on has to offer when showing up every week at repair shops. Products like the MODIS Ultra handheld diagnostic unit, faster with a bigger full colour touch screen and our Fast-Track Expert information, it’s launched last year in the U.S. it’s been a big success and it’s helping to drive big ticket volume.

During this quarter, we brought the MODIS Ultra to the UK and to Australia, it’s been well received in both markets and has contributed significantly to our international growth. Also speaking on new products and innovation, you might recall the S6810 Flip Socket, the MOTOR Magazine Top 20 award winning tool, we introduced last year. Sounds simple. A two sided socket, 8 millimeter and 10 millimeters on opposite sides, very common sizes on under body panel.

The new socket can be quickly flipped for convenience, and removing panels with only one tool. It’s a real timesaver and as a consequence, a big success. We have taken that idea and expanded it to other common sizes, adding a 13 millimeter and 15 millimeter combo, and specifically for European mix a 9 millimeter and 11 millimeter combo. And for Asian model, a 12 millimeter and 14 millimeter combo were sold in a set to span a range of vehicles a technician is likely to see, and a design to be used what our Snap-on CT power tool series. That combination is now one of this year’s hit.

When it comes to new product innovation, you think that there might not have been much opportunity in a product line like a ratchet. They’ve been around a long time. But actually we've been growing in that category over an extended period based on customer connection, innovation and design capabilities. You see preferences differ greatly among technicians depending on the mix of vehicles they encounter and the pairs on which they focus. So we take an advantage of those varying needs by introducing multiple ratchet designs and features against the relatively standard offerings of our competitors. I’ll mention one of those variations.

Our quarter inch drive extended reach series, it incorporates an extra-long handle, we believe the longest quarter inch drive available anywhere. It reaches hard to access areas and allows a greater leverage. It also has a quick release mechanism for those who want speed and I am fortunate incorporates our Dual 80 technology for strength and durability, another hit product, innovation even in a fully established line like ratchet, finely related to the tools group and its growth.

I want to mention our financial services segment. Aldo will speak of that area in some detail, but I just want to highlight the strategic importance of financial services at Snap-on, and how important it's been to the advancement, especially in those big ticket categories of diagnostics and tools storage. Those products has helped blaze the trail enhancing our franchisees and Snap-on credit continues to be an essential and strategic player in that progress.

Let’s move to RS&I. The results were encouraging, but not as straightforward as for the other groups. Overall sales were up 6.7%, the operating margin at 22.1% compared to 22% last year. We did have higher restructuring charges this year that reduced margins by about 60 basis points, and adding in the lower margin Challenger sales also had an impact. These two items more than offset, was in fact a reasonable profit expansion in RS&I authored by rapid continuous improvement.

The overall RS&I sales gain included 15.2 million of Challenger lifts with only a small organic increase, reflecting primarily the wind-down of some essential tool programs at the OEM dealerships which we discussed quite a bit last year, if you might remember. As many of you know the essential tool business does tend to be a bit lumpy, thus the tough comparison in the OEM space. I will say that in this year’s first quarter, we also had some new programs. So we actually don’t see the OEMs are pulling back.

This comparison just reflects the nature of this type of business and that lumpiness largely offsets the real progress with the diagnostics and repair information products we're selling into independent shop owners and managers. We have seen those increases with independents for some time and the gains continues in the first quarter. It’s an encouraging picture. The combination of new handheld diagnostic units, repair information, the expert knowledge of Mitchell 1 SureTrack offering along with under car equipment line up of tire changes, imaging of liners and lifts, have established significant momentum with both individual and independent shops, and with a large multi-location repair chains.

We have also broadened or medium and heavy duty product offering over the past years, adding specially aimed repair information and diagnostic units. And its paid off. We had a significant win in recognition recently in this heavy duty sector when our diagnostic information from Mitchell was integrated into Navistar’s Oncommand Connection Remote Diagnostic and Fleet Management System. The combination is designed to increase vehicle uptime and provide improved fleet management efficiency.

It will give more shops across to merit a greater access to the broad range of the Mitchell 1 features that make repairing all makes of commercial trucks, class IV through VIII easier with engine fault code diagnostics repair procedures, wiring diagrams, test steps and removal or installation instructions. It’s a one clear example of building positions with garage owners and managers in the heavy-duty space. And that growing presence is driving new business with large organizations that run mixed fleet, car and truck, they need to support both vehicle types, and increasingly Snap-on has the answer. Because of that, we're seeing more fleet business with big companies, with utilities, and with governments both city and state.

Now the strength of the RS&I portfolio was also evident this past quarter at the National Automotive Dealer Association show, the NADA show in New Orleans earlier this year. Our operations came together under a tool shop solutions, a total shop solutions banner, it allows Snap-on to clearly demonstrate the depth and breadth of our offering to support OEM dealerships and the Challenger acquisition has been an important part of that depth, that portfolio. We believe that operation would be -- we believe when we acquired it, that that operation would be a fine addition to Snap-on and RS&I and that’s certainly proven to be true.

As evidenced, I’ll just point to the lift that Challenger develops specifically for the quick service space that are becoming so common in OEM service centres. It’s gotten some strong endorsements and it’s another example of how we’re able to expand the Snap-on presence with repair garage owners and managers.

So to wrap up RS&I, we see new diagnostics and repair information for cars and trucks and a growing under car equipment line that now includes Challenger lifts, progress with independence with multi-location automotive repair chain and with the important medium and heavy duty segment; we see positive trends and improved position with repair shop owners and managers. So that’s the highlight of our quarter, growth and improvement.

Sales up 5% organically, overcoming the remaining headwinds. OI margins 15.5%, up 100 basis points. C&I strength with critical industry showing their potential, the tools group growing again continuing to enhance our franchise network with success. RS&I building its position and its product line with particular success and independent shops and financial services raising its contribution both financially and strategically. It was another encouraging quarter.

Now I’ll turn the call over to Aldo for a review of the financials. Aldo.

Aldo Pagliari

Thanks Nick. Our first quarter consolidated operating results, I summarized on Slide 6, net sales of $787.5 million in the quarter increased $45.8 million or 6.2% from 2013 levels reflecting sales gains across all segments. Organically, sales increased 5% excluding $15.2 million of sales from the Challenger Lifts acquisition and an unfavourable $5.9 million impact from foreign currency translation. The 5% organic sales increased primarily reflect sales gains in our businesses serving critical industries as well as those calling out automotive technicians and providing diagnostics and information products and independent repair shop owners and managers.

Consolidated gross profit of $378.7 million increased $21.8 million from 2013 levels. The gross margin of 48.1% in the quarter was unchanged from prior year levels. As savings from on-going rapid continuous improvement or RCI, initiatives were largely offset by unfavourable foreign currency effects and the impact of lower margin Challenger products. Operating expenses of $257 million increased 7.9 million while the operating expense margin of 32.6% improved 100 basis points from 33.6% a year ago primarily due to benefits from sales volume leverage and the effects of the Challenger acquisition partially offset by inflationary and other cost increases.

As a result of these factors, operating earnings before financial services of $121.7 million in the quarter including $5.3 million or 60 basis points of unfavourable foreign currency effects increased to $13.9 million and as a percentage of sales, improved 100 basis points to 15.5%. Operating earnings from financial services of $34.4 million increased 12.8% over prior year levels. Consolidated operating earnings of 156.1 million including $5.4 million or 60 basis points of unfavourable foreign currency effects increased 12.9% over 2013 levels and the operating margin of 18.6% improved 100 basis points from 17.6% a year ago.

Our first quarter effective income tax rate of 31.6% compared with 31.9% last year. Finally, net earnings in the quarter of $95.9 million or $1.62 per diluted share compared to net earnings of $82.8 million or $1.40 per share last year, representing a 15.7% increase in earnings per share.

Now let’s turn to our segment results. Starting with the commercial and industrial or C&I group on Slide 7, sales of $290.6 million in the quarter were up 10.4% organically primarily due to sales gains the customers and critical industries as well as continued sales increases in our European based hand tools business. Gross profit in the C&I group totalled $112.7 million in the quarter. Gross margin of 38.8% improved 160 basis points over 2013 levels primarily due to benefits from higher sales, $2.1 million of lower restructuring cost and savings from on-going RCI initiatives.

These gross margin improvements were partially offset by $4.1 million or 100 basis points of unfavourable foreign currency effects. Operating expenses of $73.6 million in the quarter increased $5.2 million over 2013 levels primarily due to higher volume related and other expenses. The operating expense margin of 25.3% improved 40 basis points primarily reflecting benefits from sales volume leverage partially offset by inflationary and other cost increases.

As a result of these factors, first quarter operating earnings for the C&I segment of $39.1 million including $3.3 million of unfavourable foreign currency effects, increased $8.5 million from 2013 levels and the operating margin of 13.5% improved 200 basis points from 11.5% last year.

Turning now to slide eight, first quarter sales in the Snap-on tools group of $343.6 million increased 6% organically reflecting mid-single digit increases in both our U.S. and international franchise operations. Gross profit of $148 million increased 4.1 million from 2013 levels while the gross margin of 43.1% decreased 90 basis points from 44% last year, largely due to $2.9 million or 50 basis points of unfavourable foreign currency effects.

Operating expenses of 98.8 million in the quarter increased $2.1 million from 2013 levels, primarily due to higher volume related and other expenses. The operating expense margin of 28.8% improved to 80 basis points from 29.6% last year reflecting benefits from sales volume leverage partially offset by inflationary and other cost increases. As a result of these factors, operating earnings of $49.2 million for the Snap-on tools group including 2.1 million or 50 basis points of unfavourable foreign currency effects, increased $2 million from prior year levels the operating margin of 14.3% compared with 14.4% last year.

Turning to the repair systems and information or RS&I Group showed on slide nine. Sales of $262.7 million increased 16.6 million or 6.7% from 2013 levels excluding 15.2 million of acquisition related Challenger sales and 0.7 million of favourable foreign currency translations. Organic sales were up slightly as gains in sales of diagnostic and repair information products to repair shop owners and managers were largely offset by lower sales to OEM dealerships including the wind down of an essential diagnostic distribution. Gross profit of $118 million in the quarter increased $4 million over 2013 levels. Gross margin of 44.9% decreased 140 basis points from 46.3% last year primarily due to the impact of lower gross margin Challenger products and $1.8 million of higher restructuring cost partially offset by continued savings from RCI initiatives.

Operating expenses totalled 59.9 million in the quarter and operating expense margin of 22.8% improved 50 basis points from 23.3% last year largely due to benefits from sales volume leverage and the effects of the Challenger acquisition partially offset by inflationary and other cost increases.

First quarter operating earnings of 58.1 million for the RS&I Group increased 1.6 million from prior year levels. The operating margin of 22.1% in the quarter declined 90 basis points from last year as lower margins associated with Challenger and a 60 basis point impact from higher restructuring cost more than offset benefits from the on-going RCI initiatives.

Now turning to slide 10, in the first quarter, earnings from financial services of 34.4 million increased 12.8% and revenues of 50.2 million increased 14.1% in both the first quarters of 2014 and 2013 the average yield on finance receivables was 17.5% and the average yield of contract receivables was 9.5%. Originations of $202.1 million in the quarter increased $30.2 million or 17.6% compared to 2013 levels.

Moving to slide 11, our quarter end balance sheet includes approximately 1.3 billion of gross financing receivables including 1.1 billion from our U.S. Snap-on credit operation. Approximately 80% of our U.S. financing portfolio relates to extended credit loans to technicians. During the first quarter, our worldwide financial services portfolio grew approximately $28 million. As for finance portfolio losses and delinquency trends, these continue to in line with our expectations.

Now turning to slide 12, cash provided by operations of $88.3 million in the quarter increased $12.6 million from comparable 2013 levels primarily as a result of higher 2014 net earnings. Net cash used by investing activities of $50.9 million included $30.3 million to fund the net increase in finance receivables. Capital expenditures of 18.3 million in the quarter compared with $14.7 million last year.

Turning to slide 13, days sales outstanding for trade and other receivables of 65 days compared with 62 days at 2013 year end. Inventories increased $18.2 million from 2013 year end, primarily to support continued higher customer demand and new product introductions as well as to improve service levels.

On a trailing 12 month basis, inventory of 3.8 times remained consistent with our year end levels. Our quarter end cash position of $127.8 million decreased $89.8 million from 2013 year end levels primarily as a result of the March 2014 repayment of $100 million of unsecured notes at maturity.

In addition, the net decrease in cash also reflects the impacts of funding 169.7 million of new finance receivables, dividend payments of $25.6 million and share repurchases of $22.1 million as well as 18.3 million of capital expenditures. These uses of cash were partially offset by $139.4 million of cash from collections of finance receivables, $88.3 million of cash from operations and $12.8 million of cash from stock purchase and option plan exercises.

At the end of the first quarter, our net debt to capital ratio was 25.5%. In addition to our $128 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 market should we chose to do so. At quarter end, no amounts were outstanding under any of these facilities.

With that I’ll now turn the call over to Nick for his closing thoughts. Nick.

Nicholas Pinchuk

Thanks Aldo. Well as I said at the start, we are encouraged by the quarter. We believe the results are more clear evidence of potential and they are added confirmation of what we’ve been saying for some time that as we look forward, Snap-on has abundant and wide runways for both improvements and for growth. We believe the quarter’s performance adds to a long trend which reinforces that outlook.

We are moving down our runways for growth, enhancing the franchise network, sales growing by 6% new products strong franchise metrics and a credit company is amplifying that strength. Expanding repair shop owners and managers, new diagnostics and information products, growing stronger with independent shops, Challenger Lifts giving us more to sell, extending the critical industries C&I growing organically at 10% with over 200 basis with an over 200 basis points increase in OI margins and building in emerging markets, ramping up our new lift factory and growing even in a place like India where economic and election uncertainty are major headwinds today.

We’re also progressing down our runways for improvements, Snap-on value creation, safety, quality customer connection innovation and RCI driving margin gains. So we’re encouraged by the continuing trends, but we believe there is much more ample opportunities and clear runway for growing and improving. And we believe that with the inherent advantages we hold, the investments we’re making and the capable team we’re enlisting, we will extend on a positive trend for the foreseeable future.

Before I turn the call over to the operator, I believe it’s appropriate to speak to our franchisees and associates. I know that once again, many of you are listening. The encouraging results of the first quarter and the positive trends we’re demonstrating are direct result of your extraordinary capability and your continuing commitment. For the role you play in our on-going achievement, you have my congratulations. And for your unfailing dedication to our team, you have my thanks.

Now I’ll turn the call over to the operator. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We’ll take our first question from David Leiker with Robert Baird.

Joe Vruwink - Robert W. Baird & Co.

Hi good morning. This is Joe Vruwink on line for David. I wanted to start, is it possible to quantify any impact weather might have had on the tools group in the quarter? I’d imagine some of the van routes were impacted and obviously fewer repairs are going on, mechanics have less money in their pockets. So, anyway to quantify that?

Nicholas Pinchuk

The short answer is no. My response to that it’s always something. And so yes, we had some tough winter and routes were attenuated in some time and I rode a number of these vans and when you stop at garage, I think I said this on the last call. Some guys say business is great, because we’re tearing up transmissions and chassis are getting bumped around and so there is lot of business here. Other people are saying, hey the business is terrible. So it’s hard to quantify it. Certainly it might have imposed some cauterization on us a little bit. But I think for our perspective, we’re not really looking at it as something that is that unusual, just something that comes up and we manage over it.

Joe Vruwink - Robert W. Baird & Co.

May be as the quarter progressed, so we obviously started getting better weather in March, April has been a little bit better I suppose, has your sales activity picked up kind of in line with that cadence?

Nicholas Pinchuk

Well yes, but it's hard to quantify Joe because to tell you the truth last year, if you looked at last year we had people seem to go on a sabbatical in early January, so we had a kind of back end loaded cauterization, it tends to happen from time to time from quarter-to-quarter. So there isn’t always great intelligence looking from months to months. So yes, we did see some uptick but I am not sure you can read that much into that.

Joe Vruwink - Robert W. Baird & Co.

And then just looking at the origination growth and financial services, if I kind of use that as a parameter for activity in the tools business 18% obviously a lot higher than the 6% organic growth for the segments. Is there a way to kind of understand the disconnect there and is 18% so parameter for barometer for just generally…

Nicholas Pinchuk

What I can give you -- unfortunately from quarter to quarter, it’s hard to tie it exactly because there is a -- what we say is and you have probably heard us say this over and over is that the originations should roughly follow the growth of the tools groups big ticket items which is primarily tools storage in some of the larger diagnostics. So a matter of fact over the last several quarters and in again this quarter, big ticket grew greater that the tools group in general so you have that factor.

Now in the full year we believe that comes out roughly parallel as the originations and big ticket sales roughly parallel, tools group big ticket sales and originations roughly are parallel and all work out. But from a quarter to quarter remember, we’re recognizing a sale to a franchisee. He is not necessarily selling it right away onwards, he necessarily doesn’t do the deal, so you have some disconnect in terms of cauterization as you cross over the month, so it’s very hard to tie quarterly numbers between originations in the tools group. I will tell you that it is indications that tools group big ticket sales were sold at higher rates year over year than the average tools group and that’s true in this quarter.

Joe Vruwink - Robert W. Baird & Co.

Okay. And then...

Nicholas Pinchuk

Other than you can’t really draw much from one quarter.

Joe Vruwink - Robert W. Baird & Co.

Sure, that makes sense. Switching across the pond and looking at Europe, you talk a lot about runways for growth and I’m just wondering what’s the runway in Europe not only from revenues, but Nick you think restructuring Europe C&I I think your entire 10 year at Snap-on, so what could be the OpEx goal?

Nicholas Pinchuk

It seems like it. I hate to comment on Europe anymore because I am usually wrong. But the thing is look, what happened in Europe, what’s happened in Europe is we have been continually applying Snap-on value creation, improving our productivity and efficiency even in the darkest of downturns, we have said that our customers have not gone away therefore in doing this whether it’s restructuring, in closing facilities or in creating efficiencies we have not removed productive capacity. So as I said in my remarks, that started to come home with positive traction several quarters ago where SNA Europe our European hand tool business was showing improvements and profitability even as the sales were going down.

And now with the sales going upwards, it adds that, that leverage adds that because there is good leverage because we didn’t take out any productive capacity. Remember that when you talk about where is Europe and as Europe turn the corner and what’s happening in Europe, it’s still down 20% to 25% from the peak. So we’re coming, we’re literally coming off the canvas. So while we’ve had two quarters, I am still from Missouri to see where we’re going for a longer term, still it’s a positive event and it contributed nicely to C&I although it was not the only contributor to C&I.

Joe Vruwink - Robert W. Baird & Co.

Okay. So when I think about your former peak margin in C&I at 13% in 2008, you're doing 13.5 now and so with Europe 20% or 25% off the top, fair to say that there is still a lot more upside there?

Nicholas Pinchuk

Sure I’ve always said that I believe there is a lot of runway in C&I actually I am pretty bullish about the C&I business, it’s just that C&I been the repository of headwinds I think, they have military, they had the European headwinds and so on, so they’ve had some difficult bumps, but we feel confident about that business, SNA Europe, the critical industries those are great businesses.

Operator

We’ll take our next question from Liam Burke with Janney Capital Markets.

Liam Burke - Janney Montgomery Scott LLC, Research Division

Nick you talked about the Snap-on tools doing well internationally. Is one country or another doing particularly well or are you seeing just very solid international growth?

Nicholas Pinchuk

Well, generally I would say if you look back over, I think I talked about Snap-on tools growing over the years like 9% and 9.2% and 10.7% and 7.6% last year and if you look over the 16 quarters that are involved in that international grew pretty well in general. This particular quarter, UK grew nicely, better than -- about may be little bit better than the average. Canada grew even more. Australia actually was down slightly, down slightly. Some of that could have been currency. The tools group, man they got hammered with currency in terms of transaction because you’ve got the Canadian dollar weakening and you got the Aussie dollar weakening versus the U.S. dollar where we make the products we’re moving into those markets and U.S. dollars we’re shipping them in, and so does transaction impact. And so that played out a little bit in the Australian volume I think. UK has been across the company, pretty strong. I think on balance, you could say international is pretty good, but color in this quarter, Australia is may be feeling the weight of the currency problem a little bit.

Liam Burke - Janney Montgomery Scott LLC, Research Division

Okay, great, and Aldo you had DSO step up three days. Is that timing or is this something different? Is it more international?

Aldo Pagliari

I would say above one-day due to the timing of sales where they fall in the collection cycle. But what you are seeing there, you’re spot on. The international mix is a little bit more robust. The term structurally in the international markets tends to be longer than that in the U.S. And then behind-the-scenes you have the fact that military is a little bit less than what it had been in prior years. The government's pays quick and the governments often times even uses credit cards. So that always helped to be a sole calculation.

And then finally, if you look at emerging markets, those places that have some spot liquidity issues, places you look like at China, India, Brazil, you have a lot less cash-and-carry business, and the result, in distribution circles there you have to provide little bit more structural terms. That's normal. It goes with the terms, so as those markets mature, in our presence, and then mature, I think you will see a little bit more classic dated outstanding rather than cash-and-carry type activities.

Operator

(Operator Instructions). And we will take our next question from Gary Prestopino with Barrington Research.

Gary Prestopino - Barrington Research Associates, Inc., Research Division

Good morning all, can you hear me, all right, because I am on a cellphone?

Nicholas Pinchuk

We have a little background, but we can hear you fine.

Gary Prestopino - Barrington Research Associates, Inc., Research Division

That’s because I’m at the airport but anyway, Nick when you look at that dealer business, you said those re-facilitations were winding down. If you back out some of that business that’s winding down, do you have a sense of just what the growth was just to dealers overall?

Nicholas Pinchuk

I don't have a dealer overall growth, but I'd say it’s -- if you look at our -- one of the things that I wanted to say was is that I think we said in the call that RS&I would grow without the wind down of the dealerships. And we think it'd be mid-single digits, that kind of growth, if you pull out that OEM lumpiness. If you went back to our earnings calls last year, it was growing, we had some pretty good growth in RS&I; we are saying that some of that was accelerated by some of these movements. So, we said overtime that RS&I, the margins can be moved by that and also the growth can be a little bit lumpy. We are actually pretty pleased with it because the other businesses, particularly in the independent space are growing nicely.

Gary Prestopino - Barrington Research Associates, Inc., Research Division

Okay, it just makes sense because the dealerships are doing well too overall. And then, in terms of -- do you have any facilities business, et cetera in the Ukraine?

Nicholas Pinchuk

Yes, we have some business in the Ukraine. We have a sales office there. But its peanuts, you know, I mean really Ukraine is not -- it’s a very-very small exposure at the Ukraine. If you talk about the Ukraine and Russia, it’s a little bit bigger, but it’s still a smaller piece of the business, maybe 1% of the total for the organization. And that business, and these numbers are down, already and these numbers are down multiple decades. We have seen -- we saw some headwind here.

Gary Prestopino - Barrington Research Associates, Inc., Research Division

And then lastly I had another question on just the growth in the tool business in Europe, but if you look at your business overall in Europe, you know the southern tier countries had always been very sluggish and declines really the northern countries had been doing a little bit better. Are you starting to see a pickup in places like Spain, Italy, countries like that? Are you starting to see any growth in revenues out of those countries? Or is it specifically all the north countries?

Nicholas Pinchuk

Sure. No-no-no, actually we see revenue growth in our tools business; the SNA-Europe business in Spain and Italy, Portugal, actually France even, and Germany and so on. So we see -- sort of a center of Europe, UK is pretty good. The Eastern European businesses, as you might expect, are weak. There is some growth in Turkey, for example. So that’s kind of pushing it. I will say that, sometimes I think we went so down so far in Spain and Portugal that any kind of growth, just kind of not so big but it's still positive from what we see. It’s so positive and encouraging event, yes.

Operator

We'll take our next question from David MacGregor with Longbow Research

David S. MacGregor - Longbow Research LLC

Yes, good morning everyone. Can you talk about the extent to which your growth in international business may have supported the large origination number?

Aldo Pagliari

I will take that. It was fairly evenly balanced. But the originations are still more influenced by the activity in the United States. So certainly you can look at the International portfolio grew as well, but no one do buy us one way or the other.

David S. MacGregor - Longbow Research LLC

Okay, and you mentioned that the origination should converge with the tools business over the course of the year, that from a quarter-to-quarter standpoint, you can see divergence a bit over the course of the year that should converge. So does that imply that we’re going to see a fairly substantial reduction heading into 2Q and 3Q here in the origination?

Nicholas Pinchuk

No, I didn’t actually say, what I said specifically was it should converge with big ticket sales in the tools group.

David S. MacGregor - Longbow Research LLC

Okay, good.

Nicholas Pinchuk

And so that doesn’t necessarily correlate exactly with the overall tools group number, in fact for many quarters they’ve been higher.

David S. MacGregor - Longbow Research LLC

Okay. And then within that big ticket, you talked about the fact I guess storage and diagnostics are really driving the big ticket within the tools segment as I understand. Do we begin to anniversary something here in the next quarter or two that would create a substantially slower year over year growth?

Nicholas Pinchuk

Well, I don’t know. I think -- look I have said forever that I think we expect our growth to be at 4% to 6% organically and this is at the top end and we grew like I said at 9%, 9.2%, 10.7% and 7.6% in the past year, so that will be outside that. So eventually you might expect the tools group to come down to where I said, but we have some great strengths in the tools group. We are ramping up the innovation engine with customer connection and innovation so we have more new products than ever before. We have these new marketing activities which are breaking the boundaries of the van, the Rock N' Roll Cab that has 56 on the road now and they are breaking the space constraint and adding to that tools storage and we’ve raised the Techno-Vans which support the diagnostic sales to 18. A year ago, those numbers 56 and 18 were 36 and 4 and two years ago were just 18. So we are pumping more support into the tools group. So I wouldn’t want to call for a cooling on the other hand we do say over time it’s 4% to 6%. I am not saying it’s going to happen, that we’d see a reduction next quarter though, I don’t see a lapping being a factor.

David S. MacGregor - Longbow Research LLC

Okay. Just a couple other questions, I guess on the change in working investments. Aldo you went into some detail about the things that are stressing your DSOs and that was helpful. I noticed though that going back over say the last two years, first quarter ’12 it was a 13.9 good guy in ’13 it was negative 55, and in ’14 were negative 42.5. Is that reflecting just the structural shift so the growing international business, the slowdown in military, the things that Aldo discussed here, is there something else going on there?

Aldo Pagliari

I think the same variables do characterize, you’re talking about just the receivables element in working capital is that [Multiple Speakers] are longer that’s a fact of life. The international mix of business does then impact that, emerging markets as they mature does move from a certain percent of business being as I said cash and carry and short term oriented to more traditional distributor terms. And finally the realization of the government is a little bit of a less of a player in our mix. They were one of the ones that have the most rapid payment terms usually and they do pay properly.

Nicholas Pinchuk

I’ll just jump in here, one of the things that is going on here is, if you shipped to C&I, I think we have of course the great progress in Europe where we’ve gotten another quarter of growth and we have been pounding Snap-on value creation, so we have nice leverage rolling out of that.

But, there is also a great component of extension to critical industries where we had some big wins in aviation, those are very profitable but they’re not the military business, they change the nature of the payable of the receivables and we are not only in aviation, but we’re also extending internationally. One of the things we worried about in critical industries where we able to project and roll the Snap-on brand out of the garage into aviation and oil and gas and those things, and that’s working. And then further than that, are you able to project it internationally, well that’s really working this quarter and that’s one of the things that’s driven, that’s one of the big factor, may be the biggest factor in driving the 10.4% growth in C&I and a great component of the 200 basis points improvement.

David S. MacGregor - Longbow Research LLC

Yes, okay. And the last question if I could, just last question, you paid down 100 million of debt in the quarter. Clearly the balance sheet is over capitalized at this point. I don’t want to be the guy to force or pound the table, but you need to do acquisitions I hate to see you stress that. But what is your thought process on just using some of this capitalization capacity to buyback more stock rather than wait for opportunities to surface on the M&A front?

Nicholas Pinchuk

Well, I think we’ve made it clear that, two factors I’ll say, our priorities for cash are; working capital investment and the organic business you just pointed out, some of the requirements we can have as we expand our business to different places. We see it in our working capital today; we’re growing but its eating working capital. We knew this was coming. We are looking at M&A. We view each months, we’re reviewing a list of M&A and we will act on this and we’re confident we can find targets because we keep looking at severely each month; thirdly, we keep our dividend in perpetuity and we know our investors like that dividend, like those dividends and it depends on it, and then the idea of buying back stock to offset dilution. We see that as our cash priority. And I would add on top of that though, that’s our current cash priority, but I would add on top of it, we know that as we generate cash and have capability, we will be judged on how we wheel that, we know that.

David S. MacGregor - Longbow Research LLC

Are you considering large transformative acquisitions or are they...

Nicholas Pinchuk

No nothing transformative. We think we can make acquisitions, we’ve seen several large acquisitions that didn’t quite work out that were sort of semi-coherent, on closer look it wasn’t. We believe we can make acquisitions that give us more to sell and more strength with the customer basis that are along our runways for growth, that is the technicians, the repair shop owners and managers, people in the critical industries are in emerging markets. And we can do that without having to transform.

David S. MacGregor - Longbow Research LLC

So if we got to the end of the year and you still hadn’t done a larger transaction, you still had the kind of overcapitalized balance sheet you have today. Would you consider accelerating share repurchase activity?

Nicholas Pinchuk

I am not sure. I’d wait till I get to the end of the year at that.

Operator

And next we’ll go to Richard Hilgert with Morningstar.

Richard J. Hilgert - Morningstar Inc.

I wanted to ask about, on the military spending, has that now completely anniversaried, in other words the first quarter last year was the quarter where we really saw a big decline in that area of the business, correct?

Nicholas Pinchuk

Actually I think it was the fourth quarter of the prior year, but if the answer is it completely anniversaried, the answer is no, because it keeps going down but the base is smaller. So the impact on us -- it isn’t that it didn’t impact us, it did. But the base on which the reduction is operating is smaller; therefore it’s less of an irritant. It doesn’t create the screen in C&I that it did before. So the way I characterize in my script and I think this is accurate, it no longer masks some of the progress that was happening because it’s smaller.

I mean basically that business is down, more than half, its way down. So it keeps coming down, and was down in the quarter couple of decades of percentages. So it was down again, but the base that it operates thus far.

Richard J. Hilgert - Morningstar Inc.

Is the European hand tools business that you mentioned that improved for the first time in quite a while? Was that down about the same kind of magnitude that military was down?

Nicholas Pinchuk

No, not that much but it was down let’s say 25% in sales.

Richard J. Hilgert - Morningstar Inc.

And then on the Challenger Lift business, is the nature of that equipment and the historic margins such that this would represent, always represent margins that are less than that segment’s average and therefore if sales in that business increase more so than the sales in the rest of RS&I, it would cause margins to be slightly diluted?

Nicholas Pinchuk

If the question is, I mean I think this is the question. Is the Challenger margin -- are the Challenger margins 23%? The answer is no. And therefore for some time and for either substantially lower than that, so for some time growth in Challenger margins, [indiscernible] Challenger sales would be detrimental to the overall RS&I margin numbers. However it might help, it might raise its profitability for the corporation and so on. And by the way, we’ll be working on the Challenger margins over time with Snap-on value creation to keep improving it. But there is a big gap between the Snap-on, between the Challenger margins and the overall RS&I margins.

Richard J. Hilgert - Morningstar Inc.

That gap is what is actually I was getting at and what I was getting at is that is Challenger is just the nature of this product and the pricing in that segment of the business such that you’ll never get to the 20 some odd percent that the RS&I group does, it will always be lower than that general mark.

Nicholas Pinchuk

Well, yes, I guess, I mean I think is sure always is a long time even for a guy like me. And I have a lot of confidence in Snap-on value creation, so I think it can move it upwards. So I would never see the idea that never get there. But it’s certainly a long pull. Now remember though, that we lap the acquisition in the second quarter. So we acquired Challenger, I don’t know half way to two-thirds of the way through the second quarter of last year. So once we get into the third quarter, its apples-to-apples. What you’re seeing now with the drag is in apples-to-oranges comparison, that’s why we (want) [ph] it out.

I mean RS&I actually had a pretty good quarter, it had 60 basis points of restructuring impact year-over-year and another multiple decade, a doll-up of Challenger impact and that occluded the relatively strong RCI achievement that it made in the 50 to 60 basis points.

Richard J. Hilgert - Morningstar Inc.

Certainly was an impressive quarter on margin performance. Thanks for taking my questions this morning.

Operator

And we have no further question in the queue at this time.

Leslie Kratcoski

Thanks everyone for joining us this morning, a replay of the call will be available on snapon.com shortly. And as always, we do appreciate your interest in the company. Thanks a lot.

Operator

This does conclude today’s presentation. We thank you all for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Snap On (SNA): Q1 EPS of $1.62 beats by $0.08. Revenue of $787.5M (+6.2% Y/Y) beats by $6.42M.