Good day, and welcome to the Snap-on Fourth Quarter and Full Year 2018 Results Investor Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Sara Verbsky. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us today to review Snap-on's fourth 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 have provided slides to supplement our discussion. These slides can be accessed under the Downloads tab in the webcast viewer, as well as on our website 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 regarding these measures including a reconciliation of non-GAAP measures is included in our earnings release and conference call slide deck, which can be found on our website. With that said, I'd now like to turn the call over to Nick Pinchuk. Nick?

Thanks, Sara. Good morning, everybody. Today I'll start with the view of our fourth quarter, give you an update on the environment and the trends we see, take you through some of the turbulence we've encountered and speak about the progress we've made. As usual, Aldo will then provide a more detailed review of the financials. Results for the quarter, for the full year, this time include a number of special non-recurring legal tax and debt events that affected our as-reported levels. So to provide greater clarity, we're going to refer to amounts excluding those onetime effects as an as-adjusted number to make everything comparable from an overview level. And when you look through it all, Snap-on did see external turbulence in a number of areas but we offset those challenges by and large and make what I think is recognizable progress. We saw disparity from group to group and within each group, but overall we're encouraged by our position for going forward. Fourth quarter sales of $952.5 million as reported were down 2.3%, including $17.1 million or 180 basis point impact from unfavorable foreign currency, much different than the beginning of the year. Organic sales were about flat down 0.6%. Generally shortfalls in the OEM dealership arena and in our international franchise businesses, including the U.K. were about offset by gains in critical industries, our Asia Pacific region and the beginning growth in the U.S. van channel. From an earnings perspective, our OpCo operating income for the quarter, including the onetime benefit from a legal settlement and an offsetting impact of unfavorable foreign currency effect was $182.1 million, increasing 15.3% compared to last year, which also included legal impacts. OI margin for the quarter, as reported, was 19.1%, up 290 basis points. On an as-adjusted basis, excluding the non-recurring…

Thanks, Nick. Our consolidated operating results are summarized on slide 6. Net sales of $952.5 million in the quarter were down 2.3%, reflecting a 0.6% organic sales decline $0.4 million of acquisition-related sales and $17.1 million of unfavorable foreign currency translation. The organic sales decrease this quarter principally reflected low single-digit declines in sales to repair shop owners and managers in the Repair Systems and Information segment largely offset by a low single-digit growth in the Commercial & Industrial segment. Sales in the Snap-on Tools segment were essentially flat, but reflected low single-digit gains in the U.S. franchise operations. Consolidated gross margin of 48% grew 20 basis points, primarily due to savings from RCI initiatives, partially offset by higher material and other cost. The operating expense margin of 28.9% reflected 40 basis points of benefit from the $4.3 million legal settlement Nick referred to earlier. This compares to an operating expense margin of 31.6% last year, which included 320 basis points of negative effect associated with the $30.9 million legal charge incurred during Q4 of 2017. Operating earnings before financial services of $182.1 million or 19.1% of sales compares to $158 million or 16.2% of sales in Q4 2017. Excluding the effects of the legal items in both years as-adjusted, operating margin before financial services of 18.7% compared to 19.4% last year. Financial services revenue of $82.7 million and operating earnings of $56.1 million, increased $2.8 million and $1.7 million respectively from 2017. Consolidated operating earnings of $238.2 million and 23% of revenues including $4.5 million of unfavorable foreign currency effects, compared to $212.4 million or 20.1% of revenues a year ago. Excluding the effects of the legal items in both years as-adjusted, operating margin of 22.6% compared to 23.1% last year. Our fourth quarter effective income tax rate of…

Thanks, Aldo. Snap-on fourth quarter, near-term turbulence, the auto sales transition and the associated uncertainty and the effect of Brexit, all of that about to offset by C&I stable trajectory, continuing – the favorable trajectory of C&I, continuing to extend in critical industries, Asia Pacific progressing, overcoming China's turbulence, and the Tools U.S. recovery. We believe strongly in our opportunities for growth and improvement. That's why we're keeping increasing our customer connection, working on innovation and launching new products. Looking forward, we see attractive opportunity and we believe we have a strong position to take advantage, a position in products. And an optimistic and capable van network, and a growing penetration of critical industry, and a building array of unique repair databases, and an expanding capability in the broad markets of Asia Pacific, all serving as an effective base for moving forward, for offsetting turbulence and for achieving a positive trajectory through 2019 and beyond. Before I turn the call over to the operator, I'll speak directly to our franchisees and associates around the world. I know you more than anyone, see the turbulence today. And I know that we've been able to prevail because of your extraordinary capability, energy and dedication. For your role in our progress, you have my admiration. And for your unfailing commitment to our team, you have my thanks. Now, I'll turn the call over to the operator. Operator?

Thank you. Ladies and gentlemen, at this time we will open the floor for questions. [Operator Instructions] We'll take our first question from Curtis Nagle with Bank of America.

Good morning. Thanks very much for taking the question. So I guess the first one. Good morning Nick, how are you.

Fine.

Could you guys talk -- maybe speak just a little more specifically about why you guys are -- sounds like pretty confident that U.S. franchise business is on a trajectory of sustaining growth after a couple of years of fairly modest results on a revenue basis.

Yes. Look I think this is the thing. I mean there are lots of goes-ins and goes-outs in this quarter as you can listen. But the thing is, if you look at our franchise business this is the second quarter of positivity, positive growth or returning to positive growth. And we think if you look at the sales of the van, they exceeded the numbers. Now over time, the sales of the van generally equal our numbers, but sales -- our sales of the van they're sales too. Our sales are the sales to the franchisees then they sell to end customers. The end customer sales are pretty strong this quarter and they started to approach where we want the tools business to be. So we were encouraged by that. It's one data point, but we're encouraged. And then we saw how we came out of 2018 towards the end of the year they were positive. So I think we feel good about that. More than that, when you talk to the franchisees, they're optimistic. I spent a lot of time talking to them. And I look at our product line. I think or product line is nonpareil and stronger and getting stronger every day and the franchisees agree.

Got it. And then just quickly shifting to RS&I, I don't know if you specifically commented on this, but how did the diagnostics business fare? And how are you looking at the next year? And when does the MODIS launch?

Yes. Well, first of all, couple of things. MODIS is an existing product. It's not a launch. It's sold very well in the quarter. The diagnostics business -- diagnostics sells primarily to the Tools Group. The Tools Group sales of diagnostics were up year-over-year. It was a less rich mix which is one of the product mix problems associated with Tools Group margins. But MODIS and SOLUS sold very well through in diagnostics. And in terms of the Tools Group, if you signal back to the RS&I business itself there is -- the sales to the Tools Group were less than last year, but that just has to do with the inventory adjustments between the Tools Group and RS&I. I would suggest that diagnostics had a pretty robust selling period in this quarter. If you look at Repair Systems and Information, we -- usually how we described that is the Repair Systems and Information sold to independent shops is fairly positive and they're good margin drivers for RS&I which is probably the reason why you see RS&I 25.7% up 40 basis points.

And then how are you thinking about this year?

I feel I kind of like our product line when I see it coming out. I like the momentum in this year. So from quarter-to-quarter, you can -- one of the things you find as you follow us over time, you can't really hang yourself in any one quarter in terms of products as you break it down by product, but we like our diagnostic offering. They are better than anything in the market. And it's only getting stronger and providing more options for customers, for technicians. And no one can match them. And we have enhancements coming in the next year.

All right, thanks very much. Appreciate it.

Good.

Thank you. We'll take our next question from Christopher Glynn with Oppenheimer.

Thank you. Good morning. Can you hear me?

Yeah, sure. Good morning.

Okay, great. So at C&I, the 3.5% organic was particularly striking on the comparison. You were up 10% last year. So that stood out. I'm just wondering if that equates as comparisons normalize to increased organic confidence and ability and visibility for C&I as you contemplate 2019?

Actually 3.5% was nice. I mean, I think if you look at over five -- C&I is one of those businesses, which tends to be more variable in terms of the -- even though it's got positive trajectory, C&I has grown -- take a look at our Industrial business, it's grown over the last five quarters like at 7% -- 7% or 8% organically. But quarter-by-quarter it's been all over the map, mid-teens and some low single digits. Because of the calendarization of those orders. That was the basis of my comments. So we thought this quarter was nice. We had great order activity. We had -- we did well in aviation and other places, but -- in general industry, but we -- it wasn't as strong as some other quarters. So, this was a little bit of a flat period for C&I, still it was a good -- if you look at the overall trajectory it was very strong.

Okay. Yeah, I thought so given the confidence…

So I guess another way to say that is we have expected -- positive expectations around C&I.

Okay. And then for SOT between mix and investment, margins were down quite a bit there. I'm just wondering, how we think about the margin run rates currently that you experience for the full year 2018.

We wouldn't want think something we – sorry, sorry go ahead. Sorry.

Yeah, and just if there are any sustained headwinds if we should expect little continued pressure there?

The currency is going to be -- the currency flipped on us. They had 40 basis points of good news last quarter in the currency. That flipped to negative this quarter. So, part of the problem -- I usually don't mention currency, but part of the problem is that flip you can't necessarily adjust in pricing and other things that quickly, and so it was an unusual flip for us. We usually don't see it that quick. We'll see continuing pressure, but we'll learn -- we'll deal with that in terms of market pricing and so on in RCI and so on. You're going to see some pressure on material cost and that eats up some of our RCI but we have RCI against those. The margin mix I think was more or less kind of a phenomenon that is hard to forecast, but this was a particularly low point of the quarter. Fundamentally, last year you were selling -- you were pounding ZEUSs into the marketplace. Diagnostics - our highest-priced diagnostic unit great margin. This time we were pounding the -- we're pushing the non-intelligent diagnostic portion of our lineup, the MODIS and the SOLUS, so those are lower margins that was pretty much what drove that. I wouldn't expect that continue -- to continue in that kind of level going forward. So I suppose that's a long way of explaining why we thought this was a lower point.

Got it. Thank you.

Sure.

Thank you. We'll take our next question from David MacGregor.

Nick, I guess just looking at the relatively flat Tool segment organic growth in both 3Q and 4Q I'm wondering why do you think the conversion of SFC orders was so disappointing. And I guess overall now what kind of order growth did you see from the 2019 regional kickoffs? And any reason to believe you'll see a maybe a better conversion rate on those orders than you did on the SFC orders?

Look I think we have said [indiscernible] come home that you can't really get failed from the SFC. The SFC orders are up and they were up, that's an encouraging event. And part of it as I tell you the sales of the van had been pretty good. So, I kind of feel okay about that. I think if you look at the U.S., we feel -- even though the numbers aren't quite showing it yet, we see the U.S. making progress. The thing that has bedeviled the Tools group in these is the unlooked-for effect of Brexit on the U.K. and some softness internationally, but it really has offset any kind of gain we see in the U.S. And I think the U.S. gain is somewhat muted compared to what the franchisees are saying. So, I feel okay about that. I don't think -- I think the SFC kind of did its job.

And the regional kickoffs your thoughts there?

Regional kickoffs the -- if you look at the orders that are currently coming out of the regional kickoffs into the first quarter, they looked pretty good. So, I feel okay about that. And, of course, there're always ups and downs when you go from region-to-region-to-region and from franchisee-to-franchisee, but I think, when we look at the effect -- and what we've tried to do is bring the effect in closer to those events as we did -- as you know we did in the SFC and that seems to have worked some in the regional kickoffs as well as the SFC.

And you got the lower inventory turns even adjusted for the $20 million year-over-year. I guess do you feel like you're over-inventoried right now in big ticket merchandise? Or just what's the makeup of the--

No, no. I wouldn't say were over-inventoried in big ticket merchandise. I would say that we're adding a lot of tools. We added 5,000 different line items for Industrial last year. So, we'll keep adding to tools. Now, you can say okay we are not getting all the sales we want. But if you look at the trajectory of our businesses, if you look at near-term maybe and get in a twist, but if you look at the trajectory of the Tools group over a five, six years, you'll see that it's more than 5%. If you look at the trajectory of C&I, it's a little bit below where we wanted to be. Look at RS&I, it is where we want it to be. So, you get those trajectories. I don't think while we're working on the quarter-to-quarter, we think we see the long-term good and we -- and adding the number of products is part of that strategy and we see it working overtime.

Okay. Just second question. You'd referenced the increase of $500,000 of provision for contract receivables. Can you -- what can you say right now about current trends and franchisee credit? And you called out franchisee health metrics. I guess what would you say as being the most bullish of the franchisee health metrics you--

David it's Aldo. The contract receivable provision largely reflects the leased equipment to garages. The franchisee health metrics have been steady and we experienced historically very, very low losses on the franchised portion of that. So, -- because you're coming off of a low base, it's just you can get noise one quarter to a next. And when the K comes out you guys get to see in about a week, but you'll see on a full year basis, the provision for contract receivables are actually lower on a full year basis. So, you just get some noise quarter-to-quarter, but in this quarter, most of the adjustment relates to leased equipment to garages.

Are you comfortable with current trends in franchisee credit? Are you seeing any inflections there that should be--

I certainly am comfortable. I'm certainly very comfortable.

We are comfortable.

Yes. You're not seeing any inflections?

No. We're not seeing any inflections. In fact, if anything I think it's getting better. So I mean, I don't know – yeah, sure.

Thank you. We'll take our next question from David Leiker with Baird.

Good morning. This is Joe Vruwink for David.

Yes, Joe.

I wanted to drill into Tools Group margin a bit more so I understand the dynamic with the diagnostic product category. Can you talk about the power tools growth in the quarter? And then was that subject to additional tariff pressures at all in the quarter?

Power tools had some tariff pressure in the quarter, but its growth – it wasn't – I wouldn't call it a factor in the quarter power tools except that, power tools was one of the places that didn't grow in the quarter in the Tools Group. So power tools didn't have a particularly robust quarter. It had a pretty good quarter last quarter. So we kind of didn't read anything into that, but it didn't have particular growth. So it wasn't – if you're looking for the tariffs effect of that, I wouldn't call that a factor here. The factors are the ones I called out the flip. The – if you look at the currency around the pound and the Canadian dollar and so on where they went in the last quarter and particularly the end of the last quarter, you can see that motion. And so we just didn't – maybe we should have been better at it, but we didn't get our order quickly enough. And so that 40 to 20 basis point flip was a tough one on them and then they do spin. We want them to spin and by the way we think that's paying off when you see the sales of the van. And then, if you look at the margins, the product mix, it was a particularly weak product mix compared to the ZEUS in the last quarter. That's the way it played out. And so yes you're rightly pointing out that that was a – arithmetically that was a dominant number.

And then on the franchisee support initiatives, I understand, those are going on all the time, but they typically don't get called out in the quarterly deck. So was it a larger-than-normal investment in the quarter and if that's the case why now?

That's somewhat larger but the thing is part of it is, is that we – remember I said that, I wouldn't say it's like what I would call a singularity in the quarter in this quarter. But remember, when you got – when you have your intelligent diagnostics and we have more of these, I would say more complex product offerings around the new hand tools around Flex-Head ratcheting, so around the FDX, the hand tools around Flank Drive Extra and around the intelligent diagnostic you got to spend – we made a conscious decision that we had to spend more time helping our franchisees communicate the value of those sort of marketplace. So that's been growing a little bit. And we see the payoffs though. I'm telling you we think we see the payoffs. I think the – I like the sales of the van this quarter. So I feel okay about that. Now if this is as you say arithmetically dominant you pointed out arithmetically dominating is that margin shortfall? But part of it is that, but also the margins the product mix is a big thing in that and the reversal on the currency. And then of course, you have some tariffs and some materials eating up some of our RCI.

But I think Snap-on has a pretty good track record of making these corporate investments when you see a growth opportunity. I'm thinking about the Rock 'N Roll Cabs and the Techno vans and some of the early cycle studying the franchisees and increasing their productivity. All of those investments ultimately drove inorganic growth improvement. Is what we're seeing this quarter calling out the investment in the technical skills that are with your franchisees are better positioned to sell diagnostics. Would you expect that drives an acceleration in diagnostic growth during 2019?

I would expect it would drive a richening of our mix around software which it's doing and presumably a robust diagnostic sales, but also robust hand tools sales. And hand tools were nicely -- were nice in the quarter, so I feel positive about that. It's harder to -- it's harder -- it's not as easy as the Rock 'N Roll Cab because the Rock 'N Roll Cab was very palatable. Anyway, we're pretty positive about the quarter. If -- Joe, if the U.K. and the international businesses didn't find the problems associated with Brexit this would look a lot different I think.

And then my last question on RS&I, U.S. auto sales have been plateauing around $17 million for four years. So this is probably going to be the fifth year around that level. So it doesn't really seem like there's a major change in the end market outlook and yet you're getting feedback from your sales team that the OEM dynamic has changed. Is there something else going on?

Well I don't know. No, I don't -- I think didn't IHS take down the market below $17 million ? Didn't Native take down the market below $17 million? So I think they forecasted down below $17 million. Didn't GM announce that they're closing a bunch of plants and therefore are drawing in their home. I think everybody's been kind of demuring on this market a lot of very public announcements. And I would suggest that that creates an aura. I'm not surprised at this at all. I think that creates an aura of uncertainty. I'm not saying that this is a long-term thing. I think this is a shorter-term thing. I think we're feeling pretty good about next year in terms of projects. I think eventually, it's like gas prices. When gas prices go up, everybody stops driving for a couple of weeks, so I think this is the same kind of thing. That's how I view it. Now I could be wrong about this and we could be wrong, but that's the way we see it. The OEM projects have been coming down and we see some opportunities next year. So we think the effect wears off, but I think the -- it's the concern and conservatism over what's going to happen in the future.

And then last question on the -- last question on this. So even though there might be some questions around overall industry volume there are more new vehicles launching in 2019 versus 2018 and that typically is good for your facilitation business. Would you expect that to contribute more in 2019 versus 2018 was a down year versus 2017? Does that come back for you?

Yes. I think so. I mean, of course famous last words. You know what I mean? But, yes.

Thank you. We'll take our next question from Bret Jordan with Jefferies.

Good morning guys.

Hi.

Hi, Bret.

I guess on the Tools Group margin again. I guess, I was thinking about that franchise support spend. And I guess, also you talked about lower margin mix. Was there anything I guess either accelerated rate of promotions this quarter year-over-year? Or maybe you could talk specifically about tool storage and whether your volumes were up year-over-year and sequentially in that base?

Tool storage was okay. Tool storage volumes were up. I don't think there was anything particularly special about the promotions around tool storage. So I would suggest that there were special things around promotions around diagnostics. And I don't think -- we see these things from time to time. But remember, what we did was, we had been pushing the intelligent diagnostics, the software packages, the Apollo and the ZEUS, with the data packages for, what, three quarters? And so we've been pounding nose. And there are other customers who are a little bit less software receptive and want to look at the non-intelligent diagnostics, the non-enabled products that are MODIS and SOLUS. And so it came their time and so we pushed those. And generally, when you do that, you do put promotions around it to get franchisee attention and give customers a reason to buy. And that's what happened in this situation. And the comparison to last year, which was rolling out this new product, the ZEUS, the best thing since sliced bread and it is, it's a tough comparison.

Okay. And then, I guess, one question on the OEM side. And this is sort of big picture, but do you see the OEM sort of pushing more towards an OE toolset in the sense that, I guess, the Fiat Chrysler is now encrypting the OBD port. They haven't activated it yet, but sort of trying to protect their software internally. And are they -- are the OEMs pushing their own as opposed to outside buys now as the bigger structural?

I don't think that's a factor. I don't think that's a factor for us. It's always something we watch Bret, but I think for a dog's age, they wanted to take more of the repair back, but they haven't really been successful in doing that. I mean this is -- what you're talking about in Chrysler, is just the latest iteration of that effort I think. We watch it carefully, but I don't think it's an impact on what I'm talking about. What I'm talking about I think is more or less that fewer projects were done in the last couple of years -- in the last year and I think that had to do with the anticipation of uncertainty associated with this and the dealership themselves. I mean AutoNation talked about restructuring, I think, the other day. And they're talking about in U.K., they talked about 40% less investment in dealerships. And so, you have all that stuff rolling through the industry. I just think these guys are getting up every day and getting bad news for breakfast and they're pulling in their horns a little bit. After a while, they start saying, wait a minute, I don't have new car sales, but I better get some parts and service sales.

Okay. So you don't see it, it's just lower spending, if not a reallocation of where they are spending?

I don't think so. No we're not seeing that.

All right. Thank you.

Yeah. Thanks.

Thank you. Ladies and gentlemen, at this time there are no further questions in the queue. I would like to turn the floor back over to Ms. Sara Verbsky.

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.

Thank you. Ladies and gentlemen this concludes today's teleconference. You may now disconnect.