Earnings Call Transcript
Snap-on Inc (SNA)
Earnings Call Transcript - SNA Q3 2020
Operator, Operator
Good day, and welcome to the Snap-on Incorporated 2020 Third Quarter Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Sara Verbsky, VP of Investor Relations. Please go ahead, ma’am.
Sara Verbsky, VP of Investor Relations
Thank you, Emma. And good morning, everyone. Thank you for joining us today to review Snap-on’s third quarter results which are detailed in our press release issued earlier this morning. We have on the call today Nick Pinchuk, Snap-on’s Chief Executive Officer; and Aldo Pagliari, Snap-on’s Chief Financial Officer. Nick will kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we’ll take your questions. As usual, we’ve provided slides to supplement our discussion. These slides can be accessed under the Downloads tab in the webcast viewer as well as on our website, snapon.com, under the Investor 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.
Nick Pinchuk, CEO
Thanks, Sara. Good morning, everybody. Today, I'll start with the highlights of our third quarter. I'll give you a perspective on how the virus environment is playing out and on the trends that we see today and going forward. And I'll speak on our physical and financial progress. And Aldo will provide a more detailed review of the financials. We see the third quarter as another encouraging period, the metrics clearly confirm Snap-on’s resilience, showing the ability to continue its trajectory of positive results, moving from the initial shock of the virus and the associated interruption of activity to a combination, developing safe and effective ways to support the essential nature of our business and in some segments it's starting to look toward psychological recovery where customers begin regaining confidence in the future and resume full buying participation. The quarter's results back that all up, demonstrating significant elements of advancements; sales and profitability improved sequentially across our operations despite the virus. The Snap-on team continued to make progress by increasing our ability to accommodate to the threat and pursue our essential commercial opportunity safely, moving along upward trajectories consistent with our general perspective on how the days of the virus are unfolding. Geographically, the impacts of COVID continue to be varied across our operating landscapes. Asia Pacific remains virus-challenged. Southeast Asia and India are still in deep turbulence. And at the same time, Europe showed some signs of recovery. For business segments, certain areas like education, oil and gas, and aviation experienced greater and more prolonged difficulties, as you might expect that. In fact, the speed at which our customers are accommodating to the environment does vary by segment, but leading the way upward are our vehicle repair technicians, supporting the essential mobility of our society and our direct selling vans, our franchisees providing extraordinary face-to-face value, both are taking full advantage of the opportunities and the numbers show it. And as we go forward, we see considerable additional opportunities as society pivots towards suburban locations into more individual transportation. I'll tell you it's music to the ears of the vehicle repair operation. We believe we do have abundant opportunities on the road ahead. And because of that, we're keeping our focus on Snap-On value creation, safety, quality, customer connection, innovation, and Rapid Continuous Improvement or RCI. And in this area, that emphasis is particularly important in customer connection innovation. We're following that focus to create a continuing stream of great new products, positioning our operations to monetize the accommodation and the psychological recovery that outlines the path to the future. And then the third quarter, Snap-On value creation, customer connection innovations role growth in the face of uncertainty and lead to significant additions to our long line of product and innovation awards. Snap-On was prominently represented with three Motor Magazine top tool awards. And we were further honored with five Professional Tool and Equipment News or P10 innovation awards, but most significant of all, we are also recognized with 18 P10 people's choice awards, where the technicians, the actual users make the selections; 18 is a big number. It ties our record that was set just a few years ago. You see an essential driver, our growth with or without the pandemic is innovative products that make work easier. It's always been our strength and the awards we have hard won are testimony that exceptional Snap-On products just keep coming, matching the growing complexity of the tasks and maintaining our forward progress, even in turbulence. That's the overview. Now for the results. Third quarter as reported sales of $941.6 million were up $39.8 million or 4.4% from 2019, including a $34.6 million or a 3.8% organic increase, $4.2 million of favorable foreign currency translation and $1 million of acquisition-related sales. From an earnings perspective, OpCo OI for the quarter of $185.7 million included $1.5 million in direct costs associated with the virus and a $4.5 million hit from unfavorable currency compared to $167.7 million last year. The OpCo operating margin was 19.7%, up 110 basis points. For financial services, operating income of $65.6 million increased from 2019, which was $61 million, all while the 60-day delinquencies improved year over year. That result combined with OpCo for a consolidated operating margin of 24.5%, a 130 basis point improvement. Overall EPS was $3.28, compared to $2.96 last year, an increase of 10.8% in a somewhat challenged environment. Those are the overall numbers. Now the groups, in C&I volume in the third quarter of $308.4 million, including $2.2 million of favorable foreign currency, was down 8% as reported and down 8.6% organically, reflecting the decreases in sales to our customers in critical industries. I named a few and in Asia Pacific. Now our European-based hand tool business was essentially flat to last year. A positive result, given the twin headwinds of COVID-19 and the economic turbulence that now inhabits that region. From an earnings perspective, C&I operating income of $43.1 million decreased $5.2 million, including $1.4 million of unfavorable foreign currency effects and eight-tenths of COVID-related expenses. Now C&I sales were down 8.6%. OI was down 10.8%, a reasonable ratio, highlighting that RCI and cost containment went a long way in offsetting the impact of lower volume at C&I. In addition, the group did show significant sequential progress. The decline in sales and OI both narrowed considerably compared to the second quarter, reaffirming the positive upward trend that started after April. Regarding critical industries, military and international aviation, again, continue to register growth, while activity in education, oil and gas, and U.S. aviation were particularly impacted. You might expect that, given the state of those particular industries. But we do remain confident in and committed to extending in the critical industries. And we see growing opportunities moving forward. And the principal path to that possibility is customer connection and innovation, combining to create powerful new products. Our European hand tools business showed resilience in the quarter, yes. And it was aided by a good dose of innovation, products like our all-new line of Bahco ERGO and insulated cutting and holding pliers. We redefined the steel mill and refined our heat treat process, developing a new metallurgy that strikes the perfect balance between strength and reliability. With those special material advantages, the edges were redesigned and improved, with progressive blades that cut both soft cables at the tip and hard wires close to the joint, tremendous versatility. The new pliers have longer jaws and are aligned with more precision, better access and more accurate work. The insulation meets the IEC 60900 international standard for working with live systems up to 1,500 volts DC, offering substantial protection and safety in vehicle repair or in industrial environments. Strength, reliability, flexibility, accessibility, and safety—the ERGO plier is a powerful addition to the Bahco lineup of insulated tools, now numbering 250 strong, all focused on electrical work. The new pliers were launched just this quarter, and I'll tell you, the reception was quite enthusiastic. We also continue to introduce exciting new entries in our lineup of 14.4-volt compact cordless power tools. This quarter, we made two strong additions, effective in the repair shop and around the production line. The new CGRS861 and the CGRR861 incline and right angle grinders feature high torque, longer run time, and extended motor life, all in a compact, lightweight, and easy-to-maneuver body. The new units both feature a dual collet system, accommodating both eighth-inch and quarter-inch bits, allowing for a wide range of accessories and a feature that, when combined with our built-in spindle lock, makes for very quick changeover. That's a popular time saver. The new tools also include variable speed control, a key to handling a wide variety of servicing jobs. We launched in August. The technicians clearly have noticed the grinders, which are already two of our million-dollar hit products. C&I is demonstrating encouraging sequential progress, serving the essential. Each of the businesses is generating ongoing improvement and exiting the quarter stronger than when they entered, and product investment authored a big piece of that progress. Now on to the Tools Group. As reported, sales were up 16.8% to $449.8 million, including $1.8 million of favorable foreign currency and a $62.8 million or a 16.2% organic increase, with same-store sales across the U.S. and international businesses all growing at double digits. The operating earnings were $87.1 million, including $400,000 of virus-related costs and $2.9 million of unfavorable foreign currency. That compared to $53 million last year. The Tools Group operating success was a clear confirmation of our view of the COVID-19 trajectory on the resilience of the vehicle repair business and on the strength of our direct face-to-face van model. As we entered the quarter, we saw our franchisees seeking increasingly effective ways to accommodate the pandemic. To do this, they pursued the support of the essential, and we've helped in that effort with time-saving aids, including further automation in the customer collection process, remote diagnostic software renewals, and multi-franchisee data bundling. New technology aids aimed at making it easier to operate in the virus environment and saving scarce franchisee time under any conditions. Also, as I'm sure many of you are aware, the third quarter is when we hold our annual Snap-On Franchisee Conference, the SFC. No surprise; this year was different than any held before. The in-person gathering was canceled, and our 100th anniversary celebration planned for that meeting was postponed to 2021. Instead of the usual event, we came together over the weekend ordinarily reserved for the SFC with a virtual conference, live from the Forge. More than 3,800 van drivers participated at a distance, representing nearly 98% of the North American network, following what was, I think, a rousing Friday night kickoff. We had presentations on significant offerings, training on unique product advantages, and seminars on effective selling techniques. After that Friday show, 180 individual videos featuring products and programs and training were posted on demand. And through the course of the weekend, franchisees wrapped up over 43,000 views of the content. The live from the Forge action concluded on Sunday afternoon, and I'll tell you, it was a clear success. Continuing the SFC tradition, highlighting new products, strengthening our franchise capabilities with great training, and reinforcing our brand with a positive message and a lot of fun. It was abundantly evident at live from the Forge that new product is a big driver for franchisee excitement. We do have considerable confidence in the power of our product line, and there are real reasons for that belief. You heard about the product awards. Well, beyond that, as our franchisees saw, there's a continuing stream of other great new offerings, candidates for next year's recognition—attention getters that make repair work easier and really help the technicians meet the challenges of increasing vehicle complexity as the model years roll by. Just one example: unveiled at the conference was our New Steel Titan Roll Cab with a new color combination, an eye-catching dark titanium paint brushed in blue trim, with special details in bright blue, the Snap-On nameplate, the S-ranch logo located on the cap face, and a special S-ranch imprint on each interior liner. The Titan is visually striking, I can tell you, but it's also work-enabling, with three extra wide drawers for easy access to most commonly used tools, a speed door, and improved organization for a variety of small items like drill bits. And a power drawer for power tool charging using an exclusive Snap-On power strip design with five offset AC outlets and two USB ports. Vehicle repair is moving towards psychological recovery, gaining confidence, and starting to invest in longer payback items, and a steel titan is just the ticket. It's product excitement even in the pandemic, and since then, customers love it. Also introduced in this quarter was the new 8-piece power steering and alternator polymaster set handle, helping technicians to more easily remove and install press-on pulleys on most GM, Ford, and Chrysler engines. The unique reversible dual design of this handle includes multiple adapters, allowing for quick model changeovers and increased productivity—pretty important in the garage. The master set is a necessity for smooth installation and removal of power steering pumps, alternators, and vacuum pump pulleys in a large range of vehicles. It's manufactured in our Elkmont, Alabama plant, right here in the U.S.A. I was just there last week, and I can tell you, it's a great team. It's no wonder the initial response to that master set was very positive. It made our list of hit million dollar products in just the first month. Well, that's the Tools Group—accommodating the pandemic, taking advantage of the psychological recovery, furthering innovation, and strengthening for the future. Now let's speak of RS&I. The RS&I group also posted significant sequential improvement from the second quarter, narrowing the shortfall to 1.6%. You may recall that in the second quarter, the sales were down 29.8%. That's a big move. Volume in this period was 317.5 million, including 800,000 of favorable foreign currency and $1 million from recent acquisitions. The slightly lower activity reflected continued growth in the sales of diagnostics and repair information products to independent repair shops and flat capital spending on undercar equipment, all balanced by improved but still decreased activity in vehicle OEM projects. RS&I operating earnings of $80.1 million decreased by $3.2 million, reflecting the lower volume. OI margin was 25.2%, down 60 basis points, including a 10-point hit from currency. So while the overall group was somewhat impacted, diagnostics and information-based operations continue to grow. And once again, new products led the way. Among the new offerings launched in the quarter was our latest intelligence diagnostic unit, the Apollo D9, ergonomically designed with ultrafast, 2-second startup time, a larger 9-inch touch screen, and a number of preloaded training videos installed directly on the tool for instant use. The platform is powered by our intelligent diagnostics software, which includes over 1 billion repair records and over 100 billion unique diagnostic events, all organized to help technicians fix cars much faster. Now we've been talking about shortening the selling cycle for our complex diagnostics and increasing the sales capacity of our franchisees. Well, live from the Forge featured a detailed seminar on operating and selling the new Apollo, and to make that distance training extra powerful, each franchisee was provided with a new demo unit to follow right along hands-on with the program. In addition to the special training, the unit could also be used immediately the next week to demonstrate the new Apollo's compelling advantages right in the field. It seems to be working. Although it was introduced at the end of the quarter, our on-the-street feedback indicates that our new handheld will go a long way to advance our strategic thrust into intelligent diagnostics. We're confident in the strength of RS&I, 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 our third quarter—absorbing a shock following the accommodation, moving on to psychological recovery, keeping our people safe while we serve the essential, continuing to improve sequentially on a positive trend, a successful SFC at a distance, confirming the power of our direct selling van model, results above last year. Sales up 4.4%, OI margin 19.7%, 110 basis points higher. Financial services are navigating the virus era with strength and an EPS of $3.28. All achieved while maintaining and investing in our strengths of products, brands, and people. It was an encouraging quarter. Now I'll turn the call over to Aldo. Aldo?
Aldo Pagliari, CFO
Thanks, Nick. Our consolidated operating results are summarized on slide 6. Net sales of $941.6 million in the quarter compared to $901.8 million last year, reflecting a 3.8% organic sales gain, $4.2 million of favorable foreign currency translation, and $1 million of acquisition-related sales. The organic increase reflected sequential improvements in year-over-year performance in all three operating segments, led by the Tools Group segment with a double-digit sales gain in the third quarter as compared to last year. While sales in the Commercial & Industrial and Repair Systems & Information segments were lower than the third quarter of 2019, they did increase significantly from the second quarter of 2020. During the quarter, the COVID-19 pandemic remained the headwind in certain geographies and within certain industries. But overall, the momentum experienced in the month of June continued into the full third quarter for all of our businesses. Similar to last year, we identified $1.5 million of direct costs associated with COVID-19. These costs include direct labor, under absorption associated with temporary factory closures, wages for quarantined associates and event cancellation fees, as well as other costs to accommodate the current enhanced health and safety environment. Consolidated gross margin of 49.9% compared to 49.7% last year. The 20 basis point improvement primarily reflects the higher sales volumes and benefits from RCI initiatives, partially offset by 50 basis points of unfavorable foreign currency effects. The operating expense margin of 30.2% improved 90 basis points from 31.1% last year, largely reflecting the impact of higher sales and savings from cost containment actions, accommodating the impact that COVID-19 has had on the overall business environment. Operating earnings report financial services of $185.7 million, including $1.5 million of direct costs associated with COVID-19 and $4.5 million of unfavorable foreign currency effects compared to $167.7 million in 2019, reflecting a 10.7% year-over-year improvement. As a percentage of net sales, operating margin before financial services of 19.7%, including 20 basis points of direct costs related to the COVID-19 pandemic and 60 basis points of unfavorable foreign currency effects, improved 110 basis points from 18.6% last year. Financial Services revenue of $85.8 million in the third quarter of 2020 compared to $84.1 million last year. While operating earnings of $65.6 million compared to $61 million in 2019, principally reflecting growth in the Financial Services portfolio as well as lower provisions for credit losses. Consolidated operating earnings of $251.3 million, including $1.5 million of direct COVID-related costs and $4.3 million of unfavorable foreign currency effects, compared to $228.7 million last year. As a percentage of revenues, the operating earnings margin of 24.5% compared to 23.2% in 2019. Our third quarter effective income tax rate of 23.4% compared to 23.5% last year. Finally, net earnings of $179.7 million or $3.28 per diluted share, increased $15.1 million or $0.32 per share from 2019 levels, representing a 10.8% increase in diluted earnings per share. Now let's turn to our segment results. Starting with the C&I Group on Slide 7. Sales of $308.4 million compared to $335.3 million last year, reflecting an 8.6% organic sales decline and $2.2 million of favorable foreign currency translation. The organic decrease primarily reflects a low-teen decline in both sales to customers in critical industries and in our Asia Pacific operations. While sales of the segment's European-based hand tools business were essentially flat. Across the critical industries, gains in international aviation and sales to the U.S. military were more than offset by declines in natural resources, including oil and gas, as well as continued lower technical education sales. Within Asia, sales to customers in India and Southeast Asia continue to lag behind some recovery experienced in other areas of the region. Gross margin of 37.3% declined 60 basis points year-over-year, mostly due to the impact of lower volume 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 23.3% improved 20 basis points as compared to last year. Operating earnings for the C&I segment of $23.1 million, including $1.4 million of unfavorable foreign currency effects compared to $48.3 million last year. The operating margin of 14% compared to 14.4% a year ago. Turning now to Slide 8. Sales in the Snap-on Tools Group of $449.8 million compared to $385.2 million in 2019, reflecting a 16.2% organic sales gain, and a $1.8 million of favorable foreign currency translation. The organic sales increase reflects a mid-teen gain in our U.S. franchise operations and approximately a 20% increase in the segment's international operations. Gross margin of 45.5% in the quarter improved 210 basis points, primarily due to the higher sales volumes and benefits from RCI initiatives, partially offset by 70 basis points of unfavorable foreign currency effects. The operating expense margin of 26.1% improved from 29.6% last year, primarily due to the impact of higher sales volumes and savings from cost containment actions, including lower travel and meeting-related expenses. Operating earnings for the Snap-on Tools Group of $87.1 million, including $2.9 million of unfavorable foreign currency effects, compared to $53 million last year. The operating margin of 19.4% compared to 13.8% a year ago. Turning to the RS&I Group shown on slide 9. Sales of $317.5 million compared to $322.7 million a year ago, reflecting a 2.2% organic sales decline, as well as $800,000 of favorable foreign currency translation and $1 million of acquisition-related sales. The organic decrease includes a high single-digit decline in sales to OEM dealerships, partially offset by a low single-digit increase in sales of diagnostic and repair information products to independent repair shop owners and managers. Gross margin of 47.3%, including 10 basis points of unfavorable foreign currency effects, declined 40 basis points from last year. The operating expense margin of 22.1% increased 20 basis points from 21.9% last year. Operating earnings for the RS&I Group of $80.1 million compared to $83.3 million last year, the operating margin of 25.2% compared to 25.8% a year ago, including the effects of 20 basis points of unfavorable currency and 10 basis points of direct costs associated with COVID-19. Now, turning to slide 10. Revenue from Financial Services of $85.8 million compared to $84.1 million last year. Financial Services operating earnings of $65.6 million compared to $61 million in 2019. Financial Services expenses of $20.2 million decreased $2.9 million from last year's levels, primarily due to lower provisions for credit losses, reflecting a year-over-year decline in net charge-offs. As a percentage of the average portfolio, Financial Service expenses were nine-tenths of 1% and 1.1% in the third quarter of 2020 and 2019 respectively. In the third quarter, the average yield on finance receivables was 17.8% in 2020, compared to 17.7% in 2019. The respective average yield on contract receivables was 8.4% and 9.2%. The lower yield on contract receivables in 2020 includes the impact of lower interest business operation support loans for our franchisees. These loans were offered during the second quarter to help accommodate franchisee operations and deal with the COVID-19 environment. As of the end of the third quarter, approximately $16 million of these business operating support loans remain outstanding. Total loan originations of $252.8 million in the third quarter of 2020, compared to $253.5 million last year. Originations of both finance receivables and contract receivables were essentially flat to last year's levels. 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 $25 million in the third quarter. Collections of finance receivables in the quarter were $185.2 million, compared to collections of $181.6 million during the third quarter of 2019. As we mentioned last quarter, as a result of the COVID-19 pandemic, we provided short-term payment relief or forbearance to some of our franchisees' qualifying customers. As at the end of September, those accounts with forbearance terms were back to more typical levels and were below 1% of the finance receivable portfolio, as compared to about 2.5% as of the end of the second quarter. Trailing 12-month net losses on extending credit or finance receivables of $46.7 million represented 2.7% of outstandings at quarter end, down 23 basis points sequentially. The 60-day plus delinquency rate of 1.5% for U.S. extended credit, compared to 1.7% last year. On a sequential basis, the rate is up 50 basis points, mostly reflecting the typical seasonal increase of 20 to 30 basis points we experienced between the second and third quarters, as well as the 20 to 30 basis point benefits to this rate reflected in the second quarter of 2020 that was associated with the deferred payment programs that were offered through June. Now, turning to slide 12. Cash provided by operating activities was $224 million in the quarter, an increase of $92.9 million from comparable 2019 levels, primarily reflecting the higher net earnings and net changes in operating assets and liabilities, including a $57 million decrease in working capital, largely driven by lower year-over-year changes in inventories. Net cash used by investing activities of $18.8 million included net additions to finance receivables of $11.7 million and capital expenditures of $10.1 million. Net cash used by financing activities of $105.1 million included cash dividends of $58.8 million and the repurchase of 300,000 shares of common stock for $45.1 million under our existing share repurchase programs. As of the end of September, we had remaining availability to repurchase up to an additional $294.5 million of common stock under existing authorizations. Turning to slide 13, trade and other accounts receivable decreased by $75.7 million from the 2019 year end; days sales outstanding of 64 days compared to 67 days of 2019 year end; inventories increased $4 million from the 2019 year end. On a trailing 12-month basis, inventory turns of 2.4, although slightly improved as compared to 2.3 times at the end of the second quarter compared to 2.6 at year end 2019. Our quarter end cash position of $787.5 million compared to $184.5 million at year end 2019. Our net debt to capital ratio of 15.5% 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 amounts outstanding under the credit facility and there were no commercial paper borrowings outstanding. That concludes my remarks on our third quarter performance. I'll now turn the call back to Nick for his closing thoughts.
Nick Pinchuk, CEO
Thanks, Aldo. We are encouraged by the quarter. Our operations, all the groups, C&I, RS&I, and Tools improving sequentially; shocked to accommodations of psychological recovery, tracing a clear and continuing upward trend. A significant rise in the Tools Group up 16.2% organically, same-store sales confirming the opportunities in vehicle repair and showing the power of our manned network. Financial services are performing well in the turbulence, demonstrating clearly the robust nature of its processes and its portfolio, and the positive overall results. Sales up 4.4%, 3.8% organically, OI margin 19.7%, strong, representing a rise of 110 basis points. EPS $3.28, up 10.8% from last year, significant gains against the turbulence. All achieved while consciously continuing to fortify our strength and advantage in product, a range of new offerings, in brand, a successful SFC despite the distance, and in people. We're keeping our team intact. You see, we are confident in our belief that we have ongoing upward momentum in the near-term, and we recognize that we've expanded opportunity in changing technologies and with the greater use of personal vehicles in the long-term. And we're maintaining our advantages through the virus, so that Snap-On will be at full strength, taking advantage of these abundant opportunities, driving continuous progress through this period of challenge, and well beyond. Now, I’ll speak directly to our franchisees and associates, I know many of you are listening; this was an encouraging quarter. And we do have a bright future. And I know none of it would be possible without your energy, your capability, and your dedication. For your essential efforts in supporting our society, you have my admiration. For your extraordinary achievement and driving us forward, you have my congratulations. And for your continuing commitment to our team, you have my thanks. Now I'll turn the call over to the operator. Operator?
Operator, Operator
Thank you. We’ll take our first question from Christopher Glynn with Oppenheimer.
Christopher Glynn, Analyst
Good morning. Congratulations on a strong quarter.
Nick Pinchuk, CEO
Thanks, Chris.
Christopher Glynn, Analyst
Just curious at Tools Group, how to contextualize the growth, which really had no foreshadow or precedent the last few years, other than maybe why is there to look at 2Q to 3Q combined year-over-year growth, or in terms of...
Nick Pinchuk, CEO
I think we mentioned when we began the first quarter that we faced significant challenges in March, but things were looking quite positive before that. We had invested in products and processes that helped us enhance the capacity of our franchisees more effectively, and we started seeing the benefits of that toward the end of last year and into the first quarter. While the impact of the virus affected us, we began to see recovery; that's why we refer to it as shock accommodation. By June, we noticed a return to an upward trend. As we look at the third quarter, it's important to consider that there was some recovery expected after a tough period, especially in April. However, the sales from our vans have consistently been strong. In the second quarter, those sales outperformed ours, and in the third quarter, they remained robust, with double-digit growth each month. Year-over-year, van sales saw a clear increase. It seems we are returning to an upward trajectory, but predicting the future is uncertain. One positive aspect is that Tool Group appears to be performing well, and Europe remains a wildcard. Notably, the UK showed significant improvement, and our international operations saw double-digit growth, which hadn't been the case before. While there are fluctuations and uncertainties in various regions, there is considerable momentum. Our franchisees have learned how to navigate these challenges effectively. We’ve successfully guided them through downturns before, which has proven beneficial. Looking at the numbers, 16.2% organic growth is substantial, and we've successfully maximized our profits. Sales from the vans indicate a strong demand, with vehicle repair nearing what we define as psychological recovery, and the vans are capitalizing on this. This situation highlights the resilience of the vehicle repair sector amidst turbulence and underscores the effectiveness of our face-to-face model, particularly when bolstered by technology.
Christopher Glynn, Analyst
Thanks. And just to follow up, I was curious what degree you guys contemplate an upside in the payout ratio, given that organic reinvestment and bolt-ons and share purchaser, you know, very much covered in your kind of pay-as-you-go rates there. I think, you know, some fields have a strong case for a 50% to 60% payout ratio; I'm curious your thoughts around that?
Nick Pinchuk, CEO
Well, Chris, you probably know that we have in recent history usually revisit the dividend rate in the fourth quarter; that's coming up upon us. And like every meeting we have with the Board of Directors, we'll have that discussion and we'll try to take a step forward in what we think is affordable. Realizing that Snap-On approaches that treat the dividend increase kind of like a perpetuity. Again, that's been our historic pattern and I'll kind of leave it at that.
Aldo Pagliari, CFO
Yeah. I mean, our governing policy on dividends is perpetuity. We think it's a cornerstone and a hallmark of the resilience and power of our model. So we believe in that strongly.
Operator, Operator
We’ll take our next question from Luke Junk with Baird.
Luke Junk, Analyst
Everyone. Thanks for taking the question. So two questions on the Tools Group. First wondering if you could comment on growth rates from a product line standpoint, it seems like diagnostic sales are likely up moderately based on your RS&I commentary and two storage; I guess if we just look at originations feels really stable, should we read that handle sales were the big driver of the strength, or is there something else that should be taken into account?
Nick Pinchuk, CEO
Yes, there are qualifications to those questions. First, looking at the quarterly byproduct numbers may not provide much insight as they are heavily influenced by the products and programs introduced to the franchisees, and then passed on to the technicians during the quarter. One quarter doesn’t provide a complete picture, but it can give some information. Regarding large ticket items, we saw an increase this quarter; franchisee sales were up, particularly in tool storage, which performed well. It’s important to note there’s a timing difference between originations and sales; we sell to the vans, and they need to get their products, find buyers, and then get credit. This can create a disconnect in timing. However, it’s accurate to say that hand tools saw very strong sales this quarter and led the way, with power tools also experiencing an uptick. Many products showed increases, with hand tools standing out in particular, although total storage and other categories also performed well.
Luke Junk, Analyst
Okay. That’s…
Nick Pinchuk, CEO
The other thing I think you would— one other thing I think you would conclude out of this, I think, is that when you see originations in effect; what do they got 0.3% or something like that, or, you know, something maybe a little bit bigger in the U.S., and you see me say that tool storage is up to the franchisees and the big ticket is up for franchisees, you would say that it's not the model of the product; it’s that the fact that being flat, even flat we're up a little bit year-over-year means that they're going to psychological recovery. In other words, the garages and the franchise, then the technicians and the franchisees themselves are starting to believe in the future and have confidence to invest in longer payback items. This is kind of a watershed of van's in terms of the state of mind throughout the industry. One of the setbacks and if you think about it, boy, you just step back and you look at the news about the auto industry in general, but also you kind of look around, you know, vehicle repair is pretty robust, actually in wages were up for technicians in August, according to—the rollings roll up and so I think that's a positive. And when I go out, when I went to the factory in Alabama, you know, in Elkmont, Alabama, I also went to franchisees, I just talked to several franchises across the country and they're all talking about robust garages. When I went to a garage recently out around here, you couldn't get in the parking lot; there were too many cars. So I think this is going pretty well.
Luke Junk, Analyst
Okay. And then the second question is just a clarification. Wondering what the statuses of the deferred payment sales plan programs that you told us about back in April? Was there any impact from those plans in the quarter from a sales standpoint in the Tools Group? And then from a credit standpoint, Aldo, you'd mentioned the sort of 20 to 30 basis point influence sequentially in the U.S. extending credit delinquency rates. Should we assume that that fully washes out in the third quarter effectively versus the noise if you want to call it in 2Q?
Nick Pinchuk, CEO
In the third quarter, there were no sales resulting from deferred programs since there were none available. Our Elite franchisees, who are part of the Platinum program known as Elite, typically have the option of offering a 60-day deferred program as part of their regular operations. This should not be considered just standard activity. Therefore, there was nothing exceptional in the second or third quarter that positively impacted sales. Regarding delinquency rates, collections, and charge-offs, we base our considerations on our significant historical data. Although we lack extensive experience with COVID-19 specifically, we have dealt with many local catastrophic events. We account for potential losses when customers utilize deferred versus non-deferred programs in our provisioning. Overall, while I hesitate to say it balances out, it's already reflected in our results. Whether we will offer more deferred programs in the future is still uncertain. We evaluate opportunities as they arise and if they present valid incentives for purchases. Interestingly, if it weren't for COVID-19, there wouldn't be such heightened concern surrounding potential credit company issues, collections, and delinquencies. In reality, offering deferrals is just a routine aspect of our operations. We implement them occasionally—not in a consistent manner, but rather frequently enough to provide our customers and franchisees a reason to engage and adapt their sales approach.
Luke Junk, Analyst
Good. Appreciate the color on both those questions, and I'll leave it there. Thanks guys.
Operator, Operator
We’ll take our next question from Bret Jordan with Jefferies.
Bret Jordan, Analyst
Hey. Good morning, guys.
Nick Pinchuk, CEO
Good morning. How are you doing?
Bret Jordan, Analyst
Good. Hey, when you think about the impact of, I guess—the mix, it sounded like the hand tools were very strong. Do you think stimulus played a role? I mean, obviously, the garages are seeing business as people are putting their personal cars back on the road, have you used...
Nick Pinchuk, CEO
I think, I don't know. Look, my gift is, first of all, our guys are employed mostly. You can look at the thing. Things dipped, I think the number of hours went down 5% or something like that in April. And then it snapped right back. Generally, what we see, what I'm hearing from my franchisees and I've talked to a lot of them; the garages are pretty much employed. So I don't think unemployment is a big deal. I mean, the unemployment deal or the PPI; you could have argued that whatever people got in the beginning like $1,200 or something, that might have helped. I'm reading that people put that in a bank, I don't know. But I think it would have been over in the second quarter. We kind of thought that might have helped us in the second quarter. That was one of the questions for us when we saw the tools group go up and hit the 3%, or I guess it was 2.4% in United States and that kind of thing. We thought maybe that might have been helping us. But I—my sense of it is, it was probably either banked or spent before it. I don't think it was driving the third quarter. I don't think. And I don't think those – I don’t think our guys are sitting on the edge of their seat, waiting for Congress to approve another one. Now if they do…
Bret Jordan, Analyst
So the mix of cash versus credit buyer, I mean, it sort of seems like you had a very strong tools number but not as much growth on the credit books. So was there a real shift here to cash purchase in the third quarter?
Nick Pinchuk, CEO
Well, there was a shift towards—there was a shift toward the smaller—not shift, but in the quarter we had nice hand tools and they tend to be RA, not long term credit. Remember, when you say credit, when you're talking about credit, everything sold off to buyers on credit. Everything. Right? And so, okay, you're only talking about whether it's 12 to 15-week credit or three-year or four-year credit, really, so everything’s sold on credit. So I don't think, if you say—if you put that in a pot and say everything was sold, so I don't see people paying cash so much. I haven't heard people pay in cash. And our RA book is up some because hand tools were strong. Anytime hand tools are strong, you see that happen, and the longer term credit tends to be a little bit less. But actually we thought longer term credit, given the environment was pretty robust in the quarter. Now as I said, I think it's a sign of things getting better in the general view of the repair shop. Now, if somehow a miracle happens and the people in Washington get together and they decide to send everybody $1,200, I think that would be might be cherry on the top, I don't know. I don't think we got much in the third quarter though. I really don't.
Bret Jordan, Analyst
Did you discuss the timing of the third quarter? It seems that without the franchise event, people might have been spending more money earlier.
Nick Pinchuk, CEO
Yes, all right. I mean the cadence in the—Bret, the cadence in the third quarter isn't as clear as the second quarter because we're coming off some April is god awful. So, I mean the thing is you're coming off of that and you kind of roll up; but generally, if you look at—I mean if you want to talk to Tools Group, if you look at the sales off the van, which is not really subject to much SFC impact. It was—each month was into the double-digit range clearly. So, I think the cadence was pretty solid off the van. You get up and down depending on where the SFC is, I think here. Sometimes like for example, when you have a live SFC, people tend to keep their powder dry because they want to get there and spend; it's almost like a Disney World. We were—it's almost like a fun experience when they get there, and they run around and buy all this stuff. And so this was a little more measured because it was added this, and so not quite as exciting, and so they spent a little earlier than they would have, and I think up. So, that's a fair view. But if you look at the stuff off the van, it seems to be solid.
Bret Jordan, Analyst
Thank you. Thank you.
Operator, Operator
We'll take our next question from Curtis Nagle with Bank of America.
Curtis Nagle, Analyst
Good morning. Thanks very much.
Nick Pinchuk, CEO
Curt, how are you doing?
Curtis Nagle, Analyst
Great, great. Nick, Aldo, how are you guys doing?
Nick Pinchuk, CEO
We're doing okay.
Curtis Nagle, Analyst
Terrific, terrific. Glad to hear. So, maybe just first one on inventory. I think—looks like there was a nice work down. Could you talk to you a little bit about which segments you saw I guess the largest declines or I guess the biggest movement year-over-year?
Nick Pinchuk, CEO
I think we didn't see much of a downtick in the Tools Group inventory, but you have to look at it through the lens of seasonality. Tools Group inventory always rises in the third quarter in anticipation of the sales and in anticipation of having to make good the order burst that comes out of an SFC. So, fundamentally, inventory flat in the quarter meant that the Tools Groups seasonally look pretty good, really, compared to what we—what you might expect if that had been a normal year. The other groups I think came down. I think our overall inventory was down a reasonable amount, so that's — I think it was—as you might expect in this kind of era.
Aldo Pagliari, CFO
Yeah. The inventory in constant dollars, Curt, was down about $28 million, $29 million. As Nick mentioned, Tools Group relatively flat in terms of their inventory move, and the other were shared kind of equally between the commercial and industry groups and I both had contributions to lower inventory, which is expected because their sales were not as robust as last year.
Nick Pinchuk, CEO
But I wanted—what I wanted to emphasize in the call though. Hey, one of the things that—I tell you what both were sequentially improved. I mean C&I was down what 25%, 19.7% I think. It's about 20% in the quarter—the second quarter is 8.6%. That's a nice improvement and then the one that really came from behind was RS&I; we thought—I think—I'll share with you, we thought RS&I, the garages themselves based on the atmosphere in the OEM would have been harder to come back, would take longer to come back. But they moved from—they were down like, I said in my script, 29.8% last quarter, and they knock I think 2.2% organically and one down, 1.6% as reported, so pretty big move. So I think what you're seeing in those businesses, even though they aren't—they don't have the starry numbers as the Tools Group has because their industries are still going through accommodation and aren't even approaching psychological recovery, they’re showing some pretty good movement.
Curtis Nagle, Analyst
Understood, great. And then maybe just a quick clarification in terms of, I guess a sequential trend in sale out on the vans, the Tools Group in 2Q to 3Q, did it improve or how did that trend—I just didn't quite...
Nick Pinchuk, CEO
Yeah, it improved. Sure it improved, it improved. But I would say this; it was—in Q2, it was running ahead on the sales to demand I think. Sales that was kind of—if you want to think of it this way, Curtis, you can think of it this way and I would think that Q2 inventory was being pushed out a little bit. The inventories were going down because the sales off the van were a little bit more robust, not great. But they were more robust than—and they started to spike up in June, which is why we started to talk about the Tools Group in June, we could see that, in fact, we said that on a call I think. And then in the third quarter, more or less equal, the van, the sales off the van were about equal to the—for government work were about equal to the sales off the van. That's how it happens. So I think just the sales to the van kind of caught up. Doesn't look like they're building inventory though in the third quarter, it just looks like they kind of stayed stable.
Curtis Nagle, Analyst
Okay, very good. Thanks very much and good luck with the rest of the quarter.
Nick Pinchuk, CEO
Next.
Operator, Operator
We’ll take our next question from Gary Prestopino with Barrington Research.
Gary Prestopino, Analyst
Hey, good morning, everyone.
Nick Pinchuk, CEO
Good morning, Gary. Most of my questions have been answered, but just one in terms of—you had a little bit of a tailwind from FX on the sales side, what kind of impact did that have on the adjusted EPS for the quarter, Aldo?
Aldo Pagliari, CFO
We actually had negative $0.06 of EPS driven by currency because while the sales line benefited, there were currency transaction losses, principally driven by sales of U.S. manufactured products in Canada and the United Kingdom, but also the commercial industrial group. It has to do with flows between euro-based customers versus Swedish-based sources of supply. That's what drove the transaction.
Nick Pinchuk, CEO
What happens, Gary, is that the transaction where it's translations tends to be current; transactions tend to look back because you set the cost of product when it gets shipped, and it doesn't get sold sometimes later, and that's what drives that difference, so in effect transaction kind of trails to the situation.
Gary Prestopino, Analyst
Okay. So you’d expect less negative impact certainly in work?
Nick Pinchuk, CEO
Right. You get bigger sales, good news and lower profit, bad news.
Operator, Operator
Okay. Thank you. That concludes today's question-and-answer session. Ms. Verbsky, at this time, I'll turn the conference back to you for any additional remarks.
Sara Verbsky, VP of Investor Relations
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 and good day.
Operator, Operator
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.