Snap-on Inc. Q1 2009 Earnings Call Transcript

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

Snap-on Inc. (NYSE:SNA)

Q1 2009 Earnings Call

April 22, 2009 10:00 am ET


Martin M. Ellen – Senior Vice President, Finance and Chief Financial Officer

Nicholas T. Pinchuk – President and Chief Executive Officer


David Leiker – Robert W. Baird & Co., Inc.

James Lucas – Janney Montgomery Scott

Anthony Cristello – BB&T Capital Markets

Sarah Hunt – Alpine Fund


Welcome to the Snap-on Incorporated 2009 first quarter results conference call. (Operator Instructions) As a reminder this call is being recorded. I would now like to introduce your host for today's conference, Marty Ellen, Chief Financial Officer.

Martin M. Ellen

Thank you for joining us today to review Snap-on's first quarter 2009 results. By now you should have seen our press release issued this morning. Joining me today is Nick Pinchuk, Snap-on's President and CEO. Nick will kick off our call this morning with his perspective on our performance. I will then provide a more detailed review of our financial results afterwards we'll take your questions.

Consistent with past practice, we will use slides to help illustrate our discussion. You can find a copy of the slides on our website next to the audio icon for this call. These slides will be archived on our website, along with a transcript of today's call.

Any statements made during this call relative to management's expectations, estimates or beliefs or otherwise state managements 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.

This call is copyrighted material by Snap-on Incorporated. It is intended solely for the purpose of this audience; therefore, it cannot be recorded, transcribed or rebroadcast by any means without Snap-on's expressed permission.

With that said, I will now turn the call over to Nick.

Nicholas T. Pinchuk

Well, it appears we live in interesting times. I'd say the difficulties of the period didn't really surprise us but no doubt that this was one of our more challenging quarters. Sales were down 20% with currency contributing about seven points of that decline. But as we left 2008, we said we believed that the recession was deepening, it was extending across more industries and geographies and that's pretty much what happened.

But we also said that although we're certainly not immune to the downturn, Snap-on's business models are quite strong, and our rapid continuous improvement and other value creating processes, those strong processes will help us weather the storm. They help us limit the damage of the downturn and they've done just that.

So in terms of profitability in the first quarter, we were able to maintain or achieve about an 11% operating margin. In other words, we're being impacted just like everybody else, but we were able to maintain a double-digit margin, even in the face of significant challenges. We believe that's testimony to Snap-on's strengthening operating platform and to our robust improvement processes.

Looking beyond the current difficulties, we remain confident. We remain confident that our businesses have significant runway so we're continuing to invest. We're working to strengthen those strategic areas that will make a significant difference as we emerge from the turbulence. Of course, prominent among those strategic dimensions is our franchisee network. We're working every day, training, launching new product, providing new systems, and building support mechanisms.

We're determined to make that unique distribution asset even stronger and I have to say that that effort's been working. We've maintained our van count and our franchisees are weathering the storm. And as I said in the fourth quarter, we also aim to gain greater share in the auto repair garage segment, and we're going to do that by using our imaging technology and it appears as though that's continuing.

We're also driving to extend the Snap-on brand in mission critical industries through our industrial division, and although the first quarter represented a step back from what had been consistently strong gains in that division, we're confident that our initiatives in that area will pay off as we move forward. And I couldn't speak of strategic direction without mentioning emerging markets, so I'll just say that construction of our new plants in Eastern Europe and China are both progressing on schedule.

Finally, we continue to invest in innovation. It's still winning customers even in this environment. A good example is our new MG325 power tool 3H in somatic impact power tool. It's got a magnesium body, it's lightweight, it's got increased power and reduced size and it's breaking sales records, even in this market.

So you see, we still believe in the forward opportunities, and because of that we've chosen not to close any large manufacturing facilities. We believe that capacity will be needed as the market improves. Now, there are costs in carrying those capabilities, but we're prepared to bear it and we haven't been inactive in cost reduction. We've been aggressively applying our Snap-on value creation processes. Processes like rapid continuous improvement or RCI as we call it. We're applying those processes to continue to improve productivity and I think our numbers bear that out.

And while our larger plants are still with us, two smaller facilities are in the process of closing as we speak, and there's been streamlining in a number of other areas. In fact, generally across the corporation and we continue to plan in that regard. We're planning continuing efficiencies as we move forward through the next quarter.

So the first quarter, as expected, was a challenge but our strong business models, our extraordinary brand, our effective improvement processes, they limited the damage. And at the same time they supported continuing investment in key strategic areas, areas that we believe will be strongly decisive for our future growth.

Now, I'm going to landscape the individual operating groups. Some of our biggest challenges today are in the commercial industrial group. Similar to last quarter, it's just tough. It's tough to sell big ticket items. Capital goods like wheel service equipment, aligners, wheel balancers and tire changers. Higher price products, they generally require reasonable customer confidence in the business outlook to justify a purchase. Needless to say, that is abundant in this environment.

Excluding currency, sales in our equipment division were down 22% reflecting just that. Having said that though, we believe our investments in advanced technology like our imaging alignment actually improved our market position in the period in both the U.S. and Europe.

We're also continuing to expand our equipment product line tailored specifically for Asia and assembled in our Kunshan factories. In fact, we have a couple of existing introductions in our Asian lineups plan for later this year and those preparations are proceeding right on schedule.

Turning to Europe, our Europe based tools business SNA Europe experienced a 23% sales decline before currency. Now, there is some variance from country to country, for example, Spain the business's largest market was down 40%, while France, the second largest, was down just over 6%.

It's clear now that the economy in Europe have slowed dramatically as the recession has deepened, and it's also clear that the credit crisis has imposed a tighter grip on our distributor's ability to purchase products. And as a result, we saw further inventory de-stocking in that distributor channel.

Regarding Europe, however, we did see a positive data point in March. Average weekly sales were higher than the average was for the quarter and it improved from the quarter's low point. Recent order activity has also risen, so I think it's too early to call this a trend, but it's something worth watching.

Meanwhile, SNA Europe continues to work hard. They're working hard at accelerating their own RCI activities continuing factory migration to lower cross countries and increasing the sourcing of finished goods from emerging markets. All of that is consistent with driving stronger performance in good times or in bad.

Our industrial business has faired relatively well in the quarter, although the global sales were down 6% before currency. In the U.S. our businesses in several key segments, aerospace, natural resources and the government, did decline, but not surprisingly under the current conditions. Sales in our vocational training schools improved in the quarter.

So despite the overall decrease in the industrial division, we continue to strengthen our position with customers across the critical segments served by that division because we're confident they offer extraordinary long-term growth potential. As everyone knows, even Asia is slowing. Notwithstanding that, we believe the regions still offer significant long-term potential, so our expansion plans there are continuing.

I already mentioned the under-car equipment introduction scheduled for this year. We also recently completed the migration of our bandsaw manufacturing into Kunshan and early in the third quarter we expect to complete our third Kunshan factory where we'll begin producing tool storage products in China for the first time. That will give us a platform to penetrate local storage markets and provide a captive low cost source to support our mid-tier product strategy in developed countries out of Kunshan.

We've chosen to continue the investments even in this environment because we believe strongly that they will pay off with significant growth. In Snap-on tools the van segment, constant currency sales were down 11% globally and sales for the U.S. vans were down 18%, although sales off the U.S. vans decreased somewhat less about 11%. As the difference is we continue to encourage franchisees de-stocking to improve their liquidity.

In the U.S., the rate of sales decline did decelerate, however, toward the end of the quarter so we'll have to wait and see if the positive trend continues. What we did see for sure in the quarter is that hand tool sales are holding about flat, but as in prior periods and as in the equipment business and a lot of places in our businesses, the big ticket product purchases, particularly tool storage boxes, have continued to be difficult. We'll see how that plays out going forward.

Van count in the U.S. was essentially flat, both for the year end and prior year levels. With that said, the current environment is clearly challenging for our franchisees. In that regard, we continue to support them. We support them with a comprehensive set of programs, increased training, sales development, operating expense reduction opportunities, additional credit offering, and finally product promotional programs. That's all aimed at aiding their profitability, helping their cash flow and strengthening stability of the network.

And so far looking at the turnover data, which remains roughly flat, it appears to be working. It's worth noting that auto repair spending in the U.S. continues to show growth. That's logical as cars age in the face of significant reductions in new car sales repair will grow. Our challenge is overcoming uncertainty. Like most consumers, even technicians who generally have work are now cautious in their spending.

For Snap-on that means they buy hand tools but they postpone the bigger ticket tool storage purchases, that's what we're seeing. But this will change. The auto repair industry is robust and its future is positive and pretty clear. When the current uncertainty wears off, we're confident our franchise network will be healthy and in a strong position to take full advantage.

The international van business for the most part continues to perform well. Sales before currency were up 6%. In the U.K. and Australia we grew vans by 25 about a mid single-digit percentage increase. And we also had successful results with first quarter promotional programs in both of those countries.

In the diagnostics and information group, sales were down about 14%, 10% without currency. The toughest comparison was in our OEM facilitation business. That was impacted by declines in spending on dealership equipment. Now withstanding the D&I group sales decrease, however, profitability did improve. Cost reductions, the benefits of RCI and sales of software updates more than offset the lower overall sales volume. There's been considerable public discussion regarding the contraction in the American auto manufacturers and their dealer bases. I believe most of you already know that Snap-on has little direct business with the OEMs themselves.

And even our activities with dealerships and businesses like Snap-on Business Solutions and Equipment Solutions it's not tied to rooftops as much as it is tied to repair volume. Now, turbulence in the dealership system can represent a near-term challenge, but overall this impacts a relatively narrow slice of our business. With even that difficulty abating as the repair work redistributes throughout the national garage network.

In the current environment, I don't believe it would be appropriate and I don't believe any discussion would be complete without touching on RCI. It has been and it continues to be enabling for us. It's shown the way to improving processes in both manufacturing and administration. RCI is now simply a cornerstone of Snap-on's way of creating value. It's helped us limit the damage of the downturn and we're confident it will be a big factor in our future.

In that regard, we've been rigorous in managing down all areas of spending during the past quarters, and as indicated in this morning's press release, we do expect an increased level of restructuring in the second quarter that will further reduce our cost structure going forward. Commodity costs are another important area of opportunity, and as expected we had some small increases in the first quarter. The results of trailing price indices in items like steel.

Nevertheless, we've been working strongly to take full advantage of the current environment and drive down those sourcing costs and we expect that effort to payoff as we proceed through the year. So in the first quarter and probably for the next couple of quarters, the situation will be challenging. But Snap-on has the processes to limit the damage. We believe the last three months showed that.

We also have a clear focus on the key strategic dimensions that will be decisive that will give us strength when the storm passes, and we'll continue to invest in those areas so that Snap-on will emerge from all the difficulties from all the downturns stronger than ever.

Now, Marty will take you through the financial details.

Martin M. Ellen

I will begin my remarks with slide six. As Nick mentioned, clearly the difficulties posed by the global economy increased considerably during the first quarter. Recessionary headwinds challenged our top line sales performance in the quarter with sales declining [inaudible] before currency. The affects of currency hit us fairly hard at two levels during the quarter as a result of the continued strengthening of the U.S. dollar.

First, [inaudible] U.S. dollar sales and profits were reduced because of translation, which on a year-over-year basis reduced sales by $54.5 million or 7.5%, and reduced operating income by $6.1 million. Second, and as many of your know our Snap-on branded products sold by our international Snap-on tools franchisees are manufactured in the U.S., therefore, the stronger U.S. dollar cut into their gross margins by $5.3 million in the quarter.

So in total currency reduced consolidated operating income in the quarter by $11 million. If foreign currency rates stay at present levels through the second quarter of this year, year-over-year results for the second quarter will be similarly impacted, but this should begin to abate later in the second half.

Our past and ongoing RCI initiatives have not only allowed us to improve quality, delivery, customer service and numerous other business processes, but through productivity improvements have allowed us to reduce cost. The RCI related improvements and other cost reductions have enabled us to better offset the sales volume decline by providing $18 million of savings.

In fact, if you remove the affects of currency, operating income on a comparable basis declined by $18.8 million on an organic sales decline of $95 million resulting a less negative operating leverage than might have otherwise occurred, so we're pleased with that outcome.

Gross profit margin for the quarter was flat with last year at 45.2%. Gross profit margin benefited in the first quarter from the rollover effect of certain pricing actions taken last year, and together with RCI improvements and other cost reductions, we were able to offset the negative affects on gross margin of currency and the cost to carry manufacturing capacity.

Operating expenses declined by $41.1 million, but increased as a percentage of sales by 170 basis points. This was primarily due to the negative leverage affect of lower sales on fixed operating expenses, not withstanding $11 million of RCI improvements and other cost reductions. And as we had previously indicated, pension expense was up $3 million for the quarter year-over-year and we expect similar quarterly increases in pension expense throughout the remainder of 2009.

Financial services contributed $10 million of operating income in the quarter, as compared with $12.8 million last year. I'll cover financial services in a later slide. As a result of these factors, operating earnings of $64.3 million for the quarter were down $28.9 million from last year. As a percent of total revenues, operating earnings were 10.9% as compared to 12.5% a year ago.

Interest expense in the quarter was down about $1 million from 2008 levels, primarily as a result of lower interest rates on our floating rate debt partially offset by higher interest expense from the first quarter issuance of $300 million of fixed rate five and ten year unsecured notes. Diluted earnings per share of $0.60 in the quarter were down from the $0.97 earned last year.

With that, I will now turn to our segment results. Starting with the commercial and industrial group on slide seven, segment sales of $259.8 million declined 27.2%, but before currency sales declined 17.7%. We continue to experience lower sales of professional tools in Europe and lower sales of equipment worldwide. Sales in our worldwide industrial business were down 6%.

Gross margin of 35.5% declined 180 basis points from last year as contributions from price increases taken in 2008 and $3.7 million of savings from RCI and other cost reduction initiatives were more than offset by the lower organic sales volumes, including the cost to carry manufacturing capacity. The increase of 200 basis points in the operating expense ratio was primarily caused by the effects of lower sales on fixed operating expenses partially offset with the benefits of RCI and other cost reduction initiatives of $2.9 million.

The net result of these factors resulted in operating earnings of 6.9% compared to 10.7% a year ago. Ignoring currency translation the drop through or negative leverage on operating earnings due to the sales decline in the segment was about 25%, which was somewhat limited by our RCI and other cost improvement actions.

Turning now to slide eight, on a worldwide basis, organic sales from the Snap-on tools group were down 10.7% reflecting the continued challenging sales environment, particularly for sales of larger priced products like tool storage units. Sales declines in our North American franchise operations were partially offset by increased international sales, primarily in the U.K. and Australia.

At quarter end, U.S. van count was essentially flat compared to both year end 2008 and prior year levels. Sales in the U.S. were down 16.9%, but as Nick already mentioned, sales delivered off the vans were done only 11% on an average across the system. Gross margin in the quarter was 42.4% as compared to 43.3% a year ago.

Margin compression of $5.3 million occurred in the international businesses due to foreign exchange on U.S. sourced products. Additional margin reduction resulted from the cost to carry manufacturing capacity in the face of reduced production levels. Other cost improvements were achieved to partially offset these negative factors.

Operating earnings for the Snap-on tools group of $21.1 million in the quarter declined $13.3 million from prior year levels largely due to lower sales volumes, including the cost to carry manufacturing capacity and $7.7 million of unfavorable currency effects.

Excluding currency impacts and on a comparable basis, the drop through effect of the sales decline was about 22% per Snap-on tools, much lower than the contribution margin structure of this business, as we were able to provide some offset with RCI and cost improvements of $6.5 million. As a percentage of sales operating earnings in this segment were 8.7% as compared to 11.9% a year ago.

Turning to the diagnostics and information group, which is shown on slide nine, first quarter sales of $132.5 million declined 10.2% before currency. The sales decline is primarily due to lower essential tool and facilitation sales to OEM dealerships and lower sales of higher priced diagnostics products in North America.

Sales of diagnostics products in Europe and sales of Mitchell 1 information products were both up slightly year-over-year. As the OEM facilitation business is lower margin, the overall mix impact to the segment was favorable to margins. Additionally, $5.1 million of RCI and other cost improvements along with $1.8 million of lower restructuring improved the segment's operating margins from 13.2% last year to 19.4% this year.

Turning to slide ten, financial services operating income of $10 million was down $2.8 million from 2008. Originations in the quarter were done 21% from last year, principally due to lower sales of big ticket items sold by our franchisees as these are the products which tend to get financed through Snap-on credit. Lower discount rates on contracts sold partially offset the earnings impact of the lower originations.

Many of you continue to ask about the credit quality of the portfolio of Snap-on credit loans to technicians. Accounts 60 plus days delinquent at the end of March were about 2.2%, which is slightly better that the 2.3% that we reported to you as of the end of 2008. To remind you, at the end of 2007 and 2006, they were about 2%.

The high water mark was actually about 3% at the end of 2005 and was mostly due to the consolidation of Snap-on credit steel organization. For years prior to 2005 and going back to 2001, the highest level experience was about 2.2%. Both Snap-on credit and our franchisees have always worked diligently to control delinquencies and have heightened their efforts given the current environment.

Now, let me turn to a brief discussion of our cash flow and balance sheet. The cash flow statement issued with this morning's press release requires a little more analysis than usual. Turning to slide 11, reported cash flow from operating activities in the quarter was $14.7 million compared to $74.4 million last year. However, there were a number of items in both years not truly representative of the ongoing operating cash flows of our businesses.

Slide 11 presents the operating cash flow section in a pro forma format in order to aid a more meaningful year-over-year comparison. In the middle of the slide you will see adjusted operating cash flow. We believe that the $32.5 million in adjusted operating cash flow this year compared to $51.2 million last year is a better representation of operating cash flow.

We have separately listed the other items in order to reconcile to the amounts on the cash flow statement. The $18.7 million decline in adjusted operating cash flow is principally caused by lower earnings and both a higher level of and certain variations in the timing of payments for a number of operating items. Partially offsetting these outflows was a $35.8 million cash inflow improvement from working capital reductions.

Now, below this level of adjusted operating cash flow there were certain other items included in the reported cash flow from operations. Payments of $14.2 million were made under certain foreign currency hedge contracts, which you can see last year resulted in the receipt of cash of $2.6 million. At current rates of foreign exchange we would not expect these payment outflows to continue.

Also there were higher cash outflows related to restructuring payments this year compared to last year. You will also note that last year's reported operating cash flow included certain cash receipts for the sale of a building and release of escrowed funds related to an acquisition. Capital spending was $14 million in the first quarter of this year, which included planned growth spending for our plant in Belarus, and the further expansion of our plant in Kunshan, China.

Last year first quarter capital spending was $15.4 million. Our current plans call for 2009 capital spending to be in a range of $60 to $70 million, which is down from the previously communicated range of $75 to $80 million. We will continue to mange the balance between investing and capturing growth opportunities as warranted by the business environment, and we will adjust our capital plans accordingly.

As seen on slide twelve, accounts receivable decreased $43.8 million from year end levels, primarily due to the lower sales and continued strong collections. Currency translation accounted for $12.6 million of the decrease. Day's sale outstanding improved to 62 days at quarter end compared to 64 days at year end. All of our businesses are being extra vigilant in managing and monitoring customer accounts and credit risks in this environment.

Inventories at the end of the quarter were done $18.5 million reflecting $11.1 million of currency translation and $7.4 million of lower net inventories. Due to the slow sales environment, inventory turns declined from 4.6 times at year end 2008 to 4.3 times currently. Where our manufacturing production schedules in response to the continued volume declines and expect further reductions in inventories.

Net debt at the end of the quarter of $416.3 million was up $16.7 million from year end 2008. Our net debt to capital ratio of 26.5% increased slightly from 25.2% at year end. Our liquidity position and access to credit continues to remain strong. Cash on hand at the end of the quarter was $400.7 million.

We issued $300 million principal amount of long-term unsecured notes on February 24 to take advantage of what we believed were favorable market conditions in what continues to be an uncertain and unpredictable credit environment.

We issued $100 million of notes due in 2014 at an all in effective rate of 6% including discount fees and expenses, and $200 million of notes due in 2019 at an all in effective rate of 6.8%. We anticipate using the net proceeds of $298 million from the debt issuances for general corporate purposes, including the payment of $150 million of upcoming debt maturities in January 2010.

In addition to the $400 million of available cash on hand and our cash flows from operations, we currently maintain a $500 million revolving credit facility provided by a strong diversified group of international banks, which does not expire until August 2012. We also have another $20 million of committed bank lines.

At quarter end, the entire $520 million of borrowing capacity was available. In addition to these facilities, our current A2/P2 short-term credit rating allows us to access the commercial paper market should we chose to do so. We presently have no commercial paper outstanding.

This concludes my remarks on our first quarter performance. Before opening the call for questions, Nick would like to provide some final thoughts.

Nicholas T. Pinchuk

Well, as expected, we found the first quarter to be challenging. The recession spread and it impacted more of our operations. But as we said before, and as we said before, Snap-on is not immune to the difficulties. But our business models, our brand and the robust processes that make up Snap-on value creation they combine to limit the damage.

We believe this business has strong runway so we've continued to invest. Invest in the health of our franchisees, in the penetration of critical industries, in the driving of our technology advantage and repair garages, and in building our emerging market position. And we're making headway in each of those areas and we believe it will serve us well as we go forward.

One other closing thought. Snap-on has made significant progress over recent quarters, lowering breakeven and becoming generally a stronger enterprise. Just consider this, the last time our sales were this low was in the first quarter of 2006 they were about $585 million. That's not too long ago, first quarter of 2006. OI margin in that period was 6.5%. That means that OI margins in the first quarter of 2009 at roughly the same volume were about 400 basis points better.

Now, we'll be the first to say that we're far from satisfied by the past quarter's results. There is, believe me, abundant room for improvement. However, I can't let this call end without recognizing the extraordinary contributions of our associates and franchisees that have brought us so much. The people that have authored the 400 basis points of improvement over just that short time, my thanks to each and every one of you.

Now, we'll turn the call over to the operator for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from David Leiker - Robert W. Baird.

David Leiker – Robert W. Baird & Co., Inc.

A couple of things, the one big item that jumps out is the SG&A line. Can you give us some perspective of how much of that performance there is a function of you taking costs out of the business on a permanent basis as opposed to the numbers flexing with where the revenue line is so we have some sense going forward how sustainable this level of SG&A spending is?

Nicholas T. Pinchuk

Well, generally the way we view it, David, is like this, it's an imprecise science, of course, but we figure about 5% comes out, about $5 million, you got $100 million worth of movement, which we had in the quarter in sans currency. You get about $5 million out for direct variable costs associated with the selling operation. And then you got between $7 and $10 associated with I'll say temporary cost reductions associated with the volume of activity, and then the rest I think are pretty good permanent type cost reductions.

David Leiker – Robert W. Baird & Co., Inc.

If you look back at the beginning of the quarter, where are the things that are most different than what you were expecting them to be?

Nicholas T. Pinchuk

I think a few things. I think first of all we didn't expect as much de-stocking of the European distributor businesses. That was a little stronger than we thought. So we saw de-stocking there through January into February. That lasted longer than we thought it was going to be. As I said, it seems to be abating a little bit. Big ticket items drove deeper than we thought. Those are the two, and then I think we saw industrial, the mission critical businesses soften somewhat more than we had expected.

I would have said, David, that directionally we expected de-stocking both in our franchisees and in the distributors, so we're not talking directionally we're talking about how much. And we expected big ticket items, we've been talking big ticket items for a long time and certainly that's an issue. I think we didn't know where industrial was going to come out.

We knew we'd be impacted eventually by the uncertainty and so on, so we didn't know where that was going to happen and it came out maybe a little lower than we thought. I'm not sure how that's going to play out going forward because we had some good news and some bad news in that area, as I elaborated on in the call. Schools were up and some of our other businesses were down. So that's really where we were, we are.

David Leiker – Robert W. Baird & Co., Inc.

But it sounds like as you ended the quarter, early signs that things are at least stabilized if not getting a little bit better?

Nicholas T. Pinchuk

Yes. I don't want to get, I think being in the prediction business in this environment is a dangerous profession. But I will say logically this, is that there has to be an end to destocking and so we would expect that to end at some time going forward. And I think maybe we're seeing some of that play out both in the franchisee business and in the European business.

David Leiker – Robert W. Baird & Co., Inc.

And just one last item and that's if you can touch on your franchisees here in the U.S. and just their financial health and how they're weathering the downturn and if there's anything you're doing extraordinarily to help them out, and just kind of talk about the state of the franchise business for us.

Nicholas T. Pinchuk

Okay, sure. I think the top line is the franchisees are managing the downturn with reasonable capability with our aid. Terminations and on-hold franchisees, which are sort of our measures of problems in the system, are flat. So we haven't seen significant changes in those leading indicators or indicators of franchisee health. That's one good thing. I think we feel good about that.

There was a dip say through February in what I would call delivered sales for the franchisees and that's come back in March, so we're seeing a little bit of positives in that regard. On an anecdotal basis, I was just with about 400 franchisees in a colloquium and they were all reasonably positive. Now, I suppose I could have selected a different set of 400 franchisees and gotten a little bit more pessimistic view of the world. But I think in general we would say that our franchisee system is maintaining itself reasonably well.

We have what we call a Snap-on stimulus package, so we're out trying to help them every day. We're working overtime trying to train them how to identify business opportunities in terms of reducing their own SG&A, just things we've been talking about in terms of making sense, don't idle the truck as much and you save fuel that kind of thing, using different ways to purchase various commodities. We also are providing them a little more support from time to time.

For example, selective places where we're providing extensions on some of the leases for their vans, we've implemented a new program called a small balance extended credit, which takes our traditional credit activity and moves it down in sticker price to allow it to be more effective for the franchisees and maybe they don't need quite so much cash to manage their, what we would call their usual day-to-day business.

And we've been installing some new systems, which allow them to be more productive in getting to more customers. And I would just leave it at, we get up every day I think I tell them this, and it's really true thinking about how to improve their health so we keep coming up with ideas and put it as part of their, as part of the stimulus package.


Your next question comes from Jim Lucas – Janney Montgomery Scott.

James Lucas – Janney Montgomery Scott

First question on the CapEx, while the adjustment is not big in terms of material dollars just wanted to delve a little deeper just from a thought process. Were there any particular project, one project that was cancelled or is this just reviewing your plans going into the year and tightening the budget?

Martin M. Ellen

Jim, it's Marty, good morning. It's really the latter, and as we said in our prepared remarks, the important focus investment, the very important strategic investments continue. But as you can imagine in this environment, for example, project that target productivity improvement for example at the margin in factories that already have excess capacity, those could be postponed in this environment. So we continue to look at it diligently, and the small reduction of $10 million or so we guided this morning was a result of that review.

James Lucas – Janney Montgomery Scott

Two housekeeping questions, the flat van count, what is the actual number?

Nicholas T. Pinchuk

Jim, in the U.S. we're roughly at 34, 45.

James Lucas – Janney Montgomery Scott

Okay and R&D in the quarter?

Nicholas T. Pinchuk

Give me your next question.

James Lucas – Janney Montgomery Scott

And then switching gears, you know, Nick, you alluded to a couple of, for lack of a better term, early indications that there may be some signs out there that things are at least not getting worse. Europe you talked about the de-stocking at the distributor level. When you're looking at going forward of where demand versus inventory levels are in the distribution channel, how much of a disconnect do you see out there in Europe right now?

Nicolas T. Pinchuk

Well, I think, we were down 23% versus last year in terms of our absolute numbers and I think you could say that the disconnect is between five and ten points. It's the same kind of thing we're seeing in the United States.

The United States is somewhat less, but we see that kind of thing we laid out that out for you that the off the van sales is down 11%, but the absolute number was 18%, a little bit longer and that range is the same kind of thing we're seeing in Europe.

James Lucas – Janney Montgomery Scott

And with regards to the emerging market strategy, in the prepared remarks you talked about some of the manufacturing moves that are taking place. With regards to some of the sales initiatives, you've talked a lot in terms of opportunities in China with the [Bako] brand in particular, looking into Eastern Europe as well as some non-automotive markets. What is the early read through with some of those investments you made on the sales side?

Nicolas Pinchuk

Well, we're doing our position in equipment, if you want to go product by product, is fairly strong. Our equipment product line is certainly, if not the leader, one of the leaders, certainly the leader in the premium equipment business in many of the markets in Asia. So we're very positive about that. We see that as helping us penetrate the garage in a big way and get us in there, an opportunity to demonstrate Snap-on technology.

We have a sort of Asianized version of our imaging alignment in there now. And we're launching a new product I guess it will be the third or fourth quarter this year in Asia that will allow us to penetrate automotive garages and I'm pretty sanguine about that. Our [Bako] businesses, our hacksaw business in Asia when we transferred our hacksaws to Asia, that worked fairly well for us and we continue having nonpareil brand in the cutting tools of Asia.

There are places, I think we've had this discussion before where the [Bako] branded cutting tools are premium line in several of the hardware distribution outlets in Asia. So we feel pretty good about that. The Wand activity we're still early days in developing our hand tool line for Asia. So I suppose you could say the jury is still out on that, but we remain confident in the ability to do that. Does that give you some color?

James Lucas – Janney Montgomery Scott

That's very helpful. Final question, I'm not sure if this is directed to you or Marty, kind of somewhat interrelated that the balance sheet taking advantage of recent markets locking into some good rates. You've got very healthy balance sheet, you alluded to the liquidity you have on there. So just any updates on the capital allocation and then secondly, with regards to the Snap-on credit joint venture, any updates there as well?

Nicola T. Pinchuk

Well, I'll deal with the capital allocation, I think we've said it, we took advantage of the credit markets because we thought the numbers were favorable, the rates were favorable. We have a tranche of debt that comes due I think next January. We wanted to be in position to manage that capably. That will still give us some substantial amount of cash and how we use that going forward will be determined as events evolve.

We are not without the idea that we could have acquisition opportunities, but I'm not signaling the idea we'd talk about acquisitions. And there is, of course, the credit company discussions that are ongoing, and I'll let Marty talk about the credit company.

Martin M. Ellen

Yes, Jim, as you know and as many of you know on the call, our U.S. joint venture Snap-on Credit with CIT essentially expires in January 2010, unless both parties choose to renew. That's a decision that needs to be made by June 30 of this year. I'll provide you with some color in terms of CIT and I'll preface my remarks by saying that none of my information comes from the inside at all, it's public domain information.

I will say that we believe CIT wants to renew the joint venture. We believe that CIT's condition and status has improved dramatically over the last year, which is a good sign as many of you know they ran into the same difficulties that many financial services firms ran into. And over the last year have, in fact, become a bank holding company, have received government funds and have a number of the government, what I call, subsidy programs available to them. Their capital ratios have improved.

So those are all very good signs in terms of their health. And given the improvement in their health and their desire to want to continue, we are proceeding with them on that basis through negotiations and discussions and will have to have a final decision before the end of the second quarter.

Nicolas T. Pinchuk

I wanted to circle back, excuse me, your R&D question not to avoid it. We spent about $10 million and you'll see in the detailed P&L in the Q, about $10 million in R&D and SG&A. However, I should point out our software development costs, much of our software development costs, which were actually $2 million higher this year than year, do get reported in cost of goods sold.


Your next question comes from Tony Cristello – BB&T Capital Markets.

Anthony Cristello – BB&T Capital Markets

One of the questions I had when you look at sort of some of the trends in the industry and as it pertains to your business, particularly with the dealerships shift and some of the forecasts for the number of dealerships that may be closing, how do you look at your business in the evolution of your business should the aftermarket one, start to see more business sent their way as a result of declining either new car volumes or bay closings?

And two, would the probably influx of more qualified or at least more late model qualified technicians into the aftermarket into an industry that has been at a disadvantage or at least a shortage from a labor standpoint, how does this I would imagine help your business?

Nicolas T. Pinchuk

It helps it a lot. First of all, we love it when the aftermarket gets more business because in effect independent garages engage a wider range of vehicles makes sense, right. Chevy dealership primarily works on Chevy's so, therefore, its need for a broad range of tools, whether diagnostics or hand tools or power tools, to deal with that particular model, those particular geometries, those particular computer systems, are much narrower.

So the aftermarket to the extent that there's more repair hours to the aftermarket, each technician must be prepared to deal with a wider range of products, he buys more tools. We document this all the time. And one of the great things about it is our diagnostics businesses, for lack of a better word, laptop for cars.

We have, of course, some pretty strong ergonomic laptops that plug into cars or deal with them on a wireless basis. But we also have probably the best database of a wide range of models over a wide number of years, and that gives us a great competitive advantage in the aftermarket. So we like it when the aftermarket gets more.

Anthony Cristello – BB&T Capital Markets

It would seem with projected SAAR and projected dealership closings that you might be positioning or have some of the best tailwinds you might have seen in your business in some time. And I'm just wondering at what point do you start to see that inflection where, let me step back. When you look at your customer, is a dealer technician or is an aftermarket installer, does one differ more than the other in terms of the purchasing power or the amount of generation or revenue capture you can get from one customer versus the next.

Nicholas T. Pinchuk

Yes, there are. The independent technician, the aftermarket guy purchases more tools. That's for sure. He'll purchase more hand tools. He'll purchase more diagnostics. So to the extent he has more business, we have more business. So we love the trend. Now when does this happen? I'm not so sure. In the last let's say year, the OEM dealerships and primarily you're talking about the Americans now because they're the one who have stated their closing dealerships, they had a base of about 14,000 dealerships. They closed 800 or 900 or so. They're talking about closing another 3600.

It's an imprecise science, Tony, because you're talking closing rooftops as opposed to where the repair's going to go. But some of that business is going to migrate to other dealerships, some of it's going to migrate to independents and to the extent it migrates to the independents, we'll see an uptick. But I can't tell you where the inflection point will be. I can tell you if for example GM, Ford and Chrysler decided to close down their aftermarket, we would benefit.

Anthony Cristello – BB&T Capital Markets

That's helpful because it definitely seems like you're business is very well positioned both diagnostically and from a tool standpoint from the aftermarket, and it seems like trends definitely are headed that way.

Nicholas T. Pinchuk

Before you go I want to point out, though, we have a good penetration of the OEM dealerships, too. We're in those businesses as well so we like those businesses. It's just the nature of the industry the way it's structured is that the independents use more of our products.

Anthony Cristello – BB&T Capital Markets

Well, and I would imagine if you've got a dealer, an OE dealer technician who maybe their facility closes their base closed and he lands in the aftermarket, what's the likelihood that he brings that brand recognition with him and thus may get a lift for existing customers as well.

Nicholas T. Pinchuk

It might be. It might be. Certainly, the technicians are not going to go away they're going to go to, if a Ford dealership closes on one corner and there's no other Ford dealerships in town or dealerships in town, those guys are going to be employed in the independents. They'll bring their tools and they'll bring their customers, but they'll need more tools to work as an independent.


Your next question comes from Sarah Hunt – Alpine Fund.

Sarah Hunt – Alpine Fund

To sort of follow up on that on a different way, if we get a junker clunker law, or something along those lines that has an incentive to put people in new cars, how do you guys feel about that?

Nicholas T. Pinchuk

Well, obviously that would change the aging of the cars, but the other factor about that is when new cars come out, they have new facilities or new geometries. One, they tend to have more computers. They tend to have different geometries and a lot of our new product innovation has to do with the new cars coming out. So I'm no sure how that would affect us.

Sarah Hunt – Alpine Fund

Okay, so you don't look at that and say, sort of it could be, it could go either way.

Nicholas T. Pinchuk

Right, I'd have to figure that out. We'd have to look at it carefully. But for example, if the world changed to hybrids tomorrow, we'd still be in business, believe me. In fact, it might help us. In our business any kind of change probably helps. Moving into independents is a positive to us. Moving to new cars can be a positive when those new cars come in. Aging of cars helps us at some point, too.

Sarah Hunt – Alpine Fund

Okay, I was just curious as to what you guys thought about it.

Nicholas T. Pinchuk

Right, I don't know. We monitor that, I'm not sure there is going to be a junker law but it'll be interesting to see what happens.

Sarah Hunt – Alpine Fund

Well, it seems to be all over the place and then they yes for foreign, no for foreign, so I'm not sure they're actually going to get anything done. But certainly Germany, from a new car sales perspective, it definitely listed sales. So I'm just curious as to whether or not that was something that you felt positively or negatively about. But it's an interesting thought because change is good for you, so it may not be a clear cut negative.


And as it appears there are no further questions at this time, Mr. Ellen, I'd like to turn the conference back over to you for any additional or closing remarks.

Martin M. Ellen

Thank you, [Chad], and thank you everyone for joining us this morning for our first quarter call.

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