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Snap-on Incorporated (NYSE:SNA)

Q4 2009 Earnings Call Transcript

February 4, 2010 10:00 am ET


Leslie Kratcoski -- VP, IR

Nick Pinchuk -- Chairman, President and CEO

Marty Ellen -- SVP, Finance and CFO


Jim Lucas -- Janney Montgomery Scott

Keith Schicker -- Robert W. Baird & Co.

Gary Prestopino -- Barrington Research

Holly Sankar [ph] -- Wolf Baker Investments [ph]


Good day ladies and gentlemen, and welcome to the Snap-on Incorporated 2009 fourth quarter results conference call. At this time, all participants are in a listen-only mode. (Operator instructions). As a reminder, this call is being recorded.

I would now like to introduce your host for today’s conference, Leslie Kratcoski, Vice President, Investor Relations. You may begin.

Leslie Kratcoski

Thank you. Good morning everyone. Thank you for joining us today to review Snap-on’s fourth quarter 2009 results, which are detailed in our press release issued earlier this morning.

Before we begin, I’d just like to take this opportunity to introduce myself. As Mark said, my name is Leslie Kratcoski and I joined Snap-on in December. I’ve already have the pleasure of speaking with several of you, and I do look forward to meeting and working with all of you.

We have on the call today Nick Pinchuk, Snap-on’s Chief Executive Officer; and Marty Ellen, Snap-on’s Chief Financial Officer. Nick will kick off our call this morning with his perspective on our performance. Marty will then provide a more detailed review of our financial results. Afterwards, we’ll take your questions.

As usual we have provided slides to supplement our discussion. You can find a copy of these slides on our Web site next to the audio icon for this call. These slides will be archived on our Web site 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 management’s or the company’s outlook, plans or projections are forward-looking statements, and actual results may differ materially from those made in such statements. Additional information and the factors that could cause our results to differ materially from those in the forward-looking statements are contained in our SEC filings.

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

Nick Pinchuk

Thanks, Leslie. Good morning, everybody. Well, 2009 is in the book and we finished the year with another quarter of progress. The Tools Group and the Commercial & Industrial Group both ended with sequential improvements. So while we were challenged throughout the year, we were encouraged again by the fourth quarter results. We believe that it is fair to say that the Snap-on team extended its ongoing trend of operating improvement and of strategic progress.

In the fourth quarter, our overall operating margin of 11.5% before financial services was our highest of the year and it was more than 200 basis points up from where we were at the end of the third quarter. And while the earnings are below the 2008 record fourth quarter levels, we did finish 2009 with a relatively strong performance and we are well positioned for the opportunities as they unfold going forward.

Marty will take you through the financials in a minute, but first I’ll provide some perspective on the market environment, cover some of the operating highlights and discuss just how we are managing through the uncertain times.

For the overall corporation, excluding currency which now has turned positive for us, fourth quarter sales were down 11.1% from 2008. There was an overall 5% sequential increase from the third quarter, but that’s about in line with normal seasonality. I think it’s fair to say that on balance we believe the markets have stabilized, but overall they are not yet clearly rebounding. In that however, there are some mild good news. We believe that distributor destocking is behind us, and we did see some modest strengths with stronger than seasonally normal sequential sales increases from our industrial division; however, Europe in general continues to lag, not showing any significant signs of recovery. The distributors there appear to be reluctant to begin restocking.

I believe you will know by now that we closely monitor big ticket items, diagnostic products and tool storage units sold through our van channel and under-car equipment sold through the C&I Group. These are high-value purchases that are either more discretionary or have a longer payback, and we believe they can be a reasonable barometer of the overall market environment. And by extension, they can be a gauge of the general confidence level for our various customers, customers like garage owners who are in themselves small businessmen, trying to forecast the future before making investments in longer-term items. Here again, the science for us are mixed.

Equipment continued mildly favorable trends, but tool storage and diagnostics were down slightly showing no recovery. So as I said a mild favorability but no broad upswing. So in this uncertain environment we will continue to balance the need for operating improvement, balance that need with the investment in growth areas of strategic importance. We remain focused on the elements of our Snap-on value creation, areas like rapid continuous improvement or RCI, as we call it, innovation, customer connection, safety and quality. Those are the processes that have been so transformative in helping us weather this difficult environment and weather it with encouraging results.

Speaking of results, our full-year organic sales were down 14% from 2008, but we’re reasonably encouraged that we are able to limit the impact of that downturn. On a sales decrease of about $390 million, the operating income change was contained to $118 million and that included an additional $7 million of restructuring spend. We believe that’s a strong testament to the improvements we’ve continue to make even in the turbulent times.

Throughout the past year, we also continued to focus on those areas we believe will be strategically decisive for Snap-on for our operations going forward, maintain the health for our franchise network, expanding our presence in vehicle repair infrastructure segments, rolling the Snap-on brand out of the garage and into other mission-critical arenas and strengthening our physical capability in emerging markets. During the quarter and throughout the year we continue to invest and advance along each of those crucial dimensions.

So now let’s move on to a discussion of the operating groups and of their progress in those strategic areas. The C&I Group posted its strongest quarter of the year with operating income of $21.7 million. As expected, we spent $5.7 million in the quarter on restructuring in that segment, primarily in Europe. SNA Europe, our European-based tools business; that operation continues to experience some of the largest sales declines in the segment, and that reflects the market, the operation it serves, and its strong concentration in the South of Europe which has been particularly hard hit by the recession. I think Spain still has a 17% or 18% unemployment rate, so it’s understandable. Appropriately therefore that business incurred the majority of the restructuring expense in the quarter.

At SNA Europe, we are taking aggressive actions. We are acting to contain costs and to permanently reduce fixed expense while not taking out capacity because we believe the capacity will be needed when the markets recover. With the volume decline, inventory reduction efforts and restructuring costs, SNA Europe accounted for a major slice of C&I’s fourth quarter income decline from 2008.

On the other hand, the results from the other C&I businesses in fourth quarter were fairly positive despite the market environment and a volume decline – despite that volume decline. Through RCI and reaping the benefits of past restructuring actions, the remaining C&I business had essentially offset the impact of the decline, an encouraging performance given the times, we believe. For example, the industrial division; now before the downturn this is a business that was expanding nicely and had achieved record sales in the fourth quarter of 2008. Sales were down in 2009 versus that record.

There remains, however, continuing opportunity in industrial that we believe will accelerate in a sustained recovery. Mission-critical industries like railroads, aerospace, educational institutions, the military, emerging industries like wind power, these customers value the Snap-on brand reputation for productivity, reliability, and repeatability and they are embracing Snap-on innovation. Our industrial division registered significant wins in the past quarter in all of the industries I’ve mentioned and its sales showed double-digit sequential increase ahead of normal seasonality.

We also saw some positive trends in equipment division, especially in North America, a strong seasonal increase versus the third quarter. As I said in the past, when it comes to innovation and RCI equipment is one of our great success story. In the fourth quarter, sales of alignment equipment were a real bright spot for us. Our Imaging Alignment technology is second to none and we believe that advantage is helping us gain share in the strategically important garage infrastructure space.

The equipment business also made some fine improvements in the quarter in RCI, process cost reduction, design cost improvements and purchasing savings. They all combine to make equipment one of the big drivers of C&I profitability in the period.

Moving on to the Tools Group where the fourth quarter was also the strongest of 2009. Earnings increased both sequentially and from the prior year. In fact, the fourth quarter operating income margin of 13.2% is the second highest recorded for any quarter by the Tools Group in over five years, encouraging given the sales levels. Sales were up about 2% from the third quarter, that’s about in line with normal seasonality; and while we are not seeing recovery on big ticket items, our hand tools continue to perform solidly, of course I think – I am sure I said this in the past that hand tools are the products where users can see the most immediate productivity increase and the quickest payback. So it stands to reason that Snap-on will perform well in that product line even in these times.

Repair work after all is reasonably strong, the mechanics have cash, they may not have great visibility to the days ahead, but they are willing to spend in making today’s job easier and more productive and they are doing just that with Snap-on hand tools.

In the past, I mentioned the importance of supporting our franchisees’ network and ensuring it remains strong. This was a strategic focus for us as we entered the downturn and as we managed through it; and we have had success in that goal both in the fourth quarter and throughout 2009. A number of actions we call Snap-on’s franchisees’ stimulus program seems to be working. Man count has held firm now for several quarters and our van turnover, our franchisee turnover continues at historical all-time lows.

I will let Marty cover the finance company in detail but I will just say that the integration of Snap-on Credit is moving forward on plan without disruption to our customers and our franchisees. The credit company is a powerful asset to supporting our franchisees and maintaining that advantage was a key win for us in 2009.

Now a word about Diagnostics & Information or D&I; that group had another relatively solid quarter. Organic sales were down from 2008 by 16.6% or $25.7 million and as in past quarters the declines were focused primarily at equipment solutions, or EQS, and Snap-on Business Solutions, SBS. Those are the businesses most directly impacted by the turmoil in the OEM dealership space in North America.

Having said that, though, RCI and other cost reduction activities had limited the damage and kept operating income levels strong at $30 million for the period representing 23.2% of sales for the group. Beyond that, we are starting to see some glimmer of positive activity from the OEMs. They do seem to be moving forward with selected essential tool programs that have upside for EQS; and SBS, though challenged by dealership consolidation, is having some success in offsetting the declines with sales outside North America and in near adjacent markets, places like commercial vehicles and construction equipments.

And through our handheld diagnostics business and Mitchell 1, Snap-on is expanding its presence in the garage infrastructure segment, providing integrated solutions, offering productive enhancements to the growing independent shop segment throughout North America.

I think it is important to remember again that Snap-on is tied to auto repair rather than to the overall auto manufacturing industry, and we believe that the fundamental drivers of that repair segment remain positive. Miles driven are rising again and household spending on automotive repairs is increasing. The indicators remain favorable for the future for that sector.

I will wrap up with emerging markets. We have been committed to moving forward on initiatives in Asia and Eastern Europe; we have been committed throughout the year, we have added distribution capabilities and launched new products, specifically designed for those new markets from band saws to power tools to under-car equipment; and then in the third quarter, we opened a new tool storage manufacturing facility in China and we launched our new plant in Belarus in the fourth quarter. With that Minsk plant, we not only added capabilities but we also created advantage in our cost structure. So those ongoing investments amidst this uncertain environment, we believe demonstrate our commitment to emerging markets. It also speaks to our balanced approach in managing through the turbulence pursuing cost reduction while investing for strategic advantage.

Now I will turn the call over to Marty to cover the financials in more detail. Marty?

Marty Ellen

Thanks, Nick. I will begin with our consolidated operating results which are shown on slide six. Sales in the fourth quarter of $618 million increased 6.2% sequentially from the third quarter. Without currency, sales were up sequentially 5%. As compared to last year, reported sales in the quarter were down 7.4%; and absent foreign currency effects, organic sales declined 11.1% year over year. As Nick said, we were encouraged by the sequential sales increase in the quarter in light of the continued headwinds particularly affecting certain markets in Europe.

Consolidated gross profit margin of 46% in the quarter increased 110 basis points from last year.

Because of lower production volumes, primarily in Europe, excess capacity costs continue to pose a challenge; however, we were more than able to offset those with material cost reductions, savings from our RCI initiatives, benefits of cash restructuring and other cost reductions. The net effect was a 200 basis point gross margin improvement in the quarter.

Gross margin was further aided by better sales mix, particularly in the Diagnostics & Information segment, which improved consolidated gross margin by another 110 basis points. On the downside restructuring costs, included in gross profit, reduced the gross margin by 85 basis points and currency when measured on a year-over-year basis reduced gross margin by another 90 basis points.

LIFO gains in the quarter from our continued inventory reduction efforts were offset by certain higher inventory provisions and the liquidation of slower moving items. Operating expenses in the quarter of $213 million were up $1.8 million from prior year. We achieved $19.2 million from cost reduction and cost containment actions. We also benefitted from $4.7 million of lower restructuring costs that are recorded in operating expenses. These improvements allowed us to more than offset higher pension expense, higher mark-to-market incentive compensation expense, unfavorable currency of $7.4 million and certain other expense increases. Also, last year’s expenses did benefit by $5.4 million from a favorable pre-acquisition contingency adjustment at Snap-on Business Solutions.

Total restructuring costs in both the fourth quarters of 2009 and 2008 were $6.7 million with the majority of this year’s relating to the Commercial & Industrial, or C&I segment. For the full-year, restructuring charges of $22 million were up $7.3 million from 2008. Of this $22 million, $18.2 million was in the C&I segment, primarily to improve the segment’s cost structure in Europe.

As communicated during the third quarter call, we expected that financial services would again incur an operating loss this quarter following the July16 termination of the joint venture with CIT. The operating loss in the fourth quarter for financial services was $3.8 million, which was within the range previously communicated to you. We will cover financial services in more detail later including the dispute with CIT that was disclosed in today’s press release.

Again, with this quarter’s press release we have included supplemental earnings and balance sheet schedules, which separate our financial services segment from the other operations of Snap-on. This will now be our standard practice.

Interest expense in the quarter increased $6 million year over year as a results of higher debt levels.

In 2009, we issued $550 million of fixed rate long-term notes. The proceeds on these notes are being used for general corporate purposes and most importantly for the funding of Snap-on Credits on balance sheet portfolio. After the year-end, we did repay $150 million of floating rate notes that matured in January.

Our fourth quarter effective income tax rate of 31.4% compares favorably to 32.6% in the fourth quarter of last year. And finally, net earnings of $36.6 million or $0.63 per diluted share increased 44.1% sequentially from the third quarter of 2009. Compared to the fourth quarter of 2008 net earnings declined $22 million or 37.5%. Of this decline, $13.5 million resulted from the after-tax impact of lower financial services earnings, as well as higher interest expense.

With that I will now turn to our segment results. Starting with the C&I Group on slide seven, segment sales of $302 million improved 13.9% sequentially from third quarter levels. Compared to last year, organic sales in the quarter declined 12.2% primarily due to the continued economic downturn that is particularly affecting certain European markets, most notably Spain.

On a year-over-year basis, equipment sales in North America were up mid single digits and sales in Asia were up mid double digits. Gross margin in the C&I segment was 33.6%. Before $4.7 million of restructuring charges, gross margin was 35.2% down 230 basis points on a comparable basis with last year. The effects of sales mix and excess capacity costs created by lower production volumes including our inventory reduction efforts were partially offset by material and other cost reductions resulting in a net reduction in gross margin of a 155 basis points. Since year-end 2008, inventories in the C&I segment, excluding currency, were reduced by $76 million.

Operating expenses in the quarter declined $4.6 million from prior year. This improvement is principally due to savings from ongoing restructuring and other cost reduction initiatives of $6.5 million, as well as lower sales volume related expenses. Currency translation increased operating expenses by $4.2 million.

Operating earnings for the quarter of $21.7 million include $5.7 million of restructuring charges. Before restructuring, the operating margin was 9.1% compared to 12.4% on a comparable basis in last year’s fourth quarter, and improved from 5.3% on a comparable basis with the third quarter of 2009.

Turning now to slide eight; on a world-wide basis, organic sales in the Snap-on Tools Group declined 3.7%, year over year. Van count in the US at year end was comparable to both the third quarter 2009 as well as year-end 2008. In our international franchise operations, organic sales in the quarter were down 3.5%.

Gross margin in the Snap-on Tools Group increased to 45.4% in the quarter compared to 41.6% last year. Without restructuring costs in both years the gross margin improvement was about 340 basis points. Currency reduced gross margin by about 100 basis points. Material cost reductions and favorable factory utilization rates against last year significantly improved gross margin by about 385 basis points.

Fourth quarter inventory reductions resulted in LIFO gains of about $6.7 million, but this was offset by increased inventory provisions and the liquidation of slower moving items. Operating expenses in the quarter were down $4.4 million from 2008, notwithstanding currency headwinds of $2.5 million. Expenses declined due to lower volume and from savings of $8.5 million due to RCI initiatives, benefits from prior restructuring actions, and other cost containment initiatives.

Also restructuring costs recorded in operating expenses were lower by $2.9 million. As a percentage of sales, operating earnings of 13.2 % in the quarter improved significantly from both 7.8% last year and 11.9% in the third quarter. Before restructuring costs, operating earnings improved 39.2% compared to the fourth quarter of last year on a comparable basis.

Turning to the Diagnostics & Information, or D&I Group, which is shown on slide nine; fourth quarter sales of $129 million declined 15.6%. Before currency, the decline was 16.6%. The segment sales decline was primarily due to lower sales to OEM dealerships.

Gross profit margin of 53.2% in the quarter improved considerably over 46.7% a year ago benefiting from an improved sales mix of higher margin diagnostics and software products. RCI and other cost improvements more or less offset $2 million of higher amortized product development costs.

Operating earnings of $30 million in the quarter for the D&I Group declined $4.3 million from prior year. Last year’s operating income included a $5.4 million reduction of a pre-acquisition contingent liability associated with Snap-on Business Solutions. Cost savings from RCI and other cost reduction initiatives more than offset the income decline from the lower sales.

Now turning to slide 10; the comparisons for financial services reflect the July 16 termination of the Snap-on Credit joint venture with CIT. Since that date, we no longer sell contracts to CIT and record gains on sale. Rather, we are building over time an on-balance sheet interest yielding portfolio. The fourth quarter loss of $3.8 million was within the range we communicated last quarter. In the fourth quarter, Snap-on Credit grew its on-book portfolio by $137 million.

Moving to slide 11; at 2009 year-end, our balance sheet includes gross financial services receivables of $398 million, including $267 million at Snap-on Credit. Of this amount, $227 million are extending credit loans to technicians.

As you know, Snap-on Credit continues to manage the one-off portfolio contracts owned by CIT, which totaled $590 million at year end. We presently expect the portfolio on our books to grow by about $80 million in the first quarter and by about $300 million for all of next year. The net cash requirements of our international finance portfolios are substantially self funding. Port folio loss and delinquency trends continue to be in line with our expectations.

Now turning to slide 12; consolidated operating cash flow was $96.7 million for the quarter and $347 million for the year. Both substantially ahead of the year-ago amounts. As disclosed in our earnings release this morning, we filed a notice of arbitration on January 8 regarding a dispute with CIT relating to various underpayments made during the course of the joint venture. As a result of this dispute, we withheld $81.5 million against our claim which seeks approximately $115 million.

On January 29, CIT filed its response denying our claim and asserting certain claims against Snap-on for other matters relating to the joint venture. CIT’s claim alleges damages in excess of $110 million, which does include the return of the $81.5 million retained by Snap-on as of year-end. This amount is included in other accrued liabilities on our year-end balance sheet. At this early stage, no determination can be made as to the likely outcome of this dispute. With respect to this matter, cash provided by operating activities includes only $10 million in the fourth quarter and only $20 million for the full year.

Free cash flow from operations exclusive of our financial services was $110 million for the quarter compared to only $14 million last year.

For the year, free cash flow from operations excluding financial services was $290 million compared to $125 million last year. Free cash flow from financial services was as expected, an outflow in the quarter of about $100 million and $191 million for the full year.

In the quarter, capital spending of $16.1 million included investments and our plant in Minsk and continued expansion of our facilities in China. In the quarter, we also completed the headquarters and R&D facility for our automotive parts and services information business in Richfield, Ohio.

As seen on slide 13; trade and other receivables decreased $48 million from 2008 year-end primarily due to lower sales. Day sales outstanding for trade and other receivables was 63 days at 2009 year-end as compared to 58 days last year. However, adjusting for currency, last year’s DSO would have been 62 days.

Inventories at the end of the quarter were down $12 million from last quarter and down $85 million for the year. On the trailing 12-month basis, inventory turns were 4.1 times, but on a trailing three-month basis improved to 4.8 times.

Net debt at the end of the quarter was $367 million. Our net debt to capital ratio of 22.2% compares to 25.2% at year end and 21.5% last quarter. If we exclude the $81.5 million of cash withheld for the CIT dispute, our year-end net debt to capital ratio would have been 25.8%.

Cash at year end was nearly $700 million. As I already mentioned, we repaid $150 million of long-term notes in January. In addition to our cash and cash flow from operations, we continue to maintain a $500 million revolving credit facility which does not expire until August 2012. We also have another $20 million of committed bank lines. At year-end, the full $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 choose to do so. At quarter-end, no commercial paper was outstanding. Our liquidity position and access to credit continues to remain strong.

This concludes my remarks on our fourth quarter performance. Before turning the call back to Nick to provide his final thoughts, I would like to mention some considerations for our 2010 outlook as covered in our press release.

Next year, we expect to realize approximately $25 million of year-over-year savings from our 2009 restructuring activities. We also currently expect to incur approximately $18 million to $22 million of restructuring costs. We also expect next year to incur approximately $20 million of higher year-over-year pension expense. Finally, capital expenditures in 2010 are anticipated to be in a range of $55 million to $60 million and we anticipate an effective income tax rate next year of approximately 33.5%.

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

Nick Pinchuk

Thanks Marty. Well, that’s our take on the quarter. We are encouraged by the results, both financially and strategically. The challenges do continue but our Snap-on value creation processes are serving as well. Consider that OI percent for the year was 230 basis points higher than the last time our sales were below $2.5 billion, in 2006, not so long ago. That’s evidence of real improvement.

We also believe we progressed and achieved strategically. Our franchisee network has been kept solid in the storm. We continue to make inroads in critical industries taking the Snap-on brand and product lines to new places. We are gaining share in the key segment of repair garage infrastructure and we get stronger in emerging markets every quarter.

I know many of our franchisees and associates are listening around the world. So I will close simply by observing that none of this progress would have been possible without your support. I congratulate you for your achievement, and I thank you for your commitment and your contribution to our team.

Now, I will turn the call over to the operator for questions. Operator?

Question-and-Answer Session


Thank you. (Operator instructions) Our first question today will come from Jim Lucas, Janney Montgomery Scott.

Jim Lucas -- Janney Montgomery Scott

Good morning all.

Nick Pinchuk

Good morning, Jim.

Jim Lucas -- Janney Montgomery Scott

I wanted to start first with just a couple of housekeeping questions. The vitality index percentage of sales from new products, where did that stand in 2009?

Nick Pinchuk

The percentage of sales from new products, we don’t actually track that carefully in terms of our business. I am not a -- we track the general introduction of products but we don’t track it as a percent of sales because at the end it’s sort of when you get to the bottom of the order of new products, sometimes you have difficulty whether it is really a new product or just a new paint job or a new plastic covering. I will say though that we’ve had a pretty robust product and I can name a litany of our products from power tools to equipment to hand tools that have come out. I think a good barometer of this is when we have the franchisee conference in the late summer, there were 60 or 70 new products just introduced at that forum. So while we don’t track it we feel that it has been growing actually, our new product profile has been growing.

Jim Lucas -- Janney Montgomery Scott

Okay, fair enough. Then just from a geographic standpoint, could you bring us up to date of you mix of North America and Europe and where the emerging market stands as a percentage of overall sales and wanted to transition from there. You alluded a little bit in your prepared remarks with regards to the progress you are making on the emerging markets side, but in addition on the new markets, I was just curious, are there any particular markets that you are doing better than others? You had mentioned on the last conference call that you had to go back and change some of the product offering to go after some of these new market opportunities and just wanted to get an update there as well.

Nick Pinchuk

Well, let me talk about emerging markets. The Asia-Pacific markets, you can tag it at about $100 million, that’s roughly what we are selling in that business. This year, we have some good news and bad news out of that market. The exports out of the market have obviously been a little bit down reflecting the developed markets (inaudible) downturn. The business in China and India to name two are up very strongly, but for us that’s a smaller base in terms of the total. The businesses in Southeast Asia are down reflecting the currency problems in Indonesia and the Philippines. Our European business – I think European business, you can say that our business outside the United States in total is about 40% plus, outside the US – 42% I think. And that’s been about steady over the last several quarters. That answer your question for geographic?

Jim Lucas -- Janney Montgomery Scott

Yes, that does on a geography side.

Nick Pinchuk

And the other piece of the question, you are talking about the individual like critical industries, is that what you wanted?

Jim Lucas -- Janney Montgomery Scott


Nick Pinchuk

We continue to make some progress in, I would say natural resources, in terms of that business that seems to be selling fairly well around the world in places like Mexico and in places like – even in Europe. So we had some reasonably good wins in that area. Actually aerospace, we had some good wins in the past quarter with Gulf Stream and some other people. We saw some wins in the government. And education while down quarter to quarter because third quarter is always a big one in education, it was still pretty strong. Suffice it to say that the industrial business, which is driven by those mission-critical industries these days, is up quarter to quarter sequentially.

So, we were pretty encouraged by that. I think what we’ve seen, Jim, is that the industrial business entered the recession late. It had a gangbusters quarter last year in the fourth quarter. The first part of the first quarter of ’09, it was still reasonably strong and then it dropped off some, and what we are seeing is them recover. I am mildly encouraged by what I saw in the results. I also met with several hundred of the salesmen; we had them in for their annual conference. And while we’ve talked about people from Louisiana in oil and gas or people from Washington selling to the government or people from the West Coast in aerospace, they seem optimistic. So we're looking for some mild optimism in that area.

Jim Lucas -- Janney Montgomery Scott

Okay. Then with regards to any commentary you can give with regards to what you are seeing on the pricing front? And more specific with regards to material prices, are you beginning to see any inflationary pressures?

Nick Pinchuk

No. We don’t really have any significant pricing in our numbers this year. We had some good progress in terms of material cost reduction. When we look out in the future, we do see some movement, for example one of our big buy is steel; we buy about 70 million. I guess, it’s not a big buy compared to some people but – and it’s a mix view. Steel rod, for example, which is hand tools, went down then went up slightly in the summertime. Now it seems to be going down again. Steel plates, the equipment, which equipment uses, that's been flat and tool storage, which use coal rolls, coal rolls is creeping up. I don’t worry about this too much as long as the gains aren’t tremendously precipitous because we’ve had a history in Snap-on because we are premium product and being able to price. So generally if material costs eke up, we can get it back in price. So I am not too worried about that being an impact for us.

Jim Lucas -- Janney Montgomery Scott

Okay, great. Thank you very much.

Nick Pinchuk



Next we will hear from David Leiker with Robert W. Baird.

Keith Schicker -- Robert W. Baird & Co.

Hi, good morning. It's Keith Schicker on the line for David.

Nick Pinchuk

Keith, how are you?

Keith Schicker -- Robert W. Baird & Co.

I am doing well. Couple bigger picture earnings type questions here. I think in the past you’ve always commented directionally on how you felt earnings were going to go on the next quarter. I didn’t see that in the press release this morning and I was just wondering if you had anything to add about the next quarter.

Nick Pinchuk

I don’t think, I don't think there was any information in that omission actually. I think we feel about the same. I think our view of the future is that we feel we don’t have good visibility in terms of the sales, in terms of volume. As I said in my remarks, we have some mild optimism in this mixed result. We are watching Europe very closely, it hasn’t come back and that recovery had lagged. But, looking out in the future I am confident of our strategic investments and we did say in prior calls before the downturn hit that we expect to grow at mid single digits, 5% to 6% organically and I am pleased with the progress we made in the strategic areas, that is maintaining our network, penetrating critical industries which I just talked about. We are gaining share in garage infrastructure and the emerging markets. So I think as the markets rebound, whenever that is – I think it’s going to happen for us just like everybody else -- I think we are going to see that mid single-digit sales growth.

On the other hand – on the other side of this is absence that growth we still feel pretty good as we did prior quarter in the fourth quarter -- in prior calls, about our Snap-on value creation processes and their ability to bring improvement out of the same levels of volume. So as we go forward given the same volume we believe we can improve. We have opportunity to do that.

Keith Schicker -- Robert W. Baird & Co.

Okay. Thanks. And if I think about revenue in 2010 versus 2009, would I be right to conclude that in sort of a flat final demand situation, your sales might be up because we don’t need to do any inventory correction during 2010. Is that the right way to think about that?

Nick Pinchuk

Well, arithmetically, of course, if destocking ends, say, in Europe, SNA Europe is where mostly we sell through distributors. That's our big distributor play and there are other places, but that's just in terms of volume. Arithmetically, of course. If destocking ends and end markets stay at the same level we will see an uptick. The caveat I would give you there is there can be some minor destocking at end customers where you are selling to a factory and they have a tool crib and that factory has been at half capacity for a long time and they come back and so they have a little bit. That’s a minor effect, but it is an effect. And then the other effect for us is the mix among markets. We look at this carefully. We're seeing some unfreezing in Europe, in the UK, in Sweden, in Germany, but Spain is still very weak. So it’s possible for those markets to be going in different directions in terms of demand and I am not sure where the balance will be. But arithmetically you are correct. If distributors stop restocking and all things remain equal and the markets remain equal, then we'll see an uptick.

Keith Schicker -- Robert W. Baird & Co.

Okay, that’s great. And then lastly, could you just comment on I guess the pace of business that you saw through the fourth quarter and we're a month into 2010, granted it's January, but how things have gone so far in the early part of the year.

Nick Pinchuk

Well, I think I said it in the – I think we believe the fourth quarter was up sequentially. There was some mild optimism in there and that played out December. Some of the areas in December were fairly positive for us. I think it’s best to say my crystal ball is not that good, because when I compare it to third quarter, I'm comparing to a damaged third quarter again, even though we're equal seasonality wise. Now, I will say, we were pleased with the industrial business. I just talked to the industrial guys and I must have talked to more than a hundred of them from all over the country, actually all over the world. And they all seemed optimistic. But I'm still from Missouri with regarding volume. So we'll see how it goes. I think we entered the year reasonably okay, but nothing to say, “Boy, it’s an indication of an upswing.”

Keith Schicker -- Robert W. Baird & Co.

Okay, that’s great. Thank you very much.


Our next question comes from Gary Prestopino, Barrington Research.

Gary Prestopino -- Barrington Research

Good morning, everyone.

Nick Pinchuk

Hi, Gary.

Gary Prestopino -- Barrington Research

Marty, I think you may have done this directionally. You gave us some guidance on where you think the financial services operating income will be in prior quarters as we exit 2010, or am I incorrect in that assessment?

Marty Ellen

That’s correct.

Gary Prestopino -- Barrington Research

Is it still where you said it was -- where you think it was going to be, I think it was somewhere $30 million to $40 million, is that right?

Marty Ellen

Well, I think what I said in the past was we -- looking at one or two quarters out, that first of all, in the fourth quarter we have a loss of $3 million to $5 million. We reported $3.8 million. So we are right within that range. I also had said that rolling forward another quarter into Q1, probably breakeven, we maybe $1 million or so under that number. But the trajectory from there that I’ve talked about in terms of – it’s actually taking the growth in the portfolio and looking at the interest yield on that, given more or less most of their expenses being fixed should give you the trajectory. So if you think about Q3 to Q4, and I would remind everybody that the earnings we had in Q3 included some gains in the first part of July, up until the termination, stripped those gains out you saw more or less about $5 million improvement sequentially.

And if you do the math on the portfolio growth at roughly 15% to 16% yield you pretty much get there. But you have to remember, too, going forward, Gary, that that sort of $4 million to $5 million improvement can't -- it's not linear sort of indefinitely. There is going to be at some point here an increase at a little bit of a decreasing rate. There are some longer-term contracts beyond the term of the extended credit contracts that will take a longer time to roll from their portfolio, our portfolio. But at least for the next few quarters, I would tell you maybe it will be off $1 million or so in Q1 from break-even. Expect though that trajectory that I talked about for the next few quarters to hold.

Gary Prestopino -- Barrington Research

Okay. That’s helpful. If I hear you right, overall US markets are somewhat more stable than they had been for the prior couple of quarters. Certain countries in Europe are still an issue overall. But you are seeing some stability in the US, is that correct?

Nick Pinchuk


Gary Prestopino -- Barrington Research

Okay. Now in terms of Europe, though, you cited a couple of countries, UK, Germany, I couldn't write down the last one

Nick Pinchuk


Gary Prestopino -- Barrington Research

-- showing maybe some of the stability that the US is showing.

Nick Pinchuk


Gary Prestopino -- Barrington Research

Okay, so then you still have issues in Spain? Do you have a big representation of European business in places like Portugal, Italy, Greece, all of these areas where there is big worries within the EU, about these countries overall?

Nick Pinchuk

Gary, the big issue for us is Spain. We have, ballpark, 20% of our business is in Spain -- our European business is in Spain. So we are overrepresented there I think so that’s part of our difficulty.

Gary Prestopino -- Barrington Research

Okay, so really it’s – Spain is mainly the key issue there?

Nick Pinchuk

Yes, we have business in Greece, in Italy, and places like that. So you can talk about that. But your ballpark, you're talking in that range. So we have – we watch that carefully and if Spain has a problem it affects us maybe more than you might expect in other places.

Gary Prestopino -- Barrington Research

Okay, thank you.


(Operator instructions) Next we will hear from Holly Sankar [ph] with Wolf Baker Investments [ph].

Holly Sankar -- Wolf Baker Investments

Hi, good morning. I have a quick question on financial services. So when I look at the guidance you have on slide 11 for 2010, you are talking about $300 million of anticipated portfolio increase, so how should I think about that then given in the past you’ve grown your portfolio every quarter by somewhere between $120 million and $130 million, and it looks like it accelerated up to $132 million in the last quarter. Is this $300 million just what rolls off from CAB [ph], or how do you get to this number?

Marty Ellen

It’s, no. But it's the net portfolio increase, so remember, as we're building our portfolio, we are not only originating new contract we are beginning to collect payments on the prior contracts we’ve funded. So you are really looking at our additions if you will net of our collections. In essence what we are trying to help people with is, understanding the cash flow requirements that we need to fund over that time frame.

Holly Sankar -- Wolf Baker Investments

Got it. So how would that map to originations?

Marty Ellen

Well, we provided you with origination data for the quarter and if you historically we are in the $120 million to $130 million range globally. That’s a global number, not just a Snap-on Credit number. And actually that number was up a little bit. We are actually seeing some increased penetration in the Snap-on Credit business as a result really of our end customers having fewer financing choices and therefore actually benefits our business. But more or less that number hasn’t changed much, if you go back and look at their annual origination, not a lot of change, pretty flat. So that’s not going to change much but we begin to collect cash from customers whose loans were originated on our books.

Holly Sankar -- Wolf Baker Investments

Got it. Okay. And one last question on that subject which is on the yield. I know in the past you’ve talked about 15% to 17% yield. Are you seeing any changes in the yields, higher or lower from credit, or that yields on treasuries?

Marty Ellen


Holly Sankar -- Wolf Baker Investments

Okay, thank you.


We currently have no questions in the queue. I’d now turn the conference back over to Nick Pinchuk for any closing or additional remarks.

Nick Pinchuk

No, I don't think we have any, any closing remarks. We'll just thank everybody for joining the call and I'll end the call. Thank you.

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