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Snap-on Inc. (NYSE:SNA)

Q1 2010 Earnings Call

April 20, 2010; 10:00 AM ET

Executives

Leslie Kratcoski - VP, IR

Nick Pinchuk - Chairman, President and CEO

Aldo Pagliari - CFO

Analysts

Jim Lucas - Janney Montgomery Scott

Keith Schicker - Robert. W. Baird

Gary Prestopino - Barrington Research

Operator

Good day ladies and gentlemen and welcome to the Snap-on Incorporated 2010 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our remarks, we will conduct a question and answer session. (Operator Instructions). As a reminder, this call is being recorded.

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

Leslie Kratcoski

Thank you David and good morning everyone. Thank you for joining us today to review Snap-on’s first quarter 2010 results which are detailed in our press release issued earlier this morning.

We have on the call today Nick Pinchuk, Snap-on’s Chief Executive Officer and Aldo Pagliari, Snap-on's recently appointed Chief Financial Officer. Nick will lead off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we’ll take your questions.

As usual, we have provided slides to supplement our discussion. You can find a copy of these slides on our Investor Relations portion of our website, next to the audio icon for this call. These slides will be archived on our website along with the transcript of today’s call.

Any statements made during this call relative to management’s expectations, estimates or beliefs or otherwise state management’s or the company’s outlook plans or projections are forward-looking statements and actual results may differ materially from those made in such statements. Additional information and factors that could cause our results to differ materially from those in the forward-looking statements are contained in our SEC filings.

With that said, I’d now like to turn the call over to Nick Pinchuk, Nick?

Nick Pinchuk

Thanks Leslie. Good morning everybody. Well, we’re once again encouraged with our results. We continue to make operational gains and to strengthen our strategic position. Both have helped us to deliver the results that are improving and I say are reasonable given the extended economic challenges.

Our first quarter operating margin before financial services was 11.6%, 210 basis points higher than the first quarter of last year. In fact, I think it's noteworthy that this 11.6% exceeds the first quarter record of 11.1% registered in 2008 and that was before the economic crisis. And the profits in that period were achieved at significantly higher sales levels.

This shows our commitment to the Snap-on value creations processes is driving strong improvement. The financial results are testimony to power that effort. With our focus on Snap-on value creation processes, safety, quality, customer connection, innovation, rapid continuous improvement or RCI as you call it, we’re becoming a stronger company and one that's well positioned to take advantage of any recovery. And we are seeing some positive signs, some good signs in certain market. Those opportunities added momentum to the operating progress we've been achieving over the past several quarters.

Aldo will take you through the financial but first, I’ll provide you with a perspective on the results, my own perspective. Regarding growth, our overall sales were up 8.6% from last year, over 4% organically excluding currency. As in the recent past, our results are mixed by geographies and by market segment. So I would say the quarter provides evidence that overall market have stabilized and are showing some signs of upward potential but because of the varying nature of the results, they’re not yet clearly rebounding.

In the past, I’ve mentioned the trends in big ticket items, products with relatively higher sales value, tool storage unit, diagnostic products as well as under car equipment, items which have longer paybacks. We believe sales in that arena are barometer of both our customer’s financial outlook and if they’re confident in their future.

Ending last year, the signs here were mixed. While in the first quarter, sales were mildly positive in all three of those big ticket categories. So we have some good news but its one quarter. Going forward, we are going to, we’re striving to create a reliable positive trend in those product line. It's important to us.

We’re also all aware that Europe was particularly hard hit last year at the downturn. And here again, we saw positive signs, following on with the big ticket discussion, our sales of under-car equipment in Europe posted gain encouraging given the overall struggle of Europe and give the capital nature of those purchases. We also saw increase however in our European based hand-tool business, both sequentially and year-over-year.

Encouraging here too was the fact that we saw some mild momentum in each month throughout the quarter. However, the mix nature of the results are also evidence in Europe. While we are encouraged by the overall gains South of Europe or existing Europe has a particularly strong position and Spain especially continuous to lag. Unemployment in that country is still very high and the drag is evident in a day-to-day commerce.

Another market segment that provides some gauge to the economy and one that get a real lot of national attention is the automotive OEMs and their dealers. To put this market in perspective for Snap-on, we have limited direct exposure. Our Equipment Solution Division or EQS and Snap-on business solutions SBS are where we do sell primarily OEM dealerships.

Those businesses combined make up only about 11% of our total sales. That being said, this is an area that has obviously suffered during the current downturn. But on the positive side, we are seeing some forward momentum with some new essential EQS tool program and we expect ongoing upside in that regard. SBS however continues to be impacted by the dealer consolidation.

Now, both SBS and EQS have in fact achieved some progress by capturing adjacent business, serving commercial construction and agriculture market as well as supplying products to truck fleet, all which represents expended opportunity. So there are off sets to the challenge the OEM dealer shrink and as further opportunity in those adjacent spaces.

To summarize our view on the sales and market environment, I would say we’re encouraged but cautiously. Signs are still a bit mixed. The market seemed to have stabilized but are not yet strongly rebounding, gains are being made but those increases are coming a lot comparison that were weakened by the overall downturn in 2009.

Now such on the first quarter highlight and each of our reporting segment. In the Commercial and Industrial Group, our C&I organic sales were up over 9% from last year. We saw across the board increases in nearly all the businesses. The biggest contributors here were the equipment division including Europe as I previously mentioned and in Asia Pacific where our expended product lines are starting to take hold.

From a profit increase perspective, C&I was a big contributor with operating earning of over $30 million, up $13 million from last year, the OI margin of 10.2 puts reasonably rapid recovery, reflecting the hires, I think we believe, a reasonable recovery. And that reflected the higher sales as well as the benefits from RCI and past restructuring actions.

Aside from the financial performance in the group, progress continues to be made in areas of strategic importance. The equipment division registered wins and agreements with more vehicle OEM’s as preferred suppliers. This further Snap-on presence in the garage and gives us a heightened advantage with access to quite a few additional locations. Our C&I presence in critical industries is also expanding. We introduced over 300 SKUs for a large applications and natural resource and power generation and there’s more in the pipeline. We’re working with customers in aerospace and government, launching special tools and kits that incorporate rigorous and innovative safety features specially designed for those mission critical applications.

And again in C&I, as I said earlier, we had good gains in emerging markets. It really is where the outside portions of automotive growth will take place and we continue to advance building the necessary physical and creating a broad Asian product line. Just this past month we introduced a new handheld diagnostic product in China, our first such offering for the region and our new Asian band saw our product line continue on a strong upward sales trajectory.

Moving to the tools group, overall sales were up 4.3% organically, 4.4% in United States. I mentioned the positive results for big ticket items, tool storage and high value diagnostics and we are working to make those gains a trend. The sales increase for the group vigilance and operating efficiency and favorable currency result in a $7.5 million increase in OI and an OI margin of 10.7%, up 220 basis points versus last year. Now, I’ve spoken often in the past regarding the importance of keeping our franchise system healthy. We continue working hard toward that end and it seems to be succeeding. The network’s stable, there’s evidence and there’s evidence of improving franchisee health.

Terminations are at a lower level and van sales are moving in the right direction. Now, major element of support for the franchisee is the credit company. Aldo will speak about Snap-on Credit but I’ll just mention that its transition to a wholly on subsidiary continues as planned and without interruptions to our customers. The credit business provides us with the strategic advantage. I’m pleased the integration is going well.

Now to the Diagnostics & Information Group or the D&I Group. I’ve also, I’ve already mentioned some of the challenges faced by EQS and SBS with the ties to OEM dealership. In spite of those impact however, D&I sales of a $135 million were up from last year, up slightly from last year. That’s because gains were recorded in the independent shop segment with diagnostic hardware and software and our mature one information products, all showing strength throughout the period.

D&I earnings of about $31 million were up $5.6 million. And that reflects the higher sales both in handheld units and information products as well as some solid gains and efficiencies due to Snap-on value creation. Related to the D&I market expansion or adding fleet customers in the U.S. for a heavy duty Diagnostic’s products. If a target rich environment, our existing capabilities extend nicely into that area and I believe we’re using that to our advantage.

We’re also leveraging D&I products and capabilities internationally. When you get outside in the United States, the dealership space hasn’t experienced quite so much disruption. In the first quarter, we again saw a success in capturing new international customers for the SBS Electronics Parts catalog line and we expect that trend to continue.

Well that’s the segment round up. Regarding Snap-on’s overall strategic position we’ve characterized our current challenge, our challenge in the downturn as balancing cost reduction efforts limiting the impact of the downturn with the need to invest in those strategic areas which we believe will be decisive for supporting growth going forward.

Now I believe there is abundant evidence in our results that the impact has been limited and breakeven levels have been reduced. It’s also clear to me; we’re better positioned in each of our core strategic areas of strategic importance. The franchise network remains strong, terminations are at the lower levels and sales are moving favorably, regarding the primary customer basin area, the automotive technicians our position remains preeminent with Snap-on still the preferred brand across the board by a wide margin.

We also target expanded penetration of automotive repair garage infrastructure as a strategic initiative and we’ve made progress with the shop owners and the managers, the principle customers in that segment. Our repair system is from electronic parts catalogs to imaging aligners have increased their customer base both in the U.S. and internationally. And indication of that progress was a strong growth achieved by the equipment division in the first quarter. We’ve also spoken often about the extraordinary opportunity for Snap-on to extend our position in mission critical industries, aerospace, power generation, natural resources to name a few. And in the quarter the industrial vision where we pursue those critical customers showed year-over-year growth against some reasonably tough comparison. They entered the recession late. Finally we continue to build our position in emerging market, growing distribution and expanding our local product line and we are seeing continued gain.

Our sales in Asia-Pacific were up substantially in the quarter well ahead of any economic growth in the region. So we are encouraged by the first quarter. We've limited the impact of the downturn, improved our profitability and positioned our operations strategically for growth.

Since this is Aldo's first call with us, I will provide you with the brief introduction. Aldo brings over 30 years of experience in finance and operations, corporate strategy and business development to his new role as Snap-on CFO. He joined us in 2002 from United Technologies where he held the variety of senior level positions in both finance and business development.

In his eight years at Snap-on, he played a significant role in leading our progress. He established strong record of achievement and gained deep understanding the company's global operations and strategies. Most recently he served as President at Snap-on's worldwide equipment operations and prior to that he was Senior Vice President for Snap-on's Commercial and Industrial Group with responsibility for the group's global financial operations. In short, he brings significant financial capabilities, operating experience and strategic insight to his new position.

With that I will turn the call over to Aldo, who will take you through the financial details. Aldo?

Aldo Pagliari

Thanks Nick and good morning to everyone on the call. Our consolidated operating results are summarized on slide 6. Sales in the first quarter of $621 million increased 8.6% from first quarter 2009 levels. Without currency organic sales were up 4.1%. As Nick mentioned we are encouraged by these results and by some of the business trends experienced in the quarter.

Consolidated gross profit margin of 46.3% in the quarter increased 110 basis points from last year. Savings from previous restructuring initiatives and other cost containment actions contributed about $7 million or 115 basis points in gross margin improvement. Gross margin was further aided by better sales mix particularly diagnostic and information segments which improved consolidated gross margin by another 50 basis points.

Restructuring cost reduced 2010 gross margin by 40 basis points. Operating expenses of $216 million in the quarter while up $11.5 million from the prior year were favorable as a percent of sales by 100 basis points. Unfavorable currency translation as a result of the weaker dollar contributed about $7 million of the increase. In addition higher pension expense due to lower the projected asset returns in previous years related to the U.S. pension plan accounted for $5 million of the increase.

First quarter 2010 results were also impacted by higher volume related expenses as well as by $3.5 million of higher mark-to-market incentive in other compensation. These year-over-year increases and operating expenses were partially offset by about $6 million in benefits from ongoing RCI restructuring and other cost reduction and cost containment actions. Restructuring costs in the first quarter of 2010 totaled $3.2 million as compared to $2 million last year. The significant portion of this quarter’s restructuring costs again occurred in the commercial and industrial or C&I segment.

Financial services incurred a $1.7 million operating loss in the quarter as previously disclosed Snap-on ended the joint venture with CIT in July 2009. The $1.7 million loss compares favorably with a $3.8 million loss in the fourth quarter of 2009 and the $5.3 million loss recorded in third quarter 2009. Consistent with our issuance of $550 million of fixed rate long term notes in 2009, interest expense increased $5.4 million year-over-year.

The proceeds from these notes are being used for general corporate purposes including the January 12 repayments of $150 million of floating rate debt the part of maturity as well as funding the growth to the Snap-on credit on balance sheet portfolio. Effective income tax rate in both the first quarter of 2009 and 2010 was 34.5%. As Nick mentioned, operating earnings was $71.7 million before financial services, improved 32% over prior year on an 8.6% sales increase.

Finally, net earnings of $36.8 million or $0.63 per diluted share increased from $34.8 million or $0.60 per share last year, despite the $8.6 million or $0.15 per share of lower year-over-year net earnings associated with financial services.

With that I will now turn to our segment results. Starting with the C&I Group on slide 7, segment sales of $297 million improved 14.5% from prior year levels. Excluding $12 million of favorable currency translation, organic sales increased nearly $26 million or 9.4%. This year-over-year in increase was driven by a mid-teens increase in sales of equipment worldwide; particularly higher sales of alignment machines in the Americas and Europe.

Sales increases were also realized in our European-based tools business. We still faced headwinds in this region but these higher first quarter sales may be evident of some early stabilization of the European markets. The year-over-year sales increase in the C&I also reflects, continued higher sales in emerging growth markets and increased sales of tools, kits and tool storage products to industrial customers.

Gross profit in this C&I segment of $105 million increased to $13 million from $92 million last year. This increase reflects contributions from higher sales, $4.3 million of savings from restructuring and other cost reduction and cost containment actions and $2.3 million of favorable currency advice. Operating expenses in the quarter of $74 million were essentially flat year-over-year; savings from restructuring and other cost reduction and cost containment initiatives of 3.2 million as well as some lower bad debt expense were partially offset by unfavorable currency translation of $3.5 million along with higher sales of volume related expenses. As a percentage of sales, operating margin in the C&I segment improved 350 basis points year-over-year from 6.7% to 10.2%.

Now turning to slide 8, on a worldwide basis, year-over-year sales in the Snap-on tools group increased 8.9% or 4.3% excluding currency. Land count in the U.S. at the end of the first quarter was stable compared to first quarter of 2009 and year-end 2009 levels. Sales in the U.S. were up 4.4% from the prior year. Gross profit in the Snap-on tools group $113 million increased $10.7 million over prior year representing a 60 basis point improvement in gross margin. The year-over-year increase primarily reflects contributions from higher sales and favorable currency effects, partially offset by inventory related another expenses. Operating expenses of $85 million in the quarter increased $3.2 million from prior year levels, primarily due to unfavorable currency translation and higher volume related expenses. As a percentage of sales, operating earnings of 10.7% in the quarter for the Snap-on tools group improved 220 basis points from 8.5% last year.

Turning to the Diagnostics and Information or D&I group on slide 9, first quarter 2010 sales of $135 million were up 2% from prior year levels, mostly due to currency. Excluding currency organic sales were essentially flat with prior year levels, as higher sales of diagnostics and information products, and increased facilitation program sales were partially offset by anticipated lower electronic parts catalog sales, the OEM dealerships which are continued to be impacted by the challenges in the automotive industry.

Gross profit margin of 51.4% in the quarter for D&I Group improved 320 basis points over 48.2% a year ago benefiting from an improved sales mix of higher margin diagnostics and software products. Savings from prior restructuring actions and $1.2 million of favorable currency effects also contributed to the $5.5 million year-over-year increase in gross profit. Operating expenses for the group were relatively flat with 2009 levels. As a percentage of sales, operating margin of D&I Group improved 380 basis points from 19% last year to 22.8% this year. Contributions from the improved sales mix and $3 million of savings from RCI, restructuring and other cost reduction initiatives were partially offset by $1.3 million of higher restructuring cost.

Turning now to slide 10, the year-over-year comparisons for financial services reflect the termination in 2009 of the Snap-on credit joint venture with CIT. As you know since July 16 of last year, we are no longer selling loan contracts to CIT in reporting the gain on sales. Rather we are building overtime and on balance sheet interest yielding portfolio. As the on-balance sheet portfolio grows, so will our financial services earnings.

The first quarter loss of $1.7 million for financial services was improved from the $3.8 million loss reported in the fourth quarter of 2009. Moving to slide 11, as in the first quarter end, our balance sheet includes $365 million in gross financing receivables from our Snap-on U.S. credit operations and $129 million in gross financing receivables from our international finance subsidiaries, for a total financing receivables portfolio of $494 million. Within the U.S. Snap-on credit portfolio, $313 million relates to extended credit loans to technicians. As you know, Snap-on credit continues to manage the run off portfolio of contracts owned by CIT which totals $483 million at first quarter end. Snap-on credit’s on book portfolio grew by about $98 million in the first quarter of 2010.

For the full year 2010, we presently expect that the on book portfolio will grow by and therefore require net cash of approximately $300 million. The net cash requirements of our international finance portfolios are substantially self funding. Portfolio loss and delinquency trends continue to be in line with our expectations. Turning to slide 12, consolidated operating cash flow for the quarter was $10.4 million. At the end of the quarter, our cash position of $472 million was down from approximately $700 million at 2009 year end. This decrease primarily reflects the $150 million debt repayment in January and the funding of new loans originated by Snap-on credit.

In the quarter, capital spending of $5.7 million was down from $14.1 million spent last year. The higher level of capital expenditures in 2009 including spending to support the accelerated expansion of our manufacturing capabilities in Minsk, Belarus and the further expansion of our plant in Foshan, China. Capital spending last year also included the construction of the new R&D facility and headquarters for our automotive parts and service information business in Richfield, Ohio. As seen on slide 13, trade and other receivables increased to $8.4 million from 2009 year end, primarily due to higher sales. Day sales outstanding for trade and other receivables of 63 days was flat with 2009 year end.

Inventories at the end of the quarter increased $16.3 million from 2009 year end, primarily due to seasonal inventory build and increasing production levels. On a trailing 12-month basis, inventory turns were 4.2 times, slightly up from year end. Net debt at the end of the quarter was $444 million. Our net debt to capital ratio of 25.9% compares to 22.2% in 2009 year end. If we exclude approximately $108 million of cash, currently withheld related to the dispute with CIT, our net debt to capital ratio as of the end of the first quarter would have been 30.3%.

In addition to our quarter-end cash of $472 million, 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 quarter-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 first quarter performance. Before turning the call back to Nick, I’d like to review our outlook for the balance of 2010. For the full year, we continue to expect to incur restructuring cost of approximately $18 million to $22 million. At the same time, we believe we will continue to realize further benefits in 2010 from our RCI sourcing annual cost reduction initiatives. We also anticipate continuing with our planned strategic investment including expansion in emerging markets.

We continue to anticipate capital expenditures in 2010 that will be in the range of $55 to 60 million. We also will continue to incur $5 million per quarter of expected higher year-over-year pension expense. For full year 2010, we now anticipate an effective tax rate of approximately 34.5% which is slightly higher than the 33.5% estimate communicated at year end, primarily due to a higher mix of U.S. earnings.

Before opening the call for questions, Nick would like to provide some final thoughts. Nick?

Nick Pinchuk

Well, that’s our prospective on the first quarter. Our commitment to the Snap-On value creation process to safety, quality, customer connections, innovations in RCI, it continues to pay off. OI was up 32% in the OI margin of 11.6% was strong compared with history on considerably lower sale.

The markets have stabilized and appear to be favorably inclined although its way too early to call a clear trend. And our continued investments in the strategic customer segment, the franchisees and their technicians, the repair, the garage owners and managers, the mission critical industry and the emerging markets of Eastern Europe and Asia Pacific are all reaping benefit.

The bottom-line is that because of our commitment to Snap-On value creation processes and because of our strengthening strategic position, we are confident that Snap-On is well poised to take full advantage of the recovery as it occurs.

Now, I will end with a word to our franchisees and associates. I know many of you are listening to this call. The results of the quarter were encouraging. But I know that they were only made possible by your capability, by your effort and by your commitment to our team. You have my congratulation and you have my thanks. Now, I’ll turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Jim Lucas with Janney Montgomery Scott

Jim Lucas - Janney Montgomery Scott

First question with regards to currency was hoping you could just help us out with translation versus transaction. With gross profit referring to currency being favorable yet operating expenses currency being unfavorable and with the continued fluctuation in the dollar if you could give us a little bit color what are you seeing there?

Nick Pinchuk

Well, I can start out and may be Aldo can roll in. I think what we saw in the quarter year-over-year was positives with the Canadian dollar where we sell, we also buy some out of Canadian plans but we are positively exposed there and around the pound. And those two currencies tended to be quite favorable for us and that generated the positive events here. Going forward, we see the same events around Canada but the pound has started to weaken some we could see some headwind in that situation.

If you thinking about currency in terms of translation, our translation numbers in the first quarter on sales would have been about $24 million and operating expenses would be something $6 million to $7 million on a negative basis.

Jim Lucas - Janney Montgomery Scott

Yes. That’s helpful and then starting first on the CNI side some very good color about the ongoing investments, very helpful commentary surrounding what you are seeing on the equipment and the big ticket side. Could you talk a little bit about what you are seeing in terms of re-stocking versus overall demand whether by geography or end market?

Nick Pinchuk

I don’t think we are seeing any restocking, stocking is through. I think people are snake bitten over the past recession. So we are not seeing any evidence in the United States where we sell through another level whether you are talking about our dealers, our franchisees or you are talking about distributors outside the United States. We are not seeing evidence of restocking. So none of that we believe is in our number. A quite a few of our businesses, for example, the industrial business is direct. So restocking would be a factor in that situation. The big question for us has always been Europe about re-stocking and de-stocking and we certainly haven’t seen any restocking in Europe. The de-stocking seems to have ended in certain parts particularly in terms of the North. The South continues to be sliding. Spain, the markets in Spain and if you look at the GDP in Spain it's still going South.

So what we see is no restocking, an ending of de-stocking in the North of Europe, some minor I guess continuing weakness in the South. We just haven’t seen the markets snapped back to the point that we expect people to restock. I’m not sure when that will happen Jim. When we talk to distributors or I talk to franchisees, they all have their, to use an American expression, their Missouri head on, they’re in show me territory. So they’re going to have to see quite a bit of time go by before they’re going to enter restocking.

Jim Lucas - Janney Montgomery Scott

Okay and switching gear to the tools group. You referred to the termination is down, plans in terms of adding to the franchise count this year also, where the van count stands currently and then secondarily from a mix standpoint, could you give us anymore color of what you’re seeing on hand tools versus power tools versus storage boxes?

Nick Pinchuk

Yes. Van counts are pretty stable. It’s give or take 3,460 in the United States as about where it was at the end of December. Terminations are at an all-time low but you could say we’re not capturing any. We’re not increasing on that because we’re not gaining even though the termination is at an all-time low. I would add quickly though we’re being very selective of our people at the van because we had difficult experiences when we put people in vans that might have been not appropriate or not as I guess born to do that kind of business, and so we had some difficulty when they ended up having, not being successful. So we’ve been stable there. Our plans are still to expand that business and we are still continuing to working to refine our recruiting models to make sure we can move forward and build that van count.

In terms of mix, our hand tools were up slightly in the quarter. Remember that hand tools never really went down very much. It was all tool storage and big ticket items. So, the mix of tool storage and diagnostic, you can pretty much say that the increases for year-over-year are rooted in tool storage and high value diagnostic units. Power tools was down slightly but that has to do more or less with the timing of model introductions.

Operator

We have David Leiker with Robert. W. Baird.

Keith Schicker - Robert. W. Baird

It's Keith Schicker on the line for David. I just wanted to start sequentially with the tool segment. It looks like revenue was up about $30 million sequentially; Q1 versus Q4 and operating profits split a little bit. Could you provide any color on that variance there?

Nick Pinchuk

Yes. Well, first of all, we had record. I believe probably an all time record OI margin in the fourth quarter for the tools group so was gain busters. So we knew we had top comparisons if you are going to go sequentially. We had our volume rise up. So we got some pop out of volume and a little bit of absorption. Much of that business was as I said before big ticket items which tend to be ironically a little lower in absorptions because there are components purchased more than a hand tool. A hand tool tends to be a big labor, big machine, high fixed cost equipment.

Diagnostic tend to be component purchased and assembled. So we could get a volume push but the absorption might not be as much as you might expect if you are modeling this. We had favorable LIFO in the fourth quarter which I think we called out in our release which basically accrues to the tools group. In first quarter in a tools group, you do have a launch; we have kick off around the country. So there is a little more expense there and I think I would say that if we wanted to get jump started into the year with those big ticket items because we thought that would lead the way. So we promoted them relatively aggressively. So when you put all that together that ended up blunting some of the drop through you might expect off the volume increase.

Keith Schicker - Robert. W. Baird

Perfect. Yes, that's great. If we look at the commercial and industrial segment and this is a difficult question but the margin improvement there, would you attribute more of that to getting more volume running through the model or would you attribute more of the margin improvement to some of the cross section that you have taken in that part of the business?

Nick Pinchuk

Well, I think it's both situation. The commercial and industrial division has been throughout the years pretty much our poster child to rapid continuous improvement and we did get nice drop through on some of the volume. But you don't get that kind of popping, I think we went from 6.7% OI margin to 10.2%. I think the numbers are something like that. You don't get that just from volume. So there was good drop through because we had some nice sales and alignment and so which are high profitability product, high margin product but we also had some great RCI benefits. So I’d say both were big factors.

Keith Schicker - Robert. W. Baird

But wouldn't think alone one or the other.

Nick Pinchuk

No, I would not. They got a nice increase in volume right.

Keith Schicker - Robert. W. Baird

Okay

Nick Pinchuk

That's a good thing but the drop there was very high. So you can make the calculation based on that.

Keith Schicker - Robert. W. Baird

Okay and then two more quick ones here. Has there been any issues that you've had with the closure of the aerospace in Europe from a business perspective?

Nick Pinchuk

Yes. A couple of our guys are trapped in Paris for days and they are running out of clothes.

Keith Schicker - Robert. W. Baird

Okay.

Nick Pinchuk

We haven’t had too much. I have made this kind of a joke about it. But there are people trapped there. We had some training plan, that’s that put on hold. So that’s an issue. I don’t see us having a problem. If you look forward, we could have a problem if we ran out of things that we needed to airship. Europe would be a less of a problem then if this extended to Asia let say. To put it in perspective though we spent $90 million a year in freight, $5 million of this is air. So it’s not a huge problem for us. It could create some irritancy in certain product lines and certain places. But we don’t see it being an issue right now.

Keith Schicker - Robert. W. Baird

Okay and then the last one. It's still relatively early here in the second quarter but if you could just comment on some of the end market trends that you’ve seen really early in the quarter here?

Nick Pinchuk

Couple of things, one is that we don’t see much seasonality in our business except for the third quarter. Our third quarter tends to drop pretty much because of Europe, because of our dependence on Europe and some of the markets in United States people take the van drivers to take vacations in the third quarter from time-to-time. So, we do see weak third quarter but by and large not much seasonality going from first to second. So there is not much of a tailwind in that regard.

Looking out for the future, I think I stand on what I said in my remarks. We think the markets are leaning positively but it was one quarter and in those numbers are some expansion to new adjacent segments like capturing customers in Europe for the EPC and reaching out to new OEMs and equipment sold. There is probably some market shares in our gain, in our growth number and that 4% growth number as well. So I’ve learned in the recession not to make any future calls. All I can say is the market seems to be leaning positively but I am still from Missouri that is show me. I’m looking forward for any kind of recovery. The one thing I can say is, wherever it happens we’re poised to take advantage of it.

Keith Schicker - Robert. W. Baird

Okay and do you think this market share gains are something that can continue or would you rule that out or how should we think about that?

Nick Pinchuk

I said market share. It’s always dangerous to talk about market share gains over quarter. These are simply new customers that we captured. I believe we can capture new customers though. That’s what our strategic initial is all about, that’s what penetrating the garage, a repair garage owners and managers is about. That’s what is extending the mission critical industry is about, that’s what building in emerging market is about. It is after all share gain and so we believe very strongly that we’ve taken the action in building capabilities in product lines and physical distribution to be able to take advantage in those areas which are pretty much adjacent for us as the recovery occurs.

Operator

We’ve Gary Prestopino with Barrington Research.

Gary Prestopino - Barrington Research

Seems to me just a little bit more optimism, can you express here but relative to the past conference calls I have been on Nick. But I just went through my notes. I just want to make sure you basically said that some of the big ticket items particularly in Europe you were seeing so mildly positive sales gains in tool storage diagnostics under-car is that correct?

Nick Pinchuk

Yes. What I said was I am seeing increases in tool storage and high value diagnostics that more refers to the United States than Europe, equipment I meant both developed markets United States and Europe.

Gary Prestopino - Barrington Research

Are these sequential or year-over-year?

Nick Pinchuk

They are year-over-year and for tool storage and diagnostics they are sequential. Equipment had a gain busters quarter, in the fourth quarter so I say it’s about flat.

Gary Prestopino - Barrington Research

You also mentioned that some of the more Southern European countries you are dealing with are Italy possibly Greece Marseille having issues?

Nick Pinchuk

Spain.

Gary Prestopino - Barrington Research

Spain. But the Northern European countries are starting to at least stabilize.

Nick Pinchuk

We are looking better in the North UK, Sweden; France is looking a little better for us. Spain, the reason I mentioned Spain, Gary is that SNA Europe has a significant portion of its business in Spain. It’s the leading market player in Spain and so for us Greece is kind of interesting. We sell there but it’s not such a big factor. Italy, some factor for us but Spain is a significant challenge for us and we see the Spanish market continuing downward.

Gary Prestopino - Barrington Research

Could you just remind us what your percentage of sales are to Europe and U.S. and then what would you categorize emerging? Do you have that handy?

Nick Pinchuk

Of the top of my head 42% outside United States, I would say is 26%, 27% in Europe. You might say Asia-Pacific 8-10%.

Gary Prestopino - Barrington Research

And in Asia-Pacific which is probably more your emerging markets?

Nick Pinchuk

Yes.

Gary Prestopino - Barrington Research

What did you see there is particularly?

Nick Pinchuk

Booming. We saw great smaller base though. When I am quoting the numbers Asia-Pacific, I am talking about Japan which is a much more stable market. But when I talk about the emerging markets of Asia-Pacific, I am talking about China, India, the ASEAN, all where we’ve been building our physical presence and expanding our product lines where we add the diagnostics in China, where we provided the ASEAN (inaudible) those business in the emerging markets of Asia were up substantially well ahead of any GDP growth in those areas. So the GDP growth is pretty robust. Now again Gary it's off a smaller base but we are pretty encouraged by that.

Gary Prestopino - Barrington Research

Okay and then last question, we are truly coming out of this worldwide recession.

Nick Pinchuk

I didn't say that.

Gary Prestopino - Barrington Research

What? No I am saying that. My prediction. How is the performance bid of your business line different now or coming out of this relative to where it has performed in the past recessions coming out of that? Is there any big differences that always been choppy by country or is there something that you can point to that significantly different that is giving you cause to be cautious here?

Nick Pinchuk

No. Actually nothing that's giving us cause to be cautious out of that. If you are asking me how I feel about this, there is a couple of things, one is I feel why we brought down our breakeven?

Gary Prestopino - Barrington Research

Right.

Nick Pinchuk

That's good. Secondly, okay, the recession put everybody on stall a little bit. We’ve had chance to build our strength in places. So we kept investing. So I think we are in better shape perhaps then maybe some others are because we kept investing. We didn’t take capacity out in Europe, we kept in place. Remember, we talked about that in the prior calls. We kept, because we were confident that the markets are going to come back. So I believe and we have building in Asia-Pacific well maybe this there was a tough time for some others. So building our product line for critical industries. We kept expanding our product lines throughout the recession. So I feel pretty good about the positioning. The only difference for us I’d say is that Spain, one of our markets, one of our more major markets in Europe is unusually weak. That’s about the only difference about our business versus I guess any other kind.

Operator

We have no further questions at this time, and I will turn the call back over to Leslie Kratcoski for any additional comments or closing statements.

Leslie Kratcoski

Thanks everyone for joining us this morning. A replay will be available shortly on our website and as always we thank you for your interest in Snap-on. Have a good day.

Operator

That does conclude today’s conference and we thank you for participating.

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