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Snap-on Incorporated (NYSE:SNA)

Q3 2010 Earnings Call

October 22, 2010; 10:00 am ET

Executives

Nick Pinchuk - Chief Executive Officer

Aldo Pagliari - Chief Financial Officer

Leslie Kratcoski – Investor Relations

Analysts

Jim Lucas – Janney Montgomery Scott

Steven Gregory - Mandalay Research

David Leiker – Robert W. Baird

Gary Prestopino – Barrington Research

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Snap-on Incorporated 2010 Third 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, please go ahead.

Leslie Kratcoski

Thanks Evelyn and good morning everyone. Thanks for joining us today to review Snap-on's third 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 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 the 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 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'll now turn the call over to Nick Pinchuk, Nick.

Nick Pinchuk

Thanks Leslie. Good morning everyone. Well, Snap-on had another quarter of improved year-over-year performance and on top of that we saw some favorable market signal, so it’s very encouraging. We believe there is now clear evidence of a building Snap-on strength in the recovering market. Overall, our organic sales were up 13.4%, solid by any measure, and that’s after being up 9.5% in the second quarter and 4% in the first quarter. Needless to say, we like that trend.

Operating income rose 72% from last year with financial services contributing profitability as projected improving its performance as it brings the loan portfolio on to Snap-on’s books. The operating company ally without financial services increased by a strong 46%, so again overall we are encouraged by the strength of the quarter, and that result was in the face of an unfavorable swing in LIFO.

We would say our runways for growth are clearing and our Snap-on value creation processes around safety, quality, customer connection, innovation, Rapid Continuous Improvement or RCI, they continue to drive progress. So, having said that let me give you a bit of color, and my perspective on the trends we see.

With respect to the economic environment and the impacts on our market, there are some nice positives. It was our third straight quarter of increasing year-over-year gain. So that alone indicates a better environment, and there is also a building momentum in some of our more strategically important areas in our core auto repair business, in emerging markets, in critical industries, all areas where we see clear long-term runway.

Now, the third quarter is seasonally are most challenging. It can be quite variable. So, it’s some times difficult to draw extended conclusions from the results, but having said that Snap-on’s quarter was robust completely overcoming the typical season low.

We often talk about big ticket items, higher-price products that either have longer paybacks like diagnostics or under-car equipment, or a more discretionary like tool storage units. Activity here is usually a barometer of our customers’ overall financial health and of their confidence.

You recall that during the downturn last year we saw quite a bit of variation from period to period in big ticket purchases, but with these results we’ve now put together three quarters in a row of year-over-year increases in all three big ticket categories. They are all back now to pre-downturn levels.

In the tools group, both diagnostics and tool storage units showed significant gains. A real help in this was our new diagnostics handheld unit called them VERDICT. It was launched at our annual franchisee conference in August and it got great reviews. It’s a fully functional unit that we believe set a new industry standard with features like detachable wireless touch screen display, remote use from anywhere in the garage, Wi-Fi internet capability and access for Snap-on’s unique repair information and database.

The VERDICT is clearly an innovation. It provides real productivity to technicians and as you would expect the reception has been very strong. Beyond the vans, our equipment division, part of the Repair Systems and Information or RS&I group showed strong year-over-year gains in particular and its big ticket under-car products that’s what equipment sales. It achieved gains in both North America and Europe well ahead of our company’s overall sales increase. In fact equivalent lines were even slightly ahead of the second quarter, and third quarter sequential increases is very rare for this business, because a large presence in Europe and the associated seasonality usually make July through September a tough period. So, this quarter’s increase, sequentially increase in equipment sales was a big win.

From a geographical standpoint, there hasn’t been much change in the regional market landscape. North America showed gains that were a bit better than those recorded worldwide. Europe’s recovery is generally a little weaker, we were however up double-digits, though the story there continues to vary region-by-region.

In the south, especially Spain there still hadn’t been much improved. Spain is important for us because that’s in our European big hand tools business has an exceptionally strong presence. On the other hand, the North is decidedly more positive. Sales in markets like Germany, Sweden and Finland all grew strongly, so Europe is still mixed, but for us up double-digits overall.

With the respect of emerging markets, the places where we’ve made investments and are focused on expansion like Eastern Europe we saw a strong growth in Russia again in the quarter up nearly 50% and Asia-Pacific continued its steep growth curve significantly higher than our overall increase with India and China both setting the pace.

China continues to sell out all the bandsaw’s it can produce and the Indian sales team is now gaining real traction in the under-car equipment market. So that’s some perspective on the global environment, a varied landscape, but increasing almost everywhere.

Now for some highlights on the operating segment. Commercial and Industrial or C&I saw volumes up about $45 million that’s more than a 21% increase, operating earnings rose $21 million with those increased volumes and strong RCI results driving in the improvement. RCI results in the quarter are dramatic testimony to the ongoing power of our Snap-on value creation processes.

They’ve contributed greatly to our progress so far and we are confident there is still much more opportunity to go. We’ve often spoke about the runway in critical industries where the tasks absolutely need to be accomplished without sales. Well, recently we had graphic evidence of such a situation, many watched the dramatic rescue of the miners in Chile as it was broadcast around the globe, it was a great story and you could clearly see SNA Europe’s BAHCO branded tools on the scene assisting in the rescue, accomplishing the critical mission on the quarter.

So, our performance, but while that’s an interesting sidebar. I think I would like to talk about our performance in the industrial business. One of the real positives for the company this past quarter, near record sales trailing only the fourth quarter of 2008 in volumes, a really strong quarter.

Our industrial business was up 34% and that gain was across the globe and that was without much restocking. We believe that is evidence of our success in moving the Snap-on brand out of the vehicle garage and into critical industries everywhere. Look it’s clear, that overall economic activity is not at pre-crisis levels, but we still achieved a near record quarter in this space, it shows we are making significant gain in the strategic area.

I have also mentioned in the past, that we are expanding our product offering aimed specifically at critical industries, like power generation, mining and aerospace, it's paying off. Along those lines innovations play the big part of Snap-on history and that tradition continues today.

Just this past quarter, we launched our new Automated Tool Control or ATC tool storage product aims squarely at the aerospace sector. We’ve taken our sophisticated digital imaging technology, which is a huge competitive advantage for us in car aligners and transform tool storage boxes into hi-tech assets, compared with the keyless entry system that laser technology scans the tool door, it knows who checked out and who returned every tool, every time.

It's important to know where your tools are when you are working on jet engines, ATC accomplishes that task like no other product and it’s a great system and we’ve started to see our first sales in the quarter. The ATC technology is only one example of leveraging Snap-on’s breadths and depths to drive the company’s presence in critical industry. We are collaborating widely across business operations to maximize opportunities by applying our existing advantages in one sector to develop opportunities in others.

For critical industries, such as power generation and aerospace, military, and mining and many other we are well positioned to modify our core product and technologies to meet the unique requirement, the third quarter is more evidenced that it's working.

A good portion of our effort in emerging markets gets reflected in C&I, so I will talk about that now, I touched on the strong increases earlier and that growth only comes with expanded physicals presence in products, and we are aggressively building both in those market.

In Asia we are increasing manufacturing capabilities, both in Zhejiang and in Xiaoshan were our Wanda acquisition is based and we recently launched our Asian Handheld Diagnostics Unit, it’s our first specifically tailored for the region and there is more in the pipeline. In Eastern Europe, last year we build a plant in Belarus, just this past month we have the official inauguration that included government dignitaries and broad TV coverage.

It was great exposure for the innovated technologies we’re bringing to the region, and it’s just a type of presences and reorganization that helps in building a distribution network, creating a foothold and in generating the strong sales increase we’ve seen in this quarter in Eastern Europe, that’s C&I.

Let’s move to the tools group, we’ve seen a return to pre-downturn sales levels, overall volumes up nearly 11% in the US better at nearly 13%. OI margin is same as last year after adjusting for a $4 million negative LIFO swing. These results reflect our balanced approached to maintain the strength of our powerful franchise system. We’ve invested significantly in training and product support to keep our network robust.

In that way in August we held our annual Snap-on franchisees conference. It’s annual, but this one was special, it served as the highlight of our 90th Anniversary celebration, we’ve been in business for nine decade and it was a significant success, record attendances, more product, more trading seminaries, and a business and profit center aimed specifically at helping our franchisee to improve their business efficiencies. That was really popular.

The mood of the conference was very positive, I can tell you. The franchisees are up beat about their prospects. They enthusiastically embrace Snap-on’s cohered focus on making work easier for professionals who perform critical task and because they know our whole organization is behind that mission across the globe in all of our division. They believe strongly in their future with our company.

We’ve spoken in the past about the Snap-on stimulus program. Well the best stimulus we can provide is great product. So, we’re encouraged that we were recently recognized for just that. Snap-on was named the overall best brand in six tool categories of tools by Frost & Sullivan’s in the 2010 survey of technician.

Snap-on carried the number one ranking by wide margins, for example in hand tools 70% of the technicians preferred the Snap-on brand. The nearest competitor had an 8% share, and diagnostics in winning margin was 46 to 9 and the numbers for tool storage was 63% Snap-on the highest other brand 8%.

Our products were also recognized in the quarter by professional tool and equipment news, the Snap-on low profile ratchets in the Quadriga tire changers were both recognized by that publication for outstanding innovations in vehicle repair. Now this awarded special, because it was based on the opinion of professional users, the people that gained productivity by actually using Snap-on. So, that says a lot.

I already mentioned the recovery in big ticket items. Many of those sales are through our vans, on credit and that credit has been available without disruptions throughout the inauguration of Snap-on Credit. Our financial service business is performing as we predicted, becoming increasingly profitable as the loan portfolio moves on to our books and that successful inauguration of Snap- on Credit has had a significant hand in supporting the sales and growth.

Now for some discussion of the RS&I group; sales up about 10% or $19 million excluding currency, OI up 11.2%. I already mentioned the equipment division’s big ticket sales gains in both North America and Europe. The strong increases of equipment are a big part of our RS&I progress. You remember that RS&I portfolio is where we have our exposure to the North American OEMs and their contraction of the dealerships.

So, Snap-on business solutions does continue to be impacted by that disruption. We did, however, in the quarter, achieved more offsets with an increasing activity and OEM essential tools and diagnostics programs. We’re also gaining a heavy duty diagnostics products, supplying trucks, supplying to truck shop owners in a greater volumes than ever before.

And you’ll probably remember that RS&I focuses on vehicle shop repair owners and managers, we’re expanding in that space and you can see it in this group’s numbers. Our Diagnostics and Mitchell1 divisions already strong in the independent repair shop continue to better the positions. In addition, for the successful new VERDICT handheld I mentioned earlier, Mitchell1 released a new version of a shop management software with significant success. We’ve made investments in this area and it’s paying off.

Well, that gives you a little color on the quarter. Significant sales increases, encouraging profitability, strengthening strategic position and ample runways for further growth.

Now, I’ll turn the call over to Aldo for the financial review.

Aldo Pagliari

Thanks Nick. Our consolidated operating result is summarized on the slide 6. Net sales for the third quarter of $653 million increased 12.3% year-over-year. Excluding currency translation, sales increased 13.4%. As Nick mentioned, the primary drivers behind the $71 million year-over-year sales increase include significantly higher sales to customers in critical industries in emerging markets, as well as double-digit increases in worldwide equipment and sales to franchisees in the United States.

Consolidated gross profit of $301 million increased $40.7 year-over-year driven by higher sales, improved manufacturing utilization and savings from ongoing rapid continues improvement or RCI initiatives and restructuring actions. Foreign currency benefited gross profit by $2.7 million while lower year-over-year restructuring cost contributed another $2 million.

The overall benefits from improved manufacturing utilization, RCI currency and lower restructuring were partially offset by $4.1 million of higher year-over-year LIFO-related inventory expense. As a result of these factors, consolidated gross margin improved 130 basis points a 46.1% as compared to 44.8% last year.

Operating expenses in the quarter increased $15.9 million from 2009 levels, primarily due to higher volume-related and other expenses including higher cost as a result of increased participation at our 2010 Annual Franchisee Conference.

Year-over-year operating expenses also included $4.1 million of higher U.S. pension expense largely due to lower the projected asset returns in previous years. These increases were partially offset by lower bad debt expense, favorable currency translation and savings from ongoing RCI and restructuring initiatives.

As a percent of sales, operating expenses of 34% in the quarter improved to 150 basis points from 35.5% last year. Operating earnings of $78.8 million before financial services improved $24.8 million, which is a 45.9% year-over-year increase on 12.3% of higher sales.

Including financial services, operating earnings increased $35.1 million or 72.1% over 2009 levels. As a percentage of total revenues, operating earnings increased 420 basis points from 8.3% last year to 12.5% this year. Financial services operating earnings of $5 million in the quarter improved $10.3 million for the third quarter 2009 loss of $5.3 million. On a sequential basis, financial services operating earnings improved $3.3 million from second quarter 2010 levels.

As expected operating income from financial services, which is before interest expense continues to improve as the on-book finance portfolio grows. The third quarter effective income tax rates were 34.4% in 2010 and 29.3% last year. The lower rate in 2009 reflects the favorable resolution of certain tax matters as well as the favorable mix of foreign earnings.

Finally, third quarter net earnings of $46.5 million increased $21.1 million or 83% from the $25.4 million earned last year. Let’s now turn to our segment results. Beginning with the Commercial and Industrial or C&I group on slide 7, segment sales of $261 million improved 19.5% from prior year levels. Excluding the impact of currency translation organic sales increased 21.2%. The year-over-year sales increase was again driven by higher sales across all operating units with particularly strong increases in those businesses serving customers in critical industries and emerging markets.

Gross profit in the C&I segment of $96.2 million increased $25.9 million or 36.8% from 2009 levels. This increase is primarily due to higher sales and $3.5 million of savings from on going RCI and restructuring initiatives. The gross profit comparison also benefited from improved manufacturing utilization, primarily in Europe, as a result of increasing production levels.

For the quarter, gross margin of 36.8% improved 460 basis points from 32.2% last year. Operating expenses in the quarter of $65.6 million increased $4.8 million from 2009 levels, primarily due to higher volume related and other expenses, and increased restructuring cost. As a percentage of sales, operating expenses improved by 280 basis points year-over-year. Operating margin in the C&I segment of 11.7% in the third quarter of 2010 improved 740 basis points from 4.3% last year.

Turning now to slide 8, on a worldwide basis, third quarter sales in the Snap-on tools group of $259 million increased 10.8% from 2009 levels, including a 12.8% increase in United States. Gross profit in the Snap-on tools group of a $108 million in the quarter increased $3.4 million from 2009 levels primarily due to higher sales in favorable currency effects.

The year-over-year gross profit comparison was also impacted by higher costs associated with increased franchisee product related programs and by $4.1 million of higher LIFO-related expense. LIFO-related expense was $600,000 in the third quarter of 2010. Last year, as a result of lower production in inventory reduction efforts, the LIFO-related benefit was $3.5 million. As a percentage of sales, gross margin in the quarter was 41.6% as compared to 44.7% last year.

Third quarter operating expenses of $79.5 million in the Snap-on tools group increased $4.7 million from 2009. This is primarily due to higher volume related and other expenses as a result of increased participation at this year’s annual Snap-on Franchisee Conference, which focused primarily on the development and profitability of the franchise network.

In the quarter, we also incurred higher cost associated with the development of a new and expanded product catalog that was deferred from 2009 to 2010. We view these increased cost as longer-term investments in our business. As a percentage of sales, operating expense from the quarter improve to 140 basis points, from 32.1% last year to 30.7% this year. Third quarter operating income for the Snap-on tools segment was $28.2 million or 10.9%of sales compared to $29.5 million or 12.6% of sales last year.

After adjusting for LIFO on both years, operating income in the quarter increased $2.8 million or 10.8% year-over-year and as a percentage of sales was 11.1% in both years.

Turning to slide 9; in the Repair Systems and Information or RS&I segment. Third quarter sales of $207 million were up 8.1% from 2009 levels. Excluding currency, organic sales were up 10.1%, primarily due to higher worldwide sales of equipment, increased essential tools and facilitation program sales, and higher diagnostic sales and Mitchell1 information products. These increases were partially offset by the anticipated lower electronic parts catalog sales in North America, as a result of OEM dealership consolidations.

Gross profit of $97.3 million in the quarter increased $11.4 million or 13.3% from 2009 levels. Primarily due to higher sales, low restructuring cost, material cost reductions and continued savings from ongoing RCI and restructuring initiatives. Gross margin in the quarter of 46.9% improve 210 basis points over 44.8% last year.

Operating expenses of $55.6 million in the quarter were essentially flat with 2009 levels as higher volume related product development and other expenses were largely offset by lower restructuring cost, favorable currency translation, savings from RCI and restructuring initiatives as well as lower bad debt expense.

As a percentage of sales operating expenses improve 210 basis points year-over-year. Operating earnings of $41.7 million in the quarter increased $11.2 million or 37%. As a percentage of sales operating margins in the RS&I group improve 420 basis points from 15.9% last year to 20.1% this year.

Turning now to slide 10, financial services, operating earnings of $5 million in the quarter, compares favorably to both second quarter 2010 earnings of $1.7 million and to the third quarter 2009 loss of $5.3 million.

The $10.3 million year-over-year increase and operating earnings primarily reflects the higher revenue contributions from Snap-on Credits growing on-book finance portfolio. As you know, since July of last year, we are no longer selling loan contracts to CIT and recording gains on sale, rather we are building an on-balance-sheet interest yielding portfolio. As this portfolio grows, so well our financial services operating earnings.

Moving to slide 11, as of third quarter ends, our balance sheet includes gross financing receivables of $528 million from our US Snap-on Credit operation and $139 million from our international finance subsidiaries, for a total financing portfolio of $667 million.

In the United States $445 million of the portfolio relates to extended credit loans to technicians. Snap-on continues to manage the run-off portfolio of contracts owned by CIT, which totaled $317 million at third quarter end, down $67 million from second quarter levels.

For the full year, we continue to expect that the on-book financing portfolio and Snap-on Credit will have grown by approximately $300 million, resulting in a year end US finance portfolio of about $565 million to $570 million. Regarding finance portfolio losses in delinquency trends, these continue to be inline with our expectations and they have improved compared to both Q1 and Q2 levels.

Turning to slide 12, consolidated operating cash flow for the quarter was $10.2 million. At the end of the third quarter our cash position of $360 million declined $71 million from second quarter 2010 levels, primarily due to the funding of new loans originated by Snap-on Credit.

Since second quarter end, net financing and contract receivables increased $85 million. In the quarter capital spending of $10.5 million was down from 2009 levels, primarily due to last year’s construction of a new R&D facility in Richfield, Ohio and the accelerated expansion of our manufacturing capabilities in emerging markets.

As seen on slide 13, since last year end trade and other receivables increased $20.6 million and days-sales outstanding improved to 62 days. Inventories increased $50 million from 2009 year end, primarily due to higher production levels as a result of increased customer demand. On a trailing 12 month basis, inventory turns improve to 4.5 turns as compared to 4.1 turns in 2009 year end.

Net debt at the end of the quarter was $571 million. Our net debt to capital ratio of 29.2% compares to 22.2% at 2009 year end. Excluding approximately $108 million of cash, currently withheld related to the previously disclosed dispute with CIT, our net debt to capital ratio as of the end of the third quarter would have been 32.9%.

In addition, to $360 million of cash, we continue to maintain a $500 million revolving credit facility and $20 million of committed bank lines. Most recently on October 1, we entered into a loan and servicing agreement that allows us to secure additional borrowings up to $100 million through the pledging of Snap-on Credit finance receivables under an asset back securitization facility.

This agreement provides us with additional available credit capacity and funding diversification that supplement to our existing credit agreements. As of third quarter end no amounts were outstanding under any of these facilities. This concludes my remarks on our third 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 expect to incur approximately $15 million of restructuring cost and approximately $45 million for capital expenditures. We continued to expect that full year 2010 pension expense will be $16 million higher than last year.

Finally, the anticipated effective income tax rate for full year 2010 will approximate 33.6%. Before opening the call for questions, Nick would like to provide some final thoughts. Nick.

Nick Pinchuk

Thanks, Aldo. Look, I’ll close by saying again that our performance in the quarter was quite encouraged. We believe that represent strong confirmation that Snap-on is a company with unique strengths, ongoing opportunities for improvement and extended runways for growth.

Going into the downturn, we assess the macroeconomic difficulty saying that big ticket long payback items were important. They would help to ease our recovery and they have.

We said that we would invest in strategic areas that would be decisive growing forward and those efforts appear to be working well. We’ve maintained our van network; it’s more enthusiastic and more stable than when we entered the difficulties. We said that critical industries would be quarter [ph] growth. We are growing strongly in that arena. The industrial division was up 34% in the quarter.

We were convinced that our technology and reputation would enable expansion with repair shop owners. Equipment in RS&I are confirming that belief. Equipment shook off the natural third quarter headwinds and grew strongly in both the US and Europe, and we said emerging markets, presented with the unique opportunity of physically provisioned, would help us grow and we are growing and gaining in those areas. Those regions are growing at deep double-digits, well ahead of even the robust GDPs.

No one can predict how the environment will unfold. The economies of the world are still fragile, having said that, however. We now have three quarters of positive Snap-on momentum. The situation seems to be playing out as we expected and our strategic programs are successful. Because of all that, we are more confident than ever before that Snap-on is well positioned to take strong advantage of the future, strong advantage of the future in whatever shape it unfolds.

Before taking questions, I want to end by thanking the people responsible for these encouraging results, our associates and franchisees. I know as usual, many of you are listening. These results would not have been possible without your capability and your dedication. I thank you for your support and I congratulate you on your success.

Operator, now we’ll take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll first go to Jim Lucas, Janney Montgomery Scott.

Jim Lucas – Janney Montgomery Scott

Thanks, good morning all.

Nick Pinchuk

Hello, Jim

Jim Lucas – Janney Montgomery Scott

I want to start with a couple of housekeeping questions. First, on the restructuring, what is the year-to-date number?

Nick Pinchuk

Year-to-date number in restructuring is about – I think it’s like $8 million, $8.4 million or $8.5 million, something like that.

Jim Lucas – Janney Montgomery Scott

Okay. I thought you were about half-way to the target which implies. Do you anticipate that full $15 million spend?

Nick Pinchuk

I mean, you do the arithmetic, it says six and change in the fourth quarter, but last year, we did seven in change. So, I mean, I don’t think we think that’s an extraordinary amount.

Jim Lucas – Janney Montgomery Scott

Okay. And with the early successes you’re having on the emerging market strategy, could you just bring us up-to-date on where you stand today from a geographical footprint, North America versus Europe versus the emerging markets?

Nick Pinchuk

You mean the sales?

Jim Lucas – Janney Montgomery Scott

The sales, yes.

Nick Pinchuk

Yes, it’s roughly this way, I think. You can say, look, North America is 65%, 66% of the business, Europe is 25% of the business, emerging markets. Asia-Pacific is 8 -- between 5% and 10% of the business and the rest is dribs and drabs, Latin America and so on.

Jim Lucas – Janney Montgomery Scott

Okay. And on the critical industries, glad to hear that the new vision tool box is out there and that’s a great example on the aerospace side. Can you talk a little bit about, which of the critical industries you’re having the best success in and far and is that geographically spread out or it more end market specific?

Nick Pinchuk

Actually, the success in industrial, which I think I said really success in industrial’s been across the board geographically, at least generally almost all the quarters we’ve seen, the critical industries have been pretty strong in United States, Europe and so on. This quarter was showed strong gains from aerospace to mining to natural resources. I think the strongest in this quarter was natural resources for us, but if you look back over some period, we’ve seen growth in each of those areas. But in this quarter, we saw a nice bump out of the natural resource business.

Jim Lucas – Janney Montgomery Scott

Okay and I know that it’s probably a little too early to be talking about 2011 at least on public environment, most companies answer this question, but clearly the third quarter was a positive surprise from the season, not having the normal impact and it does signify that those of us that have been waiting to see this sort of long time on the outside as I know it has been the same on the inside, very good to see. But as you start looking ahead, not just to the fourth quarter but 2011, can you talk about -- you talked a lot about what’s going to happen on the reward side, but from headwinds, can you talk about what you’re seeing there?

Nick Pinchuk

Well, from a headwind point of view, I can’t predict what’s going to happen in Spain. We’ve got a lot of business there. It seems to be bumping along the bottom, so I don’t know when that’s going to recover.

So, in terms of looking at where improvements going to come from, and looking from recovery, I have a question marked myself about Southern Europe.

You can talk about commodity prices, a lot is talked about in terms of commodity, we don’t see for us a major headwinds because we do get commodity prices, but as you know Jim, a lot of our products are not so much material as they are labored, so our increases are not very devastating and plus we generally comprise for recognized commodity increases, so that’s not such a problem for us.

You could say, you can take a look at critical industries and say okay, well, will the military spend as much as they have in the past, maybe they won’t, that could be a headwind that we have to offset some places. Some people are talking about restocking, but for us we see almost none.

So, the 34% we saw in the critical industries in the industrial division in third quarter had almost, and only restocking. I can tell you that we just went through our quarterly reviews here and I don’t think restocking came up at all in a week of discussion.

So, we are not seeing that as a factor, so for us the headwinds are mostly around, what’s going to happen in Southern Europe, could there be some variation and some cooling in critical industries, but we don’t expect a lot. We expect that to continue reasonably good because we’ve seen it for many quarters now, and some of the traditional headwinds for some other businesses like commodities or restocking, we’re not seeing in our future.

Jim Lucas – Janney Montgomery Scott

As then just, as a reminder with regard to that industrial business, what is the rough percentage mix of direct versus distribution there?

Nick Pinchuk

You know, I have to say that about 70-30.

Jim Lucas - Janney Montgomery Scott

Okay.

Aldo Pagliari

Most of its direct. I mean, 70 being direct. So, that’s one of the reasons of course, why you don’t have a lot of people in between you and the end customer, that’s why we don’t see the restocking as much.

Jim Lucas – Janney Montgomery Scott

Great, well, congrats on a very good third quarter.

Nick Pinchuk

Thanks.

Operator

Next one is Gary Prestopino, Barrington Research.

Steven Gregory - Mandalay Research

Yeah, this is actually Steven Gregory from Mandalay Research. A couple of things Nick, this is one of the calls I always looking forward to every quarter, you’re very enthusiastic and do a great job to continued success.

Nick Pinchuk

Thanks.

Steven Gregory - Mandalay Research

Couple of things, about two months ago in the Wall Street journal there was an article written, how 2011 is going to be really – critical for companies to drive more revenue online. Can you provide some color on the call today as, what is your e-commerce vision going forward and how do you plan to drive more revenue through your really good website?

Nick Pinchuk

Well, I think, in terms of our van business, we offered the price – in United States in the traditional tool business that you’ve for Snap-on, I don’t think you’re going to see much revenue in that business because our customers in that van business is about 35% of it, see real added from the up closing and personal delivery of the product.

So, I don’t see that happening there, now I want you to remember that we are about making work easier for professionals in critical tasks. So the online piece of our business, the online delivery does not provide as much opportunity for us, really, you may see some online delivery with some of our distributor activities and that’s more B-to-B in that situation, but that’s really where we, I’d say we limited to.

Our sticks if you will, our value is that, we sell to customers and we convince them, we sell the customers whoa are performing critical path and we convince them that they are going to see real productivity in using our solutions and our product. And that usually requires face-to-face.

Now, after you convince them you can see some kind of structural ordering, but it’s not a big factor in our business.

Steven Gregory - Mandalay Research

So, driving people aside to buy some of your cars, battery packs and stuff like that is not rally, usually an initiative to kind of a status code really?

Nick Pinchuk

It can, but the thing is that we remember when you are talking about a guy, a van driver, he wants to get it right now, he goes out there and his big value is that when he’s talking to the technician and technician say I need it now and we’ve got it right there boom, its off the truck and he has it now. He doesn’t have to wait for delivery.

Steven Gregory - Mandalay Research

Hopefully, on your website, whom are you targeting on your website. I guess why you didn’t have it up, wasn’t it or is there specific…?

Nick Pinchuk

Well, our websites are targeting people who want the order that way, but it’s most around trying to create brand awareness.

Steven Gregory - Mandalay Research

Okay, do you any revenue methods that how much your revenue …?

Nick Pinchuk

It’s a very small percentage of our business.

Steven Gregory - Mandalay Research

Very small.

Nick Pinchuk

I don’t have any metrics.

Steven Gregory - Mandalay Research

Are you guys building Mobile Apps for your – any sight at all?

Nick Pinchuk

You’ve being a little garbled. I didn't hear that, could you say it again please?

Steven Gregory - Mandalay Research

Companies obviously are looking to mobile or social media, are you guys doing anything for mobile or social media to gather more attention in the community, get people more to your site, whether they purchase or not, but to get people more involved with your site? Are you building any Mobile Apps for the iPhone or anything?

Nick Pinchuk

I don’t know, I don’t think [Multiple Speaker].

Aldo Pagliari

We do use some of those features, but they are oriented towards our franchisees. Our effort is to increase the productivity of the franchisees and not so much for the end user technicians.

So, all those you were describing are an excellent tool from an RCI perspective. We also used the web for supplier based activity, but when it comes to end user purchases it’s not the preferred means is to how they conduct the trade.

Steven Gregory - Mandalay Research

Okay.

Nick Pinchuk

One of these, we talked about in terms of productivity for our van and that’s, we’ve identified that as one of our best opportunities is continuous improvement of their computer systems or their IT systems. And in fact we are rolling out a new system in Canada, as we speak and that will be spread out throughout the United States, okay?

Steven Gregory - Mandalay Research

And final question, going forward, for 2011 and beyond. Where would you like to see the company head, if you could picture a perfect world, not like revenue stream or profit? Where would you like to be a couple years from now?

Nick Pinchuk

Well, I think we have said in the call, and I said many times, we see substantial runways for growth, particularly around critical industries, around repair shop owners and managers, and in emerging markets.

We also see opportunities to grow our van business, but those are two, three places. Critical industries, repair shop owners and emerging market, and I see those businesses being a bigger part of our company. We are going to continue to pursue roll down those runways, because in the third quarter, I think is abundant evidence that those runaways are clearing for us.

Now we have said, I think that moving forward, after the recession recovers, after we recover the recession, after recession recovery goes away, we believe we can register between 4% and 6% organic growth consistently and we believe we can drive towards strong mid-teen OI margins.

And we believe that we will get that through organic growth and then also in those critical runaways we can find both on acquisition, so I see as pursuing that moving forward.

Operator

Thank you. Moving on, we hear from David Leiker, Robert W. Baird.

David Leiker – Robert W. Baird

Hi, good morning. How are you all?

Nick Pinchuk

David.

David Leiker – Robert W. Baird

I just want to follow-up on a couple of things, here. The organic growth number here is 13%. You answered one of my questions, how much you think there's restocking there. But how much do you think is pent up demand is part of that as opposed to the market growing or market share gains?

Nick Pinchuk

It’s always a tough question, but look I’ll say this, it’s pretty clear, we’re growing market share with van. It’s pretty clear, it’s clear that we are growing share in industrial with critical industries, 34% is gaining buster’s number.

I can’t tell you how much but we are seeing that expansion. And it’s on top of, if you go back previous session, we were growing strong, double-digit in a moderate economy in that areas, so I think this is just extension of that.

Of course we are growing share in emerging markets, and I think one of the places where our people on the ground say we are expanding, is in Europe. Europe was up double-digits even though is in fact to ’08 levels, everybody, a lot of people are saying they are up in Europe, but what we see in Europe is the customers aren’t going way, but the smaller player seem to be contracting.

So, our people on the ground in Europe say we are gaining share even there. I can’t part between, I can’t tell you which part of that is, is market share –it’s share increase and return, but if you look at things like, if you look at places like equipment and the critical industries, equipments up strong double-digits almost 20%, over 20% critical industries are up 30%. You see Europe up double-digit, I think if you look at the economies there locally you are not going to see anything like that number, you have to conclude we are gaining shares in those areas of the significant amount.

David Leiker – Robert W. Baird

On a longer term basis, you said you’ve got organic growth of 4% to 6% and your running 13%. You get to that normalized rate, do you think that's two quarters out, four quarters out, how would you characterize the progression to that number?

Nick Pinchuk

Well, I would simple say this, it think if you look at this we are going to keep growing at strong double-digits in Asia-Pacific. We’re going, I think we’re backed the pre-prices levels in the van business, so I don’t know what should expect. We are back the pre-crisis levels.

We are starting to get the pre-crisis levels in our critical industries, were by the way we are growing at double-digit and Europe is the wildcard David, because I don’t, I can predict how that’s going to come back, that’s got a long way to come back to 2008. I really can’t say were we’re going to get back the stabilize numbers.

David Leiker – Robert W. Baird

And then on the critical industry side, where would you say you are in your game plan in terms of penetrating those end markets of having a presence and a product for those markets? Do you think it's pretty much where you want and now it's like a share opportunity or do you think there's still some market opportunities there?

Nick Pinchuk

Can you say that again, I am getting, I’m must have some bad connection, because I didn’t get, did you say about emerging markets?

David Leiker – Robert W. Baird

No, in the critical industries, where you think you are in terms of penetrating that in terms of having that right product in the right markets presences versus still having opportunities to broaden your exposure on this?

Nick Pinchuk

Yes, okay. Based on where we started, based on the opportunity that I see, based on the, I think, the incidence of people coming to me with both product and customer opportunities, it’s the end game of a 10, I would we’re at 2.5.

David Leiker – Robert W Baird

Okay. And the last item on that is who do you think you’re gaining share from in those critical industries?

Nick Pinchuk

Well, I think there’s a number of people, I mean, there’s a number of people. Certainly we have our big competitors like Armstrong and Proto in the United States. In Europe, you have Gador, you have Sanville you have Usag and those are the broad tool manufactures and then you have some specific people that do like pliers and other things, of smaller products like Nepex in Europe.

So I’d say we’re gaining from a collective group. We can’t offer a wider range of products than anybody else David. So, when we sell a kit to an aerospace company or we sell a kit to the military, we’re usually displacing a number of different competitors.

When we sell to Shanghai Airlines, we maybe replacing a German competitor or Japanese competitor and a Chinese competitor at the same time. So it’s a mix.

David Leiker – Robert W Baird

Okay. Thank you very much, and have a great quarter.

Nick Pinchuk

Sure. Thank you.

Operator

(Operator Instructions) We’ll now move to David Manger, Morningstar.

Nick Pinchuk

Hello.

Leslie Kratcoski

We go to the next person in the queue please.

Operator

Thank you. We’ll next move to Gary Prestopino, Barrington Research

.

Gary Prestopino - Barrington Research

Hi, good morning.

Nick Pinchuk

Hi, Gary.

Gary Prestopino – Barrington Research

Can you hear me?

Nick Pinchuk

Yes.

Gary Prestopino – Barrington Research

Hey Aldo, I try to ask a question before I got cut-off. What did you say was the goal with the portfolio by the end of Q4? Did you give a number there?

Aldo Pagliari

I did actually. I mean, we said, consistently we expected from the beginning of this year to add about $300 million for the overall portfolio. So, if you do the mathematics, we should end up at about $565 million to $570 million by year end is our projection for the Snap-on Credit portfolio.

Gary Prestopino – Barrington Research

That’s US, right?

Aldo Pagliari

That’s correct.

Gary Prestopino – Barrington Research

Okay. Alright, and then the ultimate goal with the overall portfolio to get it, or maybe I’m wrong, is the US ultimate goal to get to about 700?

Nick Pinchuk

I think more closely Gary to about $750 million or so. Historically if you look at the combined portfolio they exceed over $800 million in the half or sometime. As I’ve said before in our investor meeting, is that we probably do a little bit less van leasing going forward, there are other sources of funding for our credit strategies on that dimension on a very competitive, we have no problem with them using those.

But we look at our extended credit portfolio and our leasing of equipment portfolio with that in there, I think we see of about 750ish and again internationally, again we expect at least $130 million and we look to the future to see if this opportunity to grow that, but I’d like to at a combined portfolio of about $900 million, $880, $900 million right now in the terms of a future state.

Gary Prestopino – Barrington Research

Okay. And then in terms of some of these growth markets like critical industries and the emerging markets, could you maybe size each of these markets on a worldwide basis as you see it? And then maybe give us some idea of what the revenues are in each of these markets currently?

Nick Pinchuk

Well. Sure, I think I’ve said, it’s very difficult to size the market state for critical industries because it’s so vertical and there are so many different aspects of it and what products do you include in it. But I would say for example that, we’ve said that, that business has the clear potential to be as big as our tools group, that business alone and today that business is somewhere between lets say $350 million to $400 million.

But, we think that’s relative to where we are now that’s quite unbounded. And emerging markets its anybody guess, but Gary they are going to sell more cars in China this year than United States and I think that place out in terms of airframe and then full other things in power plants and so on.

And so when you see our opportunities there and realizing that the repair market hasn’t started yet, because there is 300 million vehicles on the road and there are 45% over 10 years old now and in China even though they’re pound in a lot of vehicles into the park right now. There is still only 15 million on the road and they are all new, you can see the China market alone being as big as in the US market and therefore being kind of the size of the van business again. Again there are various difficult - -

Gary Prestopino – Barrington Research

Emerging markets, I mean you kind of gave a range of 5% to 10% of revenues?

Nick Pinchuk

Yes.

Gary Prestopino – Barrington Research

That we are ..

Nick Pinchuk

Yes. That’s were we are today, yep.

Gary Prestopino – Barrington Research

So if you dial back a year or two years ago where were you was as a percentage of revenues?

Nick Pinchuk

I don’t know that number, but it’s been growing dramatically, on a small base. So I really don’t have that, it was quite a bit small, I have just said that, I think you and I have spoken about this is that, if you go back to 2004 let’s say are those kind of years we hardly sold anything in Asia, we got ten people in two offices, so it’s really - -

Gary Prestopino – Barrington Research

So is your main competition and say place like China is that like a domestic manufacture - -

Nick Pinchuk

It depends on the industry if you tend to, it depends on the particular product in the industry, but let’s say for example, it can be some times there can be imported product for or some times for lets say Shanghai Airlines, your competition will be imported, but for let say the Volkswagen OVM dealership, it will be primarily local.

And it’s a galaxy of competitors, the thing about China and India and all emerging markets, they’re generally fragmented, that’s why we like the opportunity actually.

Gary Prestopino – Barrington Research

Thank you.

Nick Pinchuk

Sure

Operator

And at this time there are no further questions. I’d like to turn the conference back to Leslie Kratcoski for any additional or closing remarks.

Leslie Kratcoski

I’d just like to say, we appreciate you interest in Snap-on. A reply of the call will be available on snapon.com and we thank you for joining us today.

Operator

And that does conclude today’s conference. Thank you all for your participation.

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