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Snap-on Inc. (NYSE:SNA)

Q4 2010 Earnings Call Transcript

February 3, 2011 10:00 am ET

Executives

Leslie Kratcoski – VP-IR

Nick Pinchuk – CEO

Aldo Pagliari – CFO

Analysts

Jim Lucas – Janney Montgomery Scott

David Leiker – Robert W. Baird

Dax Vlassis – Gates Capital Management

Alex Guestio [ph] – Barrington Research

Operator

Good day ladies and gentlemen and welcome to the Snap-on Incorporated 2010 Fourth Quarter and Full Year Results Conference. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks we will conduct a question-and-answer session. (Operator Instructions) And please note that today’s program is being recorded.

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

Leslie Kratcoski

Thanks Lisa and good morning everyone. Thank you for joining us today to review Snap-on’s fourth 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 kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we’ll take your questions.

As usual, we have provided slides to supplement our discussion. You can find a copy of these slides on 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 everyone. As we look at our fourth quarter, we’re once again encouraged both by our financial performance and by our advancements in the areas we’ve identified as being of strategic importance.

Overall volumes in the quarter were up 13.6% and the gains were widely spread across customer basis, across operating units, and across geographies. Operating earnings rose nearly 44% and the overall margin of 13.5% increased 270 basis points from last year powered by expansion in the operating company as well as by the ramp up in our financial services profitability. Excluding the financial services operation, the 12.6% operating margin was up well over the 11.5% registered in 2009.

Importantly, I think the results confirm continuing progress and the building momentum. It was the fourth consecutive quarter of year-over-year sales increases and these results represent the largest of those gains.

Also, the operating margins were the highest of the years defining a bright line of progress throughout 2010. I believe it’s clear that Snap-on closed out 2010 in a much stronger position than when we entered the year.

Of course there was improvement in the overall global economic environment and we’ve taken advantage. But we’ve also strengthen our tactical execution driven by our commitment to the Snap-on value creation processes, rapid continuous improvement or RCIs we call it, innovation, customer connection, quality and safety. They continue to drive improvement and the good news is that there’s much more to gain, there is much more to go.

Beyond that, we’ve achieved a much more progress in those focused areas that we believe will be strategically decisive for our future, enhancing our franchisee network, expanding the company’s presence with repair shop owners and managers, rolling the Snap-on brand out of the garage, extending into other mission critical areas or arenas, and building our physical capabilities in emerging market. We’re making progress in each of those areas.

Now, let me for a moment, touch on what we’re seeing in the economy in the related sales activity. It’s actually somewhat refreshing and a more straight-forward discussion than we had in 2009, most trends are in fact positive.

Those areas that already demonstrated signs of recovery continue to show progress. Take for example, the tools group serving professional automotive technicians, that business return to pre-downturn levels in the third quarter and the recovery was confirmed again in the fourth quarter.

As part of the trend, activity in big ticket items remained strong. These are longer payback products like handheld diagnostic units and under car equipment or more discretionary items like tool storage units. We watch those particular sales trends because they, we believe there are reasonably accurate parameter for our customer’s financial health and of their confidence.

The strength in those big ticket products was across the aboard with diagnostics and tool storage units driving increased sales to the tools group and undercar equipment especially high value aligners bolstering sales in the repair systems and information group which serves vehicle repair shop owners and managers.

I think we can say, the trends here were consistently encouraging throughout 2010. Each quarter had a year-over-year gains in all three big ticket categories and the fourth quarter ride outpaced our overall sales increase.

We also continue to register recovered activity in the industrial business with professional users and critical industries all across the globe. And beyond that, emerging markets just continue to be robust and the fourth quarter was no exception.

So the areas I just discussed were a continuation of the positive trend we saw in the earlier period. But we also saw some additional favorable signs in the spaces that have been slower to recover. For example, our businesses that are tied to automotive OEM dealerships, although, the North American dealership base continues to contract and it’s an ongoing challenge, we did see some considerable increases relating to essential tool distributions in both North America and Europe.

In the fourth quarter, we’ve registered some gains as those customers became more willing to commit. In Europe, in area of mixed economies overall, we did see our strongest year-over-year increase in the fourth quarter, solid double-digit.

I already mentioned, the continuing strength in under car equipment in the region, but we also saw strong comparisons in Northern and Central countries of Europe like Sweden and Germany and favorability in the at Eastern emerging economies where we’ve added additional presence in Belarus and recently ramped our production in the (inaudible) facility.

So there are real positives in Europe, but the South especially Spain hasn’t changed. It’s still weak, and that’s a market which is significant for us, it’s a significant market for Snap-on. So overall, we registered an encouraging quarter and that was encouraging while still fighting the headwinds generated by our major markets in the South of Europe and by the consolidation of the OEM dealership space.

Now, I’ll provide some highlights for each of the segments and mention some of the progress we made on our strategic areas of focus. Commercial and Industrial or C&I posted a volume increase from 2009 of 15.4%. The operating earnings were up over $18 million recovering smartly to 12.6% of sales from the 6.8% registered last year. We’re gaining in C&I and we’re also seeing the benefits or gaining position in C&I and we’re also seeing the benefits from RCI and from restructuring actions.

Speaking of RCI, one of the real highlights in the quarter was a recognition of our power to plant in Murphy, North Carolina as one of North America’s 10 best (inaudible) it’s an annual competition conducted by industry week magazine with which Snap-on has some experience. Our Milwaukee hand tool plants was a plant was the finalist last year.

Excellence in manufacturing has sort out and evaluated and the judges like what they saw in Snap-on Murphy. Industry weakened in their comments highlighted the breadth and depth of the RCI culture at Murphy as a key driver in that plant excellence. Endorsements like that only come from hard work and dedication. So I can congratulate and I thank the associate that our Murphy facility for the success.

The C&I segment is also where we see clear runway for growth and leveraging our powerful brand to further penetrate market outside of automotive repair. Snap-on progress in serving new customers in critical industries is quite evident in our industrial businesses with auto performance. Sales were up there about 17% from last year with particular strength in international market and that capped up a gain of over 20% for the full year.

That progress was driven by both an increasingly clear customer focus and also by innovative new products specifically aimed at solutions for those particular segments. Products such as the large tools for mining, tether tools for working at heights in aerospace and energy industries and products with advanced technology, like the automotive tool control unit or ATC for the aviation industry. You might remember that I mentioned the launch of ATC last quarter and reception since has been enthusiastic.

Beyond that, we also established important partnerships with technical schools focused on automotive, aviation, and alternative energy. We are putting Snap-on in at the ground floor careers for techs in those critical industries with (inaudible) payoff and make them Snap-on customers for life. All of those, all of those products help drive our improved and growing position in this strategic arena.

Also on in the C&I group is where we have our Asian and emerging market businesses. We’ve spent the past few years building physicals in those geographies. During 2010, we expanded plans and launched new products designed specifically for those markets.

From automotive handheld diagnostics to professional brand of hand tools, we are building the physicals primarily to serve in the local markets, but they are powered by Snap-on technology and expertise that reflect our history and legacy of innovation and productivity, and that gives us an advantage in those fragmented but growing markets.

We can particularly see that growth in China and India and increases continued at a rapid pace in both those markets. I believe when you think of emerging markets, it’s worth noting that the repair cycle is just getting started in those economies and there is much more opportunity for Snap-on in that arena.

Overall in the quarter and throughout 2010, the advance in C&I were marked by solid volume gains and improved profitability all throughout the group and we see those businesses clearly moving forward along an extended runway for growth.

Moving on to the tools group where we serve professional or automotive technicians, as I said it’s back above pre-recession levels. Big ticket activity is strong, the overall year-over-year fourth quarter volume gain of 12.8% was led by the U.S., the operating margin was 9.6% and it offers a bit of a complicated comparison because of non-comparable items both in 2009 and 2010.

As I will provide some more detailed analysis, I’ll just highlight that we’re reportedly structuring in the fourth quarter in the tools group of $4.6 million, absent that charge the tools group margin of 11.3% is in inline with the full year result and includes our focus support to successfully maintain the strength of our franchising network.

I do believe that the relatively modest decline in the tools group volume during 2009 and then having it to be among first to recover is a testimony to the strength of our franchisee. We recognized that advantage as we went into the turbulence. We were committed to maintaining and supporting the network through the difficulties and by all accounts, it worked.

The key indicators of franchisee are quite positive, turnover has been reduced. Cash collections are strong and delinquencies are at low level. The advantage that is to the Snap-on franchisee network remains robust.

I already spoke about big ticket strength. If you regain early on, we said that these categories would lead us out of the downturn and they have. And as I meet with the franchisees their outlook is upbeat. We have record attendance at our annual conference earlier in the year. Over 2000 franchisees made additional commitments to attend, refined field training program and as I meet with them, they are quite excited about our new award winning products.

Some of those are high tech innovations like the VERDICT, like the VERDICT handheld diagnostic unit and some are just great designs that demonstrate connection with our customers like low profile ratchets, all in one wire stripper, crimpers, and cutters with a compact clutch version of the cordless CT561 impact wrench.

These three items and many others all have one thing in common, they make work easier for technicians operating in an ever changing and ever increasingly tight space and they help create the tools group recovery. Aldo will talk in some detail about the results of the financial services segment, but I’ll only say that we believe our in-house financing capabilities are a unique advantage. It’s a special Snap-on feature that makes our franchising network stronger.

Bringing Snap-on credit home after we ended the joint venture with CIT has been a smooth transition. No interruption to our franchisees or to our end customers. We were confident we could execute on integrating the credit company and we did just that.

As evidence of that successful integration the financial services operations is demonstrating the same strong profitability ramp up as we always expected. Snap-on credit has been a strategic strength, it’s now becoming a significant profit contributor and we believe it’s only going to get better.

Now for some discussion on repair systems and information or the RS&I group. Fourth quarter organic sales were up 16.8% and the operating margin was 19.7%, both representing substantial improvements from last year.

I already mentioned the big movers, undercar equipment continued its fourth quarter trend of double digit year-over-year increases with gain positioned in that arena around the world.

We’ve also increased facilitation in essential tools activity through equipment solutions or EQS. The vehicle manufacturers are gaining more confidence as we go forward investing in service and were playing our part.

We continue to invest in RS&I because we see the opportunity to make strategic gains with repair shop owners and managers and to expand our presence within shops of varying types. For example, the RS&I group is expanding in medium and heavy duty truck repair growing with investments in that segment.

Growing with and we’re investing in truck repair information, essential diagnostic tools for diesel engines, and diagnostics for products aimed particularly at fleets. Truck is an area that’s a natural fit for Snap-on and we are on the upswing. During the fourth quarter that progress was rewarded when Snap-on product was used by the American Trucking Association as the repair information source for their SuperTech competition. It’s a great opportunity to further introduce our product to fleet customers and was a fine endorsement of Snap-on for the heavy truck segment.

Also during the year Mitchell1 our business that provides shop and repair information launched new shop management software with expanded and integrated parts capabilities. The new offerings will make work easier for the shops and it’s helping strengthen Mitchell1’s already substantial repair shop position.

I’ll just wrap up the odds in my discussion with the final word about innovation. Snap-on received significant attention and recognition for new products in the last year. One is the Quadriga, a fully automated tire changer, recently was the recipient of an Innovation Award from the Professional Tool and Equipment news. Snap-on’s cutting edge 3D imaging technology along with Pro-42 software around the liners is leading to gain to that important aligner segment, a crucial segment for the equipment business.

We have new wheel balancing technology, technology that laser maps tire wear and helps predict tire replacement needs. It’s the first of its kind in the industry. Of course, as we have mentioned before we have the fully functional VERDICT diagnostic hand held unit, it set a new standard with Wi-Fi access, integration of Mitchell1 repair information and a wireless touch screen, all in the technician’s hand that allows remote use by the technician from anywhere in the shop.

These are productivity enhancing tools. They are also attractive, quite attractive to shop owners and managers and they are helping Snap-on expand its position with that important customer base and they were in the fourth quarter a big contributor to the fourth quarter and the full year RS&I achievement.

So I think you can say, our fourth quarter was a further in of the positive trend we see now for several periods. Organic sales were up over 13%, operating income up over 40%, and this was against the headwinds generated by the continued weakness in southern Europe and the OEM dealership consolidation.

Overall, we are encouraged by the results. And by what they say about the clear runway for growth we have going forward. Now I’ll turn the call over to Aldo for the financial review, then I’ll make a few closing comments. Aldo?

Aldo Pagliari

Thanks Nick. Our consolidated operating results are summarized on slide 6. Net sales in the fourth quarter of $697 million increased 12.7% year-over-year. Excluding currency translation, organic sales increased $83 million or 13.6%.

The primary drivers behind the year-over-year sales increase include double-digit sales growth across many of our businesses including sales to franchisees in the United States, customers in critical industries and emerging markets, an increased facilitation program activities with automotive OEM dealerships including higher sales of essential tools.

Sales of under car equipment to repair facilities were also up significantly, driven by imaging alignment product sales gains across all major geographies. While continuing to be impacted by challenging economic conditions throughout Southern Europe, sales in our European based hand-tool business also experienced year-over-year increases, particularly in Northern Europe.

Consolidated gross profit of $319 million in the quarter increased $34.1 million from 2009 levels, driven by higher sales, favorable manufacturing utilization, and savings from ongoing rapid continuous improvement in our RCI initiatives and restructuring actions.

These gross profit increases were partially offset by $6.5 million, of lower year-over-year LIFO related inventory evaluation benefits. The higher LIFO benefits in 2009, resulted from inventory reductions including the liquidation of slow moving and excess inventories as we adjusted production response to the weakened demand during the economic down turn. As a result, consolidated gross margin of 45.7% in the quarter decreased 30 basis points from 46% last year.

Operating expenses in the quarter of $231 million increased approximately $18 million from the prior year primarily due to higher volume related and other expenses, including $4.1 million of higher U.S. pension expense, largely due to the amortization of investment losses incurred in 2008 related to our domestic pension plan assets.

Operating expenses were also impacted by $3.8 million of higher year-over-year performance based incentive compensation expense and $1.7 million of higher stock based mark-to-market expense.

These operating expense increases were partially offset by $4.9 million of lower bad debt expense, $2.5 million of benefits from ongoing RCI and restructuring initiatives and $1.6 million of favorable currency effects.

As a percent of sales, operating expenses of 33.1% in the quarter improved 140 basis points from 34.5% last year. Restructuring cost in the fourth quarter of 2010 of $5.8 compared to $6.7 million last year. Restructuring cost in 2010 include initial cost to consolidate our North American tool storage operations. For the full year, restructuring charges of $14.2 million in 2010 compared to $22 million incurred last year.

Financial services operating earnings of $9.4 million in the quarter improved $13.2 million from the fourth quarter 2009 loss of $3.8 million. On a sequential basis financial services operating earnings improved $4.4 million from third quarter 2010 levels.

As evidenced by the continued quarter-over-quarter improvements in the sequential operating performance, we expect that operating earnings from financial services will continue to improve as the on-book finance portfolio grows. We’ll cover financial services in more detail in a few minutes.

Interest expense of $14 million in the fourth quarter decreased slightly from 2009 levels, reflecting lower average debt levels partially offset by higher average interest rates. In December, we issued $250 million of 4.25% 7-year senior notes. The proceeds from these notes are being used for general corporate purposes which may include the funding of Snap-on credits on-balance sheet finance portfolio and the August 2011 repayment of $200 million of debt upon its maturity.

Incremental interest expense in the fourth quarter related to these notes was about $600,000. Going forward, interest expense associated with these new notes will approximate $2.7 million per quarter or about $0.03.

Our fourth quarter 2010 effective income tax rate of 30.1% compares favorably to 31.4% in the fourth quarter of last year. As noted in our earnings release, the fourth quarter 2010 effective income tax rate benefited primarily from non recurring tax items including the late December extension of certain Federal tax incentives.

Finally net earnings in the quarter of $57.9 million and $0.99 per diluted share including $0.06 from the non recurring tax items increased $21.3 million or $0.36 per diluted share from fourth quarter 2009 levels.

With that let’s now turn to our segment results. Starting with the C&I Group on slide 7, fourth quarter sales of $282 million improved 14.5% from fourth quarter 2009 levels. Excluding currency translation, organic sales increased more than 15%. The year-over-year sales increase was again driven by higher sales across all operating units particularly by our business serving customers in critical industries and emerging markets.

Gross profit in the C&I segment of $108 million in the quarter increased 28.4% from 2009 levels. This $24 million gross profit increase is primarily due to higher sales, $4.8 million of lower restructuring cost, and $3.1 million of savings from ongoing RCI and restructuring initiatives.

The gross profit comparison also benefited from improving manufacturing utilization primarily in Europe, as a result of increased production levels. Gross margin of 38.4% improved 420 basis points from 34.2% last year, including 200 basis points from the lower restructuring cost.

Operating expenses in the quarter of $72.6 million increased $5.3 million from 2009 levels, primarily due to a higher volume related and other expenses. As a percentage of sales, operating expenses improved by 160 basis points year-over-year.

Operating earnings of $35.4 million for the C&I segment in the fourth quarter of 2010 increased $18.6 million or more than double from 2009 levels. As a percentage of sales, operating margin in the C&I segment of 12.6% in the quarter improved 580 basis points from 6.8% last year.

Turning now to slide 8. On a worldwide basis, fourth quarter organic sales in the Snap-on tools group increased 12.8% year-over-year, including a 15.2% increase in the United States and a 6.7% increase in our international franchise operations. Fourth quarter gross profit in the Snap-on tools group was a $107 million in both years.

Gross profit contributions in 2010 from higher sales were more than offset by $6.5 million of lower year-over-year LIFO related inventory benefits and $4.6 million of higher restructuring cost.

As mentioned earlier, the higher level of LIFO benefits in 2009 resulted from inventory reductions, including the liquidation of slow moving and excess inventories as we adjusted production response to the weakened demand.

Gross margin in the Snap-on tools group was 40% in the fourth quarter of 2010 as compared to 45.3% last year, including a 440 basis point reduction from the year-over-year LIFO impacts and the higher restructuring cost.

Operating expenses of $81.4 million in the quarter increased $7.1 million from 2009 levels primarily due to a higher volume related and other expenses. As a percentage of sales, operating expenses of 30.4% improved 90 basis points from 31.3% last year.

Including the impacts of lower LIFO related inventory evaluation benefits and higher restructuring cost, fourth quarter operating earnings for Snap-on tools was $25.8 million or 9.6% of sales compared to $33.1 million or 14% of sales last year. After adjusting for LIFO and restructuring in both years, operating income as a percentage of sales was comparable in both years.

Turning to Repair Systems and Information, our RS&I segment, shown on slide 9, fourth quarter sales of $232 million increased $30 million or 14.9% year-over-year. Excluding currency translation, sales increased 16.8% led by greater sales of under car equipment in both the Americas and Europe, higher sales of diagnostic and Mitchell1 information products and increased activity with automotive OEM dealerships primarily due to increased essential tool and facilitation program sales.

Gross profit of a $103 million in the quarter increased $10.4 million or 11.2% from 2009 levels, primarily due to higher sales and contributions from favorable manufacturing utilization as a result of increased production levels.

As a percentage of sales, gross margin of 44.6% in the quarter decreased a 140 basis points from 46% last year. This is primarily due to a shift in sales mix that include a greater sales of lower margin essential tool and facilitation program sales by OEM dealerships.

Operating expenses of $57.6 million in the quarter decreased slightly from 2009 levels as higher volume related product development and other cost were more than offset by $3.6 million of lower bad debt expense and $2.2 million of savings from ongoing RC&I restructuring initiatives.

Operating earnings of $45.7 million in the quarter for the RS&I segment increased $10.7 million or 30.6% from 2009 levels. As a percentage of sales, operating margins in the quarter of 19.7% improved 240 basis points from 17.3% last year.

Now, turning to slide 10, financial services’ operating earnings of $9.4 million in the fourth quarter, compares favorably to both third quarter 2010 earnings of $5 million and to the fourth quarter 2009 loss of $3.8 million.

The $13.2 million year-over-year increase in operating earnings primarily reflects the higher revenue contributions from Snap-on Credits growing on-book finance portfolio. Originations in the quarter increased 7.5% compared to the prior year.

Moving to slide 11, as of 2010 year end, our balance sheet includes gross financing receivables of $592 million from our U.S. Snap-on Credit operation and $141 million from our international finance subsidiaries, for a total financing portfolio of $733 million.

In the United States, $491 million or 83% of the Snap-on Credit portfolio relates to extended credit loans to technicians. Snap-on Credit also continues to manage the run-off portfolio of contracts owned by CIT, which totaled $260 million at year end and which is down $57 million from third quarter 2010 levels and down $330 million from year end 2009 levels.

For the full year, the on-book financing portfolio at Snap-on Credit grew about $325 million. Regarding finance portfolio losses and delinquency trends, these continue to be in line with our expectations.

Now, turning to slide 12. Consolidated operating cash flow of $64.3 million for the quarter and a $140.4 million for the year includes the effect of a $48 million discretionary cash contribution to our U.S. pension plans.

Operating cash flow for the full year was also impacted by a $112 million of higher levels of trade and other receivables and inventories as a result of increased sales and customer demand.

Our yearend cash position of $572 million increased $212 million from third quarter 2010 levels, primarily due to the proceeds from the December note issuance and cash flow from operations. These cash increases were partially offset by the funding of new loans originated by Snap-on Credit and capital expenditures.

As a result, free cash flow from the operating company was $25.8 million for the fourth quarter and $91.1 million for the full year. As anticipated, free cash flow from financial services was negative in 2010 as a result of funding new loan origination. We expect that the impact of loan origination on free cash flow were lessened over time once the on-book portfolio stabilizes.

Capital expenditures of $28 million in the quarter and $51 million for the full year included the continued expansion of our manufacturing capabilities in lower cost regions and emerging markets. Investments have focused on increased efficiency and cost reduction and improvements at our Kenosha, Wisconsin R&D facilities and headquarters.

As seen on slide 13, working capital metrics improved year-over-year. Day-sales outstanding for trade receivables of 61 days at 2010 year end improved from 63 days last year. On a trailing 12 month basis, inventory turns at 2010 year end of 4.7 times improved considerably from 4.1 times last year.

Net debt at the end of the quarter was $590.6 million [ph]. Our net debt to cap ratio of 30.1% compares to 22.2% last year and 29.2% at the end of the third quarter reflecting the $250 million December note issuance. Excluding the $107.8 million withheld for the previously disclosed dispute with CIT, our year end net debt to cap ratio would have been 33.7%.

In addition to our $572 million in cash and our cash flows from operations, we continue to maintain a $500 million revolving credit facility, a $100 million asset backed securitization facility, and $20 million of committed bank loans. 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. As of 2010 year end, no amounts were outstanding under any of these facilities.

This concludes my remarks on our fourth quarter performance. Before turning the call back to Nick to provide his final thoughts, I’d like to mention some considerations for our 2011 outlook as covered in our press release.

In 2011, we expect to incur $11 million of higher year-over-year pension expense largely due to the amortization of investment losses incurred 2008 related to our U.S. pension plan assets.

Capital expenditures in 2011 are anticipated to be in the range of $55 million to $65 million and we anticipate a full year effective income tax rate of approximately 33%. And as discussed earlier, interest expense on our fourth quarter debt issuance were approximately $2.7 million or $0.03 per diluted share per quarter.

With that, I’ll now turn it back over to Nick.

Nick Pinchuk

Thanks Aldo. We believe, the message of our fourth quarter is threefold. First, the Snap-on value creation processes are continuing to drive improvement. We saw the results in our new product, and our profits, and achievements like the Murphy factoring being named in the top 2010 and our successful integration of the credit company. And we believe, there is a long road of progress still to be traveled.

Secondly, many of our businesses have recovered returning to pre-recession levels, at the same time we do have selected areas, particularly Southern Europe in the OEM dealership segment that have some way to go.

Finally, we see in the results that our runways for growth are clear, we grew substantially in the quarter while still facing the headwinds of Spain and the rest of Southern Europe in the OEM dealership segment. Those increases were driven by decisive strategic gains enhancing our franchise network, expanding with shop owners, extending to critical industries, and building an emerging market and we can see further and expansive opportunities in each of those areas.

Overall, I think you’ll remember, we said entering the recession that we would navigate the difficulties and emerge stronger than before. We believe, the fourth quarter results continuing the trend defined to 2010 are evidence that we did just that. But most importantly, those result indicate that we are positioned quite well, Snap-on is positioned quite well to capitalize on the abundant opportunities for growth that stretch out before us.

Now, before I turn the call over to the operator I want to finish by thanking our associates and our franchisees. I know many of you’re listening. The fourth quarter and the full year results were only possible because of your efforts on behalf of Snap-on and because of your commitment to our team. For all of that, for your continuing support of our company you have my congratulations and you have my thanks.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question from Jim Lucas, Janney Montgomery Scott.

Jim Lucas – Janney Montgomery Scott

Thanks. Good morning all.

Nick Pinchuk

Good morning.

Jim Lucas – Janney Montgomery Scott

Couple of questions here. First, for 2010 what did the geographic mix look like at the end of the year, in particular how much did the emerging markets grow in terms of the overall percentage?

Nick Pinchuk

Well, I think we said emerging – it’s I think we said 59% is the U.S., about 26% in Europe. Emerging markets is between 5% and 10% in that regard. The emerging markets we generally say is growing faster than GDP. We saw pretty good growth in India particularly in the fourth quarter and the third quarter of this year, we starting to see our business in India pickup quite a bit. I don’t know if we foresaw that so much when we entered the year.

Jim Lucas – Janney Montgomery Scott

So, out of curiosity, since you call that out, what is driving the India growth?

Nick Pinchuk

Jim, I think it’s the new equipment product. We started out taking equipment focused on China market and launching a mid tier, you might remember we talked a bit about that in the beginning, the early penetration of China was around, I don’t want to say skimming but around the top of the line products in the best garages and then we got some experience and then we came out with a mid-tier line of aligners and balancers and tire changers. When we introduced that in India, it took off quite smartly.

Jim Lucas – Janney Montgomery Scott

Okay, so just to clarify the emerging markets in terms of the overall percentage it’s still in the 5% to 10%, you are saying faster growth, but…

Nick Pinchuk

Yes, I mean it’s off a small bit, I mean I think actually a lot of people have observed, I found some others have observed, I think you could observe with us and I think I said in my remarks, we are early in the cycle, this repair cycle. Industrial companies around the country I think are up around 20% or 25%.

What you see from us is a situation where the repair cycle hasn’t started yet. You know the story, 300 million cars in United States and are all – 45% are over 10 years old, 70 million in China and they are all new. So we haven’t actually seen our business as a broad fit, as an industry really grab hold yet. And that applies not only to automotive repair but also to aerospace and a number of different things.

Repair cycle is just starting, we are building to get there and I think we have quite a bit of opportunity and you can see that, just if you compare to other industrial companies, how they are represented in China and other places in the emerging markets.

Jim Lucas – Janney Montgomery Scott

Absolutely and on RS&I, what impact does mix have on the margins there, just trying to understand what those new segment, what the margin profile should look like going forward?

Nick Pinchuk

Well, I think you are seeing the margin profile now, what happened is that you get some headwinds when the OEM facilitation business starts building and that happened in this quarter, it had been under represented in prior quarters. When the OEM manufacturers start having this central tool distributions those were lower margins, more than 10 points lower at a gross margin level.

I think what you are seeing now is a good base to model going forward. I don’t think you are going to see a big mix change, because I think the facilitation business is now reasonably represented as a mixed piece.

Jim Lucas – Janney Montgomery Scott

Okay, that’s helpful. On the tools group Aldo, do we – is the LIFO comps kind of worked their way out at this point, so 2011 more apple-to-apples.

Aldo Pagliari

Jim that’s a good characterization. Certainly as inventory build there will be some impact of LIFO but you won’t have that year-over-year noise that you had in the fourth quarter of this year. So, yes you characterized it correctly.

Jim Lucas – Janney Montgomery Scott

Okay and final one for me on the credit business, first expected a contribution from a cash basis this year and secondly any update CIT disputes?

Aldo Pagliari

First half, we expect that the portfolio grows, yes you’ll see sequential improvement as we have seen consistently over the last quarter since the termination of the joint venture back in July of ’09. So we don’t provide the exact guidance on what that buildup will be, but you will see, we expect there will be incremental improvements in each quarter as we go forward.

With respect to CIT really there is no further update of consequence, so we have a meeting scheduled with an arbitrator in the second quarter of this year, we are hoping that the matter will be fully resolved by that point in time, but really nothing much else to say in that matter.

Jim Lucas – Janney Montgomery Scott

Great, thank you.

Operator

Our next question today will come from David Leiker, Robert W. Baird.

Nick Pinchuk

Hi David.

David Leiker – Robert W. Baird

Although as we look forward on the growth profit line with the LIFO, are we through the point now that on a go forward basis we are not going to see LIFO benefits flow through the income statement anywhere?

Aldo Pagliari

I don’t believe we will see LIFO benefits David. I would expect as the economy is continuing to recover and we continue to grow inventories will pick up appropriately. So, and with that if anything you’ll have some LIFO expense creep into the financials, but not the benefits.

David Leiker – Robert W. Baird

How big do you think those expenses might end up running, do you have any thoughts?

Aldo Pagliari

I don’t know, I don’t think they are being significant.

David Leiker – Robert W. Baird

Okay. And then as we look at the organic performance across the businesses, tools business and diagnostics, both have seen an acceleration and that’s relative to what we saw in the prior quarters. Is that something that we’re seeing some real strong underlying growth there accelerate or there is something else going on?

Nick Pinchuk

Well I think the tools, actually the tools business looks fairly strong. It’s hard to say, I think we are seeing some real positives there. I think I said in the last call, everybody says they are gaining share. I think we feel quite confident that we are improving our position with technicians in the tools group.

I think you are seeing technicians themselves become a little bit more, they are a little bit confident of their future and not necessarily, it’s not necessarily pin up demand, it’s just they are going back business as usual in terms of buying.

When you – we just had to kick off David and the kick off events were I think are best ever. Now these are events which lead up the year, we hold them in January and have distributed around the country in places like Chicago and Deadwood, South Dakota, and Phoenix and so on. And the attendance at those was a record and the enthusiasm for the programs that are coming forward was very positive.

So I have to say that the anecdotal reports from the individual dealers, I attended a couple of them myself. The anecdotal reports from the dealers seem to match up with the numbers to say that we are gaining position and this looks like that that group is getting its momentum moving forward positively.

It recovered from I think we are back to 2008 levels, so you can say we are at pre-recession levels. So the fourth quarter I think is a pretty good quarter for them.

David Leiker – Robert W. Baird

Do you think that, if you look at that business here in the U.S. in particular, in the tools side you are back to normal customer behavior. Is there a…

Nick Pinchuk

Yes, I’d say that. I’d say we are seeing – in the United States the business grew 15%, 16%. So big number and so we feel pretty positive about that and I wouldn’t call it pinned up demand. I just think customers are – they’ve been fortified by the continuing demand in the shops even through the recession, now they’re getting more confident and they are going back to business as usual and by the way, we are stronger than when we entered, our franchisees are stronger, their cash is better, determination is better, and our products are better.

David Leiker – Robert W. Baird

I think I have a question on the repair side is that back to normal level of demands or not yet?

Nick Pinchuk

I think it’s back to normal levels of demand. Now of course the comps gets tougher in 2011 as you know, but I feel positive about that business.

David Leiker – Robert W. Baird

And then lastly, I was a little late getting on, but Europe, the Southern part of the region particularly in the C&I business has done bit of a lag, has that gotten back, is that starting to support the year end or not?

Nick Pinchuk

Bouncing along the bottom, I’d say, that’s how I describe it. Some quarters, if you go back and you look at in the last couple of quarters, last couple of three quarters as a body of work, you would say these businesses are bouncing along the bottom. So I don’t think we are seeing recovery yet there.

So if you think about us going forward you can think of us this way. We have a number of businesses that are fully recovered and then we’ve got places that have, still kind of caught in a kind of a recession level, which is the OEM dealership business for reasons of consolidation. And the Southern European business, that’s, I think that’s how you can look at us going forward.

David Leiker – Robert W. Baird

Okay, thank you.

Operator

(Operator Instructions). Next up is Dax Vlassis, Gates Capital Management.

Dax Vlassis – Gates Capital Management

Yes, I think you said that C&I group – was the restructuring charges were about $4.8 million, doubt the year-over-year. Can you give us the absolute numbers?

Nick Pinchuk

Well, actually I think I said that the tools group was the $4.6 million year-over-year charges. Is that, you are talking about the fourth quarter or the full year?

Dax Vlassis – Gates Capital Management

I’m talking about the fourth quarter.

Nick Pinchuk

$4.6 million is in the tools group, that’s was the tools group years.

Aldo Pagliari

It was last year’s number. In 2010 we have a nominal amount, so it’s about $4.8 million difference year-over-year.

Dax Vlassis – Gates Capital Management

Yes, commercial and industrial, there is an increase – gross profit, increased due to higher sales $4.8 million lower restructuring costs?

Aldo Pagliari

Correct, those $4.6 million were occurred late last year, we had a nominal reversal this year. So $4.8 million is total difference [ph].

Dax Vlassis – Gates Capital Management

Okay and then can you talk about the fourth quarter vis-à-vis any seasonality, is this sort of like the new, sort of run rate, so to speak. I mean are we in a level where there is a, that this is a consistent this year or is there some seasonality to some of the businesses that I should be aware off.

Nick Pinchuk

No, I don’t think so. And I think our big seasonality quarter is the third quarter. It’s the third quarter all right, because we have European businesses and so you see vacations flow through the numbers. But, generally, we have little seasonality in the other three quarters.

Now, there can be a little turbulence in expense because when you start out the year you are spending on things like I said the kick off meetings and so on, so the expense line can move somewhat based on those things. But, generally I’d say in the terms of the top line, in terms of – it’s pretty much no seasonality.

Dax Vlassis – Gates Capital Management

Okay and if I exclude the impact from financial services, looking forward and not just from a general perspective, if I look at the financial services segment and ex-out the sort of working capital requirements of that business, and I’m just looking at the core three segments, are we at a working capital level with those now that you would generate some pretty substantial free cash flow from those segments exclusive of the financial services segment?

Nick Pinchuk

Yes, I think that’s right. I would say that, we think that moving forward, now I am not going to say that we are not going to add any working capital as our sales move upwards, that’s not the situation. But I think the free cash flow from what we call OPCO, the operating company outside of the financial services, we are pretty robust.

Dax Vlassis – Gates Capital Management

Right because I mean it seems like the CapEx levels are low and if working capital is back up to a high-level, you should generate a fair amount of free cash flow here.

Nick Pinchuk

Yes, I think that’s true, the one exception to that might be if you say as you expand in emerging market that tends to be a structural build. So that’s a little different but generally the rest of the business. So I would that you – in a broad sense you’re correct.

Dax Vlassis – Gates Capital Management

Okay, and my last question is on the restructuring expenses going forward, it seems like the lot of the expenses have trailed-off, do you have any – what are your expectations for…?

Nick Pinchuk

No, I wouldn’t characterize them as trailed off, we spent, I think we spent $15 million this year, we spent…

Aldo Pagliari

14.2.

Nick Pinchuk

Okay, thank you 14.2 this year and we – and last year we spent just over 20, 22 or something like that and I think we consider ourselves controlled restructures, we spent about in that area every year, so I think you’re going to see about that level going forward.

Dax Vlassis – Gates Capital Management

$14 million through the P&L that…?

Nick Pinchuk

Like we spent this year, I’m not saying we’re going to spend that amount this year or less but that’s the kind of money if you go back and you look at what we’ve done in the past, it’s the kind of money we spent that’s generally what we can handle in a year, we feel pretty positive about doing it, we feel we can execute it and so those are the kinds of numbers we generally turn out. We see opportunities.

Dax Vlassis – Gates Capital Management

If that’s an annual number why is it restructuring non returning nature, I mean will that be part operations or is there some programs that would have a specific end date and it’s just not in 2011?

Aldo Pagliari

It really will be just more program specific, restructuring definitions and accounting terminology and if it’s a specific and unique program as compared to the prior year it’s categorized by that. So I think what Nick is saying is we still see opportunities to improve ourselves, we’re going to continue to look for those opportunities and we’ll invest accordingly if we see a return on those projects.

Dax Vlassis – Gates Capital Management

Okay, I appreciate it.

Operator

(Operator Instructions) Next, we’ll go to Alex Guestio [ph], Barrington Research.

Alex Guestio – Barrington Research

Hi Nick, hi Aldo, hi Leslie, how are you guys?

Nick Pinchuk

Good morning.

Aldo Pagliari

Good morning.

Alex Guestio – Barrington Research

Most of my questions were answered. Just concerning the franchisees, how many were in the – how many did you have in the quarter and do you see…?

Nick Pinchuk

I couldn’t quite hear you Alec could you say that again?

Alex Guestio – Barrington Research

I’m sorry. How many franchisee did you have in the quarter?

Nick Pinchuk

I think the number advance is about 3464 in the U.S.

Alex Guestio – Barrington Research

In the U.S.?

Nick Pinchuk

That’s the number we usually quote. I think there is, I don’t know the actual international number, but…

Alex Guestio – Barrington Research

Is that up quarter-to-quarter and as of last year?

Nick Pinchuk

4800 (inaudible).

Alex Guestio – Barrington Research

Is that up?

Nick Pinchuk

No, it’s about, it’s up, it’s about flat.

Alex Guestio – Barrington Research

Any ideas of that moving up in fiscal ’11?

Nick Pinchuk

We have some open routes that we could fill and our structural, as we get more efficient, the structural nature open routes can get filled. I think we found that we want to be very selective as who we put in the trucks and it served us very well, going forward. And so that’s really the idea that has dominated the last four or five quarters, that doesn’t mean we won’t increase in the future, but…

Alex Guestio – Barrington Research

So you haven’t had the purge as much because of such a higher standard?

Nick Pinchuk

Right, right. If you actually got here and you looked at all the real detail our inter mortality is one way down, which has made all the difference for us in terms of terminations. So that’s been a very big positive as you might imagine. So I would say that you would be entitled to believe that over the last say two or three years, we’ve learned a lot how to manage the franchise systems with lower cost associated with turbulence in the franchisees. And we paid lot of attention to their profitability as well.

So we boosted their profits on an average basis and then paid attention whose going in there and that all works pretty well. Actually, it’s one of the things I just want to say little bit more, it’s one of the great advantages for Snap-on because when you have so many franchisees you may have the big portion of the 3500 people in the United States were capable of running these franchisees, it’s kind of a barrier to entry and a tactical advantage that’s hard to duplicate and hard to deal with some of our competitors.

Alex Guestio – Barrington Research

What was the growth in tools for international was it 6.7 Aldo?

Aldo Pagliari

6.7% was the growth outside United States in the quarter.

Alex Guestio – Barrington Research

I think you guys mentioned before, it’s pretty difficult to implement van strategy into India or China, is that correct?

Nick Pinchuk

No, no, of course. Actually – generally, it is difficult because the van strategy flourishes best when technicians own their own tools. India and China, the technicians do not own the tools, the shops own them. So we use direct and distributors to manage our distribution in that place.

Just an aside for the international businesses, remember that if you look back to last year, when we were in the recessions, the international tools businesses did not go down, the international van channels did not sink as much as other U.S. businesses so the comparisons were much tougher for those, U.K. and Australia businesses.

Alex Guestio – Barrington Research

You mentioned critical areas, was there any particular areas that was more – grew outstanding in the quarter or was it just across the board?

Nick Pinchuk

Yes, actually we grew it ever one of those areas in the quarter and we’re quite please with them. But I would say if you ask me that question, the broad category of natural resources seems to be the strongest things like mining and, oil and gas, and we’d put power generation in natural resources. So we felt that to be a pleasing trend.

Alex Guestio – Barrington Research

I know you mentioned that Europe represented like 26% of revenue?

Nick Pinchuk

26%.

Alex Guestio – Barrington Research

Would you be able to say how much it’s like Southern Europe in that 26%?

Nick Pinchuk

Well, I can say that our Spanish, I’ll say this, I know the Spanish number. Our Spanish number is between 20% and 25% of our European business. We acquired business in Spain several years ago, one of our major acquisition. So we have a fairly large share of the Spanish market.

Alex Guestio – Barrington Research

Is there any – are you guys looking any small tuck-in acquisitions, is that, does that make any amount of sense strategically right now?

Nick Pinchuk

Say that again, please?

Alex Guestio – Barrington Research

Any like tuck-in acquisitions?

Nick Pinchuk

Yes, I mean well, our view on acquisitions is this is that, the Snap-on umbrella is – we use to think ourselves as somebody who sold hand tools through vans to auto mechanics but when you step back at it, the real Snap-on proposition is making work easier for professionals who operate in critical industries.

That’s a fairly wide but yet coherent space where the whole Snap-on proposition works powerfully. And so we are looking at acquisitions in those areas, we’re receptive to acquisitions that would, in emerging markets, an acquisition that would put us in a better position to serve repair shop owners and managers.

We made once several year of our (inaudible) or anybody anything that would further and give us greater weight in critical industries in alternative manner in places like natural resources or aerospace and so on. So we’re alert to those and we’re reviewing them. I don’t – I – yes?

Alex Guestio – Barrington Research

What about and I know you’re gaining ground in the heavy, medium truck is that where acquisition would help or is that more of a organic.

Nick Pinchuk

Well, I don’t see us, I don’t necessarily see us – looking at that for an acquisition, I think we have quite a bit of capability right inside Snap-on to fully mine that position. When people always ask me what are we going to do with our cash, well I think we have quite a bit of capability, quite a bit of runway enrolling the Snap-on brand out of the garage in – its building an emerging mark, on expanding with repair shop owners and managers.

Remember, that’s the different, that’s the different customer base than technicians. So we’re investing in organic growth there, but we’re looking for acquisitions. I’m not sure heavy truck would be a, is a clear opportunity, but that doesn’t mean I would disqualify if a great property came in – was available.

Alex Guestio – Barrington Research

All right. Thanks for answering my question.

Nick Pinchuk

Sure thank you.

Operator

Our final question today is the follow up from Jim Lucas.

Nick Pinchuk

Yes Jim.

Jim Lucas – Janney Montgomery Scott

Thanks. First one, a housekeeping basis. Given us the CapEx, the DNA expectations for the year?

Aldo Pagliari

It remains about the same Jim.

Jim Lucas – Janney Montgomery Scott

And any thoughts or color you could share on the ramp of material inflation we’re seeing in particular lot of press these days about the rising steel prices. Can you just kind of give us an update of where you stand in terms of pricing, it would offset this rising inflation.

Nick Pinchuk

Yes, we had some pricing in the quarter. We’re seeing some mild inflation. Remember, we don’t buy any particular one quantity. I think we said in the past that to the extent the inflation is quite visible that if steel prices go up to clearly or oil price is spiked dramatically and stay up like gasoline prices are up and things like that. We can price for that, we think we can find to offset, so we can find offsets for those – for that pressure.

If you go back, I think the last time we saw spikes in 2008, I think gasoline was like $4 a gallon and so, in 2008. Oil went from 80 to 140 that was one of our best years. So I don’t think we’re trembling over commodity inflation, I’m not to say it isn’t a challenge but in history we’ve been able to find ways to offset it.

Jim Lucas – Janney Montgomery Scott

And just from clarifications standpoint. When do you normally put your, if I remember correctly, it’s usually an annual price increase you put through and then to your response of being able to pass through when inflation is visible, is there a normal lag from when you realize that price?

Nick Pinchuk

Yes, first of all, across the range of businesses, there is no particular period I can say that we put in pricing. I mean the tools group is different than SNA Europe and that’s different than Asia and so on. You can say I think that there is a kind of maybe quarter lag and this kind of thing, we’ll see a two to three month lag and when we put in pricing and see it come out in marketplace.

Jim Lucas – Janney Montgomery Scott

Great, thank you.

Nick Pinchuk

All right, thank you.

Operator

And at this time there are no further questions, I’ll turn the conference back over to management for any additional or closing remarks.

Leslie Kratcoski

Thanks everyone, this is Leslie. We thank you for joining us today. A replay of this call will be available on snapon.com shortly. And as always, we appreciate your interest on Snap-on. Have a good day. Bye.

Operator

And once again that does conclude today’s conference, thank you all for your participation.

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