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Snap-on (NYSE:SNA)

Q1 2012 Earnings Call

April 19, 2012 11:30 am ET

Executives

Leslie H. Kratcoski - Vice President of Investor Relations

Nicholas T. Pinchuk - Chairman, Chief Executive Officer and President

Aldo J. Pagliari - Chief Financial Officer and Senior Vice President of Finance

Analysts

Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division

James C. Lucas - Janney Montgomery Scott LLC, Research Division

David S. MacGregor - Longbow Research LLC

Alek B. Gasiel - Barrington Research Associates, Inc., Research Division

Michael Aaron Prober - Clovis Capital Management, LP

Operator

Good day, and welcome to the Snap-on Inc. 2012 First Quarter Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Leslie Kratcoski. Please go ahead, ma'am.

Leslie H. Kratcoski

Thanks, Melissa, and good morning, everyone. Thanks for joining us today to review Snap-on's first quarter 2012 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 discussions. 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 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'd now like to turn the call over to Nick Pinchuk. Nick?

Nicholas T. Pinchuk

Thanks, Leslie. Good morning, everybody. I'll start off as usual with the highlights of the quarter and with my perspective on the results and on the overall business. Then I'll turn the call over to Aldo for a detailed review of the financials.

Our first quarter was another period of encouraging progress. Once again, it showed that the Snap-on Value Creation Processes are enabling improvements just as they been doing for some time in a variety of macroeconomic environments. I think you could say that these past few years sure have been marked by a very dynamic environment. And yet, our discipline around safety, quality, customer connection, innovation and Rapid Continuous Improvement or RCI has driven momentum in good times and in bad.

Speaking of momentum, our first quarter reflects continuing gains in the majority of our markets, and it represents another period of favorable operating margin comparisons. Organic sales increased 7% from last year. The OpCo operating margin of 13.3% was up 70 basis points, while FinCo contributed $23.9 million of operating income, a substantial increase from $12.5 million a year ago. The end result is an EPS of $1.21, a rise of 26% from the first quarter of 2011.

Now the primary feature in the past quarter was the volume. Widespread, strong gains across the majority of our business and the Tools Group serving automotive technicians and the Commercial & Industrial group or C&I serving emerging markets of Asia, as well as professionals in critical industries through our industrial division. And in diagnostics and software sales through our Repair Systems & Information group or RS&I, which focuses on serving repair shop owners and managers. All of those areas had solid gains.

If you recall that we identified 4 key strategic runways for our growth, areas that we believe will be decisive for our future, building in emerging markets, extending into critical industries, enhancing our franchise network and expanding in the garage. We believe this quarter's performance represent ample evidence of significant progress in each of these areas.

Importantly, I think, our overall 7% volume gain and improved profitability was achieved even in the face of a turbulent Europe, a headwind that strengthened since the last quarter.

Just like in the past quarters, our overall environment is favorable, but Europe is a clear challenge. Our volumes in Western Europe and Western European markets were down mid-single digits. You can see that impact most notably in the results of C&I, but it's also evident in the volumes of RS&I where we have a sizable European presence in our undercar equipment business.

The real story in the quarter though is that we were, once again, able to overcome the challenges and still grow robustly. So overall, we continued our progress, gaining in those areas we've identified as being decisive for our growth.

Now on to the highlights of some of the segments. C&I group organic sales were up 6.4%. So in spite of Europe, our overall C&I sales gain was actually more than we posted in the previous 3 quarters.

I mentioned the strong gains in both Asia and our industrial business, 2 of those strategic runways for growth, while both of those businesses were up double digits.

Related to Europe, I'll remind you that we have particularly large and higher-margin position in the South, especially in Spain. And that regions been even harder hit than the rest of the continent, so that certainly amplifies the European impact for the group. Operating margins in C&I was 10.2% compared to 11.6% last year. Now in those numbers, we did incur $3.5 million and restructuring charges related to Europe. Given the situation, we're making adjustments to the cost structure to better match the environment. These actions brought C&I margin down by 120 basis points.

In our industrial business, where we serve serious professionals in critical industries, we're pursuing a number of initiatives to drive continued growth. For example, we're expanding our presence in technical schools, a growing number of which offer Snap-on's certification programs for industries such as aviation, vehicle repair and wind industry. And covering a range of specialties like torque and diesel and diagnostics and tool control. Those programs are -- we found are a great way to get the Snap-on brand introduced to the new professionals who will inhabit the critical industries of are our future. The schools are equipped with our products. We train the teachers, and the students learn their profession with Snap-on products front and center. We believe that's a great way to build what we call customers for life and it's working.

Our efforts in extending in the critical industries can be seen in our annual industrial sales kick off, hundreds of direct sales associates join that event and instead of focusing on products, we focused on serving specific customers: Aerospace, natural resources, the military. The main theme was customer connection, how to make work easier for particular professionals and specific industries and the participants left better equipped to drive our sales growth down that critical run -- down those crucial runways and that's been working.

Now I'll mention emerging markets. The bulk of that activity for Snap-on also shows in the C&I group. Sales in Asia were encouraging with double-digit growth coming across many of our major markets. Now China, of course, is our biggest opportunity, and we grew well ahead of GDP. But we saw an even greater increase in places like Indonesia and India. And that growth is being aided by our expanding product lines and hand tools from our Zhoushan factory and undercar equipment, hand held diagnostics and band saws, all from our Kunshan complex, where we've been expanding our capacity and launching new products, aimed specifically at Asian customers and that's working.

Outside of Asia, we're also making progress in other emerging markets. Our expansion in Belarus has been a key to gaining presence in Eastern Europe. That operation has been critical to growing our position in both in Eastern Europe, where SNA Europe actually saw solid gains in places like Russia and Turkey, as well as in the U.S. In fact, our Bahco band saw line continues to be robust, selling well in most regions of the world.

One final comment I'll make on C&I is related to innovation. SNA Europe and specifically the Bahco brand has long been known for its innovation and quality in serving professionals. In fact, Bahco recently celebrated 125 years of prominence in the professional segment. That reputation was, once again, reinforced this past quarter when Bahco earned 2 prestigious 2012 Red Dot Design awards. The winning new products were entries in our ergo line, a line that differentiates itself by clear advancement in professional grade ergonomics. Those awards generate product excitement and exposure, and our strong endorsement of our brand and of our continuing innovation and of the progress we're making in spite of the challenges that are present all around Europe.

Moving to the Tools Group, another strong performance. A sales increase of over 12%. It represents another highlight of the quarter. The operating margin of 14.6% was up from 13.2% a year ago. Now, last year's comparison did include nearly $3 million in restructuring charges, but even excluding that effect, there was a 50 basis point increase and this quarter's absolute margin of 14.6% certainly exceeds most of the historical comparisons.

You might remember, we made it a priority to enhance and strengthen our franchise channel, even while we're in the midst of a recession. And more recently, we were aiming Rapid Continuous Improvement or RCI efforts toward increased efficiency, creating more selling time for our franchisees.

Now the results of all those efforts appear clear. Organic sales in the first quarter were more than 15% above our prerecession levels. Speaking of the franchisees, overall, the network is strong. And it's evident in the trends we track. Franchisee sales and profits continue to rise, credit delinquencies remain at historically low rates and our turnovers are down. To look beyond the franchisees, we see solid indicators on the health of our end customers, the repair technicians, activity with big-ticket items like hand held diagnostics and tool storage remain at the solid levels, as you would expect given the growth rates we've been recording for several quarters now.

And the strength, the core of our franchise network, the Snap-on brand is now being recognized even more broadly. The results from this year's franchise business review satisfaction survey were announced in February. Snap-on moved up 8 spots from last year to #23 among all large franchise systems. The importance of this ranking is that it's based on the opinions of our franchisees themselves on issues like training and support and operation and financial opportunity. And in February, Snap-on was also cited by Forbes magazine in its ranking of best franchisees to start for the buck, and that article, Snap-on was rated #1 of all franchisees. More confirmation of the growing strength of our system.

The results are also reinforced what we hear regularly when we speak to our franchisees face-to-face. I characterized their outlook as almost uniformly quite positive, both for the company in general and for their individual businesses in particular.

Now we're for Snap-on credit. I said it in the past, it's -- but I think it's worth repeating. Our wholly-owned finance company has been a real advantage. Just this week, there's been news relating to the difficulties of securing financing for small businesses in general and for franchises specifically. While our franchisees clearly benefit from their ability to access valuable financing for themselves and for their customers, the credit company is a strategic advantage for Snap-on, and as you can see, evidenced in the first quarter results, it's financially attractive.

Now let's move to the RS&I group, where we serve repair shop owners and managers with diagnostics repair and shock management information and undercar equipment. The overall organic growth gained for the group -- the overall organic sales gain for the group was a modest 1%. Similar to the C&I group though, some fairly strong sales performances were muted by the impact of European weakness. Our large undercar equipment business on that continent was down in the quarter.

Outside of the Europe impact, the gains across the operations in the group were up mid-single digits. The operating margin for RS&I was 21.5%, up from 18.9% last year and the highest we seen in the group. It reflects progress in our RCI initiatives, as well as favorable effects of solid growth in higher-margin categories of diagnostics and information products.

We are worried about those high-margin products. Our hand held diagnostics software sales reached an all-time quarterly high, driven by our new release. This update includes expanded vehicle coverage, along with the new functional tests and reprogramming features and the numbers show it was well-received.

Our diagnostics business also received recognition for innovation when the readers of Undercar Digest voted 2 of our hand held diagnostic units: The SOLUS Ultra and the VERDICT, as 2012 top 10 tools. This marked the second year in a row that Snap-on has had the only diagnostic units included in that publications award roster. That recognition not only is a testimony to our position as leader in the space, but inclusion of diagnostic units in the top 10 also provides significant evidence of the increasing importance of a handheld unit in undercar work and repairing breaks, wheels and chassis. With our strong position in that segment, this is a favorable trend for Snap-on.

We also saw strong sales gains driven by product innovation in our repair and shop management information business, Mitchell 1. Mitchell 1 is our repair shop management information business in the RS&I group. We're seeing the benefits in that area from the investments we made over the past several years. We strengthened our offering for repair shop owners and managers with automotive-related products, with new heavy-duty truck applications and with new features like our customer retention programs that assist shop owners to better market to old and new customers. The high single-digit growth that Mitchell 1 during the quarter is evidence of that expanded credit.

Our repair information position will take another step forward this month when Mitchell 1 launches our new pro demand software. It enhances technician productivity by improving the speed and accuracy of search capabilities, as well as the navigation to other online information like wiring diagrams, technical service bulletins and schedule maintenance data.

With ProDemand, we're basically expanding the vocabulary of the system, harmonizing terminology across OEM badges, making it better able -- making the system better able to decipher what the technician needs and taking him to the solution faster. We've been trying the product with a broad base of technicians, and the initial reaction has been very positive.

One more highlight related to RS&I. I already mentioned that our equipment business in Europe is fairly large, and the impact is evident in the overall growth rate for RS&I. We are, however, making great progress in emerging markets like Brazil and the Middle East, with the equipment business, where saw solid double-digit gains of undercar equipment. We launched a number of new products for those markets over the past several years, and we're seeing them pay off.

While that's the highlights. OpCo, operating margin expansion and FinCo continuing on-track with increased profits, a 7% organic growth, significant progress along our strategic runways even in the face of a difficult environment in Europe.

Now I'll turn the call over to Aldo for a financial review. Aldo?

Aldo J. Pagliari

Thanks, Nick. Our consolidated operating results are summarized on Slide 6. Net sales in the first quarter of $735.2 million increased $41.5 million or 6% year-over-year. Excluding foreign currency translation, organic sales increased 7%, led by double-digit growth in Snap-on tools and across the majority of our businesses serving customers in emerging markets in critical industries.

Consolidated gross profit of $347.7 million in the quarter increased $17.1 million from 2011 levels. As a percentage of sales, gross margin of 47.3% was down slightly from 47.7% last year, primarily due to continued margin pressure in our European-based hand tools business, partially offset by contributions from RCI initiatives and $2.1 million at lower restructuring costs.

Operating expenses in the quarter of $250.2 million were up $6.9 million from 2011 levels. As a percentage of sales, operating expenses of 34% in the quarter improved 110 basis points from 35.1% last year, largely due to benefits from sales volume leverage in savings from RCI and restructuring initiatives. These improvements were partially offset by a higher stock-based mark-to-market and performance-based incentive compensation expense and $3.1 million of higher restructuring cost.

Operating earnings before Financial Services of $97.5 million in the quarter increased $10.2 million or 11.7% from 2011 levels. And as a percentage of sales, improved 70 basis points to 13.3%. Operating earnings from Financial Services of $23.9 million in the quarter increased $11.4 million from 2011 levels, reflecting the continued growth of our on-book finance portfolio. Consolidated operating earnings of $121.4 million in the quarter increased 21.6%, and as a percentage of revenues, improve 180 basis points to 15.7% from 13.9% a year ago. Finally, net earnings of $71 million or $1.21 per diluted share in the quarter increased $14.8 million or 26.3% from last year's levels.

Now, let's turn to our segment results. Starting with the Commercial & Industrial or C&I group on Slide 7, sales of $286.5 million for the first quarter were up 6.4% organically from 2011 levels, primarily as a result of double digit sales increases across the majority of our businesses serving customers in emerging markets and critical industries. These increases were partially offset by a mid-single digit sales decline in our European-based hand tools business, particularly as a result of further weakness in Southern Europe.

Gross profit of $102 million in the quarter decreased $1.6 million from 2011 levels, primarily due to continued margin pressure in our European-based hand tools business, partially offset by savings from RCI initiatives. As a result, gross margin of 35.6% in the quarter compared with 38% last year.

Operating expenses of $72.8 million in the quarter were up slightly from 2011 levels. As a percentage of sales, operating expenses of 25.4% improved 100 basis points from 2011, primarily due to benefits from sales volume leverage, partially offset by $3.4 million of higher restructuring cost, primarily to improve the segment's cost structure in Europe. As a result of these factors, first quarter operating earnings of $29.2 million for the C&I segment declined $2.4 million or 7.6% from 2011 levels. As a percentage of sales, operating margin of 10.2% compared with 11.6% last year.

Turning now to Slide 8. First quarter sales in the Snap-on Tools group of $316.6 million, improved $34.6 million or 12.3%, largely due to continued higher sales in the United States. Gross profit of $139 million increased $14.1 million from 2011 levels, and as a percentage of sales, was 43.9% compared to 44.3% last year.

Gross margin last year benefited from favorable manufacturing utilization associated with the anticipated consolidation of the company's North American tools storage operations. Operating expenses of $92.9 million in the quarter increased $5.1 million from 2011 levels. As a percentage of sales, operating expenses of 29.3% improved 180 basis points, primarily due to benefits from sales volume leverage.

First quarter operating earnings of $46.1 million for the Snap-on Tools Group increased $9 million or 24.3% year-over-year. As a percentage of sales, operating earnings of 14.6% compared with 13.2% a year ago.

Restructuring costs in the quarter were $2.6 million lower than last year. Excluding the effect of restructuring expense in both periods, operating income margin improved 50 basis points year-over-year.

Turning now to the Repair Systems & Information or RS&I group shown on Slide 9. First quarter sales of $226.1 million increased 1% organically. As of mid-single digit sales gain of diagnostics and Mitchell 1 repair information products, primarily the independent repair shop owners and managers and a low single digit sales gain to OEM dealerships were partially offset by the lower sales of undercar equipment in Europe that Nick discussed in his remarks.

Gross profit of $106.7 million in the quarter increased $4.6 million from prior year levels. Gross margin of 47.2% in the quarter improved 220 basis points from 45% last year, primarily due to a more favorable sales mix, reflecting higher sales of diagnostics and repair information products, including the SOLUS Ultra mentioned earlier. Gross profit also benefited from savings associated with ongoing RCI initiatives.

Operating expenses of $58.1 million in the quarter decreased $1.2 million from 2011 levels. As a percentage of sales, operating expenses of 25.7% improved 40 basis points from 26.1% last year, principally due to savings from RCI initiatives and benefits from sales volume leverage.

Operating earnings of $48.6 million for the RS&I group increased $5.8 million or 13.6%, and as a percentage of sales, improved 260 basis points to 21.5%.

Now turning to Slide 10. First quarter earnings from Financial Services of $23.9 million increased $11.4 million from prior year levels, primarily due to a continued growth in our on-book finance portfolio. Originations of $156.3 million in the quarter rose 7.3%, reflecting both higher sales in our Snap-on Tools segment and increased participation in our credit programs.

Moving to Slide 11. As the first quarter end, our balance sheet includes $968 million of gross financing receivables, including $813 million from our U.S. Snap-on Credit operation and $155 million from our international finance subsidiaries.

In the United States, $660 million or 81% of the financing portfolio relates to extended credit loans to technicians. Since 2011 year end, our on-book financing portfolio has grown approximately $33 million. The pace of the portfolio's growth has continued as expected and is naturally decelerating as the transition of the CIT owned portfolio nears completion. In 2012, we continue to anticipate that the gross on-book portfolio will increase by approximately $125 million over 2011 year-end levels. 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 for the quarter was $65 million. This includes the decrease in accruals and other liabilities, comprised primarily of incentive compensation-related payments made during the quarter and the effect of a $25 million cash contribution to our U.S. pension plans, which included an $18.3 million required 2012 contribution and a $6.7 million discretionary contribution. In 2012, we also intend to make required contributions of $12.6 million to our foreign pension plans and, depending on market and other conditions, may make additional discretionary cash contributions to our U.S. plans. As expected, free cash flow from Financial Services was a negative $35.1 million in the quarter, reflecting the continued funding of new loan originations at Snap-on Credit. The operating company generated positive free cash flow of $48.9 million in the quarter, representing a $46 million increase over the prior year. Capital expenditures of $21.8 million in the quarter included continued investments particularly in the United States and new product efficiency, safety and cost-reduction initiatives, as well as investments in new production and machine tooling. Capital expenditures also included continued spending to support our strategic growth initiatives including the expansion of manufacturing capabilities in emerging growth markets.

As seen on Slide 13, day sales outstanding for trade receivables of 58 days was unchanged from 2011 year-end levels. Inventories increased $9.4 million from 2011 year-end levels, excluding currency translation, inventories increased $4.1 million, primarily to support higher customer demand in the U.S.

On a trailing 12-month basis, inventory trends of 4x compared to 4.2x at 2011 year end. Our quarter end cash position of $162 million decreased $24 million from 2011 year-end levels, primarily due to the funding of new loan originations by Snap-on Credit, the previously discussed U.S. pension contribution, share repurchases of $29.9 million and dividend payments of $20.1 million. These uses of cash were partially offset by cash generated from operations.

Our net debt-to-cap ratio of 33.8% compares to 34.3% at 2011 year end. In addition to our $162 million of cash and expected cash flow from operations, we have more than $700 million in available credit facilities and our current short-term credit ratings allow us to access the commercial paper market should we choose to do so.

As of first quarter year end, our first quarter end, no amounts were outstanding under any of these facilities.

This concludes my remarks on our first quarter performance. Now I will briefly comment on a few outlook items.

We continue to anticipate that capital expenditures in 2012 will be in the range of $60 million to $70 million. Restructuring expenses in the second quarter of 2012 are expected to approximate $8 million, including the settlement of a pension plan related to the 2011 closure of the company's Newmarket, Canada facility. Finally, we also anticipated that our full year 2012 effective income tax rate will approximate 33.5%.

I'll now turn the call back over to Nick for his closing thoughts. Nick?

Nicholas T. Pinchuk

Thanks, Aldo. Well, that's our quarter. An encouraging period, strong volume growth, continuing credit company ramp up and more progress in driving increased profitability, and all of that was achieved in the face of European headwinds. We believe the quarter's performance represents, clear confirmation that our decisive runways for growth are wide and that we are advancing forward. The van network is being enhanced. Sales were up more than 12%, and franchisee health metrics are the best we've seen.

We are extending to critical industries. Our industrial division grew by double digits again. We are expanding with repair shops owners and managers. Our Diagnostics and Mitchell businesses grew nicely, and we are building an emerging market strong double digit again in places like China, India, Indonesia and Russia. The progress along each of these runways made our quarter and overcame imperfect economies.

Going forward, we believe we're well-positioned. We have momentum. And we will take advantage, full advantage, of the abundant opportunities that stretch out before us.

Before I close again this quarter, I think it's appropriate that I recognize the essential role of our franchisees -- that our franchisees and associates have played in our performance. I know many of you are listening, and I also know that this quarter's result is a direct result, is a direct reflection of your contribution. For your energy, for your support and for your commitment to this team, you have my thanks, and you have my congratulations.

Now I'll turn it over to the operator for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from David Leiker with Robert W. Baird.

Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division

This is Joe on the line for David. I think the most obvious surprise and it's a great quarter with the Tools Group growing 12%. Several straight quarters now that group has been putting up double-digit results. I'm just wondering if you can point to anything specific that might be driving that, because it's obviously well in advance of what some of your public peers are reporting for growth in their businesses.

Nicholas T. Pinchuk

Well, I think there's a couple of factors. One is that, as I've said, we kept investing during the downturn. We said that. We invested in the health of our franchisees, and they didn't take a step back during the downturn. They, in fact, got better and stronger. And I think coming out of that, we came out of the downturn with relative to others a strong, strong network. That's one. Two, we've been investing in innovation. If you've ever been here, you see the innovation works and you see the products were rolling out so they have attractive products. And then finally, as I said in my remarks, we've been spending time working on RCI in terms of Rapid Continuous Improvement and expanding the selling time. Only a -- not all of their day is spent on selling. And so this is a productivity opportunity for us, and we're working on that. I've said many times on the call, I think our call and then analyst meetings one-on-one that fully enabled our advance call on, maybe 800,000 technicians or 850,000 technicians and there are 1.3 million technicians in the United States. This is a product -- and they don't call on them because they're less target rich. This is a productivity opportunity. What you're seeing here is in effect that given our people more time to sell, more productivity advancements and, therefore, able to call on broader range of customers. And so you see those 3 effects: New products, stronger health and better productivity. And that's what's generating these double-digit gains.

Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division

So with the van count pretty much stable productivity has helped you increase coverage, is there an indication of how much more you can pull that lever to further revenue increases?

Nicholas T. Pinchuk

This is -- you're right. This is same-store sales. It's a great -- it's an encouraging look. I don't want to speculate on that. I mean, I said that the numbers -- but the numbers -- when we had a first couple of quarters like this, I said, well, one quarter a trend does not make. But now the Tools Group has been putting together some pretty good quarters. I think their organic growth have been stuff like 9, 10 and 6 and 9 and 12, so they've been doing pretty well. So we think this has got some runway.

Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division

The new trend is double-digits?

Nicholas T. Pinchuk

But I -- but, no, I wouldn't say that. I wouldn't use -- I wouldn't say --

Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division

Of course, yes.

Nicholas T. Pinchuk

-- it is double-digit, of course. But I think we feel very good about the position the Tools Group is in. So without making any projection, I stick to my projection which says, we are looking to grow as a company at 4% to 6% organically, right, every quarter. And the Tools Group is a component of that.

Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division

Sure. And then just on the C&I business, I think this is the first quarter that the military side of that business is in a headwind, and I'm just wondering with the organic growth going from 4.5%, 5% and now it's up about 6%, would 6% be a more sustainable pace of growth in that business if [indiscernible]

Nicholas T. Pinchuk

Look, sure, we said that our growth range would be 4% to 6% organically, and we said that C&I would be toward the top end of that. And so this kind of lines right up with that, it's a little bit better than that actually. And you're right in saying that this military was not a headwind this time, but this is the critical -- military is part of the critical industry, the critical industry's piece of this business. And so you have -- and that's concentrated in our industrial division. And if you go back to our last call, you'll see this is the second quarter in a row, which the industrial business has been registering double-digit growth, which we view as confirmation of our assertion that we have runway in these critical industries. And so we think that the C&I group will be helped by that.

Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division

Okay, that's helpful. And then just one last one for me for Aldo. Can you say what the delinquency rates have been running at with portfolio?

Aldo J. Pagliari

Well, the delinquency rates are published on Chart 11. If what you're suggesting is the all-in bad debt rate that we sometimes talked to, again, it remains a favorable trend with these delinquency rates.

Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division

So like around 3%?

Aldo J. Pagliari

About 3.3%.

Operator

Our next question will come from Jim Lucas from Janney Capital Markets.

James C. Lucas - Janney Montgomery Scott LLC, Research Division

A couple of things here. You've given a lot of good color, not just this quarter but over the past several quarters about the runways and how they continue to widen. Wanted to just delve a little bit into the Tools Group. In the past, you've talked a little bit about the makeup of bigger ticket items and demand there. And just curious what you're seeing in terms of the purchasing patterns of your customers if it's more toward the handheld, the software upgrades, the toolboxes or is it just really just the day-to-day?

Nicholas T. Pinchuk

Actually, it's the mix by product. If you characterize it, let's say, big ticket tool storage, the big boxes and the big size diagnostics and so on all the way down to hand tools and so on, that mix hasn't changed for several quarters. It's been -- we use -- the big ticket have been reasonably strong and robust in those mixes, and they haven't really gone down or up within reasonable, what I would say, quarterly windage. And so I don't think we -- you'd see any trend inside there whatsoever. You could -- you see sometimes in the Tools Group as they reach out to other customers, you get a different mix within those groups, like if you sell more to heavy truck or somebody like that, you'll get different diagnostics and different hand tools and so on, so you get a different mix within the groups. But we haven't seen much change with regard to the dimension between big ticket and small tickets. It's pretty much been the same.

James C. Lucas - Janney Montgomery Scott LLC, Research Division

Okay. And then if you -- if we take a step over to the C&I side on critical industries, are there any particular industries were you've been more successful? And conversely, are there others where you find you're not having as much traction? Just curious as to what is standing out there.

Nicholas T. Pinchuk

If you look at the quarterly numbers, Jim, you'll get ups and downs every quarter. These businesses can be lumpy, so you get -- but if you step back and then look at it over the March and say 18 months or so on, I would say that we've been pretty strong in aerospace. We've been very good at that. I think we've been good in the military when the military has been positive, hasn't been so lumpy, and we haven't had these sort of political headwinds flowing through the military. So we've been strong in that critical applications. And those are the 2, I think, that we've been better at. Natural resources is very good for us at times and so on. And so I think those have been the improving areas for us.

James C. Lucas - Janney Montgomery Scott LLC, Research Division

Okay. And finally on Europe, I mean, undoubtedly that's going to continue to be a headwind. You've got some further cost actions that you're going to be taking. When you take a step back and you look at your competitive position in Europe, where you are today, what you're doing from a cost structure, is it really more just about playing defense until the headwinds subside? Can you just talk a little bit about how you manage through the current environment in Europe?

Nicholas T. Pinchuk

Yes. First thing I'd say is we're not exactly wringing our hands over it. You go back and forth when you make comments on these calls and you want to say -- you want to make people aware of the issues in Europe and so on. But we don't -- we -- this isn't our first recession, our first downturn, of course. And so we're managing through this. And so what we see is our customers are still in place. We see our productivity and our RCI efforts creating opportunities for restructuring. We see our Asian factories ramping up to the point they get capability and so on, so they can support and provide even more capacity. So we're being proactive in the idea. We're bringing together the new capacity expansion we're seeing in Asia, and okay, looking to support Europe more in that. We're taking the RCI activities and tailoring the footprint to the current environment reflecting those RCI activities. So I think those 2 things are happening. And one -- so I wouldn't call it necessarily plan defense. I would say more or less saying we believe the market comes back. We believe our customers in place. We believe that the Bahco brand is still strong. And around that, we are tailoring the footprint to be as flexible as possible. So in future ups and downs, we're more -- we're less vulnerable to, let's say, variations in volumes. And then on top of that we're overlaying the idea that more capacity is coming online in the very flexible and growing capabilities in our Asian markets. And that will also create the kind of restructuring program around Europe. One of the things I do want to emphasize around our brand, one of the things that's encouraging to us there is that when you look at SNA Europe's primary brand Bahco, it's selling pretty well outside any -- when you're not talking about the core Europe, when you're talking about the periphery about Turkey and Russia and Middle East and so on, this brand is selling pretty well. So we're convinced there's nothing wrong with the product lines. It's still very strong and being well received, and we get our pricing there. It's just in those economics that are causing us the current challenges -- those economies that are causing us the current challenges, and remember that Spain is one of our, as you know, is one of our biggest area, was one of our biggest areas and the highest margin areas, and it's down substantially in the quarter.

Operator

And next, we'll go to David MacGregor with Longbow Research.

David S. MacGregor - Longbow Research LLC

Just on the Snap-on Tools segment. I guess you realized a 12% organic growth, but gross margins were off about 40 basis points. So I was wondering if you could talk a little bit about sort of what appeared to be disconnect there? And mindful that there was a comp issue here. In the first quarter '11, you had some manufacturing activities, I guess, that were influencing them. Can you quantify that for us?

Nicholas T. Pinchuk

Well, I don't think we're going to quantify those, but I'll give it to you directionally. When you look at that, you're getting the -- I think we said in the 10-Q or maybe that there was a manufacturing unfavorable comp in terms of manufacturing because last year we're preparing for the consolidation of our tools storage business in the United States and Canada. So therefore, there were some better absorption positions despite the differences in volume in certain of the factories in the first quarter last year. And then the other piece of this is it depends on where you're talking about. The other piece of it is if you look in quarter-to-quarter, the first quarter is always lower because of -- is always past because of higher spending in the first quarter because of kick-offs and so on. And then the other factor, I think, is fair is that as we reach out to different customers, and remember, I said these are -- these were less target rich customers. You get a different mix of product lines that sell to those, and that can create a product line mix -- within a mix within product lines, that will give you some difficulty. And also, I mean, and my view is when you look back over time, the margins are kind of in line with the range of Tools Group anyway. But I think that's -- those are the sort of couple of effects this year as the thing we called out in terms of the year-over-year absorption that was very favorable last year. And secondly, the reach to different customers, which creates a little bit of different mix in some of our products. That's what happened in the Tools Group. The Tools Group. I know some people are worried about tougher comparisons sometimes as we go forward from time to time. But -- and it is. It will get tougher. It does get tougher. But this quarter in the U.S., the U.S. grew over 15% this quarter. That's a gang busters quarter.

David S. MacGregor - Longbow Research LLC

That's a great quarter.

Nicholas T. Pinchuk

This business is doing pretty well, I think, so.

David S. MacGregor - Longbow Research LLC

So I'm just trying to understand in your operating margins, you get 140 bps of improvement there. Does that just imply that you had a lot of RCI gains sort of bridging the relatively flat gross margin down to a reasonably good step up on the operating margin?

Nicholas T. Pinchuk

In the Tools Group?

David S. MacGregor - Longbow Research LLC

Yes.

Aldo J. Pagliari

Just leverage.

Nicholas T. Pinchuk

Yes, you get leverage. You get leverage in the Tools Group.

David S. MacGregor - Longbow Research LLC

Okay. What's normally the gross margin leverage that we should see absent all sorts of year-over-year comp issues that we're seeing this year, but what's the normal?

Nicholas T. Pinchuk

I hate to speculate on -- I hate to say that because it depends on -- I realize you'd like something like that to help modeling, but it really depends on the situational situation. Sometimes you can be selling products which you don't make. We can be using not everything we sell are of the brands we make. And so therefore, it depends on the mix of products. So it's very difficult to give you guidance in that regard.

David S. MacGregor - Longbow Research LLC

Okay. If I could just ask one other point. Just on the Financial Services business. What's a good number for originations going forward beyond 2012? Growth [indiscernible].

Aldo J. Pagliari

The growth in the Snap-on FinCo portfolio over time get more closely aligned with that of the Tools Group. So once the runoff of the CIT portfolio and the transition stops to occur, originations are more or less fall in line with the Tools Group growth pattern. You can always have a little bit of timing difference one quarter to the next, and it depends on the mix of what is sold in the way of big ticket items, because that tends to find its way onto credit contracts more readily than just hand tools. But over the long-term, it will reflect the growth of the Tools Group. As Nick characterized, while we're enjoying double-digit growth these days, over the longer run, it'll be probably something a little bit less than that.

David S. MacGregor - Longbow Research LLC

Aldo, should that convergence occur early in '13?

Aldo J. Pagliari

I think you'll start to see 2013 become more normalized. At the end of this year, I mean, our estimates -- I think we've commented on this before, it will be probably about another $25 million or so of CIT-owned extended credit receivables will be managing on their behalf. So once we get down to that level, I think the crossover will become less.

Operator

Our next question will come from Alek Gasiel, Barrington Research.

Alek B. Gasiel - Barrington Research Associates, Inc., Research Division

Just sitting in for Gary. Most of my questions have been asked. But I guess one thing. I know, Nick, you talked in the past about -- just kind of curious again, what percentage of your territory is under penetrated by the van network? And has that changed recently?

Nicholas T. Pinchuk

Actually, I don't -- generally, it kind of changed over time. We're not looking to -- I would say the addition of vans is not a major factor in our growth going forward. So we have probably as many vans -- it's not to say we won't add some, but the thing is I don't think that's going to be a major factor in the growth. The big thing about in terms of vans is how quickly we can replace them. Of course, we -- our turnovers are down. I believe at least a relatively -- a relative low and I think it might be an all-time low, but so -- but when somebody turns in his Van or somebody wants to retire and he sites to retire and he happens to do Northeast Peoria, you maybe don't have anybody in Northeast Peoria to go in there. So how quickly do we fill that? So how quickly do we get them in? How quickly to get somebody up? This is a factor, so we track that and we talk about that. That's something that can do -- that can go better, that we could do better. We've improved, so we can do better. And then, secondly, I said, we call on a group of technicians. There are some we don't call on because they are less target rich. They're either off the geographic center of our route or they're in tire shops, something like that, and as we get more productivity with our vans, give them more selling time available, they can choose to use this time to call on those people. That's part of the phenomena we're seeing in this growth. And so I would offer that the 2 of the runways for growth anyway with regard to the physical to the van have to do with getting a new guy in when another guy leaves, retires and then secondly, have the people get more selling time so they can reach out, reach more customers. And I guess if you have more selling time, you can schmooze the existing customers and sell them more. So those are the elements of growth.

Alek B. Gasiel - Barrington Research Associates, Inc., Research Division

How fast is it to get a new guy running up, I mean, versus in the past?

Nicholas T. Pinchuk

It depends if we have a guy for the territory. Being as maybe we have trouble -- we might have 4 guys for, let's say, a garden spot, Kenosha, Wisconsin. We might have a lot of people for Kenosha, but we happen to live in here in Kenosha. Our headquarter is in Kenosha, so I'd say that. But we might have a lot of people for Kenosha, but we might not have many people for Peoria. I'm not sure -- it's come down. I don't actually have the statistics. If you like to get the statistics, we'll get them to you. If you call Leslie, she'll have it for you. Okay?

Alek B. Gasiel - Barrington Research Associates, Inc., Research Division

All right. And just one quick. I might have missed this. Just with Europe, and I know last quarter, you talked about how the softness and weakness in Southern Europe is now creeping into more mature area, which is evident now. Just kind of what you're seeing right now in the quarter, Q2 at the moment? If you can provide any color.

Nicholas T. Pinchuk

Yes. I don't think -- we can't. I can't speculate on that. If you read the same paper as I do, I think this is being driven economically. We're not sure. I think if you look at the GDP growth rates that are projected in Europe, a lot of them are flattish. Some of them are down. Our European businesses are down substantially, deeply in the south, mid-single digits in the sort of center, and in Eastern Europe, we're actually up a little bit. I think the important thing to think about for our businesses, if you look at the European business, and our European businesses in each of our groups, there's 10% in the Tools Group and some other percentage all the way up to about 1/3 or more of C&I. If you take those businesses and you isolate them, the rest of the business grew at double digits organically. So if you look at the place where we weren't organically -- we weren't economically afflicted, you're growing at, what, double-digits, and Europe represents a kind of challenged 20% to 25%. We used to say 25%. It's down now, because it shrunk a little bit, okay?

Alek B. Gasiel - Barrington Research Associates, Inc., Research Division

Okay. All right.

Operator

And next we have a question from Michael Prober from Clovis.

Michael Aaron Prober - Clovis Capital Management, LP

Could one of you talk about the acquisition environment and how the deal pipeline is? And then I have a follow-up.

Nicholas T. Pinchuk

Well, as I said, I think when I've spoken of this, we found that -- we say that we will look at acquisitions that will be in any of the 4 critical paths, our strategic runways for growth. I think you could argue that the Tools Group doesn't have so many acquisitions available to it. But in terms of emerging markets, in terms of repair systems and information and with repair shop owners and managers and with critical industries, there are businesses which would enhance our business and enhance our position that we could acquire bolt-on and allow us to continue to grow coherently. There are a number of those. And I think I've also said that we're still working -- we think we're still -- we're working through and just getting through the largest acquisition in our history, which was the credit company. So the idea that there is a -- we're working through that large acquisition. We have a pipeline -- I don't know, pipeline implies that you're going to go off and do them all. I don't really mean that, but we have a number -- a universe of possible candidates that we have out there in each of those segments, and so we keep -- we're looking at those and when the time is right, we'll take some actions.

Michael Aaron Prober - Clovis Capital Management, LP

I mean, the company really hasn't -- I know that credit card -- excuse me, credit division was a big acquisition. Credit company is a big acquisition, but that was really more of a financial integration than an operational integration because you were mostly...

Nicholas T. Pinchuk

Well, that's worth $800 million.

Michael Aaron Prober - Clovis Capital Management, LP

But it soaked up a lot of capital in the balance sheet and now the company is over capitalized by most measures. And I was just wondering if you're planning on spending capital after you build the balance sheet for the finance company in 2013, '14 on acquisitions? And are there any out there for you because it doesn't really look like there are that many out there?

Nicholas T. Pinchuk

Well, I think there are acquisitions. I mean, I -- obviously, I don't want to talk about such things on the call, but I think a casual review of things available would say that there are acquisitions that would be available. We may not have -- in fact, there has been acquisitions available, which we may not have moved at for a variety of reasons. So I think there clearly are acquisitions. If you look at the automotive space around repair shops -- repair shop owners and managers, there've been a couple of properties passed. We viewed it, and we didn't -- we weren't the acquirer. And then there are critical industries. There are a lot of product lines, which we could add to our product lines smear the Snap-on patina above it and make positive things. In emerging markets, there are places to acquire.

Operator

And at this time, we have no further questions in the queue. And I will turn the call back over to Leslie Kratcoski for any additional or closing remarks.

Leslie H. Kratcoski

Thanks, everyone, for joining us today. A replay of the call is available later today on snap-on.com. And as always, we appreciate your interest in Snap-on. Thanks. Goodbye.

Operator

And that does conclude our conference for today. Thank you for your participation. You may now disconnect.

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