Snap-on, Incorporated F2Q08 (Qtr End 06/28/08) Earnings Call Transcript

Jul.24.08 | About: Snap-on, Inc. (SNA)

Snap-on Incorporated (NYSE:SNA)

Q2 2008 Earnings Call

July 24, 2008 10:00 am ET

Executives

Martin Ellen – Sr. VP & CFO

Nick Pinchuk – President & CEO

Analysts

David Leiker – Robert W. Baird

Jim Lucas – Janney Montgomery Scott

Alexander Paris – Barrington Research Associates

Operator

Good day ladies and gentlemen and welcome to the 2008 second quarter results conference call hosted by Snap-on Incorporated. (Operator instructions) I would now like to introduce your host for today’s conference, Mr. Martin Ellen, Chief Financial Officer. Mr. Ellen you may begin your conference.

Martin Ellen

Good morning everyone. Thank you for joining us today to review Snap-on’s second quarter 2008 results. By now you should have seen our press release issued this morning. Despite challenges in both the US economy and commodity price inflation we believe that our second quarter results continue to demonstrate the soundness of our business model and the progress that is being made in many of our core operating and growth initiatives. We will discuss these with you today.

Joining me is Nick Pinchuk, Snap-on’s President and CEO. Nick will kick off our call this morning with his perspective on our strategic achievements. I will then provide a review of our financial results and afterward we will take your questions.

Consistent with past practice we will use slides to help illustrate 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 a transcript of today’s call. Any statements made during this call relative to management’s expectations, estimates, or beliefs or otherwise state management’s or the company’s outlook plans, or projections are forward-looking statements and actual results may differ materially from those made in such statements.

Additional information and the factors that could cause our results to differ materially from those in the forward-looking statements are contained in our SEC filings. This call is copyrighted material by Snap-on Incorporated. It is intended solely for the purpose of this audience. Therefore it cannot be recorded, transcribed or re-broadcast by any means without Snap-on’s express permission. With that said I will now turn the call over to Nick.

Nick Pinchuk

Thanks Martin, for those of you following the slides my comments start on slide number five. You know I think we can say that the second quarter for Snap-on was another encouraging period. I believe it represents further and clear evidence of our continuing progress. Sales were up 7.6%, earnings per share grew almost 28% and our operating margin reached 14.2%. That’s up 220 basis points over last year’s second quarter. So needless to say it’s a positive result. And that’s I think particularly true given the increasing economic challenges we see in the environment today.

I’m going to be landscaping that progress in more detail but before I go further, I want to thank our associates and our franchisees. Your considerable capability and your extraordinary effort made these results possible. My congratulations and my thanks to all of you. I feel fortunate to be part of your team.

So let’s review the second quarter, its clear every day that these can be uncertain times. We are reminded of that almost every newscast, but against these difficulties we believe Snap-on has considerable offsets; a growing global position with strength in Europe and North America, an expanding presence in emerging markets, a diverse set of customers from automotive repair to aerospace to natural resources. Those are industries that follow a varied set of macros.

We’re also well positioned with almost legendary brands and for a number of quarters we’ve demonstrated a continuing capability of creating strong value through relentless and repeatable innovation, fairly passionate customer care and of course, rapid continuous improvement. Those are strategic advantage and capabilities that are quite valuable especially in the uncertain environment we face today.

And our second quarter was a demonstration of those strengths. To detail some of the progress we are growing globally. Snap-on sales outside the United States are now 46% of our total, up several points from last year and each of our major regions, North America, Europe and Asia Pacific, grew in the period even after neutralizing the effect of currency translations.

In the emerging economies of Asia and Eastern Europe growth was 17% and these markets now comprise over 8% of our sales. You know its still relatively early days but we’re encouraged, we’re very encouraged by the success in those areas. And we see further opportunity to keep investing, keep building our physical capability. In fact some of the increase in capital spending that we’ve registered so far this year and the reason we’re guiding our full year up modestly, is to support the growth in those strategic theaters.

For example our factory in Kunshan near Shanghai is now producing power tools, under car equipment and hacksaws. Those of you listening might recall that we recently transferred from some of our state of the art hacksaw technology from Sweden to China. It was a tough transfer but it was a successful migration and we’re now selling quite well out of that factory with that great product.

So now bolstered by that success, we’re expanding again to manufacture tool storage in Kunshan. That production will be targeted at both western and Asian markets where we see ample opportunity. And with last quarter’s acquisition of our 60% interest in Wanda Snap-on in Zhejing, China, we now have in-region capability to manufacture a full range of low cost, high quality hot-forged hand tools.

Besides manufacturing we’re also aggressively expanding our sales and distribution network throughout Asia. In fact we expect to have a network of over 600 resellers by the end of this year and that’s up over 50% over last year. Eastern Europe is sometimes an overlooked area. We’ve just approved a relocation and expansion of our plant in Minsk. Our existing facility in that city for several years has demonstrated that it can produce some of the highest quality and lowest cost cutting product in the world.

When I tour that factory I like what I see in the workforce so we’re doubling down our investment in that area. There is abundant opportunity in Eastern Europe for Snap-on. We have an encouraging start in the region and we’re going to take full advantage. So you see we have substantial runway in emerging markets, potential that’s very right for Snap-on products and value. Those markets are all growing and they’re still unclaimed. So we’ll continue to pursue aggressively and we saw some of that positive affect in the second quarter.

Let’s move on to slide six, beyond geography the overall diversity and strength of our customer base has served us well again this quarter. Now clearly our US franchise business faced some headwinds; the decline in home prices, rampant increase in things like fuel, energy, and food does have an impact. That said we continue to believe that the vehicle repair industry is more resistant to downturn then many other sectors. Sales of new cars to be sure have declined dramatically and the recent data suggests that a 2% to 4% decrease in miles driven in the US has been a reaction to the rise in gasoline prices.

However published data also does report that there’s been an increase in spending in automotive repair and it further indicates a modest real increase in technician wages. Now there’s a logic to this phenomenon, with new car sales down the car part does get older. Almost 40% of the US cars are now greater then 10 years old and much of the driving in the United States is not discretionary. Therefore vehicle repair is a continuing necessity from that perspective.

And so from that perspective the increase in repair spending, even in the face of economic slowdown is not really a surprise. We do recognize however that our customers the automotive technicians are also consumers. In this environment they are more deliberate in their spending. Therefore not surprisingly sales of higher priced tool storage products which are more discretionary purchases then hand and power tools, those continue to be weak in the quarter. They continued weakness in the quarter and that softness accounted for about half of our reported 4% sales decline in the US van business.

Our sales of equipment and diagnostics were similarly impacted. It makes sense; those products are more like capital investments and traditionally they are a tougher sell in uncertain times. Now as you might guess though, I want to landscape the United States for you in terms of the van business, as you might guess the results aren’t uniform across the country. In certain regions in the US mostly in the central and the Midwest, our franchisees are reporting on average, mid single-digit growth rates.

However in regions like the southeast and southwest where home prices have suffered the most and consumer confidence is the lowest, our franchisees are having more difficult time and there is a clear decline. So what you’re seeing from the tools group is a downturn in troubled and a softness in bigger ticket items offset somewhat by the other parts of the United States and their international business.

What is challenging though for all our franchisees across the country are higher fuel prices but the corporation, all of us, are working hard to mitigate the problem. We’re aggressively using our RCI and our innovation processes, our two cornerstones of the way Snap-on creates value, we’re using those tools to find ways for the franchisees to offset the fuel cost increase and it’s having a positive affect.

We’ve identified some real efficiencies and offset some of those costs and we’ll keep working hard to maintain our franchisees’ profitability in the weeks and months ahead because they are important to us. We’re often asked about van count, the US van count, well it was flat in the quarter remaining down about just a little over 1% versus last year. Now terminations did improve, but the count remains flat because we’ve raised the standard for accepting new franchisees.

Being more selective has played out in reducing first year franchisee problems and that’s been positive but it’s made it harder to expand and as a consequence, the overall franchisee number has not risen. We do believe however the open territories still represent a considerable opportunity. We have been and we’re continuing to employ significant resources in both franchise recruitment and training and we’re confident that we’ll see the van count increase going forward in the second half of this year.

So while the Snap-on tool segment of our business is more challenged other customers in other market segments are generating substantial growth. In the US industrial business the focus on critical buyers, the military, aerospace, natural resources, and the automotive vocational training sector, once again this quarter that focus contributed substantial growth to the commercial and industrial segment. Overall the US industrial business grew 25%. That process is quite encouraging and I think it’s important to note that that expansion reflects Snap-on’s direct industrial sales force.

It’s probably the most powerful in the industry and sometimes overlooked. WE believe it’s the most powerful in the industry with more than 500 well trained professionals. They consider themselves solutioneers and that they are, they provide tailored product solutions for the specific needs of their customers and it is having substantial success even in this environment.

In the broad industrial segment customers value the productivity that comes from Snap-on solutions and our unique direct sales force delivers that value. So we see abundant opportunity in industrial going forward and we believe we’re uniquely positioned to take advantage.

Moving outside the United States where economies are somewhat less challenging we are able to achieve fairly solid growth not only in emerging markets but in developed ones as well. Strong double-digit growth was achieved in our international franchise business in the UK, Australia and Japan as well as in our European diagnostics business. And despite the slowing of many of the major economies in Europe, our European hand tools business, SNA Europe was able to grow by 3.5% in the period without counting the benefits of the strength in the currency.

So clearly diversity of both geography and market segments is providing us with a platform for balanced growth. I should add that our portfolio of strong and well positioned brand is also a major factor. Whether its Snap-on tools in the automotive and industrial sector or Baco saws and wrenches in both industry and professional trades, our brands speak of reliability, design and productivity enhancing attributes that provide strong customer value.

And beyond that our expanded mid tier products are also working as expected, they are adding to our reach and building our penetration in broader segments. So Snap-on, Baco and Blue Point and our other corporate brands are recognized widely as making work easier and helping our customers make more money and that plays out well in every environment.

Moving to slide seven regarding product innovation, it’s been our heritage and it’s been our hallmark and it’s never been more important then in slow economic times. It’s clearly helping stimulate our growth and its also helping drive cost reduction. Yes innovation can drive cost reduction too. Let me give you a few examples. In our power tools business which is a critical supplier to our franchisees our new half-inch impact wrench which exceeds 800 lbs. of torque, and our three-eighths inch cordless impact wrench, both lead the industry in power weight ratio.

These tools were both introduced this year and both are big sellers. They both, and this is important in the situation, they both give our franchisees and salesmen something exciting to sell and both have been major contributors to the strong growth in that category. We have consistently said I think that hand and power tools are the purchases that translate immediately into productivity improvement.

When technicians make tough choices in an uncertain economy they tend to choose products like our professional tools that will help them expand their prospects and hot new innovations like the two power tools I’ve mentioned, help amplify that tendency. That means that purchases in those product segments are more resilient to uncertain economies. And in fact all of that is playing out in our results even in that market.

Beyond power tools we have also recently upgraded our versions of the Modis and the Solus handhelds in our diagnostic business, extending their technical leadership and indications are quite positive. We are just launching, and I’m pretty excited about this, we are also just launching our new imaging aligner. It features patented imaging technology with great value and our early returns from customers in both North America and Europe seem to confirm that conclusion.

And those are just a few examples of Snap-on innovation at work. Going forward in any environment we plan to keep investing in innovation at a strong pace across all our businesses because we know it will pay off. We are increasingly working to improve the processes that create value through innovation listening to the voice of the customers through out franchisees, we have 3,500 of them scattered throughout the United States and 4,700 worldwide, through field research and through our unique Snap-on new innovation centers which we are putting up in the corporation where we study the way our products create better solutions.

We are confident that those types of processes and process improvements will help continue and help expand the parade of cost effective products that will make our customers more productive and importantly more profitable.

Our rapid continuous improvement or RCI initiatives also helped strengthen our operating platform in the period. They created more value for our enterprise just as they have in multiple quarters past. A good example is the complete and on time deliveries for our US distribution system or COT as we call it. COT reached about 96% at the end of the second quarter, up from 94% last quarter and up from substantially lower just a few years ago. That’s good progress. But as I’ve said on many other calls our goal is 99%. We are not giving up so we have a long way to go.

And I suppose one of the most important issues of the day is commodity cost inflation. It’s a challenge for every business. For us we’re most vulnerable to the rising cost of steel and fuel. In the second quarter we estimate that those cost increases for Snap-on were about $6 million over last year and the pain will probably approach $10 million next quarter but in the second quarter productivity improvements from our RCI initiatives and our selected price increases combined to cover that inflation and then some.

In fact a significant component of our second quarter results was the improvement we saw from RCI. And while we expect commodity cost pressures to increase going forward we believe we’ll be able to offset them because RCI is part of our every day and because we continue to see as we go around the corporation we continue to see very abundant opportunity for improvement. In the second quarter our productivity improved by over 10% versus 2007 and we see that trend continuing.

So as I said the second quarter was an encouraging period. It was a further confirmation of the strength of our business model, the breadth of our operation, and our capability for improvement. We were quite encouraged. Now Martin will take us through some of the details of the results.

Martin Ellen

Thanks Nick, turning to slide nine net sales of $766 million in the quarter increased $54 million or 7.6%. Currency translation contributed 4.5%. Strong growth contributions this quarter came from sales of tools and equipment to commercial and industrial customers worldwide, emerging market growth, and increased sales of higher margin diagnostics and information products.

Sales in our international franchise operations also increased, up 18.2% without currency. Given the economic headwinds in the US our franchisee sales were down 4.1% particularly in sales of big ticket tool storage and other products. As in prior quarters or OEM essential tool and facilitation business experienced $13 million of lower sales due to the lapping of certain 2007 OEM programs.

This negative OEM comparison reduced our global growth rate by 2%. Consolidated gross profit of $346.5 million was up $24.1 million compared to the second quarter of 2007. The gross profit margin of 45.2% was relatively flat compared to last year. Pricing improvements and benefits from RCI initiatives covered steel, freight and other product cost inflation. Offsetting these improvements in gross margin was the less favorable sales mix in the Snap-on tools group.

In addition lower restructuring of $5.7 million benefited the gross margin. Operating expenses of $245.6 million in the quarter were up $5.5 million from 2007 including $9 million of unfavorable currency translation, $1.7 million of inflationary cost increases and $1.2 million of higher restructuring costs. These increases were partially offset by $3.9 million of lower franchisee termination costs and $3.5 million of benefits from RCI initiatives.

As a percent of sales operating expenses improved 160 basis points to 32.1% in the second quarter as compared to 33.7% last year. In our financial services segment operating income improved $5.7 million primarily reflecting lower market interest rates. Operating earnings of $111.7 million for the quarter were up 27.8% from 2007 with currency translation contributing $2.3 million of the $24.3 million increase.

Operating earnings as percent of total revenues improved to 14.2% up 220 basis points from the 12% earned a year ago. Interest expense in the quarter is down $2.9 million primarily as a result in declining interest rates on our floating rate debt and lower average debt levels in the quarter. Our effective income tax rate on earnings before equity earnings and minority interests is 33.1% in the second quarter. We anticipate that for the full year this rate will be 33.3%.

Diluted earnings per share from continuing operations of $1.15 in the quarter were up nearly 28% from the $0.90 earned last year. With that as an overall summary I will now turn to our segment results.

Starting with the commercial and industrial group on slide 10 segment sales of $387.7 million in the quarter increased $56.1 million over 2007. Currency translation added about $25 million. Excluding currency sales were up 9.4% which included higher sales to industrial customers, increased sales of power tools and imaging alignment systems, continued strong sales growth in emerging markets, and higher sales of professional tools in Europe.

Second quarter operating earnings of $49.3 million for the segment was up $16.8 million or 51.7% from prior year levels. Currency translation contributed $1.5 million of the increase. Also contributing to the year-over-year earnings increase were higher sales and pricing including a 21% increase in sales in our worldwide industrial business, and $5 million of lower restructuring costs.

Savings from RCI and cost reduction initiatives offset $3.7 million of commodity and other cost increases. As a percentage of sales operating earnings in the CNI segment improved 290 basis points in the quarter to 12.7% from 9.8% last year.

Turning now to slide 11 the Snap-on tools group reported second quarter sales of $292.8 million which was up $8.8 million or 3.1% from prior year. Currency translation contributed 1.9%. The groups’ international operations reported double-digit growth led by a strong performance in the UK and Japan. Sales in the US however declined 4.1% for the reasons Nick already mentioned.

Second quarter operating earnings for the Snap-on tools group of $35.3 million were up $600,000 from prior year levels. Pricing and RCI improvements net of cost increases coupled with less favorable product sales mix in total reduced the gross margin by about 100 basis points. Additionally there was about 100 basis point reduction in gross margin representing profit transfer to other segments as a result of higher sales of their products by the franchise channel.

While currency translation added $1.6 million to reported operating expenses reduced franchisee termination costs were a major factor in the improved operating expense comparison. As a result operating earnings of 12.1% of sales in the quarter for the Snap-on tools group were essentially flat with prior year levels.

Turning to the diagnostics and information group which is shown on slide 12 second quarter sales of %164.8 million were essentially flat with prior year levels. Higher diagnostic sales in Europe, increased sales of Mitchell1 information products, and $2.9 million of currency translation were more then offset by lower OEM program sales. As we’ve said in the past revenue comparisons for the OEM business are influenced by the timing of these OEM programs.

As a result of two major programs last year this year’s comparison reflects a $13.2 million sales decline. This comparison is expected to be substantially better in the third quarter. Excluding these OEM programs the diagnostics and information segment grew 8.8%. As a percentage of sales operating earnings in the quarter of $31 million improved 18.8% from 17.7% in the second quarter of 2007.

Turning to slide 13 our financial services segment revenues were $18.3 million compared to $14.8 million last year while income from financial services rose from $5.1 million last year to $10.8 million this year. The increase in both revenues and income relates primarily to our US credit business. The major contributor to the earnings improvement was the year-over-year decline in market interest rates with the discount rate on extended credit contracts down 230 basis points.

Now let me turn to a brief discussion of our balance sheet and cash flow, as seen on slide 14 our accounts receivable and inventory levels increased $86 million from year end levels, with about $27 million of the increase coming from currency translation. Days sales outstanding increased by one day to 74 days from both year end and June, 2007 levels primarily due to a shift in business mix that includes higher levels of international receivables which typically have longer payment terms.

Inventories increased primarily to support anticipated sales growth including higher levels of inventory for industrial customers and to support our growth initiatives in emerging markets. Our net debt position at the end of the quarter is $383 million which is down from $425 million at year end 2007. Our net debt to capital ratio of 21.3% is down from 24.9% at year end 2007.

Turning to slide 15 cash provided by operating activities in the quarter was $80.5 million and free cash flow was $62.6 million. The contribution to cash flow from the higher earnings was partially offset by the higher levels of receivables and inventory shown on this slide as part of the change in operating assets and liabilities. This concludes my remarks on our second quarter performance, now I would like to briefly review with you some financial considerations for the balance of 2008 which are shown on slide 16.

With respect to full year 2008 we expect to continue to invest in our growth initiatives including further investments in Asia and other global emerging markets. We also to expect to continue implementing our other strategic and RCI initiatives intended to enable higher levels of growth and profitability.

We anticipate full year 2008 restructuring costs to be in a range of $13 million to $16 million, down from the previously communicated $15 million to $20 million. And we now expect capital expenditures to be in a range of $60 million to $65 million, up from the previous $55 million to $60 million primarily to support the growth initiatives Nick mentioned.

And as I said we also expect our 2008 effective income tax rate on earnings before equity earnings and minority interest to be about 33.3%. As a result we expect that sales and operating earnings will improve over 2007 levels for the balance of the year.

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

Nick Pinchuk

Thanks Martin, our second quarter did have some challenges; economic headwinds yielding a softness in big ticket sales in the US, commodity cost increases and the wind down of the OEM essential tools programs. Despite that we did have an encouraging period. Our growth strategies reaching globally and expanding in critical industries that value productivity, those initiatives served us well. And the performance was also an indication that the Snap-on way of creating value in our space, relentless innovation and rapid continuous improvement helped us overcome the difficulties of the day.

As for the rest of the year we know our businesses are not immune to economic conditions but we believe our model is well balanced, spread across many geographies and varied and significant customer bases. We are confident that our improvement processes can create substantial value even in difficult environments. Going forward then we remain positive. This corporation has strong positions, robust business models, extraordinary brands, a diverse customer base, and a great team of associates and franchisees.

Yes there are bumps in the road but we continue to believe that considerable runway remains and Snap-on is well positioned to take full advantage. Now we’ll take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Leiker – Robert W. Baird

David Leiker – Robert W. Baird

I know you don’t give specific guidance and in your conversation you—in your comment at the end you didn’t really talk about your outlook for—the economic outlook for your end markets and some of those that Nick mentioned and whether you think those—just what your assumptions are for going forward.

Nick Pinchuk

I think we see issues but we believe we can manage them affectively. I think I said on prior calls that we expect our volume growth to be in the mid single-digit range and that is roughly what we have in this quarter and we expect our earnings growth to be 15% plus quarter-by-quarter and we see nothing that should discourage us from that.

David Leiker – Robert W. Baird

As we are listening to earnings calls here this week, we’re hearing a lot of talk about pretty meaningful weakness in the European market particularly construction end markets, economic activities clearly slow here in the US, doesn’t seem to be getting better, Europe seems to be getting worse, the Asian market seems to be weakening, so in that context with what you’ve done in the first half of the year, it seems like the second half of the year has more challenges then what you’ve experienced here in Q2.

Martin Ellen

You’re correct that major economies in Europe are showing a slowdown, clearly we talked about the issues affecting the automotive sector and really the impact on our customers in terms of their spending habits the point is we’re pretty diversified globally, we’re still seeing growth opportunities in all of these markets and I think as we’ve said in the past we see a lot of market sectors within these economies that were relatively un-penetrated by us in the past so there’s a lot of business out there for us and that’s why we are focusing for example in natural resources and in aviation and some of those other sectors in the commercial side whereas Nick said in the US alone, notwithstanding the economic climate in the US sales improved 25%.

Now we’re not communicating that we expect continued 25% growth quarter-over-quarter in the US industrial business, so its sometimes misleading to try to take a macro picture and somehow try to translate it directly into our micro performance because we do see pockets of opportunity and really on a global basis.

Nick Pinchuk

Regarding Europe, yes as I said the European economies are slowing down but we tend to be strong in Spain and that’s led the slowdown. So the first and second quarter our businesses took one of the biggest hits associated with the slowdown. A quarter of our business is in Spain and Europe and that, I don’t know if you’ve been following that but the construction market in Spain imploded and a lot of the industrial indexes and consumer spending have followed along and we weathered that.

So we’re not so—we see some back off in Europe but we’re not so negative about that. The United States of course there are the challenges, fuel prices are probably the biggest thing but if you look back in history what you’ll find is, is that as fuel prices have increased still our vans have seemed to weather pretty well. In 1978 the last time the fuel prices moved in this kind of level, van sales went up reasonably well each year. So we’re not too daunted by this. We think our models are resistant.

Then as Martin said, and I think it maybe is not always clear, we have not mined the industrial business as we might have. We like to say we’re finally realizing that we can bring the Snap-on brand out of the garage and that’s what you’re seeing in terms of this 25% growth. It’s not so much capturing more business with existing customers, it’s reaching out to new customers and with that 500 manned direct sales force which is pretty large as direct sales forces go in this sector, we feel pretty confident that that can keep going.

David Leiker – Robert W. Baird

As we look at energy costs and clearly you were able to offset it for yourself here in terms of Snap-on energy costs, but if you look at the dealer, how big is fuel as a part of his costs and do you see dealers drive fewer miles making fewer stops in environments like this?

Nick Pinchuk

Let me not get into specifics but let’s say if the diesel price goes up $1.00 that adds about roughly $0.90, that adds about $100.00 a week—just under $100.00 a week to their gas expenses and we figured out how to offset that with our RCI. We’ve got programs to try to do that and we’re continuing to do more of that. One of the things we’re doing really is turning the RCI engine focused on the franchisees. And as you might expect these are small businessmen, they all do things somewhat differently in a lot of ways and there’s a lot of opportunity to improve there.

So we feel pretty positive about the value of rapid continuous improvement and in some of our innovation processes and bringing down their costs at least for the foreseeable future and keeping them even. Now of course it’s a struggle each quarter, we have to work pretty hard at that. But we feel positive about it.

David Leiker – Robert W. Baird

I don’t think you gave a specific number but your sales of your US dealers were down 4%, how is your dealer performance to the end market?

Martin Ellen

The reported sales are down 4% and as we’ve communicated in past calls we didn’t touch on it in our formal remarks, if you eliminate some of the factors that don’t necessarily give you a good indication of sort of flow through the stores for example, the variation in year-over-year sales comparisons for the effect of the one-time sales on the convert trial franchisees to full franchisees which again for the reasons Nick cited, were less this year then last year, you actually take the 4% down to about a negative 1%.

We did get some pricing which would make the volume there a little lower then 1% and then if you disaggregate that further across our Snap-on product as compared to our mid tier and RWD you’d find that we had growth in both mid tier and RWD but again a decline in the Snap-on branded products and particularly the higher ticket products that Nick mentioned.

Operator

Your next question comes from the line of Jim Lucas – Janney Montgomery Scott

Jim Lucas – Janney Montgomery Scott

Pricing overall in the quarter what was that for you?

Martin Ellen

Pricing overall in the quarter was about 1%--$9 million roughly.

Jim Lucas – Janney Montgomery Scott

When you look at these un-penetrated markets taking the Snap-on brand beyond the garage, today if I remember correctly non-automotive markets represent about 28%, and is there a way that you could provide a little more granularity of that 28% what the end market exposure is in terms of whether its aviation, energy, etc.

Nick Pinchuk

We could think about doing that on a future call, I can tell you that I can granulize the growth rates, the aerospace business grew about 29% in the quarter. Natural resources grew 26%, that kind of thing. Some of those businesses were lower; the vocational training business grew between 5% and 10% so somewhat lower so there’s some of the balance you see in some of those specific markets. The base markets grew at about 11%.

Martin Ellen

You know our business; SNA Europe sells predominantly outside automotive, that’s increasingly a global business with respect to a number of their important products including hacksaws and band saws because that’s increasingly being penetrated in Asia. Nick talked about some of the focused markets which are really serviced by our US industrial business and that business today is, the size is approaching 20% of the segment so we’ve got very high growth and opportunity in that portion of the CNI segment. A lot of our Asian business as you know is—there’s automotive end market in that but there’s quite a bit of non-automotive as well.

Automotive concentration as you know is predominantly the entire DNI segment as well as the Snap-on tools plus you have equipment. And then the under car equipment business which is roughly a quarter of the CNI segment.

Nick Pinchuk

I think one of the things you can think of is that the Snap-on US van business now is between 25% and 30% of our overall business. So we’re substantially less dependant on that particular business then we have been in the past. That’s one of the overall messages we have here.

Jim Lucas – Janney Montgomery Scott

You had made a comment about the hacksaw manufacturing transition from Sweden to China and you had referenced a tough transition, could you expand a little bit there?

Nick Pinchuk

When I said tough I don’t want to imply that we had necessarily problems but I think through bitter tears I’ve learned the difficulty of projecting a state of the art technology thousands of miles. And so I think we approached it with the idea it was going to be daunting. The technology we’re using in China in fact is an evolution of what had been used in Sweden so we fundamentally used the Sweden operation as a base, developed a new technology there in terms of machining these hacksaw blades, ordered the products and then started them up in China without having an exact copy base operations in Sweden.

So what we have in China today is a hacksaw blade that is manufactured in a more efficient process and is manufactured to higher standards then the particular model that had been manufactured in Sweden at that time. So that’s what I meant by the tough transition. We really didn’t have any major disruptions or anything like that. It was in fact completed on time, on cost and we’re pretty much at sell out right now so we’re looking at expanding.

Jim Lucas – Janney Montgomery Scott

Finally if we look in the remarks its clear the diversification of the portfolio is paying very big dividends in these times, when we look at the margin performance particularly in CNI and DNI in the quarter we’re getting into unchartered territory from what we’ve seen from Snap-on historically and with CNI in particular can you talk about where that business can go longer term?

Nick Pinchuk

I think we believe it will be in the strong mid teens. That’s where we believe it will be. I think it’ll end between 15% and 20% over time. I think we’re discovering things about CNI that we didn’t quite realize. When I ran CNI I don’t think I fully envisioned the runway that’s in the industrial business. We believe this to be a tremendous opportunity and it dawns on us like I tried to communicate in my call is that we are uniquely positioned with the technical knowledge imbedded in that sale force and we have a product that critical buyers value and want.

In the past we thought of ourselves as being in the garage. That’s one. Two we understand we have a technical advantage in equipment in our imaging technology. We’re pushing that advantages and the people down there are quite technically enabled and we’re pushing the technical advantage and at the same time our costs are being driven down. The cost of the new model are terrific and yet the benefits to the customer are better then any competition. So we feel pretty good about that.

And then SNA Europe is a story of just continual improvement because they had a good business in Baco in tools and we put them together and there’s constant potential for improvement and they’re contiguous to the eastern European markets. When you put all the together I see them going to 15% to 20% in between there someplace.

Jim Lucas – Janney Montgomery Scott

DNI in terms of, it would seem that ProQuest is having a very pronounced impact in terms of the overall increased profitability of that segment, when we look at the margin potential of that business especially once these OEM contracts lap and we’ve got some top line to leverage what can that business look like?

Nick Pinchuk

I think we feel pretty positive about our positions. We really have two positions in DNI, one is with independent car repair people, the Mitchell and the diagnostics business are fairly strong and our data content is stronger then anybody else in the industry. No one can get better data on wide range of products then we can provide. So we have a great position there.

And ProQuest gave us a—greatly expanded our position with OEM dealerships. And ProQuest is fulfilling all our targets when we made the acquisition. Its base business, the electronic parts catalogue business is on target. Its synergies which I think we had for $4 million or $5 million this year are happening so we see that business being, I guess I wouldn’t want to comment on the total number but I see it being somewhat stronger then the other businesses because I think we have some pretty proprietary advantages in that area.

Martin Ellen

Let me just add because we’ve talked in the past about margin expectations for the company as a whole and years ago we talked about a 13% number for 2010, we said earlier we were ahead of that and we were charging to 15% by 2010 and the mix of that would have put as you know diagnostics and information at the high teens or so, then tools and then commercial industrial and I think the one thing we’re seeing is improving commercial industrial margin expansion beyond what maybe we would have thought just a short while ago.

And I think if you put that mix together you can easily see how we can get a 15% overall corporate margin.

Operator

Your next question comes from the line of Alexander Paris – Barrington Research Associates

Alexander Paris – Barrington Research Associates

Could I just ask about your restructuring cost, you had mentioned $5 million in the CNI segment is that where most of it was?

Nick Pinchuk

Yes last year we had some major restructuring, some very large formal restructuring in Europe. We closed our [Enchoping] plant and moved it into Spain and moved some production into Spain and others into Eastern Europe and China. So that was driving a big piece of that.

Alexander Paris – Barrington Research Associates

And that $13 million to $16 million for 2008 most is that is in the CNI?

Martin Ellen

Some of it is, its spread across the segment but CNI would still have the majority of it.

Nick Pinchuk

I want to point out that the reduction doesn’t necessarily mean we’re not doing improvement activities. We are constantly spending money on improvement activities that don’t meet the formal description of our classification around restructuring so I think if anything, what you’ve seen this year is a little bit of a migration from the big bang items like Johnson City and [Enchoping] closing which happened last year to more individual items that just don’t meet the classification and restructuring and are being spent in the operations and absorbed and not called out as restructuring.

And we’re seeing that benefit in terms of the performance improvements year-over-year.

Alexander Paris – Barrington Research Associates

So in 2009 would you expect that to be lower or higher, I’m getting at that as a measure of your discovery of additional opportunities for improving efficiency, is that running down a little bit, you’re getting to the point where you found a lot of the big improvement potential?

Martin Ellen

First of all we don’t have a clear view yet on 2009 but I think as Nick said at some point the major actions in terms of the major plant consolidations are fairly well behind us and I don’t think anybody would have expected us to spend the $20 million or $25 million a year indefinitely that had been our history so I think you’re now starting to see the decline reflecting just what Nick said which is as he said a lot of the big bangs are behind us. We continue to look for improvements every day and some of those will result in restructuring but I don’t think any of us thought we would spend $20 million to $25 million a year. There’s just not that many plants to consolidate and other physical improvements to be made where a lot of those charges result.

Alexander Paris – Barrington Research Associates

But it sounds like you’re switching the emphasis of that going forward to the Snap-on tool part of the business.

Martin Ellen

We’re switching it there and everywhere. I don’t want anybody to think, we’re doing more RCI every day and I think that’s coming through clearly in the numbers particularly this quarter so don’t read the trend in restructuring spending as any indication as to the level of RCI activity because that would not be correct.

Alexander Paris – Barrington Research Associates

It has been an important part of your upside operating leverage as you’ve been showing particularly when the sales growth was a little slower.

Nick Pinchuk

That’s true but if you look at commercial industrial for example if you adjust for currency and lower restructuring they still grew at 30% year-over-year so that’s still pretty good performance leverage I think—without that adjustment. I think it would be wrong to think that we are switching our emphasis to the tools group in any way. Simply this, when you close a major plant in Europe its big bucks and so when you don’t do that it tends to reduce your numbers somewhat.

I would think that I would see us spending $10 million to $15 million for awhile because we do see continual opportunities going forward. Its just that we also are seeing the small opportunities as well and one of the things that happens with this rapid continuous improvement that I found here is that when you first start it you kind of tend to focus on the big opportunities but as it tends to wend its way through the organization those kernels of improvement that are down in various departments and locations find opportunities to improve. And we’re seeing some of that this year.

So even with lower restructuring spending we’re seeing substantial performance improvement.

Alexander Paris – Barrington Research Associates

There were a lot of questions on Europe and you did the major restructuring in 2007 do you still see currently and going forward more benefits leveraging benefits still to be seen from the major restructuring that you already had?

Nick Pinchuk

Yes sir. We haven’t seen it all. I can assure you.

Alexander Paris – Barrington Research Associates

And you talked about being hit in Spain and Italy is pretty weak too--

Nick Pinchuk

Italy is pretty weak but we’re not that—Italy is a big country but not so strong for us. Spain is a strong country for us. So the fact that Spain was on the leading edge of some weakness in the economics gave us a problem and we overcame it.

Alexander Paris – Barrington Research Associates

In the tool business Snap-on tool van business it sounds like your weakness more is due to capital spending decisions on big tool storage and diagnostics, but I would expect that your hand tool business would have held up better particularly you’ve got higher on time delivery which probably should have added to sales and you had RWD that should still be adding to sales growth, is there something I’m missing there?

Nick Pinchuk

No, our hand and power tool business which is the productivity improvement business held up pretty well. Its just we took a pretty big ding in the tool storage and the big ticket items. To me its pretty logical is that what happens is, is that you know the guys decide well its tougher times, its uncertain times, maybe I’ll get along without that toolbox. But they do buy our wrenches. And they do buy our power tools, particularly the power tools, the power tools had a dynamite quarter.

So what you’re seeing coming out of that same store sales is just the balance of that mix.

Alexander Paris – Barrington Research Associates

So that would imply then that it’s the tech reps who maybe sell even more expensive equipment directly to the dealers then that should have been very weak then.

Nick Pinchuk

Yes that was somewhat weaker yes. We do have some less expensive diagnostics which go through that channel and they sold pretty well.

Operator

Your final question is a follow-up from the line of David Leiker – Robert W. Baird

David Leiker – Robert W. Baird

In your commercial business how are the equipment sales going for the auto repair market?

Nick Pinchuk

Well equipment sales, up slightly but not like we’d like it. It’s being hurt by the capital expenditures restructuring so in the quarter it was up very slightly.

David Leiker – Robert W. Baird

You would expect that to slow down though with this capital spending, or not.

Nick Pinchuk

I don’t think so, I think—I have confidence in our technology. We think we can instigate replacement because our technology is better. I think it was up, excluding currency, equipment was up 2% or 3%. That’s what I mean by slightly.

David Leiker – Robert W. Baird

So only on facilitation business, where does that stand right now in terms of size and—is there more there to run off, I know you made the comment that the impact is going to be more moderate.

Martin Ellen

For the first half of this year we had a negative comparison of $19 million mostly because of the one major program in the US and the program in Europe, as I said in my prepared remarks we expect the comparison to be substantially more favorable and I’ll interpret that to mean sort of a flattish comparison with respect to EOM programs.

David Leiker – Robert W. Baird

What’s the size of this business now?

Martin Ellen

The size of this business now again if you sort of look at their core business the ongoing business, exclude the programs it’s a business that will run $30 million to $35 million a quarter that’s without the program business. I can look over this year and last year and tell you that you can have quarters in the program business in the $5 million range and believe it or not you can have program quarters of $25 million at least in terms of the last couple of years, that’s the kind of variation extremes you can see.

Nick Pinchuk

With regard to that business the facilitation business I think you understand is kind of the base, the programs—we see a couple of programs coming on that we feel pretty optimistic about in that area so its not like we think that business is a bad business or anything or we’re thinking about pulling back on that just because the two programs have wound down. We just didn’t do the best job of getting programs in the pipeline to make up for those two or three contracts that are causing some disruption now.

David Leiker – Robert W. Baird

Are there any changes in the competitive landscape that you’re seeing these days, overall?

Nick Pinchuk

No I don’t think so. I think though that we are seeing—with regard to the equipment business we are seeing the winning of our technology. We are starting to see a substantial improvement in the wheel service area in terms of alignment, and in terms of balancers and tire changers such that we believe we are gaining substantial share in that area. That’s one. Two, I think you’d have to conclude that we’re gaining share however you contrive share in the industrial segment.

It’s kind of hard to do that because it’s such a large segment. So we’re pushing people out in that segment and we’re winning against some of our major competitors there. So those two businesses I think we’re seeing a pretty good improvement in our position.

David Leiker – Robert W. Baird

Do you think in the dealer hand tool business share is going up or down?

Nick Pinchuk

Our data says that our share is flat in the quarter but I think we’ve learned to keep our powder dry about that and to take a look at it on an annual basis as opposed to a quarterly basis because of the imprecision of the reporting.

David Leiker – Robert W. Baird

Where are you in your rollout and penetration of the RWS and the mid tier product lineups, how long does that continue to be a positive for you?

Nick Pinchuk

Well I think for some time, for the foreseeable future because we keep adding to that lineup our franchisees as we talk to our franchisees, and we’re bringing the franchisee group together in Las Vegas again this year, I think we’ll have two-thirds of the US franchisees in Las Vegas with us, and we get ideas from them about adding lineup to the RWD product lines so I’m not sure we’re going to see that abate for awhile. It may reduce in terms of numbers, amount of increase, but I’m not sure we’re going to see the growth abate or go away.

David Leiker – Robert W. Baird

And what about in the mid tier products?

Nick Pinchuk

Mid tier was up about a percent this year, maybe a half a percent, I would say maybe another three-quarters of improvement in that area—I mean three fiscal quarters of expansion in that area and we’ll be finished.

David Leiker – Robert W. Baird

Can you talk about the credit environment and what you’re seeing, what your customers are seeing?

Martin Ellen

I assume you’re referring to our Snap-on credit business; the portfolio there actually is performing still very well. We watched delinquencies closely and if you go over the last year actually our 30 plus delinquencies are actually only up about three basis points from September. They were actually higher in December and they’ve actually come down since December both in terms of 30 plus delinquent accounts and 60 plus delinquent accounts.

The portfolio still performs very, very well.

Nick Pinchuk

As an outsider who came to this business that portion of the business only 18 months ago, I’m pretty pleased with what I see. I think our sound bite is we’ve been in this kind of business for a long time and so we’ve been able to manage what ordinary people would say might be not necessarily the best credit risks and we’ve managed it well and our businesses have actually improved in quarter-to-quarter in terms of delinquencies that when the rest of the world has gotten worse.

David Leiker – Robert W. Baird

And you’re not really putting loans out there that are worth more then the product you’re selling either.

Nick Pinchuk

No I don’t think so, but we have a terrific touch with the customer.

Operator

At this time we have no further questions; I would like to turn the conference back over to Mr. Ellen for any addition or closing remarks.

Martin Ellen

Thank you everyone for joining us this morning. We thank you for your interest in Snap-on. Good day.

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