實耐寶 (SNA) 2007 Q2 法說會逐字稿

Good day, everyone. Welcome to the Snap-on 2007 second quarter results conference call. As a reminder, today's conference is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Marty Ellen, Chief Financial Officer. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us today to review Snap-on's second quarter results. With me this morning are Jack Michaels, Snap-on's Chairman and CEO; and Nick Pinchuk, Snap-on's President and Chief Operating Officer. I'll begin our review this morning with second quarter financial results. Nick and Jack will then provide additional commentary on our results and initiatives. Afterwards, we'll 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 outlooks, 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 the Company's SEC filings.

This call is copyrighted material by Snap-on Incorporated. It is intended solely for the purpose of this audience. Therefore, please note, that it cannot be recorded, transcribed or rebroadcast by any means without Snap-on's expressed permission. With that said I will now begin our discussion with slide 4.

We believe our second quarter results continue to demonstrate the progress being made by all of our businesses on our core initiatives to improve customer service, strengthen our brands, improve our global supply chain, and reduce overall complexity and cost. Net sales of $712 million in the quarter were up $90 million or 14.5% over last year, with sales increases across all segments. The November 2006 acquisition of ProQuest Business Solutions rebranded Snap-on Business Solutions, contributed 8 percentage points of the total sales increase. Organic sales growth contributed 3.9 percentage points and currency translation added 2.6 percentage points. As a measure of productivity improvement, sales per associate were up over 9% from comparable 2006 levels.

In our Financial Services segment, revenue increased $3.1 million and operating income improved $2.1 million. This was due primarily to improved yields. Consolidated gross profit of $322 million or 45.3% of sales is up slightly from prior-year levels. Restructuring costs included in gross margin were $5.6 million this year compared to only $1.8 million last year. We also experienced higher raw material and certain other manufacturing cost increases. We were able, however, to more than offset these cost increases with productivity and other rapid continuous improvement initiatives or RCI, as we call it.

Operating expenses of $240 million increased $15 million from last year, excluding the impact of the $38 million franchisee litigation settlement that was recorded in the second quarter last year. With the exception of the operating expenses added by the Business Solutions acquisition and a $4.5 million increase in expenses due to currency translation, operating expenses for the quarter were down year over year. As a percentage of sales, operating expenses improved from 36.2% to 33.7%. Our RCI and other cost reduction initiatives are clearly eliminating waste and allowing us to better leverage our spending.

Operating earnings of $87 million for the quarter were up over 50% from 2006 levels, excluding the impact of the franchisee settlement last year. This increase reflects both the earnings contribution from the higher sales, as well as savings and improvements from RCI initiatives. As a percentage of revenues, operating earnings improved to 12%, which is up significantly from the 9.2% earned a year ago. Interest expense in the quarter is up $7 million year over year due to higher debt levels from the Business Solutions acquisition.

Our effective tax rate on continuing operations of 32.5% for the quarter benefited from the resolution of previously unrecognized tax benefits in certain non-U.S. jurisdictions. Diluted earnings per share from continuing operations were $0.90 in the quarter compared to the $0.60 earned last year, again excluding the franchisee settlement. As we previously communicated, Snap-on sold it Sun Electric Systems business which is based in the Netherlands. The sale was completed on June 29, and resulted in a $9 million or $0.16 per share net loss in the quarter. The sale of this noncore business is consistent with our plans to focus resources on our strategies for building sustainable, long-term profitable growth. The loss on sale, as well as the operating results for all comparable periods is presented in our income statement as discontinued operations. For segment reporting, the operating results of Sun Systems were removed from the Diagnostics & Information Group. With that as an overall summary, I will now turn to our segment results.

Please turn to slide 5. Sales in the second quarter for the Snap-on Tools Group of $284 million were up nearly 5% over last year. In the U.S., sales increased 4.6% from prior-year levels, notwithstanding 1.3% fewer franchisees compared to a year ago. We continued to benefit from our Blue-Point, midtier, and RWD programs, as well as our continued innovations across our Snap-on branded products. Lower franchisee turnover also contributed to the improvement. We are also pleased that on a sequential basis, we achieved a slight uptick in the number of U.S. franchisees since the first quarter.

International sales in the Tools Group increased nearly 8% due to continued strong sales growth, including significant gains in Australia as well as currency translation. Operating earnings for the Snap-on Tools Group of nearly $35 million reached 12.2% of sales, up significantly from the 9.8% operating margin last year, again excluding the franchisee settlement. The increase in operating earnings reflects the higher sales along with benefits from operating cost leverage, lower franchisee turnover, and $4.7 million of savings from ongoing RCI initiatives.

Turning to the Commercial and Industrial Group on slide 6, segment operating earnings of $32.5 million were up nearly 18% year over year on a 10.5% sales increase. Currency translation added 3.7 percentage points of the sales growth. The gross margin rate declined 30 basis points to 36.3% in the quarter. Restructuring costs, primarily related to manufacturing footprint initiatives in Europe, decreased the gross margin rate this quarter by about 150 basis points. Increased material costs were more than offset by the benefits of RCI and low-cost sourcing initiatives. RCI and other cost improvement initiatives lowered operating expenses to 26.5% of sales from 27.4% of sales a year ago, even though we continued our operating investments to further our expansion in Asia and other emerging markets.

Turning to the Diagnostics & Information group on slide 7, net sales of $165 million in the quarter were up 31% compared with a year ago. Increased sales of Mitchell 1 Information Products, handheld diagnostics and related software, along with incremental sales from Business Solutions all contributed to the year-over-year sales increase. However, these increases were partially offset by $16 million of lower sales from the wind-down of an OEM facilitation program and the outsourcing of certain nonstrategic low-margin equipment products. Gross margin improved to 46.6% from 37.8% a year ago, reflecting the continued shift in sales to higher margin, higher value added information products. Operating earnings of $29.3 million in the quarter were up $15.6 million from prior year. As a percentage of sales, operating earnings were 17.7% in the quarter as compared with 10.9% in 2006.

Now let me turn to a brief discussion of our balance sheet and cash flow. As seen on slide 8, accounts receivable at the end of the second quarter were $561 million, essentially flat with both year end and first quarter levels. However, days sales outstanding of 73 days was down from 75 days at year end and 78 days at the end of the second quarter of 2006. Inventories at quarter end of $324 million and inventory turns of 4.6 times were also essentially flat with year end levels, but improved from inventory turns of 3.9 times a year ago.

For the most recent 12-month period, and as adjusted for the acquisition of Business Solutions in late 2006, pretax return on invested capital improved to 17.4% from 13.5% a year ago. Our net debt position at second quarter end is $449 million. Our net debt to total capital was 28.3% at the end of the quarter, down from its high of 31.5% shortly after the ProQuest acquisition.

Turning to slide 9, cash flow from operating activities in the quarter was $90.2 million, up considerably from $46.2 million last year. Capital expenditures were $14.3 million in the quarter and $27.6 million year-to-date consistent with our previous expectations. For the six months of 2007, we've deployed about one-third of our $90 million of free cash flow to debt reduction and the other two-thirds to shareholder distributions, including the repurchase of 1.245 million shares at an average price of $51.62. That concludes my remarks on our second quarter.

Now I would like to briefly review with you some financial considerations for the balance of 2007. As we said in the press release and as summarized on slide 10, we expect year-over-year operating and earnings improvements for the remainder of 2007 as we continued to execute our strategic initiatives. Nick will talk about these in a moment. Let me remind you that our third quarter is seasonally low for many of our businesses. In the first half of this year, we spent about $15 million on restructuring initiatives. We continue to expect that full-year restructuring costs will be about $28 million. We anticipate that capital spending for 2007 will be in a range of $55 million to $60 million while depreciation and amortization will be about $70 million. Because of higher debt levels, we expect to incur approximately $24 million of increased year-over-year interest expense. Finally, we anticipate that our effective tax rate for the second half of 2007 will approximate 34.5%. Now I would like to turn the call over to Nick. Nick?

Thanks. Let's turn to slide 12. As Marty said, our second quarter shows encouraging progress and it's being recorded all across the Corporation. I'm going to comment on those individual groups or the individual results in a moment, but before I go further, I want to recognize the progress we're announcing -- that the progress we're announcing today is the direct result of Snap-on associates all around the world. To those associates listening, I simply say that your individual and collective capability, your energy, and your commitment made this quarter possible. Thanks for your contribution.

Now let's talk about the results. In the Snap-on Tools Group, we're continuing to focus both on the external, enhancing the franchise proposition, and on the internal, improving the supply chain and providing new offerings, exciting new offerings, we think. In that regard, we are seeing progress. Franchisee same-store sales are up and very importantly the franchisee count stabilized and that's after several periods of downward slide. And we're optimistic that this inflection point can signal the start of a positive trend as we go forward. Beyond that our midtier product and our RWD marketing initiatives appear to be working. They're capturing additional customers and winning back some of our business that was going to outside suppliers. If we talk about supply, particularly complete and on time order fulfillment or COT, as we call it, we've also improved. COT for our core SKU product lines reached a 93%, and that's significantly better than last year.

Now, we have to view that number in the context of our breakthrough goal, which was, in fact, 99%, so we still have work to do, but having said that, we're moving well and in the right direction. In pursuit of that target, we just about completed the streamlining of our U.S. distribution centers to improve our supply chain. We're also continuing to focus our shop floor RCI initiatives on reducing machine setups. In fact, Jack, Marty, and I were privileged to just receive a report from a Shingijutsu led effort from our Milwaukee plant. In that event, lead times were reduced from hours to just a few minutes. So we're working hard to make the distribution system more efficient and our factories more flexible and the delivery or COT metric is evidence that all of that is working now. But we recognize we have more to do. Our goal is to lower lead times, reduce inventory, and fill orders to direct demand. Today, we just fill orders to forecast. So we're not yet where we need to be.

Turning to the Commercial & Industrial Group, our focus is now on growth. Organic increases in existing territories and expansion in emerging markets. At the same time, we're still working to improve our cost and our competitive position, migrating away from high-cost, higher-cost manufacturing regions and increasing our low-cost sourcing. In fact, in this quarter alone, the group incurred over $5 million of restructuring costs in support of those improvements. It should also be noted, I think, within C&I the industrial businesses in the quarter experienced strong double digit growth. We also continued to expand in Asia Pacific and Eastern Europe. In June, Jack, Marty, and I helped open a second plant in Kunshan, China. It will be focused on our state of the art saw product. It's aimed at customers throughout Asia and we believe it will be a great enabler for our expansion in that region.

In the Diagnostics & Information Group, the Business Solutions acquisition continues to meet our expectations. For the overall group, the strong margin expansion in the quarter reflects growth in our value added and pretty uniquely capable information-based products. On the other hand, the difficult sales comparison in the period for the group was with the facilitation business. Last year, that division was in the midst of fulfilling a major OEM contract in Europe involving sales to, I think, about 8,000 dealerships. What we're seeing now in the D&I volume is the wind-down of those contracts.

Overall for the Corporation, we can say that our fundamentals, our business fundamentals, safety, quality, delivery, and cost are clearly improving. They're progressing both in terms of demonstrated results and in the capability created by the underlying processes we've been establishing. Snap-on is increasingly today able to leverage our strength and support more aggressive levels of growth. So while we continue to work at improving our cost structure, we're now shifting to create more focus on growth, driving initiatives to expand with our existing customers, to access new adjacent markets and to penetrate the emerging economies of the world. It's encouraging to see the results of those efforts start to appear and we expect more as we go forward. With our improving business fundamentals, strong brands, and our capable teams, we're quite optimistic regarding the extraordinary and ample runway ahead. With that said, let me turn the call over to Jack for his closing thoughts.

Thank you, Nick. I want to close by referring to slide 14. As I've said to many of you, business fundamentals, safety, delivery, quality, and cost hang together. And as I've also said, an organization truly aligned around a set of shared beliefs and values can create a powerful culture to drive accomplishments of its mission. Our mission is to provide the most valued productivity solutions in the world. I believe we're moving in the right direction.

Improvements in safety, quality, delivery, customer care, innovation, and rapid continuous improvement, our core beliefs, are being attained across our businesses. Some examples were already mentioned by Marty and Nick this morning. I'm pleased to tell you that in September three of the Snap-on companies will each be recognized for winning Motor Top 20 product innovation awards in the categories of Hand Tools, Diagnostics, and Wheel Service Equipment. This company was founded on innovation and we're pleased to continue to be recognized for our innovation accomplishments.

My feelings about Snap-on today are the same as they were two years ago and can be summed up in one word, opportunity. We have many. Our markets are growing, our brands are some of the most well recognized in the world, our competitive position is enviable and our management team is solid. We've made some improvements, but we have much, much more to do. And because of our many opportunities, I remain very encouraged about our prospects and ability to drive increasing levels of long-term shareholder return. I, along with Nick and Marty, want to thank our associates worldwide for all of their efforts. Now, operator, we'll be open for the questions.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from Alexander Paris from Barrington Research.

Good morning.

Good morning.

A great quarter.

Thanks.

Just some questions on, mostly on the Snap-on Tool business. You did 4.6% growth in North America, which is probably just a little bit better than your franchise dealers' end growth; is that true?

Alex, it's Marty. Good morning. Let me decompose that number a little bit to help everybody this morning. In the U.S., we grew about 4.5% in sales. About 300 basis points of that growth did come from the benefits of lower turnover and the remaining 1.5 points or so came from about 3% growth in per franchisee sales year-over-year, so that's very encouraging. As I said in our prepared remarks, we did have a lower count by about [1.3], year-over-year. So those, I think, are the three important data points to construct a growth rate.

What do you estimate the -- your dealers' end market demand growth at? Something less than 4.6%, right?

Yes. Actually, our guys grew 3 and the market data that we regularly get by surveying technicians in the quarter grew about 2. We grew a little bit, slightly over and above that rate of market growth.

I guess my question is, now that you're focusing more -- changing your focus more to top line growth from what you said, are you still -- you were talking about at the last call about midyear, after midyear you would expect to start increasing the number of dealerships. Is that still the goal?

Well, Alex, as I said on the call, I commented and Nick commented, we actually had a very, very slight uptick in the number of franchisees. That's what we'd been saying. By midyear or so, we thought we would turn the corner there. So we did in this corner. Now as we've said before, given the turnover we have had, there are parts of the country, there are open territories, some 300 depending upon how you count them. And we have plans to build them back, but build them back in an appropriate away.

Alex, this is Nick. Let me just add to that a little bit. One of the things we're doing is trying and working very hard to enhance franchisee profitability.

Right.

One of the very favorable events that has occurred is we've designed what we call franchisee development training. We've had about maybe a quarter of our franchisees through it and the results are pretty spectacular. I was just at a -- we were at a conference with the franchisees and about half of them were there in Las Vegas and in fact, the statistics say that when our franchisees attend these trainings, their per-week sales goes up in a quite large amount. That's what our statistics tell us and that's what we're told anecdotally by the people on the floor of this conference. So we feel pretty good about that.

You asked about growth. I think the van channel has substantial dimensions and runway for growth. One is, of course, improving the per-channel sales -- per-store sales. The other is filling some of these routes and the other is finding these technicians or accessing these technicians, which we haven't in the past been able to access.

What I'm getting at, with the hitting the low point in dealers and your continuing fulfillment rates, would you expect, for at least a year or so, to pop up to significantly better than industry growth, kind of a catch-up before you settle down?

We'd like to think so, Alex. we'll see as we move forward, clearly, as we add more franchisees and get better market coverage, we would expect to grow and in that process improve our market share and market position.

Alex, this is Jack. I think, absolutely, we have that opportunity. I think our execution has improved. We've still got more to do in the whole area of execution, but I think now we can start leveraging it for growth. As Nick laid out for you, I think we have three avenues of the growth that we can realize as we go through the next few quarters.

Great. Thank you very much.

We'll go next to Jim Lucas from Janney Montgomery Scott.

Thanks. Good morning, guys.

Good morning, Jim.

A couple questions here. First off, Marty, the incremental of 6 million restructuring that you highlighted, is that any specific area, or are you just identifying more opportunities and can you just give us some color there, first off?

Well, the -- we've said, since the beginning of the year, we'd spend about $28 million for the full year, up a little bit from what had been our prior annual run rate in the low 20s. Principally because we've got some fairly large manufacturing plant relocations going on in Europe, as well as a plant closure here in the U.S. That activity level this year is a little higher than it's been. And that's consistent with what we've been communicating all throughout this year.

Also, Jim, we have moved to a national customer care center. We had reasonable care centers before. We think we can be a lot more productive, obviously, in one, but we think we can also give improved service. So we have closed -- we have closed two of those, two of the four during this second quarter.

Okay. That's helpful. Thank you. On the diagnostic business, that's an evolving portfolio. I'm gaining a better understanding of this, to use your term, information-based business. When you evaluate the diagnostic portfolio today in terms of lower margin opportunities to source additional product, where are you in that process in terms of opportunities to source or potentially even exit other product lines longer term?

Well, I think as you know, Jim, and one we commented on it, I touched on it as well as Nick, we had a plant in Mexico making some low margin Freon recovery product, lower-value product, clearly. It's an important product for our customers. There are others who do that better than we do. As you would expect in that case, we outsourced it to a third party who now sells directly into our Tools Group. It doesn't count as a sale anymore, if you will, through the Diagnostics Group.

What you're seeing in that business, fundamentally, is the shift to higher value added software and call it the razor blade strategy, less emphasis on selling. Years ago it was about selling PCs on a metal cabinet. That is gone, clearly. It's about handheld devices with lots of software capability, with increased levels of integration, integrating the diagnostic readouts from the control modules to service repair libraries and hopefully down the road at some point as we continue to work on ultimately integration into parts information to go along with service repair information. That's a capability we believe that nobody else has. That's fundamental to some of the strategy -- important strategies in the D&I group.

Jim, this is Nick. One of the big things going on in the D&I group, of course, is the integration of Snap-on Business Solutions. The old ProQuest. And the integration is going pretty well. The standard integration, I think we had 50-some steps and most of those are progressing very well and almost completed. And then we move on to synergies where we have the Business Solutions people who after all are software salesmen, sales specialists helping sell some of the existing product for Mitchell and Diagnostics. So you're already seeing the nascent effect of some of that synergy come out of the Snap-on Business Solutions and it's been integrated very well. That's the other big thing going on in that group.

Jim, this is Jack. I think what we said, just to touch on it here. I think Nick and Marty answered it very well. As we acquired Business Solutions, we said, what we really want is a management system for the back end of the shops that will cover repair, service, and parts. So whether it be for a dealership or a repair shop, we want to be able to provide that and that's our long-term strategy, that's what we're working towards. Obviously, we still have more to do to achieve that, but that's clearly in our sights. It's our focus and our strategies are aligned to it.

One of the great things -- this is Nick again. One of the great things about SBS is they have great relationships with the OEMs and the OEM dealerships. And this gives us a level of penetration with that customer segment which we've never had before and allows us to bring our products right into that segment in a way which we never had the projection.

Okay. Final question regarding RCI, can you comment now that -- as we as outsiders can see, that's clearly gaining some good momentum. With the number of events that are taking place, when you look at the involvement with Shingijutsu versus internal-led events, can you kind of characterize where you are in that evolutionary process, just based on what you've seen in the past, Jack, and where Snap-on is now?

Before, I said on a scale of 1 to 10 -- obviously, you're never finished. That's why we call it continuous improvement, right?

Right.

Well, I think on a scale of 1 to 10, in the past, I said maybe we were between 2 and 3 and the last conference call I said maybe we're at 3, maybe today we're 3.5. My point is, yes, we're using Shingijutsu, we also use Lean Horizons in our administrative processes, the ex Danaher group. It's just great benefits and we're developing our own internal skills now as we move forward. But we have so much to do.

As Nick said, this report out yesterday at Milwaukee, it's just -- it boggles your mind when you think about the opportunity of going from -- we had one where we're setting up machines and we went from some 90 minutes down to 5 minutes. We have those opportunities every place and then that provides us great flexibility. Then with the flexibility then we can, as Nick said, we then can supply product to the replenishment system. As it's sold, we replenish it rather than to a forecast. So I guess my bottom line -- that's the reason why I'm so very optimistic about the future. We've got to continue to execute, execute, because there's great opportunities here.

Great. Thank you very much.

Thanks.

We'll go next to David Leiker from Robert W. Baird.

Hi. This is Keith Schicker calling in for David.

Good morning, Keith.

Good morning.

When we look at the dealer group, we had a couple quarters of good growth here and now we're down to 5. Going forward, what's the trends there? Are we at the high end of the range, the low end of the range of what we can expect?

Well, Keith, I would answer that by saying this quarter we said our franchisees, it's a function of what's flowing through the franchisees and the number of franchisees. In terms of the number of franchisees, we expect to continue to see improvements there. This quarter we had year-over-year 3% growth per franchisee. That's what the market was growing too, but we have always believed that, particularly given our strategies around penetrating the midtier, capturing back the business that our franchisees a couple years ago began doing with outsiders when our supply chain was not fulfilling their orders has benefited us. Early indications are we're growing faster than the market and we'd expect to continue to do that. So low to mid-single digit growth before we think about what is going on with the franchisee count is certainly not out of the realm for us. We think we've got great opportunity.

Okay. When you think about the business that you guys exited this quarter and the Diagnostics and Information segment, is there anything else similar on the horizon there that you would consider exiting in the future?

We always look, but as we sit here today, there's no other business today in the portfolio that we have any other plans for but to continue to improve.

Okay. When we look at Commercial and Industrial, we've had a couple of quarters here of double digit revenue growth. How sustainable is that going forward?

Nick, do you want to?

Well, I think you have to deconstruct that a little bit. Certainly, we have currency in there so -- because there's a substantial piece of the Commercial and Industrial Group in currency -- in Europe, particularly. If you take that out, I guess the growth is about 6.5 to 7% and I think that's very sustainable. I think these businesses are expanding and emerging -- we have an emerging market activity and we have some pretty good growth in some near adjacent markets in Europe and other places in the United States and our industrial business, as I said, has been going very well. We're changing our product offering kit, and also in that business, I'm pretty pleased with the continual reduction in cost. We had $9 million of RCI benefits in the quarter that offset some material inflation and so that group is doing pretty well in terms of -- in terms of balancing sales growth and cost reduction. And I think you can see that continue.

Excellent. That's all I have. Thank you.

Thank you, Keith.

We'll go next to Seaver Wang from Utendahl Capital Partners.

Good morning. Can we assume that the restructuring costs next year will be back in the low $20 million range? That's kind of been the run rate except for this kind of blip this year.

Yes. We've said before, unless and until we communicate differently, we said we'd expect about $20 million a year. Obviously, going into this year, we communicated a higher number based on some of the additional things we've got going on this year. But that's a fair assumption.

Okay. Then I was just curious if you could give us some more color on the marketing strategy, emerging markets? I assume that the customers are a little different there?

I didn't hear that last phrase, Seaver?

The marketing strategy for Commercial and Industrial and emerging markets. Can you give us an idea of how you're approaching it?

Sure. The thing is, one is, we're establishing a distribution network in both Asia Pacific and Eastern Europe and that means putting offices in place. I think we started out three or four years ago with one or two offices in Asia Pacific and the end of this year we'll have 18, doing the same kind of thing in Europe. Recruiting a number of distributors, which are like resellers and then establishing a product line. And the product line is pretty much this.

We have a Snap-on Tools line which accesses to high-value, very difficult application customer and then we're launching a number of other products in the midtier in that region that are accessing automotive customers, construction trades customers, and industrial customers. And those are first being sourced out of Europe and South America, our South American plant. And then as we establish that position, we're building behind that a manufacturing base to support it. You heard me talk today about Kunshan. Well, we had had our first plant and that produces Power Tools and equipment specifically for the region. In future, Kunshan II will produce a saw product line for the region. So what you're seeing us do is establish a distribution network, designate a product line-up, which takes both premium and midtier customers into account and support that with a local manufacturing -- with local manufacturing that will provide the products for those customers in the region.

And is there that much demand for that to Snap-on higher end type of tool?

Well, yes. There's a pretty good demand because Aerospace, whether you're talking about Shanghai or San Francisco, the Aerospace applications want the very best because the implications of having a tool which might chip and get in an engine result in in flight shutdown or leave a tool in an engine. So Aerospace applications are very, very good customers of the Snap-on product line and there's no place in the world that's growing faster in Aerospace than China and the emerging markets. You can go down to natural resources, the same kind of thing and power generation, where Snap-on tools are prized and have quite a high share because of the importance of the application. And all of those are big players in that region.

Okay, thank you.

We'll go next to Jonathan Steinmetz from Morgan Stanley.

Thanks. Good morning, everyone.

Good morning, Jonathan.

I want to follow-up on some of the discussion related to the whole margin opportunity. I know you're sort of transitioning a little bit to focus on revenue growth. But if we pull revenue growth out of the equation and for the sake of argument assumed things were flat, do you think that there's another couple hundred basis points from some of these initiatives over the next two or three years, or are there are some cost increases that maybe we're not thinking about that would get in the way of that?

Well, Jon, that's a good question. Let me just talk about this quarter for a minute and put some color on it. We had overall for Snap-on -- first of all, the margin, if you think about gross margin structure, it's obviously somewhat a function of the mix of our businesses because we've got some very different business models inside Snap-on, as you know. If I look at the Company on an overall basis for the quarter, we had about a 2% increase in material and other underlying inflationary cost trend increases, but our RCI events and activities and results covered that number by almost 3 times. I think that goes to your point. I think there's probably more RCI opportunity -- I know Jack believes this, he'll probably comment when I'm done, than we even appreciate or believe there is today. And so we've done some of that.

Now, this year, remember, I said in the prepared remarks, in the gross margin line, we deducted from it $5.6 million from restructuring costs this year versus only $1.8 million last year. That's a $3.8 million delta, if you will, year over year, which put some pressure. Otherwise, we would have had margins up. Don't know that we'll spend that much each and every quarter in cost of sales so we may get some relief there. The point is, RCI so far has in fact allowed us to actually make improvements over and above inflation. Actually pricing, just to close the loop on that, we, across our business, it only took about, realized 0.5% in pricing. Actually, the other powerful benefit of RCI for us, as it relates to our businesses, is the ability not to have to necessarily take pricing as much as we might otherwise in the face of steel and other cost increases. And I know from talking to some of our franchisees in certain segments of the market in the mobile channel, they said more recently some of their competition has raised price, much more so than we have and these franchisees tell me that's made us much more competitive in the marketplace. So long winded answer to say, yes, there is some opportunity.

This is Jack. I think we have great opportunity. The fact is, we're going to have some price increases. We've got chrome and nickel, obviously, is hitting us. Steel, I think it will moderate to some degree. It's started moderating even in this quarter. The point is, as Marty said, the whole notion of rapid continuous improvement, and as I said earlier, it's just -- we will underestimate the benefit that we'll get from rapid continuous improvement. And the reason we'll underestimate, because we've never really done it. We're just now starting to do it.

We had a -- I'll just give you another example. We had a report out of an event that took place in our Tennessee plant where they were looking at setup time reductions on forging machines. And we had four forging machines and we reduced the setup time so much that now we can do the work on only three machines. We don't need the fourth machine. Furthermore, we move from two shifts -- actually, from a third shift operation, now we can do it with, in two shifts. I think those things are starting to catch hold. I think the enthusiasm is building around it and I think everybody is starting to see the benefits. As you think about us, we've got 39 major sites, both manufactured and distribution centers around the world. The opportunity is clearly there and so I -- again, I'm terribly excited about those opportunities.

Okay. Then switching gears on the Diagnostics & Information side, specific to the ProQuest, or, I guess, Snap-on Business Solutions, do you think there's a big pricing opportunity here over the next few years as you update the product and go through and renew contracts given the high market share, or would there be some reason why you wouldn't be able to get some price there?

First of all, that business model, at least as it exists today is a subscription model. These are multiyear contracts and they do actually today have price escalation built into them. So that's been part of their business model. We have a unique offering. That being said, the business is not without competition. But the existing business today has had and has always had a built in price escalation.

You talked about the long run goal of a complete shop management system, if you will, on the back end. Is there any piece of that that you don't have today with the existing software that you would need to acquire to have an end to end solution?

We don't think so. We think we've got it all and we think we're the only one that has it all.

I would just say one -- this is Jack. I would just say one thing. We don't want to mislead you to think we're going to have that in the next few weeks or few months. There's a lot of work that needs to be accomplished here in order to integrate the systems. But we're clearly working on it.

I assume when you talk about that, you mean everything from diagnosing the problem to interfacing on the parts side to actually ordering parts and getting stuff to the shop?

That's correct.

Okay. Thank you.

We'll take a follow-up question from Alexander Paris from Barrington Research.

The questions were asked. Just one quick one. When you mentioned new midtier products helping in the tool business, are you referring mostly just to the Blue-Point?

Correct.

Correct.

Okay. Do you get -- I guess if you're going faster than the market, do you see yourself picking up market share on the dealer channel?

Yes, yes. We're growing faster than the market and we see a share. Although I hesitate to talk about share in the context of quarter. It appears as though we're getting share. All our indications from the economic data appear to indicate that and also our individual surveys, our pulse surveys with technicians indicate that as well.

This is Jack. One thing I want to be sure you keep in mind is the fact that Blue-Point is really intended for us to capture customers we don't have today and once we capture them, then to get them to move up to Snap-on. So we want to, in essence, capture them for life. That's the global strategy, if you will, as you think about the midtier.

Okay. Thanks again.

Thank you, Alex.

With no further questions in the queue, I would like to turn the conference back over to the presenters for any additional or closing remarks.

Thank you, everyone, for joining us this morning and thanks again for your continued interest in Snap-on.

This concludes today's conference. We thank you for your participation.