實耐寶 (SNA) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the 2008 first quarter results conference call hosted by Snap-On Incorporated. At the conclusion of our remarks, we will conduct a question and answer session. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded.

I would I now like to introduce your host for today's conference, Mr. Marty Ellen, Senior Vice President and Chief Financial Officer. You may begin your conference, sir.

Thank you, Antony. Good morning, everyone. Thank you for joining us today to review Snap-On's first quarter 2008 results. By now, you should have seen our press release issued this morning. We believe that despite more difficult business conditions in certain markets, this quarter continues to demonstrate the strength of our business model and the progress we're making in many of our core operating and growth initiatives. We'll 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 achievements this quarter. I will then provide a review of our financial results, and, 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 Web site next to the audio icon for this call. These slides will be archived on our Web site, 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 managements 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 expressed permission. With that said, I will now turn the call over to Nick. Nick?

Thanks, Marty. For those of you following the slides, my comments are outlined starting on slide number five. In general, Q1 was another encouraging period for our corporation. Sales of $722 million and earnings of $0.97 a share. Having said that, I think we all know that the business environment was quite turbulent. And, for Snap-On, that resulted in some specific positives, like favorable interest rates, and, of course, it created general negatives like lower demand for larger purchases. Overall, the operating earnings were up almost 36% or $25 million. This is even though our sales were up only slightly after adjusting for currency and off-setting the timing of our OEM facilitation programs. $9 of the earnings, $9 million of that increase came from our financial services segment. That was reflecting continued strong yields, ongoing solid delinquencies and lower market interest rates. And, all of that came together to drive that improvement.

Now, we can't take credit for the earnings that resulted from interest rate movement, but what we can be encouraged by is executing our strategic initiatives across the corporation. With that overview, I'd like to give you my take on the quarter. Looking at slide six, North American demand for hand and power tools remains strong. Innovation and continuing demand for immediate pro-activity solutions, they're serving us well.

And, on the other hand, sales of big ticket items, things like tool storage boxes, they were impacted significantly by the economic downturns, economic atmospheres. Beyond our home market, diversification has been an asset. Our worldwide businesses provide off-sets to the North American turbulence. I believe, I highlighted in the last quarter that Snap-On is increasingly an international corporation. In fact, in the period 44% of our sales came from outside the United States. A good example was the worldwide industrial business with global reach and with customers in critical industries like aviation, natural resources and power generation. And, therefore, with activities in sectors that follow a diverse set of macro economics, that business grew pretty robustly. Emerging markets were also strong. Although expansion in that area is on a relatively small base. And, as we announced in our press release, we just completed the acquisition of the 60% majority ownership of Wanda tools. It's now named Wanda Snap-on Tools. It's located in Hangzhou, China about two and half miles southeast of Shanghai. And is probably, we believe, the premier manufacturer of pliers in China. The venture employees about 1,000 associates and has over 750,000 square feet of manufacturing space, and it brings with it extensive and relatively sophisticated product test labs that will serve us well going forward.

Wanda provides Snap-On, as we see it, extensive capacity for Asia based, high-quality hot-forged hand tools. We're confident it'll be a major contributor to the future of our corporation. We're very pleased to welcome Wanda associates to our Snap-On family. We also recently approved another capacity expansion to add tool storage manufacturing capacity for our plant in Kunshan, China. If you put them together, Wanda Snap-On and Kunshan expansion, these are two more important steps in filling out our product line and building our capabilities the critical Asia Pacific theater. We expect them to play a growing role in our path to the future.

Now, on slide seven, the first quarter also saw continuing product innovation. We believe that - in innovation that's consistent with our strong brand position. Innovation investments across the corporations are continuing at a rapid rate. In every business, in every product category from hand tools to power tools to equipment to diagnostics to information-based products. And across numerous dimensions with advancement in metallurgy, ergonomics, technology processes, content management and imaging..

The new products that we spawn from those efforts are tremendously important to us. Particularly in today's environment and difficult economic environments that we see today. A great example is the MG725 Pneumatic Impact Wrench, light magnesium body, extraordinary power, great ergonomics. It's the market leader now. And talking about power tools for a moment, a recent Frost and Sullivan survey, a survey of North American auto technicians, confirmed what had we had already known, based on innovations like the MG725, Snap-On power tools are now the top choice of technicians and are pulling away from competition. Over 40% of techs now prefer the Snap-On brand. That's up substantially from just the short time ago. So, that's part of the reason that power tools products have remained strong even in these difficult times. With that overview, let me landscape the individual groups.

As shown on slide eight, the Commercial Industrial group, we call it C&I, registered sales increases of about 3%, 3.5% or 3.4%, excluding currency. As I mentioned before, worldwide industrial and Asia Pacific were prominent contributors. Those increases were partially offset by a short fall in S&A Europe, our tool business in Europe, where we saw some weakness that surfaced in the slowing economies of southern Europe, particularly in Iberia. Earnings for the group were up 36%. These included gains from currency translations and lower - lower restructuring expenses. But having said that, the primary earning drivers were the increased volume and strong cost reductions across the business, which more than offset higher levels about - higher levels about 2.4 million higher of investment in new markets for the period. For C&I, I believe we can safely observe that Q1 was a confirmation of the group's diversity, it's ability to withstand strong efficiency, and it's continuing opportunity for efficiency and improvement.

Let's talk about the tools group. That's slide nine. Overall, sales were down 2% compared to 2007, 3% in North America. This reflects the continuing lag in North American van count ,and it's also due to a difficult comparison with the 2007 introduction and initial van sale of our mid-tier product line. The van count was, in fact, up sequentially from the fourth quarter of last year. Reduced franchisees, terminations and ongoing recruiting efforts made progress. That's the second straight quarter we've had an increase after a relatively long string of declines. That's the good news. The difficulty is that when compared with the levels of last year's first quarter, the van count was down by 1.4%. In addition to that hurdle, the mid-tier - mid-tier line was rolled out in Q1 of 2007 comparison against that initial van fill resulted in another 1% or so of sales short fall. If you step back from those structural items, the ongoing van business did see continuing strength in hand and power tools.

As I believe I said in the last quarter's calls, these are the products which immediately helped the tech make money, and the demand has remained robust. As you might expect, though, bigger purchases like tool storage boxes have been impacted by the environment. They're down substantially over last year at this time, and, on balance, we saw a flat quarter for U.S. vans. Big ticket reductions off-set the strength in hand and power tools. Going forward, though, we believe filling open van territories is a near-term opportunity. We continue to work hard in recruiting, training and other initiatives to continue that improvement quarter-by-quarter. And we do therefore expect to see year-over-year progress as well as continuing strength in our hand and power tool lines.

Looking inward, execution across the group is improving. Terminations are down, complete-on-time deliveries are improving Our COT or complete-on-time, rates are up 94%. That's an increase, and costs are being reduced in line with the times.

Along that line, we improved the field organization significantly in the quarter, reducing the regional sales offices from 13 to 9. That move will result in lower costs and better resource alignment to support the franchisee. So we expect significant benefit from the tools group from that change going forward.

In the diagnostics and information group, organic sales growth was 5%. Now, that excludes because of the wind down of two essential tool programs, they experienced a $19.5 million dollar sales decline. When we step back from that, I believe when we look at the organic growth, it's clear evidence that our software and information-based products are continuing to sell and sell with reasonable strength. And are contributing substantially to the improved profitability of that segment. Also in the quarter, Snap-On Business Solutions performed consistent with our expectation and made the solid contribution we always anticipated it would when we acquired it.

Turning to slide 10. It's appropriate rounding out my comments that I touch on our global RCI and lean initiatives. We're spending quite a bit of time, energy and commitment to imbed those processes into our culture. And, I think it's clear they're paying big dividends. It's making us more responsive to our customers and helping to us reduce costs. An example, the first quarter's a great example. In the first quarter, we showed that rising global commodity prices and other inflation pressures clearly raised our costs. Maybe in the neighborhood of $8 million compared to a year ago. While our RCI initiatives more than off-set rise and made a significant contributions to earnings growth in the period. Consider that our consolidated operating margin in the quarter reached 12.5%, that's up 290 basis points from a year ago. Excluding the contribution for financial services, operating margins would have been up 11.1%, up 180 to 190 basis points. In a world of increasing inflation and competition and economic bad news, we believe that solid evidence of continuing improvements.

In closing, I want to thank our franchisees for their loyalty and their ongoing contributions, which are a major strength for our corporation. I also believe it's important to note that these results would not have been possible without the efforts of our associates across the globe. And to each and every one of them I offer my congratulations and my thanks. Now, Marty will take us through the financial results. Marty?

Thanks. I will begin on slide 12. Net sales of $722 million in the quarter increased $16 million from 2007 levels. Currency translations added 33 million while other OEM business declined by $19.5 million as Nick already mentioned. As we said before, our revenue comparisons can be significantly impacted by the timing of these OEM programs. Factoring out the impacts of both currency and the OEM program sales decline, sales for the quarter across all of our other businesses were up slightly.

On the positive side, we continue to experience higher sales to industrial customers worldwide and growth in emerging markets as well as increased sales of higher margin diagnostics and information products. On the downside, we experienced a 3.1% decline in U.S. franchise sales in the Snap-On tools group. As a measure of productivity improvement, sales per associate were up 10.5% from comparable 2007 levels as we continued to advance our RCI initiatives. In our financial services segment, revenue increased $12 million, and operating income improved $9 million, primarily reflecting lower market interest rates. Consolidated gross profit of $326 million was up $16 million compared to the first quarter of 2007.

In dollar terms, the gross profit improvement includes $11 million of currency translation, nearly 7 million of savings from RCI initiatives, which more than offset $5.6 million of material and other cost increases. Restructuring costs were lower by $3.6 million, and LIFO-related inventory costs were lower by $2.1 million. These increases were, of course, partially offset by the effect of the lower organic sales. As a percentage of sales, gross margin improved to 45.2% in the quarter, up 130 basis points from prior year levels. The improvement in the gross margin rate was also due to an improved sales mix that resulted from higher sales of higher margin diagnostics and information products and lower OEM facilitations sales, which typically have lower comparable margins. Operating expenses of $245 million in the quarter were essentially flat with 2007 levels. Unfavorable currency translations added $8.6 million. Increased spending to further expand our presence in emerging and growth markets added $2.4 million. These were largely off-set by over $6 million of benefits from RCI initiative and $4.6 million of benefits from lower franchisee termination costs.

Operating earnings of $93 million for the quarter were up nearly 36% from 2007 levels with currently translations contributing $3 million of the nearly $25 million increase. Operating earnings as a percent of total revenues improved to 12.5% up 290 basis points from the 9.6% earned a year ago. Interest expense in the quarter is down $1.8 million as a result of declining interest rates on our floating rate debt. Our effective income tax rate in the first quarter of 33.4% is up slightly from the 33% that we previously communicated. This is due primarily to the geographic mix of our earnings. We anticipate that our full-year 2008 effective tax rate will now approximate the first quarter rate of 33.4%.

As a result of these factors, diluted earnings per share from continuing operations of $0.97 cents in the quarter were up 52% from the $0.64 cents 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 13, segment sales of $357 million in the quarter increased nearly $35 million over 2007 levels. Currency translation added about $24 million. Organic sales growth was 3.4%. Organic sales increases included higher sales of tools to industrial customers, continued strong sales growth in emerging markets and increased sales of power tools. These increases were partially off-set by lower sales of BAHCO professional tools primarily in southern Europe, although recent sales order activity has improved. First quarter operating earnings of $38 million for the C&I group were up 36% year-over-year on higher sales, ongoing contributions from RC I and $3.9 million of lower restructuring costs. Currency translation added $1.6 million to operating income. Our Industrial business had sales growth of 17% and contributed importantly to the operating income increase in the segment. RCI improvements more than offset about $4.8 million of inflationary and other cost increases. We also spent an additional $2.4 million to further expand our sales and manufacturing presence in emerging and growth markets. As a percentage of sales, operating earnings in the C&I segment improved 200 basis points in the quarter to 10.7% as compared to 8.7% a year ago.

Turning now to slide 14, the Snap-On Tools Group had first quarter sales of $289 million, which were up slightly from prior year levels. Without the contribution from $7.5 million of currency translation, organic sales declined 2.3%. In the U.S., sales declined 3.1%. U.S. van counted quarter end was up slightly from year end but down 1.4% as compared to last year's first quarter. About 1% or so of the U.S. sales decline resulted from lapping the van fill associated with our mid-tier product launch last year. While sales of large ticket tool storage and equipment product declined. This was mostly offset by increased sales of hand tools. First quarter operating earnings of for the Snap-on Tools Group $34.4 million were up over $5 million from prior year levels. The impact of the lower organic sales in North America was more than off-set by benefits from cost improvements an RCI initiatives, including $4.6 million of lower franchisee termination costs due to lower number of term terminations and improvements in the process.

Operating earnings improved from 10.2% of sales in the first quarter 2007 to 11.9% of sales in 2008. This year's first quarter included very little LIFO effect, but the year ago quarter included $2 million of LIFO-related charges. Currency translation add the $1.4 million to operating income. Turning to the Diagnostics and Information Group, which is shown on slide 15, first quarter sales of $155 million were down $11.5 million before $2.7 million of contribution from currency translation. The OEM facilitation business experienced an $19.5 million sales decline. They were lapping a first quarter 2007 rollout of a major essential tool program in North America and the wind-down of a program in Europe. The rest of the segment grew 5.1% on higher sales of diagnostic and Mitchell1 information products.

As a percentage of sales, operating earnings of this $20.4 million in the quarter improved to 13.2% in 2008 from 12.6% in the first quarter 2007. Turning to slide 16, our financial services segments revenues were $25.4 million, compared to $13.4 million last year while income from financial services rose from $3.7 million dollars last year to $12.8 million this year. The increase - the increase in both revenues and incomes relates primarily to our U.S. credit business as a result of lower market interest rates. The discount rate on extended credit contracts fell by about 290 basis points when compared to a year ago. Now let me turn to a brief discussion of our balance sheet and cash flow. As seen on slide 17, our accounts receivable and inventory levels increased $63 million with about $30 million of the reported increase coming from currency. The three-day increase in day sales outstanding to 76 days was primarily due to a shift in business mix. Inventories and industrial and Asia increased to support higher sales growth.

Our net debt position at the end of the first quarter is $409 million, which is down from $425 million at year-end 2007. Our net debt-to-total capital of 22.8% is down from 24.9% at year-end 2007 and down from a high of 31.5% shortly after the Business Solutions acquisition. Turning to slide 18, cash provided by operating activities in the quarter was $74 million, up significantly from $27 million in the first quarter of 2007. Free cash flow of $59 million was also up significantly from $13.7 million last year. We also completed the acquisition of 60% interest in Wanda Tools, a hot-forge hand tool manufacturer in China at a cost of $13.4 million. The acquisition which closed in March had no material impact on quarterly operating results.

These conclude my remarks on our first quarter performance. Now, I'd like to briefly review with you some financial considerations for the balance of 2008. These are shown on slide 19. 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 expect to continue implementing our other strategic and RC I initiatives, intended to enable higher levels of growth and profitability. We anticipate full year 2008 restructuring costs to be in a range of $15 to $20 million and full year capital expenditures to be in a range of $55 to $60 million. And, as I already said, we also expect our 2008 effective income tax rate will approximate 33.4%. As a result, we continue to expect that full-year 2008 sales and operating earnings will improve over 2007 levels. Before opening the call for questions, Nick would like to provide some closing thoughts. Nick?

Thanks, Marty. I believe we can summarize by saying the first quarter results were affected by some big wins. Favorable interest rates and an unfavorable North American economy. The results reflected some challenges. Weak big ticket sales, working off our year-over-year lower van count and the timing of the OEM essential tool programs. It also represented some nice gains. Worldwide industrial, serving critical industries, Asia Pacific increased and growing our capability. And our diagnostics and information software sales remain strong.

It's also worth noting that RC I again played a big part in our quarter. The operations overcame cost increases and then some with strong productivity and efficiency gains. Going forward, we're quite positive. This corporation has strong positions, robust business models, extraordinary brands and a diverse customer base and significant runway. And as we said in the past, there also remains abundant opportunity for improvement throughout the organization. On top of that, we believe we have a strong team that's committed and capable to take full advantage of the opportunities going forward. With that, operator, I'll turn the call over to questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) We'll take our first question from Jonathan Steinmetz from Morgan Stanley.

Great. Thanks. Good morning, everyone. Can you hear me Okay?

Good morning, Jon.

So a few questions, first starting in the dealer group, can you just elaborate a little bit upon the 4.6 million of lower franchisee terminations. Just talk about what exactly this consists of, and, if you're able to provide the absolute levels year-on-year. so that we can compare it and try to get an idea of how long this can persist.

Good morning, Jonathan. It's Marty. That is the lower cost of terminations associated with a lower number of terminations. So, terminations are going down, that's the good news. You should surmise that from the fact that our van count is starting to level out over the last couple of quarters. And we've improved the process.

You know, our field structure, our franchise performance team structure, one of the reasons it was put in place to work more closely with our franchisees, and those that are in trouble we're working with sooner in the process. And, by doing that, we recover more in the termination process, particularly in terms of inventory recovery, which the more we get back from them, the lower our exposure, our accounts receivable exposure is. So, that was an important process improvement. We think, I don't have last year's number, Jonathan, but actually we think going forward we should expect favorability in terms of lower termination costs.

So, not just staying at this level, but from a year-on-year perspective continuing to be favorable.

We think because we've improved the process. Remember that's a big part of RCI is process improvement. We'll have terminations, hopefully, lower terminations. That continues to be our plan as we build the fleet back of vans and franchisees. But, because the improvement of the process, lower terminations, we expect some upside still in future quarters.

Okay. And I know you don't have the exact number, but, just maybe order magnitude, I'm just not really sure whether this is a $15 million line item or $20 or $30 or whatever it is. But, any order magnitude you can provide?

I would characterize it in the mid-teens.

Okay. Sticking with the dealer group, you guys commented that big ticket items were down substantially in some of the other hand tools were up. Can you talk about how far down they were, and maybe what percentage of your business this consists of? It seems like hand tools would have had to be up a lot to get you even to where you were.

Well, hand tools. Jonathan, this is Nick. Hand tools and power tools were up between 5% and 10%. The big ticket items were down somewhat more closer to 10%. So that's the kind of balance. We actually sell more tower pools and hand tools in aggregate than we do tool storage and other what we would classify as big ticket items. What you do is you have a bigger base at hand tools moving up robustly between 6%, 7%, 8% depending on what product line you look at. And tool storage is down close to 10%.

We can triangulate with that. And the last question I guess I would have is on the finance income. I mean, do you think $12 to $13 million, is that sort of a sustainable level in your view as we move throughout the year? I'm just trying to short rates move back up a little in the last few weeks. I'm just trying to understand. We've clearly been unable to mode this will line item. So I'm just curious, I know you don't provide guidance, just how should we think about that going forward?

Jonathan, it's Marty. First of all, the revenue is the U.S. part of the business is driving all this. The revenue that we report comes from the sale of the contracts so the discount rate is very sensitive to that gain. Of course, rates were down 290 basis points.

The benchmark rate, you need to look at there, is the two-year treasury given the average term of those contracts. So one has to take a view on where you think interest rates are going to model that. That's point one. I'm not going to share our view. Everyone's got probably their own view. We think rates will stay at these levels for a little while.

The other comment I'd make is originations are obviously the underlying volume measures. You saw on the slide originations were up a little bit. Stuff that gets financed through our credit business are the large ticket items, and, interestingly, while we comment that tool storage for example is down in the quarter, if you look at the trajectory through the quarter, it actually picked up a little bit as we exited the quarter. So maybe that's a good sign. To model, it you really got to think about the movement, the underlying treasury, and you've got to think about the level of originations.

Yes, with the originations being up, it seems like there's a little bit of a disconnect. So, are people going to you guys more as a source of credit availability? And, lastly here I'll jump off and let someone else go on, you had talked in the past about delinquency statistics here without seeing a big uptick. Are you starting to see any change at all there?

Firstly, Jon, it's right. Obviously with sales down and originations up, that meant not surprising over the last couple of years we competed with cheap credit cart offerings and the like. Of course, Those have simply gone away. So we become the next best attractive financing alternative, and the portfolio continues to perform very well. In fact, when we look at 30 days plus and 60 days plus delinquency trends, they are actually down at the end of March and still at very low historic levels. They had upticked a little we commented the last quarter at the end of December so that drives the contribution as Nick said the portfolio yields. We've not changed our pricing parameters. We price this credit risk, we think very appropriately. And when we manage delinquencies well and get the tail-end associated with the low discount rate, as you see here, you see it again in 2003 when rates were low. We get a nice contribution from that business.

Thank you.

And we'll go next to Alexander Paris at Barrington Research Associates.

Good morning, Great quarter.

Good morning, Alex.

Good morning, Alex.

I would still like to see better top-line growth. Speaking of that the RC I, do you have enough projects out there to keep the same kind of positive- net positive contribution or close to it for the remaining quarters --

I think we feel pretty strongly that that's true. I think we said that we have -- I think the last number was 103 or 104 dedicated RC I people sprinkled throughout the organization. They're all working diligently. We have a -- people here guiding them. We're still involving [Shingzu Shitzu] from Japan.

So we pretty feel strong about the opportunities. I think I shared this with you perhaps before when Marty and I or Jack walk around the corporation, we just see so many ways in which we can improve. And I think we've said that wear targeting 2010. We see ourselves making mid-double digit returns. I think strongly, mid-double digit returns, and we feel we can get there pretty much through cost reduction. We'd like to get there through balance, but if we had to balance between sales and cost reduction. But, if the sales turn down, we believe we have a lot of runway in cost improvement.

Great. Looking at China, now that you made the other acquisition, how do you see that business developing? I imagine there's good opportunity. In terms of your three segments, for example is there a possibility of van business in China, or is it all going to be more C&I and D&I?

There's no, Right now, the way I see the China market there's no, there's little possibility of van business. Generally, the vans occur effective where technicians own their own tools. And the jurisdictions where that doesn't happen they usually are relatively marginal. And so in China, as most of the world, the technicians don't own their own tools.

So, the proprietary model will not work. We believe we have technology and product quality and ergonomics will set us apart from other people, and, therefore, be able to get the kind of proprietary priority position in the marketplace. We're seeing that somewhat in equipment now where we've brought our imaging product in there and gaining share dramatically. Wanda will give us a base to start that with hand tools. We haven't in the past because we've been lobbying hand tools in there from Europe and the United States. They don't have the cost positions that can compete in that market.

Okay, thank you. Just one other question, I know in the past, every once in a while we have a surprisingly poor third quarter because of some big jump in gasoline prices. How would you see the possibility of a negative effect on your third quarter if gasoline goes to $4,00 as a lot of people are talking?

Well, we've looked at the effect of gasoline on our franchisees. There are probably two factors. One is the lower driving. Generally though when we step back and look at the macros in the marketplace now, the spending on automotive repair has remained fairly strong, fairly reasonable. So we feel relatively good about that going forward. Now, I can't predict how that would be affected as gasoline prices go up and up. On the other hand, on the other hand, in - on our vans, their costs go up. So their costs have probably doubled in the last, say, six or seven months. We've been working with them on productivity to make sure they can make up some of that in terms of their margin expansion. And in a time in which the gasoline prices have risen over the last six or eight months, we've seen our franchisees general profitability rise. We've been able to off-set it just by projecting RC I and improvements into the franchisee system.

Thank you very much.

Sure.

(OPERATOR INSTRUCTIONS) We'll take our next question from Jim Lucas with Janney Montgomery Scott.

Thanks, good morning, guys.

Hi, Jim

Nick, could you give us a reminder on a couple of these head wind issues which are more timing related? Both the van count and the OEM projects. At what point do we get to more of an apples to apples comparison? Is that second half of the year?

Looking out into the second quarter, we see the OEM start to decay. I think we'd say it'd be about half of what it is today. Then it starts to decay down in the third quarter and fourth quarter from that level. So you can see it going from like 19, you might chop it in half in terms of effect. And, then it gets much less significant in the third and fourth quarter.

In terms of the van counts, we start to catch up and probably -- well, our goal is to try to catch up as soon as possible. But, you start to get easier comparisons in the third and fourth quarter.

Okay. And, was a little bit surprised to hear about the softness that you're seeing in Southern Europe. When you look at the Western European economy, if we step away from Eastern Europe as more of an emerging market and Western Europe in general, whether it's in your industrial or equipment businesses, what is the overall environment look like today for you?

Well, what we saw was we're actually seeing -- Jim, we're actually seeing reasonable growth in places like the U.K. and Scandinavia and the low countries. We got hurt in the quarter in Spain and Portugal. And, if you look at the economic news there in the first quarter, they revised down their GNP estimates. We think that had our distributors take a pause. We had the same kind of thing in Italy, which has been slow for some time. We kind of see that as a quarter effect.

What we're seeing now is better order rates. In fact, the order book is relatively strong in Europe so we expect to see some recovery in the second quarter in that area. Our take on that is that the economic news hit in the first quarter and in Spain. We're the market leader in Spain by a long shot and in Portugal and in some of those southern Europe countries. And the distributors wanted to take a pause. Now we're seeing them come back. The magnitude of that come-back I'm not sure. But we expect to see some recovery.

Okay. And when we take a look here, I think we've done a good job in terms of mapping out the issues impacting the organic numbers in the first quarter and how that potentially gets better as the year progresses. Margins continue to be a great upside surprise as well as financial services. When we look at the balance sheet, and, you had this, nice small strategic acquisition in the first quarter, but can you talk about capital allocation priorities? We highlight them every quarter, but have they changed? Are you seeing anything different out there?

This is Marty. Make a comment then maybe Nick wants to make a comment. First of all, add some color. I think we are not just in Spain, but elsewhere I said that tool storage seems to be picking up. Hopefully we've got positive trajectory coming out of the first quarter in terms of top line.

And e will continue to expand margins as we've said. We remind everybody by 2010, we expect to be mid-teens operating profitability. We think we're moving directionally there. So we're pleased with that. Capital allocation continues to be the same. Yes, we made a small acquisition. We continued a look for acquisitions like that, that allow us to give us a very immediate ability to grow in the markets that are growing or to expand our product offering through our existing distribution or gain access to distribution and customers. Nothing transforming, nothing large. And we continue to want to work the balance sheet, to generate as much free cash flow as we can. The priority has always been our dividend of course. We look at raising that each and every year if our board so chooses. Share repurchases to off-set dillutions, we'll continue to do that I've guided you guys on capital spending including the capital addition if you will that we're making in China to bring tool storage manufacturing capability into China. And - and that's sort of the keep the ship in that straight line for now.

Okay.

I'd like to add one thing to that, Jim, is that I would just slightly clarify the characterization of Wanda as a small acquisition. It was small in terms of financial impact, but the physical capabilities are a monster. It's 750,000 square feet of fine manufacturing space. It's a number of product labs. It is 1,000 capable associates. This is a very strong company, which we feel sanguine about being able to wheel to our advantage in the future. I hope some day I can guide you on a tour of the facility. I think you'll be impressed.

I'd look forward to that. Okay, thank you very much.

(OPERATOR INSTRUCTIONS) And with no further questions left in the queue, Mr. Ellen, I'd like to turn the conference back over to you for additional or closing remarks.

Well, thank you, everybody. And, thank you for your interest in Snap-On, and have a good day.

This does conclude today's presentation. You may disconnect your lines at any time.