實耐寶 (SNA) 2009 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Snap-on Incorporated 2009 first quarter results conference call. At this time, all participants are in a listen-only mode. And at the conclusion of our remarks, we will conduct a question and answer session. (Operator Instructions). I would like to introduce your host, Marty Ellen, Chief Financial Officer. You may begin your conference.

Thank you, Chad, good morning everyone. Thank you for joining us to review first quarter 2009 results. By now, you should have seen our press release issued this morning. Joining me is Nick Pinchuk, Snap-on's President and CEO. Nick will kick off the call this morning with his perspective on our performance. I will then provide a more detailed review of our financial results. Afterwards we will take your questions.

Consistent with past practice, we will use slides to illustrate our discussion. You can find a copy of the slides on the website next to the audio icon for the 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, expectations, estimates, or beliefs, or otherwise state management's or the company's outlook, plans, or projections are forward-looking statements and actual results may differ materially from those made in such statements. Additional information and factors that could cause results to differ materially from those in the forward-looking statements are contained in the 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 rebroadcast by any means without Snap-on's express permission. With that said, I will now turn the call over to Nick.

Good morning, everybody. Well, it appears we live in interesting times. I would say the difficulties of the period didn't really surprise us, but no doubt this was one of our most challenging quarters. Sales were down 20%, with currency contributing about 7 points of that decline. But as we left 2008, we said we believe that the recession was deepening. It was extending across more industries and geographies, and that's pretty much what happened. But we also said that although we are certainly not immune to the downturn, Snap-on's business models are quite strong. And our rapid continuous improvement and other value creating processes -- those strong processes will help us weather the storm. They help us limit the damage of the downturn and they've done just that. So in terms of profitability in the first quarter, we were able to maintain or achieve about an 11% operating margin. In other words, we are being impacted just like everybody else, but we were able to maintain a double digit margin, even in the face of significant challenges. We believe that is testimony to Snap-on's strengthening operating platform and to our robust improvement processes.

Looking beyond the current difficulties, we remain confident that our businesses have significant runway. So we are continuing to invest. We are working to strengthen those strategic areas that will make a significant difference as we emerge from the turbulence. Prominent among those strategic dimensions is our franchisee network. We are working every day, training, launching new products, providing new systems, and building support mechanisms. We are determined to make that unique distribution asset even stronger.

And I have to say that that effort has been working. We maintained our van count and our franchisees are weathering the storm. As I said in the fourth quarter, we also aim to gain greater share in the auto repair garage segment. We are going to do that by using our imaging technology. And it appears as if that is continuing. We are also driving to extend the Snap-on brand in mission critical industries through our industrial division.

Although the first quarter represented a step back from what had been consistently strong gains in that division, we are confident that our initiatives in that area will payoff as we move forward. And I couldn't speak of strategic direction without mentioning emerging markets. So I will just say that construction of our new plants in Eastern Europe and China are both progressing on schedule.

Finally, we continue to invest in innovation. It's still winning customers even in this environment. A good example is our new MG325 power tool, 3/8 inch pneumatic impact power tool. It's got a magnesium body, it's lightweight, it's got increased power and reduced size, and it's breaking sales records even in this market.

So you see, we still believe in the forward opportunities, and because of that, we have chosen not to close any large manufacturing facilities. We believe that capacity will be needed as the market improves.

Now there is cost in carrying those capabilities but we are prepared to bear it and we haven't been inactive in cost reduction. We have been aggressively applying the Snap-on value creation processes, processes like rapid continuous improvement, or RCI as we call it. We're applying those processes to continue to improve productivity. Our numbers bear that out. And while our larger plants are with us, two smaller facilities are in the process of closing as we speak. And there's been streamlining in a number of other areas, in fact, generally across the corporation. We continue to plan in that regard. We're planning continuing efficiencies as we move forward through the next quarter.

The first quarter as expected was a challenge. But our strong business models, our extraordinary brand, our effective improvement processes -- they limited the damage. At the same time, they supported continuing investment in key strategic areas, areas that we believe will be strongly decisive for our future growth.

Now I'm going to landscape the individual operating groups. Some of our biggest challenges today are in the commercial industrial group. Similar to last quarter, it's just tough. It's tough to sell big ticket items. Capital goods like wheel service equipment, aligners, wheel balancers and tire changers, higher priced products -- they require reasonable customer confidence in the business outlook to justify a purchase. Needless to say, that isn't abundant in this environment. Excluding currency, sales in our equipment division were down 22% reflecting just that. Having said that, though, we believe our investment in advanced technology like our imaging alignment improved our market position in the period in both the US and Europe. We are also continuing to expand our equipment product line tailored for Asia and assembled in our Kunshan factories. In fact, we have a couple of existing introductions in our Asian lineups planned for this year, and those preparations are proceeding right on schedule.

Turning to Europe, our Europe based tools business, SNA Europe, experienced a 23% sales decline before currency. Now there is some variance from country to country -- for example, Spain, the business's largest market was down 40%, while France, the second largest was down just over 6%. It's clear now that the economy in Europe has slowed dramatically as the recession has deepened. It's also clear that the credit crisis has imposed a tighter grip on our distributors' ability to purchase products. As a result, we saw further inventory destocking in that distributor channel.

Regarding Europe, however, we did see a positive data point in March. Average weekly sales were higher than the average was for the quarter improved from the quarter's low point. Recent order activity has also risen. So I think it's too early to call it's a trend, but it's something worth watching. Meanwhile, SNA Europe continues to work hard. They're working hard at accelerating their own RCI activity, continuing factory migration to lower cross countries, and increasing the sourcing of finished goods from emerging markets. All of that is consistent with driving stronger performance in good times or in bad.

Our industrial business has fared relatively well in the quarter, although the global sales were down 6% before currency. In the US, our businesses in several key segments -- aerospace, natural resources, and the government did decline. But not surprisingly under the current conditions, sales in our vocational training schools improved in the quarter. Despite the overall decrease in the industrial division, we continue to strengthen our position with customers across the critical segments served by that division, because we are confident they offer extraordinary long-term growth potential.

As everyone knows, even Asia is slowing. Notwithstanding that, we believe the region still offers significant long-term potential. So our expansion plans there are continuing. I already mentioned the under car equipment introduction scheduled for this year. We also recently completed the migration of our bandsaw manufacturing into Kunshan, and early in the third quarter, we expect to complete our third Kunshan factory, where we'll begin producing tool storage products in China for the first time. That will give us a platform to penetrate in local storage markets and provide a captive low cost source to support our mid tier product strategy in developed countries out of Kunshan. We've chosen to continue the investment even in this environment because we believe strongly that they will pay off with significant growth.

In Snap-on tools, the van segment, constant currency sales were down 11% globally, and sales for the US vans were down 18%, although sales off US vans decreased somewhat less, about 11%. The difference is we continue to encourage franchisees destocking to improve their liquidity. In the US, the rate of sales decline did decelerate towards the end of the quarter. So we will have to wait and see if the positive trend continues. What we did see for sure in the quarter is that hand tool sales are holding about flat. But as in prior periods, and as in the equipment business and a lot of places in our business, the big ticket product purchases -- particularly tool storage boxes -- have continued to be difficult. We will see how that plays out going forward.

Van count in the US was essentially flat, both for the year end and prior year levels. With that said, the current environment is clearly challenging for our franchisees. In that regard we continue to support them. We support them with a comprehensive set of programs, increased training, sales development, operating expense reduction opportunities, additional credit offering, and finally product promotional programs. That's all aimed at aiding their profitability, helping their cash flow, and strengthening the stability of the network. And so far, looking at the turnover data, which remains roughly flat, it appears to be working.

It's worth noting that auto repair spending in the US continues to show growth. That's logical -- as cars age in the face of significant reductions in new car sales, repair will grow. Our challenge is overcoming uncertainty. Like most consumers, even technicians who generally have work are now cautious in their spending. For Snap-on, that means they buy hand tools, but they postpone the bigger ticket tool storage purchases. That's what we are seeing. But this will change. The auto repair industry is robust and its future is positive and pretty clear. When the current uncertainty wears off, we are confident our franchise network will be healthy and in a strong position to take full advantage.

The international van business for the most part continues to perform well. Sales before currency were up 6%. In the UK and Australia, we grew vans by [25], about a mid single digit percentage increase. We also had successful results with first quarter promotional programs in both of those countries.

In the diagnostic and information group, sales were down about 14%, 10% without currency. The toughest comparison was in our OEM facilitation business. That was impacted by declines in spending on dealership equipment. Notwithstanding a DNI group sales decrease, profitability did improve. Cost reductions, the benefits of RCI, and sales of software updates more than offset the lower overall sales volume.

There has been considerable public discussion regarding the contraction of the American auto manufacturers and the dealer bases. I believe most of you already know that Snap-on has little direct business with the OEMs themselves and even our activities with dealerships and businesses -- like Snap-on business solutions and equipment solutions is not tied to rooftops as much as it is tied to repair volume. Now turbulence in the dealership system can represent a near term challenge, but overall this impacts a relatively narrow slice of our business, with even that difficulty abating as the repair work redistributes throughout the national garage network.

In the current environment, I don't believe it would be appropriate or any discussion would be complete without touching on RCI. It has been and continues to be enabling for us. It's shown the way for improving processes in both manufacturing and administration. RCI is now simply a cornerstone of Snap-on's way of creating value. It's helped us limit the damage of the downturn and we are confident it will be a big factor in the future. In that regard, we have been rigorous in managing down all areas of spending during the past quarters. As indicated in this morning's press release, we do expect an increased level of restructuring in the second quarter that will further reduce our cost structure going forward.

Commodity costs are another important area of opportunity, and as expected, we had small increases in the first quarter -- the result of trailing price indices in items like steel. Nevertheless, we have been working strongly to take full advantage of the current environment and drive down those sourcing costs. We expect that effort to pay off as we proceed through the year.

In the first quarter, probably for the next couple of quarters, the situation will be challenging. But Snap-on has the processes to limit the damage. We believe the last three months showed that. We also have a clear focus on the key strategic dimensions that will be decisive. That will give us strength when the storm passes. We will continue to invest in those areas so Snap-on will emerge from all the difficulties, from all the downturn, stronger than ever. Now Marty will take you through the financial details.

Thanks, Nick. I will begin my remarks with slide six. As Nick mentioned, clearly the difficulties posed by the global economy increased considerably during the first quarter. Recessionary headwinds challenged our top line sales performance in the quarter, with sales declining [13.1%] before currency. The effects of currency hit us fairly hard at two levels during the quarter as a result of the continued strengthening of the US dollar. First US dollar sales and profits were reduced because of translation, which on a year-over-year basis reduced sales by $54.5 million or 7.5%, and reduced operating income by $6.1 million.

Second, as many of you know, our Snap-on branded products sold by our international Snap-on tools franchisees are manufactured in the US. Therefore the stronger US dollar cut into their gross margins by $5.3 million in the quarter. In total, currency reduced consolidated operating income in the quarter by $11 million. If foreign currency rates stay at present levels through the second quarter of this year, year-over-year results for the second quarter will be similarly impacted. But this should begin to abate later in the second half.

Our past and ongoing RCI initiatives have not only allowed us improve quality, delivery, customer service, and numerous other business processes, but through productivity improvements have allowed us to reduce cost. The RCI related improvements and other cost reductions have enabled us to better offset the sales volume decline by providing $18 million of savings. In fact if you remove the effects of currency, operating income on a comparable basis declined by $18.8 million on an organic sales decline of $95 million, resulting in less negative operating leverage than might have otherwise occurred. So we're pleased with that outcome.

Gross profit margin for the quarter was flat with last year at 45.2%. Gross profit margin benefited in the first quarter from the rollover effect of certain pricing actions taken last year, and together with RCI improvements and other cost reductions, we were able to offset the negative affects on gross margin of currency and the cost to carry manufacturing capacity.

Operating expenses declined by $41.1 million, but increased as a percentage of sales by 170 basis points. This was primarily due to the negative leverage effect of lower sales on fixed operating expenses, notwithstanding $11 million of RCI improvements and other cost reductions. And as we previously indicated, pension expense was up $3 million for the quarter year-over-year, and we expect similar quarterly increases in pension expense throughout the remainder of 2009. Financial services contributed $10 million of operating income in the quarter compared with $12.8 million last year. I'll cover financial services in a later slide. As a result of these factors, operating earnings of $64.3 million for the quarter were down $28.9 million from last year. As a percent of total revenues, operating earnings were 10.9% as compared to 12.5% a year ago.

Interest expense in the quarter was down about $1 million from 2008 levels, primarily as a result of lower interest rates on our floating rate debt, partially offset by higher interest expense from the first quarter issuance of $300 million of fixed-rate five and 10 year unsecured notes. Diluted earnings per share of $0.60 in the quarter were down from the $0.97 earned last year.

With that, I will now turn to our segment results. Starting with the commercial and industrial group on slide 7, segment sales of $259.8 million declined 27.2%, but before currency sales declined 17.7%. We continued to experience lower sales of professional tools in Europe, and lower sales of equipment worldwide. Sales in our worldwide industrial business were down 6%. Gross margin of 35.5% declined 180 basis points from last year, as contributions from price increases taken in 2008 and $3.7 million of savings from RCI and other cost reduction initiatives were more than offset by the lower organic sales volumes, including the cost to carry manufacturing capacity. The increase of 200 basis points on the operating expense ratio was primarily caused by the effects of lower sales on fixed operating expenses partially offset with the benefits of RCI and other cost reduction initiatives of $2.9 million. The net results of these factors resulted in operating earnings of 6.9% compared to 10.7% a year ago. Ignoring currency translation, the dropthrough or negative leverage on operating earnings due to the sales decline in the segment was about 25%, which was somewhat limited by our RCI and other cost improvement actions.

Turning to slide 8, on a worldwide basis organic sales in the Snap-on tools group were down 10.7%, reflecting the continued challenging sales environment, particularly for sales of larger priced products like tool storage units. Sales declines in our North American franchise operations were partially offset by increased international sales, primarily in the UK and Australia. At quarter end, US van count was essentially flat compared to both year end 2008 and prior year levels. Sales in the US were down 16.9%, but as Nick already mentioned, sales deliver off of the vans were down only 11% on average across the system.

Gross margin in the quarter was 42.4%, as compared to 43.3% a year ago. Margin compression of $5.3 million occurred in the international businesses due to foreign exchange on US sourced products. Additional margin reduction resulted from the cost of carrying manufacturing capacity in the face of reduced production levels. Other cost improvements were achieved to partially offset these negative factors.

Operating earnings for the Snap-on tools group of $21.1 million in the quarter declined $13.3 million from prior year levels largely due to lower sales volumes, including the cost to carry manufacturing capacity, and $7.7 million of unfavorable currency effects. Excluding currency impacts and on a comparable basis, the dropthrough effect of the sales decline was about 22% for Snap-on tools, much lower than the contribution margin structure of this business, as we were able to provide some offset with RCI and cost improvements of $6.5 million. As a percentage of sales, operating earnings in the segment were 8.7% as compared to 11.9% a year ago.

Turning to the diagnostics and information group, which is shown on slide 9, first quarter sales of $132.5 million declined 10.2% before currency. Sales decline is primarily due to lower essential tool and facilitation sales to OEM dealerships and lower sales of higher priced diagnostics products in North America. Sales of diagnostics products in Europe and sales of Mitchell 1 information products were both up slightly year-over-year. As the OEM facilitation business is lower margin, the overall mix impact to the segment was favorable to margins. Additionally, $5.1 million of RCI and other cost improvements, along with $1.8 million of lower restructuring, improved the segment's operating margins from 13.2% last year to 19.4% this year.

Turning to slide ten, financial services operating income of $10 million was down $2.8 million from 2008. Originations in the quarter were down 21% from last year, principally due to lower sales of big ticket items sold by our franchisees, as these are the products that tend to get financed through Snap-on credit. Lower discount rates on contracts sold partially offset the earnings impact of the lower originations.

Many of you continue to ask about the credit quality of the portfolio of Snap-on credit loans to technicians. Accounts 60 plus days delinquent at the end of March were about 2.2%, which is slightly better than the 2.3% that we reported to you as of the end of 2008. To remind you, at the end of 2007 and 2006, they were about 2%. The high water mark was actually about 3% at the end of 2005, and was mostly due to the consolidation of Snap-on Credit's deal organization. For years prior to 2005 and going back to 2001, the highest level of experience was about 2.2%. Both Snap-on Credit and our franchisees have always worked diligently to control delinquencies and have heightened their efforts given the current environment.

Now let me turn to a brief discussion of our cash flow and balance sheet. The cash flow statement issued with this morning's press release requires a little more analysis than usual. Turning to slide 11, reported cash flow from operating activities in the quarter was $14.7 million compared to $74.4 million last year. However, there were a number of items in both years not truly representative of the ongoing operating cash flows of our businesses. Slide 11 presents the operating cash flow section in a pro forma format in order to aid a more meaningful year-over-year comparison. In the middle of the slide you will see adjusted operating cash flow. We believe that the $32.5 million in adjusted operating cash flow this year compared to $51.2 million last year is a better representation of operating cash flow. We have then separately listed the other items in order to reconcile to the amounts on the cash flow statement. The $18.7 million decline in adjusted operating cash flow is principally caused by lower earnings and both a higher level of and certain variations in the timing of payments for a number of operating items. Partially offsetting these outflows was a $35.8 million cash inflow improvement from working capital reductions.

Now, below this level of adjusted operating cash flow there were certain other items included in the reported cash flow from operations. Payments of $14.2 million were made under certain foreign currency hedge contracts, which you can see last year resulted in the receipt of cash of $2.6 million. At current rates of foreign exchange, we would not expect these payment outflows to continue. Also, there were higher cash outflows related to restructuring payments this year compared to last year. You will also note that last year's operating cash flow included certain cash receipts for a sale of a building and a release of escrowed funds related to an acquisition.

Capital spending was $14 million, which included planned growth spending for our plant in Belarus and the further expansion of our plant in Kunshan, China. Last year, first quarter capital spending was $15.4 million. Our current plans call for 2009 capital spending to be in a range of $60 million to $70 million, which is down from the previously communicated range of $75 million to $80 million. We will continue to manage the balance between investing and capturing growth opportunities as warranted by the business environment, and we will adjust our capital plans accordingly.

As seen on slide 12, accounts receivable decreased $43.8 million from year end levels, primarily due to lower sales and continued strong collections. Currency translation accounted for $12.6 million of the decrease. Days sales outstanding improved to 62 days at quarter end compared to 64 days at year end. All of our businesses are being extra vigilant in managing and monitoring customer accounts and credit risk in this environment. Inventories at the end of the quarter were down $18.5 million, reflecting $11.1 million of currency translation and $7.4 million of lower net inventories. Due to the slow sales environment, inventory turns declined from 4.6 times at year end 2008 to 4.3 times currently. We are managing manufacturing production schedules in response to the continued volume declines and expect further reductions in inventories.

Net debt at the end of the quarter of $416.3 million was up $16.7 million from year end 2008. Our net debt to capital ratio of 26.5% increased slightly from 25.2% at year end. Our liquidity position and access to credit continues to remain strong. Cash on hand at the end of the quarter was $400.7 million. We issued $300 million principal amount of long-term unsecured notes on February 24th to take advantage of what we believe were favorable market conditions in what continues to be a uncertain and unpredictable credit environment. We issued $100 million of notes due in 2014 at an all in effective rate of 6%, including discount fees and expenses, and $200 million of notes due in 2019 at an all in effective rate of 6.8%. We anticipate using the net proceeds of $298 million from the debt issuances for general corporate purposes, including the payment of $150 million of upcoming debt maturities in January 2010.

In addition to the $400 million of available cash on hand, and our cash flows from operations, we currently maintain a $500 million revolving credit facility provided by a strong diversified group of international banks which does not expire until August 2012. We also have another $20 million of committed bank lines. At quarter end, the entire $520 million of borrowing capacity was available. In addition to these facilities, our current A2/P2 short-term credit rating allows us to access the commercial paper market should we choose to do so. We presently have no commercial paper outstanding. This concludes my remarks on our first quarter performance. Before opening the call for questions, Nick would like to provide some final thoughts. Nick?

Thanks, Marty. As expected, we found the first quarter to be challenging. The recession spread and impacted more of our operations. But as we said before, and as we said before, Snap-on is not immune to the difficulties. But our business models, our brands, and the robust processes that make up Snap-on value creation -- they combine to limit the damage. We believe this business has strong runway. So we've continued to -- invest in the health of our franchisees and the penetration of critical industries, and the driving of our technology advantage in repair garages and in building our emerging market position. We are making headway in each of those areas and we believe it will serve us well as we go forward.

One other closing thought. Snap-on has made significant progress over recent quarters, lowering breakeven and becoming generally a stronger enterprise. Just consider this -- the last time our sales were this low was in the first quarter of 2006 -- they were about $585 million. That's not too long ago, first quarter of 2006. OI margin in that period was 6.5%. That means that OI margins in the first quarter of 2009 at roughly the same volume were about 400 basis points better.

We will be the first to say we are far from satisfied by the past quarter's results -- there is, believe me, abundant room for improvement. I can't let this call end without recognizing the extraordinary contributions of our associates and franchisees that has brought us so much -- the people that have authored the 400 basis points of improvements over just that short time. My thanks to each and every one of you. Now we will turn the call over to the operator for questions. Operator?

(Operator Instructions). We will first go to David Leiker with Robert W. Baird.

Good morning.

Good morning, David.

Couple of things, the one big item that jumps out is the SG&A line. Can you give us perspective of how much of that performance is a function of you taking cost out of the business on a permanent basis opposed to the numbers flexing with where the revenue line is? So you have a sense going forward sustainable this level of SG&A spending is?

Generally the way we view it, David -- it's an imprecise science, of course. We figure about 5% comes out, about $5 million, you got $100 million of movement, which we had in the quarter, we saw in currency, you get about $5 million out for direct variable cost associated with the selling operation. Then you got between $7 million and $10 million associated with -- I will say, temporary cost reductions associated with the volume of activity. Then the rest, I think, are pretty good permit type cost reductions.

Okay. Great. If you look back at the beginning of the quarter, what are the things most different than what you were expecting them to be?

I think a few things, I think first of all we didn't expect as much destocking of the European distributor businesses. That was a little stronger than we thought. So we saw destocking there through January and February. That lasted longer than we thought it was going to be. As I said seems to be abating a little bit. Big ticket items drove deeper than we thought. Then I think we saw industrial, the mission critical businesses soften somewhat more than we had expected. I would have said, David, that directionally we expected destocking both in our franchisees and in the distributors. So we are not talking directionally, we are talking about how much. And we expected big ticket items -- we have been talking big ticket items for a long time and certainly that's an issue. I think we didn't know where industrial was going to come out. We knew we would be impacted eventually by the uncertainty and so on, so we didn't know where that was going to happen. It came out maybe a little lower than we thought. I'm not sure how that's going to play out going forward. We had some good news and bad news in that area, as I elaborated on in the call. Schools were up and some of our other businesses were down. That's really where we are.

Sounds like you ended the quarter things -- early signs that things are at least stabilized if not getting a little bit better?

I don't -- I think being in the prediction business in this environment is a dangerous profession.

Welcome to my world.

I will say logically this, is that there has to be an end to destocking. And so we would expect that to end at some time going forward. And I think maybe we are seeing some of that play out in the franchisee business and in the European business.

Then just one last item, and that's if you can touch on your franchisees here in the US and their financial health and how they're weathering the downturn -- anything you're doing to help them out. Kind of talk about the state of the franchise business.

Sure. I think the topline is the franchisees are managing the downturn with reasonable capability with our aid. Terminations and on hold franchisees, which are our measures of problems in the system, are flat. So we haven't seen significant changes in those leading indicators or indicators of franchisee health. That's one good thing. We feel good about that. We have seen, there was a dip say through February in what I would call delivered sales for the franchisees. And that's come back in March. We are seeing a little bit of positives in that regard. On a anecdotal basis, I was just with about 400 franchisees in a colloquium. They were all reasonably positive. I could have selected 400 franchisees and gotten a different set of 400 franchisees and gotten a little bit more pessimistic view of the world.

But I think in general we would say that our franchisee system is maintaining itself reasonably well. We have what we call a Snap-on stimulus package. So we are trying to help them every day, working overtime trying to train them how to identify business opportunities in terms of reducing their own SG&A, things we have been talking about in terms of making sense -- don't idle the truck as much and save fuel, that kind of thing. Using different ways to purchase various commodities. We also are providing them a little more support from time to time. For example, selective places were providing extensions on some of the leases for some of their vans. We implemented a new program called the Small Balance Extended Credit which takes our traditional credit activity and moves it down in sticker price to allow it to be effective for the franchisees -- maybe they don't need so much cash to manage their what we would call their usual day-to-day business. We have been installing some new systems which allow them to be productive in getting to more customers. And I would just leave it at, we get up every day, I think I tell them this and it's really true, thinking about how to improve their health. We keep coming up with ideas and put it as part of their -- part of our stimulus package.

Okay. Great, thank you.

Sure.

Our next question comes from Jim Lucas with Janney Montgomery Scott.

Thanks, good morning. First question, on the CapEx, while the adjustment is not big in terms of material dollars, just wanted to delve a little deeper just from a thought process -- was there any particular project that was canceled or is this just reviewing your plans going into the year and tightening the budget?

It's Marty. Good morning. It's really the latter. As we said in our prepared remarks, the important focus investment, the very important strategic investments continue -- but as you can imagine in this environment, for example, project that target productivity improvement for example at the margin and factories that have excess capacity, those could be postponed in this environment. We continue to look at it diligently and the small reduction of $10 million or so we guided this morning was a result of that review.

Okay. Two housekeeping questions, the flat van count, what is the actual number?

What is it?

In the US, roughly 3,445.

Okay. And R&D in the quarter?

Give me your next question while we --

Switching gears -- Nick, you alluded to a couple of for lack of a better term early indications there may be signs out there that things are at least not getting worse -- Europe you talked about the destocking at the distributor level. When you are looking at going forward, of where demand versus inventory levels are in the distribution channel -- how much of a disconnect do you see in Europe right now?

Well, I think we were down 23% versus last year in terms of our absolute numbers. And I think you could say that the disconnect is between 5 and 10 points.

Okay.

It's the same kind of thing we are seeing in the United States somewhat less, but we see that kind of thing we laid out for you -- that the off the van sales is down 11%, but the absolute number was [18], little bit longer -- in that range is same kind of thing we are seeing in Europe.

Okay. With regards to the emerging market strategy, in the prepared remarks you talked about some of the manufacturing moves that are taking place -- with regards to some of the sales initiatives, you talked a lot in terms of opportunities in China, with Baco brand in particular, looking into Eastern Europe, as well as some nonautomotive markets. What is the early readthrough with some of those investments you made on the sale side?

Well, we are doing -- our position in equipment, if you want to go product by product, is fairly strong. Our equipment product line is certainly -- if not the leader, one of the leaders -- certainly the leader in the premium equipment business in many of the markets in Asia. So we are very positive about that. We see that as helping us penetrate the garage in a big way and gets us in there an opportunity to demonstrate Snap-on technology. We have a sort of Asianized version of our imaging alignment in there now and we are launching a new product, it's -- I guess it will be the third or fourth quarter of this year in Asia -- that will allow us to penetrate automotive garages. And I'm pretty sanguine about that. Our Baco businesses, our hacksaw business in Asia when we transferred our hacksaws to Asia -- that worked fairly well for us, and we continue to have a nonpareil brand in the cutting tools of Asia. There are places -- I think that we had this discussion before -- where the Baco branded cutting tools are premium line in several of the hardware distribution outlets in Asia. So we feel pretty good about that. The Wanda activity, we're still early days in developing our hand tool line for Asia. So I suppose you could say the jury is still out on that, but we remain confident in the ability to do that.

That's very helpful. Thanks. Final question, not sure that this is directed to you or Marty, somewhat interrelated that the balance sheet -- taking advantage of the recent markets, locking into some good rates, you got very healthy balance sheet, you alluded to the liquidity you have on there. So just any updates on the capital allocation? And then secondly with regards to the Snap-on Credit joint venture, any updates there as well?

I will deal with the capital allocation. I think we said it, we took advantage of the credit markets because we thought the numbers were favorable. The rates were favorable, we have a tranche of debt that comes due next January. We wanted to be in a position to manage that capably. That will still give us some substantial amount of cash and how we use that going forward will be determined as events evolve. We are not without the idea that we could have acquisition opportunities, but I'm not signaling the idea we'd talk about acquisition. There is of course credit company discussions that are on going and I will let Marty talk about the Credit company.

As you know, and many of you know on the call, our US joint venture, Snap-on Credit with CIT is set to expire in January 2010 unless both parties choose to renew. That's a decision that needs to be made by June 30th of this year. I will provide you with color in terms of CIT. I'll preface my remarks by saying none of my information comes from the inside at all -- it's public domain information. I will say that we believe CIT wants to renew the joint venture. We believe that CIT's condition and status has improved dramatically over the last year, which is a good sign, as many of you know. They ran in to the same difficulties other financial services firms ran into, and over the last year have in fact become a bank holding company and received government funds and have a number of the government what I call subsidy programs available to them. Their capital ratios have improved. Those are all very good signs in terms of their health, and given the improvement in their health and their desire to want to continue, we are proceeding with them on that basis through negotiations and discussions and we will have to have a final decision before the end of the second quarter.

Okay.

Let me circle back, excuse me. Your R&D question, not to avoid it. We spent about $10 million -- you will see in the detailed P&L and the Q, about $10 million in R&D and SG&A. However, I should point out our software development costs, much of our software development costs which were actually $2 million higher this year than last year do get reported in cost of goods sold.

Okay. Great, thank you very much.

(Operator Instructions). We'll go next to Tony Cristello with BB&T Capital Markets.

Thank you. Good morning. Thank you for taking my question this morning.

Good morning, Tony.

One of the questions I had -- when you look at some of the trends in the industry and as it pertains to your business, particularly with the dealerships shift and some of the forecasts for the number of dealerships that may be closing, how do you look at your business and the evolution of your business should the aftermarket -- one, start to see more business sent their way as a result of declining either new car volumes or dealer bay closings, and two, would the influx of more qualified or at least more late model qualified technicians into the aftermarket, into an industry that has been at a disadvantage or at least a shortage from a labor standpoint -- how does this I would imagine, help your business?

It helps a lot. First of all, we love it when the aftermarket gets more business. Because in effect, independent garages engage a wider range of vehicles. Make sense, right? Chevy dealership primarily works on Chevies. Therefore its need for a broad range of tools, whether diagnostics or hand tools or power tools to deal with that particular model, those particular geometries -- those particular computer systems are much narrower. So the aftermarket, to the extent there is more repair hours to the aftermarket, each technician must be prepared to deal with a wider range of products. He buys more tools. We document this all the time. One of the great things about it is our diagnostics business -- for lack of a better word, laptop for cars, we have of course some pretty strong ergonomic laptops that plug into cars or deal with them on a wireless basis. But we also have probably the best database of a wide range of models over a wide number of years. That gives us a great competitive advantage in the aftermarket. So we like it when the aftermarket gets more.

It would seem with projected SAR and projected dealership closings that you might be positioning or have some of the best tailwinds you might have seen in your business in some time. I'm wondering at what point do you start to see that inflection where that -- let me step back. When you look at your customer, is it dealer technician, or is a -- aftermarket installer, does one differ more than the other in terms of the purchasing power or the amount of generation or revenue capture you can get from one customer?

Yes, sir. The independent technician, the aftermarket guy purchases more tools, that's for sure. He'll purchase more hand tools and he'll purchase more diagnostics. So to the extent he has more business, we have more business. So we love the trend. Now when does this happen -- I'm not so sure. In the last let's say year, the OEM dealerships, primarily you are talking about the Americans now because they are the ones who stated they are closing dealerships -- they had a base of about 14,000 dealerships. They closed 800 or 900 or so. They're talking about closing another 3,600. It's an imprecise science. You're talking closing rooftops as opposed to where the repair is going to go. But some of that business is going to migrate to other dealerships. Some of it is going to migrate to independents, and to the extent it migrates to independents, we will see an uptick. I can't tell you where the inflection point will be. I can tell you if, for example GM, Ford, and Chrysler decided to close down their aftermarket, we would benefit.

Okay. That's helpful. It definitely seems like your business is very well positioned both diagnostically and from a tool standpoint from the aftermarket. Seems like trends definitely are headed that way right now.

Before you go I want to point out we have a good penetration of the OEM dealerships too. We're in those businesses as well. So we like those businesses. The nature of the industry, the way it's structured, is that the independents use more of our products.

I would imagine if you got an OE dealer technician who maybe their facility closes, their bay closes, and he lands in the aftermarket, what's the likelihood that he brings that brand recognition with him and thus may get a lift from existing customers as well?

It might be. Certainly the technicians are not going to go away. They are going -- if the Ford dealership closes on one corner and there's no other Ford dealerships in town, those guys are going to be employed in the independents -- they will bring their tools, and they will bring their customers. But they will need more tools to work at an independent.

Okay. Very helpful. Appreciate it. Thank you.

Next to Sarah Hunt with Alpine Fund.

Good morning. Yes, it's still morning. To follow up on that on a different way, if we get a junker clunker law or something along those lines that has an incentive to put people in new cars, how do you guys feel about that?

Well, obviously that would change the aging of the cars, but the other factor about that is when new cars come out, they have new facilities or new geometries -- one, they tend to have more computers, they tend to have different geometries, and a lot of our new product innovation has to do with the new cars coming out. I'm not sure how that would affect us.

You don't look at that and say that's definite negative. It could go either way.

I would have to figure that out. We would have to look at it carefully. For example if the world changed to hybrids tomorrow, we would still be in business. In fact it might help us. In our business, any kind of change probably helps. Moving to independents is a positive to us. Moving to new cars can be a positive when those new cars come in. Aging of cars helps us at some point too.

Okay. I was just curious as what you guys thought about it.

I don't know. We are not -- we monitor that. I'm not sure there is going to be a junker law but, it will be interesting to see what happens.

Seems to be all over the place. Yes for foreign, no for foreign, so I'm not sure if they're actually going to get anything done. But certainly Germany from the new car sales perspective it definitely lifted sales. I was curious as to whether that was something you felt positively or negatively about. But it's an interesting thought because change is good for you. So it may not be a clear cut negative. Thank you.

There are no further questions at this time. Mr. Ellen, I would like to turn the conference over to you for additional or closing remarks.

Thank you, Chad, and thank you everyone for joining us this morning for the first quarter call.