實耐寶 (SNA) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Snap-on Incorporated, 2010 second quarter results conference call.

(Operator Instructions) As a reminder, today's call is being recorded.

I would now like to introduce your host for today's conference, Leslie Kratcoski, Vice President, Investor Relations. You may begin your conference.

Thanks, Holly, and good morning, everyone. Thank you for joining us today to review Snap-on's second quarter 2010 results, which are detailed in our press release issued earlier this morning. We have on the call today Nick Pinchuk, Snap-on's Chief Executive Officer, and Aldo Pagliari, Snap-on's Chief Financial Officer. Nick will lead off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we'll take your questions. As usual, we have provided slides to supplement our discussion. You can find a copy of these slides on the investor relations portion of our website, next to the audio icon for this call. These slides will be archived on our website along with the transcript of today's call.

As noted in today's earnings release, and as previously communicated, we recently realigned our management organization in an effort to better support the product and service needs of our primary customer segments. As a result of this realignment, our reportable business segments now include, the Commercial & Industrial, or C&I Group, the Snap-on Tools Group, the Repair Systems & Information, or RS&I Group, and Financial Services. Any statements made during this call relative to management's expectations, estimates, or beliefs, or otherwise state management's or the Company's outlook, plans or projections are forward-looking statements, and actual results may differ materially from those made in such statements. Additional information and the factors that could cause our results to differ materially from those in the forward-looking statements are contained in our SEC filings. With that said, I'll now turn the call over to Nick Pinchuk. Nick.

Thanks, Leslie. Good morning, everyone. I think it's fair to say that the second quarter results provide some significant evidence that our strategies are working.

We continue to make tangible gains in markets that are mixed, still tough, but are improving. In this environment, we remain committed to the Snap-on value creation processes. They form a powerful framework for both capturing growth opportunities, and for achieving cost and flexibility improvement. And we continue to make progress in the four key strategic initiatives that we believe will be decisive for us going forward. Enhancing the franchise network, expanding our presence in vehicle repair facilities, expanding out of the garage and into critical industries and building in emerging markets. In each of those areas, we're encouraged by the progress that's evident in our second quarter.

The organic sales in the quarter were up nearly 10%, about $57 million from last year, and operating earnings before financial services were up more than $25 million, or 47%, over last year's level. The resulting operating margin was 12.2%, that's up 310 basis points from 2009. Encouraging progress that the Snap-on value creation processes. Processes like safety, quality, customer connection, innovation, and rapid continuous improvement, have driven to reality.

As usual, Aldo will take you through the financials in detail. But first, I'll give you our perspective on the markets, and cover some of the operating highlights. At last quarter, I characterized the markets as -- I think I said stabilized, favorably inclined but not rebounding. Since then, we haven't seen any exceptional economic acceleration. However, I will say that overall, nothing has led us to be less positive. And certainly we now have one more quarter of stability, and we actually see some pockets of further strengthening, so we're a bit more encouraged, but we remain cautious. It's clear that the recovery is fragile. Let me provide you a little bit more color on the sales front. In addition to the 9.6% of year-over-year organic sales increase, volume was also up about 6% sequentially from the first quarter. For us, overall, there's not much seasonality, except in the third quarter, when summer vacations and shutdowns, primarily in Europe, can make volume hard to predict. So, the 6% sequential increase in the second quarter was fairly strong compared to what normally is a relatively flat first to second quarter progression. In fact, it was the strongest second quarter up-tick we've seen in at least seven years. And this strength was reasonably widespread with all the operating groups -- Commercial, Industrial, Tools and RS&I were all up stronger than the normal increase.

In addition to those overall volumes, we've also been watching the trend in what we've been calling big-ticket items -- large-dollar products like diagnostics and under-car equipment that have longer paybacks, and tool storage units which are more discretionary purchases. Given their capital nature, we believe activities in those products is a window on our customer's financial position and on their overall confidence. And we're encouraged by what we saw. Under-car equipment sales showed favorable trends in the quarter, and that was true in both North America and Europe. Diagnostics and tool storage units, which are generally sold through the van channel, also showed positive signs. So now, we've recorded two quarters of big-ticket progress. And that is a fairly strong positive because we have seen quite a bit of variation in these products during the downturn over the last 18 months.

If we dissect the sales by geography, we see an uneven landscape. In Europe, sales are up from last year about in line with what we see for the overall Company increase. Remember, however though, that Europe was hard hit, very hard hit, last year. So I think we need to see a bit stronger gain in order to start feeling clearly positive about that situation. And within Europe, the regional variances of the last quarter continued. Modest recovery in the north and central areas, weakness in the south -- Spain in particular, where we have a fairly large position, is not recovering. I think everybody is aware that Spain has been among the hardest hit in the downturn, and we have seen this reflected in our Spanish business. A couple of bright spots, though -- I'll say even better than elsewhere, have been under-car equipment in Europe. And even a bit more rapid recovery in the east, in places like Russia and Turkey. All of those were up strongly. Also in the UK we're seeing some strength, especially in the tools group, where, actually, we're coming off a fairly solid 2009. That is -- the comparisons aren't that easy. So, the gains in the UK are significant, a real positive. So I say, then, that Europe is mixed. We're seeing some positive signs, but we're still some distance from a clear trend. Asia -- no surprise, is outpacing the rest of the world. We're seeing solid increases there both in emerging markets like India, and even in the more established markets like Korea -- building our presence in the region with both physicals and the product is paying off. So with another quarter of favorability behind us, we are optimistic.

However, we also still believe the recovery is fragile. It seems every day we see and we hear mixed signals. And for us -- for our customers, it does impact their confidence. I said frequently last year that people were eating bad news for breakfast every day from the paper and from the TV. And I think we still have a bit of the same thing going on now, only with mixed signals. So, the uncertainty remains, but we would say we're moving in a positive direction. So we'll stay focused on the approach that's been successful for us -- vigilance on cost, flexibility in reaching for opportunities, Snap-on value creation driving improvement and investment in the decisive initiatives for growth.

Now for some highlights in each of the operating groups. Commercial Industrial, or C&I, -- sales were up 22% from last year with double-digit increases in all of the units. The operating margin was 9.9%, also up substantially, volume and ongoing operational improvements did the trick in that area. The Industrial division, especially in the US, showed the strongest gains, making advances in critical industries, taking the Snap-on brand out of the garage, like we said before. For example, our position in the aerospace segment, it continues to strengthen. We're partnering with OEM aircraft manufacturers as well as tech schools to develop and support Snap-on specific aviation certification programs. It's a great way to establish an early relationship with students who are future technicians and for us, it's an effective path in creating a lifelong professional customer. And we continue to move forward with that type of partnership approach in a number of industries, like wind, oil and gas, and in fact, auto repair.

Let's go back to the aerospace segment. This is an area where Snap-on is uniquely positioned. The mission-critical nature of the work is obvious. The quality of the Snap-on brand is required and valued and the potential for growth is abundant for us. While the industry has been depressed, there are some signs of recovery. Just this week at the Farnborough International Airshow, there's been a lot of confidence, and aircraft orders were surprisingly strong. Snap-on is at that show, displaying our revolutionary tool control innovations and they have been a big hit. So we like our position as the aerospace sector recovers. We're also reaching new critical industries and tailoring our lineup to support that effort. I spoke to you last quarter of the broadened product line we have been introducing for large tool applications in areas -- in segments like mining and natural resources. In the second quarter we saw more progress with those customers due to that that expanded offering, and a significant industrial sales growth is evidence of that success.

Let's talk about innovation. Often at Snap-on, our leadership and innovation and design, our focus on safety, is also evident with the Bahco brand. Last year, the Bahco Hand Saw system won the prestigious Red Dot Award for European design excellence. And this year, the recognition continued with the product being named the winner of the Design S award for ergonomics. That system provides ergonomically superior handles, and different sizes for left-and-right-handed users, with ten different interchangeable blades for cutting a variety of materials, and it offers a patented locking system. Innovation driven by customer connections helping S&A Europe sell, even in a downturn, helping Bahco maintain a world class brand.

And Asia Pacific, as I said, is continuing its upward trend. Sales were again up strongly with gains in India, China, Philippines, and Korea leading the way. We have been working hard over several years in that region to establish our physical capabilities -- more salesmen, more factory capacity, more Asian-ized product -- and it has been paying off. You can see it in our numbers. You can see it in the success of our new product. A great example is the new Bahco Asian-ized band saw. It's been a run-away seller, so much so that we outstripped our recently established capacity, and we're acting right now to double down on Kunshan saw capacity. So Asia is a success.

Moving to the tools group, volumes increased 7.8% in the quarter, about $19 million from last year. With the US, posting a 9% gain, operating income was up $7.5 million to $33 million, or 12.5%, of sales. For some time, one of our key initiatives has been to strengthen the franchisee network. I think we have clear evidence that those efforts continue to pay off. In the second quarter, our sales in the US returned to 2008 pre-recession levels. Now, I think it's widely agreed that the overall economy hasn't returned to the same level as two years ago, so reaching that benchmark is encouraging for us. I've spoken in the past about our franchisee stimulus programs aimed at supporting the network. It's been a key to our sales return. And we believe that right now our franchisees are in better shape -- sales strong, profits robust, cash improved. So the stimulus is working, and the network is stronger.

I already mentioned big-ticket items and the favorable results. Well, those are the products that often require financing, and in that space, Snap-on credited a huge advantage. It's a core contributor to the power of our franchise network. The credit companies transition into a wholly-owned subsidiary of Snap-on, started about a year ago and it's progressing well. And in the second quarter, it's now turned profitable, as we said it would in several prior calls. At the end of the day, though, in our business, you have to have great products to sell. And we use our frequent touches with the end customer to create just that. Innovation and new products are often borne out of technology advances, but sometimes it's less complicated.

It comes from just knowing your customer's problems. For example, in using the 3600 franchisees and talking and visiting with customers, with automotive technicians, we found that all-in-one wire stripper, crimper and cutter pliers were designed primarily for electricians. They tend to spend more time stripping wires, and they don't -- you can imagine, they don't have the same space challenges as an auto tech. So with that insight, our engineers went to work and developed a new, compact cutter and stripper tool, designed specifically for tight auto applications. It's been a huge hit. Not a big-ticket, breakthrough product that transforms a Company, but thousands were sold. And it's a great example of using customer connection to our advantage -- extending Snap-on's tradition of innovation, and that tradition echos favorably up and down the product line and in and out of garages all over this country and all over the world.

Now, to Repair Systems & Information, or the RS&I Group. This was the group that was formed out of our recent reorganization, lining each new segment up with the primary customer base -- the Tools Group, focused on auto technicians, C&I, focused on professionals in critical industries and emerging markets, and RS&I, serving vehicle repair shop owners and managers. We're now organized to capture growth in each of these broad and important customer segments. Back to RS&I -- overall volumes increased 4.7% driven by the equipment division activity. It was driven by the equipment division increases that I mentioned before. It also had some solid improvements at AQS, our facilitation and essential tools business. Those gains in those areas helped offset Snap-on business solutions, or SBS, where activity continues to be down related to consolidation in the overall OEM dealer space. SBS is working to help itself, it's working to create some offsets of its own by expanding with existing customers, including internationally. And with badges that haven't been impacted by the dealership disruption. They're also working hard to grow in near adjacent markets such as power sport, agricultural and construction. Speaking of OEM's and their dealers, we're seeing some improvement in that area -- in the OEM's manufacturer's willingness to commit to essential tools, and the dealers themselves are starting to make purchases. So all of this certainly drove some of RS&I's improvement.

And the RS&I group is growing elsewhere. We saw some solid sales increases related to our expansion in heavy truck and fleet markets. Now, if you think about it, that's a natural fit for us, and we've been making investments in product -- both diagnostics and repair information -- and we're starting to get traction. So that summarizes the markets and I think it provides you some perspective on our advances in the quarter. From an operating perspective.

So now I'll turn the call over to Aldo for a review of the financial results in detail. Aldo?

Thanks, Nick.

Our consolidated operating results are summarized on slide six. Sales in the second quarter of $648 million increased 9.8% from second quarter, 2009 levels. The primary drivers behind the $58 million year-over-year sales increase includes higher sales in critical industries, increased sales in emerging markets, higher equipment sales and increased sales to franchisees in the US and the UK. The Company also saw steady improvement in its European-based businesses.

Consolidated gross profit of $303.8 million in the quarter, increased $49.8 million year-over-year. While the gross margin improved by 380 basis points. These increases were largely due to the higher sales volumes and favorable manufacturing utilization as a result of the increasing levels of production. Savings from rapid continuous improvement, or RCI, initiatives and benefits from previous restructuring actions, contributed about $7 million of gross profit improvement.

Foreign currency, primarily transaction effects, contributed $5 million, and lower year-over-year restructuring costs contributed an additional $3 million of gross profit improvement. As a result of these factors, consolidated gross margin improved to 46.9% in the quarter, as compared to 43.1% last year. Operating expenses in the quarter increased $25 million from 2009 levels. This was primarily due to higher volume-related expenses, and $14.9 million of increased performance base incentive compensation expense as a result of improved year-over-year operating performance and increased participation in the Company's stock purchase programs. In addition, we incurred $3.1 million of higher pension expense, largely due to lower-than-projected asset returns in previous years related to the US pension plan. These increases in operating expenses were partially offset by $2.5 million of benefits from ongoing RCI and other cost reduction initiatives, and $2.5 million of lower restructuring costs.

As a percent of sales, operating expenses were 34.7% in the second quarter of 2010, as compared to 34% last year. Restructuring costs in the second quarter totaled $3.1 million, as compared to $8.6 million last year. Operating earnings of $79 million before financial services improved 47% over prior year in the 9.8% sales increase. Financial services' operating earnings of $1.7 million in the quarter improved sequentially from a $1.7 million loss in the first quarter of 2010. It also compares favorably with the $3.8 million loss in the fourth quarter of 2009, and a $5.3 million loss in the third quarter of 2009. As previously discussed, and as expected, operating income from financial services, which is before interest expense, is consistently improving as the on-book finance portfolio grows. Since the termination of the financial services joint venture with CIT in July of last year, our gross on-book finance portfolio has grown over $450 million to $577 million. Year-to-date, this portfolio has grown about $180 million.

Turning to interest expense, higher average debt levels, primarily related to the growth in our on-book finance portfolio, increased interest expense by $1.6 million year-over-year. The second quarter, affected income tax rates were 31.2% in 2010 and 31.9% in 2009. The improved, and lower-than-previously-communicated effective tax rates for the second quarter of 2010, primarily benefited from the favorable settlement of tax audit. The second quarter 2009 rate benefited primarily from the realization of a tax benefit in a foreign jurisdiction. Finally, net earnings of $45.3 million, or $0.78 per diluted share, increased from $37.4 million, or $0.65 per share, last year, despite $11 million, or $0.19 per share, of lower year-over-year net earnings from financial services.

Let's now turn to our segment results. Beginning with the C&I group on slide seven, segment sales of $259 million improved 22% from prior year levels. The year-over-year sales increase was driven by higher sales across all operating units, with particularly strong increases in those businesses serving customers in critical industries in emerging markets. Again this quarter, sales increases were realized in our European-based tools business. While we still face head winds in this region, we are encouraged that the higher year-over-year sales in the first half of the year may be evidence of some continuing stabilization in the European markets, despite the headlines of late regarding financial market volatility in that region. Gross profit in the C&I segment of $93 million increased $27 million, or 41.6%, from 2009 levels, reflecting the 22% sales increase and $5.2 million of savings from RCI, restructuring, and other cost reduction initiatives. The year-over-year gross profit comparison also benefited from favorable manufacturing utilization as a result of increasing production levels. You may recall that last year we incurred substantial cost to carry excess manufacturing capacity, primarily in Europe, as the result of lower production levels and inventory reduction efforts. For the current quarter, gross margin of 35.8% improved 500 basis points from 30.8% last year. Operating expenses in the quarter of $67 million were up slightly year-over-year, as higher volume-related and other expenses were partially offset by $1.4 million of lower restructuring costs. As a percentage of sales, operating margin in the C&I segment improved from 1.1% in the second quarter of last year to 9.9% this year.

Turning now to slide eight, on a worldwide basis, second quarter sales in the Snap-on Tools group increased 9% from 2009 levels. Excluding currency translation, organic sales increased 7.8%, including a 9.3% increase in the United States. Band count in the US at the end of the second quarter increased slightly compared to prior year levels. Gross profit in the Snap-on Tools group of $116 million increased $14.4 million over the prior year. This increase primarily reflects contributions from higher sales and benefits from favorable manufacturing utilization as a result of increasing US production levels and $4.9 million of favorable currency effects. In the quarter, gross margin improved to 43.7%, an increase of 200 basis points over 41.7% last year. Operating expenses of $83 million in the quarter increased $6.9 million from 2009 levels, primarily due to higher volume related and other expenses. As a percentage of sales, operating earnings of 12.5% in the quarter for the Snap-on Tools Group improved 200 basis point from 10.5% last year.

Let's now turn to slide nine and the segment we now refer to as Repair Systems & Information or RS&I. As previously communicated, the RS&I segment and its operations are aligned and focused on better serving customers in the world wide vehicle service and repair marketplace -- including owners and managers of independent and OEM dealership service and repair shops. In addition to equipment products and equipment repair services, the RS&I segment includes the business operations of the former diagnostics and information group. Second quarter sales of $206 million in the RS&I segment were up 4% from prior year levels. Excluding currency, organic sales were up 4.7%. Primarily due to higher sales of equipment and increased essential tool and facilitation program sales, partially offset by anticipated lower electronic parts catalog sales in North America, the latter a result of OEM dealership consolidations.

Gross profit of $96 million in the quarter increased $8.2 million from 2009 levels, primarily due to contributions from the higher sales, $1.6 million of savings from ongoing RCI and restructuring initiatives, and $1.1 million of lower restructuring costs. Gross margin in the quarter improved to 46.5%, an increase of 230 basis points over 44.2% last year. Operating expenses of $56 million, while up $1.1 million, from 2009 levels, improved 50 basis points as a percent of sales. Higher compensation, volume related and product development expenses were partially offset by $1.7 million of savings from ongoing RCI and restructuring initiatives, as well as $1 million of lower bad debt expense. Operating earnings of $40 million in the RS&I Group for the quarter increased $7.1 million, or 21.6%, on a $7.9 million, or 4%, sales increase. The favorable incremental operating margin is primarily due to $3.3 million of savings from ongoing RCI and restructuring initiatives, and $1.8 million of lower year-over-year restructuring costs. As a percentage of sales, operating margin in the RS&I group of 19.4% improved 280 basis points from 16.6% last year

Turning to slide ten, the $1.7 million of financial services earnings in the second quarter compares favorably to a loss of $1.7 million in the first quarter of 2010 and a loss of $3.8 million in the fourth quarter of 2009. Financial services earnings in the second quarter of 2009, prior to the termination of the joint venture with CIT, were $16.6 million. As you know, since July 16, of last year, we are no longer selling loan contracts to CIT and recording gains on sale. Rather, we are building, over time, an on-balance sheet interest-yielding portfolio. As this portfolio grows, so will our financial services operating earnings.

Moving to slide 11. As of the second quarter end, our balance sheet includes $451 million in gross financing receivables from our US Snap-on credit operation, and $126 million in gross financing receivables from our international finance subsidiaries for a total financing portfolio of $577 million. In the United States, $384 million of the portfolio relates to extended credit loans to technicians. Since the termination of the joint venture, Snap-on credit continues to manage the runoff portfolio of contracts owned by CIT, which totalled $384 million at quarter end, which is down approximately $100 million from first quarter end. For the full year 2010, we continue to expect that the on book financing portfolio will grow by approximately $300 million. This suggests additional growth in the Snap-on credit US portfolio of about $110 million to $120 million over the remaining six months of this year. The net cash requirements of our international finance portfolios are substantially self funding. Portfolio loss and delinquency trends continue to be in line with our expectations and have improved sequentially compared to Q1.

Turning to slide 12 -- consolidated operating cash flow for the quarter was $55.5 million. At the end of the quarter, our cash position of $431 million was down from approximately $472 million at first quarter end. This is driven by the net increase in finance receivables of $73 million, primarily due to the funding of new loans originated by Snap-on credit. In the quarter, capital spending of $6.6 million was down from $19.5 million spent last year, primarily due to last year's construction of a new R&D facility and headquarters for our automotive parts and service information business in Richfield, Ohio. For the full year 2010, we expect capital expenditures will be approximately $50 million.

As seen on slide 13, trade and other receivables decreased $6.9 million from 2009 year end. Excluding $18.6 million of currency translation impacts, trade and other receivables increased $11.7 million, primarily due to higher sales. Day sales outstanding for trade and other receivables of 59 days improved from 63 days at 2009 year end. Inventories at the end of the quarter increased $21.8 million from 2009 year end. Excluding $14.4 million of currency translation impacts, inventories increased $36.2 million, primarily due to higher production levels as a result of increased customer demand. On a trailing 12-month basis, inventory turns increased to 4.4 turns as compared to 4.1 turns in 2009 year-end. Net debt at the end of the quarter was $493 million. Our net debt to capital ratio of 28.3% compares to 22.2% at 2009 year end. If we exclude approximately $108 million of cash currently withheld related to the previously disclosed dispute with CIT, our net debt to capital ratio as of the end of the second quarter would have been 32.5%. In addition to $431 million of cash, we continue to maintain a $500 million revolving credit facility that does not expire until August 2012. We also have another $20 million of committed bank lines, and at quarter end the full $520 million borrowing capacity was available. In addition to these facilities, our current A2P2 short-term credit rating allows us to access the commercial paper market should we choose to do so. At quarter end, no commercial paper was outstanding. Our liquidity position and access to credit continues to remain strong.

This concludes my remarks on our second quarter performance. But before turning the call back to Nick, I would like to review our outlook for the balance of 2010. For the full year, we presently expect to incur approximately $15 million of restructuring cost, somewhat less than the previously communicated $18 million to $22 million. This reflects the more likely calendarization of program actions to improve the Company's fixed cost structure. We also anticipate continuing our planned strategic investments, including expansion in emerging markets, and as I mentioned earlier for the full-year 2010, we presently expect that capital expenditures will be approximately $50 million. With respect to pension, our current expectation is that 2010 full year pension expense will be $16 million higher than last year. This is down from the previously-communicated estimate of $20 million due to changes in actuarial assumptions. Finally, as a result of the favorable settlement of certain tax audits in the quarter, the anticipated effective income tax rate for full year 2010 is now expected to approximate 33.7%. Before opening the call for questions, Nick would like to provide some final thoughts.

Thanks, Aldo.

So to wrap up, we're encouraged by the quarter's results. The second straight upward movement and perhaps the beginning of another trend -- sales up almost 10%, profits up 47% versus last year. Good sequential progression versus the first quarter. The OI margin of 12.2% is fairly robust. Our Snap-on value creation processes keep generating gains. In the quarter we saw all the elements of that playbook work -- safety, quality, customer connection, innovation and RCI and you can see it in the numbers. We have said consistently that throughout the downturn we would keep investing in the key areas which we believed would be decisive in capturing growth going forward. And we said as a result we would take advantage of the recovery as it occurs. Well, the second quarter is testimony to the success of that approach.

The van network is robust and back to 2008 levels. Share is growing in the garage. Our presence in critical industries is expanding, and we are building a significant position in emerging markets. So, looking forward, we're optimistic -- although, cautiously so. We see the world leaning favorably in North America, mixed but positive in Europe. And clearly growing in Asia. To be sure, the recovery is fragile, and we are going into the third quarter, which is always difficult to predict because of the vacation period. But we have two positive periods, so we're optimistic. We're not certain what the immediate macro-economics will hold. But, we believe in the special strength of our markets.

Making work easier for serious professionals performing critical tasks is valued in any situation. And with Snap-on value creation and our strategic investments, we continue to believe that we're very well positioned to take advantage of any recovery, in whatever shape, over whatever timetable occurs. I want to finish just by recognizing our franchisees and our associates. I know many of you are on the call. The successes in the quarter were only possible because of your efforts, your capability and your commitment. You have my congratulations and you have my thanks. Now we'll open the call to questions. Operator?

Thank you.

(Operator Instructions)

We'll take our first question from David Leiker with Robert W. Baird.

Good morning, everyone.

Good morning, David.

Nick, I think I heard you correctly when you made a comment that your US tool business is back up to pre-recession levels -- was that correct?

Correct.

Is there -- I know you've got a lot of different businesses, but is there any way you can give us some characterization of any other pieces of your business that might be back there or close to getting back to those levels?

The Industrial business is starting to get back toward that level. Industrial business had a pretty strong quarter, and showing some pretty good growth. So, we're starting to approach back to 2008.

However, we weren't really satisfied with the 2008 levels. We thought we had a lot of opportunity beyond that. So, that's a business. The Equipment business, even though we've been showing some upward growth, and upward trend, in the equipment business, we're still somewhat below the 2008 levels, and of course Europe is quite a bit below, still. The European, the S&A Europe businesses are quite a bit below that level.

Okay, great. And then, if you look across your businesses, where do you think -- what are the biggest laggards, where's weakest parts of your business right now? It sounds like most likely would be out of Europe at the moment.

Well, you know, I might not use the word "laggard" but the business that's the furthest behind 2008 is, of course, our S&A Europe business. They took quite a beating over last year. They were down substantially and they're coming back. We didn't believe -- We believe in the future of that business and we still believe we're maintaining or gaining shares, we've said through the years, but the volume is just, still quite a bit below 2008. So I say that has to be the place which is the weakest position. The other place, I didn't mention RS&I before.

Some elements of RS&I -- the new repair systems and information group, Mitchell 1 and Diagnostics are at 2008 levels, but SBF is down because of the consolidation of the dealers. The OEM dealers in the United States and that business is working feverishly to find offsets in adjacent markets, as I said in my remarks. So if I were going to take two places which are behind, I would say, Snap-on Business Solutions in the OEM dealership business, and S&A Europe.

And Europe, definitely Europe is predominantly driven by Spain, right?

Well, the North is strong, and Spain and Portugal is down. I think even the North is still below 2008 levels, though, David. We're definitely seeing signs of recovery in the North, but Spain and Portugal are pretty flattish. If you took Spain and Portugal out of the numbers you would see some pretty strong growth year over year, but we have to remember that it's off a pretty weak base there.

Okay, and just one last item here -- with the reorganization and realigning the business amount all year, what has been the reaction from your workforce and your franchisee distributors -- what kind of response have you gotten from those folks?

Well I think the franchisees, there's no reaction, it pretty much didn't change their situation very much. It pretty much just said we're focused on technicians. We have favorable responses from our customers, particularly around the RS&I, because in grouping equipment with that, said hey, now we've got a number of operations which are truly focused on that particular customer -- vehicle shop owners and managers. It's a terrific customer base for us. And the fact that we declared that you're a specific customer for us -- we don't want to provide you products, we want to provide -- we want to solve your problems, has been received very well.

That's great. Thank you very much.

Sure.

And next we'll take a question from Jim Lucas with Janney Montgomery Scott.

Thanks, good morning, all.

Good morning, Jim.

First question, Nick -- in your prepared marks you were talking about seeing some pockets of recovery as well as improvement on the big ticket side, which, obviously is encouraging, but could you give us a little more color, maybe, put some numbers behind what you're seeing first on the big ticket side but when you refer to those pockets of recovery, is any particular geography or end market standing out more than others?

Well I think the US is a great -- the US dealer, the van channel, the mobile van channel, is, I think, a shining example of maybe pocket is a little bit of a dismissive way to look at that, but the mobile van channel is a good place to talk about that and that business is, like I said, up to 2008 levels and people talk about the restocking, there's no -- we haven't seen any restocking there at all. So, in fact, we like the cash position of our vans in that business. So, I think that's -- we were very encouraged by the 9% -- 10% growth in that channel itself. Now, the equipment -- the big ticket items in there, its kind of bifurcated. The smaller big ticket items, that is, diagnostics and tool storage, are starting to get back to 2008 levels, which we like. This is what we've said all along, and if you look at -- I think we've got -- we had the best quarter since 2008 in that business this quarter. If you look at the equipment, the other piece of the big ticket items, we are encouraged because -- in North America -- but we're still below 2008 levels, about -- low double digits.

Europe, though, in equipment, was a big, big strength for us. Europe has gotten back close to 2008 levels in the big ticket items. And that was driven -- I didn't talk about this in my remark -- but by an extraordinary product which we launched in Europe, the PRISM aligner, this is an aligner which allows you to package alignment into smaller bays, and as you probably can figure, that the bays, the garages in Europe are somewhat more compact, so the value of that aligner breaking on that market has given us some pretty good traction so we feel pretty good about that situation. So I think those are a couple of places. The other places in the Industrial Group -- the businesses in critical industries like natural resources and aerospace are up in some pretty -- I don't want to give you any numbers in this because we don't give numbers out -- but they're up very strong and much, much higher than our average. We feel pretty good about that. And as you know, Industrial is not a restocking situation. The direct -- that's a direct sales model, so restocking doesn't have much to do with that.

Now, we do have in our industrial business a smaller group, which a smaller piece of the business, which is, you know, we sell through distributors. You may remember this in the United States. It's a very small piece of the business. And, there could be restocking there but that business was up over 50% in the quarter. So we feel pretty robust about that situation.

The whole idea of recognizing that when we roll the Snap-on brand out of the garage the customers are open to that idea. They're open to it. So it seems to be working. All right, that's very helpful. And if we could spend a minute on the Tools Group -- because that clearly, as you said, is a shining example here, a good turn, but if we go back over the last decade, I mean, the revenue for that business has fairly consistently been between $1 billion and $1.1 billion. And we are seeing back to the `08 levels as you said, but as you look at that business going forward, how do you get consistent growth out of that Tools Group? Wow, yes. Certainly it's one of our strategic challenges that we've said always, but, we feel -- we believe that we have runways for growth in that group.

One is the fact that we know that there are a number of investor -- customers who buy Snap-on tools for their workplace and then at home they use another brand -- let's say, a mid tier brand. So we can sell Blue-Point, we've launched a mid tier brand to sell to them. Also, as much as we work to make customers for life with educational institutions, and we sell Snap-on brand to them, some new technicians simply don't think they can afford Snap-on, they buy an alternate brand until they can afford Snap-on. We sell a Blue-Point to that. So, there's opportunity to grow in that mid tier. Secondly, we call on about 800,000 technician in the United States. There are 1.3 million -- fully enabled -- about 850,000 technicians or 1.3 million.

The reason why we don't call on those others, 400,000 or 500,000, is because they're lower -- they're lower volume and our technicians drive by them because they don't want to spend time with them and that's a productivity issue -- not our technicians, our vans drive by them. That's a productivity issue. So productivity on the van will allow us to take our existing framework, our existing network, and reach out to a big portion of that 1.3 million. Now, it's not a one-for-one replacement, but it's a real opportunity for us. That's why we're launching rapid, continuous improvement in the vans. That what we're doing this year, it's one of the big initiatives. And I see those two things as ways to grow.

Okay, that's helpful. And then, you know, finally, as, you know, hopefully we're back to getting to some sense of normalcy despite the fragile nature of the recovery -- I think we all agree on -- can you just bring us up to date with the realignment here as we look at the three segments -- I don't want to pigeon hole you into actual targets, but conceptually, how do we think about the margin potential for these three segments longer term?

Well, yes, the thing is we've said, that overall, we would expect the target to grow -- in normal environments, not recessionary environment, not recovery environment, because that -- all bets are off in that kind of situation -- in a recovery we would expect to grow faster than normal, but we say -- we'd grow, you know, 4%, 5%, 6% per year on an organic basis, and then we'd expect our operating margins on an overall basis to be mid-teens. And the way that lays out with the new segment is that the RS&I, I believe, it's at 18, 19 now, it will be over the 20 mark some place, and the Tools Group and Commercial Industrial would start to approach the mid-teen, be slightly below the average. And that's where we see it. We feel pretty confident we can do that.

Okay. And final question -- just in terms of longer-term capital allocation strategies -- the financial services, kind of pulling out as expected, could you just bring us up-to-date about how you think about an acquisition strategy longer term?

Well, our view is that we are always available -- we're not a serial acquirer, but we could see ourselves acquiring properties that became available and seem to make -- not available -- but seem to make sense in our orb. Lots of people used to think about Snap-on, and I think we've thought about this as ourselves, as a company that makes wrenches. Sells through vans to auto mechanics, and we now think of ourselves as something broader, that is, a company that provides -- makes work easier, productivity solutions for serious professionals who are performing critical tasks in critical industries, like aerospace and oil and gas and that's a much wider space. And any acquisition -- an acquisition that would give us further presence in that broader space with customers, we would be interested in doing.

Okay.

So that's where we'd invest our cash. Because we believe that concept is a valuable concept, and we believe with Snap-on value creation, we can drive profitability through that, and the Snap-on brand on top of it gives legitimacy in that space. So that would be cash well spent.

Great, thank you very much, and a lot of good color on today's call.

All right, thank you.

(Operator Instructions) Next we'll hear from Gary Prestopino with Barrington Research.

Hey, good morning, all.

Good morning, Gary.

Nick, in your comments, you mentioned that, the big ticket items you were encouraged by what the trends were there. Could you possibly -- I don't know if you want to put a number on it -- but, Q2's significantly better than Q1, or just really seeing a stabilization and no more deterioration?

No, no, Q2 is better than Q1. In all those categories. I think -- just let me restate just to be clear, is that for diagnostics and tool storage, primarily sold through the van channel, Q2 was the best quarter we've seen since Q2, 2008. And that was the best quarter in 2008. So we had a gang buster's quarter in terms of big-ticket items. And actually, if you remember, we said -- this is exactly how we understood the business. We said people that were in garages, they buying wrenches, and they kept buying wrenches through the downturn, and that was it. It was big ticket that was off, because people thought that they charged their uncertainty, the idea of not wanting to invest in those big ticket items took them away.

Well, we're back to 2008, and low and behold, the vehicle of restoration has been the rise in the big ticket items. That's exactly what we have been -- I think, thinking about, in trying to conjure in these calls for a long time. And so that's really what happened. And we did have a good quarter, in the first quarter. It was a good quarter. But this quarter was up double digits. And then, in terms of equipment, we're still not -- as I said, we're still not back to 2008. We're still coming off the floor. And that makes sense though, Gary, if you think about it. Diagnostics -- is the best is -- the most expensive is like an $8,000 purchase. Tool storage can be $5,000 to $10,000.

But when you're talking about some of that equipment, that under car equipment, it can be up $20,000 and it's more of a capital type equipment. And so therefore the whole idea of the uncertainty around the recession becomes more dampening in that area, and that's what we're seeing. So, we are seeing progress, but it just isn't as fast as -- it hasn't snapped back to the full 2008 level. In fact, it went deeper, than diagnostics and tool storage. The one thing I did say though, is that what we were really pleased with, is the effect of that new PRISM product in Europe, which really gave us some boost in equipment.

Okay. And then -- do you -- do you feel that -- you mentioned in your prepared comments, that a lot of gross margin improvement was due to higher sales volume. I mean, if the sales volume it kind of stays the same in terms of growth here, do you feel you can kind of maintain that gross margin in the high 46%, the back half of the year?

Yes, I think that's right. We obviously -- like any company, you can have a mix issue.

And if we have higher sale in Asia and so on. If we have higher sale in Asia and so on, we can -- that's a little less profitable, and the drop through is somewhat. But we feel pretty good about maintaining the -- number, that gross margin number. We had some absorption in this period, and we had some cost savings. But still I feel pretty good about maintaining the gross margin. What you have to remember though, is I think everybody should remember, is we had a couple of good quarters. We're going into the third quarter. And I think -- I think that -- the third quarter for us is highly unpredictable, more difficult to predict. Because we have European vacations, the franchisees tend to relax a little bit. They go to the Maryland shore.or something like that, whatever they do. And so historically our third quarter has had more variance than other quarters. So we think of our year as one, two, three, and four in terms of trying to model it out. I think the their quarter is hard to make a lot of judgments on.

Appreciate that. Thank you.

Sure. Okay?

(Operator Instructions). We'll take a follow-up from David Leiker.

Hey, David. A couple of other items here to follow-up with.

Sure.

You called out couple of things here -- that were higher costs here, year-over-year, the comp expansion in particular about $16 million. What does that number run year-to-date? Do you think?

Well it's about $20 million is an absolute number. And also want to call attention to -- it did include higher, particularly higher year-over-year expenses related to greater participation in two of the various company stock purchase programs, which allows franchisees to invest in the Company's stock as well so we saw some higher year-over-year participation. And with the growth of the stock price, it fueled a higher year-over-year cost per share for those participating as well.

Okay, so four in Q1, 16 in Q2 is that -- what should we kind of look at for that number here, sequentially going forward in the back end of the year? Would you think?

Q4 is about -- it will be approximately $5 million, 4 to 5.

And Q3?

Similar amount. Maybe a little less.

Okay, so we really did have a bump up here beyond what normal is.

We did. Sure.

Okay, great. And then, Nick, I know this is a tough -- ( laughter) -- this is always a tough thing. And I know we have talked about before but in the industrial market, is this any way you can give us some sense of what your penetration is, market share?

(Laughter). I don't know. I can't. I can only tell you we're growing faster than anybody else is saying.

(Laughter).

Pretty much. We're growing pretty fast. And that's been for some time. You can't -- it's very difficult to do that. And that's -- both bad news I think, from a modeling point of view. -- and I suppose from an investment point of view. But it's good news from an operating point of view, because what it means is that market is unbounded in terms of customers and in terms of products. One of the reasons why it's so difficult to say what the market share is because we go into -- how do you calculate it? we go into a customer like a military -- like a tank command. And we say, what do you need? We're not sure -- sometimes we provide them things we never thought was part of our orb, because we put it in a kit.

Right.

Like flashlights or something or generators, and thing likes that. We sell it and provide it, package with Snap-on tools. So that is an example of us struggling with trying to identify that. Equally, we find customers that are added I would say, three years ago, I wouldn't have said wind would have been a customer for us. And now it's some of -- there's some customer there.

It's very difficult to define that. I can just say that, boy, it seems to us, based on the growth up to -- we were getting good growth if you remember, all the way through the first quarter of 2009 in this business. We were expanding. Then we took a down tick -- grow faster than anybody else was talking about. and we should. But we were rolling the Snap-on brand out of the garage. It was a new thing. We're providing something new, capture, share takers. And now this quarter has started back up again.

Okay.

So I believe we're take sharing. I can't define it, though, sorry.

So as you go into these customers in these markets, obviously they're getting the product from somewhere right now. Do you have a sense of who you're displacing in those products, or are they new market opportunities that didn't exist?

Well it depends on the location in in Europe we're deplacing people like -- as I said, if you're talking about tool competitors, you're talking about displacing people like in Europe, let's say, a [Stopvili] or a [Gador]. In the United States, the usual suspects that come out of our major -- major competitors would be those who would be displaced. And also some specialist people who are smaller -- there are people in the United States who only make pliers, or screwdrivers, and so on. We would displace them. And then also, we wouldn't displace people who would be it-- in the interest of sort of like the distributor for some other people that might have been selling direct before, but the customer feels pretty good about it packaging with our tools. All those phenomena are occurring.

And then -- we look at China -- the economy is hot there. The government is trying to slow things down. We're definitely seeing it in the automotive side of things, and I know your business is more industrial -- are you seeing that slowdown and what are

I was just there -- I have been back from China less than -- only a week. I was just there with our salesmen and meeting with our customers, and we don't see a slow down now. Having said that though, Asia is 5% to 10% of our business. And we're just bulking up there, adding factories and products and so on. I would charge our -- in fact I do charge our people to grow regardless of whether the economy moves from 12% growth to 7% growth because we're taking share in general. So we -- we wouldn't necessarily see it so easily. But having said that, we didn't -- I didn't see any evidence of slowdowns, to tell you the truth. Now, I read the papers like everybody else, and the government is saying slowdown, but I didn't see it.

I'm with you on that. And then lastly here, as you look at the financial services business, where do you think you're on track now to rebuild that asset base? Is that kind of a second quarter 2011 that you get back there?

I think it will take -- our target, David, if you look at the former portfolio that we had with CIT as a partner, it was about the $800 million range. We anticipate that our future state with that would be about $750 million, because we'll probably do a little less van leasing and things of that nature that might be better suited for banks to do directly with franchisees. But it will take a little time for some of the tail of the old CIT portfolio to come across. So I have been saying as I meet with people, that I think we see our stake around about $750 million US portfolio, in and around somewhere around 2012, perhaps, somewhere in that time frame. But our future state we envision is tending to follow the model.

We have a portfolio that's yielding at expected rates. We're fortunate in the bad debt performance of delinquencies are on plan and target and actually have slightly improved. We're very pleased with that. And the originations which underly the volume trend to track more less with the tools group. I think it reflects actions in the tools group. That's what it is there for. So pretty much as the tools group volume grows, we expect that this renewal of contracts and add-ons as we call them, will continue to prosper. So at the end game, we expect this has the capability even after our interest expense is calculated to create a portfolio that will generate about 25% return on financial income. And that financial income would be the portfolio yield times the overall finance receivables that are there within it.

Okay, and then -- okay, great. Thank you very much.

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

Thank you for joining us today and for your interest in Snap-on. A replay of this call is going to be available shortly this afternoon, and we look forward to speaking with you again next quarter. Thanks, bye.

Thank you, and this concludes our conference. And we thank you all for your participation.