實耐寶 (SNA) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Snap-on Incorporated 2010 fourth quarter and full year results conference.

At this time all participants are in a list be only mode. (Operator Instructions)And please note that today's program is being recorded.

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

Thanks, Lisa, and good morning, everyone.

Thank you for joining us today to review Snap-on's fourth 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 kick 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 our website next to the audio icon for this call. These slides will be archived on our website along with a transcript of today's call.

Any statements made during this call relative to management's expectations, estimates or beliefs, or otherwise states 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'd now like to turn the call over to Nick Pinchuk. Nick.

Thanks, Leslie. Good morning, everyone.

You know, as we look at our fourth quarter, we are once again encouraged, both by our financial performance, and by our advancements in the areas we've identified as being of strategic importance. Overall, volumes in the quarter were up 13.6%, and the gains were wide in each spread across customer bases, across operating units, and across geographies. Operating earnings rose nearly 44% and the overall margin of 13.5% increased 270 basis points from last year, powered by expansion in the operating company as well as by the ramp-up in our financial services profitability. Excluding the financial services operation, the 12.6% operating margin was up well over the 11.5% registered in 2009.

Importantly, I think, the results confirm continuing progress and the building momentum. It was the fourth consecutive quarter of year over year sales increases and these results represent the largest of those gains. Also the operating margins were the highest of the years. Defining a bright line of progress throughout 2010. I believe it's clear that Snap-on closed out 2010 in a much stronger position than when we entered the year.

Of course, there was improvement in the overall global economic environment, and we've taken advantage. But we've also strengthened our tactical execution, driven by our commitment to the Snap-on value creation processes; rapid continuous improvement, or RCI as we call it, innovation, customer connection, quality and safety. They continue to drive improvement, and the good news is that there is much more to gain. There is much more to go.

Beyond that, we've achieved much more progress in those focused areas that we believe will be strategically decisive for our future. Enhancing our franchise E-network, expanding the Company's presence with repair shop owners and managers, rolling the Snap-on brand out of the garage, extending it to other mission critical arenas, and building our physical capabilities in emerging markets. We are making progress and each of those areas.

Now, let me for a moment touch on what we're seeing in the economy and the related sales activity. It's actually a somewhat refreshing and a more straightforward discussion than we had in 2009. Most trends are, in fact, positive. Those areas that already demonstrated signs of recovery continue to show progress.

Take, for example, the Tools group, serving professional automotive technicians. That business returned to pre downturn levels in the third quarter. And the recovery was confirmed again in the fourth quarter.

As part of that trend, activity and big ticket items remain strong. These are longer pay back products like hand held diagnostic units and undercar equipment, or more discretionary items like tool storage units. We watched those particular sales trends because we believe they're a reasonably accurate barometer of our customers' financial health and of their confidence.

The strength in those big ticket products was across the board, with diagnostics and tool storage units driving increased sales through the Tools group and undercar equipment -- especially high value aligners -- bolstering sales in the repairs systems and information group, which serves vehicle repair shop owners and managers. The trends here were consistent -- I think we can say the trends here were consistently encouraging throughout 2010. Each quarter had year over year gains in all three big ticket categories. And the fourth quarter rise out paced our overall sales increase.

We also continue to register recovered activity in the industrial business with professional users and critical industries all of across the globe. And, beyond that, emerging markets just continue to be robust and the fourth quarter was no exception. So the areas I just discussed were a continuation of the positive trends we saw in the earlier periods. But we also saw some additional favorable signs in the spaces that have been slower to recover.

For example, our businesses that are tied to automotive OEM dealerships. Although the North American dealership base continues to contract and is an ongoing challenge, we did see some considerable increases relating to essential tool distributions in both North America and Europe. In the fourth quarter we registered some solid gains as those customers became more willing to commit.

In Europe, an area of mixed economies overall, we did see our strongest year over year increase in the fourth quarter. Solid double digits. I already mentioned the continuing strength in undercar equipment in the region. But we also saw strong comparisons in the northern and central countries of Europe like Sweden and Germany. And favorably in the eastern European -- eastern emerging economies, where we've added additional presence in Belarus and recently ramped up our production in the Minsk facility.

So, there are positives -- there are real positives in Europe. But the south, especially Spain, hasn't changed. It's still weak. And that's a market which is significant for us. It's a significant market for Snap-on.

So, overall, we registered an encouraging quarter. And that was encouraging while still fighting the head winds generated by our major markets in the south of Europe and by the consolidation of the OEM dealership space.

Now I will provide some highlights for each of the segments, and mention some of the progress we made on our strategic areas of focus. Commercial Industrial, or C&I, posted a volume increase from 2009 of 15.4%. The operating earnings were up over $18 million, recovering smartly to 12.6% of sales from the 6.8% registered last year. We are gaining position in C&I and we're also seeing the benefits from RCI and from restructuring actions.

Speaking of RCI, one of the real highlights in the quarter was the recognition of our power tool plant in Murphy, North Carolina, as one of North America's ten best (audio difficulties). It's an annual competition conducted by Industry Week magazine, with which Snap-on has some experience. Our Milwaukee hand tool plant was a finalist last year.

Excellence in manufacturing is sought out and evaluated, and the judges liked what they saw in Snap-on Murphy. Industry Week in their comments highlighted the breadth and depth of the RCI culture at Murphy as a key driver in that plant's excellence. Endorsements like that only come from hard work and dedication. So, I congratulate and I thank the associates at our Murphy facility for this success.

The C&I segment is also where we see clear runway for growth and leveraging our powerful brand to further penetrate markets outside of automotive repair. Snap-on progress and serving new customers in critical industries is quite evident in our industrial business's fourth quarter performance. Sales were up there about 17% from last year, with particular strength in an international market. And that capped off a gain of over 20% for the full year.

That progress was driven by both an increasingly clear customer focus and also by innovative new products specifically aimed at solutions for those particular segments. Products such as the large tools for mining. Tethered tools for working at heights in aerospace and energy industries, and products with advanced technology like the automative tool control unit, or ATC, for the aviation industry. You might remember that I mentioned the launch of ATC last quarter and the reception since has been enthusiastic.

Beyond that, we also established important partnerships with technical schools focused on automotive, aviation and alternative energy. We are putting Snap-on in at the ground floor of careers for techs in those critical industries. We're confident it will payoff and make them Snap-on customers for life.

All of those, all of those products, help drive our improved and growing position in this strategic arena. Also in the C&I group it's where we have our Asian and emerging market businesses. We've spent the past few years building physicals in those geographies. During 2010, we expanded plants and launched new products designed specifically for those markets.

From automotive hand held diagnostics to a professional brand of hand tools. We're building the physicals primarily to serve in the local markets, but they are powered by Snap-on technology and expertise that reflect our history and legacy of innovation and productivity. And that gives us an advantage in those fragmented but growing markets.

We can particularly see that growth in China and India, as increases continued at a rapid pace in both those markets. And I believe when you think of emerging markets it's worth noting that the repair cycle is just getting started in those economies and there is much more opportunity for Snap-on in that arena.

Overall in the quarter, and throughout 2010, the advances in C&I were marked by solid volume gains and improved profitability all across the group, and we see those businesses clearly moving forward along an extended runway for growth.

Moving on to the Tools group, where we serve professional and automotive technicians. As I said, it's back above pre recession levels. Big ticket activity is strong. The overall year over year fourth quarter volume gain of 12.8% was led by the US.

Now, the operating margin was 9.6%. And it offers a bit of a complicated comparison because of noncomparable items both in 2009 and 2010. Aldo will provide some more detailed analysis. I'll just highlight that we recorded restructuring in the fourth quarter in the Tools group of $4.6 million. Absent that charge, the Tools group margin of 11.3% is in line with the full year results and includes our focused support to successfully maintain the strength of our franchising network.

I do believe that the relatively modest decline in the Tools group volume during 2009, and then having it be among the first to recover, is a testimony to the strength of our franchisees. We recognized that advantage as we went into the turbulence. We were committed to maintaining and supporting the network through the difficulties. And by all accounts it worked.

The key indicators of franchise help are quite positive. Turnover's been reduced. Cash collections are strong and delinquencies are at low levels. The advantage that is the Snap-on franchising network remains robust.

I already spoke about big ticket strength. Here, again, early on, we said that these categories would lead us out of the downturn and they have. And as I meet with the franchisees, their outlook is upbeat.

We had record attendance at our annual conference earlier in the year. Over 2,000 franchisees made additional commitments to attend refined field training programs. And, as I meet with them, they are quite excited about our new award winning products.

Some of those are high-tech innovations like the Verdict hand held diagnostic unit. And some are just great designs that demonstrate connection with our customers, like low profile ratchets, all-in-one wire stripper, crimpers and cutters, or the compact clutch version of the cordless CT561 impact wrench.These three items, and many others, all have one thing in common. They make work easier for technicians operating in an ever changing and ever increasingly tight space. And they've helped create the Tools group recovery.

Aldo will talk in some detail about the results of the Financial Services segment. I will only say that we believe our in-house financing capabilities are an unique advantage. It's a special Snap-on feature that makes our franchisee network stronger. Bringing Snap-on credit home after we ended the joint venture with CIT has been a smooth transition. No interruption to our franchisees or to our end customers.

We were confident we could execute on integrating the credit company, and we did just that. And as evidence of that successful integration, the Financial Services operation is demonstrating the same strong profitability ramp up we always expected. Snap-on credit has been a strategic strength. It's now becoming a significant profit contributor, and we believe it's only going to get better.

Now for some discussion on Repair Systems and Information, or the RS&I group. Fourth quarter organic sales were up 16.8%, and the operating margin was 19.7%. Both representing some substantial improvements from last year. I already mentioned the big movers.

Undercar equipment continued its four quarter trend of double digit year over year increases. We gained position in that arena around the world. We've also increased facilitation in essential tools activity through Equipment Solutions, or EQS. The vehicle manufacturers are gaining more confidence as we go forward, investing in service, and we are playing our part.

We continue to invest in RS&I because we see the opportunity to make strategic gains with repair shop owners and managers, and to expand our presence within shops of varying types. For example. The RS&I group is expanding in the medium and heavy truck -- heavy duty truck -- is expanding in medium and heavy duty truck repair. Growing with investments in that segment -- And we are investing in truck repair information, essential diagnostic tools for diesel engines and diagnostics products aimed particularly at fleets. Truck is an area that's a natural fit for Snap-on and we are on the upswing.

During the fourth quarter, that progress was rewarded when Snap-on product was used by the American Trucking Association as THE repair information source for their Super Tech competition. It's a great opportunity to further introduce our product to fleet customers, and it was a fine endorsement of Snap-on for the heavy truck segment.

Also during the year, Mitchell 1, our business that provides shop and repair information, launched new shop management software with expanded and integrated parts capabilities. The new offerings will make work easier for the shops. It's helping strengthen Mitchell 1's already substantial repair shop position.

I'll just wrap up the RS&I discussion with a final word about innovation. Snap-on's received significant attention and recognition for new products in the last year. One is the Quadriga, a fully automated tire changer, recently was the recipient of an Innovation award from the Professional Tool and Equipment news -- from Professional Tool and Equipment News. Snap-on's cutting edge 3-D imaging technology, along with Pro42 software around aligners, is leading to gains in that important aligner segment, a crucial segment for the equipment business.

And we have new wheel balancer technology. Technology that laser maps tire wear and helps predict tire replacement needs. It's the first of its kind in the industry.

And, of course, as we've mentioned before, we have the fully functional Verdict diagnostic hand held unit. It's set a new standard with Wi-Fi access, integration of Mitchell 1 repair information and a wireless touch screen, all in the technician's hand that allows remote use by the technician from anywhere in the shop.

These are productivity enhancing tools. They are also attractive. Quite attractive to shop owners and managers, and they are helping Snap-on expand its position with that important customer base. And they were, in the fourth quarter, a big contributor to the fourth quarter and the full year RS&I achievement.

So, I think you can say, our fourth quarter was a furthering of the positive trend we've seen now for several periods. Organic sales were up over 13%. Operating income up over 40%, and this was against the head winds generated by the continued weakness in southern Europe and by the OEM dealership consolidation. Overall, we are encouraged by the results. And by what they say about the clear runway for growth we have going forward.

Now I will turn the call over to Aldo for the financial review. Then I'll make a few closing comments.

Thanks, Nick.

Our consolidated operating results are summarized on slide six. Net sales in the fourth quarter of $697 million increased to 12.7% year over year. Excluding currency translation, organic sales increased to $83 million, or 13.6%. The primary drivers behind the year over year sales increase include double digit sales growth across many of our businesses. Including sales to franchisees in the United States, customers in critical industries and emerging markets, and increased facilitation program activities with automotive OEM dealerships, including higher sales of essential tools.

Sales of undercar equipment to repair facilities were also up significantly, driven by imaging alignment product sales gains across all major geographies. While continuing to be impacted by challenging economic conditions throughout southern Europe, sales in our European-based hand tool business also experienced year over year increases, particularly in northern Europe. Consolidated gross profit of $319 million in the quarter increased $34.1 million from 2009 levels. Driven by higher sales, favorable manufacturing utilization, and savings from ongoing Rapid Continuous Improvement, or RCI initiatives and restructuring actions.

These gross profit increases were partially offset by $6.5 million of lower year over year LIFO related inventory valuation benefits. The higher LIFO benefits in 2009 resulted from inventory reductions, including the liquidation of slow moving and excess inventories as we adjusted production and response to the weakened demand during the economic downturns. As a result, consolidated gross margin of 45.7% in the quarter decreased to 30 basis points from 46% last year.

Operating expenses in the quarter of $231 million increased approximately $18 million from the prior year, primarily due to higher volume-related and other expenses, including $4.1 million of higher US pension expense, largely due to the amortization of investment losses incurred in 2008 related to our domestic pension plan assets. Operating expenses were also impacted by $3.8 million of higher year over year performance based incentive compensation expense, and $1.7 million of higher stock-based mark to market expense. These operating expense increases were partially offset by $4.9 million of lower bad debt expense, $2.5 million of benefits from ongoing RCI and restructuring initiatives, and $1.6 million of favorable current effects. As a percent of sales, operating expenses of 33.1% in the quarter improved 140 basis points, from 34.5% last year.

Restructuring costs in the fourth quarter of 2010 of $5.8 million, compared to $6.7 million last year. Restructuring costs in 2010 include initial costs to consolidate our North American tool storage operations. For the full year, restructuring charges of $14.2 million in 2010 compared to $22 million incurred last year.

Financial Services operating earnings of $9.4 million in the quarter improved $13.2 million from the fourth quarter 2009 loss of $3.8 million. On a sequential basis, Financial Services operating earnings improved $4.4 million from third quarter 2010 levels. As evidenced by the continued quarter-over-quarter improvements in the sequential operating performance, we expect that operating earnings from Financial Services will continue to improve as the on- book finance portfolio grows. We will cover Financial Services and more detail in a few minutes.

Interest expense of $14 million in the fourth quarter decreased slightly from 2009 levels, reflecting lower average debt levels partially offset by higher average interest rates. In December, we issued $250 million of 4.25% seven year senior notes. The proceeds from these notes are being used for general corporate purposes, which may include the funding of Snap-on Credit's on-balance sheet finance portfolio and the August 2011 repayment of $200 million of debt upon its maturity. Incremental interest expense in the fourth quarter related to these notes was about $600,000. Going forward, interest expense associated with these new notes will approximate $2.7 million per quarter, or about $0.03.

Our fourth quarter 2010 effective income tax rate of 30.1% compares favorably to 31.4% in the fourth quarter of last year. As noted in our earnings release, the fourth quarter 2010 effective income tax rate benefited primarily from non-recurring tax items, including the late December extension of certain federal tax incentives.

Finally, net earnings in the quarter of $57.9 million, or $0.99 per diluted share, including $0.06 from the non-recurring tax items, increased $21.3 million, or $0.36 per diluted share from fourth quarter 2009 levels.

With that, let's now turn to our segment results. Starting with the C&I group on slide seven. Fourth quarter sales of $282 million improved 14.5% from fourth quarter 2009 levels. Excluding currency translation, organic sales increased more than 15%.

Year over year sales increase was again driven by higher sales across all operating units, particularly by our businesses serving customers in critical industries and emerging markets. Gross profit in the C&I segment of $108 million in the quarter increased 28.4% from 2009 levels. This $24 million gross profit increase is primarily due to higher sales, $4.8 million of lower restructuring costs, and $3.1 million of savings from ongoing RCI and restructuring initiatives. The gross profit comparison also benefited from improving manufacturing utilization, primarily in Europe, as a result of increased production levels.

Gross margin of 38.4% improved 420 basis points from 34.2% last year. Including 200 basis points from the lower restructuring costs.

Operating expenses in the quarter of $72.6 million increased $5.3 million from 2009 levels. Primarily due to higher volume-related and other expenses. As a percentage of sales, operating expenses improved by 160 basis points year over year. Operating earnings of $35.4 million for the C&I segment in the fourth quarter of 2010 increased $18.6 million, or more than double from 2009 levels. As a percentage of sales, operating margin in the C&I segment of 12.6% in the quarter improved 580 basis points from 6.8% last year.

Turning now to slide eight. On a worldwide basis, fourth quarter organic sales of the Snap-on Tools group increased 12.8% year over year, including a 15.2% increase in the United States, and a 6.7% increase in our international franchise operations. Fourth quarter gross profit in the Snap-on Tools group was $107 million in both years. Gross profit contributions in 2010 from higher sales were more than offset by $6.5 million of lower year over year LIFO related inventory benefits and $4.6 million of higher restructuring costs.

As mentioned earlier, the higher level of LIFO benefits in 2009 resulted from inventory reductions, including the liquidation of slow-moving and excess inventories, as we adjusted production response to the weakened demand. Gross margin of the Snap-on Tools group was 40% in the fourth quarter of 2010, as compared to 45.3% last year, including a 440 basis point reduction from the year over year LIFO impacts and higher restructuring costs.

Operating expenses of $81.4 million in the quarter increased $7.1 million from 2009 levels, primarily due to higher volume-related and other expenses. As a percentage of sales, operating expenses of 30.4% improved 90 basis points from 31.3% last year. Including the impacts of lower LIFO related inventory valuation benefits and higher restructuring costs, fourth quarter operating earnings for Snap-on tools was $25.8 million, or 9.6% of sales, compared to $33.1 million, or 14% of sales last year.

After adjusting for LIFO and restructuring in both years, operating income as a percentage of sales was comparable in both years.

Turning to the Repair Systems and Information, or RS&I group, shown on side nine, fourth quarter sales of $232 million increased $30 million, or 14.9% year over year. Excluding currency translation, sales increased 16.8%, led by greater sales of undercar equipment in both the Americas and Europe, higher sales of diagnostics and Mitchell 1 information products, and increased activity with automotive OEM dealerships, primarily due to increased essential tool of facilitation program sales.

Gross profit of $103 million in the quarter increased $10.4 million, or 11.2% from 2009 levels, primarily due to higher sales and contributions from favorable manufacturing utilization as a result of increased production levels. As a percentage of sales, gross margin of 44.6% in the quarter decreased 140 basis points, from 46% last year. This is primarily due to a shift in sales mix that included greater sales of lower margin essential tool and facilitation program sales to OEM dealerships.

Operating expenses of $57.6 million in the quarter decreased slightly from 2009 levels, as higher volume related product development and other costs were more than offset by $3.6 million of lower bad debt expense and $2.2 million of savings from ongoing RCI and restructuring initiatives. Operating earnings of $45.7 million in the quarter for the RS&I segment increased $10.7 million, or 30.6% from 2009 levels. As a percentage of sales, operating margin in the quarter of 19.7% improved 240 basis points from 17.3% last year.

Now, turning to slide ten. Financial Services operating earnings of $9.4 million in the fourth quarter compares favorably to both third quarter 2010 earnings of $5 million and to fourth quarter 2009 loss of $3.8 million. The $13.2 million year over year increase in operating earnings primarily reflects the higher revenue contributions from Snap-on Credit's growing on-book finance portfolio. Originations in the quarter increased 7.5% compared to the prior year.

Moving to slide 11. As of 2010 year end, our balance sheet includes gross financing receivables of $592 million, from our US Snap-on Credit operation, and $141 million from our international finance subsidiaries. For a total financing portfolio of $733 million.

In the United States, $491 million, or 83%, of the Snap-on Credit portfolio relates to extended credit loans to technicians. Snap-on Credit also continues to manage the runoff portfolio of contracts owned by CIT, which totaled $260 million at year end, and which is down $57 million from third quarter 2010 levels, and down $330 million from year end 2009 levels. For the full year, the on-book financing portfolio at Snap-on Credit grew about $325 million. Regarding finance portfolio losses and delinquency trends, these continue to be in line with our expectations.

Now, turning to slide 12. Consolidated operating cash flow of $64.3 million for the quarter and $140.4 million for the year includes the effect of a $48 million discretionary cash contribution to our US pension plans. Operating cash flow for the full year was also impacted by $112 million of higher levels of trade and other receivables in inventories, as a result of increased sales and customer demand.

Our year end cash position of $572 million increased $212 million from third quarter 2010 levels, primarily due to the proceeds from the December note issuance and cash flow from operations. These cash increases were partially offset by the funding of new loans originated by Snap-on Credit and capital expenditures. As a result, free cash flow from the operating company was $25.8 million for the fourth quarter, and $91.1 million for the full year.

As anticipated, free cash flow from financial services was negative in 2010, as a result of funding new loan originations. We expect that the impact of loan originations on free cash flow will lessen over time once the on-book portfolio stabilizes.

Capital expenditures of $28 million in the quarter, and $51 million for the full year, included the continued expansion of our manufacturing capabilities in lower cost regions and emerging markets, investments that focused on increased efficiency and cost reduction, and improvements at our Kenosha, Wisconsin, R&D facilities and headquarters.

As seen on slide 13, working capital metrics improved year over year. Day sales outstanding for trade receivables of 61 days at 2010 year end improved from 63 days last year. On a trailing 12 month basis, inventory turns at 2010 year end of 4.7 times improved considerably from 4.1 times last year.

Net debt at the end of the quarter was [$590.6] million. Our net debt-to-cap ratio of 30.1% compares to 22.2% last year and 29.2% at the end of third quarter, reflecting the $250 million December note issuance. Excluding the $107.8 million withheld for the previously disclosed dispute with CIT, our year end net debt-to-cap ratio would have been 33.7%.

In addition to our $572 million in cash and our cash flows from operations, we continue to maintain a $500 million revolving credit facility, a $100 million asset backed securitization facility, and $20 million of committed bank lines. In addition these facilities, our current A2P2 short term credit rating, allows us to access the commercial paper market should we choose to do so. As of 2010 year end, no amounts were outstanding under any of these facilities.

This concludes my remarks on our fourth quarter performance.

Before turning the call back to Nick to provide his final thoughts, I'd like to mention some considerations for our 2011 outlook, as covered in our press release. In 2011, we expect to incur $11 million of higher year over year pension expense, largely due to the amortization of investment losses incurred in 2008 related to our US pension plan assets. Capital expenditures in 2011 are anticipated to be in the range of $55 million to $65 million, and we anticipate a full year effective income tax rate of approximately 33%.

And, as discussed earlier, interest expense on our fourth quarter debt issuance, will approximate $2.7 million, or $0.03 per diluted share per quarter.

With that, I will now turn it back over to Nick.

Thanks, Aldo.

Look, we believe the message of our fourth quarter is three fold. First, the Snap-on value creation processes are continuing to drive improvement. We saw the results in our new product, in our profits, and achievements like the Murphy factory being named in the top ten, and in our successful integration of the credit company.And we believe there is a long road of progress still to be traveled.

Secondly, many of our businesses have recovered, returning to pre recession levels. At the same time, we do have selected areas, particularly southern Europe and the OEM dealership segment, that have some way to go.

Finally, we see in the results that our runways for growth are clear. We grew substantially in the quarter while still facing the head winds of Spain and the rest of southern Europe and the OEM dealership segment. Those increases were driven by decisive strategic gains; enhancing our franchise networks, expanding with shop owners, extending to critical industries and building in emerging markets and we can see further and expansive opportunities in each of those areas.

Overall, I think you will remember we said entering the recession, that we would navigate the difficulties and emerge stronger than before. We believe the fourth quarter results, continuing the trend defined through 2010, are evidence that we did just that. But most importantly, those results indicate that we were positioned quite well, Snap-on is positioned quite well to capitalize on the abundant opportunities for growth that stretch out before us.

Now before I turn the call over to the operator, I want to finish by thanking our associates and our franchisees. I know many of you are listening. The fourth quarter and the full year results were only possible because of your efforts on behalf of Snap-on and because of your commitment to our team. For all of that, for your continuing support of our company, you have my congratulations and you have my thanks.

Now I will turn the call over to the Operator for questions. Operator?

Thank you.

(Operator Instructions)

We will take the first question from Jim Lucas, Janney Montgomery Scott.

Thank you all. Good morning. Couple questions here. First, for 2010, what did the geographic mix look like at the end of the year? In particular, how much did emerging markets grow in terms of the overall percentage?

I think we said, emerging markets -- I think we said 59% is the US, about 26% in Europe. Emerging markets is between 5% and 10% in that regard. The emerging markets we generally say is growing faster than GDP. We saw pretty good growth in India, particularly, in the fourth quarter and the third quarter of this year. We're starting to see our business in India pick up quite a bit. I don't know if we foresaw that so much when we entered the year.

And so, out of curiosity, since you call that out, what is driving the India growth?

You know, Jim, I think it's the new equipment products. We started out taking equipment focused on the China market and launching a mid-tier. You might remember, we talked a bit about that in the beginning. The early penetration of China was around -- I don't want to say skimming -- but around the top of the line product and the best garages. And then we got the experience, and then we came out with a mid-tier line of aligners and balancers and tire changers. And when we introduced that in India it took off quite smartly.

Okay. So just to clarify, the emerging markets in terms of the overall percentage is still in the 5% to 10%. You are seeing faster growth, but --?

Yes, it's off a small base. I think, actually, a lot of people have -- some others have observed, and you can observe with us, and I said in my remarks, we are early in the cycle, this repair cycle. Industrial companies around the country are up around 20% or 25%. What you see from us is a situation where the repair cycle hasn't started yet. You know the story. 300 million cars in the United States and 45% over ten years old. 70 million in China and they are all new.

So, we haven't actually seen our business as a broad set, as an industry, really grab hold yet. And that applies not only to automotive repair but also to aerospace and a number of different things. Repair cycles is just starting. We were building to get there, and I think we have quite a bit of opportunity. You can see that as you compare to other industrial companies, how they're represented in China and other places and the emerging markets.

Absolutely. And on RSI, what impact does mix have on the margins there? Trying to understand what the new segment -- what the margin profile should look like going forward?

Well, you are seeing the margin profile now. What's happened is that you get some head winds when the OEM facilitation business starts building, and that happened in this quarter. That's been under represented in prior quarters. And when the OEM manufacturers start having these central tool distributions, those are lower margins. More than 10 points lower at a gross margin level. And what -- what you are seeing now is a good base to model going forward. I don't think you will see big mix change. The facilitation business is now reasonably represented as a mixed piece.

That's helpful. And on the tools group, Aldo, is the LIFO comps kind of worked their way out at this point? So 2011 more apples to apples?

Jim, that's a good characterization. Certainly as inventory builds there will be some impact on LIFO. But you won't have that year-over-year noise that you had in the fourth quarter of this year. You characterize it correctly.

Okay. And final one from me on the credit business. First, expected contribution from a cash basis this year and, secondly, any update on the CIT disputes?

Well, first off, we expect as the portfolio grows, yes, you will see sequential improvement as we have seen consistently over the last quarters since the termination of the joint venture back in July of '09. We don't provide exact guidance on what that buildup will be, but you will see -- we expect there to be incremental improvements in each quarter as we go forward.

With respect to CIT, really, there is no further update of consequence. We have a meeting schedule with an arbitrator in second quarter of this year. We're hoping that the matter will be fully resolved by that point in time, but nothing much else to say in that matter.

Great. Thank you.

Our next question today will come from David Leiker, Robert W. Baird.

Aldo, as we look forward on the gross profit line with the LIFO, are we through the point now that on a go-forward basis we aren't going to see LIFO benefits flow through the income statement any more?

I don't believe we will see LIFO benefits, Dave. I would expect that as the economies continue to recover and we continue to grow, inventories will pick up appropriately so. And with that, if anything, you will have some LIFO expense creep into the financials. But not benefits.

And how big do you think those expenses might end up running? Any thoughts?

I don't think they will be significant.

Okay. And then, as we look at the organic performance across the businesses, the Tool business and Diagnostics both have seen an acceleration in that, relative to what we saw in the prior quarters. Is that something that we are seeing real strong underlying growth there accelerate, or something else going on?

I think actually the Tools business looks fairly strong.

Yes?

You know, it's hard to say. I think we are seeing some real positives there. I said in the last call, everybody says they are gaining share. We feel -- we feel quite confident that we are improving our position with technicians in the Tools group. You are seeing technicians themselves become a little bit more -- a little bit more confident of their future and not necessarily -- it's not necessarily pent up demand. It's just, they're going back to business as usual in terms of buying.

We just had the kickoffs, David, and the kickoff events were our best ever. These are events which lead off the year. We hold them in January, and they're distributed around the country in places like Chicago and Deadwood, South Dakota, and Phoenix and so on. And the attendance at those was a record. And the enthusiasm for the programs that are coming forward was very positive. So, I would have to say that the anecdotal reports from the individual dealers, I attended a couple of them myself, the anecdotal reports for the dealers seem to match up with the numbers to say that we are gaining position and this looks like that group is getting its momentum moving forward positively.

Do you think -- ?

It has to recovered. It recovered from -- we are back to 2008 levels. So, you can say we are at pre recession levels. So, the fourth quarter is a good quarter for them.

Do you think that as you look at the business here in the US, in particular, and the Tool side, that you are back to normal customer behavior there?

Yes. I would say that. I would say we are seeing -- in the United States the business grew 16%. 15% , 16%. So, big number. We saw -- we feel pretty positive about that. And I wouldn't call it pent up demand. I just think customers are -- they have been fortified by the continuing demand in the shots even through the recession. Now they are getting more confident, and they're going back to business as usual. And, by the way, we are stronger than when we entered. Our franchisees are stronger, their cash is better, determination is better and our products

And same kind of question on the repair side. Is that back to normal level of demands, or not yet?

I think it's back to normal levels of demand. Of course, the comps get tougher in 2011, as you know. But I feel positive about that business.

And then lastly, I was a little late getting on. But Europe, the southern part of the region particularly, in the C & I business, has been a lag. Has that gotten back -- is that starting to perform --?

Bouncing along the bottom. I would say. That's how I describe it. Some quarters -- if you go back and look at the last couple of quarters, last couple three quarters as a body of work, you would say these businesses are bouncing along the bottom.

I don't think we were seeing recovery yet there. So, if you think about us going forward, you can think of us this way -- we have a number of businesses that are fully recovered, and then we have places that have are still kind of caught in -- in a kind of recession level, which is the OEM dealership business for reasons of consolidation, and southern European business. That's how you look at us going forward.

Okay. Thank you.

Once again, ladies and gentlemen, it's star-one if you have a question today. Next up is Dax Vlassis, Gates Capital Management.

Yes, I think you said that the C & I group was -- the restructuring charges were about a $4.8 million delta year-over-year. Can you give us the absolute numbers?

Well, actually I think I said that the Tools group was the $4.6 million year-over-year charges. Are you talking about the fourth quarter? Or the full year?

Talking about the fourth quarter.

The fourth quarter -- the 4.6 million in the Tools group.

It was last year's number. In 2010 we have a nominal amount. So it's about $4.8 million difference year-over-year.

Commercial and industrial. It says, increased gross profit increased due to higher sales $4.8 million, lower restructuring costs.

Correct. It was $4.6 million were incurred last year. We had a nominal reversal this year. So, $4.8 million is the total difference.

Okay. Can you talk about the fourth quarter vis-a-vis, any seasonality? Is this is like the new run rates, so to speak? Are we at a level where this is a consistent business here? Or is there some seasonality to some the businesses that we should be -- that I should be aware of?

I don't think so. Our big seasonality quarter is the third quarter. It's the third quarter. Because we have European businesses. So you see vacations flow through the numbers. But generally, generally, we have little seasonality in the other three quarters.

Now, there can be a little turbulence and expense because when you start out the year you are spending on things, like I said, the kick off meetings and so on. The expense line can move somewhat based on those things. But, generally I would say in terms of the top line and in terms of the performance, pretty much no seasonality.

Okay. And if I exclude the impact from Financial Services, looking forward and just from a general perspective, if I look at the Financial Services segment and ex out the working capital requirements of that business, and just looking at the core three segments, are we at a working capital level with those now, that you would generate some pretty substantial free cash flow from those segments exclusive of the Financial Service segment?

Yes, I think that's right. I think that's right. I would say that we think that moving forward -- I'm not going say that we are not going to add any working capital as our sales move upwards. That's not the situation. But the free cash flow from what we call OpCo, the operating company, outside of the Financial Service, will be pretty robust.

Right. Because it seems like the Cap Ex levels are low, and if working capital is back up to a high level, you should generate a fair about of free cash flow.

Yes, I think that's true. The one exception to that might be, as you say, as you expand into emerging markets, that tends to be a structural build. So that's a little different. But, generally the rest of the business, I would say that in a broad sense you are correct.

Okay. And my last question is, on the restructuring expenses going forward, it seems like a lot of the expenses have trailed off. Do you have -- what are your expectations for -- ?

No, I wouldn't characterize them as trailed off. We spent $15 million this year. We spent -- $14.2 millionthis year, and we last year we spent just over $20 million, $22 million, something like that. We consider ourselves control restructurers. We spend about in that area every year. You will see about that level going forward.

$14 million through the P&L --?

Like what we spent this year. I'm not saying that we are going to spend that amount this year, or less. But, that's the kind of money, if you go back and look at what we have done in the past, it's the kind of money we spent. That's generally what we can handle in a year, and feel pretty positive about doing it. We feel we can execute it, and so those are the kinds of numbers we generally turn out. We see opportunity. If that's an annual number, why is it restructuring and non-recurring in nature? Wouldn't that be part of the operations? Or, is there some programs that have a specific end date, and it's just not in 2011?

Really, it will be more program specific. The restructuring definition is an accounting terminology, and if it's a specific and unique program as compared to the prior year, it's categorized by that. So, what Nick is saying is we still see opportunities to improve ourselves, we're going to continue to look for those opportunities, and we will invest accordingly if we see a return on those projects.

Okay. I appreciate it.

All right.

(Operator Instructions)

Next we will go to Alex Gasiel, Barrington

Hi, Nick, hi, Aldo, hi, Leslie. How are you?

Good morning.

Most of my questions were answered. Just concerning the franchisees. How many were in the -- how many do you have in the quarter and do you see --?

I couldn't quite hear you, Alex.

I'm sorry. How many franchisees do you have in the quarter?

The number of vans we have is about 3,464. In the US.

In the US --?

That's the number we usually quote. I think -- I don't know the actual international number, but --

Is that up quarter-to-quarter? From last year?

Worldwide.

Is that up --?

No, it's up -- you know, it's about flat. About flat.

Any years of that moving up in fiscal '11?

We have some open routes that we could fill and that our structural -- as we get more efficient our -- the structural nature of our open routes can get filled. We found that we want to be very selective in who we put in the trucks and it's served us very well going forward. And so that's really the idea that has dominated the last four or five quarters. That doesn't mean we won't increase in the future.

You haven't had to purge as much because of such a higher standard.

Right. Right. And you know, if you actually got here and looked at all of the real detail, our infant mortality has gone way down. Which has made all the difference for us in terms of termination. That's been a big positive, as you might imagine.

So, I would say that you could -- you would be entitled to believe over the last two or three years we've learned a lot how to manage the franchise systems with lower costs associated with turbulence in the franchisees.

And you mentioned -- ?

And we've paid a lot of attention to their profitability as well. We've boosted their profits on an average basis, and then paid attention to who is going in there, and that all works pretty well. Actually, it one of the things -- I want to say a little bit more. It's one of the great advantages to Snap-on. When you have so many franchisees, you may have the -- a big portion of the 3,500 people in the United States who were capable of running these franchisees. It's a barrier to entry and tactical advantage that's hard to duplicate and hard to deal with for some of our competitors.

And what was the growth in tools for international? Was it 6.7%, Aldo?

6.7% was the growth outside of the United States in the quarter.

And I think you mentioned this before. It's pretty difficult to implement a van strategy in India or China.

Of course. Generally, it is difficult because the van strategy flourishes best when technicians own their own tools. India and China the technicians do not own the tools, the shops own them. We use direct and distributors to manage our distribution in that place. Just in an aside for the international businesses, remember that, if you look back to last year when we were in the recessions, the international tools businesses did not go down. The international van channels did not sink as much as other US businesses, so the comparisons were much tougher for those. UK and Australia businesses.

All right. In your mission critical areas, was there any particular area that was more -- grew outstanding in the quarter or was it just across the board?

Yeah. Actually we grew. In every one of those areas in the quarter, and we were quite pleased with them. But, I would say, if you ask me that question, the broad category of natural resources seemed to be the strongest. Things like mining and oil and gas and -- we put power generation in natural resources. So, we felt that to be a pleasing trend.

Okay. And I know you mentioned that Europe represented 26% --?

26%.

Could you -- would you be able to say how much is southern Europe in that 26%?

Well, I can say our Spanish -- I will say this. I know that Spanish number. Our Spanish number is between 20% and 25% of our European business.

Okay.

We acquired a business in Spain several years ago. One of our major acquisitions. We have a fairly large share of the Spanish market.

And lastly, there is any -- are you looking at any small tuck-in acquisitions? Does that make sense strategically?

Yes. Well, we are -- our view on acquisitions is this. Is that our -- the Snap-on umbrella is -- we used to think of ourselves as somebody who sold hand tools through vans to auto mechanics. But, when you step back at it, the real Snap-on proposition is making work easier for professionals who operate in critical industries. That's a fairly wide, but yet coherent space, where the whole Snap-on proposition works powerfully.

And so we are looking at acquisitions in those areas. We are receptive to acquisitions that would -- in emerging markets, an acquisition that would put us in a better position to serve repair shop owners and managers. We made one several years ago called ProQuest -- or, anybody, anything that would further and give us greater weight in critical industries in alternative -- in places like natural resources or aerospace or so on. We are alert to those and are reviewing them.

What about in -- I know you are gaining ground in the heavy medium truck. Is there anywhere where and acquisition would help? Or more of a organic?

I don't see us -- I don't necessarily see us looking at that for an acquisition. I think we have quite a bit of capability right inside Snap-on to fully mind that position. When people always ask me, what are we going do with our cash? We have quite a bit of capability, quite a bit of runway in rolling the Snap-on brand out of the garage, in building in emerging markets, and expanding with repair shop owners and managers. Remember, that's a different customer base than technicians. And so we're investing in organic growth there. But we are looking for acquisitions. I'm not sure heavy truck would be -- is a clear opportunity. But that doesn't mean I would disqualify it if a great property came available.

All right. Thank you for answering my questions.

Thank you.

Our final question today is the follow-up from Jim Lucas.

Yes, Jim?

Thanks. First on the house keeping basis. You've given us the Cap Ex, but D&A expectations for the year?

About the same, Jim. About the same as what we have seen.

Okay. And, any thoughts, color you can share on the ramp in material inflation we're seeing. In particular, a lot of press these days about the rising steel prices. If you can just give us an update on where you stand in terms of price being able to offset this rising inflation.

Yes, we had -- you know we had some pricing in the quarter. We are seeing some mild inflation. Remember, we don't buy any particular one quantity. I think we said in the past that, to the extent the inflation is quite visible, that as steel prices goes up clearly, or oil prices spike dramatically and stay up, like gasoline prices are up and things like that, we can price for that. We think we can find offsets. We can find offsets for those -- for that pressure.

If you go back, the last time we saw spikes, in 2008, I think gasoline was like $4 a gallon and so on in 2008. Oil went from $80 to $140, that was one of our best years. I don't think we are trembling over commodity inflation. I'm not to say it isn't a challenge. But in history we were able to find ways to offset it.

And, just from a clarification standpoint, when do you normally put your -- if I remember correctly, it's usually an annual price increase you put through, and then to your response of being able to pass through when inflation is visible. Is there a normal lag from when you realized that price?

Yes. First of all, across the range of businesses, there is no particular period I can say that we put in pricing. I mean, the Tools group is different from S & A Europe, and that's different from Asia and so on. You know, you can say that there is a kind of maybe quarter lag in this kind of thing. We will see a two to three month lag and when we put in pricing and see it come out in the marketplace.

Great. Thank you.

All right. Thank you.

And at this time there are no further questions. I will turn the conference back to management for additional closing remarks.

Thanks, everyone. This is Leslie. We thank you for joining us today. A replay of this call will be available on Snap-on. com shortly. And, as always, we appreciate your interest in Snap-on. Have a good day. 'Bye.

Once again that does conclude today's conference. Thank you all for your participation