實耐寶 (SNA) 2011 Q2 法說會逐字稿

Good day and welcome to the Snap-on Incorporated 2011 second quarter results conference call. At this time, all participants are in a listen-only mode. At the conclusion of our remarks, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Leslie Kratcoski.

Thanks, John, and good morning everyone. Thanks for joining us today to review Snap-on's second quarter 2011 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 will 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 the transcript of today's call. Any statements made during the 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.

Finally, today's discussion and presentation include reference to certain non-GAAP financial measures that exclude the previously announced $18 million arbitration settlement gain recorded this quarter from the resolution of the dispute with CIT relating to the former Financial Services joint venture. Please refer to the company's earnings release issued today and to the slides accompanying this webcast for a reconciliation of these non-GAAP financial measures to those most directly comparable GAAP financial measures. With that said, I will now turn the call over to Nick Pinchuk. Nick?

Thanks, Leslie. Good morning everybody. Well, the second quarter results were reasonably strong again, and I think it's safe to say we're encouraged by the continued progress. Overall sales in the quarter were up 12.2% from last year with some help from exchange rates. Organically volume rose by over 7%. The overall operating margin was 15.4%, and operating income was up more than 44% from 2010, and both of those comparisons exclude the positive effect of the arbitration settlement with CIT. The 40%-plus rise in operating income is similar to what we posted in the past couple of quarters, so these results mark a continuation of an ongoing and strong trend.

Profit increase included a $15.8 million rise in earnings from Financial Services, but a real highlight was the quarterly operating margin of 13.6% before Financial Services. That [OpCo OI] margin represents the highest level Snap-on has achieved in well over 15 years. We believe the operating performance and the trend clearly demonstrates the strength of our Snap-on value creation processes -- safety, quality, customer connection, innovation and rapid continuous improvement. It's a framework we apply everywhere at every level to improve our performance, and our commitment to those principles and processes is enabling our broad progress.

Now with respect to the macro environment the various markets in which we operate, the second quarter was fairly unchanged from what we spoke about three months ago. I characterize our performance as widespread gains in most areas, more than overcoming those few continuing headwinds we mentioned in the past. I will provide a bit of color on the quarter and cover the highlights for each of the operating groups, and then as usual, Aldo will offer a detailed financial review. From a geographic perspective the same dynamics are present for our operations as have been in play for the past couple of quarters. In North America, no real change. The overall 10% volume growth in the Tools Group reflects the same stable upward trend we have become accustomed to in North America. Also the big-ticket diagnostics and tool storage units sold through the van channel remain strong and that is a continuing positive for us. Our undercar equipment, another big-ticket category, was also up in North America, better than our overall sales increase. The same was true in our distribution and general industrial sales in the region.

Moving to another area of strength, the emerging markets of Asia-Pacific, again this quarter, we saw strong double-digit gains. It's no secret that those markets are expanding and we are taking advantage as we build presence and gain position. Throughout that jurisdiction, but especially in China, in India and Indonesia we are seeing growth, far above both GDP rates and the Company's overall pace of growth. We continue to see progress in most of Europe, and in the established markets like the UK, Sweden, Finland and we are growing in the East in Eastern Europe, of course in Russia but also in other developing areas like Poland and in Turkey. The gains we have seen are across business segments from big-ticket undercar equipment to industrial customers to SNA Europe.

But the overall growth in that region was somewhat muted by the ongoing economic weakness in Southern Europe. You might remember that for Snap-on, these are large markets by way of SNA Europe, and we are not seeing relief. Countries across the South like Spain and Portugal remain weak but that is no real surprise given the almost daily news from that region. Actually, when it comes to Europe, given the turbulence, we feel okay about no major changes for us in Europe over the past few quarters. Speaking of headwinds, another we mentioned last quarter is Japan. The situation there is fairly well known, it's unsettled as we thought it would be for a while. The good news is it is isolated and most people believe it is temporary.

Now for the operating segment. For the operating segments and a view on the advancements we made in those strategic areas which we have identified as decisive for our future -- expanding into critical industries, building in emerging markets, enhancing the franchise network and expanding in the repair garage. In Commercial and Industrial or the C&I group, sales were up 8.1% from 2010 levels. However, excluding the benefit from foreign exchange, volumes increased about 2%. The operating margin was 10.4%, up 50 basis points from last year. As you expect from the geographic discussion I just provided, most areas here were up solidly, widespread double-digit rises. Keep in mind however, that C&I is where we see most of the impact of those fairly specific headwinds of Southern Europe, the unsettled situation in Japan and the lower military spending which we discussed last quarter. So the story in C&I is robust gains in most areas, partially offset by the concentration of our external headwinds in this one segment.

C&I operations outside those concentrated headwinds grew organically at double digits, very much in line with the gains in the Tools Group and in the repair systems and information groups. From that perspective, we are encouraged by the progress along our runways for growth in C&I, and that progress can be seen in the volumes, the positive motion in Asia-Pacific, and in critical industries such as aerospace and natural resources. All these continued with the trend of double-digit growth. But more important than the sales in a particular quarter, we know that Snap-on is building expanded long-term presence in each of those strategic areas.

Just last month the Corporation had a strong showing at the Paris Air Show, it's widely recognized as the most prestigious aircraft exposition in the world. And many of you know that our array of products for the aerospace sector is expanding. In Paris, we highlighted the high-tech automated tool control unit, or ATC, and our newly increased range of torque products aimed at aerospace, and the response was very enthusiastic. It is that kind of growing presence that is generating the big gauge we are seeing in this critical industry of aerospace. And the gains are being driven by customers throughout the industry, from airlines in support of their fleet, to aircraft manufacturing facilities, and into the maintenance and repair and overhaul shops, or MRO facilities. And as you would expect, the opportunities here are across the globe and Snap-on is increasingly valued in this important sector. We feel encouraged by that.

I have spoken in the past about the partnerships with technical schools in creating certification programs. We believe it's a great way for technicians of the future using Snap-on products -- it's a great way to get the technicians of the future to use Snap-on products, to get them to see the quality and professionalism of the Snap-on brand and ultimately for them to become Snap-on customers for life. We continue to build those programs in the US and internationally, and across the wide range of disciplines, from automotive repair to critical power generation to aerospace. And as part of that progress, an array of key technical schools across the US have adopted Snap-on certification protocols and that practice is expanding.

Our sales and education were up over 20% again in the quarter, but more importantly, we believe those gains are setting the stage for future growth across all the critical industries. I've already mentioned the rapid growth we're seeing in Asia-Pacific but I will just provide one example of products that are helping to drive that expansion. During the quarter, we released a new version of our diagnostics unit in China, the handheld includes a new touchscreen interactive display as well as expanded vehicle and system coverage. As you can imagine in China, with relatively recent development over the new car market, the repair wave is just starting to form. Our handheld unit is getting great reviews and it's positioning Snap-on to ride that wave as it breaks. That gives you a little insight into C&I -- continued advancements in critical industries and emerging markets, and significant gains with offsets from a few concentrated headwinds in that segment.

Moving to the Tools Group, where we serve professional automotive technicians. Sales were up 13% including 3 points related to currency and the operating margin was 15.5%, up 300 basis points from last year. Sales of diagnostic products [through] the vans were up strongly. We are continuing to see the benefits of the successful launches of both our high end VERDICT and our updated VARUS handheld units. Those products are innovative, big-time productivity enhancers, and they are driving a big-ticket strength across the Tools grouping. We said we need to maintain and even enhance our van network. It's been a big focus for us, and it's showing in the results.

Again this quarter, the franchisee health metrics are moving positively. Obviously the sales are up but our franchisees are in better overall financial shape, the turnover is low and we believe the network is stronger than ever. We did get some validation of that progress in the quarter when Franchisee Direct published its annual global franchisee report. The Snap-on franchisee proposition ranked sixth overall. The top-ranked tool company by a wide margin. In fact, the top-ranked industrial company of any type This is a publication that is a leading source of information for the franchise industry in both North America and Europe, so it was a valuable endorsement for us. The rankings were based on several criteria including stability, growth, best practices and support and training. And those are areas that all have directly benefited from our focused efforts to enhance the channel and from the application of Snap-on value creation processes.

Now, on to the repair systems and information group. This is where we serve vehicle repair shop owners and managers, and where we have a great opportunity to expand the Snap-on brand throughout the garage. RS&I posted a sales increase of 13.9%, just under 10% excluding currency. And the operating margin, it was 20.9%, 150 basis points up from 19.4% last year. Related to the growth in those shops, our equipment division was up in both North America and in Europe. Over the past several years we've had a number of innovative new products and equipment, and they are propelling us forward. The OEMs increasingly are directly signing on to these products and that additional exposure is a big plus. Particularly strong in the quarter were big-ticket alignment products up more than double the group's growth rate. This is a product where we have a lead in imaging technology and we are taking advantage.

Also related to our expansion in the garage, we are increasingly seeing -- serving medium and heavy truck markets with information and diagnostics. We have launched the pocket IQ handheld diagnostic unit specifically for the truck segment. It is designed for anyone diagnosing or repairing trucks, from dealers to fleet maintenance shops, even to owners. We are also working with truck engine OEMs, launching software for diagnostic testing, for repair information and for reprogramming capabilities to ease repair work across their entire line of OEM engines.

In the Independent repair sector, MITCHELL1. MITCHELL1 has been making investments in truck repair and information for some time, now we are well-positioned and we're gaining in the truck software space. We have spoken in the past about our relatively small direct exposure to automotive OEMs, but obviously as the roof tops in the US decreased, our electronic parts catalog business through Snap-on Business Solutions has been impacted. But we're finding offsets, both internationally and in adjacent markets. Areas like motorcycles and agriculture, and we have made gains in those areas. Also related to this space, we continue to see increased activity in essential tool distributions. The OEMs are more freely committing and that is helping drive some of the sales increases in RS&I.

So, that gives you a picture what's going on in the operating units. As I said in the beginning of my remarks here, the Snap-on value creation processes are driving our progress -- customer connection, building relationships with students, creating customers for life. Innovation, new diagnostics units in the US, UK and China for cars and for trucks, new undercar equipment building on technology leadership, winning new customers and products expanded to serve critical industries, automated tool control and wider torque offerings. And of course, rapid continuous improvement or RCI, one of our biggest value creators. The operating income margin tells that story. 13.6% before Financial Services, up 140 basis points, stronger than we've been in some time. We believe we have come out of the downturn as a stronger company than when we entered and the Snap-on value creation process has made it possible. Now I will turn the call over to Aldo for a financial review.

Thanks, Nick. Our consolidated operating results are summarized on slide six. Overall revenue growth increased profitability in Financial Services and what we believe are ongoing benefits from our Snap-on value creation processes, generated a 44% improvement in year-over-year operating earnings. This operating earnings improvement excludes the $18 million arbitration settlement gain recorded during the quarter. Net sales in the second quarter of $726.7 million increased $79.1 million or 12.2% year-over-year. Excluding currency translation, organic sales increased 7.2%. We continue to realize year-over-year sales growth broadly across most of our businesses, including increased sales to franchisees by the Snap-on Tools Group, higher sales to repair shop owners and managers by the repair systems and information group or RS&I, and increased sales to a wide range of customers in emerging markets, in critical industries, in our commercial and industrial or C&I group.

Consolidated gross profit of $342 million in the quarter increased $38.4 million from 2010 levels as a result of higher sales, $11.1 million of favorable foreign currency effects, savings from ongoing RCI and restructuring initiatives and $1.9 million of lower restructuring costs. Consolidated gross margin of 47.1% in the quarter improved 20 basis points from Q2 of last year. Operating expenses in the quarter of $243.4 million increased $18.6 million from 2010 levels, largely due to $8.3 million of unfavorable foreign currency effects and higher volume-related and other expenses, including $4.2 million of anticipated higher pension expense. As a percentage of sales, operating expenses in the quarter of 33.5%, improved 120 basis points from 34.7% last year. Restructuring costs of $1.9 million in the quarter compared to $3.1 million last year.

Operating earnings from Financial Services of $17.5 million before the arbitration settlement, improved $15.8 million from second quarter 2010 levels. Sequentially and as expected, Financial Services' operating earnings continues to improve as our on book finance portfolio grows. Interest expense of $16.3 million in the quarter increased $3.1 million from 2010 levels, mainly due to higher average debt levels following last December's $250 million notes issuance. Next month we intend to repay $200 million of 6.25% notes upon their maturity with available cash. Our second quarter effective income tax rate of 34% was higher than last year's 31.2% rate, primarily due to the mix of earnings including the impact of the arbitration settlement gain that is taxable in the United States.

Finally, reported net earnings in the second quarter of 2011were $78 million or $1.33 per diluted share. Absent the settlement gain which contributed $0.19 per share, net earnings in the quarter were $66.9 million or $1.14 per diluted share. This represents an increase of 47.7% when compared with the $45.3 million or $0.78 per diluted share earned in the second quarter of last year.

Now let's turn to our segment results. Starting with the C&I group on slide seven, sales of $279.7 million for the second quarter improved 8.1% from 2010 levels. Excluding currency translation, organic sales increased 1.9%. Sales to a wide range of customers in emerging markets in critical industries were up considerably in the quarter. However, the rate of year-over-year organic sales growth in the C&I group was again affected by lower sales to the military, continued weakness across Southern Europe and some impact in Japan from last quarter's natural disasters. Gross profit of $102.4 million in the quarter increased $9.8 million or 10.6% from 2010 levels, primarily due to higher sales and lower restructuring cost, $4.2 million of favorable currency effects and $2.8 million of savings from ongoing restructuring -- ongoing RCI initiatives, partially offset by inflationary and other cost increases. Gross margin of 36.6% in the quarter improved 80 basis points from 35.8% last year.

Operating expenses of $73.2 million in the quarter increased $6.1 million from 2010 levels, primarily due to unfavorable foreign currency impacts, higher volume related expenses and higher restructuring costs. As a percentage of sales, operating expenses in the quarter were 26.2%, as compared to 25.9% last year. Second-quarter operating earnings of $29.2 million for the C&I segment increased $3.7 million or 14.5% from 2010 levels. As a percentage of sales, operating margin in the C&I segment of 10.4% improved 50 basis points from 9.9% last year.

Turning now to slide eight. Second-quarter sales in the Snap-on Tools Group increased 13% year-over-year, largely due to continued higher sales in the US. On an organic basis, sales were up 10%. Gross profit in the Snap-on Tools Group of $132.4 million in the quarter increased $17 million from last year's levels, primarily due to higher sales led by increased sales of hand tools and diagnostic products, and favorable currency effects. These gross profit increases were partially offset by higher restructuring costs with the previously communicated consolidation of our North American tool storage operations.

As a percentage of sales, gross margin of 44.3% improved 60 basis points from 43.7% last year. Operating expenses of $86.2 million in the quarter increased $3.7 million from 2010 levels, primarily due to higher volume-related and other expenses, and $1.6 million of unfavorable foreign currency effects, partially offset by $1.5 million of lower bad debt expense. As a percentage of sales, operating expenses of 28.8% in the quarter improved 240 basis points from 31.2% last year. Operating earnings for the Snap-on Tools Group of $46.2 million in the quarter increased $13.2 million or 40% from the $33 million earned last year. And as a percentage of sales, operating earnings of 15.5% increased 300 basis points from 12.5% last year.

Turning now to the RS&I group shown on slide nine, second-quarter sales of $234.5 million increased 13.9% year-over-year. Excluding currency translation, organic sales increased 9.7%, reflecting continued higher sales to repair shop owners and managers. Gross profit of $107.4 million in the quarter increased $11.7 million from prior year levels, primarily due to higher sales and $3 million of favorable foreign currency effects. As a percentage of sales, gross margin of 45.8% declined 70 basis points from 2010 levels, reflecting the higher relative growth in sales of undercar equipment and essential tool and facilitation programs.

Operating expenses of $58.4 million in the quarter increased $2.7 million from 2010 levels, primarily due to higher volume related expenses and $2.1 million of unfavorable foreign currency effects. As a percentage of sales, operating expense of 24.9% improved 220 basis points from 27.1% last year. Operating expense as a percentage of sales also benefits from the higher mix of undercar equipment and essential tool and facilitation program sales, which tend to exhibit lower operating expense levels relative to the other businesses within RS&I. Operating earnings of $49 million for the RS&I group increased $9 million or 22.5% from 2010 levels. As a percentage of sales, operating margin of 20.9% improved 150 basis points from 2010.

Now, turning to slide 10, Financial Services' operating earnings of $35.5 million in the quarter of 2011 includes the previously discussed $18 million arbitration settlement gain. Excluding the settlement gain, operating earnings of $17.5 million in the quarter compares favorably to both first quarter earnings of $12.5 million, and to fourth quarter 2010 earnings of $9.4 million. The $15.8 million year-over-year increase in operating earnings from $1.7 million last year to $17.5 million in the second quarter of 2011, we believe is testament to the earnings potential of our growing on book finance portfolio. Originations of $153.1 million in the quarter increased 12% compared to last year's levels, reflecting increased sales in Snap-on tools, higher approval rates, as well as increased participation in our credit programs.

Moving to slide 11, as of the second-quarter end, our balance sheet includes $845 million of gross financing receivables including $697 million from our US Snap-on credit operation. In the United States, $576 million, or 83% of the financing portfolio, relates to extended credit loans to technicians. Since the beginning of 2011, our global on book financing portfolio has grown over $110 million. The remainder of the year we expect our on book financial portfolio will roughly increase by an additional $45 million. Regarding finance portfolio losses and delinquency trends, these continue to be in line with our expectations.

Now, turning to slide 12, net cash used by operating activities was $13.7 million in the quarter. This compares to net cash provided of $55.5 million in the second quarter of last year. This $69 million year-over-year net decrease primarily reflects the return of $89.8 million of cash previously withheld from CIT related to the arbitration settlement. This return of cash, combined with the funding of higher inventory levels and new loans originated by Snap-on credit, were partially offset by higher net earnings. Similarly, our quarter end cash position of $418 million decreased $154 million from year end levels, primarily due to the funding of new loans originated by Snap-on credit, the return of cash to CIT and increased levels of working investment and capital expenditures partially offset by higher levels of net earnings in 2011. Free cash flow from Financial Services was, as expected, a negative $160 million, primarily due to the return of cash to CIT and the continued funding of new loan originations at Snap-on credit. Free cash flow from the operating company was a positive $82 million. Capital expenditures totaled $14.7 million in the quarter.

As seen on slide 13, days sales outstanding for trade receivables of 59 days at quarter end, improved from 61 days at both first quarter and 2010 year end. Inventories increased $63 million from year-end, primarily to support increased customer demand, and to mitigate supply-chain disruption from both the recent natural disasters in Japan and the consolidation of our North American tool storage operations. Currency translation also contributed $12.9 million of the inventory increase.

On a trailing 12 month basis, inventory turned 4.3 times compared to 4.4 times at the end of Q1 and 4.7 times at 2010 year end, reflective of the higher inventory. Our net debt to capital ratio of 32.4% compares to 30.1% at 2010 year end, and 28.3% last year. The year-over-year increase is primarily reflective of last December's $250 million bond issuance. In addition to our $418 million of cash and cash flow from operations, we have more than $600 million in available credit facilities and our current A2/P2 short-term credit rating allows us to access the commercial paper market should we choose to do so. As of second quarter end, no amounts were outstanding under any of these facilities. This concludes my remarks on our second quarter performance, and I will now turn the call back over to Nick for his closing thoughts.

You know, these are interesting times. But we believe Snap-on's performance confirms the underlying strength of our businesses and the ongoing potential of our runways. We are quite encouraged by the results. Sales up nicely, OpCo OI margin at a relative high, meeting headwinds and overcoming. Financial Services continuing to fulfill the promise of profitability that we believed in from the original acquisition, now two years ago. Snap-on's potential is unfolding just the way we've been describing for some time. The Snap-on value creation processes are driving improvements. Margins are up again, OpCo by 140 basis points and the overall Company by 320 basis points. And again this quarter, we're demonstrating progress along our strategic runways for coherent growth. The van network has been enhanced. Cash collections are up, turnover is down and Snap-on was named the top industrial franchise by Franchise Direct.

We have expanded in the repair garage, our liner sales continue their upward trend and our big-ticket diagnostics are increasing their penetration. The Snap-on presence is expanding further in critical industries, sales continue to grow significantly in sectors like aerospace and natural resources, and our presence in emerging markets keeps building. Our growth in China, India and Indonesia confirm the opportunities.

So that's our quarter. More evidence that Snap-on has considerable strengths, capabilities and position, has much more runway for growth and improvement, as it embarked firmly on a path that we believe will continue our progress for some time to come. I once again want to end my remarks -- I want to end today by speaking to the many franchisees and Snap-on associates that I know are on the call. All of what we discussed today, the encouraging results, the strategic progress, would not have been possible without your commitment and contribution. For all that you do, and all that you have done for Snap-on and our team, you have my congratulations and you have my thanks. Now I will turn the call over to the operator for questions. Operator?

(Operator Instructions) We will pause briefly to allow everyone a chance to signal. Jim Lucas, Janney Capital Markets.

Good morning. I wanted to focus first on the Tools side of the business. You talked a little bit in the prepared remarks about the improved franchise metrics, citing some things such as turnover in particular. And I was wondering if you could give a little more granularity on turnover metrics, number of vans today, with the comment of the franchises being stronger than ever? And any additional color you can provide in terms of helping us better understand?

Sure. The turnover is at a relative low, I think. We have been tracking it back. I can't say it is at an all-time low because we don't have statistics at our hand, that's way back 20 or 25 years. But in recent history, it's at an all-time low, now down below I would say 10%, so we find that to be pretty good for us and that is quite manageable. One of the problems with turnover is it becomes very expensive. But at this level we have the ability to manage it quite well. The way we see this is that we've invested all through the recession in trying to help our franchisees in terms of continuous improvement, the productivity on their vans, in terms of upgrading their system, in terms of giving them access to other opportunities like more efficient ways to insure their vans, more efficient ways to communicate more, better ways to manage their vans from a fuel consumption point of view, and we see all that coming through in these numbers. Now, in terms of the van sizes, I think the numbers are somewhere just south of 3,500. That's been growing gradually, I want to say on a year-over-year basis single digits, so it's been moving upwards but not at a large pace, but it has been very stable.

Okay. With regards to the 15% margins in Tools, a phenomenal number, and we have been waiting a long time to see the potential getting unlocked, and that is very gratifying to see. When you look at the margin profile of Tools today, where is the potential for that, and secondary to that question is, what impact did mix have on margins this quarter?

Let me speak of that in a couple of ways. The first thing is if you are thinking about the short-term and you want to extrapolate off of this, what you have to think of for Snap-on of course, for the Tools Group and for our Business in general is the second quarter is a good strong quarter for us. The third quarter is always uncertain. We have in the Tools Group, the van drivers will take time off. They have to go on vacation sometimes, they usually go on the third quarter and we put the Snap-on franchisee conference in that period.

So if you're looking at the short term, I don't think you can extrapolate from second quarter on to the third quarter. You have that effect in the Tools Group and you have the effect in Europe of vacations which are always, in my experience, of indeterminate length, depending on the year in Europe, so you have that in the short term. In the longer term, we feel very positive about our position in the Tools Group. I don't know if you can extrapolate off the 15.5%. In the past, we have said our target for operating margins for the entire Corporation is around mid-teens and we thought the Tools Group would approach that. In this second quarter, it got above that number. It started to go into the back half of that number.

I don't know what you can make out of one quarter, but having said that, we feel very good about where the Tools business is today. That is not being driven by necessarily an extraordinarily rich mix of the business. It is simply being driven by RCI, by good strong sales, by our ability to price against inflation, which we said before, and a combination of those things. And together with -- I suppose you could say robust sales of big-ticket items like diagnostics and tool storage. I think you could look at the Tools Group second quarter and say, wow, that is an extraordinary quarter and they are operating on all cylinders. They probably have gained some share if you look at their growth in the situation. They have got good growth and they are performing well, and the mix is very robust. I don't know if you can extrapolate from that number.

That is very helpful. And then finally, on C&I, you've got the ongoing headwinds that persist out there and a lot of investments that have been made with the core growth in the quarter shows those investments clearly are paying off. As we look out to the second half of the year and as you start thinking about budgeting next year, how are you thinking about those headwinds persisting and the ability to potentially accelerate the growth rate within C&I, given all of those other opportunities outside of the headwinds?

Sure. As I said in my call, if you take away the headwinds in those concentrated areas, C&I grew just like we always believed it would, double digits. But, let's talk about the headwinds. Japan is going to fix itself. I was just there about four weeks ago myself, and it is still having trouble associated with rolling power cuts and so on, but that will all work itself out. As we know the Japanese do, they are very ingenious and so on, and we think Japan comes back from it's current malaise. I don't know if it will go back to pre-recession levels or not, but you will certainly see recovery. So I think that fixes itself out toward the back of the year.

If you're talking about the military, I don't know where the government goes but the comparisons get easier year-over-year. When you're talking about a growth scenario, that looks like we have managed over at least through this quarter and maybe another quarter, the worst of that and we will start building from a base. I have given up predicting Spain. Because I think -- I would have said a year ago, that Spain's got to get better. We believe we are not losing market share but the Spanish market was down again. I think what you're seeing, if you pick up a newspaper and read about it, you can see the roots of that across Southern Europe. And so that's how I see C&I, good strong double-digit growth happening just like we thought it would. Three concentrated areas of headwinds, two of which we think dissipate as we go through the year, in the third and fourth quarter at varying time constants, and Spain, I'm not so sure. We're confident it's going to come back, but I can't predict the timing.

Okay. Thank you very much.

Gary Prestopino, Barrington Research.

Good morning everyone. A couple of questions on the Financial Services portfolio. When do you think that CIT receivables will totally run off by, Aldo?

I think that you'll see the balance of that portfolio -- it runs off in an ever-slowing pace, because the most vibrant of accounts have already come over. But in the year 2012 is when I think we have been looking to say we will be at our future state, and there will be very little noise from the CIT old portfolio.

So there will be little impact in 2012?

I think so.

Okay. And then, in terms of either balance sheet capacity or where you want to take this, where do you think this portfolio goes in a year and a half? Can you overall be managing a portfolio of close to $1 billion?

I think so. I think we've spoken of a portfolio size of around $925 million. It will largely reflect the growth in the tool storage business. That is largely what they are financing is sales to mechanics in those markets where the Tools Group serves. It would be that order of magnitude.

Okay. In terms of what you guys do on new products; you often say you put out about 40 new products a year that generate over $1 million per product, are you on track to do that this year as well?

Sure. We saw some of it -- we tried to give some color of that in my remarks, and we're seeing that. If you could see the new products we're going to roll out at the Snap-on franchisee conference, I think you would be excited. I was excited when I viewed some of them, and it's across the line. We see them in industrial -- aimed at critical industries, some new stuff that excites people in critical industries. We see new products in power tools and torque, and tool storage and hand tools and diagnostics, and they will all be rolling out as we go through the year. If anything, it is getting stronger. I think we feel better about that. Part of the reason we had this good quarter, I think, is we have been driven by new products.

Okay. Then in terms of the emerging markets, can you give us any idea of what percentage of your sales are coming from there now, versus where they were last year at this time, or is that something you just don't disclose as of yet?

We generally don't disclose it, I can tell you it's between 5% to 10%, and it's increasing every year between last year. That's generally what we've kind of held to and I think we will stay there. But it's growing -- it's 5% and 10%, growing greater than GDP, greater than the rest of the Company on a base that is smaller, but still pretty nice growth for us when you look at it on the margin.

Is it safe to assume the majority of those sales are in China or is it split evenly between China and India?

The biggest piece is China. But we get -- this month we get good growth out of India and actually this month we tried to highlight that Indonesia is becoming a bigger market for us. I think that's the under-appreciated growth engine in Asia-Pacific, having lived there for 11 years myself, I know that for a long time Indonesia malingered in political problems, but I think they solved some of it. A couple years ago they had a currency problem but now they seem to be hitting -- as I said before on other things, hitting on all cylinders. So we are pretty positive about our position there and we have a good position in Indonesia. So that was a contributor this quarter for us, and we look to it to be a contributor going forward.

(Operator Instructions) Jared Plotz, Robert W. Baird

Actually it is David Leiker. Good morning. Nick, two things, on C&I. First I missed some of your comments earlier and I just want to confirm a comment I heard earlier. Are you saying that your C&I business, excluding Southern Europe, military and Japan is running double digits?

Yes, that is what I said.

And is that consistent with what we would have seen in the first quarter where the segment as a whole had organic growth of 8% or 9%?

Yes, it's pretty much like that. I think we are not seeing any -- If the question is are we seeing any backoffs in the industrial area or the critical industry areas, we are not seeing anything like that. I know there's a lot of discussion about industrial back and forth in a number of different sectors, particularly in the last few days. We like our industrial business and now we have a specialized industrial business. First, we are armed with the Snap-on brand which all these professionals in the industry love and revere, and secondly, we are aiming just at the critical which is not so easy to back off of when you need the results because the need for repeatability and reliability is important. So I think we are in a great spot in the industrial sector.

I agree, I think that is fantastic. So if we look at this move from this 8% to 9% to 2% organic growth, it would seem that most if not all of that is a function of military and Japan, is that fair?

Actually, Spain was down 2%, Spain got worse. I almost want to say shut my mouth, I was surprised by that. Because we -- that's why I said, I've given up predicting Spain, although we don't think -- our customers are still buying, it is just small amounts. We don't think we lost share.

On the other side, if we look at what Stanley Black & Decker reported yesterday or two days ago, it looks like there are some volume gains that are going on there. And I know it's hard to tell how much of it -- because the revenue numbers we see are from Corporate to the dealer, not the dealer to the street. Do you have any sense with the change in ownership and direction there, is Mack being run better? Do they have a better presence in the market, do they have a better value proposition? Can you just talk about what's going on in that regard?

I will let others opine on how Mack is being run. I have a lot of respect for the Stanley management myself, but I don't know what's actually -- . We are not seeing any change where the rubber meets the road at the customer base, second quarter versus first quarter. If anything, we think our competitive position is fairly robust. I would offer that, I think double-digit growth, 10% in the Tools Group, that's got to be pretty strong. I don't think we are losing out, or losing position to anybody in that situation.

I even think we are getting stronger. Our people feel we're getting stronger. I was with 1,200 customers at Joliet, Illinois at the National Drag Racing Championships about 10 days ago, and when I talked to our franchisees, they were quite enthusiastic and quite full of themselves in terms of confidence. If the anecdotal evidence is anything, I feel we are, if anything, stronger than ever, and if the metrics are anything, I think 10% indicates we are growing. By the way, the comparison wasn't that easy. If you look at the Tools Group, they were pretty strong last year in the second quarter, so the 10% growth year-over-year is not small. It's fairly significant. I can't explain necessarily the Stanley numbers, and again, you have questions about -- you're selling into the vans and I'm not exactly sure what is in those

What did you see in terms of end market demand, your dealer sales? How did those track relative at the Corporate level?

Pretty much in lock step with our Corporate levels -- if the question is are we building inventories on the vans, I don't believe so. No. We are not building inventories on the vans. Generally we see this as just a reflective of the marketplace. I think what you are seeing in the van channel is good robust product. We have some nice product out there that is engaging the customers. And I say that our -- you can't dismiss the fact that our franchisees are, we believe, stronger than ever before. We feel better about our franchisee population than we ever have in the past. By the way, Franchisee Direct said something like that. We were sixth and no tool manufacturer was even close, and no industrial franchise was even close. We felt good about it.

No, you should be. Thank you much for your time.

Okay.

At this time, we have no further questions. I'd like to turn the call over to Leslie Kratcoski for any additional or closing remarks.

Thanks everyone for joining us today, and a replay of the call will be available on our website snapon.com shortly. As always, thanks for your interest in Snap-on, and have a good day.

Ladies and gentlemen, that does conclude today's conference call, thank you for attending.