實耐寶 (SNA) 2013 Q4 法說會逐字稿

Good day, and welcome to the Snap-on Incorporated 2013 fourth-quarter and full-year results conference call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Leslie Kratcoski, Vice President, Investor Relations. Please go ahead.

Thanks, Cameron, and good morning, everyone. Thanks for joining us today to review our fourth-quarter results, which are detailed in our press release issued earlier today.

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've provided slides to supplement our discussion. You can find a copy of these slides on our website next to the audio icon for the call. These slides will be archived on our website, along with the transcript of today's call.

Any statements made during this call relative to management's expectations, estimates or beliefs, or otherwise state management's or the Company's outlook, plans or projections are forward-looking statements, and actual results may differ materially from those made in such statements.

Additional information, and the factors that could cause our results to differ materially from those in the forward-looking statements, are contained in our SEC filings.

With that said, I'd now like to turn the call over to Nick Pinchuk. Nick?

Thanks, Leslie. Good morning, everybody. Look, I'll start by covering the highlights of our fourth quarter and of our year. I'll give you our perspective on the results, on our markets, and on the progress we've made. Then Aldo will move into -- as usual, Aldo will move into a more detailed review of the financials.

Our fourth quarter is a story of reaching new customers, energizing existing customers with innovative products, and creating value by operating more effectively -- more productivity. I believe it's strong evidence of Snap-on advancing along our runways for both growth and for improvement.

Our EPS in the quarter was $1.60, up from $1.43 in 2012. That rise reflects an optical operating margin of 15.5%, an increase of 70 basis points. It also includes $33 million in financial service earnings. Taken together, the consolidated operating margin reached 18.5% compared to 17.7% in the fourth quarter of 2012.

The operating improvement came on our organic sales growth of 4.6%. When you add in $15.2 million, the contribution from Challenger Lifts, which you'll recall we acquired earlier in 2013, overall sales in the quarter were $797.5 million, a rise of 5.9%, which overcame a 70-basis-point impact from unfavorable foreign currency translation.

That activity represents a continuation of a generally favorable environment for the tools group, and for the repair systems and information, our RS&I group. These are the operations serving our automotive repair and related customers. As you may remember, that sector's been leaning favorably for quite some time.

Encouragingly though, in the commercial and industrial, or C&I, group, we saw additional confirmation of easing in our European headwinds. I think it's fair to say that the growth at our European-based hand tools business, S&A Europe, up in the high single-digit range, is the biggest highlight for us in the quarter, with respect to market dynamics anyway. Now, one quarter of growth doesn't make a trend. And that region's been down and unpredictable for an extended period, but this quarter's increase was a breath of fresh air.

On the other hand, military activity did remain a strong headwind. Nothing's really changed on that front. The combination of troop withdrawals and budgetary restrictions continue to create a difficult environment. It doesn't show signs of rebounding anytime soon.

To wrap up the broad discussion on markets, other than the initial spark in Europe, I'd summarize things as relatively similar to past quarters. But we do believe that no matter the environment, we have the opportunity and the capability to advance our position. We continue to progress along our four defined runways for growth: enhancing the franchise channel; expanding Snap-on's presence in the garage; extending into critical industries; and building in emerging markets.

When coupled with the Snap-on value creation processes of safety, quality, customer connection, innovation, and rapid continuous improvement, or RCI, we achieved decisive progress. We believe the results over the past several years, and again in 2013, show just that. That progress can be seen in the full-year absolutes, as well as the longer-term trend of improvement.

Speaking of the full year, Snap-on's EPS for 2013 was $5.93, an increase of 14% from 2012. Driving those earnings was an optical operating margin of 15.1%, up 120 basis points for the year. When we include the income from our financial services, which was $125.7 million, which rose $19 million from 2012, the consolidated operating margin of 18.1% was up 140 basis points. That performance came on sales of $3.1 billion, a 4% year-over-year increase that was made up of 3.5% organic growth, $39.3 million in sales from Challenger Lifts, and 80 basis points of unfavorable foreign currency.

Through the year, gains in the tools group and RS&I were somewhat offset by the external headwinds that primarily impacted the C&I Group, although it is worth mentioning that the second-half organic sales increase was 4.7% as the European headwind abated. So, there was a generally improving trend as the year progressed. That's the overview of the quarter and the year.

Now let's move to a discussion of the individual segments. In the C&I group, organic sales were up 3.8%, in spite of the continuing military challenges. That gain was authored by the improvement at S&A Europe, which I already mentioned, as well as favorable comparisons across the balance of the operations: in our Asia-Pacific business, in the critical industries outside of the military, and with our power tools, driven by innovative new products.

From an earnings perspective, C&I operating income of $37.1 million increased $5.2 million compared to the prior period. That represents a margin rate of 13.1%, or an expansion of 150 basis points. The benefits from RCI are evident across the C&I businesses, and this quarter, with volume growth at S&A Europe, the improved cost structure in that operation really shined through.

C&I is where we had the most attention related to building in emerging markets and extending into critical industries. Our progress along those runways, and the benefits from Snap-on value creation, can be seen once again this quarter. You can see it in the results.

For emerging markets, China and Indonesia led the way, with that growth being enabled, in part, by our newest plant, ramping up production of undercar equipment for China in the region. But our focus isn't just in Asia. We also saw a good expansion in other emerging regions. For example, S&A Europe's business in Turkey recorded another encouraging quarter in that important market.

Another highlight was our natural resources business, which is up strongly in the quarter. We continue to broaden our lineup for industries like oil and gas, and it's paying off. I'll give you a prime example how it works. Our customer connection and innovation processes came together to make work easier for oil and gas professionals, supporting our extension into that critical industry. The result is our new adjustable wrench and valve persuader aimed specifically at those technicians and providing a safe alternative to the homemade versions that our salesmen noticed in many of the toolboxes on the North Slope of Alaska. Came right out of a direct observation in Alaska.

Taking input directly from those operators, we combined a wide-mouth, heavy-duty adjustable wrench, with a persuader at opposite ends of the tools that enables the opening and closing of nearly every valve in an oil field. It's now outfitting facilities across the globe, building Snap-on's presence.

Now, this product is just one relatively small example, but an easy one to understand, and it demonstrates our ever-increasing lineup of tools not only for oil fields but for places like deepwater drilling and for industry power plants. All places where we're gaining traction. More and more, our array of tools are being put together as specialized toolkits, in unique tool control units, equipped with top-of-the-line technology to serve critical industries.

Speaking of technology and of tool control, this is an area that's really opened the doors for our extension into the critical aviation sector, which is up nicely again in 2013. Our advanced tool control units -- they continue to be a great halo product in that arena. When paired with our customized toolkits, these unique solutions are at the foundation of our growth in aviation. Snap-on's now able to better support maintenance facilities or production lines for airplanes or helicopters in all fleets, commercial or corporate, across the US and internationally.

Also speaking to innovation, with applications across a whole host of tasks in 2013, we launched what we believe to be the best combination of power and speed in an industrial-grade cordless ratchet. It's built to the same well-known Snap-on strength standards as our hand-tool ratchets, and features over 3,000-inch pounds of manual torque capability. And it has a digital variable speed trigger for the precise control needed in industrial application, and a built-in break that stops the tools from damaging sockets and fasteners. This new product's a big hit, and it demonstrates the clear Snap-on advantage.

One final point on innovation in C&I, and this is at S&A Europe -- the Bahco Ergo Tool Management System recently won an award for innovation at the equip auto show in Paris. This product, aided by web-design interfaces for the customer and the salesperson, allows nearly infinite customization. It's not only the toolkits that can be specified, for oil and gas or aviation or heavy-duty applications. It's also the foam inlays and the drawer configurations, providing unique and efficient placement for the tools, and specially designed spaces for PCs and tablets and printers that are now so frequently used in the modern field.

The innovation award was encouraging, but more importantly, this product helped drive S&A Europe's growth this quarter. And it has been especially well received in critical applications like oil and gas, where outstanding tool offering customization and standardization are really highly valued.

Now onto the tools group where we posted a strong 10.2% year-over-year organic sales increase this quarter, with good growth in all geographies. The operating earnings of $51 million represented a margin rate of 14.5%, up 30 basis points from 2012. You know, some years ago, we set a goal of enhancing the franchise channel. In that regard, the results in the tools group continue to speak for themselves. I believe the state of that business is stronger than ever.

Once again this year, there was outside validation of that belief. Snap-on continues to be consistently ranked in the top 25 of all networks by Franchise Business Review, which measures franchisee satisfaction. And we moved up again in Entrepreneur Magazine's top 500 franchise list.

More importantly, I think, really, the internal evidence supports the same positive view. The franchisee metrics we monitor so closely are quite strong, and they continue to trend favorably. Our direct interactions with the franchisees, the 2014 kickoff event that just took place, the meetings of our franchisee advisory councils, and our regular regional gatherings aimed at getting feedback and enhancing productivity -- all of them confirm the growing strength of our network emphatically. And it makes sense.

We have major sales and marketing initiatives like the Rock 'N Roll Cab Express and the new Techno-Van. They continue to expand driving excitement and sales. Those traveling shows generate strong demand for our big-ticket tool storage and handheld diagnostics. They're all up.

But it's not just these big-hitter marketing programs that are enabling improvement. It's also the everyday focus, customer connection and innovation -- creating new product after new product that builds our position.

For example, in 2013 we introduced an all-new 36 long 0.5-inch breaker bar, our longest ever. With this new tool, technicians not only have extended reach and access, but they can also apply more torque with less effort. It makes their work easier as they break free the most difficult of fasteners. The product has a wide range of applications, but is especially powerful in the critical heavy-duty segment where it's particularly effective on truck engine heads and bulldozer track bolts.

This is just another one of the offerings that will make our hit parade list. Those are the new products that sell more than $1 million in the first year. It's a good example. It sounds simple, but innovation doesn't need to be earth shattering. It just needs to make work easier, and the opportunities in that regard keep continuing.

Of course, Snap-on's uniquely positioned actually to gain customer connection insight with our franchisee network and our teams of sales people visiting sites, observing work, bringing back ideas. During 2013, the tools group alone launched more than 40 new products that were directly based on our feedback from professional users and our franchisees. For example, we recently developed a new thin-wall socket, specifically designed to remove difficult fuel pressure sensors on many new vehicles.

The product concept came to us from a franchisee. He noticed that the access to the sensors was often restricted, and that technicians risk damage when they use standard tools. So, our new thin-walled socket will fix all that. It's another good example of customer connection, a knowledge of the practical, and technical design capabilities, innovation, and understanding the possible, coming together to create a winning product.

I'll just mention one last item on customer connection for the tools group. We were recently recognized in Tech Shop Magazine, named as a 2013 top five tools award winner. This award's noteworthy because it's determined directly by professional users as they name their favorite tools. I believe the award speaks clearly to the continuing appreciation and aspiration that serious professionals hold for Snap-on and its products.

Let's move on to RS&I. Sales in the fourth-quarter were $246.6 million, and for the first time, surpassed $1 billion for the year. The fourth-quarter organic gain was 2.9%. Now, that's somewhat less than the past few quarters, primarily reflecting the wind down of a large OEM essential diagnostic distribution, rather than any real change in the overall macros.

Adding $15.2 million from Challenger Lifts, and 30 basis points for favorable foreign exchange, RS&I reported quarterly sales of 9.5% -- sorry, RS&I reported quarterly sales that were up 9.5% from 2012. Operating earnings of $60.8 million in the quarter were up $5.4 million, with the OI margin of 23%, up slightly from 22.9%, as the benefits of RCI more than overcame about 90-basis-points impact from adding the lower-margin Challenger business.

I've spoken often in the past about our string of new handheld diagnostics introduced over the quarters and the years, and they continue to drive growth in the independent repair space. With our most recent launch, the Modis Ultra unit -- bigger screen, more features, faster operation. It was launched in the third quarter, and it's been a tremendous hit.

We're also adding to the content imbedded in our Mitchell 1 repair information. Just recently, again, acting on feedback from customers, we introduced enhanced search functionality in our ProDemand product. It's called One Search. It allows the user to simultaneously search both the standard OEM repair information and our special SureTrack expert shortcuts, a clear efficiency driver and a differentiator for the Mitchell offering.

Just a little more on SureTrack. It represents a consolidation of our proprietary experience-based information for professional technicians who are performing millions of successful field fixes. It frequently shows the way to faster diagnosis than is possible by following the standard OEM protocols. We believe that the ProDemand structure for Mitchell, reflecting substantial input from users, is the most effective in the industry, combining powerful and comprehensive OEM repair information with practical shop experience. It's a winning product.

RS&I is also rapidly expanding its suite of products that serve the important medium and heavy-duty trucks segment. With our essential diagnostics for OEMs, repair information, and truck-labor estimating for Mitchell 1, and the Nexiq line of handheld diagnostics units, we're expanding our presence with truck-shop owners and managers, supporting fleets, dealers, and repair garages. We continue that expansion this past quarter as Challenger Lifts launched a new mobile column-lift, specifically aimed at heavy-duty shops. It has a capacity of up to 144,000 pounds, and provides flexibility and convenience to lift large vehicles without requiring a permanent dedicated footprint in the service bay.

As I said before, Challenger was acquired to expand our portfolio, and to give us more to sell. Well, it's working. And we've been pleased with its contribution.

So, that's our fourth-quarter. Optical organic sales up 4.6%, overcoming some tough military headwinds. OI margin reaching 15.5% for the quarter; 15.1% for the full year, a 120-basis-point increase. EPS, $1.60 in the quarter, up from $1.43; $5.93 for the year, up 14%.

Progress along the runways for improvement, customer connection, and innovation, and RCI creating real value. And advancement down each of our runways for coherent growth. Growing by doing what we do so very well for more and for different customers. It clearly was an encouraging quarter.

Now I'll turn the call over to Aldo. Aldo?

Thanks, Nick. Our fourth-quarter consolidated operating results are summarized on slide 6.

Net sales of $797.5 million in the quarter increased $44.3 million, or 5.9%, from 2012 levels. Organically, sales increased 4.6%, excluding $15.2 million of sales from the Challenger Lifts acquisition, and an unfavorable $5.3-million impact from foreign currency translation.

The organic sales increase primarily reflects continued higher sales in the Snap-on tools group, along with increased sales of diagnostic and repair information products, and higher levels of undercar equipment. It also reflects higher sales of power tools, and a high single-digit sales gain in our European-based hand tool business, reversing a multi-year trend of declining sales as a result of prolonged economic weakness in that region. These sales increases more than offset continued lower sales for the military.

Consolidated gross profit of $378.5 million increased $26.5 million from 2012 levels. And the gross margin of 47.5% improved 80 basis points, largely due to savings from ongoing rapid continuous improvement, or RCI, initiatives. Operating expenses of $254.9 million increased $14.3 million, and the operating expense margin of 32% compared to 31.9% a year ago.

As a result of these factors, operating earnings before financial services of $123.6 million in the quarter increased 11%; and as a percentage of sales, improved 70 basis points to 15.5%. Operating earnings from financial services of $33 million increased 12.6% over prior year levels. Consolidated operating earnings of $156.6 million in the quarter increased 11.3% over 2012 levels. And the operating margin of 18.5% improved 80 basis points from 17.7% a year ago. Our fourth-quarter effective income tax rate of 32.1% compared with 32% last year.

Finally, net earnings in the quarter of $94.5 million, or $1.60 per diluted share, compared to net earnings of $84.6 million, or $1.43 per share, last year, representing an 11.9% increase in earnings per share. For the full year, 2013 net earnings of $350.3 million, or $5.93 per diluted share, increased $44.2 million, or $0.73 per share, from 2012 levels, representing a 14% increase in earnings per share.

Now let's turn to our segment results. Starting with commercial industrial, or C&I group, on slide 7, sales of $283.2 million in the fourth quarter were up 3.8% organically, primarily due to sales gains in our European-based hand tools business, along with higher sales of power tools. These increases were partially offset by continued double-digit decline in sales to the military.

Gross profit in the C&I group totaled $110.3 million in the quarter. Gross margin of 38.9% improved 80 basis points over 2012 levels, primarily due to savings from ongoing RCI initiatives, particularly in Europe.

Operating expenses of $73.2 million in the quarter increased slightly over 2012 levels, while the operating expense margin improved 70 basis points to 25.8%, reflecting benefits from sales volume leverage. As a result of these factors, fourth-quarter operating earnings for the C&I segment of $37.1 million increased $5.2 million from 2012 levels, and the operating margin of 13.1% improved 150 basis points from 11.6% last year.

Turning now to slide 8, fourth-quarter sales in the Snap-on tools group of $351.1 million increased 10.2% organically, reflecting continued increases across both our US and international franchise operations. Gross profit of $146.2 million increased $10.4 million from 2012 levels, and the gross margin of 41.6% decreased from 42.2% last year, largely as a result of $2.6 million or 40 basis points of unfavorable foreign currency effects.

Operating expenses of $95.2 million in the quarter increased $5 million from 2012 levels, primarily due to higher volume-related and other expenses. The operating expense margin of 27.1% improved 90 basis points from 28% last year, primarily due to benefits from sales volume leverage. As a result of these factors, operating earnings of $51 million for the Snap-on tools group, increased $5.4 million from prior year levels, and the operating margin of 14.5% improved 30 basis points from 14.2% last year.

Turning to the repair systems and information, or RS&I, group shown on slide 9, sales of $264.6 million increased $23 million or 9.5% from 2012 levels, including $15.2 million of sales from the Challenger Lifts acquisition. Excluding Challenger sales, and $0.7 million of favorable foreign currency translation, organic sales increased $7.1 million or 2.9%. The organic sales increase primarily reflects a mid-single-digit gain in sales of diagnostic and repair information products, as well as a mid-single-digit increase in the sales of undercar equipment. These gains were partially offset by slightly lower sales to OEM dealerships.

Gross profit of $122 million in the quarter increased $10.8 million over prior year levels. Gross margin of 46.1% increased 10 basis points from 46% last year. Operating expenses totaled $61.2 million in the quarter, and the operating expense margin of 23.1% was unchanged from 2012 levels. Fourth-quarter operating earnings of $60.8 million for the RS&I group increased $5.4 million from prior year levels, and the operating margin of 23% increased 10 basis points from 22.9% last year.

Now, turning to slide 10, in the fourth quarter, earnings of $33 million from financial services increased 12.6%. Originations in the quarter were $198 million, a healthy 19.3% increase when compared with last year's 7% increase. Revenues in the fourth quarter increased 10.5%. The average yield on finance receivables of 17.4% in the quarter increased 20 basis points from 2012 levels, and the average yield on contract receivables was 9.5% in both periods. For the full year, originations increased 14.9% over 2012.

Moving to slide 11, our year-end balance sheet includes approximately $1.2 billion of gross financing receivables, including $1.05 billion from our US Snap-on credit operation. In the United States, $838 million, or approximately 80% of the financing portfolio, relates to extended credit loans to technicians. For the 2013 full year, our worldwide financial services portfolio grew approximately $148 million. As for finance portfolio losses and delinquency trends, these continue to be in line with our expectations.

Now, turning to slide 12, cash provided by operations of $122.5 million in the quarter increased $19.6 million from $102.9 million last year. Fourth-quarter discretionary pension contributions were $9.3 million this year and $12 million last year. Investing activities in the quarter included cash used of $33.8 million to fund the net increase in finance receivables. Capital expenditures were $19.9 million in both the fourth quarters of 2013 and 2012. Full-year capital expenditures totaled $70.6 million.

Turning to slide 13, days sales outstanding for trade receivables of 62 days compared with 61 days at 2012 year end. Excluding currency impacts, inventories increased $38.5 million, primarily to support continued higher customer demand and improve service levels, new product introductions, and inventories related to the Challenger acquisition. On a trailing 12-month basis, inventory turns of 3.8 times compared with 3.9 times at year end.

Our year-end cash position of $217.6 million reflects the full-year net funding of $142.5 million of finance receivables, dividend payments of $92 million, share repurchases of $82.6 million, the acquisition of Challenger Lifts for $38.2 million, and capital expenditures of $70.6 million. These uses of cash were more than offset by $392.6 million of cash generated from operations, including higher levels of net income, as well as cash generated from other investing and financing activities. Our net-debt-to-capital ratio of 26.3% compares to 29.7% at 2012 year end.

In January of this year, Moody's upgraded our senior unsecured credit rating to A3, and we continue to maintain A- ratings from both Standard & Poor's and Fitch Rating services. In addition to our $218 million of cash and expected cash flow from operations, we have more than $700 million in available credit facilities, and our short-term credit ratings allow us to access the commercial paper markets, should we choose to do so. At year end, no amounts were outstanding under any of these facilities. In March of this year, we intend to repay our $100 million of 5.85% unsecured notes upon maturity with available cash, coupled with our sources of borrowings.

This includes my remarks on our fourth-quarter performance. I'll now briefly review a few outlook items. We anticipate that capital expenditures in 2014 will be in the range of $70 million to $80 million. Finally, we anticipate that our full-year 2014 effective income tax rate will be comparable to our full-year 2013 rate of 32.3%.

With that, I'll now turn the call over to Nick for his closing thoughts. Nick?

Thanks, Aldo. It was an encouraging quarter and the year. Significant progress was achieved throughout 2013 in the face of meaningful headwind. Reduced military spending was a substantial factor in our fourth quarter, and other quarters were impacted to varying degrees by the military declines, as well as by the weakness in Europe. That said, we're reassured by the advancements being made along each of our runways for growth. Critical industries like aviation, natural resources and heavy fleets, posted good gains and we're gaining further traction.

Our new undercar plant in China came to life, providing a broader range of new products for service facilities both in OEM dealerships, as well as the developing independent repair industry in that region. And outside of Asia, we're building presence in other emerging markets such as Brazil, where this year we launched our first handheld diagnostic unit for automotive technicians.

The tools group continues to gain position, with expanding sales and favorable franchisee metrics speaking to the improvements. RS&I made progress, serving shop owners and managers with new handhelds, enhanced repair information, increasing heavy-duty capabilities, and with an expanded undercar equipment portfolio that now includes Challenger Lifts. At the same time, the Snap-on value creation framework, which drove much of our improvement over the past few years, contributed again, resulting in the strong margin increases we registered during the fourth quarter and throughout the year.

But as we move through 2014, we remain confident in our strategies, and encouraged by our runways. The balance of driving growth and creating improvement has authored our trajectory of positive results, achieved regardless of headwinds. We will maintain that balance. We will take full advantage of the abundant opportunities before us, and we believe we will continue the trend of encouraging performance in the quarters and years ahead.

Now, before I turn the call over to the operator, I'll turn my attention to our franchisees and associates. As always -- I know many of you are listening -- the encouraging results would not have been possible without your unique capabilities, considerable energy, and continuing commitment to our team. For the extraordinary part you played in achieving this performance, you have my congratulations, and you have my thanks.

Operator, now we'll take questions.

Thank you.

(Operator Instructions)

And we'll take our first question from Gary Prestopino with Barrington Research. Please go ahead.

Hi, good morning, everyone.

Good morning, Gary.

Nick, you mentioned in the Tools Group, I believe, you did 40 new products this year. Is that correct?

No, what I said was 40 new products came directly and clearly out of field suggestions from franchisees and our field sales personnel. In other words, we can clearly trace them to customer connection. We did more new products that bubble up in imprecise ways through information we have in the organization or ideas that are developed in the engineering labs here. So the 40 were really -- they were the new products we could clearly identify that came out of the North Slope and Alaska or the garage in Sacramento.

So is it a safe assumption to say that you more than hit your target of 40 new products that generate over $1 million in sales?

Yes, yes. We did much more than that. I'm not saying in the Tools Group.

I don't want to get into the numbers, but what we've said is, is that I think regularly, I told you and others in these kinds of conversations, that how we measure the effectiveness of our new products are measuring what's on the hit parade. Those products which sell over $1 million in the first year.

Last year we achieved several times what we did just a few years ago, say 2006 and 2005. And we're up a nice number over last year's number, so we see progress in that regard. We're pretty encouraged by that access of customer connection and innovation, the art of the practical understanding of the garage, matched with the understanding of what's possible based on technology coming up with a new product. We've had a number of great hits this year.

Okay. And then you mentioned some pretty good growth in your emerging markets. Given what's going on in some of these emerging markets due to currencies and whatever, are there any cause for concerns there?

I'm not concerned, but I think, look, it isn't easy. I think we said back in the second quarter, you can see lumpiness from quarter to quarter in the emerging markets, but we believe strongly in our physicals, growing our physicals.

For example, our resellers are up more than 10%. Our training, a number of training units in emerging markets, training sessions in emerging markets up more than 10%. Our new factories there, our products in the mid-tier are growing.

And when we look at the marketplace, what we see is tree effects. You've got the macros. So the macro occurs and the economy is up-and-down. Some of it, for example, in China is driven by exports. So they were exporting to Europe. A lot of those factories shut down, so there is a kind of macro that affects people, and it affects us in some ways too.

Although, -- so you have that, but you also have for us, the idea of the repair wave rising on top of that, and then you have the fact that we're just getting started in those markets. So it's kind of a complex new you that drives our business.

We don't have concerns about the future though. We were up nicely in China in this quarter, and India had a good year. Indonesia was up, and that has been up-and-down for us. This quarter Indonesia led the way. So we're pretty pleased and encouraged by where we're going in the emerging markets.

Okay and two other quick ones. First of all, you've often said that the portfolio on the financial service will mimic the growth in the Tools Group. This quarter it's certainly the originations. Certainly, it outgrew what your segment sales growth was in Tools. So can you maybe comment on that delta?

This is Aldo, Gary. Certainly, it was a strong quarter. Up more than what we saw last year moving from Q3 to Q4. But, the 19%, I think is in the bounds of reasonableness.

If you look at the Tools Group, their overall growth was up 10.2%, a little bit more in the US than the average. And within that group, their sale of big-ticket items, including tool storage and diagnostics, was above that average as well. So while it certainly was a good quarter in financial services and people took advantage of the financing packages that we had available, I think the originations were reflective of the fact that it was good big ticket performance in Q4.

Okay, and then lastly, and I'm not asking for a specific number, Nick, but do you think given that you hit that operating margin goal that you set a couple of years ago, you've actually exceeded it, that sometime this year you'll be able to reset that for the investment community?

Well, like you said, we set that target a long time ago. I think 2005 or 2006 when we were down around 5.9%, and we've been talking about it often. This year for the full-year we're up 15.1% -- 15.5% in the quarter

I'll simply say this. We believe strongly in our runways for growth and improvement and our capability to take advantage of this. We believe that we can continue to improve on a regular basis. I'm not saying every quarter, although if you look back, we've been doing it every quarter. I'm not saying everything has to happen every quarter like clockwork, but we feel pretty strongly that we can continue to improve in a trend, continue to improve in sales and in profitability. We're not topped out in margin.

And as far as the endpoint, we sit. We are armed with a great franchise. So we think this franchise is among the best. We don't see any end to the improvement in our -- and looking out into the future.

Thank you.

And we'll take our next question from David MacGregor with Longbow Research.

Yes, good morning, everyone. Great quarter, Nick. Congratulations on all the progress.

Can you talk -- you talked during your prepared remarks about franchise productivity and about growing productivity. I was wondering if you could maybe go back to that and elaborate a little further. Give us a sense of how much for opportunity you think might be there. Is it being driven by new products? Is it the diagnostics and storage? Help us understand what's behind your expectations for upside and for the productivity.

Well, look, I think the thing is that the Tools Group has been performing quite in an encouraging manner. We have said that we will grow organically at 4% to 6%. We have said, the Tools Group by nature of this business is probably over the long haul in the sort of lower end of that number, but it grew 10.2% this fourth quarter.

Last year in the fourth quarter it grew 9.3%. 9.3% and that was in 2012. In 2011, it grew 9.3%. In the year before that, it grew 12.8%. So it's been hammering away at some great quarters, and that management team has understood the resonances of this business.

And part and parcel of the resonance is to recognize that the van is bounded based on space, and the driver is bounded based on time. And what the Tools Group is doing in terms of the productivity side, they're working on ways to break through those boundaries. That's why we have the techno -- we have the Rock 'N Roll Cab Express, which adds space in effect. Virtual space. There are -- temporary timesharing space to the vans and it's driven some of our big-ticket tool storage business.

We're up to over 60 of those now in North America. We added about six or seven in this past quarter, about 10%. The techno-vans, which basically focuses on diagnostics, relieving the van driver of having to understand the diagnostics as deeply as he might. In fact, I just rode on a techno-van just recently here in Illinois with a young franchisee, Miguel Ortiz and Mike Bedell, the driver. And they went around and you want to see how this works.

They go to these shops and the three technicians get on, and they demonstrate the efficacy of the individual tools, the big diagnostics and the small ones, and even the tool storage stations where a shop owner -- a lead tech can look at this tool storage station and say, Gee, I can explain to my customer in a 16 x 7 flat screen what's on the diagnostic, and I can store all my tools in it. And he pops for a bigger ticket item around diagnostics. He understands the real value and the full capability to diagnostics. And that's part of what's behind the selling. But at the core of it is, breaking through the franchisee's time constraints.

What the Tools Group is doing is looking at doing that, and so what you're seeing in the Tools Group is selling to more customers because they are giving the franch -- they are freeing up more time for the franchisee. Miguel Ortiz told me -- the franchisee told me, I ride by shops because I can't -- I don't have time to call on them. This helps them get more time to sell.

The other thing we're doing with Tools -- with the Rock 'N Roll cabs and with the new products and innovation and customer connection, is we're giving them more to sell to excite existing customers. So when we roll out these thin-wall sockets and so on, they excite the existing customers. I can't parse between those two, but I can tell you that the Tools Group seems to be understanding that very well.

Now, are they going to hit double-digits every time? I don't think so. But we're cheering them on because they've been doing it.

So in 2014, you're going to comp the techno-vans and you're going to anniversary the contribution. I appreciate the fact that you are still growing the size of that fleet. I guess the question is, do you continue to grow that fleet and that drives growth through 2014?

I don't know. A year ago we had -- now we have -- if you combine the vans, if you combine the techno-vans with the Rock 'N Roll cabs, we have about 70 now. We had about half that number a year ago.

So I would say that we've been growing quite a bit. I don't know if we're going to keep growing. I would expect we won't grow that many more Rock 'N Roll cabs, which are the bigger number. I think we have almost, say like 50 of those now -- 50 or 60 of those now.

But we'll add them as long as they are adding incrementally to us and they have so far. Probably will slow down. But then we'll be adding techno-vans. Where that stops, I don't know. Where that stops, I'm not sure.

The growth is encouraging. Just a couple of other quick questions. On the operating expenses, I guess on the operating comp you are up to about $1 billion now. How leverageable are these from here? How does that number grow going forward with respect to revenue growth?

You mean operating expenses? Say that again, please. Sorry.

Your operating expenses. I'm just wondering how leverageable those are. So the questions is, how do those grow going forward with respect to growth in revenue?

I can't give you a guidance; but I'll tell you this, I think we're giving the Tools Group a blank check when they're growing at 10% or 9%. So I think they're out capturing territory. If you look at their operating expenses, they are out there -- now, blank check may be a little bit of an overstatement, but we're encouraging them to invest in things like product development, like the vans, and so on.

If you are looking at the Tools Group and you're looking at this great growth, you're probably not going to see as much leverage on operating expenses. Until they sort of level off and then we know how to make money on top of that and be more efficient behind that growth wave.

The other businesses, I think if you look at C&I. C&I has shown some great leverage in that area. In fact, C&I was up 130 basis points in the quarter, and that was against -- they had 70 basis points of unfavorable currency transactions.

There are 150 basis points, and that was, again, 70 basis points of unfavorable currency transaction -- not 70 basis, 120 basis points of currency transaction bad news. So they're seeing great leverage. So it's sort of a tale of two views of that.

In the Tools Group, you are not seeing much leverage because we are in spending and we're rolling as fast as we can to capture territory. In C&I, we are getting a little bit more leverage because we're seeing the headwinds and we're paying attention to a little bit more to efficiency.

That make sense. Last question is just January here. Just talk about the impact of weather disruptions on the business.

Look, yes, but it's kind of mixed. Of course, if you have something happen like Atlanta, it's going to cause you some problems. You're going to lose business.

If you have continuing cold weather, just as a regular cold weather like we're seeing here in Chicago, 0 degrees, 0 degrees, 0 degrees, sometimes it actually can accelerate business after a while because you get more difficulties. People will ruin transmissions and some of the heavy trucks will ruin transmissions trying to plow in the snow. You'll see people have difficulties in starting their cars and so on and you have collision which will drive more business.

I think the story here is the jury's out on this. It might affect you in a certain period. Because of items like Atlanta or storms in the Northeast or so on, but then you have to wait and see. In our business, whether it's going to generate much more business based on the negative effects of that on the cars and so on.

So for us I don't really have a good answer on that. We're in a wait-and-see situation. I can't say whether it's definitely be good or definitely be bad.

Okay. Thanks very much, Nick. Congrats on all the progress.

Thanks.

We will take our next question from David Leiker with Baird.

Good morning, everyone.

Hi, David.

Good morning, David.

Let's start with Snap-on Europe tools. Nice to see an increase on there. Now that, we can pretty firmly say we put a bottom in that business, can you give us some perspective?

No, I said there was a --

How far is below 2007 and 2008 levels?

How far below 2007 and 2008 levels are we today?

Yes, where did it bottom out?

I don't know. I don't really have an answer for that. I can't really say that. I just know we're pretty far below those levels in our overall European business. Certainly, in southern Europe it's come down substantially. I really don't have an answer for you.

Do you think it's down more than a third?

No, I don't -- I'd say a quarter maybe, something like that.

Yes, 20%, 25%.

I'd say a quarter probably. You can think about this. I'm trying to remember, but I think we entered the recession with Europe being about a quarter of our business, and now it's like a fifth or something like that.

So that's the kind of number. But that is our overall European business. S&A Europe may be down slightly more than that.

Yes, it's outside of -- outside of there. Okay. And then as we look in the improvement that you're seeing, is that broad-based across the continent, or are there certain pockets that you're seeing?

Well, there are landscapes to that. Actually, interestingly, southern Europe was up higher than the average, but it was off of dog-food base. So it was up, in this period, substantially. Northern Europe, including the UK and some of those broad countries, while some of that was mixed, the UK was very strong and other countries were up, and so that was up very strong.

The middle of Europe, which I would say like Germany and so on, that was sort of smaller than the average growth. And then interestingly, our Eastern European business, which in this particular period; and it can be lumpy, our Eastern European business was actually a little disappointing. It was a little flat and maybe down a little bit in certain countries, but that was because it's mostly been bigger ticket items and so I think that can be a little variation.

If you look at the other periphery, which I would say the Middle East and I mentioned Turkey, the Maghreb countries, northern Africa, they were up strongly. So you have that mix throughout Europe. The net of it is that the UK continues to shine through and is probably better than it was and the North was better than it was. The South was better than it was -- the center came back to more an even keel. Eastern Europe might have backed off a little bit and the periphery stayed strong.

Okay. And then in the emerging markets in China, Southeast Asia area, as you are growing out your physicals there and you try and grow your distribution foreign partners and things like that, what are you running into from the competition in this space?

Sure, we see people trying to copy our products, people try to come in and copy our products and match our products. It's not so much for -- I don't know if it's so much in the distribution area. It's more in the product area where people try to mimic what we're doing. And remember it's quite a fragmented market. So we'll see an effect maybe in lets say, Chongqing, you'll see a local competitor try to step up and try to emulate what we do, but we have to deal with that there and we do.

I would say that's the number one effect. We do try -- I think the major thing I can say about emerging markets is, simply, it's early, early, early days. It is over 10% of our business now, but we expect it to be more because we can see ourselves riding up on the wave. Yes, we'll see competitors. People will try to match our product or copy our product and maybe they'll try to compete with us with resellers, although we haven't seen that so far, but we're pretty confident in our model, in our technology, our products, and the building of our physicals to prevail over time.

Okay. And then just two last things here. If we look at some of these companies that make automotive parts, after market parts, and sell them into the market, whether it's shock absorbers or batteries or what have you, tires, they've seen in the last quarter or two an acceleration in their revenues selling into the market, which would imply that the frequency of the repair, maybe mainly to the repair is starting to increase. Are you sensing anything like that that's going on in the market?

Well, no. You know, I'll say that our business has -- I read to you what the Tools Group's numbers were over four years for four quarters. So we have may been seeing something like that for some time. I have the sense though, that we are getting stronger relative to our competition in that mobile tool space.

So I see ourselves, having gotten out of the box, giving us an advantage after the recession, having found our Tools Group, having found the residences and the distribution model with product and productivity to expand helping us make progress in the marketplace. But also when I talk to our customers, when our customers -- I was just out on the van talking to transmission shops and regular shops. They all say their business is pretty good.

They don't say things like, -- occasionally you hear somebody say it's never been better, but it's not uniform. It does say I'm feeling good, I think I have a good business, I need to figure out how to expand, to handle more business. So maybe you do see some increase. But I don't think it's been more this quarter than say last quarter.

Okay. And then the last item here. Obviously, you have an opportunity here with the European tool business from a cyclical recovery perspective. What else in the business model right now would be opportunity for upside to get back to normal type demand? My guess is most everything is there -- is back there already.

Yes, I mean, -- well, look, I think to get back to normal demand, we keep expanding our product line. I think the great example of that is the Bahco Ergo Tool Storage System, Tool Control System. New products opening up a whole set of -- a whole different selling activity that works for us in Europe.

That does help us. So as the European market comes back, we've been sharpening our skills in Europe to be able to take even more advantage than we had when the market was last up in 2007.

The other piece of this is -- I mean, I would say we've been dealing with a pretty significant headwind in the military. Brutal. The military has just been going down and down and down, and so I think eventually, -- even though I said on the call, I don't see the end of that -- eventually that comes back and we feel confident about our position because we're still getting contracts.

The problem is they always say congratulations, you got the contract, but the bad news is we don't actually have any money to fund it. So you'll have to wait to actually get orders on this contract. I think that the military would accrue very well to us.

You got to remember, that in the quarter -- and we don't make a big thing about this because we think it's just noise for us -- Currencies didn't exactly treat us that well in this quarter. 70 basis points -- I think it was 70 basis points on sales for translation and another 70 basis points on profits for transaction. Eventually currency -- I always feel currency always evened out. I think that comes back after a while, or you adjust for it.

Okay, great. Thank you very much.

Sure.

We will take the next question from Liam Burke with Janney Capital Markets.

Thank you. Good morning Nick. Good morning Aldo.

Yes, Liam.

Nick, you talked about Europe rebounding nicely, and you went around all the region's and how they were doing, but you did talk about the European auto show and how much lift, and you had some new product acceptance there. How much has that auto show helped lift sales either in this quarter going forward?

You know, I think it's a factor but it is not a huge factor. Our auto business is one of the pieces in Europe, so I wouldn't tie it completely to the auto sector. Although, as the auto sector -- I think the European sales are supposed to be up a couple percent next year, maybe 2.5% or something like that? I don't know if that's going to drive us.

We certainly have an opportunity to get bigger in auto. The fact that we got the award in auto will give us an opportunity. In the quarter I wouldn't say it was the main effect, but it does represent an opportunity for us. And if we win, as we did an innovation award at the auto show, it bodes well for our future.

Great. Thank you. Aldo, you had another nice step up in free cash flow, even as you pointed out the 19% increase in the finance receivables. You called out the fact that you are going to pay down $100 million in debt. It seems your cash flow is going to continue to increase. How do you prioritize the use beyond what you discussed in the payback of the $100 million?

First and foremost, of course, is the to support the organic growth. We're a fairly working capital intensive company, so I always remind people as revenues grow, we invest 25%, 26% of revenue growth goes into working capital. Snap-on credit was actually one of the larger users of cash. Of course, if you look back over the year with the growth of that portfolio. While I don't expect it to grow at the same rate of $148 million, it still will be a user of cash as we look at 2014. Our CapEx pretty much equal to depreciation and amortization. So up a little bit.

Share repurchases, were not insignificant. I mean $83 million in the course of the year. Of course, our strategy is to offset dilution. We are opportunistic as we look at acquisitions. This past year we spent $38.2 million on Challenger.

I think as Nick has commented, it is very close to our D&A. As a result of that, we're leveraging that acquisition in a variety of ways. We continue to look for opportunities like that, so going ahead that's what we have our radar screen open to.

Great. Thank you.

And we'll take our next question from Richard Hilgert with Morningstar Financial Services.

Good morning. Thanks for taking my question. I wanted to ask about just some big picture items here. Competition? I was curious, what's the competitive landscape at this point? Are competitors growing their van pool? Are you seeing new tool creation there similar to what you're doing? How does the competitive landscape look at this point?

Well, look, I think, of course if you talk about the mobile tool channel, we have three competitors. Mac, a sign of Stanley Black & Decker, Matco from Danaher and Cornwall, an independent shop. An independent operation with 400 or 500 vans. When I go out on these van rides and when I meet with franchisees at the things like kickoff meetings and FAC, they really don't mention the competition particularly.

Occasionally, you'll get a guy mention that he has a particular friend who's riding a van, but nothing in a competitive way. Generally, our people reflect upon their own activity and say, I'm up year-over-year I have a better product offering or I'd like to see a little bit more. They don't talk so much about that. So we don't really take action based on what the competitors are doing so I'm not that well-informed. Although we try to make sure that we understand that their constantly improving.

If we don't work hard in product and efficiency and so on, they'll be closing the gap with us. We understand that clearly, but we haven't seen what I would say in our numbers or in the anecdotal statements from our franchisees, what I would call competitive pressure from those other franchises. I do know that Stanley Black & Decker, for example, has new products based on the Black & Decker line that they can sell through their van. So their replacing -- I'm sure they are replacing some of the source product they had with their own manufactured product rolling through there. That should give them some good sales increase for Stanley, but to the extent how that plays out in the marketplace, I'm not sure. We're not hearing much about it.

Do the competitors have the same kind of development that you're so good at where you have all of these different franchisees out there looking for opportunities with tools similar to what you described earlier in the call, where the witness of specialized tool come back, bring that back into the organization and say, -- this is what I saw, let's develop this -- or have you caught the competitors copying what you've done, because these I would imagine are pretty unique tools?

Well, look, occasionally you'll see similar tools in the marketplace that Snap-on has, but I know the Stanley people. They're smart people. I'm sure they're doing everything possible to try to create productivity and innovation and the capability in their network. I couldn't comment really on any specifics in that regard, because we don't really run into it in the marketplace. Our focus is on looking at our own vans and saying, how can I reach more customers?

Take that guy I mentioned, Miguel Ortiz, a young franchisee, and get him time so he doesn't have to drive by those places on his route. He's got time to call them. He gets to call on more customers. Getting new products out so they energize our existing customers so they can't live without some of our tools because it will make their work easier and make more money for them. That's our focus. It's not so much about the competitors. After all, Snap-on does have a fairly strong position in this marketplace in terms of vans, in terms of loyalty of customers, in terms of power of the brand.

Okay. Second big picture kind of item is, over the next couple of years here, we're going to see more off-lease vehicles coming into the US carpark. I was curious overtime, have you seen as the carpark has ebbed and flowed here for the last 10 years or so, do you notice a corresponding change in your revenues? Should we think of this as somewhat maybe of an incremental couple of basis points to your revenue growth as the carpark expands?

I don't know. That's one possibility, but in general the carpark expanding, of course, would add to our revenues. As the carpark expands it would add to our revenues. So if that occurs, that would be a positive tailwind. The big tailwinds for us are the change in the technology, the change in the technology as cars change and they come out with new cars -- our cars coming to the park that have different technologies, people need different elements and tools to deal with them.

Secondly, the idea that the cars are getting older every year. Big sale years and small sale years, cars have gotten older every year since 1980 this has happened, and therefore that creates more repair. And then the idea that the independent garages are becoming a more important component in terms of sales, and they need to be more upscaled and more sophisticated. Therefore, they need more products.

One of the reasons why the diagnostic workstations are selling well, and this is a very big ticket item, which combines a tool storage unit with a diagnostic unit and a flat screen, is because the independent shops want to ascribe and project the idea of capability incompetence, and that kind of product does it.

So I think that's what I can say.

Okay. Thank you, Nick.

Thank you.

And that does conclude our question-and-answer session for today. Ms. Kratcoski, I'll turn the call back to you for any further remarks.

Well, thanks for joining us today. A replay of the call will be available at Snapon.com shortly, and as always, we thank you for your interest in Snap-on. Have a good day. Bye.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation.