Snap-on Incorporated (SNA) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Snap-on Inc. 2011 First Quarter Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference call over to your host, Ms. Leslie Kratcoski. Please go ahead, ma'am.

Thank you, and good morning, everyone. Thanks for joining us today to review Snap-on's First Quarter 2011 results, which are detailed in our press release issued [Audio Gap] Pinchuk, Snap-on's Chief Executive Officer; and Aldo Pagliari, Snap-on's Chief Financial Officer. Nick will kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we'll take your questions. As usual, we have provided slides to supplement our discussion. You can find a copy of these slides on our website, next to the audio icon for this call. These slides will be archived on our website along with 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. Well, I'd say our first quarter results were positive. And I believe they once again confirm clear progress in strengthening our strategic position and in improving our operating execution. When you look at the first quarter, you can be encouraged by the performance and quite positive regarding the Snap-on future. Volumes in the period were up 10% from last year. It was actually the best volume performance we've had in relation to pre-recession levels. Adjusted for FX, our sales were nearly identical to the first quarter of 2008. Operating earnings were up more than 42% with a 12.6% operating margin before financial services, 100 basis points higher than last year. And we registered $12.5 million in earnings from financial services, an over $14 million increase. Consolidated operating margin of 13.9% was up 280 basis points from 2010. On the overall environment, I think it's fair to say that the landscape is not nearly as unpredicted in nuance as it has been over the past couple of years. We believe we now have clearer visibility and that alone is a positive for us. While there are some pockets of challenge, as you would expect when you have a global operation, there was broad progress in the vast majority of our businesses that more than offset the few difficulties. For example, the businesses serving the automotive space showed considerable strength. You can see that reflected in the nearly 12% volume increase of both the Tools Group and the Repair Systems & Information or RS&I Group. These are businesses where we track the activity in what we call big-ticket items, high-value products, things like diagnostics, undercar equipment and tool storage units. As we've been saying, the customers' willingness to make commitments to those types of buys give us an insight into their financial health and into their confidence in the future. During the downturn when the outlook was uncertain, these products were particularly hard hit. They turned the corner in the middle of last year and an upward trend continued into the first quarter of 2011. So these recent results confirm that big-ticket is back and that optimism is strong. Also, in new automotive space, we do have some activity that's tied directly to OEM dealerships -- to OEM dealerships rather than independent. As the number of dealerships continue to shrink in the U.S., it has created a headwind for us. As an offset, we've been increasing global essential tool activity, which is driven by the OEMs and we've also been capturing Electronic Parts Catalog business in adjacent markets. So while the U.S. dealership rooftops are still contracting, the RS&I group has been recording solid gains, capturing other business and overcoming the turmoil. From a geographic perspective, again, it was an extension of what we've been seeing in the past few quarters. For example, in Europe, we continue to see a general improvement. Double-digit gains were the norm in the region from our industrial division to the big-ticket equipment products, to our European Hand Tools business or SNA Europe. It now seems that European weakness for us is limited to the South and especially Spain, where SNA Europe does have a particularly strong presence. Spain was down a bit again, even from last year's already depressed levels. We're just not seeing much favorable movement in that market. Overall though, the general European improvement, especially in the U.K. and Scandinavia more than made up for Spain. Turning to emerging markets. They also remain strong and the expansion in those arenas was another positive. In Eastern Europe, our fortified presence with our new Minsk plant helped drive significant increase in Belarus, in Russia and the Ukraine. And no surprise, Asia-Pacific had strong double-digit gains again, driven by increased penetration in India, Thailand and China. Related to Asia Pacific, I think it's the topic the day, as you would expect, we saw some initial impact from the tragic events in Japan. We're down in that country by about 5%. We were fortunate that our associates and franchisees came through the earthquake and tsunami safely. Having said that though, there is an unsettled business environment in Japan and going forward, any impact will be in place for an entire quarter rather than for only a month as was the case in the first quarter. However, for us, sales in Japan are only a small percentage of the company's total volume and our most significant activity in that country tends to be outside the northeast where the most disruption is occurring. So while nobody can predict how the Japan market will play out, it will certainly be another headwind for a while. But we've demonstrated in the recent path that we've been able to overcome, to manage through challenges by finding offsets where increased opportunities present themselves. The other consideration related to Japan is component sourcing. Of course, like most companies, we do have some exposure particularly as related to the diagnostics product, but we're already working with suppliers to offset or to mitigate any short-term supply chain problems and again, to find offsets. So that's the overall market update. No major surprises and we think that's favorable. Still a few headwinds, but fairly broad growth carrying us through in driving overall gains. Now I'll say a bit on each operating segment. The commercial industrial group or C&I saw sales increase 10.3%, including a couple of points due to foreign exchange. The operating margin was 11.6% up from 10.3% last year. I already spoke about the favorable environment and growth we saw in emerging markets in Europe. The C&I group is where most of that business resides and the uplift in those geographies did aid the group's growth. Let's speak for a moment about critical industries. C&I is where we're focused on extending the power of our brands and our capabilities into critical industries. And as we said before, we see great opportunity for expansion in that effort and in this quarter, there were some strong positive improvements. In the aerospace sector, we're building a strong position. And Automated Tool Control or ATC has been a high-profile product that's provided a great boost. I've mentioned it in the past, it's a new technology for this type of application. Laser imaging, originally developed for the undercar aligners but used here to control tools, to make sure they're not left in the aircraft engine. I guess I'd say that I can't think of any task more critical than that. GC, the smart tool storage box, gets a lot of exposure and attention. It's really the broad expansion of our product line, more hand tools, torque products and power tools developed specifically for aerospace applications that drove double-digit volume growth in this area. We also saw strong increase, also double digits, in the critical natural resources arena. This industry's a natural fit for us. Professionals performing critical tasks with a need for quality and reliability and a high cost of failure. So we're pleased with that progress. Now the expansion in critical industries isn't just limited to the Snap-on brand on our industrial division, SNA Europe has also grown it's offering in large tools designed for the critical mining industry under this strong Bahco brand and we're gaining position there. Our advancements in that space fueled some significant growth in the quarter. For example, in South America, Chile had a fine quarter led by the mining sector. So we continued to make progress in critical industries and we saw solid growth in most of those segments, like aerospace and natural resources. We also had headwinds, like lower military spending and field operations as sealed operations wind down around the globe. That was a partial offset to the many advancements in Europe, emerging markets and in critical industries like aerospace and natural resources. This quarter, the C&I story is that broad growth, overcoming a few headwinds to again post solid sales and earnings increase from the prior year. Moving to the Tools Group, where we serve professional automotive technicians, we had a strong quarter. Sales of $282 million, a record, up 13.5% from last year with 11% organic growth. The OI margin of 13.2% was up 230 basis points from 2010 and that 13.2% includes $2.8 million of restructuring mainly related to our tools storage plant consolidation. Excluding those restructuring costs, the margin exceeded 14%. Though it's clear, the Tools Group is getting stronger. I've spoke of the continued strength of big-ticket volumes and that's being supported by some great product launches. Customer connection and innovation, they're important elements of our Snap-on Value Creation Processes, they keep delivering winning products. For example, our updated VERUS handheld diagnostic unit has considered -- has generated considerable excitement in the period. The new version incorporates wireless technology. VERUS owners can now scan the vehicle system from anywhere in the shop. It's a productivity enhancer that builds on our already market-leading position. And if you have a prior version of the VERUS, there's an update -- an update kit is available and that's also been well received. Last year, we launched the new VERDICT handheld in the U.S. It's simply the most sophisticated diagnostic unit available anywhere and that launch, that product was a big it. Well, we took that product to the U.K. just this past month and it started out with the same strong reception, just like the U.S. It's another strong step in solidifying Snap-on's leadership in that important European market. And while we're discussing the Tools Group, I think it's important to highlight the strength of the van channel. We worked hard to support the network through the downturn. We identified that as being strategically important and we are investing to that end and it's paying off. We monitor a number of metrics to gauge the health of our franchisees business and many of those indicators are at the best levels we've ever seen. Obviously, sales are up, all-time high and that helps. But importantly, franchisee turnover is down and keeps going in the right direction, down. Loan delinquencies are at a low -- at low levels and we've improved internal execution all over the corporation. An example is another of our Snap-on Value Creation Processes, RCI, helps us keep improving our complete and on-time delivery performance to the franchisees. So the van network, better than ever before. But beyond the network, beyond the metrics, I'll tell you that when you talk to franchisees, when you speak with them, enthusiasm is high. Consider our annual kick-off meetings that are held each January this year and -- at each January. And this year, we had the highest participation ever with over 80% of the franchisees attending and sales at these events this year were up nearly 50% from 2010. So the channel appears healthy. And when that's coupled with our strong Snap-on brand and our unique finance company, we have a substantial advantage in this space. The results show it and we believe there's much more upside. Let's move to the RS&I group, where Snap-on is expanding our presence with repair shop owners and managers. Organic sales increased 11.7% from last year, led by increases in undercar products and essential tool and facilities -- facilitation activities. The volume helped drive operating margins 18.9%, up from 18.3% last year. We're ramping up our product development efforts especially in this group and it's paying off with better and expanding position. This group is in fact fueling some of the big-ticket strength in the Tools Group with the diagnostic products I just mentioned through the van channel. Additionally related, thought, to big-ticket category, are liner volumes, sold through the equipment division which is part of our RS&I, were up double digits in both North America and in Europe. And our equipment operations -- when you think about equipment, it's also key at collaborating with our Asian team as we take our technology and capabilities to that region with products specifically designed for those markets and that process, that support, that collaboration is working well, as evidenced by the growth we're seeing in that emerging arena. I'll just add 1 more item for RS&I and that's our expanding position in serving the medium and heavy-duty truck market. We've been making investments because it's a natural opportunity for Snap-on. For example, Mitchell, our business that provides shop and repair information, has expanded its offering beyond just cars into the Truck segment. And it's now gaining in commercial and truck fleets. An important part of our strategy also working with the truck engine OEMs and our partnerships here are growing through both Snap-on Business Solutions and EQS businesses. We develop both handheld and PC-based diagnostics products that serve as essential tools for the engine manufacturers and dealer networks and also serve as broadly versatile products for independent truck repair shops. That breadth of new products is generating significant presence and it's helping us offset some of the weakness inherent in the shrinking rooftops of the automotive OEM dealerships. So those are the highlights for the quarter. Considerable advancement in the 4 strategic areas we've identified as being decisive for our future. Enhancing the franchise channel, expanding with shop owners and managers, extending out of the garage into critical industries and building emerging markets. The results, they confirm progress in each of those areas and we're confident that those strengthening initiatives, when coupled with the improvements driven by our Snap-on Value Creation, will assure that the positive trend we've already established and now reinforce with the first quarter results will continue for some time to come. Now I'll turn the call over to Aldo for a more detailed discussion of the financial results. Aldo?

Thanks, Nick. Our consolidated operating results are summarized on Slide 6. Overall, revenue growth continued profitability increases in financial services and what we believe are significant benefits from our Snap-on Value Creation Processes generated a 52% improvement year-over-year net earnings and diluted earnings per share. Net sales in the first quarter of $694 million dollars increased $72 million or 11.6% year-over-year. Excluding currency translation, organic sales increased 10%. We continued to realize year-over-year sales growth throughout our businesses, including increased sales to franchisees by the Snap-on Tools Group, increased sales to repair shop owners and managers by the Repair Systems and Information or the RS&I group 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 $331 million in the quarter increased $43 million from 2010 levels as a result of higher sales, favorable manufacturing utilization, savings from ongoing RCI and restructuring initiatives and favorable foreign currency effects. Consolidated gross margin of 47.7% in the quarter increased 140 basis points from 46.3% last year. Operating expenses in the quarter of $243 million increased $27 million from 2010 levels, largely due to higher volume related and other expenses including: $6.8 million of increased performance-based and stock-based compensation including mark-to-market, $2.3 million of anticipated higher pension expense and $2.2 million of unfavorable foreign currency effects. These operating expense increases were partially offset by lower bad debt expense and benefits from ongoing RCI and other cost reduction initiatives. As a percentage of sales, operating expenses in the first quarter of 2011 were 35.1% as compared to 34.7% last year. Restructuring costs of $3 million in the first quarter were comparable to last year's $3.2 million. Financial services operating earnings of $12.5 million in the quarter improved $14.2 million from the first quarter 2010 loss of $1.7 million. On a sequential basis, Financial Services' operating earnings improved $3.1 million from fourth quarter 2010 levels. As expected, operating earnings from Financial Services continues to improve as our on-book finance portfolio grows. Interest expense of $16.3 million in the quarter increased $2.3 million from 2010 levels, mainly due to a higher average debt levels following last December's $250 million notes issuance. As anticipated, our first quarter 2011 effective income tax rate was 33% compared to 34.5% a year ago. Finally, net earnings in the first quarter of $56.2 million or $0.96 per diluted share increased $19.4 million or $0.33 per diluted share from 2010 levels. Now let's turn to our segment results. Starting with C&I group on Slide 7, sales of $272 million for the first quarter improved 10.3% from 2010 levels. Excluding currency translation, organic sales increased 8.4%. Continued higher sales to customers in emerging markets, increased sales in the segment's European-based Hand Tool business and continued sales progress in the critical industries of aerospace and natural resources more than offset lower year-over-year sales to the military. And as Dick mentioned, while our organic sales in Japan were down in the quarter, it did not significantly impact our overall results. Gross profit in the C&I segment of $103.6 million in the quarter increased $14.9 million from 2010 levels, largely due to higher sales of favorable manufacturing utilization, savings from ongoing RCI restructuring initiatives and lower restructuring costs. Gross margin of 38% in the quarter improved 210 basis points from 35.9% last year. Operating expenses of $72 million in the quarter increased $8.7 million from 2010 levels, primarily due to higher volume related and other expenses and unfavorable foreign currency impacts. As a percentage of sales, operating expenses in the quarter were 26.4% as compared to 25.6% last year. First quarter operating earnings of $31.6 million for the C&I segment increased $6.2 million from 2010 levels. As a percentage of sales, operating margins in the C&I segment of 11.6% improved 130 basis points from 10.3% last year. Turning now to Slide 8. On a worldwide basis, first quarter sales in the Snap-on Tools Group increased 13.5% year-over-year, largely due to continued higher sales in the United States. On an organic basis, sales were up 11.7%. Gross profit in the Snap-on Tools Group of $125 million in the quarter increased nearly $20 million from last year's levels. This increase includes contributions from higher sales and favorable manufacturing utilization and $1.7 million of favorable currency effects. These gross profit increases were partially offset by $2.3 million of higher restructuring costs, primarily due to the previously communicated consolidation of our North American Tools Storage operations into our Algona, Iowa facility. As a percentage of sales, gross margin of 44.3% improved 200 basis points from 42.3% last year. Operating expenses of $87.8 million in the quarter increased $9.6 million from 2010 levels, primarily due to higher volume related and other expenses. As a percentage of sales, operating expenses of 31.1% improved 30 basis points from 2010 levels. Operating earnings for the Snap-on Tools Group of $37.1 million in the quarter increased $10.1 million or 37.4% from the $27 million earned last year. As a percentage of sales, operating earnings of 13.2% increased 200 [Audio Gap] Turning to the RS&I group shown on Slide 9. First quarter sales of $227 million increased 12.3% year-over-year. Excluding currency translation, organic sales increased 11.7%, reflecting higher sales of undercar equipment and increased essential tool and facilitation program activity with automotive OEM dealerships. Gross profit of $102 million in the quarter increased $8.4 million from prior-year levels, primarily due to higher sales, lower restructuring costs and contributions from ongoing RCI and restructuring initiatives. As a percentage of sales, gross margin of 45% compared to 46.4% last year. The 140 basis point decline is largely due to higher relative growth in the sales of undercar equipment and essential tool and facilitation program sales. Operating expenses of $59.3 million in the quarter increased $2.6 million from 2010 levels, as higher volume related product development and other costs were partially offset by savings from ongoing RCI and restructuring initiatives. As a percentage of sales, operating expenses improved 200 basis points year-over-year. Operating earnings of $42.8 million for the RS&I segment increased $5.8 million from 2010 levels. As a percentage of sales, operating margins of 18.9% improved 60 basis points from 2010. Now turning to Slide 10. Financial Services operating earnings of $12.5 million in the first quarter compares favorably to both fourth quarter 2010 earnings of $9.4 million and to the first quarter 2010 loss of $1.7 million. The $14.2 million year-over-year increase in operating earnings primarily reflects the higher revenue contributions from our growing on-book finance portfolio. Originations of $145 million in the quarter increased 24.2% compared to the first quarter 2010 levels, reflecting improved approval rates and greater participation in our credit programs. Moving to Slide 11. At the first quarter end, our balance sheet includes $785 million of gross financing receivables including $640 million from our U.S. Snap-on Credit operation. In the United States, $530 million or 83% of the financing portfolio relates to extended credit loans to technicians. Since 2010 year end, our total on-book financing portfolio has grown about $50 million and we expect for the full year 2011 that our on-book finance portfolio will increase approximately $130 million over 2010 year-end levels. Regarding finance portfolio losses and delinquency trends, these continue to be in line with our expectations. Now turning to Slide 12. Consolidated operating cash flow of $27.9 million for the quarter compares to $10.4 million last year. Our quarter end cash position of $517 million decreased $55 million from year-end levels, primarily due to the funding of new loans originated by Snap-on Credit, increased working investment in capital expenditures partially offset by higher net earnings. Free cash flow in the quarter was $3 million from the operating company, and as expected, a negative $35 million from financial services reflecting the continued funding of new loan originations at Snap-on Credit. Capital expenditures totaled $18.6 million in the quarter, reflecting our continued commitment to planned strategic investments. As seen on Slide 13, day sales outstanding for trade receivables was 61 days at both first quarter and 2010 year end. As of quarter end, inventory levels were up $39 million versus 2010 year end, primarily to support higher levels of customer demand and as a result of foreign currency translation. On a trailing 12-month basis, inventory turns of 4.4x compared to 4.2x at the end of the first quarter of 2010 and 4.7x at 2010 year and. Net debt at the end of the quarter was $653.2 million. Our net debt to cap ratio of 30.5% compares to 25.9% last year and 30.1% at 2010 year end, reflecting the $250 million December note issuance. Excluding the $107.8 million withheld for the previously disclosed dispute with CIT, our quarter end net-debt-to-cap ratio would have been 33.8%. In addition to our of $517 million in cash and cash flow from operations, we have more than $600 million in available credit facilities and our current A2P2 short-term credit rating allows us to access the commercial paper markets, should we choose to do so. As of the first quarter end, no amounts were outstanding under any of these facilities. This concludes my remarks on our first quarter performance, and I'll now turn the call back over to Nick for his closing thoughts. Nick?

Thanks, Aldo. So we're quite encouraged by the quarter's results. There are still challenges with continuing weakness in Spain, the U.S. dealership consolidation and now the uncertainty surrounding Japan. There are always challenges and weaknesses. We've consistently demonstrated the ability to overcome headwinds. The improvements of this quarter are a testimony to the strength of the Snap-on Value Creation Processes, Rapid Continuous Improvement, innovation, customer connection, quality and safety. It's a solid framework that's propelled us forward and we believe it will continue to do so. We also said we would invest in the areas that we believe are decisive for our future and represent major runways for growth. We're doing that, and it's working. We said we'd enhance the van network. All the health metrics and the franchisees themselves say the vans have never been better. Extend to critical industries. We saw strong gains in aerospace and natural resources. Expand with repair shops owners and managers. Our SN&I absorbed dealership consolidation and still grew strongly and build in emerging markets. Eastern Europe and Asia Pacific are growing well ahead of GDP. I mentioned in the past that we're confident we'd emerge from the downturn stronger than when we entered, while the first quarter did provide some strong evidence that we did just that. Volumes were back to the Q1 2008 levels at constant currency. And our OpCo margin of 12.6% was 140 basis points higher than it was in that pre-recession period. And remember that in achieving that improvement, we shook off higher pension costs which are, after all, related to the financial crisis. And that represented an additional 130 basis points of expense. So our ongoing operating structure is significantly improved. All of that, Snap-on value creation, investments and decisive strategic positions, the credit company contributing more as projected and the first quarter results. We believe those are strong signals that Snap-on is well positioned for continued improvement and to take full advantage of the broad runways for growth that are now clearly evident before us in the quarters and years ahead. Before I close, I want to again express my appreciation and gratitude to all our associates and franchisees for their commitment. I know many of you are listening in to this call. You are responsible for the progress that's been made, that's been achieved and for the encouraging first quarter results. You have my congratulations and you have my thanks. Now I'll turn the call over to the operator for questions. Operator?

Yes, thank you, sir. [Operator Instructions] We'll take our first question from Jim Lucas with Janney Capital Markets.

A couple of questions here. First, C&I, I thought it was interesting that you called out military as 1 of the headwinds, and I wanted to see if we could just drill down a bit further because, I mean, clearly, the comps are getting tougher in C&I. But not that 8.5% core growth is not shabby by any means, but what would the growth rate have been without that military headwind?

Well, I think it would have been a few percent up, but I think the thing about C&I is, you said it first, to use the New York expression, I'm from New York, 8% isn't chopped liver, we think. And so we think it's pretty good. And then if you look at overall C&I sequentially, this is about in line with the sequential seasonality that you see in the C&I. So overall, we feel pretty encouraged by the quarter in C&I. If you look at the way C&I behaves in the first quarter, you have in there the Asia-Pacific businesses which are generally down in the first quarter seasonality wise because of Chinese New Year. And you have the idea that the fourth quarter is a little bit up because you've got the sort of year-end budget cycle plans through the industrial businesses. So the C&I numbers, we think, are pretty encouraging.

Okay. Again, I just wanted a little clarification since you had called it out. And then switching gears to RS&I, facilitation, which we haven't heard much about the last few quarters, did you sign any new facilitation contracts? And what kind of headwind was that on margins?

I think you're just seeing more Facilitation business come through. I think the dealers are coming out. I think what you see there is the auto industry getting a little stronger and recovering from what was 1 of the deeper recessions. And so the dealerships after the consolidation of dealerships are feeling a little more robust in placing in a few more orders. We didn't get any more big contracts or anything like that. The Facilitation business, though, can be like 15 points down from the average.

There's about a -- there could be a 15 point variation given the market performance when you're selling Facilitation versus the other business units that are in the RS&I.

And that's reflected more in the gross profit line?

Yes.

Yes. Sure.

Okay. Then bigger picture, I mean, it was interesting and good to hear that the big-ticket demand has remained, but with gas prices now $4 and that magic number seeming to get back in the headlines more and more, have you heard anything either from your dealers specifically or seen any changes in the technician's buying patterns?

No. We haven't seen that yet. Or I don't -- our view of this, when gas prices go up, miles driven tends to react, I think, to the change in gas prices not to the absolute. A little bit like this, the gas prices go up the guy gets mad, he stops driving for a weekend, then he gets tired of being home. And so he tends to drive a bit more. But even through that period, when gas prices last went up in 2008, we didn't see much impact to our revenues. So I wouldn't expect to see it, I wouldn't expect to see it over the spread of a longer term. I don't really expect that. And we certainly haven't seen any yet. Now gas prices can impact our franchisee base somewhat in that they drive and they have diesel fuel, but it's not a major factor. You're talking about for every dollar of diesel price rise, you get about less than 1% increase in cost and that's usually offsetable in a number of ways. We did the last time, we're working on it now.

Okay. And then final question, on the topic of cost, can you just give us an update of what you're seeing on the inflation side and the expectation for full-year price versus inflation?

Yes. We do see some cost increases. Remember, our exposure is not that high, we don't -- a big component of our business, certainly Hand Tool business is labor, but we do have some exposure in steel and in freight and component and so on. And we see some of that drifting too. I think the good news is steel seems to be abating for us a little bit now. But we do see some costs, but we're seeing evidence, like we've always said, that we're able to price against that. As long as -- our tried-and-true situation has been, our demonstrated situation is, is that when the inflation is visible, when it's something like steel or freight or gasoline, we're able to price for it when people recognize that's the environment. If it's something like nickel or something a little more obscure, that might be another issue. But in terms of this, we see ourselves being able to price and we have been able to price when we've seen inflation here in this quarter.

Okay, great. Well congrats on a good start to the year.

[Operator Instructions] And we'll take our next question from Gary Prestopino with Barrington Research.

Can you, on the portfolio for the financial services, you've given us some idea of what the originations would be domestically. International, are -- can you give us any idea where that would be? Or does that stay kind of stagnant there?

Well, Gary, international portfolio did grow since last time. Sequentially, it's up about $4 million and I expect that it will continue to grow, not as rapid an absolute number as what you see on the U.S. side. And that's simply because we don't have all the mechanisms of Snap-on Credit extended globally at this point in time. That's something we have on our long-term vision is to how can we project some of the finance company attributes internationally? That's why we talked mostly about the U.S. portfolio.

So with originations that you've given us for U.S., we're looking at something of between $860 million, $870 million as a year-end portfolio overall, Aldo? Was that about right?

That's a good estimate, I'd say up at about the $865 million mark, considering we have a robust origination experience in Q1. So we came out of the box stronger. It is typical in Q1 because we have -- it reflects the growth of the Snap-on Tools Group more than anything else. Snap-on has a lot of what we call kick-off meetings in the first quarter. So a lot of the products that are featured in that program tend to led themselves to contract finance arrangements. So the first quarter tends to be a little bit more robust. But certainly we came out strong so I'd say $865 million is a -- $870 million is a reasonable expectation for full year.

Okay. And then just 1 more question on that. The CIT receivables that are managed by SOC, when does that run off entirely?

Well, the contracts tend to have an average duration in the extended credit arena of about 3 years. So if you go back from July of '09, you'll say well, we're starting to get towards the average duration of where those will be. But all don't perform equally. Some of the ones that don't have what we call a renewed business or add-on performance can lag to their entire duration and go out the full 3-year to 5-year cycle. Also in there there's a pocket of van leases and there's some long-term leasing of equipment. We don't usually see those terminate early or come to early payment. So those could be laggard to the portfolio. So the bulk of the extended credit will run off this year. The remainder of it could be a tail that hangs out there for a few years, but it will create much less noise in 2012 than what it does this year.

Okay. And then just last question. It seems that you're at a -- total company wide, a more normalized level of operations relative to where the worldwide economies are. So as we think of your quarters, Q2 would be the second strongest sales quarter, Q4 would be the least -- Q3 would be the least and then Q4 would be the strongest. Is that how we should think about that?

Yes. That's generally right, but it's not wildly different. The big seasonality in our business, Gary, most definitely is the third quarter. And so everything else, it's kind of noise around it. You're talking about the third quarter down 5% or 6% or 7%, that kind of thing. But we generally think -- I think I've said on these calls that it's very difficult to judge anything from the third quarter results. It could be up and down, depending on whether the Europeans come back from vacation or go longer, those kinds of things.

Okay. Thank you.

We'll move on to Dax Vlassis with Gates Capital Management.

Yes. If I look at the internal growth rate of the company for the quarter, I think it was about 10%. How much of that was units and how much of that was pricing?

There wasn't very much pricing in that. I would say minimal pricing.

Okay. But you said that the -- that you're...

Sure. But the thing is, we're seeing that much -- we're not seeing that much material on inflation either. So we're not seeing much in terms of pricing. I would say less than 1% would be pricing.

I'd say that the first quarter reflects really pricing actions that took place in Q3, Q4 of last year. And up until the first quarter, we haven't seen a lot of the inflation effects on the commodity front. But we have forward-looking price increases that have already been announced and they'll be in place beginning in April. So we're already in place.

Well, if you raised prices in the second half of last year, you'd have pricing up year-over-year in the first quarter versus the first quarter, no?

And we do. And that's why we say it's probably 1%.

Okay. So it's 1% -- so you're saying it's of the 10%, 1% was pricing, 9% of the units and you had 1% sort of inflationary pressures in your costs.

Yes.

Yes. That's a good summary. Yes.

Okay. And the on the cash flows of the company, obviously you seem to put some more working capital in with higher inventories, obviously on the higher sales. On the inventory turns, do you think there's opportunities to improve that? Do you think you'll wring some more cash out of working capital this year on a full-year basis?

Well, I think first of all, there's a seasonal question and so the inventory turns almost seasonally always go down from the fourth quarter to the first quarter. That happens to us. I think the answer is we probably will see some modest improvement, some improvement in working capital as we go forward in the year. There's a seasonality event there. What we did here, and you'll be entitled to view this, we took special action around inventory because I directed the Tools Group to add inventory to offset to make sure that we had no disruption when we made the Tool storage plant consolidation in the United States. And that's happening now. So some of what you're seeing is that. And then secondly, in Europe, as Europe came back, we saw raw material shortages in Europe. And so we asked the Europeans to put in place a little more raw material and whip so that they can serve their customer somewhat better. So you'd be entitled to view that as an idea that, that would come out as the world matures and we put behind us the consolidation in Tool Storage and that's going to happen through the year. And then I believe the raw material situation will stabilize in Europe as we go forward and that inventory will come out.

Right. And then regarding the balance sheet, I mean, if I look at the debt of the company especially the way you sort of, I mean, I guess Financial Services is consolidated but you sort of break it out as sort of a separate entity, as if it were a separate entity, and that if I look at the leverage that you use in that business, it's sort of moderate and on the whole company it's -- if you look at it on a sort of operating basis excluding Financial Services, that it sort of looks extremely low. What is the priority for cash flow? Because it looks like you have, really -- I mean, it looks like you can generate significant amounts of cash and really have nowhere to go with it as far as -- I guess, you have 1 issue of debt pay down that's about $200 million this year but other than that...

I disagree with the idea of nowhere to go. That's the first thing I'd say. I wouldn't characterize it quite like that. I mean, first of all, we do have cash flows that are associated with the credit company and, of course, as the on-book portfolio comes on, that will leave cash from us. We have to repay the debt and that comes due in the middle of next year. Then we have substantial ideas around organic growth. And you see our capital investment ramping up this year to greater than last year. And we have acquisition opportunities that are coherent to our strategy in critical industries and serving repair shop owners and managers that lay out before it. So I think we have ample places to put that cash.

Well, that's kind of what I was getting at, the acquisition opportunity and sort of how do you view the pipeline for that? And how do you look at the multiples of these businesses? Obviously, given what I'm looking at, the overall company, Snap-on, trades at a relatively cheap multiple. And I'm just wondering about acquisitions, about the amount you'd have to pay for acquisitions versus buying your own stock here.

Well, I think our policy on the stock buyback is more or less we offset dilution. We think we have places where we can put the money at reasonable prices and make a lot out of it. When we acquire somebody, we think we can make them a lot better. Because we've got Snap-on Value Creation Processes. We impose -- when we put that on an acquisition, we can make them better than they were before, because those processes are tight and capable and value creating around safety and quality and customer connection and innovation and Rapid Continuous Improvement. It did a lot for our company and we acquired ProQuest, the Electronic Parts business in what, late to almost early 2006, late 2007. That business has been rocked by dealership consolidations in the interim and the Snap-on Value Creation system has wrung profitability out of that and allowed us to offset it. So we feel pretty confident we can acquire somebody, 1, and make them better just with Snap-on Value Creation and secondly, and secondly, we can add it to our -- because we're not looking at acquiring somebody that's sort of like -- that's unrelated to our business. We see ourselves saying we can grow coherently. We're just -- we're taking the Snap-on brand out of the garage and into critical industries. So of we would acquire a company that had a position in, let's say aerospace or natural resources and added it to the power of the Snap-on brand, there would be synergies beyond the idea of the processes we would bring to that company. And so there will be tremendous value created. So I'm not so worried about the multiple question.

Well, okay. And just to be clear, when you're talking about, I mean, businesses, you're not talking about buying turnaround situations, you're talking about decent businesses that you would improve.

Yes. I mean, yes. I'm not saying that we're buying businesses to turn them around, but I think we can improve almost most businesses we see, actually.

Okay, thank you.

Ladies and gentlemen, we have no further questions at this time. I'd like to turn the call back over to Ms. Leslie Kratcoski for any additional or closing remarks.

Great. Thanks, everyone, for joining us this morning to review our results and what we know is a very full earnings release date. A replay and the transcript will be available shortly after this call and we wish you the best. Thanks.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. Have a great day.