Snap-on Incorporated (SNA) Q2 2011 Earnings Report, Transcript and Summary

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

Thanks, John, and good morning, everyone. Thanks for joining us today to review Snap-on's Second Quarter 2011 results, which are detailed in our press release issued earlier this morning. We have on the call today Nick Pinchuk, Snap-on's Chief Executive Officer; and Aldo Pagliari, Snap-on's Chief Financial Officer. Nick will kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we'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 the call relative to management’s expectations, estimates or beliefs or otherwise state management’s or the company’s outlook, plans or projections are forward-looking statements, and actual results may differ materially from those made in such statements. Additional information and the factors that could cause our results to differ materially from those in the forward-looking statements are contained in our SEC filings. Finally, today's discussion and presentation include reference to certain non-GAAP financial measures that exclude the previously announced $18 million arbitration settlement gain recorded this quarter from the resolution of the dispute with CIT relating to the former financial service's joint venture. Please refer to the company's earnings release issued today and to the slides accompanying this webcast for a reconciliation of these non-GAAP financial measures to those most directly comparable GAAP measures. With that said, I'll now turn the call over to Nick Pinchuk. Nick?

Thanks, Leslie. Good morning, everybody. Well, the second quarter results were reasonably strong again, and I think it's safe to say that we're encouraged by the continued progress. Overall sales in the quarter were up 12.2% from last year with some help from exchange rates. Organically, volume rose by over 7%. The overall operating margin was 15.4% and operating income was up more than 44% from 2010, and both of those comparisons exclude the positive effect of the arbitration settlement with CIT. The 40-plus percent rise in operating income is similar to what we posted in the past couple of quarters, so these results mark a continuation of an ongoing and strong trend. The profit increase included a $15.8 million rise in earnings from Financial Services, but a real highlight was the quarterly operating margin of 13.6% before Financial Services. That Opco [ph] OI margin represents the highest level Snap-on has achieved in well over 15 years. Now we believe the operating performance and the trend clearly demonstrates the strength of our Snap-on value creation processes, safety, quality, customer connection, innovation and rapid continuous improvement. It's a framework we apply everywhere at every level to improve our performance, and our commitment to those principles and processes are enabling our broad progress. Now with respect to the macro environment, the various markets in which we operate, the second quarter was fairly unchanged from what we spoke about 3 months ago. I characterize our performance brought -- our performance has widespread gains in most areas, more than overcoming those few continuing headwinds we mentioned in the past. I'll provide a bit of color on the quarter and cover the highlights for each of the operating groups. And then as usual, Aldo will offer a detailed financial review. From a geographic perspective, the same dynamics are present for our operations that have been in play for the past couple of quarters. In North America, no real change. Look, the overall 10% volume growth in the Tools Group reflects the same stable upward trend that we've become accustomed to in North America. Also, the big-ticket diagnostics and tool storage units that are sold in the van channel remain strong, and that's a continuing positive for us. Our Undercar Equipment, another big-ticket category was also up in North America, better than our overall sales increase. The same was true in our distribution and general industrial sales in the region. Moving to another area of strength, the emerging markets of Asia Pacific. Again this quarter, we saw strong double-digit gains. It's no secret that those markets are expanding, and we're taking advantage as we build presence and gain position. Throughout that jurisdiction, but especially in China, in India, in Indonesia, we're seeing growth, far above both GDP rates and the company's overall pace of growth. We continue to see progress in most of Europe in the established markets like the U.K., Sweden, Finland and we're growing in the East, in Eastern Europe, of course, in Russia, but also in other developing areas like Poland and in Turkey. And the gains we've seen are across business segments from big-ticket undercar equipment to industrial customers to SNA Europe's. But the overall growth in that region was somewhat muted by the ongoing economic weakness in Southern Europe. You might remember that for Snap-on, these are large markets by way of SNA Europe, and we're not seeing relief. Countries across the south like Spain and Portugal remain weak. But you know that's no real surprise, given the almost daily news from that region. Actually, when it comes to Europe, given the turbulence, we feel okay about no major changes for us at Europe over the past few quarters. Speaking of headwinds, another that we mentioned last quarter is Japan. The situation there is fairly well known, it's unsettled as we thought it would be for a while. The good news is it's isolated and most people believe it's temporary. Now for the operating segment. For the operating segments and a view on the advancements we've made in those strategic areas, which we've identified as decisive for our future: expanding into critical industries, building in emerging markets, enhancing the franchise network and expanding in the repair garage. In Commercial-Industrial or the C&I group, sales were up 8.1% from 2010 levels. However, excluding the benefit from foreign exchange, volumes increased about 2%. The operating margin was 10.4%, up 50 basis points from last year. And as you expect from the geographic discussion I just provided, most areas here were up solidly, widespread double-digit rises. Keep in mind, however, that C&I is where we see most of the impact of those fairly specific headwinds of Southern Europe, the unsettled situation in Japan, and the lower military spending which we discussed last quarter. So the story in C&I is robust gains in most areas, partially offset by the concentration of our external headwinds in this one segment. C&I operations outside those concentrated headwinds grew organically as double digits, very much in line with the gains in the Tools Group and in the Repair Systems and Information Groups. From that perspective, we're encouraged by the progress along run rates from growth in C&I. And that progress can be seen in the volumes, the positive motion in Asia Pacific and in critical industries such as aerospace and natural resources. All these continued with their trend of strong double-digit growth. But more important than the sales in a particular quarter, we know that Snap-on is building expanded long-term presence in each of those strategic areas. Just last month, the corporation had a strong showing at the Paris Air Show. It is widely recognized as the most prestigious aircraft exposition in the world, and many of you know that our array of products for the aerospace sector is expanding. While in Paris, we highlighted the high-tech Automated Tool Control unit or ATC and our newly increased range of torque products aimed at aerospace. And the response was very enthusiastic. It's that kind of growing presence that's generating the big gains we're seeing in this critical industry of aerospace. And the gains are being driven by customers throughout the industries from airlines in support of their fleet, to aircraft manufacturing facilities and into the maintenance and repair of overhaul shops or MRO facilities. And as you would expect, the opportunities here are across the globe, and Snap-on is increasingly valued in this important sector. We feel encouraged by that. I've spoken in the past about the partnerships with technical schools in creating certification programs. We believe it's a great way for technicians of the future using Snap-on products. It's a great way to get the technicians of the future to use Snap-on products, to get them to see the quality and the professionalism of the Snap-on brand and ultimately for them to become Snap-on customers for life. We continue to build those programs in the U.S. and internationally and across the wide range of disciplines from automotive repair, to critical power generation, to aerospace. And as part of that progress, an array of key technical schools across the U.S. have adopted Snap-on certification protocols, and that practice is expanding. Our sales in Education were up over 20% again in the quarter. But more importantly, we believe those gains are setting the stage for future growth across all the critical industries. I already mentioned the rapid growth we're seeing in Asia-Pacific, but I'll just provide one example of the products that are helping to drive that expansion. During the quarter, we released a new version of our diagnostics unit in China. The handheld includes a new touch screen interactive display, as well as expanded vehicle and system coverage. As you can imagine in China, with relatively recent development of the new car market, the repair wave is just starting to form. Our handheld unit is getting great reviews and is positioning Snap-on to ride that wave as it breaks. So that gives you a little insight into C&I, continued advancements in critical industries in emerging markets, significant gains, with offsets from a few concentrated headwinds in that segment. Moving to the Tools Group, where we serve professional automotive technicians. Sales were up 13%, including 3 points related to currency, and the operating margin was 15.5%, up 300 basis points from last year. Sales of diagnostics products to the vans were up strongly. We're continuing to see the benefits of the successful launches of both our high-end VERDICT and our updated VERUS handheld unit. Those products are innovative, big-time productivity enhancers and they're driving a big-ticket strength across the Tools Group. We said we need to maintain and even enhance our van network. It's been a big focus for us, and it's showing in the results. Again this quarter, the franchisee health metrics are moving positively. Obviously, the sales are up, but our franchisees are in better overall financial shape, the turnover is low, and we believe that the network is stronger than ever. We did get some validation of that progress in the quarter when Franchise Direct published its annual global franchisees report. The Snap-on franchisee proposition ranked sixth overall, the top-ranked tool company by a wide margin, in fact, the top-ranked industrial company of any type. This is a publication that's a leading source of information for the franchise industry in both North America and Europe, so it was a valuable endorsement for us. The rankings were based on several criteria, including stability, growth, best practices and support and training, and those are areas that all have directly benefited from our focused efforts to enhance the channel and from the application of Snap-on value creation processes. Now on to the Repair System & Information Group. This is where we serve vehicle repair shop owners and managers and where we have a great opportunity to expand the Snap-on brand throughout the garage. RS&I posted a sales increase of 13.9%, just under 10% excluding currency. And the operating margin, it was 20.9%, a 150 basis points up from 19.4% last year. Related to the growth in those shops, our Equipment division was up in both North America and in Europe. Over the past several years, we've had done a number of innovative products and equipment, and they're propelling us forward. The OEMs increasingly are directly signing on to these products, and that additional exposure is a big plus. Particularly strong in the quarter were big-ticket alignment products, up more than double the group's growth rate. This is a product where we have a lead in imaging technology, and we're taking advantage. Also related to our expansion in the garage, we're increasingly seeing -- serving medium and heavy truck market with information and diagnostics. We have launched the new Pocket iQ handheld diagnostic unit, specifically for the Truck segment. It's designed for anyone diagnosing and repairing trucks from dealers, to fleet maintenance shops even to owners. We're also working with truck engine OEMs, launching software for diagnostic testing for repair information and for reprogramming capabilities, to ease repair work across their entire line of OEM engines. And in the independent repair sector, Mitchell 1. Mitchell 1 has been making investments in truck repair and information for some time. Now we're well-positioned and we're gaining in the truck software space. We've spoken in the past about a relatively small direct exposure to automotive OEMs. But obviously, as the rooftops in the U.S. decrease, our Electronic Parts Catalog business to Snap-on Business Solutions has been impacted. But we're finding offsets both internationally and in adjacent markets, areas like motorcycles and agriculture, and we have made gains in those areas. Also related to this space, we continue to see increased activity in essential tool distributions. The OEMs are more freely commending, and that's helping drive some of the sales increases in RS&I. So that gives you a picture of what's going on in the operating units. As I said in the beginning of my remarks here, the Snap-on value creation processes are driving our progress, customer connection, building relationship with students, creating customers for life, innovation, new diagnostics units in the U.S. and the U.K. and in China for cars and for trucks. Undercar, new undercar equipment, building on technology leadership winning new customers and products expanded to serve critical industries, automated tool control and wider torque offerings. And of course, rapid continuous improvement, or RCI, one of our biggest value creators. The operating income margin tells that story, 13.6% before Financial Services, up 140 basis points stronger than we've been in some time. We believe we've come out of the downturn as a stronger company than when we entered, and the Snap-on value creation processes made it possible. Now I'll turn the call over to Aldo for our financial review. Aldo?

Thanks, Nick. Our consolidated operating results are summarized on Slide 6. Overall revenue growth increased profitability in Financial Services and what we believe are ongoing benefits from our Snap-on value creation processes generated a 44% improvement in year-over-year operating earnings. This operating earnings improvement excludes the $18 million arbitration settlement gain recorded during the quarter. That sales in the second quarter of $726.7 million increased $79.1 million by 12.2% year-over-year. Excluding currency translation, organic sales increased 7.2%. We continue to realize year-over-year sales growth broadly across most of our businesses, including increased sales to franchisees by the Snap-on Tools Group, higher sales to repair shop owners and managers by the Repair Systems & Information Group our RS&I and increased sales to a wide range of customers in emerging markets and critical industries that are commercial and industrial or C&I Group. Consolidated gross profit of $342 million in the quarter increased $38.4% million from 2010 level. As a result of higher sales, $11.1 million of favorable foreign currency effects, savings from ongoing RCI and restructuring initiatives of $1.9 million of lower structuring costs. Consolidated gross margin of 47.1% in the quarter improved 20 basis points from Q2 of last year. Operating expenses in the quarter of $243.4 million increased $18.6 million from 2010 levels, largely due to $8.3 million of unfavorable foreign currency effects and higher volume related in other expenses, including a $4.2 million of anticipated higher pension expense. As a percentage of sales, operating expenses in the quarter were 33.5%, it improved 120 basis points from 34.7% last year, restructuring cost of $1.9 million in the quarter compared to $3.1 million last year. Operating earnings from Financial Services of $17.5 million before the arbitration settlement, improved to $15.8 million from second quarter 2010 levels. Sequentially and as expected, Financial Services operating earnings continues to improve as our on-book financial portfolio grows. Interest expense of $16.3 million in the quarter increased $3.1 million from 2010 levels, mainly due to higher average debt levels following last December's $250 million notes issuance. Next month, we intend to repay $200 million of 6.25% notes upon the maturity with available cash. Our second quarter effective income tax rate of 34% was higher than last year's 31.2% rate, primarily due to the mix of earnings including the impact of the arbitration settlement gain that is taxable in the United States. And finally, reported net earnings in the second quarter of 2011 were $78 million or $1.33 per diluted share. Absent of settlement gain, which contributed $0.19 per share, net earnings in the quarter were $66.9 million or $1.14 per diluted share. This represents an increase of 47.7% when compared with the $45.3 million or $0.78 per diluted share earned in the second quarter of last year. Now let's turn to our segment results. Starting with a C&I Group on Slide 7, sales of $279.7 million for the second quarter improved 8.1% from 2010 levels. Excluding currency translation, organic sales increased 1.9%. Sales to a wide range of customers in emerging markets in critical industries were up considerably in the quarter. However, the rate of year-over-year organic sales growth in the C&I group was again affected by lower sales to the Military, continued weakness across Southern Europe and some impact in Japan from last quarter's natural disasters. Gross profit of $102.4 million in the quarter increased $9.8 million or 10.6% from 2010 levels, primarily due to the higher sales of lower restructuring costs, $4.2 million of favorable currency effects and $2.8 million of savings from an ongoing restructuring of ongoing RCI initiatives, partially offset by inflationary in other cost increases. Gross margin of 36.6% in the quarter improved 80 basis points from 35.8% last year. Operating expenses of $73.2 million in the quarter increased $6.1 million from 2010 levels, primarily due to unfavorable foreign currency impacts, higher volume-related expenses and higher restructuring costs. As a percentage of sales, operating expenses in the quarter were 26.2% as compared to 25.9% last year. Second quarter operating earnings of $29.2 million for the C&I segment increased $3.7 million or 14.5% from 2010 levels. As a percentage of sales, operating margin in the C&I segment of 10.4% improved 50 basis points from 9.9% last year. Turning now to Slide 8. Second quarter sales of the Snap-on Tools Group increased 13% year-over-year, largely due to continued higher sales in the U.S, On an organic basis, sales were up 10%. Gross profit in the Snap-on Tools Group of $132.4 million in the quarter increased $17 million from last year's levels, primarily due to the higher sales led by increased sales of hand tools and diagnostic products and favorable currency effects. These gross profit increases were partially offset by higher structuring costs for the previously communicated consolidation of our North American tools storage operations. As a percentage of sales, gross margin of 44.3% improved 60 basis points from 43.7% last year. Operating expenses of $86.2 million in the quarter increased $3.7 million from 2010 levels, primarily due to higher volume-related and other expenses and $1.6 million of unfavorable foreign currency effects, partially offset by $1.5 million of lower bad debt expense. As a percentage of sales, operating expenses of 28.8% in the quarter improved 240 basis points from 31.2% last year. Operating earnings for Snap-on Tools Group of $46.2 million in the quarter increased $13.2 million or 40% from the $33 million earned last year. And as a percentage of sales, operating earnings of 15.5% increased 300 basis points from 12.5% last year. Turning now to the RS&I group shown on Slide 9. Second quarter sales of $234.5 million increased 13.9% year-over-year. Excluding currency translation, organic sales increased 9.7% reflecting continued higher sales to repair shop owners and managers. Gross profit of $107.4 million in the quarter increased $11.7 million from prior-year levels, primarily due to higher sales and $3 million of favorable foreign currency effects. As a percentage of sales, gross margin of 45.8 declined 70 basis points from 2010 levels, reflecting the higher relative growth in sales of undercar equipment and essential tool and facilitation program. Operating expenses of $58.4 million in the quarter increased $2.7 million from 2010 levels, primarily due to higher volume-related expenses and $2.1 million of unfavorable foreign currency effects. As a percentage of sales, operating expenses of 24.9% improved 220 basis points from 27.1% last year. Our operating expenses as a percentage of sales also benefits from the higher mix of undercar equipment and essential tool facilitation program sales, which tend to exhibit lower operating expense levels relative to the other businesses within RS&I. Operating earnings of $49 million for the RS&I group increased $9 million or 22.5% from 2010 levels. As a percentage of sales, operating margin of 20.9% improved 150 basis points from 2010. Now, turning to Slide 10. Financial Services operating earnings of $35.5 million in the quarter of 2011 includes the previously discussed $18 million arbitration settlement gain. Excluding the settlement gain, operating earnings of $17.5 million in the quarter compares favorably to both first quarter earnings of $12.5 million and to fourth quarter 2010 earnings of $9.4 million. The $15.8 million year-over-year increase in operating earnings from $1.7 million last year to $17.5 million in the second quarter of 2011, we believe is testament to the earnings potential of our growing on-book finance portfolio. Originations of $153.1 million in the quarter increased 12% compared to last year's levels, reflecting increased sales in Snap-on tools, higher approval rates, as well as increased participation in our credit programs. Moving to Slide 11. As of the second quarter end, our balance sheet includes $845 million of gross financing receivables including $697 million from our U.S. Snap-on Credit operation. In the United States, $576 million or 83% of the financing portfolio relates to extended credit loans to technicians. Since the beginning of 2011, our global on-book financing portfolio has grown over $110 million. In the remainder of the year, we expect that our on-book finance portfolio will roughly increase by an additional $45 million. Regarding finance portfolio losses and delinquency trends, these continue to be in line with our expectations. Now, turning to Slide 12. Net cash used by operating activities was $13.7 million in the quarter. This compares to net cash provided of $55.5 million in the second quarter of last year. This $69 million year-over-year net decrease primarily reflects the return of $89.8 million of cash previously withheld from CIT related to the arbitration settlement. This return of cash, combined with the funding of higher inventory levels and new loans originated by Snap-on Credit, were partially offset by higher net earnings. Similarly, our quarter-end cash position of $418 million decreased $154 million from year-end levels, primarily due to the funding of new loans originated by Snap-on Credit, the return of cash to CIT and increased levels of working investment in capital expenditures, partially offset by higher levels of net earnings in 2011. Free cash flow from Financial Services was, as expected, a negative $116 million, primarily due to the return of cash to CIT and the continued funding of new loan originations at Snap-on Credit. Free cash flow from the operating company was a positive $82 million. Capital expenditures totaled $14.7 million in the quarter. As seen on Slide 13, day sales outstanding for trade receivables of 59 days at quarter end improved from 61 days at both first quarter and 2010 year end. Inventories increased $63 million from year end, primarily to support increased customer demand and to mitigate supply-chain disruption from both the recent natural disasters in Japan and the consolidation of our North American tool storage operations. Currency translation also contributed $12.9 million of the inventory increase. On a trailing 12-month basis, inventory turns of 4.3x compared to 4.4x at the end of Q1 and 4.7x at 2010 year end, reflective of the higher inventory. Our net debt-to-capital ratio 32.4% compares to the 30.1% at 2010 year end and 28.3% last year. The year-over-year increase is primarily reflective of last December's $250 million bond issuance. In addition to our $418 million of cash and cash flow from operations, we have more than $600 million in available credit facilities, and our current A2P2 short-term credit rating allows us to access the commercial paper markets, should we choose to do so. As of second quarter end, no amounts were outstanding under any of these facilities. This includes my remarks on our second quarter performance, and I'll now turn the call back over to Nick for his closing thoughts. Nick?

Thanks, Aldo. These are interesting times, but we believe Snap-on's performance confirms the underlying strength of our businesses and the ongoing potential of our runways. We're quite encouraged by the results. Sales up nicely, Opco [ph] OI margin at a relative high, meeting headwinds and overcoming. Financial Services continuing to fulfill the promise of profitability that we believed in from the original acquisition, now 2 years ago. Snap-on's potential is unfolding, just the way we've been describing for some time. The Snap-on value creation processes are driving improvements. Margins are up again. Opco [ph] by 140 basis point and the overall company by 320 basis points. And again this quarter, we're demonstrating progress along our strategic runways for coherent growth. The van network has been enhanced. Cash collections are up, turnovers down and Snap-on was named the top industrial franchise by Franchise Direct. We had expanded in the repair garage. Our liner sales continue their upward trend, and our big-ticket diagnostics are increasing their penetration. The Snap-on presence is expanding further in critical industries. Sales continue to grow significantly in sectors like aerospace and natural resources, and our presence in emerging markets keeps building. Our growth in China, India and Indonesia confirm the opportunities. So that's our quarter, more evidence that Snap-on has considerable strength, capabilities and position. It has much more runway for growth and improvement, and as it embarked firmly on the path that we believe will continue our progress for some time to come. I once again want to end my remarks -- I want to end today by speaking to the many franchisees and Snap-on associates that I know are on the call. All of what we discussed today, the encouraging results, the strategic progress would not have been possible without your commitment and your contribution. For all that you do, for all that you have done for Snap-on and our team, you have my congratulations and you have my thanks. Now I'll turn the call over to the operator for questions. Operator?

[Operator Instructions] And our first question comes from Jim Lucas of Janney Capital Markets.

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

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

And with regards to the 15% margin in tools, I mean, is the phenomenal number we've been waiting a long, long time to see the potential of getting unlocked and that's very gratifying to see. When you look at the margin profile of tools today, where is the potential for that? And I guess secondary to that question is, what impact did mix have on margins this quarter?

Let me speak of that in a couple of ways. The first thing is, if you're thinking about the short term and you want to extrapolate off of this, I think what have to think of for Snap-on, of course, for the Tools Group and for our business, in general, is the second quarter is a good strong quarter for us. The third quarter is always uncertain. We have in the Tools Group the van drivers will take time off. They have to go on vacation sometimes. They usually go on the third quarter, and we put the Snap-on Franchisee Conference in that period. So if you're looking at the short term, I don't think you can extrapolate from second quarter onto the third quarter. You have to get that effect in the Tools Group, and you have the effect in Europe of vacations which are always, in my experience, of indeterminate length depending on the year in Europe. So you have in the short term. In the longer term, we feel very positive about our position in the Tools Group. I don't know if you can extrapolate off the 15.5%. In the past, we have said that our target for operating margins for the entire corporation is around mid-teens, and we thought the Tools Group would approach that. In this second quarter, it got above that number. It started to go into the back end, the back half of that number. I don't know what you can make out of one quarter. But having said that, we feel very good about where the Tools business is today. That's not being driven by necessarily an extraordinarily rich mix of the business. It's simply being driven by RCI, by good strong sales, by our ability to price against inflation, which we said before, and a combination of those things. And together with, I suppose, you could say robust sales of big-ticket items like diagnostics and tool storage. So I think you could look at the Tools Group second quarter and say, "Wow, that is an extraordinary quarter. They have been selling on -- they are operating on all cylinders. They probably have gained some share, if you look at their growth in this situation. They've got good growth, and they're performing well and the mix is very robust.” I don't know if you can extrapolate from that number.

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

Sure. If you take away, as I said in my call, if you take away the headwinds in those concentrated areas, C&I grew just like we always believed it would, double digits. But let's talk about the headwinds. Look, Japan is going to fix itself. I was just there about 4 weeks ago myself, and it is still having trouble associated with rolling power cuts and so-and-so. But that will all work itself out, as we know the Japanese do, they're very ingenious and so on and so. We think Japan comes back from its current malaise, I don't know it will go back to prerecession levels or not, but you'll certainly see recovery. So I think that fixes itself out toward the back of the year. If you're talking about the military, I don't know where the government goes, but the comparisons get easier year-over-year. So when you're talking about a growth scenario that looks like we have managed over, at least, through this quarter, maybe another quarter, the worst of that, and we'll start building from a base. I have given up predicting Spain. Because I think, I would have said a year ago that Spain's got to get better. We believe we're not losing market share, but the Spanish market was down again, and I think what you're seeing is, if you just pick up a newspaper and read about it, you can see the roots of that across Southern Europe. And so, that's how I see C&I. Good strong double-digit growth happening just like we thought it would. Three concentrated areas of headwinds, 2 of which we think dissipate as we go through the year in the third and fourth quarter, varying time constants. And Spain, I'm not so sure. We're confident it's going to come back, but I can't predict the timing.

And we'll now move on to Gary Prestopino with Barrington Research.

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

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

So there'll be little impact in 2012?

I think so.

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

I think so. I think we've already spoken about a portfolio size of around $925 million. It will largely reflect the growth in the Tools Storage business. That's largely what their financing is, sales to mechanics in those markets where the Tools Group serves. So it will be that order of magnitude.

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

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

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

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

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

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

[Operator Instructions] And we'll move on to our next question from Jared Platts [ph] with Robert Baird. David Leiker - Robert W. Baird & Co. Incorporated: Actually, it's David Leiker. Nick, 2 things. On C&I first, I just want to -- I missed some of your comments earlier, I just want to confirm the comment I heard earlier. Are you saying that your C&I business, excluding Southern Europe, Military and Japan is running double-digits?

Yes, that's what I said. David Leiker - Robert W. Baird & Co. Incorporated: And is that consistent with what we would have seen in the first quarter, where the segment as a whole had organic growth of 8% or 9%?

Yes, it's pretty much like that. I think we're not seeing any -- the question is, are we seeing any back-offs in the industrial area or the critical industry areas? We are not seeing anything like that. I know there's a lot of discussion about industrial back-and-forth in a number of different sectors, particularly over the last few days. We like our Industrial business. And now, we have a specialized industrial business. First, we're armed with the Snap-on brand, with all these guys and all these professionals in the industry loved and revere. And secondly, we're aiming just at the critical. We're just not so easy to back off of when you need the results, because the need for repeatability and reliability is important. So I think we're in a great spot in the industrial sector. David Leiker - Robert W. Baird & Co. Incorporated: Yes, I agree. I think that's fantastic. So if we look at this move from this 8% to 9% with 2% organic growth, it would seem that most, if not all, of that is a function of Military and Japan, is that fair?

Actually, Spain was down, too. Spain was down. David Leiker - Robert W. Baird & Co. Incorporated: Spain has gotten worse?

Spain got worse. I almost want to say, "Shut my mouth." I was surprised by that because we -- that's why I've given up predicting Spain. Although we don't think -- our customers are still buying, it's just small amounts. We don't think we lost share. David Leiker - Robert W. Baird & Co. Incorporated: And then on the other side, if we look at what Stanley Black & Decker reported yesterday or 2 days ago, it looks like there's some volume gains that are going on there. I know it's hard to tell how much of it, because the revenue numbers we see are from the corporate to the dealer, and not the dealer to the street, do you have any sense with their change in ownership and direction there? Is Mac being run better? Or they have a better presence in the market? Do they have a better value proposition? Can you just talk about what's going on in that regard?

I will let others opine on how Mac is being run. I have a lot of respect for the Stanley management myself, but I don't know what's actually -- we're not seeing any change at the -- where the rubber meets the road at the customer base, second quarter, versus first quarter. If anything, we thought our -- we think our competitive position is fairly robust. I would offer that, Gee, I think double-digit growth, 10% in the Tools Group, that's got to be pretty strong. I don't think we're losing out or losing position to anybody in that situation. I even think we're getting stronger. Our people feel we're getting stronger. I was with 1,200 customers at Joliet, Illinois at the, National Drag Racing Championships about 10 days ago. And when I talked to our franchisees, they were quite enthusiastic and quite full of themselves in terms of confidence. So if the numbers, if the anecdotal evidence is anything, I feel we're, if anything, stronger than ever. And if the metrics are anything, I think 10% indicates that we're growing. And by the way, the comparison wasn't that easy. If you look at the Tools Group, they were pretty strong last year in the second quarter. So at 10% growth year-over-year, it's not small. It's fairly significant. I can't explain necessarily the Stanley numbers. And again, if you have questions about your selling into the van, and I'm not exactly sure what's in those numbers. David Leiker - Robert W. Baird & Co. Incorporated: What did you see in your -- in terms of end market demand, yout dealer sales, how did those track relative at the corporate level?

Pretty much in lockstep with our corporate levels. If the question is are we building inventories on the vans? I don't believe so. We're not building inventories on the vans. So generally, we see this as just a reflective of the marketplace. I think what you're seeing in the van channel is, is good robust product. We have some nice, nice products out there that's engaging the customers. And I say that you can't dismiss the fact that our franchisees are, we believe, stronger than ever before. We feel better about our franchisee population than we ever have in the past. By the way, Franchise Direct kind of said something like that. We were 6 and no tool manufacturer was even close and no industrial franchiser is even close. We felt good about it.

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

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

Ladies and gentlemen, that concludes today's conference call. Thank you for attending.