Welcome to the Snap-on Incorporated 2010 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our remarks, we will conduct a question and answer session. (Operator Instructions) As a reminder, today's call is being recorded. I would now like to introduce your host for today's conference, Leslie Kratcoski, Vice President of Investor Relations. You may begin your conference.

Thanks Holly and good morning everyone. Thank you for joining us today to review Snap-on's second quarter 2010 results, which are detailed in our press release issued earlier this morning. We have on the call today Nick Pinchuk, Snap-on's Chief Executive Officer and Aldo Pagliari, Snap-on's Chief Financial Officer. Nick will lead 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 the Investor Relations portion of 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. As noted in today's earnings release and as previously communicated, we recently realigned our management organization in an effort to better support the products and service needs of our primary customer segment. As a result of this realignment our reportable business segment now include the Commercial & Industrial or C&I Group, Snap-on Tools Group, Repair Systems & Information or RS&I and Financial Services. 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 turn the call over to Nick Pinchuk, Nick?

Thanks Leslie. Good morning everyone. I think it's fair to say that the second quarter results provide some significant evidence that our strategies are working. We continue to make tangible gains in markets that are mixed, still tough, but improving. In this environment we remain committed to the Snap-on value creation process. They form a powerful framework for both capturing those opportunities and for achieving cost and flexibility improvement and we continued to make progress in the four and key strategic initiatives that we believe would be decisive for us going forward; enhancing the franchise network, expanding our presence in vehicle repair facilities, extending out of the garage and into critical industries, and building and emerging markets. In each of those areas we are encouraged by the progress that's evident in our second quarter. The organic sales in the quarter were up nearly 10%, about $57 million from last year and operating earnings before financial services were up more than $25 million or 47% over last year's level. The resulting operating margin was 12.2%, that's up 310 basis points from 2009. Encouraging progress was the Snap-on value creation processes, processes like safety, quality, customer connection, innovation and rapid continuous improvement have driven to reality. As usual, Aldo will take you through the financials in detail but first I will give you our perspective on the markets and cover some of the operating highlights. Last quarter, I characterized the markets as, I think I said stabilized, favorably inclined but not rebounding. Since then, we haven't seen any exceptional economic acceleration. However, I will say that overall nothing has led us to be less positive. So certainly, we now have one more quarter of stability and we actually see some pockets are further strengthening. So we are a bit more encouraged, but…

Thanks Nick. Our consolidated operating results are summarized on slide 6. Sales in the second quarter of $648 million increased 9.8% from second quarter 2009 levels. The primary drivers behind are the $8 million year-over-year sales increase, include tire sales in critical industries, increased sales in emerging markets, higher equipment sales and increased sales by franchisees in the US and U.K. The company also saw many improvement in its European based businesses. Consolidated gross profit of $303.8 million in the quarter increased $49.8 million year-over-year, while the gross margin improved by 380 basis points. These increases were largely due to the higher sales volumes and favorable manufacturing utilization as a result of the increasing levels of production. Savings from rapid continuous, RCI initiatives and benefits from previous restructuring actions contributed about $7 million of gross profit improvement. Foreign currency primarily transaction FX, contributed $5 million and lower year-over-year restructuring cost contributed an additional $3 million of gross profit improvement. As a result of these factors consolidated gross margin improved to 46.9% in the quarter as compared to 43.1% last year. Operating expenses in the quarter increased to $25 million from 2009 level. This was primarily due to higher volume related expenses and $14.9 million of increased performance based incentive compensation expense as a result of improved year-over-year operating performance and increased participation in the company's stock purchase programs. In addition, we incurred $3.1 million of higher pension expense, largely due to lower than projected asset return in previous years, related to the US Pension Plan. These increases in operating expenses were partially offset by $2.5 million of benefits from ongoing RCI and other cost reduction initiatives and $2.5 million of lower restructuring cost. As a percent of sales, operating expenses were 34.7% in the second quarter of 2010 as compared…

Thanks, Aldo. So, wrap up. We are encouraged by the quarter's results, the second straight upward movement and perhaps the beginning of another trend. Sales up almost 10%; profits up 47% versus last year; good sequential progression versus the first quarter. The OI margin at 12. 2% is fairly robust. Our Snap-on value creation process just keep generating gains. In the quarter we saw all the elements of that play book work; safety, quality, customer connection, innovation and RCI, and you can see it in the numbers. We've said consistently that throughout the downturn we would keep investing in the key areas, which we believed will be decisive in capturing growth going forward and we said as a result we would take advantage of the recovery as it occurs. The second quarter is testimony to the success of that approach, The van network is robust and back to 2008 levels. Share is growing is the garage. Our presence in critical industries is expanding and we are building a significant position in emerging markets. So looking forward we are optimistic, although cautiously so. We see the world leaning favorably in North America, mixed but positive in Europe and clearly growing in Asia. To be sure, the recovery is fragile and we are going into the third quarter, which is always difficult to predict because of the vacation period, but now we have two positive periods, so we are optimistic. We are not certain what the immediate macroeconomics will hold but we believe in the special strength of our markets. Making work easier for serious professionals performing critical tasks is valued in any situation and with Snap-on value creation and our strategic investments we continue to believe that we are very well positioned, well positioned to take advantage of any recovery, in whatever shape, over what ever timetable it occurs. I want to finish just by recognizing our franchisees and our associates. I know many of you are on the call. The successes in the quarter were only possible because of your efforts, your capability and your commitment. You have my congratulations and you have my thanks. Now we will open the call to questions. Operator?

(Operator Instructions) We will take our first question from David Leiker with Robert W. Baird.

If I think I heard you correctly you made a comment that your US tool business is back at pre-recession levels, is that correct?

Correct.

I know you got a lot of different business, but is there any way you can give some us some characterization of any other pieces of your business that might be back there close to getting back to those levels?

The industrial business is starting to get back towards that level. Industrial business had a pretty strong quarter, and showing some pretty good growth, and so we are starting to approach back to 2008, however we weren't really satisfied with the 2008 levels, we thought we had a lot of opportunity beyond that, so that's the business. The equipment business, even though we have been showing some upward growth in it, upward trends in the equipment business, we are still somewhat below the 2008 levels and of course Europe is quiet a bit below still. The European, the SNA Europe businesses are quiet a bit below that level.

Okay, great. Then, as you look across your businesses, where do you think, what are the biggest laggards, where is the weakest parts of your business right now and it sounds like most likelihood it would be auto Europe at the moment?

Well, I might not use the word laggard but see the business that's the furthest behind in 2008, is of course our SNA Europe business. They took quite a beating over last year. They were down substantially and they are coming back. We believed in the future of that business and we still believe, we believe we were maintaining or gaining shares, we said through the years but the volume is just still quite a bit below 2008. So I'd say that has to be the place which is the weakest position. The other play, I did mention RS&I before, there are some elements of RS&I, the new Repair Systems and Information group, Mitchell1 and Diagnostics are at 2008 levels, but SBS is down because of the consolidation of the dealers, the OEM dealers in the United States and that business is working feverishly to find offsets in adjacent markets as I said in my remarks. So if I were going to take two places which are behind, I would say Snap-on business solutions in the OEM dealership business and SNA Europe.

SNA Europe is predominantly driven by Spain, right?

Well, the North is strong and Spain and Portugal was down. I think even the North is still below 2008 levels though, David. We are definitely seeing signs of recovery in the North but Spain and Portugal are pretty flattish. If you took Spain and Portugal out of the numbers, you'd see some pretty strong growth year-over-year but we have to remember that it's off a pretty weak base there.

Then just one last item here. With the reorganization and kind of realigning the business model here, what has been the reaction from your workforce and your franchisees, distributors? What kind of response have you gotten from those folks?

Well, I think the franchisees, there's no reaction, and it pretty much didn't change their situation very much. I just pretty much said, we are focused on technicians. We have favorable responses from our customers particularly around the RS&I because in grouping equipment with that and now we've got a number of operations, which are truly focused on that particular customer vehicle shop owners and managers. It's a terrific customer base for us and the fact that we declared that you are a specific customer for us and we don't want to provide you products, we want to provide, we want to solve your problems. That has been received very well.

Next we'll take a question from Jim Lucas with Janney Montgomery Scott

First question, Nick, in your prepared remarks you were talking about seeing some pockets of recovery as well as improvement on the big ticket side, which obviously is encouraging, but could you give us a little bit of more color, maybe put some numbers behind what you are seeing first on the big ticket side, but when you refer to those pockets of recovery, is any particular geography or end market standing out more than others?

Well, I think the US is a great, the US dealer, the van channel, the mobile van channel is I think a shinning example of, maybe pocket is a little bit of a dismissive way to look at that, but the mobile van channel is a good place to talk about that. That business, like I said is up to 2008 levels and people talk about the restocking. We haven't seen any restocking there at all. So, in fact we like the cash position of our vans in that business. So I think we are very encouraged by the 9% to 10% growth in that channel itself. Now, the equipment, the big ticket items in there, it's kind of bifurcated. The smaller big ticket items, that is diagnostics and tool storage are starting to get back to 2008 levels, which we like. This is was we said all along and if you look at, I think we had the best quarters since 2008 in that business this quarter. If you look at the equipment, the other piece of the big ticket items, we are encouraged because that was in North America but we are still below 2008 levels, in low double-digits. Europe, though in equipments was a big strength for us. Europe has gotten back close to 2008 levels in the big ticket items and that was driven, I didn't talk about this in my remarks but by an extraordinary new product, which we launched in Europe the Prism aligner, this is an aligner, which allows you to package alignment into a smaller base, and as you probably can figure that the base, the garages in Europe are somewhat more compact, so the value of that aligner breaking on that market has given us some pretty good tractions., So we feel pretty good about that situations. So, I think those are couple of places, the other place in the industrial group, the businesses in critical industries like natural resources and aerospace are up in some pretty, I don't want to give you any numbers in this because we don't give numbers out, but they are up very strong and much, much higher than our average. We feel pretty good about that and as you know industrial is not a restocking situation. That's a direct sales model so restocking doesn't have much to do with that. Now we do have in our industrial business a smaller group, a smaller piece of the business, which we sell through distributors. You may remember this in United States it's a very small piece of the business and there could be restocking there, but that business was up over 50% in the quarter. So, we feel pretty robust about that situation, the whole idea of recognizing that when we roll the Snap-on brand out of the garage, the customers are open to that idea, they are open to that idea. So it seems to be working.

All right that is very helpful. Can you spent a minute on the Tools group because that clearly is a shinning example here, a good turn but if we go back over the last decade, the revenue for that business has fairly consistently been between a $1 billion and a $1.1 billion. So we are seeing it back to the '08 levels as you said, but as you look at that business going forward, how do you get consistent growth out of that Tools group?

Certainly, its one of our strategic challenges that we said always but we believe that we have runways for growth in that group, one is the fact that we know that they are a number of customers who buy Snap-on tools for their workplace and then at home they use another brand, lets say a mid-tier brand, so we can sell Blue-Point. We launched the mid-tier brand to sell to them also, as much as we work to make customers for life, with educational institutions and we sell Snap-on brand to them. Some new technicians simply don't think they can afford Snap-on, they buy an alternate brand. So they can afford Snap-on, we sell a Blue-Point to them. So there is opportunity to grow in that mid-tier here. Secondly we go on about 800,000 technicians. In the United States there are 1.3 million. Fully enabled our vans call on about a 850,000 technicians. There are 1.3 million. The reason why we don't call on those others, 400,000 to 500,000 is because they are lower volume and our technicians drive by them because they don't want to spend time with them and that is a productivity issue, none of the technicians are vans driven, but that's a productivity issue. So productivity on the van will allow us to take our existing framework, our existing network and reach out to a big portion of that 1.3 million. Now it's not a one for one replacement but it's a real opportunity for us. That's why we are launching rapid continuous improvement in the vans. That's what we are doing this year. It's one of our big initiatives and I see those two things as ways to grow.

Okay, that's helpful. Then finally, hopefully we are back to getting to some sense of normalcy despite the fragile nature of the recovery, which I think we all agree on. Could you just bring us up to-date with the realignment here as we look at the three segments? I don't want to pigeonhole into actual targets but conceptually, how do we think about the margin potential for these three segments longer term?

The thing is we've said that overall we would expect the target to grow in normal environment, not recessionary environment, not recovery environment, because that's all better off in that kind of situation. In a recovery, we would expect to grow faster than normal, but we'd say we'd grow 4%, 5%, 6% per year on an organic basis and then we'd expect our operating margins on an overall basis to be mid-teens and the way that lays out with the new segments is that the RS&I, I believe is at 18, 19 now, it would be over the 20 mark some place, and the Tools group and the Commercial and Industrial would start to approach the mid-teens, be slightly below the average. So that's where we see it. We feel pretty confident we can do that.

Okay. Final question, just in terms of longer term capital allocation strategies, the Financial Services is kind of playing out as expected. Could you just bring us up to-date about how you think about an acquisition strategy longer term?

Our view is that we are always available. We are not a serial acquirer, but we could see ourselves acquiring properties that seem to make sense in our orb. Lots of people used to think about Snap-on and I think we thought about this as ourselves as a company that makes wrenches, sells through vans to auto mechanics and we now think of ourselves as something broader that is, a company that provides, makes work easier, productivity solutions for serious professionals, who are performing critical tasks in critical industries like aerospace and oil and gas. That's a much wider space, and any acquisition, an acquisition that would give us further presence in that broader space with customers we would be interested in doing.

Okay.

So that's where we would invest our cash because we believe that concept is a valuable concept and we believe with Snap-on value creation we can drive profitability through that and the Snap-on brand on top of it gives us legitimacy in that space. So that would be cash well spent.

(Operator Instruction) Next we'll hear from Gary Prestopino with Barrington Research.

Nick, in your comments you mentioned that the big ticket items, you were encouraged by what trends were there. Could you possibly, I don't know if you want to put a number on it but Q2 is significantly better than Q1 or just really seeing a stabilization and no more deterioration?

No, Q2 is better than Q1. In all of those categories, I think just let me, the stage is to be clear is that for diagnostics and tool storage, primarily sold through the van channel, Q2 was the best quarter we have seen since Q2 2008.

Okay.

That was the best quarter in 2008. So we had a gangbuster this quarter in terms of big ticket items and actually if you remember we said this is exactly how we understood the business. We said that people who were in garages, they were buying wrenches and they kept buying wrenches through the downturn and that was it. It was big ticket that was off, because people thought that they charged, the uncertainty, the idea of not wanting to invest in those big ticket item took them away. Well, we are back to 2008, and lo and behold the vehicle of restoration has been the rise in the big ticket items. That's exactly what we been I think thinking about and trying to conjure in these calls for a long time and so that's really what happened. So we did have a good quarter in the first quarter, it was a good quarter, but this quarter was up double digits. Then in terms of equipment we are still not as I said we are still not back to 2008, we are still coming off the floor and that makes sense. So Gary as you think about it, diagnostics is the best. So the most expensive its like an [$8000] purchase, tool storage can be $5,000 to $10,000 but when you are talking about some of that equipment that under-car equipment it can be up $20,000, and it's much more of a capital type equipment. So therefore the whole idea of the uncertainty around the recession becomes more dampening in that area and that's what we are seeing. So we are seeing progress, but it just isn't as fast and it hasn't snapped back to before 2008 levels. In fact it went deeper than diagnostics and tool storage. The one thing I did say though was that, what we are really pleased with is the effect of that new Prism product in Europe, which really gave us some boost in equipment.

Then do you feel that, you mentioned and also in your prepared comments a lot of the gross margin improvement was due to higher sales volume. I mean if the sales volumes kind of stay the same in terms of the growth here, do you feel like you will be able to maintain that gross margin somewhere in the high 46% in the back half of the year?

Yeah, I think that is right, I think you know, we obviously, like any company you can have a mix issue and if we have higher sales in Asia and so on, if we higher sales in Asia and so on, we can, that's is a little less profitable and the drop through is somewhat, but we still are pretty good about maintaining the number, that gross margin number, I mean we had some absorption in this period and we had some cost savings but still I feel pretty good about maintaining the gross margin. So you got to kind of remember though is that, I think everybody should remember is, you have a couple of good quarters, we are going into the third quarter. I think that the third quarter for us is highly unpredictable, more difficult to predict because we have European vacations, the franchisees tend to relax a little bit, they go to the Merlin show or something like that, whatever they do. Historically our third quarter has had more variance than other quarters. So we think of our year as 1, 2, 3 and 4 in terms of trying to model it out. I think the third quarter; it's hard to make a lot of judgments on.

(Operator Instructions) We will take a follow-up from David Leiker.

Just a couple of other items here to follow-up. You called up a couple of things here that were, higher costs here year-over-year, and the current expense you mentioned particular about $16 million. What is that number running year-to-date, do you think?

This is Aldo, David. It's about $20 million, I would say as an absolute number. Also I want to call attention to it, it did include higher, particularly higher year-over-year expenses related to greater participation to the various company stock purchase programs, which also allows franchisees to invest in the company stock as well. So we saw some higher year-over-year participation and with the growth of the stock price, it fueled a higher year-over-year cost per share for those who participated as well.

Okay. So, 4 in Q1, 16 in Q2, what should we kind of look out for that number here, sequentially going forward in the back end of the year, do you think?

In Q4, it will be approximately $5 million, 4 to 5.

Then Q3?

It will be similar. Similar amount, maybe a little bit less.

Okay. So we really did have a pump up here that's beyond what normal is?

We did.

Sure.

Okay, great. Then, yes, I know this is the tough thing. We've talked about this before, but in the industrial market is there any way you can give us some sense of what your penetration, is there market share and…?

I don't know. I can't. I think I can only tell you that we are growing faster than anybody else is saying, pretty much. We're growing pretty fast and that's been for some time. It is very difficult to do that and that's bad news I think from a modeling point of view and I suppose from an investment point of view, but its good news from an operating point of view because what it means is that market is unbounded in terms of customers and in terms of products. One of the reasons why its so difficult to say what the market share is, because how do you calculate it, because we go into a customer like a military, a tank command and we say, what you need and we're not sure. Sometimes we provide them things we never thought was part of our orb, because we put it in a kit.

Right.

Like a flash light or some thing or generators and things like that. We sell it, we provide it in package with Snap-on tool. So that's an example of us struggling, we try to identify that. Equally, we find customers that are added, I would say three years ago I wouldn't have said wind would have been a customer for us and now there is some customer there. So it's very difficult to define that. I can just say that, it seems to us based on the growth, we were getting good growth if you remember all the way through the first quarter of 2009 in this business. We were expanding and we took a downtick, growth faster than anybody else was talking about and we should because we are rolling a Snap-on brand out of the garage, it was a new thing. We are providing something new, capturer, share takers. Now this quarter it has started back up again. So, I believe we are taking share, I can't define it though, sorry.

So, as you go into these customers and these markets, I mean obviously they are getting the product from somewhere right now. Do you have sense of who you are displacing in those products or they are just new market opportunities that didn't exist?

Well, it depends on the location, I mean in Europe we are displacing people like…As I said if you are talking about tool competitors, you are talking about displacing people like in Europe, let's say you stop [Willie] or a [Good Door]. In the United States the usual suspects that come out of our major competitors would be those who would be displaced and also some specialist people who are small. There are people in United States who only make pliers or screwdrivers and so on. We would displace them and then also we wouldn't displace people, we would be sort of like the distributor for some other people that might have been selling direct before but the customers feels pretty good about a packaging with our tools. So all those phenomena is occurring.

Okay. Then if we look at China, the economy is hot there, the government there is trying to slow things down, we're definitely seeing on the automotive side of thing and I know your business is more industrial there, but are you seeing that slow down and what your thoughts about going forward?

I was just there. I have been back from China less than only a week. I was just there with our salesmen and meeting with some customers and we don't see a slow down now. Having said that though, Asia is 5% to 10%, of our business, and we are just bulking up there, we are adding factories and products and so on. So I would charge out, I in fact I do charge our people to grow regardless of whether the economy moves from 12% growth, to 7% growth, because we are just taking share in general. So we wouldn't necessarily see it so easily but having said that, I didn't see any evidence of slow down, to tell you the truth. Now I read the papers like everybody else and the government saying slowdown, but I didn't see it.

I am with you on that, and then lastly here Aldo as you look at the Financial Services business, where do you think you are on track now to rebuild that asset bases that's kind of the second quarter 2011, as you get back there?

I think I will take a little [mirror] targets though, David, as an end stage. If you look at the former portfolio that we had with CIT as partner was about $800 million range. We anticipate that our future statement that would be about $750 million because we are probably going to do little bit less badly seeing that things of that nature that might be better suited for Banks than do directly with franchisees. It will take a little bit of time for some of the tail of the old CIT portfolio when it comes across. So I have been saying as I meet with people, that I think we will see our future staying at about like a $750 million US portfolio in and around somewhere around 2012. Ramps somewhere in that time frame, but you know our future state that we envisioned for this, is tending to follow the model, we have a portfolio that is yielding at expected rates, we are fortunate in that the bad debt performance and delinquencies are still on plan and on target and actually have slightly improved. We are very pleased with that. The originations which underlie the volume tend to track more or less with the Tools group. I think it the reflects the actions in the Tools group. That's what it's there for. So pretty much as the Tools group volume rose, we expect that this renewal of contracts and add-ons as we call them will continue to prosper. So at the endgame, we expect that this has the capability even after interest expense is allocated to create a portfolio that will generate about a 25% return on financial income and that financial income would be, the portfolio yield times the overall finance receivables, that are there within it.

At this time we have no further questions in the queue. I will turn the call back over to Mr. Kratcoski for any additional or closing remarks.

Well everyone, thanks again for joining us today and for your interest in Snap-on. A replay of this call is going to be available shortly this afternoon and we look forward to speaking with you again next quarter. Thanks. Bye.

Thank you. This does conclude our conference. We thank you all for your participation.