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…

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…

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.