Leslie Kratcoski - IR Nicholas Pinchuk - CEO Aldo Pagliari - CFO

Joe Vruwink - Robert W. Baird & Co. Liam Burke - Janney Montgomery Scott LLC, Research Division Gary Prestopino - Barrington Research Associates, Inc., Research Division David S. MacGregor - Longbow Research LLC Richard J. Hilgert - Morningstar Inc.

Good day, and welcome to the Snap-on Incorporated First Quarter Investor Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Leslie Kratcoski. Please go ahead.

Thanks, Sarah, and good morning, everyone. Thanks for joining us today to review Snap-on’s first quarter 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 and with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we'll take your questions. As usual, we've provided slides to supplement our discussion. You can find a copy of these slides on our website next to the audio icon for this call. These slides will be archived on our website along with the transcript of the 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, everyone. As usual I'll start today’s call with the highlights of our quarter. I'll give you my perspective on the results, on our markets and on our progress. Then Aldo will move into a more detailed review of the financials. Our first quarter results were encouraging. They demonstrate clear progress along our runways for both growth and improvement. Our sales were up 6.2% from last year. The operating margin expanded by 100 basis points and the earnings per share increased 15.7% to $1.62. The organic sales increase was 5%. Challenger Lifts, which you'll recall, we acquired in the second quarter last year, added another 15.2 million which along with an 80 basis point impact from unfavorable foreign exchange rates brought our total sales for the quarter to 787.5 million. The EPS rise included an opco operating margin expansion to 15.5%, up from 14.5% in 2013. Financial services operating income increased to 34.4 million from last year’s 30.5, driving the consolidated numbers to -- operating margin to 18.6%, also up 100 basis points. Both the operating margin and the total margin were up 100 basis points. From a macroeconomic standpoint, our automotive repair related businesses, the Tools Group and the Repair Systems & Information or RS&I Group, they’ve enjoyed a reasonably favorable environment for quite some time. And I'd say there is no real change. Now RS&I overall organic activity was up only slightly. But that primarily reflects the wind down of a major OEM program rather than any real change in market dynamics. You’ll also remember that C&I is where the majority of our headwinds have been concentrated. So that’s an area where I think is worth more -- a more discussion is warranted. And as you can tell from the group's, 10.4% organic rise, there…

Thanks Nick. Our first quarter consolidated operating results, I summarized on Slide 6, net sales of $787.5 million in the quarter increased $45.8 million or 6.2% from 2013 levels reflecting sales gains across all segments. Organically, sales increased 5% excluding $15.2 million of sales from the Challenger Lifts acquisition and an unfavourable $5.9 million impact from foreign currency translation. The 5% organic sales increased primarily reflect sales gains in our businesses serving critical industries as well as those calling out automotive technicians and providing diagnostics and information products and independent repair shop owners and managers. Consolidated gross profit of $378.7 million increased $21.8 million from 2013 levels. The gross margin of 48.1% in the quarter was unchanged from prior year levels. As savings from on-going rapid continuous improvement or RCI, initiatives were largely offset by unfavourable foreign currency effects and the impact of lower margin Challenger products. Operating expenses of $257 million increased 7.9 million while the operating expense margin of 32.6% improved 100 basis points from 33.6% a year ago primarily due to benefits from sales volume leverage and the effects of the Challenger acquisition partially offset by inflationary and other cost increases. As a result of these factors, operating earnings before financial services of $121.7 million in the quarter including $5.3 million or 60 basis points of unfavourable foreign currency effects increased to $13.9 million and as a percentage of sales, improved 100 basis points to 15.5%. Operating earnings from financial services of $34.4 million increased 12.8% over prior year levels. Consolidated operating earnings of 156.1 million including $5.4 million or 60 basis points of unfavourable foreign currency effects increased 12.9% over 2013 levels and the operating margin of 18.6% improved 100 basis points from 17.6% a year ago. Our first quarter effective income tax rate of 31.6%…

Thanks Aldo. Well as I said at the start, we are encouraged by the quarter. We believe the results are more clear evidence of potential and they are added confirmation of what we’ve been saying for some time that as we look forward, Snap-on has abundant and wide runways for both improvements and for growth. We believe the quarter’s performance adds to a long trend which reinforces that outlook. We are moving down our runways for growth, enhancing the franchise network, sales growing by 6% new products strong franchise metrics and a credit company is amplifying that strength. Expanding repair shop owners and managers, new diagnostics and information products, growing stronger with independent shops, Challenger Lifts giving us more to sell, extending the critical industries C&I growing organically at 10% with over 200 basis with an over 200 basis points increase in OI margins and building in emerging markets, ramping up our new lift factory and growing even in a place like India where economic and election uncertainty are major headwinds today. We’re also progressing down our runways for improvements, Snap-on value creation, safety, quality customer connection innovation and RCI driving margin gains. So we’re encouraged by the continuing trends, but we believe there is much more ample opportunities and clear runway for growing and improving. And we believe that with the inherent advantages we hold, the investments we’re making and the capable team we’re enlisting, we will extend on a positive trend for the foreseeable future. Before I turn the call over to the operator, I believe it’s appropriate to speak to our franchisees and associates. I know that once again, many of you are listening. The encouraging results of the first quarter and the positive trends we’re demonstrating are direct result of your extraordinary capability and your continuing commitment. For the role you play in our on-going achievement, you have my congratulations. And for your unfailing dedication to our team, you have my thanks. Now I’ll turn the call over to the operator. Operator?

Thank you. (Operator Instructions). We’ll take our first question from David Leiker with Robert Baird. Joe Vruwink - Robert W. Baird & Co.: Hi good morning. This is Joe Vruwink on line for David. I wanted to start, is it possible to quantify any impact weather might have had on the tools group in the quarter? I’d imagine some of the van routes were impacted and obviously fewer repairs are going on, mechanics have less money in their pockets. So, anyway to quantify that?

The short answer is no. My response to that it’s always something. And so yes, we had some tough winter and routes were attenuated in some time and I rode a number of these vans and when you stop at garage, I think I said this on the last call. Some guys say business is great, because we’re tearing up transmissions and chassis are getting bumped around and so there is lot of business here. Other people are saying, hey the business is terrible. So it’s hard to quantify it. Certainly it might have imposed some cauterization on us a little bit. But I think for our perspective, we’re not really looking at it as something that is that unusual, just something that comes up and we manage over it. Joe Vruwink - Robert W. Baird & Co.: May be as the quarter progressed, so we obviously started getting better weather in March, April has been a little bit better I suppose, has your sales activity picked up kind of in line with that cadence?

Well yes, but it's hard to quantify Joe because to tell you the truth last year, if you looked at last year we had people seem to go on a sabbatical in early January, so we had a kind of back end loaded cauterization, it tends to happen from time to time from quarter-to-quarter. So there isn’t always great intelligence looking from months to months. So yes, we did see some uptick but I am not sure you can read that much into that. Joe Vruwink - Robert W. Baird & Co.: And then just looking at the origination growth and financial services, if I kind of use that as a parameter for activity in the tools business 18% obviously a lot higher than the 6% organic growth for the segments. Is there a way to kind of understand the disconnect there and is 18% so parameter for barometer for just generally…

What I can give you -- unfortunately from quarter to quarter, it’s hard to tie it exactly because there is a -- what we say is and you have probably heard us say this over and over is that the originations should roughly follow the growth of the tools groups big ticket items which is primarily tools storage in some of the larger diagnostics. So a matter of fact over the last several quarters and in again this quarter, big ticket grew greater that the tools group in general so you have that factor. Now in the full year we believe that comes out roughly parallel as the originations and big ticket sales roughly parallel, tools group big ticket sales and originations roughly are parallel and all work out. But from a quarter to quarter remember, we’re recognizing a sale to a franchisee. He is not necessarily selling it right away onwards, he necessarily doesn’t do the deal, so you have some disconnect in terms of cauterization as you cross over the month, so it’s very hard to tie quarterly numbers between originations in the tools group. I will tell you that it is indications that tools group big ticket sales were sold at higher rates year over year than the average tools group and that’s true in this quarter. Joe Vruwink - Robert W. Baird & Co.: Okay. And then...

Other than you can’t really draw much from one quarter. Joe Vruwink - Robert W. Baird & Co.: Sure, that makes sense. Switching across the pond and looking at Europe, you talk a lot about runways for growth and I’m just wondering what’s the runway in Europe not only from revenues, but Nick you think restructuring Europe C&I I think your entire 10 year at Snap-on, so what could be the OpEx goal?

It seems like it. I hate to comment on Europe anymore because I am usually wrong. But the thing is look, what happened in Europe, what’s happened in Europe is we have been continually applying Snap-on value creation, improving our productivity and efficiency even in the darkest of downturns, we have said that our customers have not gone away therefore in doing this whether it’s restructuring, in closing facilities or in creating efficiencies we have not removed productive capacity. So as I said in my remarks, that started to come home with positive traction several quarters ago where SNA Europe our European hand tool business was showing improvements and profitability even as the sales were going down. And now with the sales going upwards, it adds that, that leverage adds that because there is good leverage because we didn’t take out any productive capacity. Remember that when you talk about where is Europe and as Europe turn the corner and what’s happening in Europe, it’s still down 20% to 25% from the peak. So we’re coming, we’re literally coming off the canvas. So while we’ve had two quarters, I am still from Missouri to see where we’re going for a longer term, still it’s a positive event and it contributed nicely to C&I although it was not the only contributor to C&I. Joe Vruwink - Robert W. Baird & Co.: Okay. So when I think about your former peak margin in C&I at 13% in 2008, you're doing 13.5 now and so with Europe 20% or 25% off the top, fair to say that there is still a lot more upside there?

Sure I’ve always said that I believe there is a lot of runway in C&I actually I am pretty bullish about the C&I business, it’s just that C&I been the repository of headwinds I think, they have military, they had the European headwinds and so on, so they’ve had some difficult bumps, but we feel confident about that business, SNA Europe, the critical industries those are great businesses.

We’ll take our next question from Liam Burke with Janney Capital Markets.

Nick you talked about the Snap-on tools doing well internationally. Is one country or another doing particularly well or are you seeing just very solid international growth?

Well, generally I would say if you look back over, I think I talked about Snap-on tools growing over the years like 9% and 9.2% and 10.7% and 7.6% last year and if you look over the 16 quarters that are involved in that international grew pretty well in general. This particular quarter, UK grew nicely, better than -- about may be little bit better than the average. Canada grew even more. Australia actually was down slightly, down slightly. Some of that could have been currency. The tools group, man they got hammered with currency in terms of transaction because you’ve got the Canadian dollar weakening and you got the Aussie dollar weakening versus the U.S. dollar where we make the products we’re moving into those markets and U.S. dollars we’re shipping them in, and so does transaction impact. And so that played out a little bit in the Australian volume I think. UK has been across the company, pretty strong. I think on balance, you could say international is pretty good, but color in this quarter, Australia is may be feeling the weight of the currency problem a little bit.

Okay, great, and Aldo you had DSO step up three days. Is that timing or is this something different? Is it more international?

I would say above one-day due to the timing of sales where they fall in the collection cycle. But what you are seeing there, you’re spot on. The international mix is a little bit more robust. The term structurally in the international markets tends to be longer than that in the U.S. And then behind-the-scenes you have the fact that military is a little bit less than what it had been in prior years. The government's pays quick and the governments often times even uses credit cards. So that always helped to be a sole calculation. And then finally, if you look at emerging markets, those places that have some spot liquidity issues, places you look like at China, India, Brazil, you have a lot less cash-and-carry business, and the result, in distribution circles there you have to provide little bit more structural terms. That's normal. It goes with the terms, so as those markets mature, in our presence, and then mature, I think you will see a little bit more classic dated outstanding rather than cash-and-carry type activities.

(Operator Instructions). And we will take our next question from Gary Prestopino with Barrington Research.

Good morning all, can you hear me, all right, because I am on a cellphone?

We have a little background, but we can hear you fine.

That’s because I’m at the airport but anyway, Nick when you look at that dealer business, you said those re-facilitations were winding down. If you back out some of that business that’s winding down, do you have a sense of just what the growth was just to dealers overall?

I don't have a dealer overall growth, but I'd say it’s -- if you look at our -- one of the things that I wanted to say was is that I think we said in the call that RS&I would grow without the wind down of the dealerships. And we think it'd be mid-single digits, that kind of growth, if you pull out that OEM lumpiness. If you went back to our earnings calls last year, it was growing, we had some pretty good growth in RS&I; we are saying that some of that was accelerated by some of these movements. So, we said overtime that RS&I, the margins can be moved by that and also the growth can be a little bit lumpy. We are actually pretty pleased with it because the other businesses, particularly in the independent space are growing nicely.

Okay, it just makes sense because the dealerships are doing well too overall. And then, in terms of -- do you have any facilities business, et cetera in the Ukraine?

Yes, we have some business in the Ukraine. We have a sales office there. But its peanuts, you know, I mean really Ukraine is not -- it’s a very-very small exposure at the Ukraine. If you talk about the Ukraine and Russia, it’s a little bit bigger, but it’s still a smaller piece of the business, maybe 1% of the total for the organization. And that business, and these numbers are down, already and these numbers are down multiple decades. We have seen -- we saw some headwind here.

And then lastly I had another question on just the growth in the tool business in Europe, but if you look at your business overall in Europe, you know the southern tier countries had always been very sluggish and declines really the northern countries had been doing a little bit better. Are you starting to see a pickup in places like Spain, Italy, countries like that? Are you starting to see any growth in revenues out of those countries? Or is it specifically all the north countries?

Sure. No-no-no, actually we see revenue growth in our tools business; the SNA-Europe business in Spain and Italy, Portugal, actually France even, and Germany and so on. So we see -- sort of a center of Europe, UK is pretty good. The Eastern European businesses, as you might expect, are weak. There is some growth in Turkey, for example. So that’s kind of pushing it. I will say that, sometimes I think we went so down so far in Spain and Portugal that any kind of growth, just kind of not so big but it's still positive from what we see. It’s so positive and encouraging event, yes.

We'll take our next question from David MacGregor with Longbow Research

Yes, good morning everyone. Can you talk about the extent to which your growth in international business may have supported the large origination number?

I will take that. It was fairly evenly balanced. But the originations are still more influenced by the activity in the United States. So certainly you can look at the International portfolio grew as well, but no one do buy us one way or the other.

Okay, and you mentioned that the origination should converge with the tools business over the course of the year, that from a quarter-to-quarter standpoint, you can see divergence a bit over the course of the year that should converge. So does that imply that we’re going to see a fairly substantial reduction heading into 2Q and 3Q here in the origination?

No, I didn’t actually say, what I said specifically was it should converge with big ticket sales in the tools group.

Okay, good.

And so that doesn’t necessarily correlate exactly with the overall tools group number, in fact for many quarters they’ve been higher.

Okay. And then within that big ticket, you talked about the fact I guess storage and diagnostics are really driving the big ticket within the tools segment as I understand. Do we begin to anniversary something here in the next quarter or two that would create a substantially slower year over year growth?

Well, I don’t know. I think -- look I have said forever that I think we expect our growth to be at 4% to 6% organically and this is at the top end and we grew like I said at 9%, 9.2%, 10.7% and 7.6% in the past year, so that will be outside that. So eventually you might expect the tools group to come down to where I said, but we have some great strengths in the tools group. We are ramping up the innovation engine with customer connection and innovation so we have more new products than ever before. We have these new marketing activities which are breaking the boundaries of the van, the Rock N' Roll Cab that has 56 on the road now and they are breaking the space constraint and adding to that tools storage and we’ve raised the Techno-Vans which support the diagnostic sales to 18. A year ago, those numbers 56 and 18 were 36 and 4 and two years ago were just 18. So we are pumping more support into the tools group. So I wouldn’t want to call for a cooling on the other hand we do say over time it’s 4% to 6%. I am not saying it’s going to happen, that we’d see a reduction next quarter though, I don’t see a lapping being a factor.

Okay. Just a couple other questions, I guess on the change in working investments. Aldo you went into some detail about the things that are stressing your DSOs and that was helpful. I noticed though that going back over say the last two years, first quarter ’12 it was a 13.9 good guy in ’13 it was negative 55, and in ’14 were negative 42.5. Is that reflecting just the structural shift so the growing international business, the slowdown in military, the things that Aldo discussed here, is there something else going on there?

I think the same variables do characterize, you’re talking about just the receivables element in working capital is that [Multiple Speakers] are longer that’s a fact of life. The international mix of business does then impact that, emerging markets as they mature does move from a certain percent of business being as I said cash and carry and short term oriented to more traditional distributor terms. And finally the realization of the government is a little bit of a less of a player in our mix. They were one of the ones that have the most rapid payment terms usually and they do pay properly.

I’ll just jump in here, one of the things that is going on here is, if you shipped to C&I, I think we have of course the great progress in Europe where we’ve gotten another quarter of growth and we have been pounding Snap-on value creation, so we have nice leverage rolling out of that. But, there is also a great component of extension to critical industries where we had some big wins in aviation, those are very profitable but they’re not the military business, they change the nature of the payable of the receivables and we are not only in aviation, but we’re also extending internationally. One of the things we worried about in critical industries where we able to project and roll the Snap-on brand out of the garage into aviation and oil and gas and those things, and that’s working. And then further than that, are you able to project it internationally, well that’s really working this quarter and that’s one of the things that’s driven, that’s one of the big factor, may be the biggest factor in driving the 10.4% growth in C&I and a great component of the 200 basis points improvement.

Yes, okay. And the last question if I could, just last question, you paid down 100 million of debt in the quarter. Clearly the balance sheet is over capitalized at this point. I don’t want to be the guy to force or pound the table, but you need to do acquisitions I hate to see you stress that. But what is your thought process on just using some of this capitalization capacity to buyback more stock rather than wait for opportunities to surface on the M&A front?

Well, I think we’ve made it clear that, two factors I’ll say, our priorities for cash are; working capital investment and the organic business you just pointed out, some of the requirements we can have as we expand our business to different places. We see it in our working capital today; we’re growing but its eating working capital. We knew this was coming. We are looking at M&A. We view each months, we’re reviewing a list of M&A and we will act on this and we’re confident we can find targets because we keep looking at severely each month; thirdly, we keep our dividend in perpetuity and we know our investors like that dividend, like those dividends and it depends on it, and then the idea of buying back stock to offset dilution. We see that as our cash priority. And I would add on top of that though, that’s our current cash priority, but I would add on top of it, we know that as we generate cash and have capability, we will be judged on how we wheel that, we know that.

Are you considering large transformative acquisitions or are they...

No nothing transformative. We think we can make acquisitions, we’ve seen several large acquisitions that didn’t quite work out that were sort of semi-coherent, on closer look it wasn’t. We believe we can make acquisitions that give us more to sell and more strength with the customer basis that are along our runways for growth, that is the technicians, the repair shop owners and managers, people in the critical industries are in emerging markets. And we can do that without having to transform.

So if we got to the end of the year and you still hadn’t done a larger transaction, you still had the kind of overcapitalized balance sheet you have today. Would you consider accelerating share repurchase activity?

I am not sure. I’d wait till I get to the end of the year at that.

And next we’ll go to Richard Hilgert with Morningstar.

I wanted to ask about, on the military spending, has that now completely anniversaried, in other words the first quarter last year was the quarter where we really saw a big decline in that area of the business, correct?

Actually I think it was the fourth quarter of the prior year, but if the answer is it completely anniversaried, the answer is no, because it keeps going down but the base is smaller. So the impact on us -- it isn’t that it didn’t impact us, it did. But the base on which the reduction is operating is smaller; therefore it’s less of an irritant. It doesn’t create the screen in C&I that it did before. So the way I characterize in my script and I think this is accurate, it no longer masks some of the progress that was happening because it’s smaller. I mean basically that business is down, more than half, its way down. So it keeps coming down, and was down in the quarter couple of decades of percentages. So it was down again, but the base that it operates thus far.

Is the European hand tools business that you mentioned that improved for the first time in quite a while? Was that down about the same kind of magnitude that military was down?

No, not that much but it was down let’s say 25% in sales.

And then on the Challenger Lift business, is the nature of that equipment and the historic margins such that this would represent, always represent margins that are less than that segment’s average and therefore if sales in that business increase more so than the sales in the rest of RS&I, it would cause margins to be slightly diluted?

If the question is, I mean I think this is the question. Is the Challenger margin -- are the Challenger margins 23%? The answer is no. And therefore for some time and for either substantially lower than that, so for some time growth in Challenger margins, [indiscernible] Challenger sales would be detrimental to the overall RS&I margin numbers. However it might help, it might raise its profitability for the corporation and so on. And by the way, we’ll be working on the Challenger margins over time with Snap-on value creation to keep improving it. But there is a big gap between the Snap-on, between the Challenger margins and the overall RS&I margins.

That gap is what is actually I was getting at and what I was getting at is that is Challenger is just the nature of this product and the pricing in that segment of the business such that you’ll never get to the 20 some odd percent that the RS&I group does, it will always be lower than that general mark.

Well, yes, I guess, I mean I think is sure always is a long time even for a guy like me. And I have a lot of confidence in Snap-on value creation, so I think it can move it upwards. So I would never see the idea that never get there. But it’s certainly a long pull. Now remember though, that we lap the acquisition in the second quarter. So we acquired Challenger, I don’t know half way to two-thirds of the way through the second quarter of last year. So once we get into the third quarter, its apples-to-apples. What you’re seeing now with the drag is in apples-to-oranges comparison, that’s why we (want) [ph] it out. I mean RS&I actually had a pretty good quarter, it had 60 basis points of restructuring impact year-over-year and another multiple decade, a doll-up of Challenger impact and that occluded the relatively strong RCI achievement that it made in the 50 to 60 basis points.

Certainly was an impressive quarter on margin performance. Thanks for taking my questions this morning.

And we have no further question in the queue at this time.

Thanks everyone for joining us this morning, a replay of the call will be available on snapon.com shortly. And as always, we do appreciate your interest in the company. Thanks a lot.

This does conclude today’s presentation. We thank you all for your participation.