Operator: Good day, and welcome to the Snap-on 2013 Second Quarter Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Leslie Kratcoski. Please go ahead, ma'am.
Leslie H. Kratcoski - VP, IR: Thanks, Melanie, and good morning, everyone. Thanks for joining us today to review Snap-on's second quarter 2013 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.
With that said, I'd now like to turn the call over to Nick Pinchuk. Nick?
Nicholas T. Pinchuk - Chairman and CEO: Thanks, Leslie. Good morning, everybody. I'll start out today with the highlights of our second quarter. I'll cover the general environment and I'll discuss some of the progress down our runways for both growth and improvement. Aldo will then provide a detailed review of the financials. Much as we have seen over the past several quarters, we were again able to overcome the substantial headwinds to post solid sales and profit gains. Our organic sales increased 3.1% from last year's level with OpCo operating income rising to $117.8 million or 15.4% of sales, and financial services contributed an additional $30.6 million, up $5 million from last year. It all added up to a consolidated operating margin equal to 18.4% of revenues. And an EPS of $1.50, which is up more than 15% from last year's $1.30.
Now, there are couple of items in this year's year-over-year comparison that should be noted. First, last year's results were impacted by relatively high restructuring charges, which included $6.8 million for pension settlement at our now closed Canadian Tool Storage facility. Also this year, we incurred $4.4 million of higher stock-based mark-to-market cost that was primarily related to our recent share price increase and to more participation in our longstanding employee and franchisees stock purchase program. But even after adjusting for these two items, we believe that the year-over-year comparisons represent encouraging progress. Related to our quarterly sales of $764.1 million, in addition to the 3.1% organic increase we also had $8.5 million or 120 basis points contribution from our recent acquisition of Challenger Lifts along with the negative 70 basis point impact from foreign currency the total result with an overall sales increase of 3.6%.
Now the macro level, we haven't seen much change in the external environment from the last two quarters. Our Tools Group and our Repair Systems & Information or RS&I Group both which primarily serve the automotive repair sector are showing mid-to-high single-digit volume gains. However, those increases in the generally favorable market environments in those automotive related segments are somewhat offset by commercial and industrial or the C&I Group.
You may remember that the businesses in C&I are where we feel the brunt of our major headwinds and the overall unevenness in the world economies. You see it continuing this quarter mainly with softness in Europe and the impact on S&A Europe. Our hand tool business based in that region and in reduced military spending driven by troop withdrawals and budgetary constraints. So there are challenges, but as I see it there is also further progress. We do believe that this quarter's results clearly demonstrate the benefits of (indiscernible) the strategies we're pursuing as we proceed down our runways for both growth and improvement. For growth we've identified four areas that are critical to our future, enhancing the franchise channel, expanding in the garage, building in emerging-markets, and extending into critical industries, and again this quarter, strategic progress in those areas more than offset the impact of the external headwinds.
Let me focus for a moment on customer connection and innovation. These are two key components of Snap-on value creation and they're helping drive our growth. Just this past quarter Snap-on was again recognized for innovation when Professional Tool & Equipment News or PTEN recognized us with their top innovation awards in five categories.
I've mentioned some of these products in the past and I'll highlight a few more now on the heels of their wins. In the tool storage category Snap-on was recognized for our diagnostic mobile workstation. It's a complete diagnostic and information system packaged in a secure fully enclosed unit that on wheel, so can easily be moved around the garage going right to where the work needs to be done. The station was designed for use with our VERDICT handheld unit, it provides custom form cut-outs, organization of accessories, (indiscernible) and plenty of storage space for other tools.
Another of these award winning products was the AC Touchless Wheel Clamp. This unique design allows alignment (indiscernible) to securely clamp it higher in one single and fast motion without touching the rim. Now today that's important because today's cars have ever more varied and sensitive and expensive rims. People worry about rim damage (indiscernible).
Lastly, of these recent winners – and lastly of the recent winners, I'll mention the BK8000, Wireless Digital Inspection Scope. This tool provides the technician with the ability to visually inspect areas that are normally inaccessible but are important to speed; like under the dash, tiny engine block, inside the transmission housing of engine. It has a screen that's 40% larger than the competition, touch interface, rechargeable lithium battery and more memory than ever before for digital video. This scope is a worthy winner of this award and it is a popular seller.
One important additional fact that everybody should know or recognize is that the PTEN Award is that they are voted on by actual users. So, the Snap-on products selected its innovation leaders were chosen by a panel that included active technicians and shop owners those who will actually use the product. We believe that customer connection is a big advantage for Snap-on with our 4800 franchisees around the world hundreds of direct sales people calling on 600,000 repair shops and many more critical work sites. We have great insight into products that will make work easier for professionals. The PTEN Awards selected by the same professionals are evidence that customer connection and innovation are advantages for Snap-on and you can see it in the results.
Now, demonstrating our balance between growth and improvement, we also saw stronger operating performance in the quarter, in fact, the OpCo operating margin of 15.4% recorded in the period does represent a new level. You see every day, we'll climb the elements of Snap-on value creation, safety, quality, customer connection, innovation, and rapid continuous improvement or RCI. It's a focus that moves up along the runways for improvement and the gains can be seen not just in those areas benefitting from increased volume, but other price, in fact maybe more selling.
Even though C&I Group was down in sale this quarter, it still achieved the 12.6% operating margin. The impact of the sales decline was checked and limited, that's Snap-on value creation.
Speaking of C&I, I'll move to a discussion of each of our segments, C&I sales of $266.2 million were down 5.4% organically with an additional 70 basis point drop from currency. Operating income of $32.6 million, actually was up as I said a reasonable job of eliminating the impact from the drop in volume.
For the Group, there really wasn't much change from last quarter's sales picture. The year-over-year activity comparisons were about what we've seen in the past. S&A Europe was down, high single-digits overall, but their profits were up, the benefits of RCI and the restructuring actions we've taken in prior periods. As expected military was down again big double-digits. So, the headwinds and trends remained about the same with the normal period-to-period variation seen across individual markets.
In short, our overall view and outlook remains the same. The military decline did more than offset gains elsewhere in industrial business. Remember this is the business that's primarily focused on extending the Snap-on reach into critical industries; places like aviation, mining and oil and gas.
In the past I've spoken of expanded product line to serve customers in those critical industries and we continue to have successes with new customers and products. One highlight this quarter was strong gains with international aerospace customers. We're reaching more maintenance, repair and overall facilities around the globe and that extension is aided by products like our Control Tech Electronic Torque Wrenche patented technology to achieve the fastest and most accurate torque and angle combo in a single motion, added durability important for the critical industry environment. An audible indicator of vibrating handle and LED display all to alert the technician as the proper torque is achieved and bring him right in on target.
It incorporates Snap-on's Dual 80 Technology, providing more precise yet stronger ratcheting. It just launched, just launched this past quarter, and it's being well received by professional across the critical industries. One more point, one last point, remember that C&I is where we have our primary effort to penetrate emerging economies.
These geographies were much as we saw in the first quarter with India, the Philippines, Turkey and Russia being particularly positive this quarter. So we continue to build position and make progress along that decisive runway.
Let's move to the Tools Group; organic sales were up 7%, an encouraging volume gain. The operating margin of 15.7% in the quarter represents a new high for the group and compares to 13.7% recorded last year. Now you remember that there were higher restructuring charge in the second quarter of 2012, $6.9 million of which was in the Tools Group, mainly for the Canadian pension settlement.
I also mentioned the franchisee stock purchase plan. This quarter we have 1.8 million higher costs associated with that (plain in) and Tools Group. These two items impact year-over-year comparisons, but adjusting each year for the two items this year's operating margin of 16.3% would compare to last year at 15.8%, still strong growth.
For the Tools Group, big ticket sales were significant growth drivers in this period. Diagnostics and tool storage unit those products were strong. We believe it is important for us we believe that big ticket activity provides meaningful evidence of the financial wellbeing of our customers and is a good barometer on the overall health of the auto repair sector and those big ticket sales are being supported by Snap-on credit, it is an important advantage for us. Not only is credit helping to drive big ticket activity in North America but we are now extending some of that advantage to the international van operation. The well-established programs and expertise we've developed here are being applied to our advantage in places like U.K. and Australia improving service, increasing customer satisfaction and driving more growth.
Tools Group performance was also driven by customer connection innovation. Three of the five PTEN Innovation Award winners are sold by our franchisees and there are many more new products like the innovative S6810 impact flip socket and 8 millimeter and 10 millimeter hex on the same tool, saving technicians valuable time, moving today's underbody panels that have dozens of different in size fasteners, a process required even for routine repair and maintenance. This tool is a big savior. Products like our new digital display circuit tester that provides the technicians with no guess voltage rather than having to estimate it based on volt brightness. We took technology and features from a more advanced multimedia and applied it to a common handheld texture.
Now, it sounds simple, but since April we've sold tens of thousands of them, well over $1 million in value. The Group's performance testify that we are progressing along the strategic runway of enhancing the van channel. You can see it in the franchisee health metrics, sales up, franchisee turnover down, trends positive. So based on the second quarter, the Tools Group appears to be hitting on a lot of cylinders.
Now for (indiscernible), our total sales increase of 8.7%, which is made up of an organic rise of 4.9%, an additional contribution of 380 basis points from the acquisition of Challenger Lifts and a 40 basis points impact from unfavorable foreign exchange. The operating margin was a strong 23%.
We continue to see strength in our business providing independent shops with diagnostics and repair information and then serving OEM dealerships with essential hard and diagnostics tools and with electronic parts catalogues. Gains in those businesses drove RS&I growth in spite of flat sales for undercar equipment, a product line that has been impacted by the decline in Europe where we have a relatively large position.
Obviously, one of the big highlights for RS&I this quarter was the Challenger Lifts acquisition in mid-May. We're excited we had challenges to our portfolio; a well established brand, a complimentary product line. We believe that the acquisition is a step along our path of coherent growth. It will broaden our product line and help us to better serve customers who are repair shop owners and managers.
Moving away from undercar equipment, Snap-on's presence it expanding in other parts of the garage and here to the gains are driven by an ever-growing offering of innovative and new products. Like entry-level diagnostics, earlier this year we launched the successful MICROSCAN III and (indiscernible) plus in North America, basic diagnostics. Now in the second quarter, we rolled them out internationally and U.K. and they're quite popular. These are important entree products introducing technicians to Snap-on capability, creating customers for life who transition into utilizing our full diagnostics line-up.
Mitchell1; our repair information business has also been launching new products to serve the important medium and heavy-duty truck market. Our new truck labor estimating product, we believe the most complete such database available for estimating truck repair has been well received and adds to our already strong and growing line-up in that segment.
It's clear to us that we're gaining traction with truck repair, shop owners and managers. You can see it with this new estimating product and it's evident with our truck repair information offering, which registered a 25% increase in customers since this time last year. So, that's the highlights of our quarter.
Advancements along our runways for growth and for improvement, continued expansion with strengths in the Tools Group and RS&I, overcoming the external challenges in C&I and its headwind and better performance Snap-on value creation driving improvements, higher profitability across the corporation despite the challenges.
Now, I'll turn the call over to Aldo before making a few closing comments. Aldo?
Aldo J. Pagliari - SVP, Finance and CFO: Thanks Nick. Our second quarter consolidated operating results are summarized on Slide 6. Net sales of $764.1 million in the quarter, increased 3.6% from 2012 levels. On an organic basis sales increased 3.1%, excluding $8.5 million of sales from Challenger Lifts and an unfavorable $4.7 million impact from foreign currency translation.
The year-over-year organic sales increase primarily reflects continued higher sales of the Snap-on Tools Group along with higher sales to OEM dealerships and increased sales of diagnostics and repair information products. These sales increases more than offset lower sales to the military and lower sales in our European-based hand tools business.
Consolidated gross profit of $373.2 million increased $23.3 million from 2012 levels. Gross margin of 48.8% improved 140 basis points, largely due to lower restructuring costs as well as savings from ongoing rapid continuous improvement or RCI initiatives.
Operating expenses of $255.4 million increased $10.1 million primarily due to higher volume related expenses and $4.4 million of increased stock-based and mark-to-market expenses. The operating expense margin of 33.4% compared with 33.2% last year.
Restructuring cost in the quarter totaled $1.8 million. Last year restructuring cost totaled 10.2 million and included $6.8 million to the settlement of a pension plan following the 2011 closure of our new market Canada facility. As a result of these factors, operating earnings before financial services of $117.8 million increased 12.6% and as a percentage of sales improved 120 basis points from prior year levels.
Operating earnings from financial services of $30.6 million increased $5 million or 19.5% over prior year levels. Consolidated operating earnings of 148.4 million increased 14% over 2012 levels and the operating margin of 18.4% improved 170 basis points from 16.7% a year ago. Our second quarter effective income tax rate was 32.5%. We continue to expect that our full year 2013 effective tax rate will be comparable to our 2012 full year rate of 32.8%.
Finally, net earnings in the quarter of $88.4 million or $1.50 per diluted share compared to net earnings of $76.4 million or $1.30 per share last year representing a 15.4% increase in diluted earnings per share.
Now, let's turn to our segment results. Starting with the Commercial and Industrial, our C&I Group on Slide 7, sales of $266.2 million were down 5.4% organically from 2012 levels primarily due to a double-digit decline in sales to the military and high single-digit sales decline in our European based hand tools business as a result of ongoing economic weakness in that region. Gross profit in the C&I Group totaled $105.4 million in the year. Gross margin of 39.6% improved 280 basis points from 36.8% last year, primarily due to savings from ongoing RCI initiatives, particularly in Europe and lower restructuring cost.
Operating expenses of $71.8 million in the quarter were essentially flat with prior year levels. The operating expense margin of 27%, however, increased from 25.2% last year primarily due to lower sales. As a result of these factors, second quarter operating earnings of $33.6 million for the C&I segment increased $800,000 from 2012 levels and the operating margin of 12.6% improved 100 basis points from 11.6% last year.
Turning now to Slide 8, second quarter sales of the Snap-on Tools Group of $346.2 million increased 7% organically, reflecting increases across both our U.S. and international franchise operations.
Gross profit of $152.9 million increased $15.9 million from 2012 levels, primarily due to $6.8 million of lower restructuring cost. The gross margin of 44.2% in the quarter increased 200 basis points from 42.2% last year.
Operating expenses of $98.4 million in the quarter increased $5.9 million from 2012 levels, primarily due to higher volume related cost and $1.8 million of increased stock-based and mark-to-market expenses associated with our franchisee stock purchase plan. The operating expense margin was 28.5% in both the second quarters of 2013 and 2012.
As a result of these factors, operating earnings of $54.5 million for the Snap-on Tools Group increased $10 million from prior year levels and the operating margin of 15.7% increased 200 basis points from 13.7% last year.
Turning to the Repair Systems and Information or RS&I Group shown on Slide 9. Sales of $246.2 million increased 8.3% from 2012 levels, including $8.5 million of sales from the recent acquisition of Challenger. Excluding the Challenger sales and unfavorable foreign currency translation, organic sales in the quarter increased $11.1 million or 4.9%, primarily due to a high single digit gain in sales to OEM dealerships and a mid-single digit gain in sales of diagnostics and repair information products.
Gross profit totaled $114.9 million in the quarter. The gross margin of 46.7% decreased 110 basis points from 47.8% last year, primarily due to a shift in sales mix that included higher volumes of lower gross margin products including higher sales of essential tool and facilitation products to OEM dealerships, and sales from the Challenger acquisition. These gross margin decreases were partially offset by continued savings from ongoing RCI initiatives.
Operating expenses totaled $58.2 million in the quarter and the operating expense margin of 23.7% improved 110 basis points from 2012 levels. Primarily due to contributions from sales volume leverage, including the effects from the sales mix shift discussed above and savings from ongoing RCI initiatives.
Second quarter operating earnings of $56.7 million to the RS&I Group increased $4.5 million from prior year levels and the operating margin was 23% in both the second quarters of 2013 and 2012.
Now turning to Slide 10; in the second quarter earnings from Financial Services increased $5 million, or 19.5% and originations of $203.1 million rose 15.7% year-over-year. Revenues in the quarter increased 4.6 million, primarily due to continued growth of the on-book finance portfolio and higher average yields. The average yield on finance receivables of 17.4% in the quarter increased 30 basis points from 17.1% last year and the average yield on contract receivables of 9.6% in the quarter increased 20 basis points from 2012 levels.
Moving to Slide 11, our quarter-end balance sheet includes approximately $1.15 billion of gross financing receivables including $976 million from our U.S. Snap-on credit operation and $169 million from our international finance subsidiaries. In the U.S. $785 million or 80% of the financing portfolio relates to extended credit loans to technicians. Year-to-date our worldwide on-book financing portfolio grew approximately $61 million.
For the 2013 full year, we anticipate that the gross on-book finance portfolio will increase by approximately $100 million over 2012 year-end levels. As for finance portfolio losses and delinquency trends, is continued to be in line with our expectations. I’ll also note that the CIT owned portfolio which continues to be managed by Snap-on credit is down to $35 million with the extended credit portion at $5 million.
Now turning to Slide 12, cash provided by operations of $110.1 million in the quarter increased $18.4 million from $91.7 million last year. This quarter we made cash contributions of $10.4 million to our U.S. pension plans including $10 million of discretionary contributions.
Also in the quarter in investing activities, cash of $52.5 million was used to support a net increase and finance receivables. Capital expenditures of $16.7 million in the quarter compared with capital expenditures of $18 million last year. For the full year, we continue to expect that capital expenditures will be in the range of $70 million to $80 million.
Turning to Slide 13, day sales outstanding for trade receivables of 61 days was unchanged from 2012 year-end levels. Excluding the impact of currency, inventories increased $25 million including inventories from the Challenger acquisition. On a trailing 12 month basis, inventory turns of 3.8 times compared with 3.9 times at year-end. Our quarter-end cash position of $174.7 million reflects the year-to-date net funding of $74.4 million of finance receivables, share repurchases of $62.1 million, dividend payments of $44.4 million and the acquisition of Challenger for $38.2 million, as well as capital expenditures of $31.4 million. These uses of cash were largely offset by cash generated from operations, including higher levels of net income.
Our net debt to capital ratio of 29.9% compares to 29.7% at 2012 year-end. In addition to our $175 million of cash and expected cash flow from operations, we have more than $700 million in available credit facilities and our current short-term credit ratings allow us to access the commercial paper market should we choose to do so. At quarter-end, no amounts were outstanding under any of these facilities.
This concludes my remarks on our second quarter performance. I'll now turn the call over to Nick for his closing thoughts. Nick?
Nicholas T. Pinchuk - Chairman and CEO: Thanks Aldo. Our second quarter was encouraging. The Tools Group growing and getting stronger, franchisee helped metrics trending positive, new products creating excitement across our customer base, volume up 7%, profits continuing their rise to 15.7%.
C&I, challenged by ongoing headwinds, but offsetting the impact of the volume decrease, with strong operating performance. Sales were down, but profits were up with an OI margin at 12.6%. In RS&I, expanding with repair shop owners and manager's independent and OEM dealerships maintaining encouraging levels of profitability. Organic growth at 4.9% and profits at 23%, a coherent acquisition focused on repair shop owners and managers brought on board with positive effects.
Overall, we believe the quarter's performance offers a bundle of evidence that the Snap-on future is playing out growth and improvement. We believe we will continue to advance along those two broad run way as we move forward throughout the year and into 2014.
Before I close, I recognize that the encouraging results of the second quarter would not have been possible without our extraordinary franchisees and associates. Once again, I know many of you are listening to this call. So, for the success and progress you have achieved (you have) my congratulations. And for your contribution, commitment and support you have my thanks.
Now, I will turn the call over to the operator. Operator?
Operator: David Leiker, Robert W. Baird.
David Leiker - Robert W. Baird: Couple of things here. As we look at C&I business can you give us any color on the sequential performance (indiscernible) year-over-year, but are you seeing things stabilize when you look at it relative to Q1 or are we still declining?
Nicholas T. Pinchuk - Chairman and CEO: No. I think you are looking at similar – I think we would characterize it as not congruent, but similar to Q1. I think I said in Q1 that military is still down big time, but it is operating on a somewhat lower base and that's the primary difference between 6%. I think it was down 6.3% year-over-year in the first quarter, it is down about 5.4% in this quarter. That's the major player. You got some that goes ins and goes outs in terms of okay, from critical industries, one critical industry is up in the first quarter and the stars are maybe mining in the second quarter and things like that, you got those things up and down. Then in Asia Pacific, in our emerging markets you got, including Eastern Europe you got some ups and downs in markets, but pretty much the same stuff. We are seeing another constant though a positive constant is that the effects of Snap-on value creation I think are working pretty well, and I think sequentially the sales aren't much different, but the profitability is higher. So, that's looking pretty good, well as we look at it sequentially or year-over-year, you can see the effects of Snap-on value creation working through and you can see it actually very dramatically in Europe where the sales are down again high single-digits and the profits are up. So sort of a similar quarter for us.
David Leiker - Robert W. Baird: So, is that all true for the European Tool business as well if that is stabilizing here sequentially?
Nicholas T. Pinchuk - Chairman and CEO: I'd say it's not decelerating downwards like it had been for a while, sort of stabilizing. We're not seeing worsening, but I think that's a fair statement, yes.
David Leiker - Robert W. Baird: Then as we look at the Tool business and you had some great initiatives over the last several years that drive productivity and sell more products to the van channel, sounds like you're starting to take into your international market. Can you talk where you are in the timeline of that and weather we could see a similar response in those international markets that we've seen in the U.S. markets in recent years.
Nicholas T. Pinchuk - Chairman and CEO: It's very early days in that regard. So, because the international markets are -- the vans are even though we kind of say the vans -- we talk about them as vans, the vans in England are slightly different than the vans in Australia, that are slightly different than the vans in U.S. So, we're very early days in that. So, I think you just got to stay tuned in that regard. Our van business – we're still building the marketing efforts. You can see written on the face of the Tools Group financials we're still spending more on our marketing, for example I think we've got, what is it 42 Rock 'n Roll vans now and that's up and we're going through like 51 by the end of the third quarter and we've got a new van called the Techno vans. This is – you remember that Rock 'n Roll Cab Express was focused on tool storage compared to eight selling and tool storage where we have these new vans, four of them on the road now, which talk about diagnostics, particularly the big ticket diagnostic. You get on this thing it got flat screens all over the place, it allows the customer to kind of shop owner or the technician to work the thing on a big 16 by 9 screen, so it's dramatic for them. It shows them all the features of the diagnostic, so it's working pretty well for us. We have four of them, now we are going to I think 10 by the end of the third quarter.
Operator: David MacGregor, Longbow Research.
David MacGregor - Longbow Research: Great quarter Nick.
Nicholas T. Pinchuk - Chairman and CEO: I think this is a – the OI margin was a high watermark. The EPS was a high watermark, but you're kind of – when you're moving upwards, you expect to have a high watermark every year.
David MacGregor - Longbow Research: Few questions, before I ask my questions, I guess the first one is just what's (indiscernible) 15% was kind of the target margin, and I'm just wondering if it's comfortable sort of (indiscernible) of your growth.
Nicholas T. Pinchuk - Chairman and CEO: I know, but before I get overheated about the 15%, remember that I kind of said mid-teens, but for like a year. So I kind of think it's more or less a year, and I'll point to everybody like I do every second quarter call that our third quarter have some seasonal issues – no, I don't want to say issues but seasonal headwinds in terms of the vacations in European and the van drivers got to take vacation sometime, and they usually do it in the third quarter. So, our third quarter is usually – I am not forecasting bad news, I am just saying it is more emphasize and more capricious than other quarters. And I think if you look over history, it is usually our weaker quarter. So, you kind of got to look at it is over full year basis.
David MacGregor - Longbow Research: First question just on the tools business, you talked about the strength in big ticket. That 7% organic growth is there some way we could sort of bifurcate that between ticket and transaction. What was the growth from the average ticket?
Nicholas T. Pinchuk - Chairman and CEO: I don't really want to get into it on that granularity. I will just tell you that big ticket was substantially – bigger than the 7%. It was quite strong. I don't want to tie myself to that wheel of explaining that big ticket and small ticket every quarter because there is a lot of variation. But I will tell you that, and the reason why, I don't know if you recall this but the reason why we focus on big ticket is we learn that it is a indicator of weakness of the economics in the marketplace because during the recession we saw some really weak numbers on big ticket. People demurred or decided not to purchase. In fact they were seeing this makes us feel pretty good about the marketplace.
David MacGregor - Longbow Research: Can you say what big ticket represents as a percentage of the segment?
Nicholas T. Pinchuk - Chairman and CEO: I don't know if I have that number actually. But I think you could say like between tool storage and big ticket diagnostics my ballpark sausage math would say like a quarter something like that. (Indiscernible) detail, but I'd say around that number.
David MacGregor - Longbow Research: Last quarter you talked about sort of the three month pattern within the quarter, I wondered if I could get you to just address that again this quarter, how the three month pattern played out? Did you see strength at the end of the quarter that is always due…?
Nicholas T. Pinchuk - Chairman and CEO: We always see a little bit of strength at the end of the quarter. I don't know -- I've been in business, I don't know decades and I see this everywhere and you always see that kind of thing at the end of the quarter. But I'd tell you, I wouldn't say it didn't happen like the first quarter, remember what I said in the first quarter I think that, I said the first quarter was dominated by the idea that things were very weak in the first couple of weeks of 2013, I think it had to do with uncertainty around sequestration and what will be the social security tax increase and the changes in the tax rates. And I think we found that our customers were afflicted by the bad – bad news for breakfast that we're seeing every morning and then we saw a build through the quarter. I'm not sure people thought kind of believe me, but I think this played out in the second quarter. Our Tools Group growth was at 3.5% or so on or 3 and change in the first quarter, but we said it was stronger at the end, and that growth move –carried on into the second quarter. But I wouldn't say in the second quarter it was to the same incentives as the first quarter. we didn't have some terrible time and then move on towards the end of the quarter.
David MacGregor - Longbow Research: Sounds like it was more linear. I want…
Nicholas T. Pinchuk - Chairman and CEO: I'll remind you that despite the fact we got 7%, we always say that we've grown like 4% to 6% organically in the Tools Group as sort of the bottom of that.
David MacGregor - Longbow Research: Then, on the RCI achievements, can you just talk about how much RCI contributed to the quarter?
Nicholas T. Pinchuk - Chairman and CEO: I can talk about it in terms of – a let me not talk about in terms of OI or something like that. But let's say if you look at our margin improvement 120 basis points, right? You could say 110 of that is restructuring sure, but it was the stock plan that cost you 50 basis points, 60 basis points, Challenger is the weaker profitability than average it's a 10 and 40 from – so you put those negatives together it's about 100, between volume and RCI you got another 110 positive, so I think RCI is 80 basis points, 90 basis points of positiveness.
David MacGregor - Longbow Research: Is it fair to say most of that was in Europe?
Nicholas T. Pinchuk - Chairman and CEO: A lot of it was in Europe, but I would say that we had good progress in a lot of different places. Our RS&I, which is only 25% Europe had good RCI and Tools Group made some RCI contributions too. If you peel their results you'll find it. So, I think we saw it everywhere, but more in Europe into a varying degree there.
David MacGregor - Longbow Research: But just if you take the industrials business out of C&I and isolate that, so excluding Europe and excluding Asia and just talking about your critical industries, you obviously had negative comp – big negative comp in the military business, it sounds like mining was good. If you view those as a portfolio of businesses it sounds like they were up year-over-year, can you talk to the extent which they were up year-over-year and to the extent which they were…
Nicholas T. Pinchuk - Chairman and CEO: I would just say they were up single digits year-over-year if you take out the U.S. military. We got good news in mining, the international business. We're finding, we're reaching out – the cool thing about that is we're now seeming to be able to project ourselves better in that business even to the international businesses. So we felt okay about that. I just want to clarify one think, I'm sitting here and thinking your question about big ticket, where you asking the total corporation at Tools Group.
David MacGregor - Longbow Research: I was thinking about the Tools Group, but…
Nicholas T. Pinchuk - Chairman and CEO: Sorry, I gave you the total corporation, Tools Group is somewhere like 35% to 40%, something like that.
Operator: Gary Prestopino, Barrington Research Associates.
Gary Prestopino - Barrington Research Associates: You are talking a lot about new products. That's all good. Are you kind of accelerating some new product introductions as you are growing here. You always had a goal of 40 new products with $1 million of sales or more, has that been accelerated?
Nicholas T. Pinchuk - Chairman and CEO: Yeah, it is. We are getting better at it. That's simple point. I think our customer connection and our innovation. I think you've been through our innovation works you could see where we take customer observation up close to design and it is all part of Snap-on value creation processes and it didn't take – Snap-on knew how they were developing products before, of course. We have the idea of being in the workplace and observing it, but now we've boiled it down to repeatable and reliable processes and we get better at that. So, we are getting better at documenting what we see. In other words, determining a sense of the practical, what's needed in the workplace and then we are adding higher – I don't want to say hi-tech because a lot of people have this stuff, but for us higher-tech stuff; like x-ray diffractometers and electron microscopes and more use of finite element analysis. So, we model in 3D printers and that stuff. So, we are sort of upgrading our engineering capability to do what it has ever been before. I am not saying it is anything better than anybody else, but upgrading of where we had and it is coming together for more new products. And I think I said that last year our new products are hits that were $1 million sellers or six or seven times what they were in 2006. So, we are rolling out new products. And I feel what this is an important thing because I’ve just not (indiscernible) van the other day and upturn was constant and a guy gets on a van and he says this is the guy who have been working about 25 years a tech working on transmissions and I remember the guys name, but I won’t say it on the phone is on our (auto up here) and he says; geez, I got a huge number of ratchets but look at these new ratchets they are going to help me and save me a lot of time, so we bought two new ratchets even though we had like 15 or 16 ratchets already. So, that's an important characteristic of our growth – scenario is that cars keep changing and the faster we can bring out new cars guided by customer connection – new products, new tools guided by customer connection, the better we grow the more share we take. That was a good example, about the other day and we are doing more of that.
Gary Prestopino - Barrington Research Associates: Can we maybe just talk about Europe in terms of – you'd always said that Southern tier was weak, the Northern tier was holding its own. Are you seeing the Northern tier kind of slip here talking about France, Germany…?
Nicholas T. Pinchuk - Chairman and CEO: I don’t like to hear the word France, it gives me headache, now these days. It wasn’t so good last quarter. So, France, you are right. I don’t want to overplay southern Europe. I mean, Southern Europe is again so small for us, that it's getting lesser and lesser factor but Southern Europe was down but the core Europe France was down pretty – was weak this quarter, Benelux was weak, Germany was a little better, the U.K. was better, Sweden was weaker. So in general you're right. So if you're talking about year-over-year comparison, South got a little better, the quarter got a little worse, the periphery was good. So, like I said we feel good about Europe, of our RS&I Europe business because one, we're not taking capacity down, yet we're finding RCI improvements, we're finding improvement, so we have higher profitability on lower sales, and two, we haven't dismantled the value creating nature of the business because anybody who has money that is the periphery, places like Russia and Northern Africa and so on, and the Middle East, they're buying, so that's a endorsement. What's happened in the year, they're still pretty strong. They're just waiting for the markets to come back.
Gary Prestopino - Barrington Research Associates: Then the last question would be in terms of the emerging markets, you've always said that that was 5% to 10% of sales; I would assume that that's trending closer to the 10% or has it exceeded?
Nicholas T. Pinchuk - Chairman and CEO: Closer to 10%, no. It's a slice over 10%. Of course you realize our numbers aren't that precise and so on in all these, but it's over 10%. So we're moving upwards.
Operator: Liam Burke, Janney Capital Markets.
Liam Burke - Janney Capital Market: Nick you talked about the profitability step up in the C&I segment in Europe, looking at the critical industries business without Europe. Did you still see gross margin step up as well in the rest of the segment?
Nicholas T. Pinchuk - Chairman and CEO: Yeah, you see productivity improvements, of course we spend in that segment to try to extend into Europe for example. The idea I think in my remarks I talked about international aviation business and if you just strip back the core business, you like the profitability of it. On the other hand, we have like in the Tools Group we have an overlay of spending to talk about penetration, but still I like the profitability to this.
Liam Burke - Janney Capital Market: You made the Challenger acquisition this quarter. Is the pipeline continuing to be healthy there on the acquisition front?
Nicholas T. Pinchuk - Chairman and CEO: Challengers is a great poster shop or the type of acquisition we make, not necessarily the size, although it is not a bad. We like that size, but it doesn't mean we wouldn't do bigger. But it is right down our wheel house. We think about giving us more to sell to one of our key customer bases. So, we have a series of acquisitions that we keep looking and Challenger was I guess the first one we've done in a while after the credit company, I like to say the credit company being in acquisition given that it was $800 million or so. And we have a pipeline. We continue to work on it.
Operator: Adam Brooks, Sidoti & Company, LLC.
Adam Brooks - Sidoti & Company, LLC: Just a few quick questions here. Given performance in C&I the last few quarters, do you have a more optimistic view on the long-term margin. Can we get to that mid-teen range just as in the segment or has nothing really changed and this is kind of what you had been expecting?
Nicholas T. Pinchuk - Chairman and CEO: I am not quite sure. Let me try to answer, (indiscernible). I see this as a mature mid-teens because I think I have always said how I have done this I have said look we are going to the mid-teens, the components of that would be the RS&I Group up around 20s, the Tools Group kind of around the mid-group and C&I hanging around little bit below that but approaching mid-teens. And I have full confidence that's the case. C&I we are kind of happy about the C&I, we are kind of happy about the C&I quarter, the 12.6% is pretty strong, if you look at historical performance of C&I and yet it’s taken all these hits from the headwinds. That's headwind city for us. You got Europe, you've got the military, it's a tougher place to be these days but they performed pretty well. So, I see them moving on up, I’m not saying next quarter or something like that, but I just think the opportunities are very clear and we are confident in those businesses.
Adam Brooks - Sidoti & Company, LLC: And then maybe just a little bit on Challenger now that you have it under your belt just for a few months, maybe some color on any opportunities that you see now anything that's gotten you little bit more excited?
Nicholas T. Pinchuk - Chairman and CEO: Look I think funny, when you acquire somebody all of a sudden when you are turning to garage you start noticing the names on the list more. Like I said, I was on the truck the other day and it seem like every garage had Challenger Lifts and I know that’s not the cause, they are not the largest lift manufacturer. So, I think; one, talking to technician I found that it has a good – it reinforced my idea of great reputation, that’s one thing. Secondly, we have opportunities to lower that business out into international, it’s not an international business now, but we have equipment selling in international markets into Europe and in particularly Asia. So, we are very excited about the opportunities to take that product portfolio and spread it into those places and it's pretty important about emerging markets because you see. Emerging markets they’re building new brick and mortar all the time around auto repair garages and the first thing that gets thought of when you are putting brick and mortar (indiscernible) repair garage is the lift. So, if you have a strong line-up there it gives you a leg up in selling, we like that. So, we're pretty excited about it.
Adam Brooks - Sidoti & Company, LLC: Do you think now being under the Snap-on umbrella you can bring the margins up on that business or they're where you think they are going to be?
Nicholas T. Pinchuk - Chairman and CEO: I hope we can bring their margins up. I think we – that's probably why we have Snap-on value creation. We think Snap-on value creation, safety, quality, customer connection, innovation, and rapid continuous improvement imprinted on any operation makes it better. So one of the things we've always said about our – I think have said about our acquisition strategies we acquire somebody coherent, so we get the synergies around strategic alignment. It helps us with our customer base. But that doesn't diminish the idea that we have opportunities to make almost any operation better, we're confident of that.
Operator: Richard Hilgert, Morningstar.
Richard Hilgert - Morningstar: Over in Europe, I was wondering if you could talk a little bit about, since that market is down as much as it is, what's your experience with the franchisees over there? How do you motivate the Group? Are you seeing many of them fold up, and also curious about – are you seeing any of the independent mechanic shops closing up too?
Nicholas T. Pinchuk - Chairman and CEO: Let's talk about this. Europe is a little bit bifurcated. Let me give you the landscape, remind you the landscape a little bit. The franchisees overwhelmingly in Europe are concentrated in England because our van business mostly works with technicians on their own tools. So the place in Europe where they own their own tools is the U.K. that business has not been as affected by the downturn. It had its weak moments, but it isn't as – it didn't have as much problems as the other businesses. And so therefore having said that though we have worked very hard to make sure that our franchisee population stays essential, the franchisee we haven't seen any huge downturn in the franchisees in the U.K. and so that's maintained robust. We have some (vans) in places like Germany and Netherlands, but they are not really that weak. They are not really that big. Most of the business in Europe is the direct distributor business which we sell through SNA Europe and our other divisions, not the Tools Group division. And remember that C&I is 33% Europe, RS&I is 25% Europe fair way above the Tools Group. So, those businesses have been impacted, but they are broader base and that's just – the C&I business is in industry and culture and a lot of other different things. Now, what we have noticed is in Europe that our customers we sell to distributors our customers that have not going away. So, it appears to us that the customer base is still intact. So, the long and the short of this is – I guess the long and short of my answer is that we don't see any deterioration in the opportunity in Europe. We see the customer base still there. We believe the morale of our people are still pretty high because there is nothing like seeing your sales down and your profit is up, we feel pretty good about it. So, they feel strong. Because we believe in the opportunities going forward is why through all this restructuring, through all the RCI, through all restructuring we did in Europe we didn't take out any capacity, that's one thing we demanded in terms of the restructuring plan. We demanded that no capacity go out, we reduced based on we enable to do the same with more during this period. So, I hope that answers your question.
Richard Hilgert - Morningstar: U.K. new car sales are actually up there versus the rest of the Europe, which has been down most of the year. So, I would imagine that you're still seeing fairly good business in the U.K. then.
Nicholas T. Pinchuk - Chairman and CEO: Yeah, in the U.K., look the Tools Group was up, I think about the same internationally as it was in the U.S., but the U.K. might have been like at the lower end of that, but still up pretty good like 4%, 5% something like that, so still like (indiscernible).
Richard Hilgert - Morningstar: On the CapEx you've been running -- the run rate has been pretty good low compared to what the full year expectation is, it's been 1.8, 1.9 for the first and second quarter's percent of revenue and your full year run rate is the $70 million to $80 million comes out to something like, maybe 2.3% to 2.6% of revenue. We're going to see -- the third quarter and the fourth quarter would be high 2, low 3% spend?
Nicholas T. Pinchuk - Chairman and CEO: Yeah, I suppose, look I don't actually think of it that way. I kind of think that we're thinking about we have what 31.5 or so year-to-date. So, okay, I think we still like 70 to 80 number. There is a lot of variation from quarter-to-quarter around these things and I still think the 70 number, 70 to 80 is a decent number to forecast. So, if that means going up in the second half yes.
Richard Hilgert - Morningstar: Is there anything in particular in the second half of the year in terms of capital spending, any one big project or something that's ramping up?
Aldo J. Pagliari - SVP, Finance and CFO: We have investments both in the U.S. and the international arena, second half is pretty broad based.
Richard Hilgert - Morningstar: Then one last question. A large part of your success is your ability to bring up new product and be in tune with what the market needs having new technologies or having new tools that meet a certain criteria that the market wants. I was curious to know do you have any kind of information or analysis on the percentage of your product portfolio that is new over a certain timeframe.
Nicholas T. Pinchuk - Chairman and CEO: Look everybody has a different view of this. But for me, I don't like – I'm not a big fan of that metric. The metric we like is and I'll tell you why we like it, is a tool that sells $1 million in the first year. The reason is because when you ride these vans what you see is a new tool, the guys get on the van and get excited. Okay, they buy the new tool, but then they buy a whole bunch of other stuffs too. So, it drags other products with it. So, for us it's the matter of not how many new products there are, but how many exciting new products or how many products make the hit (parade). That's what I was talking to Gary Prestopino before. So, that's what we measure. As I said, the number of new products last year, that sold over 1 million in the first year, we're pretty strict about this, was up six to seven times since 2006. So, our innovation process and our customer connection process are improving. It is our lifeblood because if you think about this we guarantee a lot of our tools for life so how does it we have a business and the reason is because the guy needs instead of 16 ratchets he needs 18 because car has changed. That's the biggest driver in our business and that fits in with this innovation. So, we seem to be doing better on that. So, the metric I like to offer is tools over $1 million and that was over 50 last year.
Operator: (Sarah Hunt, Alpine).
Sarah Hunt - Alpine: Couple of quick questions for you. One, you mentioned that you were doing fairly well with other OE repair shops. So, are you taking share from somebody or is that market just getting better?
Nicholas T. Pinchuk - Chairman and CEO: I think you will have to say some of both. We like to think taking share – Sarah, it is hard to assess share in this space because we are basically 65,000 SKUs, if you add 3,000 more; is that taking share? I don't know. You see what I mean. So, I think we do believe though our sales are getting better in these shops. We are selling more to each individual shops. The franchisees and the individual sales – the franchisees are selling more, the individual sales and they selling more. So, we believe we are taking some share.
Sarah Hunt - Alpine: And then the next question is on interest rate. So, we have seen a lot of movement in our last four weeks or so based on various interpretations of what the Fed is going to do. For your own financing piece of the business, how rapidly do you need to or have to just as interest rates change, so how are you looking at that now that you've got the finance portfolio as internal?
Aldo J. Pagliari - SVP, Finance and CFO: I think that actually it's a little bit of headroom I believe in the interest rate arena. The reason I'd say that is our finance receivables and contract receivables tend to be at relatively high interest rates in the market reflective of the credit profile of the customers that we serve. Our philosophy is as we finance the credit company along, and what I mean by that, if you look at our pro-forma statements that are attached to the earnings release, we use the Snap-on average all in debt expense rate and that's at above 5.6% more or less at the end of June. So, we don't use floating rate to that to really finance the receivable portfolio and if today if we had issued ten year paper as an example, I'm guessing the rate will be above 3.6ish somewhere around that neighborhood. So, you'd see we still have 200 basis points of headroom before I think that our cost of funds would start to impact squeezing the spread of what we charge customers or what we pay.
Sarah Hunt - Alpine: That would really be a temporary, I'm guessing sort of a temporary issue if rates are going up. They're steadily going up and you're chasing it, I would think that you're probably that would -- as rates go up, that gets reflected in what you charge folks, is it not?
Aldo J. Pagliari - SVP, Finance and CFO: Sure, it would be. I think there would be a little of a lag effect because in some situation that we do charge rates that are sometimes the highest rates allowed by law depending on the circumstances in the profile of the customer and those laws change probably on a lag basis I'm going to guess versus the open free market rates.
Operator: There are no further questions at this time.
Leslie H. Kratcoski - VP, IR: This is Leslie Kratcoski, I'd just like to thank everyone for joining us today on the call and as always for your interest in Snap-on. A replay of this will be available shortly on snapon.com. Thanks a lot. Have a great day.
Operator: This does conclude today's call. We thank you for your participation.