Feb 4, 2009
Executives
Martin M. Ellen - Senior Vice President - Finance and Chief Financial Officer Nicholas T.
Pinchuk - President and Chief Executive Officer
Analysts
Seaver Wang - Utendahl Capital Partners, L.P. Sarah Hunt - Alpine
Operator
Good day ladies and gentlemen and welcome to the Snap-on Incorporated 2008 Fourth Quarter and Full Year Results Conference Call. At this time all participants are in a listen-only mode.
At the conclusion of our remarks we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today's call is being recorded.
I would now like to introduce your host for today's conference, Mr. Marty Ellen, Chief Financial Officer, you may begin sir.
Martin M. Ellen
Thank you, Ms. Dean and good morning everyone.
Thank you for joining us today to review Snap-on's fourth quarter 2008 results. By now you should have seen our press release issue this morning.
Snap-on reported record earnings for the fourth quarter and the full year. That said, economic headwinds clearly increased during the fourth quarter.
And as we enter into 2009, business conditions are clearly more challenging than we anticipated 90 days ago. We believe our businesses are reasonably well positioned to weather these challenges and that continued execution of our core business strategies and value added processes will continue to strengthen Snap-on over the long term.
Joining me is Nick Pinchuk, Snap-on's President and CEO. Nick will kick off our call this morning with his perspective on our performance.
I will then provide a more detailed review of our financial results and afterwards we will take your questions. Consistent with past practice, we will use slides to help illustrate our discussion.
You can find the 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 a 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.
This call is copyrighted material by Snap-on Incorporated. It is intended solely for the purpose of this audience.
Therefore, it cannot be recorded, transcribed or rebroadcast by any means without Snap-on's expressed permission. With that said, I will now turn the call over to Nick.
Nick?
Nicholas T. Pinchuk
Thanks, Marty. Good morning, everybody.
Speaking on the fourth quarter, I would say that we are encouraged by the performance, especially given the macroeconomic challenges of what I would call these very interesting times. I think I've said before that Snap-on is not immune to the difficulties of today.
But, we believe that our business models are quite strong and when they are matched with our capable processes, the result is an operation which is resilient, which is positioned well and which can limit the impact of a difficult environment and which can emerge from the difficulties with an expanded strategic advantage. And I think we're seeing play out here.
I'll highlight some of that as we review the fourth quarter performance. Speaking of fourth quarter, sales were down 10.1%, more than half of that decline was from currency translation resulting from the stronger U.S.
dollar, and that change is pretty rapid, it was rapid in fact, primarily in the fourth quarter and with more than 40% of our sales outside the U.S., the impact on Snap-on was significant. Excluding currencies, the volume was still down, about 4.5%, I think the exact number is 4.4%.
But despite lower sales, operating margins reached 14.2%, our brand positions, our product innovations and the improved processes embedded in the Snap-on way of creating value, all contributed to those profitability gains. And based on that, the earnings per share reached to $1.01, up from $0.98 in the fourth quarter of 2007.
For the full year, sales were over $2.8 billion, that's an increase that's flat, it's an increase of less than 1%. But operating margin was 13.2%, up 200 basis points from the 11.2 reported last year.
And that corresponded to about 20% increase in operating income. EPS for the year reached $4.07, up 26% from 2007.
Both the fourth quarter and the full year for 2008 were record performances for Snap-on. I believe they were particularly extraordinary period given the significant headwind.
And before I go further, it's appropriate to recognize that the brand positions, the business models, the processes, the capable processes and those records would not have been possible without the enormous contributions of our dedicated associates and our loyal franchisees. My congratulations and my thanks to all of you.
We do believe our broad business models are sound even in these turbulent times. They are advantaged, because they provide unique solutions for serious professionals that are performing critical tasks.
And we're extending those models geographically, particularly into emerging markets. And when we combine that strength...
that strength of model with Snap-on value creation that is processes aimed at safety, quality, customer care, rapid continuous improvement and innovation, the result is strong, a strong and resilient business that we believe has substantial potential over the long term. Of course, we all know times are difficult, but actually we see strategic opportunities in this situation.
And we believe we are taking advantage. We've increased share in some of our major customers segments like automotive, technicians and repair shop owners.
New customers in industries have been added as we keep extending our Snap-on brand out of the garage. And of course, we build in the emerging markets, where growth opportunities still abound.
Actually, I believe we are not letting the crisis go to waste. We are making significant advances in each of these areas and we are strengthening our competitive position.
At the same time, we know we do face challenges of the economy, everyday we see that. We are working to strike the right balance, aiming to limit the damage, still making the strategic progress that will be decisive, that will be decisive for us as the positive times return.
For example, given the present uncertainty, we increased our restructuring in the fourth quarter to a total of $6.7 million, that brought the full year to $14.7 million and that's higher than we had previously communicated. We projected those actions will reduce 2009 cost by about $19 million.
At the same time, we spent more restructuring money. However, we also accelerated capital expenditures to further expand manufacturing capacity in China and Eastern Europe.
We believe those investments are essential for the future. We also continue to invest in innovation.
In the fourth quarter we completed a Snap-on innovation works here in Kenosha, advanced vehicle repair facilities; two and three dimensional prototyping labs and whole areas specifically devoted to industrial customers in critical industries. We found out now that innovation sells, even in this environment, so we'll continue to invest.
See we believe, the challenges posed by the current environment don't call for a change in strategy or direction. Rather they require more vigilant balance between growth investments and a need for further cost reductions and that balance is our primary task as we go forward into 2009.
Now I would like to give you my perspective on the fourth quarter performance across the operating segments. We'll start with commercial and industrial.
Europe did slow dramatically in the fourth quarter. Overall activity was down 13% and the Southern Europe regions were particularly challenged.
Volume in Spain and Italy declined by 30%, a major difficulty and beyond the declines in end-user demand; SNA Europe was also challenged by some level of destalking among its distributors. They faced tight credit controls and they reduced inventory.
So we're seeing some difficult conditions in Western Europe. In Eastern Europe where we've targeted a number of growth initiatives, sales on a constant currency basis were actually down 3.5%.
But we're not discouraged; we believe that Eastern Europe is a continuing opportunity, sales were up almost 9% for the year, backing up that feeling. So we're going to keep building in that important arena.
Overall, SNA Europe has worked fairly hard improving its cost position, migrating manufacturing from higher cost countries, sourcing more finished products from lower cost regions and our European brands and our market positions remains strong, and the combined with the improved cost position, that should enable us for much better performance as the European market. Now let's turn to under-car equipment.
That business had a decrease of almost 12.1% in the quarter on the constant currency basis. It's just difficult to sell big ticket, higher price capital goods in this environment.
But while the sales declined, we believe our global share is actually improving. In the second quarter, we introduced our most advanced significant productivity advantage over conventional alignment systems.
And as a consequence, sales of imaging alignment products were actually... were up double-digits in the fourth quarter.
We are gaining share in what we think is the strategically decisive alignment segment, and it's based on the innovation like the present. We view that as important progress.
And as in prior periods, our industrial business continues to expand the Snap-on brand beyond the automotive garage, focusing on the needs of professionals in a variety of critical industries. Sales for that business in the fourth quarter were up 11.2%, with solid double-digit gains across our government, aerospace, alternate energy and educational markets.
As on a slide, alternate energy appears to be developing into a significant opportunity. Snap-on hosted the initial meeting of the National Wind Energy Training Consortium recently right here in Kenosha.
Some at that conference were predicting 180,000 service tax will be needed for wind power over the next several... over the next few years...
next several years. Now, I noticed today in The New York Times there was an article that said something like though days for green energy.
But we believe that over time alternate energy will be a significant business, and we are in on a ground floor, so we feel good about our position in alternate energy. I think some of this section is the extending Snap-on brand to other industries is working well.
For the full year, our industrial business grew by 13%, showing long-term strength. As I said before, we believe that business has great runway and the sales keep confirming that belief.
China and much of the Asia is also experiencing a slowdown. However, many believe that China economy will still grow, mid and maybe high single digits in 2009.
And I don't think that's bad given this depth of the global recession. So we continue to invest in key capabilities and physicals.
Earlier this year, we acquired Hot Forge (ph) hand tool manufacturing capability in our Wanda Snap-on joint venture. We're also expanding our Kunshan saw plant to manufacture ban saws and we're building right now a third plant for tool storage units on the Kunshan site.
We know Asia is important and we haven't back dropped one bit. All in all, I am pleased with the progress across commercial and industrial.
We are capturing share, we are expanding our capabilities and our margins are expanding. Turning to Snap-on Tools segment.
Constant currency sales declined 3.1% globally in the fourth quarter. U.S.
sales were down 5%. Clearly, our franchisees are being challenged.
The technician customers are generally busy, but there're uncertain. They continue to buy essential tools and products, but there're increasingly reluctant to buy a higher priced more discretionary products, like our tool storage units.
And I think that trend is going to be with us for the near term. In our U.S.
franchise system, we did again sequentially grow van count in the quarter, ending the year about flat with 2007 and franchisee turnover in the U.S. remained stable, even with the third quarter and it's lower than a year-ago.
So I would say our network in this situation is still solid and strong. The big ticket drop, however is a worry, is a challenge.
We continue to help our franchisees navigate the difficulties of course and so we're encouraging them to lower inventory levels. And we believe they did in the quarter, improving their breakeven and cash flow and that's going to strengthen them going forward.
On the cost side, fuel prices are down and we successfully negotiated network wide credit card processing, office supplies and shipping programs that further reduced our franchise costs. Recently, I think it's worthwhile to relate that Marty and I and other senior managers attended some of our 2009 regional franchisee kick-off meetings that are held across the country.
Franchise attendance in general was good. A number of products and promotional programs were introduced and we spent, a considerable time was spent on business planning, sales and cost management techniques.
The most important thing though, was the attitudes of the franchisees were positive. They said that times are difficult, but the corporation's cost management programs are really healthy.
They also feel I think significantly that they're gaining on the competition. In fact our coverage in the U.S.
technician market increased through out 2008 and we believe that our market share rose in the fourth quarter. So Snap-on competitive position is improving.
We continue to believe in the longer-term fundamentals of vehicle repair, it's positive. The overall part continues to age with more than 40% of the cars over 10 years old.
And while some discretionary repairs maybe postponed in the short-term, and we believe this could be happening. This will only lead to even more repairs in the long-term and our network will be there to take advantage, holding a larger share.
One final note on the franchisee network. Recently Entrepreneur Magazine recognized Snap-on Tools as number five in home base franchises and 37th overall amongst the 3,500 franchise businesses that they cover.
Two years ago, we ranked 61st and more importantly, we now ranked as the number one mobile tool franchise. That recognition is important because it helps attract capable people to Snap-on franchises and it further confirms the strength of our van model.
In diagnostics and information, constant currency sales were down 5% to 6%, mostly driven by the timing of OEM programs. Earlier this year, I think I've talked about this already.
We introduced our new VERUS handheld diagnostic platform as a powerful piece of equipment. It not only contains all of our diagnostics software, but integrates with Mitchell 1 service information.
Even at its higher price point, it sold well and that further provides evidence that innovation sells even in tough times. Now if you think about diagnostics, I think you'll recognize that Snap-on business solutions and our OEM facilitation group are both directly affected by the auto dealership segment.
And while consolidation of U.S. dealerships will have some impact, we do have new business opportunities.
We recently signed agreements to develop new electronic price catalogs for Australia and Brazil. We also have expansion opportunities with number of European OEs.
And there are OEs who provide their own in-house electronic price catalogs that are now looking to outsource their programs to Snap-on. Finally, in the time of lower new car sales, dealerships are looking to expand their backlog with revenue, to expand revenue.
Snap-on has just launched a new product that greatly improves their ability to sell that genuine part, those genuine parts in the aftermarket. It's called Namore (ph).
We see it as a strong opportunity and so to our dealer customers. The auto industry environment is a challenge.
But we see long-term opportunities in the repair side of that industry. And we are investing accordingly.
So I'll characterize the fourth quarter as encouraging, and the year as well. It's record financial performance, and significant strategic progress on a number of fronts, even in the face of stiffening economic headwinds.
And now Marty will take us through the financials and when he is done I would like to share some closing thoughts with you as we enter 2009, Marty?
Martin M. Ellen
Thanks Nick. I will begin on slide six, Net sales of $668 million declined 10.1% from last year.
However, excluding currency translation, sales were down 4.4%. The U.S.
dollar rapidly strengthened during the fourth quarter against our key currencies, while strengthened by only 3% against the euro, the dollar strengthened against the pound, the Canadian dollar and Australian dollar by 15% or more just in September. In the balance of my remarks, any references to percentage changes in sales will be on a currency neutral basis.
Looking at sales performance geographically, in the United States, sales declined 1%, with sales in our U.S. franchisee business down 5%.
This business comprised 27% of this quarter's global sales. Sales in our U.S.
industrial business, however, grew significantly double-digit, up 14.5% in the quarter. The declining economic conditions in Western Europe contributed to our 11% sales decline in this geography.
Western Europe comprised about 25% of this quarter's global sales. Sales in our European tools and under-car equipment businesses faced increasing headwinds due to the slowing European economies.
In our equipment business which sells more expensive capital equipments was again conflicted with the challenges of the economic slow-down as well as tight credit conditions. Consolidated gross profit of $300 million in the quarter was down $33.4 million, the reported gross profit margin of 44.9% was flat with last year.
However, if we strip out the effects of LIFO inventory valuation which produced a $6 million gain last year, versus $300,000 of expense this year, gross margins on a FIFO basis improved to 45% this year, compared to 44.1% last year. This 90 basis point improvement resulted primarily from a combination of higher pricing, improved productivity and cost savings from RCI and lower year-over-year restructuring.
These improvements were partially offset by $9.5 million of higher commodity and certain other cost increases. Additionally, fourth quarter manufacturing production slowdowns reduced gross margin in the quarter.
Operating expenses of $211.4 million in the quarter decreased $33.7 million from 2007, including benefits of $12.6 million from rapid continuous improvement savings, $10.9 million from currency translation and $9.3 million of lower incentive compensation expense. Operating expenses in 2008 were also reduced by a $5.4 million adjustment of a contingent liability related to Snap-on business solutions.
In this comparison, you should note that operating expenses in 2007, benefited from a $4 million gain on the sale of a building in Europe. Financial services contributed $8.9 million of operating income in the quarter, as compared with $8 million, last year.
I will financial services in the later slide. Operating earnings of $97.5 million, for the quarter were up 1.2%, over the last year.
As a percent of total revenues, operating earnings improved to 14.2%, up 160 basis points from the 12.6% earned last year. Before I move beyond operating earnings, let me summarize some of the important items affecting the fourth quarter year-over-year operating income comparison.
In 2008, our recorded operating income included $9.3 million of lower incentive compensation expense and the $5.4 million favorable contingent liability adjustment, I just mentioned. Partially offsetting these increases was $6.4 million of unfavorable currency translation.
These three items caused a net improvement and operating earnings of $8.3 million. In 2007, however, our reported operating income included $6 million of LIFO benefits and the $4 million gain on the sale of the facility in Europe, for a net improvement last year of $10 million in the fourth quarter.
Moving on, interest expense in the quarter was down $2.8 million from 2007, primarily as a result of lower interest rates on our floating rate debt and lower average debt levels in the quarter. Our effective income tax rate on earnings before equity earnings and minority interests was 31.9% in the fourth quarter, as compared to 31.2% last year.
Diluted earnings per share of $1 in the quarter were up, from $0.98 earned last year. With that, I will now turn to our segment results.
Starting with the commercial and industrial group on slide seven, segment sales of $326.8 million declined 4.9%, year-over-year before currency. We continue to experience lower sales of professional tools in Europe and lower overall equipments sales worldwide, despite strong double-digit increases in sales of our new imaging aligner products.
We also experienced higher sales from industrial customers worldwide and to a lesser extent, increased sales of power tools. Gross margin of 37.8% improved 190 basis points from last year as contributions from higher pricing, lower restructuring and rapid continuous improvements more than offset $4.8 million of commodity and other cost inflation.
We also had higher cost associated with manufacturing production slowdowns in the quarter. Notwithstanding the weakened sales environment, fourth quarter operating earnings of $39.1 million for the segment increased 2.4% from last year.
This includes $9.8 million of savings from RCI along with contributions from higher pricing and $7.3 million of lower restructuring cost. The year-over-year comparison was also affected by the 2007 $4 million building gain already mentioned.
As a percentage of sales, operating earnings in C&I segment improved 170 basis points in the quarter to 12%. Turning now to slide eight.
On a worldwide basis, the Snap-on Tools Group reported sales of $252.4 million, down 3.1% without currency. In the U.S., sales were down 5%.
Our international franchise businesses including Canada grew slightly about 1%, and van count in the U.S. was up slightly from the third quarter and flat with year-end 2007.
After factoring out the affects of restructuring costs, which were $1 million higher this year and the LIFO effects in both years, the gross margin was 42.2% in 2008 and 43.7% in 2007. We gained about a 150 basis points of margin improvement through pricing which did offset commodity and other cost inflation.
However, mix shift and higher cost associated with slowing production in our plans, lowered the overall gross margin. With respect to operating margin and again factoring out the effects of LIFO and restructuring cost in both periods, the operating margin in 2008 was 9.6%, compared to 11.3% last year.
The effects of mix and higher cost due to production slowdowns were the principle reasons for the margin decline. Turning to the diagnostics and information group which is shown on slide nine.
Fourth quarter sales of $152.9 million declined 5.6% before currency. The largest portion of this decline occurred in our OEM group, due principally to lower program sales in Europe.
As we've said in the past, revenue comparisons for the OEMs business are influenced by the timing of these programs. In our worldwide diagnostics business; sales were down less than 1%.
However, sales in North America were up 2% sales of Mitchell shop management and repair information products were up about 1%. A large portion of the 3.8% decline in sales at business solutions resulted from our exit earlier in the year of certain non-core product lines.
Operating earnings for the diagnostics and information group of $34.3 million, increased $6.9 million from 2007 levels, including the $5.4 million contingent liability adjustment. Excluding this adjustment, operating earnings in the quarter were up 5.5%, year-over-year.
Despite the lower sales, primarily due to $3 million of savings from ongoing rapid continues improvement initiatives. As a percentage of sales and again, excluding the $5.4 million adjustment, operating earnings for the D&I group improved 270 basis points year-over-year, from 16.2% last year to 18.9% this year.
Moving to slide 10. Financial services operating income improved $900,000, originations of about $122 million or $18 million lower than last year due to lower sales of big ticket items sold by our franchisees.
As these are the products which tends to get financed through Snap-on credit. While origination volume was down, lower discount rates on contracts sold led to the improved earnings.
Many of you continue to ask about the credit quality of the portfolio of Snap-on credit loans to technicians. Accounts 60 plus days delinquent at the end of December were about 2.3%.
At the end of September they were 1.9%. At the end of 2007 and 2006, they were about 2%.
The high water mark was actually was about 3% at the end of 2005 and was mostly due to the consolidation of Snap-on credit steel organization. Three years prior to 2005, and going all the way back to 2001; the highest level experienced was about 2.2%.
So the recent quarter trend is up, although not unexpected in this environment. This trend also reflects the regional differences we're seeing in our U.S.
franchise business. The Southeast and Southwest regions of the country, where economic conditions are generally worse, are having the biggest impact on this trend.
Both Snap-on credit and our franchisees have always worked diligently to control delinquencies and have heightened their efforts given the current environment. Now let me turn to a brief discussion acknowledging cash flow.
As seen on slide 11, our accounts receivable decreased $64.8 million from year end levels with $38.6 million of the reported decrease coming from currency translation. Day sales outstanding decreased to 64 days, down from 73 days at the end of the third quarter.
All of our businesses are being extra vigilant in managing and monitoring customer accounts and credit risk in this environment. Inventory turns declined from 4.9 times at last year end to 4.6 times currently.
They were 4.5 times at the end of last quarter. We did extract $10 million of cash out of inventories in the fourth quarter.
The combination of inventory increases to support targeted growth opportunities including inventories acquired with our acquisition of Wanda in China, the effects of higher steel and other costs and lower than expected fourth quarter sales, all contributed to our inventory build. Our 2009 plans include inventory reductions.
Pre-tax return on invested capital continued to improve in 2008. For the year, it was 22.3%, up from 20% last year.
Net debt at the end of the quarter of $400 million was down $25 million from the $425 million last year. Our net debt to total capital ratio of 25.2% increased slightly from 24.9% last year.
This slight increase occurred as shareholders equity at year-end 2008 was reduced by $130 million due to foreign currency translation and by a $118 million to record an increase in the unfunded liability of our pension and post retirement plans. In 2009, we expect to make pension contributions of only approximately 9.5 million and that primarily relates to our foreign plans.
Our liquidity position continues to remain strong. Besides the cash flow generated from operations, we currently maintain a $500 million revolving credit facility provided by strong diversified group of international banks, which does not expire until August 2012.
We also have another $20 million of committed bank lines. At the year end the entire $520 million of borrowing capacity was available.
In addition to these facilities our current A2/P2 short term credit rating allows us to access the commercial paper market, should we need to do so. We presently have no commercial paper outstanding.
Turning to slide 12, cash provided from operating activities was $46.3 million in the quarter and free cash flow was $20.7 million. For the year Snap-on generated $215 million of cash flow from operating activities and $141 million of free cash flow.
Capital spending in the fourth quarter of $25.6 million was about $10 million higher than our previous estimate. Major expenditures in the fourth quarter included an acceleration of our strategic gross spending including the relocation and expansion of our plant in Belarus and the expansion of our plants in Kunshan, China.
In the fourth quarter, we also spent $2 million to begin construction of an office and development facility to consolidate our North American Snap-on business solutions operations. The economics to build this building are attractive, given a number of local tax incentives and consolidating these groups will lower future operating expenses.
We expect this project will be completed in 2009. Our current plans call for 2009 capital spending to be in a range of $75 million to $80 million, but we are not financially committed at this level of expenditure.
Should circumstances dictate, we will adjust our capital plans. This concludes my remarks on our fourth quarter performance.
Before opening the call for questions, Nick would like to provide some closing thoughts. Nick?
Nicholas T. Pinchuk
Thanks, Marty. Clearly, the economic challenges have increased.
They appear to be spreading geographically and reaching more industries. I believe we said in the press release that as a result of the macroeconomic conditions and the financial headwinds of pensions and foreign exchange.
We expect earnings to be down from last year in the first quarter, probably not a surprise. But we do enter 2009 in full throttle against those difficulties.
Our RCI initiatives enabled us to offset rampant rises in commodity cost last year, and we see more opportunity for improvements in 2009. We are confident in the strength of those processes.
We are confident that they can help us to limit the impact of the environment. So, we do see challenges going forward, but we also see opportunity, opportunity for strategic progress, just as we've made in recent quarters.
So in 2009 we'll continue to maintain and strengthen our dealer network. And we believe gain share with technicians.
We'll continue to role the Snap-on brand out of the garage, reaching more new customers and critical industries. We'll use our imaging technology and electronic parts catalogs and diagnostic products to gain share in automotive repair garages around the world.
We'll become stronger in emerging market of the Asia Pacific and Eastern Europe. And I think most importantly, we're going to continue to build our innovation capabilities, because we've learned that that sells in any market.
So going forward, we know we have challenges, but we also believe that our extraordinary business models, our brands and our capable processes will allow us to strike an effective balance. A balance between the long and short-term and allow us to emerge from these difficulties with an even stronger operation and stronger strategic positions than we enjoy today.
Now I will turn the call over to the operator. Operator?
Operator
Thank you. (Operator Instructions).
We will take our first question from David Leiker. Please go ahead sir.
Unidentified Analyst
This is actually Keith on the line for David. I just wanted to set off by diving into the CapEx number.
If you do decide to eventually dial back on some of the things that you identified, I mean how much could that number fall versus the $75 million to $80 million guidance?
Martin Ellen
Keith, this number could fall in $20 million to $30 million range.
Nicholas Pinchuk
Right. But we're not considering dialing back at this point.
I want to emphasize that.
Unidentified Analyst
Okay. And can you just elaborate some more on some of the expenses in China and Eastern Europe that are driving the year-over-year increase?
Martin Ellen
Yes. Keith in, let's just start in the quarter, we spent about $25 million and if you look at our growth investments, as I said in Belarus and Kunshan, they alone were $6 million to $7 million of the $25 million and that was somewhat accelerated from our original plan.
The balance we've got still manufacturing improvements and capacity expansions going on in other plan, both in Europe and the U.S and those were another $4 million to $5 million in the quarter and then of course, you've got a base level of normal maintenance CapEx.
Unidentified Analyst
Okay. If we look at the SG&A or the operating expenses line, at a pretty sizeable year-over-year decline in the fourth quarter.
Obviously, the portion of that that's related to currencies and always going to be at the same magnitude and we are not going to get the contingency adjustment again. But is there any reason to believe that sort of base pace of decline can't continue or accelerate through 2009?
Martin Ellen
No, I mean, you said the word decline. We'll continue to remind you that, again our business model as we've sort of marched towards the mid single digit operating profitability target for the entire corporation, always included a structure that had us at mid 40s gross margin, about where we are and a lower 30s SG&A which is wherein recent periods, we've been making the improvements and we are going to continue to try to hold to that, even though the top line is going to be more challenged.
Unidentified Analyst
Okay.
Nicholas Pinchuk
I think what we've said is. This is Nick, Keith, this is Nick Pinchuk.
Unidentified Analyst
Yes.
Nicholas Pinchuk
I think, if you look at our results over the past several years, I don't think, I don't want to tie it to any percentage decrease, because that's associated with where the sales goes of course and that impacts somewhat. But we've been able to drive down our SG&A cost pretty effectively from quarter-to-quarter to quarter, because we believe strongly in the rapid continuous improvement process.
And as I said on calls before, one of the great things about Snap-on is, it's a strong company. But everywhere Marty and I go, we see things that can be improved.
Even today, after we've taken quite a few points out of SG&A. So, we see opportunity in the next quarter and for the foreseeable future in that line.
Unidentified Analyst
Okay. And if we look at just the year-over-year contribution margin across the businesses, and again we normalize for restructuring in the LIFO variances year-over-year.
Was there anything in the quarter that was unusual or can you quantify the impacts on the manufacturing slowdowns?
Martin Ellen
Keith, our best estimate looks to be about $5 million of additional cost in the quarter due to production slowdowns.
Unidentified Analyst
Okay.
Martin Ellen
Obviously, you know our business, and as you think about modeling going forward, obviously the margin contribution, the variable contribution affects really depend on the business unit, because obviously they have different margins structures.
Unidentified Analyst
Okay.
Nicholas Pinchuk
You see a lot of different things occur. This is Nick again.
You see a quite a few different things across the businesses. Big ticket items are down substantially, tool storage boxes are down almost 30%.
However, I'd like to point out that just recently in the journal, they talked about, there was a article about sole revival, about the shoemakers having a boom. And at the same time the shoemakers in repairing shoes are having a boom, new shoe companies are lying off people.
We're in automotive repair and our hand tools that are supporting that basic automotive repair are doing pretty well. They're pretty much flat year-over-year, even in the fourth quarter.
It's the big ticket items that are hurting us. So when talk about production and absorption impacts, it's relatively complex question for us here.
Unidentified Analyst
Okay. And then if we just look across each of the three business units, how are the things trended so far in January, versus sort of the reported numbers that we saw, organic growth numbers that we saw in the fourth quarter?
Nicholas Pinchuk
Well, the January numbers are about consistent with December actually, in terms of sales on an overall basis. Now December was a little squeezed, compared to the overall fourth quarter, but we didn't see a dramatic drop-off in volume in January.
However, I'll hasten to say that for Snap-on January is a very narrow month historically. So we never make judgments based on January, positive or negative.
Unidentified Analyst
That's great. Thank you very much.
Martin Ellen
Thanks Keith.
Operator
And we'll take our next question from Seaver Wang with Utendahl Capital.
Seaver Wang - Utendahl Capital Partners, L.P.
Hi, good morning.
Martin Ellen
Good morning.
Seaver Wang - Utendahl Capital Partners, L.P.
Hi. You said on the call, I think Nick, that you got...
you encouraged franchisees to lower inventory that was proved and prudent? So, is there...
I guess what would be the catalyst for them to try to have their inventory back at regular levels, just to being more comfortable with the outlook of the environment or, I mean what would be that?
Nicholas Pinchuk
I think so I said, I think that the situation here of course the U.S. sales are down 5%.
We would like to see them, see a little more comfortable on that situation. I think they are sitting like any independent businessman and saying, we believe in our business model.
They're feeling instinctively the same the Wall Street Journal is reporting with the shoemaker repair. That repair keeps going on.
We are not in automotive manufacturing, we're in repair. But they get up every morning and eat bad news for breakfast when they see CNN and they start worrying about things.
So they try to reduce, there not a little bit, because they worry that perhaps it could worse. And so, I think what we'll is when people believe, when generally, when I say people, I think the environment as the recession has bottomed out.
We have measured the bottom and we now feel confident, we can start to build our inventories back up. I think that will be the signal point.
Seaver Wang - Utendahl Capital Partners, L.P.
And you can tell us, some of the magnitude was down maybe 10%, did you have a suggestion of 10% or 20% or and an idea of what they reduce their inventories by?
Nicholas Pinchuk
I think, it's probably I'd say, you can say between somewhere approaching $10 million.
Seaver Wang - Utendahl Capital Partners, L.P.
Okay. Alright and then just a quick question on acquisitions, your CapEx kind of keeping that mid $70 million to $80 million level and I guess if nothing changes, the acquisition strategy is still the same or do you think the activity will increase?
Nicholas Pinchuk
Well, I think it's still the same. We remain alert for opportunities in critical areas where we think there might be acquisitions available that would further our strategic intent.
In places like critical industries, in places like the automotive repair garage, in emerging markets things like that I think, I said it in my call. I actually, of course we're concerned and we are vigilant about the balance.
But we see this situation as; in this situation we still see opportunities for share gain and perhaps the acquisition. I am not saying we're going to go on an acquisition binge, but we haven't changed our profile.
Seaver Wang - Utendahl Capital Partners, L.P.
Okay. Thank you.
Martin Ellen
Seaver, if it's more than this area (ph), CapEx as well because our guidance is $75 million to $80 million which is larger than we historically run at. Because we are building this facility in Ohio for business solution, that project get completes in '09, Had it not been for that project, our guidance probably would have be under $65 million, may be $70 million range.
So, it's really a one-time expenditure and it completes in 2009.
Seaver Wang - Utendahl Capital Partners, L.P.
Okay. Thank you.
Operator
(Operator Instructions) And we'll take our next question from Sarah Hunt with Alpine.
Sarah Hunt - Alpine
Hi, good morning. Gentlemen.
Martin Ellen
Hey, Sarah.
Sarah Hunt - Alpine
My question is more of a larger one. Instead of given what's going on in the macro world and the political world and how much outsourcing you as well as a lot of other folks have done.
If we start to get some trade legislation that looks like, we've got U.S. content laws or something along those lines, what it that due to the basic philosophy of outsourcing in lower cost countries, is that something that you guys have been talking about yet or is that just something we're hoping doesn't happen?
Martin Ellen
Well, No. I think; look I think there aren't many companies.
There aren't many manufacturing companies today in industries like ours that are sourcing as much in the United States. So I believe, if they pass legislation that requires U.S.
sourcing, we'll be advantaged. Not disadvantaged.
That doesn't mean we are not alert for... from a microeconomic sense, opportunities to outsource in Asia and so on.
But Snap-on product, Snap-on brand is still by and large sourced in United States.
Sarah Hunt - Alpine
Okay.
Martin Ellen
So I'd say we are among the most foremost in that situation. So bring it on.
Sarah Hunt - Alpine
Okay. Thank you.
Martin Ellen
Sure.
Operator
And with no further questions in queue, I'd like to turn it back over to Mr. Ellen for additional comments and closing remarks.
Martin Ellen
Thank you Ms. Dean and thank you everyone for joining us this morning and thank you for your interest in Snap-on.
Good day.
Operator
This concludes today's conference. Thank you for joining us and have a wonderful day.