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Industrial “State of the Market”

Industrial “State of the Market”. Marketing Intelligence Group January 2006. Macroeconomic Briefing. U.S. Economy Continues to Expand in 2006. ‘05 U.S. GDP growth was 3.6% Expected to average 3.4% in ’06 In Q1, annualized GDP growth to reach ~ 4%

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Industrial “State of the Market”

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  1. Industrial “State of the Market” Marketing Intelligence Group January 2006

  2. Macroeconomic Briefing

  3. U.S. Economy Continues to Expand in 2006 • ‘05 U.S. GDP growth was 3.6% • Expected to average 3.4% in ’06 • In Q1, annualized GDP growth to reach ~ 4% • Positive stimulus from Gulf reconstruction combines with recovery in energy production ’06 Hand Tool Growth Estimated Faster Than GDP

  4. U.S. Economy Continues to Expand in 2006 • In Q2/4, a gradual slowdown sets in • Housing market cools due to overextended prices and higher interest rates • Core inflation rates to creep up from 2.2% in ‘05 to 2.3% in ‘06 • Businesses are bolder about passing on their energy cost increases • More Federal Reserve tightening is required to keep core inflation in check ’06 Hand Tool Growth Estimated Faster Than GDP

  5. Manufacturing growth is stronger fueled by more business investment • Q4 manufacturing sector growth strongest in ‘05 • December was 31st consecutive month of growth • Aerospace industry to enjoy spotlight in ‘06 • Boeing reported 360% increase in new planes orders in ‘05 • Contrast: auto mfg will continue to struggle in ‘06 (due to weaker consumer)… • Corporations still have plenty of cash to sustain vigorous investment pace • ’06 will see a repeat of a double-digit jump in business equipment spending in ’05 • Non-residential construction spending should rebound in ‘06, helped by post-hurricane rebuilding

  6. Manufacturing growth is stronger fueled by more business investment • Drilling activity will be high to take advantage of attractive energy prices • Heavy truck sales will be stronger through ’06, declining the following year due to new ’07 EPA engine regulations • Little export-oriented production growth in ’06, waiting for ’07… • The dollar will be weaker • U.S. exports of commercial aircraft will finally hit their stride

  7. Accelerated growth expected in each quarter of 2006 Economic Dashboard Expectations of Solid Growth in Commercial Sector Source: Global Insight January 2006

  8. Where Growth Will Be in 2006? • Natural Resources Snap-on Industrial Investments Are Well Positioned Source: Global Insight January 2006

  9. Where Growth Will Be in 2006? • Government Spending/Investment Activity Is Shifting Towards State & Local Govt. Source: Global Insight January 2006

  10. Where Growth Will Be in 2006? • Manufacturing Growth in Natural Resources and Aerospace Sectors Fuel Other Manufacturing Source: Global Insight January 2006

  11. Global Setting Chinese growth is moderating yet still spectacular Japan’s resurgence will not last Eurozone’s structural problems do not support higher growth Source: Global Insight January 2006

  12. Market and Competitive Overview

  13. Four major forces are shaping the industrial market. Customer Driven Supply Chain Globalization Snap-on’s Market Opportunity Networked Value Chains Web Enablement

  14. Supply chains have shifted toward the customer… Traditional View “Push” Customer-Driven View “Pull” Mfgr. Manufacturer Supplier Customer Distributor Distributor Customer “Chain” “Long and slow” “Forecast-based” “Manufacturer-driven” “Designed from product forward” “Cost-reduction” “Network” “Fast and flexible” “Demand-based” “Consumer-driven” “Designed from shelf back” “Value and growth creation”

  15. Implications for our business… • Redefinition of inventory policy and manufacturing capability around customer and demand • Resources aligned to pull – not make-to-stock and buffer systems. • Customer-purchase triggers real-time information movement throughout the supply network • Move forecasts from monthly to weekly to daily to sub-daily

  16. Implications for our business… • Collaborative business planning with customers • Collaboration on “events”, key merchandising activities and initiatives • Manufacturing flexibility and cycle response to produce-to-demand vs. produce-to-forecast • Supplier relationships move from “connected” to “integrated” based on demand

  17. Global Total: ~$11.5B @ mfg. net Automotive Aftermarket $3.1B Global Positions DIY/Retail $2.4B HT Market C&I $2.4B $1.2B $0.6B $0.6B Trades/ Construction $3.4B Sources: Marketing Intelligence Group, Freedonia, Frost and Sullivan estimates

  18. WW Industrial MarketMajor Trends • Product • Desire for productivity improvements drive power tool market • Fewer fastener joints in designs due in part to alternate fasteners (glues, sonic welding, velcro) • Ergonomics and limited access tools • Product quality is a given – Asian sources meet the need • Manufacturing • Growing downward pricing pressure • Continued movement offshore

  19. WW Industrial MarketMajor Trends • Markets • School consolidation and move towards privatization and globalization • Electronics, health care and trades will grow; manufacturing will decline • Homeland security will provide opportunities • Growth in regional aircraft market • Distribution and service • Channels of sales are blurred (Amazon), sellers are broadening services to provide more value to customers • Electronic supply chain innovations • Increase in private branding activity

  20. Brand PositionHand Tools Size of Bubble = Dollar Volume Armstrong Wright Relative Quality Rating Stanley - Proto Craftsman SK Blackhawk Westward Relative List Pricing Source: The Martec Group; Snap-on Marketing Intelligence Group

  21. Brand PositionHand Tools Best Size of Bubble = Dollar Volume Snap-on Better Armstrong Good JH Williams Wright Relative Quality Rating Stanley - Proto Williams Global Global Market Downward Price Pressures Craftsman SK Blackhawk Westward Relative List Pricing Source: The Martec Group; Snap-on Marketing Intelligence Group

  22. WW Industrial MarketHand Tool Competitors Competitor Industrial Brands Key Changes Using Craftsman brand for distribution Blackhawk global (mostly in USA) Acquisition of Facom complete Westward growing to more than $40M Troubles appear to be resolved Results improving - targeting aerospace Reducing prices New customer friendly sales approach

  23. Stanley Background Overview • Rated “Buy” • 2006 EPS target: $3.55 to $3.65 • 2007 EPS target: $4.00 • HQ Location: New Britain, Connecticut Financials Recent News • 2005 YTD Sales: $2.475B (up 10.5%) • Net Profit: $209.4M (down 24.9%) • EPS: $2.52 (down 25.9%) • Industrial Tools* Sales: $1.03B * Includes hydraulic tools, laser leveling tools and industrial mechanics tools and storage, assembly tools and Mac Tools • Completed acquisition of FACOM in January 2006 • Adds EU-based manufacturing and sales footprint • 1st to have global positioning of brand distribution and manufacturing • Completed acquisition of National Hardware in November 2005 • Aimed at helping Stanley diversify its customer base among professional builders

  24. Stanley - Proto • Market Leader due to strong international growth = ~30% share • Pushing heavily in China, Australia and New Zealand • Strong in Aerospace (selection of torque wrenches and impact tools…”black sockets”) • Furniture • Military • Construction Equipment Manufacturing • Most complete product offering • Known for best metric tool offering • Wide array of socket types, pliers, wrenches (different price levels) • Replaced Danaher as the key supplier to Grainger • Danaher encountered conflict with Grainger by pushing Craftsman brand which was viewed as direct competition to Westward brand

  25. Stanley - Blackhawk • Small player currently = ~5% share • Stanley’s low-price point brand • Intended to compete with Craftsman • “Re-inventing” itself due to lackluster success • Focused on price-oriented distributors • Does well with trades/school market • Price driven – customers have difficulty distinguishing quality levels • Stanley “flooding” market with Blackhawk

  26. Danaher Background Overview • HQ Location: Washington D.C • Danaher holds 30% of Mechanic Hand Tools total market share. • New Product introductions added $40 million onto sales in 2004. • Projects strong growth in APR, driven by expansion in China • Stock rated “outperform” Financials • 2005 YTD Sales: $5.72B (up 16.5%) • Net Profit: $229M (up 14%) • EPS: $2.75 (up 16%) • Tools & Components: $323M Recent News • Agreement in place to acquire UK-based First Technology for $634M • First Technology is focused on gas sensing, automotive and special products and safety and analysis • Industrial Technologies projected to grow 12.3% in 2006 • Acquired Linx – Q1 2005

  27. Danaher - Armstrong • Second in market share = 20% • Not as strong internationally as Stanley – Proto • Strong in… • Utilities • Rail • Mining • Military – primarily with the Navy • Markets itself as “good as Snap-on, but at a lower price” • Similar finish and quality • Priced close to Proto • Since departure from Grainger has aligned with Affiliated Distributors buying group • Also aligned with Ferguson Enterprises • Focusing new product development on “hard to reach”/limited access tools

  28. Danaher – Craftsman • Mid-price point industrial brand = 10% • Positioned below Armstrong • Approximately the same dollar volume in the U.S. as Armstrong • Rely heavily upon brand recognition and price • Struggling in manufacturing areas – customers question “true” industrial tool status • Strong with trades/school market • Emphasizes “new” products – ergonomics etc.

  29. Cooper Background Overview • HQ Location: Houston, TX • Stock rated “outperform” • Expanding market into: • Mexico, Eastern Europe, China, Southeast Asia, South America. • In December 2005 located its Asian headquarters in Pudong New Area. • The new location is estimated to more than double China sales to USD 500 million, half of total Asian sales. Financials • 2005YTD Sales: $4.75B (up 6%) • Net Profit: $339.8M (up 56%) • EPS: $4.07 (up 12%) • Tools & Hardware: $733M (up 6%) Recent News • Recently settled 38,000 asbestos claims related to its former Abex Brakes unit • $130M cash; 1.4M shares valued at >$100M

  30. W. W. Grainger Background Overview • 2006 Revenue growth projected at 10% to 12% • Rated “Strong Buy” with target price of $82 (52 week range = $52 to $75) • Branch-based Distribution in midst of multi-year initiative to increase presence in top metropolitan markets • Phase I (Atlanta, Denver, Seattle) 9% sales increase • Phase II (Southern California) 17% sales increase • Phase III (Houston, St. Louis, Tampa) 18% sales increase • Phase IV (KC, Cincinnati, Washington DC, Baltimore, Philadelphia) Started Q3, 2005 • Phase V/VI (Northern California, Phoenix, Dallas, Minneapolis, Chicago, Detroit, Cleveland, Pittsburgh, Newark, NY, Boston) Start date TBD • HQ Location: Lake Forest, IL Financials • 2005 YTD Sales: $4.14B (up 9.2%) • Net Profit: $242.5M (up 23.2%) • EPS: $2.70 (up 23.9%) • Branch Distribution Sales: $3.85B (93% of sales) Recent News • Acquired AW Direct • Started China Expansion • Expanded into 15 new NA markets

  31. Home Depot Background Overview • Stock rated “outperform” – target price: $48 (52 week range: $34.50 - $44) • HQ Location: Atlanta, Georgia Financials Recent News • 2005 YTD Sales: $62.01B (up 9%) • Net Profit: $4.55B (up 13%) • EPS: $2.12 (up 16%) • Industrial Supply ~$5B • Over the course of the past year acquired 20 companies, most of which are commercial supply companies. • Biggest acquisition was Hughes Supply in January 2006 for $3.5B. • Estimated to more than double the Home Depot Supply business to $12 billion in revenue. • Estimated the acquisition will help Home Depot account for 3% of professional dealer market.

  32. Lowe’s Background Overview • Rapid Response Replenishment (R3), a strategy of improving customer service, optimizing supply chain profitability and improving inventory management, continued its integration into the business model • HQ Location: Mooresville, North Carolina Wilkesboro, North Carolina Financials Recent News • 2005 YTD Sales: $43.07B (up 15%) • Net Profit: $2.17B (up 20%) • EPS: $3.38 (up 20%) • 2005 sales were positively impacted by hurricane season in USA. • Foresee women as a lucrative market segment and are making strides to create female-friendly stores. • The trend is leaning towards more women shopping at home improvement stores than men. • A 2003 survey found 45% of customers shopping at Lowe’s were females.

  33. Other Competitors

  34. Did you know? • Car Ownership Per 1000 people: • U.S. 481 cars • China 7 cars • Largest Industrial Output: • U.S. $2,256B • Japan $1,120B • China $746 • Germany $693 • UK $475 • China is world’s largest producer/manufacturer of: • Lead, zinc, tin, aluminum, coal • Cotton, wheat, rice, cereals, meat, fruit&vegetables • Oil (6th largest) • China is world’s largest consumer of: • Copper, zinc, tin, coal, rubber • Wool, cotton, wheat, rice, oil seeds • Oil (2nd largest)

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