實耐寶 (SNA) 2002 Q1 法說會逐字稿

Snap-On Incorporated first quarter earnings release conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. William Pfund, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Operator, and good morning, everyone. Dale Elliott, our President and Chief Executive Officer, is here with me this morning. As usual, we'll begin with a brief review of quarterly performance and then open the discussion for your questions. We encourage your questions during the call. Consistent with our policy and past practice, we will not discuss undisclosed material information offline.

Also let me remind everyone that statements made during this conference call that state management expects or believes, or otherwise state the company's plans or projections for the future, are forward looking statements, and that actual results might differ materially from those made in such statements.

Additional information concerning the factors that could cause actual results to materially differ from those in the forward looking statements is contained in the news release issued this morning by Snap-On and in the latest 10Q, 10K, and other periodic reports filed with the SEC.

In addition, this call is being recorded by Snap-On Incorporated and is copyrighted material. It is intended solely for the purpose of this audience. Therefore, please not that it cannot be recorded, transcribed, or rebroadcast by whatever means without Snap-On's express permission.

Your participation implies your consent to our recording this call. Should you not agree to these terms, simply drop off the line. Now I'll turn the call over to Dale Elliott.

Thank you, Bill, and good morning, everyone. Let me start our review by sharing with you a few general observations. First, overall performance in the first quarter was in line with expectations although we like most other companies in the industrial marketplace were impacted by the same level of economic stutter stepping that we saw in the second half of 2001. In spite of this difficult environment, Snap-On made steady progress in improving both operating profitability and operating cash flow. Savings from the restructuring and other operational fitness initiatives are being achieved. Our European diagnostics business is a good example. The footprint is moving toward the desired outcome, and their cost structure has been lowered. This quarter, we will begin to implement a build to order process for many of our larger diagnostic products shipping direct from the plant to the customer. In North America, our equipment businesses are making real progress, and the facility consolidation and power tools is more than sixty days ahead of schedule. As expected, these savings are being used to fund higher spending for our key growth initiatives as well as offset the unfavorable impact of diminished production associated with lower volume and the move toward faster managed inventory terms.

Higher pension expenses are also a factor reflecting the change in actuarial assumptions for a lower investment return. Our business unit teams remain clearly focused on driving to a higher level of operational fitness. Second, consistent with last year, we continue to support spending in those areas that we feel are most important for our longer term growth, the two key areas being, one, support of the expansion of our dealer base, and two, increased research and development for new products.

In the dealer business by the end of the first quarter, we added sixty one more net new dealers, largely the result of franchisees adding second vans. The use of second vans allows existing dealers to greatly expand their businesses. Dealers increase their sales by being able to spend more time with their customers and thereby developing new business.

In this way, we continue to move the bell shaped dealer sale success curve up and to the right. This provides greater local market penetration, facilitates their growth, which in turn benefits Snap-On.

An unfortunate element from the aftermath of September 11th due to a reluctance to travel is that we lost approximately one quarter in the timetable we had announced at the end of 2000. Consequently instead of hitting the 10% growth target midway through this year, it is expected to occur during the third quarter.

With nearly 4,100 dealers in the U.S., of which 375 are second vans, our overall market penetration and foundation for future growth is now greater than it has ever been. Interest in the second van program remains strong as does general interest in becoming a full Snap-On franchise owner. In fact, this level of interest has allowed us to attain a new low in the number of vacant routes. This is a real indicator that dealers and potential dealers clearly recognize the current and future value of the Snap-On franchise.

We remain committed to our expansion program and its success in helping dealers, our strategic partners, continue to grow. Based on the favorable feedback and positive metrics being achieved, we expect to continue this effort through the rest of 2002 and 2003. The business remains sound, our customers are busy, and there is a steady demand in the marketplace. There has been no better time to be a Snap-On dealer. Our investment in new products also remains high. As you've heard before, we firmly believe that innovative products that enhance customer's productivity have been and will remain a key driver of success at Snap-On. As we move through the balance of the year, we have what we believe is a rather impressive lineup of new product launches.

In the first quarter, we began marketing a new dial indicator torque wrench with a soft grip ergonomic handle and great new styling. And for those technicians who have everything and need a place to store it, we have introduced a new 108 inch tool storage cabinet. It is the largest unit in the market. In the power tool arena, a new eighteen volt half inch drive cordless drill and impact wrench were introduced with excellent acceptance providing an 8% sales boost in the dealer channel in an otherwise double digit down power tool sector. And at quarter end, we introduced our next generation sound alignment system featuring voice activation, which is receiving favorable feedback. These products illustrate success that comes from a strong collaborative process and talented quality people in engineering, marketing, manufacturing, and finance. And finally, in the first quarter, a period in which Snap-On typically has been a cash user, free cash flow would have been approximately $30 million excluding the net impact of the arbitration matter. Even with that outflow, total debt was up only $14 million to $488 million from year end 2001, evidence that our focus on reducing asset intensity is having the desire to impact.

Now let me turn the call over to Bill Pfund, who will cover the financial performance of the company in a bit more detail. Bill?

Thank you, Dale. Earnings per share at $0.44 before special charges were in line with the guidance provided at the beginning of the quarter. Growth in the U.S. dealer business was offset by depressed sales of industrial and commercial tools and big ticket equipment. Currency translations in the first quarter, unfortunately, continued to be unfavorable and negatively impacted sales by about 2% with a slightly greater impact on the bottom line due to having many of our manufacturing facilities in strong currency countries.

In addition, in April, subsequent to the period end, our CFO, Don Hummel, [phonetic] left the company, and a customer of many years, Penske Auto Centers LLC, announced it would be shuttering its 563 service centers co-located at most Kmart stores. The charges associated with these actions were taken in the first quarter. As a result, special charges in the first quarter totaled $6 million pretax or $3.9 million after tax, which is $0.07 per share. Of this amount, $3.4 million pretax was for the transition costs related to restructuring activities and the resignation of our former CFO.

We had announced last year that we expected $7 million to $8 million in transition costs to be incurred in 2002. We believe that the remaining $4 million will be incurred in the second quarter as we finalized our restructuring activities in Europe and North America.

In addition, $2.6 million of the special charge was in operating expenses for the writeoff of receivables resulting from the Kmart store closures. These charges were largely offset by a one-time gain for the accelerated recognition of negative goodwill that was prescribed as a result of adopting FAS142. Now let me turn to segments. In the dealer segment, the U.S. dealer business grew 2% in the first quarter, reflecting a continuing solid demand for tools and tool storage and the expanding number of dealers. On an encouraging note, sales of big ticket products through the tech rep organization began to stabilize late in the quarter, a significant change in direction from the double digit declines of the prior year. Offsetting this growth was a decline in international sales, which resulted primarily from unfavorable currently translations. Currency negatively impacted results in Europe, Japan, and Australia. For example, a 6% dollar denominated decline was recorded for Japan while results were actually up 6% in local currency. Operating margin in the dealer segment increased on a year over year basis and sequentially was essentially flat with the fourth quarter of 2001 despite the typical seasonal decrease in dealer sales activity. Earnings continued to reflect both the planned higher costs related to the expansion of the dealer network. And our effort is, as Dale mentioned, to support the move of the bell curve of dealer sales success up and to the right.

Offsetting these higher costs were the savings from maintaining a tight control on discretionary expenses and the productivity enhancements from operational fitness activities. In the worldwide commercial and industrial group, sales for equipment and tools were down 6.3% for the first quarter. Sales of professional tools worldwide for commercial and industrial users, which includes our Bacco [phonetic] and Euro tools businesses, the Snap-On direct industrial business, and Sue [phonetic] Power Tools, decreased 5% in the quarter reflecting reduced spending in many industrial and manufacturing sectors such as electronics, aerospace, and automotive, while demand dropped precipitously in the second quarter of last year and remained soft in the aftermath of September 11th, industrial sales had been strong last year during the first quarter for these sectors. Sales in the diagnostics and information businesses grew 2%, which includes the negative impact from discontinuing non-core products in Europe, the result of a significant refocusing of the product line. Information based products and sales of handheld diagnostics continued to be sales highlights during the quarter while the improving profitability trend in Europe even in a slow seasonal sales quarter deserves note. Sales of equipment continued to decrease down 16% reflecting the continued lack of confidence that existed at the beginning of the quarter. Earnings for the commercial and industrial segment were impacted by unfavorable operating leverage from the lower volume as well as increased research and engineering spending and the impact of the $2.6 million special charge for the receivable write-down.

These factors along with the unfavorable effects of producing goods in strong currency countries offset improvements in productivity and cost control. However, I should note that the restructuring activities are generating the expected savings, and we believe this will be important element in our earnings outlook especially if the economy picks up for the balance of this year. Turning to the consolidated gross profit margin for the quarter, it was 46.2% of sales, up sequentially from the 45.6% achieved in the seasonally stronger fourth quarter period in 2001, and was flat with the prior year. This improvement is a reflection of the savings being achieved from operational fitness initiatives, general manufacturing cost control efforts, and pricing discipline which is offsetting the negative impact of lower production utilization due to soft sales and efforts to reduce inventory. Operating expenses were $195.3 million or 38.3% of sales after excluding the $2.6 million of special charge for the receivable write-down. As a percentage of sales, this was essentially flat with a year ago but included the benefit from the discontinuance of goodwill and certain intangible amortization as a result of adopting FAS142 effective with the beginning of our fiscal year 2002. The continued support for our dealer support initiative, expenses for new product development, and higher year over year pension costs offset the goodwill amortization in operational fitness savings. Net financing declined modestly from the fourth quarter principally reflecting the seasonal decrease in sales activity in the dealer group. Compared with the first quarter last year, the decline largely reflects the highly favorable interest rate environment and yield curve that existed in last year's first quarter when the Federal Reserve surprised the markets by moving from a position of tight money management to easy money. Interest expense in the quarter declined to $7.8 million from $8.9 million in the prior year reflecting both lower debt levels and lower interest rates. Excluding the impact of special charges, the effective tax rate on earnings was 36% and is expected to remain at 36% for the full year. The balance sheet was strong in the quarter as the debt to equity ratio was 38.3% compared with 39.6% a year ago. But the real highlight of the quarter, as Dale mentioned, was the free cash flow. The first quarter is generally a period of cash use for Snap-On. This year, while cash from operations is only $5 million, that amount masks the disbursement of $44 million paid in the resolution of the patent arbitration matter announced at year end 2001.

There was an approximately $5 million tax benefit received in the quarter with roughly equal benefits to be received in each of the next two quarters. Excluding this payment, free cash flow defined as operating cash generated less cap ex, would have been approximately $30 million. As a result, total debt increased only $14 million from year end to $488 million, which is down nearly $55 million or 11% from last year at this time.

For the balance of this year, and as part of our longer term emphasis, we remain dedicated to reducing working investment through increased inventory turns, lower receivables, and the efficient use of payables. Now let me turn the discussion back to Dale.

Thank you, Bill. Snap-On is making progress. And we expect to see this translate into positive EPS comparisons in the second quarter. Though there are some early indications that the tone of business is improving, much is still only talk that is yet to materialize into orders. With the current continued uncertainty and the strength of the economic recovery, we have chosen to maintain a cautious sales outlook near term. Even so, as noted in the press release, we expect that the margin improvements from operational fitness activities will lead to earnings in a range of $0.49 to $0.54 per share in the second quarter on relatively flat sales excluding the estimated $4 million in remaining transition costs as we complete our restructuring actions.

For the balance of the year, we will maintain our drive for continuous improvement and the enhancement of financial returns. We will balance our operational fitness efforts while further strengthening our leadership in new product development and growing our dealer business.

And as a result, we are confident that Snap-On will emerge a more profitable company with a stronger market position enhanced by real competitive advantages. Thank you. Now we would be pleased to take your questions. Operator?

Thank you. The question and answer session will be conducted electronically. If you'd like to ask a question, you may do so by pressing the star key followed by the digit one on your touchtone telephone.

Again, ladies and gentlemen, if you'd like to ask a question, that's star one on your touchtone telephone. We'll pause for a moment to assemble our roster. We'll go first to Alexander Paris [phonetic] with Barrington Research.

Good morning.

Morning.

Nice quarter.

Thank you.

Just a couple of quick questions. The flat sales guidance you just gave for the second quarter, is that sequential or year over year?

Year over year.

Okay.

Again, we're looking at this based on the uncertainty and with the hopeful note that there is not any further potential negative actions that could occur out there.

Right.

Alignment.

is that for the on car systems like the on star and so forth?

No, this is a voice activated alignment unit that would allow it a technician that's doing alignment to instruct the equipment on how to perform without walking back to the console.

Okay. Thirdly on your new dealer program, have you reached the point where you're seeing some accretive results from that, that is, their incremental revenues are exceeding your startup costs and training costs and so forth yet?

Yes, we are, although it's difficult to estimate given the uncertainty and the timing. It takes about a six month period for a new individual to become fully productive. And as you might be aware, we're adding these people over time, so we are seeing now that the preponderance are getting over that six month cycle that we're seeing that benefit.

Okay. Just one other question, your, in the commercial industrial particularly in the equipment and so forth which has been most of the problem here lately, can you differentiate between the U.S. and, say, Europe in terms of stabilization quotation activity and things like that? Maybe you're not getting the orders yet, but are you hearing good things out of U.S. particularly relative to Europe?

Well, as it stands today, we would still ascribe to the situation that Europe may be, in fact, six months behind the U.S. market. So while we mentioned we have seen some small indications of stabilization, I would tell you that the European market remains very challenging. And again, we would ascribe to the potential of a six month delay there.

Okay, just one, as a part of that, the facilitation agreements, is most of that related to new dealerships going up? Or is that a decent proportion of that just from kind of replacement and supplies and being ordered out of the catalogue?

It's a combination and a blend. I think of late, most of our activity has been on new dealership openings because of the general reluctance of many of those individuals to reinvest in their business. But over time, it reflects a blend of both those circumstances.

So you could see even if you didn't sign up new dealers over the next year, you could see a pickup just because of kind of pent up demand where they have not been ordering?

Well, we do believe that there is some degree of pent up demand out there as we have discussed in the past. Automotive service equipment does wear out. This is something that you could postpone replacement and maintenance to some degree for a period of time.

But at the end of the day, given that the shops are still busy and their flow of activity hasn't fallen off, we believe that they're going to have to deal with those equipment issues sooner of later. So it's our hope again at the back half of the year that we'll start seeing more of that as confidence improves.

Okay, thank you very much.

We'll go next to Jim Lucas [phonetic] with Janney Montgomery.

Thanks a lot. Good morning.

Morning, Jim.

A couple of questions here. First, I just wanted to verify a number. Of the 4,100 dealers, did you say 375 are second vans?

Correct.

And how many would you say, is it still a small percentage, are you seeing it growing, that are adding, going beyond second vans?

Well, we are seeing some that have been in the second van program for a couple years looking at an additional group. Last week, I was with many of our top dealers at our annual dealer incentive trip, and the discussions in many cases were of people going to second and third trucks however they were acquired, either through second vans or second franchises. So we are seeing people that are moving beyond the initial first and second van.

Okay. When you talk about the new power tools, new cordless, whose battery are you using in that?

I believe we're utilizing Sanyo batteries as I understand it.

Okay. And power tools in general, that's interesting that you saw up, is that just a function of new products or are you seeing a pickup in the market in general there?

We believe it's more due to new products and our efforts, Jim. All the other secondary research we see and hear of shows the market in general is down anywhere between the neighborhood of I would say 15% to 25% depending on which sector you're talking about.

So we believe that what we have done through the dealer channel has actually improved our position significantly in a down market. But primarily, it's generated through new product activity across the whole dealer network.

Okay. And could you touch on your cap ex plans for this year, how much would be for maintenance versus growth initiatives?

Right now, we're looking at a total cap ex of about $50 million to $55 million. And at the last figures I had seen, I would think that split would be about 50%.

Okay. Great, that's it for now.

Okay.

Just an additional comment on the cap ex, when we talked about the growth component, a lot of that is directed at new products, not necessarily increasing the footprint or anything of that nature.

Okay, thanks.

We'll go next to Laura Thero [phonetic] with Robert W. Baird.

Good morning.

Morning.

Just a couple questions for you. Some of them have been answered. But in general on your driven to deliver program, where do you think you are on that one? What inning do you think you're at if it's been going on for awhile and you've made significant progress?

Well, I couldn't characterize it as being at the seventh inning stretch. laughter] I think we're probably about halfway through the progress. There are a lot of other key elements that have to fall into place before I could consider that into the later innings, primarily the completion of our LRP process by the end of this June.

But the early indications are that the adoption rate is at or a little bit ahead of where we expected it to be. We're starting to see people utilizing it as a normal part of managing their operations. And I think that's the exciting part about it.

Okay.

One of the real outgrowths that we've seen is really the collaboration that's beginning to result between different functions inside the business as well as some of the different business units themselves. And that's a real plus going forward.

Okay. Just a follow up question on the second vans, where would you like that take rate to be? What's your goal for the percentage of dealers taking a second van?

Well, it's a difficult question to answer because of the way a lot of the territories are configured. I think what we're looking for is the top 20% of our dealers to look into this opportunity.

Okay.

And again, it's tough for me to give you a succinct answer because of the differences in the territory configuration.

Sure.

I think the current ratio we feel is comfortable, a lot of that will be determined about where we go from here on the remaining outlooks. But as I said now, we've hit an all-time low for territories that are open, and we think that that's a good indicator that it's on the right track.

Okay. Also another question on driven to deliver, as we're modeling, obviously your debt's down significantly and we can see that down even more significantly by the end of 2003, and you're still generating cash, do you have a plan for that cash?

Yes.

Uh-huh.

as you noted. Second would be to reinvest in new products and growth programs.

Okay.

So those would be the primary utilization of the cash.

Okay. And then last question here, in terms of potential acquisitions, do you see any holes in your business model that you would want to fill with acquisitions [inaudible]?

Well, as I said in light of our desire to use the cash to pay down debt and look for new products, we have not stopped looking at the market at large. And there are some opportunities out there.

We have been made aware of many. We've looked at many and passed on most if not all of them. So I would say that we're still in the acquisition game, if you will, but we clearly have our priorities set, as I mentioned earlier.

Uh-huh, okay. Great, thank you.

We'll go next to John Enrich [phonetic] with Ricolora [phonetic] Capital.

Thank you. Can you hear me?

Yes.

Okay. Was there anything else in SG&A that, it was, I'm just trying to figure out, is there some seasonal effect that caused it to be up sequentially despite sales being down sequentially?

No, I would think the major driver on that was the reinvestment in new products and the dealer expansion. That's the largest change quarter to quarter.

Okay.

We did see significant improvement in SG&A cost control as a result of our driven to deliver. And right now, we appear on plan to deliver the $40 million in savings we had mentioned earlier, half of which will be reinvested into growth.

Okay. And sequentially as I kind of just plug in the, plot year over year sales number, which will be a sequential increase, I'm guessing slightly higher gross margin, SG&A as a percentage of sales in the next quarter, would that be expected to be down a bit?

Well, I think [unintelligible] yes because we see the increase in operational fitness savings.

Uh-huh.

Again, the offset will be a bit of uncertainty as to how many new dealers we add in.

Uh-huh.

So that we're in the process of kind of smoothing that on a month to month basis.

Okay. That's it. Thank you.

Our next question comes from Darren Kendall [phonetic] with Lehman brothers.

Hi, it's Roger Freeman. phonetic] Just a couple of quick questions. What is the revenue effect of the Penske service center closing?

We estimate that to be around $4 million for the total year.

For the whole year?

Right.

Okay. Alright, and then what do you, can you just remind us what the cash payout on the restructuring is expected to be over the balance of the year?

We roughly have about $4 million left on that element, if I'm reading your question correctly on the transition cost.

The $4 million is the transition cost. I think you, were you asking about the cash payout?

Yes, cash payout.

We paid out probably on the order of maybe $12 million to $13 million in the first quarter of prior restructuring charges.

Uh-huh.

And I think we've got probably on the order of $25 to $30 left for the remainder of the year.

That's correct.

It's weighted towards the third and fourth quarter.

Okay. Alright, thank you.

We'll go next to Steve Haggerty [phonetic] with Merrill Lynch.

Good morning.

Morning, Steve.

A couple of quick questions. On the cash flow, using the $30 million figure that you used, what would the comparable figure have been a year ago if just on that basis, or what would I compare that to, the $30 million versus what?

It's around $11 million from prior year, Steve.

Eleven million positive?

Right.

And was the improvement in working capital that you achieved in the quarter, I'm looking at the release here, was that largely because of the improvement in inventory, or was it payables or receivables? Which were the drivers of your improvement in working capital?

It was a blend, but payables were a significant factor as well as inventory.

And I'm assuming that this is all part of your ongoing improvement as a business, so can we assume that these working capital changes are something that you can maintain going forward?

That's our goal. We have as you may remember a very aggressive goal of taking $250 million out between now and 2005. So it's not going to happen overnight obviously, but we are going to be keeping to chip away at it on that timeframe.

Okay. And then just one last question. In the dealer group, I just wanted to clarify, the international sales, I know, Bill, you gave an example in Japan, but the international sales declined, was it almost completely a turnkey translation? Or if you adjusted for currency, would international sales still be up or down?

If you were to take international sales if you look on a dollar basis, the non-U.S. dealer businesses were down about 7% in total. And if you were to look at it on an operating basis, it would have been almost flat.

Okay. Thank you very much, guys.

Thanks.

We'll go next to Michael Ward [phonetic] with Salomon Smith Barney.

Good morning, everyone.

Morning, Michael.

Just to follow up a little bit on the remaining transition costs, in the release, you said $4 million in the second quarter, so you're talking $10 million to $15 million in each of the third and fourth quarters? Is that about right?

No, well, I think that's correct, but I want to make sure we're segmenting transition from the cash restructuring.

Oh, okay, I gotcha. Alright, did I miss that?

Well, I just want to make sure it was clear because there's $4 million in transition and then the remainder as we talked about is cash restructuring.

Okay. And that's $25 to $30, alright, so that's separate.

Right.

So there's only $4 million to the transition cost.

Correct.

Okay. Do you have, what do you look at as far as timing of the possibility of some of the commercial industrial turning? Are there any indicators you track that we can look at to just have hope?

It's really tough, Michael. As I said earlier in the comments, the stutter stepping activity out there continues to amaze and disappoint.

Yes.

We have seen some strengthening in our power tools segment, as we mentioned.

Right.

That's positive. We have seen stabilization in the equipment market, which I think is a very big positive considering the history in the last eighteen months. But we have been in a down cycle in some of those. This will be in essence two years at the end of this quarter.

So it's very tough to talk about a compelling catalyst that's surfacing out there or even that we see building. Unfortunately, I think we're in a situation where it's going to be a very slow recovery, again, withholding potential downside should anything unfortunate happen.

Are there any economic measures or metrics that you track internally?

Well, we do model our industrial businesses and our dealer business and have for some time. I think the numbers say that it should be better than it is, but I think we've got still a lot of what we've termed economic breath holding going on out there where people have the funds, they have the opportunity, but they do not have the desire given the uncertainty to reinvest in their businesses.

And clearly on the industrial side, that's the case. But again, many of these expenses can only be postponed so long if you have a core rate of business that's holding up. And that's what we're anticipating is going to benefit the back half of the year.

Okay, alrighty. Thanks very much.

Again, ladies and gentlemen, if you'd like to ask a question, that's star one on your touchtone telephone. We do have a follow up question from Jim Lucas with Janney Montgomery.

Thanks. When you're talking about the free cash and you touched on the reinvesting in the business and acquisitions, are there any thoughts given to stock repurchase?

Some, Jim. As you know, we have a sizable authorization already outstanding. But we are focusing on debt reduction and new product investment at this time. We don't think that overutilization of stock repurchase is in our best interest in the long term.

Okay. And kind of more of a bigger picture, if you look at, you said you're kind of middle inning of the game, when you look at the people component, you've given a little color that people, for lack of a better term, getting it with the driven to deliver program.

But how would you characterize the overall of where the employee asset, as an asset in terms of getting it right now and are there many voids that need to be filled?

Really one of the most positive things that I have had, Jim, has been the response of the employees to the driven to deliver. I think in many cases, they are internalizing it to their own situations and process.

We are getting increased cooperation and collaboration as we mentioned earlier. Now, obviously as we move into different sectors in the future, that there'll be skill set requirements that we'll need to do, and we have programs underway right now to evaluate our current skill set, what skill sets we need to be successful in the future, et cetera.

But overall, I think the attitudes are very positive. And again, given the economic uncertainty, people are holding up very well with the challenges that are out there. But all of us I think are a bit tired of the current economics and are looking more to return to normalcy. And I'm anticipating an improvement in attitude once that occurs.

Okay, thanks.

Good morning. Looking at the sales in the last quarter, December quarter, I believe they're about $534, and I think we're around $510 this quarter, receivables and inventories were up and there may be some 4X impact there.

Could you, I guess I thought we were going to see a pretty significant working down of those account receivable numbers as well as inventory. Could you talk a little bit more about what's taking place in the quarter and what the outlook is there?

Yes, I think on the inventory, we, it may be important to remember that we do have a seasonal build that occurs in the first quarter for many of the programs that kick off in the second quarter.

Okay.

An easy one to illustrate that is air conditioning, for example. On the other measures, again, I think the seasonality of the first quarter compared to what we see in prior years, we are still making progress.

Okay.

Albeit we'll have to exit this quarter to see them. I know, for example, that our April results on inventory show a sizable decrease that didn't occur at the end of the quarter. Again, that's due to timing and how we record the change. So I think you'll see a continued improvement on those measures through the end of the second quarter.

Okay. Have you discussed where, what the targets might be on a longer term basis for both those items?

For inventory you mean?

Yes, inventory and receivables.

Okay.

which is behind the $250 million reduction by 2005, which we have talked about at several occasions.

We've got some DSO calculations on that. We haven't been as succinct on what we're looking for in there. In essence, what we're doing is taking a working investment approach where we're taking inventory, accounts payable and receivables, and bundling those together. Our focus is on clearly things that are within management's control. And that's what the net emphasis is on.

Alright, thank you.

Uh-huh.

Pat, just as a piece of history, we began really kind of focusing on inventory a couple of years ago. So our efforts geared at that are further along, and we have just more or less recently turned out attention to receivables, as Dale had mentioned is we kind of moved our focus from inventory to the whole concept of working investment.

Okay. Thank you.

We'll go next to David Gerou [phonetic] with T. Rowe Price.

David, I'm going to have to look that one up here. I think almost all of it is in the commercial and industrial group. And I may have to get back with that housekeeping detail for you later.

That's fine. Just another smaller, small question. If we look at the CNI group, how much did you, how much was the, what was the earnings impact, the absolute earnings impact from FX on the EBIT line of that group?

Let me check here.

Specifically because this should be the last quarter where FX is a material issue.

It's about $0.01 from what we can see here.

Okay.

But your point not to expand on it too much, but the whole FX area has been a disappointment I think for more than just Snap-On the last few weeks.

Okay.

I think we had hoped we'd seen the bottom of the Euro situation, but apparently that's not true.

Okay. Actually those were the only two questions I had. Thank you very much.

Thanks.

Mr. Pfund, there appears to be no further questions at this time. I'd like to turn the conference back over to you for any additional closing comments.

Great, thank you, Operator. We appreciate everybody turning in today. We think we hit a pretty decent quarter. And I'll be in my office for the remainder of the day if anybody has any other questions. Thank you.

This does conclude today's conference. We thank you for all you participation. You may now disconnect.

Thank you for calling.