實耐寶 (SNA) 2003 Q2 法說會逐字稿

Good day, everyone, and welcome to Snap-On's second quarter conference call. Just as a reminder today's call is being recorded. Now at this time for opening remarks and introductions I would like to turn the call over to Mr. William Pfund, VP, investor relations. Please go ahead Mr. Fund.

Thank you, operator, and good morning, everyone. Thank you for joining us to discuss our second quarter results. With me this morning are Dale Elliot, Chairman and Chief Executive Officer, and Marty Ellen, senior VP, finance, and Chief Financial Officer. Consistent with our policy and past practice we encourage your questions during this call. We will not discuss undisclosed material information off-line. Also any statements made during this call that management expects, believes, anticipates or otherwise state the company's plans or projections for the future are forward-looking statements and 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 and 8(K) issued this morning by Snap-on and in the last 1010(Q), 10(K) and other periodic reports filed with the SEC. In addition this call is copyrighted material by Snap-on incorporated. It is solely for this audience, it cannot be reported transcribed or rebroadcast by whatever means without Snap-On's express permission. In addition this call is being recorded and your participation implies consent to our recording this call. Should you not agree to these terms simply drop off the line.

Now let me turn the call over to Dale Elliot

Thank you, Bill, and good morning. Let me start are clearly disappointed, particularly for the commercial industrial groom. Many of our business units continue to make real progress and I remain encouraged by the evidence for further group. The group is largely on track with their nature your initiatives, cautious by big-ticket diagnostic continue causing a decline in tech rep sales which mask the gains in the franchise dealer business. While sales from the tech rep side of the dealer group were down sales to technicians grew both in our core franchise dealer business and as measured by end user off the truck sales from the dealers to customers.

From the very beginning our dealer expansion enhancement initiative More Feet on the Street program has been directed at both growing and strengthening our dealer network. Providing a new growth avenue for qualified franchisees through the opportunity of having second bands and second franchises is an important element. This opportunity gives our dealers the ability to expand and growth their business by having nor quality time to reach out to additional customers. As important as the expansion was we have also consistently emphasized strengthening the network.

For example, one aspect was the significant increase in training. New development program emphasized not just better additional training for dealers entering the system but was also targeted for providing rookie training for one year dealers and enhance [inaudible] for existing dealers. These development programs are aimed not just at making them better tools salespeople but rather independent and entrepreneurial business people. Along with the obvious increases and expenses for training and the opportunity lost due to time away from selling we face another temporary constraining influence on our sales.

As dealers became focused on improving their working capital utilization just as we have been working on improving Snap-On's working investment turns, the net impact was a leaner inventory position for dealers and a temporary reduction in Snap-on sales growth. In addition, we took other actions, particularly in 2002, to assist dealers in strengthening their financial position. Even the significant growth in second vans had a positive impact on improving inventory turns for dealers as many second vans were stocked primarily from a dealers existing inventory.

These actions coupled with the additional volume growth anticipated in the remainder of 2003 for the dealer group should provide for operating margin growth. Having ended the second quarter, we have largely lacked the initiation of these actions. for the second quarter Snap-on sales in its North America dealer businesses were up lie single digits and were roughly in line with the sales by our dealers to end users. Due to continued new product introductions as well as second vans these measures while not likely to track precisely with each other should be similar.

The diagnostic and information group was also on track. Sales growth of hand held diagnostic was strong but the continued weak market for the larger big-ticket products offset that growth. Decline in the tech rep business represents a sizeable portion of the decrease in intersegment sales within the diagnostics and information group. Additionally as part of the streamlininged process improvements in the equipment business in Europe, the production of certain products that were previously assembled in Europe within the diagnostic and information group were transferred to the equipment business within the commercial and industrial group. These groups already had handled the distribution of these products. This change lowered reported intersegment sales of the diagnostic and information group.

In the commercial industrial group as we discussed in our June 26 release the continued weak demand for tools and industrial applications across the board negatively impacting sales more than we had anticipated earlier in the year. That softness coupled with the strategic changes in the North American equipment marketplace represented a significant portion of the sales and earnings decline. In the industrial tools sector, as best we can determine from our monitoring of competitors and customers, we believe the softness is largely an industry challenge and not a change in our competitive position.

In the North American equipment marketplace we began the creation of a direct sales and marketing operation the Technical Automotive Group, or TAG, to supplement our distribution based operation. While we anticipated some disruption in sales as a result of this action we were not able to higher and train a sales force as quickly as we had anticipated. There was also further market softening during this period. However, with another month of progress under our belts we remain enthusiastic about the higher profit opportunity that this strategic change will provide.

Let me spend just a moment on additional background as to why we made this move. During the past three years we have spent significant effort and cost to rationalize and consolidate the footprint for much of the equipment business. In addition, as with our other core businesses we devoted considerable resources to implement to process and pipeline. Today we have a strong product development team in place. We have considerably improved the contribution from new products and, most importantly, have strengthened our portfolio of high value-added products. Our opinion, we have the strongest, broadest based and most technically advanced product portfolio in the North American marketplace. We believe the use of a dedicated highly focused and technically capable sales and marketing organization is the best complement to our product line.

At present we are seeing positive reaction and involvement by the dealer network in generating qualified leads to the TAG team. In addition, gross profit margin is being enhanced as we had expected and the overall sales leads and sales dollars have improved month by month. Currently our sales force is more than 100 strong and growing. And the sales dollars, productivity and seasoning continue to improve. We continue to recruit and train and the trends early as they may be, are favorable. As a result we remain encouraged about the opportunity in the second half of the year and expect to be ready for the traditionally strong seasonal fourth quarter.

Overall as part of our long-range planning process instituted in the last 18 months, our management teams have made real progress in analyzing their business operations and developing a better understanding of the increased profit opportunities that exist for them. Everyone is fully committed to the implementation of our [inaudible] to deliver strategic framework and in particular increasing the emphasis on continuous improvement in all areas of the businesses. The action announced within the Snap-on tool business is a good example. The operating team for the business after considerable study determined the need to streamline production around core technologies in our hand-tool plants. As a result, the plan is to phase our production at two U.S. hand tool facility including the Kenosha, Wisconsin plant with anticipated completion expected in 2004. They actions will surround around core technologies reduced redundancies and realign a sizeable portion of our capacity while still maintaining our Heritage made in America commitment and quality. Our drive to become a more competitive, more performance oriented and more customer responsive organization will continue.

These two plant phaseouts are anticipated to cost approximately $22 million for the remainder of this year with another 4 million expected in 2004. However, we expect to realize approximately $12 million per of cross savings beginning next year as well. This is clearly the right step to improve the competitive and performance capability of Snap-on in the long term.

Now let me turn the call over to Marty for his review of our second quarter financial results.

Thank you, Dale, good morning, everyone. Snap-on second quarter net earnings were 22.3 million, or 38 cents per diluted share, in line with our most recent expectations. Net sales were 565.2 million for the second quarter of 2003. Favorable currency translation accounted for 30.7 million of the reported sales increase. Otherwise, sales declined 2.3%. This decline was principally driven by the continued soft demand for big-ticket diagnostics and equipment as well as the weak environment for industrial and commercial tools. Partially offsetting this weakness was strength in sales of tools, tool storage and hand-held diagnostics within our franchise dealer business.

Consolidated GM was 246.1 million, or 43.5% of sales, compared to 251.4 million, or 45.9% of sales in the second quarter last year. Benefits from cost reductions, better pricing and foreign currency effects were more than offset by lower volume and unfavorable mix, particularly in the commercial and industrial group, and by manufacturing under-absorption and inventory-related costs, higher pension and post-requirement expenses and higher cost for continuous improvement actions.

Operating expenses of 216.6 million in the quarter increased 12.4 million year over year, including 10 million of currency impact. Otherwise expenses grew 1% year over year for the quarter. The benefit of cost reduction was offset by 3.6 million of higher pension, other retirement and insurance costs, and $2 million of costs for continuous improvement actions. I remind you that the second quarter last year included 1.4 million of restructuring related transition expenses.

Net finance income increased 2.4 million over last year, driven by the overall growth and strength in dealer sales. Higher originations both in the United States and worldwide and the effects of the continued favorable interest rate environment led to the improvement. Interest expense in the quarter declined to 6 million from 7.5 million a year ago, reflecting both our lower debt levels as well as lower interest rates. Other expense declined by 2.5 million due to improved foreign currency exchange, lower amounts of minority interest and lower claims in our dealer insurance programs.

Now moving to segment results. In the worldwide dealer segment, second quarter total net sales were up 1.8% to 281.3 million, including 6.1 million of favorable foreign currency translation. Sales through the tech rep organization of big ticket diagnostics and equipment showed a substantial decline year over year due to the continued weak environment for those products. Sales in the North America franchise dealer business increased low single digits roughly in line with the growth in sales to end users. Sales of tool storage products performed well during the quarter and, another testament to the benefits of our continued focus on new products. International dealer group sales showed solid gains for the quarter.

Operating earnings for the dealer group were 23.6 million, compared with 26.9 million a year ago. Benefits from new products, cost reduction and favorable price realization were more than offset by hiring pension, other retirement and insurance costs, hiring expenses for continuing improvement actions and manufacturing under absorption.

In the commercial and industrial group, sales increased 5.5% year over year to 282.3 million, including 22.3 million, or 8.3% as a result of currency translation. Otherwise, sales declined 2.8%. Weak economic conditions continued to affect the sale of capital goods equipment to vehicle repair shops in North America and also affected industrial tools in such sectors as aerospace and aviation, general manufacturing and nonresidential construction. In addition, as Dale mentioned, we suffered a disruption of sales resulting from the changes being made in the North American equipment business distribution channel. Also, sales to government entities including Federal, state and local municipalities were down year over year. Partially offsetting these declines were higher European equipment sales and growth in the company's facilitation business for new vehicle dealerships where we provide purchasing services for their dealerships.

Operating earnings for the commercial and industrial group were $800,000 in the second quarter of 2003, compared with 12.4 million in the prior year. The impact of the lower sales volumes, coupled with unfavorable manufacturing cost absorption and inventory-related costs offset savings from prior restructuring activities and benefits from new products. In addition, and as expected, there were higher costs for pension, other retirement and insurance.

Sales in the diagnostics and information group were 75.9m in the second quarter, down from 89.2 million a year ago, primarily due to a decline in intersegment sales. Increased sales of hand held diagnostic products and steady sales in Europe were offset by a decline in big-ticket diagnostics equipment in North America, primarily products sold through the dealer groups tech rep organization. In addition, the production of certain European equipment products that were previously handled by the diagnostics group were transferred to the commercial and industrial group as Dale mentioned. This realignment represented about one-third of the intersegment sales decline. Operating earnings for the diagnostics and information group were 5.1 million in the second quarter, compared with 7.9 million a year ago. This earnings decline is primarily due to the lower sales level.

Now let me turn to cash flow and working investment. Snap-on generated $37 million of cash flow from operating activities in the second quarter which exceeded net earnings. As of the ends of the second quarter, the reported amount of total accounts receivable increased YTD by 23.9 million. However, foreign currency translation caused recorded amounts to increase by approximately 35 million. Looking at it from a days trade sales outstanding perspective Snap-on improved by five days, or just over 5% year over year.

As with receivables, recorded inventory levels increased by 15 million from the beginning of the year with currency translation adding about 25 million. As of the ends of the second quarter, inventory turns improved to 3.3 turns. This is up from 2.9 turns in the comparable years ago period and up substantially from the historical average of approximately two turns. The improvement in inventory and working investment turns made the point of strong emphasis across the company. We believe that Snap-on is on track to achieve its inventory targets by the ends of 2004 and the overall improvement in working investment by the targeted date of year end 2005. That goal is expected to generate cash of approximately $250 million over the target period which began in 2001.

Our disciplined approach to spending under driven to deliver is every bit as disciplined when it comes to capital spending which focuses us to invest in value-added projects while eliminating waste. Capital expenditures of $13 million YTD were down substantially year over year, reflecting the early benefit of our lean transformation where production versatility and creativity before capital are two important concepts. As a result we now expect that our capital expenditures will be around 35 to 40 million for the full year, down from the earlier expectation of 45 to 50 million. A priority for Snap-on is to use our free cash flow to reduce debt. As a result, the ratio of total net debt to total invested capital strengthened to 25.3% at the end of the 2003 second quarter from 29.2% at the end of FY 2002. A year ago this ratio was 34.3%. Included in this current reduction is about 160 basis points of favorability caused by the increase in equity due to currency translation YTD. Our expectation to is to continue to use our cash flow to reduce our net debt levels.

Some final comments about our 2003 earnings expectations. As Dale has said we intend to phase out production at two of our U.S. hand tool plants with the planned completion in 2004. The plant closure of these two facilities is expected to reduce 2003 diluted EPS of about 25 cents with about 19 cents of that in the third quarter. We now expect 2003 earnings to be in the range of $1.65 to $1.75 per share.

In our announcement of June 26 we stated that we expected 2003 earnings per diluted share to increase five to 10% year over year. Our expectation had and continues to assume a greater portion of 2003 earnings growth to occur in the second half. Today we anticipate no change in the business and economic factors underlying that expectation with the exception of the impact of the aforementioned plant phaseouts.

Thank you. Those conclude our prepared remarks. Now we will take your questions.

Operator, we are ready for the question and answer period.

Thank you, sir. Today's questions and answers will be conducted electronically. If anyone in the audience does have a question or comment please press star one on your touch-tone telephone. Again, for any of us joining us today please press star one. We will take our first question today from Alexander Paris from Barrington Research.

Good morning.

Good morning, Alex.

Just on the charges, of 22 million of cost, then had you 17 million, of the accelerated pension and retirement, that's associated with this consolidation?

Alex, it's Marty. The 17 million in the third quarter includes 12 million of accelerated pension and post-retirement medical expenses, and that results from the accounting rules that require us to now accelerate the recognition of expenses that were otherwise being actuarily spread over the working periods of those affected employees.

That's not related to people who were laid off as a part of the consolidation?

No, it is. I'm sorry, for those two facilities, for the population affected there who will be laid off, it is the recognition of pension and post requirement medical expenses that absent their layoff would have otherwise been spread over future periods.

So that left $5 million of the cost just for the other expenses related to the closing?

Correct.

Then there's another 5 million in the fourth quarter?

Correct.

And then 4 million sometime in 2004?

Correct.

Okay. Now, does that take the form of a charge or is that running through your income statement?

It will run through the income statement in the amounts we've just talked about during the periods we just talked about.

And that's not a charge yet because of this new accounting rule? In the past wouldn't you treat that as a non-recurring charge?

In the past we probably would, under the new accounting rules for restructuring type activities, many of the costs are now spread over the transition period between the time you initiate the action and the time you complete the action.

Okay. So your prior guidance of 5 to 10%, that was like $1.89 to $1.98, I think, or something like that, and that was on a pure operating basis, and now you are reducing it by essentially 25 cents, I think, and that's on an operating basis?

That's correct, Alex.

Because you could not make these a non-recurring charge?

Well, we elected not to. I think this is really more evidence of our desire to go to a pay-as-you-go approach and as you said that's been exacerbated by the way of rules have changed.

But it looks like when you wash it through, the difference in the guidance is all related to this decision to consolidate plants?

That's correct.

Right?

That's correct.

Okay. That was my only question, then. Thank you.

Anything further, Mr. Paris?

No, that's okay.

Thank you. Next we will hear from Jim Lucas with Janey Montgomery.

Good morning, guys. Two questions, one, could you expand a little bit further on the weakness, the issue you saw in the tech rep organization and what the outlook there is going forward? And, secondly, clearly the focus on debt reduction is an area that you've met and exceeded your goals and now that you've got a BS that has been strengthened very much with still more potential for improvement going forward and the strong cash flow can you talk about maybe some uses of this BS going forward?

To the first question, Jim, I think what we saw was some continued concerned as we talked about unfortunately for quite sometime now in the realm of purchase of capital goods equipment for more I guess you'd say the basic automotive functions, things like air conditioning, recycling, fluid management and the large diagnostics, the sun machines if you will that were fairly high dollar sales, some were in the neighborhood of 25,000, for example.

That is what we have seen continued reluctance to reinvest in in the current period. Conversely we have seen good success in the handheld diagnostic innovations we've developed in the last several years and that continues to kind of go against the trend, if you will. In our minds that's really related to the productivity enhancement that those products provide and it really makes a very compelling story for the end user about why an investment in this product in spite of the current concerns is the right thing to do. Again, that follows the same rule that this stuff does wear out over time. If they want to remain in business and utilize equipment to do so, that there is a replacement cycle out there that eventually will come to fruition.

Relative to the BS, you're right, we have been focusing on that for some time and we do believe there are another level of benefits to be extracted. The uses of the cash clearly have been to get debt out of the way first and foremost. We are below our stated goal and range of debt to equity. But at the same time we also had the pension rear its head and we are obviously taking very close watch on what the pension circumstances are.

So primarily I think that will be added to the use of the cash in addition to the debt. And then, finally, we have not completely withdrawn from looking at other outside acquisition opportunities. The [Nexik] acquisition of last Fall is the most graphic example of the fact that we are still engaged in this process. I just visited [Nexik] and I can tell you that's gone very well and it's going to be a key part of our business future. But we are very cautious on getting into the acquisition area, if you will, for a lot of reasons and we will corporate to pare down the debt where we can and I would not be surprised if you see us adding to a cash position modestly over the period for the remainder of the year and possibly into next year.

Is that due in large part just weighting to see the pension calculations at the end of the year to see where you stand? Is that a big factor in your decision right now?

Jim, it's Marty. No, we know what our minimum contributions are for this year and as I said before they are roughly 20 million of which 10 million was actually already contributed back in the first quarter. And looking forward into next year, we were looking at a range of numbers that are clearly very manageable. So at this juncture we don't view our anticipated pension fundings as constraining the company. They are currently manageable out of our operating cash flow.

I think, maybe, Jim, is thatin the driven-to-deliver we ratcheted up [inaudible] we are seeing some element of that. But I will tell me that you haven't completed recently the long-range planning cycle, the opportunities that have come out of that process just on the current footprint and base of business, are particularly interesting to us and could provide some significant benefits. So I think the balance of those two elements is really what's causing that kind of discipline, if will you, in our cash usage.

Okay. And one final question on the two plant closures. If you take a look, there's been a lot of pruning that's been done to the manufacturing footprint over the last several years. You made the comment about evolving more to the pay-as-you-go restructuring. How much more is there? Is it really based on, do you think if we are truly bouncing along the bottom and we are looking at maybe a gradual pick up in demand next year, are you comfortable with where you are or is it something that you are going to continue evaluating the cost structure on a quarterly basis?

That's a good question, Jim. I think in this particular case, what you are seeing is evidence of our ability to improve the efficiency and effectiveness of our plant footprints. These two plants account for roughly 10% of the volume in the handtools area and through the improvements we've made on the production process and floors we now freed up that amount of capacity in our existing plants that we can absorb those two and get the benefits we outlined. I think in the future as those continuous efforts continue to pay off we don't think we'll have a capacity issue at all.

We are very comfortable that we can handle any upturn of any sizeable nature within the current footprint. But to your point on continuous improvement, as always you are never done with these things and as I said earlier in my comment relative to long-range plan, we are seeing a large amount of projects bubble up from the bottom up, if you will. So I think it's evidence for us that we are seeing people really thinking about how to become more efficient, more effective within the driven to deliver framework and they are bubbling up good ideas that we are in the process of implementing to help us down the road. I also will remind many of us that I have spoken in the past several times to not be surprised that over the course of the next weeks, months and years that we would show some plant eliminations as a result of some of this activity and this I think is a good example.

Okay. Thank you very much.

Moving on, we'll hear from David Reiker with Robert W. Baird.

Good morning. I'd like to follow up on the plant closings. You already answered one of my questions that these plants are 10% of your volume. What products do you make in these facilities?

It's a wide variety depending on the location. It's primarily hand tools, ratchets, extensions, some of the specialty size and larger size sockets, I guess you would say lower volume items, C. and D. characterization from an inventory standpoint coming out of the Kenosha plant.

And the other plants are they about a comparable size?

They are slightly larger in one case and about equal on the other.

And in the cash costs, the 26 million, it doesn't look like a large portion of that is cash.

Dave, it's Marty. The pension and medical piece, the $12 million piece that will be very long term.

Right.

The balance of roughly 13 million for the most part will be cash.

It will? Okay. Great. And then, Marty, in your comments I guess you talked generally about the pace of your shipments versus the end market and the sale off the truck. Can you put some numbers on that?

What we said is, I think we said low single digits.

So the pace of the sales off the truck to the mechanic continue to be relatively steady with what we've seen in the last several quarters?

Within a range, I think that's an accurate statement.

And then your sale to the dealer going forward will track the end markets sales more closely than they have the last four quarters?

That's our expectation. As I mentioned in my comments, we have seen an anniversary coming up here quickly and have initiated some of those actions and this quarter, to your point, those were more in line and it is our that those will continue as well. But there will be some vagarities causing some disconnect, if you will, because of products for, promotional emphasis many things but those aren't going to be in lock step.

Those would be normal things?

Generally they should trends directionally the same.

The last piece of this, your shipments relative to the sales off the truck, that's going to continue to lag here for another, what, four, five quarters as you work, work down your inventory levels?

Well, we don't think it's going to be as high as it has been in the past, David. I think as I said we are seeing evidence now that they are getting in line. So what goes in and goes off the truck is roughly equivalent. But, again, depending on the economic circumstances staying relatively stable. If they change then that prognostic occasion might change.

I might have misspoke, your production rates relative to.

Oh, the rates? The rates will be in line with our ability to hit the inventory reduction. So that's a combination of new product activity, inventory reduction and some of the changes we'll make to reflect the impact of these two plant changes.

Okay. And then the last question on the commercial industrial, I think the last time we talked about all this it was several weeks ago. Have you seen, we're hearing from some industrial companies that the end of June into July was a little bit better than what we they that seen the months before that. Is there any early read on what you can give to what late June, early July looks like.

That's interesting, David, because all of the friends and colleagues I have that operate in the industrial space saw the opposite. They saw the last two weeks of June getting softer and that clearly was our experience as well. Again, that depends on what sectors you're in and your mix of those sectors in your business. It's an old phrase and maybe getting to be a hackneyed phrase but I think the bouncing along the bottom is still with us and again we show an amazing alacrity to turnoff activity at the drop of a hat and that's still with us and frustrating us to a degree.

We have seen convergence, though that some of the big issues that were hanging over the market, i.e. the Iraqi situation, the resolution of the tax benefit package, those have been resolved but unfortunate I think as we spoke at that time, the end user has shown a great need to find another reason not to do things and have latched on to other things now to, most notably the discussion about the consumer fading to resist their ability to go back in and by capital goods. So I don't see any lessening in my mind of the general nature of concern and the willing mess to reinvest that I can point to and say clearly the worm has turned and we are on to a different track.

And they were very mixed comments, it was just a couple of them that have mentioned that generalizing?

We pay attention. Some of our business units are early indicators if you will and pay close attention to those. And so far they've had some evidence, and again we felt good for a number of weeks and then they've shown an amazing ability to fall off and disappoint us again. So, again, given that uncertainty, we are focusing on the things that we can control and influence, what we can see, touch and feel and are continuing to grind away to improve the situation.

Then the last follow up on that is just, you see what your current patterns are costing to the end of the year, how much risk there to your earnings guidance?

Well, it's hard to characterize that, David, and I feel constrained to really comment more about the than the range we provided you is our best estimate of what that could ends up being.

But you are assuming that there's some improvement in those end markets.

To some degree, right.

If you find your question has been answered you can remove yourself from the queue by hitting the pound sign, up next we will hear from Boyd Posten from A.G. Edwards.

Good morning. The 12 million in savings, is that is that a run rate will you reach in the second half of next year or will you realize that total in the year?

We expect to realize that total in 2004.

Okay. Can you refresh our memory, you have 100 TAG sales reps, how many did you want to get to?

The initial interim target was around 120 and as we said we are a little bit behind that. The final number quite honestly is a matter of discourse right now. It really depends on what we feel the opportunity is. So I would expect that we will exceed the 120 figure in the near term and what it will settle out at as I said is yet to be determined.

Has there been any increased turnover among the tech reps as you've kind of started the TAG program?

Actually quite the opposite has happened. Our turnover rate in the tech reps has gone down dramatically since we initiated this change.

Okay. Thank you.

Up next from Clovis Capital we will hear from Michael Prober.

Marty, can you break down for me how much of the finance income was due to lower interest rate versus origination benefits? Is that possible?

I can only tell you that originations of the volume proxy were up 7% year over year, volume was pretty good.

Then for the dealer channel group, it sounds like the sales are coming back in line with what you had expected but my model is the margins are a little higher. Was that anything specific in the quarter? I know that manufacturing cost absorption was an issue but I guess tension was big, too. Was there anything specific to this quarter that was hitting the margins in this segment?

Well, the margins as we said, affect, the margins offer the truck sales were up low single digits but the bigger ticket diagnostic equipment was down so that's a little unfavorable in terms of mix impact. And then we had some continuous actions associated with that, in manufacturing absorption you referred to, higher pension cost year over year. So they lost a little bit on mix at the top line and then had some costs underneath that and that's what caused a little bit of the erosion.

When can we see the margins actually start to improve on a comparable basis, in which quarter?

Well, again, our expectation is that as we move into the second half for the dealer group and as we lack a number of the initiatives that began last year that hurt the margins that we begin to see improvement.

Okay. Thanks, guys.

Next we will hear from Dan Donovan with American Express.

Dale, can you kind of run through for me on the technical automotive group, just what products we are talking about here and differentiate what you are doing in the technical automotive group versus the tech reps and how they work with the dealers?

Okay. The distinction between the two is the tech group is focused on automotive diagnostics and a limited range of service equipment. The TAG group is focused around wheel service, so you are looking at wheel balancers, tire changers, liners and collision repair equipment. So that's fairly well the distinction between the two groups. So really you have a group of people focused on automotive under hood, if you will and you have people focused on the under car, that would be a good generalization to make.

How they work is, those groups work in concert with the dealer facilitated through our systems. Our dealers if they enter a shop and by observation or commentary by the shop management they say they are in the market for a particular piece of equipment, that is funneled back to our respective group and that initiates a sales contact for those people at that account location. We call that providing a lead from the dealer back. So now we have a great loop with the dealer in his normal stop of once a week at everyone of their stops has an ability to closely couple the response to a need from an end user to the appropriate type of sales support. So that's really kind of the dynamic and the operating mechanism of the TAG, TAG rep and dealer triangle right now.

Okay. Thanks, Dale.

Moving on, from Lehman Brothers we will hear from Darren Kimball.

Hi, just a question on dealer sales. You are talking about low single digits and that you are mirroring the market. We had previously I thought been talking about mid single digits. Are you telegraphing a slightly softer environment for end market sales?

No, I think there's a lot of moving parts in that, Darren, at the same time. I think it's probably hard to tell what's market and what's self inflicted if you will because of the tech rep movers and some of the other things we are doing. Now as I said earlier, within a range it's still in that lower single-digit, but obviously we will keep an eye on it in the third, fourth quarter. But we haven't seen any dynamics that says there's a say change on the part of the dealers that we are getting a part of the slow down. As I said gas prices have behaved themselves pretty well, we will see how the high season, if will you, and with vacations how it goes at the end of August and we will know much better at the end of the next quarter. The early indications were is we are not seeing a huge fall off.

I understand. What you are doing to affect your sales to the dealer. I'm not sure what Snap-On has done to affect the dealer sales to the end user.

Well, again, we are driving new products, trying to promote actively the benefits that our products provide, some of the normal marketing maintenance items you should say.

But you haven't done anything to hurt the dealer sales, are you?

No, not at all. We are trying to enhance it.

I'm confused because you said you are mirroring the market which is now low single digits and that certain is a change from the mid single digits that we are talking about at the end user level?

Again, one or 2% can make the difference between low and mid so it's pretty tough to get much finer than that.

If you can just provide a little more color on the hand tool business footprint. You mentioned Kenosha. Did you name the other plant that you are closing? I'm just curious.

We did on the press release but I haven't on the conference call. The other facility is the Mount Carmel, Illinois facility And [inaudible]

Can you given what your footprint will look like pro forma for these actions?

You mean the number of facilities?

Yeah, what major facilities are left.

We would have three hand tool facilities left after that, Milwaukee, Wisconsin, Johnson City, Tennessee, and Elizabetha, Tennessee. So we will go from five to three.

Any comments on capacity utilization on a three-facility basis rather than five?

Yeah, obviously it will be improved as we move the other two facilities volume into the remaining units. But as I said earlier we don't have any concern over capacity constraints at this time at all.

Okay. That's helpful. Thank you.

Next we will hear from Steve Girsky with Morgan Stanley.

Good morning it's Jonathan Steiner for Steve. I'm trying to figure out on both the commercial and industrial on the dealer side are you seeing either sequential improvement? I know you have a pretty easy relative comparison on the dealer side, an improvement in the first few weeks of July, here?

We don't have much visibility to that. It's a little two early to call that.

Okay. And a couple of BS questions. There are two line items, dealer deposit and deferred subscription revenue that are down pretty substantially year over year. I was just wondering if you could give a little color on what's actually in those lines and is that something that's related to the slowing of the Feet on The Street program?

The deferred subscription revenue all results from our Mutual One information business. Their business model has changed over the year from selling longer term subscriptions to shorter term contracts. So that causes a decline in deferred subscription revenue. And on the deposit side, it's really due to due to lowering of interest rates. We pay our dealers on those deposits. I guess they decide to put some money elsewhere.

Okay. On the dealer business, can you break out in any way sort of on the revenue side unit change versus price versus mix change?

Jonathan, not really other than to say they had some improved price realization and that helped them a little bit. Otherwise it's all volume related.

Like-for-like unit you are saying there is positive price?

Correct, yes.

And the last one, have you broken out gain on sale at the finance company?

No, we've not.

Would you be able to do that on a year over year basis?

Define gain on sales.

I believe there are a few components on the finance company income, gain on sale is one of them?

I don't have that data. We have not broken that out. You are correct, finance company products are fundamentally sourced by selling contracts to our financial partners and realizing gains on the securitization. That would certainly be a very large portion, the largest portion of the finance company's profits. I would expect it to be in sort of similar proportion to what you would see if you opened up last year's annual report.

Jonathan, it's Bill. If I might add to that just from a general standpoint which is if you are kind of referring back you may recall when we convert from a captive to the joint venture because of the existing portfolio that was on Snap-on Incorporated's BS we generated a gain on sale of that portfolio, but that was covered over the period of 1999 and 2000. That is no longer going forward. And as Marty commented the model for the joint venture is largely based on an origination model where you originate the loans and then they are sold immediately at the end of every week to our partner. So there is a difference in how that has been treated. But I think if you are referring to what was once stated that was kind of a period that ended midway through 2000.

Thank you.

Next from [Speis Thorson] we have Fred Speis.

Yes, in the commercial and industrial, how much of the sales decline was due to dealers putting merchandise back to you?

There was some of that, Fred, but I wouldn't call it a commanding amount. Actually it was below our estimate going into the program on what would happen there. So, you are right, there was a small percentage of that but we think that's largely behind us now.

And your cash builds, that's a curious comment, so you are saying you are seeing other internal investments to improve that are more attractive than acquisitions, and our plant closes, this is a capital investment in effect, are they that kinds or are they add on? Are you seeing more plant closures that will require cash to do?

Well, it's, at the present time we don't have any, Fred, but all I am saying is as we become more efficient and effective as I said before unfortunately one of the outcomes of that can be that you have less plants facilities, especially in light of an uncertain top line as we've been going through here in the last few years. But to your point, yes, we are seeing some very interesting, if you will, from a financial internal rate of return standpoint a lot of projects from a lot of our people, again based on their bubbling ideas from the bottom up to get waste out of their system and do a better job and become more efficient.

So the change between doing that, a deal like that internally if you will and going outside and making an acquisition is one that we do consciously make trade-offs on. But obviously as you would imagine there is a strategic nature to acquisitions that we don't overlook as well.

Okay. Thank you.

We now have a follow-up question from Alexander Paris with Barrington Research.

Getting back to the plant closings, the handtools that you produce out of the plants that are being closed, they go to the independent dealers as well as into your industrial channel. Is that true?

That's correct.

So the decision to close the plants since the dealers business has been holding fairly steady is that primarily to reflect the downturn in the industrial channel or is it just because you've, with your changes in thought that you can, you can get along with less capacity?

Right. No, it's an overall benefit is what we are looking at. There's nothing specific to the plant closures to the industrial situation. As I said earlier, we don't believe we are losing share in the industrial markets today. We have a brand strategy that allows us to have coverage on several price points, not just the traditional Snap-on premium product. So this is more from an overall efficiency and effectiveness standpoint that this decision has been made.

In the past you made acquisitions of Euro Tools and companies like that that are selling I guess that is other than Snap-on brands?

Right.

Is there any consolidation possibilities there? Because they should be doing poorly, also, then?

They've done a reasonably good job. We have done a lot of acquisitions integration in the last few years, so much of what you talked about we've actually done already. We can't rule out that the future may change and dictate us to do something different. But there's a continuing reevaluation depending on the local market factors inventory investment, freight cost, if you will, to get product from one part of the world to the other, that we evaluate on what's the best place to make think where is the best technology to make think and that's a constant reevaluation process we go through on a yearly basis.

So I don't have anything short term looming on the horizon aside from what we already communicated but as many companies, Snap-on is in that group that we continually reevaluate what we are doing and where we do it.

Speaking of EuroTools, you had a very big consolidation and rationalization in Europe over the last couple of years, that's essentially over that part of it have?

That element is over and you are correct, we had a fairly sizeable program and that is in process right now and delivering the benefits we expected. Again, I will stress there's nothing we can rule out because of the uncertainty in the future that we will take the appropriate steps to remain competitive in those markets we choose to operate in.

The facilitation business was better, is that because you signed up one or more new accounts?

We have had some new accounts added into the facilitation business but I think the majority of the increase was more activity with the current account base.

Okay. Thank you.

David Reiker with Robert W. Baird has a follow-up question.

A couple of quick small ones here. If I'm correct, Dale, I don't think you've done any restructuring or downsizing on the tool, hand tool manufacturing side. Is that correct?

How far back, David, are you saying, in recent times, you mean?

Since you were CEO

We did some, well, we did some in the power tool side during my tenure here. We've done some minor thing in hand tools, shipping production among the plants and facilities like I mentioned earlier. This is probably the largest and for sure the largest plant closure affecting hand tools that's been done in my tenure, that's correct.

Most of your actions have been on other parts of your business?

Correct. As I said we've been spending time on equipment, diagnostics and other areas of the business.

I just wanted to be clear on that. On the finance income, I mean at some point we are going to have to deal with interest rates going up, probably. How much risk is there to that finance income line as that happens?

David, we've not quantified that. I think we said in prior guidance that our forward plans include [inaudible] and they have actually started up that way a little bit. We never quantified the sensitivity although I would admit the finance income line is interest rate sensitive. So we never quantified sensitivity.

In a flat interest rate environment, that line over that line over time grows five, 6% a year?

If interest rates stay flat it's pretty much a function of originations coming out of the dealer business.

I would agree. I think it would be a proxy for the overall dealer business, the expansion in the dealer business and then whatever new product mix again that we would offer that would be the likely candidate to go through the credit companies such as an equipment lease or something of that nature.

And your 7% origination number that you talked about year over year is greater than mid single digits on the North American dealer business? What's the difference?

The difference there, David, is a combination of both originations on products sold to dealer customers, if you will, as well as higher volumes of financing to dealers themselves are for new dealers, et cetera.

Okay. And then a couple of other items here. Minority interest, had you made a comment that minority interest is down, I assume that's all Mitchell. Can you talk a little bit about what's going on there and what the trends might be?

You are correct the only minority interest we have is coming from Mitchell. I will let Dale comment a little bit on Mitchell's business.

Yeah, I think the Mitchell business itself is sound. It is being impacted by this reluctance to reinvest in the business that we talked about. But I think the Mitchell new product activity has been very well-received in the marketplace and they continue to be what we would characterize as the leader in the automotive information business. So I think the prospects for Mitchell are as and they've always been which we think is favorable.

This is the first time I think I heard you talk about that not being up year over year or at least.

I think so, I think there's been a lot of activity at Mitchell recent that will has helped the company. We are coming around some anniversaries on some new products so there are a lot of elements that are causing that but again there is some market softness out there no doubt.

Two things here, capital expenditures, where do you think that ends up in your long term run rate on capital spending?

This year we said to expect the 35 to 40 range. A lot of that is a result of the efforts that our people are coming in again at the grass routes level to look at creativity before capital. I think that has more to do with it before anything. And we are seeing opportunities now with the plant closures that we talked about to avoid some CAPEX as a result of that. Longer term I think going back to that 40 to 50 million range is probably what I would expect to see.

Then the last piece here is the other income which I realize jumps around pretty meaningfully quarter to quarter. Is there any kind of ballpark number that we should be using on an each item basis going forward for that number?

I think David in the past we talked about roughly 2.5 million a quarter.

And the variance here, if you split it between currency and minority interest, are they even, is one bigger than the average?

They are roughly the same.

Okay. Great. Thank you.

One final reminder today. Please press star one if you have a question or a comment. Jim Lucas with Janey Montgomery has a follow-up question.

Thanks. Just a couple of housekeeping questions here. Dale, you mentioned that you have a couple of businesses that are early indicators. Could you give us an idea of what those businesses are and what you are looking for there?

I don't want to tell all my secrets, Jim.

Can you give us an idea? How about that?

Some segments of the power tool business can be seen as early indicators. And then you somewhat of the industrial products business. It's more reflective around certain industries that we participate in. So that's really what I was talking about when you refer to early indicators.

In terms of the dealer count at the end of the quarter, can you give us an idea of the net increase or decrease in the quarter?

Jim, in the U.S. we had about 4243 Feet on The Street and I believe, 4243 and it was about 4245.

So you are up about 17 and that about 100 year over year.

In terms of your dealer base that's now multi-franchise, multi-van, do you have a rough estimate of where estimation of where you stand?

As far as penetration do you mean?

Yes.

We are right about where we thought we'd be on the number of vans. This program, if you will, is running through the end of this year, Jim. So we are still on track to meet or slightly exceed what we originally estimated for that mix, mix of seconds to primary franchises. We won't know until, as likely as not as we get towards the end of the year there may be some impact as that program comes to a close.

Finally within the diagnostic business, can you give us an idea of roughly what percentage of that business is now soft, what the software component is?

Jim, I don't have that.

We don't have that split, Jim, with us.

Okay. All right. Thank you.

And our final question today comes from Fred Speis with Speis Thorson.

Yes, I'm assuming your dealers are hungry because their same store sales are so low. Are these incentives to refer to the TAG team important and how might you have, how many how many have you had in May and June? Is this building.

To your first question yes the sales of automotive equipment and diagnostics are important to the dealers and this addition of the TAG will actually expand their participation in sales beyond what they had in the past. So we hope that if they hit the targets that we are expecting that this will become a significant benefit to the dealer, to their overall business health, if will you. The number of people in the TAG group as I said is now over 100 that's up around 20 or 25 people in the last 30 to 45 days.

The dealers themselves, I guess my question was, the dealers themselves, how many referrals have you gotten in, I know it's a new program but is there a number you have in the May and then one in the June --

I don't have the number off my head but they are increasing by a significant percentage each month and the number of referrals is in the thousands. So this isn't a one or two things, this is literally thousands of leads that we've been provided.

Great. Thanks.

And there are no further questions at this time. Mr. Fund, I will turn the conversation back over to you, sir.

We would like to thank you for your participation and we would be happy to address any further questions you might have as you think of them. Thank you.

That concludes today's teleconference. Thank you all for joining us.