實耐寶 (SNA) 2004 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Snap-on Incorporated First Quarter Results 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.

Good morning, everyone. Thank you, operator. Thanks for joining us to discuss our first-quarter results. With me, this morning, are: Dale Elliot, Chairman and Chief Executive Officer; and Marty Ellen, Senior Vice President-Finance and Chief Financial Officer. Today, we'll be using a set of slides to help illustrate our discussion. For those of you listening to our webcast, you should have found the slideshow accompanying the "audio" icon, when you logged on. You will need to flip through the slides, as we go along; and we'll let you know, as we move on to the next slide. These slides will be archived on our website, at "snapon.com."

As is consistent with our policy and past practice, we encourage questions during this call. We will not discuss undisclosed material information offline. Also, any statements made during the call, such as management "expects," "believes," "anticipates" or which otherwise state the company's plans or projections for the future are forward-looking statements; and actual results might differ materially from those in the forward-looking statements is contained on "slide two" and in the news release and 8-K, issued this morning, by Snap-on as well as in our latest 10-Q, 10-K and other periodic reports filed with the SEC.

In addition, this call is copyrighted material by Snap-on Incorporated and is intended solely for the purpose of this audience. Therefore, please note that it cannot be recorded, transcribed or rebroadcast by whatever means without Snap-on's expressed permission. The call is being recorded, and your participation implies your consent while 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 everyone. Let me start with some overall observations regarding the quarter. On "slide three," there is a brief recap of Snap-on's financial results. Overall, the financial performance was largely where we expected it to be. Although there were, as anticipated, a number of factors affecting our results, as we accelerated numerous actions into the first quarter. After taking this into consideration, improvement is being made on several fronts and is reflected in the continued strength and growth in cash flow. We continue to address process improvements and drive customer responsiveness. Coupled with some improvement in the economic climate for industrial demand, we continue to expect enhancement to our bottom line to begin to show in the second quarter, as many of you are already expecting.

During the first quarter, we consolidated our financial services joint venture as a result of the new FASB guidelines in FIN 46. While this added 21.2 million to total revenue, the consolidation did not change the bottom line. Net sales increased 52 million, of which 32.2 million was from currency translation and 18.8 million from higher sales volume worldwide. While not yet at a desired level, a 3.3 increase in the volume is a good start and begins to reflect the shift in the headwinds we've faced for much of the last 4 years.

Worldwide sales of industrial tools and vehicle repair equipment as well as improved sales to Snap-on's franchise dealers, particularly in international markets, contributed to the increase in organic sales volume. Sales in the U.S. dealer business were essentially flat year-over-year in the first quarter, while sales recorded by U.S. dealers to their customers continued to increase in a mid-single digit rate for the first quarter.

EPS was 22 cents per share but did include 16 cents of costs for continuous improvement actions and manufacturing inefficiencies and variances largely associated with the consolidation of the two U.S. hand-tool plants and to other U.S. manufacturing facilities. This is a significant step, and I would discuss it in more detail in a few minutes.

Cash flow was again a strong positive in the quarter, largely reflecting the continued and substantial progress being made in our working investment management. Marty will discuss this further in his comments, but I would like to share my enthusiasm for the progress that has been made throughout the corporation in this area. We still have a long road ahead of us, but the organization is responding in a positive manner to our needs of change and we expect further gains. I believe the journey is progressing and we will continue our effort to accelerate improvements.

Cash generated from operations was 31 million despite the dip in net earnings due to the higher spending for continuous improvement actions. And free cash flow was 24 million. Working investment turnover improved to 3.3 turns, and we believe remains on track to recharge data target of 4 turns at the end of 2005. In the area of inventory turnover, a level of 3.8 turns was achieved. We are now entering into territory, not historically associated with Snap-on. You've heard me talk about the substantial investments made to strengthen the foundation of our business. Whether it was improving inventory turns for the company and our dealers or streamlining, manufacturing and supply chain processes, we expected the cost of making those changes, notwithstanding the short-term impact on earnings.

The Driven to Deliver framework and Snap-on business process are predicated on strong operating skills and discipline. The task has been to internalize these disciplines across the company. Our goal is to drive superior long-term financial performance and build sustainable growth, delivering real value to our customers and, in turn, delivering significant value to our shareholders.

I would like to take a few moments now to share with you some of the significant changes that have taken place in the Snap-on dealer group and Snap-on tools operations our heritage business began over 80 years ago.

As you can see on slide 4, on July 21, 2003, we announced that we would be closing our two largest and oldest hand-tool plants, Kenosha, Wisconsin and Mount Carmel, Illinois, not because of the communities in which they were located or because of the people who work in them, rather to address the need to strengthen our supply chain from end-to-end, in order to maintain our value proposition to the customer and build better financial performance. Plans were finalized and a whole host of details necessary to move such a significant amount of production were mapped out. And importantly, we were determined not to let any lapse in customer service occur.

As you can see on slide 5, the statistics are dramatic. They, however, do not tell the whole story. We were able to consider such bold action because of the positive changes that have taken place under Driven to Deliver. Building a mindset of continuous improvement and a culture that emphasizes value and performance, and lean tools allowed us to take great strides in moving towards cellular, one-piece manufacturing flow and in eliminating waste. As equipment was being moved to the Milwaukee and Tennessee plants, we continue to drive new lean activities finding further process gains. Even as manufacturing store footage decreased by more than 50% in our hand-tool plants, capacity was maintained when measured by throughput potential.

Communication was a key element in our success and within the plants, organizational responsibilities were realigned from traditional department to responsibilities by value streams. From raw material as it enters the plant to the finished products as they leave the plant, what was once organized in our department lines like machining, grinding and plating, it is now the responsibility of the value stream teams and it encompasses all activities related to a particular value stream, such as (inaudible) pliers for example.

As we stand today, production ceased at the Kenosha and the Mount Carmel plants March 31, on schedule. It is also important to recognize that our people, everyone from the associates on the job floor to the plant managers affected did a tremendous job in seeing this major project through to conclusion in a professional manner. This is even more noteworthy in light of the impact this decision had on them personally.

Remember that is only one aspect of the deeper changes that have been made within the Snap-on organization. Let me turn to slide 6 and briefly talk about product management. About a year ago, we altered the management philosophy of our product management group from a single product focus to a portfolio management focus. As a consequence, we began to view our product offering as a dynamic lineup not a static listing. In combination with that move, we adopted a new key defining metric to help us mange this change: Gross Margin Return on Inventory or GMROI. GMROI, a tried and tested measurement from the retail sector, looks at both product profitability measured by gross profit and product velocity measured by term.

Today, we have internalized product line reviews continuously bringing together all the people necessary to evaluate a products continuing existence. These changes have been instrumental on improving success with new products reducing complexity in our product lineup and increasing the opportunity to develop fresh solutions for the marketplace such as new on-band marketing and merchandising for our viewers. We're working to combine the best processes in retail with the best mobile band tool distribution network, Snap-on.

Through the discipline of the line reviews, the lessons of 18-20, and the metrics of GMROI, product managers now let the marketplace tell them what was successful and necessary for continued success for the line in the future. Outliers on the metrics of profitability and velocity are eliminated, which when combined with new methods for managing the end of life process, ties to improvements being made in inventory management. Taking advantage of the closure of the two manufacturing facilities, production managers work hand-in-hand with product managers to rationalize the hand-tool item.

Overall, since a year ago, the product lineup has been reduced by 22%. Yet, this represented only 3% of previous unit volume. This has significantly reduced complexity, providing a positive effect on production scheduling. It has also reduced the need for manufacturing equipment, setups and the amount of space in the distribution centers. Most importantly, it allows managers to focus sales and marketing efforts on those profitable products that matter most. This, combined with our new robust product development efforts and our target of generating 30% of sales from new products, now becomes another positive aspect of how we expect to generate profitable and sustainable growth.

Let me share an example. One of the first areas we applied our pressure approach to was hand tools, again our largest and oldest product lineup. Sockets, the innovative products developed by Joe Johnson back in 1919 and which led to the formation of Snap-on as a company, have driven our success for many years. (Inaudible) the socket line grew and evolved as the variety of fasteners and applications increased. Over the past 85 years, the socket line has proliferated resulting in significant redundancy and mismatch in coverage.

The original concept of five to do the work of 50 had now become 50 to do the work of five. Our emphasis in the future will be in achieving a right portfolio balance in each category in which we participate. That won't stop innovation, for instance one of the exciting new product launches is a new spark plug socket featuring special engineering geometry on the inside. This patented Snap-on magic positively grips the plug and protects the insulator without the extra cost of rubber in search of magnets.

Now being sold, this is a good example of how new ideas can add value to products that have been around for decades. With our dynamic focus, there is no such thing as a matured category. I would be remiss if we didn't mentioned two areas concerning this: steel prices and energy prices. Both are areas where we're spending a great deal of time and attention. Without a doubt, the current path of steel pricing is concerning to us.

We expect to feel the impact of these increases beginning in the second half of the year. To beat this challenge, we are looking at both accelerated cost reductions and strategic pricing actions to maintain margins. Relative to energy, we have not seen today an adverse market reaction to exceeding the psychological price points of the past. We are hopeful that market forces will provide some temperance to the recent trend and pricing.

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

Thank you, Dale. Good morning, everyone. I will begin with slide 7. Total revenue was 616.3 million for the quarter. The consolidation of financial services as Dale mentioned added 21.2 million of revenue. This reflect the consolidation of Snap-on Credit LLC our 50% domestic joint venture with CIT Group and the reclassification of revenues and expenses of Snap-on's wholly-owned credit subsidiaries, in those international markets where we have dealer operations. These businesses now comprised a fourth segment financial services and are included in our statement of segment results attached to the press release.

Also included with the press release and to assist you with comparison, is a supplemental statement of earnings, which provides a reconciliation of prior year results consistent with the current presentation of consolidated earnings. Statements for all four quarters of 2003 are available on our website, Snapon.com and in an 8-K report filed recently with the SEC. Net sales in the quarter grew 52 million, of which currency translation represented 33.2 million.

Higher sales volume accounted for 18.8 million of the increased or growth of 3.3%. I will address the components of our sales performance as we review each operating segment. Consolidated reported net earnings were 22 cents per diluted share compared with 37 cents per share a year ago. Before cost associated with the two plant closings, other continuous improvement actions as manufacturing inefficiencies largely associated with this significant move in production, earnings were essentially flat.

Turning to slide 8, Snap-on's consolidated gross profit, defined as net sale less cost of goods sold, was 249.3 million up from the 245.4 million a year ago. Included in gross profit are 7.1 million of costs related to the plant closing in Kenosha and Mount Carmel. And another 1.5 million for other plant consolidations underway worldwide. This compares to the total of 1.8 million of similar costs a year go. Gross margin of 41.9% was 330 basis points lower then the year ago level of 45.2% excluding financial services.

The year-over-year increase in plant closing costs as well as related production and efficiencies reduced year-over-year comparisons by 185 basis points. The absence of year-over-year (inaudible) inventory benefits as well as the effects of inventory adjustments recorded in the quarter, further reduced gross margin by 75 basis points. Another 50 or so basis points of margin reduction was due to currency effects. Therefore, on a global basis, the effects of pricing cost and mix were all essentially flat. With the major U.S. hand tool plant closures now behind us, we expect to see improving margin trend.

Turning to slide 9, operating expenses were 243.5 million in the first quarter including 10.2 million resulting from the consolidation of financial services. Absent this effect, operating expenses where 39.2% of sales flat with last year. A significant portion of our operating expenses relate to people, salaries, wages, pension, medical and other related cost of employment. We've been able to offset most of the upward cost pressure on these with productivity and other continuous improvement savings.

And one final data point related to our worldwide headcount. At the end of the quarter was down 3.2% from yearend 2003. Since 2001, headcount has been reduced by 15% worldwide. Our drive to become a more competitive performance-oriented and customer- responsive organization will continue. While we expect future periods to include continuous improvement costs, we do not expect them to be as significant as they were in the first quarter.

Let me now turn to our segment results. In the worldwide dealer segment, as seen on slide 10, first quarter total net sales of 279.9 million were up 15 million or 5.7% compared with the first quarter of 2003. We are pleased with our sales performance in international markets even though 9.3 million of foreign currency translation is included. Excluding currency, international sales were up 13.1% in the period.

Sales in the North American dealer business were flat compared with a year ago. As we noted in the press release, however, reported sales by Snap-on franchise dealers to their customers in the U.S. were strong, increasing at a mid-single digit rate for the first quarter of 2004. This improvement is believed to have largely resulted from improved market penetration that Snap-on dealers continue to expand their businesses through second bands reaching new customers and better serving existing customers. However, as our dealers continue to draw down their inventories and strengthen their balance sheets, our sales are reduced.

Operating earnings for the dealer group were 11.6 million after cost of 9.7 million from the previously discussed plant closing actions and related production inefficiencies. This compared with operating earnings of 23.6 million a year ago. Also negatively affecting the year-over-year comparisons were 1.9 million of higher freight related to increased freight rates and smaller but more frequent deliveries as well as 1.3 million of higher marketing and sales expenses.

In the commercial and industrial group on slide 11, sales of 309.9 million increased 37.2 million or 13.6% year-over-year. This includes 22.6 million as result of currency translation and 14.6 million from higher sales volume. Within the segment, demand for tools in industrial applications increased in both Europe and North America. The improvement in demand that began late in the fourth quarter of 2003, while still relatively weak and not yet reflected in all sectors, does appear to be strengthening.

Continued sales growth in the first quarter was achieved in the company's facilitation business, where we provide OEM purchasing and distribution services. I would remind everyone, however, this is a low margin business and does have a relatively small profitability impact. Worldwide equipment sales volume increased in the first quarter. We believe the improving economic climate in certain parts of Europe had a beneficial impact on the sales of capital equipment. And in North America another sequential quarterly improvement in year-over-year growth was experienced in our technical automotive group or TAG operations, our equipment direct sales channel. As you can see in slide 12, TAG sales now exceed the year ago level, and sales leads in the involvement of the dealer group continue to increase.

Turning to slide 13, the commercial and industrial group experienced an operating loss of 3.1 million in the first quarter of 2004 compared to operating earnings of 6.1 million a year ago. Despite the benefit from higher sales volumes and savings from prior restructuring activities, these improvements were offset by higher costs. Included in the first quarter, is the segment's $1.6 million portion of plant closing cost, as well as an additional 2.7 million per cost, including expenses for two hand tool facilities currently being consolidated in Europe. In addition, inventory adjustments of 4.6 million were incurred, bad debt expense increased by 1.3 million, and higher cost of 1.5 million for startup and other expenses associated with the expanding distribution and our operating presence in Asia.

Asia offers significant long-term potential for sales of tools and vehicle repaired diagnostic and equipment. The segment also experienced 1.1 million of adverse currency impact year over year similar to the fourth quarter of 2003, largely as a result of the continued strengthening of the Canadian dollar, the euro and the Swedish Kroner related to products sold in U.S. dollars.

Sales in the diagnostics and information group, which you can see from slide 14, were 80.3 million in the quarter, up from 76.4 million a year ago. Continued growth in handheld diagnostics, particularly through the dealer network, was the most significant factor. Partially offsetting this sales growth was the decline in inter-segment sales. Diagnostics production of certain European equipment was transferred to the commercial and industrial group a year ago. This represented a decline of $5 million on a year-over-year basis in inter-segment sales.

Operating earnings for the diagnostics and information group were 7.6 million compared with 2.8 million a year ago. The earnings gain was principally due to the increased volume of handheld diagnostics sold through the dealer network, lower bad debt expense and cost reductions from prior continuous improvement activities.

Now, let me turn to a discussion of cash flow shown on slide 15. Snap-on generated $31.2 million of cash flow from operating activities in the first quarter compared with 18.6 million a year ago. Included in the first quarter of 2003 is a $10 million pension contribution. After taking into account capital expenditures, free cash flow increased to 23.9 million from 12.4 million. Capital expenditures of 7.3 million in the first quarter compared with 6.2 million a year ago. Depreciation and amortization expense was 18.9 million this year compared with 14.7 million a year ago. This increase is primarily due to the accelerated recognition of depreciation on Mount Carmel and Canotia depreciable assets.

For the full year, our expectation of the capital expenditures will be in a range of 40 million to 45 million. It remains a high priority throughout Snap-on to continue to improve working investment turns and generate free cash flow. Going forward in the near term, our cash flow priorities can be seen on slide 16.

First and foremost, let me assure everyone that despite a more disciplined approach to the use of capital, we will not starve high return investments, whether they are in the area of new products, productivity enhancement, safety or for other value adding investments.

We expect to maintain our emphasis on dividend growth. And as we stated in the first quarter, we expect to accelerate our share repurchase activity, buying up to 1 million shares this year. Furthermore, we do not expect to make any pension contribution this year as a result of the 95 million contributed last year.

Major acquisitions are not a likely use of cash near term. Our acquisition opportunities are concentrated on near neighbor product line acquisitions, much like the 2002 purchase of Nexec (ph). As a result, for the next few quarters, the leverage in our capital structure will most likely remain below our long-term target of 30 to 35% net debt-to-total capital.

As you can see on slide 17, at the end of the first quarter, net debt-to-total capital was 18.4%, down from 19% at fiscal yearend 2003, and 28.6% at the end of first quarter 2003. That quarter end inventory was $15 million lower than a year ago. The slight increase of $2 million over yearend 2003 partially reflects some planed inventory built in the U.S. dealer group to ensure adequate fill rates as production and equipment was relocated during the closure of the hand tool plants. For the first quarter 2004, inventory turns were 3.8 compared with 3.1 a year ago.

Total current account receivables at the end of the first quarter were up nearly 14 million over a year ago and up 28 million versus yearend 2003. The consolidation of Snap-on credit added 16 million. Looking at it from a day sales outstanding perspective, Snap-on improved by six days on a year-over-year basis and one day on a quarterly sequential basis. We believe we are on track to achieve our inventory targets by the end of 2004 and the overall improvement in working investment by the targeted date of yearend 2005. That goal was expected to generate over $250 million from the beginning of 2001 to the end of 2005. We already achieved that portion of the goal.

Now, let me conclude by sharing with you some of the assumptions in operating trends included in the press release issued this morning. They are outlined on slide 18. Let me emphasize our earlier comments. We are fully committed to continuing our efforts towards achieving stronger cash flows, sustainable operating margin improvements and increasing our returns on capital employed. Market factors affecting steel and gasoline have caused some increases in supplier prices. This did not have material impact in the first quarter, but these are two areas that we are closely monitoring as Dale indicated.

As some of you may know, rapid increases in gasoline may eventually alter peoples' driving habits. To date, we have not seen any indications of this happening. While we maintain long-term contracts on steel, partly because we buy proprietary (inaudible), the market in the last six months has tightened significantly. While we do anticipate some cost increases in future quarters, our current expectation is to offset these through a combination of price increases and further productivity savings. This continues to be a fluid situation, and we are monitoring it very closely.

Based on our assessment of our first quarter operating performance and our existing economic and operating environment, we reiterate our guidance that was provided at the beginning of the year that we expect full year 2004 earnings to be in a range of $1.80 to $2.20 per diluted share on a GAAP basis, including approximately 25 to 28 cents per share of continuous improvement cost. We expect approximately 7 cents of these costs to occur in the second quarter. Thank you. I would like to turn the call back over to Dale.

Thank you, Marty. Before taking your questions, I would like to mention one further item. Subsequent to quarter end, we sold our partial interest in Texo, an Italian manufacturer of vehicle lifts. It is a 70% owned subsidiary that was part of our European equipment business. Sales were less than $10 million and the sales price was essentially equal to its book value. So, there is no gain or loss on the transaction. I call your attention to this item, primarily because it illustrates a key aspect of the implementation of the Driven to Deliver strategic framework. Snap-on management will continue to monitor and evaluate the strategic positioning and financial progress of all our business units for their ability to generate shareholder value. Operations that do not fit our strategic profile or whose financial return on performance is not acceptable will be dealt with appropriately. As I stated in the annual report, our task is clear: accelerate the pace of change, execute our plan seamlessly, and make our goals reality. Now, we will take your questions. Operator.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please press the "*" key followed by the digit "1" on your touch-tone telephone. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, it's "*" "1" if you do have a question today. We'll take our first question from Jim Lucas with Janney Montgomery Scott.

Thanks. Good morning, guys.

Good morning, Jim.

I apologize I jumped on about half way through the presentation, so if you've covered this, I do apologize. First off, could you talk a little bit of what you're seeing on the general industrial side, tools in particular, and what kind of trend that could portend into later in the year?

Sure, Jim. I think we were pleased with what we saw in the first quarter, particularly at the end of the first quarter in March. Fairly broad across most of our industrial product offerings. We saw some good market growth. The order book, if you will, is holding up pretty well going into the second quarter. So I think, that's the third stark contrast in the last few years. I think we are seeing some good news on the industrial base businesses.

Ok. And, one of your competitors on the van side indicated this morning that they saw their van business up mid-teens. On the Heritage side same store sales, what does that business look like in the first quarter?

We were up mid-single digits from our dealer sales to the customer. I must admit I haven't seen the report that you mentioned but I'll see - we'll check into it.

Yeah. It came out on the - it's in the 10-Q there.

Ok. But again our feedback from our dealers are is that they're having good success. The amount of leads for equipment, for example, as we mentioned, has continued to increase. We are seeing somewhat of a move to purchase in that segment, again that has been stagnant for quite a while. So, the feedback we're getting from our dealers are that they're taking the right steps to improve their financial health. They are gaining a lot of sales activity out there and continued being encouraged for the remainder of the year.

And for the second quarter outlook you've given us, so there's going to be about 7 cents of ongoing cost in there, on a GAAP basis what should we look for in the second quarter?

Jim, its Marty. Good morning.

Good morning.

I'm not going to be evasive, but as you know, we're not going to give specific guidance so let me sort of talk you through, again, some of the factors that should drive profitability in the second quarter. As we said there will be about 7 cents of continuous improvement cost. (Inaudible) the plant closing cost are clearly behind us, we believe some of the manufacturing most, if not all manufacturing inefficiencies that were incurred in the first quarter, as a result of the move, are behind us. As you know we tend to be seasonally stronger in the second quarter as well. So, as we've said both a quarter ago and really on this call, we do -- we do expect to see an improvement in profitability going forward.

A bit of caveat to that too, Jim. We do have, what I believe, is a very strong new product launch schedule starting in second quarter and really continuing through from May to December. Again, pretty much across all product categories. So, I think that's also going to be, we hope, a highlight of the performance for the remainder of the year.

And are there any one or two key products that you're highlighting or is it just going to be a bunch of singles and doubles here?

Well, it'll depend on the product category. We do have some things that actually in about a couple of hours here I'm going to be talking about as part of the annual meeting presentation that you can see on the website. But we've got a brand new lineup of toolboxes that we're kind of excited about that we're calling the Blacklights (ph). We've got some interesting things in Diagnostics that we're really -- we believe, again based on early input from the customers, should ignite some continued sustained growth there. But it is pretty broad based in pretty much every product category. We've got a brand new wheel balancer that has generated some excitement, et cetera, et cetera. So, pretty broad based. I hope there's a few homeruns lurking in those but I would think there'd be probably more singles than double.

Ok. Thanks a lot.

Once again, please press "*" "1" now if you do have a question. We'll move next to David Leiker with Robert W. Baird.

Hi, good morning.

Good morning, David.

Marty, as you were talking the depreciation number, you said that there was accelerated depreciation that came through there under plant closings?

Correct.

Will that continue? That-that's behind you now.

Correct. What we needed to do was write-off the remaining value over the closure period, which is now completed.

And what would you expect that quarterly run rate to be on depreciation going forward than with those costs behind you?

Bottom line, with my capex guidance.

So, 30 million for the year?

I talked about 40 to 45 million of capex guidance for the year.

I don't know where the 30 came from. And then in the commercial and industrial, there is a whole host of negative factors that you rattled off there. Most of which seem to be new in the quarter. Can we talk a little bit more about, kind of, the sustainability of those issues remaining going forward?

I think there were a litany of things. I did refer to, for example, 4.6 million of inventory adjustment. And, I think as you know, David, we continue to take a lot of activity around inventory, from consolidating plants including some plants in Europe. As you know, we're making lots of headway with lean (ph), we're making lots of progress in trying to sell as much as we can of some of our older, slower moving products. And all of that this quarter resulted in total adjustments of inventory of 4.6 million. You know, for purposes of thinking about that going forward, we would hope that we would not see those kinds of numbers going forward. As we've communicated around the continuous improvement costs generally, as we continue to force down this path, we talked about 2 million to 4 million a quarter. I would sort of see this is -- as a little bit outside of our expectation going forward and it being somewhat unique to the first quarter.

And then the continuous improvement actions remain, what about the costs for the emerging markets expansion? Is that something that we're going to see continue?

A little bit, David, but I think this was a pretty high quarter. We are in the process of putting up a new manufacturing facility so we did have some preparatory costs in relation to that that were higher in the first quarter here. But I would suspect that they would kind of soften out at the remainder of the year as that plant gets up and running. I think I'm scheduled to go up for the grand opening to visit there in July. So beyond that, I think you'll just see more normal operating results coming out of that part of the world.

And then the last piece in there is the bad debt number.

Yeah, David, I would say in the bad debt number that was - more of the result of application of our policies around level to bad debt reserves to receivables as opposed to any specific identification of any customer issue. Actually in the press release I believe we also talked about little bit of favorability in one of our other segments diagnostics. (Inaudible) call that everybody revising their estimates for bad debt reserves consistent with their receivables position.

So this is a normal process that you are going through?

And in fact if you look at the table that was attached to the press release, I believe, a look at the reserve coverage receivables remained at about 7.5%.

Right. Ok. Wonderful. Thank you.

Thanks, David.

And as a final reminder, it is "*" "1" if you would like to ask a question today. We'll take a follow-up from Jim Lucas of Janney Montgomery Scott.

Thanks. One of the trends that have been discussed over the last couple of years is the fact that a number of the shop owners have had very strong and improving balance sheets yet they are reluctant to spend. Can you talk anecdotally what you are seeing in the market place right now?

Yeah. Jim, I think the best proxy for that, if you will, that I kind of keep an eye on, that's not scientific by any means but it's one I found that has pretty good correlation, is the leads that we've been talking about. We see continued interest and opportunities expressed by the shop owners now about upgrading their product capability. As we've said in the past, during this whole last few year period that has been very difficult for capital type goods. We haven't seen a fall off in activity through the shops themselves. So I do believe that what we predicted before, that when you have a 7.5 year average useful life on a piece of equipment and you hold your breath for four years, sooner or later you have got to come back in the market and replace what you had. So I am hopeful that with that is exactly what we are seeing. And then barring any unforeseen shocks due to gas prices, coupled with our increased penetration and contact in the TAG group, as you can see the TAG sales now are well above prior year, which I thought was a nice news for us, given the pit we went through last year. But I think the combination of all those indicators says that I think the shop owners are saying, well, I think this recovery had some legs and I have got to get my plant -- my equipment rather up to snuff to stay up with it. Let's take a peak at what's out there today and see what's available. And I think there where we have invested in new products, I like our chances of going head-to-head with everybody else based on the productivity enhancements and value that we provide in that type of product.

Ok. And from a portfolio standpoint, you alluded to the sale of the Italian lift business; you've got a balance sheet in good shape, looking for selective acquisitions. Could you speak a little bit to both sides of that equation in terms of what the acquisition pipeline and opportunities look like today, in addition to, as you evaluate your own portfolio, potential divestiture opportunities. Are you closed or is this just something that's just going to happen overtime?

I think Jim to the last question, as we go through our long-range planning process every year, we utilize that to step back and take a look at the profile, both currently and in the future, that we think all of our businesses will display. And out of that, many times, grows a list of concerns and actions in areas of focus that we keep an eye on quite honestly. As we look at areas such as the one we just announced in the European lift business, we just deemed that it wasn't a good fit for us as far the long-term growth profile we're looking for and the technology that we can apply to the market to try and get a premium obviously to what's been experienced out there. As far as the pipeline itself, as you'd imagine, that is an evergreen process as well. We periodically look at some in closer detail than others. I will tell you that we have as many -- been seeing some rather large deals recently and, as Marty mentioned, we aren't looking for transformational type of acquisitions at all. But we do remain focused on those that we can digest over a shorter period of time, and then make logical sense as far as the market that we would like to get into in the future and the growth profile looking forward. So, overall, I would say I wouldn't expect us to be jumping with both feet back into the acquisition game, if you will, anytime in the near future. But I wouldn't be surprised if you see us do some smaller more modest deals that strategically add to the offering.

Ok. Thanks a lot.

Our next question will come from Fred Speece (ph) of Speece Dorson Capital (ph).

Yes, is there a seasonal -- excuse me -- is there a seasonal downward trend in the dealer in the C&I? The margins went down sequentially even after getting (inaudible) credit for some of the items.

Well, Fred, there is a first quarter and fourth quarter bias toward seasonality to your point. But I would say that there are, as we mentioned earlier, a lot of moving parts in this first quarter. So I'd be hesitant to say that this was any (inaudible) indicator for the future quarters.

Ok. And the dealer sales in the North America were flat versus up 2% in the previous quarter. Any comment on that? Is the environment worse?

No, actually the environment at least is good, maybe trending as I said, toward the end of the quarter was trending even a little better, Fred. And this is the commentary that I know that we're going to face today. But I think the key element there to understand is that our dealers are really paying close attention to their financial health. And we have been preaching to them, if you will, the importance of working investment management, not just for us at Snap-on but also for them as individual business owners. So I think in that case, they are paying attention to us and we are seeing rather drastic improvements in their working investment situation and I think that's really what spells the difference in what our sales were versus their sales were are relative to the first quarter. Now obviously, over time, our sales increase and their increase should go in relative parallel and we do believe that that will be the situation as we roll into the back half of the year. But I think our people are very good business people, they're smart people, and they're doing what is right for their business and we're going to have to get through this period of softness if you will that's as a result to us.

And the TAG seems to be gaining some momentum here. Your sales force is becoming more effective. There's some volume level where we should start seeing that show up in the margins because this whole process was to not only gain volume but then also contribute to the margin.

That's correct Fred. I think we're very - as I said earlier, we are very happy that we now exceeded prior year sales levels, and as I said, the lead generation is strong. So, we are hopeful that that will continue through the year. And as mentioned on the answer of your earlier question that is a fourth quarter type skew to the equipment business in most cases. It is important not to forget as well that we've got the expiration of the accelerated depreciation provision that still occurs in this year as well. So, some of the small business owners are subject to, I believe, the $100,000 cap on that. That they'll be paying close attention to that as we go through the rest of the year.

Fred, excuse me it's Marty. I want to come back - come back to, I think, your first question about margins and margins trends. Just give you everybody's data points around the dealer group because certainly as reported the margins are down and let's just make sure we get a line around the numbers. 9.7 million was deducted from Dealer Group operating income for the plant closure cost. I referred in my remarks to some higher marketing sales expenses of 1.3 million, which really were just annual expenses we've had every year for, really, all of our sales kick-off meetings that we've now this year decided to take the expense fully in first quarter. And also, and very importantly, (inaudible) worked against the Dealer Group in first quarter, as between the equipment portfolio and the equipment products versus tools and tool storage and that was probably not a small factor in terms of it probably having a $2 million to $3 million profitability affect.

Ok. Thank you. So, that the next quarter, then, if you move the marketing in this quarter, we should see the reverse side of that?

That's correct to the remainder of the year, Fred, that's right.

Ok. Great. Thank you very much.

Ok. David Leiker of Robert W. Baird has a follow-up.

I just want to follow-up on the comment on the dealer working investment. Can you quantify at all what they might have taken their inventory down or what there turns might have gone to off of the truck at all?

Not yet, David. As you know, we've just recently turned down the point of sale data information and we've logged our first year under that regard. The metrics that we are looking at really relate to how much dealers owe us, through our credit company, how much money is out on the street, and what form that money is taking. So, there's a lot of indicators that we use internally but because we don't have full visibility into our franchisees' personal finances, we really can't determine succinctly what's going on there. I will tell you on the trucks, as we have mentioned I think in the past, that many of our dealers now that we've got, fully 25% of them that have a second van, second franchise, are using their inventory spreading it over more vans. And because we are providing them better information on product velocity or doing a better job of looking at the quality of their inventory, making sure they understand where they have invested their dollars. And we are going to be helping them in that regard as up grade the amount of information capability that we provide to our dealers. So, we give them much better insight on what their sales patterns are, and what their inventory should be, to take advantage of that. So, it's hard to put an absolute dollar on it. We got some internal estimates that are fairly significant from what we seen is a turn around in -- and again the financial profile that we are allowed to see if you will. But it's hard to gauge where the bottom of that is because you don't really understand what the market shape is going to be relative to volume, and then our own dealer's personal preference of how much they think is appropriate. Then you got another layer on top of that which is new products and some other factors that make it pretty tough to generalize.

Ok. And then where are you in your second band strategy of increasing penetration in existing markets, getting to markets that you haven't been in?

Well, we're still up about 10% from where we started. We are kind of going and getting our second wind, if you will, on second band, second franchise. We are going to be pushing those again to the back half of this year. But I still think the opportunity for us to grow at a 3 to 4% rate is still a doable number, and if we get some help from the markets then I think that's clearly doable. It's nice to hear and see, as Marty pointed out, that equipment sales were coming back and I think we stated before in conference calls that that was a significant portion of cash to our dealers that they used to expand their businesses. It was kind of found money, if you will, when you sell out $25,000 piece of equipment. So I'm hopeful that that injection, if you will, will have a good impact on our ability to grow the business. But there is clearly still opportunity for dealers out there, a lot of unmet needs in the territory markets. The market share statistics data that we do quarterly says it's there. And while we've made some great penetration gains in the last year and a half as a result of the more vans, we still see good opportunities left on the table.

And then lastly, Marty, you made the comment that you expect earnings to improve your -- the balance that you are starting in the second quarter. I am assuming you are talking year-over-year improvement - they're not sequential.

No. That's correct, year-over-year.

Ok. Just wanted to clarify. Thank you.

We will take a follow-up question from Frederick Speece of Speece Dorse and Capital.

Yes. I was taken back by this. SKUs in the one plant. How many SKUs do you have throughout the company and how many have you reduced over the last two years?

A little point of clarification, Fred, the 22% number is a worldwide hand tool offering just to say we are clear on that. So it's a 22% reduction in our worldwide hand tool offering.

It's for the Snap-on portion?

Under the Snap-on brand only.

But it is more than just the two plants because we took a look at Dale who commented on between product management and the plant, that they were closing down the plant, they worked very hand-in-hand. And so it was extended beyond just the products produced in the two plants.

So that were 4,000 SKUs transferred?

Out of those two plants. Correct.

Ok. Ok. And have you reduced the SKUs over the years?

Yes we have in a couple of steps, Fred. Obviously it's a dynamic process as we bring in new items. In fact, there's been a pretty dramatic focus on inventory reduction and complexity reduction as a result of the Driven to Deliver and lean efforts. And as I said earlier, we continue to see more opportunities in there to do that. I think it's easy because of the number of items to get ahead of yourself in some cases and being an old product manager myself, I think you would agree it's tough for product people to get rid of products. Everybody likes to bring a man but nobody likes to get rid of him. So we've really changed our view on that by the portfolio management approach and we are making the tough decisions and saying, well, it was a good idea but it didn't work, let's get out of it gracefully and get on to the next good idea.

Ok. Thank you.

We have a follow-up question from David Leiker.

Just one more. This has been a tough question to answer in the past and I just want to see if you have any more insight into what you think your contribution margin is going to be on the upside when the volume starts running through the model the way that you have it structured today?

I will let Marty answer that question.

It's tough only because of the different economic profiles and financial profiles of our different businesses. I mean we clearly we'd expect the gross (inaudible) something more to our mid 40s gross margin.

Great. But again, David, it depends. We get great growth in our OEM business but as you know that facilitation (inaudible) there's more high return because they're very little assets in the business at very low margin as we just facilitate products from suppliers to car dealers. So it really depends. Obviously on the Snap-on brand, the tools side, profitability is higher. So mix is really a major factor. Not an unimportant factor in terms of moving the margin. But, you know, clearly it's going to be improved, as we continue to see the benefits of lean. And so -- I'm not trying to be evasive, it sort of depends on where it is. I mean, obviously, if you looked at - if you got some improvements consistent with the mix in the sales numbers today, you'd expect a gross margin drop through to be greater than the overall gross margin today because we obviously have fixed costs. And beyond that it really depends on where it is.

I understand that. And I appreciate the difficulty in it. But my gut says that contribution margin with a constant mix, is probably greater today, than it was four years ago.

Oh no. Absolutely. Absolutely.

Well done.

Absolutely.

Well done. Do you think that went up by a magnitude of 10%, not percentage points, but, I mean, you didn't double the contribution margins?

We certainly didn't double it, but beyond that I don't know that I could put pinpoint the number on it. But -- double it would probably be too large.

Ok. Great. Thank you.

We've no further questions, at this time. Mr. Pfund, opening the conference back to you, for any additional or closing remarks.

Thank you. I'd like to thank everyone for joining us and I will be as usual -- I'll be around and able to take your calls today and tomorrow. So if you've got any follow up comments or questions, please feel free to give me a call. Thank you all and good day.

That does conclude today's conference call. Thank you for joining and have a great day.