實耐寶 (SNA) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Snap-on Inc. third-quarter results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to Mr. William Pfund, Vice President Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Thank you for joining us to discuss the results of Snap-on's third-quarter performance. With me this morning are Dale Elliott, 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, and we'll let you know as we move on to a new slide. The slides will be archived on our website at Snap-on.com along with the transcript of today's call.

Following our remarks, we'll open the discussion for questions. And consistent with our policy in 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 state management expects, estimates, believes, anticipates, or otherwise state managements' or the Company's outlook plans or projections for the future, are forward-looking statements. Actual results may differ materially from those made in such statements.

Additional information and the factors that could cause actual results to materially different from those in the forward-looking statements are contained on slide number 2, as well as in the news release and 8-K issued this morning by Snap-on, and in the latest 10-Q, 10-K and other periodic reports filed with the SEC. In addition, this call is copyrighted material by Snap-on Inc. It is intended solely for the purpose of this audio. Therefore, please note that it cannot be recorded, transcribed, or rebroadcast by whatever means without Snap-on's express permission. In addition, this call is being recorded, and your participation implies your 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 Marty Ellen to review our financial results.

Thank you, Bill, and good morning everyone. I will begin my remarks with slide 3. Total revenue in the third quarter of 2004 was 568.8 million and included 17.9 million from the consolidation of our Worldwide Financial Services businesses. Net sales of products and services in the third quarter were 550.9 million, up 25.3 million or 4.8%. Currency translation accounted for 16.6 million of the sales increase. I will address the components of our sales performance in a moment as we review each operating segment.

Consolidated reported net earnings were $0.39 per diluted share for the third quarter, up from $0.30 a year ago. Diluted EPS includes $0.04 per share of costs for continuous improvement actions this year, compared with a total of $0.16 per share last year. The current quarter benefited by $0.06 per share from a lower tax rate due to the conclusion of prior years' tax matters. The third quarter a year ago included a similar benefit in the amount of $0.05 per share. However, in the fourth quarter we do expect the tax rate to again be 35%.

Turning to slide 4, Snap-on's consolidated gross profit, defined as net sales less cost of goods sold, was 239.4 million, up 17.6 million over last year. As a percent of net sales, gross profit margin was 43.5% in the quarter and was reduced by approximately 50 basis points, or $2.6 million, for continuous improvement costs. These principally relate to commercial and industrial group facility consolidation activities underway in Europe.

Last year's third-quarter gross profit margin was 42.2%, which included approximately 250 basis points, or $13.3 million, primarily related to consolidation and closure costs for the hand tool facilities in Kenosha and Mount Carmel. Absent these items in both years, the gross margin was 44% in 2004 compared with 44.7% a year ago. This remaining decline in gross margin was due primarily to higher costs from production inefficiencies, higher material costs, and lower LIFO inventory benefits, which amounted to approximately 16.9 million in total. These higher costs were only partially offset by price increases of 9.7 million year over year, and to a lesser extent, favorable mix.

As you know, we closed two hand tool plants at the end of the first quarter. Ongoing challenges for relocating the manufacturing to other U.S. plants, while changing the processes at the same time, resulted in significant production inefficiencies and additional costs. These were compounded by additional challenges related to steel. We experienced not only higher material costs, but also the frequent need to change over production lines due to delayed steel shipments or larger size substitutions, which added to waste and excess labor hours. We believe our action plans, which will carry into the first half of 2005, will remedy these problems. Execution of these plans will continue to require us to experience higher costs through the fourth quarter, which is the primary reason for the previously-announced reduction in our fourth-quarter earnings outlook.

Turning to slide 5, operating expenses were 220.8 million in the quarter, including 10.5 million resulting from the consolidation of financial services. There was little change in continuous improvement costs year over year, 1.4 million this year versus 700,000 last year. Absent these items in both years, operating expenses were 37.9% of net sales this year compared with 38.1% last year. Research and development expenses of 14.8 million were up slightly from the 14.5 million a year ago, reflecting our continued reinvestment in innovation and new products.

As you would expect, a significant portion of our operating expenses relate to people -- salaries, wages, pension, medical and other associated costs. This year we've been able to offset most of the upward pressure on these costs with productivity improvements. One way of looking at productivity is on a sales-per-employee basis. On a trailing 12-month basis, sales per employee are presently running approximately $190,000. At this time last year sales were running $170,000, a 12% improvement year over year.

Let me now turn to a review of our operating segments, starting with the Snap-on dealer group as seen on slide 6. In the worldwide dealer group, third quarter 2004 total revenues were 260.9 million compared with 249.9 million in 2003. On a currency neutral basis, sales were up 6.3 million or 2.5% year over year. This is a significant sequential improvement in growth from the decline experienced in the second quarter comparison with 2003.

Sales in the U.S. dealer business improved 1.5% in the quarter despite the decline in the average number of dealer vans in operation during the quarter. Total vans in operation at the end of the quarter, however, are up approximately 8% since we launched the Second Van, Second Franchise program in 2000. Much of the dealer group sales improvement is due to price increases we initiated at the beginning of the quarter, partially offset by lost sales due to the hurricane activity in the southeastern United States. We believe that approximately 350 to 400 dealers had their sales activities significantly curtailed, with a total of 600 to 700 dealers seeing some negative impact. This is another factor previously noted in our fourth-quarter outlook.

In our international dealer operations on a currency-neutral basis, sales were up 6.8% for the quarter. Operating earnings for the dealer group, shown on slide 7, were 11.9 million. This compares to 8.4 million last year after deducting the $11.6 million of plant closing costs associated with the two hand tool facilities. The negative impact from manufacturing inefficiencies and certain higher costs for steel, freight, as well as lower LIFO benefits, were partially offset by the higher selling prices. Also bad debt expense was lower year over year.

Turning to the commercial and industrial group, shown on slide 8, sales of 256.9 million increased 11.9 million year over year, or 4.9%, but $10 million of this increase resulted from currency translation. Our sales of tools in industrial and commercial applications weakened in the third quarter. In North America, sales were down year over year, while tool sales were essentially flat in Europe. Worldwide equipment sales also increased slightly in the third quarter. Sales of equipment through the Snap-on dealer group and through TAG were up. We remain focused on improving our equipment sales mix and productivity. After four years of cyclical downturn we are encouraged by recent sales trends as well, as the increased involvement of Snap-on dealers in generating sales leads.

Turning to slide 9, the overall commercial and industrial group segment reported essentially breakeven results in the third quarter this year compared to operating earnings of 3.9 million last year. Negatively affecting operating results were higher costs for continuous improvement actions year over year, particularly in Europe. The European actions primarily include the closure and consolidation of a German hand tool plant into our Spanish operation, the elimination of one Spanish plant through further consolidation, and the movement of certain saws production from the U.K. to Eastern Europe. A gain of 1.7 million on the sale of a facility partially offset the costs of these other footprint changes. Additionally, segment results include $1 million as the segment's allocated portion of the higher U.S. hand tool plant costs this quarter.

A couple of other items to point out in the quarter relating to the commercial and industrial group include 1.7 million of higher bad debt expense, 1.2 million of higher freight costs, and approximately $1 million of adverse currency effects primarily related to products manufactured in Sweden but sold in the United States.

Furthermore we're expanding our distribution and operating presence in Asia, and we incurred about $1 million for startup and other expenses associated with this effort in the third quarter. We believe Asia offers significant long-term potential for sales of tools and vehicle repair diagnostics and equipment. And we are beginning to see some sales increases in that region.

Turning to the diagnostics and information group on slide 10, you will see that sales were 118 million in the quarter, up 20.3% from the 98.1 million a year ago. Growth overall was fairly broad, including handheld diagnostics, diagnostic products for diesel engines and the large over-the-road truck and off-road vehicle markets, and Mitchell1 information products in North America. Of significance, however, was the successful launch through Snap-on dealers of the Snap-on SOLUS (ph) scanner diagnostic tool.

Operating earnings for the diagnostics and information group were 18.1 million compared with 8.8 million a year ago, together with significant operating margin improvement. The earnings gain was principally driven by the sales increases I just mentioned. Operating expenses were essentially flat year over year, providing strong operating leverage and margin enhancement. As the third-quarter results benefited from an initial stocking of dealer vans, we do not anticipate this same level of fill to happen again in the fourth quarter. We also plan to reinvest in further new product development. This is expected to result in lower margins in the fourth quarter in the diagnostics and information group sequentially from the level attained in the third quarter.

Turning to the financial services segment on slide 11, operating earnings were 7.4 million. Last year comparable net finance income was 10 million. The largest component of our financial services operating earnings comes from our domestic credit business through our joint vision venture, Snap-on Credit. Dollar volume of contract originations was down 12.6% year over year to 109.1 million. This decline is partially a result of sales mix in the dealer group for the quarter and lower originations in the southeastern United States. Also, dealer loans were down. The strengthening fiscal health of dealers, along with the introduction of the extended trial franchise program, has reduced the level of dealer borrowings. In addition, the increase in market interest rates year over year lowered the earnings contribution.

With that completing my operating segment review, now let me turn to a discussion of cash flow, shown on slide 12. Snap-on generated 43.2 million of cash flow from operating activities after paying $10 million in the third quarter for the settlement of two government services administration contract audits. In addition to the GSA payment, the year over year change primarily results from the timing of certain interest and tax payment, as well as the change in accrued expenses related to last year's pension curtailment costs associated with the Kenosha and Mount Carmel plant closures. As you can see, cash flow from net earnings, depreciation and amortization and working investment changes were essentially flat year over year.

Capital expenditures were 8.6 million in the quarter compared with 5.7 million a year ago, and are 25.9 million on a year-to-date basis. For the full year we now expect capital spending to be in a range of 35 to 40 million, lower than the previous expectation. We expect 2004 depreciation and amortization to be approximately 62 million. It remains our high priority to generate free cash flow. Going forward in the near-term our priorities on the use of cash flow can be seen on slide 13. We continue to maintain our emphasis on our dividend, and we have accelerated our share repurchase activity this year. We purchased an additional 150,000 shares in the third quarter, which brought total repurchases to 900,000 shares over the last three quarters. We expect to continue buying additional shares in the fourth quarter, taking us past the target of 1 million shares we had set at the beginning of 2004.

As you can see on slide 14, at the end of the quarter, after netting our cash of approximately 153 million against total debt of approximately 332 million, our net debt was about 179 million, down 25 million from the end of the second quarter and 72 million lower year over year. Our net debt to total capital ratio of 15% remains below our longer-term target of 30 to 35%.

Other balance sheet highlights at quarter end include an inventory reduction of 20 million compared to a year ago, while essentially flat with the second quarter, despite the adverse impact of higher steel prices and actions to address availability. For the third quarter 2004 inventory turns were 3.6 turns compared with 3.3 last year.

Total accounts receivable at the end of the third quarter were down 29 million sequentially from the second quarter and were down 34 million versus a year ago, despite the consolidation of Snap-on Credit, which added 15 million year over year. Looking at it from a day sales outstanding perspective, Snap-on improved by 10 days on a year-over-your basis. Since the introduction of the Driven-to-Deliver framework, greater focus has led to a 20% improvement in day sales outstanding.

With the greater emphasis on asset efficiency, we've achieved not only a smaller footprint with a drop in capital spending, but also significant cash was generated from lower levels of working investment to run the business. Since the beginning of 2001 working investment reduction has generated almost 290 million of cash, and we expect to continue to improve working investment in future years.

Those conclude my remarks about our financial performance. Before I turn the call over to Dale, let me point out that during the quarter we realigned our OEM facilitation and equipment service businesses. This had a relatively small impact on our reported business segments. Prior years' segment results have been restated, and all of the restatement detail has been provided to you in the tables accompanying the press release.

Now let me turn the call over to Dale.

Thank you, Marty, and good morning everyone. Before opening the call to your questions, I would like to add my perspective regarding Snap-on's overall performance. Marty has taken us through the financial analysis of the quarter's results, and while the results were disappointing to us, they are motivating as well.

During the third quarter, as in previous quarters, Snap-on has been faced with significant challenges. These are a mix of both external issues, such as steel costs and availability, gas prices and freight costs, but also substantial internal difficulties. With respect to issues outside our control, like everyone else, we must deal with them in a focused and timely manner. The remaining issues are mainly of our own doing, brought about by making the changes needed to transform the culture and operating philosophy of Snap-on. Having said that, let me spend a few minutes on our internal changes and why they were necessary.

Roughly three and a half years ago we introduced the Driven-to-Deliver strategic framework in order to transform Snap-on. We needed to increase focus on process improvements and operating discipline and better utilize assets employed in the business to earn an acceptable return. At the same time we needed to plan ahead and reinvest to lay the foundation for future sustainable growth in earnings. Overall, we needed to change from a traditional, and many would say, old-line manufacturer to an organization capable of producing to customer demand. That has required a substantial degree of process change and a change in skill sets. Many of you have heard me speak of the changes at the leadership level, with roughly two-thirds of the team either new to Snap-on or in new roles. Those changes and the fresh perspective they have added have produced a more thorough analysis around change initiatives and an emphasis on making them happen, notwithstanding the implementation difficulties.

While the transformation has clearly taken longer and has not been as smooth as we would have liked, we are seeing increased evidence of the benefits of addressing root causes. A prime example is the consolidation and relocation of our U.S. hand tool production. This is a move that would not even have been contemplated a few years ago. We've experienced negative impacts, largely as a result of our desire to affect our transformation in culture and operating philosophy with some urgency. But it is something that had to take place if longer-term we were going to continue to manufacture products in the U.S. and remain competitive globally. However, there is a silver lining; we have identified several key constraints that we believe have impacted performance in the past, and have taken actions to mitigate those issues going forward.

Solutions to these issues have eluded us historically. With the change in process and mindset, we have down the full depth analysis necessary to discover the underlying issues and put in place detailed action plans to address them. Unfortunately this is taking time and investment. The proper course of action for the long-term often does. Yet to me, we are seeing clear indications that our drive to change mindsets around the organization is working. The adoption of a new mindset, one of continuous improvement, we believe, will lead to sharper focus on customer needs, a strengthening of our competitive position, and improvement in shareholder value.

We continue to believe the benefits of our journey will be significant. And a journey it is! We will not stop once we achieve some of our near-term metrics, which we're close to doing. The tools of lean thinking are now being applied throughout the Corporation to improve processes worldwide. While these have required certain charges and additional costs in recent years, we believe much of the heavy lifting of our journey is now behind us, as I had commented on a few weeks ago.

We have consolidated or closed 51 facilities, close to 15% of our square footage, including plants, warehouses and branches. Our workforce has been reduced approximately 17% through necessity to approximately 11,900 employees. In short, sales per employee are up dramatically. We are achieving overall improvements in efficiency and we are now capable of doing more with less. We are seeing other solid indicators of progress. Substantial enhancement in cash flow is well documented, and we now are beginning to see production costs in certain plants a level competitive with low-labor cost countries.

The improvement in the sales and earnings in the diagnostics and information business is another indicator. This group has largely mirrored many of the same transformation steps Snap-on, in total, is undergoing. We took actions to integrate what otherwise had been largely a collection of past acquisitions, so that today they are a focused and unified organization. They have weathered a significant readjustment of the product portfolio from big box diagnostics to handheld electronic tools for technicians, and at the same time continue to invest in new products.

Within this segment, significant footprint rationalization, process change, and retooling of databases has been accomplished, with the majority of that activity concluded in the fourth quarter last year. This year Snap-on is benefiting from those prior changes and additional continuous improvement efforts. Sales are growing as a result of a strong and competitive product line, with significant new products still in the pipeline. Effective collaboration with the dealer group can be seen in the launch of these new products, and the continued focus on maintaining the strong and positive relationship that exists between dealers and their customers. And those benefits are being seen in improved earnings and return on capital. Simply put, that is what we are striving for across the entire Corporation, and it is proof that it is possible. Our task now is to make that vision a reality across all our business units in 2005.

Thank you. And now we'll be pleased to take your questions. Operator?

(OPERATOR INSTRUCTIONS). Alexander Paris, Barrington Research.

Just a couple of quick questions. You mentioned industrial tools were down in North America. Given that industrial activity has been going up all summer long, what's the reason for that? Are you getting more competition from other distributors like you were a couple of years ago or what?

I wouldn't cite that directly as the root cause. I think there are two factors that have been the major drivers for that, Alex. First is some dislocations from availability due to the plant efficiencies. And secondarily to that there has been some timing issues around the industrial shipments in that in the quarter. So I think we did see some softening so much of our own manufacture, if you will, because of fill rate issues. But I doubt that we've really taken a significant step back from a marketshare position. Although, as you said, I've noticed the same commentary coming out of some of the other competitors.

Continuous improvement -- just for my benefit -- is $0.26 for the full year, but what was it on a per-share basis for the first nine months?

Alex, this is Marty. We'll grab that number in one second -- $0.22.

Okay, so there is another $0.04 in the fourth quarter, then, estimated at least.

Correct.

In the dealer segments -- from their change in their inventory to improve their business improvement to operations, is that dislocation pretty much over with? Are your sales to dealers running close to their end market growth?

The gap is narrowing. It obviously was better in this last quarter, Alex. As we said, we expect over time for those two measures to somewhat get in line with each other. I think the impact is softening as such. I am hoping to have a better closure in the fourth quarter, and then we will see what happens next year, I think.

The regular dealers are the ones that are selling the SOLUS? Or are they also being sold by tech reps?

The tech reps are cooperating in the process, so it's a joint sales effort.

Are there any new foreign dealer operations with your fleet dealers, aside from what you've had in Japan and Australia and the few countries in Europe?

Nobody new coming on the horizon, Alex, if that's your question.

Right.

Pretty much the same competitive landscape as existed now for some time.

Finally, the consolidation in Europe -- I thought we were pretty much done. Is that some operations or consolidations that already started there from your last conference call? The one is Spain?

That's correct. These are somewhat the last elements of those originally communicated changes.

So that pretty much ends, at least for now, the consolidations under your 3 1/2-year plan?

As we sit today, I think some of the large -- what I would characterize as the larger programs -- are behind us. Obviously we can't close the largest hand tool plants again; we've done that already. But I think, as I've said in the past, there may be other opportunities that surface as a result of our own gains in efficiency or market changes out there. Again, I don't see anything looming on the horizon of the size or nature that would be disruptive to what we have already communicated.

Jim Lucas, Janney Montgomery Scott.

Three questions this morning -- number one, when you talk about identifying several key constraints and taking the proper course of action, could you give us a little more color surrounding that? Number two, you talk about two-thirds of the management team either new or new to their position. Given the ongoing struggles this year, have there been any additional changes over the last two quarters? And third, given the ongoing struggles that seems to be mostly within the commercial industrial segment, are there any thoughts about possibly exiting some of the under-performing businesses?

Okay, Jim relative to constraints, that is a good question. What we have really found in that is about a dozen areas of interest, if you will, that have surfaced through this process. A good example would probably be somewhat of the struggle we have had with ratchet repair kits. That might be something that you may have bumped into in your travels with Snap-on dealers in the past. In the past it seemed about every three years we ran into availability issues sometimes with ratchet repair kits. Normally after a high period of sales and ratchets would we introduce a new series of ratchets. And after we drilled down into this process we really found that there were some basic equipment flexibility issues that had been plaguing us for some time, i.e., that they were not as quick a changeover equipment as we had needed. They also weren't as efficient as far as their cycle and throughput time as we needed.

We've uncovered several of the stumbling blocks. We really had to get into the guts of the process and take it apart and put it back together to really understand what the limiting factors were. And that has produced many, many projects now that we see as clear breakthroughs to allow us to move beyond these, get a much more flexible process, improve the throughput through these cells, and really kind of break the back of some limiting factors that we struggled with for a long time. But there's a myriad, if you will, at least 12 different product families that we've uncovered significant areas of opportunity, that people are now working very diligently to solve.

As far as additional management changes, yes, we have made management changes on a selective basis across the organizations. I'm not going to sit here and blame everything on the problems on the management per se, but where we have said we needed a skill set and then not found it available in the current people, we have made changes. So it is a performance culture that we're developing here. We have taken that position with the people that work in the Company. And if changes need to be made, we have and will continue to make them.

Relative to C&I, as I have said many times in the past, we take a hard look at all of our business units on a frequent basis and try to make a determination whether or not those businesses are really going to get to the goals we have set for ourselves in the long-term. If we don't feel that those businesses are going to achieve those targets, we'll take the appropriate steps necessary to deal with it. That still applies. We have severed our relationships with some smaller businesses in the past, and I can't rule out, nor can I rule in, that there is something imminent on that near-term. But we continually look at those business profiles, make that determination, and again, are not afraid to take action to deal with it.

So it is something that is constantly under review?

That is correct. We always look at our progress on our plans. We just completed our recent three-year planning cycle. We did that in great detail, as you'd imagine. But it's something that we reevaluate on a very frequent basis to make sure that we are on track and if we are making progress or not. And if not, why not.

And following that three-year review, has your thought process changed at all?

Yes, we have raised the emphasis on a couple of businesses. I think we talked about them in the past. I'm very concerned, for example, on the collision repair business. We are getting increasing elements of information coming in that there's some structural changes in that marketplace that are causing us to rethink our position. But again we're trying to look at what we've got going internally, if you will, and what the external situation and environment is, and kind of harmonizing those two to determine what we want to do.

Boyd Poston, A.G. Edwards.

Just a few questions here. Since your September 29th conference call, has the international C&I sales weakened further or about the same amount of weakness? Or how would you characterize it?

Boyd, it's Marty. I would say it's about the same. We talked upon the September 28th or 29th call about some weakening we had seen in Europe, and that comment back then was against an earlier expectation that earlier in the year we had seen improvements in Europe and thought they might be sustained. And those have not happened.

And could you give us a feel of how fast -- like you talked about the processes in the two plants that are remaining in that U.S. hand tools have to be fixed or improved? And I don't know, there's some five dozen processes that are under review being fixed. How much progress like you've made in the last month with trying to improve these processes?

Quite a bit. As a matter-of-fact, the item I mentioned in my illustration to Jim Lucas earlier, ratchet repair kits, we have actually now caught back up and are in good shape as far as availability for the product. So many of the processes now are well underway to being fixed. We have caught up on some of the downtime issues, for example, that were causing us some pain. The maintenance cycles are getting back up to speed. We are getting better control of material availabilities, so we are not substituting sizes as frequently as we were before. We've secured a lot of the throughput inactivity on raw materials. Again, we are not making needless changes to suit what material availability was there. So I think we are making progress. I think some of the long-term solutions to some of the things we have found, though, will stretch into next year, as we said in the last conference call.

And just to clarify -- the sales by the dealers to mechanics were up 3, 4% in the quarter? They were better than your wholesale sales?

Roughly mid-single digits.

And then on D&I, you talked about the margin down from third quarter. The rate of sales growth, should we expect that to stay in the current ballpark?

Well, we'd hope so. Because it's very tough to predict what's going to happen when you have a new product that appears to be as successful as what we have with our SOLUS and new software philosophy. I think reason would dictate that we wouldn't get the pipeline fill effect in the fourth quarter that we got in the first quarter, depending on how you think -- if that's 10 to 15, or 20 to 25% -- that's really the issue that we're running into now. We are seeing some pretty sizable reorder points coming back. I think it would probably be safe to assume somewhere in the low to mid-single digit increase in the fourth quarter. Until, again, we see a little bit more indication.

Finally, I might have missed this, dealer account for the quarter versus last year? Or dealer account for the nine months versus nine months last year? Did you give that?

It's Marty. In the United States in the third quarter, our average vans -- or our vernacular is feet on the street -- is down about 4% or so from the average number in Q3 a year ago.

(OPERATOR INSTRUCTIONS). Jon Steinmetz, Morgan Stanley.

A few quick questions here. The raw material inventory looks as if it was down to about 70 million versus around 90 last year. Is this in some sort of anticipation that raw materials prices will decline, and then trying to go short on inventory here? What would be behind that?

No, I think, John, really what you're seeing there is kind of a combination of influences. One, we had planned to take inventory down. We do have a pretty aggressive inventory turns improvement target this year. But we did have to ameliorate some of that planned production because of availability issues. While we did show some good year over year, relative to the plans we had internally, they were higher. So I think it's really more we've taken some strategic positions in certain of our raw material steel that are kind of susceptible, or had been problems, if you will, on availability, tried to insulate ourselves from them to some degree. And then also we've got some work-in-process that are flowing through the system that kind of balances between raw and whipped (ph). A little bit more complicated situation than it might appear on the surface there.

On the pricing in the dealer group, it looks like you got about 5 million in price there. Were the price increases in effect for the whole quarter? In other words, could that be a sustainable run rate here as we start to anniversary these increases?

For the remainder of this year, do you mean? Yes. But next year, as far as January, we are now reconsidering what are actions will be for 2005.

Reconsidering, meaning thinking of another price increase --

Well, it depends on what happens with steel and some other commodities, notably gas, fuel prices. The ripple effect of steel increases are not just from the suppliers. Component suppliers now are going through negotiations. I think it's a bit of an open issue for us to see what happens between now and the end of year as we look to 2005. My point is we are fundamentally keeping our options open, depending on what our rollouts tell us.

And you talked about a 4% year over year change in the van count. That's a net number. What would the turnover look like within that number?

The turnover would be in the low double-digit percentage range, which is higher than historic and mid to upper single digit sorts of turnover range.

Again, as we said in the last conference call, the new three-year trial franchise, in effect, has accelerated some of that turnover earlier in the process. This is also going hand-in-hand with our raising of eligibility standards in the new dealers that we're looking for. I think when I look at the data, to Marty's point, we are down. We're up still about 8% from where we started a few years ago, which is positive. And I think the quarter-to-quarter change was, at least to my mind, signaling that we're seeing some softening in that. And as I said, again, on the last conference call, we've put a concerted effort on making sure that we get new dealers into the system. The classes are starting to fill up for training. So our anticipation is that we will see some good news in that by the end of this year and next year.

Last question. We are most of the way through October here, what does the dealer's side of the house look like in October?

So far so good, the way I would characterize it. I think the SOLUS is selling well still. We are, as I said earlier, filling some of the issues that we had with ratchet repair kits, etc. So cautious optimism would be the way I'd characterize it.

Alexander Paris, Barrington Research.

I'd like to understand the continuing production inefficiencies and changing over to produce for demand now. Essentially to me that means flexible manufacturing, including things like cell manufacturing, kanban, flexible tool changeovers, just-in-time inventory. That's been going on for a long time in these hand tool plants. Is it just that they were not doing that in those plans? Or you have something in addition to these traditional things to improve flexibility?

That's a good point, Alex. I think when we stepped back and looked at what we were doing, I think there's a couple of elements that relate to the points you raise. I think one would be relative to our search for bigger opportunities. Again, when you shut two large plants and move them into smaller facilities, by necessity, you have to take the bar up in your thinking and really challenge the group to be much more aggressive in terms of where the opportunities are. I guess it would be more revolutionary as opposed to evolutionary change. And that was one of the reasons behind our decision to move forward.

Whenever you get into lean efforts, you always have to be cautious and be looking out for -- a term we coined internally in the company, we call, Kum-ba-yah lean, which is people kind of going through the motions, or working on the periphery of an issue as opposed to really addressing and attacking the root cause. And it takes some degree of fortitude and management leadership to really get into the guts and the operating philosophies of a unit or an operating facility and challenge the status quo. And fundamentally that's what we've been trying to do. So I would characterize it more of an acceleration of what we've been doing for years. We have challenged ourselves, put much more stretch goals into the equation. And then the whole environment that we are operating in, obviously, has made that even more important. When you get steel increases like we have seen in the last six months, we have to be much more aggressive in productivity to offset that negative drag.

But the exciting thing about it, in my opinion anyway, having gone through this for many, many years, is the opportunities are clearly there. We're seeing, to your point, reductions in set-up time. Things that used to take us four to six hours, we're now doing in a matter of minutes. We have done a lot of consolidation in the type of materials that we're purchasing and the different flavors, if you will, of steel that we buy. So there's a lot of good fundamental re-evaluation of what we're doing and why we're doing it that periodically you have to do. And again, we've kind of created a burning platform here by consolidation of plants and challenging the units to take it to a higher level.

So in other words, you used to do longer runs for inventory and then you do your changeover and run something else. Now you're into more flexible changes, short runs and things like that?

Correct. Shorter runs that improve your ability to fill the customer demands, obviously lower your work-in-process and raw material inventories and finished goods inventory. But to accomplish that, you really have to turn your thinking, to your point, from a batch mode to a one-piece flow idea. And that really takes time to get the organization to get their minds around that type of change. It's also something, quite honestly, you can talk about, but until you actually do it, you really don't know what you have. The value stream management approach we've take to our product lines now have really helped us uncover where those bottlenecks have been, and it's very hard to tease those out of the operation until you get that up-close visibility. And then finally, like I said, you really don't know what you have until you moved it. When you move something you uncover all sorts of things that did not show up on a cost and route sheet or on a maintenance schedule. And we have had our share of those as well.

Going back to my original question, these kinds of things have been done by people for years. But you've had these two very large plants, and it was just hard to change that over until you were pressed to do that while you were moving to smaller plants? Is that it?

Well, really the chicken or the egg situation there, Alex, really was the understanding that we had to prove our efficiency and effectiveness and throughput to get where we wanted to go in the long-term to stay competitive, if you will.

And again, we weren't able to comprehend that in the past because there's a lot of training the needs to be done. A lot of education that needs to be done at the operating level in these plants to get these people to understand what needs to get done. And as I have said many times, historically Snap-on had a much more lackadaisical, I guess you would say, focus on inventory. We used a larger investment in inventory to offset some of the shorter run philosophy we had in the plants. Fundamentally we have turned that around. We have said "no, we want to operate on a lower asset base," and to your point, become much more flexible on the manufacturing front in order to manage the equation differently. So that's really what has taken us a number of years here to get understood. If you get that training out there, get the value streams done, get the people in harness to the new measures and metrics, and then begin the process of conversion.

Again as I look at older plants and the newer plants, sometimes you had the older plants would be three different machine operators running a machine, a different guy to do the repair. And if you look at a modern one, there may be one very experienced guy doing this setup, running two or three machine and doing his own maintenance.

Exactly.

So that takes a lot of training, and that's kind of the delay here, you have to find and train people like that?

The best example I have seen recently is one of our European plants that we spoke about, or Marty rather, mentioned earlier. We've fundamentally closed the facility and had 36 people and roughly around 3,000 square meters. We now are doing that same amount of output with two people in 300 square meters. So I think, to your point, to get people to understand how one does that and actually accomplish it, it takes a lot of training, a lot of education, a lot of kind sweat equity to get that to happen.

So some of these inefficiencies are going to last a little bit more into 2005?

To some degree, but they are not mysteries anymore. They're set out there, we know where they are at, we know why they are there, and we have people focusing on eliminating them, which is a much preferable circumstance than scratching your head and wondering why you can't get the throughput up.

I don't want to belabor this, but just one more question. For example, last quarter you mentioned, or in your warning for this quarter, you mentioned that you had to make some production adjustments. I think you gave one reason, the demand for something, one product was higher from the dealers, and so forth. Your system is going to cure that kind of problem, kind of adjustment problem?

It will make it much easier for us to shift emphasis should we get a change of mix because of an unexpected oversell or undersell or a new product activity. It just makes us much more fleet of foot to react to volume changes in the field.

Thank you sir for taking so much time.

And gentlemen, it appears we have no more questions at this time. Mr. Pfund, I'll turn the call back over to you.

Thank you. I'd like to thank everybody for participating in the call. Those were great questions. And I'll be available throughout today and tomorrow if you've got additional questions. Thank you.

This includes today's conference. We do thank you for your participation today and have a great day.