實耐寶 (SNA) 2004 Q4 法說會逐字稿

Good day everyone and welcome to today's Snap-On Incorporated 2004 fourth quarter and full year earnings 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 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 fourth quarter and full year 2004. With me this morning are Martin Ellen, Senior Vice President Finance and Chief Financial Officer and Jack Michaels, Chairman, President, and CEO.

Today, we will again be using a set of slides to help illustrate our discussion. For those of you listening to our web cast, you should have found the slide show accompanying the audio icon when you logged on. You will need to flip through the slides, and we will let you know as we move on to a new slide. The slides will be archived on the web site at snapon.com along with the transcript of today's call. Following our remarks, we will open the discussion for questions.

Consistent with our policy and past practice, we encourage your questions during this call. We will not discuss undisclosed material or information off line. Also any statements made during this call that state management expects, estimates, believes, anticipates, targets, or otherwise state managements of the company's outlook, plans, or projections for the future are forward looking statements and actual results may differ materially from those made in such statements.

Additional information and the factors that could cause actual results to materially differ from those in the forward-looking statements are contained on slide number two as well as in the news release in 8-K issued this morning by Snap-On as well as in the latest 10-Q,10-K and other periodic reports filed with the SEC. In addition, this call is a copyrighted material by Snap-On Incorporated. It 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 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 Martin Ellen to review our results.

Thank you Bill and good morning everyone. I will begin my remarks with slide 3. Total revenue in the fourth quarter of 2004 was $610 million, and it included 18.2 million from the consolidation of our worldwide financial services businesses. Net sales of products and services in the fourth quarter were 591.8 million, a decline of 7.5 million or 1.3%, included is 21.3 million of favorable currency translation.

I remind everyone that our current quarter includes one less week. The 2003 fiscal year contained 53 weeks, with the extra week occurring in the fourth quarter. Consolidated reported net earnings were $0.42 per diluted share for the fourth quarter up from $0.30 a year ago. Diluted EPS includes $0.03 per share of costs for restructuring actions of this year partially offset by a $0.01 gain from facility sales.

This compares with $0.12 per share last year for restructuring partially offset by a $0.03 gain on the sale of two facilities in Europe. This year's results also include $0.04 of severance cost for our former CEO. We do not believe that there was any material impact on EPS from the extra week of results in 2003 as a full week of expenses offset the benefits of less than a full week of actual selling days.

Turning to slide 4, Snap-On's consolidated gross profit defined as net sales less cost of goods sold was 264.7 million up 13.3 million over last year. As a percent of net sales gross profit margin was 44.7% and was reduced by approximately 20 basis points or 1.1 million for restructuring costs. These costs principally relate to commercial and industrial group facility consolidation activities in Europe.

Last year's fourth quarter gross profit margin was 41.9%, which included approximately 160 basis points or 9.7 million of restructuring cost primarily related to consolidation and closure cost for the hand tool facilities in Kenosha and Mount Carmel. I would also point out that the gross margin in 2004 includes a LIFO inventory benefit, although lower than last year's by 3.3 million.

Absent these effects in both years, the gross margin was 44.2% in 2004 compared with 42.3% a year ago. This improvement resulted from our lean initiatives and footprint consolidation along with increased pricing, which more than offset the 7.2 million in higher steel cost, and the impact of certain production inefficiencies.

Our operations continued to be challenged by last year's relocation and consolidation of our US hand tool plants. Difficulty in changing production processes, training production employees new to the processes, capital equipment issues, and from time to time steel availability, all have contributed to added costs and delayed delivery of product.

We continue to make progress in rectifying these issues. We still have much work to do. Changing our processes, we build to customer order system continues to be our objective, and it is the key to our customer service, cost, and inventory reduction goals.

Turning to slide 5, operating expenses were 244.9 million in the quarter including 12 million resulting from the consolidation of financial services. Results in 2004 include the 3.3 million of severance costs associated with our former CEO, 1.9 million for restructuring, and 1.3 million of gains on building sales.

Absent these items, operating expenses were essentially flat year-over-year. As a percent of sales, operating expenses were 38.7% of net sales this year compared with 38.4% last year. A significant portion of our operating expenses relate to people. Salaries, wages, pension, medical, and other associated costs. In the fourth quarter as throughout much of 2004, we were able to offset the upward pressure on these costs with productivity improvements.

One way of looking at productivity is on a sales per employee basis. On the trailing 12-month basis, sales per employee are presently running at approximately $197,000 per person compared with $177,000 at this time a year ago. An 11% increase on an approximate 6% decline in workforce year-over-year.

We expect to experience additional productivity improvements in 2005 with further head count reductions. Some of which already occurred in January. I will comment more on this in a moment when I discuss our 2005 outlook.

Let me now turn to a review of our segment results. Starting with the Snap-On dealer group as seen on slide six. In the worldwide dealer group, fourth quarter 2004 total revenues were 265.2 million compared with 274 .8 million in 2003. On a currency neutral basis, sales were down 14.4 million or 5.2% year-over-year. Sales in the North American dealer operation were down, but were partially offset by an improvement in international dealer operations.

The domestic sales decline reflects 8% fewer dealer vans in operation year-over-year, lower product deliveries, as well as one less week in the current year. Operating earnings for the dealer group shown on slide seven were 14.6 million compared to 15.3 million last year, but last year's results also included 5.8 million of cost for closing our hand tool plants.

In the fourth quarter, we did realize approximately 3% of average selling price increase. But these were eaten up by higher material cost, particularly steel and the inability to completely deliver product from our hand tool plants.

Turning to the commercial and industrial group shown on slide eight, sales were 291 million compared with 289.4 million a year ago. Currency translation increased revenue by 14.5 million year-over-year, resulting at a currency neutral sales decline of 12.9 million from a year ago.

Our sales of tools and industrial and commercial applications in North America were down year-over-year in the fourth quarter, partially attributable to one less week included in 2004. Despite the one less week, sales of tools in Europe, particularly under the Bahco brand were up year-over-year.

Sales of power tools and torque products were also up slightly year-over-year. Worldwide, total equipment sales declined as an increase in the North American operations were offset by a decline in sales in Europe.

Turning to slide nine, commercial and industrial group segment operating earnings were 6.7 million, up from the 2.7 million earned a year ago. Improved productivity worldwide along with higher prices, more than offset the impact of the lower sales, and 3.1 million of higher steel costs.

Year-over-year, there was little impact from restructuring costs as gains on the sale of redundant buildings partially offset the cost in both years. We continue to expand our distribution and operating presence in Asia and other emerging economies.

During the fourth quarter, although we had additional start-up cost, we have also begun to see the sales increase in these areas, albeit from the small base. Longer term, we believe Asia offers significant long-term potential for sales of tools and vehicle repair diagnostics and equipment.

Turning to the diagnostics and information group on slide 10, you will see that sales were 112.5 million in the quarter up 11.4% including 3% from currency translation. The growth primarily reflects the continued success from the third quarter launch of the new Snap-on SOLUS Scanner diagnostic tool sold through the dealer channel, as well as the success of the programmable cartridges that support the large installed base of existing scanner products.

Operating earnings for the diagnostics and information group were 10.5 million compared with 5.2 million a year ago. The earnings gain was principally driven by the sales increase I just mentioned. Last year's results included a 3.5 million of restructuring cost associated with the closure of the plant that produced large platform diagnostics and a gain of 2.5 million on the sale of a facility in Europe.

Turning to the financial services segment on slide 11, operating earnings were 6.2 million. Last year, comparable net finance income was 12.1 million. The largest component of our financial services operating earnings comes from our domestic credit business through our joint venture, Snap-On credit.

The increase in market interest rates year-over-year was the major factor in the lower earnings contribution. Dollar volume of contract originations was down 10.7% year-over-year. The strengthening fiscal health of our dealers, along with the introduction of the extended trial franchise program has reduced the level of dealer borrowings as well as having a fewer number of dealer vans in operation.

Leases and originations to end-use customers were essentially flat year-over-year. With that completing my operating segment review, now let me turn to a discussion of cash flow shown on slide 12. Snap-On generated 12.6 million of cash flow from operating activities after making a 63.6 million voluntary pension contribution. This brings our major domestic pension plans into a fully funded status on both an ABO and PBO basis.

As you can see, cash flow from net earnings increased in both the fourth quarter and full year, while depreciation and amortization decreased in the fourth quarter, partially reflecting our lower levels of capital expenditures in recent years, and the accelerated depreciation last year related to the closing of the two hand tool plants. Working investment changes while a positive contributor to cash generation contributed less in both the quarter and full year as a result of the substantial improvements made a year ago.

We believe substantial opportunity yet remains to further improve our working investment. And, as a result, we anticipate we will continue to be a positive contributor to cash flow in 2005. Capital expenditures were 12.8 million in the quarter compared with 10.7 million a year ago, and were 38.7 million for the full year compared with 29.4 million a year ago.

For 2005, we expect capital expenditures to be in a range of 40 million to 45 million as we expect to make some equipment replacement to support our new manufacturing processes. Depreciation and amortization is anticipated to be in a range of 50 million to 55 million.

It remains our high priority to focus on improving 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 believe our dividend is an important element of total shareholder return and we modestly accelerated our share repurchase activity this last year. In the fourth quarter, we repurchased 300,000 shares, which brought total repurchases to 1.2 million shares for the full year.

In October 2005, our 100 million 6-5/8th% (ph) unsecured notes mature. We also have outstanding 25 million of commercial paper that was swapped into a fixed rate of 6.93%. That swap terminates in April. We expect to retire this total aggregate indebtedness of 125 million in 2005 from our existing cash resources.

Given the fully funded status of our domestic pension plans, we do not presently believe we will need to make any further contributions in 2005. As you can see on slide 14, at the end of the quarter, after netting our cash of approximately 150 million against total debt of approximately 331 million, our net debt was 181 million, down 56 million from the end of fiscal 2003.

Our net debt to total capital ratio declined to 14% from 19% at the end of last year. Other balance sheet highlights at year-end include an inventory reduction of 9 million compared to a year ago, despite higher steel prices, and 18 million of increase from currency translation.

For the fourth quarter, inventory terms were 3.9 compared with 3.6 last year. Total current accounts receivable at the end of the year were down 5 million versus a year ago, despite the consolidation of Snap-On credit, which added 15million year-over-year. Looking at it from a day sales outstanding perspective, Snap-On improved by seven days on a year-over-year basis.

Since the beginning of 2001, greater focus has led to a 24% improvement in day sales outstanding. In total, since the end of 2000, more than 300 million of cash flow has been generated from improved working investment management, while overall working investment turns have improved to 3.5 turns from 2.5 turns.

Those conclude my remarks about our financial performance. Before I turn the call over to Jack, let me spend a few minutes outlining some of our expectations for 2005. As we stated in this morning's press release, we expect earnings to show an improving trend during 2005 and to exceed full year 2004 earnings. Rather than providing a specific EPS range, let me share with you certain considerations as we move into 2005.

Underlying our financial expectations are the following assumptions. Given the current and expected economic climate affecting our major businesses and markets globally, sales growth in 2005 is expected in the low to mid single-digit range. This includes our planned pricing actions during 2005.

In our US dealer business, our key initiatives include improving service levels from our hand tool plants with the greatest recovery in the second half, investing in more field support for our dealers and by the end of next year, achieving very modest growth in our dealer vans and operation.

Our dealers today appear to be very fiscally sound as evidenced by the continued increases in same store sales and the lowering of their debt balances to us and to Snap-On credit since the end of last year. And at the end of the year, we had just over 100 more dealers in the trial franchise program as compared with the end of 2003. We believe that a proposition of a Snap-On franchise continues to be appealing.

In our commercial and industrial businesses where we experienced an improved fourth quarter due to consolidation benefits and better performance in our European tools businesses, we expect further improvements in 2005.

Diagnostics and information had a strong 2004 performance led by new products sold to our dealer network. Their focus in 2005 will be on continued scanner sales and software updates for our large installed base of hand-held devices.

Our expectations for 2005 include higher cost for steel, particularly in the first half, as much of the 2004 cost increase did not occur until late last year second quarter. We anticipate steel costs could increase by about 20 million to 25 million for all of next year across all of our businesses globally.

We expect to cover cost increases with pricing and manufacturing improvements. However, some of our planned pricing actions will not occur until midyear. Our expectation is to reduce SG&A expense in 2005 as a result of cost reduction plan. This is a major 2005 focus.

We have already implemented a workforce reduction affecting about 20% of our 700 white-collar employees in the Kenosha, Wisconsin area as well as other reductions throughout the company. As a result of this and other cost improvement actions, we expect restructuring costs of 10 million to 12 million in the first quarter.

Thereafter, as we said in the past, continuous improvement of restructuring cost to continually improve our business are expected in the range of 2 million to 4 million per quarter, and should be covered by savings from past initiatives.

As occurred in 2004, rising interest rates reduce our financial services income. With the current outlook for continued increases in short-term interest rates throughout 2005, and an expected continuation of slow origination growth, we expect financial services income in 2005 to be lower than in 2004.

Additionally, I previously provided you with a few modeling data points around depreciation and capital spending as well as our expectations for lower fourth quarter interest expense as a result of the aforementioned debt retirement.

Finally, we are assuming a 35% effective tax rate for 2005. With an expectation for higher earnings, continued working investment improvements, and no anticipated pension funding requirements, we expect strong operating cash flow performance in 2005. Now let me turn the call over to Jack.

Thanks Marty. Good morning. Marty has given us a detailed review of our fourth quarter and the full year as well as some comments about our outlook for 2005. I would like to comment on actions for 2005 and beyond.

First of all, most of you are probably wondering why I'm here and what I'm doing. Number one, I want to assure you there is no significant change in our corporate direction. Opportunities before us are exciting around the globe. However, we must accelerate our present path, we will maintain our existing dedication to product quality, performance, and value. This is not negotiable. Our heritage and brand promise are strong values of this company.

We have simply two focuses at this point in our company. Our focus number one and Marty talked briefly about this, is to take better care of our customers. We must drive customer responsiveness to new levels. And I mean new levels. This will allow us to have premium product with corresponding superior service.

As Marty indicated earlier, this is primarily in our hand tool business. We must enhance our order fill rates, which simply means our complete non-time delivery to our customers. We have set plans, and will measure our progress daily and these plans by the way are set by products, by plants, and by distribution center. By measuring our progress on a daily or weekly basis that will allow us the opportunity to take appropriate actions.

Our number two priority or focus is to reduce complexity. We have a lot of legacy of cost due to past organization. We must drive out waste and cost. (Break in audio) faster. This will allow us to have faster response to our customers. This will be accomplished by driving down accountability and initiative in the organization.

As Marty said earlier, we have begun this progress. For example, with the reduction in the workforce in January in the Kenosha area and as Marty indicated, we have plans to continue this throughout the company throughout the year. So, there is nothing new. This is not some new technology that we need to implement in the organization. This is simply blocking and tackling. These are basic, but we must raise the level of urgency in the organization.

So, what does this mean in the near term and I want to share with you what I have been telling our associates. We must continue to fix production efficiencies at our US manufacturing plants primarily, but it is not only our US plants, it is all of our plants and all of our DCs worldwide.

Simply meaning, we must improve delivery to the dealer network and to our industrial customers to new levels that this organization has not yet achieved in its history. We are going to continue to fix issues in our commercial industrial group. We saw some improvement in the fourth quarter, but we must continue. There are several actions we are exploring to further this improvement throughout 2005.

Next is to drive out complexity, take out costs in the organization's structure. We must be aggressive about this and we must do it now. Longer term, we will achieve greater financial results by taking care of our customers, to yield higher sales and market share. And by focusing on taking out complexity, expected to lead to faster responsiveness and better processes, which will yield sales growth and better responsiveness that will lead to higher earnings and improved cash flow. Simply said, the net of this is to build long-term shareholder value. I thank you and I will turn it back over to about Bill.

Thank you. Now, we will open up the call for your questions.

[Operator Instructions].

The first question will come from Darren Kimball Lehman Brothers.

Hi, Good morning.

Good morning Darren.

I found your comments very interesting about the longer-term potential and I'm just curious, having followed your company for a long time, and your margins now are the lowest that they have been in a long time. You sort of have to figure out which historical periods to make a comparison to try to figure out what the potential might be in future. And I'm just wondering what, in terms of the work you have been able to accomplish so far, what kind of internal targets are you thinking about as sort of the art (ph) of the possible from an operating margin standpoint?

Darren, it is Marty. We are still very confident we could achieve operating margins of 10% or greater. We discussed a number of issues that affected the fourth quarter and truthfully some of those issues affected prior quarters in the full year and we talked about those, particularly issues around some of our US manufacturing hand tool plants.

I understand your observation, but again as we have said for next year, given our focus on cost reduction, given what we expect in terms of the revenue growth I talked about, and a little bit of uplift in gross margin coming from that and coming from cost reductions and efficiencies in manufacturing, we are confident we can push our margins up close to what has been our goal the last few years of 10%.

This is Jack. Let me just add a couple of comments here if I may. One of the things that we have developed internally are metrics that really drive other business for each of our business segments. These metrics are being tracked on a daily and weekly basis. It's just not our deliveries. There is a host of metrics that we want to track, so that we can take corrective actions to continue the improvements.

I concur with your observations obviously, but needless to say we must improve our bottom line results. We clearly intend to do that. And I will assure you that I have outside my office charts that show the metrics that are very visual that you can see our progress. In my case, I watch it on a weekly basis, our key metrics.

The other -- down in the operating units, we are watching them on a daily and weekly basis. Because it doesn't help us to finish the month's results and then say what should we have done, we want to be in a position to do this on a daily or weekly basis. That is part of setting greater urgency in this organization to take corrective actions.

Okay, thank you for that. Just a follow-up on steel if you could. You made reference to a 20 to $25 million global cost increase and that you will be looking to offset that through price and manufacturing improvements. I was a little unclear on what you expected the net to be, you said that the pricing might not come until midyear. What sort of -- be the net impact from steel after taking into account those two offsetting factors?

Darren, in terms of the price increase, particularly in our dealer business, which will occur mid year, some of our other businesses will take pricing sooner and some have as of the beginning of the year. If we think about 20 to 25 million on a full-year basis which is really about 1% of revenues, we will more than price that.

I think the key takeaway from my remarks should be that since the greatest amount of our 2004 price increases occurred late in the second quarter, early in the third quarter, that in the first half of the year, particularly in our dealer business where they won't price until mid year, we will have to lap without pricing some increases in the first and second quarters, which we are estimating those cost increases in the first and second quarters could be maybe 7 million a quarter.

That's helpful. Thank you.

We will now here from Jim Lucas, Janney Montgomery Scott.

Thanks. Good morning. Two questions if I might. First, you spoke of the dealer count being down 8%. Your two main competitors have shown some -- one good numbers, one improving numbers. Can you talk about what you are seeing from a competitive standpoint, number one? Then I will ask the follow-up question.

Well, Jim, clearly as you know and you have been following the story closely, some of the decline we have experienced is really somewhat inflicted by our view that we need to maintain the discipline that we started a couple of years ago in terms of either working with dealers to improve their performance or those that are not meeting performance goals, removing them from the program.

And truthfully, if you look at the data around the declines in 2004, it's not that we have seen more dealer terminations, we have had fewer adds; that goes to the next comment, which is that we have clearly tightened our recruitment specifications. It does neither us or the dealer, the franchisee to get that a program that just can't be successful. So we have been more rigid in our recruitment and identification of people that we think can be successful. I think as you know, we also last year expanded our trial program before we will let somebody go out as a full-fledged franchisee, we now have a three-year trial program.

And during that program, that every 13-week period we watch their metrics very carefully and we do see turnover out of that program. We have put a lot of work and effort into helping them be better business people and helping us have better visibility to their business through our DSS or dealer support system, which gives us lots of business metrics that we are then able to sit down with them and develop business plans and help them understand where their weaknesses in the business are.

While we have not been doing this very long, this is relatively new in 2004, we are optimistic and the feedback we are getting from the dealers makes us optimistic that that's going to help us create stronger dealers. A big part of this business is, us trying to take prospects and turn them into successful entrepreneurial business people.

So, that's why we are where we are. Clearly, we added a lot of dealers in the last couple or three years through our feet on the street program. And we found that too many of those people just could not be successful. We believe our three-year program along with all of the training and recruitment and activity around finding good prospects is the right recipe to strengthen and grow the system over time.

This is Jack. Let me add one other thing. We will be increase being the field support this year and Marty briefly mentioned in his earlier comments, but clearly that is an action that we are undertaking right now as we speak.

Okay. Jack, a question for you, you were talking about some of us might see a reiteration of things that have been said by the prior managements at Snap-On in terms of the complexity of the organization, the improvements. There's obviously been a lot of headway that has been made through the years in terms of streamlining part of the organization, yet while we are seeing the balance sheet and cash flow improvements, it hasn't fallen to the bottom line. It would be interesting to get your perspective of where you think that disconnect might have come from and where you see the biggest opportunities?

Well, as I said, I think the biggest opportunities are on the two focus points that I mentioned. Number one, is taking better care of our customers, which means improving our deliveries to our customers. In order to do that, we must improve efficiencies in our plants. We clearly have set ambitious goals as I indicated. We have a by product category, by plant, by DC, the levels that we have never achieved here. As I said, the company has never achieved.

I came from an industry that had a lot more skews than this industry and I know what we accomplished there and we can do it here as well. So I think that is number one. Number two; there is too much cost in the company. That is very clear. The cost comes from a lot of different areas. We don't have sufficient productivity in our facilities. We have been working on the lean.

We can accelerate. I came from an organization that has practiced lean for some 14 years. I know what can be done. We need to drive out the complexity, which means we do things over and over and in different formats that I think we can streamline to get it to -- we just do it once and get on with it.

So those are some generalities, but I think both our operating expense is going to come down and our costs of goods are going to come down. Now the first thing though that we have to do is take better care of our customers and that's clearly what we intend to do. So, I want to focus there before we start really driving out costs at least in the manufacturing arena, because we have got to improve the performance first, then we will get to the cost. Not that we have to wait and do everything -- when one element is done, to move on to the second element.

In the meantime, we have already taken actions on the operating expense or SG&A area. And we have got plans to continue that throughout the year. As Marty said, we have already taken care of it here in the Kenosha area.

Fair enough. And the final question is you talked about dashboards that you are putting in place throughout the organization. How should we as outsiders monitor the progress? What are our external dashboards if you will?

Well, since we are a complex organization we have it by product line because it does not do any good to talk about averages. We need to be more focused on the product category. I could talk about that, for example, our diagnostics business has got very excellent deliveries to the customers where our hand tools does not at this point, so we are making improvements in hand tools, but we are not still not where we want to be. I would have to give that some further thought.

Okay.

I don't see anything readily other than looking at our bottom financial results obviously. I will be happy to get back to you if I can think of anything of anything that would be meaningful that we could share with you, because I wouldn't want to mislead you.

Okay, fair enough. Thanks a lot.

Now we hear from Alexander Paris, Barrington Research.

Good morning. Could you estimate how much in sales the extra week was this year, how much it costs in sales?

Alex across the whole company, we estimate in terms of selling days, it was probably three selling days, three productive selling days, was roughly the 25million to $30 million range.

So your sales in your two main areas would have been down anyway without these fewer days, right?

Well if you look at the overall company and 25 to $30 million is roughly 4 to 5% that would have accounted for reduction absent currency. So it would have been principally flat, but obviously there were puts and takes across the different businesses.

So you shouldn't (ph) see much growth and you said the dealers, their end market growth was okay and on the commercial industrial side, the manufacturing sector did very well in 2004 and capital expenditure has been picking up. It seems like a climate in which you should be seeing better sales growth than that. Is there - you have more plans - you talk a lot about improving the operations, but do you have any new plans about accelerating top line growth in your markets?

Alex, of course we do. I mean as I said in my prepared remarks, we did see a sales decline in North American dealer business and while sales from the dealers to the customers were up, mid single digits. We had this 8% decline in store count. That as I said we expect to see a recovery from throughout 2005.

We have got great new products. We are sill optimistic about the equipment business. I know we have had very spotty at best performance there. There are lots of programs and activities as I said in my guidance for 2005, looking for low to mid single digit revenue growth, and it is not going to be hugely contributed to by pricing on a full-year basis because we will only get a mid year pickup in the dealer business so we are anticipating volume growth.

Okay. Your fill rate, you implied that is mostly in the hand tool business. Are you talking about trying to raise it from the existing level or was there a sharp decline in the fill rate when you closed the plants and you are trying to replace that?

This is Jack. You are correct. As we move the plants, as we closed, we did have a slight decline, but clearly we are going to recover and then go beyond that. We have plans to go beyond our historical levels. That is not all going to occur overnight obviously, but it will occur during 2005 and 2006.

Usually, we will measure that in percent days to deliver from the order rate. Do you have that percentage, is that how you look at it?

Yes, but we do it by given product line. In fact, even in product lines, we will go down deep into more specific because again, as I indicated earlier to the previous question, if we do it by averages, it doesn't really tell you a lot. I mean, you could have some that are 100 and some that are, you know, 50, so you come in at 75 obviously if its weighted evenly.

So we are really tracking it, by product family and even product specific categories. Again our whole thrust is to build to order. That's where we are going. And, again, I have done this in a previous life and it takes time. It isn't going to be done overnight. But we are on the path, and that path will be accelerated during 2005 and 2006.

I guess when I was looking at comments like last quarter when you are talking about the manufacturing efficiencies and changing over to the produce to demand, I kind of got the impression that it was mostly involved in these two major hand tool plants, but you are going back to all the plants. Is this change in process going throughout the system to all of your plants in Europe, here, and everywhere?

Yes.

Okay.

This is not -- this will not require a great deal of capital spending or such. It really revolves around us looking at our processes from the time we receive an order, how we process to the order, till the time we deliver it to the customer.

Alex, let me elaborate on the question. Clearly we have probably the largest area of difficulty is clearly the hand tool plants. We closed those plants physically at the end of last year's first quarter. Sometimes around here we say we are wiring the house with the power on.

Clearly a difficult change, because we not only had to deal with the physical relocation, but we are changing production processes because we must get to a build to customer order model. And it has just been difficult. We are nine months beyond that as I said in my prepared remarks, we think it is going to take us the better part of the first half to fix that.

If you look into the numbers though, our fixed cost spending in these plants are down, as we would expect. The problem is given production problems, we are spending more to get out the same level of product or even more to try to get out as much product as we can. So, we are working the processes hard.

All of our manufacturing people have recovery plans that I can tell you they are working actively on. We have made some progress in some product lines, particularly around pliers and some other products. We are not where we want to be, so it is taking us longer to get there than we had originally anticipated, but we're optimistic we are going to get there.

Let me just add a little bit of clarification to something Marty just said. I don't want to leave this conversation that you believe we are going to be building everything to customer order in the time frame we want to do it by the end of the first half. We will have improved our fill rates during this first half, but building to a customer order is going to take us longer than that. And that is the reason why I said it's going to take us through 2005 and into 2006.

Yes, Okay. I'm just trying to get a hold of this. You went for years doing okay with top line growth and bringing it down to, as much as 19% return on equity and so forth. You went through years ago and you have completely restructured your whole distribution, which presumably was aimed at improving the fill rates and delivery time. And you have pretty much restructured plants all over the world. And you still are having the fill rate problem. You were doing okay operating on your other manufacturing process.

I am trying to just see what has changed. Did the fill rates go down that much and now you are having a recovery or you are going --things have changed in the industry and you have to change the operation to really just get back to where you were or what? I am having a hard time getting a hold of, after five or six years of doing all of the right things in terms of reducing your footprint and improving your distribution and so forth? A big question I guess.

Well, Alex, it is hard question, but I am sure what timeframe you are referring to, but the way I think to look at it, our fill rates have - by some people's account been deemed adequate. Internally, I would say, we would have always wanted them to be better and to a significant degree, any weakness we had in fill rate was just stuffed up with inventories throughout the channel.

So, over $300 million of cash has been taken off the balance sheet in these last few years through all of these other efforts. As we have said, our problem is we are not seeing the same kind of improvement on the operating P&L side of the business. That just needs to be the focus now. The model will -- to have too much capital tied up just was not the right model.

All right, thank you.

We hear from Charlie Brady, Hibernia Southcoast.

Thanks. Can you just tell us where the head count is at year-end on an exact number?

11,600. Did you hear that?

Yes. How does that compare with year-end 2003?

I don't have that number readily, but we will grab it. You have another part to your question?

I guess second question would be on the dealer vans and operation. The number of vans at year-end versus the year end '03.

12-6 was the head count at the end of 2003 --12,600.

In response to your question on van count in the United States just over 3,900 vans in operation, about 4250 vans a year ago. Globally 5,300 compared to about 5,600 a year ago.

Thanks that is all I had.

[Operator Instructions].

We will now hear from David Powell, Brown Advisory.

Hi thanks. Jack, a question for you. You just mentioned in your release about the long-term journey that Snap-On is on that sort of changed the culture and I am wondering if you could give us any sort of sense of where we are in that and how long that will take, if you could just expand on your definition of long-term that would be great.

Well, as I have indicated earlier, I think many of the programs that we have embarked upon, one being better service to the customer and driving cost out; I think we are going to be well alone -- you are never complete. We are on a journey, not on a trip here. But I think the bulk of it will be done during 2005 and 2006. In fact, I would say that a larger portion of it will be in the later half of 2005. Then we will continue through 2006. But I would think by 2006, we will look much better, financially as a company and as well in our growth.

Do you have a goal in mind for the percentage of your production coming from, sort of that build to order by 2006?

I think by 2006, we should be in excess of probably 60%. It will always be some low volume items that we probably won't be able to achieve that, but I don't know, obviously on our high volume products, I think we can do that.

You mentioned a little bit about accountability and driving accountability a little faster. Could you just expand on that, and maybe give us a comparison of what the accountability looked like before you came and what sort of the steps you have taken to sort of make that a little bit better?

My observations have been and since I have been here these past three months and obviously having been on the board since 1998 is that, the decision making got elevated in the corporation at a high level and my objective is to drive accountability and responsibility and decision making to the lowest informed level.

Now, that means we got have the right people at the lowest informed level. But there are illustrations of that. If you go to a plant and when you talk about what a plant manager is accountable for, responsible for, it just strikes me that he has too many things that ought to be within his control that are someplace else in the organization and we are in the process of changing that.

This is Rick Bernstein. I work with David. Can I ask a follow-on?

Certainly, sure.

I know it is early in your time there at Snap-On, but can you give us a read as to how you have felt generally about the talent there, and whether or not you have the people you need to get the job done.

No, I feel good about the talent here. We will continue to evaluate it. This is an ongoing process obviously. That's not to say we are never going to make any changes. Clearly we are looking for the very best talent to get the job done. I think most of it is just empowering people and changing this accountability and responsibility and I think people will respond to it.

They have thus far as we have put the metrics in place. But I don't want to mislead you by saying that we are not going to make any changes. Clearly, I didn't bring a team of people in with me. I don't plan to do that. There's a good organization in place, but we will look to strengthen the organization.

Great, thanks a lot.

There are no further questions at this time. I will turn it back over to our speaker, William Pfund for any additional closing - (audio break).

I want to thank everybody for participating this morning, particularly in light of this being our kind of tee off to 2005.

I will be around all day today and tomorrow to handle any thoughtful follow-up questions that anyone might have or anyway thank you very much and we appreciate your following us.

Thank you.

That does conclude today's conference call. We thank you for your participation you may now disconnect at this time.