實耐寶 (SNA) 2005 Q1 法說會逐字稿

Welcome to today's Snap-on Incorporated 2005 first quarter 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 Mr. William Pfund, Vice President, Investor Relations.

Thank you Operator. Good morning everyone and thank you for joining us to discuss the results of Snap-on's first quarter 2005.

With me this morning are Jack Michaels, Chairman, President and Chief Executive Officer, and Martin Ellen, Senior Vice President, Finance and our Chief Financial Officer.

Today, we will again be using a set of slides to help illustrate our discussion. For those of you listening to our webcast, you should have found a slide show accompanying the audio icon when you've logged on. You will need to flip through the slides and we will let you know as we move onto a new slide. These slides will be archived on our web site at www.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 the call. We will not discuss undisclosed material information offline. Also, any statements made during this call that state management expects, plans, estimates, believes, anticipates, targets or otherwise state management's or 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 #2, as well as in the news release and 8-K issued this morning by Snap-on and in the latest Form 10-Q, 10-K and other periodic reports filed with the SEC.

In addition this call is 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 while recording this call. Should you not agree to these terms, simply drop off the line.

Let me now turn to Jack Michaels to offer his observations on our first quarter performance.

Thanks Bill and good morning. This morning I will give some general business comments. I want to talk about some of our accomplishments and obviously some of our challenges. Marty Ellen then will discuss our financial results in detail. And then I will give some closing comments before we go into our Q&A session.

Let me first start by saying, I am pleased and in fact I'm excited with the early improvements that we are showing during this first quarter. We have always said that we are on the path to the continuous improvement, and I believe that we have made such improvements during this first quarter. I need to thank our associates on a worldwide basis. Without our associates we would not get the accomplishments made. Having said that we have much more to do. We have much more to get accomplished.

During my five months here in this position, I've had the opportunity to travel to all of our manufacturing locations in North America and Europe. I will be traveling to Asia in the early part of May. I have also the opportunity to be with about 1700 of our dealers and I will have the opportunity this weekend to be with another 1100.

So, I am trying to get out and meet our people, understand the challenges they face so that, we can get focused on them and get things corrected. You may be interested in knowing what am I saying. It's not anything different than what I've been saying since I joined the company. That is, number one focus is to take better care of the customers. Clearly, we are showing progress there. We have more to improve.

We are getting the job at least started and getting it done. The next is to reduce complexity in our organization and that really means driving out cost. We actually reduced about 300 salaried head count in this first quarter out of about 6800. We have more to do during the remainder of this year.

Let me make a couple of comments on the two priorities of taking better care of customers and driving out complexity. First of all, on the taking better care of the customers, our fill rates are improving to our dealers and we are moving to accomplish more in our complete and on time. We are seeing improving trend lines. We have new machine tools that we are putting in place for lower volume items and we are getting to more one-piece flow in many of our operating cells. We have more cells to do folks. At least we are getting started and we're making progress.

You saw in our announcement that we acquired a plant. This was a plant that we had outsourced low-volume product to back mid last year. It was the right decision to get low-volume production out of a high-volume Snap-on plants. Unfortunately, the supply was unable to perform to our satisfaction so we took immediate action. We acquired the facilities and put our own people in. I am happy to report that in the first four weeks, we are showing improvement there.

We are running our facilities six and seven days a week to meet customer demand, to work down our back orders and improve our fill rates. Obviously this has prevented us from making the improvements we would like to make in our cost of goods sold. However, the first criteria that we must meet is taking better care of our customers. We are improving and we will continue to improve on a week-by-week basis. And as I have said to many of you, we have tracking mechanisms where at the local level we are tracking on an hourly basis. The group level they are tracking on a daily basis and I personally track on a weekly basis.

The second priority is to drive out complexity in the organization. As I said earlier, we have taken out about 300 of our salaried head count actually here in the Kenosha area. We took out-- that represented 20%. Not all of the 300 are here. That is on a worldwide basis. We still have some that will come out, a larger group still in the second quarter.

We are continuing to strengthen our organization and putting greater focus on areas of improvement. Many of you are aware that we put a new president in our tool group. We moved Al Biland who was president of our Diagnostics and Information Group, who had proven himself as a leader. We moved him into the tool group. Michael Montemurro who was running that is assisting us until he retires. He is working on some special projects, reporting directly to me. I am certain, as you gathered from the press release, you've seen that we have a lower number of dealer vans in operation.

Let me just make a couple comments around that if I may. First of all I would say to you that the market is strong and we believe that our business model of how we go to market is a great model. We are not concerned about it whatsoever.

However, we do need to improve our service levels to our customers. We are making improvements, but we have more to do. We have a high backlog. Our backlog at the beginning of the quarter was approximately $55 million. It has dropped to about $45 million. So you can see the continual improvement. If you think about the backlog that we have and the need to continue to fill some open routes, you can see that we have the opportunity to achieve our goals as we go forward. We have many applications. Our applications for van dealers are at an all-time high, so it certainly is appealing. Yet, we want to be certain before we put a major push that we have the service levels required to support the dealers as they come on stream.

We are also improving our field support. We're putting more in the field with higher qualifications to help existing dealers, but particularly also the new dealers coming on stream. All of these actions will be taking place in the latter half of the year, although some of them are beginning now. You will see more improvement in the latter half of the year and I think you'll also see that our sales growth will occur later in the year. What I have to say has been nothing but blocking and tackling. These are just basic things that need to be done. Clearly, our focus has to be on execution.

To summarize in three words, what we must do is execute, execute, execute. Clearly, that is it as we forward. As I said, I think we've made progress. I am excited as I travel around to see the opportunities before us. So, with those remarks I will turn it over to Marty.

Thank you Jack, and good morning everyone. I will begin my remarks with slide 4. Total revenue in the first quarter of 2005 was $612.8 million, and includes $14.1 million of financial services revenue. This compares with $616.3 million of total revenue last year, which included $21.2 million of financial services revenue.

Net sales of products and services in the first quarter were $598.7 million, an increase of $3.6 million or six-tenths of a percent. On a currency neutral basis net sales were down 1.5%. Consolidated reported net earnings were $0.31 per diluted share for the first quarter, up 40.9% from the $0.22 earned a year ago. Diluted EPS this quarter includes $0.09 per share of costs for restructuring actions, mostly related to staffing reductions. This compares with a $0.11 per share last year, primarily related to the hand tool plant closures.

Turning to slide 5, Snap-on's consolidated gross profit, defined as net sales less cost of goods sold was $256.9 million. As a percent of net sales, gross profit margin was 42.9%, and was reduced by approximately 20 basis points or $1.2 million for restructuring costs. Last year's first quarter gross profit margin was 41.9%, which included approximately145 basis points or $8.6 million of restructuring costs. These primarily related to consolidation and closure costs for the facilities in Kenosha and Mount Carmel. Absent these restructuring effects in both years, the gross margin was 43.1% in 2005, compared with 43.3% a year ago. Increased selling prices and with respect to the Commercial and Industrial Group, greater productivity and lower manufacturing costs, were largely offset by $6.8 million of higher total company year-over-year steel costs, and the higher production cost still occurring in our Snap-on tools facilities.

We have previously discussed the execution issues that challenged us with last year's relocation and consolidation of the 2 hand tool plants, so I won't engage in another lengthy discussion. Progress is being made. Priority emphasis continues to be placed on correcting these issues, and as Jack said the trend is improving. We still have much to do, and we are clearly focused on correcting these issues.

Turning to slide 6, operating expenses were $236.7 million in the first quarter, including $9.8 million of financial services operating expenses. A year ago operating expenses were$ 243.5 million, which included $10.3 million of financial services operating expenses. Restructuring costs this year were $6.6 million compared with $1.3 million a year ago. Absent these items, operating expenses were 36.8 % of net sales compared with 39% last year, an improvement of 220 basis points. We continue to work hard at reducing complexity and unnecessary cost.

Let me now turn to a review of our segment results. First, I would like to make everyone aware of the recent change we made to our segment presentation. Prior to 2005, shared services and general corporate expenses, as well as certain corporate assets like cash, were allocated to the business segments based on segment revenues.

Beginning this year and to conform to our operating and management structure, we only charge businesses for the value of the services provided. General corporate expenses and corporate assets not allocated. We believed this provides better line of sight and accountability over operating results. Our 2003 and 2004 quarterly segment results have been restated for this change. We have made this data available through our Form 8-K filing last Friday and on our website. Please note that the changes only relate to segment presentation and did not in any way revise or restate consolidated results.

Let me now began with the Snap-on Dealer Group on slide 7. For the Worldwide Dealer segment, first quarter 2005 total revenues were $255.8 million compared with $262.9 million in 2004. On a currency neutral basis, sales were down $9.9 million, or 3.8% year over year. International Dealer operations were essentially flat on a currency neutral basis. Sales in the North American dealer operation were down 5.5% year over year.

The sales decline principally reflects 7 % fewer dealer vans in operation year over year. Notwithstanding this overall decline in vans, the number of trial franchisees is growing. At the end of March, we had 279 trial franchisees up from 150 a year ago. We extended the trial program to three years, and have tightened the measures we review at every 13 weeks to gauge whether or not the prospective franchisee can be successful. This means that fewer will graduate, and it will take longer to do so. But longer term, we believe this will lead to a stronger franchise system.

Operating earnings for the dealer group shown on slide #8 were $18.1 million this year compared to $14.9 million last year. In the first quarter, we realized an approximate 1.5% selling price increase. This essentially offset the impact of higher year-over-year steel prices. The $5.4 million reduction in restructuring costs year over year was partially offset by $3 million of costs related to terminating a supplier relationship and which resulted in our acquisition of their manufacturing facility as Jack just mentioned. And as Jack said, we have now installed our own management in this facility, have supplied new machining tool capabilities, and we are making progress on reducing the backlog of these products.

Turning to the Commercial and Industrial Group shown on slide #9, sales were $293.8 million compared with $282.8 million a year ago. Currency translation increased revenue by $8.7 million year over year, resulting in a currency neutral sales increase of just under 1% from a year ago. Sales of tools and industrial and commercial applications in North America were up year over year in the first quarter. Sales of power and torque tools were also up, while sales of tools in Europe, particularly in northern Europe, were off slightly. Worldwide equipment sales declined, partially reflecting the divestiture of a small collision repair business in Europe last year, and the absence this year of certain OEM dealership program sales made in 2004. Sales of equipment products in North America were essentially flat.

Turning to slide 10, Commercial and Industrial Group segment operating earnings were $11 million, up from $3.3 million earned one year ago. Improved productivity worldwide, along with higher prices, more than offset the impact of $3.5 million of higher year-over-year steel costs. Much of these efficiencies and cost improvements result from our continuous improvement initiatives.

Turning to the Diagnostics and Information Group on slide 11, total revenue was $114.4 million in the quarter-compared with $118.2 million a year ago, with the effects of currency translation contributing about $1 million. Sales decreased $4.8 million year over year largely reflecting sales made in the first quarter last year for state emission program updates, which did not repeat this year. This was partially offset by higher handheld diagnostics sales in the quarter. The increased sales of higher margin and handheld diagnostics and information related products resulted in essentially flat year-over-year operating income comparison. We're pleased to see that sales of our new Solus(scanner diagnostic tool introduced in the third quarter of 2004, and sold through the dealer van channel continued to sell well in the first quarter of 2005.

Turning into financial services on slide 12, operating earnings at $4.3 million were down from $10.9 million a year ago, principally reflecting the impact of higher market interest rates. Total revenue declined to $14.1 million from $21.2 million. In the U.S., Snap-on Credit originations were down 19.3%. This had the effect of lowering our operating earnings by $1.3 million, while the effect of higher interest rates lowered our operating earnings by $4 million.

With that completing my operating segment review, now let me turn to a discussion of cash flow shown on slide 13. In the first of quarter of 2005, Snap-on generated $19.3 million of cash flow from operating activities. Depreciation and amortization was lower by $4.3 million, partially reflecting the lower level of capital expenditures in recent years and the accelerated depreciation of assets last year related to the closing of the two hand tool plants.

Inventory increases during the quarter occurred in certain businesses in anticipation of future sales expectations and also includes $1.3 million in acquired inventory from a former supplier. We believe substantial opportunity yet remains to further improve our working investment. And as a result, we anticipate that further reductions will contribute positively to 2005 cash flow. Capital expenditures were $9.2 million in the quarter, including $1.4 million for the acquisition of the manufacturing facility acquired from the former supplier. This compares with capital expenditures of $7.3 million a year ago. We believe capital expenditures will be in a range of $42 million to $47 million for all of 2005. Depreciation and amortization is anticipated to be about $55 million.

Looking at the balance sheet, it continues to be strong reflecting the improvements made during the past few years. As you can see on slide 14, at the end of the quarter after netting our cash of approximately $145 million against total debt of approximately $331 million, our net debt was $186 million, down $39 million from the end of the first quarter a year ago. Our net debt to total capital ratio was 14.7%, compared with 18.4% one year ago.

Looking at some other balance sheet items, inventories measured in days on hand declined two days year over year to 95 days at the end of the first quarter. Total current accounts receivable on a days outstanding basis improved by five days year over year. Those conclude my remarks about our financial performance.

Now let me spend a few minutes outlining some of our expectations for 2005. We continue to expect that our earnings will show an improving trend during 2005 and to exceed full-year 2004 earnings, as stated in this morning's press release, and as we said at the beginning of the year. Our expectations for 2005 include higher year-over-year cost for steel, particularly in the first half, as much of the 2004 cost increases did not occur until late in last year's second quarter. There are some signs that steel costs have reached a plateau. We will continue to closely monitor these trends. At present, we continue to believe that we should be able to recover higher steel costs with modestly higher selling prices. Our expectation is to reduce SG&A expense in 2005, as a result of cost reduction actions. This remains a major 2005 focus.

As previously noted, during the first quarter we implemented workforce reductions including actions that affected about 20% of our white-collar employees in the Kenosha, Wisconsin area. As a result of this, and other cost improvements, we expect pre-tax restructuring costs of $20 million to $25 million for all of 2005, which includes the $7.8 million in the first quarter. In our U.S. dealer business, our key initiatives include continuing to improve service levels from our hand tool plants. We expect to achieve a modest increase in the number of dealer vans and operations by year-end and achieve modest growth in sales as a result. We also expect to continue to invest in dealer support during the year. Our dealers continues to report increases in their same-store sales, and the continued lowering of their debt balance to us and to Snap-on Credit. And at the end of the first quarter we had over 135 more dealers in the trial franchise program, as compared to the end of 2003, which was just prior to lengthening the program to 36 months.

The Snap-on franchise continues to be appealing and the market's demand for Snap-on product strong. In our Commercial and Industrial Group, we continue to expect improvements throughout 2005. Continuous improvement actions coupled with modest sales growth are expected to drive margin enhancements. In the Diagnostics and Information Group, focus in 2005 remains on scanner sales and software updates for our large installed base of handheld devices. Comparisons in the third quarter for the Diagnostics and Information Group will be more difficult because we will then be lapping last year's successful Solus( launch.

As occurred in 2004, and as well in this quarter 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. We expect to retire a $100 million, 6&5/8% bond in October 2005 and finally we are assuming a 35% effective tax rate for 2005. With an expectation for higher earnings, continue working investment improvements, and no anticipated pension funding requirements, we expect strong operating cash flow performance in 2005. Before we take your questions, Jack would like to add a few comments.

Thanks Mary. Again, let me repeat a couple of items. First of all, our expectations are the 2005 earnings trend to be better than 2004. We believe that the trends of improvement have begun in this first quarter, will continue, but there is much more that remains to be accomplished. We have a laser sharp focus on the improvements in the areas of complete and on time deliveries, reduction of our backorders, reducing our costs, and obviously continuation of coming to market with innovative products. We believe that these will provide the basis for growing our revenues in the future.

I would like to conclude by just again thanking our associates on a worldwide basis for all of their accomplishments during this first quarter of 2005.

Now we we'd be happy to turn it over to questions.

Thank you. The session will be conducted electronically.

[Operator Instructions]

We will pause for just a moment. We will now take our first question from Jim Lucas of Janney Montgomery Scott.

Thanks good morning. First question is on the housekeeping side. Could you give us the dealer count where it stood at the end of the first quarter and how that compared against a year ago?

At the end of the first quarter this year, in the U.S. roughly 3850 vans, in the U.S., about another 1400 internationally and, in the U.S. a year ago, at the end of the first quarter roughly 4100.

Okay.

And it's about the same count internationally.

Okay and Jack, in your opening remarks you gave a good overview of -the progress that's being made and could you talk about after having traveled around to different businesses, why you . . .

Jim, can I interrupt? There is two lines coming in at the same time, and it is difficult for me to hear you.

Yes, I have been picking that up the whole conference call, I don't know what is happening.

I apologize for that. Please go ahead, I'll see if I can hear you.

Yes let me try that again, If you look, after having gone around to a number of the businesses, could you talk about what you see as the two biggest opportunities and the two or three biggest challenges that you face here in the short term.

I would be happy to Jim. Thanks for the question.

Let me try to answer that. I think as I said I have traveled to all of the U.S. locations. I think the key take aways are number one, we have really strong dedicated people. They just need, I believe, some focus on some key areas.

And the key areas, obviously, are in the areas of service. I mean as I look at our complete and on time deliveries they are improving, though we have a long way to go. We are implementing that as a key measurement. I think we have great opportunities to reduce our working investment, particularly in the inventory levels. I mean its seems like that my view is that we kind of put safety stocks in every place we go, and we have opportunities to drive that out. Obviously, probably the most important in the manufacturing arena is our cost structure.

We have got terrific opportunities in our cost of goods sold and we've seen some areas where we have put in some one piece flow cells that have got us tremendous improvements. For example, even on the fill rates in one area, on small sockets, we move from something like 60% fill rate, up to 95% fill rate in a matter of just a couple or three weeks. So that is encouraging because the opportunity is there and now we are moving on to the medium-size socket cells, and we have other things in place.

With the split in focus that we've done, we got these values stream managers in all of our facilities, so that allows us to really get focused on what we're doing. And so it's not going to be where we do one and then move on to the other. We have of several these going on at the same time.

So I would think those are the biggest items. Probably as far as challenges are concerned, Jim I think, it's again, it's be sure we get the focus down to the lowest level. It is one thing for us at the top level to say, here's what we want to do, but do the people out on the shop floor, for example, do they really understand that.

So we have been spending- I personally - a lot of time with all of my direct reports, particularly the operating group presidents, out in these factories, out in the marketplace understanding what message they're hearing and more importantly what are they're doing about it. Then with the metrics we have in place to measure, then we can easily see quickly, as I said earlier either in a factory, in a cell, on an hourly basis or a daily basis or weekly basis. Did I answer your question, Jim?

Very much.

Thank you will take our next question is from Darren Kimball of Lehman Brothers.

I apologize for the cell phone. Can you hear me, okay?

Yes.

I was wondering if you could you talk a little bit more about the dealer count in the context of how many people you are adding versus how many people are attritting. I was really curious about the attrition because obviously I assume you're adding people for the training classes, but you are fighting a pretty high tide of departures. I am just wondering how much of that is a demographic wave. I mean do you have a lot of veteran dealers that are retiring etc.?

Again this is Jack. And then Marty will conclude here with some remarks also on that subject. First of all, we have not put a major push on in filling open routes at this time because we want to be sure that we can service dealers as they come on and that we are giving them added training. That is why we are increasing the number of our field managers out there.

Our people going through the training schools, as you just indicated that we want to supplement that further on an ongoing basis and are adding several field managers, as well as training managers out in the field. You're going to see a pick up greater in the latter half of the year. And you will see a net increase by, although it will not be significant, by year-end. Marty.

Darren, you asked about some demographics with respect to turnover. Most of the turnover of our dealers, and turnover by the way in the first quarter was at about the same level it had run the past couple of quarters, is mostly with dealers who had been with us less than three years, with a not too small number even less than a year. So what does that tell us? That tells us that there's something about recruitment, there's something about training. As those of you who know the business and have ridden with our dealers know, it's a unique and somewhat difficult business, not only physically but of course, having to sell the broadarray of SKUs we have, having to sell the financial product that goes along with the hard iron if you will. And that is why a year of so ago, we lengthened the trial franchise program. It does us, or the dealers, no good to try to run those routes and run those territories and be a successful businessperson without adequate training. So, it is a three-year program. Every 13 weeks, the management of those trial franchisees review metrics. I myself have seen some of the metric reports and the sign offs and the commentary.

As I said in my remarks, few are going to graduate but those that do graduate and hit the street, we believe are going to be strong, successful dealers. It's going to take a little time.

This is Jack again. Let me just add once comment. I don't want to mislead you to think we are not adding some now. We are adding some now. But we'll have a greater activity in that regard later in the year. We know that our service levels, because they are improving, that they will be nearing satisfactory levels later in the year.

So this is an issue that in part anniversaries itself because the shrinkage is partly so bad because you are pushing a lot of kind of unsuccessful young franchisers out?

In essence, in some sense they're being pushed out, and some sense they are failing as well. They're unable to make the livelihood that they want to make or need to make in the business. So they just can't financially continue.

We are certainly not pushing them out. They're coming in and are being fully trained. They know the expectations. I think, with any franchise system such as we have, you are going to have a failure rate. But we know that some of the things that we need to do-- we are focused on that to get them corrected.

Okay, let me just ask one follow-up on the dealers and then I will jump off. I think you said that domestically you are down about 5% against the 7% dealer count shrink. That implies that dealer sales productivity is up about 2%. So if you weren't shrinking, your sales would grow 2%. What are your expectations going forward on that? I don't know if I have those numbers perfectly right, but what're your expectations for sort of same van sales? Can these guys grow more than 2%?

I think at the low end, low single-digit on up to mid single digit.

Mr. Kimball do you have anything further?

No thank you.

[Operator Instructions]

We do have a follow-up question from Jim Lucas.

Thanks. Hopefully, there will be no background noise this time. I wanted to just follow up from a market share standpoint. Clearly one of your competitors was out this morning talking about double digit gains, and we have to wait until next week for the other player. But we have seen others stumble in this arena and then regain their stride with Snap-on being the preeminent brand, how long before you see the significant market share gains? Is this something that's going to happen gradually over time or will we just all of a sudden see a return in a meaningful way?

Jim, this is Jack. It is not going to just happen in one shot. It will be gradual, but I think you will see improvement later this year. And that will obviously continue into next year As we continue to focus and make accomplishments on the items that I laid out in my talk. I think later this year you will see us rebounding, and I think you'll see us continued improvement as we go into next year.

Okay, and on the working capital side, on the inventory. You made reference to finding safety stock in many places you go and clearly you are implementing dashboards and putting the metrics out there. In terms of the reception of the message, has it been overall positive, and do you foresee any other management changes that are going need to be made?

Jim, Good question. I do not see any big wholesale management changes need to be made. We'll obviously continue to look on position-by-position basis. That's what we are doing now. We will probably be making a few changes, but there won't be of anything of significant magnitude. I think the reception at the level, even down to the shop floor and certainly with the dealers, as I say we'll be addressing 1100 on Saturday, it has been very, very positive. They're just anxious to see the improvements. I was with 300 dealers two weeks ago. They indicated - I spent three days with them - they indicated that they're starting to see some improvements. But obviously, we have a long way to go.

So, I think the message is there, they just need to be encouraged to continue to work the basic fundamental things and to make it happen. That is the reason why said it is all about execution. Because it's all simple stuff. This is almost like Class 101 if you will, but it's things that we know how to get done. We just need to encourage them to make it happen, and if they get in our road, we will have to take corrective action.

Okay. Thank you very much.

[Operator Instructions].

We will now take a question from Boyd Poston of A.G. Edwards.

Yes, good morning, question for each segment. On the dealer group, January, February, March and the end of April, can you say there was a difference in the same-store sales number as the gasoline prices went up?

I think - This is Jack - I think the same store numbers were about flat.

Okay, and then no big difference between one month and the next as we get into the quarter?

No, we have not noticed anything. Obviously, we're monitoring that closely with the gasoline prices, but now we haven't seen anything this point.

Okay, and the Diagnostics and Information. I just wanted to try to get the pieces together here. The state emissions was in the first quarter last year. Is there any of that in the second, third, or fourth quarter of last year?

No.

And so the comparisons would be okay from that point of view, but you're saying that the Solus( was introduced in the third and fourth quarter which makes it harder comparison. When you put all together can this group still have a positive sales comparison for the year?

Yes.

As far as Commercial and Industrial Jack, the extent that you've check this out, what would you think would be a potential doable operating margin in this business?

I think longer-term, we are still convinced it could be an operating margin of 10% or greater. I am convinced that that is doable. The other question comes of when that is one to happen. Obviously I am not certain of that date. But I think we will make great strides. And as I said on earlier calls and I think that by the end of 2006, we will have made dramatic improvements toward that 10% or more.

Additional major restructuring needed?

I do not think so. I think we'll have ongoing restructuring, but I don't think is there anything that I see at this point that is major going forward.

Okay. Thank you.

We still have - when I say that I do not want to mislead you for the second quarter, because in the second quarter we will still have some predominantly toward the continued reduction of some salary headcount.

Okay. Thanks

Thank you we have a follow-up question from Darren Kimball of Lehman Brothers

I was just wondering, I don't know if I missed these comments, but could you drive down a little bit deeper in the industrial component of C&I what kind of growth you've seen or what are the trends, what are you working on to improve your positioning there?

Darren, its Marty so we've got to look at C&I, we have got to pull C&I apart a little bit because there are a few different businesses in there that serve some different end markets. First of all U.S. industrial business, tools to professional tool users were actually up in the quarter in the U.S. and close to about a double-digit increase. So we were pleased there. Our big tool businesses in Europe, Bahco and Eurotools, their sales were up modestly. And their important end markets happen to be the trade, the construction markets, which in Europe were soft in the quarter.

Can I interject something here while Marty's talking, something I forgot to say. Bahco and Eurotools, we are in the process of integrating these 2 to organizations and we think we will have a long-term benefit not only on the revenue side but obviously on the cost reduction side. I am sorry Marty. Go ahead.

In the equipment business, as I said in my prepared remarks, North America was flat. That is our under car wheel service line predominately. Europe was down, but again they had some one-time program sales last year and we sold a small collision repair business one year ago. So without that, it would have been essentially flat. So we continue to see sort of issues in that business that we need to address. That business has been improving in terms of its profit contribution to the C&I group but it continues to be the laggard in the group. And I left out power tools. Both our power tools business as well as our business built around torque products, and as I said in my remarks, those were both up.

Let me just make an added comment on our power tools side. I made a comment earlier about innovative products. We came out with two excellent products in the air tool side of our business. They are performing beyond our expectations in the marketplace in terms of sales volume and performance. We are excited about that. It is one of the areas that we are struggling to keep up with demand.

Okay. Thank you. One final housekeeping question. I did not follow exactly what you were getting at when you talked about a backlog in the Dealer Group of $55 million and coming down to $45 million. Can you explain that?

Let me just clarify that. That is not all in our Dealer Group. It's spread across our Commercial and Industrial group as well, particularly our industrial group. It is just where somebody has placed an order that we have not been able to fill on the first time we go out to pick. So then it goes into a backorder position. Obviously, that as I said we started the year at approximately $55 million. That had increased dramatically during the latter half of last year. So, what we are doing now is working it down. But we need to keep our service levels also at high levels. In fact, our plans are to take them to levels that historically we have not been able to achieve on the fill side or complete and on-time side that we've never achieved at Snap-on.

At this time, we have no further questions. Gentlemen I will be turning the conference back over to you for any for closing remarks.

This is Jack. First I would just like to thank you for joining us today. Bill do you have any other comments?

No, I would just remind everybody that I will be in my office during most of the day if you should have any final questions that you'd like to talk over with me. Otherwise, thank you very much and we will talk to you soon.

This will conclude today's conference. We'd like to thank you all for your participation and have a great day.