實耐寶 (SNA) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to today's Snap-on Incorporated 2005 Second 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, please go ahead sir.

Thank you, Cindy. Good morning, everyone. Thank you for joining us to discuss the results for Snap-on Second Quarter 2005. With me this morning is Jack Michaels, Chairman, President and CEO, and Marty Ellen, Senior Vice President, Finance and CFO. Today, as usual we will be using a set of slides to help illustrate the discussion. For those of you listening to our webcast, you should have found the slide show accompanying the audio icon when you log 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 website at www.snapon.com along with a 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 the call that state management expects, plans, estimates, beliefs, 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 latest Form 8-K, 10-Q, 10-K, and other periodical ports filed with the SEC.

This call is copyrighted material by Snap-on Inc. and 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.

Now let me turn the call over to Jack Michaels to offer his observations on our quarterly performance.

Thanks Bill. Good morning. Today we are on the call from our Snap-on hand tool plant in Milwaukee, Wisconsin. What's going on here this week is we are all involved in a continuous improvement event. We have 5 teams working here. We are working on -- sales and set up or change over time and cost reductions. All of my reports are here. We also have some improvement leaders, who are working with the hourly workforce on each of the team's and we have people from around the world.

So, this is the next phase of our kickoff and really getting focused on our continuous improvement. You've heard about it in the past, clearly, we're taking it to a new level. The executive team will be doing these every year. We will do 4 or 5 during the 12-month period to keep abreast. But they really signal to the organization that these are terribly important to our future.

Our teachers this week are the world's renowned experts in the area that introduced the torial production system it's a company call Shingitsu (ph). (Inaudible) this week none of the speak English so we have translators, but it's been a very rewarding week thus far. We will finish up tomorrow with presentations. More importantly, the week has been one of training and development as well as getting results.

Next week we will have our 2 Tennessee plants involved, and we will have people again from around the world who use the same team. So, it's taking continuous improvement to a whole new level, of which we need to do in order to realize reduced cost and increase our revenue as we go forward. Secondly, I would like to think our associates on a worldwide basis for everything that they have accomplished.

We are beginning to get our positive results. We really had outstanding people. What we need to do is really keep them really on a laser focus and be very sharp at getting at things that need to be improved as we go forward. And at the same time, apply urgency in getting accomplishments and the discipline to keep the improvements in place as we go forward.

Our second quarter, I think overall we are about as we expected. We saw some financial progress, but we see signs that we are beginning to turn the corner. This is the second quarter now in a row that we have seen the positive trends, but I do not want any of us to get terribly ecstatic and excited about it because we have the long, long ways to go. But at least we're getting focused on our customers, improving delivery to our customers, but we have much, much more to be accomplished.

Our operations and operational improvements are occurring, particularly in our hand tool plants. Our order rates are improving. Our back orders are declining. But, we are a long ways from our goal of 99% complete and on- time delivery to all of our customers. But we are making improvements. We are seeing that our people are engaged. They are truly engaged even at this plant this week, you can see people engaged in terms of making improvements.

Let me just talk a little bit about each of our groups. Let me talk first of all about the dealer group. We continue to fix the production and efficiencies that we have had. But primarily what we have been focusing on is improving customer service. In fact, that has increased our cost structure beyond where we'd normally what have it because of our drive to improve bill rates and reduce back orders. But clearly we see ways to reduce our cost structure going forward.

And I think it will start seeing more improvements probably as I told some of you early into 2006. Because this year, we will continue to focus on getting our service levels to the levels that we expect, our customers expect and we expect to be really that lot of happened in 2005. I think in the second half, as we continue to improve our logistics to our customers, again we will see opportunity then to increase our revenues. And I think the increase in revenues will come about by adding more dealers.

However at the same time, we are going to be having a major effort on improving -- reducing our inventories and improving inventory turns. So, how all of that will net out in the second half of the year is somewhat our question. But, clearly, there are 2 focuses, improving customer service while improving cost structure. And the cost structure will be done as I said we are improving our balance sheet by reducing inventory while taking other costs out. Those are cost of goods sold as well, our SG&A area, our operating expenses area.

On the commercial and industrial group, as you have seen from our numbers we have a good trend going and trends of improving our margins. And I think that will be continued improvement as we go through the year, the balance of the year. Our European operations, we have begun the integration of Bahco Eurotools, and we're at the early stages of that. We have not seen all of the improvements obviously that we expect, but it is well underway. So, we're pleased with the efforts here to drive out complexity and reduce our costs.

On the Diagnostics and Information Group, we have seen steady improvement in the second quarter. More on the profit side than on the revenue. We have seen some revenue growth, and I think that will continue through the balance of the year. In the corporate overall direction, we are not really changing our emphasis. There are 3 focus is. One, is to maintain the strength and quality and product performance. We have been the ones to shoot at, the ones they want to beat. We need to continue that, that distance with our competitors, and continue to be the innovative market leader.

Secondly, as I have said numerous times and repeated numerous times here already in my short remarks, continue to improve our customer service and delivery to world-class levels, which really means 99% plus complete in on-time deliveries. And that will take us a long way towards strengthening our dealer channels while increasing revenues and reducing costs. And third, we need to be relentless in reducing complexity and costs. We are really focused on the 20 that gives us the 80% of our results. And we have introduced that throughout the Company, so you will hear more about 80-20.

Overall, it is still blocking and tackling. These are very fundamental, very basic items we're working on. There's nothing-exotic here. It's just doing the fundamentals correctly, keeping the discipline in place, and continuously driving improvement. So, I would just summarize by saying there is so much opportunity here that we're getting at, but it can never just happen quickly. I would love to tell you that it's going to happen overnight, but it is really going to happen over the longer-term.

We want to continue to make steady improvements. I have said to you before, I cannot assure you that every quarter there's one to be continued improvement. We clearly intend to make that happen, but I do not want anybody to be disappointed because we might take a financial -- somewhat of a flat or even maybe a little bit of our backward step. But it is clearly about as keeping focused on creating long-term shareholder value.

So, I will make some comments at the end, some closing comments, but let me turn it over to Marty at this point.

Thank you, Jack and good morning everyone. I will begin my remarks with slide 4. Total revenue in the second quarter of 2005 was 608 million, and includes 16.2 million from financial services. This compares with 612.1 million of total revenue last year, which included 20.8 million from financial services. Net sales of products and services in the second quarter were 592.4 million, an increase of 1.1 million. On a currency neutral basis, net sales were down 1.8%, primarily as a result of lower US dealer segment sales and sales decreases in our OEM facilitation and worldwide equipment businesses.

Consolidated reported net earnings were $0.46 per diluted share for the second quarter, up 21% from the $0.38 earned a year ago. Diluted EPS this quarter includes $0.08 per share of costs for restructuring actions, mostly related to staffing reductions as well as business unit integration initiatives. This compares with a total of $0.09 per share last year with $0.05 for plant consolidation and a charge of $0.04 per share last year for the settlement with GSA.

Turning to slide 5, Snap-on's consolidated gross profit defined as net sales less cost of good sold was 268.5 million. The gross profit margin was 45.3% and was reduced by approximately 10 basis points or $800,000 for restructuring costs. Last year second quarter gross profit margins was 43.3%, which included approximately 60 basis points or a 3.7 million of restructuring costs again primarily related to plant consolidations. Absent of restructuring affects in both years, gross margin was 45.4% in 2005, compared with 43.9% a year ago. Not only did we improve over the last year, but also sequentially compared with 43.1% in the first quarter on a similar basis.

Lower manufacturing costs due to footprint consolidation, primarily with respect to the commercial and industrial group, and greater productivity from continuous improvement actions in a number of businesses helped improve results. Stronger margins in the Diagnostics and Information Group, primarily from an improved sales mix of higher margin software and handheld diagnostics, along with increased selling prices more than offset $7.8 million of higher total company, year-over-year steel costs and the higher production costs still occurring in our Snap-on tools manufacturing facilities. In our manufacturing operations, I will reiterate what Jack has said. We still have much opportunity ahead of us and this remains a key priority of the management team.

Turning this to slide 6,operating expenses were 237.5 million in the second quarter, including a 11.2 million from financial services. A year ago, operating expenses were 235.9 million. Restructuring costs this year were 6 million, compared with 1.1 million a year ago, although last year's operating expenses also included the $3.6 million charge for the settlement with the GSA. Absent these items, operating expenses were 37.2% of net sales in both years. As an indicator of improving productivity, sales per average employee were 198,000 in the second quarter of 2005, up nearly 8% on a 6% decline in the worldwide work force.

Let me now turn to a review of our segment results beginning with the Snap-on Dealer Group on slide 7, please. For the worldwide dealer segment, second quarter 2005 total revenues were 260.6 million compared with 261.1 million in 2004. On a currency neutral basis, sales were down 3.4 million or a 1.3%, year-over-year.

Sales in the North American dealer operation were down 2.8% year-over-year, compared with a decline of 5.5% year-over-year in the first quarter. The sales decline principally reflects approximately 6.5% fewer dealer vans in operation year-over-year, partially offset by an improved dealer sales average. Notwithstanding this overall decline in vans, the number of trial franchisees is growing. At the end of June, we had over 300 trial franchisees up 92 from the beginning of the year. We continue to believe that this extended term trial program will lead to a stronger franchise system.

Operating earnings for the dealer group shown on slide 8 were 23.4 million this year, compared to 30 million last year. Our actions to improve production operations and deliveries to our dealers are continuing to result in higher costs in the near term. As we continue to achieve improve deliveries and service to our dealers, we do expect that these higher costs will abate. We are experiencing improvements in order fill rates. As these improvement trends continue, plans are in place to still open dealer territories. In the second quarter we have 3.9 million higher year-over-year steel prices although lease costs will offset by improved pricing.

Turning to the commercial and industrial group shown on slide 9, sales were 294.8 million, compared with 282.9 million a year ago. Currency translation increased revenue by 8.2 million year-over-year resulting in a currency neutral sales increase of 1.3% from a year ago. Worldwide sales of tools for industrial and commercial applications increased year-over-year in the second quarter, not withstanding that our businesses in these markets are somewhat concentrated in Europe, where our end markets have been sluggish.

With respected to power tools and torque tools, sales were up principally reflecting the successful introduction of new products. Our Global Equipment business experiences declined in sales. About half of this is in Europe as well, where again market conditions were not favorable.

Turning to slide 10, Commercial And Industrial Group segment, operating earnings were 17.9 million, up from the 4.2 million year ago. Improved productivity worldwide reflecting the benefits from our continuous improvement initiatives, as well as footprint consolidations contributed to these results. We were able to realize higher selling prices to more than offset 3.9 million of higher year-over-year steel costs. Furthermore, our last year's results included a $3.6 million charge for the settlement of the GSA contract audits.

Turning to Diagnostic And Information Groups on slide 11, total revenues were $117.2 million in the quarter, compared with 114.7 million a year ago. Sales without currency increased to 1.5 million year over year, largely reflecting higher sales of software, information, and handheld diagnostics products. These improvements were partially offset by lower sales in the OEM facilitation business. The increased sales of higher market in handheld diagnostics and information related products, coupled with lower costs and greater productivities, resulted in higher earnings.

We are pleased to see that our sales of our new SOLUS scanner diagnostic tool introduced in the third quarter of 2004 and sold through the dealer van channel continues to sell well in 2005. Since the launch of these products occurred in the third quarter of last year, it will make a comparison in the third quarter of this year a bit more difficult.

Turning to financial-services on slide 12, operating earnings of 5 million were up slightly on a sequential basis from the first quarter. Year-over-year, they're down as a result of continued higher year-over-year market interest rates and lower credit originations. Total financial services revenue declined to 16.2 million from 20.8 million. In the US, Snap-on credit originations were down 18.6%. Lower originations represented approximately one half of the operating earnings decline, while the effect of higher interest rates accounted for the remainder. Lower credit originations in the US were the results of lower sales, and a less favorable sales mix of products which tend to be financed with extended credit contracts such as equipment and tool storage. Also there was a reduction in financings with our dealers as a result of the extended trial franchise program.

With that completing my operating segment review, now let me turn to a discussion of cash flow shown on slide 13. In the second quarter of 2005, Snap-on generated 31.8 million of cash flow from operating activities. The major factor affecting the free cash flow comparison in the quarter was the change in working capital. Since the beginning of the quarter, inventories increased 28 million, for reason I'll comment on in a moment, while timing of payments on accounts payable caused a further cash outflow of 24 million. Needless to say, we believe substantial opportunity yet remains to further reduced our investment in working capital.

Capital expenditures were 9.8 million in the quarter, compared with 10 million year ago. For the full year, we believe capital expenditures will be in a range from 42 million to 47 million, up from 39 million last year. This largely reflects the investments being made within our manufacturing facilities to increase production, flexibility, and productivity.

Depreciation and amortization as anticipated to be about 55 million for the year or about 10 million more than capital expenditures. With respect to 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 131 million against total debt of approximately 312 million, our net debt was 181 million, down 23 million from the end of the second quarter a year ago, and down 5 million from the end of the first quarter 2005. We did repay 25 million of short- term debt during the quarter.

Our net debt to total capital ratio is 14.9%, compared to 17.2% a year ago. As I have said earlier, inventories increased during the quarter. This was the result of higher material costs, principally steel, a higher level of consigned inventory as a result of the increase in the number of trial franchisees in the US dealer business, and an increase in finished goods. We continue to need to build inventory to forecast the demand until we can get closer to a bill to order system.

The result is some build in second quarter finished goods, which are expected to decline in subsequent periods. Accounts receivable management continues to improve. As you will note, DSOs are down to 77 days outstanding, compared with 84 days a year ago, and are down from 82 days at the end of the first quarter.

That concludes my remarks about our financial performance. Now let me spend a few minutes outlining some of our expectations for 2005. Overall, our expectation is to continue to reduce SG&A expenses in 2005, as a result of cost-reduction actions, as well as to increase our focus on improvements in gross profit margin. Most of our 2004 cost increases for steel occurred in the second half of last year and we are now seeing some pricing softness in certain grades of steel. We also will continue our aggressive efforts on continuous improvement. That is indeed why we are here in Milwaukee Tool Plant this week.

We expect pre-tax restructuring costs of 20 million to 25 million for all of 2005, which includes the 14.6 million incurred in the first half of the year. In our US dealer business, as we have previously stated, our key initiatives include continuing to improve service levels from our hand tool plants by focusing on improved manufacturing operations. We believe we will continue to show progress.

As this occurs, efforts are also underway to recruit new dealers to fill the open-dealer territories that exist today. One of our plans are to fill them along with ongoing improvements in service levels. We also expect to continue to invest in dealer support during the year, particularly through the addition of more trainers in the field and sales managers to assist dealers.

Our dealers continue to report increases as a mere same-store sales and the continued lowering of their debt balances to us and to Snap-on credit. And at the end of the second quarter, we had a 139 more dealers in the trial franchise program as compared to a year ago. We believe that Snap-on franchise continues to be appealing and the market demand for Snap-on products is strong. We need to remain focused on doing a better job of supplying and meeting that demand.

In our commercial and industrial group, we continue to expect year-over-year improvement 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 hand-held devices.

As I previously mentioned, 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 has occurred on the both half of 2005, we expect rising interest rates will reduce financial services revenue and income on a year-over-year basis. We expect to retire our 100 million 6% and 5.8% bonds in October 2005.

And finally, we are still remaining a 35% effective tax rate for 2005. With an expectation for higher earnings, continued working capital improvements, and no anticipated pension funding requirements, we expect strong operating cash flow performance in 2005. Before we open up for questions, Jack, would you like to add some comments?

Thanks Marty. Again, I would just like to thank you for joining us this morning. I think as you can tell from our comments, we are enthusiastic and we are confident about achieving the opportunities or realizing the opportunities ahead. Primarily continuation of our improvement in service levels to our dealer van channel principally as well as our industrial group are continued to improve and reduce our costs and improving our margins and improving our sales growth. We believe that our growth will primarily come from the existing and adjacent markets as we move forward through the balance of 2005 and clearly into 2006 and beyond.

So, with those comments, I would now like to turn it over to your questions or comments. Thank you.

Thank you, gentlemen.

[Operator Instructions].

We will take your first question from Jim Lucas of Janney Montgomery Scott.

Thank you, good morning guys. You are most pronounced it that time, Jack. With the dealer training aspect, could you give a bit about where you are on the training curve in terms of how the overall program is going? You alluded to it in the prepared remarks. You have increased the number of trainees out there, but could you add a little bit more color about the overall training program?

Regarding dealers, right? I am sorry -- there in the conversation I didn't hear.

Right regarding dealers.

We have frankly teams underway right now. We are evaluating how we continue to strengthen our dealer van channel. It is a large part the training of not only new in coming, but the continuation of training for the existing one. New in coming, we are strengthening our one-week program in our Dallas training facility. We are also improving the training that being undertaken in a mentoring program with existing dealers.

We are strengthening the number of people in the field. We have had sales managers in the field. We are changing that position, not just in title, but in content and expectations to business development managers. We have some 55 trainers -- just training that we were in the process of adding-- to help train new and existing people in the field. I think we are investing again more in training, more in our dealer van channel. But we believe we will yield long-term favorable results.

We have metrics in all of these areas that we track. As we have said before, most of you have seen on a weekly basis. So, I believe that we're clearly providing adequate resources as we move forward. And I don't see that continually increasing in 2006. Most of that cost will be incurred in the balance of -- in 2005.

Okay that is very helpful. On the cash flow side, you got the debt retirement in October, but you have got this good problem that the working capital opportunity will continue to generate more cash. You alluded to CapEx going up a little bit, having to replace a lot of older machinery to improve the productivity in the facilities. But, can you talk about some of the longer-term uses of cash flow given that it does not seem acquisitions are high on the priority list?

Well, hey, Jim this is Marty, good morning. You are correct. At least large acquisitions are not on the priority list. As we said before, we have continued to look at smaller (inaudible) Boltons (ph) and particularly in the Diagnostics and Information space and we continue to do that. You are correct. We will retire the $100 million in bonds we will do that on current cash flow. We expect to end this year probably with less than a 100 million of cash on the balance sheet. As you know, we did not, at least so far not raised our dividend, and we expect to do that, but we need to see a sustainable earnings improvement. We had earnings improvement in the first half of this year. And if we can continue to show improvements there, our board I am sure we will take up that subject again.

So that leaves, very less share repurchase, which for the most part, I think our view would be absent any need for a large amounts of cash over time. We will probably target some level of cash to hold for the business. And, I do not think we will be hesitant at all to distribute those funds to our shareholders where they belong. But I do not know that you would see much in that way through the balance of 2005.

And could you remind us if you have an active program in place on the buyback?

Yeah we do. We have one Jim but its earmarked currently, solely really to offset the dilution that occurs from issuing shares under option in various stock purchase programs. And I think in the quarter, we bought back 150,000 shares or so. I think, a year ago, we bought a little more we 1.2 million shares in 2004. From time to time we may get ahead of that a little bit, but essentially it is targeted to offset dilution.

And certainly that will be an area -- this is Jack, that we will continue to focus going in balance of this year. And anyway, I think that basically -- I'd hope that answers your question.

Yes, it does. Hopefully Mikal Hassan (ph) is being nice to you this week?

I tell you what. You know him so. He is never that nice.

This is Marty. I can tell you that there's been a wonderful experience to be with Mikal Hassan (ph) this week.

Good luck.

This is probably the 20th or 30th time that I've been with him. So yes, he has not changed any.

Consistency.

Right.

Thank you, We will take our next question comes from Alexander Paris of Barrington Research.

Good morning.

Good morning.

Nice earnings report.

Thank you.

Thank you.

And just kind of a broad question you are doing a great job and had been to give some time on increasing efficiency and working on improving service. I am concerned with the lack of the top line growth and not a lot of talk about the aggressive new programs to try to move it ahead. But just focusing on one thing first, the dealer growth. The number of dealers, total dealers at mid-year, what were they versus a year ago?

This is Jack. Let me talk about the first part. Clearly, revenue growth has to occur in our business and we realize that. The key thing that we need to take care of first is servicing the existing business we have in a better fashion, improving our deliveries on a timely basis to those customers. And the customers, I'm talking about here number one, are dealers, but for them to be in a position that covers to the end consumer if you will. So that's been a primary focus. Our markets are strong.

So, we believe as we continue to make these improvements in the deliveries, we want to take it to historical high levels. We are actually above the historical of high level. We never really had a complete and on time above much like 85% you heard me talk about 99% plus. So, we know that that will drive additional business. I am going to let Marty now address the whole question about dealers.

But let me just add one other comment it came to my mind. One of the things that I mentioned in my closing remarks is adjacent markets. Back to the earlier questions about making acquisitions, Marty indicated some things about diagnostics. Some of this will help us get into adjacent markets that we're not currently serving. There are numerous opportunities that we have with current channels - our current delivery method to get to new segments - not new segments, segments of the market that currently exist that we're not covering. Clearly, we have to get the revenue growth. There is no question, but the only rarely do is to be sure we have the right service model and place. Marty do you want to talk about (inaudible)?

The data points on (inaudible) roughly we had 3800 vans in the US at the end of June - down from a little under 4100 as at the end of June last year, Alex. That's about the 6.5% decline that I referred to in my prepared remarks. We had about 3850 at the end of the first quarter, so not a large decline in the last quarter. But most importantly, and notice I am talking vans not dealers or franchisees. Because actually, most of the decline has occurred really in our second van program where we've got a franchisee operating a second van. That's a program we're taking a look at, but it has not been as much in the number of franchisees as it has been in actual vans on the streets.

The 300 in trainees, they actually have vans and -- ?

Yes. They do and they are included in our count.

They are included?

Yes. They are included in this whole count.

So the decline is, you could say it's even bigger because, you have trainees? As I imagine the trainees are not getting full revenues, or they wouldn't been in training?

No, what we did with the trial program Alex is we simply said that over a 3-year period, they hit the street right away. They have a field manager assigned to them. We set business metrics around key metrics that are monitored every 13-weeks. They are on the road in an actual territory. They're not in a classroom. In fact, some I think it's roughly 30or so, maybe that are actually doing so well in terms of exceeding their metrics that they have an option to come out early. But the trial program really a big part of it, which we designed to take some of the very, very early term financial pressure off of startup business.

Providing that we would consign essentially we would provide some of the startup equity for those businesses because it is very difficult for a new business to start right off with a heavy debt burden, which essentially the old program requires because they have to buy the inventory they certainly financed it whether with us and to Snap-on Credit or otherwise. But they are on the street they got field managers assigned to them they are in territories. They may be taken a territory from somebody who was in the territory. So they're out collecting on an existing revolving accounts book that they would have taken over. So, now they are effective -- feet on the street, if you will.

And but the end of market growth for you dealers, their growth to the end customer has been growing fairly steadily. So, this whole new focus on the training, must mean that your turn over or failure rate must have gone up. Is that right? Is that the impetus for all of this?

I think one of the factors in trying to connect the dots between what is happening with our dealers in terms of their same- store sales growth and trying to connect the dots back to Snap-on sales growth, one of those factors, of course, is the issue around deliveries of the plants. They will find ways to deliver products to their customers. If they cannot get it in a timely fashion, which means every week, they're seeing those customers-- if they show up another week, and they don't have the product, and the customer wants it they will find a way to get it. (Inaudible) I mean our dealers have told us that if they can get the product --they want to buy, they want to sell Snap-on products.

At the same time the business to run. That is why we have to get this focus on improving deliveries. It would not make sense from a business point of view to simply put more dealers on the street aggressively only to find that we are putting them in this difficult situation with one of their customers in market technician. We would rather correct some of these problems and have a good reliable product delivery process to feed product to them with.

This is Jack. That is clearly what we have been working on. We have been working on that over the last 8, 9 months and so, we just have to get that corrected before we put a major push out there of adding more dealers. We need to take care of them once we add them.

Many years ago, I spent a day riding on a Snap-on truck all day long. It seems the greatest demand was for your old calendar before you got that politically correct calendar. Maybe we should go back to that?

I do not think so. I think we need to get them product that they can sell, not give away.

But going back to the other businesses, I see industrial activity now Europe is clearly weak. But industrial activity generally in the US and Asia is strong. Industrial capital spending is strong, your in a very specific part of that but this is for all of repair related equipment that is -- It would seem to me that even while you are improving efficiency that your revenue would be going up a little bit more.

And clearly, our biggest challenge in terms of delivery is to the industrial segment of our business. Why is that? Because there's a lot more specialty, special tools in that business than you would find the technician. So, you are actually right. We have huge opportunity, we just have to take care of the issues of delivering product when they need it.

So that is why you have to have a bigger focus on flexible manufacturing?

Absolutely. That is so true.

That's a bigger solution for the industrial business then, than for the dealer business.

Absolutely. There are some lower volumes on the industrial - but overall you are absolutely correct. That's the reason why as I said, one of the areas, in fact, Marty has been working on one of those areas for this whole week. How do we reduce setups and changeovers. As he indicated earlier from 160 minutes -- last night they were down to 39 and their goal is to get to 15.

This implies that your competition has also been going strongly towards flexible manufacturing in offering tougher competition?

Absolutely. You are correct.

All right, thank you very much.

We'll move on to George Nissan of Merrill Lynch.

Congratulations on a solid quarter. Questions regarding raw material costs. Over the past year, a lot of your competitors have been implementing new strategic initiatives to reduce raw material costs in this challenging economy. I'm interested if you can add some color as far as what you are planning on doing to reduce from material costs by opening up a better line of communication with the suppliers.

We have underway a strategic sourcing initiative as we've called them -- hello, are you still there?

Yes.

With our suppliers. We're taking it to the phase 2 of it the next level as to how we can link ourselves with the whole supply chain. That way we can take out costs. So, we are in the process of bringing talent in that is very familiar with the processes to get that accomplished. We want to link and lean. That will be a new term you will hear more about. Link and lean the whole supply chain. We are working hand-in-hand. We want to encourage suppliers we will work with them so that they can be closer to our operations. That way they can deliver to is just as we needed. It will reduce their costs and improve their cash flow as well as our own. We're in the early stages of that at this time.

I tried to make sure that your suppliers are close to manufacturing plants?

Absolutely. Those who supply whole products, we want those close to distribution centers.

By following your company for the last 5 plus years and one thing I've always noticed why you get good results because quality has always been a very important metric of your organization. How are you making sure your suppliers are meeting quality standards? Are you score carding them on a quarterly basis? What you doing to make sure they meeting your objectives?

We are doing all of those things. We have standards that they must meet. There are monitored to those standards in 2 phases. One, at their place of manufacturing and secondly, as we receive. Now that does not mean we inspect everything we receive, because we pay for good product obviously. So we're doing it more so back at their business. That is part of the link if you will. There are 2 parts of it, one is the link and the other is the lean.

Final question, to your suppliers feel like they're being squeezed right now or are they really looking to work with you all as a partner, to help improve overall supply chain? Do they feel like you are forcing us to look at alternatives, blah, blah, blah? What's some of their feedback?

As I have talked to them, and as people and procurement talk with them, we are getting greater and greater reception of working with us because they see the benefit to themselves, and the ability to improve their own cost structure. But also, as they work with us, will get greater growth, which means more quantity to them. I think it is working very well.

Even though you have alternatives, you are still working with them, you are saying hey we like providing this volume of business, let's work together?

Absolutely. That is the part of the strategic supply base that we are identifying.

Great. Congratulations on the quarter, I wish you the best of luck.

Thanks.

Next we will take Jonathan Steinmetz with Morgan Stanley.

Thanks. Good morning, everybody. A few questions. I think you mentioned 300 of the dealers are training, what percentage of those do you expect to convert into the full- time dealers?

I do not have the exact number Jonathan. But a reasonably large number, though.

So the vast majority?

I do not know about that. I would say more than half, a fairly large number.

When you talk about reducing inventory, but the same time keeping fill rates up, I want to understand better what the problem is. Is this a forecasting issue or manufacturing issue? What is the underlying issue that prevented that from happening earlier?

All the things that you just mentioned are correct. Some of it is forecasting. Our forecast is never right. We have not taken appropriate actions on some excess inventories that we have in certain areas, in certain skews, if you will. What we need to get to as market rates and demand. What ever is being sold these to be replenished. And that's what Marty indicated, that we are not there yet. We are working on it, though. We have an active program right now as to how we can make this happen. So, the challenge we have is getting rid of the mentality that we have to keep this huge inventory level to take care of customers. No, we need to do is supply what they sell on a - basically on a daily basis, and walk ourselves this excessive level of inventory and other SKUS we that we have.

Can you talk a little bit about is the impact of higher gas prices on the actual dealer a significant item? Do have any data on how many miles the typical dealer drives per year, and how much they spend on fuel and what the delta may be? I'm just trying to understand if their own personal P&L is really getting hit a lot by this issue or if it is more of a non factor.

I do not have that data here with us. Obviously, we have it. We know that there has been an impact on them. One of the things we're trying to do is work with them to schedule their routes in a more effective way. In other words, if the travel less distance to get to their customer base. That is a program we have undertaken to accomplish. We're working on that as we speak, but obviously there is an impact on them. I cannot tell you the total impact, but it's had an impact on them. I just do not know the amount right here. We are at the plant and not back at the office where we have that data.

When you came in, everything potentially was on the table here. The commercial and industrial has shown a nice improvement. Is every segment that's within Snap-on currently need to be within Snap-on, or is there still a lot of the evaluation going on in that direction?

There's still some evaluation going on. That is something that we will continually do. It is not just because we're trying to improve our results today. We will continue to try to improve our results. We will always look at all the business units and determine if they fit our strategy. We are pleased with the progress that CNI group has made, but we have a long way to go. Not every business is performing at the level that we think they should be. So, we continually monitor. We continually evaluate the strategic fit.

Great, thank you very much.

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

I have a question on the OEM facilitation business. I imagine that's a lumpy business. I know it is a low margin business, but it is an investment in building relationships with OEMs. Can you give us a rough idea of how many facilitation agreements you have and if that is growing? Is the volume enough to be significant?

We have a number of contracts with a number of the major OEMs. You are correct. It is a lumpy business in the sense that quarter will quarter, there facilitations, if you will, will be dictated by what kind of dealer activity is going on with an OEM and whether the OEM has a specific program that they wanted taken to facilitate essential, tools, equipment, what have you.

So, it is not a steady business. That is why I mentioned the decline this quarter. It is a low-margin business as you can imagine. It's really a service business just facilitating the buying and selling of equipment. It does give us a lot of visibility. Let me go back and talk about the -- it is a low operating margin business, but not terribly capital intensive. It's a pretty good return business, but it does give us a lot of visibility to what is happening in the OEM dealership market --tools, equipment and tools that are qualified by OEM to be used in the service space, in particular for qualified warranty work. So, that is a profile of the business.

Do you sign contracts with new ones regularly enough to contribute to the lumpy business or is the business just lumpy?

They continue to seek out the businesses, but it is not a business expect to see serially grow as a result as sort of stair step signing of contracts quarter after quarter..

Okay. One other question. Just to clarify on the dealers. The business is growing. You're number has gone down. I think you have talked about the interest -- the applications to become dealers is still strong. Is the decline primarily self- imposed by yourself extending the training period and so forth?

No. I do not think it is self- imposed. I do think what is some what self-imposed is the claim (ph) and frame in which we are prepared to add new dealers into territories, which we want to make sure happens consistent with improvements in deliveries and fill rates.

You said before that you expected the deal of growth to resume in the second half for may be further toward the end of the year. Are you still thinking that?

Let me comment this way. We do expect to see continued improvement in fill rates and service levels. As we said, if we continue to see improvements in those activities, then we would expect to add dealers to fill territories because we will fell better about our ability to provide them with product.

And they will feel better about joining us.

Okay, thank you.

We will now move to Boyd Poston of AG Edwards.

Good morning could you tell me on same-store sales for the dealers what that number would have been?

Low single-digits. Low to mid-single digits.

Is your sense that the market overall is still growing mid-single digits?

Roughly.

Roughly, yes.

The a slight 1 or 2 point difference between what your dealers are doing and what the market is doing? Do you say that is due to the inability to get product from the company because of the problems with loss of market share, or the dealers still taking down inventory? What would you attribute that to?

Actually Boyd we are talking at that low mid-single digits which we actually look at today. We are pretty much in line. And what our dealers reported same-store sales is almost spot on to what we have seen in terms of end market growth activity.

The second part of a question is that the primary reason is our ability obviously to deliver what they need in a timely fashion.

Can you give us a quantified any extent what the fill rate is now and where the backorders stand?

It has improved our first time fill rate is running to the Dealer Group about 85%. Approximately, backorders had declined by about half since the beginning of the year. On the industrial side - actually it improved a little more than half, on the industrial side our fill rates are not as high because of the complexity as we discussed on an earlier -- to an answer to an earlier questions. They're backorders are down about 40%.

Their fill rates would be about where?

Probably-- I do not have the data here. It is probably in the 60% level.

To get to the 95 and then to the 99%, would you envision restructuring charges, greater than the 20 to 25 million that you predict for this year for next year?

No, not all. In fact, if anything you might see a slight up tick in capital spending, but no not any restructuring charges - nearly at the level -- even though we had this year.

Okay, thank you.

Thank you and it appears that we have no further questions at this time. I'd like to turn the call back over to Mr. Pfund for any additional or closing remarks.

This is Jack. I'd just like to thank you again for joining us this morning. Thank you for your questions and your continued interest in Snap-on. Bill?

Well. I would like to thank again, join with everybody and thanking you for attending. I will be back in my office later in the day. I am up at Milwaukee with everybody as well, but I will be back in my office. If you have got additional housekeeping questions or other things you would like to discuss. And then, I will be in my office all day tomorrow. Thank you very much.

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