實耐寶 (SNA) 2005 Q4 法說會逐字稿

Please standby, we're about to begin. Good day, everyone, and welcome to today's Snap-on Incorporated 2005 fourth quarter and full year results 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, Melissa

Good morning everyone, and thank you for joining us to discuss Snap-on's fourth quarter 2005 results. With me this morning are Jack Michaels, Snap-on's Chairman, President, and Chief Executive Officer, and Marty Ellen, Senior Vice President Finance and Chief Financial Officer.

Today as usual, we'll be using a set of slides to help illustrate our discussion. Our discussion will be a bit longer than typical, because of our desire to keep you informed about our strategic priorities for 2006. For those of you listening to our webcast, you should have found the slideshow accompanying the audio icon when you logged on. You will need to flip through the slides and we'll let you know as we move on to a new slide. These slides will be archived on our website at snapon.com, along with a transcript of today's call. Following our remarks, we'll 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 information offline. Also any statements made during this call that state management's expectations, estimates, beliefs, anticipations, 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 number two, as well in the latest Form 8-K, 10-Q, 10-K and other periodic reports filed with the SEC. 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.

Now, let me turn the call over to Marty Ellen, who will review our financial performance. He will be followed by Jack Michaels, who will discuss his observations about our financial performance, and our plan to build value for our stakeholders in 2006 and beyond. Marty?

Thank you, Bill, and good morning, everyone.

My comments on fourth quarter financial results will be brief, so as to allow adequate time for discussion of our business priorities, that were outlined in our press release. I will begin with Slide Four. Total revenue in the fourth quarter of 2005 declined 6% to $573.6 million, including an $8 million decrease in Financial Services. The decline is largely due to currency translation and lower sales across a number of our automotive related businesses, including our North American franchise Dealer business. Sales growth was achieved in our worldwide industrial tools business. Consolidated reported net earnings were $0.47 per diluted share for the fourth quarter, compared to $0.42 a year ago. This came in a bit better than had we previously expected. Operating earnings increased, as lower sales volume was offset by greater LIFO inventory benefits, along with lower restructuring costs, and improved operating expense performance. Higher pricing was able to cover increased steel and freight cost.

Turning to Slide Five, Snap-on's consolidated gross profit, defined as net sales less costs of goods sold, was $247.2 million. The gross profit margin 43.9% declined 80 basis points year-over-year, notwithstanding an approximate 60 basis point LIFO improvement, and some benefit of higher-selling prices. Increased year-over-year steel costs and higher costs incurred in the Snap-on Dealer Group plants to improve order fill rates contributed to the overall gross profit reduction.

Turning to Slide 6, operating expenses were $213.8 million in the fourth quarter, including $7.4 million from Financial Services. A year ago, operating expenses were $244.9 million, which included $12 million from Financial Services. Excluding Financial Services, the operating expense decline was $26.5 million, of which $4.8 million was due to currency and $4.6 million due to lower restructuring and related costs. The remainder was primarily due to the benefits of cost reduction actions.

Let me now turn to a review of our segment results, beginning with the Snap-on Dealer Group on Slide Seven. For the worldwide Dealer segment, fourth quarter 2005 total revenues were $233.3 million, a decrease of 5.8% compared to a year ago. Sales in the North American Dealer operation were down 4.9% year-over-year. As anticipated, we had approximately 6% fewer vans in the U.S. Similar to recent trends, we expect that the first quarter of 2006 will continue to show some reduction in the total number of U.S. vans. As reported to us, by our U.S. franchisees, their same-store sales were essentially flat in the quarter. We clearly need to make additional improvements in this business. Jack will cover these plans in a few minutes.

Operating earnings for the Dealer Group, shown on Slide Eight, were $20.6 million this year, compared to $22.7 million last year. The net effect of the sales volume decline, while somewhat offset by higher pricing, reduced operating margins by $3.1 million. Year-over-year LIFO benefit improvements of $3.6 million and certain improvements in cost performance were pretty much offset by higher steel, freight, and cost incurred to improve service levels and fill rates. We are experiencing improvements in order fill rates and in reducing the level of back orders; however, these achievements have come with a higher level of spending.

Turning to the Commercial & Industrial Group, shown on Slide Nine, sales were essentially flat on a currency neutral basis. Worldwide sales of tools for industrial and commercial applications increased year-over-year by 4%, on a currency neutral basis, even though our businesses in these markets have a significant sales base in Europe, where activity has been slow. Our global equipment business experienced a decline in sales. About half of this business is in Europe as well, where, again, market conditions have not been favorable.

Turning to Slide 10, Commercial & Industrial segment operating earnings were $22.9 million, up from $12.5 million a year ago. Improved productivity worldwide, reflecting the benefits from our rapid continuous improvement initiatives, as well as footprint consolidations and other operating expense reductions, were major contributors. We also were able to realize higher selling prices, to more than offset $2.5 million of higher steel costs.

Turning to the Diagnostics & Information Group on Slide 11, total revenues were $100.7 million in the quarter, essentially flat on a sequential basis with the third quarter, but were down from the level of a year ago, as a result of last year's successful new product launches. Additionally, our OEM facilitation business experienced a $10 million decline in sales year-over-year. However, the operating margin improved year-over-year and sequentially, as benefits of rapid continuous improvement initiatives and an increasingly higher sales mix of information and software-related products, more than offset the lower sales volume.

Turning to Financial Services, on Slide 12, operating earnings in the fourth quarter were $2.8 million. Year-over-year, the trend in operating earnings continues to reflect the higher year-over-year market interest rates, as well as lower credit originations.

With that completing my operating segment review, now let me turn to a discussion of our balance sheet and cash flow. Balance sheet measures are discussed on Slide 13. At year-end, after netting our cash of approximately $170 million against total debt of approximately $226 million, our net debt was $56 million, down $125 million from year-end 2004. During the fourth quarter, we retired our $100 million 6 5/8% 10-year notes. Inventories and receivables declined year-over-year by $115 million, with $43 million due to currency. And importantly, our operating return on invested capital increased to 13.9%, compared to 11.8% a year ago.

Let me point out one final balance sheet item. At year-end 2005, we reversed $152 million of prepaid pension assets, and recorded a $93 million after-tax charge to equity. A key highlight for the quarter was $104.4 million of operating cash flow generated as seen on Slide 14. Overall changes in operating assets and liabilities added $56.6 million to operating cash flow for the quarter, a substantial improvement compared to a year ago, as the year ago amount included a $64 million pension contribution. Capital expenditures for the full year were $40 million, compared to $39 million last year. This largely reflects the investments being made to modernize manufacturing facilities, to increase production flexibility and productivity. Depreciation and amortization was approximately $52 million for the year.

Those conclude my remarks about our financial performance. Now I'd like to turn the call over to Jack Michaels to talk about our strategic priorities and plans for 2006. Jack?

Thanks, Marty. Good morning, everyone.

I would like to begin with Slide 16. Just over a year ago, I transitioned from being a member of Snap-on's Board to The Company's CEO. Accepting this role, I did so with the firm belief that there was significant embedded but unrealized value in our Company. The Snap-on brand is powerful and is supported by a strong franchise system. Snap-on has a broad portfolio of high-quality products and a team of people truly dedicated to the Company's success. One industry study found that the majority of professional technicians believe that Snap-on franchisees did the best job of meeting their needs. At the time I joined as CEO, however, these strengths were being overshadowed. We needed to accelerate change and refocus on the fundamentals.

In particular, as you can see on Slide 17, our priorities for 2005 were the following -- take better care of our customers and deliver superior service, reduce our complexity and lower costs, and improve our manufacturing effectiveness and flexibility. Over the past year, we made measurable progress in each of these areas, as shown on Slide 18. We achieved an 87% fill rate. Frankly, we were quite often in the fourth quarter over 90% by the end of 2005, a level 40% better than a year ago. We made progress in reducing complexity and lowering cost. This contributed to 120 basis point improvement in operating margins for the full year and a 4% increase in sales per associate year-over-year. Additionally, Rapid Continuous Improvement, or RCI, is now becoming a part of the Snap-on culture, and is helping us make progress towards improving manufacturing and reducing costs.

Having the right team in place to build on, this success is important, and last year, Snap-on's team was strengthened with the addition of Jeanne Moreno as Vice President and Chief Information Officer, Joseph Abbud, Vice President of Rapid Continuous Improvement, and Andy Ginger, Vice President and Chief Marketing Officer. Each of these individuals brings a wealth of experience and proven results. This progress gives me confidence that we're moving in a right direction; yet, we clearly need to do more. Accordingly, we have been working diligently to develop our plans to build on the improvement initiatives already underway in our Commercial & Industrial and our Diagnostics & Information Groups, and to strengthen the operating and financial performance of the Snap-on Dealer Group.

Please turn to Slide 19. We believe we must deliver all three of our operating business groups if we are-- if we are to achieve long term successful-- sustainable success. I believe our strategic priorities will enable us to do just that. Achieving our goals of profitably growing sales, further lowering costs, and maintaining Snap-on's strong cash flow. In the end, this is about creating value for our shareholders, associates, franchisees, and other distributor partners.

Let me begin with the Commercial & Industrial Group on Slide 20. The past few years have been a time of change and heavy lifting in C&I as we have rationalized brands and the operating footprint for the Group, moved to lower cost sourcing and manufacturing sites, and created an integrated Pan-European marketing presence. We also invested in advanced technology products, such as our next generation tire and wheel service equipment, and expanded in emerging markets such as China, India, and Eastern Europe. Customer service levels have improved and we've increased our market penetration and profitability. We're pleased with our progress in C&I and intend to build on this success. Our 2006 plan for this segment is concentrated on the following four priorities -- first, we will continue to invest in emerging market growth initiatives; second, we will increase market share and industrial tools to continue the improvements in fill rates and product innovation; third, we will continue to invest in the development of new value-added products that utilize advanced technology to enhance our customers' productivity; and fourth, we will remain focused on lowering costs, manufacturing, and sourcing initiatives.

Turning to Slide 21, in the Diagnostics & Information Group, much has been accomplished over the past three years in creating an integrated instrumentation with information business. For instance, 2/3 of engineering development is now concentrated on high-value-added data-stream and software applications. Additionally, we have made investments to support a better B2B, business-to-business initiatives, that includes developing and distributing essential diagnostics and tools and facilitation services for vehicle manufacturers and their dealership networks. Complexity and costs have also been reduced, and we have achieved faster product development cycles. As we look to 2006, we'll continue to emphasize process improvements in new products, such as the recent launch of Mitchell's new customer retention marketing programs. We'll also leverage our market-leading capabilities to capitalize on the growing need for new products and services related to advanced diagnostics, vehicle interface, and data-stream communications.

Now, please turn to Slide 22. As you know, our Dealer Group is our heritage, and as our key distribution channel, it is also an important part of our future. To that end, we asked internal teams over the past year to evaluate and analyze market data, the Dealer business, and its growth potential. As part of this analysis, we took time to listen to our franchisees and understand what they believe will drive their and our long-term success. What we learned in this review reaffirmed my enthusiasm about the growth opportunities available to Snap-on and what I have always believed were our greatest strengths, namely, the Snap-on brand, our mobile tool distribution system, which is still the preferred system for the automotive service industry, and the breadth and experience of Snap-on's franchisees. This review also made clear that customers are willing to pay for Snap-on's premium value and quality products, but that customers believe their service experience should match the value and quality of our products in the image of our brand.

Our 2006 plan for the Dealer Group is designed to help us fully capitalize on these strengths and enhance The Company's responsiveness to our franchisees and customers, and to insure that we continue to add value for our stakeholders. Specifically, we have identified four focus areas for 2006. First, we will continue to improve and transform our manufacturing and supply chains into market demand replenishment system with lower cost. Second, we will continue to improve service and value to franchisees and customers. Third, we will work to further enhance the sales and profitability of our franchisees. And fourth, we will extend Snap-on's brands and product lines into targeted market niches that are presently underdeveloped.

Specific initiatives in each of these areas are underway. For example, in the coming year, we will continue to upgrade manufacturing processes, which we believe will enable us to further improve fill rates. With our 2006 initiatives, we believe that we can achieve 99% fill rate by 2007. We also see opportunities to enhance our distribution capabilities, and drive superior service.

Let me give you an example of what I mean. Today, 25% of our current product line accounts for 95% of Snap-on's sales volume. However, our current U.S. distribution centers are not setup to move these high-volume products in an efficient manner. Work is therefore underway to reshape the existing distribution centers to handle high-volume SKUs, with one distribution center devoted to the central stocking of all other items. By moving to a reliable market demand-based replenishment system, capable of 24-hour turn around on high-demand items, we expect to achieve a 99+% fill rate and exceed our customers' fulfillment expectations. Through this process of rationalizing our almost 50,000 SKUs, we will also be able to reduce manufacturing complexity to drive our desired manufacturing improvements.

It is also essential that we continue to improve our service levels, in many ways this means that we need to make it easier for our franchisees to do business with us. We want our franchise doing what they do best, rather than administrative task. For example-- an example is the recent launch of our Mobile Information Center, or MIC. MIC is based on pilot technology that was developed in 2005. In simple terms, it allows franchisees to find product information, including tech manuals, product availability, and equipment information via an Internet interface. Before we launched MIC, franchisees had to call the regional service center for this information. The result of the Mobile Information Center is a significant reduction in the time the franchisee spends on the phone with Snap-on and an increase in the time that our franchisees have available to spend with customers and improve their own sales productivity.

We're also piloting a new wireless signature authority for customer credit. This initiative uses established technology to simplify the application process and to decrease the time our franchisees spend on customer credit applications. This is another way we're trying to serve our franchisees and provide them with the tools they need to allocate their time where it counts most -- serving existing customers and developing new customer relations.

To further enhance franchisee sales and profitability, which is our third focus area, we will enhance sales support and training. In the coming year, we will transition to a team-based support group that includes four people with specialized expertise in the areas of business management, product knowledge specialist, and training. We believe this largert support group affords a number of benefits, including better and more complete franchise coverage, quicker and more knowledgeable responses, and better backup support. We also intend to provide much better business planning and development to our franchisees.

On the training front, we will move from one week to two week intensive training sessions and provide pre-programmed sales activities that utilize pull-based marketing aids. We will also upgrade continuous learning opportunities. Through improved pull marketing programs and sales productivity tools, we expect to be able to lower our franchisees' level of inventory investment.

The fourth focus area for the Dealer Group is to more aggressively extend Snap-on's brand and product lines in to targeted market niches. We don't believe we need to look far and wide for these opportunities. Instead, we believe significant opportunities are available to us by better focusing on near neighbors, such as the specific needs of large and small fleets. Also, we have a significant opportunity to capitalize on OEM dealerships as they expand and renovate their service areas. We need to insure that their storage units are Snap-on and that they are filled with Snap-on tools. A good example is our Build-A-Bay Program, which is a joint program between our OEM facilitation operation and local Snap-on franchisees to better meet the needs of automobile dealerships who are expanding or who are in major renovations.

Please turn to Slide 23. By executing on our four focus areas in this Snap-on Dealer Group, by continuing to deploy rapid continuous improvement to improve our processes and lower our costs, and by continuing to develop new innovative products, I am confident that The Company and our franchisees will realize stronger growth and profitability. We intend to be very open with you about our progress along the way. In addition to our financial results, important measures of progress, which we will share with you regularly are -- one, first time fill rates as an important measure of our service levels; two, sales per employ as a measure of productivity, and three, the percentage change in same-store purchases by our franchisees, as a measure of franchisee improvement.

With this overview of our 2006 strategic priorities, Marty will now review our financial outlook for the coming year. Marty?

Thank you, Jack.

In 2006, in our Commercial & Industrial and Diagnostics & Information segments, we expect operating earnings to increase over 2005 levels. Tempering this earnings growth, however, will be about $10 million to $15 million of higher spending to continue our expansion in Asia and other emerging growth markets and to support innovative new information-based diagnostic products.

In our Dealer segment, we expect full-year 2006 operating earnings to decline as a result of our investments over the next three quarters for the strategies Jack outlined. Costs to enhance field support and for other franchise system initiatives are expected to be about $15 million. We believe that our enhanced field support will generate annual operating earnings improvements of more than $20 million from higher productivity and sales growth, beginning in late 2006. Customer service and supply chain initiatives, along with new marketing programs, will require us to spend another $8 million to $10 million in 2006. The benefits of these programs will reduce inventories, increase market share, and lower costs. Our Dealer segment manufacturing plants are expected to invest $10 million to $15 million of additional capital this year. This spending along with other cost reduction actions are expected to deliver $13 million of annual cost savings in 2006. Additionally, as part of ongoing initiatives aimed at integrating the Company's global operating footprint and lowering its cost structure, Snap-on expects to incur restructuring expenses of approximately $20 million in 2006, which is a level similar to that incurred in 2005.

Our Financial Services segment, we expect results to continue to be under some pressure from rising interest rates, although not as significantly as experienced in 2005. And finally, we expect stock option expense will be approximately $6 million to $8 million in 2006. Given these assumptions, we believe consolidated net earnings in the first two quarters of 2006 will be modestly lower than 2005, principally driven by the increased spending I mentioned. We expect a recovery in our consolidated net earnings performance to begin in the second half and to maintain steady improvement into 2007. Consolidated net sales in 2006 are expected to grow at a low single digit rate year-over-year, reflecting increased sales in all segments, except the Snap-on Dealer Group, where we expect sales to remain flat for the full year. We believe our 2006 operating cash flows will be strong, but may not be at the levels achieved in 2005. We continue to expect improvement in working capital management. Capital expenditures are expected to be about $50 million to $55 million in 2006, as we increase investments in our tool plants. We and our Board are confident in our ability to execute on the plans and initiatives we've shared with you today. Accordingly, our Board has increased Snap-on's quarterly dividend by 8%, to $0.27 per share, payable March 10.

I'd like to now turn the call back to Jack for closing comments. Jack?

Thanks, Marty.

In closing, let me underscore that this is an exciting time of opportunity, for our company, our associates, and for our shareholders. And let me underscore my own personal commitment to seeing us move forward in our journey and build a solid foundation that will support sustainable growth. I believe we have the right leadership team and the right plan in place to enable us to achieve this goal. By being relentless in our focus on meeting and exceeding our customers' needs and never being satisfied with less than best, I am confident that we can build a strong value-focused company for our shareholders, our associates, our franchisees, and our other stakeholders. I hope you share my enthusiasm about the road ahead.

Operator, we would now-- are ready for questions.

Operator?

Thank you. The question and answer session will be conducted electronically.

[OPERATOR INSTRUCTIONS]

We'll go first to Alexander Paris with Barrington Research.

Good morning.

Good morning, Alex.

I'm sorry, got on the call late, so I might ask questions that you might have covered. I guess my biggest question is, looking at the Commercial area, was down 3.8%. I'm just wondering, with the industrial sector, at least in the United States being very strong and capital spending being pretty strong, I'm just wondering why you are not seeing more growth there? Or some growth?

Alex, you did come on the call late, I don't know if you saw the slides, almost the entire reduction, if you're talking sales, came from currency. We did say that in our industrial businesses, selling tools into the industrial and commercial after markets, sales up were 4% on currency neutral basis.

But, the equipment sales cancel that out?

Yes, exactly.

Again, with capital spending, wouldn't you think the equipment sales would be trending up?

Well, I -- again, our equipment business is focused on automotive shops, we're not seeing evidence there's real improvement in capital spending on equipment in those shops. If you look at our equipment business, and it is pretty much half in Europe and half in the U.S., and we probably saw similar sales declines in both. The U.S. market, we do face some very strong competitors in the U.S. and we saw sales decline there. I'm not sure how their businesses did, but our own data showed equipment spending in shops in the U.S. was not very robust at all. And while the market is much more fragmented in Europe, the economic climate there, we continue to see as being very slow.

Alex, hi, this is Jack. Obviously, we need to make improvement. We have made some improvements in this Group, but we still have further improvements to be made, both in the revenue side as well as the income side.

Just looking at currency, you are-- the two companies that you are consolidating, industrial tools, Eurotools, and the other one, don't they manufacture in Europe?

Yes, they do. The combination is Bahco and Eurotools, and today most manufacturing footprint is in Europe, quite a bit, in fact in Sweden, and as Jack pointed out in our strategies, they're spending considerable effort in looking at ways to move that-- much of that footprint to lower cost sources.

Sources.

But shouldn't that lessen the currency exposure? So that all that currency exposure is coming from selling the Snap-on hand tools over there?

Some of it is; not all of it is. That business as well has quite a bit of sales of product that come out of Europe into dollar markets as well.

Alexander Paris - Barrington Research Associates, Inc. - Analyst

So on a local currency basis, was international was flat, then? Or down? Or up?

They were pretty much flat.

And in-- domestically, it was up or flat?

In the U.S., it was up. Again, led by our industrial business in the U.S.

Right. But equipment was down, and, same thing, tools were up and equipment was down?

Right, correct.

And can you give us a rough idea what, on the operating basis, what kind of consolidation or investment cost that you that have allocated to this particular sector?

Alex, your question again goes to Commercial & Industrial?

Yes, right. I think you said there's still some investment costs, there's probably some consolidating costs-- consolidation costs in putting the tool companies together?

Right. Well, across the entire Commercial & Industrial segment, not just the combination of Bahco and Eurtools.

Right.

In next year's approximate $20 million of restructuring costs, about half of that will be spent in that segment.

In C&I, okay. And I guess the same question, then I guess the same answer, in the Diagnostic business, that was even worse, 19.4% down, and that's pretty much all capital spending, I would guess.

No, in Diagnostics, year-over-year we had a really great successful launch of our SOLUS product last year, so this year's fourth quarter there lapping that. Sales were down, but as you can see from the segment results, due to lots of improvements in mix, due to more software - that is increasingly becoming a software model, as opposed to a hardware model - and lots of good work and effort there on reducing complexity costs, faster product development cycles, operating profitability improved.

You didn't mention currency. Was currency a negative in that sector, too?

They've got a much smaller exposure.

And excluding the negative comparison, because of the successful loss-- launch if, you could do that, would the business be up? Flat? Down?

Yes. I should point out too, as we said in there that, in that segment includes OEM facilitation business, which in terms of quarterly comparisons, can be influenced quite a bit by the activity in OEM dealership facilitations, and some of that is time, but they did have a negative comparison in Q4, most of that we believe is a result of just timing of orders under facilitation programs.

Okay, thank you, I'll get back in line. Thank you.

We'll go next to Jonathan Steinmetz, with Morgan Stanley.

Thanks, good morning, everybody.

Good morning.

A few questions. When you talk about the $15 million investment in the Dealer Group to increase field support and support other franchise system initiatives, if I were a Snap-on Dealer, and you talked about it a little bit, but can you go into more detail, what benefits I would be seeing from that spend?

Yes. This is Jack. Basically, we will be putting an organization in place in the field that will actually give them more support than they've experienced in the past. For example, today, if one of the current sales managers rotated out for whatever reason, then we don't have-- we have no one ready to step right in, and therefore, we have lost support to the franchise system. In the new structure, there will be four people working within a given area, the franchise areas, and so there will always be some coverage, and as we need to replace we'll do so, but we believe, in essence, we'll have much better support to them in the field.

Okay. So the vast majority of that spend, then, would be sort of headcount related?

Yes.

Okay. Second question, switching gears, is on pricing. You talked about pricing being strong enough to overcome some steel and freight headwinds. Do you have a number, and I know there's a lot of different SKUs and businesses here, but do you have a rough estimate of what you think you got from pricing, as a counter measure here, on percentage basis?

Yes, let me-- I'll give you -- roughly, if you want to look at the fourth quarter, we had about 1% pricing and steel was a little more than half of that.

Okay. And the last question, it's just, on what you think longer term is the right leverage, financial leverage ratio here. You've been generating cash, paying down debt. There’s very little debt left here. Businesses generate steady cash flow. Do you think that a higher target net debt-to-capital is appropriate for the nature of the business as you improve it?

Jonathan, our view, I guess, if I step back, and if you listened carefully to Jack today and the discussion of our strategies, when we think about it, it's really about creating the right balance and optimal balance of growth and getting that growth through high levels of customer service responsiveness and cost management and profitability, and from where we sit today, we believe that we also need to keep a healthy balance between our current level of profitability and our capital structure. We acknowledge that our level of profitability is simply too low, in an absolute sense, to support our single-A credit rating, which we get that rating because we have a conservatively managed balance sheet and that's important to us. Now, that notwithstanding, as you know, we did raise our dividend by 8%, as acknowledgement in our confidence in these plans, and we recognize the importance of the dividend as an important part of the total shareholder return to the shareholders. We're not changing or posture on share buy backs at this point; we will buy back shares to offset dilution. And we need to keep an eye on other debt or debt-like obligations like pensions and make sure that those don't ever get to a level that create any overhang on our credit. And at least for the time being, this quarter, this point in time, that's the course we intend to stay on.

Okay. Thank you very much.

We'll go next to Jim Lucas with Janney Montgomery.

Thanks, morning. Following up on that last question, can you expand a little bit more? Cash flow is good problem to have, you're making the internal investments, at what point do you look at potentially returning a larger portion of that cash flow to shareholders?

Jim, I'll say it again. We look at it every quarter. We look at our cash position. We look at our alternatives for use of cash. We discuss it with our Board, and then we make those judgments on a regular basis. And so as I sit here today at the end of fourth quarter of 2005, we will stay the course that I just mentioned, but we continue to evaluate it.

Okay. Fair enough. Pension, did you make any changes to your assumptions going into 2006?

Yes, we did. We actually lowered the liability discount rate. The U.S. is the biggest piece of our pension plans and pension obligations by a long shot. We did lower or discount rate to-- we peg off the Moody's AA, to 5.5 in the U.S. Actually the result of that was to leave a very small unfunded accumulated benefit obligation of less than $20 million. But as a result of that, under current accounting rules, we did reverse the $152 million or so of pension asset and took the charge, the after-tax charge to other comprehensive income in equity.

Okay. And Diagnostics, you made a comment earlier, just wanted to get a housekeeping clarification. Software today, the software versus hardware for Diagnostics, what's the current makeup there?

In terms of total mix?

Yes, total mix.

We don't really quote that number, but it is becoming an increasing portion. It's probably gotten to the point now where it is at least half, if not a little greater.

Okay. That's interesting. Within Asia, as your expansion, it's interesting that the comments are coming up more about going after emerging markets, while you're still focusing on getting your home turf, defending it here. Can you talk a little bit about your brand strategy as you go after these emerging markets?

Yes. Jim, this is Jack. We'll leverage the Snap-on brand wherever it is possible to leverage it. Obviously, as we look at those emerging markets, the value that the brand demands is, obviously, reflected in pricing. And so, therefore, the Snap-on brand is primarily to the airline industry, government sources, and then we will leverage, for example, the Bahco brand as we look at Eastern Europe, even to some degrees we look at the Asia-Pacific market. So, the Snap-on brand is our premium brand, continues to be around the world, and other brands will fit in in what we call the mid-tier, where appropriate. And you know, we have several brands, but I would say the Bahco brand would be the second most recognized and used brand.

Okay. And final question, dealer count at the end of 2005, and do you have a ballpark of where your market share stands today in the U.S.?

Jim, vans in the U.S. were about 3700, and as we said that was down 5.5-6% from a year ago. Market share still sits in the mid-50s, it's possible we lost a share point or two in the U.S. from recent data, but otherwise, unchanged.

I would just add a comment to the market share there. We know in what product category that we believe we lost the market share. We have taken actions with some new products that we just actually launched most recently at our western dealer business council-- meeting, so I think we'll overcome that and be back on track to continuing to maintain or increase our market share.

Okay. Thanks a lot.

[OPERATOR INSTRUCTIONS]

We'll go next to John Bossler with Dominick & Dominick.

Yes, Jim, I'm a little new to this story. Maybe you can help me understand the Finance Service earnings. Why would they be down 54% year-over-year? Don't you make loans to your customers and therefore receive the interest?

Yes. That's a-- John, I'm glad to talk to you, it's Marty Ellen. Yes, you're correct, except that the structure of that model, the contracts originated by Snap-on Credit here in the U.S. are sold to the joint venture partner, CIT, and those are sold as securitizations, and therefore, its revenue stream are really gains on sales of contracts sold. So as a result of rising market interest rates, the present value of those streams becomes lower and therefore, we realize lower gains.

Do you recognize gains at the time of writing them somewhere else on the income statement, then?

No, it's essentially, the gain we recognize from selling the paper at the time it's originated is recorded as Financial Services revenue. So you're going to have much more volatility because of changing rates, than you would, for example, if you had a model where you held the loans and realized interest income on the loans against whatever your interest cost would be on the underlying debt to carry the loans. It's a sale model, based on the discounted present value of the streams at current rates.

In a question on the number of franchisees, in other words, I guess you said they were down about 5.5 or 6%, so in other words, there’s about 185 fewer franchisees today than a year ago, is that correct, then?

Yes. Correct.

Yes.

Is the Company looking at rebuilding and expanding number of franchises? Or can we expect to see further declines in the number of franchises?

John, let me make a general comment at this point. As we implement the dealer strategies that I outlined, there will be given market areas that we will reallocate to existing dealers, for example. In fact, I will share something with you, in the fourth quarter, we allocated 82 areas to adjacent franchisees. So I think the number of franchisees as we go forward will change-- will be a planned change, as we-- as Marty said in his remarks earlier, there was a decline in the fourth quarter, but we knew it was going to decline. It was planned to decline. The key measurement will be the same-store sales, basically. And that's what we'll be looking at as well as market share. So as we go forward, we'll be more emphasis-- obviously we continue to look at the number, but more appropriately, we'll look at the percent increase of our sales through our franchisees and then our market share data.

Great, thanks so much, guys.

You're welcome.

I'll go next to Boyd Poston with Gallatin Asset Management.

Good morning. Could you go over, in the Dealer Group in the fourth quarter, the same-store sales were flat, and I get the impression there was some growth in the industry. Are you saying that, maybe there are one or two or three key product lines which you might not kept up with a competitor? Because there seems to be growth in the industry, your sales to the mechanics seem to be flat. Your vans are very flat, lean on inventory. I was surprised there wouldn't have been some growth among your existing dealers in the fourth quarter. I'm trying to reconcile that.

Well, okay. Boyd, it's Marty Ellen. The-- as reported to us by our franchisees in the U.S., sales of product off their vans, year-over-year was about flat. The most recent data we have, actually, when we went into the fourth quarter, we were actually seeing data that showed us that average spending on tools per technician was actually starting to decline a little bit. And then, later in fourth quarter, it actually improved a little bit to be about flat. So our own market research says spending about flat; business with our dealers was flat. Now, when we have fewer vans, though, we have less people to cover the market. We can't see as many people. And as Jack said, if we had any real weakness any part of the product offering competitively, it would have been in one part of the product line and we believe we're addressing that with some new 2006 products and programs. That's the data that we see.

Okay. In your assumption for this year, for the Dealer Group, where you say sales are expected to be flat for the whole year, this quarter, the number of dealers year-over-year is still down, but you thought that would begin to flatten out in the second quarter and perhaps even more dealers year-over-year in the third and fourth quarters. Unless you assume that the end market is drying up some, it would seem that you would make a case at least for a small, positive comparison in your U.S. Dealer van sales for the whole year. It seems somewhat conservative to say flat for the full year. Could you help me understand that?

Boyd, I think you know our view. I think your comment's a correct one and we will see some decline early on. As Jack said, we are going to be making some changes in our field structure and so from an internal point of view, we don't want to lose sight of the fact that as we make some changes in our field, it's possible, I'll emphasize the word "possible", that we could see some disruptions in some sales activity. So, I don't know, maybe we're being conservative, but we know we're going to make some changes, and that could have a negative impact, so our view is, some decline in the first half in sales, improvements in the second half, to end up pretty much flat, and if we can avoid some of these issues through our execution, then maybe we'll have better result, but right now we're not prepared to say that.

I think in general this is Jack, let me just summarize our view, I think, you know, the early part of the year is going to be a lot of realigning, out in the field, and then the latter half of the year will be the strengthening. So it will be aligning our own organization as well and we'll be working closely with the franchisees, and then we believe the latter half of the year we will be strengthening, and perhaps, as I said in my comments, we can even do it with less cost in the latter half of the year. But the early part of the year, we're going to be-- as we already are, we're beginning the journey here of-- with specific actions that are-- will increase costs, and as Marty said, could result in some disruption in the field, we hope not, but-- and we'll try to guard against it, but nonetheless it may be there.

Okay. And just one final question. On the equipment side of C&I, it seems like the under-- the car service equipment has been pretty depressed for a number of years, more so this time around than past cycles, not just for you, but for most of the competitors, as far as I can tell. Have you been able to realize what is going on there? Are the products just not innovative enough, or what's taking the cycle so long for replacement? Because a lot of the dealers, the mechanics, the owners of the shops, I should say, do have cash flow for reinvestment, but these products just don't seem to be ever recovering here, and what's taking so long in this cycle?

Well--

Just--

Yes, let me-- this is Jack, let me address that. We have some new innovative products that we launched this year. We're starting to see them taking hold in the marketplace. The decline was, in sales was, in part, due to the fact that we discontinued some products that had been long in the line that weren't-- we didn't see them in our future; but the new products, as I said, with the new technology in wheel balancing and alignment and others that we planned, are starting to grab hold and we believe that we made great progress this year, we don't really break it out for you, but we made great progress this year in terms of earnings improvement, and I think next year we'll see continued earnings improvement, but we’ll also see revenue improvement.

Okay.

When I say next year, I mean 2006.

Yes, and you're talking strictly on the equipment side of C&I?

Those comments are all directed to the equipment side.

Yes, Thanks.

We'll go next to Darren Kimball with Lehman Brothers.

Hi, good morning.

Morning.

I'm just wondering, in the D&I segment, how much in the way of SOLUS sales were in the fourth quarter, and if you think this $100 million level is sustainable as we head into '06?

Not going to quote the amount of SOLUS sales we had by year, in fact I don't have that number in front of me, but we are looking for growth in the D&I segment in 2006.

Okay. And, just a follow up on the working capital side, you clearly expect the working capital inflow, although maybe not as big as '05, as you just said. Some of your comments suggest that a reduction in inventories is part of it, is that all of it? Could you just give me sense of how you expect that to play out?

More opportunity exists in inventories than receivables. We did have nice improvement, particularly in the fourth quarter in inventories.

Keep the – this is Jack here -- keep in mind we're turning inventories about three turns, so we have opportunities, folks.

That's it for me, thanks.

We'll go next to Alexander Paris with Barrington Research.

Hi. On your guidance that you gave, I don't know if you gave any more early, whether I say I missed the first part. But, you were talking about single digit top line growth, low single digit top line growth and the first half being down the second half being up, is that-- the sales, do you anticipate the sales growth at that rate throughout the year and the first half is the shortfall is more the higher cost, and the second half the cost diminished significantly, is that the thinking there?

Alex, Marty again, let me just again go through the top line expectations. As we said, the Dealer business in the U.S. is where we're going to be flat, lower sales first half; higher in the second half. Remember that the U.S. portion of our total Dealer segment is about 80% of that segment. So, we're talk being low single digits for the whole company notwithstanding the fact that, that large part of the U.S. portion of the Dealer business is expected to be flat for the year.

Right.

Okay, but let me ask you the other way, the investment and restructuring costs, how do they compare the first half versus the second half? Do they drop off sharply in the second half?

We will spend less on restructuring, we believe in the second half this year than in the first half this year.

Okay. Have you -- did you say what you expected the full year to be up? Will the second half cancel out the first half? Or didn't you say that?

We gave no -- if you're talking about earnings--

Right.

We gave no full year earnings guidance.

Okay. As far as the on-time delivery, could you give a-- just a little review of-- as far as the Dealer side-- where they were at the low point, what they are now, as far as you think? And what the goal is? And when you expect to hit the goal?

Yes. This is Jack. I -- the low point would have been around 50% fill rate, first-time fill rate.

Wow.

That's out of our D.C. So you can see why, when I came on board I said, we got to be focused on taking better care of our customers.

Right, right.

Now during this last quarter, we were routinely running around 90% or a little higher. We -- there were some issues, some weather-related with some suppliers and stuff that caused us in December to be down to, I think it was, 87.

Uh-huh.

But our goal is to be at 99% plus. And I-- we know how to get there. We think by the end of 2006, we'll be at 96%. And we believe by the end of 2007, we'll be at 99%.

Now, this seems to be, from your past comments, this is the trigger point as when-- as to when you start getting more aggressive in terms of adding more dealers? You don't wait until 99%, at what level--

No, no, I-- No, excuse me, I didn't mean to interrupt, Alex. No I-- actually, I think we're at a point, we did say that early on, you're absolutely correct. I think we're now very competitive, as a matter of fact. I don't-- we see some other numbers that people, our competitors talk about are in 90, 92. I think we're largely there, so that's not really holding us back in terms of going after dealers. We just believe that there's too much inventory in the system, and I say the system, I'm talking, all the way through the system, suppliers, us, to our franchisees, and we actually want to reduce it.

So you going to reduce that by holding off a little longer? To add dealers?

No, no, no. I meant reducing inventory, I'm sorry.

Right.

Reducing inventory.

So, if you're already there and you've been, I think, you said, in the past, that you've been looking aggressively, maybe not acting, and you're saying it's-- the number still won't base out until the second quarter?

Yes. Because we'll be doing realignment. We'll be realigning here in the early part of this year. The first six-months we'll realign. As said, we've hit 82 in the fourth quarter, and we think that, in fact, I'm not certain having, I guess I could summarize by saying, I'm not certain having more dealers is the right answer.

Right.

We want to be sure our franchisees are very profitable and growing, but having more may not be the answer to that.

So we need to a new metric to measure how you're doing, then?

Right. And that's why I said, we want to share with you the percent change in their sales of our products.

Okay. Now, did you have a similar problem with your on-time fill in the Commercial side of your hand tool business?

Well we did -- not generally, but we certainly did on the industrial side, because their tools, primarily, their product come primarily from the tool group, or the Dealer Group, so, we're seeing improvement there; we still have much more to achieve. But -- and, but our -- but the other parts of our business, if you looked at Europe, Asia, we didn't have the suffering that we had here in North America in the Tool Group.

Uh-huh. One other question. I think you made a comment, I don't know if you did this time, but last time, that soon as you, not too long into 2006, you start switching your emphasis a little bit more to top line growth from fixing the system, and I know you've had a good history of turning companies around, at least at HON, what does that mean? Now, if you wanted to say, today, you're going to start to raising the top line, what would you do, for example? People -- somebody mentioned the cash. Are there acquisitions that you could make that would relatively seamlessly improve top line?

Well, let me try to address this in some parts here. I think, number one, we have said, I hope we've conveyed to you that we've been able to turn around the Commercial & Industrial. We feel good, it's not what we want it to be, we still have more work to accomplish, but we believe in 2005, we have demonstrated that this is a good, solid, sound business and it can grow. In addition, we have emerging market growth that we're going after. So we believe that business will grow. Some of this activity that Marty talked about, some of the expenditures and moves that we're making in Europe to lower cost sourcing, we'll see more of that taking place, and in terms of growth, the latter part of the year. On the D&I Group, we believe over the last three years that we've made good improvement. We know there's been a mix in the business, a change in the business, but we believe that this year we'll be back on growth to with higher margin levels. And so I think the top line will grow as well as the bottom line in both those businesses. That gives us confidence, then, that we know what to do with our Dealer Group. We have to fix the fundamentals in our Dealer Group.

Uh-huh.

And we don't -- I don't see a tremendous amount of growth occurring until late in this year, and obviously as we get into 2007, in the Dealer business. There's still fundamentals that we need to fix there. But since having two groups well-established, with opportunities for growth in both revenue and earnings, I-- we'll now be concentrating, and had been concentrating on the Dealer Group, but there's more opportunity there. As far as acquisitions, obviously, as Marty said, we'll-- we wouldn't turn our back on a great opportunity, if it was strategic to our business. But, clearly, our number one focus is, fix what we have, and I don't want it to be said, we'll fix what we have and then look at acquisitions, but we won't put a huge amount of focus on acquisitions until we're sure that we have the fundamentals fixed in our existing businesses.

Well, you've been talking about C&I and D&I and lot of what you're saying is good in terms of reducing costs, and global sourcing and so forth, but is-- that doesn't necessarily get the top line growing. You mention leveraging the Bahco name, and--?

Yes, as I said, we consolidated, if you will, the Bahco and Eurtools, and now we have better market coverage in Europe. Now we're looking more to Eastern Europe. That will give us growth. But it doesn't happen overnight. You'll see it occurring later in the year, and as we look at Asia-Pacific, we have nice base, we're putting more people on the ground, because that's going to be what's required in that marketplace. We'll be looking to expanding sourcing there. Both our own internal manufacturer, as well as external sourcing to facilitate that growth. But the more feet on the streets -- I shouldn't use that word, because that word gets back to our Dealer Group.

Alright, wheels on the street.

Yes, wheels. Yes. But, getting more people into the marketplace will be required and we'll see the group-- more growth occurring later in 2006, and then, obviously, going forward.

So you are saying the consolidation of Bahco and Eurotools, aside from cost reductions, it's really the big gain is, once consolidated, you're going to increase the top line?

Absolutely, and some of that is already planned. In the-- this plan of this year, for the full year, was I said, a lot of that over, I believe, will occur in the latter half of the year.

Okay. One last question, related to this. I think with Bahco, you got a, got to put a toe, at least into the retail side and you did put up a retail website. Is this at all in your top line growth plans?

Well, obviously, there, as they go to market, it is somewhat different than the way we go to market here. So we do sell to retailers there.

Right.

And so, yes, we have products that meet those needs and, therefore, we offer them, obviously, on our website. But, so, will that be an expansion? It will be with the Bahco brand, but obviously we have no plans of doing that with the Snap-on brand.

Is the website been -- is that a profit center?

Yes.

Retail website?

Yes.

Okay. Fine, thank you, thanks for all the hard work. Keep it up.

Okay, thank you.

We'll go next to Jonathan Steinmetz with Morgan Stanley.

Thanks, I just had a follow-up definitional question on same-store sales so we can understand that going forward. You talked about dealers taking 82 adjacent territories, that kind of thing. If I were a dealer and I had one territory, and then I got another territory, do I count as two stores, so to speak? Or would I still count as one store with more sales because I took that territory?

One store with more sales.

Okay. So this is almost like sales per franchisee?

That's correct. And it will be the sales of our products.

Okay. So if they sell something else off the truck you're not counting it.

No.

Okay.

Oh, we will be-- Yes, we count it, but won't be in this measurement, or this metric going forward.

Got it, okay. And are there a lot-- are there still a lot of available territories? Do you have a number of unfilled, if you will?

Yes, we have a few unfilled territories that we're continually looking at how they're realigned as we move forward. And if they-- we need to, obviously, some of those will require new franchisees going into those particular markets.

Is there any-- is there a number for those that you can share, are they major population centers? Or is this small rural areas that don't have coverage?

It-- we should -- it's basically all over.

Okay. Alright, thank you.

Jonathan, one final comment on this, because I think it is important, I think what we're trying to communicate this morning through a lot of work that we can't do justice to in a short call this morning is that, we're trying to-- we've reexamined the model and lots of work around improving the dealers or franchising sales productivity, it's really trying to change the model so that they can call on 15, 20% or more customers and improve their profitability by so doing.

Okay. All right. That makes sense, thank you very much.

You're welcome.

It appears there's no further questions at this time. I'd like to turn the conference back over to Mr. Pfund for any additional or closing remarks.

Let me just make-- this is Jack again, let me make a couple of remarks. First of all, we want to thank you for joining us this morning. Obviously, 2006 is-- will be-- heavy lifting for us. But as I said, we have the team in place to do it. We have the plans. We have time tables to do it. Policy deployment will be a big part of achieving our 2006 plan. But it's all geared to long term value creation for all of our stakeholders. And we believe that we are doing the right things for all stakeholders. So, Bill, I'll turn back to Bill.

I couldn't have said it better myself, Jack, thank you. I'll remind everybody, I'll be in my office throughout the day, if there's any questions that anyone else has. But we thank you for joining us. Thank you.

That does conclude today's call. You may now disconnect, we appreciate your participation.