實耐寶 (SNA) 2006 Q1 法說會逐字稿

Please stand by. Good day and welcome to Snap-On, Incorporated's 2006 first quarter results conference call. As a reminder, this call is being recorded. For opening remarks and introductions, I would now like to turn the call over to Mr. William Pfund, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Jim. Good morning, everyone. Thank you for joining us to discuss Snap-On's first quarter 2006 results. With me this morning are Jack Michaels, Snap-On's Chairman, President and CEO, and Marty Ellen, Snap-On's Senior Vice President of Finance and CFO. You can find a copy of these slides on our website, next to the audio icon for this call. You will need to through the slides and we will let you know as we turn to a new slide. The slides will be archived on our website, along with the transcript of today's call.

We encourage your questions during the call. We will not discuss undisclosed material information offline. Also, any statemented made during this call that state Management's expectations or beliefs or otherwise 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 2 as well as the latest 8K, 10Q, 10K, 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. It cannot be recorded, transcribed or rebroadcast by any means without Snap-on's express permission.

Now let me turn the call over to Jack Michaels.

Good morning. I thought I would start by reviewing what I established when I arrived 18 months ago as mandates that this organization need to accomplish. I will give you a brief view of those and our accomplishments today because they continue to be our mandates as we move forward. And clearly, in summary it was to accelerate change and build long-term sustainable value. In order to accomplish that, we said we needed to take better care of our customers by deriving superior service to them, reduce complexity and lower costs, improve our manufacturing effectiveness, strengthen our leadership and position ourselves for sustainable, profitable growth.

Let me briefly review each of those, take better care of customers and deliver superior service. As you recall, I talk continually about our fill rates or our complete on time accomplishments. A year ago we were about 80%. We had improved up to that level, clearly not acceptable in the marketplace. We moved it to a record high of 91% for our Dealer Group. By the end of the year, I will report to you we've dropped off slightly to 85% at this time, still up over a year ago, but this has been a result as we've continued to implement our strategies as we are in the midst of transformation in our manufacturing facilities, but clearly, we will achieve 96% completing on time fill rate by the id eend of this year, on our way to 99% by the end of the following year.

Reduced complexity and lower costs, we've had a 4% increase in a sales per associate. Marty is going to cover more detail of what we've been able to accomplish this year in terms of our profitability improvement a little later on. Improved manufacturing effectiveness, our rapid continuous improvement program or RCI is beginning to get ingrained in the organization. I'm very pleased with our progress today. We still have a lot of opportunities but we are making improvements and you've seen that our margins are up in our Diagnostics and Information as well as our commercial and particularly in our Commercial and Industrial Group. We have also sharpened our focus on our safety of our associates worldwide and we've shown marked improvement there.

As far strengthening our leadership, there's been other in the organization we have also strengthened, but clearly we have a new Chief Information Officer, Jean Marino. We have a Vice President of Rapid Continuous Improvement who has a proven track record, Joseph Abbud, , and a new Chief Marketing Officer that overseas total marketing for Snap-on, Incorporated, working close with each of our operating groups and divisions and his name is Andy Ginger. Obviously to move forward, we have to have balance. And in order to achieve aggressive profitable growth, we must maintain balance between product expertise, innovation, strong customer relations, all of which we have been very, very strong with over our 86 years of history. We also need to improve the operating excellence in manufacturing in our supply chain.

So, as we look forward and begin to implement our initiatives in 2006, I will repeat again, it's taking better care of our customers, making it easier for our franchisees and customers to do business with us, reduce complexity, wastes and costs and make Snap-on a great place to work. Let me come back again and recap. We said in -- our last call, that we needed to maintain the progress and build on improvement initiatives under way. We've continued to do that. So, we're on track. We need to sustain improvements in our Diagnostics and Information Group and build a foundation for growth and you've seen the results in our quarter. And we need to strengthen the operating performance of the Snap-on Dealer Group.

I'm pleased to report the initiatives that we outlined to you in February, Marty will cover very briefly, but we are on track with these initiatives. Although we have spent less cost than we had originally planned. So, I'm very pleased with our results to date. On the commercial industrial, we continue to invest emerging market initiatives in Asia-Pacific, the Eastern Europe, we're reaching out to new customers. We're continuing to come with new innovative productive enhancing equipment, particularly in our wheel balancing and wheel alignments as well as power tools, new products.

We are lowering our costs of manufacturing. In part, we're moving to lower cost countries as it pertains to Europe and, therefore, we are increasing our margins. So, we have a tremendous new product introductions that have been very, very successfully received in the marketplace. Notably some sanders, some cordless compact wrenches and some new wheel alignment as well as tire balancing. In the Diagnostics and Information Group, we continue our process improvements, as I said earlier.

We're maintaining focus on developing new high value-added products. We are applying an 80/20 focus and we're leveraging all of our capabilities to grow across the group, between diagnostics and our shop management systems. We introduced many new products there from build to bay in our OEM facilitation business as well as products for Toyota and we have a new product from Mitchell called our customer retention marketing tools. Those have been launched into the marketplace and being received quite well.

As far of our tool group, we have -- we have accomplished a lot in the quarter. We still have much more to accomplish. We said, to begin with, continued improved manufacturing of our supply chain. Become quick response marketing demand-based replacement systems to lower our costs. We are on track with the initiatives to achieve that. As we move forward during the year. We said we'd continue to enhance service and value to the franchisees and customers, we're clearly on track there. We continue with our rapid continuous improvement rollout. In fact, our executive team will be at our Milwaukee facility starting Monday and spend another week learning new tools, along with our associates out on the shop floor. We're working on our synchronized supply chain and we've implemented policy deployment.

As far as new productivity and enhancements for our field, our franchisees, we have the Snap-on mobile information center that we're continuing to enhance with new features to improve their productivity so they can spend more face time with customers and selling more product. And we're putting in and rolling out as we speak, new field performance teams for our franchisees. So, we are giving our franchisees more support as we move forward. Again, in clearly -- we're making progress. I'm pleased with the success we've had to date. And I would be remiss if I didn't thank our associates worldwide for all of their support, their hard work and above all, the success that they're achieving.

Now I'd like to turn it over to Marty.

Thank you, Jack and good morning, everyone. I will begin my remarks on slide 4.

In the first quarter of 2006, net sales were $593.5 million. A 1.6% sales increase due to higher volume and pricing was offset by $15 million of unfavorable currency translation. Increased sales in emerging markets, higher sales volume of hand tools and industrial channels and year-over-year increase in OEM facilitation actions, more than offset a sales decline in our North American franchise dealer business. Financial Services revenue declined $2.9 million, mostly due to lower effective interest rate spreads. Consolidated reported net earnings were $0.37 per diluted share for the first quarter, compared to $0.31 a year ago. This came in better than we had previously expected.

Operating earnings increased due to the improved sales volume aided by significant productivity and cost reductions generated by our rapid continuous improvement actions. These improvements more than offset the planned higher spending levels we are making to invest in our merging market growth initiatives, to fund innovation in both product and process improvements and cost to implement our strategies aimed at improving our U.S. franchise distribution business.

As a result of the revenue declining in Financial Services, its operating earnings were $2.3 million lower. Higher selling prices were able to cover year-over-year cost increases in steel and other materials as well as freight, pension and certain other general operating cost increases.

Turning to slide 5, Snap-on's consolidated gross profit was $260.3 million. The gross profit margin of 43.9% improved by 100 basis points year-over-year. Higher selling prices, along with favorable product mix and better productivity in our manufacturing facilities worldwide more than covered the cost increases for steel and certain other manufacturing costs.

Turning to slide 6, operating expenses declined to $222.9 million in the first quarter, down from $226.9 million a year ago. Operating expenses this year were reduced by $4.5 million from currency and a total of $6.9 million from cost reductions and lower restructuring spending. These improvements were partially offset by spending increases of $3.3 million to support our previously-discussed strategies.

In addition, higher year-over-year costs for healthcare pension, stock option and other share-based compensation plans, as well as other general operating cost increases were incurred. Stock option expense in the first quarter was $2 million.

Let me now turn to a review of our segment results. I will begin with slide 7 for the Snap-on tools group, formerly named the Snap-on Dealer Group. For the Snap-on tools group, which serves the worldwide franchise distribution business, first quarter 2006 sales were $248.7 million, a decrease of 2.8% compared to a year ago. Organic sales were down 1.7% year-over-year compared to the 4.9% year-over-year decline in the fourth quarter of 2005. Sales in the North American dealer operation were down 1.8% year-over-year. Importantly, in the United States, Snap-on's sales per franchisee increased 1.5% but the number of franchisees did decline 2.5% year-over-year, which was not unexpected.

In international operations, sales increased 1.2% on a constant dollar basis. Operating earnings for the Snap-on tools group were $18.2 million this year, essentially flat with last year. This is a better performance than we had anticipated. The benefits from higher pricing and a more favorable product mix were largely offset by the decline in sales volume and $2 million of costs associated with plant spending to implement our strategies in the U.S. franchise distribution business. Costs to do an extensive update to the Snap-On catalog and higher freight costs were largely offset by the absence in $3 million in costs last year related to the termination of a supplier relationship and our subsequent acquisition of that supplier's manufacturing facility.

While early on, progress is being made against our strategic initiatives we discussed in February. So far, we've been able to achieve these results at a lower level of spending. Turning to the Commercial and Industrial Group shown on slide 8, net sales declined 2.2% for the segment as a 1.5% increase in sales was offset by a 3.7% decline due to currency. Worldwide sales of tools for industrial and commercial applications increased year-over-year. Our North American industrial business continued to show significant improvement with sales up approximately 9% while our European business was up about 1% absent currency. Continued sales increases were achieved in emerging markets, albeit from a small base last year.

Our global equipment business experienced a 1% increase in sales volume on a constant dollar basis, which is a positive sign for this business. Segment operating earnings were $23.1 million, up from the $11 million earned a year ago. Improved productivity worldwide, reflecting the benefits from our rapid continuous improvement initiatives, as well as further footprint consolidations, were major contributors. These savings more than offset the planned higher spending undertaken to support our emerging markets growth initiatives. We also realized higher selling prices year-over-year that more than offset other steel and other material costs.

Turning to the Diagnostics and Information Group on slide 9, net sales were $119.2 million in the quarter, up 4.2% compared to $114.4 million a year ago. Sales of information products from Mitchell 1 and higher sales in our OEM facilitation business were the primary factors. Segment operating earnings increased 10.8% year-over-year and the operating margin improved 50 basis points. The higher sales volume and benefits from rapid continuous improvement were the primary contributors.

Turning to Financial Services on slide 10, operating earnings in the first quarter were $2 million. Year-over-year, the trend in operating earnings primarily reflects lower effective interest rate spreads, as market interest rates are higher as well as lower effective yields from new financing programs. With that completing my operating segment review, let me turn to a discussion of our balance sheet and cash flow.

Balance sheet measures are discussed on slide 11. At quarter-end, after netting cash of $183 million, against total debt of $228 million, our net debt was $45 million, down approximately $11 million from year-end 2005 and $141 million from quarter-end a year ago. Inventories and receivables declined year-over-year by approximately $92 million, of which approximately $28 million was due to currency. And importantly, our pretax operating return on invested capital increased to more than 15% compared with 12.4% a year ago.

Cash flow remains strong in the quarter as shown on slide 12. Cash provided by operating activities was $27.5 million, up from $19.3 million a year ago. Capital expenditures were $10.7 million in the quarter. It continued to expect full year capital expenditures to be in a range of 50 to $55 million. This increase over last year largely reflects the investments being made to modernize our manufacturing facilities so as to improve production flexibility and productivity. Those conclude my remarks about our first quarter financial performance.

Now I would like to briefly share with you our assumptions and trends impacting our outlook. First quarter 2006 earnings exceeded expectations that were provided at the beginning of the year. We continued to believe that operating earnings for both the Commercial and Industrial, as well as the Diagnostics and Information Groups will improve for the year, even as they continue to invest in their key initiatives to support sustainable profitable growth in Asia and other emerging markets and focused innovation on new technology and information-based products.

In the Snap-on tools group, we plan to continue to invest in our initiatives discussed in February. These are to improve service and value to both our franchisees and customers, enhance sales and profitability of our franchisees, improve and transform our manufacturing supply chain into a lower cost, market demand replenishment system and extend Snap-on brands and target lines at the targeted underdeveloped market segments. Expected cost to enhance field support and for other franchise system initiatives, which we previously believed might cost up to $15 million for the year, we now believe will cost 5 to $7 million for the year. Of this, approximately $1 million has already been incurred in the first quarter.

While spending less than anticipated, we are achieving expected results. This lower level of spending contributed to the higher than expected earnings in the first quarter. We continue to anticipate that our customer service and supply chain initiatives, along with new targeted marketing programs, will require spending of 8 to $10 million in 2006 as originally anticipated with a significant portion of this spending expected to occur toward the end of the second quarter and into the third quarter.

The Financial Services segment as you would expect, in this continued climate of rising interest rates, is expected to continue to be challenged and as a result, we expect operating results for the full year to be lower than the results achieved a year ago. Overall, we are encouraged by our progress and with the improvement in first quarter earnings performance. As we look to the balance of the year, we are guardedly optimistic regarding our performance. We are still early in the implementation phase for many key initiatives and we still have certain important transformation changes planned for the second and third quarters of 2006, which will require the levels of spending I just mentioned.

Those will conclude my remarks. I would now like to turn the call over to Jack for closing thoughts.

Just very briefly, you know, as Marty said in his concluding remarks and as I mentioned earlier, we are pleased with the first quarter, with the improvements that are being made. We still have much more to accomplish in all of our operating groups but particularly in the -- in the tools group, but we are on track with each of those initiatives. We're on schedule, as we laid them out internally. And again, I'd just like to thank our associates for all of their many contributions. With those closing remarks, we'd like to turn it over for questions or other comments.

Thank you. [ OPERATOR INSTRUCTIONS ] We'll go to Alexander Paris with Barrington Research for our first question.

Good morning.

Good morning, Alex.

Nice quarter. You're making great quarter on costs in the efficiency moves. I want to talk a little bit about the top line. You've mentioned in the past that once you've really cured some of these problems, as far as supply chain and so forth, you'd focus on growing the top line, which is still kind of slow. I guess you're doing that in part by emerging countries as one new market that you're emphasizing, correct?

That's correct.

A question on that, though, I think historically your van-type business works only in countries where the -- where the mechanics own their own tools, otherwise there's not a lot of incentive for the management to buy high-quality tools. As you see these emerging markets, say in Eastern Europe and so forth, are there a number where they have that prerequisite for your van-type distribution approach?

In many of the emerging markets we have not seen that. We are -- we have another direct selling model.

Yes.

So, it's not going through the vans. In other words, direct to dealers. We may go through what we call resellers, for example, and Asia-Pacific, particularly in China, but it's -- it's not through vans, as we have here if North America. And other markets around the world.

Okay. That's -- and then any other new markets that you have in mind? You know, more focused on retail or anything like that in order to get higher top line growth?

Not in retail I mean we will stick with our current business model but there are other markets. If you look at geographic markets that we're going after, as I mentioned in my comments, Eastern Europe, for example, as well as Asia-Pacific, but we will stay with our basic models. We've approached many of those markets through our industrial sales force, that is on a global basis, but I would also say to you, Alex, that we continue to look for near adjacent markets where we have opportunities to grow.

I think we have mentioned those to you perhaps just a few of them in the past, such as, fleet accounts, we are taking a little different approach with fleet accounts. They're not easily handled necessarily by -- the larger accounts -- necessarily handled by franchisees. We're also moving into more into build a bay for the larger dealerships. They want a uniform look to go with their respective company images. So, those are just a couple, but we continue to explore near-adjacent markets.

Let me make a couple of comments related to growth. We have a lot of different businesses and factors affecting the businesses. If I could just add quick color, if I start sort of the diagnostics group, they had mid-single digits, actually almost 6% organic sales growth. A large part of that business is tied to the U.S. franchisee distribution systems, so, as we deal with the issues in that system and somewhat the decline in franchisees, they are impacted and as we fix the system and improve system, they will also benefit.

In the commercial industrial segment, which is a major part of our total top line, as we said in our remarks, if you look at the North American piece of the industrial sales business, that was up 9%. My unscientific sampling of earnings reports coming out of other industrial companies says we're pretty much at the upper end of organic growth rates. Their challenge is they've got a big base in Europe through S&A Europe, the old entities that we combined. That organization is more than a third of its business and so it was up only 1%, I think we all understand what's going on in many of the economies in Europe and, of course, after-currency it was probably down 7%.

So, then we move to the Snap-on tools group and I think we've discussed some of our challenges there and things we're doing there and that we expected that probably because of the first half of the year, we'd feel a further decline until we got the benefits of the improvements that we plan to make. So, it's little bit a way to sort of dissect the major pieces of the company.

Just one other question, looking at individual pieces, like in the C&I and the D&I, you have roughly an 8% and I think roughly an 8.6% operating margin in the first quarter. What is your goal in terms of operating margin? Where did you think it would go when all the improvements are in place?

Alex, in the -- if we look at the commercial industrial group, the Commercial and Industrial Group, we'd expect them to be north of 10% operating margins. In the Diagnostics and Information Group, there, the only -- the view there -- their margins are going to grow, but they also sell a lot through the channel, so, part of the profitability on the sale of diagnostics ends up in the Snap-on tools segment as opposed to in their segment. Obviously we do get very high margins on the software side of that business.

Okay, thank you very much.

You're welcome.

And we'll now go to Jim Lucas with Janney Montgomery Scott.

First question, housekeeping, could you give us a reminder on the C&I business, what the breakdown of North America versus Europe is?

About 50/50, Jim, it's Marty.

Good, thanks. And question on costs and then a question on growth, the cost question two part, one, could you give a little more clarity of what you are seeing in the dealer business that cause you to ratchet back the anticipated spending levels that you had alluded to before and in the second part on the cost side is what you're seeing, in particular, with the dealer channel, with the higher fuel costs. And on the growth side of the equation, if you could talk a little bit on the innovation side, since new products seem to be a lot of focus embedded in your comments this morning.

Let me make a couple of comments, if I may. On the additional spending that we had forecasted for the tools group was primarily additional resources into the selling organization. We thought we would need to implement, as we rolled out our strategy so we wouldn't have disruption, if you will, in the field. As we move forward, we found one, that wasn't necessarily the case. In fact it wasn't the case, we didn't implement that as many additional people in the field as we had foreseen and part of it was due to the fact that we're able to move some of our strategies forward as it related to the field, in fact, we had proposed to rollout our field structure revisions in the second quarter and actually we got some of those started even in the first quarter. They will continue, though, through the second quarter. Which -- so, hopefully that answers what happened to our spending levels on initiatives, so, we're on track, in fact, you know, some of them were slightly ahead of schedule, none of them are we behind schedule in our initiatives.

As far as the impact to the franchisee costs, obviously this is a major concern to us, particularly as it relates to field costs -- or fuel costs, excuse me, and in fact, we have a meeting with the National Franchise Advisory Council going on as we speak. And I -- I will be with them on Sunday but it goes through the weekend and we're exploring what else that we might be able to do, but one of the areas key that we're focused on is improving their productivity. We want them to spend more time with the customer and less talking to us so we need to fix the root problems, but if they need to call us, how to make it more productive. That's some of the computer programs and software and hardware that we're putting on our vans, particularly as we move forward. Marty, if you've got other comments --

No, I think that covers it. Jim, near-term, you know our business pretty well. The operating cost -- fuel is behind what they pay for tools, as the largest expenditure and short-term they're looking at lots of near-term opportunities, for example, these trucks carry quite a bit of weight in tools. Is there something short-term that can be done to that? Do they have to carry everything they need to on the van that they need to carry to still be aggressive in selling, I'm sure this topic is getting a lot of discussion this weekend. But it is an issue for our franchisees, no doubt.

Let me address the new tools and innovation. That is key to us and weed to to accelerate, although we have done some neat things, in my view. We have a new angle torque wrench that we've just launched. We found that it improved productivity in the repair of an engine by some 16% and some of the repairs would take up to eight hours. You could take one hour out. It's another way of enhancing productivity. We have some new pliers that we've come with, that you say wow, what -- everybody's got pliers, what's neat about ours? Ours cuts. And it cuts where others tend to fail.

And maybe when you visit with next week we can show you that. We're coming in with a new ratchet. Ratchets have been around a long time. This one reduces the angle that you need to move the handle in order to make contact in order for it to operate. We think that's going to be also a winning force. And we have a new product in tool storage -- it's a tool storage cart, allowing the technician to get the tools on the storage cabinet closer to the workplace, again, to improve productivity. So, all of these are geared, obviously, at increasing productivity.

Power tools, we -- we just launched a -- a new cordless torque and drill. Products that are really been very well received in the marketplace. We've got new balancers in the equipment group that we've launched. So, those are just a few of the many new products that we just recently have launched or about to launch.

And anything on the D&I side?

We've got -- we have -- we have new products there, as well. We have this new customer retention marketing tool from Mitchell that we're just now rolling out. We have some tools that we've put together -- diagnostic tools specific for OEMs, one is Toyota, for example, it's a Toyota product. We work collectively with them.

We have some updated software. I think Marty mentioned it. That's coming out for our existing hardware that we have out. And MODIS and SOLUS.

And finally, with regards to the dealer counts, which has continued to go down, at what point do you expect that trend to reverse course? Do you have the fill rates at the level now that you're comfortable to start growing that business?

Yes. I think the fill rate is getting largely behind us. We have more improvements to make, Jim, as I relayed to you. I think as we rolled out our other strategies and as we look at our -- how we continue to enhance the productivity of the franchisees, we will be continually looking at how they're calling on their customers. The numbers of customers, et cetera, so, I would think that by the end of this year, we should have this largely behind us.

Okay. Thank you.

And we'll now hear from John Emerich with Iron Works Capital.

Thanks,couple of unrelated questions. I will ask them separately, if that's okay. Why is the depreciation and amortization down so much year-over-year? Silly question, but I'm just -- as you know, I'm just getting back up to speed.

That's fine. It's -- we had higher depreciation a year ago as a result of some plant and other facility closures that we had to accelerate depreciation on the prior year.

And were there any pension contributions in the quarter?

No.

Do you plan on making any this year?

We're not expected to make any at this point.

Okay. Bill, when you and I spoke you said it was -- it wasn't likely that -- it would be a surprise, I think, if cash flow -- free cash flow were as strong as it were last year because of the low-hanging fruit we picked up working capital last year. Although we're going to continue to make improvements. Is that still the view, even though we're ahead of the game, year-to-date, even though it's only three months.

This is Marty Ellen speaking. That's still the -- the view.

Less and less next year. Do you all have allowance for that in the quarter by any chance?

We always have provisions --

Do you have the dollar amount?

I don't have that readily available.

Okay, I will check back with you.

Good.

Thanks.

[ OPERATOR INSTRUCTIONS ] We'll now hear from Boyd Poston with Gallatin Asset Management.

Yes, I just wanted to try to dissect a little bit more your assumption of a decline in the tool segment, operating earnings. Can you kind of give me some of the assumptions for that projection, especially the same van sales, the dealer count, which I think are both improving. Does it come down to simply that 8 to $10 million third quarter expense being the main factor per assumption of a down operating earnings in the Dealer Group?

That -- that is a big factor because -- many of the key changes affects the supply chain and affecting the field support structure being made, second quarter, back of the second quarter and into the third quarter, a big part of that 8 to $10 million in spending will occur over that timeframe and that is a major factor. And I think we used the word guarded optimism because these have to be executed. We will spend the money, but we also have a lot of things to execute on and make them work properly so that we avoid any disruption to the business.

You're assuming the van -- same-van sales will be positive --

We would expect them to be. Again, I want to be clear, the comment went to year-over-year improvement in sales per franchisee and not per van because we don't believe it's simply the number of vans that is necessarily the most important measure of success, if you will. It's how profitable, starting with sales growth are each individual franchisee in the system?

And the van count, I would think, would turn positive before the fourth quarter. I thought there was an outside chance, even in the second quarter, second and third quarter.

It could. But I don't think we're prepared to give that as guidance at this point.

Have you seen much difference in the geographic segments with the rising fuel prices as far as the repair shops and --

This is Jack. It's pretty uniform. I don't think -- we haven't seen, obviously fuel prices aren't the same every place, but it's not materially different to impact our business at this point.

And 4 to $6 million, that's remaining to enhance the field support and the other franchise system initiatives. How will that drop by quarter? The next three quarters?

That, too, I think -- a lot of that will be a little bit second and third quarter with a little less in the fourth quarter.

Okay. Thank you.

And Darren Kimball with Lehman Brothers has our next question.

There's an overlap too much with the questions that were just asked, but just building on that, it sounds like there isn't a big decline in the dealer count for the -- for the year. You started to see some same-franchise -- same-franchisee productivity. I'm just curious sort of what the -- what your view on the potential exit rate of sales growth for the year is in the -- in the tool group? We did see one of your competitors post a double-digit sales increase so in the short-term it has the appearance of market share loss. I mean could you put all of that into perspective, please.

I tell you, our market intelligent group, deals with some 4,000, or surveys 4,000 technicians. When we look at market share, that's where we get our information as to what's happening and I -- I -- in this first quarter, we -- we have shown good market share gain in most all product categories.

I don't know the other comments, but we know as we talk with technicians that when they're buying, they're still preferring Snap-on. We still have, by far, the largest market share position in every product category. And we continue to show growth in most of those, even in this first quarter. Over prior year.

Darren, it's Marty. Let me -- I think we've talked about this, there is no question that one or more of our competitors can have some near-term success in selling to technicians in places where we are not and we've made a conscious decision to build this system back and the way we think it will be built. I can tell you, anecdotally one area where we did not have the dealer, one of our competitors was the only game in town and as soon as we put somebody back in, the technicians in the shop switched over to Snap-on. We know there's a good demand and preference to Snap-on. We just want to build the system back in the way that we think is most appropriate.

Any comment on sort of an exit rate for sales growth in the North American tool group?

I don't know -- you mean in terms by the fourth quarter this year?

Yeah.

I don't necessarily want to give guidance on that at this point.

Okay. And I just wanted to ask a question to the industrial piece of C&I. Is it fair to say that the strength in the North American industrial piece is primarily economically driven and do you think that it could get better here? Recently you were running up close to 10% here. And I'm also curious if you think that the European piece is set to follow suit here, maybe the -- the economic recovery spreads over there or some other factors maybe?

This is Jack. One of the key drivers of our improved results in the industrial field were a worldwide, but, particularly here in the United States, has been our improvement in our fill rates. Because we -- it's still not at the level that we have it in, the tools group, but we have dramatically improved it and continued to improve it. So, that's been a major pickup to us in the marketplace.

Any further questions, Mr. Kimball?

No, I don't know if there was any comment about the European industrial ally, but that's it. Thank you.

Thank you. Our next question comes from [Sharine Crosby with Pilot Advisors. ]

The outlook for Europe? And then my question was -- the rate at which you are reducing cost in the commercial and Industrial and the diagnostics business, should we expect a similar rate going forward, as you get to the 10%? Or should it slow down and sort of like the remaining costs will come out slower than they have been in the last 15, 18 months.

Well, you know, you always have a declining rate of improvement at some point. We think we have a lot of opportunities to make improvements. So, near-term, we're still fairly bullish in our ability to get significant year-over-year improvements from cost reductions.

But I'm -- I'm almost asking more like sequentially, the absolute dollars sequentially, is that another way to look at it?

I -- I don't know whether we will get as much push from cost reduction next quarter as we did this quarter, but we have lots of improvements to go.

Thanks. Thank you.

Now we will hear from John Emerich with Iron Works Capital.

One -- two follow-ups, one is the -- the seasonality, is Q1 pretty close to tied for first with the strongest quarter?

No.

How does it work?

We tend to have some seasonality in Q2. Obviously Q3 overseas tends to be softer with European holidays and then we tend to have a better fourth quarter.

You said you have seasonality, up or down?

Up.

So, Q2 is strong, Q4 is strong and then Q1 and three are softer?

That would be within reason, yeah.

You get the change the delta in spending on cost saving initiatives, you had $1 million in the first quarter. We've got four left on that program, kind of one of five spent in the first quarter. We have another 8 to 10 also coming starting the end of '02 and a lot in Q3. So, in total, that's between 12 and $14 million over the next, three quarters somewhere in incremental spending on -- in improvement initiatives.

That's correct.

Thank you very much.

And [Gabor Wagner with Shane Capital] has our next question.

I wanted to ask you a few questions about the tools group. The -- the first quarter performance, you remarked in the press release, that the lower level of spending contributed to the higher than expected earnings. Would you mind quantifying the contribution?

Probably in the range of a couple of million dollars, 2 to $3 million.

It's after tax or...

Before tax.

Before tax. The reason I ask this is that as I was praying around with the numbers, your original $15 million in guidance, plays out to something like $0.17 after tax. And new guidance plays out to something like $0.06 or $0.07 after tax. I'm curious, when you try to distribute this difference of say $0.10, that is the swing factor between the two expense guidances, how that is distributed between the quarters.

Somebody did a good job of bucketing the remaining spending balance a year and your EPS calculation in terms of tax rates sounds correct. So, that would be the answer.

I see. And when you -- when we look at the operational side of the things, are you just finding that your initiatives are cheaper to implement? Or have the nature of the initiatives changed?

The nature of -- the initiatives have not changed. Had somewhat lower expenses, but some of our other initiatives are getting better results than we had foreseen, as well.

And finally, on the last call you mentioned that there would be perhaps an increased number of franchisee terminations among the lower performing franchisees and given to the higher performing ones. Has this process been on the pace that you envisioned, faster, slower, what should we understand to be the underlying development there?

I think that the pace we talked about is pretty much happening. We've but again it's all about trying to find ways to allow us to get at customers in the most productive way. We probably did more than 80 territories or something in the first quarter, to existing franchisees.

Clearly our goal is to have growing and profitable franchisees and the number and that's what Marty was saying there. The number is going to fluctuate. We would never be able to forecast the exact number. In fact, what happens is you can appreciate the market changes every day. So, anyway, we're not certain of the exact number, but know that they need to be growing and profitable.

Okay. Then if I can just rephrase, perhaps, in terms of the proportion of profitable versus unprofitable franchisees that you have in your network today, is that -- is that more closely aligned with the terminal expectation? I.e. what you expect at the end point?

I'm not certain I follow your question. Because you said, profitable versus unprofitable, I -- we've never referred to anybody being unprofitable out there. The question is we want them to be more profitable. I don't know how to answer your question.

Okay. I think it's good enough color. Thank you.

And Dale Benson with Wells Capital Management has our next question. Due to no response, we will move on to a follow-up from Sharine Crosby with Pilot Advisors.

Just a quick question. The SG&A was up a fair amount year-over-year and for a lot of reasons, it makes sense that everyone is experiencing, as well. Just curious if that's a good sort of run rate to you or could that decline in future quarters.

We expect it to decline. I talk in my prepared --

I'm sorry, I meant the corporate, not the total listing --

The corporate segment --

Corporate in general.

It was up year-over-year because of things that will continue like stock option expense, insurance, healthcare -- insurance and healthcare costs. There is an ailment, I will call it mark-to-market, stock compensation plans and which the expense is a function of what happens to our share price.

Yeah. But that's -- otherwise that's a pretty good run rate.

You can probably use that for now.

Thanks.

And there are no further questions. I will turn the call back over to you for closing remarks or comments.

This is Jack. I'd like to thank you again for joining us this morning and look forward to visiting with you again. So, have a good day.

That does conclude our conference call. Thank you, everyone, for your participation and we wish you a great day.