實耐寶 (SNA) 2006 Q4 法說會逐字稿

Welcome to Snap-on Incorporated's 2006 fourth quarter and full year results conference call. [OPERATOR INSTRUCTIONS] For opening remarks and introductions, I'd now like to turn the call over to Mr. Marty Ellen, Chief Financial Officer. Please go ahead, sir.

Thank you, Kerry, and good morning, everyone. Thank you for joining us today. We believe our fourth-quarter results clearly demonstrate we're making progress on our core initiatives. And we are encouraged by the many opportunities we see for continued improvement. Our fourth quarter acquisition of ProQuest Business Solutions affords us more opportunities to add important products and customers to further advance our profitable growth strategy. With me this morning is Jack Michaels, Snap-on's Chairman, President and CEO. I will provide a review of our fourth-quarter results. Afterwards, Jack will discuss our strategic initiatives, and then we'll be happy to take your questions.

Consistent with past practice, we will utilize slides to help illustrate our discussion. You can find a copy of these slides on our web site, next to the audio icon for this call. These slides will be archived on our web site along with a transcript of today's call. Any statements made during this call relative to management's expectations, estimates, or beliefs or otherwise state management's or the Company's outlook, plans, or projections 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 differ materially from those in the forward-looking statements are contained in the Company's SEC filings. 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 any means without Snap-on's expressed permission.

With that said, let me start our fourth quarter review, beginning with slide 4. Net sales of $656 million in the fourth quarter were up over 16% from prior year. Sales increases were experienced across all segments. Organic sales growth was 10%, while currency added 2.8% and ProQuest added 3.6%. ProQuest is included for the last five weeks of the quarter. We believe the improvements in both our franchise and global supply chain initiatives are major contributors to the higher order fill rates and resulting increased sales and profitability in all of our segments.

Productivity also improved in 2006, with sales per employee up 6% for the full year. In our Financial Services segment, revenue increased $4.6 million and operating income improved $2.2 million, mostly due to reduced loan losses and improved yields, despite flat originations. Diluted earnings per share of $0.64 in the quarter were up over 36% from the $0.47 reported last year. Fourth quarter earnings include $0.05 per share of lower income tax expense related to the reversal of certain foreign income tax valuation allowances. Last year's fourth quarter included $0.01 per share of increased taxes related to the repatriation of foreign earnings. The ProQuest acquisition contributed $0.03 per share to this year's fourth quarter earnings. Operating earnings of $59 million for the quarter were up almost 36%, benefiting from higher sales, increased pricing, and savings of $12 million from rapid continuous improvement initiatives. ProQuest contributed $4.8 million of operating earnings for the five-week period.

Consolidated gross profit of $284 million or 43.4% of sales compares to gross margin of 43.9% last year. Significantly affecting this comparison are the effects of LIFO inventory valuations. This year's fourth quarter includes a LIFO inventory related charge of $4.1 million, which reduced the gross profit margin by 60 basis points. The year ago quarter included a LIFO related gain of $7.7 million, which improved gross profit margin by 140 basis points last year. This represents a swing of 200 basis points in the year-over-year consolidated gross margin comparison. Aside from the LIFO effects, improved pricing and manufacturing cost improvements from our rapid continuous improvement activities were able to more than offset production cost increases.

Operating expenses of $230 million were up nearly $24 million on higher sales. ProQuest added $6.7 million of operating expenses. We also incurred $5.5 million of higher cost to fund growth initiatives and $2.8 million of higher stock and performance based incentive compensation. Currency translation increased operating expenses by $4 million. Productivity improvements enabled us to lower our operating expense ratio to 35.1% this year from 36.6% last year. The $2.4 million increase in interest expense in the quarter is largely due to the funding of the ProQuest acquisition.

With that as a brief overall review, I will now turn to our segment results on slide 5. As I mentioned, year over year comparisons of consolidated gross margin and operating earnings were significantly affected by our LIFO inventory valuation and those adjustments all relate to the Snap-on Tools Group. At the top line, sales in the fourth quarter for the Tools Group were $262 million, up 12% from last year, largely due to higher sales in North America. The $28 million sales increase reflects improvements being made in both the franchise system and order fill rates through our global supply chain. The average number of U.S. franchisees in the fourth quarter was unchanged from third quarter levels and was down 3% year over year. Sequential growth in franchisees is expected to occur in mid 2007. Improved product sales mix, better price realization, growth in sales in our warehouse distribution program, and timing of software sales all contributed to strong growth in sales per franchisee in the quarter. International Tools Group sales in the quarter were up 14% year over year, due to contingent strong sales growth in the UK and Australia, and were also aided by currency translation. Operating earnings for the Tools Group of $15.2 million included $2.2 million of higher spending to support strategic supply chain and franchise improvement initiatives. These are the programs we've been discussing with you all year.

Also, we recorded $2.1 million of costs related to the expected closure in mid 2007 of our Johnson City, Tennessee, hand tool facility. The product manufactured at this facility, which is primarily screwdrivers, is being transferred to other Snap-on facilities. As already mentioned, the operating earnings comparison is negatively impacted by the $11.8 million year over year effect of LIFO inventory valuations. We're pleased with the progress being made with our supply chain and franchise improvement initiatives. Jack will comment on these further in a few moments.

Turning to the Commercial and Industrial Group on Slide 6, segment operating earnings of $32 million were up over 40% or $9.3 million year over year on a 14% sales improvement. Currency translation added 4% to sales and $1.4 million to operating earnings. Gross profit increased $16.5 million. Improved volume and pricing, as well as $5.4 million of savings from rapid continuous improvement efforts, were partially offset by higher restructuring costs. During the quarter, we continued to invest in the expansion of our sales and manufacturing presence in emerging growth markets.

Turning to the Diagnostics and Information Group on slide 7, net sales of $145 million in the quarter were up 44%, compared with a year ago. The increase in sales was primarily driven by our OEM equipment solutions business, together with $20 million of sales from the ProQuest acquisition. Segment operating earnings of $21 million in the quarter were up $9 million or 76% from last year, largely reflecting the significant contribution from the higher sales, as well as $4.8 million of operating earnings from the ProQuest acquisition. The gross profit margin of 41.9% was down from prior year, primarily due to a higher level of lower margin OEM equipment solution sales. This shift in sales mix also contributed to the lower operating expense ratio. Rapid continuous improvement contributed $1.5 million of cost and productivity savings, while higher spending of $1.7 million was incurred to support market growth initiatives.

On slide 8, we've provided you with a full year 2006 pro forma financial table, including the ProQuest acquisition, to assist you with your financial modeling. As I said earlier, ProQuest was included in our actual results for the last five weeks of the fourth quarter.

Now let me turn to a discussion of our balance sheet and cash flow. As can seen on slide 9 our net debt position at year end is $486 million. The ProQuest acquisition added $517 million in net debt. Recently, we issued $150 million of three-year floating rate notes and $150 million of ten-year fixed rate notes to retire the commercial paper that was issued as part of the funding of this transaction. Inventories at year-end are up $40 million from last year, with $15 million of this increase caused by currency translation. About $12 million of the increase was for early 2007 OEM program deployments. In addition, we added an initial supply of inventory to support the January mid tier product line roll out. Receivables at year end are up $73 million from prior year, primarily due to the higher fourth quarter sales and $21 million of currency translation.

Turning to slide 10, cash flow from operating activities in both the quarter and full year remain strong. With cash flow in the fourth quarter somewhat moderated by the higher levels of receivables and inventories as compared to the fourth quarter of 2005. For the full year 2006, our operating cash flow of $203 million was more than two times our net earnings. That concludes my remarks on our fourth quarter.

Now I would like to briefly share with you some financial considerations for 2007. Turning to slide 11 we expect operating and earnings improvements in 2007 as we continue to execute the strategies that we've been discussing with you throughout 2006. Jack will talk about these in a moment. We expect to incur approximately $26 million to $30 million in restructuring costs which is up from $22 million spent in 2006. Our rapid continuous improvements are enabling us to further combine certain manufacturing activities in existing facilities, while we continue to migrate some of our production to lower-cost regions. Capital spending for 2007 is expected to be in a range of $50 million to $60 million and depreciation and amortization is anticipated to be in a range of $70 million to $75 million. Because of higher debt levels we expect to incur approximately $18 million to $20 million of increased year over year interest expense. And finally, we anticipate that our full year 2007 effective tax rate will approximate 34.5%. Now I'd like to turn the call over to Jack. Jack.

Thank you, Marty. We've accomplished a lot this year, and we have great opportunities ahead. But what really transforms good organizations to great organizations are its people. And people need to be aligned around a set of shared beliefs and values. Our associates globally came together and created the Who We Are document which you see on slide 13. And initially that is all it was, a document. Today, it's more than a document, it's becoming part of our culture, and it's aligned the organization around the very fundamentals that are driving our business improvements. It will serve as the foundation for our future improvements. We will walk the talk. Please note the vision. Yes, we aspire to be the investment of choice.

Moving on to slide 14, I am pleased with the progress our associates made in 2006. They made it happen, and I thank them for their efforts, and I know they too believe we have a lot more to do and can do it. For the most part, it's focusing on the blocking and tackling, the basics of any business. We're building a capability around rapid continuous improvement, a set of tools and processes to allow us to use structured and proven approaches to eliminate waste while making improvements in quality, delivery, cost, and safety, which are business fundamentals.

We also use 2006 to set the stage for 2010 and beyond. We set future state goals to achieve aggressive profitable growth, and 2006 is an initial positive step towards achieving these goals. We expect meaningful progress, again, in 2007, as we drive to accomplish our mission of providing the most valued productivity solutions in the world and being the investment of choice. Last year we reviewed with you our strategies that were developed throughout most of 2005 to pursue our future state. They were based upon my initial assessments to take better care of customers, reduce cost and complexity, and seek aggressive profitable growth. I would like to now review with you the progress we've made, beginning with the Snap-on Tools Group on slide 15. The two major areas of focus are to improve the franchise proposition and improve the supply chain. A number of important initiatives were launched to improve the franchise proposition. Some of these are outlined on slide 16. In the U.S., we completed the field transformation to 92 franchise performance teams. These teams are headed by a business manager and include sales and product specialists. Improving the business skills of our franchisees was an identified need, and we concluded that annual business -- annual business plan reviews should be conducted with each franchisee. We completed these during 2006. Obviously, this field support structure is new, with many new people and new jobs so it's early to determine its effectiveness, but we are encouraged.

Our study of our franchise model also yielded a number of ideas to improve training, layout, and display of product amongst others. Rather than making sweeping changes across the entire system, we've been running pilots with 16 franchisees throughout the United States. The results of these pilots so far have exceeded our expectations with double digit improvements in sales and collections. As you can imagine, we're studying these pilots carefully to understand the practices and behaviors that are contributing to these improvements so to be able to roll them out to the entire system. As seen on slide 16, we're beginning to launch a mid tier product offering. This product line allows us to reach an important market segment of technicians that we had previously not targeted. These technicians are recent graduates who are not able yet to afford the premium Snap-on products or they're technicians who are looking for a second set of tools for their homes or hobbies, or those who have a need for a non-everyday tool. The Blue Point brand has been around as many years as the Snap-on brand, but we didn't really manage it well as a second choice product offering. We have now created a new Blue Point product line, with products in key categories and with features and functions specific to the needs of this mid-tier professional segment of the market. We first rolled out this mid tier Blue Point offering to our Australian franchisees, and have excellent results because we gained new customers. In the U.S. we just rolled out some of the products to our franchisees at our January 2007 kick offs, and their reaction was quite favorable. We believe this offering will allow us to capture more customers.

In their efforts to better serve their customers, our franchisees sourced some product from third party warehouse distributors, sometimes as the result of our inability to timely deliver product and other times just to get products that we do not have. Estimates of products sold by our franchisees sourced from third parties are as high as $150 million annually. We have had an in-house warehouse distribution program for many years, but it, too, like the Blue Point brand, was not well managed, in our judgment. We recognized that there were many products needed by our franchisees that we will not make, nor should we. But we believe we can do a much better job of sourcing these products for our franchise system. We believe these and other initiatives are improving the franchise proposition and will lead to a stronger system over time.

On slide 17, we provided a few highlights of the many activities underway to improve the supply chain. In the Snap-on Tools Group, we carry almost 50,000 SKUs. Our previous supply chain model treated all those alike, even though we've discovered that 13,000 SKUs of these represent 98% of our volume. With that kind of a business model and a relatively low level of manufacturing flexibility, it's no wonder why we carry high levels of inventory and have low fill rates. We're in the process of redesigning our distribution system to only carry high volume SKUs at our three outlying distribution centers, which we call velocity centers. Our goal is to produce or source these products daily based on demand from the velocity centers. Lower volume items will be simply stocked, and some may only be produced to order.

The breadth of Snap-on's catalog is a differentiated competitive advantage. Our challenge is to create a supply chain that can be more effective in capturing this value. Our manufacturing plants have an important role to play. If they are to produce daily to meet the market rate of demand from the velocity centers, they need to reduce machine set ups and change overs and create cells that allow us to flow production as needed and not produce in large batch quantities. We've invested capital to replace old machine tool technology with more current and flexible technology and are focusing much of our rapid continuous improvement efforts at these initiatives. This is an area that we acknowledge still has a long way to go, but we're achieving results. For example, in one product line, we have reduced the total lead time, which includes transportation time to the DC from weeks to as little as five days. We are on our way. The progress in Snap-on tools is encouraging, but even more encouraging are the opportunities ahead. We are the clear market leader in this segment, offering the best brands and offering the most in productivity solutions to our franchisees and products. We believe Snap-on tools has significant growth opportunities.

I'd like to now move to a brief discussion of the most important initiatives in our Commercial and Industrial Group. These are shown on slide 18. This group has made enormous improvements, as we have -- as you have seen in their financial results. We're continuing to build our footprint in Asia and other emerging markets, which will serve as an important growth platform. This also provides all of our business with a low-cost sourcing platform. We're also continuing to execute our plans to relocate high-cost manufacturing locations to lower-cost regions. Industrial tool sales growth in 2006 was in line with our expectations, given that a portion of this business also relies on our Snap-on tools supply chain to fill orders. We have experienced stronger sales growth in the fourth quarter and we are hopeful this momentum will carry over into 2007. This should be aided by continued emerging market growth, mostly in Asia and in central and eastern European regions. Product innovation and deployment of advanced technology and certain businesses yielded strong results in 2006. In our global under car equipment business, we experienced strong sales growth of our advanced technology products, which drove significant profit improvements in this business. And recent innovations in automotive power tools are enabling us to grow share in this segment. Our Commercial and Industrial Group continues to execute on its initiatives, and we expect further improvements in 2007.

As indicated on slide 19, in our Diagnostics and Information Group, further advances in diagnostics products and service information were made, and we continued to advance our capability of linking these to create integrated products, which we believe can significantly change the competitive playing field. And now with the addition of ProQuest Business Solutions, which we renamed Snap-on Business Solutions, we're extending our reach into OEM parts and parts information and establishing deeper OEM customer relationships.

In closing and turning to slide 20, we're moving into 2007 with positive momentum. We have a lot more to do. Obviously, we need to continue to build on our 2006 successes and stay focused on the strategies I just outlined. We need to take them to the next level and beyond. We believe we have great growth opportunities in our core and adjacent markets. With an improved operating platform and with lower costs, we believe we're able to capture these growth opportunities with improved levels of profitability. What -- while not terribly visible to people outside of our 12,400 associates globally, we're building a culture at Snap-on around core values. I've already shared those with you. One belief that perhaps transcends all the others is a mindset that every day brings a new opportunity for improvement. Success at one level simply is a foundation for driving to the next level of improvement. We're building this capability and increasingly, our associates are embracing it. That is why we are entering 2007 with great enthusiasm. Now, operator, we'll open the call for questions.

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

Good morning. It was a super quarter.

Good morning. Thank you.

Just a couple of quick questions. It almost looked too good. The Snap-On tool, for example, the 12.1% gain in sales, that had to be a surprise to you. Weren't you looking more for a modest sales and -- but a lot more increase in margins and profits. Is some of that sales catch up from dealers coming back from third party back to your tools? I'm trying to get at is this sustainable?

Alex, it's Marty. Good morning.

Good morning.

First of all, yeah, the per franchisee sales growth was strong, and as I said in my prepared remarks, some of it was timing around software sales, because we released software products at various times during the year. Some of it was, and we're pleased to say was, in fact, improvement in our WD, or warehouse distribution product offering. But even in our sort of core product lines, you know, we had very good sales activity in the quarter. That being said, I don't think any of us here would argue that we're going to have 15% to 17% per franchisees sales quarter over quarter, but a lot of the initiatives we've been talking about are taking hold, and we're capturing more business.

And I think, as we said, you know, in January, we launched our Blue Point mid tier offering. So we expect that will continue the trend of, you know, the improved results.

This is running about probably at least double end sales for your franchisees. Can you keep up that kind of above-industry growth for another year?

Well, Alex, you know, we have -- as we improve the system, given that, again, our system is all about calling on our customers and visiting our customers. As we improve the quality and capability of our franchisees, as we continue to bring innovative product -- we could talk a lot this morning about our product, what we're doing in areas like power tools. Like I said in the prepared remarks, I mean, we are taking, share, for example, from power tools from a very well known brand in the marketplace. Anecdotally, I was with 250 franchisees in early January. I asked many of them about what was happening in the shops when they call on technicians, and they said business was fairly good, and that was encouraging.

Great. The ProQuest $20 million sales, I know that was a little bit more than a month, and I -- but I presume there is some growth in that business. Is that, in terms of seasonality, is that a monthly number? You know, say, $18 to $21 million range that you could expect on a monthly basis from them?

There appears to be a little seasonality in the business, Alex. I think the reason we provided -- I don't remember the slide number -- a full year pro forma, though, was to help you easily -- more easily than digging through the 8-K and piecing things together, to build a new baseline for 2007.

But that -- did ProQuest have growth, that $20, $24 million? Was that up from a year ago?

ProQuest looks to be about mid single digits top line growth.

Okay. Just one other question. The Financial Services, I think the last time we were here you were expecting it to be weak, and then suddenly you got sales up 45% and operating income up 78%. That seems like an awfully dramatic change, as interest rates didn't change that much.

Right. This -- the news this quarter was not so much market interest rates, but rather improved yields in the product portfolio, because we had some special programs a year ago and better portfolio performance.

Do you expect 2007 to be up because of these programs, or is it kind of more of a one-shot deal?

Well, we're encouraged across all Snap-On. I don't want to make a specific comment on the Financial Services segment, because it can move around with market factors.

Okay. Just one other quick. Diagnostics and information, that was up over 20%, even without ProQuest. Was there one or two particular things that really drove that business?

Yeah, they.

software --

And, Alex, they've had this year and into next year, they've had some good OEM program deployments for some major OEM's, and this quarter happened to be mostly in Europe. Some of these programs will end in the middle of 2007. That's the nature of that business. It is somewhat program driven. You know, we're expecting that they'll be able to garner new programs over time. But that is the nature of that business.

Thank you very much.

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

Thanks. Good morning, guys.

Good morning, Jim.

And congrats. Those of us who have been in the show me camp have been left behind, that's for sure. First question on Blue Point. Was that historically more of a power tool brand that you're migrating into hand tools?

No, I mean, it probably had higher sales in the power tools, but it transcended to other products, particularly into hand tools, as well. But it was a brand that was almost like an orphan, and if we didn't want to put Snap-On on a brand because we didn't feel it met the Snap-On brand promise we stuck Blue Point on it, and there was no real managing of it or no real program, which now we have changed. And so we've broadened the product line, and, you know, we're encouraged with the initial results. It's too early to really tell what all will happen, but, you know, what we're trying to do is capture customers that, you know, we had bypassed.

Right. Which leads me to my next question on Blue Point. Given that it is a different price point from a cost structure standpoint, is this still a made in USA tool?

No.

Okay.

No, there are very, very few of the products that are made in the USA. Most of it is sourced, you know, obviously outside. Some of it in our own Snap-On plants outside the U.S., but some from third parties.

Okay. And, you know, it's interesting the migration in an industry that historically was predicated on that made in the USA that, you know, there is that developing market, and maybe that speaks more to the evolving technicians out there.

Yeah, well, right now, Jim, you know, we -- every month we do market research by a third party. So it's very independent, you know, talking to the professional technicians. And made in the USA is still a primary consideration in their buying patterns. And so we have certainly kept that with the Snap-On brand.

Okay. And then when you look at -- I find it very interesting that, you know, when you have oligopoly in the van channel, and, granted, it's hard to get an apples to apples, but when you have all three industry players growing at double digits, that clearly speaks to the health of the industry. You mentioned taking some market share on the power tool side, but could you maybe provide a little industry color of what you're seeing out there from a demand standpoint? Because it is interesting that we're seeing such dynamic growth across the board.

Yeah, I -- you know, Jim, again, from our market research, we realized that, you know, there is some more buying power out there. There is a definite need for more skilled technicians. In fact, you know, the schools are struggling to get more out, you know, more graduates out into the marketplace because of the complexity in the cars today leads to more skilled technician needs. And so, you know, I think we are seeing that, you know, there's more -- more efforts devoted to -- by the OEM's, by their dealerships, towards, you know, out of warranty service and parts and repairs. And the average age of cars on the road now is, you know, from the best of our knowledge, is over ten years old. And then it seems to be increasing. And so that creates more of a demand. So I think -- I think all that -- I think the fundamental underlying factors for the industry are still strong and, in fact, are improving.

Okay. And, finally, on the C&I segment, you know, that has been, at least to me, one of the more pleasant surprises from what we're seeing. And a two-part question here. Number 1, can you talk about -- maybe give us a little bit additional color from both geographical and in-market standpoint of what specifically is driving the top-line demand in C&I? And, secondly, in the emerging markets, in particular, as you know, the needs for automotive and industrial tools continue to grow, how your brand positioning and pricing strategy works in those emerging markets.

Well, clearly our biggest growth opportunity and one that we have realized during 2006 and will continue to realize is Asia Pacific. You know, we have established a strong reseller organization, you know, not only in China, but throughout the Asian countries. And so, you know, their sales year over year are up nicely. And we think that will continue. What we have really done in those markets -- you know, we do sell the Snap-On brand, but it's to a different type of a customer. It doesn't really go to the dealer or repair shop technician. It primarily goes to, you know, higher end aviation sales, you know, to the military, et cetera. So what we have been doing is positioning in that part of the world the Bahco brand, you know, as more prominent brand, and it's more recognized, you know, within the technicians, within the automotive space, repair space. And so the price points, obviously, are not as high as a Snap-On because the Snap-On tools are all produced in the United States, basically. So the Bahco brand, it serves us well in Europe, it serves us well in Asia, and it serves us well in all of the segments, the trade segments, as well as construction as well as the technician segments. So that's what really is taking place today. And as we continue to strengthen the reseller organizations in those markets and supplement with additional tools, we believe that we'll have, you know, a good future. In fact, right now in Asia Pacific we're building our second plant, and that plant will initially just build hacksaw blades that we also build in Sweden. So we're leveraging that technology in Sweden to produce in a lower-cost environment in China, but also Asia Pacific has a great demand for that product. And, obviously, we're looking to -- and we'll continue to expand the product offering. Either in-house manufacture or outsourcing.

Okay. Thanks a lot.

Go next to John Bossler with Dominic and Dominic.

Yes, gentlemen. Can you say it has the franchisee suits, have those all been settled now? Are they finalized, and have all payments been made?

No. No.

That's underway obviously, but we don't expect, you know, all the payments and so forth to be finalized in the class action suit until, you know, during the first half of the year.

But the agreement is finalized?

Yeah, I'm sorry.

Yes. The settlement has been approved, and so, you know, we're in the process of making -- you know, payments to the various classes within the settlement.

And I thought that there was a $60 million receivable that would be written off associated with that. Has that been taken yet, or when we would expect that to be taken?

No, there's no receivables on our books to be written off.

What was -- I thought there was something on forgiving of the debt that was owed?

John, as part of the settlement, we agreed to not pursue any past debts from those franchisees. The fact of the matter was we had already written them off years ago.

Okay. So that was never carried on the books, then?

Correct.

No.

Okay. And what do you see as the real -- it seems like there's some positives to come out of this from your slide presentation. What would you say has been the biggest change in the business with the settlement of this suit?

Well, John, what it -- yeah, I mean, I think clearly what it enabled us to do is put all that behind us and focus on the franchise system improvements and other initiatives that we've been talking about throughout 2006. And that's probably been the biggest benefit to us of getting the settlement behind us. And --

Let me just add something to that. I think there's more things than just that. I think the whole thing of this business planning process, where we said, you know, we've completed that this year. That's something we hadn't done in the prior years. So every franchisee, you know, had a business plan review, and I think that, you know -- so we made them aware. We were obviously even running some we call boot camps to help them with their skills, to enhance their skills in running their own business. So I -- and then, you know, we've got a lot of new product coming. Our fill rates, our complete and on time deliveries have obviously improved. And so we're treating them more as partners. I think in the past, we may have thought of them more as maybe employees. But they're really partners with us, and we're certainly, you know, treating the franchisees in that manner and encouraging them through a lot of different programs that we have to get it involved, enrolled, and I think it's making a heck of a difference.

Now, you commented earlier in the call that you would -- that we should expect to see franchisee numbers grow, in terms of number of franchisees during '07. Would that be existing franchisees taking on more geographic areas, as we've seen in the past, or would these be actual, you know, new franchisees taking on abandoned geographic areas?

John, John, these would be new franchisees taking on territories that, you know, need coverage today. And that really, we believe, will start occurring in the second half of the year.

So you'll probably begin some more of a promotional campaign to recruit new franchisees, then?

Well, not only -- I mean, we do not have a problem with recruiting. That's not a -- we have a very large list of applicants. What we are really working on is the selection and the training process to ensure that, you know, we select the right individual for the positions.

Okay. Great. Well, congratulation. Thanks.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to David Leiker with Robert W. Baird.

Good morning.

Hi, David.

Just a couple number items here. That $70 to $75 million D&A for next year, what's the mix between depreciation and amortization?

Probably $50 in depreciation and the balance in amortization.

And the intangibles from there are getting amortized over what time period?

We added, David, about $190 or so million of intangibles in ProQuest and about $160 is over 16 years, and the balance over 5 years, and that's what is driving the increase in amortization.

Yeah. Okay. So did you say 16 years?

16 years on about $165 million of that $190.

So that will be around for a while?

Yeah.

When you -- when you take a step back and look across the business, just from an operational prospective, and you have had a lot to do over the years, you know, where are you now in that process of just kind of getting things running better? I mean, are you through most of that and caught up? It'smore ongoing things at this point, or are there still kind of project related items?

David, we're certainly not caught up. We -- you know, we had a lot more to do. You know, on a scale of 1 to 10, I think maybe we're someplace between a 2 and a 3. I mean, we just have great opportunities in every facet of our business. I just -- One of our sites, one of our plants last week -- probably one has done the best job so far, but there's still huge opportunities. And we -- in fact, we have another [Shizagitsu] event with them the first week of March at this particular plant, and we have one later in the year. So, yeah, we got -- we're moving into new markets. The emerging markets. So we're just starting, you know, some of this. I mean, we're -- so 2006 was kind of -- we made some steps forward, as we said, and our results show that. We've got more to make, and that's why we laid out our 2010. Like we just had a management conference and talked about 2010 and beyond, and what's going to drive us. And I won't share those numbers with you, obviously, but you know our folks -- these were plans that were built from the ground up in the organization. They weren't from the top down. And we felt at the top, you know, the corporate management felt they were very doable, a lot of hard work, but would be very rewarding.

And as you look at that $18 to $20 million I guess for restructuring for next year?

No. The $26 to $30 million, up a little bit from the $22 million this year.

Yeah, sorry, I was trying to grab the number as I was talking. $26 to $30. Is any of that kind of bigger actions, plant closings, head count reductions, or more of a continuous improvement type spending?

Well, it's both. As Marty said, we're closing -- we plan to close, you know, our Johnson City, Tennessee, plant. And different than what we had done in the past with our closing, the receiving plants are already up to speed and know exactly what they need to do to produce the screwdrivers, and that's what Johnson said he was doing. You know, some of the products had previous -- you know, had been moved, but the screwdrivers are the remaining products. So we feel very comfortable. We know what we're doing, and, you know, we're continuing with the rationalization in our European facilities of moving to lower-cost sources, and we continually look at some other opportunities we believe we have in the United States for further consolidation. That's to drive out our overhead cost while improving our productivity.

When you look at your manufacturing footprint, how much more of that do you think you need to consolidate?

Boy, David, I'll tell you what, I -- in my prior life, we did RCI, we thought we needed capacity, and we bought a company that had five plants, and two years later, we ended up closing all five of them because we didn't really understand what the RCI, or rapid continuous improvement can do for us. And so, you know, there may be some more -- I don't think they'll be significant, because I think we'll continue to grow. But I think as we do that, we'll do it with less inventory, we'll do it with higher productivity, and in essence, we'll do it with less costs.

Okay. Thank you.

I don't think there will be anything major -- you know, if I had to look out and speculate 2008, we may not be at this level, but there will always be some, because we continually rationalize through our rapid continues improvement programs.

Okay. Great. Thank you.

We'll go next to Seaver Wang with Utendahl Capital Partners.

Hi. Good morning, guys.

Good morning, Seaver.

A quick question on actually, on CapEx, it's you're forecasting $50 to $60 million. What's the additional $10 million or possible $10 million for?

Well, ProQuest brings a little bit of capital spending, as we define it, as they develop products, and the balance is our early view of some additional spending we need to make as part of both the supply chain and manufacturing initiatives and Snap-On tools.

Okay. So looking further out, is that 50 million -- say $ 55 million range, kind of going to be more steady, or do you see a little bit more of a ratcheting up?

I don't have a crystal ball, but for your purposes, now, Seaver, I would say that appears reasonable.

Okay. I want to go back to Blue Point. Can you give us a margin comparison between Snap-On brand and blue point, considering the lower price point, but also the difference in -- where it's manufactured.

You know, I -- you know, the margins, you know, are very comparable.

Okay.

So, you know, the price point is lower, but, obviously, the cost is lower as well. And as I said earlier, that, you know, most of the sourcing is occurring outside of the United States. So let's be honest, most of it is in Asia Pacific, and so, you know, the margins are still, you know -- are about equal.

And when you are going overseas, is Blue Point or Snap-On, is there a --.

hello?

Seaver, we lost you.

[OPERATOR INSTRUCTIONS] Okay. Mr. Wang, your line is open.

Okay. Is there more of a push for a Blue Point or Snap-On overseas?

Oh, I --.

considering Snap-On might not be as strong a brand overseas?

No, Snap-On is a very strong brand for a certain type of customer. You know, and so I would say in our franchise system -- and keep in mind we run franchise systems primarily -- you know, obviously in Canada, Japan, Australia, United Kingdom, you know, Netherlands, you know, Germany, South Africa. So, no, I think they'll be very comparable to what we're doing here. In fact, that's the reason why we ran the first pilot in Australia, just to get a feel of what their reaction would be. And as I said in the call, was very positive. We captured new customers that, you know, obviously we had passed by previously. So, no, I think it will be very comparable in the franchise system.

Okay. And then one last question. The percentage between the amount of inventory in the trucks between Blue Point and Snap-On, do you have, like, a percentage that you would be comfortable with? I mean, could you see -- obviously, at Blue Point, there is more of a push now to sell those, or it would be more available, at least, and so that will obviously increase as the percentage of the inventory per truck?

I'll tell you what will happen. Every franchisee will be different, but clearly Snap-On will be the larger -- by far the larger share of the inventory both in value and in SKUs. Because the product offering in Snap-On brand will be broader than it will be in the Blue Point brand.

Okay. I see. Thank you.

Uh-huh.

[OPERATOR INSTRUCTIONS] The next to Boyd Poston with Gallatin Asset Management

Good morning. On the pilots, I think you had seven franchisees in the third quarter, 16 in the fourth quarter. How many in the first quarter, and what kind of timetable would you have before it would be rolled out to all of the franchisees, some sort of pilot.

Well, first of all, the last ten that went on, went on late in the year, and so we're still following those. So the results of those -- we've got some early indications, very, very positive. But, you know, we're still tracking -- each of the ten we did different things with, and so we could understand what would be -- what we felt would be the largest thing as we rolled out. Now, the roll out will commence. In fact, I'll be honest to you. We are working on that program as we speak. So it would be too early for me to tell you, you know, what the roll out is going to look like. But it will progress throughout 2007.

Okay. As far as the spending on the supply chain and field support, you thought that would be pretty much wrapped up in the fourth quarter, but some spill over in the first half of this year. Do you have the amount of spill over that might be in the first quarter or second quarter, as far as spending on those two?

Boyd, we spent -- we had a range that went as high as $18 million earlier in '06 that we'd spend on the various initiatives. We actually spent about $13.3 million full year in '06. We're actually going to spend another $4 to $5 million throughout '07. More than half of that, which is going to be concentrated in the first half is in the supply chain, and particularly in our Crystal Lake distribution center. So that's the guidance right now in '07 on what we consider to be nonrecurring strategy-related spending.

Okay. And as far as ProQuest initially accretive in '07, do you have any up date to that statement?

No. I think we provided you all the numbers, so I think you can now run the numbers.

Yeah. Okay. Thanks.

Thank you.

And we'll take a follow-up question from Jim Lucas with Janney Montgomery Scott.

Thanks. Bigger picture question here, two of them. One, you're going to have a little bit of digestion here with the business solutions acquisition, but can you talk about potential usage, capital deployment going forward, given the strength of your balance sheet and the cash flow that you're generating? And, secondly, I just wanted to see if there was any update on the succession planning, Jack.

Sure.

Jim, let me take the first part on capital deployment. You know as well we made the ProQuest acquisition because it fit a very well defined strategy that was developed actually, a number of years ago by the Diagnostics and Information Group. We have nothing else planned of that magnitude. Our capital deployment now will be sort of stay the course. We now have debt. Some of it was specifically tenored to be shorter term so that we can apply our cash flow over time to debt reduction, as we had previously done. For the time being, we'll continue with our dividend policy. Our board will continue to review that every quarter, and we'll continue to buy back shares to offset dilution.

Okay.

And, Jim, let me -- I can bring you up to date on the succession planning. Obviously, as we said in the past, there's been a process that the board has, you know, utilized, is continuing to utilize. We have identified some internal candidates, you know, external candidates, as well. The board is in the process of evaluating all of those candidates. I would think that perhaps, you know, some time, you know, mid to third quarter, there may be an announcement. It's too early to tell because the evaluation is still ongoing. I will continue to be involved with the company in some capacity going forward, at least into 2008.

Okay. Thank you.

And, Mr. Ellen, there are no further questions at this time.

Okay. Thank you all for joining us this morning. We appreciate your attendance.

Yeah. Thank you.

That concludes today's teleconference. Thank you for joining us.