Snap-on Incorporated (SNA) Q3 2007 Earnings Report, Transcript and Summary

Goodday, ladies and gentlemen, welcome to the 2007 third quarter earningsconference call hosted by Snap-on Incorporated. (Operator Instructions) I wouldnow like to introduce your host for today's conference, Marty Ellen, SeniorVice President Finance and Chief Financial Officer. You may begin yourconference, sir.

Thankyou, and good morning. Thank you for joining us today to review Snap-on'sthird-quarter results. With me this morning are Jack Michaels, Snap-on'sChairman and CEO and Nick Pinchuk, Snap-on's President and Chief OperatingOfficer. Iwill begin our review this morning with our third-quarter financial results.Nick will then provide some additional commentary and Jack will share hisclosing thoughts. Afterwards, we will take your questions. Consistent with pastpractice, we will use slides tohelp illustrate our discussion. You can find a copy of these slides on ourwebsite, next to the audio icon for this call. These slides will be archived onour website along with a transcript of today's call. Anystatements made during this call relative to management's expectations,estimates or beliefs or otherwise state management's or the company's outlooks,plans or projections are forward-looking statements and actual results maydiffer materially from those made in such statements. Additional informationand the factors that could cause our results to differ materially from those inthe forward-looking statements are contained in our SEC filings. This call iscopyrighted material by Snap-on Incorporated. It is intended solely for thepurpose of this audience; therefore, it cannot be recorded, transcribed orrebroadcast by any means without Snap-on's express permission. With that said,I will now begin our discussion with slide four. Webelieve our third quarter result showed the continued progress being madeacross all of our businesses in improving quality, delivery and customer care,driving innovation, strengthening our brands and reducing overall complexityand costs. These improvements are facilitating our ability to increasinglycapture profitable growth opportunities which were demonstrated again thisquarter with sales up 14.5% and operating profits up almost 59%. Net sales of$681 million in the quarter were up $86 million or 14.5% over last year, withsales increases across all segments. The November 2006 acquisition of BusinessSolutions contributed 8.2 percentage points of growth, while currency contributed3.3 percentage points. The balance…

Thanks,Marty. For those following the slides, my comments are outlined beginning onslide number 12. I would say we are in -- I would say our third quarterrepresents another encouraging step on the path of improvement defined by ourstrategic initiatives. We are particularly pleased with the balance of theprogress, both volume gain and cost reduction contributed substantially to ourimprovement in this quarter. I am going to landscape that for you in theindividual groups in a minute, but before we go further, I want to -- I want torecognize that our continuing progress is the clear and direct result of ourSnap-on associatesaround the world. My thanks to all of you for your contributions. They havebeen extraordinary. I also believe that it is important to highlight the rolethat great product plays in our performance. Innovation has been an importantpart of Snap-on's strengthsince its founding. Inthe past quarter, we have again seen more tangible evidence of that strength.We are extremely pleased to have received three of Motor Magazine's 2007 awardsfor innovation. They are pictured on the slide. The first is the Snap-onVariable Length Extension. It is a spring-loaded device that increasesproductivity when you are working in tight spaces. The second is the BFH 800Wheel Balancer. It uses Snap-on's unique laser-enabled systems and it createsthe fastest balance in the industry. And the third is the ETHOS, which is theunit which provides great diagnostic power to entry-level technicians. Theproducts so recognized, span a range of our operating divisions from tools toequipment to diagnostics, so we are pleased about that. At Snap-on, innovationis an essential part of our ongoing commitment to our customers and it is areally key element of our growth going forward. In that regard, we are proud ofthe recognition we consistently receive from both our -- both the industry andfrom our customers. Now, let's…

Thankyou, Nick. You know before you now, you have -- you should have a document onyour slide that is labeled "Who We Are." This is a guiding documentfor our entire worldwide organization. And you can see our beliefs, our valuesand our vision, but clearlyunderstanding our mission. Now, as Nick just talked about, the importance ofour business fundamentals, you see the safety, quality, delivery, which is ourcomplete and on-time deliveries, innovation and costs -- obviously as you lookdown on the belief column, you can see those. And you see -- understand howwhen they truly hang together can provide a sound platform for aggressiveprofitable growth. Now,as I look at the many areas where we are making improvements, and mostimportantly how we are making them, I am beginning to see the development ofour own business model. A set of documented sustainable processes, whichhonestly, I don't think we have had in the past that aligned with and supportexecution of our strategies. There may be nothing more powerful and importantfor our future success. Now, there are a number of well-known and trulysuccessful companies who have done this and their success is admirable. Now, weadmit today that we are not at those levels. In fact, since I know someone willask me I will ask and answer the question now. On a scale of 1 to 10 where 10is never achievable, where are we in our transformation? Maybe we are at 3,perhaps 3.5 and moving towards 4. That should help you understand how much moreadditional opportunity I see for Snap-on. Ourmanagement team is focused and committed. And the organization is becomingincreasingly enthusiastic about our opportunities as they see what we have beenable to accomplish. And I want to thank all of our associates for their effortsand contributions and for their continued support. Now, operator we will open thecall for questions.

Wewill take our first question from Alexander Paris at Barrington ResearchAssociates. Alexander Paris – Barrington Research Associates: Goodmorning, great quarter.

Goodmorning Alex. Alexander Paris – Barrington Research Associates: Butyou expect that nowadays, anyway, right?

Absolutely. Alexander Paris – Barrington Research Associates: Ijust want a clarification on this OEM facilitation contract. You called that awind down. Are you really talking about -- you just -- you had -- establishingthe contract last year, you are just having a negative comparison against avery strong year-ago?

That'sright. What it is -- this is Nick. The contract is fundamentally to supply anessential diagnostics to a finite number of dealerships in Europe. And as you supplythem, as you work your way through the system, you have fewer and fewer. So, atthis point, we are supplying them to the last few trailing dealerships and thenthe contract is ended.

Thisisn't one where you're running the book on a broad range of products for –

No,no. That is the other part of the business. The EQS business has two sides. Oneis you are in effect like a distributor.

Right.

Youprovide -- you provide a wide range of products for dealerships. And that is anongoing basis. You have a contract with them. And you can gain the contract orlose the contract, but it tends to be start up from the beginning at almostfull level and then end very abruptly. This is a particular contract for a particulardevice, which we call an essential diagnostic that addresses a certain set ofmodels for -- for one of the OEMs in Europe. You roll it out to thedealerships, and once all the dealerships have facilitized themselves, theprogram is over.

Oh,I see. Okay. Thank you. I just want I see -- would -- you had really goodmargin improvements on operating basis overall in all the segments. Can youjust review, just very briefly what your targets are, longer term over the nextcouple of years?

Alex,this is Marty, and I -- I know we have said this before. If you look at the mixof our current businesses today, the way we think about the model, say out to2010, gross margins in and around the mid-40s and operating expenses in thevery low 30s. Yieldingsort of middish, mid-teens or so operating margin which is, as we've saidbefore and truthfully just puts us really where many other industrial companiesare operating today.

Andthis would be kind of a gradual improvement toward that range?

Yeah.But I am also pleased to say that when we set -- we had set a previously lowerexpectation for profitability in 2008, our results and where we are in our keystrategies and initiatives tell us we are probably ahead of schedule.

Okay.Thank you. Just one other kind of a knit-picking question. You mentioned inthose products that laser re -- a wheel balancing system. Is that your own thatyou developed or is that someone else's that's –

No,it is ours. It fundamentally takes a laser beam and profiles the tire andtherefore, by doing that profile understands where is the imbalance is in thetire. It is very effective to watch. You spin in the tire for a fewrevolutions. You understand where the imbalance is and the laser will pinpointexactly where to place the weights.

Whatis the price of the product to the –

Youknow, I want to say that the price is around, what, maybe $4,800 -- no, sorry,a little bit more than that, more like $6,000.

Becauseit seems to me like that is a pretty major breakthrough. I know there aresystems out there being sold to OEM companies to go on the production line, butI have always heard that although it is great they'd have to get that down to adecent price before they can sell that to dealers. Is that a -- sounds to melike that is a pretty good breakthrough for a very good product.

Itis a very good breakthrough. Before I have a number of people beating down mydoor over pricing, it is more like -- more like $6,700, $6,800 in terms of thestreet price are up. Approaching $7,000, but the thing about it is, this is agreat productivity advancement and actually if you look at our -- if you lookat our equipment progress over the last several quarters, there has beentremendous advancement in our wheel service position, particularly in Europebut also in the United States and it has been fueled by this kind of thing. Thewheel service business in -- in automotive repair is going more toward imaging,either taking a picture -- either in alignment where you take a picture of thewheels and -- and create an alignment around that picture or profiling thetire. And Snap-on, I think, arguably is further down the learning curve inimaging technology than any other -- then any other competitor. It has beenoffering products like this like our imaging aligners and like thislaser-guided balancer and the share -- and the share is -- is moving forwardshowing that. After all, this is what we believe we are about. It is part ofWho We Are. It represents some -- the most valued productivity solutions in theworld. The balancing here literally is the fastest in the industry. If you arein a shop, an OEM or tire shop, and you move volumes through that shop, you getgreat, great advantage to this and customers are starting to see this.

Great,thank you very much.

Wewill go next to Jim Lucas at Janney Montgomery Scott, please go ahead.

Thanks.Good morning, guys.

Goodmorning, Jim.

Thanksfor anticipating the question, Jack.

Youare welcome.

Acouple of housekeeping questions first. If -- as the portfolio has changedhere, could you bring us up to speed in terms of, number one, if you look atthe Commercial and Industrial business of tools versus equipment, how that iscomprised, and not specificallyfor C & I but the overall company, also give us the geographic breakdowntoday.

Jim,in terms of the C & I segment, the tool -- the equipment business ratherthe under car equipment business is roughly one-fourth of the total segmentsales.

Okay.

Interms of total geographics split of our revenues on a global basis, a littlemore than half is in the U.S. with the balanceoutside of the U.S.

Andis that in terms of Europe versus the emerging markets. That is what I wastrying to get a handle on is --

Today-- yeah, I mean, today, clearly there is much more in Europe than in Asia. And that's why Asia --we are doing well in Europe as are a lot ofcompanies, but not just because the economic situation there because as Nicksaid, we have -- we've really done alot in innovation, probably more than we adequately could cover on this shortcall. Asia is an enormousopportunity for us. I mean, we are growing there at 18% in the quarter. Yeah,it is a relatively small base, but lots of opportunity. As Nick said we expandedour factory in Kunshan. We are going to make other investments in China in the near term. We'vegot some exciting plans, I think. And I don't know if we are a late entrant ornot, but this there is clearly lots of opportunity.

Ithink this is important -- this is Nick. I think it is important to realizethat we really started in Asia about three or four years ago. And whatwe are doing is we are building a product line and a distribution. And it isaccruing to us pretty effectively now, but weare still in early days in positioning the proper product line in Asia for taking fulladvantage of that. The good news about that is, the Asia market is growing. Itis attractive but it is pretty much unclaimed. So, there is lots of -- lots ofwhat I would call runway for expansion with the proper products and the properfacilities in place, and we are getting those.

Okay.And the number of dealers at the end of the quarter?

Okay.Jim, let me connect some dots around the -- you are talking about the franchisesystem.

Right.

Roundnumbers, we had about 3,000 franchisees. So, let me give you some -- some datapoints around -- what our franchisees and very important our franchises.Because as everybody knows that we lost some franchisees over recent periods, someof our betterfranchisees have taken on second franchises which allow us to cover the marketbetter. So, if you actually look at – and franchises -- franchises is reallythe way to think of our market coverage. This quarter was flat when it comes tofranchises – the franchisee count was down 8/10 of a point, I said less than 1%in my remarks. But in terms of market coverage and that’s because we picked upmore -- more seconds. What I didn't say in my prepared remarks but should sayreally here is that the through-put, the sales through the franchisees - and wecare about both - we care about market coverage in terms of franchises, we careabout the health of the franchisees. You know, we picked up through-put interms of year-over-year growth in sales to our franchisees, a fairly strong 8%and it was roughly split in thirds around our RWD growth, which is reallymarket share gain that we are taking away from warehouse distributors, ourmid-tier sales, much of that we believe is market share gain and then still athird, over 2. 5%, coming from Snap-on and I hate to use the word core -- butyou may think about it some of our core and more historic products. So,that was pretty good. The reason that the U.S. reported only about 4%year-over-year growth. They had good diagnostic sales. From an accounting pointof view, we defer some of that revenue because there is some software we'lldeliver in later quarters. That revenue will come back in later quarters. Nickcommented on lower turnover. That had an impact. So, we are really pleased withthe level of velocity of through-put and the year-over-year growth in thatthrough the franchisees.

AndI can add some local color to that. I just came back from the franchiseeconference in Canada, which had about 300people -- 300 franchisees, 300 people and 300 franchisees in conference in Calgary and I would say themood was tremendously upbeat. When we look at the -- when we look at themetrics and we see van sales up, the purchases up, and we see all the othermetrics going in the right direction and turnover down, I have to report thatit is reflected in the attitudes of our franchisees. They are dedicated andthey are optimistic about the future. They know we have more to do, but theyrecognize the improvements that have been made and they say that it's enablingthem for further advancement and having a favorable outlook on their business now.

Okay.Final question, philosophical one. Jack, you talked about the -- that a -- thata system is being developed a lot more standard work, documented processes inplace. As you look at the progress that has been made here at Snap-on, and youthink about what is left to do, can you maybe frame from a priority standpointif you were looking out over the next 12 to 18 months of -- of what you see askind of the pressing priorities still?

Yeah,I think -- Jim, I think we have made improvements on all fronts, butnonetheless, I think the -- the greatest area of improvement for us going through2008 is going to be focused on productivity improvement. Now, the way wemeasure that, it is at a high level. If you get down to a cell, it's measureddifferently. But at a high level, we are looking at sales per associate and allof our business, and we are going to pay a lot more attention to that on asingle focus next year because as we do that, it will help improve ourflexibility in our plants. As Nick said, we offer more SKUs than anybody elseso we have to be able to -- you know, have great flexibility in our plants andwe are improving it but we are still not where we should be and we'll also improveon our complete on-time deliveries and therefore our sales. So you understandit very well. So I think we are going -- we are going to put a lot of attentionon just productivity for next year, and as we did in our safety program, wejust focused on one element of it, which was our incident rate, and we madegreat improvements and went from a 13 incident rate level down to 3 -- below 3,almost 2. That may not mean much too many of you but that's an OSHAcalculation, and but it shows what we can do when we really get focused and weput process steps in place and realize results. So that's exactly what we arein the process of doing. Now, we want to carry it a little larger. You know,some of the well-known competitors that we have for one, for example, you knowwho we are talking about, have done a great job with their business system. Andso we believe we have moved far enough that we can start thinking of that, andwe will be developing that. And there are several other elements to that likeour innovation, et cetera, new product development that we think will be partof that. But we will -- we will be documented and as we go forward we will keepyou informed.

Letme -- Jim, let me add -- just something. This is Nick. Let me add justsomething about that going forward. We see substantial opportunities, substantialrunway for growth. We will be talking about that a lot and we will be trying totake advantage of that with our execution. But make no mistake about it, weknow that ongoing cost reduction and improvement is an essential part of our future.So, things like Jack referred to, like a business system that will -- that willenable our operations to focus on productivity aregoing to be front and center in our management discussions and the focus of allof our people going forward.

Great.Thanks a lot, guys.

Wewill go next to Jonathan Steinmetz at Morgan Stanley. JonathanSteinmetz – Morgan Stanley : Great,good morning, everyone.

Goodmorning, Jonathan. JonathanSteinmetz – Morgan Stanley: Thefirst question I had is I guess you guys are sort of talking about the abilityto achieve a mid-teens operating margin by 2010 and it seems like a lot of that-- which I think you are talking 300 to 400 basis points of improvement versuswhere you are today, a lot of that seems like it will come on the operatingexpense side of things. Can you talk a little bit about how much you see that asmore effectively leveraging an increase in sales and how much is a reduction inactual operating expenses and to the extent there is a reduction, where doesthat come from and what is the key driver of that?

Well,John, it is Marty. Good morning. First of all, don't minimize at all the growthopportunities. Again, I think we demonstrated this quarter that organically wehave a lot of good things happening in our businesses, and we believe ourbusinesses have organicgrowth capabilities in the mid to high single digits. So, and as I saidearlier, I mean, we are trying to get our operating expenses in the low 30s. Ifyou run all the numbers, maybe that would be higher than mid-teens. I don'twant to go there yet. I don't want to get ahead of ourselves, but we areactually very encouraged by the growth opportunities in our businesses. Our industrialbusiness, for example, in the commercial segment, which did great this quarter,is really into some end-market segments that have pretty good growthopportunities. We have lots of -- as you know, going on in the franchiseebusiness in terms of our product offering and the breadth of our product lineand we are seeing great gains there. So, as we look out the next three years, Imean we are actually very encouraged by our growth opportunities. Diagnosticsand Information we haven't talked about in this call. There is a lot happeningthere both in the core businesses, as well as in Business Solutions. So, I havegot to tell you, if we can obviously overachieve on the top line, you know, wewill do very well.

Letme -- this is Nick. Let me just put some landscaping on that. I think we arelooking for balanced progress as we go forward. We feel pretty good, prettyenthusiastic about our growth opportunities. The van business has substantialopportunities. It has open routes we haven't filled. It has purchases in themidtier, that our existing customers go else where now. We can capture thoseand there are a number of technicians we have never reached and we can. Martytalked about the industrial business and I think it's a little understood pieceof the business. Fundamentally, we have 500 direct salesmen. These are peoplewho have tremendous technical capability. They go forward and address otherindustries like -- like manufacturing or oil and gas or – or the government. Andnow that we have been able to enable them and arm them with good and betterdelivery and new products, together with the wide product line, we seetremendous runway along that -- along that route, and then finally – or notfinally, but the OEM garage. The -- the repair garage. The management of repairgarage in terms of repair information and shop management and parts catalogs,we see this as a growing opportunity for us. And then when you lay on top ofthat emerging markets, we are pretty excited about the possibilities. JonathanSteinmetz – Morgan Stanley: Butdo you see and I appreciate all the growth opportunities, but if for any reasonwe were to hit sort of any macroeconomic pothole or anything like that and thetop line were to come in weak or so there was less ability to leverage it, arethere more plain vanilla cost reduction type opportunities that you see and ifso, where would those be concentrated?

Well,I think the concentration is -- is a lot of different places. I don't thinkthere is any particular concentration. I think we have done a good -- some job-- some reasonable job of taking cost out of our product in recent quarters.But when Jack and I walk around our -- our back office situation, our backoffice activities, we see opportunity everywhere. So, while I wouldn't -- whileI wouldn't characterize it as any one area providing a mother load orlow-hanging fruit, I think that Jack and I often talk about the fact that oneof the great things about Snap-on is almost everywhere we look we seeopportunities for RCI to create more productivity.

Wehave 103 associates dedicated that have been trained to some degree and we arecontinuing to train them, just working with the rest of the organization atsites around the world on our RCI programs.

I-- I could add to this. I think these -- these are businesses -- I amrelatively new here. These are businesses that have been classically doing wellbased on brand and innovation. And there is a lot of opportunity forproductivity advantages as we manage moreaggressively going forward. JonathanSteinmetz – Morgan Stanley: Okay. Just a couple of other ones. You talked about the wind downon that OEM facilitation business, are there any costs on that that would besort of be in the quarter lingering where as that winds down those comes out insort of a step function way or does the cost wind down as the revenues havebeen winding down?

John,this is Marty. There is not a cost wind down and that business unit today as wesit here is in fact, bidding on and negotiating new contracts. That is just thenature -- the issue with the business when we try to do these quarterly compsin our numbers is ofcourse the volatility that is created by the timing of these programs, butthere are a number of programs that we are bidding on and actually expect to besuccessful on, that will replace that business. JonathanSteinmetz – Morgan Stanley: Okay. And Cap Ex levels as you think forward into '08, would youexpect to remain where we are this year? Or do we need to go up to -- to sortof take advantage of some of the growth opportunities?

No,I think they are going to be about the same levels. JonathanSteinmetz – Morgan Stanley: Okay.And lastly, I am surprised no one has asked it yet, so I will toss it outthere, credit trends in the credit company, any metrics you can provide us interms of delinquencies among end customers or anything like that, given what isgoing on in the sort of macro -- from a macro perspective?

Thatis a great question, Jonathan. Let me remind everyone on this call that we havebeen in the sub-prime lending business for decades. But we run it as abusiness. Every customer is properly credit scored. We don't do everytransaction. And I think as allof you know the pricing on those contracts represent the risk in thosecontracts. So, there are no funny or, you know, strange structures that we doin an effort to gain business and those of you who that have followed us knowwe have been doing this a long time. Actuallywith respect to losses and delinquencies, they are down. And one of the mostimportant predictors of future losses is our 30-plus-day delinquency and I willtell you that it is at -- it is now lower and substantially lower, probably 40%lower and runs inthe 3% to 3.5% range than it was at this same time two years ago and it washigher at the same time a year ago. Not withstanding what you read, ourportfolios are performing well. As all of you know, it is a model that is verymuch managed by and influenced by our franchisees who collect. So, probably acouple of years ago we had a little more turnover in the system. Thedelinquency data reflected that. We have improved on that. People know we arenot embarrassed to collect money. Our franchisees are not at all -- not at allafraid to take back toolboxes and tools. And so we have always been verydisciplined in this area. We are pleased. Given what is happening in the macroenvironment-- we are very, very pleased with what the data is telling us.

Letme just again add on that that in a macro sense, of course, no one ever wantsto see disruptions in the marketplace, but as Marty just said, all the data wecan look at, turnover, delinquencies seem to be moving in the right directiondespite the apparent headwinds of this. Secondly, when we look at our businesses over time, they are not- our van business over time, it is not particularly vulnerable to interestchanges. And remember this, when a technician purchases a tool, it is aproductivity advantage. Hepurchases that tool because it makes him more money. It is his path for more --for more income. So they are -- they place those purchases very high onpriority levels. So, they don't back out of them very easily. And then onefinal point. What we are seeing thisquarter is balanced strength. Yes, we have a good van business, but we have gotgreat industrial business. We have got strong positions in Europe, and we are -- and weare building a position in Asia-Pacific. So any one particular jurisdictionthat gets affected by economics, we have some offset. JonathanSteinmetz – Morgan Stanley: Great.Thank you very much. Very helpful.

Thanks.

Wewill go next to David Leiker at Robert W. Baird & Co., Inc. David Leiker - Robert W.Baird & Co., Inc.: Goodmorning.

Goodmorning, David. David Leiker - Robert W.Baird & Co., Inc.: Iwas wondering if you can put some items in different buckets for me. When youlook at -- I apologize for the voice -- I am in the process of losing it, butwhen you look at the margin gains. You are actually seeing them accelerate herein the last year versus what you have been doing over the prior two or threeyears, and I am sure it is a combination of things. If you could put some coloraround how much of this is revenue growth. How much is Business Solutionsbusiness which had higher margins and how much is -- is a focus on the costside?

Okay,David. You are talking about operating profitability. Well, you saw the salesgrowth. And we don't separately call out the financial result of BusinessSolutions, but clearly that's -- that's having some -- some effect on theexpansion of our margin. I thinkwhen we first showed the numbers for Business Solutions, you saw it representedjust under -- roughly 10% of the company's total sales. So you can -- you cansort of do that math with the data we shared back when we did the transaction. Itseconomic model is clearly intact. You -- you can go by segment here. There isno question as we said on the call that, you know, we are able to use RCI to, forthe most part, more than offset headwinds we have gotten in -- in costincreases. And you can see the improvement in the operating expense ratio -- Idon't know what that is offhand in terms of a percentage gain. You guys can alldo the math. And you can sort of work through the organic top-line growth whichis somewhere between 3% and 8% depending on how you think about the OEMfacilitation business. Thereis no question more of it is coming from the lowering of expenses as a percentto sales, but it is not really cost-cutting. There is no question we areeliminating waste, and that is a form of cost-cutting, but we are also seeingthe drop-through effects of incremental sales. I mean, you know, the greatthing about this business, we have got some real premium products. They arehighly valued products. And we have businesses that, you know, at theincrement, you know, can drop through at the gross line 50% or more with very-- very little direct selling if you will in the SG&A side. That's why withnot huge growth numbers we can get very, very dramatic improvements inprofitability. David Leiker - Robert W.Baird & Co., Inc.: Okay.So as we look forward, do you think that those drivers behind the margins arecomparable going forward? Or does it shift somewhat among those three items?Obviously revenue growth is -- there continues to be -- a big turnover.

Overthe long period -- I don't want to think beyond 2010. Right now as I have said,you know, whatever, 34.4% in OE -- we think that with very little growthtruthfully -- and this will go back to Jonathan's comment a little bit -- ifyou really understand the powerof RCI and you look at processes, and you don't realize how much waste is reallyin processes, whether it’s five days to process an order that should be fiveminutes. When you really get at this, there are a lot of areas of waste. And weare just getting at it verymethodically. Webelieve that we can drive ROE today without much top-line growth down into the32% range. That has always been our internal plan, not relying on any growthreally to get there. That should tell you the amount of opportunity we see inour current business. Over the very, very long term, be unlikely that you willdrive, you know, four times operating profit improvement from -- from your topline, but between now and 2010, we have got a lot of opportunity to sort of dothose sorts of things, to end up with those sorts of operating profitabilitygrowth relationships to sales growth. David Leiker - Robert W.Baird & Co., Inc.: Okay.Should we expect any more gains from the LIFO accounting going forward? Or hasthat run its course?

Well,you know, look, as you further reduce inventories and we didn't talk much inthis call, we think there is more opportunity there that is a by-product. David Leiker - Robert W.Baird & Co., Inc.: Right.

Itry not on the call to separate out the effects on the rate of margins so tothe extent you see that as nonrecurring or non-operating, however you thinkabout LIFO versus FIFO, to help you guys with the margin comparisons. David Leiker - Robert W.Baird & Co., Inc.: Howmuch lower do you think you can take your inventory?

Well,David, at 4.6 turns -- you know Jack is over here sort of smiling -- you knowwe think substantially. If you look at our – you guys look at our Qs and Ksyou'll see that most of our inventory is in finished goods. That is why we aredoing all the work around thedistribution centers and created, if you will, our 80/20 which that drove oursynchronized supply chain and is driving us to handle the high volume SKUs verydifferently than the low volume, which not only helps our complete and on-timedelivery which is a critical measure of customer care if you will for ourfranchisees and customers, but also is going to drive down inventories.

Flexibilityin the manufacturing plants.

Flexibilityin the manufacturing plants is the other piece of that equation. When you getflexible, as everybody knows you no longer really have to produce to a forecastand now you can produce to demand so you are not producing excess inventory or inventorythat you don't need. There is a lot of opportunity there. David Leiker - Robert W.Baird & Co., Inc.: Okay.Do you have a currency number for payables?

Acurrency number? David Leiker - Robert W.Baird & Co., Inc.: Foraccounts payable. How much?

Somebodyis telling me 6.2 -- is that dollars or what is it?

$6.2million.

Shedoesn't want to speak. $6.2 million, David. There it is. I can't know anything.

Iguess we don't know.

Igive credit to all of my people. David Leiker - Robert W.Baird & Co., Inc.: Ifwe look at the Diagnostics and Information, if we pull out Business Solutions,roughly 50 million and you add back in the facilitation and call it 20 million,you have a revenue number that is flat year-over-year. I am just -- either mymath is wrong or I'm trying to reconcile that with the fact that sales are up10%.

Letme do that for you because my comment went to sort of our core Diagnostics andInformation which is essentially the Mitchell business. You know ourbusinesses, the service information and shop management business, as well asour diagnostics business,fundamentally handhelds and [inaudible] software. In forming that comment Ishould have been clear, recall that a year ago, we took out of that segment --we made some noncore products, air conditioning products, battery chargers at aplant down in Mexico that we got rid of. David Leiker - Robert W.Baird & Co.: Right.

Forpurpose of that measurement. What I wanted to communicate was when you think ofthe core across Diagnostics and Information... David Leiker - Robert W.Baird & Co., Inc.: Okay.

…wethink is really high value-added. We actually did very well when you make thecomparison that way.

Ithink the thing -- the thing about that area is the place we are trying togravitate toward which is supplying the shop ownership with products whether itis repair information or shop management or online parts catalogs or even someof our new diagnostics productslike the SOLUS PRO which just came out, those seem to be selling very well andso when we isolate on those core businesses as Marty did, the quarter looks prettypositive and we are encouraged by that. David Leiker - Robert W.Baird & Co., Inc.: Twolast things and I will just throw them out together and you can deal with themindependently. If you take the midtier product in the RWD business and thetools business, can you give us some sense of scale how much of your businessis going through those two product extensions today. And then similar questionremains reflects the emerging markets in China and how much of yourbusiness today is to those end markets?

Iwill take the first part of that and just frame this in dollars for you.Roughly in the third quarter, our midtier and RWD, let's call it $20 million.So, clearly a small but fast-growing part. David Leiker - Robert W.Baird & Co., Inc.: Okay.

AndI think the Asia-Pacific, the emerging market portion of Asia-Pacific, if youexclude Japan where we already have areasonably mature business, we are talking about I think the forecast for theyear is about 85 -- $85 million, which is up about 35% or 40% fromlast year. David Leiker - Robert W.Baird & Co., Inc.: Whatabout Eastern Europeand Russia and –

Eastern Europeis substantially smaller. It is more like -- I think our business there may be more like $20 million but it is growing veryfast. David Leiker - Robert W.Baird & Co., Inc.: Marty,I have -- is that -- is that a quarterly number or an annual number, Nick?

That'san annual number the 85 million and the 20. David Leiker - Robert W.Baird & Co., Inc.: Marty,I have some recollection that you have a $200 million revenue business in China. Is that a bad number?

That'snot -- I don't know where –

Thatis not us. We said earlier -- we said we tried to approach $100 million thisyear. Nick said it will be the $85 million to $90 million range.

Whatyou might be thinking of is, if you look at Asia-Pacific region which includesJapan, China, the area I just quoted in emerging markets and Australia, then weroll up to a little bit north of $200 million. David Leiker - Robert W.Baird & Co., Inc.: Okay.Great. Thank you very much.

Thanks,David

Wewill go next to Boyd Poston at Gallatin Asset Management. BoydPoston – Gallatin Asset Management: Goodmorning. With restructuring cost 8 million first quarter, 6 million secondquarter and you ramped down to a little bit under 2 million third quarter and Iguess you are ramping back 6 , 7 or 8 million in the fourth quarter. Can youcomment and give me coloron the ramp down in the third quarter and ramp back up in the fourth quarter?

Asyou know, Boyd, first of all, these sort of come in -- in lumps depending uponwhat we are specifically doing. As I said on the call, now it looks like thefull year is going to be $3 million or so less. As I said in my prior remarkswe could be up to 25 million. We are still looking at some projects that may ormay not happen this year. If they happen may be up to the $25 million range ifnot we will be lower. But it is not a number that you can necessarily thinkabout in terms of some pattern or, you know, some normalized level.It is very project specific. I think everybody knows we have been working onsome big initiatives in Europe, migrating productionand moving facilities, you know. Earlier this year, we spent some money tomigrate production to one of our U.S. hand tool plants. So,you know, it really occurs on a project basis. BoydPoston – Gallatin Asset Management: Wouldyou expect that at this point for '08 that number to be under $25 million?

Yes,I mean, we haven't seen all of our plants through the whole of 2008 yet, but Iwould say so. Do you remember, before this year we communicated roughly 20 withsome view over time that it would even decline from that level and that wouldstill be our expectation. But we will try to give you as much color on thisgoing forward each quarter as we have these calls. BoydPoston – Gallatin Asset Management: Kindof a follow-up to what Jim was talking about, as far as franchisees, thatnumber might be 3600, 3700?

Not-- not in terms of franchisees in the U.S. BoydPoston – Gallatin Asset Management: Interms of vans?

Oh,in terms of vans, around 3500. BoydPoston – Gallatin Asset Management: Okay.As far as the U.S. dealer performance, wasthere much difference as far as sections of the country, as far as their salesto the repair shops?

I-- you know, Boyd, I don't have that information, I don't know. I would sayprobably not. Nothing has been communicated to me from our business people, so truthfully,I don't have that data. BoydPoston – Gallatin Asset Management: Asfar as modeling purposes, the higher production material costs, 5.2 millionthis quarter. Going forward is there -- would you expect much change in thatnumber in the fourth quarter?

No,I mean -- obviously you know -- we are close to what happens to steel. Priceshave actually moved around depending if I have -- whether you are looking atsheet steel or bar stock for the Hand Tools. But yeah, we'd expect to continueto see some upward pressure, no question. BoydPoston – Gallatin Asset Management: Okay.Thank you.

Andwith no further questions left in the queue, I would like to turn the conferenceback over to Mr. Ellen for any additional and closing remarks.

Well,thank you, Tony. Thank you all of you for joining us this morning. We lookforward to talking to you again soon. Thank you.