Snap-on Incorporated (SNA) Earnings Call Transcript & Summary

Sure. A couple of things. It's really 2 things: the resilience and essential nature of auto repair, maintaining, underpinning the critical mobility that keeps our society moving. If you think about it, you buy -- everybody is looking for a roll of toilet paper, right? They need a roll of toilet paper at the beginning, everybody's worried about it. The roll of toilet paper is delivered to the grocery store by a truck driver who can't work from home, and that truck driver is made -- his truck is kept on the road by mechanics who can't work from home, and we supply them the tools that allow them to do that. So auto repair tends to be resilient. What we saw in the -- and that's the underpinning. Then the other thing is the capability of our model, the direct sales model, and they played out. What we saw in the COVID was a -- we see like a 3-phase thing. First thing, shock. Nobody knew. One day, I'm at a Milwaukee Bucks' game with 18,000 people. The next couple of days, everybody is shelving for home, boom. Nobody knew what to do. And so beginning in April, in late March and April, our customers and our franchisees didn't know how to accommodate the situation. Many franchisees parked in the Northeast, let's say, or in Canada and the U.K., others had sort of like, I guess, attenuated activity. Some of the garages closed. But then we entered what I would call the second phase, which is a combination. People learned how and they realized that they were essential, and there was a business, learned how to accommodate it safely. We did the same with our franchisees. And one of the things I think our team did pretty well is we had seen the movie before. We had been in hurricanes, like Hurricane Harry and Katrina and so on where smaller areas won't be -- but it's kind of the same effect, everything stopped. So we took actions to support the franchisees and the customers in those places, got them over the hump, and they came back at full strength. And then I think the third place is psychological recovery where everybody says, wow, I can now invest in bigger ticket items because I'm sure of the future. That -- we're starting to move toward that, but we haven't achieved that level. So what happened, I think, was you saw in the beginning, ended the first quarter through the second quarter, shock. Tools Group is down, what, 20%, something like that. And then we came out of it and Tools Group is up 60%. But by the end of the second quarter, I think I reported that the U.S. Tools Group was -- or the Tools Group was only down 3%. So it was already accommodating, and we got it. And I suppose the question is how much is Snap back, how much is not? I'll just offer to you that if you look at the sales of the vans, our franchisee sales through end customers, at the end of September, at the end of the third quarter, it was already up year-over-year. And if you want to speak to the resilience of our model or our company in general, if you look at our EPS in the first 3 quarters, if you add it all up, it's already greater than any 3 quarters before 2018. So in fact, that's not that much of an impact really on the company. If you're like me and you're worried about how is the company going to go forward, okay, it's 2 years back. But we were fine in 2017, thank you very much. So this is the same kind of situation. So I see the thing kind of going forward. And it's sort of an extension of the first couple of months of the first quarter, we thought the Tools Group had been rising. The principal, I guess, barrier to the Tools Group growing or anything like that or the principal thing that has to be solved is getting the franchisee more time, having them be able to sell the more complex tools that he's selling today. Cars are getting more complex. Our tools are matching it, but it's harder to sell them and explain them to mechanics. It eats up more time. If the franchisee is alone on that van or maybe as an assistant, so is time is a scarce resource, it's one of the limitations. And we were learning how to expand that time through lean and rapid -- what we call rapid, continuous improvement. And you could see it start playing and training. You could start to see it come out in the first couple of months of the year. Of course, then COVID hit, everything gets hard to see through the fog of that. And then you start to see it come back in the third -- at the end of the second quarter and then on into the third quarter.

Great. So that kind of leads me to the next question about fundamental drivers since you touched on complexity. It's something we deal with on the aftermarket often. It's just becoming harder to repair a car. So can you kind of talk about potentially the benefits for Snap-on there? But also any other fundamental drivers that might be driving growth going forward?

Well, I think, let me just -- before I forget about it, I think one of the fundamental drivers we're kind of pumped about is, out of the COVID, we think people are going to be driving more. I think if you look at China, people are driving more. They drove more out of the COVID, and it just makes a lot of sense. It's been documented in a lot of articles around. I mean people are going to think twice before they depend on mass transit anymore. Ridesharing maybe. The world may have turned on urbanization and ridesharing and all that stuff to the point people are going to want to drive more, at least certainly have access to these kinds of things. They won't want to depend on that kind of thing in the future because they're worried that the COVID will come back. I think people would be moving out of the cities into more a distributed offices and more distributed living. And so I think that drives more kind of a tailwind for us. It's one of the reasons why during the COVID, we have kept introducing new product because we believe the future is stronger. It's because we have held our brand. We've invested, and we haven't -- we've pretty much kept our people intact because we want the team to be full strength when we come out of this because we think there'll be a lot of opportunities. If you roll back, there are fundamental drivers. First, the cars in the United States are 11.8 years old. They've gotten -- and they've gotten older every year since 1980. So the car park is getting older. And secondly, I think the big thing -- and it gets figured. It adds a few cars every year. The new car is always overwhelmed with scrappage. So it gets bigger. It drives -- as I go through some of the hard scrabble, America, you can see the number of cars grow in the driveways there. You see it before your eyes. And then the -- but the principal driver is the complexity of the cars. There's a number of these things, but I can name them. So in the mid-'90s, the number of trouble calls on the cars could be measured in a dozens. Now it's measured in the thousands. So we have products that will help you do that. Already today, 80% of the repairs on cars have nothing to do with drivetrain. Or anything like that, they have to do with other things. A lot of that rolled into electronics. A lot of that has to do with these troubled codes. So we have, for example, and you're right, it's a complexity thing that the independent shop mechanics says, wow, how do I work on these cars? Well, we put them right on target with our diagnostic units. Some of those diagnostic units have 1.6 billion repair records that will guide them in repairing common problems. They'll be able to say, okay, instead of spend a lot of time diagnosing it and running after something, you can just have our short track capability. Say, I've got a 2005 Audi with 85,000 miles, and it's checked engine like and trouble called P001, we'll show you a Pareto diagram that says the top 3 things that happens. All you got to do is look at those, saves a lot of time. By the way, they're paid by the job, not by the hour. And so therefore, it's a tremendous help for them in diagnosing those things. And for the really difficult things, the things that only happen on alternate Wednesdays, we have something called alternate Wednesdays in months that end -- that have an R in them. The -- we have something called smart data, 160 billion data points that guide them through that help them find this kind of thing. So we're helping people do that, deal with the electronics. The other thing is trying to be autonomous cars. Every time today, a car is a neural network distributed around the periphery. And if you hit your bumper or have a little accident or have to often have any kind of repair, you have to recalibrate all these things. We have products that will help you recalibrate from all models in the independent garage. And then finally, for reasons, I think, passing understanding, but as the number of electronic codes have gone up from dozens to thousands, the demand for hand tools has only gotten bigger because the geometries of the cars have gotten more complex. Look under the hood of a year 2005 car and look under the hood of a 2020 car, and you'll know what I mean. It's a lot harder to get to those things. And no matter how electronic things get, you still have to position yourself and make adjustments to the wheels and in a lot of different moving parts.

Great. So -- and I have a question from the audience, I want to make sure we address kind of on top of this. Two parts of the question. One, I think the whole complexity issue has led to what people talk about, just a shortage of technicians and then they're moving around because they're getting better offers. So anything you can address there? But also the -- another thing we hear from suppliers to repair shops is just consolidation in the industry. So any effects on Snap-on because of that?

Okay. First of all -- okay, 2 things. One is, hey, yes, technicians have been short for a long time. I've been in this job a while. It ain't my first rodeo. And in fact, everybody has been talking about shortage. The situation is like this, 105,000 technicians leave every year. We mint 75,000 out of schools. And so what we do anyway, in terms of that, that turnover, we try to get the schools to expand their programs, and we're in the schools. We are in 2,500 trading areas or schools for technicians. And over 500 of them offer Snap-on certification programs. So we try to get in there and make the new guys Snap-on customers for life. It seems to be working. Actually, they seem to be buying it. So that's one thing. I think there may be a shortage. But in fact, I think we're helping with the efficiency. In terms of -- but I think schools are going to expand to take care of that as it goes forward, and we'll be there to help the people, and therefore, indoctrinate them to be Snap-on in the future in this great brand. Secondly, the story of the consolidation, actually, we don't see any consolidation in terms of number of rooftops. You may be talking about, okay, bigger chains or take it over or they're buying out independents. But the number of dealers since the Great Recession, when they -- the number of OEM dealerships have stayed solid. The number of independents have pretty much stayed solid during this period of time. So -- and our sales to those -- if you're looking on tools, you're talking about the repair systems and information group that sell directly to the owners, they haven't wavered in this period. So I don't think the shift to multi-store locations has given us a problem.

Great. Good. And then another question from the audience. I know you can't really talk too much about what's happening in the quarter, but can you kind of reiterate any comments you made about just the exit rate of third quarter? And anything to...

No, I can say this. I can say this. Look, if you look at the sales of the truck, if you look at the sales of the van, which is really the sales to the end customer, it was pretty solidly in double digits every month. Solid in the double digits every month. So you get ups and downs, of course, but nothing more than noise. So it looked pretty solid as you went through the quarter, I would say, every month in the quarter looked pretty solid for us.

Perfect. And then let's just -- moving on to repair systems and information, very similar. I mean, some similar drivers, at least, but can you kind of explain who the customers are? Any difference in the products you're selling? And then obviously, we'll talk about the fundamental growth factors there.

Yes. Well, look, I think it grew -- I think in the quarter, organically, it was down 2.2%, which wasn't bad, I think, for the kind of capital purchase. And as I said, very profitable, 25.2%, down 60 basis points, but 30 basis points of that was associated with currency and COVID -- special COVID costs. But what we sell there, I think you can think of it -- you can think 2 things. We sell to OEMS, the OEM dealerships. There are certain programs that we deal with in the OEMs. And for them, we do things like we will facilitate their -- we will deal with their in-shop operations. So we will sell them things like electronic parts catalogs. We get an OEM that commissions us to electronic parts catalog. And then we have an OEM that will say, okay, maybe a particular manufacturer will say, I need -- it's very difficult to get the wiring harness out of this particular truck I have. So can you put together a tool that will help that take that out and distribute it to all my OEM dealerships over the next, say, 3 quarters. We have those kinds of programs. So you have these kind of services to the OEMs and software, many of them are subscription. Electronic parts catalog is the best example. And then you have other things that are one-off programs that OEMs will commission us to do and deal with them. And then for the OEMs, we'll also sell things like or provide things like -- just like we would for independence, lifts and tire balances, entire changes and those kinds of things that would be in the garage itself. Then the other side of it is RS&I's independent repair shops, Joe's Garage or might even. I think people like that. It will provide them repair shop information, which would be a suite of information that would allow the technicians there to understand what to do when they have to repair any particular model that they may be working on any year. Then we'll offer things like repair shop management, how to manage the repair shop, either truck or vehicle repair shop. And then in that side, we will also do things like offer the same kinds of things like lifts and balancers and tire changers.

Great. And then we did touch on complexity, but I know in your calls, this is kind of the segment you often talk about some more advanced technology happening in terms of ADAS technology or any of that. Can you just talk about that and what...

Well, this is where the ADAS technology would come in. I mean, it's getting hard. Now in this business, one of the things I didn't mention is we also have a -- we acquired a collision business. See that our basis of growth in this business, it's kind of a follow-on to the technician business. We knew we're in the technician business. Then we realized we could be in, in a big way, the repair shop owners and managers business. So the pacing element for us to grow in that business is our ability to grow the product line because our share in that business is lower than our share in the technician business, even though the owners and the technicians share the same high opinion of the Snap-on brand, I believe. And so what we're doing is we're trying to take advantage of growing in 2 ways. One, internal development. So ADAS was an example of internal development. We put together a set of equipment that would allow an easier calibration for any model. And by the way, all the manufacturers have different protocols for calibrating their ADAS systems. There's no commonality to it. So we have in there, the software that allows you to span the models from Fords to BMWs to Kias. And then we also have the hardware that will accommodate the idiosyncrasies of those things, and we've developed that recently. So that's one of the things that's been pretty good for them. The other thing would be, for example, enhancing repair information. So if you want to understand the repair, you use our, what we call, ProDemand information, and we've just added interactive wiring diagrams that allows the technicians to more quickly deal with the situation. And by the way, you have to understand the breadth of this because you've got to work on all models and in many, many years of products, and we've added that. And then it would be added by things like acquisitions. So recently, we acquired autoVHC, which allows independent repair shopper dealership to deal with people who come in and more efficiently handle people as they come. Software that lets them more efficiently handle those people as they come in the door. And then we acquired somebody like Car-O-Liner collision, which put us in a whole other segment. It turns out that if you look at dealerships, whether you're talking about -- look at repair, if you're talking about dealerships or independence, sort of the body shop is different. It's a world apart, but they're coming together because not only are the materials getting different in cars, but also the cars have this neural net. So you bang the bumper, you can't just bang them to be offended. You can't just put it back in shape, you have to repair. You have to restore the system. So you have to diagnose it like you'd have to diagnose a car, and our addition of Car-O-Liner gave us that capability to have the stuff that would put the car -- restore the car to shape, and we put RS&I's traditional strength with that and help collision garage be more efficient.

That's great. So last question, we just have 1 minute left. It looks like you -- to our numbers -- according to our numbers, net debt under 1x, you generate pretty significant free cash flow. Obviously, you've done the constant growth in dividend over the last few years. But what do we think of capital allocation going forward? And in terms of what you just said, investment, is it along the 3 different segments or internationally? Any comments there?

Sure. Look, our view of capital allocation is like this. We invest in our business as we expect our business to grow organically, and the developments I talked about in terms of the interactive wiring diagrams and the ADAS stuff and other things do handfuls. It takes some money. And so we do invest in that business. That's our first priority. And it tends to be -- tends to have some working capital intensity. So we need that. Secondly, one of the, I guess, hallmarks of Snap-on strength. We have paid a dividend every quarter since 1939, and we have never reduced it. So we are focused on making sure we can maintain our dividend in perpetuity, yet help increase it to give proper return to our share owners. And then we look at acquisitions along what we call our runways for growth, figuring out if we could figure -- if we see acquisitions that would help us enhance the van channel, expand with those repair shop owners and managers or extend to more critical industries or build in emerging markets. So we have targets. We have a landscape of targets that we continue to review. And so we have dry powder that we can do that. And then finally, we consider things like pension and share buyback.

Great. Thanks. Well, thank you. So I ran over time. Sorry, teammates. But thank you so much, Nick, for being here today. It's informative, and we'll definitely let you know if any clients have further questions.

Okay.