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

Thanks, [ Charles ]. Good morning, everyone. Welcome to Snap-on's session with us at our Oppenheimer Industrials Conference. And Nick and I have developed an annual tradition through this fireside format. And so Nick, thanks for the consistent participation in our conference.

Good to see you again this year, Chris.

Yes, sir. Good to see you. So before I jump into the fireside, we have a 35-minute session, there are a number of people also in the presentation session. So I would encourage the question function. I have visibility to the questions, and I'll voice any questions that come in through the line. And I'll do the fireside for a while, and if no questions come in, we'll use the session that way. But please put anything you like into the board, and we'll get it asked.

So Nick, it's been a really interesting 3 quarters. You came into the pandemic with 3 or 4 years of SOT, kind of flattish, following a 6- or 7-year period with really nice kind of 7% CAGR same-store sales type of business. And you just had the brief interruption for a few months with the pandemic, and then you kind of came back like never before and successive quarters blew out an argument of pent-up demand there. What's been the most surprising about this emergence? And if it's a different element, what's been the most gratifying?

Well, actually, I have a negative answer and a positive answer to those questions. First of all, nothing surprised me. And as we know, we knew that we had a resilient business. We always said that -- I love to say that Snap-on has paid a dividend every quarter since 1939, and we have never reduced it. And it's a testimony to the special nature of the business. And we say, in the pandemic, we knew that we had resilient markets demonstrated. We knew that we had a very, I guess, strong model and demonstrated -- and capable people. And we kept investing in that -- in those -- in our strengths, our product, our brand. And we kept our team intact because we knew we would get through it. In fact, in the beginning of this and when we had that second quarter call, in the depths of the pandemic, we said V-shaped recovery, and so it was. So it performed as we thought it would. And so that wasn't surprising to us. But at the same time, it was gratifying to see the reconfirmation of all that. There's a bunch of things at work there. I think part of it is we are in a resilient market. The auto repair market is great. The model is special. And in fact, what's kind of interesting is that direct selling was ascendant during that period as opposed to distance selling. And we believed in our team, so we didn't lay anybody off, really. And so we exited the pandemic stronger than when we entered. We believe that, and you can see that in the numbers, even [Audio Gap] One other thing I would add is, is that one of the things people don't realize, what played a huge factor in this and has done it in the past, is our credit company. First of all, a lot of people expect a credit company to have problems during a pandemic; not so much. Profits up, delinquencies down, and so rock solid. But the other thing about it is the fact that in the depths of it, when people were uncertain, and in the second quarter that the credit company entered like they did for -- in the hurricanes and other natural disasters and gave forbearance both to our franchisees and our customers, kind of created that bridge that led to the V. We knew that was going to happen. And so what you see in Snap-on is a company that has a lot of opportunity moving forward and a demonstration that it isn't easy to dislodge. That's -- one, I was confident in that, but it's gratifying that we actually delivered on it.

Great. And you mentioned a lot about the organizational strengths and the direct sales model. I'm curious how much can assortment drive momentum in a stretch of quarters? And I'm curious because you have 80,000 SKUs or so, maybe 50,000 in SOT, I forget the number, but wondering if there was kind of a discrete breakout or kind of a pull opportunity with the more immediate mix shifts in the fleet, what the OEMs are selling, that allowed your assortment to really move to a different ZIP code than it's been.

Well I think, actually, I think the big factor was we believe our product was stronger than ever. Our launch in the first quarter of the D10 TRITON diagnostic, which some of our franchisees are calling the best diagnostic ever launched -- I agree -- faster and more innovative and smarter and easier to use, wielding our Intelligent Diagnostic database. It's the diagnostics for the time as the car gets -- cars get more complex. Some of our products around ADAS, the Advanced Driver Assist Systems, that helps technicians address the -- technicians and shop owners address the neural network that's at the base of all the -- the sensor network that's at the base of all the sort of new autonomous systems like lane departure warnings and so on, because they get out of whack periodically and you need to be able to help them, those have worked. And then the whole idea that cars are just getting more complex in terms of the physicals, around trying to eke out more performance out of it, led to the hand tools. And so our hand tool products, particularly around pliers and some of the packages we put together, worked very well in that situation. So that helped us to a great extent. But the big thing that I think was demonstrated in this was the idea that some of the investments we were making in trying to help franchisees get more capability, be more efficient, more productive in selling, which we've always said is one of the ceilings on the Tools Group, we were able to make some breakthroughs, better harnessing social media. The idea, we've been working on that for a while, but it dawned on us, after a while, we started to develop the idea that we identified certain things that social media could give us and therefore make the franchisee's -- not just be communication, but make the franchisee's 7 minutes that he or she has in front of -- few minutes he or she has in front of a technician more effective. Preselling, a promotion or a particular product so that the time -- the rare time in front of a technician can be done -- can be devoted to closing the deal. And then the idea of training; some of these diagnostic units or even some of our hand tools are difficult to pitch. And therefore, I think we're getting better at getting compact pitches to our franchisees and getting a better mechanism for transferring them. And then down in the bowels of the way that our promotional systems work and the vans work itself, just RCI-ing that. And it all came together, I think, to enable our franchisees to be able to do pretty well. And the interesting thing about this is it happened globally. All our businesses, in the United States and U.K. and Canada, all were up nicely in all these quarters. So I think that's my answer to that. And the breadth of the product line does help because it allows you to deal with any particular problem technicians have at this time. And there is a variety of problems as new products move into the dealerships and then on to the carparc. And the fact that you have so many SKUs means you can solve any problem.

Right. And that kind of leads to one in particular. There seems to be some confusion in -- around the EV impact on Snap-on. And what I usually tell investors is that, look, it might be a headwind if we went to majority EV in a blink, but that's not the case. They will stay fully invested in ICE for a long, long time. And EV is incremental. I don't want to answer my own question, but why don't you take it from there?

Well, that is one of the answers. I mean the answer is, again, EV, well, remember, that most of the, for example, in China or in California, a lot of different places, the assertions that they're going to be EV by a certain date includes EVs, pure electrics, plug-in hybrids and, in China's case, hybrids itself. And so that's 3 different -- certainly, the plug-in and the EVs are 2 different power plants, 2 distinct power plants, and therefore 2 distinct tool sets. We're seeing those emerge already. And so what you're going to do is you're going to have people -- our franchisee and our customers are going to have to work on internal combustion engines, plug-in hybrids, regular hybrids and EVs. That just incredibly complicates the situation and therefore creates -- that complexity is where we thrive. And so that will be good for us for a while. I'm not even sure though, by the way, that EVs won't be better because who knows what it's going to be moving forward. Right now, 80% of the -- only 20% of the repairs on a car are done on powertrain, on the drivetrain. So already, you're doing a lot of work in electronics and so on. So EVs will be pretty complicated in their own right in a different way, and that difference is what's going to make it a great opportunity for us. And then overlay on top of that all this autonomy. Autonomous -- the drive to autonomy just incredibly complicates everything as well, again, in a different dimension. So we love that change, one of the reasons why we acquired this Dealer-FX because Dealer-FX is a place which has -- does what we think to be the best software for running repair shops in dealerships. So it drives us deeper into the dealership. We get more involved in management of the dealership, so we understand how it works, and that's a good thing for a company like us who allows you to call in air strikes. But one of the most important things is it puts us at the vanguard when new models hit -- the first place they're going to hit the carparc is in the dealerships. And so this gives us visibility to that. Therefore, we can see their patterns and how they perform under those early days and then for -- make some extrapolations on top of that and be ready, one, attend to it right there in the dealership, and be ready for what they're going to do in the aftermarket.

Okay. And we have one from the queue here. It is: is it reasonable to infer that there has been higher use of cash for tools purchases given the delta between SOT organic growth and SOC originations? And what role do you think stimulus plays in that shift?

It's reasonable to use -- it's reasonably -- assume 2 things. One is the franchisees are stronger from a cash point of view than they have ever been. And so therefore they're willing to put more money on the street in terms of RA, which is their receivable themselves. And so that's one factor in the growth of that shorter-ticket purchase business. They have to have that, and they've been there. And yes, people have been willing to take on bigger payments on a weekly basis. Maybe an RA is instead of like a 48-month payment terms for extended credit, it's 15 weeks. So yes, there's that there. How much has stimulus been involved? Okay, I tend to think some, but it's hard to say that. I think the big factor is the product line and the expansion of the capability of the selling. Now stimulus certainly has had an effect in terms of adjusting the mix, because when I talk to technicians or I talk to factory workers, and I ask them, what are you going to do with your stimulus, 85% of them say, I'm going to save it or I'm going to pay off debt. So I think it's reasonable to assume that some of the franchise -- some of the customers are applying that cash to their purchases. It's not so much -- I want to point out, it's not so much instigating purchase, but allows them to make it over a shorter period of time. So that may be a factor. One other thing though I think I said, and it's important to realize, is the overall sales was up just as much in the U.K., Australia and Canada, and there ain't no stimulus there.

Okay. And back to some of the explanations around product vitality and seller bandwidth that kind of really came to fruition, as you expected, noted, I think another thing you've talked about over the past couple of years is you're working on adding associates and also migration to larger vans. So wondering kind of -- there's 2 ballgames there, one, what inning are you in in kind of penetrating those 2 vectors; and second, how do you think about the lag to the benefits being realized, say, if a nice-performing franchisee adds an associate and moves to the larger van?

Yes. The larger vans, I would say, we're in the seventh inning or maybe something like that. For associates, I would say we're in the -- assistants we call them, we're in about the third. That's been -- and in fact, as you might appreciate in the pandemic, that's kind of going into cycle stall for a while because you have to be pretty -- it's more difficult to get people to get out of the van. You're going to be on the van for, what, 10 hours a day, 5 days a week minimum. And so that's a difficult situation for that, but we expect that to move forward. It takes a while, I think, for either of those to come to fruition. Sometimes, it takes a while to find the right associate or assistant. Sometimes, it takes a while, even with the right assistant, to get them into the cadence of the van sales so that works. But generally, it's clear that that does create assist. And right now, only between 20% and 25% of the van drivers have assistants. So there's an opportunity there for greater expansion, we believe, tremendously. Now we see the future as being very positive for us. I mean look, I think people are going to lean away from the cities towards suburbs. They're going to -- if you look at what happened in China after the pandemic, they drive more. People are going to lean away from shared -- pivot away from shared transportation toward individual. They're not going to want to depend on it. I'm not saying they're going to take -- not take it at all, but they're going to want to have their individual vehicles as a backup. And so we see that as opportunity. We see this technology rolling through as an opportunity. And then in our own numbers, what we see is, to the extent that technicians have focused more in this period of psychological recovery, in this period of where people are flush, of more shorter-ticket items and shorter-payback items, they have this credit capacity out in the future, which can be taken advantage of as we move forward.

Yes. Speaking of credit capacity there, the finance receivables balance has been flattish the last 4 quarters or so, down a tad most recently, even as SOT has been growing product volume, 30% plus for 3 quarters. Have you ever seen a decoupling of that dynamic like that?

Well, look, I think -- yes, look, I think there's a couple of factors there. I think one is, is that collections have been strong. And you might argue that some of that has to do with the stimulus being -- flowing through our business. And then the other thing is, to be fair, I mean, I think anytime you live through the shock of the system, the franchisees themselves are probably a little bit more on edge in terms of collections. Everybody is probably a little bit more on edge in terms of collections. So that worked in that situation. I do think, over time, you tend to see the sales and the extended credit rotate back into more standard alignment. It does move back and forth. I remember that when it was higher than average, people were concerned about that. Now that it's lower than average, some people get concerned about that. To us, it isn't really a factor. We kind of see it move back and forth. If you tend to look back over time though, if you look over a longer period of time, you'll see it kind of come into equal alignment. Generally, they tend to fit over some period of time. Now any 1 year or any 1 particular quarter, it can get out of -- there can be some divorce, but that just happens to be the situation that occurs in that particular interlude. I think we've seen the divorce over time between those 2 numbers. And it always rotates back in. So I think you would expect that the extended credit over time would rotate higher into the mix. It might rotate down, it might go over -- a little over the average and come back. That, in fact, is natural progression for the Tools Group.

Okay. And in the past, I've heard you generally characterize the technician-served market per franchisee maybe being 200 or a little less per franchisee. As the franchisees are hitting on sales productivity with social media and associates, et cetera, is that average technician count per franchisee, is that a share gain driver?

It should -- well, it should be. It should be. I mean I think the idea is it gives them more time to sell. So either they can -- now part of this is be more effective in selling the more complex product, which gets better margins and bigger tickets, so I mean it kind of moves out in that regard. And then it allows them to reach more customers, which sometimes, you remember my discussion about this, sometimes they don't reach those customers simply because it's less efficient. They're less target-rich or they're off their route a little further. Or they have to spend a little more time selling them. I love to tell the story about one guy told me I -- I was in a garage with him and he walked by a technician and I says, "Why aren't you calling on that guy? He says, "He's dating the competitor's daughter." So the thing is he said I could convince him, but it would take me longer, so that's a capacity issue. So now that we've expanded the capacity, I would expect us to add some of that.

Great. One from the audience here is: what accounts for big-ticket sales underperforming versus SOT broadly?

Well, I mean, look, I think first is it's, I think -- underperforming, I don't actually say, I don't accept that characterization. For example, if you look at our tool storage over the last couple...

Well, let's stipulate that if you weren't growing the business 20%, it wouldn't be a frame of reference.

Okay. Right, right. Okay. No, no. I'm not -- now Chris, as you know, I'm just saying that. My point, that's not how we look at it. We look at it like this, is that the tool storage business, for example, the numbers are pretty big compared to historical levels. So they're not -- we're not disappointed in them. They're just not up 15% over 2019 or the 25% over 2020 that the overall business is. So in a way, we're okay with that number. We're okay with that number. We see it as opportunity. The other thing is, though, here's why the mix might shift in that direction. And I think it's simply this, is that -- you pointed that out, is that, one, you have customers who have franchisees who are flush, customers who are flush, therefore being able to finance bigger-ticket items, maybe not what you would call big-ticket items, but some portion of the bottom end of the big-ticket items in our -- in what we would call the 15-week -- 12- to 15-week category. You got that. You've got the stimulus coming in, where people can pay off some of their numbers more quickly, pay off some of their debts more quickly, and that tends to be -- or take smaller originations, paying some in cash. And then you have a kind of a mix when you look at the bigger-ticket items. They do tend to roll toward the -- particularly around tool storage, they tend to roll toward the lower cost, the smaller-ticket items, the smaller cost items like carts and tops for existing boxes or lockers for existing boxes. They tend -- that mix tends to be higher in this situation. And I think some of that reflects -- our franchisees -- I mean, our customers, while they are very confident, they're very strong, there is this question of they get up everyday and they hear bad news for breakfast, variants are coming. So while they're confident, they're probably saying, look, I don't know, I think I'd get through the shock again, I know I can, I'm confident I'm not going to get shocked again, but I'm going to be a little careful about -- maybe a little bit cautious about going for a 48-month commitment or a 3-year or 4-year commitment. That's really the factors in that situation. Again, I would say that, for us, it's not a handwringing situation. We see it as an opportunity.

Okay. And speaking of opportunity, how much of recent momentum at SOT is tied to adoption curve for tool packages for EVs? I think on the last earnings call, you talked about some nice kitting for the sort of mini-explosion of EV platforms OEMs are...

Yes. That was mostly in the section of the RS&I business though. That's the kitting for the new models that are coming out. The EQS business in that place, many times when there's a new model come out, in fact almost always, they will contract somebody, of which we are one of the primary people, to say, "Okay, come out with a toolkit that will help that product, we'll support that product, and just assemble it and distribute it. I want you -- I want to put 5 of them or 1 of them in every dealership." And so there were a couple of new EV models coming out, and we got that business. They're starting to build some business, but it's still very early days. If you think about it, there aren't many EVs on the road really. And most of them are new. And so really, you don't have -- in terms of the carparc, that's why I think the opportunity is tremendous, is that really, you're not feeling that uplift from the EVs when they hit the -- uplifts from the EVs or the plug-in hybrids when they actually hit the carparc. You're not seeing that yet. So we see some of it, but not -- it's not really a factor in the growth, the 20% year-over-year, that would be worth shaking a stick at, at this point.

Great. And on the diagnostics business, I did want to spend a little more time on the TRITON-D10 because you -- it seems like a couple of times a year, there's a new model coming out and you have varying degrees of conviction. You're kind of hedged about some launches along the way, we'll see how it goes. There is a different tone here with TRITON-D10. So just technically, price points, I'm curious how it's clearly distinguishing itself in the long-term evolution of this...

Sure. Sure, sure. You're right. It does seem as though we're bringing out -- but if you think about it, we have 4 levels of diagnostics. So if they have a 4-year life, we'd have at least 1 every year, if you think about that. So you would expect having some launch every year because 4 years is a long time for these kinds of things. There's a lot of motion in terms of the technology versus the software and the hardware. In terms of D10, the reason why I'm so pumped about that is the franchisees have been filling me up about this. So we were out -- Aldo and I were on a truck last -- about 2 weeks ago, and this guy was really pumped about the D10. I'm talking to a guy in California. He says this is the best one he's ever had. He can't believe it. And it's not cheap. It's our -- we have our top of the line is ZEUS, but right under that is the D10 TRITON. And it has a number of great features, faster boot-up, a couple of seconds. It's got a bigger screen, 10-inch screen. It has a number of features which allow -- in terms of navigation, so it allows you to get through our Intelligent Diagnostics suite more effectively and therefore wield that 200 billion data point database and able to make it easier to solve some of the most difficult problems much more effectively and quicker, which is a big factor for people in garages. And so the idea that it's -- the hardware itself is easier to use from an ergonomic point of view, is faster to use from an electronic speed point of view, from an organization point of view, and is simpler to use, from the wielding of the diagnostics, this complex database, has made it a winner in the eyes of our technicians and our franchisees. And one of the things we did is we're now adapting one of -- we talked about how to sell better, one of the things we did with this is we gave every franchisee an original, a demo unit. We said, okay, here's a free demo unit, here it is. Now we're going to go through the demonstration with -- online with you holding the unit. And therefore, they could do it with their customers. They can hand them -- they could hand it to their customer and do it. Boy, that worked. So that's a combination of helping improve the productivity of franchisees and having a product that was boffo. The reason why I think it's boffo is, is because the franchisees are filling me up with that.

Great. And on the -- while we're on the side of data and software, your Mitchell 1 database, I think, is a fairly singular asset. And you already had shop management software. What couldn't you guys quite get to internally exactly that Dealer-FX kind of sounds like it puts you over the top on a couple bases?

Yes. There's a couple of things. I think one is, is that there's a difference between the management of the shops in independent shops. They're different. They operate differently, as you might think; there's a lot of variety in those shops. So you would say that the ability to be flexible and variant is essential in that kind of situation. So that's the kind of software you would have for those, because you've got to apply to a number of different areas. For dealerships, okay, Toyota dealers are different than Nissan dealers and are different than Ford dealers, but they're much closer. And so you kind of have that. And they're much more sophisticated in terms of the number -- and I don't want to say sophisticated, they're much more detailed in the amount of data they want to look at, and they're tracking the cycle much more effectively. And so there's this kind of cycle, from the time the customer calls in and wants to make an appointment, what do you present them, what records do you have? How do you say, okay, I want to show you what you need to do more effectively. Can you present them that data? And how you manage that car all the way through so the customer has a great experience and comes back and not only repairs his car there, but buys a new car? Those are the kind of situations which makes the Dealer-FX a little bit more comprehensive, more narrow in a way, because dealerships are dealerships. [ Sort of ] dealerships, they all have that circle, but more complex in another way in terms of managing different processes. And then the other thing is the basic -- one of the things we liked about this, the basics, I guess, data configuration, the data configuration and the structure of the software, the framework, is a different type of framework, which we think we can use and migrate to create an underpinning for new things in Mitchell, the new things we can do in Mitchell. So we felt that, that acquisition was pretty good for us. That's why we didn't develop it internally.

Got you. One from the queue: what percentage of customers, I guess in SOT, are involved in body repair, auto restoration-type work as opposed to the core mechanical?

I don't think we've ever gotten that number. I think -- look, I think it's -- you would have to say that maybe a significant percentage of dealerships, maybe 30%, 40% of dealerships have that. And in independent repair shops, there's a whole separate -- for independents, there's a whole separate group of specialized businesses that are associated with that. Body shop for us has become a little bit recent. We acquired focus, we didn't focus so much on it before because it was kind of a different type of milieu or a different type of environment. And so we acquired, maybe 2 or 3 years or 2.5 years ago, Car-O-Liner, which put us at the forefront of the ability to put cars back into shape, to create the cars into shape. But we saw that we could marry that with our diagnostics product and our equipment product to restore the neural network that is associated with the network of sensors around the car these days in the fenders and in the hoods and the rear ends, that allows them to support autonomous driving. And so that's worked pretty well for us. In fact, we talked about a product on the call, Tru-Fit (sic) [ Tru-Point ], where we marry our ability to align cars, which is not -- which is -- I was an aerospace engineer at one time. It's not -- it doesn't lack sophistication in terms of the ability of spatial orientation. We put that together with the calibration of those sensors, and it's a winning product that's going to, I think, going to do very well for us in that situation. So it's early days, not a large piece of our business so far beyond the Car-O-Liner business is associated with this, but it's growing substantially.

Great. Curious, a high-level view of the composition of the C&I segment and the -- how you kind of differentiate the cyclical opportunity in the next year or 2 versus the penetration opportunity? I think your European tools is really demonstrative of good, consistent channel penetration. How do you broaden that to give critical industry some extra cyclical juice?

Holy moly, European hand tools. You asked about what surprised me -- well, you were asking about the Tools Group -- European hand tools surprised me in this period. I mean the thing -- you would have thought Brexit plus the -- I don't know if you followed Europe, but they aren't doing that well in terms of vaccine distribution. And so you've got the pandemic plus you got Brexit, and our European hand tools has done tremendously well during this period, with double-digit increases in the face of this difficulty. And it's been rooted in the idea of customization of their product. They used to sell one-offs -- like typical distributor sales, we sell a pack inventories of products into distributors. Now we're reaching the end customers, working with the distributors and customizing kits for these people. That's worked very well for us and has helped raise their capabilities. Now how does that roll into critical industries? Well, critical industries is doing the same kind of thing, the industrial business, which is moving upwards. And remember, I said that it's -- I think I said that it's -- as part of C&I, it's having sequential improvement. And you're seeing in that business a component that's been growing over the last couple of years is the customization of kits for particular problems in different industries. And that's kind of the cousin of what's happening in Europe. So those things -- 2 things are working together to drive that upwards. If you want to look at the segments, hey, Heavy Duty has been doing well. As you might have figured, I've been driving -- I've been at work everyday, and the trucks have been on the road everyday. So Heavy Duty has been going okay. Aerospace is -- was wounded in the United States. We've had some ups and downs in terms of the overall because the international aerospace business has been good for us. Critical -- general industry, just the factories and so on, has gotten to about equal to 2019. And education and oil and gas are still lagging, are still question marks because of the impact of the pandemic. So what you see in critical industries, if you want to go by -- you have a kind of an onward moving growth in terms of more customization and better business. You have the segments, where heavy truck has been strong, general industry has been reasonably flat, the military has been reliable. And then you have 3 wounded areas: aerospace, education, and oil and gas. We're seeing education come back now as people go back to work. We're seeing aerospace get -- we see green shoots. And oil and gas, your guess is as good as mine when that comes back. So you kind of see that. And they're all about equal in terms of size.

Great. I think that brings us about to the close. Nick, nice to chat. Appreciate it.

Good to see you, Chris.

You too. Have a good day.

Take care.