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

Thank you, Tyler. Welcome, everyone, to our fireside format with Snap-on. We've got CEO Nick Pinchuk here to conduct discussion with. Nick, thanks for joining.

Sure. My pleasure. Good to see you, Chris.

You guys have had some nice momentum, particularly at the Snap-on Tools segment. But before we get into any details here, RS&I was rather ripping as well as I catch myself. But just kind of what is top of mind for you today in terms of how you view the 3 operating segments?

Well, top of mind, I think, in this era is, I think I started out with my call, these are interesting times and it seems like the hits just keep on coming. So it's all about alacrity, riding to the sound of guns, moving as quickly as possible, pricing, solving supply chain, doing the kinds of things you need to do to overcome this situation. And I think I'm kind of encouraged that our team has been able to do this for several quarters, just been able to adjust. We have certain advantages: resilient markets, a wide range of product, short supply chains. And I think we have a relatively capable and experienced team that looks at performing under these situations as table stakes. So I think those are the big things. I think the Tools Group is doing very well. They control the customer interface, and you see that. Their supply chains are short. They still have problems, of course, but they have certain innate advantages. They've got a number of mechanisms for pricing. The RS&I Group and the Tools Group was up, what, 7.7% organically, 22.7% OI margin, up 200 basis points. The RS&I was up 13.3% organically year-over-year, 17.4% over 2019 and margins were 23%. And they were down 40 basis points, but all of that can be explained by acquisitions and mix, where the hardware business has evolved. And they're seeing some good stuff because they've been able to work to redesign some of the products and therefore, meet some of the supply chain challenges which they deal with. And you're seeing a rise of the OEM dealership segment come back a little bit as the dealerships start to get used to the current environment of lower amounts of vehicles and maybe repivoting towards service and repair. And then you got C&I. It was kind of the place which gets most impacted by these things, the most challenged because they're in most geographies. So you see a lot of variations from geography to geography. And on top of this, many of their product lines are customized to certain customers, a certain task, certain critical tasks and some of them are 100 SKUs wide. And therefore, trying to get delivery on a 100 SKU kit before you ship it is quite a challenge. So they grew at 1.1%, 3.6% over 2019. They were down some in OI margins year-over-year. But if you look at it versus '19, they were down -- their 100-point reduction versus 2019 was more than explained by currency and acquisitions. So I think we feel pretty good, but that's what you would expect. The advantages of the Tools Group are clearly the strongest in this kind of situation. RS&I is second and are doing okay. C&I, a little bit more vulnerable, but in general, the enterprise moving forward and being able to confront it and overcome.

Great. A lot to build on there. On the C&I side, where you talk about the kitting challenges and things like that. Do you guys have a past due metric? Is that something...

Yes. I mean, I think as we have -- we're getting a lot of orders. So we're expanding capacity. Where I sit -- about 200 yards from where I'm sitting, there's a building rising to give us more capacity to kind of create a bigger python. So when the pig goes down the throat of the python, we're able to handle a little bit better. But I'm not sure we can overcome all the problems. I'm still pretty sanguine about C&I because I think their product is in high demand. The brand name seems to be working. They seem to be understanding more about the critical industries than ever before. And so we see them. You might -- they were up 1.1% and 3.6% versus pre-pandemic levels, but we see them as advancing better than that when you look at the actual physicals. It's just that they've got to overcome these hits that just keep coming. We think we're getting better at that. We'll see how it works out. But we're confident of their future.

Okay. So for C&I specifically, you have seen past dues blow out a little bit?

Yes. Blow out is a little bit of, but get bigger, yes, right, get bigger, for sure, for sure. It's the most vulnerable, as I've described.

Okay. And within really strong SOT results, I think you guys said the storage was especially strong, usually drives a little bit of SOC originations growth. That question has been there the past few quarters, and I think the dynamics in the first quarter lend a little volume to the question. Are they finding alternative financing or...

Well, our guys say no. And anybody I talk to if I'm in a garage or in the franchisees, they say no. Our credit company says no. We think it's simple as this, is the franchisees are flush. Their business is up, what, Tools Group was up 24% over pre-pandemic levels. So they're coining money. It's rolling through there. And so they have more cash that they can put on the street for RA. That's revolving account. That's shorter-term financing. So even -- so they're more willing to finance bigger-ticket items or let's say, medium-ticket items and that kind of thing. And then the technicians -- technicians are -- their salaries are growing. The investments -- their salaries are up 5%, 4% on BLS data year-over-year and rolling 12. The amount of investment in the garages and repair is up 16% and 8% and the same numbers in BLS data. So it's kind of a good time there. And plus, they feel the ongoing complexity becoming more and more -- putting higher and higher value on their professions. So they're willing to maybe take on a little more, oh, I've got the cash. I think I'll put it in investment and what I'm going to do in the future because I think I can turn it into dollars. And so they look at that. And so you see that. And then the other thing -- the other factor is, while tool storage was up, the mix, we have been working hard on our carts. You can think of a tool storage box as a downtown storage. It's got sheet metal all around it. It's built like a Mack truck. It is tremendously strong. And people -- that's what people aspire to buy. And while we have made many students who are entering technicians, mechanics, becoming early new mechanics, we made them Snap-on customers for life. Sometimes they look at the box and they say, geez, I can't afford a new one. I have to look at an old one or so on. Well, we worked on carts. Carts are basically partial tool storage boxes that roll around. They have open tops or maybe just smaller covers on the top. So they aren't quite as large, but what we've done is we've launched some new ones that have new colors and new trim, just like the big brother boxes that have some features like power and other things and speed drawers and then are built of a unibody construction. That is they're all welded, not bolted together like some of the cheaper competitors. And so entry-level technicians can buy a Snap-on professional box but in a kind of a little bit lower entry point for them. And so it's been pretty good. And those sold BAFO in the quarter. So that's one of the things that happened. And so what happens out of that is they're a little cheaper, so they're a little more financeable in the short term, and we think that's part of the situation as well.

That's an interesting point about the unibody construction. Is anyone else doing that?

I don't think so. I don't think so. Of course, it's hard to say that never does anybody do this because a lot can happen between now and then. You never know. But generally, we think, number one is, this is the most robust and strongest box in the market. We can say that. It's got the most features. It's the best approximation to a full-size box and it has a Snap-on brand on it, which is a huge factor for technicians. So we feel pretty good about that. Now the cool thing about it is, we don't have a lot of angst over the fact that the credit company isn't financing as much or the originations are down because all that says is technicians have credit capacity to use later. It's a good thing actually not necessarily a bad thing. All I'm worried about, were they up? Yes, they were. They were up 7.7%, the Tools Group, and 22.7% margin looked pretty good to me, up 200 basis points year-over-year, 630 over 2019. So I'm not so worried about the mix.

Yes. The -- speaking -- the margin trend at SOT has been great. And also thinking about the growth, you guys have talked about the things that have enabled the franchisees versus before the pandemic, social media, associates, the larger vans gaining tenure. What about on the administrative side? Because you guys have talked about technicians only spend 7 minutes per customer a week or something like that. So they're spending a lot of time on other stuff, which comes back to administration and bureaucracy a bit.

Yes. Well, look, one of the things we have done is we figured out a couple of things in the pandemic. We've been working on it for a while. These are things -- we get up every morning in the shower and think about ways to expand the selling capability of the franchisees. We know this is the basis for going forward because the demand is out there and complexity is only getting better and the market is only going to get bigger. And so -- and yet, we want those guys to participate. We don't want to expand the number. We want them to be equal participants in that growth to us. And so it's about giving them more selling time. And so we, at one point, you might remember in 2011, 2016, we added trucks, the Rock N' Roll Cabs and so on. And they grew very well. Lately, we've kind of cracked the code with things like better training. So ironically, one of the things in the pandemic, we had to deal with them at a distance. So that kind of clarified our training a little bit because it removed the ability to be iterative in terms of delivering the 7-minute elevator speech. And so we got more disciplined about doing that and found better ways to deliver via videos to our customers, to our franchisees who could then use them right at the point of sale, have it ready. Right on the van, they could refresh their memories about it and go out and do it. Secondly, we learned how to use social media better. Of course, we had social media. We were advertising stuff. We were trying to do things. And what we realized is to focus the social media on preselling, not trying to sell with social media, but try to say, okay, we're going to broadcast, Mr. Franchisee, broadcast to your customers. This is the promotion this week or this is the new tool this week. So that when they get in front of the people, all the case facts are already out as in business school cases. All the case facts are already in the guy's mind and you spend the time telling them, trying to convince the guy that this is the tool for them. You ought to buy now. And so that allows him to focus his activity, that 7 minutes he has in front of them much more effectively. And those kinds of things, plus some RCI, which we've done on the vans, we kept doing this, and we had a lot of time doing it, has created a larger selling capacity. And you're seeing it, up 24% versus pre-pandemic levels. And so that's really been an expansion of selling capacity for the franchisees to take advantage of that market that's been there. And we keep working on that. We have big data we're looking at. We have other things we're trying to do. And so we kind of keep pushing that. And I'm not sure we plumbed the ceiling of the things I've just described to you. I'm only saying that those are the things that kind of brought us there. On top of this, by the way, we think we didn't stop investing in product. So we think we brought out some new compelling products like the new downtown carts that I just described.

Yes. The larger vans' penetration is high. I know productivity of that initiative probably has legs. Associate penetration is -- or assistant, I'm not sure what you call this, relatively low or maybe 1/4, if I heard correct.

You're right. You're exactly right, just about 1/4.

What's a realistic kind of -- what do you think is a good realistic number? You're going to have 1/3 or more guys who like, I work alone, period.

Yes. Look, I think we haven't yet cracked the code for being able to figure out how to choose -- match, should I say, match the assistant with perfection to the franchisee. That's sort of on us. We got to get better at that. We're getting better, but we have to be able to do it. Of course, the COVID created a little bit of a cycle stall in that because the people were understandably a little bit more careful about who they want to put on their truck and so on. But that's really the issue, Chris, is that generally, I think most people, we can show them a data that you use a technician, you use an assistant, it's going to work. Part of it is just what you say. 1/3 of them say, I don't want to do this, maybe 1/4 anyway. Another 1/4 says, I'm just -- I can't figure out how to work with the people. Another 1/4 say, I can't find the right guy. So first step is to help them find the right person because they're going to spend 24, I don't know. These guys work long hours. And so therefore, they're going to spend a lot of time cheek-to-jowl with the same person. You got to have the right person. And so we need to be able to solve that problem. And I think we're getting better at it, but we'll see. That's one of the advantages. Because once they get those technicians, it expands their capability to sell tremendously, which is the pacing element for the van business.

Okay. I think everyone's going to find some level of demand elasticity in this environment. Otherwise, I would argue you're not doing your job on pushing price if you're not finding some demand elasticity. And that's not you specifically. That's general. But curious if you could react to that and where you think you might start to see some early indications of demand elasticity.

We haven't seen so much so far, but part of it is this, Chris, is that we have almost a 3-phased way to price if you're talking about the van business. We have the list price, and that's where it's visible. But we don't declare that the list price is up whatever percent we put it up. We just put it out. So people can look at 1 or 2 products that they're familiar with. So it's not so visible. It kind of goes in. But that could erect elasticity problems. But then we have the promotions which are on the van every week, and they can be leaner or richer, and that's a lot more nebulous in terms of how good the deal is. The magic of the magician in promotions is to make people feel that, boy, this is a great reason to buy now and it isn't so expensive, but it's something they might want. And so that's the kind of thing you do. And then thirdly, we bring out an awful lot of new products constant. We bring out dozens of them every quarter. And so those new products always have different features, which are newly priced and it's hard for somebody to react to, is that feature worth it. Now people might say, okay, that new feature on that new torque wrench isn't worth it. They might do that, but they do that all the time sometimes in almost all situations. So it creates a kind of hazy situation that I think works in our favor. As you say, I wouldn't be surprised to see some elasticity someplace, but we haven't seen it so far. And part of it is that kind of hazy version of it. All I know is, so far, we've been able to make our numbers and react to the cost increases, and you see it in the margins.

Yes. So stick with RS&I for a minute and the EV equation. I think the way your EV solutions flow to the market, it may take a little time to be impactful at SOT because that's kind of the aftermarket business. But maybe for the next couple of years, in theory, the OEM business in RS&I should have a pretty sustainable, consistent stretch. Is that extrapolation...

Yes. I think it's not just EV, Chris, it's new models so. But one of the characteristics of EV is that seems like there's a lot of new models. It seems like every day I open a paper, there's a new model being announced some place. So you would see that drive the OEM program business. You would believe that would create kind of an underpinning for RS&I in their, what we call the EQS business, the Equipment Solutions business. And you saw some of that in the first quarter. RS&I was up, what did I say, 13.3% and a big piece of that was the dealer side of the business, both in equipment and in those essential programs. The essential programs, though, do get lumpy. Even from quarter-to-quarter, they can get lumpy because it just has to do with calendarization of the launch. But still, over time, you would expect that to be a nice stream for us, early in this complexity rising cycle. The other thing that's happening in OEM dealerships is I think the dealerships are starting to wake up or snap out of what I would call a disorientation. First, they had the COVID, then they had the question of no cars. So while they were raising prices, they were dogged with the idea that, what am I doing? I can't service my customers. I'm going to lose the customers I so carefully nurtured over these 10 years and created. So therefore, they didn't know what to do in terms of spend. They seem to be moving out of that because you can see our undercar equipment business, which is driven by that, and the collision business, which is also driven by that, that's going upwards. That was up nice double digits in the quarter. It's one of the characteristics of the RS&I growth.

Okay. And let's stipulate, say, your next few years you get your growth targets at the 3 segments. That goes to plan. In that context, the market may credit at parity or 0.75x or 1.25x. But regardless of that, assuming that base case, the market will do what it does, outside of that, what do you think is the top 1 or 2 levers you can do to create incremental shareholder value? The dividend is going up 15% a year for a decade. One thing that comes to mind to me is you maybe have a little bit of an underexposed software business and you have a clean balance sheet.

Well, the software business is, yes, I mean, the software business is, what, $500 million now and growing. And it's kind of a multiheaded software business. You got the Mitchell 1 repair information business, which is a pretty good business. We have databases that are 270 billion data points and 2.7 million actual fixes and so on. It's a nonpareil and it's growing and growing in terms of importance and technology and requirement to be table stakes for garages. Then you have the repair shop management business where we just acquired Dealer-FX and so on. So you have that kind of business. And then you have in that situation, you'll have the diagnostic software, which I think gets underappreciated sometimes because with all those diagnostics, the hard bodies we sell, the Apollos and the ZEUSes, there's the question of, okay, that keeps getting updated. And in fact, we're moving from selling every 6 months updates to subscription, which is a much more regular basis. And so what you're seeing a little bit is, we're moving away from the everyday, the title selling every 6 months is going down a little bit while we add subscriptions. And all subscriptions are up very healthily over the last couple of years. So we see a great, great push on that going forward. And then finally, you see the software that inhabits things like aligners and balancers and so on, which is underappreciated in that kind of situation. So I see a wide array of software taking on a new business, growing there. And as you say, with our balance sheet and so on, we could be in the market for adding to that. We're in the market branding for that organically, of course. We're really trying to pound that software business that's working well for us, but also we could be like in the Dealer-FX acquisition, we can look for some inorganic additions as well in that scope.

Okay. In that sort of $0.5 billion software business, what proportion roughly is priced discretely as a software sale?

All of $0.5 billion. The things that isn't priced as a software sale is the stuff I talked about in terms of the software that's inherent in some of the hardware like aligners and balancers and so on and collision equipment. That's generally in addition to. The point I was trying to make in that situation is, there's even more software content in our hardware which we would normally think is, okay, that's an all hardware business. And so that would be raising the value. We aim to raise the margins in that business without having more, by having more software specifications in those areas. The $500 million is more like what you would consider standard software. And I guess all of it would be identified as such and priced as such.

Got you. Okay. We'll look forward to incremental breakouts as you go forward from here. So C&I, you talked about some of the advantages of SOT operating in the current environment, but the more disparate geographies and sourcing and kitting for C&I. So it's kind of in a holding pattern in terms of demand with some margin pressures. Once some of the cloud is clear, where would you see kind of a quick leg up? What sort of markets or exposures that are kind of under-operating or undisturbed where it's just kind of raring to go if you can get these clouds cleared?

Well, I think it's important to think about, you said it correctly. C&I, I think I said it in my opening remarks, too. C&I was the most challenged in terms of turbulence, but it grew 1.1% year-over-year organically and it grew 3.6% versus 2019. And okay, that isn't the greatest, but it was facing one headwind, which we identified on the call, which I think not everybody fully appreciates. But the biggest sector of C&I in terms of industry sector is the military. And it's been particularly in defilade during this period to use a military term. And so we would think military would be a near-term opportunity. You would have thought we would have been talking about quite different numbers in C&I if the military had come back. So you got to believe that the current situation has got to drive some of that backwards, even in a new administration. So we kind of see that happening. And I think rolling off of that, in C&I, we see the whole idea, as you say, we have a lot of demand for our kitting. Our kitting has been very successful. The principal value-creating mechanism for C&I and for Snap-on, in general, is to observe the work, figuring out what will make it easier. And in the C&I segment, it is a kit that will address certain things like on a flight line of an F-35 or an oil and gas platform or in a general industry area. And so as you see that, and we were able to clear up the supply chain, either through redesign or the clearing generally of the supply chain, you're going to see us fill that backlog and take advantage of the opportunities that are inherent in the higher demand that we're seeing and the popularity of our products. Right now we're just having difficulty doing that. Now it's not like they're totally flat on their back either. I mean, they are growing against a particularly weaker military. They're overcoming that to grow. But if they were unleashed, if we could get the military back, if they get the military back, which I think it happens. And then as you counter supply chain, you're basically not one issue down after another, you start to be able to fulfill that backlog and start to expand on that. I see that as the biggest opportunity. Then in Europe, we're starting to become more customized. And so Europe was driving that upwards. And they were up even in the quarter. Our European business in total was up low single digits, but it was up against some pretty big turbulence. And so that business is starting to transform into a truly critical industry business. And I see that as another opportunity for C&I.

Yes. Could you spend a little bit more on that final point, Nick?

You mean about Europe?

Yes.

Yes, sure. Look, I think as we...

The more customized aspect.

Yes. Look, we have something we used to just sell to a distributor unit by unit. We'll sell you so many wrenches and you put them on your shelf, mister, I don't know, you name the customer. And now what we're doing is we're going around the distributor and sometimes with the distributor to talk to the customer and say, what could you use? What kind of kits could you use? We can customize for you. And we still sell with the aid of the distributor, but it creates the same kind of thing that's been so successful for us in the United States. We call it the Bahco Ergo Tool Management System. It's a mouthful, BETMS, but it uses the Bahco brand, which is incredibly popular in Europe. People get tattoos with that brand. And it also, to the customer, provides a bespoke kit that they're able to use to work with certain, to address certain problems. And this is the same kind of business that has worked so well in the military, in oil and gas, in aviation and in general industry and heavy duty in the United States. We're starting to do that in Europe. And so that kind of thing, that system of customization, going directly to the customer, understanding the problem and coming up with a solution that is made out of more than just one tool. In other words, configuring for the customer as opposed to them going to a distributor and configuring for themselves.

Okay. Great. So migrating some of the attributes that are more fully baked at SOT it sounds like. Curious, kind of a macro question for you, it's been a while. You maybe have a little firmer memory of inflation in the '70s than I do. I mean, I think of a Marathon candy bar going from $0.25 to $0.50 from one weekend to the next when I was on my first bike off training wheels but...

I'm afraid I was working at Ford. So yes, I do have a little more. Nice of you to say so. You could say, you wouldn't know it by looking at me. Okay.

You got a better memory though than I do. What's your kind of sort of optimistic time line of when inflation rates may normalize to what we've been used to in the past couple of decades? And do you think industrial supply chains are a leading indicator of general inflation?

I do. I think industrial supply chains are a leading indicator of general inflation. They've been part driving this. And I think the root cause of all this has to do with the microviscosities introduced in the sourcing chain by the COVID. I mean, you see the Port of Shanghai closed at times. You see our ports slow down. COVID has, I kind of view this whole thing as, if you go, let me go back to the Jimmy Carter era when I was at Ford. And what happened was, you saw a tremendous wage-price spiral and it kept going upwards. And the answer to that was to create globalized supply chains. And then in the era of efficiency and continuous improvement create a very effective and efficient just-in-time global supply chains akin to a highway with cars moving at 200 miles an hour. But what happens to such a highway is when you have an accident or a breakdown along the highway, it tends to slow down and the capacity of the highway goes down. That's what you're seeing. And those breakdowns are really a version of COVID interrupting the actions. So as COVID recedes into the background, not necessarily the disease itself but our paying attention to the disease or our willingness to stop because of the disease, as that recedes, then I believe this will all kind of abate. I don't have a great crystal ball. But if you were asking me, I would say the fall, if we can roll over the fall, another fall without really being disrupted. If we say, okay, we don't care. COVID's around us, but nobody is going to get really sick, then I think this dissipates. And I think the inflation goes away. It's a different inflation. It's not driven by wage-price spiral. It's driven by interruptions. And there is a cure for that. And I think that cure can come. Now if it stays on longer, maybe all bets are off, maybe you do get a wage-price spiral. But I don't think so. I'm not seeing. I will tell you this, Chris. When I was young and I was working for Ford, my next-door neighbors would come in at a party or something and say, I'm buying a TV because I don't want to wait a month because it will be a lot more expensive next month. I'm not seeing that so much yet. People complain about the values, but they're not really assuming prices are going to go up. And so I think that's a favorable condition, which means that it's still abatable. And I think maybe that, I think if COVID kind of goes down, then we're going to solve the problems.

Great. Okay. That brings us right, I don't know if you did that on purpose then, but that brings us to within seconds of the closing time. So good time management, Nick, and thanks for your insights and time.

All right. Good to see you, Chris. Take care.

You too. Bye.

Bye.