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

Okay. Thank you, operator, Sunny, and welcome, Nick. Thanks for joining us for the fire today, and I hope your one-on-ones are going well. So I thought I would just kick off, I think, a little frame up, if you could provide a little overview of the 3 operating segments, and in particular, how you think about market shares and the relative long-term growth targets?

Okay. Look, let's start with the vehicle repair and everybody wants to talk about the Tools Group. It's 40% of our business. This is the business where we sell through franchise vans, which call on the actual technicians twirl the wrench and they see them every week. This business seems to be doing okay. It is benefiting, I think, from a couple of things. I think one is there's kind of the long-term, long wave activity of the changing of the vehicles, the complexity, the ongoing move to drive by wire, the rise of autonomy and the -- in some ways, starting to benefit maybe not that particular sector, but will benefit from the changes in the powertrain going forward. You see that. And generally, in our history last 20 years, even though you would think that hand tools would diminish over increase in fly by wire, we have almost one, I think it's 0.88 correlation between the number of electronic codes and the rise of our hand tools sales because the cars get more complex. So they're benefiting from, I think, a very good and resilient business. We say car repair occurs all the time everywhere, almost no matter what happens and our experience has been through a lot of different turbulations. And so that's worked. The task for us is wanting to keep new products rolling outwards and matching the complexity, enabling the technician to do that and enabling our franchise drivers to be able to sell those complex vehicles in a reasonable time. Business grew -- was encouraging, grew 6.2% organically in the quarter, and margins were at 24.5%, up 180 basis points against 80 basis points of negative currency. And then you have the business that stands right next to it, which is about 28% of our business, RS&I repair system information they sell to the repair shop owner and manager, not the technician. Basically, a semi-capital investment, things like lifts and aligners and balancers and software for the shop and repair information software and collision equipment, that business is you're starting to see the effect of electric vehicles because one portion of that business is a business that does the projects commissioned by OEMs for new models. When they design the model, they usually find out that there are certain idiosyncrasies in the physicality of the vehicle or the electronics of the vehicle that needs special repair tools that need to be put in the hands of the dealerships. We've seen that business grow nicely. It was up strong double digits in the quarter because of the need to accommodate things like new lifts for electric vehicles because electric vehicles can't be dealt with in terms of the old lifts. So those kinds of things. And that business grew, I think, in the quarter 23 -- 13.9% organically. Margins were 23.4%, up 40 basis points and so that was a nice contributor. So that's the vehicle repair business. And then there's the other business that we say roll the Snap-on brand out of the garage into critical industries where the need for repair and repeatability require a Snap-on level product where the penalty for failure is high into places like water repair and the military and aviation and in oil and gas and wind and mining education. And that business generally has a variety of products, but one of the characteristics is we tend to be evolving into a business which provides kits. If you have the F-35, we provide a kit for the F-35 repair and for manufacturing. That kit may have 200, 300 tools in it in a toolbox like the one behind me. And so that had been lagging the recovery of the COVID because of the turbulence associated with supply chain all those kits needed to be shipped complete. So tough to get all 300 tools at the same time in the kit. So it did some attenuation of viscosity, and that started to clear up in the quarter and the military business started to come back. So that business grew at 11.1% organically. And the margins a little bit lower because it's all over the world, 15.3%, but it was up 170 basis points, 190 basis points, sorry, 190 basis points in the quarter, and that was against negative currency. So that's kind of a view. In the commercial and C&I business, we sell through direct sales and through distributors and also in the RS&I business, we sell through direct distributors. That's sort of my summary.

Great. So I think the next one is something that a lot of people talk about the rise of eVs. In your opening pitch there, you mentioned eventually powertrain change will be a driver for SOT. I think you see it a little sooner at RS&I, but can you talk how you expect that to emerge as a demand driver over the next handful of years?

Well, yes. I mean I think, look, what happens in these things is generally what we see is as cars change, there is a demand for new and different tools. A simple thing in electric vehicles would be you need insulating tools because you don't want to fry yourself. A simple thing would be in the diagnostics unit, you've got to be able to more aggressively manage the cooling systems so that the batteries don't overheat and therefore, go dysfunctional. Little things like that, but you're going to see all of those things come on. And if you look at the repair that's happening today, about 80% of the repairs on a car today is already not on the powertrain. So you're going to change that 20%. It's going to be nice for us. But that 80% continues. And then when you see the changing in the powertrain, they're going to need new tools, so you're going to see electric vehicles roll out. You are going to see, I believe, the rise of plug-in hybrids already. If you look at the China numbers last year, China added almost as many plug-in hybrids as they did electric vehicles. in their explosion. You see it growing in Europe. So it's probably going to come to the United States if you think those cars. So you have electric vehicles, you've got plug-in hybrids. You're probably going out of Japan. If you read the press in Japan, you're going to see an alternate type of hybrid. And the interesting thing about new technologies is they hardly ever foresee to the market in standard applications. So what I would say is when we look at from a repair point of view, an electric vehicle is not an electric vehicle, it's not an electric vehicles, they're all different. So these things are going to drive substantial expansion. You already see if there's an article in the New York Times today talking about Norway, saying that, okay, to get 80% of their sales in electric vehicles, but repair shops keep coming. So you're going to see that. And here, I don't think it's going to happen as fast as 80% of the sales. And so you'll see a continuation on top of all those, the aging of the internal combustion part will drive new tools as well. Because what happens in a car, the life of a car for repair is -- comes out. The OEM says, "Geez, we need these things -- we need special tools to get this wiring harness out or to deal with this certain -- this overheating problem or a certain physicality or certain software problem. And so we provide those." Then what happens at the dealership, the dealership starts to see the new cars come in, and there's a demonstration of what's happened in the first -- in the initial driving of the vehicle. And frankly, the dewrinkling, the wrinkling out of all the maybe shortfalls in the car, we have dealer FX that provides our really acquired software business that has repair shop software, repair shop management software that sees those things and gives us a warning about what's happening and allows us to have tools for that. And then they roll into when they get off of warranty and independent repair shops. And we have another software business, Mitchell 1 that surveils those through repair shop management systems. And so we get to see that. And as the cars, even if the warranty start to go from 50,000 miles to 100,000 miles to 200,000 miles, they encounter different problems. And so each of those drives different needs. And so you'll see that play out across the range of even a tremendously more complex range of individual models for powertrains and for the autonomy that's being impressed on the cars now.

Sounds like a lot of vectors intertwined there. Skipping over to C&I for a second. On the recent earnings call, you stated -- you sort of indicated that the segment is starting to really hit the stride with respect to kind of your long-term organic growth aspirations for that segment independent of kitting, getting a little bit better. Could you elaborate on that comment about starting to hit stride, if I'm quoting you correctly?

Yes. Look, I think this, I think you're seeing the -- there are a couple of factors here. The direct critical industry business which provides the kits and other things was up deep into double -- was up more than 11.1%. And that's because of the sort of like 2 factors. One is here to 4 when it had been growing. They had a couple of quarters of up 7%. And I think in the fourth quarter, it was only at 1.5%. But generally, there was an underrepresentation of military. Every time a new administration comes in, it doesn't matter the Democratic Republic, there's a new Sherriff in town, and they come in and they say, we got new rules for procurement and the rules create I use the word again, tremendous viscosity in the ordering. And generally, that works for a while. It takes down the military sales. And then what happens is the war fighter say, hey, buddy, you better do something because I need these products. And that's what's starting to happen in the military. So we have the military boosting it and we had the -- for the kitting business, which is a pretty big portion of the business and high-margin portion of the business because they started to have a little bit of daylight , a little bit of daylight. They've got more to go in terms of their deliveries. And then you had Europe C&I is all over the world. And so Asia kind of held its own, it was about the same. But Europe was a little better this quarter for them. They didn't get hammered like we thought. So I would say the C&I growth in the quarter says, "Hey, kind of a leap forward not lead forward, but moving forward in the United States and with the kitting business." Europe holding its own against a difficult situation and not being pumped and Asia kind of holding its own, against some difficult situation and it all turned out to good growth and a nice step forward in terms of margin, principally driven by the higher kitting volume, which is good margin business.

Great. And then at SOT, that's been really interesting in the past couple of years. It had been bandwidth constrained for several years prior and just into the pandemic. Could you describe some of the key breakthroughs in wiggle room you were able to open up in...

Sure. I think one thing -- I would say that one thing that was maybe underappreciated, it isn't quite an answer to your question, but I will answer your question. One thing that was underappreciated is we kept investing in product through the downturn, and we kept making sure our product was available, so the guys kept going. And because we kept investing in product, we have more and more strong product that can match the complexities. We didn't fall behind on that. So that's one thing. We feel good about our product line. Secondly, what's happened there is the pacing element is, one, the product; 2, the ability of the franchisee to sell because it only has they're only 24 hours in a day, 7 days a week. He's out there, he's calling on people. And so what we did to enhance him in the COVID is we did a few things. One is we were able to be much more effective through shorter burst video presentations that allow them to translate and learn about products before they went to the actual point of sale. So that worked pretty well for them. In terms of, I think we had a pretty good breakthrough in terms of training, much more effective ways to be able -- they didn't have to go back and look up things or look at a longer video and the video is more effective. It's hard to summarize all a bunch of little steps in that way. But I think the best way you can think about it is we just got better at producing those distance and not iterative training programs. And that allows the franchisee to like just before it goes into the grass and to look at 2 minutes of a video and learn something that help them. Secondly, we much sharpened our social media activity where we were able to interact with our -- franchisee was able to interact directly with his customers and brief him through social media, breif them on social media about the next new tool or the next -- the promotion. And so therefore, when the franchisee goes into the grant, he doesn't have to spend precious minutes of the 7 minutes he has with each technician to give them what we would call a business school as well as case facts. They knew it already. And so therefore, he could spend time closing the deal. This tremendously helped them. And then we expanded some in our, what I would call, our shop equipment sort of a version of our technovan. We kind of expanded and adjusted our shop equipment van network that helped them in terms of having specific events in the field with customers and that worked. And then during the COVID, we spent a lot of time just working on what I would call more physical things. So we came up with this activity where in 1 or 2 weeks, every quarter, we've rolled out and we mobilize office personnel and field personnel to go on the field and actually not worry about sort of like administrative tasks, but help sell product. And that worked to, we call it rally weeks. And so that seemed to work for us. So you put those together, it greatly expanded greatly expanded, I guess, you could say, great, because they're up 32% over prepandemic levels, greatly expanded our capacity to sell. And we're going to keep driving those kinds of things. Because that is one of the product and capacity to sell at the pacing elements. There's something else that came up in this period that for the future is I can sell every toolbox that I could make now. And so I think given the increase, we bumped up against capacity in some of our factories, and we're expanding, I think we're expanding 4 factories in the Tools Group, one of which we've already done in Alabama. And then we've got the other 3, we're expanding the capacity of those things. So those are the things for the future because we believe there's a lot more opportunity to mine as we go forward.

Okay. And then wondering if there's any learnings on that kind of throughput expansion that can carry over to C&I. I know the channels are very different. But what's in play in terms of sharing best practices across C&I in terms of sustained commercial excellence and organic compounding.

Well, I think -- look, I think in C&I, we have learned the translatable portion is the video training for a distributed sales force. I mean C&I, one of the big sales, well, a lot of the sales force is direct sales. And the characteristics of direct sales aren't that much different than franchisees. They're fundamentally a distributed sales force. And so if you're able to deal with them on these bursts, you're able to help them be more effective in selling. So we've learned that as an ability to enable C&I. The big thing in C&I, these days, though, I think, is for short term is we want to deliver, we want to deliver, we want to deliver, we want to get that kitting business moving forward faster than it even did in the last quarter. That's the price because there's business there that we haven't been able to fulfill so we want to take bigger advantage of that, and that's the principal bottleneck. But coming out of the Tools Group, the learning principally was that video. Of course, social media works, but not quite in the same sense because the direct salesman have a little more time to deal with their interlocutory at the various customers. So it isn't quite as a hurry up business as it might be in franchising. That's I think those are the 2 big things that I think are going to play through in that. C&I, we're pretty optimistic about it. It seems like the business is in -- particularly the kits are in great demand. We're also -- we were also encouraged about Europe that they held their own. We were worried about it a little bit, and it seems to have absorbed the problem and that's been a big hole for us.

Great. And then what do you attribute that Europe resilience to?

I don't know. I guess, I think we have good products. So I think that we're fulfilling a point that we kept introducing. Remember, I come back to the idea that during the COVID, we kept investing on both sides of the Atlantic in profits on products and brands and our people. We don't lay people off. So we were fully loaded to come out of this. And I think other people may have had to do some catch-up, and we weren't in that situation. So I think I have that. Plus I think we did pretty well in certain markets. So I think like Germany until we made some progress in Germany and so on. So I think those are the principal situations, just that we were kind of still strong. We came out of the COVID stronger physically than when we entered.

Okay. And given that C&I has had some of the most impact from supply challenges and now getting better. And this question can apply across the portfolio, too. But is there a tailwind emerging from capitalized costs and inventory versus what's been passing through the last few quarters?

Sure. But the thing is, is that's a double-edged sword, if you got capitalized costs, you may have some of the older and higher cost in spot buys still in inventory rolling through. So it doesn't come out as quickly. That stuff doesn't wrinkle out as quickly in terms of cost. I don't think you're seeing in C&I in the quarter that affect so much. You see it more in the Tools Group. Tools Group is on LIFO so they're in a completely different situation. But in general, you're going to see it going forward. The time constants associated with that are not so clear to me. Generally, I think what happened in C&I was mostly the fact that they're able to deliver. And of course, they get their price for their cost in that situation. Eventually, it will work through and you get back to the lower cost levels.

Okay. Great. And how are you calculating the capacity adds for storage at...