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

Thank you, Efrain and welcome, everybody. We're going to move into our session with Snap-on, with CEO, Nick Pinchuk, Nicholas Thomas Pinchuk, is the full name, and Nick, thanks for joining us today and returning to the conference. Looking forward...

Good to see you, Chris.

And yes, for those in the audience, we'll prompt a few times if there's any questions so that I don't intend to monopolize it, but it will do fireside throughout if there's no questions from the audience as well. So Nick, just to kick things off, Snap-on has a relatively dominant position in the professional direct channel to automotive technicians and seemingly with some incremental share pickup over the past few years. But there's some well-run competitors in this kind of captive market, too. So curious if you could at a high level discuss competitive stability and rationality and how Snap-on can continue to protect your growth share long term?

Sure. Look, yes, we do have -- I think we've had a strong position for some time, and I think we've made it stronger. I think the Snap-on product line is fairly large. The tools business has 40,000 SKUs and keep growing, and most of those are [indiscernible]. The brand is I think, defining for people who use it. And we tend to think, and I believe this is quite true is that Snap-on proposition is strong, so we get among the best people to drive our vans and work in this industry. The other guys are smart guys, though, as you say, they're well backed and they're smart and they can expand or contract as they have over the years. And right now, they're expanding some in terms of number of vans. But I think in general, our position is pretty solid. I just was with the National Franchise's Advisory Council. And we talked about the market and so on. And the market today is quite turbulent and there's a lot of uncertainty in it, but we're confident in our position. And how we held on to this over the years or expanded on it. One is we keep expanding our product lines. Existing products, we keep pushing up the state-of-the-art products and our new synergy ratchet, for example, 102 stronger than any other ratchet and gets in places where no one else can get, some of our diagnostics with the databases, and we keep expanding on that. But also because we have more people in the garages, we spend more time in garages, we're able to configure tools which will address certain particular problems like the spark plugs on an F350 truck or the pins, the holding pins on Toyota SUVs that just have some difficult and sticky problems for mechanics, and we have a growing array of those. When you look at our -- how do we maintain our position, brand, just keep emphasizing the Snap-on brand because for a long time, and still is, clearly, it's the outward side of pride and dignity that working men and women take in their profession and then we try to take care of our people. We try to train them and not lose them and they stay with Snap-on for a long time. I just had our annual meeting, and we recognize somebody with 48 years with Snap-on, 50 years with Snap-on, 52 years with Snap-on, and the guy with 52, his father had been with us almost 25 years.

Sounds good. And then on the recent slowing in SOT volumes, what do you think is the mix of kind of market drivers there? And I know your focus is on driving assortment and mix to growth. So you sort of have this dynamic where you've had your typical toolkit of optimizing mix, working in tandem with market strength. Now that's maybe going against you a little bit, but you've shown in the past some pivot potential and realigning assortment. So curious how you think that...

Yes. That's right. Look, I think, boy, yes, the performance -- the growth of the Tools Group was not what we would call standard. And the principle -- I've been out talking to people in the field. We interviewed more than several dozen franchisees, not to mention the national franchisees so a council and then also just random calls to talk to people or visits. And generally, what's happened today, probably interesting pivot in the summertime and in the spring when the -- I think the financial markets were more worried about the -- where the Fed was going, the people in the garages seem to be unstoppable. And then I would say in the fall somewhere in early October, late October, they started to get overwhelmed what I would call bad news for breakfast and the uncertainty associated with them seems palpable. I'm talking to people -- I talked to one guy in Nevada, one of our franchisees said, it seems like people are getting caught up in headlines. I talked to a guy in the Northwest, he said, ratchet -- customers seem a little afraid now. They don't want to stretch out. They don't want bigger ticket items because it requires them to commit to payment terms that they're not so sure about that future. Guy in Kentucky said sort of the same thing. And so -- but that's just a snapshot of it. So you'll see in our customer base, and this happened through the fall and it's kind of playing out, pivoting to saying, well, I'm going to solve my problems. I like a lot of Snap-on products. I'm going to try to pivot toward what I would call quicker payback items. I'll pay some money now. I'll be able to use it right away like if I can better remove the pins in the Toyota or some of the smaller diagnostics or maybe the synergy ratchet in that expansion, those kinds of things or cheaper cards or lower-end tool storage items. Those things -- those are accessories, which aren't as expensive. Those are the kinds of things that are popular in this situation. We've seen it happen before in the great financial recession. And in fact, as the COVID hit as we're at the early days of coming out of the COVID, this is exactly what we did. We sold shorter payback items, quicker payback items. And we did it in the financial recession. Now what it required us to do is pivot our manufacturing, our design and our design efforts and our selling efforts to try to emphasize those areas, and that's what we're doing to respond to the market. But really, it's at the core of it is. There's probably multiple reasons. But at the core of it is this uncertainty that you're seeing. And you can read it in the Wall Street Journal and New York Times a bunch of different other places. We were one of the first to see it, though, I think.

Okay. And then at RS&I, OEM demands continued very sturdy, compounding several years now. So I just want to take a little dive into that business model, the drivers for sustained growth and runway versus kind of a notional external bias to an eventual pause after some significant expansion.

Well, -- that's a multi-point explanation of its growth.

Nick, do you want me to back up and redo the question.

No, no, no, I got it. No, no, no. I don't need you to back up. I was just going to say, there are several reasons for its growth. Now was it up like 3% or 3.3% in the quarter organically. But it also sells to the Tools Group, Chris. So it's important to realize that the RS&I Group grew organically externally. External organic sales were up 5.8%. So it's still growing pretty strongly. Its OI margins were up, what, 90 basis points in the quarter. So it's still pretty robust. And it's been robust for a while. And what's driving it are several pieces. The one thing you just alluded to, I think, has been very good for us. It was this traditionally lumpy business that takes OEM projects that quite often, quite regularly, accompany the launch of new models and serves them. And these are kinds of things I think you and I had the conversation, which lasts like several quarters and that goes away and you got to get new ones, all those kinds of things. It is a consistent business. But what's happened in recent days is the number of new models, I think, driven by the new technologies and new powertrains seem to be rising and being more consistent. Now I think one question would be, is that going to continue? Well, it can't continue forever. But I saw the Stellantis CEO on TV about 6 weeks ago saying he's bringing up 30 new models. So it seems like there's going to be pretty good runway and there should be some pretty good runway in that area. For some time, I cannot predict when it goes back to more lumpy situations. That's one. Two is the equipment business has grown. The undercar equipment business has grown nicely in this period, both from some of our new products that we brought into that space in alignment and balancers and tire changers and lifts. In particular, we've done pretty well in this. But particularly around our investment -- our propitious investment in collision. About 5, 6 years ago, we bought this company, one of the leaders in collision, [indiscernible] Car-O-Liner and collision has bloomed because what's happened is collision shops are now being asked not to only restore the car to its original shape, but they also have to work on the car because every time a car gets dented, it disrupts the neural network of sensors that are in there that are needed to create all these advanced driver assist systems. And that's a much more complicated task that the collision shops in a lot of ways are being asked to take on, and we have the products to do this. So what's happened in collision. Not only has there been more sophistication and metals and materials. So restored near new shape, to the proper shape has been more difficult, and therefore, we could get a boost from activity in that area, but also the idea of calibrating sensors, restoring them and calibrating is an incredibly software-based task that collision shops need, and that's helped us boost. And then the third thing, I think, is just we used to take -- we used to look at software in electronic repair a car and a laptop or a car, you plugged it in. And what it did is it told you what the trouble codes were in the car, the signature of the car, the trouble signature of the car. And that moved over the years just get going. 25 years ago, it was dozens. Now it's tens of thousands. And that became more difficult. But that became more difficult and we've kept up with that. But what's happened is instead of, I would call that single point software, trying to find what those different top codes are and amass them into a code, a fingerprint. But the fingerprint itself is not definitive. So then there's another phase. You scan the car to find out what the car is saying, then you got to figure out what does it really mean that's called diagnosis. And what we found is, instead of depending on the usual OEM prescribed decision tree, you keep going through a car physical activity, keep going through and then coming up with, say, a mass air flow sensor or certain wiring harness, you can use data, which we have, 2.7 billion repair records of data of real actual repairs that happen in the car and we can classify it by modeling, by mileage and all those kinds of things and trouble code, and it will give a Pareto diagram cutting that in half. And then the other thing is for the much more complicated and rare events, we have a 412 billion database that allows you shortcuts those repairs, and that cuts a lot of time out for mechanics. And so what helps -- what has helped that growth is that growth of that database, making it more and more efficacious as cars have become more complex, but that's only going to continue. And we -- the OEMs are blind to that database. And recently, we had an event that confirmed the proprietary nature of that database for Snap-on. So we feel pretty good about that.

Yes. Could you describe just how that came to pass where the database is so proprietary. I mean, this is auto repairs industry that touches anyone who owns a car. The market to service autos is huge. Why such a singular position for one player in this repair records?

We are in the garages more. We touch the garages through a number of different ways. We touch them with our software, we touch them with our people. We touch them with our diagnostic units. It's the original scan tool units that were in the garage. And so we have -- that's what we found over the years, instead of just looking at what the car is saying it and using that data, we realized we had this reservoir of data, which we could marshal and keep growing, and that's what's happened. Now the interesting thing about it is though it's not just having the data, although I believe we're the only ones who actually have the data. this data is all written or reported in what I would call technician. It's a different language. And so you have to have the code, you have to have the decoder ring and we have that. So this is one of the things that has given us a real proprietary position in that situation. And like I said, it's just recently been confirmed that it is proprietary for us. And there was never any question that the OEMs wouldn't have it because it's after warranty. Most of it happens after warranty. So it's in the independent garages and we are clearly the behemoth in independent garages.

Right. Okay. And then -- so the software -- your diagnostics tools sales, they're bottle, they're lumpy. They're up and down, but the software grows persistently, I believe, does that difference reflect conversion to subscription model or...

Well, yes, sure. One thing that's happening is we have -- we used to -- as you know, I think we used to sell what we call titles. Every 6 months, we had an update. Now more and more people are moving to a subscription model where they pay us every week. And therefore, we don't have to resell them on this stuff, they stay in it. So that's helped the software go up. I think it's important to realize. So I think this is an interesting thing. It isn't -- it's not only software, but it's the basic data. We have the basic data in our database, which is really a big advantage. So when we say software, we mean both of those, but that's been a big factor for us. And I think what's going to happen is as people -- as cars get more and more complex, Chris, one is, is that more and more technicians are going to realize that they need electronic assist in diagnosing the cars. They're already start -- they had long -- one thing we've talked for a long time, even I about the idea that people are going to need more and more diagnostic units. But in a way, that was a dialogue around scanning, knowing what the car is saying. And therefore, more and more repairs require somebody to get in there and understand the repair codes. That was 40% of new car, 40% of repairs on the road need a diagnostic unit, 80% of new cars need this. That's mostly about scan, but more and more -- and so what has been happening is technicians and particularly the senior ones who we say, well, once you tell me what the car says, I can fix it because I know what that means, but it's getting more and more complicated to figure that out. And so they need someone to aid them in that second step, which is diagnosis. And that is where the database becomes incredibly strong. And so one good thing is as more and more technicians realize that need as the cars get more complex, that plays to our proprietary position. And one of the things we do is you're going to see our vans become better and better at explaining that and wielding that and it ain't complicated -- it ain't so easy with the 412 billion data points to explain it in 7 minutes. So we get better and better at doing that. So we see those sort of 2 or 3 trends that are very favorable to us.

Okay. And there's a view out there that diagnostic tools themselves are pretty... [Audio Gap]

Happening here is it's a lot more -- it's an important thing to have coverage and scanning, Chris, but it's more pedestrian, harder to diagnose. You see what I mean. So -- and then as the cars get more and more complex, the messages are going to be harder to decode mentally by the guys. And therefore, they're going to turn to these things. There are a bunch of ways people do that, but we clearly have the database that makes a difference.

And when you say the scanning identifies the repair type when you say diagnosis, you mean the repair -- tiering the repair protocol options?

No. What I mean, there are actually 3 steps. One is scan. It tells you what the electronic codes are saying to you. But the thing I think a lot of people don't understand. This is not definitive. There's a lot of interpolation or interpretation that needs to be done on that. Then you go to diagnosis. You take that electronic data and boil it down to saying, okay, it leads to say that the mass airflow sensor, for example, is bad. That's our second point. Then the third thing is how do you take out the repair fall sensor? Or how do you repair it, how do you repair certain wiring vans? That's a repair information thing. So there's almost 3 steps. But the one I'm talking about here now is the handoff between scanning and diagnosis.

Got you. Okay.

They are going to need help on all 3 of those.

And for C&I, critical industry, I think recently, you referenced the critical industry. There's about 40% of that and put a mid-single-digit growth on a double-digit comp, not too shabby, but I want to discuss the global mix in key verticals in that [indiscernible].