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

Thank you, Annie, and welcome, everyone, to our Generac fireside session. special thanks to Nick, Aldo and Sarah for joining from Generac and glad to have you guys back at the conference. Thanks for participating. So I think I wanted to kick off with sort of a high-level kind of frame up type question and get into some of the comings and goings of the business model and the market backdrops. But maybe if you could discuss Snap-on's market position, competitive distinction and challenges and high-level management style and philosophy.

Sure. Look, Snap-on is, I suppose it's the -- I would say, the premier tool company in the world that certainly has a brand that substantially one of the most profitable, if not, the most profitable with working men and women in the United States, all over the world, really, but particularly in the United States. And where we operate is we operate where the jobs are critical. That is the need for repeatability and reliability just to buy a Snap-on level tool or a piece of software or so on. And we used to just provide wrenches, hand tools, but now we found and we used to just sell through our van channel, which is now 40% of our business, we found that we could we could provide things a wrench, of course, but a piece of software or anything in between, as long as it solved critical tasks and we could sell through our vans well, but we could also sell through distributors and direct. We have a big direct sales force. Our principal value creating mechanism is a little different than others. We tend to want to be at the place of work so we can observe that work and figure out the particular challenges in the critical environment. And when I say critical environments, I of course mean automotive repair, but also aviation, oil and gas, heavy-duty truck, education, mining, a lot of different things. Again, where the penalty for failure is high. We like to be there. In fact, we are there. We spend more time and more workplaces than anybody else in the world. We call on 1 million technicians almost every week or almost 1 million technicians almost every week. And so we observe the work, and we get insight from that, that says, boy, we could make a tool, we can make an innovation that would make that work easier, that would create greater ease in that work. And that is the fundamental value-creating system that we have. We tend to make in the markets where we sell because the essence of our business is to be at the point of work. So as such, we have 36 factories around the world, 15 here in the United States. So in the parlance of the day, tariffs aren't terrifying us. We're not immune to them, but we are resistant to them, we can maneuver around them very well. In terms of our management philosophy, I think it comes down to that. We like to be forwardly placed. We like to drive the decision-making down as close to the customer as possible. We try to be vertically integrated, which we are -- and again, we try to be as close to the customer, all while trying to make sure that we keep reinforcing one incontrovertible fact is that work is essential, we saw it in the pandemic. And so we try to reinforce the pride and dignity of work. And 1 of the best support for that is that Snap-on brand is the outward sign of pride and dignity that working men and women take in their profession. They ask us, they take pictures on their wedding days in front of a Snap-on box or off a Snap-on truck, they put a Snap-on wrench in the hands of their newborns, and they ask us for Snap-on boxes so they can bury their love ones' ashes in them, and I am not kidding about that, too. It is the outward sign of pride and dignity for working men and women. So that's our company.

Great. Thanks for that, Nick. And right now we're getting an environment where you have -- I think you called it confidence for the condition for the tax presently with all the headlines and issues. So your response has been what it's been in the past, SOT assortment pivot work. You had some nice initial momentum, it looked like in the third quarter, effectiveness arguably into the first quarter as maybe that sort of sentiment fatigue built more with the tech's condition. Are there other adjustments to make there? Is it more just kind of block and tackle, execute the...

I think this, Chris, I think -- we would -- I would characterize it slightly differently. I think we kept making progress in the first quarter. It's just there was such a huge drop in confidence in that quarter. Now you might say just kind of take a windshield ideas of supporting maybe or justifying a downward trend. But if you do -- if you think about it qualitatively, we were seeing -- just let me back up, say, the garages are filled. We don't think they're cash poor. We think they're cash rich, they keep getting cash. The problem is all through the past year, they've been looking at the they're getting for breakfast like the 2 wars. Now you might say, okay, it's Ukraine and the Middle East, how is that going to affect us? But if you're [indiscernible] wrenches in a garage, you're pretty sure that your children, if we fight, your children are going to be among those who fight. You see that's the thing, it weighs on the grassroots. These are people who have FICO score of 600, 620, that kind of thing. They're at the bottom level of the economic chain. And now they do pretty well. They keep their families warm and safe and dry and they have money for tools and so on, but they're not -- they're not at the same level as the people on this call. And so they have a view for this. And then they see things like the border was kind of chaotic. And they saw the idea that the prices went up in the post-pandemic period when Shanghai or China interrupted the supply chain and they haven't gone down. Beef is still 44% above what it was in pre-pandemic levels, and milk is still 23% above and eggs are quite a bit above, but for a lot of reasons. And so they see that and they're worried about that uncertainty. So they pulled back from big ticket items. Now big ticket items in Snap-on's parlance are like the box behind me. They get financed over 3, 4, 5 years. And so they didn't want -- less willing to tie themselves to that kind of cash obligations. They were willing though, to go into the quicker payback items, which they liquidate the payments in 12 to 15 weeks. And so they're in kind of had a consumer shift, and we were pivoting our product line. 30% of our product line are those big ticket items that are longer paybacks in our finance over 3 to 4 to 5 years. And the other 2/3 are pretty much the shorter items. So we were pivoting more of our product line that it was working. And the uncertainty kept going, the uncertainty didn't abate but we kept closing the gap through last year by virtue of the effectiveness and the pivot, then came the new administration. And so they're looking at this and they're hearing the rapid fire coming out of Washington, where it's like, God, we're going to build a hoteling guys, and we're going to take over Greenland. I don't know what we're going to do with Canada. And so you hear that and you hear the tariff Blizzard, the fog of tariffs and they are thinking, "Geez, what's really going to happen now." And so if you think about that, it is a higher level of uncertainty for virtually everyone now qualitatively and quantitatively, if you want to look at the consumer sentiment, it dropped 30 points -- 30 percentage points since December, the second lowest ever. So what happened was our pivot kept working. We were learning things about what we could sell that they would accept like lower levels of some of these boxes. People still bought those or lower-level diagnostic units. We did that. So that we learned some things and we made some gains, but the confidence dropped much more precipitously thus the change.

Great. Helpful frame up, thank you. And how would you size the unmitigated tariff costs and time line to neutralizing. Is it primarily sourcing and production shifts relative to pricing?

Look, I think it's -- boy, Wrangler. The thing is, is that, it's not who knows? I mean where do you think Vietnam tariffs are going to plant. They're talking about talking to China now. You don't know particularly -- I think a particular thing is it seems like every day, we're actually tracking the announcements out of the White House every day. We have somebody tracking the announcements as they're going wild. Every day, there's a new revelation that comes out of meeting with this guy, I'm going to exempt these consumer goods, things like that. So I think it's pretty hard to judge also in our case, where we don't have big flows as important. Remember, we make in the markets where we sell. What comes off the van, 80% is made in America. So our main products, the tool storage box behind me, the hansels we have, 100% U.S. U.S. steel and everything. A lot of others are mostly U.S. products and some come from places like Europe or so there's a kind of complex cocktail of sourcing. And as the tariffs go up and down, it's very hard to predict that. And then on top of it, we have the ability to direct our sales through our promotion programs to things we think are unaffected by the tariffs. Thirdly, we have experience in shifting things that occurred in the pandemic -- right after the pandemic when, as I said, when the supply chains were interrupted. If you look at that and say it's hard to predict what the exposure is going forward because we don't like it to be very minimal. Now it's not going to be minimal, but we're working pretty hard to do this, and we're unable to do this because if you step back and think about it, people have talked about 3 to 5 years to put up manufacturing plants in the United States. We're are not going to do that. And the barriers to that -- those manufacturings are 3 things. Do we have the facilities. Well we have 15 plants in the United States. The biggest ones we've just expanded. So you have the know-how. Well, we make a version of everything we sell, almost everything we sell in the United States already, even if we import it from other places. We make a version of it. So we have the know-how here to do most of our stuff. And then finally, people say, and I think this is true, it's hard to get workers. Well, we have a pretty good reputation with our workers, and we can hire because we didn't lay off in the pandemic. So we haven't had trouble getting workers. So I think we're, one, we're not -- we have a thinner wedge expose. We're kind of advantaged versus others in this situation because we're making the markets where we sell. We're experienced recently in having done this. And by facility, if you count the plant space, the know-how and the workers, we're pretty enabled in this situation. So how that all plays out going over the future is hard to say, but I kind of like our chances to be among the best in this.

Thanks. Appreciate that. And I wanted to discuss the resilience we've seen out of RS&I's OEM business. To what degree is that isolated from OEM production challenges and profitability on EVs, all the noise that they're facing on the production side, obviously, the service centers are a different business under that, but within the same entities.

Well, there is a business when -- I presume you're referring to the business within RS&I, we call equipment services that really has done well recently. And it's done well on 2 things. I haven't talked about this very much, but it has been one of the drivers. RS&I, by the way, was up 3.7% in the quarter. and its profitability was 25.7%, up 140 basis points. So -- and that profitability went up 70 basis points of gross margin. So it was pretty cool in that situation. And within that, one of the late boomers here over the last, I'd say, 3 or 4 years, you've followed us, Chris, is that our EQS business which gets projects or programs from the OEMs and provides those to the dealerships and what this might be. It usually is something like this. Every time somebody brings out a new car, believe me, there are repair idiosyncrasies built into that car that they don't foresee. And when they finally see the finished car, they'd say, oops, it's going to be hard to get this wiring harness. It's going to be hard to get those spark plugs. We need a software patch or something like that. And so they would engage us to provide that product and distribute it to their dealerships. And they prescribed 5 to every dealership or 1 or 2, things like that. It could be something like a life table for batteries in electric vehicle. So every time a new model comes out there's some of that. Every time there's a recall there's some of that. So that gets driven by the programs. And what you're seeing now, even though the -- you could argue that when the auto industry is down, they might pull back from some of those programs if they were discretionary, but if you're bringing out new -- some of them can be discretionary to improve vehicles as well to improve the service. So there are 3 types of things: one, new model, one recall, one in from the service, you might see the improved service come out if the OEMs were difficult. OEM sales, I think, are kind of down, but the new model introductions keep going. So that's probably going to keep that business moving. It is a lumpy business because you got to get a program, you got to get a program, you got to get -- and sometimes there will be a quarter without the program. But lately, it's been a nice drumbeat and I don't see an interruption of that. But here's something else that happened in that space as we've gotten more and more in this business. And as we become more capable and as the OEMs have become more familiar with our capability, I think it's pretty sure that we're gaining a larger share of those programs. And that's what's been driving us. So in the quarter, that business was up kind of double digits, and it did pretty well in terms of profitability. That was up, and I don't see that going down in the near term. That doesn't back away, Chris, from the overall thing that it is a kind of lumpy business, and you could see some flat spots from quarter to quarter to quarter. I'm not telling you anything about the next quarter, by the way. I'm just saying I see it going upwards because I see us gaining share and I see a number of new models coming out just staying at a good down -- a good beat.

Great. And going over to C&I had some military softness more than offset a decent trend at the balance of critical industries and just modest international softness. So you've talked about Ben here before with military change of administration. Sometimes people take a pause. But what's your base case for how the military demand phases because it seems to be kind of steering directionally what C&I is going to do.

Look, I think -- well, the military, they were -- let's put it this way. Here's the quarter we're seeing. C&I was down, I think, 2.9% organically, but its profitability was 15.5%, up 10 basis points and its gross margin was up 180 basis points. So fundamentally, the C&I profitability would have been substantially stronger if we didn't keep spending around a lot of those areas. We kept spending. Actually, that's a theme for Snap-on in total. Snap-on gross margin was up in the quarter, 50.7%, up 20 basis points, but we kept spending even with lower volume. And so that's what drives some of the profitability financials in this quarter, that -- okay gross margin pretty strong reasonably strong, not up where we want it to go, but it's still up, and offset by just same SG&A and lower volume. And so you come back to C&I, they had a -- they were down in the quarter, up in profitability, but the whole down was explainable by a military. And the military is in what we call the critical industry segment of C&I, piece of C&I. And we find this not every time a new administration comes in, but often. A new administration comes in and a new Sheriff in town, got to put my way, my stamp on it. And usually, what happens is after a while, and this is a time space of indeterminant proportion, but what happens really is, in the end, the new stuff doesn't work as well as the new people thought it was going to. It clogs the system as it did now, it tends to stop the system. The war fighters complained. Nobody wants the guy to be standing there and when the 50-caliber bullets going overhead in the wrench break, they want to have the best stuff there. So in the end, the warfighters when it goes back to normal. And so I think you'll see that happen. And I can't predict when that will happen. But it will come back. And I have to say, I do think, boy, I think our view is in fact, I think you would say -- most people would say this, I think the kind of -- the wind is blowing on the side of more military spending, I think. So I don't think that's going to be a hole in the system. Now overall, that business has been doing okay. Its profitability has been going up, see nice profitability is going up and the critical industries have been driving it, even against the headwinds of the international markets, C&I is our most international businesses. So I would say where the Tools Group may be 85% in United States and in RS&I, maybe 70% in the United States or North America at. C&I is like 40% and the rest is outside somewhere. So I think you can see some waves, some waves associated with international business. And in this quarter, Europe was weaker than before. It hasn't been strong since the Ukraine wars. But what we saw in this quarter, the Nordic countries seem to turn down and maybe Spain and Italy were a little weaker. Some of the -- Germany seemed to get better for us. And then when you go out to Asia, I mean, China is kind of a basket case. Japan was okay, but it's got -- had a currency problem in the quarter in terms of importing stuff. And Indonesia and India is weakening, I think, because Modi, the Prime Minister has lost his more of a majority and able to impose things, so it's starting to drift away in terms of a great economy now. So you kind of see those things happen internationally. So I do think when you look at that business, boy, the critical industries are getting bigger and better than ever before, higher profitability. yes, this time, the military gave them a hole, but everything else, if you looked at everything else, they were up nicely. And so I do believe you got that. And the rest of the business will just have to deal with the ebbs and flows, but there are earnings, but then there are positives. But I don't really think we have something going there in C&I.

Great. I think I'll try to come back to that. I wanted to jump over to the liquidity that you have, the cash position. I'm going to pause to remind anyone listening in, we have the portal. I'll check it for Q&As in a bit. You have $1.4 billion in cash, $230 million net cash. Just wanted to revisit thoughts on carrying so much liquidity. Some would argue it's inefficient with a dividend payout over 2x covered. And historically, share repurchase and bolt-on activity has been fairly modest. So the cash position, coupled with the capital allocation posture seems too big. It seems to leave a gap what the capital intentions are.

Okay. I'll tell you our intentions. We -- our first priority is working capital. We're working capital hot. You only have to look at our working capital. So we're working capital intensive. We get a good return on it, though, our return on assets, I think, is in the 30s some place, mid-30s. So I think that's not so bad I do think and it generally goes upwards. And so I think that's proven to be a good formula for us. So we are working capital hot. Secondly, we -- yes, we do pay a dividend, and we started paying a dividend in 1939. And we have paid one every quarter since, and we have never reduced it, which means our dividend policy is perpetuity. So we want to make sure that we can keep that up because we think that's a very big positive to our long-term shareholders. And then we do make acquisitions. And I'd like to be ready to make big or small acquisitions. We've made some bolt-ons in the past that have been significant, for example, Car-O-Liner or Norbar. Car-O-Liner the collision business and Norbar the heavy-duty torque business or dealer effects, the software business for running dealer shops. Those have been reasonable. And we're not afraid to make a big one, actually I think we are. I'm just not looking for something transformative. If I found something that was coming our way that was coherent with our businesses, that is expand -- enhance the van channel, expand with repair shop owners and managers, extend the critical industries, and build in emerging markets that would enable us in the critical link we'd be willing to go after that, and we review. Every quarter, we review these things pretty extensively, but we're careful about our money. And then we buy back shares, and we bought back some shares in reasonable proportion of those things, if you actually go back and look at it. And on top of it, the consumer sentiment just dropped 30%. I'm not sure I am moaning about having cash. I'm not sure. I don't think Warren Buffett is moaning either, but he's not -- we're not Warren Buffett either. But I don't think this is the worst time to have cash. That doesn't mean I think we're going to need it, but I like having it there because I do think we might make an acquisition or we might do something else, I don't know. But those are our priorities.

Okay. Great. Appreciate the Buffett comparison. And he does like to have a lot of cash on, but he retired before you did. So...

That's true. He's a lot older than me, though. I want to point out.

He is, he is.

I maybe old, but he was old, he was old.

While we're on the topic of bigger strategic prospects and probabilities and considerations here. The C&I strategic growth target is above more into the heavier mid-single digits. You've gotten that in spots. It's been tough to do that on a compound basis, even though the backdrop of having less market share makes sense why that would be your leading growth business through the time. But we talked about one thing goes this way, one thing goes that way. To what extent do you and the Board review the idea of maybe slimming down? Do you need to be in European tools, APAC? Can you better configure the portfolio composition at C&I at large, to better enable say, a 5% or 6% compound truly through the cycle?

Well, look, 2 years ago, it would have been penal not to be in China. And it's still the largest market in the world. So or maybe one of the largest markets and certainly large automotive market in the world. So I'm not so sure I like pulling out of there. And I do have faith in Asia. It's running through a spot now where there's a lot of turbulence, but I'm not abandoning the idea that, that is an opportunity. This is kind of very judgmental. I happen to be -- my judgment is Asia is still an opportunity for us. And it's because it is still emerging. It's got tremendous economic power in a lot of different places. And so I feel that's some place you want to be. I think Europe, you have some questions about Europe, but we do review this periodically, and it's not like we're not looking at this with a critical eye. But we learned things in Europe and our businesses in Europe around RS&I are pretty good. You could say the European hand tools business in Asia. I mean, in Europe, that's in C&I, it's had its ups and downs. Well, we kind of have faith in it because we see a transition going in there. It used to be an off-the-shelf type of distributor business. Now increasingly, it's become a customization business. So that's working. We see some of that working, maybe not as quick or as powerfully as we want. It isn't like we don't have a strategy to make it better because we do. And we do think we can work that through. It's just that it's hard to overcome the ups and downs. Now you're -- again, it's a judgmental thing. Do you think Europe will be considerably constantly down? I tend not to think that. I tend, okay, they're going to fix the Ukraine thing and then they're going to find their way through this. So that's our sort of strategic take on that. If you look at C&I in total, yes, the international markets have buffeted them. We have decided because we have a favorable view of the trajectory of those long term for those markets if we keep our position in there. But if you then look at the critical industries worldwide, you would see that, that business grew in the range where we expect it to grow over the last 5 years. And its profitability has gone up pretty much is where we want the profitability to rise, like maybe over 70 to 80 or 90 basis points. So I think we kind of like what's going on there. Now when you look at it and you're a modeler, I don't think you like taking the -- I don't know. We don't like taking the buffets, the ups and downs. But then it comes back to what your belief about the long-term view of those geographic positions and we tend to be still okay with them.

Perfect. Very clear answer, Nick. And then I wanted to dive into the software business because the RS&I margin trends have been a nice, steady story and I think you just have a bit of a perpetual mix tailwind there. So just wanted to touch on the scope. I think you've called software, 1/3 of the RS&I...

It's growing, yes. Look, here's the thing. Remember, I didn't lead off with this, but our groups are facing certain customer bases. The tools group faces the technician, C&I, RS&I faces the garages themselves and some -- and they come together in tools and RS&I making diagnostic units and then selling through the van channel. And C&I where we roll the Snap-on brand out of the garage to other industries. But if you look at the software business in general, I'd rather talk to it in general just in C&I because of the diagnostics business. But software has become more important. Now everybody would know this, "Boy, if you can put efficient systems to run the garage, then the garages will love it," whether it's independent garages or dealerships, we're in both those places. By the way, all that gives you early warnings on what repair is going to look like in the future, you have things like electronic parts catalogs, which we -- we're the market leader, I think, in that. But here's the cool thing about it. If you think about repair and cars, there are 4 steps. One is you get kind of a maybe a there's something wrong with the car. So the cars these days have thousands of data points. They call them electronic trouble codes in the car. So you got to read them. They call it scanning, but we scan and you have to have a huge library because every car, every model is different. So you have to have a huge library to actually read it. We have the biggest fiber. Our handheld diagnostic units have the biggest library. Now what happened is it used to be that technicians would diagnose just by listening to the car or driving it a little bit. Now they look at the data points. Then what happens is, well, experienced technicians can look at the data points themselves and say, the data is saying this. But as the data points get larger, it's harder to do that. And then the galaxy of data points, the growing galaxy of data points that are in there, it's hard to do it by the seat of your pants. Now okay, then you could go, the OEMs provide you some guide, so you go through a decision tree based on the data and say, oh, it's a mass airflow sensor. But we have databases based on experience in cars, 3 billion actual repair events and so you can plug it in and say, "Well, I've got a Audi that's got 85,000 -- 2015 Audi that's got 85,000 miles on it. Here's what the footprint, here's what the signature of the data points are, the electronic trouble codes are, and we'll give you a pareto diagram. So you don't have to go through a long decision tree to say, okay, 69% of the time, it was the mass airflow sensor. So we scan, we have the best scanners. The widest library of scanned data. We have the only and proprietary database of how to diagnose the car. By the way, we have a 3 billion unit database, and we got a 500 billion database for the things that don't show up that happens so infrequently they don't show up on that pareto diagram. So we can teach -- as the number of data points get bigger and mechanics get more and more confused by it, they can turn to our database, and it helps them. Then on top of it, all of this just told you what's wrong. Then how do you actually take the part out? Well, senior mechanists got to memorize 2,000 procedures, 2,000, how many does a surgeon memorize by the way. So we will -- by the way, junior mechanics don't know all those procedures so they can go to our Mitchell1 database and figure out how to do it. And then once they figure out how to do it, it still doesn't mean it's easy to do and then you turn to a Snap-on tool to make it easy. So we've got a range covered and it has the software -- as the car gets more complex, the software that we have that's proprietary becomes more essential to do the repair. That's why you're seeing software goes up in RS&I. It's one of the reasons RS&I was up 140 basis points at this time.

Great. Thank you for that. And then SOT, the decremental margins were pretty steep. I know volume was down, and you talked about continuing the investment spend because you have a long-term focus and you're thinking about 2, 3, 5 years out, even as you're thinking about today. So I appreciate that. But just curious about the impacts gross volume mix and pivot program investments. Just any perspective on how...

It was down like 360 basis points, I think. So is not the most comfortable situation, but still 20%, it's chopped liver. That's up -- that's 500 basis points above 2019, by the way. So okay. But here's the thing. Okay, you wanted to mention it. Half of it is SG&A. Half of that percentage, Chris, is keep spending. And we're not keeping spending for -- where we are spending for the 4 or 5 years, I'm spending some ready when this confidence comes back. And I think -- I don't know when it will come back. When it comes back, just like when the pandemic fixed, we kept spending through the pandemic, and we were ready to come out, we came out roaring and so I'm following that playbook again. That was half of it. On the other hand, I think you could say maybe a 60-40 volume mix, maybe 50-50 volume mix. In this particular interlude the first quarter, we sold -- we had a program around the lower-end diagnostics. Remember, I said that we learned that we can nibble at the bottom end of the bigger ticket items, the longer payback items and get people to buy those things if they were smaller, smaller tickets themselves. And so we did it in diagnostics and diagnostics was a bigger portion of its sales this time. It grew in an atmosphere that -- and an overall that was down, Chris. And so what that means for the corporation is great margins. But for the Tools Group, they share the margins on diagnostics with the RS&I group. And so fundamentally, for the Tools Group, diagnostics is one of the lower-margin businesses. So that's what drove the mix in this time.

All right. We've got to pivot to the next blocks, both you and I. Awesome chatting with you, Nick. Have a great day. Appreciate the time.

Good to talk to you, Chris.