Snap-on Incorporated ($SNA)

Okay. Thank you, David, and welcome to our Snap-on fireside discussion here for those listening in. And Nick, thanks for joining our conference. And great to see you, and I hope the one-on-ones in small groups are going well. And this is made for people newer to the stock or just looking to listen in a bit. So I always appreciate the opportunity to pick and choose the questions. Just to start off, in case of some newer people on the line. Just curious if you could lay out the kind of broad strokes of Snap-on's business model, the market positions and the competitive distinctions and challenges. I think people understand the Vans franchise, we've seen in our whole lives, but that's just one aspect.

Yes. Look, I think you said it well here, Chris, is that you know us very well, of course. But look, I think Snap-on started out in a kind of van business. And it developed the art of calling on technicians, the guys who actually coil the wrenches to the point and selling them wrenches and through these vans directly. And today, we have 3,400 vans, and we sell directly to those -- we call on about 1 million technicians. But that was a narrow description of what Snap-on actually does. Actually, Snap-on operates effectively in the critical -- it's principal value-creating mechanism. What we do everywhere is we are at that. We try to be in the workplace, observing the work, figuring out where the particularly sticky tasks are and designing and taking those insights to design and implement either a wrench or a piece of software that will make that task easier. And that rides above almost any industry really. But it does require, that kind of thing requires that the industry and the job is critical. That is the need for -- the penalty for failure is high in places like vehicle repair or mining or oil and gas or aviation or the melter and the need for repeatability and reliability justifies a Snap-on level product. And so from that, comes our business of today. We still have the van model, like you said, when everybody thinks about Snap-on, they think of us in a van, and it's 3,400, calling on 3,400 people calling on the end users. So we're very vertically integrated, calling on 1 million technicians. And that business, we call the Tools Group. And the quarter, they were up, what, 5% as reported, 3.4% organically, and the profitability was 21.6%, up 160 basis points. And then you have -- and that's about 40% of our business. Then we're organized by customer. You have a customer base that stands right next to them. It's the repair shop owners and managers, not the guys who twirl the wrenches, the guys who run the shop. And they appreciate Snap-on too because vehicle repair is our history, and we understand it very well. And so we sell them what I would call semi-capital projects, capital things like software, run the shop or software to identify problems in the -- solve the diagnostics problem in a car or undercar equipment like aligners or tool tire changes or tire balancers. And those -- that business is -- we kind of came to it lately, but it's about 28% of our business. By the way, we don't sell through the vans. We sell direct or through distributors to that different customer base. That was about flat in the quarter, but it was up a little bit. They've got enough to be the highest ever quarter for that group. Its profitability was 24.6%, down 60 basis points, but its gross margins were up 30 basis points. So that difference was really pretty much due to 2 things. I mean, the lower profitability was due to 2 things: one, currency; and two, spending on things like better software systems, software development and brand building. So you have that business. Then finally, about another 28% of our business. You have the commercial and industrial business. We say it's when we roll the Snap-on brand out of the garage, but still it's a critical thing where the penalty for failure is high. And so you go out there, it's industries like the military, oil and gas, mining, general industry, heavy duty, education, natural resources. And about 2/3 there, about 45% that business or 40% of the business is through direct sales that go out there and deal directly with the customer. And we sell customized tools that will solve the problems. For example, we sell a special customized kit, which will deal with the particular idiosyncrasies of repair an F-35 fighter. We will provide a tool set that will help some of the heavy-duty equipment. And so that business has been growing pretty well. That's been a decent business, and it's part of our commercial and industrial group, which also has a what we do in emerging markets and has a European hand tool business, which sells through distributors to the trades and to auto repair and another number of other items in other areas in Europe. And when you roll those businesses together, that grew at 10.8% quarter as reported 7.1% organically. Its profitability wasn't as strong as we'd like to see at 14.4%, down 110 basis points. But the 110 basis points reflect there about 50 basis points of currency. Currency was not our friend this quarter. And then the other piece of it is this is the place because it's the most international of our business was most affected by material costs and tariffs. And then you roll back from that. And one of the things if you want to know all about Snap-on and our business model, you can't talk about it unless you hear about the brand. And the brand is the outward sign of pride and dignity that working men and women taking their profession. We literally have people where by our jackets, put our wrenches in the hands of their newborns or ask us for small toolboxes to bury their loved ones in it, and I'm not kidding. That's our...

So yes, those toolboxes are kind of interesting. You kind of tailor them to a lot of different things, and it's a really interesting marketing model with the storage space there. So going into that, does the feeling storage has turned a corner? And...

We, I think -- I guess it takes a little background, but we think we see positive signs about tool storage, which is a product which is sold through the van channel, the franchise van channel. Remember, we -- as what I just told you is we're organized by customer, the van channel sells to the technicians. RS&I tells that the owners have managed with a shop, and C&I sells to other industries not automotive repair, but they're still critical and sells to -- not to the users, but to the owners of those -- the people in charge of those various facilities. But if you come back to tool storage, it was positive in the quarter, and it's the first time in a while, it's been positive year-over-year. And the reason why this is significant starting in if you step back from -- if you step back, and you see that probably starting in the fourth quarter of '23, we identified that uncertainty started to separate the grassroots economy from the financial economy and it particularly affected the mechanics. Vehicle repair is one of those great resilient markets. There are a lot of secular drivers behind it. The number of cars getting bigger every year. Number of cars on the road getting bigger. The cars are getting older. Now they're 12.8%, and they all 12.8 years old, and they've gotten older every year since 1980. It's arithmetic. And then on top of it, there is a growing complexity of cars on the road that requires more tools and more information to actually repair them efficaciously. And they those things are rooted in things like different powertrains, electric vehicles, plug-in hybrids and super hybrids as well as advancements in internal combustion engines. That create a little challenge. And then there's the growing desire for autonomy, not just the auto autonomous cars, of course, at the end, but every car these days are starting to take on automated driver assist systems. And this creates a greater need for things like ability to decode those systems to make sure they're always in sync, to recalibrate those systems. And so those things drive that business. So vehicle repair is one of the great businesses. Technicians are cash rich and you can see it in the Bureau of Labor data, hours, technicians up, wages up and household investment in vehicle repair up, year-over-year, high single digits. So our technicians that we call on are cash-rich. It's starting back in the fourth quarter '22, they started to get confidence poor. They were looking at things like the border and the Ukraine war and inflation bearing down. And then since then, you had a number of different instances of rising problems, the Middle East war that was finally settled. Now you have the Iran -- you have conflicts with the Iran, you had conflicts with China that has been ongoing. So this weighs on the psyche of our customers. And what we found is with this change with this feeling about uncertainty, they withdrew from, let's say, not withdrew, but had less preference for buying big-ticket items. And the reason is this they could see, particularly with this administration, with the daily items that are coming out of Washington, they feel like they're on Space Mountain. You're going back and forth, you know you believe in where you're going, but you're worried you're going to tilt off the rails and they worry about that and they figure a tilt off would create a problem for them because they don't have the cushion that other people do, even though the cash reach now. And so they say, "Wow, we don't want to tie ourselves to long cash flows that were required to pay." Less people want to do that. And in Snap-on business, we have 2 types of sales. One, the big ticket items like here like this tool storage box behind me, and that's -- we sell that with the credit company finance note for 3, 4, 5 years terms. And they have pulled back from that over time. In the first quarter, we started to see for the first time that they seem to be coming back in terms of our sales. Now I don't -- 1 quarter does not a trend make, and it does not confirm that uncertainty is abating see Poland and I would haptic. And so I think it's positive for us in that regard.

Right. So I mean, comps have generally been easy. So it wasn't just a peculiar comp issue in the first quarter, just fundamentally felt like a better quarter for Tools.

Yes, I would have said -- Chris, I would have said the comps have been -- you said the comp was easy, but not so much when you look particularly at tool storage. I think we thought that was a positive.

Yes. Okay. Great. And the -- while storage has had its sort of own cycle, and it's been kind of a similar cycle for SOT in general with the pullback, but you have had some successes with assortment along the way to quicker payback items. And some of that strategy involves adapting manufacturing capacity. Where are you with capacity alignment now for SOT?

We would say, look, I think we called it the pivot the Tools Group pivots to shorter payback items. And so I said we had tool storage boxes, which are financed over 3, 4, 5 years. But the other 2/3 of the business are things like power tools and tools and hand tools and other smaller items, and they're financed only like 12 weeks to 15 weeks, and customers are more comfortable signing up for that kind of commitment. And so we took the Tools Group and tried to pivot to provide a richer mix of products in those areas. And so what you've got to do is you've got to get designs going to focus more. You got to take resources and focus more smaller payback items. And then you've got to take the manufacturing and tilt it toward that. And then you have to take the marketing, which is the easiest stuff, I guess, and you arrange your promotions to be more effective in that. And as the quarters have gone by, we've gotten better and better at that. And that's some of what you're seeing in the first quarter.

Okay. Yes. So is there a lot more capacity tweaking always underway there? Or have you gotten through kind of the most...

We got through most of it. But I think, look, there's always something you can do in that regard. I mean, it's a matter of balance. I mean, if things keep getting -- let's say, for example, is Chris, if the uncertainty continues, we keep tilting away from big ticket items. Right now, we're at a certain point, we could make it more small ticket items. But remember that when I say that people had a higher preference for shorter payback items. It isn't like no one tool storage. And it's a tool storage was still selling. It just was down.

And I think maybe to wrap up on SOT, then we'll move along. But I think you had a favorable sell-through versus sell-in in the last couple of quarters. So that might suggest some increasing liquidity for your franchisees and put them in a good position to...

Sure. You're exactly right. You know very well. We had what Chris is referring to is that the -- when we talk about our sales, they are sales to the franchisee, but we also monitor the sales from the franchisee to the actual technician customers. And they were positive. That was a positive number for a couple of quarters. And so if you look at the last half, we've gone through that number selling off is a little bigger than selling to our selling too. So as you say, the franchisees, the bans themselves should be in a little bit better position at this situation. You always like to see that. And generally, though, Chris, generally, I think it evens out over years. If you look at a year, it's usually pretty.

Yes, but it's just kind of interesting. Do you think -- I mean, there's a lot of foresight in your experienced franchisee network of what might be coming down the pike or certain demand streams. Do you think there kind of doing a little inventory cleansing a little hygiene? And are there certain programs that you think they're preparing for?

That can be, it can be. I was just talking to -- look, I think certainly, it's an unmitigated positive that you have a positive cell off the van, and it's better than sell 2 demand. That's a positive. I was talking to a bunch of franchisees over the weekend because we had our National Franchise Advisory Council for both Canada and the United States. I have about 25 franchisees here. And I have to tell you -- they by and large, they seem pretty optimistic, pretty positive. So I take that to be a good dipstick debt charge in terms of where things are. Now I don't think anybody knows how this on war is going to affect things. But despite that, they seemed pretty good. So I came away from that in a very positive frame of mind.

Yes. I think people are kind of used to stuff happening now and things people just getting back to business. So that was a lot of like process industry project orders with some that were gated just other companies. So for C&I, it seems to be generating some incremental strategic momentum. You mentioned expanding field reps, stronger performance in kitting packages and alignment of production capacity with the front-end structures of C&I. So just wondering if you could discuss those factors in what seem to suggest internal momentum building as opposed to maybe just a better economic backdrop?

Yes. I don't think it was a better economic back track. I mean I think look, I think part of it is if you step back from it and allow me a moment, the principal casing element of C&I is for us to get more understanding of the needs of critical industry customers that is customers in aviation, oil and gas and the military and so on. Remember, I started out the whole thing by saying our principal value creating mechanism is to go into where the work is being done, understand it and figure out how we can make those particular jobs easier. That's our art. We're really good at it in vehicle repair because we've been doing it for 106 105-plus, more than 105 years. And in fact, in this building, there are 600 people and 300 think they're car mechanics, they can really interpret -- if you're talking about aviation, we're building. And so what you're seeing there is we're building an understanding and feeding those insights back to create a richer and richer product line. That's customized to particular jobs. And that's what we're seeing in the principal on -- C&I is a lot of components. But the principal component, which we call the direct critical industries business, we saw some nice gains there. And part of it is, one, we're building a product line; two, we recently added -- well, recently, 2 years ago, we added more capacity -- and when you add capacity, Chris, to start out and really helps you. But as time goes on for some period of time, you understand how to wield that capacity more and more effectively, and that's what we're seeing in the critical industries. Critical industry was up. It's highest in almost 2 years, year-over-year. It was up high single digits and its profitability is strong. I mean every bit as strong as the Tools Group. And so that business, I think led the way and see and I am very optimistic about it. I have other pieces in C&I. You've got the European hand tools business which is more tepid in its profitability and was up some, but Europe still has a bunch of pain. So that business is okay. And then you have power tools and the power tools business, which makes the power tools for us and the toric business. And those are the businesses most affected by material cost increases and tariffs -- and so it isn't as positive for -- that's where they took a lot of hits in that situation. in that area. That's where we took a lot of the, I guess, increases or negative impacts of the material cost. And so -- and then you have Asia Pacific, who is kind of gain momentum. One of the things I'm positive about in the Asia region is that we always thought this would happen. We invest out there. We build factories, we develop distribution. We build the product line. And then usually start out trying to penetrate a greater position in the market in the middle. Unlike most Snap-on, you try to build it in the middle because they're in a place -- in an emerging market, there isn't that appreciation for the best product. And now what you're starting to see is a higher appreciation for the more higher quality tools that would be under the Snap-on brand. And even a stronger appreciation for some of our most sophisticated position products like the automated tool control boxes, which keep track of tools to make sure they don't get left on site, let's say, in a jet engine after they close up in the sell -- and so that's become more popular. So I'm kind of positive about that. So you see that business. And if you look at -- if you step back, I don't think one of the things I mentioned is -- and I did talk about I know one of the questions and everybody will allow these days, how is material cost increase in tariffs hitting you? And it does hit us some we're certainly not immune to tariffs, but were resistant. And then even if you're making the United States the material costs have drifted up. But if you look at our numbers, and this is the gross margins -- the gross margin for the corporation, I think, was 50.4%, down 30 basis points, but -- it took a 40 basis point hit from unfavorable currency. So basically, we're holding flat gross margins in a time in which the cost of goods sold is probably the most turbulent that I've seen in a while. And that's a credit to our, what we call, Snap-on value creation processes which we say is safety, quality. We keep the quality of customer connection and innovation where you're in the shop and you turn it into a -- turn those insights into an innovation, but also rapid continuous improvement. People are at every site. We have special teams with Japanese consultants that fix particular problems that in year-to-date, the rest of the corporation and the techniques learned. We all go to a site once a year to work on this, and we have a we honor the best teams with traveling trophy and prizes to have parties. And that business, that's what's fuels our business in terms of improvement, and you can see in the gross margins in this period.

Okay. Yes, for the particular area of what the power tools and the specialty torque that you mentioned, that maybe you can catch up on price with the lag? Or is that just it's going to be a negative equation when they're placing?

Well, I think they're going to -- I think they get better and better at it because part of this is swapping out components that are -- that didn't hit with well, who knows what the tariffs are going to be. The tariffs in China went 150%, and then it was 55%. I know it was 45%. So I don't know. One thing I do know, though, the tariffs are starting to lap tariffs for the second quarter and third quarter, fourth quarter next year are lapping tariffs. The first quarter had an unfavorable comparison any kind of tariffs you had you feel like you felt like the Princess in the P, you could feel any of those things on a year-over-year basis. But I do think they'll get better. They are -- part of the reason they're maybe not as helpful to C&I as they otherwise could be is they share the margin with the Tools Group. A lot of their stuff goes through the Tools Group. So yes, they bear some of those increasing costs and it goes through the Tools Group, and we can price for it there. It dilutes versus, say, the critical industries business, which is about 45% of it is where we sell, we make it in C&I, and we sell it directly.

Got you. Okay. And then I wanted to talk about the software business. I think you mentioned it's up to about 1/3 of RS&I now. I just want to hear you kind of mark-to-market. What the composition of different pieces of that? How you define software sales in terms of pure versus embedded? I'm sure there's a mix of that in there. And then what you're seeing on penetration rates for the subscription models?

Actually, we don't have too much embed in that number. That's pretty much more pure -- but we do have a lot of embedded software in things like aligners or tire balancers or other things. It is -- but it is -- I guess you could say it includes 2 pieces, 2 big pieces. I think diagnostics and information systems sold to independent repair shops. That was up in the quarter. And that can range from the handheld diagnostic units, which hold a lot of software, including wielding our proprietary databases, which are going to be enhanced by the use of AI through those things. And we have been working AI to actually develop those databases -- but our -- as the systems improve, we'll be able to wheel them even more efficaciously as we see AI as allowing us to bring out superior product, not just creating efficiencies. And then you've got subscription-based services like for, let's say, repair shop management or repair information or electronic parts catalogs and so on. And those are kind of fixed the difference between those. So you have some things that are associated with a particular product that we sell them by the drink, and that would be diagnostics. And then we have a bunch of other businesses that are rooted in subscription. So that's what makes up software for us. And I should add, the subscriptions are a growing amount of that.

Growing piece of the pie.

Yes.

Yes. And you break out certain categories of growth in RS&I, but tends not to be software as a standard disclosure like you do have for undercar and electronic parts catalogs. Why that's the software piece isn't broken out a little more?

Because I don't like breaking it out because it's in a bunch of different businesses. That's why -- and so it kind of confuses the issue. I will say software, we're very positive about its growth trajectory. That's what I'd say. But you know what influences some things like this. For example, in diagnosis in this quarter for RS&I, in the past quarter, you have the question of diagnostics, which was one of the categories that was down in the Tools Group despite the overall increase. And what drives that, Chris, is diagnostics, I think, has maybe different product offerings. And so it's a very model-based orders. So if you introduce a new product, boy, if it's the right -- if it hits, if it's the right product, it tends to drive things up in a quarter. And that tends to go out for a couple of quarters. And after that, the penetration -- the exceptional penetration tends to stop, and it tends to kind of adopt a more standard sales pattern. And then so if you're comparing year-over-year without a new product, you can see some weaker comparisons. Now we just -- so in the second quarter last year, we launched -- toward the end of the first quarter, we launched a new diagnostic unit. And so it's a little tougher comparisons. But what the -- we've just launched I think it was Thursday, a new product. Last year, we launched the Triton, which is our #2. We have these strike by highest most challenged technician that's the top of the line. Next works on a bunch of different things like calibration systems and so on. and then you keep going down until you got entry level. And so last year, we launched the #2. This year, we launched the #3, which is the Apollo. We just launched last Thursday, and it's aimed at the middle. So we'll have to see how that plays out, but we're optimistic. I think we're pretty positive. -- launch seems to have gone pretty well.

Okay. Sounds good. And then I think a big part of what you guys do is to develop key initiatives to help franchisee productivity. And I know coming out of the pandemic shutdown part of a phase of it, adoption of a lot of social media tools and electronic selling aids was a big part of what really opened up the valves and the capacity there. Just curious right now, if there are any -- I know there's always a lot of blocking and tackling, not every environment is like, hey, we got this particular initiative here. But just wondering what you're focused on advancing with the franchisees in terms of professional development these days.

The big thing is we're trying to -- everything about the franchisee, Chris, is how much time can we save them so they can spend more selling time. So because they're calling million timeline technicians. So they need selling time. It's one of the things. It tends to be one of the pacing elements every once in a while will run up against a ceiling that they don't have any more selling time and we can't follow the market. So one of the elements here is as our products have become more sophisticated, specifically around the diagnostics product line but also some of the power options in our tool storage and some of the other torque business. We need to give them more training so they can more compactly explain the great advantages of these sophisticated tools to the customer and how they can wheel them. So that's sort of part of our activity because they can go in -- what will happen is they're supposed to take 7 minutes per technician, they can roll into a garage, would say, like a Triton or the new Apollo minutes trying to explain it. We're trying to make sure they can explain it in 7.

All right. And then as RS&I at RS&I, the OEM business looks probably leveled off after a couple of years of really exceptional double-digit growth -- so curious how you're thinking about the growth prospects for that segment in the near medium term? It seems like C&I and SOT trends are a little more clear.

Look, I think -- first, I have to give a commercial for RS&I because I think I said this, although when you're in these events each day, you're not sure what you said, during this meeting versus the other ones. But look, I want to emphasize that, yes, RS&I was kind of flat, but it was still the best quarter we ever had in terms of the biggest quarter we ever had in terms of sales. So it wasn't CHOP liver. One of the headwinds between that is, as you say, we have that business. We call it the EQS business, and it's a lumpy business. I was at to work with the auto companies as an engineer. And what happens is when you design a car, you pay attention to all kinds of things like cost and performance and emissions and safety and all that stuff, but you don't pay attention to repairability. So when a car comes out, they look at the car and say, well, a minute, there are certain idiosyncrasies to this car design, it makes it harder to repair, so we need to aid the dealer technicians. And so the commission Snap-on, and I think we're the leader in this field now to provide a set of tools or software that into the dealership's need. And we've been doing pretty well in that. One is because there have been a bunch of programs. And two, we've gotten better and better and we've gained share. In this quarter, it was a flat quarter for that business. And so that is part of the headwind on the sales in both the OEM area and then RS&I in general. I -- it's hard to predict in the next quarter because lots of times, Chris, the launch dates of these programs, even though we see a nice, I guess, landscape of programs coming up, the launch dates tend to be quite fluid. And so we're not sure when they'll come in. But I feel pretty positive about the business going forward, particularly because we are now the go-to business to -- for OEMs to try to help them in this area.

Yes. It sounds like you really kind of took a step-up assert in your preeminence in that space over the past couple of years. I haven't heard you talk about it in those terms prior to that. So point noted there. That's.

Yes.

Okay. And I think that's a positive note to end on here as we're at time. So always great speaking with you, Nick.

Good to see you, Chris.

Catch you later.

You know a lot about our company. It's always a pleasure to talk to you.

Indeed. Likewise. Bye.