Business Breakdowns
· Matt Reustle, Matt Fleming
[00:00:00] S0: Do you see pockets of pressure on that system? Because as you mentioned, you're putting a lot of the business decisions in their hands. It removes some of the risk from you, but ultimately you're dependent on them to remain in business and thoughtfully efficient. How much volatility have you seen with that over time? [00:00:00] S1: I don't have a great number in terms of a turnover, but it's pretty low. I wouldn't go so far as to say that the Snap-on franchise is like a Budweiser dealer or Caterpillar dealer, anything like that. It's a pretty loyal group. They bring all these franchisees out to this main conference every year, and it's a 10-day event and people really love it and they look forward to it. The initial capital costs are not insignificant. So I think what you get is folks that are pretty committed to being in the business and then figure out pretty quickly that they like it. One thing I didn't mention is the company also has a number of other trucks that they use as well, and they will supplement the vans. And so these are pretty funny. They've got the Rock N Rollcab and the Techknow which is T-E-C-H-K-N-O-W. These are specialized vans that they will bring around and really help the franchisees sell the product, market it. But for example, they don't have to carry 100 units of $10,000 tool cribs. I think Snap-on has done a very good job partnering with the franchisees and making sure they know that they're supported.
· Matt Reustle, Matt Fleming
[00:00:00] S0: One of the other things I wanted to tap into was the idea of advice, and this is something that I'm always surprised by, but I need to adjust my thinking around it. How these reps can really instruct and help out the actual people performing the jobs, would you say that that is a big piece of what they're doing? How would you measure the value in just the knowledge and the ability to suggest a different tool that's going to make whatever operation a little bit easier on a BMW? [00:00:00] S1: Candidly, the van operators are not necessarily automotive technicians themselves. They're probably not going to suggest a new way of auto repair. Where I think their value added though is, really understanding from the company what the new product line is and again really refreshing that 4,500 new tools a year. The company itself does a great job of really going to visit customers, watching technicians take cars apart, take notes and say, "Wow, we could come up with this new product." So again, I think that the new tools are really being designed in partnership with the customer, but it's the van operator who is just really distributing or promoting. That is probably a better way to think about it.
· Matt Fleming, Matt Reustle
[00:00:00] S1: Candidly, the van operators are not necessarily automotive technicians themselves. They're probably not going to suggest a new way of auto repair. Where I think their value added though is, really understanding from the company what the new product line is and again really refreshing that 4,500 new tools a year. The company itself does a great job of really going to visit customers, watching technicians take cars apart, take notes and say, "Wow, we could come up with this new product." So again, I think that the new tools are really being designed in partnership with the customer, but it's the van operator who is just really distributing or promoting. That is probably a better way to think about it. [00:00:00] S0: That makes sense. On the idea of the advantage that they have built over time. It's a historic business, there's been a ton of tools businesses around. Maybe this gets into what you were mentioning with KCI, but what can you point to that has allowed them to differentiate from competitors but also just maintain that advantage over time? If you were to isolate or think about different variables, what really stands out there?
· Matt Fleming
[00:00:00] S1: First of all, they have a lifetime warranty. I can't speak to Matco's warranty or some of their competitors, but that's a pretty big differentiation, because getting back to this capital cost, if you're going to pay 20 to 30% premium, you want it to be durable. And then if it breaks, you want to obviously have it taken back. I think that's a key piece of their brand. It really probably goes back to the innovation and breadth of product. They're really controlling how far and wide they can go. For example, Matco supplies Milwaukee brand power tools on their van, but it's a third party and so Snap-on really takes pride in the fact that they control 85 to 90%, meaning soup to nuts, manufacture and design and distribute their products. And so they really feel good that they're continually giving folks what they want. There are upgrade cycles which they're currently working on. So tools is probably farther and fewer between in terms of replacement. But you're probably going to replace your diagnostic equipment every three to five years, and you might replace your tool storage every five to seven years. And I think there's a pretty loyal customer base. I don't want to suggest it's Ford versus GM, but I think for folks who really know the product, there's a strong brand loyalty there.
· Matt Reustle, Matt Fleming
[00:00:00] S0: If we start to consolidate everything we kind of mentioned into the financial model a bit here. When you think about top line growth and the drivers. You have the new SKUs, it's unique because of the franchise model, but can you break down how you approach top line growth? Just how the business frames it as well. [00:00:00] S1: They talk about 4 to 6% organic top line growth. And that's company wide. Obviously that goes in waves. If I break down those components, it's going to be the new entrants to the technician market, 68,000 a year. It's going to be the existing base that is growing, with again those new tools that they're buying. There does tend to be some cyclicality, and I don't know that's the right term. It's probably better described as a product refresh. So a couple years ago they really revamped their tool storage line. That was a pretty big driver as well. So you do get those spikes. The business tends to track overall economic growth, but I would say there's certainly a component of consumer confidence slash small business optimism. And when the technicians are concerned about the economy, they might pull back on their purchases, just as a consumer might. There does tend to be a little bit of that as well, but it's certainly not the boom bust of other industrial companies.
· Matt Fleming, Matt Reustle
[00:00:00] S1: They talk about 4 to 6% organic top line growth. And that's company wide. Obviously that goes in waves. If I break down those components, it's going to be the new entrants to the technician market, 68,000 a year. It's going to be the existing base that is growing, with again those new tools that they're buying. There does tend to be some cyclicality, and I don't know that's the right term. It's probably better described as a product refresh. So a couple years ago they really revamped their tool storage line. That was a pretty big driver as well. So you do get those spikes. The business tends to track overall economic growth, but I would say there's certainly a component of consumer confidence slash small business optimism. And when the technicians are concerned about the economy, they might pull back on their purchases, just as a consumer might. There does tend to be a little bit of that as well, but it's certainly not the boom bust of other industrial companies. [00:00:00] S0: Coming into this, my impression was maybe that there was a little bit more of the natural replacement cycle that was keeping a floor on revenue, which may be the case. But I am getting the sense that a lot of the revenue base, revenue growth is driven by either net new mechanics coming into the industry or net new SKUs being introduced to the market. Is that the case, where it is a lot of new business rather than the reoccurring maintenance state?