Business Breakdowns
· 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?
· Matt Fleming
[00:00:00] S1: I think that makes a lot of sense. So I think if we break it down another way, Matt; tools is about 54%, diagnostic equipment and management systems 22%, and equipment's 24%. So equipment is going to be big-ticket items such as a car lift, a wheel aligner that's going to be purchased not by the ,but by the auto shop itself. For sure, there's a replacement cycle there. There is some innovation. They were just talking about a new wheel aligner that's modular, so you can move it around your shop if you don't have dedicated space. They're certainly innovating there, but for the most part I think you've got some more replacement cycles that go with that. Diagnostics and management systems, I would say that falls more into the new growth category. And if you think about the complexity of new cars, a 2025 Tesla is really different than your 2012 Honda Civic or what have you. It's much more computerized. You have to be really plugging in. So I think in that segment, those are higher ticket price, going to be a little more cyclical. But you're having technological innovation for sure. That big piece, 54%, I think you really got that right where there is going to be some replacement, but the majority of that's probably going to be new SKUs and new entrants to the market.
· Matt Reustle
[00:00:00] S0: On that point, just in terms of the evolution of cars and what they have become. They’re increasingly computer-esque, you often hear anecdotes from mechanics about how challenging it is to work on a car. It feels like there's not a lot of standardization from one car to the next. How much of a reality is that and how does that impact the business? Is it just a matter of evolving to create tools that support that new look and feel of a vehicle, or is there anything else to it?
· Matt Fleming
[00:00:00] S1: On the margin, you've actually seen dealerships gain share from the independent repair shops, and that's because they have access to this sophisticated equipment. And so therefore, folks like Snap-on are going to design and create tools for small independent shops to compete effectively. My sense is, what you're going to have is… in the old days you might have a big computer in your office and you had to do your work there. Now obviously we've all got mobile and handheld and iPads. And so I think increasingly, that's the way technology is going to go. In addition to just being able to plug your machine into the car and have the machine tell you what's going on with it. If you just think about the number of manuals you have to have for a car that's been in production for 30 years, you don't want to have your bookshelf with those manuals. You want to have it all on your laptop and flip it up really quickly. It's as much data as it is interaction with the machines. What's really interesting is that Snap-on I think is developing a pretty interesting subscription business every year. As a technician, you might just download all your manuals for 100 different cars or what have you, and then somebody brings in something you don't have, you might actually purchase that and be able to work on it.