Business Breakdowns
· 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.
· Matt Reustle, Matt Fleming
[00:00:00] S0: Yeah, it's an interesting way to add a new revenue line. It makes a lot of sense in a value-added way. On that point, just in terms of the independent repair shops versus car-associated dealerships and their maintenance services. Does Snap-on have any relationships with the auto OEMs, the car dealers? Do they sell into that market at all? [00:00:00] S1: Yes, they do. You can kind of cut this business a number of different ways, but the way they actually break down their segments are three. So what they call Snap-on Tools, which is about 39% of the business. That's primarily focused on that automotive technician that we talked about, primarily the independent channel. And then they have C&I which is Commercial and Industrial. That's the critical industries we talked about. That's going to be about 23%. And then the remainder, 30%, is what they call Repair Service and Information. About a third of that is going to be tools that they sell to the technicians at the OEM dealers. Another third is going to be undercar equipment. Think the big heavy capex lifting systems. And then a third is probably going to be that information systems that we talked about.
· Matt Fleming, Matt Reustle
[00:00:00] S1: Yes, they do. You can kind of cut this business a number of different ways, but the way they actually break down their segments are three. So what they call Snap-on Tools, which is about 39% of the business. That's primarily focused on that automotive technician that we talked about, primarily the independent channel. And then they have C&I which is Commercial and Industrial. That's the critical industries we talked about. That's going to be about 23%. And then the remainder, 30%, is what they call Repair Service and Information. About a third of that is going to be tools that they sell to the technicians at the OEM dealers. Another third is going to be undercar equipment. Think the big heavy capex lifting systems. And then a third is probably going to be that information systems that we talked about. [00:00:00] S0: Thank you. I think I've asked to break down the revenue base every possible which way, and you’ve come armed with the numbers. The last point, just on the top line and revenue. You mentioned cyclicality, for lack of a better term. But there's exposure to the general economy. How has the business performed when we have seen recessionary periods? Whether you take the financial crisis, I know that was a very unique time. Something like the industrial recession, which I'm not sure that that would have had an impact in that 15-16 time frame. But are there any historical precedents that you can point to that really projects what type of sensitivity they would have to downturns?