Business Breakdowns
· 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?
· Matt Fleming, Matt Reustle
[00:00:00] S1: The first quarter of 2009, which I'd say is probably the worst period in recent economic history ex-COVID, which we can talk about in a second. Organic sales were down 11% in the Snap-on Tools business. Recovered pretty quickly to finish the year down 3%, and then ramped pretty quickly thereafter. So the following year, plus 5%, plus 8%, plus 10%, plus 13%. Really for the three years afterwards, so 2010 through 2013, high single digit organic growth. Similar pattern to 2020 where you had Q2 when the whole world was shut down, down 20%. Down 8% in the first quarter, down 20% in Q2 2020, but then 17% and 20% rebound, followed by 27% and 50% organic sales in Q1 and Q2 in 2021. So the reason I mention that is, what the data would say is you certainly can have drawdowns in organic growth, but it tends to get made up in the recovery period. That could be pent up demand, that could be delayed replacement. That could again be new entrants and some combination of all the above. [00:00:00] S0: A trend line that moves upwards, with some shocks when you have macroeconomic periods. [00:00:00] S1: I think that's right. [00:00:00] S0: If we transition down into the margin line, and you mentioned they're able to control the margin now with this franchise model. Can you talk a bit about what that has looked like historically and where they tend to operate from a margin perspective?
· Matt Fleming
[00:00:00] S1: I think if we frame out the three segments, the margins in RS&I are going to be the highest. That's higher price point, higher technical sale and RS&I, which is the Repair Service and Information. In 2010 those were a little over 19%. They're 19.4% margins. Fast forward 14 years later, at the end of 2024 they increased those about 600 basis points, to 25.3%. They think those margins can certainly go up, but I think they're mindful that they're pretty high already. C&I, which is the commercial industrial margins, pretty nice improvement as well. 11% in 2010, again 600 basis points in 2024. That's going to continue to go up. But they do sell about 50% of that segment primarily in Europe through distribution. So they are going to track lower margins than their tools counterpart. But here's the real shining star. In 2010, the tools segment had a margin of 10%, and at the end of last year they finished at almost 23%. 1200 basis points in 14 years, and that averages out to be about 85% of annual improvement. Some of that is for sure mix, some of that's new product and pricing. But that really gets back to the rapid continuous improvement, really under the stewardship of Nick Pinchuk. And this one keeps surprising me. I've owned this company for a long time, and every once in a while I get hesitant and say, well, I just don't know that margins can continue to go up. And I was looking at my notes, and I think I said that when they were at 15%, at 18%, at 20%. So I'm trying to be open-minded that they can continue to improve.