Business Breakdowns
· Matt Reustle, Matt Fleming
[00:00:00] S0: How does the risk sit in terms of in the system? If a sale is made, it's financed, is that risk sitting at the parent level? Is it at the franchisee level? I know there's a lot of intermingling there, but what are the mechanics there? [00:00:00] S1: So about 30% of the tools that are sold off the van are financed by Snap-on Credit. I don't know that the technicians are financing this with outside credit. So again, 30% roll through, and then if they do that 30%, that becomes a finance receivable for Snap-on Credit. So that goes up to the parent company. The risk is held with them. The good news is the bad debt is a little under 3%, and the days delinquent are between 1.7 and 2%. And I was looking at banks and other credit companies, that's probably just a touch higher, but not meaningfully worse. And then if you look at what I’d probably call subprime lenders, this is much better than that. So I think that really gets back to that frequent collection, that weekly collection that they do. It really keeps bad debt down. And then they're earning an average yield of almost 18% on these receivables. So it's certainly expensive. And that also behooves their borrowers to pay it back pretty quickly. They also issue receivables to the franchisees. That initial $100,000, $150,000 capital, that's going to sit with the parent but is obviously securitized by the van and the inventory.
· Matt Fleming, Matt Reustle
[00:00:00] S1: So about 30% of the tools that are sold off the van are financed by Snap-on Credit. I don't know that the technicians are financing this with outside credit. So again, 30% roll through, and then if they do that 30%, that becomes a finance receivable for Snap-on Credit. So that goes up to the parent company. The risk is held with them. The good news is the bad debt is a little under 3%, and the days delinquent are between 1.7 and 2%. And I was looking at banks and other credit companies, that's probably just a touch higher, but not meaningfully worse. And then if you look at what I’d probably call subprime lenders, this is much better than that. So I think that really gets back to that frequent collection, that weekly collection that they do. It really keeps bad debt down. And then they're earning an average yield of almost 18% on these receivables. So it's certainly expensive. And that also behooves their borrowers to pay it back pretty quickly. They also issue receivables to the franchisees. That initial $100,000, $150,000 capital, that's going to sit with the parent but is obviously securitized by the van and the inventory. [00:00:00] S0: Have they ever faced issues with the underwriting, the financing arm, just in terms of pockets of weakness and seeing some stress on that portfolio? Has that ever arisen over the history? It's a long history of financing.
· Matt Reustle, Matt Fleming
[00:00:00] S0: Have they ever faced issues with the underwriting, the financing arm, just in terms of pockets of weakness and seeing some stress on that portfolio? Has that ever arisen over the history? It's a long history of financing. [00:00:00] S1: To my knowledge, not at all. And so if we go back in time, in 2009, we bought the stock when they unwound their partnership with CIT. In 1999, they had set up this partnership with CIT who went through various iterations, and in '09, they brought these receivables onto the balance sheet. And there was a lot of hand-wringing, of “this company makes tools, what do they know about finance, etc. etc.” And it's just been smooth sailing ever since. For the most part. I can't think of a period where they've had any stress or issues with the credit. So it's been a pretty nice track record for now. Every once in a while you get what I call the doubters. Really talk about how they're juicing the market. That can be the bear case, they're pushing credit to basically get technicians to buy tools they don't need. It's very much the other way around. The receivables go up when sales of tools go up. They will lead with some promotions. But again, at 18%, it's certainly not what I call incentive financing for the customer. [00:00:00] S0: On the capital allocation side, you mentioned there can be lumpiness in free cash flow. What is their general strategy in terms of allocating capital? It feels like, because of the franchise model, there's unique dynamics here. What does that look like?
· Matt Reustle, Matt Fleming
[00:00:00] S0: On the capital allocation side, you mentioned there can be lumpiness in free cash flow. What is their general strategy in terms of allocating capital? It feels like, because of the franchise model, there's unique dynamics here. What does that look like? [00:00:00] S1: They're buying back some stock. They've got a dividend. They are looking for opportunistic acquisitions. They're actually redeploying their capital in this finance company, which has been a pretty good use of their equity when they're getting those returns. They're spending probably 2% a year on R&D. So they are very efficient with their capital. They don't have a ton of capital expenditures. Probably the biggest source of redeployment is putting it back into that finance company. [00:00:00] S0: And on the M&A front, when they do make acquisitions. I know way back when it was a tool manufacturer. Is that still what it looks like? Is there anything else that falls into the potential crosshairs? [00:00:00] S1: No, this would primarily be tools. And so they bought a brand fairly recently that gets them into the specialty torque business, which is a niche for them. I would say the others are pretty similar. So that was called Mountz, that was a $40 million acquisition. AutoCrib was another tool storage business, about $36 million. So what I would say is it's just going to be getting into smaller adjacencies where they can acquire a brand that's going to be attractive for them.
· Matt Fleming, Matt Reustle
[00:00:00] S1: No, this would primarily be tools. And so they bought a brand fairly recently that gets them into the specialty torque business, which is a niche for them. I would say the others are pretty similar. So that was called Mountz, that was a $40 million acquisition. AutoCrib was another tool storage business, about $36 million. So what I would say is it's just going to be getting into smaller adjacencies where they can acquire a brand that's going to be attractive for them. [00:00:00] S0: Thinking about potential headwinds again. I know we've bounced around and then addressed a ton. If you just think about the overall auto market. Whether it's a reduction in the number of vehicles owned per household, whether or not that's actually playing out, but it's a commonly discussed theme. Are there themes like that that you can point to as potential headwinds or structural market dynamics that you see or worry about?
· Matt Fleming
[00:00:00] S1: Well, I wouldn't say it's the auto headwinds themselves that I worry about. My personal view is, you are going to see a lower number of OEM manufactured cars. And the reason you're going to see that, Matt, in my opinion, is the auto OEMs really want to manufacture higher price point cars. So 15 years ago there might have been an entry level, call it a $20,000 automobile. Those are really hard to find right now. And obviously the OEMs want to manufacture $50-plus thousand dollars SUVs. On the margin, I think you're going to have fewer new builds. But the positive is that you are going to have a very robust used market and you're going to see people hang onto their cars a lot longer. And so right now the average age of the car park or fleet is over 12 years. And that used to be in the single digits, call it 10 years ago. So people are certainly keeping their cars a lot longer. And then over time, that's going to mean increased repairs. In the old days, if you bought a car every three or four years, or if you leased and you turned it in, you might not want to repair it as frequently. Now you are going to do that. So I think that's actually a structural tailwind for Snap-on. I think where you could see some challenges though, is that ultimately this is a people business. And if you look at the number of new entrants over time, it's unclear to me how many people are getting into the auto repair market. You certainly look at other industrial end markets, like long-haul trucking for example, and it's just very hard to find people to enter that industry. So over time, if younger folks don't want to get into automotive repair as a career, that might just put pressure on the number of participants in it.