Snap-On Inc at Bank of America Global Industrials Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Sherif El-Sabbahy - BofA Global Research - Analyst : And so you've touched on this focus on the technician, these critical roles that they play. There's a lot of tools companies out there but how is Snap-on unique? And how do you see yourself in our competitive landscape? Aldo Pagliari - Snap-On Inc - Chief Financial Officer, Senior Vice President - Finance Because I said we don't cater to do-it-yourself, the one advantage. The disadvantage is you don't get scale. Advantage is you don't have scale. So that means you can do more bespoke, unique smaller lot sizes. You can cater to the more nuanced needs that might exist in different businesses. The example I've been using today -- and again, I'm not an engineer, so I don't know this by trade, but the needs of a mining company in Antofagasta, Chile, that's a mile underground of the copper mines, are different than the needs outside of Perth when you're doing open pit mining and moving major large apparatus on the surface of the earth. There's a difference between maintaining or decommissioning the North Sea oil platforms and making sure there's no leakage on the ocean floor as compared to what's needed when you're putting up new oil platforms into the Gulf of Mexico or North Sea, which we don't do too much of anymore. So because these nuances exist and because we can survive, we're very vertically integrated. So we have a lot of manufacturing capability in-house. We actually have 36 factories around the world, about 15 in the United States and 21 outside the United States. So it's not like we're US only, booming business in 130 different countries. We have the flexibility to adapt. Now again, that means you have to come in with a premium because it costs money to adapt and be in these less than desirable scale opportunities. It's not like we don't like scale for the sake of scale, but when you declare certain strategies, make certain choices, then scale comes with DIY, but we don't like that because it commoditizes the product. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Sherif El-Sabbahy - BofA Global Research - Analyst : Makes sense. And you also have this sort of unique approach to the market where you've got franchisees, direct-to-customer in other markets. You've also got a financing arm. Could you touch on how that financing arm fits into Snap-on's overall strategy and supports both the franchisee and/or direct market sales? Aldo Pagliari - Snap-On Inc - Chief Financial Officer, Senior Vice President - Finance I'd be careful about scaring everybody, financing company. If you're following industrials, financing companies are not so common. Snap-on existed in a way, shape and form really since the 1930s. If you look at the pictures of the trucks in our museum, earn now, pay later. I mean this is in vogue days. Everybody's talking about subscription-based services. When you go with a concept, earn now pay later -- and I'm not talking about payday loans, but like that, you're selling high-priced tools. Well, how do you sell a $100 wrench in 1930? Maybe it's a high price point for that time. But you sell it by saying it's $5 a week. That's how you get it across. Eventually, the price point gets to a precipice where you need more duration. And that's where the financing company comes in. So we have a financing company to help enable the franchisees and their customers, they're the actual decision-makers as to when to use financing. But when price points start to get higher, things like a tool storage box, a median price of a tool storage box at Snap-on with nothing in it, it's about USD8,000. I think they're not cheap. So you'll find that the poster child of what gets written on extended credit is tool storage boxes. So mix, off the back of the van -- since we're going down this path and I'm talking a lot. Off the back of the truck, about 70% of what the franchisees sell is financed by themselves with their own working capital. These are the products that are selling X amount per week over up to 15 weeks. 30% of the time, again, more less, they're selling things that require longer duration. Now the longest loan that Snap-on credit offers is up to five years and the average loan in the portfolio right now is a little bit over four years. That number has been -- the 5-year duration, that maximum has been in place for 20-plus years now. So that kind of gives you a little bit of color. But what's important about this -- I don't want to scare everybody in the room. Before the word subprime was ever invented, that describes the technician. That is the financial profile of a technician. In our databases, 63% of our customers would meet the definition of a FICO score that's in the subprime or lower category. Because of the nature how auto repair work is organized -- and until you come into this room, you wouldn't have thought of it. The technician owns their own tools that only exist in certain markets of the world, unfortunately, United States, Canada, United Kingdom, and Australia. Common theme is the British Empire is in there somewhere. And in those markets, the technician owns their own tools. Everywhere else in the world, China, France, Germany, Italy, Brazil, the employer provides the tools. But because the technician owns their own tools, you have the pride of ownership. You have the weekly in-person collection agent, a franchisee who simultaneously is trying to collect the $5 to $20 per week or whatever the amount is, and at the same time, sell some new trinket or gadget, or more importantly, a productivity solving solution to them, and they're pretty artful at this. And by the way, you're doing it with all your friends around you. So I'm repossessing your tool, everybody else on the garage can see that. By the way, you need the tool because your employer doesn't provide it to be productive. Odds are, you're paid more by the job, not by the hour. So if I REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Sherif El-Sabbahy - BofA Global Research - Analyst : And over the past year or so, we've seen organic growth be impacted in tool [spending] a little bit. And despite sentiment being fairly positive, the shops are full, there's a lot of work to be done, technicians have been pulling back on spend for those big-ticket items. Have you seen any change with that with regards to the backdrop? Anything in terms of purchasing attitudes, just given some of that? Aldo Pagliari - Snap-On Inc - Chief Financial Officer, Senior Vice President - Finance I'll talk more at the macro level. And again, I'm not ducking the question. We don't give current guidance. I love that fact, actually we don't give current guidance. We give long-term guidance. But you could see that in the fourth quarter, and you can ask yourself how have things changed since the end of the fourth quarter. Technician confidence was weak. And when things are weak and you're talking to your friends that are attending the Bank of America Conference, if they're giving you bullish interpretations and saying, you're more apt to make major investments. If your friends from Bank of America saying, I don't know what the saber rattling is and 200-some people die today in Gaza and the war is no closer to resolution. And now you're firing at Yemen -- and I don't know if that's indiscriminate firing or it's targeted firing. The world is still a little unstable is the point I'm getting at. So confidence has probably not gotten better over recent times from a macro perspective. The good news is that there's plenty of work. You can go to any skilled labor application, whether it be in a factory, whether it be welders, machine operators, CNC machine maintenance people or technicians in an auto garage or at the tarmac at Heathrow, there's a need across the board for more skilled people. The governments of the world are starting to talk about this more surgically, saying we need to have more technical education. We have to make technical education and trades more popular for people to go into. Everybody wanted their children once upon a time to go into academia, and they all want to go out and become investment bankers and things of that nature, but not everybody can do that. And not everybody can be an art historian, and there's nothing wrong in being an art historian, but it is a number of people that actually know how to work the trades and you have to make it popular and have them full of pride, like it did back in 1920 when people would be surgical felt, the green tools, whatever you want to call it, and take pride in what they do. And that's kind of our calling, to make that popular again. Now the question on confidence, I'll let the audience be judges of that at this point in time. But the demand, the market is there and is needing people to make further investments because the number of cars are getting accretive. There's not less cars on the road. There's more. They've gotten a year older. There's more complexity being introduced each and every day with whether it be vehicles, whether it be getting the astronauts' back with SpaceX versus Boeing, whether it be -- I think there's one of the CEOs of one of -- an airline today declared that there won't be any improvement in at least our expectations on delivery of aircraft for four years or more. That means whatever Boeing makes, whatever Airbus makes is not enough. That means whatever the installed base of aviation is today, you have to keep them all online and running. So the need is there. So I feel pretty good about that. It's not like your demand has dried up. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Sherif El-Sabbahy - BofA Global Research - Analyst : And when we think about these larger ticket items that technicians might be putting off, typically, everyone thinks of storage, what else might be included in that? And as a technician, from their standpoint, when in their careers are they purchasing larger things like storage? How often can -- or how long can they really put it off for, given the need to the interim? Aldo Pagliari - Snap-On Inc - Chief Financial Officer, Senior Vice President - Finance Well, Snap-on on stuff last a long time, and in fact, our tools are guaranteed for life. So the hard iron sockets, wrench supplier, screw drivers, those are guaranteed for life. So unless you lose it, you're going to get that replaced for free. When it comes to power tools, there's again, variations on power tools. And there's specialty items. Now if you're doing more work in a lot of these cars is the more they get computerized, you're working sometimes under dashboards, are working on more frail componentry. So you need smaller power tools, they get into nooks and crannies and work in a controlled torque environment so you don't strip the fasteners that you cannot even see sometimes. So you're getting variations -- if you get into battery operator vehicles, I think there's 90% more faster. It's mostly associated with the battery pack. But all these items require a wider array of nuanced tools that you don't even really need them. I can't postpone it because I came to work this morning thinking I could fix every car that came into my shop, more or less. Now Snap-on shows up with some new ideas, some new invention, says you can do this more productively. Well, if I only see a certain vehicle once a month, I'd say, I'll struggle through it. I'll take the extra 15 minutes, 1 hour or 2, whatever it is. But if I see this vehicle with regularity, I say, wow, this could be a real time saver. I'll get investment on -- investment return on this, plus I like to add to my collection of tools, I think you meet with success, but you need to have, one, the person convinced that your tool delivers the productivity that you promised. I think we're pretty good at being able to demonstrate that, but it takes shoe leather to get out there in front of people and show them the difference. And you need to have -- people have a reasonable level of confidence to say, I think that demand is going to keep coming into my shop or out of the tarmac or whatever it would be. And therefore, I'll get a return on this. It's not going to be, all of a sudden, I bought this and I don't need it.

Question: Sherif El-Sabbahy - BofA Global Research - Analyst : You've touched on some of these data products and other items. Turning to RS&I that sells into the dealers, lots of those larger payer systems. Have you seen a change in the backdrop there in terms of dealers willing to spend on systems just given the more volatile backdrop? Aldo Pagliari - Snap-On Inc - Chief Financial Officer, Senior Vice President - Finance They have actually been -- well, sometimes it's prescribed and related to new car platforms that roll out. So when there's a lot of new activity, it forces sometimes, for lack of a better word, dealers to make investments. So for example, when a Cadillac declares, we're going to have X amount of sales that are going to be electric. They got to have a charging station in the front of the dealership for their customers. They have to have at least one in the back for their technicians. We don't make charging stations, but we might facilitate the industries that sell into that and help dealerships remodel, for lack of a better word, their bays, their appearance and the investments that go along with them. Some of those programs have been quite dynamic of late in our Equipment Services Division has very strong 2024 and that still seems to have a good order book as we enter 2025. So you can get variations, but still the need to deal with the ever complex array of cars that are coming is there's no signs it's going to abate because cars keep getting more complicated. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Sherif El-Sabbahy - BofA Global Research - Analyst : Understood. And -- okay, turning sort of to the commercial and industrial side of things. We've seen a few years of really strong machinery fleet sales, notable replacement the last few years, and what looks to be several strong years ahead for some end markets in terms of repair. Are you seeing any variation in those markets? And how should we think about your sales sell-through versus some of the replacement demand and upkeep for these fleets? Aldo Pagliari - Snap-On Inc - Chief Financial Officer, Senior Vice President - Finance Fleet sales directly are not so big a piece of the business to Snap-on itself. It's more you have fleets in different places that you might make spot buys and different vehicles. But selling the repair information to the fleets is important and selling products that are unique, such as the diagnostic products that are used to service heavy truck. Snap-on, I think, still has a lot more upside yet in heavy-duty applications. Even though we've been around for 105 years, we're far more penetrated on the light vehicle and truck side than we are in the heavy duty. So I think that you have opportunities that still exist on that side. And again, criticality is important. Trucks are not -- they are very valuable assets when they're on the road, not so much when they're not running. Same I'd say extends into agriculture. I think we're still in early days of penetrating agriculture. But if you get into the number of variations of what's needed to service the agricultural fleet, there's as many repair stations, I think, in Europe and the United States as there are actually for cars. But it's just not something that's been top of mind so much, but it's a growing important sector, I think, for us, the person. So I think you get -- we never there's criticality involved, and these trucks and tractors are getting more computerized, more complicated, more nuanced, I think there's a need for the people that service those to add to the repertoire of products and services.

Question: Sherif El-Sabbahy - BofA Global Research - Analyst : And when you look to expand in these areas, is it mostly an organic process, developing those tools internally? Or are there bolt-on opportunities? Aldo Pagliari - Snap-On Inc - Chief Financial Officer, Senior Vice President - Finance Both. Organic is obviously the first choice, and that's where you have the most comfort. It's got more predictability because you've been doing it and you have people on staff. When supply chains get disrupted, sometimes you have to devote your engineering talent to qualifying new suppliers versus coming up with new products. So when you don't have supply chain dynamics that are accruing, you have more engineering talent to deploy. But M&A certainly has its role. The example I like to use is right up the road here in Oxford is a company that Snap-on acquired maybe back in 2016, 2017 or so. Norbar. Norbar was created at the end of World War II because there were not torque companies in the United Kingdom that we're capable of servicing Rolls-Royce engines for the aircraft that were used in World War II. They had to get a license from someone in the United States. Norbar eventually got the direct ability to license it and perfected their own products over time. That company progressed and became very well known in the industry if you're in torque circles. At the same time, it was a GBP50 million company. But their know-how was extremely gifted. And therefore, if you marry it up with a Snap-on that has maybe a bigger balance sheet, more geographic dispersion and also power tools capability, you could start to marry the technologies of torque with the technologies of power tools and other industry sales capabilities, and you get a long sought after word, synergy. Synergy is very hard to find. Sometimes you have to be very skeptical as a finance person, I think, in judging it because sometimes synergy doesn't. In this case, we look for opportunities where the company has a strong brand, family had a great reputation, the family, the owner of that company recently retired, so they spent a good seven-plus years with us. It goes to show that Snap-on is a company that values culture and legacy. And as a result of that, it makes it possible to attract other potential M&A candidates because you can point to examples where you bought family-owned or smaller operations and their legacy can live on. So we try to find things that are kind of a cultural fit. It doesn't mean we don't make changes, but we're not looking to make rash changes. We're not the type of company that when you look at M&A, put two things together and get huge cost synergies because you're blowing up the corporate headquarters. There's a time and place for that, but that's not Snap-on's approach. Not that we don't look for cost savings, but foremost, what's the reputation of the company? What are the unique characteristics? What are the products? What's the talent? Will the talent stay or the talent walk out the door? These are all things that we think can vary highly of, first and foremost. And then how can you amplify their capabilities? When you take the entirety of Snap-on and presence in certain geographies that they might not be otherwise, how do you amplify what they already do well?

Question: Sherif El-Sabbahy - BofA Global Research - Analyst : And how should we think about Snap-on's product development cycle? You've touched on every new generation of vehicle having new problems that need to be solved and Snap-on developing the tools to solve those. So how should we think about just the refresh of the portfolio and maybe how development varies between hand tools and power tools? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Sherif El-Sabbahy - BofA Global Research - Analyst : And thinking high level, something that's been in the news quite a bit and front of mind for investors has been tariffs and the landscape has been shifting quite rapidly. Aldo Pagliari - Snap-On Inc - Chief Financial Officer, Senior Vice President - Finance Really? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Sherif El-Sabbahy - BofA Global Research - Analyst : How should we think about their impact to Snap-on, if any? Aldo Pagliari - Snap-On Inc - Chief Financial Officer, Senior Vice President - Finance First off, I'm not a fan of tariffs, per se. I believe tariffs, broadly speaking, as an economist by training, it undermines what any given country prefect or state does well, right, all kinds of joint economic world trade is you do this really well, you do that. I'll do this, we'll help each other out. So tariffs get in the way to that. So it creates inflation in some way, shape or form. Now that's theory one. Theory two is being vertically integrated, I think, gives companies more flexibility to deal with it. I'm not -- Snap-on is not so dependent on buying and resell, what's that source of supply and are they going to have declared componentry that's going to be subject to the tariff or not? Or if I have to get a second source, how do I control that? I mean, you got a second source in the last -- coming out of COVID period, you want to make sure you get a quality second source. You just don't get a second source, you have to qualify the product and make sure it meets up to your reputation, particularly if you're selling premium products. So the more vertically integrated that one is, the more I believe you're resistant -- not immune, but resistant -- to the effects of tariffs and trade. And as I mentioned in some part, as I know I'm talking a lot, but we do have 36 factories, 15 in the United States, the remainder 21 outside the US. And we try to manufacture close to where we sell. There's national pride everywhere in the world. US technicians love buying US stuff, Italian technicians love buying Italian stuff. But the practicality is, we sell 80,000 SKUs. You try to get them proximate to your major market because it costs a lot of money to transport things across oceans and then the freight time and coordinating the deliveries. So there's a certain practicality to being vertically integrated, and I think that helps with respect to tariffs. Now having said that, the thing that no one can predict in this room, I suggest, is what's going to be the fallout? Is there going to be, as you've seen in the newspapers, don't buy American whiskey, right? The Canadians -- you see there -- you saw the hockey teams got into a fight. Is that going to be enduring and permanent? Will that have a negative effect? Because we sell products in Canada, as do others. And there's not a lot of manufacturing of tools in Canada. So it's not like there's an immediate exposure there, but then how do I know a Canadian customer might not be prone then to say, well, I'll get something from Europe. I'll get something from Asia. These are all risks that are unquantifiable at this point in time. Now we don't think that's going to be the case. We think people are looking at Snap-on as a product that they're married to a point in time, but you never know what happens when emotions run hot. So tariffs are a concern, unpredictable, uncodified until you get more direction. I mean, are we stocking up on champagne that comes from France right now? Not me, but certain people might say, I want to avoid a 200% tariff. We try to position inventories creatively to try to mitigate. But you don't know the full rules yet so it's hard to really predict with accuracy, but I'm not a fan of tariffs.