Fastenal Company

Good day, ladies and gentlemen, and welcome to the Fastenal Company First Quarter 2019 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star and then zero on your touch-tone telephone. And as a reminder, this conference is being recorded. I would now like to hand the call over to Ms. Ellen Stoltz. You may begin.

Welcome to the Fastenal Company 2019 First Quarter Earnings Conference Call. This call will be hosted by Dan Flourness, our President and Chief Executive Officer, and Holden Lewis, our Chief Financial Officer. The call will last for up to one hour, and we'll start with a general overview of our quarterly results and operations, with the remainder of the time being open for questions and answers. Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission, or distribution of today's call is permitted without Fastenal's consent. This call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage, investor.fastenal.com. A replay of the webcast will be available on the website until June 1, 2019 at midnight Central Time. As a reminder, today's conference call may include statements regarding the company's future plans and prospects. These statements are based on our current expectations, and we undertake no duty to update them. It is important to note that the company's actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission, and we encourage you to review those factors carefully. I would now like to turn the call over to Mr. Dan Flornan.

Thank you, Ellen, and good morning, everybody, and thank you for joining us for our first quarter earnings call. I'm going to, before I step into Holden's flipbook, just going to touch on a few comments that I had with our leadership in our normal call at 7 o'clock this morning to talk about the quarter, to give them a little insight about some things we'll be focusing on in the call as well as just some off-the-cuff comments I made to them. My first comment to them this morning was a sincere thank you for a job well done. I think this is a really nice start to the year. I'm pleased with the performance we're seeing across our business units throughout the planet and a very positive start to the year. I also mentioned to them about the challenges that comes when you get into a multi-year improvement in business. So when I think back to stepping into this role back in late 2015, We'd had a tough year. The economy had not been our friend that year. And when you're exposed to the industrial marketplace and it flips on you, it can cause some pain in the short term. But we kept focusing on what we focused on. That's our customer. We kept focusing on things to make our business better, and we really started to transition to a much more focused approach on some of our growth drivers, particularly breathing some new life into vending and challenging ourselves to – look at onsites as not a solution when there's not an alternative, but as a means to grow faster and a new growth drive within our business, because it's a wonderful way to extend what is the traditional fastener relationship, but lower your cost structure at the same time. And I hope these numbers are all correct. I haven't proofed them through our screening process. This is just me jotting down some numbers. But what I shared with them was, If I stack together multiple years, five of the last seven months, if I look at it taking three years added together, and again, I hope I calculated it correctly, I believe five of the last seven months, we've been 30% plus when you look at the cumulative impact of the last three years. And November and January were the only two months that didn't break that 30, and they were at 29, so a good number. And I believe for the last 14 months, If you look at it on a two-year basis and combined year one and year two growth, you're at a number that starts with a two, so north of 20%. But since August, I believe that number is north of 25. So not only do we have great local plans to engage with our customer and grower business, but we're able to stack that on top of some comps that are, frankly, challenging. I'm really pleased with what the group is doing, and I'm really proud of the group and proud to be associated with them. I also shared with them one of the blessings and curses of the Internet age is it's easy for people to make comments. Sometimes you read through a newspaper and some of the comments you see, you're kind of like, boy, that person just seems angry about something. It's not this article, but they're just angry, or whatever. You can tell that person's maybe political view is driving their commentary they're putting into an article. But at 10 o'clock last night, I was reading a comment that came in from a customer. And every comment that comes in to Fastenal, I'm on an email distribution list and I read through them. Sometimes I do it late at night before I go to bed. Sometimes I do it early in the morning. And I'm reading one last night. It was a fellow. He said, I'm an older gentleman. He said, I'm 61 years old. That pained me a little bit because I'm 55 and I To hear somebody at 61 refer to themselves that old was a little troubling, but that's a different issue. But this individual was talking about where our branch, it was the San Antonio, Texas branch, but where our branch went above and beyond the call and really helped them solve a problem. And I floated it out to our regional leadership last night, and I said, you know what, folks, this is what we're about. We're about solving people's problems. Because in today's world, sometimes it's hard to find people to help you solve a problem. And it was a fun one to share because sometimes you get in a few here and there that aren't as positive. And you assess them to understand what we can do to be better. But now I'll flip to Holden's book here. We had 68 cents of earnings. Nice start, Dan. Almost 12% earnings per share growth. Bottom line is we grew our earnings faster than our sales. And that's not an easy act in a quarter where weather was very impactful. And with one less selling day, we are in the situation of with $20 million a day in revenue, there's a chunk of revenue, a chunk of gross profit dollars that aren't there. But the expenses typically are. So to pull off what we did when we're down a day is a pretty positive thing. Despite the challenging weather, our demand continued to be healthy. Our daily sales growth was 12.2 in the quarter, and I think Holden said it well, 2019 has started where 2018 left off. Operating margin expanded 20 basis points, and our incremental margin was 21.7. As we've talked about in prior calls, our growth drivers are changing the mix of our business. If we're successful with it, it's going to pull gross margins down. If we're successful with it, we should be able to leverage our operating expenses, and it should result in a great win for our customer, for our employee, for our supplier, and for you, our shareholders. And I think you saw that in the first quarter here. But sequentially, we did hold gross margin flat, which was really a sign of some of the price increases we put in late last year in the wake of tariffs and inflations, allowed us a little breathing room in the short term. but Holden will touch on that a little bit more in his comments. We've talked about this in the past. Our business, as it continues to grow with larger customers and with international customers, sometimes we get caught in a situation where you have a customer that's doing some window dressing at the end of a year, end of a quarter, and they frankly stop paying with two, three, four weeks left in the quarter, and it makes for a challenging situation. Our solution here is to constantly be engaged in discussion with our customer about You know, our value proposition to you is a better supply chain. We take inventory off your balance sheet. Don't do this to us at Denver Quarter. Because what it ultimately does, it puts us in a position where we can't fund inventory. Because there's a tradeoff. If we know we're going to have an extra $5 million receivable, we have to squeeze that somewhere else. And that doesn't serve our customer. And we need to be engaged in that dialogue and challenge. If you want to do window dressing, do it with somebody else's payable, not with ours. But we did produce stronger cash flow in the quarter and allowed us to pay a higher dividend and reduced debt a little bit. On-sites. You know, I remember years ago when we did CSP, and we really went through a change in our branch network. But at some point in time, we stopped talking about CSP because CSP became part of us. Now, we're going to keep talking about on-sites from the standpoint of, sharing with you our location count and our penetration in the market and where we're finding success. But, you know, we're going to break 1,000 onsites sometime here in the second quarter. I guess that's a forward-looking statement, but it's one I'm pretty safe in saying. But it's truly part of Fastenal now. We have onsites throughout our regions, throughout our districts, and so it's not something we're experimenting with or pushing people to change. or even pushing customers to consider and change. We're doing all that, but we're doing that from a base of knowledge, similar to not too many years ago when we were talking to the industry about vending machines. But on onsites, our goals are pretty simple this year. Let's sign 375 to 400. You know, there's 52 weeks in the year. You've got to take out a couple of those weeks because it's the holidays and not a lot happens those weeks. But if we can do eight signings per week and do it 50 weeks of the year, that's 400. And so in the first quarter, we got off to a really nice start. We hit that number, and we signed 105, so very pleased. Our sales growth, removing the transferred sales, so if I have an existing customer and we go on-site, we probably pull some revenue out of a branch and move it over there. But ignoring that, that business is growing north 20%. Really pleased with what the team's doing. On vending, our goal is to do 23,000 to 25,000. So there's 254 business days in the year. We need to sign roughly 100 every day to get it to high end of that number. If we sign 90 every day, we're at the low end of that number. We were just shy of 90 in the first quarter, but in the month of March, we rounded up to 100. We were at 99.6 per day. So we're off to, I think, a nice start. And again, it's just part of our extension into our customers' facilities. Speaking of vending... I had a new experience yesterday. So one of the things that we've struggled with is we've had, I remember a few years ago at Investor Day, talked about the idea of having outdoor lockers or having lockers where we can do deliveries into. Frankly, we struggled to make the technology easy to use. And so we didn't get really much traction with it. And we have very few branches that have outdoor lockers. We have now... built the interface between our point of sale system and our vending platform, which is a third-party software. And yesterday morning, I ordered something. We had turned down our Winona branch on Monday. So yesterday morning, I ordered something. Immediately had a confirmation of that order. And a couple hours later, I got an email, your order's ready to pick up. And I went over and I punched in my six-digit code and I pulled an item out of the locker. It was a really easy and seamless transaction. Now, that doesn't mean we're going to be getting into the retail business anytime soon. But if I think of our onsites, if I think of our customers that need something and they want to get in and out quickly or they're coming in after hours, it provides a great extension of the hours of our day and our ability to serve our customers. And I'm really excited about what that means, but really also proud of our technology team for developing that, and it worked really easily. And... And I've gotten in the habit in recent months of buying a lot of stuff online. One of the companies I'm really impressed with, and I buy from them once a week to understand what they're changing, and I keep bringing comments to our folks as a result. I don't know if any of you have ever bought on Walmart online. They do a really nice job. Now, again, we're not a retailer, but making it easy and making it efficient for your customer is an important part of the equation, and we finally have that working. National accounts grew 17% in the first quarter. The team continues to do a great job of making promises to customers. And our branch and onsite network, along with everybody else that supports them, does a great job of honoring those promises. So good quarter. Outside the U.S., exchange rate is a full right now. International is about 14% of our revenue. We grew in the mid-teens. I believe the number was about 17%. And so continue to be really impressed with our teams there in our ability to extend the the U.S. and Canadian relationships broadly around the planet. So excellent job to the team. With that, I'm going to turn it over to Holand. But before I do that, when I read through his notes, one thing jumped out at me, and that was the PMI at 55.4. And I almost, when I read stuff or even read his notes, it almost felt like that was kind of an e-number. Yeah. I've been here for 23 years, and I've never thought of 55.4 as an E number, and I've seen that in some of the external reporting. So we're seeing a good tone in the marketplace. Holden's going to touch on some oil and gas concerns. And being a farm kid, I know the agricultural side has had some tough time in the last year with commodity prices, and I'm sure there will be some weakness there. But we're pretty bullish on what we're seeing.