Fastenal Company

Greetings. Welcome to Fastenal's third quarter 2019 earnings results conference call. At this time, all participants are in listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I'll now turn the conference over to Ellen Seltz with Investor Relations. Ellen, you may now begin.

Welcome to the Fastenal Company 2019 third quarter earnings conference 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 December 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 Flournus.

Thanks, Ellen, and good morning, everybody, and thank you for joining the Q3 Fastenal Earnings Call. Just a few observations on the business as I start out. This is no secret, but the industrial marketplace has weakened in the last 12 months. The blue team has reacted. I am impressed with the group I call friends and associates. They're a talented group, and it shines through this quarter. My next comment isn't really a trade secret. The third quarter of 2019 had one additional business day. We generated about $21 million per day in revenue. This helped our quarter. The sarcastic side of me was thinking that perhaps everybody on this call could petition our respective governments about modifying the global calendar to add one business day in every quarter going through. It would probably do more for our economy than all the silliness that we typically see coming out of our respective capitals. I'll leave it at that. No political party has a monopoly on ridiculousness. All kidding aside, The supply chain for our customers has become more expensive in the last year and a half and more volatile. Our job is really straightforward. We provide supply chain solutions. We challenge the status quo with both our customer and with our supplier. And trust me, they reciprocate. That's a good constructive balance, a good friction balance. Challenge sometimes means considering a different product. Our business model has an advantage here over many of our local competitors. Sometimes it means a different solution. As you know from what you've learned about Fastenal over the years and prayer quarters, we have many to offer. Fortunately for us, many of our competitors are one-trick ponies, and this helps us win in this type of environment. Never lose sight of the strength of an organization where our team, 75% of our employees, have intimate knowledge of our customer's operation. They have knowledge of their local and global business culture and the scale to stitch it together. This is more powerful than an abstract server study a customer's keystrokes that can only do fulfillment. I believe we can win, but we have to figure out where we win with that strategy. And I think the things that we do with our growth drivers play very well into understanding that advantage. All that technology, though, does bring tremendous productivity wins. We are slowly introducing technology in our business, and I believe you see it shine through in our ability to manage the labor side of our business. Getting to Holden's flipbook. We reported earnings at 37 cents. There were some discrete tax items in the quarter, actually in both years, but adjusting for these, the EPS remained at 37 cents. Pleased to see our pre-tax profit growth accelerate from, frankly, a disappointing second quarter. Two things stood out. First, the team executed nicely on pricing, which produced a better gross margin. Does it mean that we're not behind on the price-cost? And the goal isn't about who wins on the price-cost, because this is a supply chain relationship between our supplier, our business, and our customer, and we need a supply chain that works for all. So it's not about who wins. It's about who provides the best value to our customer. Secondly, our team adjusted... really well to the slowing business. Kind of just as fast in the second quarter. We're just a little bit faster in the third to provide nice incremental margins while at the same time we continue to invest in the growth service of our business. That's one of the most important aspects of this is we still have the resources to invest in growth. Business conditions remain sluggish and our customer tone remains cautious. Very pleased with the cash generated during the year to date The improvement during the period, my compliments to our team in the field, my compliments to Holden and Sheryl and their respective teams performed really well on managing our working capital. And the nice thing about this page, in one page we talked about two things that we haven't been able to talk about with confidence and maybe even some pride in recent years, and that is we perform well on gross margin and on working capital. But we still have work to do. On-sites, we signed 84 in the quarter, a little bit less than the second quarter. I think there's two things driving that. One, a lot of discussions are in the quarter with customers centered on supply chain, challenging supply chain. Some of those discussions were about pricing. And also, in an environment like this, and we see it in our vending as well, when there's uncertainty in an environment, a natural human reaction is sometimes it's easier to not make a decision at all than to worry about what decision is the right one. And so we're seeing a little bit of a slowdown. But we're still up 30% over where we were a year ago at 1,076 onsites. And the business continues to grow in the low teens. And we believe we'll still sign between 375 to 400. It's a little bit more difficult of a goal than it would have been three months ago or six months ago. Own time will tell if that belief will be turned into a reality. But we believe we can accomplish it. The one thing that might jump out at you is we closed 22 traditional branches during the quarter. That's not a surprising number. We've been doing similar numbers of that over the last four, five, six years. But we did close 35 onsites. I'm a firm believer. Some organizations sometimes not hide from the truth but hold back the truth and won't acknowledge things challenging the status quo. And as a result, they don't do anything, don't do anything, and all of a sudden do something big all at once. And then spend all their efforts adjusting for the numbers to explain it to what was going on in the world. We don't do that. We challenge the business every day. And if our team feels, along with their customer, there are some onsites that don't make sense in today's environment, perhaps the business has slowed down, perhaps a plant's been consolidated, we want to understand the why. from the standpoint of trends of our business, but I consider this a healthy thing. Vending. You know, we continue to have a very good clip with vending. To me, the most noteworthy thing that stood out on our vending numbers, so our install base is up 12.2% Q3 to Q3. Our product sales are up in the mid-teens. Now, I'm not real good at numbers, but I do know that means our revenue per machine increased in the 12-month period. I consider that a tremendous accomplishment in an economy where things have weakened and you would expect your revenue per machine to decrease a little bit. I think there's two things that are shining through there. One, a lot of the stuff that goes through our vending machines is about PPE, so stuff people need. We're in a high employment environment, so there's still plenty of employees, and employees need stuff. I think that's part of it. I think the other part is, our team has become really dialed in at managing their vending asset base and utilizing that asset base to the benefit of their customer. And it means sometimes you pull parts out, you put new parts in. And those two things drive the fact that that base of business actually expanded in a declining economy. E-commerce was up about 28% Q3 to Q3. I consider that a weaker number. One thing that shines through in that for me is a chunk of that e-commerce is to larger customers, and a chunk of that was economically weakened. With that, I'll turn it over to Holden. Great.