Fastenal Company

Greetings. Welcome to the Fastenal 2019 Annual and Fourth Quarter Earnings Results Conference Call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to your host, Ellen Stultz, Assistant Controller. Ellen, you may now begin.

Welcome to the Fastenal Company 2019 Annual and Fourth Quarter Earnings Conference Call. This call will be hosted by Dan Flournas, 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 annual and 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 March 1, 2020, 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 Fornes.

Thank you, Ellen, and thank you, everybody, for joining us for our fourth quarter earnings call. You know, we'll be filing our end report here in the early part of the first half of February, And so last weekend I was drafting the letter to shareholders and employees for inclusion in that annual report. And one of the observations contained in that letter is a comparison of 2019 and 2015. Because when I'm writing that letter, I typically will go back and reread a few letters. And one reason to do that is so you're not too repetitive. Another reason to do that is to see what observations jumped out at the time. Back in 2015, we started out the year with a PMI index of 52.6% at the average of the first three months of the year as we disclosed back then. I'm not sure if there's been adjustments to the PMI since then. We ended the year just shy of 49. I believe it was 48.6%. And in 2019, we started the year a little bit higher. It was at 55.4% in the first quarter. In Q4, we were at 47.9, and we've been sub-50 since August. If I look at it using an internal benchmark or an internal yardstick, and I looked at our top 100 customers, and this group represents about 25% of our revenue historically. In the first quarter of 2015, about 72% of those 100 customers were growing. By the fourth quarter, that number was 49%. And given our sizable relationship with each of these customers, the change in trends in a window like that is usually more about their underlying business than fast on gaining or losing market share with that customer. If I look at that same statistic in 2019, we started the year at 81%. We finished the year at 57%. Again, it's looking at the percentage of our top 100 customers that are growing with us. And I think that's a great barometer on the marketplace. Yesterday in our board meeting, one of our directors asked, looking at Q4, and the question was about Q4, my comments here, second goal was on 2019 in general, what would you give for a grade on the quarter? And without giving it a second of thought, I looked at him and I said, you know what, I'd give it a B. And the biggest reason for the B is we did not leverage our earnings. In other words, our operating income growth was less than our sales growth. And I just can't give an A to that performance. So I graded it a B. However, if I look at our team, leaders throughout Fastenal and the execution of the team throughout the organization, I think given the subdued activity, as indicated externally in the PMI index, as well as internally in our top 40 or top 100, I believe the blue team executed well in the fourth quarter. December, as you all know from reading our release, December was a tough month. We grew 1%. The midweek holiday over Christmas was not our friend. The January, and I've been doing this, I've been at Fastenal for 24 years, and that means I have done just shy of 100 earnings calls. And there's one thing we don't do, and we don't talk about current month and the current month. I'm going to break that rule. January started with a midweek holiday. That Thursday and Friday, the second and third, was not our friend, and we really haven't recovered from that. And I expect at this point January will feel a lot like December. I don't know if that means it will be 1%, but I think it's going to feel like December did. Our sales team – is adamantly opposed to that. They see reasons why we'll do better, and time will tell. I genuinely hope they prove my expectation wrong at this juncture in the month, but I'm just sharing that. This has absolutely no bearing on my thoughts for February or for 2020 in general. Time will tell what the economy is going to provide for us, and what headwinds are created or tailwinds are created. But December ended with a midweek holiday and January started with one, so I wanted to make that observation. Flipping over to Holden's flipbook, I've touched on that second bullet where really we talk about December weakness and the impact of the holiday timing. Despite everything that's going on and my comment about my belief in the blue team and being impressed by their executing ability, we leveraged our operating costs in the fourth quarter. We continue to focus on controlling our costs, not as a means just for the expense, but to put us in a position where we can continue to invest in our growth drivers because we still have incredible opportunities for growth. We have a relatively small market share. And I truly believe we have a better supply chain model for our customers. As we talked about last quarter, the moderation and challenges of inflation and tariffs and our ability to manage through it has stabilized the price cost. Holden violated a rule last quarter in that he talked about his expectations for gross profit. I suspect he won't do that again. But what time will tell. But one observation I'd have for everybody listening to this call, don't get caught up in the minutia. The real issue in Q4, our sales fell off a bit more than we expected, and we have an incredibly large fixed-cost trucking fleet that operates. And whether we're bringing one pallet or three-fourths of a pallet product to a branch, we're running a truck. It's still a stock. And that delevered more in the fourth quarter than we expected. To add a little to that pain, our freight revenue also weakened. That's a short-term execution issue. If I were to attribute to anything, I think there was a bit of fatigue in the organization from all the tariffs and pricing and inflation, energy that we had expelled in the summer and fall months. And I think it showed up in our fourth quarter. That's an execution issue on Fastnow, and that's on me. But don't get caught up in the minutia of a gross profit, a tenth of a percent, or 20 basis points. It's deleveraging of a freight network. And that happens always in the fourth quarter. This year was a little bit more acute. Flipping to the page four of Holden's flipbook, onsites, we signed 362 for the year. Our stated goal was 375 to 400, came in just shy of that. We ended the year with 1,114 active sites, about a 25% increase from end of last year. Sales growth with this group, and this is excluding transferred sales, so this is looking at peer growth. So if we have a $30,000 customer that pulls all the branch and we go on site, it's looking at dollars above 30. It was up in the little double digits. As you can appreciate, In our more mature onsites, we did see some degradation, and that's a sign of the economy. Going into 2020, our goal remains 370 to 400. We're really excited about this growth driver in our business. Total in-market locations were 3,228 versus 3,121 at the end of last year. We closed or converted 36 locations, traditional branches. We also closed 26 onsites in the fourth quarter. Now, that probably raises a few questions in many of your eyes. Here's a couple things to always keep in mind about FAFSA and all. Some organizations prefer only showing pretty pictures. Some organizations only prefer talking about good things. We talk about the real. We talk about the things that change. We address today's issues today. One of the things the team at Fastenal has learned to live with over the last five years is every year I share with them what I consider my top ten suggestions on life, things that I learned from friends and family as a kid, and that includes where I grew up, family was also your neighbors. It includes teachers and coaches I was blessed to have in my life, It also includes the people you associate with in your adulthood. It starts with your spouse, extends to your kids, but it also extends to friends and associates you come across. Number five on that top ten list is make great decisions. Share the reason why and start today. If we have an on-site location where that customer's business has downsized, maybe they've closed that facility. Maybe the economics don't work and we decide to take that relationship and move it back into the branch. That's not a sign of failure. That's a sign of wisdom. That's a sign of saying, how are we allocating our resources and what's the best resource allocation for our customer, for our next customer, for our people, and for our business? And I consider those decisions to close an onsite that doesn't meet the requirements to be a good decision provided we don't think it's going to recover in a reasonable timeframe. Exiting and onsite doesn't mean you don't come back. Doesn't mean you lost the customer relationship. It just means the economics for being onsite aren't holding true right now. You take a step back. I think that's a great decision and we will make those decisions every day. From a vending perspective, we signed 5,144 devices in the fourth quarter. essentially in line with our – in 21, 857 for the year, essentially in line with our goal of 22,000 devices. Our installed base ended up at 89,937, an increase of about 11% from last year. And our product sales through those devices were up in the low double digits. In order of avoiding confusion, earlier in the year we celebrated vending machine number 100,000. This 89,937 includes machines that are principally – producing product sales. We have another 15,000 devices out there that are leased out to customers for check-in, check-out purposes, just to clarify that. Finally, e-commerce. Our sales grew at 25% Q4 to Q4. For the full year, we were up 32%, and this includes a 35% increase with our national account customers. The way we think about e-commerce is It's about making our business a little bit more efficient every day because as our supply chain partnership with our customer grows, most of our business activity is coming from vending, from bin stocks, where the customer really is an order in your product and we keep stepping deeper and deeper into the business. Today, those two pieces are about 30% of our revenue. I believe in the future that number will more than double as a percentage of our business. has become more entrenched in our customer's business. This is really a reflection of stuff that customers order outside of that supply chain window, the non-recurring stuff. With that, I'm going to turn it over to Holden. Great.