Fastenal Company

Greetings and welcome to the Fastenal Company's 2021 First Quarter Earnings Results Conference. At this time, all participants are on the listen-only mode. A question and answer session will follow the formal presentation. If you are connected via phone and would like to ask a question, please press star 1 on your telephone keypad. Anyone connected via the phone who requires operator assistance, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Ellen Stills of Fastenal. Thank you. Please go ahead.

Welcome to the Fastenal Company 2021 First Quarter Earnings Conference Call. This call will be hosted by Dan Flornes, 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 1st, 2021 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 Flournas.

Thank you, Ellen, and good morning, everybody, and thank you for joining us for our Q1 earnings call. I will take you to – we have our annual meeting – a week from Saturday. And because of that and too much, most people's great satisfaction, I'll not tell a story this morning. And we'll get right into the quarter. If I go to page three of the flipbook, but rest assured if you participate in our annual meeting next weekend, I will tell a story or two. If I go to page three of our flipbook, so our diluted earnings per share were 37 cents in the quarter, an increase of 3.7%. Net sales were up 3.7% as well on a daily basis. They were up 5.3%. Some things stand out for me when I think of this quarter. Obviously, we had the storms in February, a massive storm, much more than we've seen in years past. But winter is like that. It has storms, and it impacts our numbers. Probably the most meaningful impact, though, and larger than the storms, was the fact that we had one less calendar day. 63 versus 64, I believe. And that might not seem like a big deal in the scheme of life, but we do about $23 million a day. And that day we miss, most of our expenses center on the month, you know, whether it's rent or payroll or things like that, they center on a period of time. And so most of our expenses are still here, despite the fact we have one less day. So If I assume 30 to 40 cents of that dollar lost in that day would flow to the bottom line, that's about a $7 million to $9 million impact to the quarter. And so can have a very meaningful impact. I point that out only because Q4 has a similar anomaly. 2021 is a weird year. We lose two business days, one in the first quarter and one in the fourth. And I point that out just to make sure we're aware of that. but very impressed with what our team is doing to manage expenses and to grow the business in this environment. An additional item in the quarter, we wrote down about $8 million worth of three-ply masks. Now, three-ply masks is not historically a product line or a product we sell much of within Fastenal. As Holden mentioned in the release, from April of 2020 to March of 2021, We sold roughly $110 million worth of three-ply masks. So it was about 2% of our sales over the last 12 months. That's a sign of the pandemic. And what we did as a supply chain partner in the marketplace is we went out last spring and locked up supply. We were willing to spend dollars to buy a sizable amount of inventory and We knew it was a risky venture going into it, but we felt it was the right thing to do for our customers, for our employees. And quite frankly, being in a strong position, we felt would also serve society quite well. And if I had to do over, I'd do it again. I think it was a great decision. Our team did a great job. But I think it also demonstrated to our customers and to potential customers that what we are about as a supply chain partner, and we're willing to do things like that in this type of environment. So not only do we have the operational capability to handle it, we have the financial capability to do it, and we have the sense of prioritization to also do it. It requires all three, and so I'm really impressed with the team. I have to say, earlier this morning, I chuckled. I was reading through, I think Adam Ullman and Dave Manthe sent out reports earlier this morning, And I really had a kick out of Dave Banfield's, I believe it was bullet number three, where he commented, while FAST does not report adjusted anything, core gross margin, he went on to explain the impact of the $8 million. You are absolutely correct. We do not report adjusted anything. We are not an acquisitive company. We're not a manufacturer that's leveraging and talking about EBITDA. We're a distributor, and I don't think distributors in our position should be doing that. And I'm really proud with what we've done and with how it positions us going forward. I also think the write-down of inventory, it's still great inventory. The write-down of inventory is one of the most, is one of the most bullish comments we could make as an organization internally and externally because we believe the market is going to change for mass in the months to come because we believe the economy is healing. And that's showing up, as you see in our next bullet, when we talk about fastener daily growth. So we grew about 4% in the first quarter, but it was 14% in March. Now, before you get too excited about that number, that is a bit of a comp issue as well. So I think sequential has a lot more to tell the story. Just like we saw a decade ago in 2009, sequential was what it was about. January to March, our sequential fasteners grew Sequentially, our fasteners grew 7.1%. If I go back to, ignore 2020 and go back to the years before that, 2015, 2019, on average, we grew 4.9. That's a sign of a strengthened economy, and that's what led us to write down the mass because we see the market changing. and we saw very good sequential patterns in our manufacturing, particularly in our heavy manufacturing end markets. We also mentioned the release that we are seeing increasing supply chain pressure. I don't think that should come as a surprise to anybody. I suspect everybody, regardless of where you live on the planet, saw that ship in the Suez Canal sitting cockeyed for about five, six, I think it was five days. That's merely a very visual thing that we're seeing in ports around North America, we're seeing in ports around the world, and there's a lot of constraint. And constraint and rising activity create one thing, and that is inflationary pressures, and we are seeing that. Pretty nominal impact to the first quarter. We do anticipate seeing a larger impact as we move into Q2 and Q3. As we saw in much of 2020, and it's continued in 2021, The team, whether that be our local team, our district and regional leadership, our finance teams, did a wonderful job managing working capital and as a result, very, very strong cashflow performance. Flipping onto page four, while we're not back to pre-pandemic signings, we saw improvement in the signings of onsites and we signed 68 in the quarter. Again, that's our highest number since pandemic began. We ended the quarter with 1,285 active sites, an increase of 9% over last year. The daily sales in that onsite business grew mid to high single digits. And the only problematic area, if you will, in the quarter is, A, the level of signings, which is improving. But also, the older onsites are still sluggish. And that's really a reflection of that underlying customer base. But the momentum is improving as we went through the quarter. Holden did soften a bit, the signing, so that's more of a function of the current environment we operate in. It has nothing to say about the long-term opportunity we see in this piece of our business. We're very excited about the onsite business. FMI, and hopefully you've adjusted to some of the new reporting that Holden has. I'll let him dig into that in more detail. I think he did a nice job explaining it in release, and he did a nice job explaining it in our annual report. With the acquisition of the Apex Technologies a year ago and with additional pieces that our team has built, FMI has moved beyond being strictly vending to a much wider swath of business. We're really excited about that. Like onsite, FMI requires strong engagement with the customer. It also requires going into customer facilities. One thing that surprised me probably more in the last 12 months of anything is the willingness of customers to continue signing onsites, to continue signing vending, even at a lower level, in an environment where you wanted to kind of lock up your facility and keep it safe for your employees. During this entire timeframe, we have been welcomed into customers' facilities to replenish bins, to replenish line stocking, to replenish vending, and we're seeing that open up more and more each and every day. Flipping to e-commerce, e-commerce daily sales rose 35% in the quarter. Our large customer-oriented EDI was up almost 38%, and our web sales were up 29%. With that, I'll switch it over to Holden.