Fastenal Company

Greetings, ladies and gentlemen, and welcome to the Fastenal 2021 Third Quarter Earnings Results Conference Call. At this time, all participants are on a listen-only mode. Any question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, 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, Taylor Ranta, thank you. Please go ahead.

Welcome to the Fastenal Company 2021 Third Quarter Earnings Conference Call. This call will be hosted by Dan Fornes, our President and Chief Executive Officer, and Holden Lewis, our Chief Financial Officer. The call will last for up to one hour and will 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 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 Fornes.

Thank you, and good morning, everybody, and thank you for joining us for our Q3 2021 earnings call. And I'm going to start on page three of Holden's flipbook and run through some thoughts on the quarter. And similar prior quarters, Holden will share his thoughts on the latter half of the flipbook, and then we'll do some Q&A at the tail end of this call. So for the quarter, we grew our sales 10%. We ended the quarter with the business a bit stronger, up 11%. And of equal or perhaps more importance, when I think of our sequential patterns, And we highlight that, and Holden will touch on that, but we highlight that in our September information web release. We're in a good spot as far as where we were in January and where we are in September and how that positions us for going into 2022 from the standpoint of the strength of the business, the gains in the business, et cetera. If I set aside the noise of of comparisons for a second and comparisons to 2020. And I take a longer peer back and holding on page five of the flipbook, similar to what we did last quarter, is we did a comparison to 2019. And we did that because it allows us to just not have to explain all the conditionality of the comparisons and look at it and say, Here's what the business looked like before the pandemic started. And here's what our business looks like today. And everybody in this call knows what happened in the last 24 months as it relates to Fastenal's business. The success we enjoyed, the help to society we were able to provide last year and the products that we were bringing to bear and the impact we saw in our safety business in 2020. So let's just ignore all that noise for a second. And what stands out to me is we continue to invest in the growth drivers of the business. We continue to invest in the people side of the business. We continue to execute and grow our market share. And what you see is an organization that is about 13% bigger than we were two years ago. As we've talked in the past, and I'm looking at page five in the flipbook right now. As we've talked in the past, our growth drivers carry a different gross profit profile. And you'd see with the rounding and holding schedule there, our gross margin is about 90 basis points lower than it was two years ago. What we've talked about is what we like about these growth drivers is they differentiate us in the marketplace And they tap into the strengths of Fastenal. And we're able to bring scale to these elements and manage our operating expenses more effectively. And you can see that not only did we improve our operating expenses as a percentage of sales in the last two years, we completely offset the impact of the gross margin change. In fact, that's a little bit of rounding. It's closer to 100 basis points. And as a result, our operating income as a percentage of sales is 10 basis points higher today than it was two years ago. And so I believe in that two-year time frame, we've done a great service to our employees. We've done a great service to our customers. I believe we've done a great service to society in general and what we were able to accomplish in 2020 and 2021. And I believe we served our shareholders well in the process. If you think about the operating administrative expenses, and what's really happened. We picked up about 30 basis points on the people side of the business. We picked up about 70 basis points in that two-year period on the non-people side of the business. If I look at the people component, so our expense on the people side is up about $28 million in that two-year period. 14% of that number is the addition of people and or changing roles and or inflation in rates. That raised the base element of our pay above 14%. The incentive component, and this is looking at that, not 14%, 14% of the increase came from that. 61% of the increase, that $28 million over the last two years, 61% is related to incentive compensation. So when we find success as an organization, we share that deeply into the organization. And like we saw last year, our incentive comp pulled back. It reloaded itself this year. On a two-year basis, 60% of our increase in human costs is incentive comp. Another 14% is health care. One thing that's rippling really fast significantly through our P&L right now, not just on a one-year basis, which is like 45% increase, but on a two-year basis, 14% of our cost increase is healthcare. And I don't know where that's going to go in all honesty. Another 1% of our increase came from profit sharing. And 90% of our increases are bucketed into those four categories in the last two-year period. The other 10%, the biggest individual component of that is social taxes. and then other little noise in the numbers. If I look at the increases, our remaining expenses in operating expenses increased about $4.5 million on a two-year basis. 25% of that increase relates to FMI, vending and bins, 25% of that increase relates to distribution center increases. Now, part of that is cost for facilities. Part of that is cost that we're doing to manage through the chaos that is the supply chain in today's world. 50% of that increase is IT equipment. As you know, last year, we deployed 8,000-plus mobile devices throughout our network to create efficiencies. productivity gains, to create social distancing, to create a better means to serve our customers and illuminate for them what we do. That 50% of our increase there is what's funding a big piece of our labor efficiencies in the last two years. The final, the other guys you have the last two years, fuel prices are a little bit higher. Fortunately, everything else in our P&L offset the impact of fuel. And so I hope you find that helpful of taking the noise out of the one-year comparison and looking at it holistically and said, what's happened in the last two years? Fastenal has invested in its ability to serve. It's managed its costs effectively. It's shared the fruits of our labor with our team. And I think we've served customers and society and our shareholders well in that process. Flipping back to page three, and I'll get back off my tangents. Fast bin. We have talked about that next stage as we broaden our FMI, Fast All Managed Inventory footprint. And vending's been around for 13, 14 years. Putting technology into bins is relatively new. A year ago, we had 705 machine equivalent units deployed across our network. It's still a pretty small piece of the business. That number has grown almost fourfold to 2,600 in the third quarter of 2021. It's now about 1% of our sales going through that footprint. Again, it's small, but the power to become more efficient and provide a differentiated value in the marketplace is strong. I talked a few minutes ago about the mobility technology we deployed. A year ago, that mobility technology helped us manage 6% of our revenue. Today it's 11. And again, ways to better illuminate and create efficiencies for our team and frankly keep our team safer because these devices create social distance. When you're in, whether we're in a pandemic or an endemic right now, I'm not smart enough to know, but these things help in our business. As you read about in the paper and as I've seen in some of the write-ups and I've seen from some of our peers and some of our Other industries, the product and shipping cost inflation is not just high, it's brutally high. The chaos and the impact, not just from a financial perspective, but from a toll it takes on our human capital is immense. The thing that stands out for me is the entrepreneurial culture within Fastenal. Our ability to solve problems for others means you can also solve problems for yourself. The disruptions we're seeing, our teams in the local market are able to figure out solutions to take care of their customer, just like we did in 2020. We're doing it again in 2021. But it does take a toll to the organization. As we go through all this and have a lot of discussions with customers about disruption, about cost changes, price changes, it, as you can imagine, takes a lot of energy away from some of our growth drivers. And it lengthens some of the sales cycles. And you're seeing that show up a bit in our on-site and our SMI program. So on-site-wise, we signed 75 devices during the, excuse me, 75 on-sites during the quarter. Perfect world. I'd like that number to be 100. But it really is about how much participation are we getting across the network and how many customers are saying, yeah, move in with me. We'd like Fast Zone to help us on-premises. That's a tougher sale in this environment. However, our total onsites grew 10.5% over the number of onsites grew 10.5%. And the sales through those onsites grew more than 20% in the last 12 months. So they've proven what they can do for our customer and what they can do for our revenue growth. We decided to get a few more signings. As I touched on the FASTO managed inventory, I think Holden does an excellent job, and I know we haven't filed our 10-Q yet, but in our last quarter 10-Q, and the 10-Q they'll be filing in the upcoming days, does a very good job explaining our digital footprint and looking at the FMI component of that as well as the e-commerce component of that We're pushing the hardest on the FMI because we think a great supply chain partner doesn't simplify the ordering process. They simplify the supply chain process. And why are you physically ordering repetitive items? And we believe that's a unique place for us to be. Similar to what we saw on onsites, our past all managed inventory from a device standpoint is up 10% year over year. So we continue to see great traction. But I would like the signings to be a little bit higher. E-commerce, it's about 14% of our sales now. It grew 43%. There's still a lot of one-off stuff, and we're seeing that we're providing a better tool in the marketplace to help grow that piece of our business. You combine FMI and e-commerce, our digital footprint is now 44% of sales, 45% of sales, excuse me. And that's where we ended the quarter in September. And that number, nine months ago, was in the 30s. So really pleased with that. Before I transition over to Holden, I thought I'd touch a little bit on our in-market locations. Page 13 in his flipbook, he has a great table in there that shows our in-market location statistics. And I thought I'd share some perspectives on this. In the six years that I've been in this role, in the several years before that, we were doing a pivot. And that pivot was really about the intensity of our branch-based locations, the intensity of our network. We were starting to morph that into a few more onsites, and we took that into a really high gear in 2016. But if I look at what's happened in the last eight years, we've removed 938 locations. from the FASNO network. And that's basically adding up all those closed converted branch numbers over that time frame. And in three of those years, 2016, 2018, and 2021, we've removed more than 150 branch locations. Part of that is us looking at our network and saying, for what we are in the marketplace, what makes the most sense? But it's also a reflection of the onsite. As we're moving more and more business out of the branch network and moving into the customer, You rationalize your network. Most organizations would look at this and say, geez, 938 on a base of 2687 eight years ago. Let's take a big restructuring charge. Let's do it all at once. Let's throw everything plus the kitchen sink into it and have cover. That's not how we operate. Our district managers, our district leaders have figured out over that eight-year period how to be creative, I'm making the economics of that work. In some cases, they might go to a customer and lease out part of a building to them. But they figured out how to manage that process and constructively rationalize our footprint over an eight-year period, where our footprint now, when you add in openings, we're 31% lower than we were eight years ago. But there wasn't a big disruptive impact. We just did it as a normal course of business. That's something I think is a hallmark of the FASN organization. In prior quarters, I've shared some COVID stats with the group. We had a tough quarter in the third quarter. We had in the fourth quarter of 2020, we had five weeks where we had more than 50 cases in that discrete week in the fourth quarter of 2020. Two of those weeks were over 100. In the third quarter of 2021, we had seven weeks where we had more than 50 cases. One of those over a hundred. I'm proud of the fact that our teams look for ways to take care of our employee base, look for ways to protect each other and manage through that process because it's been incredibly disruptive in the third quarter. Staffing locations, when you have people out with COVID, when your average location has five to 10 employees is incredibly challenging. We managed through it. The other thing, during the third quarter, we did a survey. We did a pulse survey of our employees. And some things that jumped out in that survey, our employees felt, and we always get a very high participation in these surveys. Our employees felt in that survey, their manager, the team around them, truly cared about each other. And we were protecting each other. And as the leader of Fastenal, I'm incredibly proud of Lutein for doing that. You know, there was a negative in there. There was one that felt, which there was a little more communication internally. And that's a message to me. We need to always be good about communicating what we're seeing in the marketplace. And the other thing that jumped out is I know what's expected of me at work. And my manager cares about my well-being and about my development as a person. So a lot of positive things. The team is tired from going through this period, but a lot of positive things we're seeing. With that, I'm going to turn it over to Holden. Great.