Fastenal Company

Q4 2021 Earnings Conference Call

1/19/2022

spk08: Greetings and welcome to the Fasten All 2021 Annual and Fourth Quarter Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A 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. As a reminder, this conference is being recorded. I would now like to turn the call over to Ellen Stultz of Fasten All Company. Thank you. You may begin.
spk02: Welcome to the Fastenal Company 2021 Annual and Fourth 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 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 1st, 2022 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 Florna.
spk06: Thank you, Ellen, and good morning, everybody, and thank you for joining us on our fourth quarter earnings call. Before I start, I always... like to make sure my mind is cleared of things so I can focus on the quarter, and I thought I'd share a personal story, and that is a little after five this morning, I received a text from my wife. Her father, Glenn Gustafson, also known as Gus, had passed away at the age of 90, and there wasn't a trip that he made to Winona. He lived in eastern Wisconsin just south of Green Bay. There wasn't a trip that he made to Winona where he wouldn't tell me how many fastener trucks he met on the road, or he wouldn't beam with pride when he would drive by Pierce Manufacturing in Epsom, Wisconsin, see those shiny fire trucks, knowing that the blue team with a whole bunch of vending machines were inside that facility helping Pierce manufacture those fire trucks. This will be my first earnings call in 26 years where I won't be able to share tidbits of it with us after the call. And just want to let Gus know I love you and you will be missed. And rest assured, the Packers will figure out a way to win this weekend with Elia. With that, a bit on the fourth quarter. So our sales, we grew about 13% in the fourth quarter. We had one less business day, so we grew almost 15% on a daily basis. And the quarter was gaining momentum as we went through it, with December growing at 16.5%. We leveraged our income statement and our operating margin grew almost 14%. And the quarter really reflects strong underlying demand, good execution on pricing, improved product availability in our supply chain, and in full disclosure, probably the benefit of fewer holiday-related shutdowns that would be typical for this period. It often gets a little bit dizzying trying to make comparisons in 2021 to the prior year, given all the wild COVID swings. So I thought I'd share a few vantage points by looking at a two-year comparison. When we started the year, Q1 was up just over 8% from two years earlier. And that was a reflection of a weaker environment, a lot of uncertainty. I'm pleased to say that as we went through the year, that picked up. In second quarter, on a two-year basis, we were up just over 10%. In the third quarter, on a two-year basis, we were up 13%. In the fourth quarter, we were up 20%, and if you look at it on a daily basis, we were up almost 22%. So very pleased with how the year was strengthening within our business as it progressed. Our gross margin recovered from 2020 as we expected, and it's Down from 2019, as we expected, as Holden has shared on earlier calls, the way we're growing the business and the way the mix is changing does cause our gross margin to decline over time. Again, it's a mixed function. But it also causes our operating expenses to drop over time. And we think it's a very effective way to grow the business for our customers, for our employees, and for our shareholders. On a two-year basis, our operating profit grew faster than sales, which really speaks to greater productivity that I touched on a moment ago and very effective cost control on the part of the blue team throughout the organization. When we talk and look at the impacts of COVID-19 and how we think about it on a future basis, We now consider COVID-19 to be merely an ongoing element of our global business environment. And like all of society, we have to learn how to live with it. The first step for us is recognizing it for what it is. It's a serious virus, but our approach is not one of fear and chaos. It's an approach of sharing the facts with our customers and our employees. what we're doing and how we're handling it day to day. I can share with you at the end of last year, cumulatively we've had 3,400 cases within the Fastenal family over that almost two year period. Since year end, that 3,400 has grown to 4,000 as we've had about 600 cases in the first two weeks of the month, about 400 of those occurring last week. If patterns In January, mirror what we saw after Thanksgiving in the United States, I would expect our numbers to drop off in the next couple weeks and to move back to kind of that 40, 50 to 60 cases per week that we've seen before. And time will tell if patterns repeat themselves. Again, the biggest focus that we've had is sharing facts with our employees. We have renovated aggressively our facilities. the air handling to make the air cleaner in all of our facilities, quite frankly, not just for COVID, but for flu season in general. And it's one way of addressing the comfort for everybody in the business. The gross driver details are laid out on page five, and we continue to see expansion in sales through our digital footprint, which was 46.4% of sales in the fourth quarter versus 37% in fourth quarter 2020. Again, on page four, this is just a comparison to 2019. Thought it would be helpful for folks looking at the call. And what emerges for me is a business that exits this two-year period stronger as an organization than we entered this two-year period. And I think which bodes well for our business as we move into the future. And one thing I think that's probably understated in these comparisons, when you're looking at the sales growth and our operating income growth, in other words, how did we leverage and how did we improve the business, the three-month period on a two-year basis is actually slightly understated in our strength because we have one less business day. And when you do $25 million a day, a lot of that gross profit flows right to the P&L, and that 25.9% operating income growth would have been meaningfully stronger. Flipping to page five, you know, Holden, I've been stealing his thunder in recent weeks based on a comment he made to an investor on a call I participated in some months back. And he said, you know, in 2020 and 2021, our customers asked Fastenal for different things than in prior years. You know, if you look at prior years, our customers were increasingly asking us to move in with them and be on-site and provide resources right in their facility rather than from a few miles away. They also asked us to deploy technology to help their businesses be more efficient. Initially, it was vending. Now it's a combination of vending bins and what we call fast stock, our mobility application, or more broadly, our FMI technology. But it's really about... helping customers be more successful inside their facilities. As you see from these jagged charts, our on-site signings and our FMI device signings have been meaningfully impacted by COVID over the last two years. However, we feel our opportunity for the future is unpainted by this, and if anything, it's strengthened because the definition of who's a potential customer has expanded dramatically during this time frame. So the one thing that I think should jump out, because of our brand's footprint, one thing that for us has always been a relatively small piece is the e-commerce component within our technology platform. And I'm pleased to say that our customers are embracing that more and more, and that's partly a function of the times, and maybe it's partly a function of us embracing it too, But our web sales were up almost 50%. Our EDI was up 47.8 in combined. It was up about, e-commerce was up 48% in the fourth quarter of 2021. Page six is a new chart I asked Holden to put in. And it stemmed from a question one of our directors had in preparation for the board meeting. It was really looking at the fact that, you know, we've closed a lot of branches over the last six, seven years. And where do you see that going to? And most of those closures have really occurred in our most mature market, the United States, and to a lesser degree up in Canada. But in those two markets combined, we've seen the same pattern. So our branch network peaked out in that 2013 timeframe. At that point in time, if you had started in one of our branches and would have hopped in a vehicle and drove 30 minutes, our network – would have touched about 95% of the U.S. manufacturing base. I don't have that exact statistic for Canada, so you bear with me, please. But today, that number is about 94% as we've rationalized our network. And we believe that ultimately our branch network in the U.S. and Canada will be about 1,450 locations. So there's a few more to consolidate. And that would be about a 93.5% coverage rate on the manufacturing base in the United States. As I mentioned on the previous page, our business has evolved, and one of those elements is e-commerce. So in March of 2020, we broke 10% of sales going through e-commerce for the first time in our history. As we exit 2021, that number is now 15% of sales. As I mentioned on the previous page, from Q4 to Q4, our volume in e-commerce is up about 48%. And in that two-year period from Q4 of 19 to Q4 of 2021, so going back to before COVID started, we are up 105% in our e-commerce business. And it's really a reflection of our customer base is embracing this way of ordering products from us. But our thrust is first and foremost, With FMI technology, if there's a discernible pattern to the usage of this product within a customer's facility, most businesses, most distribution businesses focus on how do I make that an electronic order? We look at it and say, well, if there's a discernible pattern, why are you even ordering in the first place? Your supply chain partner should make it available when you need it. And that's what our FMI technology is all about. With that, I'll switch it over to Holden. Great. Thanks, Dan. Turning to slide seven, as indicated, our sales were up 12.8% in the fourth quarter of 2021. On a same-day basis, sales were up 14.6%, which includes up 16.5% in December. The period still had difficult COVID-related comparisons, with government daily sales down 35.7% and safety and janitorial products being up only 3.5% and down 3.5%, respectively, in the fourth quarter of 2021. As a result, we believe total growth in the period understates the strength we are seeing in our traditional manufacturing and construction customers. Daily sales for our fastener products increased 24.2%, and if we look at sales excluding the COVID-affected safety and janitorial products, our daily sales would have been up 21.1%. Outside of government and warehousing, this strength was experienced broadly across our end markets, consistent with macro data points such as the PMI and industrial production. We believe the period was also boosted by fewer holiday-related shutdowns and somewhat improved availability of non-fastener products. Pricing contributed 440 to 470 basis points to growth in the fourth quarter of 2021, up from 230 to 260 basis points in the third quarter of 2021. This reflects good execution on actions taken during the year to mitigate cost inflation. Higher costs will remain a challenge in the first half of 2022. While certain metals prices seem to be plateauing for the moment, most remain at high levels. Products imported into our hubs in the first quarter of 2022 will have a higher cost, and shipping costs continue to rise. We do not currently have any broad pricing events queued up for the first quarter of 2022, but we'll be addressing specific product and product categories, particularly fasteners, to offset higher costs expected in the first quarter. We expect hub product availability to improve in the first quarter of 2022 and be more stable through the year, which should be a benefit to our customers who are still struggling with availability. However, this reflects shipment timing and our willingness to procure a supply of products several months longer than normal. The supply chain otherwise remains strained. Labor markets remain tight, though we have seen some improvement in our ability to hire in markets with less restricted on-premises recruiting policies. Now to slide eight. Operating margin in the fourth quarter of 2021 was 19.6%, up 10 basis points versus the fourth quarter of 2020. Our dynamics in the quarter mimicked the full year, with gross margin rising off of 2020's product-driven low margin and operating expenses being deleveraged as costs reset off of 2020's artificially low level. The gross margin was 46.5% in the fourth quarter of 2021, up 90 basis points versus the fourth quarter of 2020. This relates to two items. First, we experienced strong absorption of overhead and on strong product demand and growth. This exceeded our expectations largely due to the strong accelerating volumes in the period. Second, our safety product margin improved as lower margin COVID-related PPE was a smaller proportion of total safety sales versus last year, and the margin on those products increased. The impact of product and customer mix in the fourth quarter of 2021 was immaterial, as the favorable effect of strong fastener growth nearly matched the negative effect of relatively fast onsite growth. As the gap between fastener and non-fastener growth narrows, as seems likely in 2022, this drag is likely to widen to 40 to 50 basis points. Higher pricing continued to largely match higher costs, yielding a neutral price cost in the fourth quarter of 2021. Our fourth quarter 2021 exit rate and first quarter 2022 plans suggest pricing will remain elevated in the first half of 2022 and sustain a neutral price-cost relationship. The increase in gross margin was partly offset by operating expenses growing faster than sales. This primarily relates to cost resets, which are typical of the first year of any recovery, but exacerbated in 2021 due to the unique COVID-related cost restraints that existed a year ago. To provide perspective, in the fourth quarter of 2021, we had four SG&A cost reset categories, incentive pay, health insurance, fuel, and travel. Where spending collectively increased 35%, and which produced about 120 basis points of deleverage in the period. On the remainder of our costs, most notably occupancy, as we continue to rationalize the branch network, and IT as we leveraged our strong growth, we achieved 40 basis points of leverage. What should not be lost is the degree to which we improved our operating expense leverage from 2019 to 2021, as detailed on page 4 of this presentation. The first quarter of 2022 will still have COVID-related comparisons, albeit moderating, aside from last year's mask write-off, but comparisons will mostly normalize in the second quarter. At that point, provided volumes remain healthy in 2022, moving past the initial reset year, combined with continued productivity gains from further penetration of our digital footprint and our branch initiatives, should generate improved SG&A leverage. Putting it all together, we reported fourth quarter 2021 EPS at 40 cents, up from 34 cents in the fourth quarter of 2020. Now turning to slide nine. Operating cash flow was $156 million in the fourth quarter of 2021, down 51% year-over-year and representing 68% of net income. For the full year, operating cash flow was $770 million, down 30% and representing 83% of net income. We continue to believe our model produces a conversion rate north of 100% of net income. Additions to working capital caused us to fall short of this goal in 2021. Year over year, accounts receivable was up 17%. This reflects strong customer demand and a shift from PPE buyers last year and toward traditional customers this year that slightly blended up days outstanding. Inventory was up 13.9%, though about 80% of that was from inflation. Growth in product per stock remains modest given supply chain constraints. the rate of sell-through as product becomes available, and ongoing efforts to clean out slow-moving hub and branch inventory, close branches, and shift our stocking focus in the field. We have a considerable amount of imported product in transit, and we expect to see product availability, particularly for fasteners, improve in the first and second quarters. In the current environment, where product availability is a key differentiator, we view our investments in working capital as an effective means of utilizing our balance sheet to support customer service and growth. We finished the fourth quarter of 2021 with debt at 11.4% of total capital, down from 12.9% at the end of the fourth quarter of 2020. We utilized roughly $25 million of our $700 million revolver, so we have ample liquidity continue to be available. Net capital spending in 2021 was $148 million. In 2022, we anticipate net capital spending in a range of $180 million to $200 million. This increase is committed to both upgrading and investing in new automation at a couple of hubs, higher spending on FMI devices to support expected higher signings, and additional manufacturing capacity. That is all for our formal presentation. So with that, operator, we'll turn it over to you for questions.
spk08: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up question. One moment, please, while we poll for your questions. Our first questions come from the line of David Manthe with Baird. Please proceed with your questions.
spk05: Thank you. Good morning, everyone. Dan, our thoughts are with you and Jen. Sorry for your loss. Yeah, so I didn't see in the slides, it may be in here, but what percentage of the revenue mix was fasteners this quarter?
spk06: Revenue mix this quarter for fasteners was 33.5%.
spk05: okay all right that makes sense um is it possible that we could see that uh percentage remain flat or even rise as a percentage of the mix this year i know sometimes early in these cycles when manufacturing and non-res construction are picking up sometimes that mitigates the uh the mixed drift could you comment on that and then have a quick follow-up yeah so
spk06: At this point, we had a gap between fasteners and non-fasteners this year that I think was about 17 percentage points of growth. I would not expect that to continue. I think your question is how far does that come back? Currently, I'm kind of assuming that growth of fasteners and non-fasteners will be comparable. I think the comps are going to be tougher in fasteners. I think the comps are going to be relatively easier in non-fasteners, and I think you're going to see significant convergence there. towards each other in that regard. Now, that would be an outperformance against history, because historically, I think the non-fasteners have grown about, you know, three percentage points faster than fasteners. And I think that might reflect some of what you're talking about. But I would expect a significant retracing of that gap. And right now, I'd probably assume they come in kind of in the same general ballpark from a growth standpoint. Dave, the only thing I'd add... Yes. The only thing I'd quick add to that is... In the short term, there are two things that can influence that a little bit. There is inflation in fasteners right now, so that's an element, but I think Holden's contemplating that in his commentary. The other thing that will help fasteners from a mixed standpoint is if you think of our growth drivers, particularly the vending element of our growth drivers, that's historically helped non-fasteners because you really don't put fastened fasteners in a vending machine. It's really helped our safety products, as you know, over the last decade plus. Our latest component of FMI, Fast Home Aged Inventory, is Fast Bin. And in there is an RFID bin that basically puts intelligence into a traditional Kanban system. That is very helpful to our fastener business because that's really used with OEM fasteners. So if there is any lift, it could be a little bit there, but I think that's
spk05: relatively short-lived because of the just the inherent growth differential in the two because of our maturity level Okay, thanks for that dad and then as it relates to the the puts and takes on gross margin if fastener mix is somewhat neutral you talk about the the higher price inventory moving through and maybe you can scale that factor the the inventory benefit you saw last year that would go away this year? And then anything else, I mean, rebates or any other minor puts and takes we should be thinking about for 2022 gross margin?
spk06: Yeah, if I think there actually are quite a few puts and takes. Now, remember, I think from a price-cost standpoint, we're fairly neutral, right? So the impact of price on gross margin, it was neutral in 2021, and we're operating under the assumption that it'll be neutral in 2022 as well. But you're right, product and customer mix was also neutral in 2021. And I think that as you get that gap narrowing between fasteners and non-fasteners, you're going to see that neutral slip back negative. And so I am assuming that product-customer mix will be sort of a 40 to 50 basis point drag in 2022. Another piece that I think will be perhaps a drag on gross margin in 2022 will simply be the absorption that we experienced this year. This year, in addition to accelerating growth throughout the year, we also had to begin buying more product because of supply chain challenges. If those things begin to moderate, I wouldn't expect the same degree of absorption benefit in 22 as you get in 21. So those two things could work against gross margin. as we get into 2022. Now, there are some offsets on the other direction. 2021 had a lot of mask write-downs, and I think that that's not going to recur. I do believe that we will have some product margin improvement in both the fastener and safety side of the business. Not dramatic, but again, I think that you can have some tens of basis points of contribution there. And I think that the one thing we'll be watching really closely is the impact of fill-in buys, because In 2021, where we had very little or where we had a lot of restraints on our availability and our hubs because of the supply chain, our field did a remarkable job going out and finding products. And when they do that, they typically don't get the same margin that they would get if they were still within our supply chain. And they often have to move a lot of product around on outside freight, which we wouldn't normally do. And so to the degree that the supply chain normalizes and that fill-in buy reverses, you know, I think that that would be favorable as well. So those are all the moving pieces. You know, netting it all out, I still think gross margin is going to be slightly down in 2022. And that's kind of how I'm viewing it at this point.
spk05: Very helpful. Thanks a lot, guys. Sure.
spk08: Thank you. Our next question has come from the line of Josh Pokrzewinski with Morgan Stanley. Please proceed with your questions.
spk07: Hey, good morning, guys. And also, shout out to the operator on the totally legit pronunciation. That's old country.
spk06: I was going to ask. It sounds like you got it right.
spk07: Yeah. Like three tally marks in my career of guys who have gotten it dead right. Good on him. So, Holden, I guess a similar question on maybe the SG&A leverage. You talked about that being a little bit better. Normally, you don't give quite the same amount of color as maybe you do on gross margin, but you know, maybe anything that you could put around parameters for, like, how much better SG&A leverage just looks as a result of maybe not, you know, quite the same cost resets?
spk06: Yeah. Well, you know, remember that part of it is simply comparison, right? I mean, I think two things happen in 2022. First, we're going to move past the year one reset. I continue to believe that our incentive pay will be up. You know, where we exit with fuel, fuel will be up. Healthcare, who knows? We'll see how that plays out. And I don't think that our travel has necessarily gotten back to what we would consider to be normal. But I also don't think that you're going to see an order of magnitude of increase in those categories that looks like what it did in 2021. So I think you move past that year one reset. I think that takes a comp issue off the table. And then we're also not going to be comping against those COVID-related cost takeouts from a year ago, right? So I just... The reason the OpEx leverage returns is in part just because the comparison gets easier, right? We have a long string of improving our leverage, and we had a little bit of a pause in that in 2021, but I think that's a unique circumstance, and in 2022, you begin to see, you know, something more normal take place, particularly as you get into Q2 and beyond. So the comparison is normalized, and then you fold into that efforts that we're taking to be more efficient, right? We talk about the structural changes that we've made at the branches, which is contributing to our ability to rationalize the network a bit more. We talk about the technology investments that we've made, which also contributes to our ability to rationalize the network a bit more. And those things are going to allow us to produce leverage off of occupancy and labor. So in my mind, where this all comes together is, you know, we would see the operating margin being higher in 2022 than 2021 with incrementals in that 20% to 25% range, which has been our goal. You're right. I'm not overly specific. I want to let you all project how effective at it you think we're going to be. But, you know, I see the dynamics that existed as recently as 2018 and 2019, where we had gross margin coming down, but significant leverage of SG&A. I see those dynamics beginning to reassert themselves in 2022. And that's particularly true as you get into the second quarter. There is still a little bit of COVID-related hangover in Q1, although it's moderating. But once you get to Q2, I think all those comparison issues are passed. barring any change in the COVID landscape in the next few months.
spk07: Got it. That's super helpful detail. And then, Dan, just to follow up on a comment you made in your prepared remarks on on-site and kind of the way customers are engaging or want to be served, is there another KPI that you were sort of tilting more toward, whether it's FMI device signings or something else, e-commerce signings, that you think folks should pay maybe closer or disproportionate attention to, given that on-site, you know, maybe customers aren't really, you know, looking to engage quite that way at this time?
spk06: Yeah. First off, I do believe the commentary I made about COVID, and COVID, it's part of our life now. I think many organizations are coming to that same conclusion. I don't think we're unique at all in that regard. And so I think willingness to focus on things that are long-term rather than short-term chaotic will improve. And I believe our on-site settings will improve. The one aspect that we've started talking about this year that we'll continue to talk about in the months and quarters to come is our digital footprint and how that continues to expand. Because it really... expands what we can illuminate for the customer. It also helps us over time become an ever more efficient distribution model because we're pulling more product through the system because we know where it needs to go as opposed to pushing it not certain where it's going to go. And you can do things a lot more efficiently, and we've talked in recent months about a concept called Lyft, which is our local inventory fulfillment terminal. We have 17 of them now. And some of those are inside distribution centers and some of those are external to distribution centers. But it's essentially, we have this vending machine that we can look at the pattern in the vending machine and say, hey, we know what it's going to need with pretty high certainty for the next week. Maybe we should be picking that product in a lift rather than one of our branches where we can do it much more efficiently. And it allows us to, you know, right now one of the most precious resources to add to an organization is people. And so it allows us to better leverage that element of our business and allows the energy locally to be focused on, you know, consultative discussions and peer service as opposed to picking inventory. And so I think digital footprint is a really important one, and it's one that – I'm pleased to say we're uniquely poised to step into because of our branch network. Got it. That's helpful.
spk04: Thanks a lot.
spk08: Thank you. Our next question has come from the line of Nigel Coe with Wolf Research. Please proceed with your questions.
spk01: Thanks. Good morning. Thanks for the question. Just hold on. I want to go back to the inventory. I think inventory was up 14%. year-over-year, and I think the comment was that the bulk of that's inflation. Is that correct, that the majority of that increase would be inflation? So the question back of that would be, is there more inflation to come through the P&L from inventory, and therefore to remain price-cost neutral in the first half of the year especially, do you need to accelerate pricing from the 4.5% in 4Q? And the spirit of that question is you've got no price increases currently planned, But do you need to have further price increases to maintain that neutrality?
spk06: Well, I think what I said is we don't have a broad sort of business-wide increase plan. We do have changes that we need to make. So first, your question. Yes, about 80% of our increase in inventory in the fourth quarter was because of inflation, not because of widgets. When I look at the inflation that's coming down the pike – you all know how we account for our inventory – Right now, I would say that if we did nothing else, particularly on fasteners, we would be behind the ball. We know the cost coming through the system in the first half exceeds where our pricing is today for fasteners. And so, yes, we have other actions that we do intend to take, which simply falls short of saying we're raising prices on everything because of generalized inflation. There are certain products within our mix that we didn't raise price as much as we think the market would have justified. And we've gone back, we've looked at that list, we've done the analysis, and we're going to address those gaps. There were certain customer sets that we weren't as aggressive with initially, intentionally, that we always intended to sort of come back and revisit that group. And that's a significant chunk of revenue that still has to be addressed. And then we think that having availability of products particularly fastener product, when I think a lot of the market will not, I think is also going to allow us, you know, to be somewhat aggressive versus some of our competitors. So, you know, we have at this point managed to really track the pricing and the cost effectively through the last three quarters. And, you know, we've been able to see what our cost is. One of the benefits of the long supply chain is we have visibility that extends to And so we've known what's coming up in Q1 and Q2 of 2022. It's not a surprise. And so some of our actions have been tracking that as well. And so whereas we don't have plans that are as broad as what we've seen through three or four events in 2021, in 2022, in the beginning, we do have plans, particularly around fasteners, because if we don't execute those plans, then we would fall behind. But we've managed that price-cost delta well. None of this information is new or surprising to us, and we anticipate managing it well in the first half of this year.
spk01: Great. Thanks, Olin. That's really helpful. And then my follow-on is on the employee costs. I think up 17%, if I'm not mistaken, this quarter. You've indicated better SG&A leverage going forward, but I'm just wondering, of that 17%, how much of that is sort of not one-time in nature, but discretionary bonuses, maybe some signed non-bonuses for hiring? and how much would be sort of base inflation within the employee base?
spk06: You know, if we look at wage inflation, it hasn't changed much versus earlier in the year. If I look at our full-timers, we're probably sort of in the mid-single-digit type range, maybe a touch below 5% in terms of what our base paper head is looking like on full-timers. If we look at the part-timers, that's still up double digits in terms of growth. So we are seeing some wage increases. However, they've been relatively stable in terms of order of magnitude over the course of the year. Incentive pay is another matter. I mean, incentive pay was up significantly over the course of the year. I think it was up about 25%, and in Q4, it was up about 35%. Now, that's a great story, right? That reflects... the success we've had as a business in growing our revenues and growing our profits and margins. And I would expect that we're going to be successful in that again next year. But that first year reset is real. And in the second year, I would expect our incentive comp to grow, but I don't expect it to grow at the same rate that we saw in 2021. Because, again, we've seen that pattern year after year or cycle after cycle. Thanks, guys.
spk08: Thank you. Our next question has come from the line of Hamza Mazari with Jefferies. Please proceed with your questions.
spk03: Dan, I'm sorry to hear about your loss, first of all. And then my question is just around onsites. Could you maybe talk about, you know, expectation for onsite signings this year? And do you think there's pent-up demand there? Because you did reference sort of the sales cycle being pushed out and that has yet to sort of normalize.
spk06: Well, so our expectations are 350 to 400 on-site signings. I think, you know, to be very clear, I think the dynamics that made signings a challenge in 2021, we're exiting the year with those dynamics still in place. And so, you know, the reality is that in order to make 350 to 400, or for that matter, 23,000 to 25,000 FMI devices, we probably need to see the marketplace grow. normalize a little bit more. And I think the challenge that we have is simply that when our customers are in short-term crisis management mode, I think they have a harder time shifting their attention to long-term strategic decision-making, right? And I think that's the fundamental issue because we absolutely believe that over time, the marketplace can support the kind of signings that we continue to project out. So, We'll see how it plays out, Hamza, but at this point, we're assuming that we're going to have an accelerated rate of signings for our growth drivers, but we'll just see how the market plays out. So that should hopefully give you some color in that respect. And I'm sorry, what was your second question around that?
spk03: It was just around the sales cycle normalizing. Do you see pent-up demand there?
spk06: I don't know if I would call it pent-up demand because I think in many respects attention has just shifted, right? We have stories from the field of, you know, we put an offer on the desk of our customer and it's just still sitting there and it's three months now, right? And so at some point that customer will return to that piece of paper on the desk and sign off on it and it'll be ready. You know, does that mean that in 2020 2022 or 2023, that 350 to 400 becomes temporarily 450 to 500? I don't know. I doubt it, frankly. I think that we've had a bit of a pause as people have managed their businesses. And as their management of that business begins to migrate away from crisis management, I think that they'll get back in task to do that. But I do want to go back to what Dan had said before. You know, because I think one of the concerns that the broader investment community has, Hamza, is well, if you're not signing onsites, does that affect your ability to grow market share? And I get the concern. But to Dan's point earlier, in 2020 and 2021, we grew market share, but we didn't do it because of the onsite signings, as we all can see. We did it because at that point, customers were asking us to do something different, which was get COVID materials in 2020, and in 2021, get any materials. And we grew market share because we did that really effectively. In 2022... We're expecting our customers' environments to become a little less chaotic, and we're expecting them to shift back to this question of long-term sort of growth driver signings as we think about it, and I think we're going to refill the pipeline. I think that's how this plays out, and we'll see how right we are as the year progresses. But, you know, if the environment remains chaotic in 2022 and our signings are low because of that, I think we're going to gain market share because we meet the customer where they are at the time. That's what we think about it. Holmes, I'll just throw in a couple thoughts. First off, thank you for your comment. And on-site, I'll tweak what Holden said only from the standpoint our range in the release is 375 to 400. He misspoke. Thank you. And I like the updated range better, 375 to 400. You know, I think there's three things – Four things that can help us in that regard with signings. I don't know if there's a backlog, per se, or pent-up demand. I know there's demand, and that demand is the same as it was two, three, four, and five years ago. I do know more customers are aware of our capabilities today than they were two, three, four, and five years ago, yet for no other reason from the discussions we've continued to have with them for the last several years. I think that bodes well for our ability. I think the commentary about people accepting COVID for what it is now and depending on what happens with this variant and how things play out as we move deeper into the year will have a meaningful impact. I do believe it's going to remain difficult to hire. Maybe not as difficult as it has been, but it's going to be difficult to hire So if it's difficult for me as a manufacturer to hire and I have a partner that is my supply chain partner who has resources efficiently deployed with technology to assist them to come into my building, that's the easiest way to hire because I can say to Fastenal, yeah, I'll take that on-site model and you're going to put, how many people are you going to put in? Maybe it's one, maybe it's two, maybe it's five people. So I think that's a real key to improving your ability to hire. And finally, there isn't an organization that hasn't been shook to its core, shaken to its core in the last two years because of supply chain disruption. I think that bodes really well of people wanting to align with a great supply chain partner, and I believe that's what we are. And the only thing I'll add on sites is to stick with a theme here. even though the signings and the new active openings weren't as high in 2021, as we expected, frankly, as we expected, that group did improve its operating margin by about a percentage point, not only over 2020, but frankly, over 2018 and 2019 as well. And the days on hand of inventory in that group also has declined versus 2020 and 2019. And so, You know, again, this is a relatively new initiative for us, and when conditions got a little bit more challenging from a signing standpoint, that group used the opportunity to be a better business in 2021 than it was in 2019. And, you know, that's relevant, too. They got better, and that's going to carry forward really well even as our signings and sales get better.
spk03: Very helpful, Culler. Just a follow-up question. I'll turn it over. Just on the national account business, What customers are not growing? I know you mentioned 82 of the top 100 are growing. Is there a particular bucket that they all fit into, or it's just sort of various sort of end markets? Thank you.
spk06: It's mostly, you know, when you're talking about that few companies, it's mostly company-specific items as opposed to market-driven. The one exception would be warehousing-type customers. That group... was pretty strong, as you can imagine, during 2020, and so they had difficult comps. The other piece that's been a little bit slower would be food processing, again, for the same dynamic, right? But it's mostly company-specific, and I might call out those two areas that were COVID-affected.
spk03: Got it. Thank you so much.
spk08: Thank you. Our next questions come from the line of Adam Ullman with Cleveland Research. Please proceed with your questions.
spk06: Hey, guys. Good morning. And Dan, sorry for your loss. Thanks, Dan. Hey, I wanted to go back to Nigel's question about price realization a different way. You had like four and a half points of price realization in the fourth quarter. And based on, you know, the actions that you guys have taken and that you plan to take in the first quarter, should we be thinking about that benefiting revenue growth by, I don't know, you know, five to six or six to seven percent? Can you help us understand the magnitude of the inflation that's coming through? Yeah. You know, well, particularly once you get into Q2 and especially Q3, Q4, you're going to start hitting, you're going to start lapping pretty big increases, right? So I wouldn't view any incremental pricing in 2022 as being, you know, purely, you know, raw incremental pricing. It's going to comp. However, if we take kind of the expectations for Q1, and then we just run those forward, right? So who knows what's going to happen in Q2, Q3, Q4 with the environment. But if you just take what we expect to do in Q1 and run those forward, I do think that your pricing contribution in 2022 could exceed 3%. Now, again, we don't know how the market's going to play out over the course of the year. It's a long 12 months. So that's based on what we know today. But, yeah, I do believe that, you know, you could have pricing contribute to sales over the course of 2022 and, you know, north of 3% just based on what we've done today. But, you know, I wouldn't expect 5% plus type pricing in 2022. Simply running the comps. Yeah, gotcha. And then from a bigger picture perspective, I think, you know, some investors are starting to get worried that manufacturers are, hoarding some inventory because of the supply chain issues and, you know, worries about that. You know, I guess I'm wondering if you're seeing any evidence of that across your customer base, that there's pockets of inventory, you know, building up that, you know, eventually might go from, you know, broadly a shortage to like an inventory issue next year. Is that anything that's come of concern? You know, the only thing I could see, Adam, is, You know, and this is from anecdotal discussions during the year. I know of situations where, you know, a customer has product that's near completion that's still sitting in a whip because there's, you know, there's a half dozen chips that need to go into that piece of equipment, and that piece of equipment can't be finished without those chips, but everything else is done around it. But I think that's gotten better as we've gone through the years. I don't think that's – I think that's worked its way through. maybe not perfectly, but pretty well. You know, probably the only place you would have, I think, some inventory issues as you go into the new year, and I think the market is on top of this and be ready to react to it would be, you know, we've talked about, you know, ocean transit times for products we're importing. And, you know, if I think of the year, and we talked about this on the third quarter call, is February and March were particularly ugly. It didn't get worse in April and May. It did get worse in June. Then it kind of moderated. Then August and September were really ugly again. And then it moderated in October. Well, November and December were the ugliest two months of the year. So that's the reality of the landscape right now. But at some point in time, and I don't know when that point in time is, that will get better. And all of a sudden, when that works its way down, there's a lot of product that's queued up. And some of our increase in inventory is because we have deeper inventories on certain things now than we would normally have. Because if it takes longer to get here, you need to buffer that into your inventory. So let's just say it's taken 60-ish days to get product across the ocean between port to port and then discharge port to destination. And that goes back down into the upper 30s. You're going to have a little blip in inventory that will quickly fix itself, but it's still a blip nonetheless. But that's more in the raw material inbound than it is in finished goods. And I think your question was more about finished goods, Adam. Okay, great. Thanks, Dan. And Adam, Dan actually pointed out, I think you also asked about maybe the first quarter or first half on the pricing question. It wouldn't surprise me if pricing approaches 5% in the first quarter and second quarter and comes in a little bit higher than what we just saw in the fourth quarter. That wouldn't surprise me. But for the full year, I don't think you're going to be at that level. Gotcha. Thanks, Holden.
spk08: Thank you. Our next questions come from the line of Ryan Merkel with William Blair. Please proceed with your questions.
spk04: Thanks. Congrats on the quarter, fellas. I wanted to ask about digital, Dan. You mentioned digital maybe getting to 85% of sales. What gives you confidence in that? Is it truly just it adds productivity for the customer? Is it that simple? And then what will the makeup be roughly long-term between e-com, bins, and vending?
spk06: You know, I think it's really predicated on the fact that when we really try to understand what our customer uses over the course of the year, We think that 65% of it is really planned spend. But unfortunately, customers either don't have a supply chain view of it that way or we don't have the tools and supply chain historically to manage it that way. But we fully believe 65% is really predictable in some form or fashion if you really understood it. And we think FMI... over time can grow to be that 65. So that's where the piece of it is. And if I started splitting it up between the components of FMI, of vending, of bins, and then of what we call fast stock, where you're just going out and scanning bins, I wouldn't be surprised if 40% of that, and I'm guessing with this number because we honestly don't know, I wouldn't be surprised if 40% of that ends up being what we call fast stock. And not 40 points, 40%, so 25 percentage points-ish. And I think the other 60% is a combination of the vending and the bins. And I think the bins ultimately can be a big piece because the bins are big in OEM. Vending is big in MROs. So it depends on how your mix plays out there. But that's where the 65 comes. The next piece of the 85 is really we look at it and we say, we think there's going to be another 20 points of e-comm on top of that. Now, that doesn't mean e-comm – now, this is where my story is going to get really muddy, and I apologize for this, Ryan. That doesn't mean we think e-comm is going to be 20%. I personally think that 65% that's FMI, I can't fathom a world where a big chunk of that doesn't get billed electronically. So let's say half of that gets billed electronically. So that's 30 points of e-comm right there, but it's just EDI billings. And then the other 20% I talked about that gets the 65% to 85%, is another piece on top of that. So our e-comm, in that scenario, is 50. But 20 points of that is incremental, and 30 points of that is just double-counting FMI. And now I probably just lost everybody on the call. But I hope that makes sense. I'm going to say I understood about that. I suspect I'm going to have some cleanup to do after this call. I followed most of it, Dan. Yeah, but it's really a case of that chunk that's repetitive – You know, the most efficient way is why are you ordering it in the first place? And, you know, it's kind of like, you know, somebody that has a newborn kid and they set up, you know, diapers that get sent in because we know the kid's going to need diapers. And we know that in two months the kid is bigger than it is today. I probably should say he or she, but the kid is going to be bigger. That's a plannable thing. Why are you going out and buying diapers?
spk04: Right. Well, it makes sense. I mean, that's the trend, and it allows you to grow with less labor and more productivity for the customer. So it all makes sense. My follow-up is on fasteners. How much of the 24% fastener growth was price? And then historically, if metal and transport prices fall, do you have to lower fastener prices?
spk06: So our fastener pricing is probably neighborhood at 20%. Now, again, that's lagging costs that's coming through the channel. That's the degree to which you've seen, you know, higher material costs and steel costs, et cetera, sort of influence. So, you know, we've had significant impact from pricing on the fastener side. I'll probably defer to Dan on the history around giving up stuff when, you know, sort of inflation goes the other way because he'll have the history that I may lack at this point. The reality of the last few years... is our customer supply chain has become more expensive. And we merely are a conduit. We're their supply chain partner. When you look at it from the perspective of OEM fasteners, if the costs go up, the costs go up. If the costs go down, the costs will go down in a competitive marketplace. And that usually moves with the turn of inventory, and that's not a new dynamic. The challenging part is, you know, what's the timeframe in which that happens? Because, you know, a big element of the increase is the dysfunction of the transportation element. And that's not going to correct itself anytime soon. And the dysfunction of that includes the ports. It includes capacity of ocean carriers. It includes availability of drivers. Part of the issue is the amount of product that's going on a semi today that should be going on rail because of all the disruption. But we operate in a competitive marketplace. On the MRO side, that's more dictated on mix and what you're sourcing.
spk04: All set, Dan. Thanks.
spk06: With that, I see we're at two minutes to the hour. Again, thank you for participating in our call today. I hope everybody has a successful 2022. Thank you, everyone.
spk08: Thank you. That does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
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