Fastenal Company

Hello, and welcome to the Fastenal Second Quarter 2022 Earnings Results Conference Call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Taylor Ranta of Fastenal Company. Please go ahead, Taylor.

Welcome to the Fastenal Company 2022 Second 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. This 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 September 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 Flores.

Thank you, and good morning, everybody, and thank you for joining us for today's earnings call. You know, life... Who you choose to surround yourself in life gives you freedom to do a lot of things and to find success with others. And, you know, one thing I found on this call is... Holden does such a fine job with sharing with the investment community, particularly the sell-side analyst community, the trends he's seeing in the business that it affords me the opportunity to be a bit more philosophical and talk to our shareholders, but also talk to the employees of Fest on this call. I suspect for most people listening to this call, the reason you're looking at earnings released today and looking at participating in this call is you want to see what red crumbs might come out of it. as far as where the economy is going. Spoiler alert, we've often said that our visibility to the future is about eight hours, and most of it comes from what we're hearing from our customer, the anecdotes that come through, what we're seeing in some of the trends in the business. So we get an indicator, and we try to share those as we see them. But we don't have a backlog in the traditional sense. We are just in time. supply chain partner to our customers and things shine through as they occur. So here are some things that have occurred in our business. First off, our travel has expanded. If I look at our travel in the year to date in 2022 and ignore for a second 2020 and 2021, our travel is about 12% below where it was in 2019. In the second quarter, our travel is about 18% higher than it was in 2019. And that's measuring dollars. And as you know, for those of you that bought an airplane ticket recently or done any kind of travel, things have not gotten cheaper. So I suspect that means we're probably still down from 2019. But the expense is up because of the inflation inherent in travel today. but what that means is the, um, most societies have entered into the endemic stage of COVID-19, uh, not all. And then, and what that means, uh, we're finding our new normal and, and I'm pleased to say travel is resuming. And that's one of the ways we engage with our customer. Um, our, our fast on culture is, is one of, we trust each other. We, uh, We work every day to build our own talent pool, and we promote from within. An integral part of that is the idea of human interaction and our ability to teach and learn from each other every day. And it's, frankly, more efficient when you can have in-person conversations. But we have adapted. If you went into a Fastenal branch today versus 2019, you'd see a different branch. You'd see many locations where we've changed what the front room looks like. You've seen many locations where we either have reduced hours or we don't have an open front door anymore because we've really morphed into more and more of a supply chain partner and more product is going out the back door than ever before. In markets where we have a larger construction presence or we have a meaningful walk-in business and the local team sees that as their means to serve the market, they might be open. But in many markets, we've changed that format. And it allows us to find success in an era when it's more difficult to hire because it's a more efficient labor model in our business. I'm also, you know, the folks that aren't in a branch are on site. Obviously, folks that work at a distribution center or manufacturing division or drive a truck, Never had the opportunity to work remote, but since the first half of 2021, we've been largely in the office, working in a different fashion than we did three years ago, but finding success together. We were able to better engage with our customer. Some of the stuff we're going to talk about on-site, et cetera, were a reflection of that. But in April, we held our first in-person customer expo since 2019, and it was a It was a great event. We had great engagement with the customers that were there. We did have to limit some geographies just from the hassle of travel and some of the COVID restrictions, but we found a really good successful event that we held back in April. Hiring remains challenging. However, our trends and applications received have improved. In fact, if I use 2019 as the benchmark, in 2020... Post-COVID starting, our applications coming in were down close to 40%. In 2021, our applications using 2019 as a benchmark were down about 36%. In the first five months of this year, they're down about 18% from what we saw in 2019. And I'm pleased to say, in the last three months, applications coming in every month are about 10% below where they were in 2019. I consider that a huge win and a sign that people are more comfortable and ready to get back to work and to build their career and to build their future. And that's just an element of that in our business. We've effectively managed marketplace disruption. It's made supply chains more expensive than pre-pandemic. And And you're seeing that if you look at our balance sheet, look at our cash flow. First six months of this year, between a combination of inflation and the fact that it takes longer for products to physically move, we have a deeper supply of inventory, and that supply of inventory is more expensive, and you're seeing that in our balance sheet. And, again, you're seeing that in our cash flow as that inventory is building and turning. We're pleased with the fact that we have the balance sheet to withstand that, And we can make that covenant with our customer that we are your supply chain partner and we will serve your needs. We did that during pre before COVID. We did that during COVID and we're doing that today in whatever stage of COVID you care to call this. Finally, this is earnings release. And for the quarter, we grew our sales 18% and our pre-tax profit grew just under 21%. Demand is generally healthy. But there were some signs of softening in May and June, and we'll delve into that as we go through this call. Onsites. We signed 102 onsites in the second quarter. We signed 106 in the first quarter. The last time we signed 100-plus in a quarter was back in 2019, I believe, was the first quarter. This is the first time we've ever signed 100-plus in two consecutive quarters. And... I think there's a number of things going on there. Again, the marketplace sees value in our onsite model. In an era where it's more difficult to hire and more difficult to manage supply chain, I believe our onsite model is even a better option for our customer in the marketplace, and I think that's shining through in our signings. Obviously, the fact that we had a customer event in April, while it didn't help the first quarter number, I think it was an element in the second quarter number. And we remain committed to strong signings for all of 2022. And we see this as a means to take market share faster and a hedge on whatever the economy might do in the months and years to come. FMI Technology continued to have industry-leading signing levels, albeit not maybe at the level we'd like. Our internal goal is always to get that number to 100 per day. And during the quarter, we were at 86, an improvement from what we saw in the first quarter, but not where we'd like it to be. And our aspirations here are very high, and that shines through in our expectations. We did, given where we are year-to-date, adjust our expectations for the year. Previously, we had indicated 23,000 to 25,000 signings. We think that number is more in the neighborhood of 21,000 to 23,000, and that's a machine equivalent unit basis. E-commerce continues to grow nicely. It rose 53% in the second quarter of 2022. And our large customer-oriented EDI was up 53%, whereas our web sales were up 51%. And you combine those two, e-commerce is about 17.1% of sales in the second quarter. Finally, digital footprint. We've talked about that in prior calls. It's our ability to manage supply chain more efficiently and illuminate that supply chain for our customers. That increased and was 47.9% of sales in the second quarter, 48% in the month of June. With that, I'll turn it over to Holton. Thank you, Dan.