Fastenal Company

Greetings and welcome to the Fastenal 2022 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 Taylor Ranta of Fastenal Company. Thank you. You may begin.

Welcome to the Fastenal Company 2022 Annual Enforced Earnings Conference Call. This call will be hosted by Dan Flournus, 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, 2023 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, and good morning, everybody, and welcome to our fourth quarter earnings call, and Happy New Year. Some highlights on the quarter. I'm on page three of Holden's flipbook. So our daily sales grew 10.7%. in the quarter, eased a bit from what we've seen in recent quarters, primarily because of tougher comparisons to what we were seeing in the fourth quarter last year, but also some moderating demand. I'm pleased to say that our fourth quarter operating margin remained stable at 19.6%, and our ability to generate cash, so we're looking at our cash conversion, it returned to historic levels, and that's really a sign of moderation and the level of inflation that we're seeing in the marketplace, but also a more stable supply chain and the ability to not need, how's that for a double negative, not need to expand our stocking levels to ensure a reliable supply line for our customers. So it gives us some flexibility as we go into 2023. Very pleased to see that. 2022 was a year of milestones, and they all centered on $1 billion. So in October, our e-commerce revenues surpassed $1 billion for the first time ever. That's on annual, looking at annual milestone. Our international sales exceeded $1 billion. We hit that milestone in the month of November. And as noted in the release this morning, our company-wide net earnings topped $1 billion for the first time ever, and that was for calendar 2022. You know, when I look at that chart on the upper left, it's hard to decide where do you start explaining all the noise you have, really, of the last three years as we went through COVID, as we emerged from COVID, as we went through supply chain disruptions and inflationary period. So I chose to not. And just compare to... 2019 from the standpoint of what was our cumulative sales growth in each of the quarters of this year, because I think it tells a more stable story and talks about the things that we've built. So in the first quarter of 2022, we were 28.1% larger than we were in the first quarter of 2019. This expanded to 30% in the second quarter, expanded to about 31% in the third quarter. In the fourth quarter, we're about 35% larger than we were in the fourth quarter of 2019. Now, you shouldn't conclude from that that, geez, that expanded seven points from Q1 to Q4. Because in full disclosure, 2019 was weakening a bit as we went through the year. I would see this as ignoring COVID, ignoring supply chain, ignoring inflation. We're 30% bigger than we were. three years ago, and I think that's a testament to the business model and to the team executing the model, and the marketplace recognizing Fastenal for what it is, a great supply chain partner to their business. And I'm pleased to say, I think we're exiting the pandemic stronger than we entered. We experienced margin pressure in the fourth quarter, and Holden will touch on that in more detail later in the call. Fasteners were challenging but we understood what was going on there and we knew what was coming. The safety, I would say the same thing. It's challenging, like anything is challenging, but we knew what to expect there. And I think on these first two buckets of fasteners and safety, we understood it and we managed through it quite well. The remaining product lines, A lot of those products aren't as prevalent in the recurring pattern, the planned spend component of our business, whether it be through the vending portion of FMI or the bin or the fast stock portion of FMI. And so it takes different tools and different means to manage that. And we had some challenges there. And again, Holden will touch on a little bit more later in the call. When I look at the final piece and the reason we were able to maintain a stable operating margin, we've done a really nice job with headcount. We did add a few more people in the fourth quarter than I would have liked to have seen. I suspect some of it is after a period of being really difficult hiring and as it eased throughout the year, there's some spots that we needed to fill that were filled. But when I look at it in totality for the year, We've really done a nice job, and I'll touch on it a little bit more in a few minutes, but we've done a nice job in the last three years as well. Flipping over to page four of the flipbook, the onsites, we had 62 signings in the fourth quarter and finished with 1,623 active sites, so up about 15% from a year ago. If you ignore the sales that transfer over when we open an onsite, where it's an existing customer. We grew our onsite based on the revenue in the high teens and reiterate our goal for 2023. Our intention is to sign 375 to 400 onsites next year. And I'm pleased to see, for us, we often talk about participation inside the organization. Just over 80% of our district managers signed an onsite back in 2019. And when society closed up, And folks weren't as excited about us moving in to stay with them during the day. That participation dropped dramatically as our onsites dropped in both 2020 and 2021. I'm pleased to say in 2022, 80% of our district managers signed at least one onsite. Now, would I prefer to see that go to 85 or 90? Sure, I would. But 80% is a nice threshold to get above again because we'd only done it once before, and that was in 2019. So my congratulations to the team. FMI Technology, we signed 4,730 weighted devices in the fourth quarter. That's 76 per day. A year ago, we were signing 64 per day. And the activity through our FMI Technology platform represented almost 39% of sales in the fourth quarter. That was 35% a year ago and 27% two years ago. For 2023, our goal is to sign between 23,000 and 25,000 MEU devices, whether it be fast bin or fast spend. E-commerce, the next piece of what we call our digital footprint, daily sales rose 48% in the fourth quarter. Again, incredible traction in that area. We've really seen that traction move in the last three years, partly a function of COVID, and I think a lot of people are seeing those kinds of patterns, but also a we've gotten better as an organization at our ability to execute on e-commerce, and that shines through the numbers as well. So EDI and punch-out catalogs and really large customer-oriented e-commerce was up 45%, and our web sales was up almost 60%. Looking at our digital footprint, so that's looking at FMI plus the piece of e-commerce that doesn't come from FMI. was 52.6% of sales in the fourth quarter, and that was 46 and a half a year ago. Our goal is 65% of net sales going through our digital footprint next year. In the interest of full disclosure, that's an aggressive goal, but it's our goal nonetheless. If I flip into page five, we put this table in the release last January as well, And it's really intended to show over time what's really happening to our network. And that is as FMI becomes a bigger piece of our business, as our mix of customers changes, as e-commerce becomes a bigger piece, you rationalize your footprint because your needs for a footprint change. So you can see in 2013, we peaked out. And I'm going to start at the bottom of this set of bullets and work my way up. So in 2013, looking at our data, we had a 30-minute access to about 95% of the U.S. manufacturing base. And this is just looking at the U.S. branch network because Canada follows a similar trend as far as what you've seen in the number of branches, whereas the rest of the planet are continuing to open locations because we're quite young there. Looking at the 1,450, which we think is the ultimate number we get to for branched count in the U.S. and Canada. The U.S. piece of that where we have really good data, we think that 95 drops to about 93.5, which we think is incredible coverage and puts us in a great position to be a great local supply chain partner and still have a really efficient network. And you're seeing that in our operating expenses over the last few years. If you look at our headcount numbers, and I touched on it earlier, and I thought I'd share a different view rather than the the year-over-year view you have in page five of the earnings release. And that is, again, a three-year view of what's happening. So our in-market locations from an absolute basis since 2019, our headcount's down about 567 people in the branch and onsite network, which is about a 4% drop. And again, things like FMI and rationalizing locations have really allowed us to to leverage that. However, our sales headcount is up because every headcount we've reduced has moved into some type of sales role supporting the branch and onsite network. So I'm pleased to say we were able to realign our resources in that timeframe and really be a better growth driving organization for the long term that aligns with our strategy of a branch and onsite network. The other thing that should stand out is a year ago, we had 377 more branches relative to onsites. So we had 1,416 onsites. We had 1,793. So it was a 377 delta between the two. At the end of 2022, that delta has contracted to 60. So we have 1,623 onsites. We have 1,683 branches. I don't know what quarter that flips, but it won't be too far into our future that we'll actually have more onsites than branches, which has been very much a planned thing within our business over time. Again, the FMI digital footprint helped us leverage our headcount in our rationalization of branches. The other piece that's an important and growing component, we've talked about our lift initiative. And we ended the year with just over 17,000 of our vending machines being resupplied out of our lift facility, which really allows us to operate more efficiently, ultimately allows us to rationalize some working capital, and our sales team can focus on selling more than managing some of the back office items in a branch. The final thing, if you look at our headcount over the three-year period, is we've been able to really rationalize our support labor. So we have added folks in the distribution because of Lyft. However, if I look at DC and manufacturing, we're up 98 people in the last three years. So again, that team's done an incredible job of managing our headcount. And if I look at our support areas in general, 51% of our headcount increase in the last three years has been folks going into IT. That's how we're able to do things like FMI, how we're able to do things like Lyft and build the technology to support it. 35% has gone into either a growth driver or into our international team or supporting our sales team. And 14% has gone into all other categories combined in the last three years. I think that's an organization that dramatically improved itself in the last three years as we prepared for the future. One last item. When you see our release in February, I usually don't get ahead of myself on what's going to be in a future release. One thing to note is in 2022, our team in India added approximately 50 interns and we ended up hiring 54 of them because a number of those interns told their friends about Fastenal and they joined the blue team and they added to our IT group. We saw such great success with that. It's a very efficient way to add folks. Here in early January, we added 96. or 98, one of the two. So you're going to see the number grow by about 100 in the month of January in our support infrastructure. Don't conclude from that Fastenal is not managing its headcount. Conclude from that Fastenal is investing in resources to support its technology side. With that, I'll turn it over to Holden.