Fastenal Company

Greetings. Welcome to the Fastenal 2023 First Quarter Earnings Results Conference Call. At this time, all participants will be in listen-only mode. A question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that this conference is being recorded. At this time, I'll turn the conference over to Taylor Ranta of Fastenal Company. Taylor, you may now begin.

Welcome to the Fastenal Company 2023 First 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 quarterly results and operations, with the remainder of the time being open for questions and answers. Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission, or distribution of today's call is permitted without Fastenal's consent. This call is being audio simulcast on the internet via the Fastenal Investor Relations homepage, investor.fastenal.com. A replay of the webcast will be available on the website until June 1st, 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 Flourness.

Thank you, Taylor, and good morning, everybody, and welcome to the first quarter FASTA earnings conference call. This call is a little different for Hola and I today because we are at the site of our customer expo that just finished up yesterday, and we're Really pleased with the event. A lot of great customer engagement. One thing nice about the event this year is some of the natural things that were occurring. Obviously, two and three years ago, we didn't have an event because of COVID. Last year, we had an event, but we had to limit the attendance. And also, because of international travel, we had to limit the attendance. This year, we didn't have those restrictions, so we had a great event. And there were four areas of focus to the theme of the event this year. One was continuing to accelerate our customers' digital transformation to give them better visibility to what is happening inside their four walls, inside their facilities. The second one was really securing their supply chain. The world has seen a lot of change and a lot of impacts to supply chains over the last several years, and really – allowing our customers the opportunity to think about their supply chains continually in a more strategic way as we move forward. The third was power and productivity. A lot of this digital transformation, understanding the elements of your supply chain, it's also about bringing productivity to your, whether it's your production floor or some element of your operation. We provide the tools to do that. And then the fourth piece, was understanding our customers' goals and sharing with them ways that we can serve their goals when it comes to their journey in ESG. And I think those four points resonated well throughout the event. Now moving on to the quarter. So first quarter, we had earnings per share of 52 cents, an increase of 10.5% over last year. The team had really... strong expense management during the quarter and pleased with the incremental margin we were able to produce. Despite the fact that, as you saw in our monthly numbers, the March daily sales came in a bit softer. You know, we're in now our fifth month of ISM below 50, and it had ticked down in March. And we're seeing that in our business, particularly in the faster side, the OEM piece of the business. But Despite that, really impressed with our team's ability to manage through it. As we've talked about in prior years, we've done a really nice job of managing pieces of our business if we compare it to pre-COVID and post-COVID. And I'm sorry for that beeping in the background. My laptop's here. If you look at operating costs as a percentage of sales, in the first quarter of 2019, operating costs were 27.8% of sales. In the first quarter of 2023, they were 24.6. And it's really about all the changes we've made to the organization. A, our average branch is larger today than it was back in 2019. More of our business is coming from onsite. We've done a nice job of digitizing our business to bring efficiencies to it, and you see that shining through. The other piece is as we understand better our engagement with our customer and their needs, and as supply chains have improved globally, we've also been able to not only lower our days on hand of inventory from what we were seeing one year ago and six months ago as we deepened our inventory, but where our business was pre-pandemic. So we've taken about three weeks' worth of inventory out of the network over that entire timeframe. And I'm really impressed with our team's ability to do that. Finally, if you manage your business well, manage your expenses well, managing your working capital well as a distribution business, you see that show up in your cash flow. So our operating cash flow is $389 million. which was 132% of earnings and was 70% higher than a year ago. And so about $160 million of additional operating cash that we generated in the quarter. Our capex, net capex is very similar in both periods. So a very strong free cash flow, which puts us in a position to invest in the business or return to our shareholders. And we continued that pattern and was able to pay out a nice dividend in the first quarter, and then last night we just announced the second quarter dividend. And about $200 million a quarter we're paying out right now in dividends. Moving to page four of the flipbook. So on-sites, we signed $89 in the quarter. Active sites finished at $1,674, so about a 16% increase from first quarter last year. If you ignore the transferred sales that come from the branch when we open an onsite, our onsite business grew about 20%, Q1 to Q1, so strong performance. We remain steadfast in our intention to sign 375 to 400 onsites this year. The number was a little bit weaker in the first quarter, and most of that we saw in March. But when I think of the engagement going on at the event here the last several days, I feel good about where we're going to be in the next six months. If I look at FMI technology, an incredibly strong performance by the team this quarter. We've talked in the past about this idea of we built infrastructure to support 100 signings per day. And during COVID, our numbers dropped from the upper 70s, low 80s neighborhood as we built up towards that ability to sign 100 a day. We dropped down in the 60s, and it slowly dug our way back. Last year in the first quarter, we signed 83 a day. This year in the first quarter, we signed 92 per day. In the month of March, we signed 99 per day. So really strong performance by the team. And you can see that continuing to expand in our platform, our FMI for the quarter was 39.4%. In the month of March, we broke 40 for the first time ever. And really pleased and we feel good about our goal of signing between 23 and 25,000 for the year. As we've seen in prior quarters, we continue to see really strong growth in e-commerce. Recall that last fall that broke 20% of revenue for the first time. I believe this quarter we're at about 22. And then finally, if you roll all those pieces together, our digital footprint came in at 54% of sales versus 47 a year ago. And in the month of March, we hit 55%. And our goal is to drive that to 65 later in the year. Time will tell if we're able to accomplish that. with a long-term goal of we believe that number is about 85% of our business is going through some type of digital footprint.