Fastenal Company

Hello, and welcome to the Fastenal 2023 Q3 earnings results conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may ask a question at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Taylor Ranta of the Fastenal Company. Please go ahead, Taylor.

Welcome to the Fastenal Company 2023 Third Quarter Earnings Conference Call. This call will be hosted by Dan Flornas, 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 December 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, Taylor. Good morning, everybody, and thank you for joining our third quarter call. I'll start on the reference to the flipbook on page three. Conditions remain challenging in the third quarter of 23, reflected in a daily sales growth rate of 4%. Still, regardless of the year, we celebrate milestones when they occur. I remember just over 10 years ago when we hit $10 billion in daily sales for the first time. We recognize that on this call as well as internally to celebrate that milestone. Some years later, we hit $20. Here in the month of September, we broke $30 million in sales per day for the first time in our history, and my congratulations to the to the Fastener organization for hitting that milestone. Our sales growth in the quarter translated into EPS of 52 cents, 4.1% growth over the same period last year. Our results reflect the unique product profile of our business. Fasteners still constitute about a third of our sales, and within that subcategory, about 63%. is an OEM-oriented fastener. And that business can be very cyclical because of the production needs of each of the customers we're serving. If you look at the rest of the business, it tends to be much more MRO-oriented. Our fastener daily sales, as you've seen in our monthly sales release, have decelerated at a faster rate than our non-fastener business as we've gone through the calendar year. The third quarter operating margin hit was 21%, which matched last year, despite the one less selling day. And so, you know, earlier I spoke about the $30 million we do in a day. The quarter had one less day. Some of our expenses are tethered to the day. Most are not. And so I'm pleased that the team was able to match the operating margin of 21% from last year. But I believe that understates the reality of the performance. If you looked at it on a same-day basis, we believe we would have increased the operating margin because we'd have had roughly $10 million more, about a third of that $30 million in operating income because a good chunk of that flows through because of the change in the nature of the expense. The blue team, if I think about the last several years, We had a unique opportunity to serve the marketplace because of our pristine balance sheet. When COVID hit the globe back in 2020, we were able to step forward and secure and purchase and fund with cash a meaningful increase in inventory, primarily centered on safety supplies, because our customers and society in general needed something to get through that period and we were proud to be part of the solution. We were able to do that because of our balance sheet. As the global economy reemerged from the pandemic, we saw firsthand and you saw it in daily news clippings about the congestion that was going on in supply chains around the planet. Again, as supply chains became more rocky, And you couldn't rely on how many days it would take to get product. There's a solution to that. It's stock more products. And we beefed up our balance sheet and our cash flow suffered as a result. But I believe our standing with our customers and in the marketplace never performed better because the market could rely on the covenant that Fastenal provided to them in being a great supply chain partner. As we moved deeper into 2022 and now into 2023, we've been able to unwind a piece of that. And as a result, on a year-to-date basis, we have converted 121% of our net earnings into operating cash flow. That's our highest performance in a decade that's averaged just shy of 100, about 95%. If I look at it from the standpoint of relative to a year ago, In the quarter, our operating cash grew about 51%. Year-to-date, our operating cash has grown 69%. Again, part of that's a reflection of the investments we made to serve our marketplace and our ability to unwind that in the current environment and translate that into cash flow for the organization to serve our shareholders and to serve the business as we move into the future. Our onsite and FMI installed basis and our digital footprint continue to expand. And earlier this year, we did some restructuring and we announced the elevation of Jeff Watts, the Chief Sales Officer in the organization. We did some restructuring of the sales side of our organization because we wanted to double down on the challenge we'd put in place in front of everybody, going back to the 2015 timeframe. And that was really stepping into what we saw as an untapped opportunity to grow our business faster, and that was to expand our onsite presence. It was earlier this year that, for the first time, the number of onsites in the organization outnumbered the number of branches in the organization, and that delta continues to expand. And we believe that each of our district managers has the potential in their market to land two onsites per year, and It's our job, and part of the purpose of the restructuring of the sales team was to really decide, hey, we believe it, but we haven't done it. Let's do this thing. You know, we expanded, you know, not too many years ago, we were signing 80 onsites a year, and we laid out the plan to get to 400 a year. We expect, you know, as you see on the next page, we'll do about 350 this year. But we haven't hit that number yet. And we've been kind of stuck. Now COVID threw some challenges our way. It's never an easy time to move in with somebody when they're trying to isolate from the rest of the world. And that challenged our ability to grow coming out of COVID. But looking at the opportunities out there, I believe we can do that. We need to turn that belief into reality. Flipping to page four. Speaking of onsites, we did sign 93 in the quarter. So our active sites are 1,778, 13.5% greater than they were at the end of third quarter of 2022. And our daily sales in those onsites, excluding transferred business when you open an onsite, is in the low double-digit rate. So we're seeing good growth there. We're just not signing enough. And as I said, we still anticipate signing roughly 350 this year. FMI technology, there we set lofty goals as well. We said... Can we do 100 a day? Not 100 a quarter, but 100 a day of our weighted device count. We did 5,969 during the quarter, 95 per day versus 81 a year ago. The team's performing really well here. We're not at the 100. The 100 is a goal, and we will push and push and push until we get there. But I'm really proud of what the team is doing. And you see that shine through when you look at our sales by product lines. and our monthly and quarterly releases. One thing you do see is our safety business grew almost 10% in the month of September, and a lot of that could be attributed to the success we're seeing in FMI. And it's our anticipation we'll sign between 23,000 and 25,000 MEUs this year, and that's a combination of FastBend and FastVend. E-commerce, you know, it's still – In the scheme of things, a relatively small piece of our business, it's just under 25%, but it's up from single digits not too many years ago. And it currently grows, it grew about 41% during the quarter. And that's really a case of the marketplace saying to us, we'd prefer to purchase from you this way. And our team in the field and our team in technology building an ever better mousetrap to serve into that marketplace. As I've shared on prior calls, we still have a ways to go on this piece of our business because a chunk of e-commerce is that unplanned spend, and our goal is to keep making that easier for our team to do in the field. Finally, if you roll up FMI and e-commerce, we talk about our digital footprint. How much of our revenue is touching some digital aspect of engagement? We were at 57% in the quarter versus 49.5% a year ago. Our challenge to the team is targeting 60% sometime before we exit this year. And our long-term expectation is still at that 85% we've talked about in the past that we believe will be part of our digital footprint as we move into the future. In addition to our earnings release, there's several AKs that have gone out around the earnings time, and I thought I'd share just some insight on the three. The first one, and I believe it went out yesterday evening after market closed, we announced, as we do typically on a quarterly basis, a dividend. We announced a 35 cent dividend, which is consistent with the dividend we paid in each of the first three quarters of the year. We also announced a few leadership changes. One is a press release we put out. One of the individuals that's been very influential in our ability to beef up our inventory during COVID and ramp it back down and overseeing the distribution and transportation teams as well is Tony Borsma. Tony's been with the organization roughly 20 years, and he's demonstrated through a career, and we identify that we lay out his career in the press release, the different roles he's had, but he's demonstrated excellence. And yesterday I asked the board of directors to elevate him to executive vice president over operations. So essentially elevating his role in that his responsibility will be largely unchanged from what he had previously, but it's recognizing his performance and what we see in the future of Tony within the organization. A second filing went out. It's a required filing related to performance. one of our officers who has decided to move on to a new chapter in his career. And it's Terry Owen, our Chief Operations Officer. I've known Terry for many years. He's been with the organization, I believe all told, he's been with the organization about 28 years. The official documents say it's 24 and a half because he was in the early years part-time with the organization, but then he came full-time and had a break in service there. But Terry's demonstrated a career of exemplary service to the organization. We've had some conversation in recent months about some aspirations he had. He's looking at the number of years he has left in his career and what he wants to do as he moves into his next chapter of life. He had discovered an opportunity he thought was quite compelling that would serve his desire for the future as well as his family. Terry had relocated to the east coast of the U.S. several years ago for family reasons. and all i can say to terry is you're a good friend i wish you best of luck in your next endeavor and thank you for the team that you developed tony being one of them but thank you for the team you developed the organization has always prided itself on our ability to build leaders and promote from within and every time we see a person decide to take a new chapter in life whether that chapter is retirement or going into a family business or whatever the case might be, we always see another layer of talent right behind that person, ready to step in and discover their future and their opportunity. With that, I'll turn it over to Holden.