Fastenal Company

Hello and welcome to the Fastenal 2023 Annual and Q4 Earnings Results Conference Call. 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 be placed into question queue 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 Fastenal Company. Please go ahead, Taylor.

Welcome to the Fastenal Company 2023 Annual and Fourth Quarter Earnings Conference Call. This call will be hosted by Dan Flournas, our President and Chief Executive Officer, and Holden Lewis, our Chief Financial Officer. The call will last for up to one hour and will 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, 2024 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 Flournette.

Thank you, Taylor, and good morning, everybody, and welcome to the Q4 FASTA earnings call. I'm going to go right to the flipbook, and on page three, we have a handful of slides here. 2023 has seen two struggles in our organization. One, you know, since November of 2022, so for 14 consecutive months, we've seen a sub-50 PMI that when you operate very heavily in the industrial space, that's a big deal for you. There's many benefits to having Holden part of our organization. One is his career before joining Fastenal, he has access to He's forgotten things about stuff that I don't even know. And so I asked him, I said, hey, how often does a period like this happen? And he said, well, back to 1970, it's happened six times that it's been sub-50 for an extended period of time, most recent being the Great Recession in the 08-09 timeframe. But it's a pretty tough period. And I said, okay. and so it's been it's been pretty tough and you know you could look at that but uh the second item the second struggle is uh we've executed better and uh in 2022 and you know we put up a good we put up good numbers inflation helps them the um the uh rebounding economy from covid helps them the fact that we're pretty good at supply chain and we were able to find stuff and keep people supplied helped because if you can't get it anywhere else you come and get it from us and uh But there was some stuff under the hood that we weren't executing as well as we'd like to see. And we made some leadership changes earlier in the year. And I think we're poised really well as we go into 2024. But those were a couple of things that challenged the year. Despite all that, in the fourth quarter, we grew our daily sales 3.7%. The team did a really nice job managing expenses. We had a few things that, you know, sometimes you have a few things that go your way. Sometimes you have a few things that go against you. On par, things were generally favorable, and we grew our EPS 8.5% to 46 cents. If I think of our growth initiatives, kind of uneven. We've continued to see nice development in our install base of onsite locations, maybe not as fast as we'd like. FMI devices, we did a really nice job. And we continue to increase our digital footprint that we've talked about in recent years. Operating cash flow was a record. at over 1.4 billion of operating cash that we generated, and it was a 52% increase to what we did in 2022. Now on the surface, that's a little bit misleading, because 2022, and I'll touch on that in a second, consumed a lot of working capital, because we were ensuring a reliable supply chain for our customers. That brings us to the final bullet on the page, and we paid out a fifth dividend, paid out 38 cents per share here in December, That's the fourth time that we've done a supplemental dividend like that since going public back in the late 1980s. The first time was in December 2008. The world was in free fall. We had cash available. We looked at that cash as being, this is owned by our shareholders. We don't know what needs they have for liquidity. We do know we won't need this in 2009 if the economy is doing what it does because our business is counter-cyclical. And we knew we'd throw off a lot of cash. And so we paid out a sizable dividend in December of 2008. December of 2012, there was a lot of uncertainty in the United States. The federal government was having a fight amongst itself about what tax rates should be on dividends. We didn't know if tax rates were going to go up in 2013 and figured we're sitting on a bunch of cash that's paid out to our shareholders and we don't need it. We generate a lot of cash in the future. We'll pay it out and let the folks in Washington, D.C. figure things out. It's nice to know that in today's Washington, D.C., things are much more calmer. Sorry for the sarcasm. I'm Midwestern. December of 2020, the world was in COVID. We had more cash than we needed, and we paid out a supplemental dividend. This one's different than the other three. We invested a tremendous amount of cash into inventory in 2021 and 2022, an incredible amount, because supply chains became erratic. You couldn't count, it was not a reliable timeframe of getting containers through ports and getting product. And we're not a sorry company. We don't say to our customers, sorry, you couldn't get it. We're a supply chain company. And if we feel that it's going to take an extra 40 or 45 days to get a container, we'll add 50 days of inventory, six days of inventory. So we consumed a tremendous amount of cash. Fortunately, things have become more stable when we harvested that cash in 2023. and we'll generate ample cash as we move into 2024 and beyond. We didn't need it, we sent it to our shareholders. We feel we have a really conservative balance sheet and we have plenty of gunpowder for anything that we need to do as we move into 2024. Flip into page four, 58 signings in the fourth quarter of 23. Not a particularly impressive number. Perhaps the The environment came a little bit tougher late in the year for signing onsites. It's not the strongest of year for many of our customers. Perhaps we had some district managers that are looking at their expectations for 2024 and maybe some onsite signings split into 2024. We're up 12.3%. We finished the year with 1,822 locations. Our older onsites had a pretty tough year. That speaks more, I believe, to the PMI index than anything else. But we still anticipate 370, 400 signings next year. We think we're poised to do that. We think the energy is behind it. And we think the team is really focused on it. And that speaks back to some of our execution issues I mentioned on the prior page. FMI technology. We had a good year with FMI. Did a nice job of signing. If I look at just below the bullet where we say we signed 24,126 MEUs, You divide that by 253 days, that's 95 per day over the span of the year. One thing we've talked about a number of years ago was building our infrastructure to support signing 100 devices a day. And that was a long way away from what we were doing at the time, but that was kind of the number we had in our head. And I'm pleased to say the team has essentially gotten there and came in at 95 per day for the year. Our intention for next year is to sign 26, 28,000. It's a big number. I believe the team is up to it. E-commerce continues to grow well. A lot of that, obviously, we're not growing 28%. So a lot of that is customers are changing how they engage with us. And we're not unique to that. And so I believe e-commerce as a percentage of our business is about 25% of sales now. If I go back not too many years ago, it was 5% of sales. So it continues to grow. And then finally, our digital footprint. That's where we engage electronically with our customers. It might be we deploy FMI, so a vending device, a bin with technology embedded, a mobility scanned bin, whatever it might be, but we engage with our customer, and then we add the e-commerce on top of that, remove the double coning. And in January of 2020, that was 36% of sales. A year later, it was 38%. A year later, it was 46%. A year later, it was 53%. and now we ended this year at 58, 59 type of neighborhoods. Flipping to page five, this is the last time you're going to see this chart. We started it a number of years ago. You know, back in, so we have about 3,419 in-market locations. It's up 3.5% from where we were a year ago. Back in 2015, about 9% of our in-market locations were what we call an on-site. Now, an on-site might be We're physically inside the customer's facility. We are operating in a facility down the street from the customer that's dedicated to that customer. We might be operating a facility that's in the back of a branch, because the customer doesn't have enough room for us to put everything in there, and we only put some stuff in there, and our back room is the back of the branch. But it's where we engage in a discrete business with a customer, and it ramps up our ability to grow. As we really looked at this as being Not just something that had happened once or twice back in the 90s. And the first one was, frankly, we couldn't find a building to rent in town, and the customer said, I have some room, and we moved in. So it was more of a necessity. But as we realized this was really a business model that could help us grow, it prompted us to revisit our branch network. And so we peaked out in 2013. At that point in time, we estimated we were within a 30-minute drive of 95% of the manufacturing base in the United States with our 2,600 or so stores or branches, and that included our U.S. and Canadian network. But we looked at it and said, if we pulled that back a bit, because some of business that wouldn't be in a branch is going to be in onsites over time, what would it look like? And we settled on a number of about 1,450. At 1,450 locations, that 95% access to the manufacturing base drops to about 93 and a half. And we know if there's customers that are outside that 30-minute window and they're onsite customers, the fact that our branch is 45 minutes away doesn't matter. So we saw this as the right density. And I'll use some, I'm always, one beauty about being organic grower of the year is in all of our systems is our one system. You have access to a tremendous amount of information. And I did a look at our oldest four states in the company. And if I go back to 2007, in Minnesota, Iowa, Wisconsin, and Illinois, we did just under $400 million in revenue. It was about 19% of our sales. We had 236 branch locations in those four states. We had 20 onsites. In the next decade, those four states, our CAGR was about 5.7% a year. And as you can appreciate, it's a nicely profitable business. It's above the company average by a few hundred basis points. And about 18% of our revenue was onsite. Since 2017, we've closed, since 2013, we've closed a bunch of locations. Well, we've opened a bunch of onsites. In fact, we've gone from 200, we peaked out at 263 branches. Currently, we have 191. So we're down about 30% from our peak. Our onsite count today is 221. So we have more onsites than we have branches. Since 2017, that area has a CAGR of not 5.7. It has a CAGR of 8.2. So we took an old, mature, profitable part of the Fastell business and grew it faster. Today, it's about a $1.1 billion business. It's about 15% of our sales. And about 46% of our sales run through an onsite. Sorry for taking us down memory lane there, but I thought I'd give a little insight on why we're excited about the rationalization of the branch network and the onsite and the potential to expand our ability to grow. With that, I'll turn it over to Holden.