Fastenal Company

Greetings and welcome to the Fastenal 2024 Annual and Q4 Earnings Results Conference Call. At this time, all participants are in listen-only mode. 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 in the question queue at any time by pressing star one on your telephone keypad, and we ask that you please limit yourselves to one question and one follow-up. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Taylor Ranta with the Fastenal Company. Please go ahead, Taylor.

Welcome to the Fastenal Company 2024 Annual and Fourth Quarter Earnings Conference Call. This call will be hosted by Dan Flournus, our Chief Executive Officer, Jeff Watts, our President and Chief Sales Officer, and Holden Moose, 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, 2025 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 Flournus.

Thank you, and good morning, everybody, and welcome to the Q4 Fastenal Earnings Call. And I'm going to start in the flipbook on page three. You know, our business grew 3.7% in the fourth quarter in extra days, so daily was 2.1. Frankly, a frustrating finish to a challenging year. Our business gets and loses leverage relatively quickly when our growth expands or our growth contracts. And you saw evidence of that in the quarter. where we lost some leverage, and EPS came in at 46 cents, down about 2%. December, I think it's worthwhile to talk a little about December, and then, frankly, we've already moved on to 2025, but to look at December from the standpoint of, there's two months going on there. The first roughly 15 days, so when I think of, say, the Friday before Christmas, we were trending towards sales growth, daily growth, we felt would be in excess of 3%. Depending on which voice you listen to, when we were comparing trends, you could have argued for 4%, but a 3 plus percent number. And in the last, you know, that Christmas week and then that New Year's Day week, that collapsed. And, you know, if I'm doing the math, it tells me if the first 15 days of the month were growing at 3 to 4%, and you weight that against the last five days and having all that evaporate, that means in the last five days we were probably negative, you know, somewhere between 9% and 12%. And, however, we don't believe – we believe the first part of the month is more indicative of where we are and where we're going to be in January and February than what we saw in the last area. If you look at the – data of what's happening. We have a lot of anecdotal data, but I sat down on January 2nd with our vending team. And I said, you know, we have something unique here that we really should understand better. And that is we have vending machines in just over 20,000 facilities on the planet. And, you know, the calendar is the calendar. And let's look at a baseline. And I asked them, we get a lot of the information that comes in and we look at it in weekly snapshots So Sunday to Saturday type snapshot. And I said, look at the two weeks prior to the week that Christmas touches. And look at what our trends were and what our pace of business was in that timeframe. And then look at each week thereafter. So the week that Christmas touches, the week that New Year's touches, the first clean week of January, and the second clean week of January. So you can really look at, Did something different happen there? The other thing that I asked them to do is we're fortunate with a range of customers. Obviously, industrial is our biggest component. But in the vending area, we have a meaningful customer base that represents non-manufacturing entities. And a handful of those are e-commerce companies. And their trends would be completely different because they're really busy around the holidays. So said, take out our top 10 vending customers. We did that, and I said, let's analyze the rest. And, excuse me, the top 10 non-manufacturing vending customers. So if I look at, and then I said, determine a bright line of where you think the facility shut down. And the team came to the conclusion that if we're doing 100 transactions on average a day, and that number goes to 25 or less, we're gonna consider that facility as essentially shut down. And because the only people there are, maybe there's some maintenance folks that are in there because it's a good time to do maintenance. Maybe there's a few production lines that are running because they're behind, or maybe there's an area you don't shut down like heat treatment because it's too expensive to start it back up. So in 2022, about 25% of the facilities we sell into that have Vending, about 25% saw the activity drop more than 75%. So they were running less than 25% of normal. In 2023, that was 30%. In 2024, that's 35%. So a meaningful uptick really since the economy weakened in 22, the industrial economy. We saw a meaningful uptick in each of the two years, and that was accentuated this year. More telling was the week of New Year's. So the week after Christmas, 5% were shut down, 6% were shut down. This year it's 17% were shut down. So there were a tremendous number of companies that probably shut down the day after Christmas. And I don't know if they were open the Monday or Tuesday before, but the day after Christmas, and they stayed shut down through January 2nd. They just said, we're idling operation. And that plays very true to what we saw in our numbers. The only other item that was noteworthy is we looked also at their activity is just down. Because if there's normally five workdays in a week and you're down to four, you'd expect to be at about 80%. We did see the week after Christmas And two weeks after Christmas, a very strong increase in the number of customers that were down at least 25%. And when I look at, so last week, that number, the activity had normalized as far as how many are shut down. It's about 4%. But we saw an impact of the weather in the southeast. And we don't have this week's data yet. our anticipation is that normalized. And Holden will touch on a little bit of that when he looks at truck routes and things like that that we canceled during last week. So a lot of wading into the weeds there. I hope that made sense. My guess is a few of you will have follow-up questions for Holden after the call. The next piece, and I'll dive a little deeper when we get on page two, but in preparation for Investor Day, we thought we'd share some information we're going to be talking about, and we're planning on Investor Day in March. And we thought we'd share a new view. So when I joined the organization back in 1996, it was all about account numbers and dollars per active. So active accounts, how many accounts bought from you and dollars per customer and growing both of those over time. And we used to always say in a typical branch, you had 100 active accounts, 10 of those represented about 65% of sales. If you would have looked at it not as an account base but as a customer, and what I mean by that is we might have three account numbers in a building because we're selling to the maintenance area, we're selling to the production area, and we're selling maybe a second production line. So you have three account numbers to track the activity. That's one customer, but we looked at it as three accounts or three at the time. I'll touch on that in a second on page two. Finally, on page three, we raised our quarterly dividend by roughly 10%. If you annualize the dividend we just declared, it's about $1.72. We feel very confident on our ability to continue strong cash flow generation, very indicative of our business model for many, many years. So you see a new chart here, probably an unfamiliar look to the business, but some I felt the best way to address this, and I'm not seeing my sheet of paper here, unfortunately, is to address a letter I did for our employees. And in that letter, sorry, I had to go back to my desk to grab it, I described to our employees what they're looking at in this information. Some quick definitions. Each customer site is a roll-up of revenue going into a unique site from a branch or onsite. It includes everything we provide, whether it's dropped at a dock or a customer's desk, supplied via an FMI device, shipped to the facility using a third party, or picked up at a fastener location. Each customer site also rolls together all the individual accounts our local team uses to summarize and build for the products and services we provide. The information in the slide is based on analysis of roughly 270,000 unique customer sites that we supply products into during 2024. Again, it's a simple looking graphic, but it tells a powerful story about our business. The top two buckets summarize customers that are doing more than $10,000 a month, and then the subset of that that do more than 50. So the 10K plus includes about 5% of the customer sites we serve, but represents about 77% of our total sales. Since 2017, revenue through these customer sites has grown at a compound annual growth rate of 14%. When I look at these customers, they really value what we bring to the marketplace, and we've been incredibly successful. In 2024, there are about 13,000 customer sites in this group, again, about 5% of 270,000, which translates into about 54 sites in the average district. There's 240 districts across our business. The average customer site spends about, spent about 38,000 per month, and the number of 10K customer sites has increased about 9% a year since 2017. Thanks to the strength of our onsite program, there's a subset of this group that has grown even faster. The customer sites were spent as at least 50,000 per month. Since 2017, revenue through this subset of customer sites has grown at a compound annual growth rate of 18%. The scale of this business changes the customer site economics. It allows us to operate more cost effectively, hence the onsite program. This in turn expands the resources we can provide improves the opportunity for the customer and professional. In 2024, there were 2,547 customer sites in this bucket, about 1% of the total sites we serve, which translates to about 11 customer sites in an average district. Since 2017, the number of 50K plus customers has grown 16% per year. So we've heavily talked about onsite acquisition, and as you see, Of this 2,500, about 2,000 of them are physically in an onsite. We'll talk in March about how we intend to de-emphasize onsite numbers and change it to talking about 50K plus customers. We believe that positions the best story of telling the business to make it clear what we're striving to accomplish and how successful we are at that endeavor. On the lower half of the slide, there are two buckets of customer sites where we appeared less successful. Here are some thoughts on these. Customer sites spending between $5,000 and $10,000 per month represent about 4% of the customer sites we serve. In 2024, there are about 10,000 customer sites in this bucket, roughly 42 in an average district. And we've added about 4% more sites per year to this bucket since 2017. This would be mediocre except for one fact. We've been incredibly successful with many of the customer sites formerly in this group. In fact, many have become 10K plus customer sites over the last seven years. This success has been driven by your efforts to introduce our supply chain, transformational capabilities using FMI, onsite, production parts, MRO products, and many industrial services. In fact, a sidebar here, industrial services broke 100 million in revenue for the first time in 2024. It's been great for those customers, for our employees, for our shareholders, and for our suppliers. In this light, our performance isn't mediocre. However, it's not great either. That 4% CAGR should probably be up for single digits, if not 10%. The final buy of customer sites, less than 5,000 per month, has borne the brunt of changes in our business and the world over the past several years. A decade of strategically closing locations, COVID-19 and its impact on how customers purchase product, think e-commerce, The removal of products from our previous stock in our distribution centers, this we reversed in 2024. A strategic decision regarding sales time allocation and maybe some slippage in execution by the FASN organization. I believe the critical aspect of this group is you close a lot of locations, that customer that sees us as convenient but not special, that business falls off. The way you make that special, is you push harder on your e-commerce capabilities and what it means for unplanned spend. Because what that does, it benefits every customer bucket you see on this page. Because we're more than planned spend, we're everything they need. Flipping to page five. On-site, we signed 56 in the quarter. So we finished the year with 2,031, increase of about 12% of what we saw a year ago. Customers in the onsite world grew mid-single digits. We did see, similar to what we saw in 2000, older contingents of onsites go negative during the year. And it's not uncommon on a call with a district manager to learn about two or three or four customers where their business is down 40, 50, 60, 70% where it was a year ago. That's a sign of what the industrial economy is taking away Our execution and our ability to take market shares is a sign of how we do self-help and fight back. All told, we signed 358 onsites in 2024. We signed 326 last year, so an increase, not at our goal, but a meaningful increase. And signings that are consistent with previous peaks in 2019, the year before COVID, and 2022, the first year we came out, FMI technology, huge, huge aspect of the business here and strong success. We broke 100 MEU signings per day for the first time. We feel very good about how we exit the year and what that means for 2025. And in the fourth quarter, FMI technology touched about 44% of our revenue versus 42 and 39. in the last two years. And we established a goal of 28 to 30,000 MEUs for 2025 versus the 28,000 we just signed. And Holden touches on that a bit in our CapEx expectations. E-commerce, you know, a good story, not a great story. It grew about 28%. E-procurement, where we have established customer relations continues to grow almost 40%, 37.6. However, the e-commerce piece that contains web, we still struggle there and we're putting double down efforts into that. We realigned some teams to make that a more relevant part of our business. All told, you take e-business and FMI technology, about 62% of our sales, just over 62%, touch our digital footprint. Our goal was to get that to 63 in 2024, so just shy of that number. We, our goal for next year is 66 to 68. And before I turn it over to Holden, I just want to touch on a couple of things. First off, some comments that Holden made to our regional leaders and our VPs this morning. He talked about in 2024, a cost structure that was effectively managed. And in one challenge I gave to the group, I believe our incremental margin will be stronger. in 2025, and the challenge to them is as our momentum takes us through the year, and time will tell what the economy allows that momentum to shine through as, but as our momentum takes us into 2025, there's a lot of expenses that we've been squeezing really tightly on in the last couple years. We have to maintain that, because it puts us in a position to allow for the reload of bonuses We have a large group of folks within Fastenal that haven't seen bonuses for close to two years, year and a half at least. And we need to allow the inherent capabilities of Fastenal to reload that. And the best way to do that is to get the revenue growth, capture the gross profit, and manage our expenses incredibly well. The other thing I touched on with the group this morning was, as all of you saw, In December, Holden announced his decision to leave Fastenal, effective April. You know, I think back to when Holden joined the organization. I think back to that conversation he had with me in December when he told me. I think it was probably a hard conversation for him, at least I hope it was. And when Holden joined our organization back a number of years ago, what we were looking for in a CFO was somebody to bring in a fresh perspective, a very analytical look, who could pick apart the business, maybe in ways that the previous CFO didn't do, and give it a new set of eyes. And from that, I want to thank Holden for what he brought to our organization from the standpoint of somebody that didn't grow up in the organization, but knew a lot about the industry and also had a keen mind towards analysis. The other thing that Holden, I think, was saying to Jeff and Jeff stepped into the president role here last fall, is it allows Jeff the opportunity, Jeff Watts, the opportunity to figure out who our CFO should be for our next 10 years. What skill set are we looking for to serve the business today at close to $8 billion versus the business eight years ago at around four? And so I wish Holden well, and I applaud the humility to recognize that maybe Jeff needs a different CFO in the future. And finally, before that comment sounds like Florence is out the door, I thought I'd share a conversation I had with my kids in August. We do a family vacation every year and our kids are in their late teens or 20s now. And they asked me, hey dad, what does it mean being CEO versus president? And I said, you know, you ask 10 people, you're gonna get 13 different answers. Here's what it means to me. I think of the CEO side of the business as you're focused on the strategy where you're going and you're focused very keenly on what that means for people development and how the organization should position itself for what it's going to become. Whereas the president is much more about executing what you're doing every day, every month, every quarter, every year. But I said, Jeff is stepping into that president piece, but he's also stepping in, he's training for that CEO piece. But he still has his first title, and that is chief sales officer. And as long as he has that title, and even when he gives it up, his number one priority is how we're executing to grow the business. And the part of our strategy that's about growing the business. That's his focus. When we get to 10%, we can change that focus. Anyway, I'll turn it over to Holden.

Great. Thanks, Dan. Yeah, it was a very difficult conversation, just so you know, but this has been a tremendous opportunity. I just want to make sure all investors understand. I have a unique opportunity to go try something different, but it's been an honor to work for Fastenal, and this is a great organization and a great opportunity, so Jumping into slide six, I know what the investors want to hear is what's going on with the quarter. You know, sales in the fourth quarter of 2024 were up 3.7%. Daily sales were up 2.1%. Daily sales growth ranged from 1.8% to 2.1% throughout the year, a consistency that makes sense in the context of a PMI that spent most of the year signaling modest contraction in manufacturing. The attributes of our sales in the fourth quarter of 2024 were similarly comparable to prior quarters. MRO-oriented products outperformed OEM-oriented products, with safety up 4.8% and fasteners down 1.4%. Larger customers outperformed smaller customers, with national accounts up 4.2% and non-national accounts down 1%. And manufacturing end markets were up 3.3%, outperforming non-manufacturing end markets, which were down 0.3%, headlined by a 4.1% decline in non-residential construction and an 11.3% decline in reseller. There was not a lot of variation in our high level top line trends through 2024. That said, the fourth quarter of 2024 can't be fully evaluated without addressing the cadence of activity in December. Dan made this point through vending transactions in his review. We see the same thing in daily sales to our top 100 customers, which grew low to mid single digits in the first 15 days of December, but declined more than 20% in the final five days. While holiday-related production slowdowns occur most years, sustained marketplace weakness and the midweek timing of Christmas and New Year's produced uncommonly sharp cuts in December of 2024. We believe that the last five business days of December swung the month from trending towards 3% plus growth to finishing flat. Now, zooming back out, we remain encouraged heading into 2025. The PMI is still sub-50, underlying business activity remains slow, and the start of January was impacted by New Year's and winter storms. The latter disrupted business activity in our southern U.S. regions, reflected in our needing to cancel 6% of our truck routes through January 10th. On the other hand, regional leadership cites broadening post-election customer optimism for 2025, We continue to sign new business at a strong rate with our contract base growing double digits, including up 12% in December. We believe these wins are beginning to be reflected in sales. Our monthly daily sales rate exceeded the historical sequential in three of the last five months, and we believe it would have been four of the last five, but for how December finished. As we move forward, we anticipate we'll see revenue from these customer signings continue to build. Now to slide seven. Operating margin in the fourth quarter of 2024 was 18.9%, down 120 basis points year to year. Gross margin was as expected. On top of that, our SG&A dollars in the fourth quarter of 2024 were largely in line with the first three quarters of 2024, as investments in onsite staffing, technology and data, and sales travel were offset with greater control over more discretionary costs. We continue to believe we are managing costs effectively. We expected operating margin to decline due to the effects of slow growth, as we've seen all year. That the deleverage was sharper in the current period than experienced in the first three quarters of 2024 reflects our seasonally lowest volume quarter and the holiday shutdown impacts. Gross margin in the fourth quarter of 2024 was 44.8%, down 70 basis points from the year-ago period, primarily from product and customer mix. We also experienced product margin pressure, which was partly offset by higher rebates reflecting year-end opportunities to assist suppliers in leaning out their inventory. The product margin pressure was largely due to shipping, with higher container costs affecting fasteners and expedited shipments to warehousing customers during the holiday season affecting safety products. We have made price adjustments to offset the higher container costs, and the expedited shipments should not recur meaning most of the product margin pressure in the fourth quarter of 2024 should not carry into the first quarter of 2025. SG&A was 25.9% of sales in the fourth quarter of 2024, up from 25.3% from the year-ago period. The largest impacts are from higher lease costs as we refresh our field pickup fleet and a currency revaluation on certain assets that relates to the stronger dollar. The effects of areas such as IT expense and general insurance costs were marginally negative. We continue to believe that as growth picks up, we will leverage the P&L. Putting it all together, we reported fourth quarter 2024 EPS of 46 cents, flat with the fourth quarter of 2023. Now turning to slide eight. We generated $283 million in operating cash in the fourth quarter of 2024, or 108% of net income. We generated $1.2 billion in operating cash for the full year of 2024, or 102% of net income. Our cash conversion in both periods was below the comparable periods in 2023. However, this mostly reflects the effects of inventory buildup and subsequent wind down related to tight supply chains being fully past us. And we view the conversion rates in 2024 as being largely consistent with expectations. We continue to carry a conservatively capitalized balance sheet with year end debt being 5.2% of total capital. Given our current strong capital position and confidence in the future cash generating capability of our model, we increased our dividend by 10%. Accounts receivable were up 1.9%, driven primarily by sales growth. Inventories were up 8%. We added 30 to 35 million related to our initiatives to improve product availability in our in-market locations and improve picking efficiencies in our hubs. Opportunistic year-end buys added roughly 10 million, and we added stock to support customer growth, including anticipated incremental growth in the warehousing space. and we accelerated some inventory scheduled for future delivery into current periods ahead of potential new tariffs. Accounts payable were up 8.9%, reflecting the increasing inventories. Net capital spending in 2024 was $214 million, up versus $161 million in 2023, but below our projected range of $235 million to $265 million. This related to lower purchases of FMI bins and fewer installations of modular picking units in our in-market locations. Looking to 2025, we anticipate net capital spending of $265 million to $285 million. We're anticipating another step up in FMI signings, which will require additional device spend. We're increasing IT spend to reflect projects that move from 2024 to 2025 and an expansion of projects aimed at developing additional digital capabilities. Lastly, distribution center spending is up to reflect completion of our new Utah hub, the beginning of construction on a new Atlanta hub, and incremental automated picking additions across our hub network. We believe NetCapX is likely to be 3% to 3.5% of sales over the next few years, an increase from 2.7% to 3.2%, largely related to greater incremental capacity upgrades across our distribution center network. Now, before moving on to Q&A, a couple items of housekeeping. First, a little color on our decision to not provide onsite signings targets beginning in 2025. When we first unveiled the onsite strategy in 2014 to 15, we were challenged with driving internal participation and building scale to justify the investment in the initiative. Today, onsites represent nearly 45% of our sales and are fully integrated into the value proposition we offer customers. Getting to this point has prioritized wallet share with existing customers over winning new customers. And at this time, it's appropriate to seek greater balance between those two things. Onsites will continue to provide a market advantage for Fastenal and we'll continue to sign them. However, our success is not solely defined by how many onsites we sign. It is defined by how many customers we sign that are doing or can do 10K or more in sales per month, whether that's through an onsite or through a branch. To ensure internal and external stakeholders are focusing on organizationally meaningful data, in the first quarter of 2025, we will begin providing customer data along the lines of what Dan discussed at the start of this call. Second, we are planning to host Investor Day in Minneapolis on March 13th. We plan on providing an update on our in-market network, which remains critical to our success, but has evolved in the last few years to support a key account strategy. This will be reinforced with a tour of a local branch that is a great representation of our industrial supply house profiles. We will discuss not only our tools and capabilities, but how we deploy them in a truly integrated fashion to provide unparalleled value to our customers in terms of supply chain costs, risk, and scalability. And last, we will do a deeper dive into the strategic plan we've developed throughout 2024, which is heavily centered on the digitization of tools and capabilities, including AI, to improve our service and addressable market. We'll be sending out invites to the event over the next week. With that, operator, we'll turn it over to begin the Q&A.

Thank you. And I'll be conducting a question and answer session. As a reminder, we ask you please ask one question, one follow-up, then return to the queue. If you'd like to be placed into question queue, please press star one at this time. One moment, please, while we poll for questions. And as a reminder, please ask one question, one follow-up, then return to the queue. Our first question is coming from Ryan Merkle from William Blair. Your line is now live.

Hey, good morning. Thanks for taking the questions and Holden, congratulations. It's been great working with you and I wish you all the best. Thank you. So my first question, you know, I guess I want to ask about the shutdowns and then, you know, sort of the comment that customer sentiment is more optimistic. So I guess, how do you marry those two comments? You know, why do you think the shutdowns this year were so intense? And then what are you hearing on customer sentiment, if you can be more specific, like Do you expect trends to improve in 25, and why do you think that?

Good morning, Ryan, and thanks for the question. You know, I'll touch on the shutdowns piece and then how that counters the sentiment. I think every organization gets to January 1st, and it's a new year, and it's either And it's always what can we do to improve upon what we just did, whether you had a great year or a weak year. That's just, I think, how many people are just wired. But I also look at it and say, you know, there might be some folks that just got through at this stage of 2024, and they're kind of like, you know, it's been a mediocre year. And we've been leaning up our balance sheet. Maybe we've been leaning up our inventory, whatever it might be. And let's just shut down, let's get the equipment fixed up and ready for the new year, get everybody's batteries recharged. And I think you had a lot of folks that didn't have a reason to stay open over the holidays, and so they chose not to. Holden, if you want to add on the sentiment part, from a customer standpoint, because you talked to a lot of our regionals, but I think a lot of folks are looking at their trends, and does that make them feel better? The recent election and what that might mean for regulation probably is a lift of burden from a lot of our customers in the marketplace. Holden?

Yeah, I mean, when I talk about the improving sentiment, what I'll say is in November when we reported sales, I mean, there was clearly post-election a step up in terms of what the RVPs are feeding back to me about. People are feeling a little bit better about things. I think there's just the – there's value in knowing. And I think that a lot of uncertainty was perhaps dissipated once we got through the election. I will say that the tone from the RVPs was fairly universal about that sentiment continuing to get better heading into next year. And so that's a fairly qualitative read on things. But nonetheless, I've over time learned to really respect the feedback of the RVPs because they really do feel what's going on in the marketplace in real time and pretty intimately. So I think there's value in that. But I also would argue that I'm not sure there's an inconsistency between aggressively shutting down in the back half of December and feeling better about 2025. You know, again, as Dan indicated, there's something magical about moving from 1231 to 11. And I think that a lot of companies in the face of a second challenging year are looking to clear the decks and move into 2025, you know, with as little overhang from inventory and you know, things of that nature as they can. And I think that there's probably a relationship between, you know, exactly what happened in the back half of December and the very beginning of January and customers feeling better about what comes next. Yeah.

No, I think that makes sense. That's helpful. And then my second question, you know, thanks for the new disclosure and it makes sense. And I think I'm a little surprised by, how concentrated your sales are. It's more than I thought. I just want to make sure I'm understanding this right. 1% of sites are roughly 50% of sales, and those sites tend to be onsite-like, I think is what you said. So should we be reading that as 1% of onsites, which is like 20 onsites, is 50% of sales? Am I understanding that right?

No, no, no, no. You know, we've always said, when we started the onsite program a number of years ago, we said, you know, that time about 10% of our revenue came from a few hundred onsites. And what we saw with onsite was a lot of times our branch personnel, there was business they didn't go after in a facility because the economics didn't work for them on how they were paid because not all the spend is 50%. there's a bunch of production business that might be in the 30s. There's some other business that might be in the 40s. And in the way our cost structure works, if you think back to the time, our cost structure in the branch was 30% of sales, 32% of sales. And you didn't want 35% margin of business. But in an onsite, when we started talking about it, our average onsite had gross margins between 35 and 40, but the operating expenses were just shy of, in the upper teens, So from a pre-tax and a return standpoint, it was nice business, but you had to think about it differently. You had to rejigger everything. And so we have roughly 2,000 onsites, and that's a little bit over 40% of revenue. In addition to those 2,000 onsites, we have another 500 customers roughly where we do $70,000 a month, $60,000 a month, $80,000 a month, but we do it out of the branch, and the branch is just – The general manager in that branch looked at it and said, I might get hurt on my pay plan, but this is good business for us, and it's good business for me and the team. And it's good business, and you think about it as a business person. And so those 2,500 locations represent about 48% of sales, and they all do more than $50,000 a month. But they're a subset of customers that do more than $10,000 a month, that represent over 75% of our sales. But Ryan, that's no different than, if you think about it years ago, hey, we have 100 active customers in this branch, and 10 of them represent 65, 70% of sales, and it was probably more like 80% of sales, but we didn't measure it that way because there was a bunch of customers that had multiple account numbers. Does that make sense? Right, it does, yes.

Yeah, and the color I made add to that is, first off, I'm not sure that 80-20 is unique to Fastenal's business. I don't know everybody else's businesses, but I would suspect that there's an element of 80-20 in most businesses that are out there. I'll grant you we're more like 80-10. But the other thing I think to think about is where we're genuinely special in the marketplace is in engaging with customers that have very large, very complex supply chains. Those tend to be larger, multinational, global, or national businesses. And so that's because of the breadth of our toolbox and the ability of our services to uniquely affect that complexity. Those types of customers tend to tend to, you know, come to our business fairly organically simply because of that capability that we have. In contrast to, you know, perhaps a purely transactional model, which might get you a lot more customers, but fewer sales. Right. So there's an element of our model in there as well.

An added nugget I'll give you is if you go back to 2007 when we announced we were seeing saturation in the location count, and we were slowing it down, and we were turning energy into things like automating our warehouse, things like vending, and what we called the pathway to profit. We said, here's the next step of our business. At that point in time, customers doing more than $10,000 a month, there were about 2,600 of them. And it represented about 40% of sales. And so in the years since 2007, we weren't opening locations as fast, but we were rolling out vending devices. A number of years later, we're rolling out onsites. And we're getting better and better and better at non-fasteners. And so fasteners keep dropping as a percentage of our business, Our business blossomed as we got deeper into that, and our ability to grow actually accelerated. And so the concentration, if you will, is a sign of success with that group of customers. Because if you look at customers doing less than, say, $5,000 a month, they don't necessarily benefit from vending, because if they did, they wouldn't be – They wouldn't be a $3,000 a month customer. They'd be a $9,000 a month customer because they have enough. The things we bring to the table and to the supply chain benefits the business more.

Very helpful. Thanks, guys.

Pass it on.

Thank you. Next question is coming from David Manthe from Bear Drew Line. It's now live.

Yeah, hi, good morning. Yeah, clearly there's always been a 80-20 rule at Fastenal, but as we look at slide four and think about the big picture, and maybe you'll elucidate this on the investor day, but is 96% of the customer sites generating 22% of sales, is that an opportunity or is that just the way it is? How do you view that?

It's always an opportunity. You know, when I have, throughout the course of the year, along with Jeff and Holden and a handful of our leaders, we have discussions with every one of our district managers. And in there, we talk about what's their opportunity. And history has told me that we have approaching 10 onsites per diem. It's around seven or eight, on average, onsites per diem. But we've identified the potential on average for 58. And so it's an incredible opportunity in the marketplace because we're really, really good at planned spend. And we're really, really good at helping with supply chain. And you think about what are some of the macro things going on in the marketplace right now? One of the macro things is there's not enough people for the jobs this year, five years from now, 10 years from now. So how does a manufacturer solve that? Well, one of them might be, hey, let's bring in Fastenal to help with supply chain. They're incredibly good at it. With their vending platform, they move the product closer to the point of use. That creates productivity in our facility. And oh, by the way, what we're doing with 10 people in a very inefficient manner, Fastenal can do with three or four, and they can actually increase the level of supply chain service in my facility, and we operate more effectively. I see it as an incredible opportunity, and that's why we continue to invest in the things we're doing. And we're going to touch on a whole bunch of that, Dave, at our investor day as well. But I'm more excited about our opportunity to grow in the next 10 years than maybe I was 10 years ago.

Yeah, and I would probably add to that. You know, you're right to think about it as the opportunity, but let's not narrow that down too much either. We measure – we're successful in the buckets that we're successful in because we bring something special to that type of customer. But we continue to broaden what it is that we're special at. We didn't used to be special at safety, but the introduction of vending brought that into a realm of specialness for Fastenal that I think others have not figured out how to scale the way that we have. I think the same is true for that onsite world. Is there an opportunity? And so we're very good. We're special in that planned world. Is there an opportunity to over time move down these buckets more effectively by figuring out ways to get special and service customers in different ways? Those are opportunities, not necessarily for the next six months or what have you, but those are opportunities that exist over the next 12, 36, five years, 10 years time. There's tremendous opportunity that exists you know, within these buckets, but whether you want to think geographically by product, you know, what have you.

Just to double down, since we're doubling down on the question, I'll throw a little tidbit in, too. When you hold and just touch on, we get better moving down those bucket sizes. Clearly, the bottom two buckets on that list were impacted by COVID and by our decision a decade ago to not just slow down opening branches, but they actually consolidate branches. In that less than 5K bucket, what I can tell you is 98% of the decline in that bucket from a standpoint of both customers and the revenue came from, there's two populations in that bucket. There's customers that spend between 500 and 5,000 that represent about 90% of the dollars in that bucket. And and they average about $1,000 a month with us, the majority of the customers represent about 10% of that bucket, and they on average spend $49 a month with us. And so it's really a case of being special in all of them. But I believe over time, all these buckets grow because as we become better and better at unplanned spend, the bottom two buckets is more about sales that look like unplanned spend, then planned spend, and then your success on all of them. But that smallest bucket, customers under 500, it's a big group of customers, but it's about 2% of sales. And so it's really, we're putting your energy and focus on being great supply chain partner to this group of customers, but that conveyor we have going across North America, anybody can grab a box off it. And with our local footprint, we're better than anybody else out there, or we could be.

Thanks, Dave. Okay, that's helpful. Yeah, thanks a lot, Dan. Maybe you can just touch on tariffs. I'm sure someone else would ask this too, but it's obviously a hot topic right now. Could you talk about how those pass through your contracts and how you're planning on making those happen, assuming that comes down the pipe here?

You know, as we've talked on previous calls, we had to get good at tariffs. I think we've always been excellent at supply chain, but we had to get good at tariffs back in the 2018 timeframe, 2017 timeframe. A lot of times we focus on tariffs that come into the United States, but tariffs are not something that's unique to the United States. Jeff, in leading our international business in years past, we've been going through tariffs coming into Mexico for the last year and a half. We've been going, you know, we've had tariffs as it relates to our Canadian market or other non-North American businesses. So that skill isn't, you know, that knife isn't dull in our ability to be surgical. We have great tools to manage that. We have great ability to give visibility to our customers because it's not just about what we do to make sure we manage it in our P&L. That's important to everybody on this call. Don't get me wrong. What's really important is our ability to give visibility to that, to our customer, and allow our customer to make better decisions. Because then we're special to them. We're not special to just us. We're special to both of us. And that's a great supply chain partner. And we're really, really good at that. We had a lot of conversations with our unrelated tariffs. We had a lot of conversations with customers. And we diverted a chunk of containers late in the year because there was a risk of a port strike. And we were able to study all the containers coming in and had conversations. I think it was about 40 containers that we had, 35, 40 containers, where we had conversations with customers and said, we believe the best risk avoidance for your business is we'll spend a little bit extra money and we'll bring it into the West Coast and we'll bring it across North America instead of bringing it to the East Coast. Because that shuts down, that's a production item. that you need in February, or that's something you need in March, and we do not want to put your business at risk. And we diverted 35, 40 containers. As it turned out, it didn't need to be, but that's what a great supply chain partner does. But we are well poised to communicate and react to whatever happens, and it's going to be an unpredictable world starting here on January 20th. Frankly, it's been an unpredictable world for the last 10 years. So that's not new. It's just maybe the The intensity of how that happens quickly might change, too. Thanks a lot, Dan.

Thank you. Next question is coming from Tommy Moll from Steven, July, and is now live.

Good morning, and thank you for taking my questions.

Morning.

Dan, you made a comment earlier. about e-commerce and I think a nexus there with unplanned spend and opportunity to improve. Can you just unpack that a little bit for us, maybe give us a teaser of what's coming here in March?

Yeah. So, you know, some stuff we've talked about. We've talked about the fact that we expanded the stocking levels of certain SKUs in our distribution centers. In 2019, we pulled back some stuff that was less common, and in hindsight, that was a mistake, and we reversed that. There's three aspects to it. One aspect to it is when you pull that from the shelf and distribution, you create a lot more work for the local team because they have to go out and source that product now. The second thing is you delay when we can get that product for the customer, and there might be some sales we lost as a result. And the third is When you're buying stuff in a rush, you don't buy better than when you buy stuff in a planned fashion. And so we believe there's some margin opportunities to all that inventory that we're adding to the balance sheet as we move into 2025. And we need margin opportunities to generate a return or CFO will give me the stink eye look. But more importantly, freeing up that time and given our ability to say yes more is important Think of the e-commerce, and think of that smaller customer, less than 5K. They hop on the website to order something, and it shows unavailable, or contact the branch. And that's something that, you know, maybe it's a fairly common, maybe it's an infrequently purchased but not uncommon fastener. In the mindset of that customer under 5,000, they should look at Fastenal and ask, these folks are awesome at Fastenal. They're awesome at safety. When I hop on their website and order something, the website's easy to use, and their depth in this is incredible, and they can say, yep, it's sitting in our distribution center in Winona. We'll have it in Green Bay tomorrow morning. What time do you need it? Because our truck gets there at 5 a.m. And so that's different than hopping on and seeing call the branch at Green Bay. And so part of it is by adding that inventory, it shows a different kind of availability. The other step we've been doing is increasing with our supplier base, better connection of show us your availability and your level of service. So even if we don't have it in the hub, we can show on the website to the individual, hey, it's sitting in St. Paul at our supplier. And we can get it to you in two days. If you need it faster than that, we can ship it overnight. But that gets expensive. And we want to manage their costs. We want to minimize the cost of their supply chain. And so we give them optionality. The other piece that we've incorporated late in the year is much better visibility to tracking. In other words, it isn't just that it's available at the supplier in St. Paul. It's been picked up and it's on our truck going to Winona. then it's going to transfer and get on a truck going to Green Bay. My wife's a Packer fan. That's why I'm using all these Green Bay examples. But it's a much different experience. And my example was a smaller customer. It could be the maintenance area of a $200,000 a month customer. But the way they engage with us is they hop on their punch-out list on their internal portal, or they hop – and so it's e-business versus e-versus-web. But regardless of what it is, that functionality exists for both, and we are rapidly rolling out those pieces. But you couldn't roll out those pieces of facing it to the customer until you had the pieces built behind the scenes to have it available in the first place. Does that make sense, Tony?

Yes, thank you, and we'll look forward to furthering the discussion in March. Holden, a question for you on gross margins. You called out some of the impacts in the fourth quarter just in terms of the cost of moving product, highlighted how that should moderate here in the first quarter. What can you do to frame for us what you view as your typical Q4 to Q1? And other than the factor I already mentioned, is there any other call out for this year in particular?

Yeah, I mean, the Q4 to Q1 can usually be fairly volatile, so there's a pretty wide range of outcomes. But typically, you're going to see Q1 increasing over where Q4 is noticeably. What I would tell you is I think at this point in the year, I'm typically maybe giving a little bit of color on the full year more than the next quarter. When I think about gross margin in 2025, I think we have a shot at having a flattish gross margin year over year in 2025. Um, you know, now to, to some extent the market will have a say in that, but you know, we're getting a period where the, uh, you know, we've had very weak fasteners and very strong safety. And I think that that gap is gonna narrow it. If you get a little bit of improvement in the marketplace, you know, you, you could see that gap narrow fairly meaningfully if, if not reverse a little bit. Um, you know, if I think that mix may not be the drag in 2025 that it, that it has been in, in 2024. I think particularly in that warehousing space, we've talked about a couple things that impacted it through a couple quarters this year. I think there's relative easy comp there. So, you know, I think that you have the usual pressures, but I think they're going to be moderated in 2025 versus what you had in 2024. You know, and that's the, you know, that's I think how we can think through it. But typically, yeah, Q1 will typically be above where Q4 is. And, you know, when you sort of walk through how the various seasonalities work, I think something around flat to very slightly negative in 2025 is probably how I'd build it out.

Thanks, Holden. We'll call that a setting the bar high but not too high for your successor. Best of luck to that individual.

I see it's a couple minutes before the hour. If there's a quick question, we'll take it. So I'll hold tight a second.

Our next question is coming from Steven Baldwin from Jeffery. Your line is now live.

All right. Holden, I'll just ask you the last quick follow-on. How should we think about operating expenses? I assume you'll have the normal increase in employee costs. Anything else to think about?

Yeah. I mean, operating expenses, 70% of our OPEX, of course, is labor. And so when we talk about being able to leverage against growth, labor plays a big part of that. But the other 30% should still be leverageable. I don't think that the dynamic has changed. I think that when we get to mid-single digits or above mid-single digits, we should be able to defend mid-single digit growth, and we should be able to expand them above mid-single digit growth. And I don't see any change to that profile at this point. And so as growth reasserts itself, as we hope it does next year, we should be at the high end of that 20% to 25% incremental margin would be the expectations. Oftentimes I get asked why it's not more than that. Bear in mind, and Dan alluded to this in his preamble, in the first year of recovery, we have that shock absorber effect in our wages, right? We haven't been paying a lot of bonuses this year. If and when business gets better and pre-tax is growing more strongly, bonuses sort of reassert themselves. And that gives us a little less volatility both on the upside and the downside. And so That's why in a world where we can see mid to high single-digit growth, getting to the high end of that 20% to 25% incremental in the first year, that's kind of what I think the expectation would be.

Thank you. That concludes our question and answer session. I'd like to turn the floor back over for any further closing comments.

I just want to thank everybody for participating in our call today. As always, we'd like to stop, frankly, on the hour because we realize you have A lot of other companies you cover and a lot of other calls to hop on. My thank you to the Fastenal team listening to this call for what you did in 24 and how you prepared the business for yourself, for your customers, and for the rest of the blue team as we enter 2025 and to our shareholders. Thank you, as always, for your support. We look forward to continuing to share the story of