Fastenal Company

Greetings, and welcome to the Fastenal Q1 2025 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 into question queue at any time by pressing star one on your telephone keypad, and we ask you to please ask one question, one follow-up, then return to the queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Dre Schreiber of Fastenal.

Please go ahead, Dre. Welcome to the Fastenal Company 2025 First Quarter Earnings Conference Call. This call will be hosted by Dan Pornis, our Chief Executive Officer, Jeff Watts, our President and Chief Sales 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 this webcast will be available on the website until June 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 these anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings relief 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.

Good morning, everybody, and thank you for joining us for our Q1 earnings call. As you can see from the flipbook on page three, Bob Curlin, our founder, passed away on February 10th. He was 85 years of age. I just thought I'd open with a few thoughts on Bob, if you'd indulge me. So Bob was born in June of 1939 in Winona, Minnesota. town of about 25,000 people in southeastern Minnesota on the banks of the, western banks of the Mississippi River. His first memory as a child was the World War II victory parade going across the interstate bridge coming into Winona. In his obituary it said, Bob's compass was a true north, Bob's compass had a true north with a belief in people, free minds, and free markets. And he indiscriminately respected others, seeing the best in everyone, without desiring reciprocation himself. I had the good fortune, I knew Bob for just over 30 years. I met him in the second quarter of 1994. And I had a number of cross-the-country road trips. Bob preferred to travel by van and visit fastened locations. And I remember my first trip with him, we... We left on a Sunday morning at about seven o'clock. We drove to Denver, visited some locations, met with some investors. We drove to Salt Lake City. We drove to Vegas. We drove to LA, San Francisco, Rock Springs, Wyoming, and made our way back to Winona on Friday evening. In that, I learned how well-read Bob was. And one thing I observed over the years is there was not a day that Bob Curlin did not read the Wall Street Journal from cover to cover. And I thought it appropriate, based on my travels with him, that in his obituary it said, Bob's sense of humor was kindled from old Mad magazines, Bob and Ray comedy shows, which I might be older than most of the folks at Fasto. I'm not sure what that is. Steve Martin and Bob Newhart. I do know the latter two, and I do know the Mad magazine reference. About 60 years ago, Bob convinced four friends to invest in a vending company. selling nuts and bolts. The idea didn't work. But after calling on customers, understanding what they needed as far as helping in their supply chain needs with fasteners, he went with Plan B. And that's the organization you know today and that the investing public first became aware of in 1987 when we went public. 40 years after our start in around the 2007, 2008 timeframe, we revisited Bob's vending idea. Today, about 25% of our revenue goes through a vending machine. And we've added a lot of other technologies to that since. And if you look at our broadly defined FMI or fast, no managed inventory, which is really point of use technologies that we've deployed over 43% of our revenue today goes through some type of technology platform. And, you know, there's been a number of articles written on Bob over the years and recently. I remember the first one after a trip I'd done with Bob. He was regarded as frugal, the cheapest CEO in America. The fact that he shares hotel rooms with other Fastow employees when he travels. On all my trips with Bob, I shared a hotel room. And he wore used suits. And they painted somewhat of a character about Bob. But I think in many ways they missed the point. And so what our flipbook includes is an excerpt from a book Bob wrote in the late 1990s titled The Power of Fastenal People. And he talked about philosophy on leadership within the organization. And he had 10 rules about leadership he had coined over the years. And I'm sharing that with our folks on the call today, whether that be shareholders, analysts, employees of Fastenal, others. In hopes that more of society can capture some of the ideas that Bob shared with us. I was very blessed to have met Bob, as I said, 30 years ago. Like many others at Fastenal, he changed the course of my life. For me, the ones that stand out particularly when I think of Bob is the first rule about challenge rather than control. Treating everyone as your equal. Be the unique humanness in all persons. Let people learn. And we've tweaked that a little bit to challenge people to learn and ask them to consider changing when they learn something new. And then finally, remember how little you know. We have a lot of tenure within Fastow. A lot of people choose to start their career young with Fastow and spend their career here. Whether you've been here five years or 30 years, you always have things to learn. And Bob carried that mantra through his entire life, and he will be sorely missed. I was personally blessed in that a couple weeks before he passed away, I had a nice visit with Bob, and we served on the board of another organization together, and we had a nice conversation afterwards. And he is sorely missed in the organization and in the community at large. Thanks, Bob. Flip into page four, some thoughts on the quarter. From a quarterly perspective, our sales grew about 3.5%. We had one less day, so our daily growth grew about 5%. The marketplace we operate in is still sluggish. I deem what's happening in our growth as mostly self-help, things that we're doing from an execution standpoint. And there's an element of comps in there, too. But it's mostly self-help. And I make that comment when I look at the sequential patterns of our business because that's about how we're executing new customer relationships we're creating and expansion of existing customer relationships that we're creating. We're executing at a very high level. And when I think of we made a lot of changes two, two and a half years ago within the organization. As we came through COVID, we had drifted apart a little bit. and we weren't as focused on a common goal as we should have been. As travel resumed, we saw signs of that, and we made leadership changes in our sales side of the organization. And everybody has been in their roles now a couple years, and you're really seeing it gel, and it's shining through in our numbers. The quarter's a little odd to look at if you think about it from a monthly perspective, but don't be misled by that either. January was a bit understated because of weather. And March is a bit overstated because of the timing of Easter. I don't know if Holden will agree to my number here, but I estimate about two, two and a half percent of the growth in March is a bit about Good Friday being in April. But regardless of that, even if you adjust for the weather in January, and you adjust for the Easter timing in March, the sequential pattern is quite strong. And it's strong in all of our geographies, which is really good to see. And again, I deem that to be about what Fastone is doing in engaging with the marketplace, rather than what the marketplace is asking us to help with because of their business patterns, because it's still sluggish. As is typical of April, we held our customer expo. A few of us actually traveled back yesterday. The expo was finished on Wednesday evening and flew back on Thursday morning. We had, similar to what we witnessed in 2024, record attendance by customers at the event. Last year surprised us a bit because coming out of COVID, the first two years in 22 and 23 that we had the show, It was a very subdued event because a lot of organizations either weren't traveling yet or they were doing limited traveling and it was so difficult to travel internationally that we weren't getting international folks. And so folks weren't coming from Canada or up from Mexico for the event. This year I can tell you firsthand that we had a record number of attendees from our business unit in Mexico because I had the opportunity to speak to a large group that was gathered. And it was exciting to see the types of questions they were asking about and the way they were approaching the relationship. The other thing, and I'll probably touch on this a couple times through my commentary. It was a unique week because in talking to various groups, the one thing there wasn't a lot of discussion on was tariffs. That's not to say it didn't come up. The way we addressed the conversation and every group I talked to, it was a few sessions we had where it was a Q&A and Bill Drozkowski was the moderator. He led off with a question on tariffs and he pointed it at me each time. And what I really impressed upon our customers is the way a supply chain partner approaches any kind of chaos. I shared some stories about the lead up to COVID. The vetting of suppliers that we did for safety products before the world got weird and how that put us in a position to be a better supply chain partner. The tactical decisions we made to go out and buy inventory to get ahead of the onslaught of everybody else because of the strength of our balance sheet and our financial resources. A lot of that attributed to things we do, but really the foundation that Bob Curlin laid many years ago in priorities in an organization and what you do with cash. But what I can tell you is we shared with them the tactics we're taking right now of, in some cases, fattening our balance sheet a little bit. It doesn't solve any issue other than it gives you time to have options. We talked about products we're bringing directly into Canada and Mexico that we would have brought through the United States before because some of the new tariffs are not eligible for duty drawback. And while it might be more expensive to bring it directly into that market from a logistics perspective, it's a lot less expensive than a tariff that gets layered on top of maybe a tariff going into Canada or Mexico as well. So we're being very thoughtful about that because about 15% of our revenue is in Canada or Mexico. From the standpoint of the US and all markets, we talked a lot about how we've changed our sourcing patterns in the last five years on diversifying where we're sourcing from. to provide a better supply chain. But we also talked about the fact that when we diversify our sourcing practices, we don't just play whack-a-mole and try to avoid a problem. We try to improve the supply chain in every step we take. And we try to be relevant to the new manufacturing partners we join with, regardless of where they're located, in that we're a top one, two, three, four, five customer with that manufacturer. Because if you're a significant customer to a manufacturer and they get tight on capacity or they need to expand their capacity, they're going to help their largest partners first when they're prioritizing their efforts. And the fact that they know we have financial resources to match with dollars what our commitments are, we often get in line ahead of everybody else. And that serves our customers in the marketplace really well. We've added a bunch of customer site information to our disclosures this quarter, three years worth of history. We had a recent investor day where we talked about it. We touched on it in our January earnings call to really give better visibility to some of the strategies we have deployed and are deploying to broaden the size of our market opportunity. When I think of stepping into this role a decade ago, One of the points I've made to our board was coming from my old role, I had the advantage of I'd studied the numbers of Fastenal for years, and I'd had a lot of conversation with our regional leaders over the years. So I understood maybe better how they thought about things, where they discovered success. There was a few people for me that stood out that had been very successful in their business. When I think of our business in Minnesota and Wisconsin, I took a lot of stuff out of that playbook. When I think about our regional leader, the two Millers, Randy, who led our business down in Indianapolis, and Casey, who led our business down in what we referred to the Southeast Central at the time, which was Kentucky and Tennessee, our team in Mexico, our team in international more broadly, Jeff Watts at the time, had a lot of discussions to really understand their tactics for growing because they had consistently discovered the success Maybe sometimes when others hadn't. Bob Hopper is another one on that list where I touched with, and he covered our Florida market. Incredible success. And you learn and you ask people, how are you doing it? And what I shared with the board is our most successful regions have a great key account program. If you put me in this role, I'm going to drive the business towards where they're discovering success. Because I think it broadens the market for Fastenal, but we have to lower our cost structure to go after that kind of business. And I'm pleased to say we've done that. And you see the success that shines through in some of those customer site information statistics. Finally, on page four, we inched up our dividend from 43 to 44 cents. And it's a dumb reason. I'll give you a little historical perspective. In 2003, our sales, total sales, we needed 10.5% growth. to break a billion that year. We came in at 9.9 and we reported $995 million in sales. That was cool, but a billion plus would have been neater. But we can't change our sales. We can influence it by our activities, but we can't change it, at least not legally. In 2018, our operating income came, we needed 13.4% growth to break a billion dollars that year. We only got 13.3. We came in at $999.2 million of operating income. We can't change that one either. Holden did get a dirty look from me, but we can't change that one. But we can change our dividend. So in the first quarter, we paid out $246 million and I looked at Holden and I said, can we bump that up a penny? If our board goes along with it and we continue this dividend through the year, we'll break a billion in regular dividend for the first time. Dumb reason. Sorry about that. Flipping to page five. FMI, we continue to execute at a high level there. Given the comment I just made about dividend, I'd feel a lot better if we had 130,000 devices, not 129,996. But I'm going to round it and say we have 130,000 devices deployed in 25 countries. Our device count grew 12.5%. When you look at our safety sales growth of almost 10% in March, that's about execution and FMI and our vending process. more generally, but FMI more broadly. Going down the page, digital footprint, 61% of total sales versus 59 and 54, one and two years ago. Our goal remains in October, 66 to 68% of sales is going through digital footprint. And that's what we're working towards. And then again, the customer site data, success in our 10K plus sites. And what that means is this is a customer, it's a building, it's a campus. where we provide more than $10,000 a month in product and services. A subset of that is what we call onsite-like customer sites, and that's where we do more than $50,000 a month with that customer. That group grew 7%. So that's about executing and engaging with customers at a high level. There's one category that you'll see that doesn't shine so strongly, and that's our under 5K, and it's really our under 2K, a subset of that. And if you're on our e-commerce team right now or if you're in IT or if you're in supply chain, you're getting a lot of pressure and dirty looks from Dan right now because we need to get better at the e-commerce side. We solved the problem with that group, not by adding resources and sales teams to go after 500 and $800 a month customers. We want those customers. That marketplace has chosen to buy more in the online channels and that accelerated during COVID. We're not great at that piece of the business. We're great at a lot of things, that's not on the list, but we can be. And the reason that matters is when you look at through some of the customer site data, I believe a great e-commerce platform enhances our ability to be successful in all groups, because I believe there's probably a 20% lift, and this is just, this is a belief. This is not based on any data. I believe there's a, there can be a 20% lift in every category if we have a great e-commerce strategy, because there's random MRO spend we don't necessarily get, even when we have a great relationship with that customer, because some department in that organization might find it easier to order somewhere else. We need to get better at that.