General Blue December 2024 Calendar

Fastenal Company (NASDAQ:FAST) Q1 2024 Earnings Call Transcript

Fastenal Company (NASDAQ:FAST) Q1 2024 Earnings Call Transcript April 11, 2024

December  Monday Start Calendar (PDF, Excel, Word)
December Monday Start Calendar (PDF, Excel, Word)

Fastenal Company misses on earnings expectations. Reported EPS is $0.52 EPS, expectations were $0.53. FAST isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Fastenal 2024 Q1 Earnings Results Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] 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.

General Blue December Calendar  Template - Edit Online
General Blue December Calendar Template – Edit Online

Taylor Ranta: Welcome to the Fastenal Company 2024 first quarter earnings conference call. This call will be hosted by Dan Florness, 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 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,

A replay of the webcast will be available on the website until June 1, 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 Florness.

Dan Florness: Thank you, Taylor, and good morning, everybody, and thank you for joining us for our first quarter call. And I’m going to go right to the flip book, page 3. And my comments on page 3 can be summarized with five statements. First one is, a tough quarter. Second one is, tricky calendar. Third one is, highlighting the customer expo. Third [sic] [Fourth] is strong performance on our growth drivers. And then the final is financially strong and that strength is continuing to build as we’ve seen in recent years. Going back to the tough quarter. So we grew about 2%. Coming into the quarter, we anticipated a number that was probably in that 4% neighborhood. And the tricky calendar was really a function of January and February are seasonally weaker months for us.

Then March starts to pick up as we move into the spring. So having two days shifted out of March and into January and February, respectively, wasn’t helpful, but that was a known event coming into the quarter. And having the quarter end on Good Friday being in March versus in April is negative. But that’s probably more of a function of trying to rationalize and figure out things on the quarter. The truth of the matter is the core issue remains sluggish demand. A positive we saw is after 16 consecutive months of sub-50 Purchasing Managers Index, we broke above 50 in the month of March. And the other day, I chatted with Holden and I said, how long have they been checking the PMI statistics and he said, yeah, since early 1970s. So, we did a look and there’s been two periods that have had longer duration of 16 months.

The one would have been in the early 1980s, I believe it was a 19-month duration. The other was in the dotcom meltdown year of the early 2000 that was about a 17 or 18-month duration. Now in full disclosures, they were a little bit longer. They were actually more severe as far as where it went into — how far into the 40s that it went or even into the upper 30s. There were a few other periods, obviously, the 2008, 2009 period, much shorter in duration, but pretty steep, but we feel positive about the 15 March, and time will tell if it’s a head fake or if it’s real, but that speaks to what we think might be happening as we move into the second half of the year. The customer expo, which we’ll host next week on the 17th and 18th in Nashville, Tennessee.

I’m upbeat about that from the standpoint. One aspect that’s challenged us in recent years with customer acquisition has been the fact that starting about 20 years ago, we started doing an employee event or we bring employees in, engage with our suppliers, and it was a great opportunity to hold in the month of December, some planning discussions for the next calendar year, but also have a trade show where employees get to interact directly with suppliers and learn about their products, learn about their supply chain. And also over time, learn more and more about some of the FMI devices that are coming out, which started up in the kind of the 2007, 2008 time frame when we started vending. What we learned a number of years into it that a lot of employees want to bring their customers to this.

They thought to be a great means to expose our customer to their supply chain. And we started doing that probably five, six years later, and we’ve been doing that for many years. In 2020 and 2021 because of COVID, we had to shut down the event. And we felt the impact of that over time, and it shows up in things like on-site signings. It shows up in how we’re engaging with that customer. What I’m pleased to say is, after restarting the event in 2022 and continuing it in 2023 and 2024, in 2024, we were surprised by the overbooked status of the show, and we’ve had to dramatically expand it. And Holden will touch on some of that in his comments about what that means for the second quarter as far as expenses. But we’ll have 50% more people attending this year than did last year, and we’ll have double the number of people attending this year than we did last year.

I believe that speaks well to our ability to capture market share with that subset of customers. And that’s been challenging us for the last several years because we just couldn’t engage in the same way. So, it’s an expense issue for the second quarter. It’s a really high-class expense issue for the second quarter. On the next page, I’ll touch on growth drivers. So flipping to Page 4. On-site, we had 102 signings during the quarter. So the number of active sites we had operating at the end of the quarter was up about 12% from what it was in the first quarter of last year. And our sales going through that channel grew low single-digits, which tells me that that’s where we’re seeing the demand issue play out in our numbers is because that number should be closer to what we’re seeing in unit growth.

The FMI Technology, we signed 105 devices a day, and I believe we’ve only had one quarter that we’ve ever done over 100. And if you think back to a few years ago, what we really challenged our team to do back in that 2017, 2018 time frame, we geared up our infrastructure to support 100 signings a day. And we challenge everybody to engage with our customer and to get there. And by 2022, we were doing about 83 a day. In 2023, we had grown that to about 90 a day. And those numbers are based on the average of the first three quarters of the year. So, last year, we did 92, 106, 95, average of about 98. Officially, we’ve always said that we want to get that over 100. Internally, what we’ve challenged our team to do is to get that number up into the 120s.

And so, we feel really good about Onsite and FMI Technology as far as the progress we’re making to take market share. In a similar comparison that I did with the unit growth of Onsite. So FMI, we have 10.5% more devices today than we did a year ago, but you can see some falloff in the revenue per device. And in safety, for example, we grew about 8%. And when I look at our revenue per device, it’s down 1% to 2% from a year ago. It’s been pretty flat as we’ve gone through the year so far. And again, that’s a demand, but ultimately, it’s a market share. It’s a land grab. And so, we will take market share by deploying more devices. And then we have to live with what the actual consumption is in those customers, whether it’s robust or less than robust.

It’s a sign of permanent market share, and I’m pleased with the progress we’re seeing there, and how it shines through in things like our safety because about half of our vending sales involve safety products. E-commerce continues to get nice traction. And our digital footprint continues to expand. We’re approaching 60% of sales. And our anticipation is sometime this year that number will hit the mid-60s, 66 is our target. And ultimately, we believe that ends up being 85% of sales. So on the second page, I feel really good about the progress, but I’ll finish where I started. It was a tough quarter, and we feel good about where we’re going. With that, I’ll turn it over to Holden.

Holden Lewis: Great. Thanks, Dan. Good morning, everyone. I’m going to begin on Slide 5. Total and daily sales in the first quarter of 2024 were up 1.9%. Q1 is seasonally low volume to start, but this year contended as well with severe weather in January and a good Friday holiday that fell in March for the first time in five years, an impact that was compounded by a following on the last business day of the quarter. This timing is estimated to have cost us 30 to 50 basis points of growth in the quarter. No matter how one treats this noise, however, it doesn’t mask that the primary challenge remains poor underlying demand. Industrial production declined slightly in January and February, but the components that most directly affect Fastenal such as machinery, were much weaker than the overall index.

Overall, end market and product dynamics are unchanged from prior periods. Total manufacturing grew 2.6%, continuing to moderate from prior periods, while our fastener product line was down 4.4% with contraction in MRO and OEM products. This reflected soft industrial production, particularly for key components such as fabricated metal and machinery, and in the case of fasteners, negative pricing. Non-residential construction and reseller continued to contract though at moderating rates as we experienced easier comparisons. Sales into warehousing, which are the fulfillment centers of retail-oriented customers remained healthy in the first quarter of 2024, albeit not quite at levels experienced in November and December of 2023. This combined with good FMI signing contributed to 8.3% growth in sales of safety products.

The tone of business activity from regional leadership is best characterized as steady at weak levels. We are encouraged by the forward-looking PMI moving above 50 in March for the first time since October ’22. However, current conditions remain better defined by the string of sub-50 readings that prevailed in the latter part of ’23 and at the start of 2024. Now to Slide 6. Operating margin in the first quarter of 2024 was 20.6%, down 60 basis points year-over-year. Looking at the pieces, gross margin in the first quarter of 2024 was 45.5%, down 20 basis points from the year ago period. Product and customer mix was a drag, partly offset by slightly positive price/cost, which continues to recapture the negative price/cost that we experienced in the first quarter of 2023.

In addition, with stocking levels largely rightsized, we experienced an increase in product movement across our network, which produce leverage of internal and external trucking resources. SG&A was 24.9% of sales in the first quarter of 2024, an increase from 24.6% from the year ago period. Total SG&A was up 3.2%. Occupancy and other SG&A expenses were well contained, increasing just 1.5% collectively. The deleverage was from labor costs, which increased 3.9%, which included a 3.3% increase in average FTE in the period and substantially higher health care costs. The consistent low growth in SG&A over the last five quarters reflects the Blue Team doing a good job, spending where appropriate to support growth and scrimping where appropriate to preserve margin, but at some point, sales growth is the core issue.

And as growth accelerates, we believe we will leverage the P&L. That said, I wanted to provide a little color on some factors that may affect margins in the second quarter of 2024. First, we continue to make investments in travel, hardware and personnel to support near and intermediate-term growth. This won’t necessarily to any greater degree than was true in the first quarter of 2024, but it was a reason for deleverage in the period and could be again, if growth doesn’t accelerate in the second quarter. Second, the expansion of attendees at our customer expo will result in an increase in expenses in the second quarter of 2024 on both an annual and sequential basis. Third, our success solving customer — certain customers’ supply chain challenges in the fourth quarter of 2023 has created opportunities to service these customers at greater scale in the future.

This will require certain near-term investments to ensure that we can meet these customers’ needs. The latter two items could impact second quarter 2024 operating margins by approximately 30 basis points. We do not expect these costs to carry over into subsequent periods. Putting everything together, we reported first quarter 2024 EPS of $0.52, flat versus the first quarter of 2023, with net income up just slightly at up 0.6%. Turning to Slide 7. We generated $336 million in operating cash in the first quarter of 2024 or 113% of net income. While below the prior year, when we deliberately reduced layers of inventory, the current year’s conversion rate is consistent with historical first quarter rates. With good cash generation and a soft demand environment, we continue to carry a conservatively capitalized balance sheet with debt being 5.5% of total capital down from 10.9% of total capital at the end of the first quarter of 2023.

Working capital dynamics were consistent with recent periods. Accounts receivable were up 5.5%, driven primarily by total sales growth and a shift towards larger customers, which tend to have longer terms. Inventories were down 9.4%, which continues to reflect primarily the reduction of inventory layers built a year ago to manage supply constraints and modest inventory deflation. While we will continue to focus on continuous improvement as it relates to inventory management, the rate of decline in our inventory balances will likely moderate going forward as the process of rightsizing our stock is largely complete. Net capital spending in the first quarter of 2024 was $48.3 million, an increase from $30.9 million in the first quarter of 2023.

This increase is consistent with our expectations for the full year where we anticipate capital spending in a range of $225 million to $245 million, up from $161 million in 2023. This increase remains a result of spending for hub automation and capacity, the substantial completion of an upgraded distribution center in Utah, an increase in FMI spend in anticipation of higher signings and in information technology. Now before turning to Q&A, I wanted to offer a higher level perspective on the quarter. Quantitatively, as Dan noted, it was challenging. But qualitatively, it was an encouraging quarter. We’ve touched on our disappointment with the pace of customer acquisition over the past several quarters and the changes made in mid-2023 to begin to address this.

We view customer enthusiasm for our expo, the solid performance of our growth drivers and trends in our contract business as manifestations of those efforts starting to take root. Change takes time and success can be uneven. However, we do believe we are seeing good indications of progress, which should reaccelerate market share gains as we proceed through 2024. With that, operator, we will turn it over to begin the Q&A.

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Q&A Session

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Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Tommy Moll from Stephens.

Tommy Moll: Good morning, and thank you for taking my questions.

Dan Florness: Good morning.

Tommy Moll: I wanted to double-click on Onsites where the KPI this quarter was quite strong, as you referenced. And Holden, you alluded to some of the leadership changes from recent months. I assume there’s a connection there. But what can you do to just bring us in a little deeper on that Onsite performance in Q1 and what you might expect going forward? What’s changed?

Dan Florness: I think we — one of the changes we made, and this was — if I go back 15 years, we made a decision to split our business into three distinct entities, essentially, the Eastern US, the Western US, and international. And in our national accounts team, we split into three pieces to as we align with those three business units. We did that for about seven years. And around 2014, we saw that national accounts being three distinct entities, it was a little chaotic. And so we rolled that back into one umbrella. When we’re going through 2022, we’re putting up really good numbers and the economy is rebounding. But when I look at things like what was going on with our Onsite signings, what was going on with our contract acquisition numbers, they were softening and it’s not about a person or a thing.

It’s about sometimes are we aligned to pursue a common goal, or are we too fixated on our individual goals? It seemed like we had so many groups talking about how well they were doing. But somehow if every group is doing well and the organization is slipping, something’s wrong with how we’re looking at it. And so in the spring of 2023, we realigned everything under one sales leader and realigned the US back into one business unit. And there’s disruption when there’s change, and it takes time to gain traction. But I think a manifestation of that is the Onsite signings and one month isn’t a trend, but they improved. The fact that we’re scrambling in the last 45 days, the last 30 days, and I say, we – there’s a team that’s coordinating our trade show.

So it’s been extremely busy lining up additional hotel rooms, additional space for an event that’s much larger than we anticipated two months ago. That’s a function of an engaged sales team and a customer that’s engaged with us of understanding how we can help their business. So that’s what the 102 means to me and of equal importance, the record sign-up relative to post-COVID world on folks attending our show and learning about how we can help. And I know personally, the visits I’ve been on, there’s some really good traction going on out there, and I feel good about it. We just have to work through the fact that we were taking market share from the standpoint of contract signings at an unacceptably low rate for a period of time. And the time between changing your sales focus, getting traction and that turns into revenue, doesn’t happen in a quarter.

Holden Lewis: Probably what I might add to that is I think an area where some of the changes are, perhaps, having the most rapid beneficial impact is probably on the contract side of the business. We’ve seen improvements in sort of the rate of signings on the contract side as well. And bear in mind, when you’re talking about national accounts and large customers, those also tend to be the kinds of customers that are signing up Onsites, utilizing more vending machines, right? And so some of the early indications of success we’re having in that group, I think, also lend itself to that area. So again, it’s uneven. I know Onsite signings can be lumpy. But you just look at a lot of those indications as a sign that the steps that we’ve taken are beginning to take root.

Tommy Moll: Thank you, both. As a follow-up, I wanted to ask about a new disclosure you introduced today, just breaking out your OEM versus MRO fastener business with some new granularity there. I was just curious what was the decision-making process to do that? And is there a takeaway you want us to make sure to have today? I mean one that comes to mind is just the relative size of those two businesses where OEM is nearly 2x the MRO in terms of revenue contribution. But if there’s something you want to make sure we take away, please flag it for us.

Dan Florness: We’ve been looking at that number internally for a number of years. And in full disclosure, when we first started delineating it, we had to figure out how to do it because it isn’t always evident what is an OEM sale, what’s an MRO sale. In the early years, the way we did it, OEM sales are not taxable. MRO sales are taxable. So our initial take at estimating what the two pieces were was to look at it in that lens. And that actually proved to be pretty accurate. And then we fine-tuned it and fine-tuned it. I think the biggest change is why Holden is willing to put it in a document because I didn’t know he was putting it in this quarter until I read it in the draft of the press. The biggest reason, I think he feels more comfortable talking about it in print rather than talking about it in concept. And other than that, I don’t know if there’s a message behind it and Holden you might tell me I’m full of it, and he’s got a message there.

Holden Lewis : Now as I usually say, we’re not playing a three-dimensional chess here with data. We gather the information, we figure we’d provide some information. Now I will tell you that both OEM and MRO tend to move with industrial production directionally the same way. But I think there’s certainly.