Q1 2020 Earnings Call
[music].
Greetings and welcome to the basketball 2021st quarter earnings results Conference call at this time Optus goods pretty listen only mode.
Sure that's recession will follow the formal presentation.
And what you could acquire operator assistance. Please press star Zero Wonder telephone Keypad. As reminder, this conference is being recorded.
It's now my pleasure to introduce your host L. installed. Please go ahead.
Welcome to the first of all company 2021st quarter Earnings Conference call. This call, we 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 we'll start with a general overview of our quarterly results in operation with the remainder of the time being open for questions and answers today's conference calls it.
Brightree Fastenal presentation is being recorded by Fastenal no recording reproduction transmission or distribution of today's call is permitted itself ethanol consent. This call is been audio simulcast on the Internet via the Fastenal Investor Relations home page Investor Dot Fastenal Dotcom, a replay of the webcast will be available on the website until June 1st 2020.
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 on the 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.
Companies 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.
Good morning, everybody and thank you for joining our call today.
Well I'd start by by giving up a quick recap of the quarter as it as it rolls out from a from a crowd sheet perspective.
And what we learned and actually took a different points.
Back in January so we have we operate in 25 countries. We held full day sales organization Anna sourcing organization that is based in China.
And we have regular conversations with that group and it was back in January that we learn first hand from our teams in China from our leaders in China about Cobot 19.
At that point in time, we started to lock down in monitor specific skews.
As we as we had a golden mine that was the maintain its a great and reliable supply chain.
For our customers, particularly I repeat customers, where we had a good understanding of their other normal usage and had some predictability to what to expect.
It was also at that time that we shared with several of our board members about the potential public transaction with a company called apex who's been our partner in the vending realm for about the last dozen years.
On February six or we sounded the alarm be alarm internally and what I mean by that is in connection with our sales release, we put a message out to all of our employees throughout the organization of what we were learning from our team in China about called at 19.
About the fact that Chinese new year was being extended a second week.
And some of the the lessons they were starting to learn in the world that was changing in their eyes. So we could start to prepare our teams as well as.
Marshall, our sourcing and supply chain resources to stabilize supply.
To better understand.
Talking supplier to supplier, where they were and where they were from an operational standpoint.
And to begin the process of vetting suppliers to expand access to select products, particularly safety in janitorial.
It was also during the first half of February that we notified the entire board about it potential the apex transaction and signed a letter of intent with apex later in the month.
Also in the latter half from February.
We engaged with our ITC folks to expand their sourcing we don't do a lot of mobile work with our employees other than the mobility platforms, we have.
At the at our branch and onsite locations and we began to expand our footprint.
For allowing work at home and creating whatever change we could also help for resource support the business.
On March 5th in connection with our February sales release, our video started expanded the updates to our employees and shared again, what we were seeing in the steps we were taking.
It was a day later on Friday March six.
That we canceled our annual customer event that was scheduled to be held in mid April.
In Denver, and it's an event that.
More than it's about 6000 people attend over a three day period, given the changing environment, we saw it prudent to cancel the event as we didn't think the.
The amount would be to come off as planned.
On Saturday March 7th in a little sideline here, we celebrate my mom's 90, a birthday I'm pleased to say, we able to do that in person.
Weekend of March 14th we notified approximately 300000 customers we were locking our front door for those of you that's ever been a fastening location, it's a somewhat feels like an industrial hardware store to certain degree.
Most of our revenue goes out the back door.
We delivered to our customers location it might be going into a vending machine it might be going to have in stock and might be strict strictly a delivery.
A smaller piece goes out the front door.
And so in and with the thought process of protecting our employees protecting our customer supply chain.
We notified our customers the front door was locked.
However, we are open for business and our folks really started to learn more and more about the term critical infrastructure are critical industry.
In and it appreciate better the role we provided in the marketplace.
We also indicated to our customers.
Please order ahead, if you are coming to the branch.
Call us on the phone placed an order online and we will have the product ready for you will do a safe handoff at the front door. So we can keep a distance from each other and keep everybody safe, but allow you to access critical supplies to business [noise].
Later in the week of March 15th.
We sent out a message and this was.
Turned out to be the first of a weekly video update to our teams and it expanded fastenal business update which is our internal communication platform.
To let folks know what's going on in later in that we could March 15th we expanded our employee benefits program to specifically address cobot 19 issues and expand our paid days off.
And our goal is quite simple.
We believe that people make better decisions.
When they can remove some words from their life and one of the elements we wanted to remove.
Is the bright side comfort that I had a job and that I would have paycheck coming in if something happened.
Might be a child its home from a school that's close to might be.
And situation, where a contract cobot 19, but we wanted replied comfort to employees, because we think we make better decisions and environment.
We also took a step of notifying employees typically benefits.
Effect, mostly full time employees. This was a benefit we put in place that affected both full and part time employees because we're equally engaged in the supply chain to our customer.
On March 25th we sent a second letter to our customers. This one was not E mailed out as the first one was this was post on our website those really intended to provide our local teams with a with an update means for their customers.
And we.
Began to limit specifics safety in janitorial skews to critical industries. So in that first communication that was about limiting contact create social distance.
We also started to talk about internally.
Focusing on our repeat customers from the standpoint of understanding their normal usage, so again, maintaining a stable supply chain to your customer.
March 27th I'm pleased to say, we celebrated my father laws 89 birthday.
This time, we made use of that a technology called pace based time first time, my father and I've ever used it.
March Thirtyth, we closed on the apex lending transaction that we that we disclosed in our release that came up earlier this morning.
April 10th we sent the third letter to our customers again. This one was posted to our web site.
To reiterate the out the allocation of critical inventory and the approach, we're taking to support a stable supply chain in the marketplace.
I'll now turn over to the flip book to that.
Holden this put out.
Talk about our first quarter.
As I mentioned.
Briefly.
We oh.
We shared with our employees the concept of critical infrastructure shared with our employees about the customers are survey and the vital role they provided in the marketplace and I'm really impressed.
With the way our team responded by setting aside personal concerns and taking prudent steps to protect their safety on there and our customer supply chain.
And in Holden will touch on a few minutes.
See I believe the fast organizations Shine and appeared like this.
Second bullet, we have several coequal first priorities as I've alluded to safety of our employees our suppliers our customers and society in general is Paramount in our mind and our thought process.
I understand our role as important agile supply chain partner.
Remain thoughtful discipline and willing to have Franken open conversations share with your customer what's you know when you know it.
Manage expectations.
And lastly, maintain a stable cash flow to support not just the business in the short term.
But to support what we see as an economy that is going to restart at some point.
We just don't know what that point is.
The also given the fact that our mix was shifting abruptly to government and safety products and our fasteners were dropping dramatically as customers either shutdown.
Because of shelter in place orders or customers business slowed in their demand slowed bizarre fastener business drop off.
And.
Gross margins and fasteners and safety products are not the same you see that when you look at our financial statements this quarter.
Tom Accordingly, we have taken steps to reduce operating costs.
We have incredibly strong balance sheet.
Historically, we've operated this business would I believe great business disciplined, but also great financial discipline.
And it's shines in times like this the economics of a distribution model.
Our also signed in times like this from the standpoint of.
Reduced activity unlock some working capital from your balance sheet and you saw that in this quarter and I suspect you continue to see this play out as the as the year progresses.
We currently.
Have every intention.
Of maintaining our dividend impact that's one of the.
Priorities I laid out for our team early on.
Very mindful of in times like this as we saw back in 2009 2010 and other periods in our history.
The ability to maintain that dividend is meaningful to our shareholders.
And I'm ever mindful of a chunk of our shareholders come to work at Fastenal are today, approximately 4.3 million shares are held by our form 10-K plan.
And also they also as I mentioned earlier, we purchased late in the quarter.
Certain assets, primarily intangible, but also supply chain access to our vending platforms that I believe will lower our cost structure in the future, but also enhance our ability to make lending ever more a part of the fastenal business [noise].
Yes.
With active activity weakening customers closing in our energy shifting to supply and key products.
To a range of critical industries government healthcare first responders et cetera.
Our visibility to our 2020 goals for both signing on sites and signing vending.
Our murky at best.
The cancellation of our customer show.
Probably creates as much murky nest is anything because history has shown that that customer event is a great opportunity to unlock particularly onsite activities.
And on site relationship is a very strategic relationship, it's not something that a customer enters into without.
A lot of thought because it's a big change to their business and.
And that's why we're not providing signing ranges at this time, although in all honesty when I look at the 85 Onsites that we signed in the first quarter.
If somebody would have gone back in time and had a discussion with me and said hey in the in in 2020 years going to start this way cobot nineteens going to become a thing globally.
And you're still going to sign 85, Onsites I wouldn't have believed it it's testament to the pipeline we have in place already in that March was stronger than January and onsite signings, but it's at a lower level and therefore, we removed our are signing ranges for the year.
Holden will touch on this a few minutes, but to give a proxy of of where patterns are ending March and where they are starting April.
As of March 30, Onest 121, or just over 10% of our active on sites were closed because the customer was closed or essentially shutdown.
Total end market locations 3270, and the end the first quarter.
2020 from a vending perspective vending is different than onsite from the standpoint, it's more transactional it's influenced by strategic decisions, but it's much more transactional.
And we did see that fall off in March in that March was above about two thirds of the signing pace of what we saw in March of 2019.
I am I will add that.
When I look at vending I feel very good about our future.
And part of that is the business that we've created over the last.
Decade or so.
Part of it is the recent apex purchase and what it means for us to streamline that in a couple things I would I would share and I'll share a quick story.
Sunday Night at 11 30 in the slowness household.
Our smoke alarm went off.
Now for those of you that don't know look back in January 232013, our helzberg into the ground.
I, my wife, and kids and dogs, all got out safely, but the house was gone.
This was a case of a bad battery.
And so the at 11 30, the Laurence going off the dancer Holly.
And we started replacing batteries at 11 that when I finished I hopped on line at Fastenal Dot Com and I placed an order for batteries and the told me they'd be available at the on Tuesday morning, because they weren't at this particular battery wasn't in stock at our local brands and.
Im pleased to say at 726. This morning, I did receive an email from Fastenal dot com.
My order is ready in outside locker ready for pickup.
And so I'll pick that up later later today.
I'm speak and then related that ecommerce grew 27% in first quarter in in the month of March It E. R E Commerce and total.
Expanded above 10% of sales for the first time ever I believe for the quarter, we're at about nine and a half.
With that I'll turn it over to hold US great. Thank you Dan.
I'll begin with the debate business cadence slide on slide five.
Total sales were up 4.4% and daily sales were up 2.8% in the first quarter of those 2020.
Daily sales in the first two months of the quarter were up 4.1% January and February both exceeding seasonal norms into PMI averaging 50.5.
Growth was helped by easier whether at holiday comps with overall business activity, we're still sluggish, but there were encouraging signs of things stabilizing marks began similarly, but the final eight business days as a month began to reflect Tobin 19 related issues.
A number of parts of our business highlight that impact one is the faster sales, which tend to be more cyclical after being up 1.4% in January and February fastener daily sales were down 10% in March more telling our non OEM nonconstruction fasteners, which represent roughly 30% of the category was down nearly 20%. This.
Group includes fasteners for amusement parks schools retail operations and our cash sales there was heavily impacted by shelter in place and social distancing requirements as well as our decision to restrict public access to our branches.
Another area is on sites were more than 120 units in North America around 10% to 11% of our total we're close as a result of customer facility closures. This likely resulted in more than two and a half million lost sales in March and they're clearly would have been additional lost sales from key account business in our traditional branches.
On the other hand unique nature of this crisis has produced opportunities safety, our second largest product category was up 31% in March as our global sourcing capabilities lined up with the needs of the market.
From a customer standpoint, our government business was up 31% in March with sales to healthcare organizations more than doubling.
Sales to warehouse operations more than tripled. These are smaller pieces of our business as Dan indicated earlier, our first priority is to play our role in overcoming the societal and economic challenges presented by Cobot 19. However, we also believe this has introduced fastenals capabilities to new customers, which should benefit us well beyond this crisis.
These are all very early reads, but the second quarter of 2020, some regional vps see their region down 20% plus while others see their reagent being closer to flat based on the influx of government business.
But none can predict the ultimate length of this situation or the degree to which safety and government will offset weakness elsewhere. There is an extreme lack of visibility in the marketplace currently but the feedback would seem to put sales in the second quarter of 2020 down 15% plus though it's worth noting that that is not the order of magnitude decline that we've seen so far through April.
Now to slide six.
Our gross margin was 46.6% in the first quarter of 2020 down 110 basis points versus the first quarter 2019th.
We did see a wider decline in March driven by two things first our cost of goods are heavily variable, but those fixed costs that we do have such as our truck fleet manufacturing procurement operation de Levered as daily growth slowed to flattish.
Second the impact of mix widen sharply from January to March based on the abrupt changes in our customer and product mix.
This impact was mostly offset by SGN, a leverage of 100 basis points in extra selling day was helpful and incentive comp is playing its usual shock absorber role as growth slows.
As a result first quarter 2020 operating margin was 19.9% down 10 basis points year over year with an incremental margins 17%.
It's difficult to pinpoint where gross margin may settle in the near term however, fixed cost leverage would remain a factor if sales wind up being as weak as many rvps. Currently expect further if growth gaps between safety and government relative to fasteners and higher margin small customer sales continue to widen it would similarly widen the impact of Ms.
Once market conditions revert back to pre crisis levels, we would expect much of the current gross margin pressure to reverse.
As it relates operating costs, we do not have a formal head count reduction initiative in place, but do expect natural attrition as the number of branches that are growing fall below 50% has occurred in March and our field leadership manages their costs.
Lower signings expectations will also likely generate reduced need for new onsite staffing and non sales related roles.
We also expect a natural decline and incentive compensation based on our variable pay programs, but have taken additional steps to reduce employee related costs by eliminating bonuses for all employees above a certain base earnings threshold.
Certain discretionary costs, such as sales and travel related selling as well as branch openings and closings will continue to be manage tightly by field leadership.
Visibility is low even by our normal standard the last time, our sales were down 15% loss was 2009, then Dick decremental operating margins range between 35 at 40% and that would seem to be a reasonable benchmark if conditions proved to be similar.
But ultimately what decremental margins and earnings looked like in 2020 depend greatly on what your expectations for normalization of business activity and the volume and mix assumptions you made for the full year.
Turning to slide seven.
Operating cash flow of 241 million in the first quarter of 2020 was 119% of net income.
The weakening environment moderated net working capital needs in the period inventories were up 4% annually and down sequentially in the first quarter 2020 and days on hand fell by more than three.
Accounts receivable was up 5.2% would days outstanding being flat.
Net capital spending in the first quarter of 2020 was 47 million down from 53 million in the first quarter of 2018, which is expected given reduced needs for new capacity. After the investments made in 2018 in light of the uncertain market outlook, we have reduced our net capital spending range for 2020 to 155 million to 180 million.
Down from 180 million to 205 million previously.
We returned cash to shareholders in the quarter in the four of 144 million in dividends and 52 million in share buybacks, we foresee no change to our 25 cents per share dividend in 2020.
But do not currently expect to purchase additional shares our purchase of apex assets in the period also used 125 million in cash.
From a liquidity standpoint, we finished the first quarter of 2020 with debt at 14.6% of total capital up versus the fourth quarter of 2019 on the apex asset acquisition.
Below the year ago level of 16.9% at quarter's end, we had an additional 344 million available on our existing credit lines with no reason after discussions that are lending partners to bleed those funds and not be available for use another $465 million capitals available under our Master Note agreement. We also review the sensitivity of our of our model for Dick.
Sales profitability and working capital scenarios and believe the cash our model will generate and our existing credit availability will be more than sufficient for our needs.
Thats all for our formal presentation, so with that operator, we'll take questions.
Thank you without whom ducking. Your question answer session. If you like to be placing the question can you. Please press star one or the telephone keypad.
Confirmation tone.
In the question Q.
Chris for our two if you'd like to remove your question for the Q for participants using speaker equipment, maybe the facility to pick up a headset for pressing star one.
One moment, please what we pull for questions. Our first question today is coming from David Manthey from Baird. Your line is alive.
Hey, guys good morning.
Morning.
You noted that there is no official reduction enforce mandate, but my question is related to PE headcount.
Back in 2008 year ft. He is we're about 12000 in you dropped by about 15% or 1800 apt to ease with nearly 1000 FC east coming out in the first quarter of await alone.
You got about 19000 today I'm just trying to gauge is is 15% via attrition and reduction of part time hours if needed.
Is that something that would be in the ballpark of those 3000.
T ease and and if so I'm just trying to get a gauge on how quickly you could move on that is half of the ultimate reduction or maybe 1500 fts reasonable as you flex down higher.
Flex down your part time hours and freeze hiring.
So I'll answer that and pieces first off.
The 2008 2009 timeframe, if you recall our business from October to January dropped about.
About 18% and.
And then we dropped another 15% between January in April and some of those those numbers quite well I Didnt look those up.
And.
And the economy froze up we took steps to too.
Mechanically alter some of our bones programs to conserve cash with one goal being we wanted to maintain as much employment as we could.
To maintain our talent pool and that's true also today.
We took deeper steps because the the the prospect of this being longer in duration.
Was greater at this point, Dave we just we just don't know.
You know the message that I've given our team is is what shelter in place orders you see a bunch of customers a bunch of businesses or shutdown Holden touched on that somebody has information.
You also see.
Examples where our business that is operating and and I believe the bias right now towards.
Pieces of the economy turning back on.
Is stronger today than I would've been a couple of weeks ago, and I I've said to our team we actually prepared for elements of the economy turning back on as we get into May.
I don't know thats going to happen, Dave, but elements of our economy turning back on so I wouldn't see the drop off being as as acute as you saw back in 2009.
We do have a hiring freeze in place.
We have pulled back part time hours.
We.
Our letting attrition.
Happen I.
I don't know what Attritional look like in this environment versus 2008 2009.
And and hold and maybe you can chime in if you have any insight I mean, you're the only thing I might add to that Dave is is we have to remember relative to 2009 too there are opportunities in this market we touched on.
The opportunities to be more involved with with safety and PPD in janitorial sanitation products to meet demand for those is very strong that was not the case in 2009.
So there are opportunities for us as the market is not quite as turned off as I recall 2009, being having spoken to have a few of the bps about what they expect from head count standpoint, their expectation is that full time headcount will decline as the field manages their PNM outs.
But I would tell you that they aren't looking for declines at this stage. It on the order of magnitude that you were sort of alluding to so I think that you'll see in all of our region. Some some decline in full time headcount, you'll certainly see a decline of part-time head count in hours or go down, but right now with the opportunities that are present and with the uncertainty that are out there it's not an order.
Magnitude that you're referring to.
Okay Fair enough just a point of clarification is there anything different about the business today that if you needed to work this is longer than expected that at a 10 or 15% flex down just via the the tools that we mentioned in fts, specifically would be possible or is it different this time.
Yes.
I don't believe it's different Dave the.
You know our head count per branch. So if you go back to the to that to that oil nine timeframe. Our average branch was doing somewhere in the 80 to 90000 dollar month category and now we're in that but we did last month hundred probably in the 100 3000 40 category sellers.
More employees per branch, which gives you some flexibility there.
In in.
And distribution the.
The picking activity drives it are.
Relative labor to pick is little different than it was a decade ago, because there's more automation in our system, but I don't believe our business is different now that we couldn't flex it.
Great all right. Thanks, very much guys.
Yes.
Thank you and this question is coming from Josh Pokrzywinski from Morgan Stanley. Your line is that a lot.
Hi, good morning, guys.
One of the.
Holden by way of a of batches gear versus the last hand, I show backend back in early March when we were in London.
Two.
The last time anybody got out.
I appreciate you might be a couple of questions.
[laughter] I don't think I would have been the blame at that point Youre on another Honda and.
Yes, a couple of questions.
First I appreciate you have the and I know that the last quarter, you kind of broke the.
Broker track of.
Talking about current course in it.
Running down.
[noise], thus far in April.
And would you mind kind of sharing where we're at this point Hey, Josh.
Josh I'm not I'm not sure. If we'll go to answer your question because right now we're getting about every other word as they I think you asked and I think in my prepared remarks, I referred to sort of our monthly or April to date, not being down on the order of magnitude of 50% plus I think you're asking to give some color as to what that order of magnitude is.
Right.
Correct.
Got it right, probably running between 10 and 15% down right now.
Now the one thing to bear in mind is.
The timing of months matters right I mean, given how much of our businesses national accounts and on sites in vending and things like that that does tend to create a little bit more movement towards the latter part of a month than the earlier part of the month.
So there's still a lot that we don't know Josh but based on where we are today in April to this point, we've been down probably between 10% to 15% as opposed to 15% plus.
John and I appreciate that Oh go ahead, I'll add one out I have one element to that and that is despite the fact, we weren't able to to celebrate it.
And in a way that was maybe normal for most of us or at least for me.
Last weekend with Easter weekend, which meant last Friday was good Friday, so that does impact our business every year the placement of good Friday, but as of Saturday morning, when I looked at the numbers, we were down about 10.5%.
That was again, probably a little bit worse because of good Friday, but that was looking at where we were month to date.
Got it that's that's really helpful color or down and then just one extra one.
You know obviously an impact from customer shut down do you called that out in.
Side, but if you had to think about the totality of customers even just anecdotally.
You know from from the region's any sense for how much of the drag is just customers literally not having their doors open.
I think the fact that well over 10% of our on sites were closed at the end of March is probably a good a pretty good proxy from the standpoint, and what we're seeing in the marketplace and the only thing that could influence that would be our on sites.
Tend to be more manufacturing, although there are on sites that are construction that are on sites that are education.
And and the like and but but I think that that probably a pretty good indicator in effect that the first week the month or the first week and a half of the month being down a little over 10% probably plays out intuitively that way, where we're seeing greater drop is in some of the industry's at holding touched on.
Smaller pieces of our business, but they're down more and then obviously the flip side of that is.
Government healthcare and for fish Bonders, while a small piece of our business is up dramatically.
I might add a little color to that only in a sense that.
Nine days before the months ended.
Got it and we kind of expected our growth to be more in the 2.5% range and so over eight days to go from two and a half the flat would imply that yeah, we probably over the course of eight days lost $10 million to $11 million in revenues that we might have otherwise expected to have gotten several days previous and that includes with the surge.
In safety in government things like that which gives you a sense of sort of the manufacturing side of things. The construction side of things and then it kind of very short order of magnitude impact that we're having in those core markets.
Got it thats, great color stay safe in saying guys appreciate it.
Thanks.
Thank you for next question today is probably from Chris Dankert from Longbow Research. Your line is that right.
Hi, good morning, guys.
Let me take the question I.
I guess first off we kind of dig in on apex, a little bit very exciting news, but I guess is this more about locking in a strategic technology capability in kind of keeping it out of competitor hands or is it more about vertically integrating or sort of where the real opportunities and bringing effects just kind of into the fold.
Here.
Yeah, So first off.
We did have a from a strategic standpoint, a good luck of the technology previously because our when we expanded our relationship back in 2010.
With this technology platform.
We did line up and exclusivity for the industrial MRO marketplace. So we did have a great spot there was probably draws from our competitors crazy over the last decade.
Okay with that and.
But what it what it really did is.
Over time.
The.
Technology platform became a deeper and deeper part of our business and so today that vending platform represents roughly 20% of our revenue goes through that lending platform.
And then we have another 10% of our revenue that goes to a car binstock platform sum up 30% of our business goes through some type of distribution mechanism that goes right into the customers facility and and is that repetitive order cycle.
And we see that piece over time expanding dramatically.
As we.
Become more and.
Pumps supply chain linked with our customer.
And and would would as percent of our business I wouldn't be surprised to see that 30% we have today more than double.
When we doubled in size and double as a percentage of our business and so from that standpoint, the apex transaction was very much about bringing the technology closer to us so that the technology development of the platform.
It is more aligned with where we want to take it.
With our partner Great partner for last 12 years.
They are as much interested about expanding outside of industrial distribution as they are within industrial distribution and sometimes that means what's prioritize from a technology development doesn't always harmonize with what were thinking and so it provided us the ability to do that it also provided us the ability to blur the lines a little bit.
Between what is vending what has been stock what is automated replenishment because it gave us more flexibility and what can go through the supply chain.
It also gives us more flexibility in how we deploy assets.
And and so very much see it as.
Making the technology part of our umbrella and having access to the supply chain ultimately will lower the cost for us overtime of the platform.
Got it got it that's really helpful and optimization sounds kind of like the way forward there.
Just a follow up for me here safety is a really nice offsets the slower OEM demanded and one Q.
But I guess my assumption is levels products are now kind of on allocation safety, 20% of sales I guess is that.
How much of that being allocation is an impediment to sales growth is a move into twoq years any any comments on product availability would would be really helpful.
We're not we're not alone in that and that the neighborhood and you see it every night on the news.
Demand has.
Surged drawn by multiples in a matter of weeks days and weeks.
And though and as I mentioned earlier in my comments, we put a bunch of effort in place back in February and March to expand our own supply chain.
To up to broaden our access we do have which is on which is unique for fastener somewhat of a backlog is exactly right now and they're not all gone for safety sort of any platform a lot of that we're we're delivering pallets a product for customers.
Because we are a source. They can rely on were also a source that they know the quality of what they're getting.
Given our history and fasteners.
One of one of our Achilles deal with with bedding, new suppliers is we are incredibly picky.
When it comes to who will do business with not only from standpoint of how they operate their business, but their supply chain and the quality of their own product because we pure beyond them. When we're understanding the bidding process and the quality of the product. It's not just testing the output is testing their supply chain to.
And and so the 20% is vending our safety is just slightly below that historically, it's around 17% historically.
Obviously, that's that's grown as a percentage here in the current environment I suspect that we'll continue to hold at a higher clip as we go into second and third quarter, because I believe I personally believe.
There will be changes in our customers and in the marketplace.
On things like of safety products and last weekend I'm in picking up some groceries and everybody in that facility about 80% of people in that facility.
And I don't mean people working there I mean people shopping we're wearing masks and I think thats going to be a greater part of our world included in manufacturing settings.
I would probably at a couple of things as well to the timing of how cobot 19 has sort of rolled through the map. If you will has has been.
Beneficial in the sense that as our U.S. suppliers, perhaps had their production diverted to very specific needs and start putting on allocations.
The Chinese suppliers were beginning to open up and I think this is really the value of having 200, some hard professionals on the ground.
Over in Asia, communicating with product professionals domestically and that they really are able to go out and find alternative uses of alternative sources of product.
And make sure that that product is of a sufficient quality and is going to deliver achieved the needs of the customer and so I think that we've done a really good job.
Being able to find alternative sources of product as as we've gone on it I think were built to be able to do that.
So I think that the timing of of things has certainly been advantageous as well and again I think these folks and product and international procurement all that deserve a lot of credit for continuing to keep our supply chain of ERP product pretty filled and then as Dan indicated right now we still have product that we're going to be working through delivery.
Throughout most of April at this point.
Got it thanks for the color guys stay safe and best of luck out there.
Thanks.
Thank you go next question is coming from Ryan Merkel from William Blair. Your line is that a lot.
Hey, Thanks, good morning, So what I wanted to dig in on.
I want to dig in on April a little bit more I'm surprised that went down 10% to 15%. So far so it sounds like the safety buffering and that's going to continue but what about the OEM fastener business and what about the Nonres business I just would have thought with fact factory shutdown and job sites potentially close to that.
Might be bigger impacts there what sort of growth declines are you seeing right now and in that part of business.
Yes, I'm not sure that I have a a great answer for you from a granular standpoint, we just don't necessarily collected that level on a day to day basis, but I think what you're describing has been playing out I think that you're seeing weakness in the manufacturing side I just add a one of our.
Our leaders in the construction side shared with me yesterday, it sort of an E mail from from some of our suppliers about what they're seeing in the marketplace in terms of construction. There's just a lot of states cities that have shut off construction in many respects and so.
Ryan the environment that you're describing absolutely exists and it's being mitigated to some extent by the need for the PE products and you know by our government and things of that nature. So I'm not sure in April exactly what the OEM versus the MRO versus the non or versus the construction.
Theres or do we don't have that on a day to day basis.
But I think that the environment, you're describing as the environment that exist today, but just unlike 2009, there are some areas, where there's a great need and were built to be able to define the product to meet that needed I think thats, what youre seeing as an offsetting factor.
Okay fair enough excess.
And then switching the gross margin I guess, a two part question, how much lower or the safety margins to government customers versus the company average and then hold and I know you don't want to being the gross margin guidance game, but any help on the magnitude of gross margin declined in second quarter would be helpful or maybe just quantify.
Or coming a different way, maybe just quantify the expected mix headwind relative to the typical 30 to 40 basis points in normal times.
I would I would normally tell you that I don't want to be on the gross margin prediction game I will tell you I can't be in the margin gross margin prediction game right. Now. It's just it's really going to dependent I don't know what the second half of April is going to look like versus the first half in terms of whereas the demand comes from right. We've had conversations internally about this is a situation where the world doesn't.
Have enough PPD right, but it's also all those situations, where you can see get to a point at some point, where frankly, there's too much of it I don't know if Thats April if thats may if thats fourth quarter. We it's just it's really hard to answer Brian. So I don't think I'm going to go down that path.
The only perspective, I think I can give you as if I if I look at mix through the course of Q1.
In in January mix was probably about a 65 basis point drag to the business and if I look at March it was closer to 90 basis point drag to the to the business and it wasn't necessarily because the customer mix had changed so much as because the product mix had changed as dramatically as it had and.
You know what does that mean going into into Q2, I honestly don't know where that's going to settle out I think it's an impossible question at this stage for us to answer.
But you can clearly see in a very short window.
What was impacting mix and we're we're going to see how that plays out over over April in second quarter. Just just like you are but I wish I could give you more detail, but we just don't have a lot of a lot of waste understand that right now I'll add just one.
Tidbit to that first off one thing that we we did is early on in the process, we put in some pretty strict pricing guidelines for our field.
From the standpoint of there's there's times, where you look at your obligations to society in your obligations to your customer and.
And.
We're probably leaving there's probably examples where we're leaving some margin on the table.
Because we're more interested in getting through this and getting society through it.
And getting back to.
Whatever the new normal is.
The fact that we closed our front door and not only did that cost us some sales growth.
Two percentage points I would guess.
It also cost us some mix elements to our business and the real question is for everybody looking at Fastenal or at the market in general.
When when do you believe.
Some elements of regrouping of the economy step into place.
As long as restaurants, and and theme parks and things like that our clothes that will that were heard a piece of our business and and that that small customer in the case with restaurant.
It's probably a higher margin element and so even that mix comes into play when I look at our.
Emerald fasteners, and I would say I would say as well that when you're when you're procuring more products from.
Sources that are usually part of your supply chain.
As we do when we go get fill in buys this off customers.
Needs at this at this point in time that tends to come in at a lower margin as well. So it's not just mix. There's some unusual circumstances that are playing out in the marketplace today that frankly.
When when this whole thing begins to normalize and stabilize we expect that most of those.
Sort of near term drags with unwind. So it's a relevant question to Twoq Ryan I don't have a great answer for you at this point, but I do believe that the issues that were seeing are not permanent issues I think that they exist as long as this this situation with cobot 19 exists and once that goes away and our mixed begins to revert back to normal in our supply chain reverts back to normal.
That then we'll have a a more normal pattern reasserting itself on gross margins, while I don't think there's a long term issue here.
Perfect understood. Thanks, I'll pass it on.
Thank you.
Thank you next question today is coming from Adam Oldman from Cleveland Research. Your line is not alive.
Hi, guys. Good morning hope the entire team and it is healthy.
I wanted to continue the discussion on on a gross margin. If we could you tell us what what price realization was this quarter and then Holden.
Price cost I guess was expected to moderate or level out are we seeing that in the in the numbers today.
Yeah, I would say.
The price level that we experienced in Q1 was comparable to what we experienced in Q4.
And I would say that in terms of characterizing price cost I would characterize that is not a meaningful factor our gross margin the period.
Okay got you and then I guess.
Could you expand your thoughts a little bit on.
With the team is doing from a selling standpoint right now it's got to be a big change of.
You are working from home and I'm trying to do remote selling processes rather than in person.
Maybe walk through how big fulfillment is occurring you know when customers are restricting access to their facilities. Other creative sales steps that that folks are taking just how the organization is working right now thanks.
First off if you if you think of our organization in buckets of population the bulk of our employees work in our branch or onsite and those folks are going to work every day unless you're in one of those onsites that are closed then you're probably going to you might be working at home or you might be working at another facility.
And doing.
Certain aspects of the business remotely.
But.
Most of our folks of on the business go onto the customer.
I know there's examples of vending machines were not filling but I would say, it's a it's a relatively small piece of the equation I have received over eat through either our web feedback or through comments, whether it's on linked in other places pictures of our employees.
Taken by customers.
Were there.
Cleaning the vending machine.
As they're filling the vending machine.
I'm not very positively received I think by our customers I do believe our customers. Appreciate the fact that we close the front door to our branches.
Because that way the amount of interaction. We have is is dramatically reduced from the variety of people. So I feel safer, having a fastenal rep come into my business, knowing there's not a whole bunch of people walking into.
Our location.
And up and so we are still fulfilling vending as we have in the past one element of that fulfillment is slowly changing that is we've talked in the past about.
Changes to our fulfillment model for vending and the creation, what the called lift our local inventory fulfillment terminal I believe we had to late last year I believe right now we're up to seven.
We continue to invest in that we're expanding that element and that's really about how we pick and how we fill the machines and you can fill with a team that can go into a has more concentrated inventory and can go into.
More of customer locations with with product that's already picked down to the individual machines.
Well, we're certainly getting asked to make accommodations by our customers.
There are some customers who were not comfortable.
Citing packing slips and maybe we're dropping off and they are picking up in their filling their machines, where we might have done it before but.
So we're obviously be accommodate what what our customers want from us in this but we're still providing those services.
Thanks, guys.
Thanks, Jeff.
Thank you next question is coming from Sam Darkatsh from Raymond James Your line is alive.
Good morning, Dan Good morning, Holden how are you.
Good morning, good fine thanks.
So.
Obviously respect.
The lack of visibility in terms of on site signings and openings. This year I'm guessing April will be the low watermark for that Holden any sense of what you're tracking in terms of of on site signings and openings near term.
No not a great sense of it to be honest with you Sam.
The yeah, I don't know Dan if you've had a more recent conversation on the matter, but I haven't I'll like to say I've I was pleasantly surprised.
By the level of signings, we had in March because I thought they would have dropped.
More meaningfully than they did.
And that's a testament to the pipeline weve hobby or they had in place.
Oh.
One side of me says.
Organizations every slower to make decisions are going to be looking at you know how they're operating another side of me says.
We've had the ability in this environment really demonstrate what our supply chain resources can do and I've heard a more than one example of Oh.
Our sales team talking about comments from customers of I get what your supply chain resources are about more than ever from what I've seen firsthand over the last three weeks.
I don't know if ultimately that helps us sign more.
And I talk about that more in the context of onsite versus vending because vending is a different animal in that it's a it's a transactional element.
The piece of vending that I'm not sure if it expands.
Or.
How it expands or how it changes is the idea of.
We're delivering to our vending machine.
Sales that are outside the vending machines, what I mean by that historically the dollars going through the vending machine our products that we put in there that are repetitive.
We have seen a meaningful increase again, it's on small basis, but a meaningful increase in.
Where we have a locker at a customer and a few a door to are now dedicated to deliveries and we're seeing more examples of it coming from us.
Relatively small subset of branches and onsites, but we saw that that grow dramatically from February March again, I'm gonna qualified by saying, it's on a very small base.
And but I would expect over time that might expand.
As it creates distance in delivery.
And with our recent transactions with apex, our ability to do it is stronger today than it was the past.
And I just wanted to ask a follow up question on the prior.
Inquiry, which is.
I just want image, because you're not really seeing any increasing instances of youre on site or legacy branch sales people not actually being allowed for one customer premises because they're viewed as not employees I guess, that's the real question a lot of folks have as if we do see.
Some sort of a seasonal or intermittent restrictions on not employees site visits how does that affect the business model, but it would be obviously, good if you're not seeing that are up across the board or even if even any instances of it.
I'm sure we're seeing examples of it but but what probably happens there as we make arrangements with that customer where they still need the product and will you know the product probably gets delivered at their dock as opposed to delivered inside their facility.
There are you know we're following the protocols of the customer we have in addition to procuring safety products for our customers. We have lined up and we now have and so we have safety products for our employees and so.
Many customers now for for our employee to come in their facility.
There are requirements for mass and things like that you will see more of that I suspect in the future and.
And but but absolutely we are seeing examples of reduced access I would say.
Other.
Partners are probably being impacted more from it than us just because of the intimate relationship of our stocking right to production lines of stocking.
Into vending devices, but by all means a customer could do that with their own facility with their own personnel and we will work with them to build some the tools to do it.
Thank you both as both stay well.
Thanks, Sam you too.
Gradually next I question today I feel causes go ahead.
Well go ahead, we have a few minutes left.
It's about four minutes until.
Just.
Quite possibly could be are part of question for topically anywhere from Hamzah Mazari with Jefferies. Your line is not a lot.
Hey, good morning, Thanks for squeezing me in a hope you're safe and healthy.
I just a question on E. Commerce are do you expect that to be a bigger piece of your business model coming out of covert 19, I know with the fastener mix GAAP. Their fleet branch network. You know ecommerce historically has not been a big part of the business models do you see that.
Changing at all.
You're right historically, but you know in recent last few years, it's really been growing fairly rapidly as we continue to.
Really present to our customers what the what the but the possibilities and options are on on our.
Our ecommerce platform and so.
We do expect that to continue to be case now we're always going to be a business that wants to be local wants to be directly engaged with the customer and so E. Commerce plays a supplemental role to that but there are customers that want to use E commerce for certain of their purchasing needs.
And that's our improvement or that platform over the last three years is a bigger and really being able to sort of showed that that value to the customer is a big reason why it's growing the way it is.
I will say that at least to this point I don't know into Q1 data I don't know that we see anything they're suggesting that coded has caused more of our customers to opt to go online versus dealing with us and the way they traditionally do.
That is evident in the first quarter numbers to me.
You know is that something that emerges in the second quarter or is this stuff that emerges sort of longer term I don't really know hamzah, but I do know that we've had a great growth trajectory in terms of adoption of our ecommerce capabilities among all of our customers, but certainly our larger national account customers as well and we do expect that to continue.
All right I'll, just very add to that.
So if you think of what we talked earlier about vending growth over time and binstock growth overtime.
In my way of thinking these are all ecommerce so if I take vending and had been stock.
And add a discrete.
Ecommerce that's what's up.
35% of our business today and over time, I see that being 60, 70, and 80% of our business just because it's a more efficient means to procure and in our objective is to be is too it's create value for the customer that they know it. So it's a reliable supply chain that I can tell.
Trust the quality of the product I can trust the reliability of the supply chain.
As cost effective and I believe we're positioned really well for that so yeah I expect that this to grow faster I don't know cobot 19, accelerates that or not but that's that's a long term trend.
Great. Thanks, so much as Dick the rest offline. Thank you Rick.
Thanks. Thanks.
The reason of our question answer session, let's turn the floor that Cobra management for any further closing comment.
Thank you everybody for participating my call today I Hope you found it useful in an unusual time.
And we look forward to some normalcy returning to our lives. Thanks everybody.
Thank you with this concludes today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.