Q2 2020 Fastenal Co Earnings Call
[music].
Greetings and welcome to the basketball 2022nd quarter earnings results Conference call.
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Now my pleasure to introduce your host Ms. Ellen still thank you Ma'am you may now begin.
Welcome to this ethanol company 2022nd 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 operations with the remainder of the time open for questions and answers today's conference call.
Proprietary fastenal presentation is being recorded bypass, though no recording reproduction transmission or distribution of today's calls permitted without fastenals consent. This call is been audio simulcast on the Internet via the Fastenal Investor Relations home page investor dots ethanol dotcom.
Play of the webcast will be available on the website until September 1st 2020 had mandate 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 that 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.
Thanks, Ellen and good morning, everybody and thank you for taking time this morning to listening on the fast earnings call.
Before I start.
I'd like to mention two milestones and pass all this week and I want to do that start Red and case I would be negligent and miss it.
Dave Donahue today celebrates 40 years with fast and on Dave I want to say, thank you and congratulations.
Not far behind Dave as Lee Hein, who will celebrate 35 years was Fastenal tomorrow, a Rodney if you're listening I would mention you as well, but you only had 20 years. So in 10 years I mentioned you on the call.
Surround yourself with great people people better than yourself.
Are you willing to learn to change can be comfortable with trusting others and you will find success.
And I'm pleased that I'm really proud of the fastball team for what we accomplished this quarter.
First off the team was successful in sourcing hard to find safety products.
And bringing this product to our existing customers would have equal importance, maybe greater importance to new customers.
Customers, we don't traditionally do much business with non thinking of hospitals and first responders when I when I talk about that group.
The team was also successful lowering our cost structure.
It's really a combination of our model simply working the way it works.
One item that assisted us this quarter.
As.
Is.
We've enjoyed great growth over the years, we are a promote from within the organization.
That means you're finding.
New talent everyday in the organization and the best way to do that at least the best way to we found.
As you have constant relationships with for your state colleges to your technical schools and you find folks everyday to come workforce part time, and so we have a fair number of full time students at work for us part time.
Well as you can appreciate in the spring of 2020.
With all the schools closing we lost some employees.
We fully expect in work and and we are maintaining contact with that group because we want them back when they are back in school, but in the short term that helped us a little bit on managing the PNM and you see that shine through on or Ft numbers again, that's the model working as it should work in an environment like this.
Yeah on the final piece and and and that is.
If you if you truly.
Believe in a decentralized decision making structure.
You can move faster than anybody else in the marketplace and I think that was demonstrated this quarter in both our ability to move quickly and rainy and expenses.
But also to move quickly on finding sort of supply of critically needed safety products.
And if there's anything that you take away from this quarter it will or when we think back to this quarter in the.
In the years of Fastenal.
Trusting others is probably the most important lessons probably one of the greatest legacies that Bob Herlin just get into this organization.
Have you ever done in here for a second I'm flipping to the second bullet in the flip book and you know our five priorities to the quarter was.
The trust in fairness.
Trust each other be fair with each other support each other.
And if somebody needs to be home with a with a child today or a parent or something else.
Flexible that person schedule if somebody.
Has a.
Person in their household that that has.
Is particularly susceptible to the negative aspects of cobot 19.
Be mindful that and conduct yourself accordingly in our branch in our support area wherever you are within the organization.
And that's up and maintain a safe environment for our people.
That concludes our people's family and for customers and their families.
Customers that allow us to come into their business every day to fill vending machines the stock product on a production floor or in a binstock, we have an obligation to Venezuela to maintain a safe environment.
Support the people directly involved in a pandemic.
There's a hurdles here.
Be there to support them make sure you're reaching out to them to see what they need.
And be creative and finding solutions for them.
Sustain of supply chain of critical products for our regular customers as well they are the fabric of our society and.
If you think about the infrastructure of this nation or the planet or you think about.
So things that you need in your day to day life, we supply the folks that make that product for you and they need a safe and resilient source supply.
Oh, the other Oh suggested I gave some folks and this is probably a bad talking.
Was oh, maybe shut off the TV.
You know social media, there's more garbage there than value. Unfortunately.
Talk to each other talk to your customer solve problems that's the task of today.
[noise] going down on page three.
If the effects of this PE surge in holding will touch on it in more detail, but the effects of the surgeon.
His notably shows up in our lower gross margin safety products is not the higher gross margin product.
Our our task in the quarter was getting product to market quickly, sometimes that meant flying product that should be on ship, sometimes that meant a using third party transportation to move it in a different fashion, it's not an inexpensive proposition, but but it brought the product to market quickly and that was more important lists.
Environment you see that's open our gross margin I believe that will recover as we move into third quarter.
The the faster sales daily sales to hub picks from the venting dispensers in more of that vending expenses in the second.
A point to a bottoming of the environment, we operate in in April and improved to.
Trends in both May and June I.
I don't think there's anything new there for the folks that are looking at our monthly numbers, but just started share that.
The we added two charts this.
Quarters.
Discussion.
And with a 100000 vending devices deployed across 25 countries I think we'd probably has a good a view into whats happening real time is exists.
So the first is looking at product dispenses and because I don't want to be in a situation where the analyst community is asking for numbers from now into infinity.
We index everything back October to 100.
And but it's really about looking at a machine out there. That's this for a group machines that dispensing 100 items per day.
And what are the the trends of that population.
And as you go through and the reason we chose october's the cut off it was well before the start of Cobot 19.
So the the gold mine you see is is a combination of the last four years of history and you can see some some points that move around so you see the Thanksgiving drop off.
You see a little surged before Christmas and that's probably a related to a lot of we have a bunch of customers in E Commerce World and there's probably a bunch of activity at spikes up there.
You see a drop off around Christmas new year.
January and February kind of tread water and you see based on history.
That if we started 100, we'll have 103 dispenses come early March this year, we were at 105.
A couple of weeks later, you see that the noise that's around Easter, but you also see the direct impact the cobot 19.
You see of.
Dramatic shift as that Blue line drops in bottoms out in mid April at 76 relative to the 100 dispenses we were doing back on October.
As we move into June you see that 109 is about the number we had expected for the dip that occurs around July 4th.
This year, we're at 93, so about.
About a 600 basis points Delta and you'd see by fall, we would expect to be at about 113. This if you have a maybe have some nominal inflation in there that would tell me our vending business is growing about 14% of year.
Welcome to the next page now we're looking at it not from a how much is dispensing, but how many unique users are accessing machine.
Again using that logic of 100 unique users last October you can see a little a little fluttering around Thanksgiving you see obviously the drop off around Christmas.
History would say would say we should be at about 104.
People accessing.
Instead of 100 come early March Thats, primarily a result of we're adding new devices every month and and so you get the growth because of that.
This year, we are actually at a 100 607.
And then again you see the little fluttering around Easter, but you see the dramatic drop off as it because the Kobin 19, and we bottomed out at about 85.
The marketplace has has since recovered we're at about 101, it's treading water as you can see through much of June.
And.
But history says we should be at about 109.
So, but at 800 basis point Delta and then come fall, we pick out at about 119, which started new cycle again as we go onto the new year. This is this is more in my mind about people and employment.
The reason I have shared this number.
Internally I think it's good for us to understand where we are in the marketplace and you can see the very conservative stance, we're taking in managing the expenses in the business and we intend to continue that as we go into Q3.
Because.
It's still a week very weak environment, holding will touch on that little more detail.
Fortunately for us.
We were able to find additional business in the in the second quarter and and mix of eliminate auto loans.
Switching to page six in the flipbook.
Our vending and onsite signings bottomed in April I don't think has any surprised by that they did improve in both may and June.
Vending an onsite is critical for us that's that's two of our principal growth drivers and they really allow us to build they don't maybe have the same type of impact in the last 90 days or even the next 30 or 60 days the vending does but the on site is about building that momentum for grew.
Both as we go into the tail end of this year and into 2021, and so we're very very attuned to.
Getting signings back because we we need that for market share gains as we go into the future.
We signed 40 on sites in the in the quarter, our our goal coming in internally our discussions all about how close can we get to a 100 per quarter.
Holding a shared numbers in the past we've since pulled those those numbers for the year, but our I'm pleased to say that the of the 40, we signed in the quarter 20 of those who are in June so lease were exiting the quarter with up some positive momentum, but it's still at a lower level.
The if you look at vending hundred is the same entre, but there is not per quarter. It's it's how close if we get to 100 signings per day last few years, we've been in the eighties can we moved into the Ninetys to then over time moving into the hundreds.
We are moving north of 100.
That dropped off in March as well.
On April was pretty low.
We gained some traction in June we signed 69 per day. So we're almost back to 70, it's still at a lower level than last few years, but it's telling me that we can engage with customers and discounting environment.
Just had to be more creative with how you communicate and and how you tell the story.
Finally, ecommerce sales grew about 13.5% in the second quarter.
They were climbing as we went into May and June one thing that hurt our ecommerce numbers during the quarter is we put in place a very strict allocation process.
For our coal that 19 products. Thank mass thing based shields, thank thermometers sanitation products et cetera, So that we essentially shut that product off from buying electronically and you had to call the branch or call. Your contact to source that because that was our best means to me.
Managed our supply chain of that product. So we had a stable supply for everybody and could could hold back.
The the urged to hoard.
With that I will turn it over to hold the right. Thanks, Dan I'll start on slide seven.
Second quarter 2020 sales were up 10.3%. It was a quarter that was marked by two really distinct trends both evolving from the social and business efforts to manage the covert 19 pandemic.
The first trend was the weakening of the economy due to stay at home measures and steps taken by companies to protect their workforce.
This caused customers to operate at greatly reduced utilization and even shut down through parts of the quarter, something which particularly impacted our onsites conditions did improve as the quarter progressed, a pattern exemplified by our fastener daily sales, which declined 22.5% in April 15.3% in May and 11.4% in June.
That same pattern was evident in the vending David advantage that Dan discussed as well as our distribution center picks we believe demand in our traditional business is still 10% to 15% below first quarter levels and we have seen some flattening in those trends in the last few weeks.
The second trend was a surge in demand for certain products that were critical to governments healthcare providers in certain businesses in handling the pandemic.
We estimate the search sales of PE sanitizer and other products contributed 350 to 360 million or roughly 25 percentage points of growth in the quarter.
These volumes, which drove 116% growth in our safety products in 260% growth in our government healthcare business more than offset weak underlying conditions in our traditional business.
Mostly sold through our pipeline of surge orders at this time.
The near term outlook remains difficult to project the reopening of industry is occurring in fits and starts as customers reconstitute their workforces and their supply chains and the trends in our internal metrics and a June PMI, a 52.6 are encouraging.
Further while we do not expect a second quarter style surge in PE and sanitizer products because the marketplace. Today is much better supplied the recent increase in coated 19 infections and expanded customer list in key industries should sustain some degree of safety growth.
On the other hand, it is less clear how that increase in infections will affect the pace of reopening I would characterize the tone in the field to be one of cautious optimism for the third quarter of 2020.
Now to slide eight.
Gross margin was 44.5% in the second quarter of 2020 down 240 basis points versus the second quarter of 2019.
Roughly one third of this decline related to mix, which was better than we would've expected at the start of the quarter, while the negative effects of product mix rose sharply. This was partly offset by customer mix as closures in April and May caused our onsites was lower gross margins to underperform total company sales.
We expect these dynamics to reverse as conditions normalize.
Roughly one third of the decline in our gross margin related to lower safety margins, a byproduct of sourcing product quickly from nontraditional channels.
This should be fully recovered, though it may take a couple of quarters as an oversupply of certain pp, particularly masks impacting margins for those products.
The remaining decline in gross margin is from cyclical and organizational factors, such as rebates and de leveraging of certain fixed costs with the exception of specific lines with unique supply demand profiles, such as three ply masks.
The pricing environment is stable.
This decline in gross margin was more than offset by leveraging invest DNA, which at 23.6% of sales was 320 basis points better than in the second quarter of 2019.
Most of our branch network did not have meaningful surge orders and reacted to weakness in their traditional business by reducing ft. He by 9.4% mostly through a reduction in part time labor, a 15% and hours worked at 23%.
This resulted in 240 basis points of leverage over labor in the second quarter.
The remaining leverage was from tight control of costs related to travel training occupancy et cetera, and produced an operating margin of 20.9% up 80 basis points and the incremental margin of 29%.
Given still challenging macro conditions, we will continue to tightly control discretionary operating costs in the third quarter 2020.
Putting it all together, we reported second quarter 2020, EPS of 42 cents up 16.7% from 36 cents in the second quarter of 2019.
Turning to slide seven.
Operating cash flow of 251 million.
Slide nine.
I'm, sorry, turning to slide nine those.
Those vending chart threw me.
On slide nine operating cash flow of 251 million in the second quarter 2020 was 105% of net income.
The increase in operating cash flow versus the second quarter of 2019 was due to 111 million in deferred taxes as part of the cares Act and higher earnings.
104 million of the deferred taxes will be paid in the third quarter of 2020.
Accounts receivable was up 7.5%, including approximately 75 million related to coded that we believe will be mostly paid in the third quarter of 2020.
Inventories were up 4.1%, including approximately 50 million related to co bid that we will work down over the course of the year.
We deployed our balance sheet aggressively through second quarter of 2020 to retain customer inventories. While they were shuttered are operated severely depressed levels as well as to secure and move critical products quickly.
Net capital spending in the second quarter of 2020 was 38 million down from $67 million in the second quarter of 2019, which was expected given reduce needs for new hub capacity. After the investments made in 2019, but also reflects lower vending and truck spending our capital spending range for 2020 remains 155.
Million to $180 million.
We returned cash to shareholders in the quarter in the form of $143 million dividends.
From a liquidity standpoint, we finished the second quarter of 2020 with debt at 12.7% total capital up versus the fourth quarter of 2019 due to the March 2020, apex asset acquisition, but below the year ago level of 16.6%.
We did convert our variable rate revolver debt to fixed debt under our master note agreement during the period and as a result, we have about 660 million available on our existing credit lines. This leaves us with ample capacity to pay deferred taxes, and our dividend as well as to support the reopening of our customers or any kobin related needs that may yet emerge.
This is all for our whole presentations and with that operator, we'll take questions.
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First question is coming from Josh.
For the ski Morgan Stanley. Please go ahead.
Hey, thanks, everybody as well.
Hi, Josh.
Morning, Holden just first first question from a comment you made flattening in the past few weeks I guess, depending on whether I will get the charts that are kind of index.
To pass points in time, or just think about year over year can you just help me I'm happy that means that business getting better in the last few weeks relative to how the quarter ended or are you trying to say that you've seen some some papering. It wasn't wasn't entirely clear apologize maybe being a little slow on the uptick there.
So I think if you look at page for which is the product dispenses through vending what you'll see is a bottom in April that really recovered nicely through may but over the last call. The three four weeks, you've really seen a flattening in the number of vending dispenses that that we've seen relative to prior weeks and I think.
Thats really what I'm, referring to we've seen something similar in hub picks.
And so I think would that kind of tells US is the last few weeks you have that steady increase that we've been seeing week upon week, there for us for a month and a half two months.
Really is kind of flattened out in the last couple of weeks now to what degree is that because of the timing of the fourth of July holiday.
To what degree is that a function of an increase infections and maybe people reacting in certain parts of the country to that we don't know that at this point.
I think there what I was referring to in the dialogue was really what you see on that chart on slide four.
Got it I guess, if I had to look at like a fastener only version of that stripping out some of the safety elements.
Do you think it with what the same or would it have more of a steady increase kind of more representative of the day to day business as it were.
I think you would probably look the same it's worth noting that we don't van fasteners.
So then.
But safety that rather than.
But if I think about the trend in hub picks which is much broader than just spending right and they show a very similar pattern.
I think that you're I think thats, what youre seeing but like I said that the cause of it is difficult to know.
This chart really this flattening really occurs around around a significant holiday and timing of the weaken matter and that sort of thing. So it's really difficult to know what that means in terms of the remainder of July and the remainder of the of the third quarter, but it's it's their ads there to sort of look at and we'll see how that plays.
Out in coming weeks.
Got it that's helpful I'll jump back in queue I'm sure there's lot of people ask question.
Sure. Thanks, Jeff.
Thank you. Our next question is coming from David Manthey of Baird. Please go ahead.
Hey, good morning, guys.
Today first off.
I think that 2021 was supposed to be the year that on sites would be gaining ground on operating margin as you're adding fewer to the bucket and and as the existing on sites were improving profitability should we as we take about going through the downturn here should we think about.
Moving that to the right a year or do you still anticipate maybe 2022, we will start to see on sites as a as a group.
Improving in terms of profitability actually helping the overall margin.
I'll throw out a thought on it now that Holden.
Correct me if I go awry.
You are correct with your comment about 2021 that are thinking is the same I think the there is too there's a couple of competing things going on one will be a follower.
If our existing on sites are added depressed level and that depressed level stays in place that wreaks havoc to what you're talking about.
If that if we work our way out of that depressed level on the existing onsites.
All of sudden their operating margin improves because their volumes improving we're absorbing our cost.
If you think of the impact of of new onsite coming in.
Actually that would that would help us in 2021 on unfortunately that help us because we'd have fewer drain from the new Onsites, we wouldn't have the revenue growth, but in the first year there the onsites actually hurt operating margin and so your your comment about mix change is really a function of as we get now four years into.
To this accelerated onsite signings and were and it becomes a more balanced mix a lower number in one year old actually helped out in a short term I don't want that help.
We wanted signings.
But mathematically so I don't know that it pushes it out and holding might have a better insight because he's closer to the numbers than I, yeah I know its.
For better for worse, what has occurred nothing has changed in terms of our overall view of how this plays out but what has occurred as weve injected a couple more variables in that we didnt necessarily anticipate injecting in I think Dan really spoke about those of the variables that was.
Causing us to think about the timing originally the one that comes to mind for me is.
One reason the margin would get better is because the average size per onsite gets better.
And you know we were going to see those lines begin to cross in 2020, and therefore lead to some better improvement in 2021.
I still think Thats the key metric David so.
Depending on how all these variables play out over the next six to 12 months I think the key metric is is the average size per onsite bottoming out and beginning to rise in a sustainable fashion and.
Is it possible that that point can get pushed out a bit by all these moving pieces that are playing out yet I think that thats possible I think those are cyclical factors as opposed to secular ones right. I think the overall dynamic is still very much in place very much in force unfortunate we've had some other variables that get injected into it but I still believe that once the.
The average size per onsite begins to move up that we're going to start to see the leverage and incremental margins in that business move up if that slides a couple of quarters because of some of the things that that's happening it's possible, but I don't think its change in anyway. The overall secular picture around on sites and improving profitability and and returns.
Got it okay and.
It's been a whilst have asked this question and mix may have changed overtime, but when you look at Fastenal business today, particularly in the manufacturing verticals.
Compared to industrial production.
What verticals do you see the company right now is being slightly overweight versus slightly under way can you just give us an idea of the maybe the top one or two there.
For how to answer that question the we're still a heavy.
Heavy manufacturing company of course.
And heavy machinery is a big portion of that.
No I think that's a natural byproduct of the kind of products that we serve our history.
You know the markets that we typically address et cetera. So I'm not sure that were overweight, but I will tell you we'd like to move our construction mix up.
We'd like to move our government and education mix up.
And I think that that's occurred over time, we'd like to see it happened faster and so if I think going forward, we'll manufacturing be slightly smaller and the mix than it is today relative to some of these governments in healthcare and educational opportunities you construction probably.
That's that's just us moving into additional markets and additional opportunities and making progress in those.
So that's probably how I'd characterize it down if you have a different perspective.
If you think about our our manufacturing business about half of our manufacturing business to pulled his point is heavy manufacturing and in a big chunk of that probably.
Two thirds of that would be heavy equipment manufacturing within that heavy manufacturing sub category.
And you picked up I saw I read the piece you put our earlier this morning, Dave we picked up on the fact that manufacturing did weaken a little bit in June.
And and that's where the weakening was aided it gained some strength in may.
Was down 24% in in April and it was down 10 and down 14 now in June I don't know how much comps from last year played into that because I just don't have as the that in front of me, but thats. It thats a piece about 40% of our our manufacturing business is broadly in led Holden describes on my end took much each year.
As media manufacturing I'll, let him to find what that means.
That was just marginally negative in June the remaining which is about 10% of our manufacturing, which probably has a lot of food in it as well.
Thats actually growing double digits in April may and June worlds, only growing 9% back in March.
Okay, all right, but if you are operating in Oklahoma, Yeah, if you're operating in Oklahoma, Texas, Louisiana, That's a pretty tough manufacturing environment right now because there is we do terminal business and oil and gas.
Mhm.
Okay, all right. Thanks, a lot there.
Thanks. Thank you. Our next question is coming from.
The Missouri of Jefferies. Please go ahead.
Good good morning, Thank you.
My question was just on the.
On your captive trucking network I think you mentioned using third party transport any thoughts as to how you're thinking about freight and just longer term what kind of.
What kind of competitive advantage you are talking that work has historically you know you've talked about optimizing that just curious where that stands.
No so.
I don't think our thought process on on freight using our own captive network has changed at all during this.
What we did do as we pulled our our lowest day of the weak for shipments is Tuesday, so our our shipment the goes out our truck routes Gault Monday night, we effectively cancel those in April and branches that were getting five trucks nominating Ford trucks, and we really challenged out those branches to work with your customer that first.
And your inventory stocking. So we didn't you know not so we didn't cancel Tuesday trucks, and then we freight in a bunch of stuff because we need the product we did a really nice job with Pat now the savings there is in some labor it's in fuel obviously the trucks. Unfortunately, all we can do on that day as park.
And.
And so as they go off lease we can we can reduce some of those if it goes for the year.
We used a fair amount for third party because our trucking network is really as this agile trucking.
System that lives and breathes within the Fastenal supply chain.
And the surge orders, but we weren't selling you know a box or a pilot product, we were selling truckloads or container loads and so that's what really prompted the need to use probably more third party than we had typically because it was just a different type of movement.
Where is our trucking network I think of it as an LTL network. It does small parcel those LTL and it's very agile and nimble, but but the but if you. If you want to move the truckload from pointing at a point be.
It might be more cost effective the moving on one of our trucks and just try that there were moving on third party Who's got with an open lane.
The combination of under utilizing some of our fleet.
As well as if you look at how much product to be move not on our fleet, but.
On third party.
Probably six to seven percentage points higher in this quarter than it has been in recent quarters and again that carries an incremental cost to it as well, but it's a reflection of some of the product that we did move but those are some of the inefficiencies that get created in the network in an environment like this.
Got it. Thank you and just a follow up question I'll turn it over just what are you looking for in terms of visibility before you start adding cost back into the system.
Specifically headcount I know you mentioned your cautiously optimistic today Bart.
Any thoughts as to work what you're looking at it internally there before you are costs back. Thank you.
Every Wednesday I get an update on those vending stats you looked at and I'm watching those vending stats because.
Here's a billion dollar business that that touches on a daily basis, and I mean, seven days a week in across 25 countries across a big piece of our customer base. You know I think goes on the the latest.
Employment numbers that came out and they were talking about how they were adjusting and the methods. We learned more about the methods for doing unemployment reporting at the federal level and I felt like GE is one thing is going to lead the board and into can prove the accuracy here, we have something that looks at our business. Every day every week, it's incredibly accurate when I see those trends move will be more comfortable to picks.
Steps.
Got it thank you, but yeah, I think to add to that.
We'll see some expenses come back I mean, we had movement travel food things of that nature. Among our sales of non Salesforce I was down 60% just about 60% in the second quarter.
Do I expect that to be down 60% in the third quarter, probably not will it be down significantly in all likelihood of will if you talk to the RV piece on how they're viewing labor.
At this point, there's still looking to be very tight with what they add back and as they add if those options, but at the present themselves, they're more likely to begin by adding hours because I think there's plenty of capacity in our part time workforce today to add hours before we have to add more more heads are more bodies. So.
The we're still going to operate I think well below sort of the Q1 level of expenses and I think the market justifies that but would you expect to see some increase as the market today, let's really different than what we thought it might look like three months ago sure, but we're certainly very fairly tight nets controlled by the field.
Okay. Thank you.
Sure. Thank you. Our next question is coming from Ryan Merkel of William Blair. Please go ahead.
Hey, guys, maybe I'll ask the key safety questions.
I think first off any color on why safety sales in June only tapered slightly I think holding you were expecting maybe a bigger fall off and I think one of your peers, who reported mentioned that hey customers already bought so they saw safety call up pretty meaningfully in June.
I will say the search the search business was still pretty healthy in June and I think that really gets to it. So in both may and June I would say the surge orders outperformed what I might have expected going into the month and that's a positive thing not only for us as an organization buffer what we can do for customers and for the marketplace in general.
So I think thats great.
But I would say the surge orders just simply were better than I might have expected going into the month now I will caution.
I think I did suggest at the time of the May sales release that we would see some more in June they would taper off they didn't taper off as much as we thought but I did indicate that I didn't think that surge orders would be meaningful as you roll into the third quarter I still believe that.
I think that Weve large like we've largely sort of taking care of the pipeline of the initial surge.
The question at this point is whether or not theres going to be a second pipeline filling event right and you are seeing a lot of cobot infections moving up we have a lot of new customers that we absolutely expect to turn.
The way from being sort of a onetime supplier search product and turning it into long term regular customers.
But at the same time the marketplace right now is much better supply. The these products than it was three months ago when when when these surged pipeline built off so.
I believe that in the third quarter.
I think safety will grow despite the market still being a little bit underwater and I think that some of what youre seeing in the market to be helpful. But I think you're looking at growth that's more like 10% to 15% not 116% and that's how I'd characterize the environment today.
The only thing I'd add to it is.
You know, there's still a lot of noise going on.
Everyday you see something new going on in a particular geographic area.
Yes.
I think we've done a nice job our government team, particularly has done a really nice job.
Of helping the public be aware of we are a reliable source supply and.
More stuff came onto the would work in June than I would've expected.
And then just last week I was talking to one of our regional Vice Presidents and he was talking about an onsite. We just signed and it was it was completely related to somebody that wasn't a business partner of ours before but they were sourcing product before they learned about what we do and how we go to market when we signed an onsite with them.
And so I think part of what's helping US right now is word of mouth in the end market.
We're still getting calls yesterday I got it I'll sit in the board meeting and see the tax from one of our.
One of our.
As a sales and there's some stuff come out of the work again.
Please don't read into that Torness, just said, it's going to its going to take off again in Q3, but it's there's still stuff that comes out of the were worth and I think part of it is the marketplace a non traditional marketplace for us as seeing us as a very valuable supply chain partner.
Because one of the things that has come out of this is and you can you see news unfortunate new stories about it.
There's a lot of garbage in the marketplace as far as product.
We were founded by mechanical engineer, we started with fasteners theres nothing that requires better QC than fasteners, because it's holding stuff together when we sell when when we sourced something.
We're we're in the plant we're testing the product in a way that maybe isn't existing existing in all.
All sources of supply.
And so.
People Trust us.
And that's really important in this environment.
Another way to think at the change perhaps is.
If I look at where the safety mix is through the first seven days of the business. What's bear in mind is only seven days.
But safety is about 24% of revenues through the first seven days of July compare that to the second quarter was 34% of revenues.
And so you fully seem that July is not going to be were June was in those numbers unless something changes as it relates to the current cobot infections and thats something that we have yet to be seen I think it's just as meaningful to suggest or point out that.
At this time last year safety was 17 18, 19% right and so that's kind of the dynamic that you're seeing and that's why we suggest that you're not going to see surged volumes in the third quarter in July like you've seen it like you saw in the second quarter, but we'll see how the market evolves.
Okay, Yes helpful color I I'm, having a pretty tough time forecasting three q. I think like everyone else, but that's helpful.
So you started to answer Dan My second question, a little bit there, but just stepping back high level in a post cobot world is your value props the customer increase in your view and and then related any change in the way that you go to market or is access to facilities not going to change that much in your view.
The I think the value prop has has expanded particularly for folks outside our historical customer base, because they didnt I mean, they didn't notice as well you know and we've been we've been we've been a serving the manufacturing and construction sectors for years, we're still kind of a new player in some of the other spaces.
Yes, so I think I think our value proposition the awareness to it has improved.
I think.
One of the outcomes of this I think we've demonstrated proven to ourselves that we can do some things that maybe we didn't even realize we could do because while we have a substantial safety business I don't want to to to make light of it half of our safety business was because of our vending business and and so we've we've we've grown great resources in that industry in that marketplace.
But I don't think we even realized how how strong they were and this gave us a chance to to flex that muscle little bit demonstrated and so what it means going forward.
That one I'm really not sure of we we had to cancel our customer show in April as you're aware.
And Thats, a big that's a big event for us because people get a chance to get exposed a little deeper into the organization. Then you meet with suppliers you learn about what we do have a go to market.
It's a very transparent events from the standpoint of gaining comfort because.
A supplier when they really turned their business over to us that's a huge trust thing and they learned that this is a group of folks that I can rely on and not having that.
That's a tough one but we have going into the fall a bunch of virtual events that that we're developing and we'll be doing and there.
We really I think Kevin good plan, there, we're going to figure out a way to to promote vending to promote onsite to promote the fast on business model in the marketplace and.
And.
I think maybe we'll figure out way to do a better but time will tell.
Perfect. Thank you.
Hey, Thanks Ren Thanks.
Thank you once again, if you do have a question you May press star one on your telephone keypad at this time.
Okay, that's coming from Nigel Coe of Wolfe Research. Please go ahead.
Hi, good morning, guys.
Ill pick up from a I think Brian So we've touched on the topic that was going to dig into as well.
In the sort of the the traditional retail will be seen a pre marked shift between physical business E commerce and doesn't feel like you've seen that I'm just wondering in opposed to book do you expect.
E commerce to accelerate the expense of physical so so not necessarily on size just you physical those.
You know if you think about how we've kind of presented the story and I talked with us, but at the annual meeting and.
Is we really when you when you boil down business, that's going into our end markets were a b to B model when you look at that business.
The bulk of the dollars are planned spend.
A smaller piece the dollars our transactional spend.
And what we've really built with with our started with pastors, especially the OEM pastors and the MRO as it relates to been stocks and now you know.
Got much deeper with our vending.
Is we're really a great supplier for planned spend and because we have the infrastructure for planned spend we're really going to transactional too so.
One of the reasons, our ecommerce numbers are different than our peers is.
Most of products our customers buy from us.
They don't order.
Interest, it's there when they need it might be in vending machine it might be in a been it might be on a production floor.
We know their needs and so it's kind of like that add that used to always see of the person, reaching in and grabbing that orange juice, and there's a hand reach and through from the volume or the.
Sunworks or whatever you call out.
We're orange has grown and but but the point is if you're if you're really good that supply chain partnership.
If you start ordering product and that changes are dynamic now.
We see on that piece of business that is transactional via great partner, and that's where we think things like our vending come into play. So one thing we really haven't talked about is.
During the during the last few months, we've rolled out about 400 vending machines to the front the branch locations. So when a customer call us up to order something or better yet or does it online we put it in the locker because the vending is the natural social distance tool.
Ben stocks is a natural social distance tool. So we think we're actually poised to be more successful at at creating a safe reliable supply chain and yet instilling so-so distance because it's inherently more efficient.
And so I think it serves us well and improves.
Brian's last question the value proposition, because especially since we did the transaction with apex back in March we now can do things with vending.
That we couldn't have done three and four and five months ago and now we own the technology. So we can we can take it anywhere that that are the marketplace wants us to take it.
I would probably add I mean, our fundamental value proposition is one of total cost of ownership savings.
And as Dan alluded to what we try to do for customers remove them from the process of doing something which is non core to them, which is sourcing product.
And.
The E Commerce path has a lot of value in the channel.
But it still is going to have heavily involved the the customer in the process or procuring product and as long as customers continue to see value in the case of an onsite and our assuming the inventory in our assuming the grid duties or in vending.
Seeing value in the data that comes out of that.
The availability on the at the point of use on the plant. That's those just are things that can be replicated in E commerce environment. So.
Our view to see a major change.
Like you're suggesting would have to see a major change in what customers value, which is a state are willing to accept more expense in their sourcing operations.
Then than they have to if they use they use our approach the marketplace and we just don't think thats going to happen.
Thats great color, Thanks, guys and then.
I want to understand what you mean by the safety.
Safety is much both applied in in the market specifically within some of the nontraditional customer base and is that because the traditional into the service into those verticals have kind of caught up nickel inventory.
We'll do customers have a lot of inventory themselves what do you actually mean by by that comment.
It's probably some combination of all of it I think three months ago. When this crisis hit remember, China was actually down and coming back up and so you weren't fully producing product at the kind of scale that you needed to deal with the issue of coded as it hit Europe in the U.S. and so I think three months ago, you had supply restrictions.
I think those supply restrictions of largely cleaned up the three months ago. The supply chain was in shock and it took a while for the supply chain to figure out where to go to get product I think that the supply chains figured that out and I do suspect that there are customers out there that over purchased product because of the uncertainty of the situation and it's probably in the chain.
I think the last piece is probably as important an element of all of them I mean, how many people in this call went out but six months, where the toilet paper in March.
It was ridiculous what you'd see going out and carts at establishments as it relates to just basic household supplies.
And when you have that kind of a surge in demand I mean, one thing that we did and I think its resonated well with our customer base, especially the including our new customer base.
Is we put in place.
Very commonsensical.
Allocation process, and we've really tried to share instead delighted day of that process with our customers and I think that even changes the ordering pattern of a customers because all of a sudden they get what we're doing they understand it and.
Now, they're buying to demand, they're not buying out a panic.
And that's what I keep harping on this point I'm, sorry, if I am beneath the death Thats, what a supply chain partner does is you shed light so here's how the system works and here's how and why we can support your needs and where we can be reliable.
And.
That's probably changing part of a two because there's less panic buying going on maybe.
Maybe broader very early on this organization was able to bring or reorganization to chaos and I think today the market has less chaos.
And it is fairly well supplied with the key products like replies and things of that nature and by the way in that particular line Thats also having an impact on sort of the pricing in the marketplace as well.
Very clear access.
Our next question.
From Chris Dankert.
Of Longbow Research. Please go ahead.
No we have time for one more do you want to wrap it up.
Okay.
Yeah, I want to answer that I talked to long.
Yes.
Thanks, guys.
With me in here I guess, I'm, just kind of circling back here.
How many of these non traditional customers have indicated there is the opportunity for a larger relationship in some of this just hey look what support the governments and hospitals and healthcare workers and this time a need.
Thats going to be just a short term sugar rush or or can some of these relationships extend into 2021 beyond and how do you kind of grow from there.
I think our safety teams have talked about probably of full year quarter of the relationships that we created.
Were entered into in sort of a onetime surge capacity can be.
Forged into longer term relationships.
Now when I say a quarter like some of those relationships, we're always going to be transactional right.
Either because they were using us because their official supply wasn't available no go back that relationship or what have you but.
There is an expectation of the safety teams that fully a quarter of those relationships from the second quarter could be extended into long term relationships as opposed to short term transactional ones and obviously those are going to be the ones that are the largest opportunities from our perspective. So.
One thing I'll I'll add to that sorry, I didn't set up is.
I think awareness as part of the game.
For a lot of these customers they probably weren't they didnt think of us as at the supply chain partner in their space in their industry I thought of US all those guys if I'm not the bolt.
Or you know there more of a manufacturing and industrial construction supplier. They normally sell what we what we source. So I think awareness is an important element here I believe also what you run into with a lot of those.
Marketplaces, they buy through consortiums.
And up and if you're if you're not necessarily a player in that space, you're not on their radar and I wouldn't be surprised and this is forward looking now so like seven certainly here to qualify everything I'm going to say I wouldn't be surprised to see some customers say hey through their consortium, we want fast all in.
Group, so that we can source from them and it's easier because we went through too many hurdles to buy from them in March or April and we need to make this easier I think you will see some of that and Eric I think it hasn't staying power I think it's all about becoming aware to what we can bring to their table comes at the other day, it's not about what fast on does it it's about the value we can be.
Turning to the customer.
And in awareness as a key part yes.
Yes, yes glad to hear that Theres, certainly some some real tangible opportunity there.
And then hold you touched on this I'd like to circle back real quick I guess fastenal deals in a fairly high amount of branch Pacific stock in most quarters, but obviously, we're seeing a lot more kind of in response to pandemic.
The supply relationships are established I guess.
The impact mix going forward is it reasonable to think that getting these these rebate relationships in place can kind of helped offset some of that gross margin pressure back half of the year.
Well I'm not sure that there is rebates are typically.
Hi negotiated on a periodic basis im not sure that that's going to have any impact on the back half of the year.
I'm struggling a little bit was sort of the where you're going with the question but.
Yeah, I mean, if you could let me know exactly what you're looking for.
Thanks.
No if you're dealing with just new suppliers that you have no history with after you that you're going to get a tougher cost basis than if you are establishing relationships you start work out better pricing that with the thrust of my question.
Got it right okay on the supply side that my apologies. So we one of the reasons our safety margin in the second quarter was probably 250 to 350 basis points lower than it needs to be and frankly lower than it was in Q1 and last year.
And that is significantly because of some of the things that you're talking about.
Now going forward.
Weve, certainly introduced ourselves to new suppliers and data us and will no doubt that those suppliers and if their suppliers that are worth carrying forward going forward than I'm sure, we'll do that and we'll do that in a more traditional relationship.
Maybe there will be rebates in there or maybe there'll be a different agreement on pricing as two parties begin to trust. Each other I think that it becomes easier to optimize that relationship and that can happen, but worst case scenario again as you as the marketplace normalizes, we will go back to our normal dynamics with our normal suppliers.
As with our normal.
You know means of of transporting product about and.
I would expect that we will get that to 50 to 350 basis points back now will that happen in Threeq, you, probably not because as I talked about we do have some product in inventory that where some of the price cost dynamics are a little bit challenging and I think we have to work through that over the course of the year and.
Again, there's probably going to be some additional kobin type business that happens based on the infection rates and so do I think we get the 250 to 350 back in the third quarter.
Probably not but I think we'll make substantial progress and I think will will normalize things as the year progresses in that particular product line.
Got it thanks for the color guys take care.
Go ahead Sir.
Just going to say, it's two minutes to the hour.
Again, thank you for everybody for participating in the call today.
My thanks to up to the Blue team at Fastenal for what you did in the in the last three four months of setting your up your personal fear as a side at times and and pursuing the goal of.
We have a strong conservative balance sheet, we can make use of it in this environment the create us a fast us to create speed and resilient supply chain.
And everybody to purpose and the reason I guess the morning, I think we found great purpose for the last four months and.
Thank you.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines at this time and have a wonderful day.
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