Q3 2020 Fastenal Co Earnings Call
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Greetings and welcome to the possible 2023rd quarter earnings results Conference call at this time, all participants on a listen only mode.
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It is now my pleasure to introduce your host Ms. Ellen Stope Fastenal. Thank you Ma'am. Please go ahead.
Welcome to the South and all company 2023rd quarter Earnings Conference call. This call will be hosted by Dan Florness, Our President and Chief Executive Officer, and Holden Lewis, Our Chief Financial Officer, the call will last for up to one hour and will start with a general overview of our quarterly results and operations with the remainder of the time be open for questions and answers today's conference call.
The proprietary Fastenal presentation and is being recorded by Fastenal no recording reproduction transmission or distribution of todays call is permitted without fastenals consent. This call is being audio simulcast on the internet via the Fastenal Investor Relations homepage industry that fast and all dotcom a replay of the webcast will be available on the website until December 2000.
And 20 at Midnight Central time as a reminder, today's conference call May include statements regarding the company's future plans and prospects. These statements are based on our current expectations and we undertake no duty to update them. It is important to note that the company's actual results may differ materially from those anticipated factors that could cause actual results to differ from anticipated results are contained in the.
Companys 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.
Thank you Ellen and good morning, everybody and thank you for joining us for the third quarter earnings call.
Before I start with the football just thought I'd share a few thoughts we do some simple things at Fastenal, we find great people.
We asked him to join them then we give them a reason to stay.
One of the one on the doorbell aspects of my role here at Fastenal is a fall of each year.
Send a letter to all of our 25 year employees.
Over 15 your employees.
And then we typically with the 25 year employees, we celebrate them at our.
National meeting held in December of each year, obviously this year won't be a.
Held in person, but but.
It's a great opportunity to recognize great service to the organization and folks that that so all the reasons compelling enough that they have spent much of their adult life faster organization.
If I look at the third quarter of this year, we actually have six people I get to work with each and every day that that hit a milestone and then play moves fastenal so back in July.
Lee Hein celebrated 35 years with Fastenal Rodney Hill, a little bit later in the month celebrated 20 years Rodney held for sales and you don't know who he is he is our senior vice president and our national accounts team.
In August we had two employees celebrated the anniversary again these are folks I work with.
Hi, Holden Lewis, who you'll hear from shortly it for years.
And.
And though but on top of that for years.
Wealth of knowledge because many of you know that he spent a good chunk of his career in the sell side community and when when I stepped on that role I wanted to bring somebody in who I'd I'd known for years, who I was really impressed with their body of work.
And and hold has been with US for years in August build Rusckowski. Many of you have heard of that name before he is our leader in our western United States business unit.
Yes, T. celebrated 25 years I remember the first time I met Bill I was traveling in southern Minnesota. He was working in our Albert Lea, Minnesota branch.
My first impression of meeting Bill as I didn't realize we've hired 16 year olds.
And and today, he's a key leader in organization and again covering the western United States.
Here in September John Soderbergh, our leader, our executive Vice President of IP.
I had a milestone celebrating 27 years with the organization and this coming Saturday brand I will reiterate Weiss Cup, our SVP of HR will celebrate 32 years with the past organization now.
Now for these six people I just mentioned grew up in the organization on the sales side seems an appropriate for a sales minded sales centered organization.
And they bring a wealth wealth of experience and knowledge to the table touched on hold in a few minutes ago I'd say.
Let's say Rene is probably the person I listen to the most if we make great decisions on HR, it's because I listened to renew that day.
If I look at decisions that I wish I had a do over it's usually because I didnt listen to renew that day.
The one other item I'd share is in that group of 25 year employees. This.
This year has its first non American.
Our Canadian business celebrated 25 years last fall and I look forward to.
Seeing Darrel next the next time, we meet to congratulate them on that milestone I did the single him out in my letter to goals and our annual holiday box of Goodies that goes out to employees in December.
The in the July call, we talked a bit about the steps we took back in the early month.
Early months of the year as we were listening to our team and in Shanghai on what they were learning first hand from COVID-19 and.
And we talked about what we did in March and that was we locked on our locations. We closed the front door of our branches we.
Asked our customers to call ahead, we'd have product ready for them we.
We are a supply chain partner for our customers most of our sales go out the back door of our branch and we deliver it to our customers facilities. So by letting us on their premises, they're placing their trust in us we want to honor that trust.
Here's a quick recap of all the information that I've been sharing on a weekly and monthly basis with our employees as we progress through this COVID-19 era.
We never shut down as an organization I think everybody knows that.
94% of our population but.
Because of their role don't.
Don't have the ability to work remotely.
They might they might work in the brands are on site they might work at the distribution center it might.
It might drive a truck that might work in our manufacturing division. They are in some rule that requires them to be present.
If I look at that population in the month of March to May.
We were seeing two to five cases per week.
And at the end of the end of May we had 41 cumulative cases within the faster organization now we have roughly 21000 employees. So that was two tenths of 1%.
In the month of June.
As some businesses were coming back to work and those little more activity. We saw our case count on a weekly basis jumped quite dramatically and we were seeing about 14 cases per week.
And at the end of June Cumulatively, we were approaching 100, we had 97 cases, which is a half of a percent of our 21000 people.
Joe I saw it increase will that more 16 cases per week.
In August 2000 cases per week so.
However, we saw an interesting change in that trend, we dropped to about 17 cases per week and at the end of the quarter cumulatively.
We've had 344 cases within the Fastenal Bluetooth family.
Again, if I did my math right and these aren't audited numbers. These are my notes that's.
That's about 1.6% to 21000.
In the first week of October we saw the case count coming in at 14 again positive trend.
I have no idea, what our trends will be in October and November and December and as we entered the new year, but I, but I do know our group of employees.
We have been taking responsible steps to protect themselves their families and their customers they serve.
While providing a much needed supply chain to the marketplace.
With those 14 cases cumulatively were at 358.
Getting that sales of last week.
At that time when I received the report we had 21 people currently out and.
And the typical duration, we're seeing is about 15 days so about two weeks worth.
If I go to the.
The.
Flip book, we talk a little bit about our daily sales. So while it's not on the sheet in Q2, we grew 10.3% in Q3 that that reduced two and a half.
Operating income in Q3 grew 2.9%.
Our incremental margin.
So it was in the mid Twentys really pleased with those numbers from the standpoint of when I think of safety safety provided us a bridge between where the economy was prior to COVID-19.
As the economy shut down and where it is today. So it's been prior to providing US a bridge if I look at discrete business pieces of our fastener business.
Masters and safety as we've talked in prior calls make up about half of our revenue.
In the second quarter, our fastener business, our oldest product line, our most mature product line, our product line that really lengths that what's going on in the industrial world.
Sales dropped 16% in Q.
In Q3 that improved to negative seven.
Safety products.
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Grew a 116% in the second quarter.
It came into it came back out of the stratosphere and grew 34% in Q3.
And and if you look at all the remaining products that aren't fasteners or safety. They contracted about 8% in Q2 about 2% in Q3 and so the trends are telling me.
The environment. We operate in is healing itself is improving and again safety has provided an incredible bridge as we've gone through this.
Earlier, I mentioned great people.
When I when I think of the last six months.
Im really impressed our ability to adapt really quickly to the new normal.
Incredibly impressed with our ability to successfully manage costs and how we are holding each other accountable. In fact this afternoon I have a call with a subset of our regional leaders have another call scheduled tomorrow, we're going to talk through that.
Elements of our PNM, where they're not pleased.
With us and us being down and Holden in the folks that support them because our expenses grew at more than there's actually our expenses didn't improve as well as there is to it.
And some things I I'm going to share with them.
Our profit sharing contribution that goes to the end.
That goes to the entire organization, that's based on our level of profitability.
Q3 to Q3 is up 40%.
Personally proud of that means we're finding success together and we're sharing that together.
We made a big acquisition of technology back in the in the in the first quarter in March So in both Q2 and Q3, we have a sizable amortization expense that's now in the numbers.
We introduced mobility across the organization, we deployed just under 8000 devices in the last nine months. So that's an expense that went from zero to a something that's not zero.
A million dollar plus increase of investments, we're making to improve the long term health of the business.
We found great success interestingly enough in our ability to sell clearance items.
Clearance products products that have been on our shelf, whether they are in our branch and distribution center and this isn't Kobe products. This is stuff that we've accumulated over time we.
We saw it.
Incredible jump.
From Q3 to Q3 like 200%, it's a small number but we're finding success where resourceful in this marketplace.
As you can expect our purchasing of inventory we did a great job of inventory are per purchase discounts. We earned our less this year than they were a year ago, and so I'll be having that conversation about team, but we hold each other accountable and that's how you successfully manage expenses and an organization most.
Most importantly, I think great people.
We have retained the talent of our organization in ways. Many other organizations Havent had the ability to do and safety in our safety sales played a role in that and I'm proud of that.
But we continue to invest in the future. Our training has actually expanded in a co vidara, even though we don't have our instructor led training at all this year our online training in our virtual instructor led training our school business our efforts Fastenal School business did an incredible pivot.
And our folks in the field are embracing it an incredible ways earlier I mentioned, we deployed eight the almost 8000 mobility devices and we created a more efficient platform for for providing service to our customer.
I believe in the last six months Weve widen the moat that fastenal enjoys but.
By demonstrating the following in the marketplace to our customers.
Great supply chain partner.
We solve problems and we invest to deliver and we have a great group of analysts that have historically covered us and I'm not saying that in.
Great shape myself to the analyst community I'm, saying exits effect.
I was reading I want to be a couple of analyst reports that came out earlier this morning, and I I asked holding about it.
And then there I saw where we have $30 million of slow moving inventory.
You know we've made a big investment in in.
Products to support the marketplace in the early part of this year. If you are in our supply chain team if youre in our our forecasting team has done a great job and I think there are folks organization that are looking at our pp inventory and sales piece, we have a bunch.
Yes, they're scared about it nervous about it's probably better word and I look at it and say this $30 million of inventory.
Our sales in Q2.
Surged dramatically.
The inventory that explicitly in this and the reason I know these numbers are starting to our board about it yesterday.
Our sales of these products that we have this inventory on.
From Q2 to Q3, the quantity of our sales went up 18% so.
This isn't something that all of a sudden or the big need for in Q2 and that need gone away in past I'll sit with all this inventory based.
Based on the the sales in Q3, we do have months of supply.
Frankly in today's chaotic world I consider that an asset.
Not a problem.
And up and it will support us as we move through this and I'm I'm happy we have it. So if you need three planned that should give us a call because the marketplace needs them and I'm glad we have them.
Moving onto the.
Surge activity as Holden mentions in the flip book It did fees. However, pandemic products continued to contribute high sales as mentioned earlier safety was up 34%.
Growth drivers.
Improved the signings improved from Q2 to Q3 sales is about what happens today.
Growth drivers and momentum with growth drivers is about what happens tomorrow.
Our tomorrow.
Proved.
From Q2 to Q3 and I feel really good about that we're not back to the hundreds in the hundreds is our our our stated internal stretch goal that we put in place last December obviously got dropped window in March one the world's kinda didn't kind of when the world shutdown, but our stated goal is can we get to 100 signing.
Sales of vending devices, a day can we get to a 100 signings of onsites per quarter.
And that's what we've invested in infrastructure to support.
Because we think that's a sign of great engagement with customers and a great ability to take market share, but they did improve from Q2 to Q3 last.
Lastly on that page here.
Holden talked about sort of the capital structure basically we have a great balance sheet and that great balance sheet improved in the quarter.
One of the things I said to the holding back in March and the finance team in general holding share on the entire team I said you know what.
What distribution businesses do in environments like this is.
He is we're not investing in working capital the same way.
And we actually become a cash generator, because we harvest some working capital and I'm.
And I'm really impressed with our supply chain team our finance team.
Our our district and regional leaders on what they did to produce the cash flow of this year and so if I look at it nine months. Because then you take out some of the noise of the of the cash to the tax payment deferrals from Q2 to Q3.
Nine months in our earnings are up 8.3%.
Our operating cash flow is up 32.2% 190 million dollar increase over last year, we pulled back some capex.
In our free cash flow operating cash.
Operating cash minus Capex is up 62%.
Year over year.
And there is a little lift in there because there is about $19 million of social security tax deferred till next year absent that the 32 and 62 goes to 29 and 57 my complements to holding Sheryl the team great job and it means we have a balance sheet that's ready to go.
For the future.
Flipping to the the vending dispenses.
Information that we shared last quarter again most of this you saw last quarter you see the dip over Thanksgiving you see the impact of Christmas and new year, you see the impact.
Easter in early April.
And you see where we history says we should be by the end of March and where we were by the middle of April.
You saw there was some recovery, but as of June.
The Blue line, which is current versus the goal line, which is history or yellow depending on quality your monitor.
We were 15 points below where history says we should be.
At the end of September that 15 points is now nine level.
Now back to where we should be.
But the health is better and once we got into September I'm pleased to say, we we are.
We are above where we started last October again that where we should be.
But a great performance and vending is really about consumption of products in the marketplace. It's a real real time, a great real time indicator activity. The next.
The next page is about unique users here to get a little more noise because the way we calculate it if you have a business stay out so you get the Thanksgiving noise, the Christmas new year noise.
Easter.
You see where we would have been in that March timeframe, you see where we bottomed out in mid April 85, and we.
And where we ended the quarter. So at the end of the quarter. We were eight points down right now were seven point stone.
We're we're we continue to narrow the gap.
The this is about employment activity the first ones dispensing this is employment.
Im really glad we have the vending business not just for the what it gives us some visibility, but the fact, how it helps us grow.
And and.
And it gives us a reason in our customers a reason to allow us to keep coming in their facilities.
And that's one of the ways that were really entrenched in the business of our customers and you see it shine through.
In this type of environment.
Final appraisals.
Two in the flip book is page six.
As mentioned earlier, our signing activity is still below where we were pre pandemic, but.
But it's but it's making a comeback.
Onsites, we signed 62 in the third quarter.
I feel really good about the momentum of that we need that momentum to come back to support us in the future that future growth one thing.
One thing I shared with our board of directors yesterday.
With that I thought was interesting development and that is if you look at government business historically, a relatively small piece of our business. Obviously it became a more.
Sizable piece of our business in the second quarter were.
We're getting onsite traction and government world too.
So at the last September 25 of our Onsites were with governmental entities that might be a K 12 school district that might be a college or higher Ed.
That might be something else in the government sector, but 25 of them.
By March that had grown to 29.
At the end of September we have 35, that's a 40% increase in onsite business with government customers that tells me that some of that govern the business. We picked up is going to be sticky.
And 60% of that occurred in the last six months and I don't know about the rest of you, but I've never seen government move real fast in a lot of things in life. This is incredibly fast pace change when I look at that business.
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College higher Ed, 56% increase over last year, we actually in the third quarter signed our first healthcare onsite don't know what that means for the future, but it is an interesting development.
The rest of the information I think it's pretty straightforward in the reading in March our E commerce sales and so when we look at ecommerce.
Even though vending is is E commerce in a way we don't include that in our number.
But it is a digital sales. This is still can strictly that Ian Webber orders for the first time ever in March that Ics that popped over 10% of our sales.
In the second quarter dropped back because most of the coal that surge was not going to review.
It was.
Reacting.
Engaging directly face to face with customers.
From a safe distance.
In August and September our E commerce, as a percentage of business again popped over 10%.
And for the quarter, we were over 10% with at all set up and turn it over to holding great. Thanks, Dan.
Flipping to slide seven.
Third quarter 2020 sales were up 2.5% like last quarter strong sell through of safety products offset weakness in our traditional manufacturing construction customers sales of safety products were up 34% sales to state and local government and healthcare customers grew 131% in the period and this certainly include sales related.
To cope and mitigation. However, we're also seeing restocking pre stocking in share gains as we received follow on orders from customers that we added in the second quarter. As a result, we're not characterizing strength here in the third quarter as Serge as the reasons behind our customers buying have become much more varied. We do view. This favourably however, as it affirms our belief that we will.
Are you able to retain relationships that began in the chaos of the second quarter that is likely what allowed us to outperform our original expectations for safety growth in the third quarter.
All other products declined 4.2%, including fasteners, which declined 6.9%. This represents deceleration and rates have declined as the economy has reopened and production has rebuilt following the disruptions of the second quarter. In fact, we saw sequential low single digit improvement in both hub picks and vending dispensers in each month of the third.
Third quarter, suggesting gradual but steady gains in the underlying business conditions. At this time, we believe customer activity levels are down mid single digits from pre pandemic levels.
As it relates to the near term outlook I think everyone understands that Corona virus is still with us but at this point customers are navigating around the issue without having to close operations. As a result business activity continues to trend steadily, albeit gradually upward against the backdrop of multiple months of better than 50, a better than 50 readings in the <unk>.
Mike and an RVP commentary about customers re engaging and growth at driver discussions conditions are encouraging remember that we are entering the low volume in holiday impacted fourth quarter, which can always introduced a bit of unpredictability still it's good to see some degree of normalization settling in.
Now to slide eight.
Gross margin was 45.3% in the third quarter of 2020 up 80 basis points sequentially and down 190 basis points versus the third quarter of 2019.
The most significant factor in the third quarter behind the annual decline is low margins for coated related safety and Jan San products. In contrast to the second quarter. When this pressure was a byproduct of inefficient supply chains and our own speed in sourcing products pressure in the third quarter from two different sources first.
First for certain products demand continues to outpace supply and cost have begun to rise we began.
We began addressing these products its price actions beginning late in the third quarter second.
Second other products like three climax in disposable respirators are oversupplied and prices have declined. We believe this will correct itself based on the sell through of these products out of our inventory. However, this process may take until the second half of 2021 color.
Collectively covert related safety and Jan San was about 14% of sales in the third quarter and the gross margin was down mid to high single digits on that group of product through.
The remaining decline in gross margin is for mix and cyclical and organizational factors such as rebates de leveraging of certain fixed costs higher import costs et cetera.
Some specific lines associated with Covance, the pricing environment is stable.
This decline in gross margin was slightly more than offset by leveraging invest DNA and higher sales of PPD, which produced 200 basis points of operating expense leverage over the third quarter of 2019.
6.3% lower ft at the end of period and lower bonuses as a result of the weaker environment generated very strong leverage of employee expenses, while lower travel expense lower fuel costs and continued tight control of operating expenses generally enabled leverage of our other operating costs. The result was an operating margin of 20.5% up 10 basis points.
And an incremental margin of 24% put.
Putting it altogether, we reported third quarter 2020, EPS of 38 cents of 3.5% from 37 cents in the third quarter of 2019.
Now turning to slide nine.
Produced $289 million of operating cash flow in the third quarter of 2020, representing 131% of net income and up 12.3% from the third quarter of 2019. This.
This strong cash generation is despite having paid $104 million of taxes deferred from the second quarter as part of the cares Act.
And is attributable to higher earnings and farming working capital the period.
Accounts receivable was up 2.1%, we did collect the $75 million in surge related balances that existed at the end of the second quarter. The follow on orders from some customers simply replace surged balances was regular way balances as a result receivables increased largely in line with sales.
Receivables quality remains excellent.
Inventories were down 1% 50 million in cobot related stock at the end of the second quarter was around $30 million at the end of the third quarter and we will continue to work down this balanced over the next few quarters. Meanwhile, the combination of weak demand in efforts to streamline our inventories translated to declining inventory at our branch locations and moderating inventory growth in our.
On sites and hubs.
Our net capital spending range for 2020 remains 155 million to 180 million.
We have three we achieved record net income and record operating cash flow over the first nine months of 2020. This allowed us to acquire the assets of apex deploy significant resources to secure critical products and carry working capital for customers. During the chaos in the second quarter and returned $480 million to investors in the form of dividends and share repurchase.
The same time net debt is just 2.5% of total capital and substantially all of our revolver remains available for use we retain ample capacity to pay our dividend finance working capital as demand improves or take advantage of any other business opportunities that may arise.
That is all for our full presentation, so with that operator, we will take questions.
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Our first question is coming from David Manthey of Baird. Please go ahead.
Yes, hi, good morning, guys.
Hi, good morning.
I have kind of a long term question here just to reorient on your on the growth drivers of the business could you update us on how you see the total available market for for vending and Oz sites relative to where you are today and then a little bit more near term. If you could just give us an update on the lift.
Initiative I think you had some pretty good early returns on the pilot programs and I'm wondering if you're moving forward with those more broadly yet.
Yeah, So a few things there.
Im going by memory here, Dave I think what we've talked in the past about is is we believe there is around 15000 theres.
There is.
Potential for about 15000 on sites based on what we know today and what we know today is largely confined to North America.
And but thats a number we have talked about internally.
I hope Thats the number we've talked what externally the past holden's not give me a dirty look so but.
But suffice it to say, it's a really big market and the reason, it's so big is.
Is because of our frugal cost structure.
We can find success and an onsite.
Doing a $100000 month doing $150000 a month.
Where most of the marketplace struggles with the onsite model when you get below 250 300000 a month.
Putting a one person in a in an office in doing sourcing is not an on site in our mind and onsite is your they're engaged in their business, but we're able to find success and a lot more places.
The vending is the vending suffice it to say.
I personally believe the numbers over a million, but I don't know how much over a million and I don't know if I'm, an energy only put into figure that one out.
The wildcard on vending is historically vending was about putting in a vending marks.
And because we were relying on a third party for vending. It was a separate system from everything else, we did but there's places where we have ending where a binstock works.
And but we want to ILLUMENATE the supply chain. So what we're doing now after acquiring it is were melting the technologies together. So some places we'll use vending in some places we'll use a binstock that has replenishment automation and in other words, we know how will the business.
We know how either.
Either through our Fiveg technology, or infrared technology, or some other technology and so suffice it to say, it's a it's an incredibly big market I believe between vending and Binstock.
It could address 70% of the true spend that exist in the marketplace and so you can size it on that based on a device that does.
2000 to $2000 a month of business, what that what that yields for a number that.
The final point and holding remind me on the final point.
Lyft Lyft second comp lift we we.
For those of you that aren't familiar with that lift is the acronym stands for local inventory fulfillment terminal.
On the way we're approaching it initially it's a it's a turn at the terminal that replenishes vending, but could replenish other things such as bin stocks in the future.
We had some pilots we have a handful of pilots we did the first one was in Phoenix, Arizona, but we've added since then what the only thing thats changing well first off the initial results are really positive because it allows us to become more efficient.
In in replenishment of ending it also pushes us to make the model better and what I mean by that is a greater standardization of products going into the vending because we're replenishing multiple machines multiple branches multiple business units out of one facility and so we're doing some aggregation.
What we're really doing now is the movement is we're moving more and more of the lifts. We're doing in the next 12 months into distribution centers to make it part of our distribution network, but really excited about.
The potential there and we're moving forward on it.
And I might ship in a couple of things Dave first on on the on the market size.
The numbers that Dan cited were numbers that we sort of derive some time ago, we havent necessarily updated them on a regular basis, but we do touch base with the owners of those businesses and there is not a belief that anything has changed in terms of that opportunity. In fact, when you hear Dan described the performance that we have in some of the educational facilities and government facilities that.
It was not a market that was envisioned in the original study and so we're seeing at the in addition to the opportunity exists in the original study were seeing expansion of the potential applications as it relates to the lifts performance.
Right now we still got relatively few I think we will ramp up the rollout on that based on the performance and so we don't have a lot of sort of long standing metrics that week.
That we can hang our hat on but you know in our oldest one we did see things such as the dollars for ft in those regions get better and.
The the signings improve in that region and quite frankly, the service level as measured by the number of returns improve and so yes, I think you're right. The initial data from the initial rollouts of the lift have been encouraging enough that I think you'll see us but more of those in the market in their various capacities and forms and perhaps accelerate that and.
Coming 18 months.
Okay terrific. Thanks, guys.
Thanks.
Okay. Thanks.
Thank you. Our next question is coming from Nigel Coe Upsell Wolfe Research. Please go ahead.
Oh, Thanks, good morning, Thanks for the question.
Just wanted to kind of dig back into the inventory reductions and also the tight lid on employee hiring given the sequential improvement, we're seeing and the Brexit vote them, perhaps from the from the.
From the field.
How long can you restrain employee costs, so aggressively going forward and and the inventories as well.
My first question.
Yeah unemployment costs remember that restraining of those expenses really is not a function of what we do and we know that it's really a function of the decisions that are being made by the individuals in the field that are running their businesses, whether that be a branch or district or region.
So I don't want to give you the impression of a degree of control that we don't by choice exercised in our culture and our model.
The reality Nigel is the reason that we protected our talent the way we did through what it certainly initially looked like it was going to be a pretty nasty downturn with specifically so that we'd be able to move quickly when conditions allowed and with demand sort of getting gradually better and with our customers.
Increasingly reengaging in.
You know inching in conversations about growth drivers in any risk.
In many respects at that moment is comp and as a result.
We fully expect that much as we saw in September we saw an uptick in FTD relative to what we've seen the month before I wouldn't be surprised if you continue to see some of that.
Travel expenses I wouldn't be surprised again, if you saw that come up from from where it's been and so.
The answer is different or difficult to answer because we don't control it coming out any more than we controlled it going in those are decisions made locally and.
The the field has made great decisions about it going in and we trust that they're going to make fantastic decisions about it coming out that's going to allow us to be both disciplined with expenses because let's not forget we're going into a volume challenge seasonal period, and we're all aware of that but I think they are going to be able to it.
Exert a great deal of disciplined over their cost structure, because it makes sense to do so and they've shown the ability to do it well.
While deploying the resources necessary necessary to take advantage of the opportunities that are reopening again, and that's probably how I'd answer that question.
If that gives you something you're looking for as it relates to the second question on inventory.
The inventory kind of react the same way right when demand is weak.
Inventory naturally can come down as customers naturally need less of it and when demand gets better then it goes the other way and so there certainly is a.
If demand gets better and we welcome that and that would come with some improvement in inventory as well.
Now that said I will tell you.
I'll tell you we're doing a lot of things to get better at managing our inventory one of which is we're really moving product through our internal supply chain really smoothly today right. We've gone through a period, where we've been closing branches. We are addressing slow moving product you know were which is sort of.
Which is sort of historical product that we brought into the business over years.
Well you know we have different types of models stockings that were that were engaging with.
Engaging with and that's required us to move product through the supply chain at an accelerating rate and whether it goes store to hub hub to hub hub to customer and branch we.
We've really made the movement of that product much smoother and at a higher velocity and I think what we've seen before and that's an improvement we've been.
We've introduced budgets on inventory to field that I think that they try to operate two which has been an improvement we're working with supplier partners. It's really time shipments better as you know we have a long supply chain and so if we can get those shipments timed better that that actually works for us and obviously were being we've been a little bit more aggressive with nonperforming inventories such as you saw.
Is that clear and stuff. So we're doing a lot of things that I think will continue to lead to an improvement in our days on hand over time.
But if demand gets better and the onsite Ics and onsite signings, we accelerate that that's going to put some some need into the inventory again, we call that a good problem. That's a good problem.
Okay. Thanks.
Thanks.
Thank you. Our next question is coming from Ryan Merkel of William Blair. Please go ahead.
Hey, Thanks first off Dan you mentioned the investment in mobility.
Just talk about what your vision is for how this is going to help sales and customer service and then I'm curious what the early feedback has been.
Yeah, I'll give the vision from the team because I am I do more listening to them and then.
And then talking Adam.
The you don't part part of it is just the two areas.
Things that our basic so think of when I make a delivery historically I print off a bunch of packing slips at the branch and I take him with me and I get those signatures on the packing slips and I bring them back on file them away and if there is something that doesn't get paid and I need a proof of delivery at some point the future on digging digging through a file cab.
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Now we have signature capture.
And not as it means we always get a signature because sometimes the the person doesn't want to touch the device and the Cobrand world and so we're working through that but but it's.
Thats a whole bunch of back office.
Streaming the back office function, which that brings no value to our customer supply chain and its figuring out how to tap into that.
Another one is when I am out visiting a customer.
Going to when I'm going to the vending machine now that we own the technology that is the vending machine our mobile.
Our mobility device talks to the vending machine.
And so were not working with a keyboard and really up to skateboard on a vending machine to do inventory transactions, we have a device in our hand, and it's talking to our point of sales system incredibly efficiency enhancement, we're using mobility with our lift facilities. So I can I can fill machines and transmit it to the point of sale.
All that is filled and that automates a lot of process and seen another one is if I'm out talking to a customer and they have a question about something I actually have the means to answer the question I don't need to write it down get back to the branch to a couple of my point of sales system and call them back I can answer on the spot I can order it on spot for that matter.
And and so it it allows you to do a lot of things right now just like a cell phone think of the efficiency that brings to it.
Almost every human being on the planet today I can take care of something right now rather than writing it down and making a phone call when I get back to a phone so yes.
It allows us to do a lot of things and it allows our team to be more mobile and the cobot environment being more.
Being more mobile is great because I don't need to go back to the branch at the end of the day, along with everybody else in Congest up an area because there we have to work on the same terminal.
The.
The other piece it allows us to eliminate for the customer when deliveries are made when our schedule is coming and so our customer has greater visibility to their own supply chain something that was difficult to do in the past in the <unk> and the final one is because we're getting orders in earlier in the day, our distribution center can be picking orders we get it.
O'clock.
At 10 in the morning, not at six in the evening because that's when the order was entered when they got back to the branch at five o'clock on the east coast or five o'clock in the Central time zone. It allows you to move work up if we can pick earlier today, our trucks can leave earlier today and more of our branches get a truck.
By six or seven in the morning, rather than seven or eight in the morning. So it does a lot of downstream efficiencies.
All right. That's very helpful. Thanks, and then secondly, I guess, maybe for Holden I was hoping you could quantify the safety surge in dollars for 2020 that may not repeat and 21 I have my estimate of course, but I just want a sanity check it.
Well I think we talked about second quarter and again, when we think about Serge I'm really confining the dialogues in the second quarter, because I don't really know how you differentiate surge from market share gains from customers that are restocking posted an issue or pre stocking in anticipation of I don't know how to differentiate.
That in Q3 and beyond.
And I believe last quarter, we talked about 350 to 360 million in search revenue.
That's.
One one conclusion could be that it may not recur, but.
One thing I would point out and talked a little bit in my President and my presented remarks from my prepared remarks was you know we are winning business.
If I think just about healthcare and government in this in the second quarter. We had 5400 accounts that we did not have in the first quarter and I remember in our system. An account is not a customer a customer can have multiple accounts, but we have 5400 accounts with customers in the second quarter in healthcare and government that we didnt.
Not have in the first quarter.
In the third quarter.
Of those 5400 in July 1000 of them ordered again in September I think 850 of them ordered again right. So that surge business of 350 to 360, we'll we'll all look at replicate I mean, we hope not right to some degree we don't want it we like this whole covered thing to back off.
But some of that is being replaced with his regular way business with customers that we've raised our profile with that we didnt have that we now do and we'll retain some of that and so you know that the I suppose that the quick answers 350 to 360, but I don't think that the whole is going to be that big but unfortunately, I'm not really sure what that is.
At this point, we're going to need more time to really sort of evaluate the data and understand the marketplace and how it evolves I think thats it.
I think thats, a perspective that that's worth providing the other wildcard to gain to at least concern.
At least consider is.
When when does the activity, we're seeing in Q3 and the activity. We're seeing in Q4, when does that some of that subside and we get to whatever our new normal way of life in this world is.
Is it people over the age of 70 wearing masks a lot I don't know.
Is it.
More sanitizing done or are we back and you know two years from now is it feel a lot like it felt a year ago.
Only time will tell personally what we challenged our team to prepare themselves for.
Is.
You know regardless of your opinion on when.
Maxine may or may not be available and regardless of of your opinion on how fast we can produce I mean to to provide vaccinations for the population that we have not just in this country are in this continent buttons in this globe.
It's going to take time.
And I feel so suffice.
Sufficient to say to our employees, we've ever plan on being in this kind of environment.
For at least through another 12 months.
And in how it how it.
Tweaks and changes and goes up and down between now and then time will tell but thats, where your head needs to be and so if that's truly there.
That tells me, there's going to be a certain level of this extra layer of safety in janitorial products I believe for quarters to come.
And let's not forget as well because obviously I know the the point of the question and I understand that when we're comping against that product. We're also comping against a fastener business that was down 17% 16, 17% in the same period that 7% this quarter at 7% this quarter right. So yes.
I understand that the point of the question right. I mean, there certainly is a difficult comparison to be had in Q2, but just bear in mind that we have an easy comparison in fasteners. If the market has come back at that point and and we do believe that we have picked up market share and so that 350 350 doesn't just go away completely because we picked up business. We didn't have in Q1 last year.
Yep, great points guys. Thanks, a lot pass it on.
That's right.
Thanks Ryan.
Our next question is coming from Michael Mcfadden of Wells Fargo. Please go ahead.
Oh good morning, everyone. Thanks for the question.
Hi, good morning.
Good start on the.
Onsite.
Historically your branch on site or consolidation efforts have been somewhat mirrored by on site signings in those same markets or at least that's been my understanding.
Given we're in somewhat on uncharacteristic time, what is the net impact on your EPS, United This year and maybe next year as the signings pick back up and you see a void left in those markets or anything like that.
The.
A void in the market related SDMA from from what.
Yes. Good question. So the branch consolidations you there.
Accelerating were onsite decelerated historically my understanding is Ben you, maybe consolidated branch and a couple of those large customers served by that.
Served by that brands are able to convert to an on site now this is different.
Does that maybe kick start things again in 2021.
So the first thing I would say is I wouldn't so explicitly tied branch closings to on site openings.
I can't rule out that there haven't been some branches that have been closed maybe in small markets, where there is very few customers because I'm on sites have gotten created I think that probably has happened but in general theyve been independent decisions. The decision to close a branch has more often been because it's a smaller branch that maybe the path to scaling it does.
Look today like it might have looked five years ago seven years ago when it got open.
You know and the onsite decision is similarly somewhat independent so I would be cautious about tying those two explicitly together that way I think that they're more independent than you're giving credit for you.
The only place that you could make a link.
Is roughly half of our branches I think it's 55%.
In large metropolitan areas with more than half a million people.
And and so there there is some connection but its not think of it more as as we opened onsites in a market like Minneapolis Saint Paul.
And we go directly.
Engage with customers on site.
Over time, it might mean to serve the market in Minneapolis Saint Paul.
Fewer branches makes sense, because instead of having.
30, or 40 branches in the market we might.
We might we might have 15 to 20 branches in the market and 40 on sites.
And so if you really morphing, how you're approaching it but when it's more of a case of the one allowed the other to operate in a different fashion in a more efficient so.
So so if you don't tie the openings and closings of the two together that changed your question.
No I'm also not just I'll take in a different direction from here.
So given that you were able to take some early actions regarding.
Stocking ahead of Covidien shown aptitude for skating to where the puck is going not where it is.
And also trying to remain as apolitical as possible you are always paid your fair share of taxes and you've also benefited from fair and open trade. So.
Looking into 21, what is the most important important factor for your business in your mind.
I'll get violent and Dan can give his but you know.
I think its re accelerating the growth driver activity.
And again part of that is simply when new customers reengage with us because that kind of shut down at it during the second quarter as our customers are dealing with some some more pressing issues at the time.
But you know those growth.
Those growth drivers is our key to what allows us to gain market share and so when Dan talked about the hundreds 100 vending a day and 100 Onsites a quarter I think.
Sort of getting back to.
To that level give or take of signings for our growth drivers is critical.
Not only for for 2021, gross but probably more importantly for 2022 2023 et cetera, I think were built on on growth drivers and growth and those are sort of core to it. So that's I think a very important element of us are for us right now.
Michael I Love the way you asked the question.
You are looking you have an apolitical question looking for an apolitical answer I only wish our our media on both sides of the fence could do the same.
And for Mike.
From my standpoint, we're up we're supply chain partner to our customers. We operate in the same environment all of our peers do we have don't unique advantage or not we have no unique advantage or not uniquely hurt by anything that changes we react to it we reacted to co bid because because of our decentralized nature.
Because of our true belief in people and give them the freedom to make decisions. We did move faster because we're not looking at everybody is looking to somebody else to tell them what to do we do and we support each other and so if if you know the trading patterns between nations on the planet changes we will morph.
To to to that change just like our industry will and just like our customers will in the marketplace will and and.
And I think our actions over the last several years in a tariff environment and now in a cobot environment.
Demonstrate the shear strength of the of the past on distribution model as a supply chain partner to our customers.
Thank you I appreciate the time.
Thanks.
Is the five minutes to I think we have time for one quick question. If there's one more our next question is coming from Hamzah Mazari of Jefferies. Please go ahead.
Hey, good morning. Thank you. Thank you for fitting me in my My quick question is.
Just at a high level, if you could just compare what does the sales cycle look like today during covered on on on sites. I know you mentioned sort of 62 signings, but it.
Versus pre corporate is the sales cycle just pushed out by a few months is or longer is there sort of an enforcer type.
Type meetings, you have to have just give us a sense of you know is their friends up demand there from signings that you know.
We're we're sort of midway through their guard essentially closed due to covert and will reopen just any thoughts high level as to the sales cycle.
Yep.
I don't think the sales cycle is changed at all.
Assuming you can do a sales cycle.
What I mean by that is there is some business you know it is when when times get crazy. Some people kind of you know dr. head and say okay that that's that's that's figured out we are its status as kind of like in the movie Apollo 13, when the when everything is falling apart in the in the rock and going to the Moon.
Okay, guys what status what do we have on this on the ship that works and that's what a lot of companies go through as they kind of shut down and they say, okay. What are we doing and.
And fast not going to give you the Heisman and say we can't talk today. So it's not that the sales cycle is drawn out it might be the sales cycle doesn't occur.
And so the real question is when does it start to occur I mean, one of the things that hurt us in 2020 on top of cold. It is an outgrowth of covert was we didn't have our normal customer Expo in the spring, which is a great igniter for change because you get a chance to really engage with folks and you really are able to talk about what we are we're not an E commerce platform.
We're not somebody hop on and if we have a great and if we don't your kind of so well we are your supply chain and we will find stuff for you and so were slowly our customers are willing to take that call. Even if it's a virtual call. It doesn't mean that we in person. It's nice if it is but it doesn't have to be in some ways, we might move faster in a very.
We'll world because we're not waiting for a resource to to be there may be the somebody at the plant can't make a meeting but they can if it's done virtually and so in some ways. It might shorten the sales cycle I do believe this I believe its expanded demand because the marketplace is more appreciative of.
Great supply chain partner after the last six months then maybe they were in the past and and when I say expand My example earlier with government.
I think a lot of those folks we kind of look at us in the past and say you know what.
That's that's different and we don't do different and now they're looking and saying we need to do Britain different we need to embrace change so I think its expanded it.
I see where we're at about.
Two minutes before thumbs I won't give you a follow up sorry, but holden's available right after the call.
I just like to close with my thanks.
Hi, Thanks to the Fastenal team for everything you've done not just the last three three months, but for the last six months and frankly for years. Many of you have been with us years, and you've seen us through good times and bad.
We make we find success together I want to thank your shareholder for participating today and in closing on October 28th My wife, and I will celebrate 25 years and Jim. Thanks, If you're listening have a good day everybody take care.
Ladies and gentlemen, thank you for your participation.
Todays event you may disconnect. Your lines are log off the webcast at this time and have a wonderful day.
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