Q4 2020 Fastenal Co Earnings Call
Yeah.
Thanks, John.
Yeah.
Yes.
Okay.
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And.
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And.
[music].
Greetings and welcome to the festival 'twenty and 'twenty annual and Q4 earnings results Conference call. At this time all participants are in a listen only mode. If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to turn the call over.
And to Ellen Stoltz. Please go ahead.
Welcome to the fast and all company to tell from 'twenty annual and fourth quarter earnings Conference call. This call will be hosted by Dan floor, and as 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 annual and quarterly results and operations with the remainder of the timing of when for questions and answers today's conference call.
And the proprietary basketball presentation and is being recorded by fast and all but recording reproduction and transmission or distribution of today's call is permitted without fast and all is concerned. This call is being audio simulcast on the internet via that fast and all of Investor Relations homepage investor at out fast and all of Dot Com a replay of the webcast will be available on the website until March one 2020.
And one 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.
And the 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 Florida.
Thanks, Ellen and good morning, everybody and thank you for joining us for the Q4 of.
2020 earnings call.
And it might not be on my age of game today and.
And I point that element of because typically when I do this call I'm very fortunate and then.
Moderator and the background of net is my my wife, who listened and we will text me if I am speaking too fast or rapidly or if I'm going too long and.
And and somebody you might say she needs to step and sooner.
Well today, I think she's probably online and trying to see if she can converge or packer of season tickets and two of two tickets for Sunday's game time will tell but.
But if I if I go off from pension so I apologize for that.
To start with.
Recapping our of our board meeting.
The last of yesterday at our discussions with leadership early this morning, and as we were able to share our earnings and our and our.
Progress a little bit more broadly within the organization and a bit of the video that we share with 20000 plus employees within fast at all.
And and.
One of the more of a more somber piece and and that is as we've done in prior quarters, just wanted to share some COVID-19 statistics with our shareholders.
Because we can talk about a lot of things, but we have to start with the most important and that is we were not at.
And if you will to the effects of the of.
Covid on the health of the fashionable team family.
Through September and I have previously shared at this information we had 344 cases of Covid within the first organization.
In the month of September we were averaging at about 17, new cases of week.
In October and as we progress at the fourth quarter, we experienced what was.
Experienced generally speaking throughout the markets when we operate our case count increased dramatically and.
October we had 27 cases per week of 10 increase over the 17 and September.
So 106 cases, so through through October we had cumulatively 450 cases within the festival family.
That number of essentially doubled in November and November we had 430 cases 86 per week.
And as of December we started to see that trend down, but still quite high at 60 per per week 238 cases, so cumulatively through the end of the year, we had 1118 cases within fast flow.
And just over 5% of our population of employees when.
When you consider the fact that our business and the way we operate doesn't afford us the ability to remove ourselves from society.
90, 394% of our employees are enrolled that involved day to day interactions with other human beings, whether that's at our branch or onsite locations working and a distribution center working and manufacturing.
Driving a truck.
And so we didn't have that luxury and the fact that our number I believe the U S population and if what I read is accurate and we're just over seven percentage of U S population has had COVID-19 and work.
Five so I believe our team has done a really nice job.
Of exercising common sense.
And trying to protect themselves and those around them every day and being mindful of the anxiety that exist and society.
When I think of 2020 I also think of.
Things that we did from the perspective of.
Thanks for the day to improve.
Our moat to widen our moat to improve our business has been move into 'twenty and 'twenty, one and beyond.
And I think one of the first things is we demonstrated to the.
The market.
And we demonstrated to ourselves and perhaps a bit of our problem solving ability.
Our growth drivers demonstrated their value and value from the standpoint of its of special weighted engage with our customer and because of the vending devices. We have deployed because of the on sites. We have deployed because of the way we engage with our customer.
When when most people were turned away at a customer's door or folks we're allowed to answer.
And they were allowed to enter because we were we were stocking bins. We were we were filling vending machines. We were we were staffing and the support and infrastructure of their business from what's inside of their facility.
And that was a that was a special place to be and a special relationship and because of that we saw the success that we did in Qs two three and four on our ability to react and serve that marketplace and a unique way.
<unk>.
The other.
Other pieces we.
We are.
Demonstrated to a whole new group of customers.
Maybe it's something that's special about fast at all.
The other thing that I reminded our teams and I remind you of our board.
We're coming and tool weird year.
And we're forced to pivot and and.
And that's of Great thing.
We look forward to this pivot versus the last but the optics of the year are abnormal and I just want to remind the analyst community of that.
Is the.
I don't recall in my 25 years with fast at all.
Might've happened maybe at happened back and the nineties are <unk> or <unk> I don't recall, a year, where we entered and we're going to be down two business days.
And as all of you know, that's an important ingredient and and our ability to grow and leverage the business. So in Q1, we will lose one business day.
Q2, and we don't lose and business days of gain and business days, but we have some weird comps because of the extreme.
Surge, we saw and safety sales in Q2 last year.
Q3 is a is of it.
A normal quarter, if you will and methods of push on days and then Q4, we lose and a business day. So it's at 253 business day year versus $2 55, and just wanted to point at all.
Sure.
When I when you read the document and you hear our conversation.
We will touch on some things about the apex transaction that we did back in March and I'm really really excited them of what that means as far as our ability to broaden and illuminate how we how we serve our customer and apex is that the technology that underpins our vending platform and we have the largest industrial.
Vending platform and planet and it's a great platform.
A lot of other our other systems, where disjointed from that because it was a captive platform and so it allows us to broaden and wherever you can bring supply chain knowledge and visibility to and we are now referring to that as the FAA and my suite of things fast flow managed inventory within that.
Our three distinct components and and Holden did a nice job eliminating at and I think from the press release at will talk about it today.
But and that is <unk>.
At its fast band, which is our vending platform as we've talked about per years. The second component is fast Ben at D. I N and Thats at the suite of.
<unk> technology, it's not restricted access like you've seen a vending machine its open access, but it's part of a lot of things like fasteners were pipe fittings and things like that but it's smart in the standpoint. The system tells us when it is hungry and needs to be fed and we don't need to have a person go check it or worse, yet our frequency of checking it means we haven't been that runs.
<unk>.
And at allow us to leaned out of inventory.
And illuminate the supply chain for a customer over time, so at the better supply chain.
But it's also more efficient from a labor productivity supply chain. The third component is what we call fast stock.
And that is we deploy.
You all know a tremendous amount of mobility technology now we've had of platform in the past, but that platform is very transactional based and this was more system based and allows us again to illuminate for the customer what they have and their facility, which is more efficient for the customer more efficient for us. So we will talk about that in combined.
Take nothing away from the individual components of vending.
Which is a great element to enhance growth and engagement of our customer. We're just broadening it because of the apex transaction allows us to do that.
If I move into and to hold and flip book you can see.
And I'm on page three of our daily sales grew six 5% and.
And the and the.
Quarter of.
The team did a great job of managing our operating cost.
Throughout 2020, and it was exemplified in the current quarter and we produced operating earnings that were double digit 10, 6%.
Safety as we've talked about on numerous prior calls and.
And I suspect it to you to talk about and the and the calls as we enter kind of 'twenty, one because of Covid is not behind us.
But safety has been an outperformer for years, largely because it's a product line and that message really well with our fast event, our vending platform.
So in the sort of despite safety being a little bit less and 20% of sales. It's produced for the last several years about 26% of our growth.
But the.
And the contribution swelled to 156% in 2020.
And as I touched on and when I was first talking at.
At highlighted our problem solving culture, and the marketplace and I believe this should open up a new customer and end market opportunities to us and the future and Holden will touch a little bit of of that and your stock.
Customer engagement and growth drivers has improved.
However at.
As you saw in 'twenty and 'twenty.
At ravaged and our ability to sign because.
And in an environment, where you're working really hard to protect your employees and maybe the last thing you want to do is all of a sudden and come on folks fast now and we love, what you're doing and want to come and move in with us at.
Introduces a variable that many folks and a year like 2020 don't want to introduce and you saw that children are signing numbers and I'll touch on that one and then.
Few minutes.
<unk>.
Apex purchase I've touched on already.
Utilization of ecommerce took a big step up in in 2020 as.
As I mentioned and commercialization of our fast men and deployment of mobility I believe will really of all of our model and evolve our ability to be efficient because one thing that's really critical and this path and we've talked about this for four of five years ago, What's really critical is.
We're going much deeper into.
What we call our key accounts growth.
Much deeper and to a large customer and the gross margin profile because of customer mix and product mix changes and then it's incumbent upon us to allow the natural leverage to shine through in other words, if youre doing more dollars you have more places of spread your expense, but also to become more efficient and that's what all of these things tighten.
At <unk>.
The.
The last piece is.
Our branch model we.
Evolved at and we'll touch on this and the months to come.
But there is two distinct <unk>.
Fast and all branch model set of emerged in 2021 is what we referred to as the C. S B, but customer service branch and that's the traditional branch of debt.
Are you familiar with where there's a show and front.
And as block and element to our business still most of it is going out the back door, but it's a more traditional and that's about half of our branch network today.
During 2020 and actually we've been testing this within a handful of regions for the last two or three years, we have what's referred to as the C. F. C. The customer fulfillment center I think of it as of branch four we closed the front door and the marketplace almost like that better.
Or we're able to operate more efficiently and maybe we should keep at closed or maybe it's close to.
To everything other than of we'll call of our pickup of.
Sure.
Maybe at a regular account base and.
And.
It allows everybody to go out the back door and most of our revenue to go at the back door and that is about half of our branch network right now and those of the things that are driving improvements to things like E Commerce and I'll touch on a few minutes. The last thing is and.
And I want to put a call out I am sitting here at the table with Holden Lewis and Sheryl Lisowski.
Our Chief Financial Officer, and our Chief Accounting Officer.
Different circumstances allow folks to shine and different ways.
And our team was able to shine this year from the standpoint of solving problems and supply chain for customers.
Older than Sheryl and.
And our team was able to shine and that we produced and amazingly strong cash flow and 2020.
And it put us in a position of late in the year similar to we've seen and prior occasions, where we had some extra cash we didn't see a need for that and of our investments of the future and.
And we paid out of a supplemental dividend late and here.
So my comments compliments to everybody on that as well and.
<unk> four sort of sharing this slide I believe it was back in July.
And this is looking at dispenses to vending I think it's a way for us to illuminate for you our shareholder what we're seeing and underlying trends. So if we index of everything to 100 and these are weekly snapshots of the expenses going through those.
And 95000, plus vending devices and 25 countries.
History, and say if we're at 100.
We should be at 103, Bye Bye and early March and the reason I call out that data point, that's right before the world shut down.
This year, we were running two points ahead of that we were at 105 and as the economy is shut down.
So did the dispensing activity at our vending devices and it dropped 29 from 105% to 76.
At the end of June history would say at we should be at 109 2020 wasn't historic in that regard and we were at 93. So we were down 16 still.
From that 29% drop.
Drop off in March and April.
By the end of September history says that you should be 112 were 104, so that negative 16 is now at negative eight.
And we always ignore the last couple of years.
The last couple of weeks of the of December because its world kind of shut down because of the holidays. So if you look at the week just before that history says it should be about 121 ran at about 115 or still down a piece of that as economic activity of pizza as we didn't sign as many vending devices, because we weren't able to move in with as many people as wed like to.
And but and we're down six.
And next phase and you said this is dispenses the next phase is.
Unique users so how many people are coming to work at these customers. If theres 100 employees coming in every week back at the in October of 2019.
History would say because we have signs of more machines that should grow to 100 for this year on year at 107 and early March.
Well one of those businesses shut down and weren't using as much just because they didn't have as many employees.
The number of dropped 22.
And at dropped from 107% of up to 85.
The.
History says by the end of June we should be at 109, we were at 101 for Tony.
By the end of September we should be at 115, we were at $109 were down six.
And that week before Christmas we should be at 123 were down 119 negative four and the employment of front that neck of the floor is probably more about we didn't sign as many devices. So people are coming back to work and you are seeing and underlying numbers, but theres still the activity is still subdued.
And the one thing I did point out on page four and apologize for that a few of the blip CSC and early July and that's obviously July 4th week.
In late November and Thats, obviously Thanksgiving week.
Yes.
And going to page six.
Onsite, we signed 36 and the quarter again.
Really really choppy year. So we signed our goal coming into the quarter is 375 to 400, we're coming into the year excuse me and was 375 to 400.
It slowed in March so and first quarter, we signed about 85.
Second quarter was 40.
Came back a bit and Q3 at 62 in many ways Q4 was of more chaotic environment than Q2 was.
And that key search and I talked about our own surge internally and we only signed 36 of $2 23 for the year.
But.
Holden included and the flip book and included and a write up our mindset is the same.
The market we believe.
Will support us signing 375% of 400 of.
A year.
Okay.
Conditions needed to open up to allow us to do that.
And want the.
The investment community to read from what we sit here all things are back to normal everything is hunky dory, and we're going to we're going to do 400 signings.
This is going to play out in Q1, and Q2 and and as we've gone into the year.
The way the economy and the marketplace and the Covid environment will allow us to happen and you saw how it played out in 2020, we don't have a crystal ball. We don't were not the burning Lewis we can't tell you what's going to happen. What you can tell as we believe the marketplace likes what this onsite is about.
And as and is open to that onsite and.
It's really about engagement with the customer the onsite signings at just a marker and time of what that engagement is translated into.
But we're very bullish on the fact that onsite proved its value in 2020.
Vending and I talked earlier about the whole <unk> concept.
To provide better information to the investment community not to confuse the issue with the vending and bins and all of the kind of stuff. So read it as this is an outgrowth of the apex transaction E Commerce.
38% growth in the fourth quarter of 2020 in March we broke 10% of our sales being E commerce.
For the first time ever.
And I'm pleased to say that despite the fact that the surge actually heard of it because most of the surge of orders actually almost all of them are outside of E. Commerce, that's people and a chaotic fashion.
Order of getting product from us and a lot of that over the phone.
But despite all of that of the first time and our history E. Commerce has more than 10% of our revenue and again, that's ecommerce measured way this community measures at.
I personally think that's a.
And inaccurate way to measure it because.
I think 20% of our revenue being vending and E commerce.
Think of.
<unk>, 7% and 10% of our revenue being bins and fast stock is E commerce because of customer, but it's better than E commerce because of the customer doesn't have to order at.
The best digital flow of there is and then the final being.
10% that true is ecommerce.
With that I'm going to turn it over to hold and because I don't have my texts from my lifestyle and these shut up.
Yeah.
And pretty soft control of that.
Alright, good morning, flipping over to slide seven.
Fourth quarter of 2020 sales were up six 4% annually, that's an acceleration from the third quarter holiday timing was favorable this year, but even so the overall tenor of the marketplace continued to improve during the period.
Sales of safety products, and up 34, 6% driven by growth to state and local government and health care customers, which is at 98, 3% of the period.
This continues to be some blend of COVID-19 mitigation, PPE restocking and pre stocking as well as share gains and most encouraging data point is at 28% of the accounts that bought PPE from us for the first time and the second quarter of 2020 bought from us and the fourth quarter and they tended to be the larger opportunities. So this continues to <unk>.
And and force that we have gained share and increased our growth prospects and state and local government and health care customers, that's going to carry into 2021.
Non safety products were up 3% annually accelerating versus the third quarter of 2020 janitorial products driven by the same trends of safety, we're up 33% more cyclical verticals remain negative and the fourth quarter of 2020, but generally saw moderation and the rates of decline in fact fasteners and material.
Handling edge into growth territory and December <unk>.
Improving macro data is producing better trends in core markets, particularly manufacturing, which grew one 7% and the fourth quarter of 2020, we don't have a lot of visibility, but our regional vps remained optimistic that activity will continue to improve.
The exception to this normalization as our growth drivers signings COVID-19 continues to negatively affect of labor markets and supply chains, but our customers are operating around those conditions. We believe that absent COVID-19. The market will support of 100 vending signings per day, and 100 onsite signings per quarter, however, lack of access to facilities and decision makers.
In light of Covid protocols is delaying new commitments. The challenge that is carrying into the first quarter of 2021 and makes it difficult to determine when signings activity will return to potential.
Now to slide eight.
Gross margin of 45, 6% and the fourth quarter of 2020 down 130 basis points due to product and channel mix relative growth of lower.
Lower margin Covid products and organizational factors such as further clearance lower vendor rebates at overhead deleveraging.
Gross margin was up 30 basis points sequentially and a quarter that more commonly sees a decline realm.
Relative to the third quarter of 2020, we saw the revenue share of lower margin Covid related products declined by 200 basis points, even as the margin on those products improved by 200 basis points on selective pricing actions taken in the quarter. We also experienced more favorable shipping and fleet costs and the period largely from having rationalized our weekly routes earlier and the year.
Strong growth and continued tight control of costs generated 210 basis points of SG&A leverage to produce and operating margin of 19, 5% of 80 basis points year to year.
Nearly half of this leverage came over labor costs as our record fourth quarter sales were achieved with head count that was down mid single digits versus last year.
Labor productivity improved meaningfully in the fourth quarter and full year of 2020, and we will look to sustain this in 2021, we also leveraged occupancy at lower branch count and vending costs as well as other expenses on tight control of travel lower freight cost as we rationalize our branch pickup fleet and lower insurance costs, our incremental margin was 31%.
And if you put it all together we reported a fourth quarter 2020 earnings per share of <unk> 34 of nine 6% from 31 and the fourth quarter of 2019.
Turning to slide nine.
We produced $321 million.
Of operating cash flow and the fourth quarter of 2020, representing 164% of net income.
And for the full year, we produced $1 1 billion of operating cash flow of 128% of net income.
Weak demand freed up cash and working capital and we did benefit from $30 million of cares act related deferred payroll taxes and about $20 million of payables that moved from the fourth quarter of 2020 of the first quarter of 2021. However, we also believe we are taking steps to be more productive with working capital at.
<unk> receivable were up three 7% with growth related to higher sales mitigated by improved collections with past dues down 23% year over year.
Inventories were down two 1%, we have taken steps to make it easier to move inventory internally to get at where it can best be used which has been particularly useful as we close branches and migrated other branches to a leaner inventory model.
You put energy into clearing of older stock from our branches and hubs as a result branch inventory was down nearly 8% at year end, while onsite and hub inventory was up just low single digits.
Net capital spending was $158 million and 2020, the lower end of our $155 million to $180 million range and 2021, we expect net capital spending to be $170 million to $200 million with the increase over the prior year being a combination of catch up maintenance spending following tight spending controls and 2020 at.
As well as higher spending from a non hub facility project and we noted to support our growth.
Record net income and operating cash flow and 2020 allowed us to acquire the assets of apex deploy significant resources to secure critical product and carrying working capital for customers and returned $855 million to investors and the form of dividends, including a special dividend in December and share repurchase at the same time net debt is just five.
And 1% from a capital and substantially all of our revolvers available for use.
And before turning it over to Q&A and there is one change to reporting I wanted to discuss at the end alluded to this.
The bin stocks have long been used and distribution to hold product and customer facilities over the last few years. We've taken these beds and we've equipped them with scales of sensors that turned them into digital tools that provide product visibility continuously monitor those products and generate fulfillment efficiencies.
And these fast bins complement venting expand the products that can be digitally managed and round out our fast and will manage inventory of our F&I offering.
And we anticipate commercialize and the more aggressively in 2021.
As a result, and 2021, you will replace reporting on vending signings with weighted <unk> signings. This is going to convert each vending device and fast been device into a standard unit based on the target output of our fast 5000, and vending machine, which is 2000 of months and.
And combine that into a single data point and 2020, our weighted <unk> signings were 15000 and 724 and 2021, we are targeting 23000 of 25000 weighted at my signings with that operator, we'll take questions.
Thank you, we'll now be conducting a question and answer session.
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Our first question today is coming from Adam Uhlman from Cleveland Research. Your line is now live.
Hey, guys. Good morning, congrats on the successful here.
Thank you.
And I was wondering if you could help us out with maybe some insights are a framework of out.
Youre thinking about.
About margins for this current year of the <unk>.
Company, there and great job controlling costs and a tough environment seems like perhaps hiring picks up and some other expenses like bonuses and they should probably be bigger.
And any kind of rough framework, you could help us out with.
You broke up a little bit there.
I guess I could probably interpret of about 20 questions and that one so I'll try to keep it short.
If I think about starting at gross margin.
If I think about 2021.
This might be one of those years, where given the easy comps that we have I would expect our gross margin to be up year over year.
Now.
<unk> had some conversations with folks that are getting really really high numbers and thats sort of day. So I don't think that the concept of surprises anybody but order of magnitude I think.
I think we need to think about and in 2019, our gross margin was 47, 2%.
And nothing else had changed.
Let's assume that mix would have pulled that down 60 basis points, a year and 2020, and 2021, which would put you at about 46% just naturally on mix and if nothing else had changed.
Yeah.
<unk>.
But if I think about it so if I think about that as kind of of baseline.
Yeah.
And it's true that I don't expect the inefficiencies, particularly in the second quarter to repeat but I do expect that we're going to have higher COVID-19 mix in 2020, just those types of projects and 2021 than we did in 2019 and I think that's going to work against that 2019 base line a little bit.
If I if I think about we're still going to be selling through masking inventory through the first two or three quarters of the year and and that's going to pull margin down a little bit.
I'll tell you I think the shipping costs are showing every indication of probably moving up.
As we get towards the end of first quarter and the second quarter and so I think there's some pressure there and so like I said I do believe that our gross margin will be up a bit in 2021 over 2020, but as I said I think we need to be somewhat tempered and our expectations of the order of magnitude and I say that only because of their had some conversations where I think people are being a bit over aggressive with that.
Hopefully that gives you at them a little bit of a framework to think about gross margin.
As it relates to operating margin.
I would expect that labor will get better.
We would add labor and Duke.
Getting better because it means were adding revenue, adding selling energy.
But whatever our growth winds up being at the top line.
We'd expect at our increase in Ftes would be no more than 50% of that growth and perhaps somewhat lessened net and I think that's kind of the objective of the organization.
And so I think that we will leverage labor.
When we grow this year.
And so when you when you tie it all together I'm still thinking in terms of the framework of $20 to 25% incremental margins.
Based on whatever level of growth that we can achieve this year and.
Those are I think the pieces that I would think about.
Okay, great. Thank you very much.
Sure.
Thank you next question today is coming from David Manthey from Baird. Your line is now live.
Alright, good morning, guys how are you.
And any.
Great.
I wanted to ask you about the bin stock of the <unk> initiatives historically, when you've come out with initiatives like vending are onsite at our CSP or whatever you've outlined some of the key aspects of the strategy and.
And this one seems fairly significant and just wondering can you share any margin metrics of how you view of the Tam to help us visualize the long term opportunity of the <unk> stock of this <unk> initiative.
Yes.
Well I think a lot of little bit of I think of the <unk> vending F&I event component.
That is really of non fastener thing and.
Close to 50 per cent of the revenue going through vending is of safety product. So as we were evolving through that go back to the earlier part of the last decade.
We are having those discussions about what that meant from a mix standpoint.
If I think of the FM.
Ben.
And then I think of the <unk>.
Excuse me fast Ben and fast stock.
Fast food.
<unk> bin.
Especially of the RFID component of that.
And a lot of cases, it might be and production environment.
Where is the current months system and the net being as empty you throw in a tub of above your shelf and it tells US you have and empty bin so it's pretty basic technology. If you think of it that way at resilient technology, that's probably more of production environment. So.
And that probably has a gross margin profile, that's that's more akin to the.
Yes.
The vending.
If I think of it from the standpoint of after the half of my third piece fast stock that's a lot of MRO.
At.
And or.
A nice mix of MRO and so that's that's probably and it's very faster centered.
And so.
That has a margin and that's more of like the fastener piece is that that helped it.
Yes. It does I guess, you've outlined these pie charts that you can give us an idea of where you think you're headed in terms of revenues and yes that does help in terms of the profitability. So we'll talk to you at offline. Thanks, a lot Dave.
And the other piece I'll point out is the.
The best part about fast Ben and fast stock is.
It's a labor efficiency its productivity.
And because that business, we want to go after allows us to go after that with the best cost structure, because that's been a really critical part of our of our path to last five years and it's gonna be a critical part of our path of the next five years.
Yeah, and I might contribute this to that and I get asked a lot and what is the gross margin of a vending machine and.
And my answer is often a vending machine doesn't have a gross margin and it really depends on the product Thats vented and what margin comes with that product and I would think about the fast Ben and the same way I don't think the BN has an inherent margin it depends on what is being stored and that Ben.
And so when we think about the bids we've always had.
Fast stock, which has been heavily oriented towards fasteners and so you would argue that that Ben has of fastener type of margin. What we believe will happen. In addition to the efficiencies that Dan talked about in terms of the fulfillment process. We think that these fast bins will actually lend themselves to our being able to be more involved with other.
Your line is outside of fasteners power transmission and fluid power come to mind for instance, and so.
We've always done fasteners and these bins will continue to passengers and these bins and we'll get the benefit the benefits and efficiencies for fulfillment.
We'll certainly try to try to leverage that and even more market share and faster and so we've always done that but to the extent that we can we can use fast Ben.
To get into some of our other nine product verticals of a little bit more of a little bit more deeply those verticals will typically have a lower gross margin than fasteners, and they'll probably be more and more consistent with our non fastener business, which is which is and that sort of low to mid <unk> type of range.
Got it thanks guys.
Thanks.
Thank you of our next question is coming from Chris Dankert from Longbow Research. Your line is now live.
Hey, good morning, guys and thanks for taking my question.
I guess first off and just thinking about <unk> again to kind of further pull that thread you were talking about increasing labor efficiency, just any additional benefit that you guys could specifically call out on working capital and 'twenty 'twenty one from that initiative.
Our book <unk> been and what we're doing with <unk>.
And if your increasing inventory turns and kind of is there any explicit and benefit to working capital there.
Probably don't want to get ahead of ourselves and what that means for 2021, because it's still going to be at its still something new and be honest with you.
The only reason when we started vending years ago, we didn't start talking about it until we were about three years into it and.
And here, we're actually talking about it when we're about a year end to it and the other reason beginning.
Because of it because in some cases, where we would've put a vending machine and the past I think we will put some bins and now because we now have a better suite of products, because we own the underlying technology and and improves our ability to bring the most efficient tool to bear.
The.
We've talked in previous calls about what we call our lift concept local inventory fulfillment terminal.
And really what that's about is.
Perhaps.
Sometimes the best place to stock product and the product is and the local branch or onsite.
Sometimes we're to do put that product is in the regional distribution center.
And and really what we're doing at Lyft is something we've talked about years ago is supporting lending.
And with maybe a third type of distribution and Thats, the fulfillment terminal, where just whats gone and the vending machine is what's in that little lift facility and are managing at there and we're able to strip. These are high frequency.
Turn it over products, we're able to strip some of that out of our branch and rake at into the.
Into the <unk>.
<unk> facility, which is from a labor standpoint, and more efficient, but from a working capital standpoint incredibly attractive over time.
We had we have dine lift facilities that are operating at the end of the year.
We're still just touching a really really small percentage of our of our vending devices. I think I think we're touching about 2500 right now and our goal is to double that lift from nine operating at the end of this year to 18 at the end of next year, we will still be.
Even with our optimistic projections still touching a relatively small number of vending devices at the end of the year, but its ever growing and that that will work some working capital out, but it's still on a relatively small base.
That logic equally applies to SaaS and Paas stock and.
And what I believe contribute to that is if you think about the core value add that fast and all brings to our customers.
Our being able to go to them and say look today you of 100 widgets on the shelf because we're better at managing the supply chain because what we do we can reduce those hundred wishes to 80 widgets.
And now those 80 widgets will probably include some safety stock from our perspective, because we want to make sure that we don't shut the customer down and and we need to make sure that we go and we check those bins and check those machines et cetera, and so those 80 widgets.
And improvement, but what do you think about what what fast Ben can do in terms of informing us and real time about need.
Possible that those 80 widgets can be 75, because we are much more aware of and of.
What the quantities on hand.
I agree with Dan and I think 'twenty and 'twenty, one as far too early to talk about what the impact of this is on working capital. This is the first year of really aggressively commercializing what we've what we've built and worked on.
But I mean intuitively if we mark at this correctly and I think we will there should be some benefit over time to working capital from the efficiencies of brings to the fulfillment.
Understood understood and does it makes sense just very briefly at a follow up.
And when I look at <unk>, obviously, a lot of noise from some of the search sales of it makes sense of kind of benchmark.
<unk> EBIT margin on <unk> 19 of that how we should really be thinking about it it sounds like kind of in your prepared remarks, how youre trying to walk people there a bit.
Well.
I'll answer that this way and it's the way we spoke at our.
At our virtual leadership meeting back in December and at centered on our government business, which.
Was.
Huge recipient and sells a lot of these COVID-19 type sort of sales.
Our government business historically is a relatively small part of our business about 4% in.
And the second quarter and surged over 10% of our business and and I don't know what the final number was for the year, but it was through most of the year on a year to date basis was up over 100% year over year.
And and.
So when we come into it into a year like 2021, and what can we talk about it internally is okay normally that business, which is still a young business, we would expect it to grow take 20% of year.
So when we're looking at second quarter of 2021 for our government business, we're saying to our teams.
Ignore your year over year numbers because of all that matters right. Now is where are we in January and where are we building two in September and October.
And then what does that mean for 2022, but at the case of the second quarter. As an example take care of 2019 Q2 numbers. If you are and the government. If you are leading our government team.
And towards the 20% we would've expected in Q2 2020.
Ignoring the Covid thing and then add another 20% to at for 2021, So 2019, plus 2000, 2020, plus 20%, 20% twice over and that sort of year, hence should be on where you're growing two going to be and the second quarter and net.
It's going be of a negative number for government and the second quarter.
Unless there is a different way to do math and.
And and then the challenge to them is because of the broader exposure.
And we received and the marketplace and the fact that more and government customers know about us and.
The only area, where our onsite signings accelerated in 2020 over 2019 was with government customers and the rest of the World you saw our overall numbers.
And does that 20, plus 20 contemplate the fact that more people want to buy from us where more people are aware of us because of that second 'twenty can become at 25% and I don't know, but that's the way we're thinking about it and I would say also and as much.
As 2000, Twenty's and unusual year from a traditional seasonality standpoint, when you think about full year numbers and how the quarters play out.
I would expect 2020 wanted it to be more traditional from a seasonality standpoint, depending on what your.
Sort of outlook is for the macro economy, and maybe it's a little stronger and the back half and the front half of I don't know your call but.
I think that.
And probably ultimately going to do is build out your annual expectations and if you think about the traditional seasonality of our business.
That would probably allow you to back end of the answer.
No. That's very helpful. Thanks, guys and best of luck this year.
Thank you. Our next question is coming from Ryan Merkel from William Blair. Your line is now live.
Hey, guys two questions from me so first off construction was.
Still pretty slow and what's what's the outlook there and then on pricing it looks like prices were flat. This quarter. What are you expecting for price increase and 2021 for both product and freight.
As it relates to construction.
Wish I had different color to give you and I have the last few months, which is to say that conditions are still soft but the.
Our expectations continue to improve.
So.
If I think about heading into 2021 my expectation for construction is still of that.
The weakness that we're seeing today is beginning to be.
Remedied through projects coming back on the board and things like that and that resulted in better results in 2021, and what we saw in 2020.
That would be my expectation, but yes at.
At this point, it's still fairly soft so we'll see obviously comps play a role and that but.
From the feedback from the regions for.
And for the most part they're talking about seeing some improvement.
In the overall tenor of the construction market. So I'm wait and like you guys are too to see that actually translate and numbers don't lose perspective of one element of our construction is there is a tethered to oil and gas.
Yes, absolutely and that's kind.
It remains fairly soft, though again, there too I think that the regionals of sort of eyeing that Q2 is perhaps being a period, where you might start seeing some strength there.
So, we'll see I would say that's and pricing.
And then on the pricing side.
Yes, I would say that pricing was not meaningfully different than Q4 as it has been the last couple of quarters.
I would say going forward. The question really is going to relate to what happens to material costs and we have seen an uptick and steel I think many of you have talked about that very same dynamic.
And if that continues or persists then.
Dissipates and we would have to take some sort of action to mitigate that.
So.
Right now.
We're not taking broad pricing actions, we're certainly doing things from a tactical standpoint, as we did to some degree with some of the safety products, but but if the trends continue on steel the way that they've begun or ended I guess ended 2021 sorry.
Alright and into 2020 than I would anticipate that we'd have to take some actions as you roll into.
And at the end of Q1 and into Q2 to mitigate that effect.
Perfect very helpful. Thanks, Catherine and thanks, Thanks, Brian.
Thank you. Our next question today is coming from cash post Kravinsky from Morgan Stanley. Your line is now live.
Hi, good morning, guys.
All right.
Just to follow up on the price cost question, I guess really over the past three or four years I don't know, if we've been and where you would call of normal pricing environment, especially with.
Tariffs kind of flying and a couple of years ago any reason to believe that.
This will be anything, but a normal pricing cycle in terms of your ability to offset at kind of unevenness of the market.
I know, it's still early Holden you talked about maybe later this quarter of the rubber hitting the road on that and <unk>.
And we put those out there and the market, but anything youre seeing so far whether it's competitively or from your suppliers that would indicate this is something beyond kind of the longer term historical framework for pricing or price cost.
I don't think so.
Yeah.
And obviously conditions around tariffs were unique.
If we get into a situation where pricing is necessary because of more econ 101 variables like steel prices going up and things like that I think that we would be able to address that and the same management and that we've addressed at historically the only difference I would say is that the structure that we've put.
And place internally to analyze and act on.
At the.
Where cost increases are happening I think.
Far better place today than we were pre tariffs net.
I think the tariffs really.
Prompted us to shore up at the technologies that we use the analytics that we use and the internal structure and personnel that we rely on to make us more effective with that so I haven't seen any changes to the market dynamics I think that our internal dynamics are and a better position today than even with the case two years ago pre caris.
Yes.
Got it that's helpful. And then just related to kind of the fast and our captive fleet.
Is there a point at which the absorption benefit from kind of keeping those folks busier again are keeping those assets this year.
Starts to level off and with normal because I know on the way down her and softer patches you talked about the deleveraging there, but at what point does that kind of get back to normal whether that's yeah.
Number of points of growth or a dollar number of any way you would conceptualize it to think about that dynamic.
No.
I think that we're like any other industrial company or cyclical company, I guess and the sense of that when conditions are somewhat soft.
That's a bit of a challenge and you under absorbed certain of your structure, our captive fleet as part of that but frankly, so is manufacturing some of us are purchasing our Asia and purchasing et cetera, right. So.
And then when demand is weak.
That you tend to deleverage and so this is an odd year because you look at our revenue stable demand once a week, but a lot of our demand doesn't necessarily run through a lot of our physical structure.
Lot more direct ship type of business and 2020 than is typical.
And the sort of off the side of that is if demand begins to go up begins to improve at.
And that improvement is impacting the core of our business, which is our field sales and our branches and taking advantage of the business that we've built over 50 plus years, then we're going to leverage those assets and so part of the I think part of.
The answer to your question is what do you expect next year in terms of industrial production growth and market growth. If you believe that we're going to be growing next year.
And then I would expect at 2021, we would be leveraging and we would be getting some benefit from that in contrast to what we saw in 2020.
So I think that the.
And.
It depends heavily on what your expectations for underlying market growth is.
But there is no ceiling, where that becomes more difficult.
I don't think so.
John Im wrestling with what that ceiling is right. I mean, we have we are of a certain amount that we invest in manufacturing we are of a certain amount that we invest in our fleet.
And other elements of our infrastructure that.
At.
If we see demand begin to get better I would expect that that.
And that you might see increases and that but not at the same rate that demand growth and so we would leverage at I don't know that I see a ceiling and that.
There is some dynamics and there.
And we took out.
A truck of data service earlier and the year.
And when that truck is filled again or is overfilled and we need to add another day of distribution and other truck service to that branch.
That's something we've been doing for years and so that's that.
That growth with at the challenge for US is we did a really nice job in 2020, I believe and we pulled that truck service out we didn't see our third party spend go up because we needed some service that wasn't there and our team did a great job of that we need to keep that reined in as well as we go into 2021 and I feel we're <unk>.
And are poised to do that we have historically, because we have better tracking information. We've we've deployed a lot of new technology over the last few years and are continuing to deploy it.
And one of those is better illuminating, what's where in our system just like when you ship of small parcel b net.
Exactly where it is at any given point in time, we're getting better at that ourselves.
The only other nuance at probably introduces I mean, yes, we are cyclical.
Within investing circles as a cyclical type of company <unk>.
Remember that we don't have anywhere near the amount of fixed cost and our gross profit or I guess at our cost of goods as say and average manufacturer does right. So desired.
As our leverage and deleverage work the same way yes. It does does it have the same order of magnitude on the upside or the downside as an average manufacturer does no no we tend to be a little more muted in that regard, but at the same way as your is your classic cyclical.
Got it appreciate at the I appreciate holding share.
Yes.
Probably have time for one more at best.
Certainly our next question is coming from Hamzah <unk> Macquarie from Jefferies. Your line is now live.
Hey, happy new year, Thanks for taking my question.
My question is largely around earned.
Where do you think the impact is on our vaccine rollout of your business.
Clearly theres a lot of moving.
Part of me.
Maybe you can speak to it qualitatively.
CFT and maybe slows, but maybe maybe maybe that helps gross margin maybe the sales cycle of accelerated so non sorry, just any thoughts as to vaccine impact on the business. Thank you.
I think the big the biggest thing is the markers and I talked about our growth drivers.
Prove because at the.
The market has has has stayed at to us.
And they have stated to us from the standpoint of our success of.
And they stayed at <unk>, we like this onsite model, we like this vending and bins and and fast stock model, we like at a lot.
We're just nervous about changed right now where we're worried about what's happening and the next eight hours two weeks two months, we're more worried about that and we are about strategically improving our business because we don't have that luxury and we don't want to invite new rescue and have you move in and so I think at would manifest itself in the fact that our pipeline that would expand and you would see.
A resumption of the goals, we talked of the targets, we talk about an onsite signings and and vending signings et cetera, and again those are markers to engagement with our customer.
And where you would see at I think you'd see the underlying economy improve because people.
And we all we're all tired of this we wanted to get back to something thats closer to normal.
And and retain Theres, a whole bunch of things that we learned and the last 10 months that frankly would have taken us years to accomplish but the necessity of his mother of invention and we invented a lot of the last 10 months out of society and there's a whole bunch of things that are positives coming out of it.
Perhaps that makes our host side a little bit better.
Yes could use it.
And I might contribute maybe a little bit of perspective, right. Because I know that everybody is very concerned about if things normalize that we're going to lose all of that safety business. We don't lose all of at least some of it.
But let's not lose sight of the fact that and as much as everybody is concerned about safety and not growing at a 116%. If you look at and we say you know of of fasteners were down almost 20 and the same period of time.
Covid gets resolved.
We have that tough comp and safety, but we have really easy comps and everything thats not safety, which is a bigger part of our mix right people might be concerned about our market share gains and safety and government if COVID-19 normalized but.
It didn't do as well and signings because of it and so we might lose one, but we gained and the other.
And I think if you stand back from the specifics and look at the overall result for the year.
It was.
Actually I think Dan and I, both used and some writings at was it was kind of a boring year.
Unremarkable year, if you step back and don't think about the specifics and just look at our results.
And that kind of that combines remarkable performance and safety terrible performance because of the market and non safety and if COVID-19 gets resolved that slips.
And that's a prospective out and offer.
With that at.
We're almost at any hour of Dan. Thank you for joining us I would I would share one closing thought of taxi and the past about the price that we all feel and I.
I hope you as shareholders feel and the Blue team and what we were able to accomplish in 2020 I'm also quite proud of the trust that was part of that and important ingredient of that with our customer and our supplier because we had to communicate like crazy and and have trust throughout that supply chain that we could pull from stuff off and I'll share. An example of.
Tomorrow's of an important milestone for us.
A year ago on January 20, <unk>, we did something we've never done after conversations with one of our trusted suppliers company up river culled through him.
We locked down and our network and 95 masks respirators.
Because of what we were learning from our team in China from our from our supplier base and we locked it down and we've never done that before and we did it with some really crude tools. We just basically shut off our request system from one part of.
Simple part numbers.
But it was all about trust between what our supplier would could do and what our customer believed.
US the supplier and fast at all can do to support them. Thanks, everybody have a good day. Thank you.
Thank you that concludes today's teleconference. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.