Q2 2021 Fastenal Co Earnings Call
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Greetings and welcome to the first of all company 2021 second quarter earnings results Conference call.
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It is now my pleasure to introduce your host tail of rental of the past small company. Thank you. Please go ahead.
Welcome to the fast low company 2021 second quarter earnings Conference call. This call will be hosted by Dan <unk>, Our President and Chief Executive Officer, and Holden Lewis, Our Chief Financial Officer, the call of last for up to 1 hour and we'll start with a general overview of our quarterly results and operations with the remainder of at the time being opened for questions and answers today's conference call.
At the proprietary basketball presentation and is being recorded bypass at all no recording reproduction transmission or distribution of today's call is permitted without basketball consent. This call is being audio simulcast on the internet via the basketball Investor Relations homepage investor at basketball Dot Com a replay of the webcast will be available on the website until September of 2021 at midnight.
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Today's conference call May include statements regarding the company's futures future plans and prospects. These statements are based on our current expectations and we undertake no duty to update them. It is important to note that the company's actual results may differ materially from those anticipated factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the 6.
<unk> and Exchange Commission and we encourage you to review those factor of carefully I would now like to turn the call over to Mr. Dan Florida.
Okay.
Thank you Taylor and good morning, everybody and thank you for joining our second quarter earnings call.
A similar sort of similar to the last 5 quarters, So let's start with the.
A few of stats on our Covid experience.
So to date, we've had 1950 cases of COVID-19, among our employee base of about 95% of our employees have contracted the virus over the last 5 quarters.
Looking at at from a pattern standpoint, and as we've discussed in previous quarters, our worst quarter was the fourth quarter of 2020 November of 2020 of was our worst month, but in the fourth quarter, we averaged about 60 cases per week.
In the first quarter of 2021 that dropped to 44 in.
In the second quarter that dropped to 20 cases per week and I'm pleased to say in the month of June we averaged 8 cases per week at about 30 cases throughout the company so very good patterns not.
Not unlike what we're seeing generally speaking in society, especially in the countries in which the bulk of our employees are located.
If I 1 of the things that that should jump out at us at a.
Reader of our earnings release or in some of the commentary 1 of the 1 of the struggles that we are seeing that is not unique to fast at all.
I suspect most companies will say this is a difficulty in the hiring.
The addition of people as we're re emerging from the shutdown of the economy of 2020 and the first part of 2021.
And there's I think 3 distinct subsets of drive at at least in our case.
As you all know historically, we are we are a promote from within culture, and we believe and starting early in a person's career of net promote from within culture.
We hire a lot of part time employees in most parts of employees.
Very high percentage of those employees are part of our full time students at.
And we think of it as well.
And in most cases in a perfect world, you're not hiring of parts of employee of hiring of future fulltime employee at.
And we provide a tremendous amount of flexibility to folks early in your career.
We focus very acutely on 4 year state colleges.
And the 2 year technical colleges.
And so in a period, where schools are closed and people are studying remotely a big chunk of our recruiting base is vaporized from the areas that we traditionally.
Our approach and that has created some challenges for us.
I'm pleased to say those challenges have lessened over time, but they are still pretty acute.
A fair number of our Oh part time employees, especially at our distribution centers of lot of them. We represent a second job I heard of example, the other day of individuals that.
Had pulled back their hours with us because they hold a second job because they are of child in college, and it's a great way to earn extra money we're at.
And to be flexible with employees and scheduling.
But their employer has gone to mandatory overtime and so they just don't have the hours to work for us So that's putting some challenges.
The third and this is more of cross when I think of generally speaking our branch and onsite network.
We are seeing some geographic biases.
In the numbers as far as country by country and state by state in the United States, depending on how open or close the society is what.
What what impediments of our to hiring them from the standpoint of.
Of public.
Public policy, we are seeing some patterns there.
We are seeing no meaningful pattern from a ratio of perspective of hiring.
Of this we've made over the last decade, we continue to see that throughout the business, where we have seen a stark weakness and I've talked about this.
And our April annual meeting is on the gender side.
We've seen the application side of the business. During 2020 and this has continued into 2021 are female applications are down about a third from what we've seen in recent years.
And we've seen worse than historical patterns as far as turnover.
In an environment, where society of shut down and a lot of schools and daycares close we've seen a dramatic impact and that's fallen largely on the female portion of our employee base and our potential employee base and we're making efforts to to to improve that but they are difficult end, but with that I'll switch over to the flipbook.
Sales of manufacturing construction customers grew 21, 5% of the second quarter. There was as expected of falloff in the pandemic pandemic related sales of.
Frankly, a good thing.
And which resulted in an overall flat sales performance from a year over year basis.
I believe we continue to manage costs really well I'm. So impressed with the team throughout fasten all at.
And in our ability to manage expenses well, we did have some resets and Holden talks to that in the earnings release.
Our branch and onsite our incentive comp, there's a reset going on there because a year ago of lot of customers were idled or shut down.
And a lot of our search business was direct container shipments are not containership with excuse me direct palette and container end truckload shipments.
And so it was of different cost structure. So I'm pleased to say our branch and onsite business is coming back in a resounding fashion.
We're paying people for that we're also seeing incredible reset in the health care I believe health care expenses were up about 25% this quarter and that's really a function of we're self insured when it comes to health care.
People weren't using at a year ago. They are using it now so we've seen a reset there where we're seeing some partial reset some things like travel.
In the.
Our air fare was up about 10 fold from second quarter 2020, the second quarter 2021, now before you read anything into that that that's meaningful we're still at 82% below of where we were in 2019 we.
We don't know ultimately where that that number of settles on.
It's the number I've challenged our team with is with some of the technology tools, we have in our and some cultural changes as far as working from a distance and communicating from a distance I do believe that 30% to 40% reduction is an achievable number and time will tell if that if I'm correct or.
I'm full of it but I believe it's something that it will be achievable right now we're about 80% down.
Price actions to date have largely match cost increases there's a ton of inflation going on theres inflation because of disruption in shipping I E. The cost of moving to container end, there's a pretty public information. So I'll need of site figures, but it's gotten really expensive move of container across the ocean.
And it takes a longer time than it did 12 and 18 of 24 months ago because of all of the congestion at the ports.
And so massive inflation going on we've been largely able to move with at the higher gross margin of experience is really about product mix of.
The fact that the organization is moving more product and more stuff glimpse of our manufacturing there's a there's a utilization of the corporate overhead organizational leverage going on.
And within the safety product category, there's a meaningful shift in customer mix and when you're when you're shipping truckloads of product versus.
Pieces of product the gross margin profile is different and we're seeing that play through in the numbers.
Final point talks.
And I see the team put it in here a few times.
The conversation I think its at both pages about additional digital footprint I guess, they wanted to make sure that debt.
Screw up and Miss it.
But if you if you think about the digital footprint, we're talking about so about 42% of our sales are part of what we call our digital footprint.
It starts at your.
It starts with SMA and at an F M I, there's a device component.
And there's a mobility component.
But of device component is our vending machines that we've talked about for the last decade. It also includes in in growing importance over the last of.
12 to 15 months R. R.
Digitally enhance our technology enhanced bins, where the bins telephone they're hungry just like the vending machine tells us 1 of the targeted needs to be fed.
So.
About.
21% or so 22% of our business is going through 1 of those devices.
Another about 10% is going through what we call fast stock and Thats, where the mobility that we deploy growth of scanning bins and that's really about a of.
Productivity.
In the short term, but I believe an ability to grow faster in the long term and on page 7 of excuse me page 4 in the earnings release, our Holden has a great table in there that lays out the <unk> pieces the devices as well as the fast stock.
The third piece is looking at E com and that's growing quite dramatically and I'll touch on more of that in a second, but but but about 10% of that is outside the semi world. So you add those 3 pieces together about 42% of our sales.
Is now digitally connected and the vast majority of that is where it's F&I and importance of semi.
The goal of shouldn't be an easier way to order the.
The goal should be if it's recurring business why the heck out of your ordering it and why don't you have a partner that supplies at when you need it and that's what we endeavor to be a great supply chain partner for our customer flipping.
Flipping to page 4 of the of the book.
Pleased to say, our onsite signings ticked up again in the second quarter of 'twenty 1.
We had 87 signings, that's our best quarter since Covid started.
And of equal importance, it's about participation how many of our district business units are signing an onsite we had 30% of our district business unit sign of onsite, we havent been north of 30 at since the first quarter of <unk>.
2020, so not only out of the number of strong.
It's broadly dispersed across our business. So theres great participation. We ended the quarter with 323 active sites just over 9% increase from second quarter of last year.
And our daily sales in the onsite business grew just over 25%. So very very strong performance there and it is improving and that builds upon our ability to engage with our customer and grow the business long term.
<unk> touched on that yesterday or excuse me on the last slide.
And I did touch on it yesterday at the board of a different matter.
It was 5843 devices, that's a weighted number of signed in the second quarter at 91 per day similar to onsite.
Nice improving strong performance, our ending installed base was up just over 9% from June of last year.
And if you look at it and I'm going to flip to some points on that table on page 4 the earnings release.
Sales through the devices.
Or up 44%.
Sales through fast stock is up 148, and you combine the 2 together semi grew 61, 4% really excited about what we have going there as far as momentum.
E Commerce.
53% increase.
Large customer oriented E D. I was up 51% that's about the economy.
That's about strengthening of our existing customer base and we're seeing at we're seeing at happen to play out right. There when I look at web sales being up 61, that's about habits changing that's about how our customers are engaging with us. So 2 dynamics going on both very positive from the standpoint of how our customers.
Engaging with us and how is our underlying customer doing starts business.
I'm going to skip the digital footprint since I've covered that pretty thoroughly already at.
Flipping to page 5 this is a new table I believe to hold them plans have at in here in this quarter I suspect next quarter, maybe fourth quarter, but.
It's really doing a quick snapshot of understanding if we ignore the noise of COVID-19 for a second and just say you know what at our business do in the second quarter of 2019, what did it do in the second quarter of 2021, some things that stand out our margin is down about 40 basis points of that.
Period, and that's about the shift that we've talked about in prior quarters of our business to more of an on site a higher proportion of our business being onsite, we're at larger customer larger transaction better expense leverage and you see debt expense leveraged play out in the operating administrative expenses being down 140 basis points.
In that same time period. So all of our operating income was up 100 basis points pleased to say, we had great incremental margin of about 31% in that timeframe.
With that Ann we generated good cash with that I'll turn it over to Jose great. Thanks, Dan.
Turning to slide 6.
As indicated at our sales were basically flat in the second quarter of 2021, I think everybody understands the dynamics at play here about $350 million to $360 million in surge business from last year did not repeat and that was offset by a significant rebound in demand from our traditional manufacturing construction customers end to a lesser degree.
New sales to customers that had never bought from fast and all prior to the pandemic our.
Our fastener products grew 28, 4% and best represent the strength of our underlying business conditions. If we were to adjust out the impact of search sales, we believe that safety and other products would have grown at at a level that is comparable to our fastener growth many.
Manufacturing and particularly heavy manufacturing is exhibiting broad strength.
And in the case of both manufacturing and nonresidential construction sequential quarterly growth in the period exceeded historical norms.
Bind with access to customers that is approaching pre pandemic levels as evidenced by our improved onsite in F&I signings in the second quarter of 2021, our outlook remains positive.
It's also worth highlighting that while government sales were down 63% in the second quarter of 2021, they were up 37% versus the second quarter of 2019, we had similar dynamics play out with certain large customers. We continue to believe that we gained market share during the pandemic.
Now to slide 7.
Operating margin in the second quarter of 2021 was 21, 1% up 20 basis points.
Gross margin was 46, 5% and of second quarter of 2021 up 200 basis points versus the second quarter of 2020.
Our safety product margin improved in a combination of mix as lower margin COVID-19 affected PPE mix retreated to pre pandemic levels at a recovery in pricing as the market has normalized we leveraged overhead costs on an improvement in volumes and favorable rebates, which is a combination of lower rebates to certain customers that were heavy surge buyer.
In 2020, and our own purchasing of key products improving versus 2020.
Product mix, specifically growth of fasteners versus non fasteners was also a significant contributor to the growth and was a significant factor in gross margin of outperforming our expectations for the period.
Our pricing actions largely match inflation, we are seeing in the marketplace and price cost did not meaningfully affect gross margin in the second quarter of 2021.
The increase in gross margin was partly offset by operating expenses growing faster than sales in the second quarter of 2020 in response to the onset of the pandemic, we took certain proactive steps to reduce costs certain costs naturally declined as a result of the weak business at a large portion of our search sales went direct as opposed to through our <unk>.
<unk>, which is of very low labor intensity source of revenue.
In response to improving conditions in the second quarter of 2021 day.
Situations reversed our head count remains under control, but it is appropriately ticking up as demand recovers at our branches further incentive compensation was up almost 20% and healthcare costs were up 25% travel expenses are growing strongly off very easy comparisons as the economy fully opened fuel costs are rising sharply at.
As we indicated last quarter deleveraging operating expenses in the second quarter of 2021 is a function of anniversarying. The first periods of pandemic related cost savings measures combined with a strongly recovering marketplace.
Setting aside these optics. However, we believe the organization continues to manage cost well.
If you put it all together we reported second quarter of 2021 earnings per share of <unk> 42, which is flat versus 42 cents in the first quarter of I'm, sorry, the second quarter of 2020.
Now turning to slide 8.
Operating cash flow was $172 million in the second quarter of 2021. This was down 32% annually and was 71, 5% of net income now recall that in the second quarter of 2020 pandemic related legislation at allowed us to defer 2 tax payments into the third quarter of 2020.
That deferral was not available to us in the second quarter of 2021, and we made those 2 payments as we historically have.
The better way to think about cash generation is by considering that in the 5 years from 2015 of 2019, our second quarter cash conversion average 63, 5%.
Against this we were pleased with our cash generation of the second quarter.
Year over year accounts receivable was up 3.1%.
Those sales were flattish the shift away from PPE surge buyers last year end toward traditional buyers this year blended up our days outstanding.
Inventory was down 5.3% and Theres a lot of moving pieces here.
Part of this is due to the difficulty in getting sufficient imported products, although our hub inventory deficit has not widened meaningfully versus where it was in the first quarter of 2021 as we are finding domestic sources of product. However, the decrease also reflects deliberate efforts to clean out slow moving hub and branch inventory branch closures and the <unk>.
At our stocking focus in the field. We believe these represent improvements at our working capital that will be sustained.
Net capital spending in the second quarter of 2021 was $32 million down from $38 million in the first quarter of 2020.
This was largely from lower F&I hardware spend which was which was a product of lower signings over the past 12 months and greater refurbishment of of semi equipment at.
Our 2021 net capital spending range is unchanged at $170 million to $200 million and we're tracking at the lower half of this range at this time.
We returned cash to shareholders in the quarter in the form of 161 million of dividend and from a liquidity standpoint, we finished the second quarter with net debt of 2.5% of total capital down from 6.4% in the year ago period, but at 5.1% versus the fourth quarter of 2020, essentially all of our revolver remains available for use.
Now before moving to Q&A I wanted to update a few subjects of current interest.
First we continued to experience significant cost inflation, particularly for steel fuel and transportation.
In the second quarter of 2021 price contributed 80 to 110 basis points to growth. This largely tracked our increase in costs and the impact of price costs on margin was immaterial.
Cost pressures remain high however, which will require us to institute further material price actions in the period.
The marketplace is still receptive to price actions and the tools and processes. We have developed of been effective even so given the rate of inflation maintaining price cost parity will be a bigger challenge in the third quarter of 2020.
Global supply chains remain tight we have managed this well domestically, which has allowed our customer service levels remained high as a result of spot buys which do tend to carry a lower margin and inventory in certain areas to build meat.
To build to meet projected future needs.
Internationally, there continues to be a shortage of capacity, which has made moving products, particularly fasteners increasingly costly and sustained long lead times. We believe this dynamic could persist at its current level of intensity through 2021.
No Dan commented earlier on the labor shortages in most of our business. We have largely manage this at this point. However, we are beginning to see those pressures be reflected in our labor costs and the increase in onsite signings and implementations could introduce some additional strains. There. However recognize a few things first this is all partly a.
Byproduct of strong demand and happens to some degree with every cycle stronger growth will allow leverage of other costs that will help us to mitigate these pressures second much of what we're doing with our digital footprint and the change in our branch model will address many of these matters third none of these pressures of unique to fast at all but we believe that our.
Culture at our structure is uniquely geared to navigate them. We've seen we have seen no moderation of these pressures over the past 3 months, but we continue to believe that we'll gain share through them that as all of our formal presentation. So with that operator, we'll take questions.
Thank you, ladies and gentlemen at the floor is now open for questions.
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Our first question is coming from David Manthey of Baird. Please go ahead.
Thank you good morning, guys.
David.
Dan in the past you've.
Noted that at $10 billion in revenues, you should have about 46% gross margin and <unk>.
20%, plus op margin, which is exactly how the business looks today at $6 billion in revenues is there any change to that formula based on how you see the complexion of the business playing out over the next $4 billion.
You know I wouldn't be surprised.
As far as the the residual number which is ultimately the number of that matters that 20% plus.
I see no change there.
Maybe a bias for increasing at but time will tell of on that 1.
I wouldn't be surprised given what we saw at all in the last year end some of the things we're doing as we get deeper and deeper with some of that with some of the larger customers.
Looking at different types of business and options there I wouldn't be surprised to see the 46 us dropped below the 46.
But in those discussions I oftentimes side of the.
46, 24 of 22 was a number that we aspire to.
I think ultimately when you have a branch network, where the average branch is north of 200000 of month versus.
130 to 150 like it is today and an onsite network, that's a bigger percentage of the business.
I feel comfortable saying that any gross margin that the mixed pulls us below at 46 threshold.
Also pulls us below 24 threshold.
And so that plus 20 thought process of when we're at $10 billion organization I feel as good about that today at anytime in the last 5 years. The focus internally Dave is that everybody who is involved in selling make sure that on every individual relationship every individual transaction debt.
They get the value that.
That they deserve based on the day that we bring to the relationship.
As long as we do that whatever the mix does because of our growth the mix does but as Dan indicated theres been no change in our expectation that we're going to be at 20% to 22% operating margin business and a 25% plus return on capital business. There is no change of that.
Yes sounds good.
Okay.
How does the branch configured.
Configuration relate to the lift program.
Maybe I'm misunderstanding of our cfcs, the new Blips and do you expect to see some benefits in 2022 as you free up that selling energy that was formerly consumed by filling vending machines at the.
Store level.
Yes.
Things to keep in mind there as of the lift is still touching of relatively small piece of our vending revenue, which is a piece of our overall revenue.
I think right now we're at about.
8% I think that's where we ended the quarter of about 8% of our vending revenue is being touched by lift.
And if vending is end.
Is lower at 20% of our revenue you can see it's a relatively small piece of it's touching so I don't want to overbuild at Lyft is.
In the short term.
We're really excited about it in the longer term.
And so that's 1 element so the CFC sort of fulfillment center type brands. So we have 2 branch types.
Generally speaking talking about our U S business in this commentary when we go outside the U S of some some nuance to it but I want money of the compensation of that.
In the U S.
In the metro areas.
70% of our branches now are of fulfillment center.
And all of that means is.
We're not we might have limited hours that were that the front door is opened and part of this spring out of Covid.
We found that debt wasn't horribly disruptive to our customer because every customer has a cell phone.
Every customer of Internet access so change of our customer hate call us when you come in or.
Order electronically and we will have it ready for you and the doors can be locked at when you get here will lay in because.
Because most of our business is recurring customers business to business relationships and Thats just the way the branch operates.
We the front showroom has been contracted down.
That's been done at contracted.
And so there is a small footprint you'll walk into at the front door is opened or you pick it up at a locker of the front doors closed 3 of calling we let you in.
That's just the branch separate to that that branch setup and then the other 30% in the metro areas would be the traditional service branch that you've visited over the years. The only been at changes when you get up to the Metro is the mix of a little bit different it's about 60.40.
But but.
But separate from the branch facility is this lift now of the lift might be adjacent to a distribution center it might be completely independent of the distribution center and Thats, just a very focused distribution center that's picking not.
A pallet of product for our branch delivery at picking of total product for a customer vending machine delivery and it's removing that labor that's relatively inefficient at the branch and putting it into a lift towards much more efficient we can bring some automation to at we bring scale to.
At <unk>.
And over time that will become a bigger and bigger piece of our vending business and the real question is can we do some of those same things for our fast stock because highly repetitive transactions you can bring scale of those.
Transactions for the branch network.
And be more efficient.
That help.
It does thanks for the color Dan.
At.
Thank you. Our next question is coming from Ryan Merkel of William Blair. Please go ahead.
Hey, guys. Thanks for taking the question Ryan Good morning.
So I guess first of all holding you mentioned bigger inflation in the second half of 'twenty, 1 and then potentially some price cost issues just given that the market is receptive to price why is their worry on price cost timing.
Well I would say it has as much to do with simply the rate of increase as much as anything else.
You didn't see an uplift in price in Q1, and then it's kind of stayed there right. You've continued to see those increases build end much as we saw during the period of tariffs and inflation. When you see a rapid rate of of scent that continues on for a period of time it can be difficult to maintain the pace, particularly when you have a business like ours.
Over half of it is national accounts of contract business. So now much like in the prior period do we think that debt you catch up to this absolutely and I've always said that I feel like.
If you if you achieve price cost parity anytime within a quarter ahead to 2 quarters behind its kind of what the business supports and I still believe that's true.
But there is always timing involved when when when when cost is trending and thats the situation that we have today.
We've gone to the marketplace for different purposes of couple of times done at least 1 large increase earlier in the second quarter.
And that was received fairly well, but based on what cost is doing will have to have to go to the market with some additional ones.
So at this point, we continue to hear from the field that debt.
Customers are still so busy and receiving at from so many areas that its not been a huge bone of contention, but there are timing issues around cost at around contracts debt that we navigate every cycle will navigate this 1 too.
At this.
<unk> added Titbits I'll throw in there 1 element Ryan is his frankly fatigue.
At set then from the standpoint of I'm going back 1 more time and that's an element that doesn't mean, you don't get it but it makes it challenging in the short term.
The other pieces.
The vast majority of what we're seeing we don't view as transition area.
But there is a transition of a component that is with the congestion at the ports were doing Phil and buys and we estimate right now.
The magnitude of filling buys that we do this year will be about 5 times, what we see in a typical year, there's always issues that come up there as of <unk>.
Spike in demand and we need to do of filling by there's there's an issue with production from a manufacturer of shipment we had fulfilled by but the magnitude of so much bigger right now.
And a piece of that is transition area net piece that you might not capture.
Yes, Okay makes sense of not any different than I expected actually.
And then I just wanted to clarify the decision to remove counter labor at some of the branches that have taken a lot of questions. On this so what are you, giving up what are you getting end would you call. This a tweak to the strategy or is this a major change.
Part of it is.
No.
I don't know if we know the answer to that keep in mind.
That.
The incredible majority of our businesses B to B.
And.
And what we saw during during Covid is is a lot of habits changed.
In your personal life I suspect Theres things you do today in and how you procure.
Items for your personal life that are different from what they were a year and a half ago well that's true with our customer base too. It's true at both the B to B and then a piece of it is I don't know if I'd call at B to C. But maybe it would be 2 very small P.
Where it's at a local business that just doesn't even have an accounts and we've really encourage that customer we can be of better partner for you.
We can provide you a higher level of service by ordering electronically and we will have it ready for you.
Part of the reason for.
We arent necessarily removing some counter labor part of it is it doesn't exist. So our business our branch based business is up 20 some percent.
Our FTE at the branches up less than 1.
Isn't by choice, that's that's what's available and so part of it is up at all.
Offshoot of Covid part of at the legacy because we don't have some of the staffing we want part of it. We do believe this is our model for the future and we believe at the better model.
And what I would probably add.
Ryan at if you think about.
The amount of revenue that's being impacted here.
The cash business, just what is paid to us in actual dollars of incentives or credit card or credit card is about 2% of our revenue I mean, it's not a huge number if I think about those accounts that are $250, a month or less sub 4% of our revenue, but it represents more than.
80% of our active accounts.
And so what we're essentially trying to time to think through is how much lever are we putting into 80% of our accounts that represents 4% of our revenues and when we think about the development of E Commerce and you see in this quarter, our ecommerce our web sales of E. Commerce were up north of 60% that wasn't entirely because of our conversation.
With the smaller customers about how we can services of that model, but a part of it was certainly because of that.
So we don't view it as walking away from a lot of revenues, we view it as aligning the best way to service different groups of customers within our branch in a way that in turn frees up time for our people to sell so it looks like the question earlier.
We created the lift program to free up time for our people to sell to customers that are really going to move the needle the things that we're doing in the branches really intended to do very much the same thing and what I can tell you is I am not sure of this model is a whole lot different from what we did 15 years ago.
A bit of a evolution towards that if you will so you asked what were giving up.
This just seems like a refinement in the model.
To focus on key accounts that can really move the needle and free up a lot of time for talented salespeople to go after those accounts, we think that makes us grow faster.
At 1 tidbit that is I'm, probably more sensitive to this change than most.
I grew up.
I think you know I grew up on a farm in Wisconsin, and I think of <unk>.
My dad would be what I would of just described as a.
B to small business. He was he basically had himself he and my mum ran the farm the kids helped.
And but they did did they did the real lifting but it was a small business at.
And I'm very conscious of we want to serve that customer to and how do we figure out the best way to serve at so when I see web feedback coming I read every web feedback that comes in.
I called quite of few customers over the last year and a half.
To understand some of the feedbacks positive some of it is negative.
It's a rare conversation I don't come off at with the response from the customers, saying.
I don't know if you guys could do that.
Rather buy from you that way, that's how I do I do a bunch of stuff in my personal life.
You guys did that because I think of you as a.
The hardware store and rates stay at Wisconsin.
And so I think the market wants us to do at.
Yes, it makes sense all right. Thanks I'll pass it on.
Thanks.
Thank you. Our next question is coming from Josh Polka Winski of Morgan Stanley. Please go ahead.
Hi, good morning, guys.
Good morning.
Just to follow up on that last question in terms of the freed of time to sell to customers.
Dan how do you think about the priorities there on sites or national accounts of more mid sized customers, maybe all of the above like what is that kind of new ideal customer that the sales force is freed up to go pursue and is there some sort of seasoning period as they they get to meet.
I would imagine or newer customers or.
Or are they productive right away.
The priority is very simple to have a plan.
And that plan involves no no who your larger opportunities are in the marketplace and make sure you are engaging with those customers.
Who really understand the potential of your existing customers in the market and engage with that customer and then they have a plan for everybody else and and that means when something's ordered.
Electronically and it's a smaller customer.
Serve the heck out of that customer meet that customer where we're at.
Works for both parties and that means of somebody orders it.
If it's in the branch, it's ready for them in a short window of time for them to come in and pick it up.
If it's something that's not in the branch income distribution center, we get at in the next morning, and it's in a locker at 7 o'clock in the morning.
And or it's ready for the customer to pick up in the branch at 7 o'clock in the morning, So you're you're very mindful of what is your plan.
Because the bulk of the dollar opportunity is coming from the larger opportunities in the market. That's just that's just math.
But you want you want a nice mixture business because it helps it.
It helps you be of great partner to a wide range of customers and.
And we can be of special.
Business, because we can fulfill transactions faster than our industry because of our local stocking and our captive distribution network, we have a better cost structure to our industry, we have a better fulfillment cycle to our industry and it's incredibly reliable.
And we have that local team.
That can react to the unexpected.
And Thats, what froze up for so many companies and in the second quarter of 2020, they don't have that at <unk>.
Decentralized something special local that can react to the unexpected.
And I think what you do at that time as it frees you up to spend more time in front of those key accounts of those large volume opportunities are and what.
What comes out of that is going to be determined by that conversation and so do we think it's more onsite at probably because we think onsite spring of tremendous amount of value is at more <unk>, probably because we think that brings a tremendous amount of value.
Ultimately remember Josh our model is set up so that we don't have 1 solution for our customer and we don't have 1 solution for each of our customers' plants, we have a different solution that's tailored to each plant for each customer.
And when we're out having a conversation about how we can do that and we have more time to have that conversation.
We suspect more on sites of come out of at least we suspect more digital footprint is going to come out of it but ultimately it's about the conversation with the customer of the gains of share as of supply chain partner.
Got it that's helpful. That's helpful color around and then just a follow up on on sites I know that.
All of it.
In the release, the closings and conversions together.
Kind of remain elevated here or is that just a function of folks kind of reassessing post COVID-19 now that they're back out in the world do you think thats more of a temporary phenomenon or is this just kind of the run rate there on churn for a while.
Since since the level of it hasn't seemed to have changed during COVID-19 or after COVID-19.
I would say that it's been a little sticky.
If you talk to the folks in on site I think they would say that 27% of quarters had been elevated.
And I think that if we.
If we were at at a piece of it I don't think that would surprise anybody at pace of 100 is probably a little bit more than we might have expected.
Why that is I'm not sure now know each quarter. We again, we go through why we're seeing closings and what we take out of that is.
The large majority of those closings continue to either be a plant being shut in of volume going elsewhere or going to a different geography.
Or simply a decision on the part of somebody at fast at all to say you know.
This isn't actually working out as an on site. We think we can service. This just as well if not better at a branch and we're going to take it back there and do it that way.
And that continues to be the vast majority of the closures that we see as opposed to those fewer cases, where it's we've lost the business, which does happen, but its the minority of those closures. So.
In the case of the first there's not much we can do about plants moving right in the case of the second were making the business decision and I can't tell you, it's a bad decision.
In the case of the third that happens every now and again you lose a piece of business but.
For the most part we're not seeing.
Is our competitive moat around onsite to get great at and that's why we're seeing closings. We just haven't seen any indication of that so that mix hasn't changed net answer hasnt changed.
I guess, where I'd leave it and were as excited about onsite as we've been in in the last.
Decades.
Great I appreciate the color guys.
Okay. Thanks.
Thank you. Our next question is coming from Nigel Coe of Wolfe Research. Please go ahead.
Thanks, Good morning Gents.
Well.
So Dan I think you mentioned last quarter.
I look for pricing some of.
In the normal range I think is at 2% at the upper end.
Is that going to be enough to offset the inflation that you're referring to in the back half of the year do you need to go above that is that normal 2% range.
Okay.
I don't think so Nigel not at this point now I don't know what.
Is it store for Q1 on costs right at the various.
Pieces are well I'm, just thinking a little bit further out otherwise I think we have a decent beat on what Q3 looks like.
But I don't know how long this inflationary environment is going to persist. So it's hard to give a definitive answer on that based on what we know today I don't think we need to be above our historical range I do think we need to be above 80 to 110.
But I would still expect that to be the case in the back half but.
I changed my earlier statement or my statement from last quarter that it wouldn't surprise me to see us.
North of 150 basis points I think that's probably what we need to see in order to continue to mitigate and we made some progress from Q1 to Q2 I expect to make more progress Q2 to Q3 end.
We'll see but no I don't I don't think we need to be north of debt $1.50 to 200 basis points that I was thinking about last quarter.
Okay and then.
You mentioned <unk> of holding them.
Sometimes you know sometimes you do give some color on gross most of mixing them.
Just given the moving pieces on inflation and pricing.
And also of the pandemic mixes coming down as well how does how do we think about that sequential built into the back half of the year on gross margins.
Yes.
Well I guess, we'll always argue over what we what we find to be unusual circumstances that we should guide for I guess I'm not doing it at the same way at this time around.
But I mean, I think if you think about the dynamics around gross margin right I mean.
<unk>.
Okay.
The last couple of months, we've seen cost of overseas transportation go up and that goes through our cost of goods right. Obviously the cost of fuel a lot of big expense, but continues to go up if you think about the fill in buys that Dan referred to earlier.
Those are going to continue to be at a fairly high clip if we think about.
<unk> costs being a wildcard.
I don't think that our second quarter is going to be 46, and a half I would not be surprised to see at taper off from that level, but.
Where that goes over quarters, you mean, I'm, sorry, when I say second sorry third quarter, Yes, I fully expect second quarter before 6 of App.
I don't expect third quarter to be at that level I think that Theres just forces of the marketplace that are going to work against that before you talked about price cost and then there is the wildcard about.
At our level of achieving on price cost and.
Now just to be clear, we have plans for pricing we have systems for pricing, we're not writing off the idea of being neutral price cost, we're going to work very hard to maintain that and I think there's a good chance we could be I'm, just saying at the pressures are going up and we have to be respectful of that.
Okay. Thanks.
Okay.
Thank you. Our next question is coming from Chris Snyder of UBS. Please go ahead.
Thank you.
Wanted to follow up on the earlier conversation on the onsite closures.
Because you guys are saying we've seen this 100 ish of run rate.
We're really starting at 19 com and carrying through today of 100 of per year I mean.
And with that the churn has gone higher to high single digit from pre 2019 at was really in the low single digit I guess my question is as you're scaling it.
Is it incrementally more challenging to find.
Onsite candidates that you have high conviction arent going to move or going to be.
Suitable from a volume standpoint.
Simple answer no its not more challenging theres ample opportunity out there.
What is challenging is in the last of <unk>.
15, 16.17 months of.
The proposition of talking to a customer moving in with them when they want to be distance from everybody on the planet imagine, having an apartment and you're bringing in a roommate.
Kind of at the same concept you just don't you don't want to be around people.
And that's that's changing and so that's seeing that expand.
So some things that if you think about vending, which we've been doing now for 13 going on 13 years, when vending really took off for us in that latter part of 2011.2012 standpoint.
In the following year.
We were pulling out.
25, 28% of the devices that we've installed because some of them are just bad.
And we didn't know what we didn't really know what we're doing yet because we were creating an industry.
And then that went to 22% and then it went to 18% and then as our participation and our knowledge base across the organization improve today.
13 years later, we remove every year about 12% of our devices.
We think we can get that 10.
With our lift strategy and some of the things we're doing to make it at a little bit easier to.
To serve fmri devices, but we think we'd get at 10, but it's still 10%.
The real question is.
What is that natural number.
For on site.
And 5 years into a really hard push unfortunately.
A year plus of that 5 years is COVID-19.
And so I don't know that we know what that number is.
Now.
We do know that about half of the onset that we close or because of the customer move the facility of close down the facility at.
And the other half are we pulled some back we lose some business. There. So there is a number of dynamics. There is somewhere we grow at from 30% to 60, and we get stuck at 60 and as Holden mentioned, a few minutes ago, we smoothed out.
The branch because it's more efficient for everybody.
Or the customer kicks us out because they are out of room.
And.
I don't.
I don't like on plant closures, but I know and I don't like semi devices coming back, but I know, it's part of the business.
And the real question is can we as an organization over time.
Outgrow our industry and gain market share.
More efficiently.
More productively and maybe were done quicker than anybody else. So we can do that with onsite and F&I devices and all the things we're doing.
A lot of business and I think the reason we look at it every quarter of why those closings happened. It's just so that we understand why and.
When you think about debt.
Typically I think people think about of closure was a loss of revenue and end in the large.
The majority of cases of closure of an answer it is not of closed there's not a loss of revenue in fact of the extent that there was some progress at the onsite at the original at steps you might be bringing more of the branch and then left in initially and so when you think about the closure rate think about cut it in half because a bunch of the business. We're still we're still maintaining and then as Dan indicated theres sort of historical precedent here.
With vending.
We ran hard and fast to sort of get into the marketplace.
We learned a lot and as we learned a lot.
We sort of.
Cleaned up some things that maybe we did when we were when we were early on in the initiative and then we were smarter and more efficient coming out of it and I think we're really following a very similar pattern here.
Appreciate all of that and I guess following up and trying to tie the onsite conversation into your.
Prepared remarks around hiring.
I guess from a customer standpoint, whether its social distancing in the factory or them, having trouble, bringing in new employees has that impacted maybe your revenue per onsite.
Year to date.
As.
That all begins to come back should we expect the revenues at onsite outpaced growth over across the remainder of the business at in the coming quarters.
Yeah, I'm not quite sure how to answer your question from the standpoint of.
If if the.
Social distancing in the plant.
Means that our production is down 20% and we're supplying OEM parts.
OEM fasteners it.
It would impact at 20% of that plant.
If it came out.
What impacted most of them.
Directionally I guess my question was more on the safety side, because when we see the pictures of the vending machine, but it seems like there's a lot of work force consumables and that.
Of that or maybe more types of how many people are in the plant and not necessarily the output from that plan.
Yes, but they usually go hand in hand.
But.
When it comes to vending.
Devices.
Vending machine.
Over half the revenue of there is PPD.
And that's directly related to how many human beings are in that plant and for how many hours of the day.
And so if there's a smaller number of human beings, but they're spread out over multiple shifts. So the same amount of hours are being worked.
I wouldn't expect safety to be impacted it might be higher because people are much more conscious about safety.
Then about wearing of masks are wearing gloves or doing anything people at a better about Washington of dam hands today than they were a year and a half ago at.
And so to that extent.
You might have fewer people and more consumption.
Because of everybody, saying do this do this do this in a number conscious to it.
I appreciate that I don't know that but I don't know specific to onsite either I mean, if what you're talking about labor productivity in general.
That could be true broadly.
You know.
Sector has gotten more productive over time, and we've continued to drive safety revenues, because we continue to gain market share we think that opportunity is still there.
Thank you I actually thought youre going at a different place with the question.
And I thought you were going to the place of if it's really difficult to higher does that help your ability to sign on sites because it's difficult for your customer at a higher I would say.
It sure doesn't hurt.
And but it's difficult for us to hire for that to interest.
It's a more efficient model so.
The customer doesn't need to hire 3 people and maybe we need to hire 1.
And so it becomes it becomes an enhancer, but its I don't know how you quantify that at scale.
No interest in color. Thank you for that.
Yes.
Alright.
Thank you. Our next question is coming from Hamzah <unk> of Jefferies. Please go ahead.
Hey, guys. Good morning, it's Ryan Gunning actually filling in for Hamzah.
Could you guys talk about good morning could you talk about market share gain and how much of that kind of outperforming in terms of growth versus your end markets.
Yes, I mean, you have to make an adjustment obviously for the.
And then for the pandemic and the search sales, which I've done at.
And if you compare our growth then I think I indicated fasteners grew 28% and if you take out the pandemic of would've been care of comparable.
Across the business I think if you compare that to what industrial production is done during the quarter or to any of the industry surveys that are out there I think that you would see that we outgrew them.
Both of those measures so.
We feel good about the continued market share gaining capabilities of the business.
Got it.
Thats helpful and then.
Could you talk about how youre thinking about freight going forward and just where maybe you are in terms of optimizing your fleet from a route perspective and other last mile delivery factors.
I would tell you what I'm going to ask Holden to take that 1 off line because we're right against the hour.
Yeah.
We're pretty strict.
We try to hold us to narrow because we realized we're in earnings season, and the analyst community isn't at a call to jump on or stop the review so we'll take that 1 off line, but.
Thank you to everybody for participating on the call today and to the fast on theme on the call. Thanks for what you did in the second quarter. Good luck in third.
Thank you.
Gentlemen, thank you for your participation and interest of ethanol. This concludes today's event you may disconnect. Your lines at this time and have a wonderful day.
Okay.
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Yeah.
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