Q1 2021 Fastenal Co Earnings Call
[music].
Greetings and welcome to the first small companies 2021 first quarter earnings results conference at this time, all participants on a listen only mode. A question and answer session will follow the formal presentation. If you are connected via phone and would like to ask a question. Please press star one on your telephone keep.
Pat.
And it wasn't connected via the phone who require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Ms Ellen and still so fast and al. Thank you. Please go ahead.
Welcome to the first small company 2021 first 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 will last for up to one hour and we'll start with a general overview of our quarterly results and operations with the remainder of the time being opened for questions and answers today's conference call the proprietary.
First of all presentation and is being recorded by fast and all no recording reproduction and transmission or distribution of today's call is permitted without fast and all that this call is being audio simulcast on the internet via the fast and all Investor Relations homepage Investor day fast and all Dot Com a replay of the webcast will be available on the website until June one 2021 at midnight central.
And 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 company's latest.
Earnings release, and periodic filings with the Securities and Exchange Commission and we encourage you to review those factors carefully I would now like to turn the call over to Mr. Dan Florida.
Thank you Ellen and good morning, everybody and thank you for joining us for our Q1 earnings call.
I will thank you too.
We have our annual meeting.
Weak from Saturday.
And.
Because of that.
And too much most people's so great satisfaction all non.
Tell the story this morning.
And we will get right into the quarter.
If I go to page three of the flipbook, but rest assured if you participate and our annual meeting next weekend.
I will tell the story there too.
If I go to page three of our flipbook.
Earnings per diluted earnings per share were <unk> 37 times for the quarter and increase of three 7% net sales were up three 7% as well on a daily basis. They were up 5.3.
And thanks stand out for me when I think of this quarter, obviously, we had the storms in February and ops.
So a massive storm on much more than we've seen in years past, but winter is.
So as like that it has storms and it impacts our numbers.
The probably the most meaningful impact, though and larger than the storms was the fact that we had one less calendar day.
63 versus <unk> 60 for I believe.
And it might not seem like a big deal and the scheme of life, but we do about $23 million a day.
And that day, we missed most of our expenses center on.
The month, whether its rent or payroll or things like that they center on a period of time and.
So most of our expenses are still here. Despite the fact, we had one less day. So if I assume 30% to 40 of that dollar lost in that day.
And would flow to the bottom line, that's about a $7 million to $9 million impact to the quarter.
And and.
So can have a very meaningful impact I'd point that out only because Q4 has a similar nominally.
2021 and a weird year, we lose two business days, one and the first quarter and one in the fourth and I point that out just to make sure we're aware of that.
But very impressed with what our team is doing to manage expenses.
And to grow the business and this environment.
Additional item and the quarter, we wrote down on about $8 million worth of Three-ply mass and our three part of mass is not historically, a product line or a product we sell much of within fast and all as Holden mentioned and to release.
From April of 2020 to March of 'twenty, and 'twenty, one we sold roughly $110 million worth of free play mass. So it was about 2% of our sales over the last 12 months.
That's a sign of the pandemic.
And.
And what we did as a supply chain partner and the marketplace is.
And we went out last spring and locked up supply.
We were willing to spend dollars to buy a sizable amount of inventory.
We knew it was a risky venture going into it but we felt it was the right thing to do for our customers.
For our employees and quite frankly.
And being in a strong position we felt would also serve society quite well.
And.
If I had to do over I'd do it again.
It was a great decision our team did a great job, but I think it also demonstrated to our customers and to potential customers.
What we are about as a supply chain partner and we're willing to do things like that and this type of environment. So not only do we have the operational capability to handle it.
We have the financial capability to do it.
And we have the sense of prioritization to also do it requires all three and so I'm really impressed with the team.
And I have to say early this morning, I chuckled and I was reading through I think at a moment and Dave Manthey sent out reports early this morning, and I really had a kick out of day Bam piece I believe those bullet number three.
For East, where he commented wildfires and does not report adjusted anything core gross margin and he went on to explain the impact of the $8 million.
You are absolutely correct, we do not report adjusted anything.
We are not a acquisitive company, we're not a manufacturer is leveraging and talking about EBITDA, where a distributor and and I don't think.
Distributors and our physicians should be doing that.
And and.
I'm really proud with what we've done.
And with how it positions us going forward I also think the write down of inventory, it's still great inventory. The write down of inventory is one of the most is one of the bullish most bullish comments, we could make as an organization internally and externally because we believe the market is going to change for mass.
In the months to come because we believe the economy is healing and that's showing up as you see and our next bullet when we talked about fastener and daily growth.
So we grew about 4% and the first quarter, but it was 14% and March now before you get too excited about that number that is a bit of a comp issue as well. So I think sequential has a lot more to tell the story John.
Just like we saw a decade ago and 2009 sequential is what it's about.
January and March our sequential fasteners grew sequentially, our fasteners grew seven 1%.
If I go back to ignore 2020 and go back to the years before that 2015 2019 on.
On average we grew four nine and that's a sign of the strength of economy, and that's what led us to write down on the mass.
Because we see the market changing.
And we saw very good sequential patterns, and our manufacturing, particularly and our heavy manufacturing and markets.
We also mentioned in the release that we are seeing increasing supply chain pressure I don't think that should come as a surprise to anybody.
I suspect everybody, regardless of where you live on the planet saw that ship and the Suez Canal sitting cockeyed for for about I think it was.
And five days.
And is merely.
A very visual thing that we're seeing and ports around North America, we're seeing and ports around the world.
And there's a lot of constraints and constraint and rising activity create one thing and that is inflationary pressures and we are seeing that.
And I'm pretty nominal increase impact to the first quarter, we do anticipate seeing a larger impact as we move into Q2 and Q3.
As we saw and much of 2020, and it's continued in 2021 and the team whether that be our local team our district and regional leadership, our finance teams did a wonderful job managing working capital and as a result, very very strong cash flow performance.
Flipping on to page four.
While we're not back to pre pandemic signings, we saw improvement in the signings of on site and we signed 68 and the quarter again, that's our highest numbers since the pandemic began.
We ended the quarter with 1285 active sites and increase of 9% over last year.
The daily sales in that onsite business grew mid to high single digits and the only problem.
Problematic area. If you will in the quarter is a the level of signings, which is improving but also the older on sites are still sluggish and that's really a reflection of that underlying customer base.
But the momentum is improving as we went through the quarter.
Yeah.
Holden did soften a bit the signings. So that's more of a function of the current environment. We operate and has nothing to say about the long term opportunity, we see and this piece of our business. We're very excited about the onsite business.
<unk> and hopefully you've got and you've adjusted for some other new reporting the Holden House, and I'll, let him dig into that and little more detail.
I think you did a nice job explaining it and release and he did a nice job explaining it and our annual report.
With the acquisition of the apex technologies, a year ago and with additional pieces that our team has built.
<unk> has moved beyond being strictly vending to a much wider swap a business. We're really excited about that like on site.
And <unk> requires strong engagement with the customer it also requires going into customers' facilities.
One thing that surprised me and probably more on the last 12 months as any of anything is.
Is the willingness of customers to continue signing on sites to continue signing vending even at a lower level and an environment, where you wanted to kind of lock up your facility and keep it safe for your employees. We have been during this entire timeframe, we have been welcomed and the customer's facilities to replenish spins to replenish livestock into replenish vending.
And we're seeing that open up more and more each and every day.
Flipping to e-commerce.
E Commerce daily sales rose, 35% and the quarter.
Our largest customer oriented <unk> was up almost 38 and.
And our web sales were up 29.
With that.
Switching over to Holden.
Thank you Dan.
Starting on slide five and Flipbook total and daily sales were up three 7% and five 3%, respectively and the first quarter of 2021, the severe storms that affected the U S. In February and reduced growth in the quarter by 50 to 100 basis points demand improve for our traditional manufacturing and construction customers.
For instance, manufacturing is up five 6% and the first quarter, but accelerated to up 10, 8% and March construction.
Construction was down seven 5% and the first quarter, but improved to flat in March.
Fasteners are a great bellwether of activity and as Dan noted the rate of change between January and March of 2021, well exceeded the typical pattern. We saw similar patterns invented safety products and total and heavy manufacturing industries. So yes comparisons begin to ease and March but even so it's clear that underlying demand growth is improving at an accelerating pace.
As well.
Now the counter balance to gains in our traditional business is moderating demand for Covid related product daily sales of safety products were up 14, 7% and the first quarter of 2021 and Thats slowed up three 2% in March we have seen daily sales of non vented respirators, and gloves, which were heavily pandemic oriented eased over the <unk>.
Last few months.
Daily sales to government customers were up 37, 3% and the first quarter of 2021, but that's slowed up 14, 5% and March this pattern will become more pronounced in the second quarter of 2021, given the absence of search sales that we had and the second quarter last year. Our long term goal. However is to retain customers that engage with us for the for.
First time during the pandemic along those lines, 26% of the customers who bought PPE from us for the first time and the second quarter last year continue to buy from us and the first quarter contributing more than $60 million and sales.
The primary area that is still being restrained by Covid related accommodations are growth drivers signing so as Dan discussed earlier, we do not believe market receptivity to our growth drivers as change and.
Access to facilities and key decision makers continues to improve as it did and the first quarter, we believe signings activity will as well.
When we look at the second quarter of 'twenty, one we see quarterly growth that is flat to slightly down as you know we do not traditionally provide forward guidance. However, given the convergence of accelerating demand and our traditional markets share gains and safety and the absence of $350 million to $360 million and <unk> sales. We just felt some perspective on and unusual.
Comparison would be useful.
Now moving to slide six.
Gross margin was 45, 4% and the first quarter of 'twenty, one down 120 basis points versus the first quarter of 2020.
Roughly half of this decline related to the mask write down addressed earlier, the remainder is split between customer mix and lower product margins and fasteners and safety.
For fasteners lower margin OEM is growing faster than other categories, which is likely to continue.
<unk> pressure related to a couple of large customer implementations and from spot buys to manage the tight supply chains should ease and the second and third quarters of 2021 and.
Safety PPE sales to government remain meaningful and carry lower margins, while the margin on this business may remain lower likely improvement and the nongovernment mix and upcoming quarters relative to the first quarter should benefit the overall product margin.
The decline in gross margin was masked by 120 basis points of SG&A leverage and producing an operating margin and the first quarter of 2021 of 19, 8% flat with the prior year.
Excluding the write down and we would have leveraged nicely and the first quarter of 2021. This leverage continues to be a function of good control of head count branch reductions lower selling related transportation expenses and reduction of discretionary spend such as travel and supplies.
Our incremental margin was 18%, but excluding the write down would have been roughly 33%.
And the organization managed cost effectively and the first quarter of 'twenty, one and we believe that will continue.
However, remember that and the second quarter of 2021, the comparisons will get tougher as we anniversary. The first periods to have been affected by the pandemic and the related cost savings measures.
And at the same time demand is improving which will likely bring incremental investment and the business.
As a result relative to the adjusted incremental margin of 33%, we would expect incremental margins for moderate in future quarters.
Putting it all together, we reported first quarter 2021, and EPS of <unk> 37 of three 7% from 35 from the first quarter of 2020.
Now turning to slide seven.
Operating cash flow of $275 million in the first quarter of 2021 was 131% of net income.
Year over year accounts receivable was up two 1% while inventories were down 3%.
Sequentially, our working capital expanded more slowly than it has historically typical this is due in part to improving receivables quality lower branch count and initiatives to improve the flow of our internal logistics reduce slow moving product and make local inventory more efficient.
We believe these represent improvements on our working capital that will be sustained however, less welcome was tightening global supply chains, which contributed to our hubs, having about $15 million less and inventory on hand, and we had intended.
Net capital spending and the first quarter of 2021 was $30 million down from $47 million and the first quarter of 2020. This was largely from lower vending spend which was a product of lower signings over the past 12 months and better device costs stemming from the app from the apex on asset acquisition.
Our 2021 net capital spending range is unchanged between $170 million for $200 million.
We returned cash to shareholders and the quarter and the form of a $161 million and dividends and from a liquidity standpoint. We finished the first quarter of 2021 with net debt at two 2% of total capital.
Down from nine 5% and the year ago period, and five 1% versus the fourth quarter of 2020.
Essentially all of our revolver remains available for use.
Now before moving into Q&A I wanted to address a couple of subjects with current interest.
First we are experiencing significant material cost inflation, particularly for steel fuel and transportation costs.
This did not have a material impact on the first quarter of 2021 price contributed 60, and 90 basis points to growth and the impact of price cost on margin was immaterial. However, we are instituting broad and material pricing actions and the second quarter of 2021 that will likely lift pricing contribution over the course of the year customer.
Customers never like higher prices of course, but they are busy and seeing increases throughout the supply chain further the tools and processes, we have developed including data for our customers has never been more effective the environment today is receptive.
We were also impacted by tightening global and domestic supply chain on the sales side certain of our customers are not operating as fully as they could be due to shortage of components on the cost and service side moving product has become increasingly costly and lead times have lengthened, causing product shortages and our hubs.
These shortages have been overcome with spot buys made and the field that have allowed us to sustain service, but at lower margins. We believe this dynamic could persist through 2021, though perhaps not quite as intensely and the second half as we are experiencing currently.
And that is all for our formal presentation, so with that operator, we'll take questions.
One other comment before we switch over to Q&A and I'll.
Last several quarters I've shared with you our employee.
Covid numbers and I neglected to mention that earlier and I just wanted to run through these with you.
So.
Since the start of COVID-19, we have had 1685 cases within the fast and on Bluetooth family.
With just over 20000 employees roughly eight 5% of our employees contracted COVID-19.
I consider that.
Low number.
And then when you look at the fact that unlike many organizations our employees didn't have the luxury of being able to work out of the room and their basement or and.
Our home office and our employees go to work every day and working on manufacturing facility, a distribution center working on a branch or onsite location on <unk>.
The truck until they are actively engaged with customers in their environment.
If I look at the peak or peak period was November of 2020, and we had 430 cases or roughly <unk> 86 per week.
To give you a contrast and March of 2020. One we had 102 cases or <unk> 26 per week and <unk>.
Drop of 70%.
And we think that is a sign of what's happening and I underline marketplace and makes us bullish as we look out into 2020 one.
We'll switch over to Q&A now please.
Thank you, ladies and gentlemen, we will now be for that.
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Our first question today is coming from Jake Robinson Amelia for research. Please go ahead.
Good morning, everyone.
Good morning, good morning.
Yes.
Wanted to I know Holden touched on price from a little bit and.
And the quarter, maybe you can just give us a sense of.
What the pricing environment looks like more broadly and if you can put a finer point on what youre expecting from it.
Further over the next couple of quarters and reserve.
Yes, I mean, I think the way we described it was simply an environment, where where youre seeing an increase and cost around transportation and youre seeing it in steel youre seeing it and fuel and that ultimately goes through plastics. So.
I think in general, we're seeing and inflationary environment, and then I suspect that that doesn't surprise anybody.
It also shouldnt surprise anybody I believe that.
We're going to react to that a number of ways, but a part of that has gone and involve a pricing behavior and so and the second quarter.
We're going to have to institutes and price increases as a means of mitigating things.
So when I talk about the 60 and 90 basis points of impact from price in the first quarter I.
I do expect that to be higher as we get into the second half of this year now will it be outside of our normal sort of zero to 2% range. No I don't think it will be I don't think its anything of that order of magnitude and I think that our objectives remain the same and that is to neutralize the impact on our margin.
And in it and essentially stay even within the marketplace and I think those are our goals.
But in order to do that obviously will have to take actions given given where the market is today I guess.
The good news and we know let's call it the news as debt right now our customers are really busy on.
And our customers are seeing these types of actions from a lot of different quarters and so there is always a conversation.
This is an environment, where inevitably customers for within the supply chain start wondering if there's other places that they could get it better piece price and thats the kind of.
Thing that happens and the marketplace and during periods of inflation, but we're not seeing anything unusual or different and the marketplace in terms of.
On an inflationary environment and I think we've experienced in the past and and we expect to be able to manage through it.
No. That's helpful color, Thanks, and maybe just go for.
Follow up and I know, others, where there is some pretty well publicized supply chain challenges out there.
Sure.
And so you guys are thinking about working capital.
Or is it carrying extra buffer inventory or anything on it from.
And that's kind of manage through.
Speed bumps if you will.
Here's what I'd say about that if we could.
And we're probably $15 million, maybe a little bit more light and hubs versus what we would've expected to be going into the quarter and the reason for that is because we simply couldnt.
We couldnt move product from where it was into our hubs as quickly as demand began to accelerate.
And so to the question of are we carrying a bunch of buffer inventory no I wouldn't say that we are carrying a bunch of buffer inventory I'm not sure. There's a lot of buffer inventory and the channel.
But what I think is is impressive about what our field does is.
Culturally we have always empowered individuals in our business units to make very independent decisions and this is not the first time.
They have been called upon to go out and source product, where we haven't been able to provided out of the hub and certain cases and.
And when I sort of.
Send out a survey to the RVP is one of the comments that came through loud and clear is.
Whatever supply chain disruptions are happening at the customer level, it's not because we arent getting them product, we are managing to source product locally and the field.
And we're continuing to keep up with things, but it does involve a lot more effort and time sourcing that product, but I think that's one of the strength of the organization and so.
Supply chain is not unique to fast and all in terms of the tightness that's out there, but I think we're uniquely structured to manage and navigate it I think we saw that in Q1 and I think that's good for you.
In terms of market share gains over time.
It does have a little bit of a margin impact right I mean sourcing outside our supply chain isn't quite as profitable as sourcing within it and you saw some of that and our fastener line, but as we as we normalize the supply chain as we go through the year to the extent, we can I think youll see that effect moderate.
I'll just add a comment and that is when I think of.
Environments like this historically.
I S.
As many of you know I have a financial background, so being on an organization that has months of inventory on hand, because of our network and how we operate.
While it's an expensive way to operate it's also it and credit incredibly resilient way to operate I think that shine through in 2020, I think that has shine through in the years past when there's a little bit of chaos going on and the supply chain.
And it allows us to be a little bit more agile because we do have some inventory on the shelf.
What we're really seeing and changes is and I mentioned it to our own employees on and internal video.
Historically, our supply chain team might be pinging branches with the reorder points.
And that are 90 days.
Phase out of 100 days out of 110 days out.
And what our supply chain teams are doing that we're going out even further we're going out into August and September and were Ping and folks and saying Hey, you might we might want to order. This now we might want to do some things now given and motion now because there are some disruptions, we want to be and Q for product.
One thing that has historically helped us for being in <unk> per product.
On an organization that is known and the industry for being incredibly responsive to paying its bills.
We have a strong cash position, we can move faster than anybody else as a result.
And that positions us well and history has told me and environments like this I believe it tips to scale towards fast and a little bit on its ability to take market share because we will have the inventory we will have.
Opportunities and abilities to move and the marketplace that some of our competitors won't.
And I'm, primarily talking about a lot of the more local competitors as opposed to some of the national players.
That's helpful. Thank you guys I'll pass it on.
Thank you.
Thank you. Our next question is coming from Chris Snyder of UBS. Please go ahead.
Thank you.
And then with the $8 million <unk> inventory write down to this cleared the decks so to speak or is there a risk of additional write downs and Q2, and then could you maybe just help frame.
How do you think about the gross margin trajectory as cash.
No it doesn't clear the decks and the fact is it's still good product and it's still moving the only difference and the market is that the value of it relative to when we purchased it is lower today than it was not just about market dynamics. So.
A full write off of that wouldn't wouldn't have been appropriate or frankly necessary.
So that's probably how I'd characterize that.
Only and not going I would add is mass for the <unk> was a unique item for us.
And other products that are like that and.
Where we went out and but that kind of supply and so from that standpoint, we've price. This now where it can it can more easily sell and the marketplace our local teams.
Are motivated to grow their business and grow it profitably if we have expensive inventory and sales and I could spend a lot of time trying to sell it and we want that inventory to turn so I think your question was in part is there a risk of another write down I mean.
The the product that's on the shelf is good products for the next 15 months and the expectation is that we'll be able to sell what's remaining on our shelves over the course net 15 month period.
Great. Thanks, John and then I guess following up on the comments on supply chain disruption.
Look back to Q2 'twenty supply chain disruption.
And all.
Seemingly took pretty material share with customers leaning on there. The biggest suppliers are you seeing a similar dynamic and the <unk>.
Current market with the port delays and whatnot.
Well, we think that that potential is there.
And I would say that supply chain issues pricing issues. Those are more sort of run of the mill issues within within distribution historically, whereas what occurred last year was generally unique and intense right. So I mean on and order of magnitude.
Do I think that youre going to see $350 million to $360 million of sales that you wouldn't have otherwise in this current environment no nothing of that sort.
But going back to what Dan and I talked about a moment ago the.
And the ability of our people and the field to be able to go out and find product independently to fill in gaps that we may have as our traditional supply chain is perhaps a little tight.
I think that that is an advantage to our business.
It was an advantage last year as Dan talked about I mean, a lot of a lot of the customers that we source and things like that there was a local element to that.
I think it will be an advantage. This year, just because right now what our customers are concerned about as demand goes up as having product available and the flexibility and our business and in our and our and our model.
I think thats going to provide us and advantage when making sure that service levels remained high and availability remains high and that I think it's going to get us market share, but I wouldn't expect anything and so intense as what you saw last year at this time.
Appreciate that.
Thank you thank.
Thank you. Our next question is coming from David Manthey of Robert W. Baird. Please go ahead.
Hey, good morning, guys.
Dave.
First off.
Pre pandemic in say 2019, I believe safety was running about 17 and 18% of your mix I'm, just wondering how you're thinking about where that mix percentage bottoms out would it be reasonable to expect.
18, and 19% and the second half and then resuming the secular incremental uptick from there or the glide path from pandemic products and the cyclical recovery of that and sort of shop for personal protection and stuff.
On the safety and Mexican bottom.
Closer to 20% or so.
Yes.
This is a gas Dave and I would be surprised to see it drop below 20.
And because there is a group of customers that are that are now safety customers Theres a group of customers that are expanded safety customers and I have to believe as.
Even and even in the balance of 2021, I think theres going to be a lot of things a lot of habits that formed.
That will continue as we go through the year and.
And I'll speak to firsthand knowledge of what some things we're doing.
So roughly $93, 94% of our employees can work remotely I mentioned that earlier around 6% of our employees can work remotely because they are and supporting roles.
And we did ask.
Yes.
Strongly asked a lot of those folks to go home a year ago, because we wanted to create a safer environment for everybody else for people that had to be here.
We have folks that are coming back and.
And we are doing a lot of things as far as putting up partitions and different things that we didn't do over the last 12 months because it wasn't necessarily because the the rooms were empty.
But we're putting up plexiglass barriers and we're putting in a lot of sanitizing stuff because people are returning to work that's going to create a core demand.
But I'd be surprised to see it drop below 20, and if it does it's because everything else grew faster than unexpected and.
And maybe to put some numbers to that for you as well Dave.
And the first quarter.
We generated a little over $60 million and revenues from customers that had not purchased PPE from us prior to the second quarter of last year.
And that amounts to a little over 1% of our sales and I think that amounts to market share gains and so when you think about where we were before and you think about those types of customers now being a part of our mix and contributing more than 1% to our.
To share.
I think Dan's right, we've always sort of thought 2021, 2% is probably where this settles out and I think that that's that's still right.
Okay. Thank you for that and second could you discuss the general economics and bin stock compared to vending on site in terms of gross and operating margins return on capital.
Well the the capital the cost of the device is much different.
What you're essentially and I'll talk to the RFID because that's that's that's the biggest piece of it and lease it is currently well CFT.
And the IR beams within MRO bins, and how big that becomes relative to it but.
And what it really is as big of a kanban system.
And and that Kanban system right now what you have and somebody has to physically go out and observe empty bins or gathered empty bins.
Really changes and and RFID environment is when that day and is empty.
Thank you for it it hasn't set of shelves and up above theirs is open box and you put them up there and Theres and RFID tag that reads. It and tells our branch actually tells our supply chain team we.
We need to replenish this Ben.
And so.
And the biggest thing is the labor efficiency.
But it also allows us to illuminate much more of the supply chain for the customer so they can really see it and.
It could operate on leaner and we can reduce inventory I believe the inventories lean up.
For our customer will fund the capital it takes.
For the the actual devices because the only and that's really changing is that the technology enablement.
The bins are the bids they were there before.
And our RFID tag on them. So the capital piece is relatively modest except for the actual communication and talking.
But the economics are better than bedding.
And and the real reason is it.
And it becomes much more labor efficient serve that business and the marketplace.
Perfect. Thank you.
Thanks.
Thank you. Our next question is coming from Ryan Merkel of William Blair. Please go ahead.
Hey, Thanks, good morning, everyone.
Okay.
So I guess first question for hold and can you just update us on how to think about gross margin. This year, just given the new headwinds on fasteners that you've discussed I think prior Holden you thought gross margin could be up slightly year over year and 21, that's still the case or do we need to rethink that.
No I don't think theres any need to rethink it and again, we're taking actions to try to mitigate some of the pressures that we're seeing.
I think the.
The guidance that.
Guidance, probably a strong word and I think the suggestion that I made coming out of Q coming out of the last quarterly discussion was net yes, I expect gross margin to be up a little bit this quarter or this year.
And but we're probably talking about 50 basis points for less.
The flip side of that is SG&A leverage will come up against the difficult comps of last year and I would expect there to be.
Marginal margin leverage on SG&A, when you think about the comps and things of that nature and then ultimately what that translates into is.
On the incremental margin for the year, that's kind of in the 20% to 25% range and.
And I think that was kind of what we discussed.
And last quarter's call and honestly I don't think anything about that has changed.
Okay. That's helpful. So it sounds like the increased headwinds on margins that you talked about because of the fill in and the spot buy that doesn't sound like that's meaningful.
Well, I mean, Phil and buys it no it's not meaning we're not talking about tens and tens of basis points here. It's relatively small at this point and again, we do believe that over the course of the year will smooth out the supply chain a bit and of course, we will be taking pricing actions to mitigate some of those pressures as well right.
So no I don't think that those are our major matters.
And this assumes that we have.
And this assumes we execute the strategy as well right.
Right. Okay. That's helpful I'll pass it on thanks.
Thanks, Thanks Ryan.
Thank you. Our next question is coming from Adam Uhlman of Cleveland Research. Please go ahead.
Hey, guys good morning.
I was wondering if we could go back to the discussion about the onsite signings.
Could you maybe expand on what Youre seeing and the negotiations that.
Led you to reduce the full year signings and outlook.
I guess I wouldn't have thought that the first half where they've had big expectations for for for signings, maybe more like a second half recovery.
And then separately and it was probably impacted by weather I'm, just wondering what what exactly youre hearing from your sales guys. There.
Sure. So if you recall last quarter. What we said is we talked about a $3 75 to 400, because we wanted to convey to people that we believe that's what the market can support and we continue to believe that's what the market can support but we also said at the time that business conditions would have to meaningfully improve and orders for us to achieve that and whereas I do.
Believe that business conditions have improved and they havent normalize to where they were pre pandemic at this point.
And in fact is in Q1, we landed 68.
And so to be on the type of pace.
That we would have to do to do closer to 400, given that we've booked 68 and quarter, one and it just seems like a stretch when the conditions haven't.
And when the conditions haven't fully normalize from where we were before right. That's the one area that I believe is still being affected by Covid.
Covid related accommodations.
So given that I think that it was worth I mean, I think we sort of.
I think I gave gave indication that this seemed like of high potential scenario, when we talked last quarter and it just seemed like a prudent thing to do now note.
And of said the same thing about F&I. This quarter right. We believe that the market can support 23 to 25000 weighted F&I devices.
But we're going to need to see the activity levels continue to improve even from where it was Q1 to get there right now, we're probably pacing a little bit low.
But I think the important thing to just reiterate is.
And I don't think this has anything to do with the receptivity of the tools that we're providing the marketplace.
I don't believe that there is any.
And any belief on the part of our organization that we can't achieve those levels, but the environment is still normalizing its not there yet and as a result, we may come and a little bit a little bit shorter, but the trend line is up.
So I'm going to comment on and hold it can be mad at me for this item.
When I was reading through Holden Flipbook I saw that he had put in that sentence about the 300 to 350 range. There are certain times and I go into hold on and I tell my disagree with them and certain times that John and I agree with them.
This is one where I don't know that I agree with him he's probably right, but I don't know if I agree with them and that is I think if you look at first quarter I believe 29 of our 68 and signings were in the month of March. So it did tick up as we went through the quarter now that's not an unusual pattern because January is usually it's usually tentative.
And and.
And February was weaker because of the storm as you mentioned I think I think the risk the signings this year.
Is more about customers really being busy.
And they just can't think about it right now they just can't do it right now and I think that's the risk of it not getting to that 100 per quarter pace and that's the only reason and I didnt ask Holden to remove that sentence for both the earnings release and the flipbook, otherwise I'd asked on and remove it because.
I think the model is great I think the market is receptive to it.
And I think we could ramp up faster, but there is that that one risk that people are too busy to let it happen because change always takes energy and.
And where do you want to prioritize your energy.
But I'm not completely in agreement with hold it on this one but if I were.
A betting person who's probably more right, but my message to our team internally is theres no reason why on the second half of the year, we shouldnt be at 100 a.
For quarter and the question is can we get there in the and the month of ore and the second quarter and I'll happy to be wrong.
Yeah.
Okay got you. Thanks, that's very helpful.
And then secondly back to the inventory discussion.
Understand it's been difficult to get inventories into the into the Dcs and I guess, how much do you think inventories need to increase this year to support for growth that you expect realizing that you have some other internal initiatives going on.
Well I know in Q1, obviously, we talked about the hubs being down.
And down $15 million plus versus what we would've expected and.
We.
We need more product and its way across and as it does I would expect the hub inventories to rise and I'm not sure that we'd necessarily put a number to that.
And I think a lot of it is going to depend on the degree to which.
Demand continues to run the way that it is so.
But I do believe that we're light on inventory and the hubs.
As inflation continues to run through I think that'll put some that'll put some upward pressure on values of inventory as well.
So I'm not sure I have a good answer for you in terms of what the ultimate number is.
But that's part of the answer to addressing what we're seeing and the supply chain and.
And improving our service levels, but right now, we're a little bit low on inventory for a little bit low on fulfillment levels, and we need to correct that and.
Q1, it would have required $50 million more and I think that builds a little bit as you get into Q2 and the supply chain pressures build.
Now that will be offset to some degree with the work that we're doing internally too.
And take out slow and no moving inventory.
In terms of reducing the branch count, which the field continues to take some of the branches out there that makes sense to them.
Sure.
And I think when we talk a little bit about the customer fulfillment center, which is a form of branch, which which has much more customized and tailored inventory.
Those are all initiatives that I think are very sustainable will continue to mitigate the effects of supply chain over the course of the year, but.
Right now our inventory would be better off and having a little bit more and then than it does and that's going to motivate our.
Our work on improving the supply chain.
Just wondering if you add is key.
Keep things in context, the $15 million of Holden sites.
That's about a days worth of inventory.
So.
It's a number.
And he felt.
Disclosing it was helpful, but in the context of things.
We're blessed with an incredible supply chain and incredibly resiliency as far as where the intake point is for inventory. The question is always the price point, but it's a days worth of inventory.
Thank you. Our next question is coming from Josh for Christmas.
<unk> of Morgan Stanley. Please go ahead.
Hey, good morning, guys.
And just wondering just back to good morning.
And that too I think Brian's earlier question just to level set us on some of those gross margin considerations that you laid out last quarter.
Holden just with some of the dynamics that you talked about which seem more acute and <unk>.
Particularly unlike mix price cost and maybe some of those still and by still having to persist for a while.
Should we think of that as maybe fair for the year, but a bit more of a second half dynamic and then what you were considering before and I know thats, putting up pretty fine point on it but just trying to sense like if there was some shift and the timing and underneath that expectation if not the total year number.
No I don't think so.
I'm still trying to think through the question a little bit I mean, we all know that we have a relatively easy comp on gross margin and <unk> and so I haven't really tried to think about it in terms of year over year rate of change I think if you take.
The first quarter gross margin you.
You adjust for the right for the write down which is.
Our intention is that is that that will be focused on <unk> 21 and be done.
And just for that Youre looking at first quarter margin and about 45, 9%.
If I move over to <unk>.
Normally second quarter would see a little bit of a decline.
Sequentially from Q1, I think that that could come in somewhere around flattish and part of the reason is the mix that you're talking about and interestingly enough right now the fastener and non fastener mix is normalizing faster than the on site non onsite mixes and so that actually moderated the impact of mix and Q1 and.
We'll see how that plays out in Q2, but it's possible that could be a little bit moderate as well and I think that contributes to that and of course.
Assuming we're effective on pricing that can contribute as well so when I think about the second quarter gross margins.
I think it gets really messy to think about it year over year. When we can kind of think about sequential patterns and try to.
Run off of that.
And I guess that I think when I think about Q2, instead of thinking about it in terms of the normal.
20 basis point decline I think the debt could actually run a little bit more flattish and that would obviously be a meaningful increase year over year, but thats just a comp issue.
That help got it and Thats helpful perspective, yes that helps a lot and.
And then I guess sort of related to the supply chain tightness that both you and Dan and I talked about.
Understanding there was a pretty big step up in activity sequentially into Mark presumably that continues just as things reopen on and the fastener side.
I know growth isn't really homogenous and can come anywhere are there limits to being able to.
And to grow here and the short term. So you talked about kind of flattish to maybe down a little bit and <unk>, but if everything went your way and they're really capacity to.
To grow a lot faster I mean, I guess I'm thinking back to some of the weather interruptions and <unk> and those customers not being able to make up days immediately.
Is that something that sort of governed on the upside here at least and the short term and so on some of the supply chain stuff works out.
Well I think of limit the growth I think of demand I do not think of supply. When you you talked about in February.
There was a number of things that caused problems one was.
You had plants down there with no power for our distribution center and Dallas was shut down for five days, because we didn't have electricity.
And so.
You had a lot of examples where I.
And I grew up and the North Dakota, and Wisconsin and so.
Realize that when temperatures get into the single digits things freeze.
And you saw a lot of that you had you had plants.
Where there was no electricity and day, one operating and you had pipe squeezing you had.
Hundreds and thousands of feet of pipes being replaced and a lot of facilities, because they froze and they broke and so the issue was one of the low power and then damage from the environment or no natural gas and essentially no energy to operate.
That's a different scenario and then what we're describing here.
Our limiting factor is demand and our ability to find more customers every day that they want to use us as their supply chain partner.
Yeah, and on some level well, yes, I mean on some.
Well I mean, there are industries out there I think the RVP and affected by auto talk about.
Some lines shutting down because of availability of shifts and things like that so you might be referring to that as well.
But you would know you would know as well as we do what industries are having issues because of products that arent related to our products. Our objective is to make sure that when a customer need something that we can supply that we can get that we'd been effective doing that we can't control the chip supply chain or how that might flow through.
Got it appreciate it thanks guys.
Sure.
Our next question is coming from Kevin and Barrick of Deutsche Bank. Please go ahead.
Hi, good morning.
Okay.
I think a lot's been said already but just going back to the appointment and about market share gains I know you called out I think it was like 26% of accounts that were first time buyers have reorder and at this point.
Is there anything you would add about deemed made outside of PPE and maybe how share name and core areas has shaped up over the spend on period.
Okay.
Yeah, I mean, there is unfortunately, there is no industry resource that tallies up how all the distributors do and and and gives anything definitive on that so I think that we had an interesting picture provided to us around safety and pandemic and new customers and things like that.
New customer acquisition is not usually so dramatic as what you saw during that period of time. So I think it's really difficult to say what.
What I would say is.
We continue to grow as a business and I think if you look at industrial production.
And things of that nature, I don't think that youre seeing that grow there's some surveys that are done out there and certainly through February the.
Those surveys, we're still pointing to distribution being negative.
Industrial production was still slightly negative we were growing.
So I think those are the ways and I, usually look at it to judge or understand the degree to which we are gaining market share historically, we've outgrown our industry historically, we've outgrown industrial production.
And that continued through Q1 I think the numbers are out there for you to evaluate and.
I think we'll continue to do that.
Got it and if it makes sense.
Quick follow up kind of following on from the prior question and I'm wondering if you could talk about the trends through the quarter or maybe by market just thinking about manufacturing versus construction.
And March it looks like results, maybe manufacturing and seeing more acceleration versus construction for improvement maybe just directly.
Comp related is there any color you can provide to delineate kind of trends between the two.
Well I don't know I mean, if you look at the construction business and interestingly. This has been one that in recent months, the rvp's I've been talking about and getting better and better and the numbers really didn't move and so it's nice to see them begin to move but I mean, if you look at construction.
In January and construction was down 9% in February was down 14, 5% and in March It was flat and so that mark fairly significant improvement now youre right the comps got easier.
But I mean, that's true within manufacturing, which caused it to go from up five 1% up 11, right. So the comps are going to play a role, but the RVP and reporting for the last several months debt. The construction the tone of the construction market was getting better.
And there has been a bit of a lag to that but it feels to me like both of those end markets are improving versus where they have been.
Got it thanks very much.
Sure.
So as it is.
Five minutes to the hour.
And because we will wrap up to Q&A and I just want to thank everybody for listening in today and and thanks for your support and fast on Bluetooth.
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Okay.
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Yeah.
And.