Q3 2021 Fastenal Co Earnings Call
Yeah.
[music].
Greetings, ladies and gentlemen, and welcome to the first of all 2021 third quarter earnings results Conference call. At this time, all participants on a listen only mode. A question and answer session will follow the formal presentation. If you would like to ask a question. Please press star one on your tongue.
The phone keypad.
If anyone should require operator assistance during the conference. 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 Taylor Ranta. Thank you. Please go ahead.
Welcome to the Vasco Company 2021 third 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 basketball presentation.
Being recorded by basketball no recording reproduction transmission or distribution of today's call is permitted without basketballs consent. This call is being audio simulcast on the internet via the basketball Investor Relations homepage Investor got basketball Dot Com a replay of the webcast will be available on the website until December one 2021 at midnight Central time as a reminder, today's conference call May include statements regarding.
The company's future plans and prospects. These statements are based on our current expectations and we undertake no duty to update them. It is important to note that the company's actual results may differ materially from those anticipated factors that could cause actual results to differ from anticipated results are contained in the 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.
I'd like to turn the call over to Mr. Dan <unk>.
Yeah.
Thank you and good morning, everybody and thank you for joining us for our Q3 two.
2021 earnings call.
And I'm going to start on page three of Holden's flipbook.
And run through some thoughts on the quarter.
And some of the prior quarters Holden will.
Sure his thoughts on the latter half of the book and then we'll do some Q&A at the tail end of this call.
So for the for the quarter. We grew we grew our sales 10%.
We ended the quarter with the business a bit stronger up 11% and of equal or perhaps more important when I think of our sequential patterns, where and we highlight that and Holden will touch on that but we highlight that in our.
In our September information Web released.
We're in a good spot as far as where we were in January and where we are in September and how that positions us for going into 2022 from the standpoint of the just the strength of the business the gains on the business et cetera.
EFI.
If I set aside the noise of.
Of comparisons for a second.
In comparison to 2020.
And I take a longer peer back and and holding on page five of the flipbook. Similarly, we did last quarter is we did a comparison to 2019.
And we did that because it allows us to just.
Not have to explain all the the conditionality of the comparisons and look at it and say here's what the business looked like before the pandemic started.
And here's what our business looks like today.
And everybody on this call knows what happened in the last 24 months as it relates to fasteners business.
The success, we enjoyed the dip that helped to society, we were able to provide last year and the products that we were bringing to bear and the and the impact we saw in our safety business in 2020, so let's just ignore all that noise for a second.
And what stands out to me is we continued to invest in the growth drivers of the business.
We continue to invest in the people side of the business.
We can continue to execute and grow our market share.
And what you see is an organization that is about 13% bigger than we were two years ago.
As we've talked in the past and I'm looking at page five and the flip book right now.
As we've talked in the past our growth drivers.
Carry a different gross profit profile and you'd see with the rounding and hold on schedule. There are our gross margin is about 90 basis points lower.
Then it was two years ago.
What we've talked about is what we like about these growth drivers if they differentiate us in the marketplace and they tap into the strength. So fast at all and we're able to bring scale to these elements and manage our operating expenses more effectively and you can see that not only did we.
Did we improve our operating expenses as a percentage of sales in the last two years, we completely offset the impact of the gross margin change in fact, that's a little bit of rounding it's closer to 100 basis points and as a result, our operating income as a percentage of sales is 10 basis points higher today.
Then it was two years ago, and so I believe in that two year timeframe. We've done a great service to our employees. We have done a great service to our customers I believe we've done a great service to society in general and what we were able to accomplish in 2020 in 2021 and I believe we served our shareholders well in the process.
If you think about the operating and administrative expenses.
And what's really happened.
We picked up about 30 basis points.
On the people side of the business, we picked up about 70 basis points in that two year period, and the non people side of the business.
If I look at the people component so our expense on the people side is up about $28 million in that two year period.
14% of that number.
He is the addition of people and or changing roles and.
<unk> inflation in rates.
That raised the base element of our pay above 14%.
The incentive component.
And this is looking at that now.
That 14%, 14% of the increase came from that.
61% of the increase at $28 million over the last two years, 61% is related to incentive compensation. So when we find success as an organization we share that deeply into the organization.
And like we saw last year, our incentive comp pulled back it reloaded itself. This year on a two year basis, 60% of our increase in human costs is incentive comp.
Another 14% as healthcare one thing Thats rippling really significantly through our P&L right now not just on a on a one year basis, which is which is like 45% increase but on a two year basis, 14% of our cost increase is healthcare and I don't know where thats going to go in all honesty.
Another 1% of our increase came from.
Profit sharing and 90% of our increases our bucket into those four categories in the last two year period the.
The other 10% the biggest individual component of that is social taxes, and then other little noise in the numbers.
If I look at the.
The <unk>.
Increases.
Our remaining expenses and operating expenses increased about $9.0 million on a two year basis.
25% of that increase relates to <unk> vendor.
Vending and bins.
25% of that in that increase relates to distribution center increases now part of that is it.
As cost per facility as part of that is cost that we're doing to manage through the.
The chaos that is supply chain in today's world.
50% of that increase.
Is it equipment as you know last year, we deployed <unk>.
1000, plus mobile devices throughout our network to create productivity gains to create.
Social distancing.
Create a better means to serve our customers and illuminate for them what we do.
That 50% of our increase there is what's funding a big piece of our labor efficiencies in the last two years.
The final the other the other got you over the last two years fuel prices are a little bit higher Fortunately everything else in our P&L offset the impact of fuel.
And so I hope you find that helpful of taking the noise out of the one year comparison and looking at Holistically and said what's happened in the last two years <unk> invested in its ability to serve its managing its cost effectively it's shared the fruits of our labor with our team and I think we serve.
Customers and society, and our shareholders well in that process.
Flipping back to page three you know get back off my tangent.
Fast spin.
I've talked about that next stage as we broaden our <unk> passed all managed inventory footprint.
And vending has been around for 13.14 years.
Putting technology in the bands is relatively new a year ago. We had 705 machine equivalent units deployed across our network. It's still a pretty small piece of the business that number has grown almost four fold to 2600 in the third quarter of 2021, it's now about 1% of our sales.
Going through that footprint again, it's small, but the power to become more efficient and provide a differentiated value in the marketplace is strong.
Few minutes ago about the mobility technology, we deployed.
A year ago that mobility technology.
It helped us manage 6%.
Of our of our revenue today.
Today, it's 11.
And again.
Ways to better illuminate and create efficiencies for our team and frankly keep our team safer because these devices create social distance when you're in whether we're in a pandemic or an endemic right now I'm not sure.
Not enough to know.
These things help in our business.
As you read about in the paper and as.
I've seen some of the write ups and I've seen from some of our peers and some of our other industries.
The product and shipping cost inflation is not just high it's brutally hi.
The chaos in the impact not just from a financial perspective, but from a toll it takes on our human capital is immense.
The thing that stands out for me is the entrepreneurial culture within fast and all our ability to solve problems for others means you can also solve problems for yourself.
The disruptions we're seeing.
Our teams in the local market are able to figure out solutions.
To take care of their customer just like we did in 2020, we're doing it again in 2021, but it does take a toll to the organization.
As we.
As we.
Go through all this and have a lot of discussions with customers about disruption about cost changes price changes.
As you can imagine takes a lot of energy away from some of our growth drivers and are linked in some of the sales cycles and youre seeing seen that show up a bit.
In our onsite in our SMA program.
So onsite wise, we signed 75 devices during the excuse me 75 onsite during the quarter.
Perfect World I would like that number to be 100.
And but it really is about how much participation or are we getting across the network and how many customers are saying yeah move in with me, we'd like we'd like Faisel and help us on premises and that's a tougher tougher sale on in this environment. However, our total onsite grew 10, 5%.
Over the number of on site grew 10, 5%.
And the sales through those onsite grew more than 20% in the last 12 months. So they've proven what they can do for our customer and what they can do for our revenue group growth, we just like to get a few more signings.
As I touched on the fast all managed inventory.
I think hold than does an excellent job and I know, we have filed our 10-Q, yet, but but in our last quarter 10-Q, and the 10-Q there'll be filing in the upcoming days does.
Very good job, explaining our digital footprint.
Looking at the <unk> component of that as well as the ecommerce component of that we're pushing the hardest on the semi because we think a great supply chain partner.
Doesn't simplify the ordering process they simplify the supply chain process and why are you why are you physically ordering repetitive items and we believe that's a unique place for us to be.
Similar to what we saw in on sites are finished pastel manage inventory from a device standpoint is up 10% year over year. So we continue to see great traction, but I would like to signings to be a little bit higher.
E Commerce, it's about 14% of our sales now it grew 43% there's still a lot of one off stuff and we're seeing that we're providing a better tool in the marketplace to help grow that piece of our business.
You combined.
And E Commerce, our digital footprint is now 44% of sales 45% of sales excuse me.
And that's where we ended the quarter in September.
And that number nine months ago was in the <unk>.
So really pleased with that.
Before I transition over to Holden I thought I would touch a little bit on our in market locations.
Page 13, and his flipbook. He does he is a great tables in there that shows our in market location statistics.
I thought I'd share some perspectives on this.
In the end in the <unk>.
Six years that I've been in this role.
In the.
In the several years before that we were we were doing a pivot.
And that pivot was really about the intensity of our branch based locations and intensity of our network. We were starting to morph that into a few more on sites and we took that into a really high gear in 2016.
But if I look at what's happened in the last eight years.
We've removed 938 locations.
From the fastest network and that's basically adding up all those closed converted branch numbers over that timeframe.
And in three of those years 2016, 2018, and 2021, we've removed more than 150 branch locations.
Part of that is is us looking at our network is saying for what we are in the marketplace. What makes the most sense, but its also reflection of the onsite as we're moving more and more business out of the branch network and move into the customer you rationalize your network.
Most organizations would look at this and say Gees 938 on a base of 2687 eight years ago, let's take a big restructuring charge, let's do it all at once that's throw everything plus the kitchen sink into it and.
And have cover that's not how we operate our district managers, our district leaders have figured out over that eight year period.
How to be creative.
And making the economics of that work in some cases, they might go to a customer in lease sale part of the building to them, but they figured out how to manage that process.
And constructively rationalize our footprint over an eight year period.
Where our footprint now when you add in openings were 31% lower than we were eight years ago.
But there wasn't a big disruptive impact we just did it as a normal course of business, that's something I think the hallmark of the fastener organization.
In prior quarters I've shared some COVID-19 steps with the group.
We had a tough quarter in the third quarter.
We had in the in the.
Fourth quarter of 2020.
We have five weeks, where we had more than 50 cases in that discrete week in the fourth quarter of 2020.
Two of those weeks where over $100.
In the third quarter of 2021, we had seven weeks, where we had more than 50 cases, one of those over 100 I am proud of the fact that our teams look for ways to take care of our employee base look for ways to protect each other.
And manage through that process, because it's been incredibly disruptive in the third quarter staffing locations. When you have people out with Covid. When your average location has five to 10 employees is incredibly challenging we managed through it.
The other thing.
During the third quarter, we did a survey we did a pulse survey of our employees and some things that jumped out.
In that survey.
Our employees felt and we always get a very high participation in these surveys our employees felt in that survey.
Their manager the team around him truly cared about each other.
And we were protecting each other and as the leader of fastener I'm incredibly proud of the blue team for doing that.
There was a negative in there there was one they felt which there was little more communication internally and that's a message to me we need to always be good about communicating what we are seeing in the marketplace.
And and the other thing that jumped out as <unk>.
I know what is expected to be at work and my manager cares about my wellbeing and about my development as a person.
So a lot of positive things the team is tired from going through this period, but a lot of positive things, we're seeing with that ill turn it over to Holden.
Great. Thanks, Dan turning over to slide six.
As indicated our sales were up 10% in the third quarter of 2021, which includes up 11, 1% in September the period still had some difficult COVID-19 related comparisons with government customers down, 44% and safety and janitorial products being down two 9% and 15, 4% respectively in the third.
Order of 2021.
As a result, we believe the total growth for the quarter understates. The strength, we are experiencing in our traditional manufacturing and construction customers as the chart on the page illustrates.
On the product side. This is also well demonstrated by our 22% growth in fasteners, but sales of our other products segment. Excluding janitorial was also up 16, 8% in safety sales of vented safety product, which removes from both periods direct shipped typically COVID-19 related both products.
<unk> was up 28, 5%.
National accounts sales were up 16, 8% and while our smaller accounts were only up two 2% if we adjust for the government. Our remaining customers would have been up 11, 7%. So bottom line, we continue to experience broad strength in our traditional markets consistent with macro data points, such as PMI and industrial production.
Pricing contributed 230 to 260 basis points to growth in the third quarter of 2021 up from 80 to 110 basis points in the second quarter.
This reflects actions taken year to date to mitigate the increases we're seeing in product, particularly steel and transportation, particularly overseas shipping inflation.
<unk> continued to rise over the course of the third quarter of 2021, particularly for overseas containers and shipping services, while we have a range of efforts underway to mitigate the impacts of inflation on our customers' costs. Further price actions may also be necessary in the fourth quarter of 2021.
Aside from inflation and as Dan discussed our marketplace continues to experience tight supply chains and labor shortages. These disruptions impacted customer production more in the third quarter of 2021 in the previous quarter and an increase in Covid infections exacerbated. These challenges these trends seem likely to persist in the near term to address these.
We will continue to lean on technology and branch initiatives to improve productivity and an organizational culture that empowers local leaders to sustain high service levels and while the supply chain remains elongated we do expect an inflow of imported product in the fourth quarter of 2021, and the first quarter of 2022 that should sustain our high product availability and reduce the impact.
Phil advice.
Now to slide seven.
Operating margin in the third quarter of 2021 was 25.
Versus the third quarter of 2000.
Sorry, the third quarter of 2020.
Gross margin was $46 three in the third quarter of 2021 up 100 basis points versus the third quarter of 2020. This relates to two items first we experienced good leverage of overhead and organizational expenses due to strong product demand and growth.
Second we had better product margin, primarily in safety products lower margin Covid affected PPE was a smaller proportion of total safety sales versus last year and the margin on those COVID-19 affected products increased.
Product and customer mix did not impact gross margins in the third quarter of 2021 versus the prior year in contrast to the favorable impact experienced in the second quarter of 2021.
Relatively strong fastener growth allowed positive product mix to offset the negative impact of strong onsite growth on customer mix, but the gap was narrower sequentially a trend that is likely to persist while the impact of pricing in the third quarter of 2021 exceeded our original expectations inflation in shipping costs Similarly exceeded our.
Patients as a result price cost continued to be largely neutral on our gross margins in the third quarter of 2021.
The increase in gross margin was offset by operating expenses growing faster than sales part of this is due to the comparison as third quarter 2020 operating expense leverage still reflected COVID-19 related low labor intensity sales versus current sales being generated in a more traditional high touch manner.
Just as relevant however is the role of cost resets in the first year for manufacturing recovery is typical for various operating expenses to have an outsized recovery. We are experiencing that in 2021, including in the third quarter, but also believe that the breadth of resets are unusually wide for instance, we are seeing a 40% increases in incentive pay.
But we're also seeing a 50% increase in fuel costs, a 165% increase in travel expenses and a 45% increase in healthcare costs, the nature of past downturns and recoveries would not necessarily lead to so dramatic arise, particularly the latter two items.
As with last quarter deleveraging operating expenses for the third quarter of 2021 is a function of anniversarying. The first periods of pandemic related cost savings measures combined with a strongly recovering marketplace similar dynamics are likely to play out in the fourth quarter of 2021, although not likely on the same order of magnitude and we anticipate being able to leverage in 2022.
Comparable level of growth.
Putting it all together, we reported third quarter 2021, EPS of <unk> 42 up from 38 in the third quarter of 2020.
Turning to slide eight.
Operating cash flow was $168 million in the third quarter of 2021 down 32% annually and 68, 8% of net income we paid roughly $30 million in payroll taxes, which were deferred from 2020 as part of pandemic related legislation.
The bigger impact on our conversion however was an increase in working capital.
Year over year accounts receivable was up 13, 8%. This reflects strong customer demand and a shift away from PPE surge buyers last year and towards traditional customers. This year that slightly blended up days outstanding.
Inventory was up four 4%, we did see meaningful reduction in our three ply masked inventory in the third quarter of 2021 and anticipate clearing out this inventory in the fourth quarter.
Adjusting for this inventory would have been up six 2%.
We continue to clean out slow moving hub and branch inventory closed branches and shift our stocking focus in the field. We believe these represent improvements in our working capital that will be sustained that is being offset by product inflation and to a lesser degree product flowing into our network. We have a significant amount of imported product in transit and we expect to see product.
Ability in our hubs improve over the next couple of quarters in the current environment. This is how we are utilizing our balance sheet to support customer service and growth.
Net capital spending in the third quarter of 2021 was $47 million up from $34 million in the third quarter of 2020, reflecting spending on a non hub construction project in Winona, we have lowered our 2021 net capital spending range to 155 to 175 billion down from 170 million to $200 million <unk>.
Why chain difficulties or limiting our purchases of vehicles branch supplies and other products.
From a liquidity standpoint, we finished the third quarter of 2021 with that at 11% of total capital and net debt at three 4% of total cap that.
Net debt is up from two 2% in the year ago period, and five 1% versus the fourth quarter of 2020, essentially all of our revolver remains available for use.
All for our formal presentation, so with that operator, we will take questions.
Thank you the floor is now open for questions. He would like to ask question. Please press star one on your telephone keypad at this time a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment necessary to pick up your handset before pressing the star keys.
Andrew I'm going to ask you.
Please limit yourself to one question and one follow up again that is star one to register a question at this time.
Our first question is coming from Jacob Levenson of Melius Research. Please go ahead.
Good morning, everyone.
Good morning morning.
Some of us were.
Positively surprised by the growth rates, particularly as it closed last quarter.
Sam.
But you had a lot of.
Maybe product availability issues, but maybe.
Maybe and maybe that maybe I'm reading into that wrong. So are there any particular areas that you guys are really.
Struggling to procure product.
Okay.
Thinking about aircraft.
Yes.
And stuffing stock off the coast of California.
Let me provide there.
Yes.
If you look at so we have a variety of supply chain partners, some of which are domestic supply chain partners and they might be selling us in many cases branded product and that might be domestically manufactured in north American manufactured or globally manufactured item and then you have.
The items that are more commodity.
And makeup in fasteners is a high player in that that tend to be produced offshore and that's been the case for 60.70 years.
And as you can appreciate.
We upped our safety stock.
And the depth of inventory, we have on domestically sourced product and if I think of our supply chain of I think of our distribution centers and our and our service level that we measure with fulfillment to our branch network. We're at a very good spot there.
It's it's product that we bring in from overseas.
That is manufactured overseas.
One thing that helps us in the process and we've gotten some grief from over the years from the analyst community and justifiably. So we carried a lot of inventory.
And we have inventory spread across 3400 locations branch on sites and distribution centers.
So that gives us some resiliency that a lot of our peers don't have but no. It's crushingly bad right now on product coming in that has to go through a port and.
And we're not immune to that we just have maybe a little more resourcefulness locally.
Some some business models are so leverage to scale.
When things get tough to kind of fall apart.
Our model is leveraged the scale, but when things get tough.
Our local folks step up and fill in the gaps, but it's brutally hard work.
And to Dan's point I'd, probably this is anecdotal just feedback from the regional.
Vice presidents that I get each month and each quarter, but.
To Dan's point about our ability to identify and locate product locally when we're not able to get it imported fasteners or a big portion of that but.
We certainly have the challenges in locating that domestic product, but the anecdotal feedback from the field is that we've done a better job of that than most and we've been able to sustained service levels and so youre absolutely right about difficulties of that imported product getting into our traditional supply chain, but we are finding.
Answers to that outside of our traditional supply chain, which is allowing us to retain high service levels to the customers.
Okay. That's helpful.
For all of it.
I have to imagine there are.
Smaller competitors are probably.
Right now im not able to maintain that same service level.
And you've got a clean balance sheet. So it is there.
Maybe you can comment on the pipeline is there an opportunity there.
So maybe pick.
Some of your smaller competitors.
Struggling.
Okay.
I think there is a couple of fronts there.
My perception would be yes. There is there are struggling thats going on in the marketplace. If you don't have as deep and as robust of a supply chain.
And as many different places to tap into alternatives as we do.
Even with our trucking network, we're able to move some stuff around that our competitors can't do because our product is incredibly expensive to move and it's expensive for us to but it's less expensive because we're more efficient at it.
I think I think the biggest risk for some of the smaller and the folks that don't have as depot supply chain is actually only now.
Popping its head up because.
My perception is some of that fill in buying activity of stuff that's imported by others that proves to be filling buys that product is becoming more scarce in the marketplace.
I believe puts us in an even better position to be serving our customer.
And not going through a herculean efforts to make it happen.
And when we look at opportunities that pipeline. If you will we're doing a lot more of evaluating strategic opportunities rather than simply picking off.
Perhaps struggling struggling competitors as a means of consolidation thats not the primary focus when we do look into acquisitions or just primary strategic so again at this point.
We think a better use of our balance sheet is investing in.
Working capital that we need to sustain the type of service levels, which will in turn put pressure on those smaller customers that allow us to gain the market share without having to pay a premium for it.
Thank you guys I'll pass it on.
Thank you.
Thank you. Our next question is coming from David Lastly of Baird. Please go ahead.
Thank you hi, guys good morning.
Okay.
Yes so.
Question on operating expenses.
<unk>.
When we look sequentially in most years.
These are the same number of selling days or sometimes there is a minus one from third quarter to fourth quarter.
This year, if my math is right, you're losing two selling days and offsetting that I know you have cost on some of these resets of inflation and things, but given that the situation is there any thoughts you can give us relative to the roughly $400 million SG&A you reported in the third quarter.
How we should be thinking about the fourth quarter.
<unk> and SG&A.
Youre right about the days count.
And so on a sequential basis.
Yes, we would lose a couple of selling days.
And then that's the leverage that you do give up.
On top of the seasonality right fourth quarter is typically not quite as active period as occurs in the third quarter, but that happens every year.
I think if you if you look at history.
History would suggest that.
You would expect sort of flat to down 3% give or take and that really depends heavily.
On compensation costs right, whether you are flat or down three is really driven by compensation costs, which makes sense because 70% of our operating expense line.
I will note I think that whereas we have a difficult comparison from a day standpoint, we do have a little bit of an easy comparison from a wages standpoint.
We added some wages that had that were they were deferred into Q4 last year, and we will not necessarily replicate that this year. So that creates a little bit of an easier comparison and I do think that will have somewhat lower growth on days and lower gross margin et cetera.
And if you bake all that in.
Honestly I think somewhere within that normal range still makes sense to me David.
Okay.
Helpful. Thanks, and then just quickly on slide seven.
You said you expect to more effectively leverage at a similar growth in 2000 to 2022 was the similar growth part of that statement any kind of outlook or is that just a placeholder for the leverage comment.
It was no sort of outlook it was just simply saying.
I guess, a better way to put it would be all other things being equal, but it wasn't it wasn't a prediction as you know.
Our.
My My Crystal Ball consists primarily of the PMI and that doesn't extend much past the beginning of Q1 as you know so no it wasn't a prediction.
Okay. Thanks, a lot holding I appreciate it.
Thank you. Our next question is coming from Chris Dankert of loop capital. Please go ahead.
Hey, good morning, everyone. Thanks for taking the question guys.
I guess first off maybe just any update here third quarter now on kind of the 2020, we added a lot of new customers comment on retention in the past, but just any update on kind of what the retention looks like kind of today.
Yeah in the quarter, we still had so the definition by the way of that retention is.
Customers that had not previously purchased from US prior to Q2 last year when the pandemic began to settle in for the first time right. So just so we understand the definition.
We still recognized a little more than $50 million in revenue from those customers in the third quarter.
Down a little bit from from where we were in the queue.
The Q2 period.
But it still represents a significant investment and opportunity within the health care space.
Derived from.
The environment that we've been experiencing the last 18 months.
Got it Okay. That's helpful I guess Mike.
My apologies if I missed it in the prepared materials, but very dynamic pricing environment, obviously any comment on kind of what youre expecting the top line impact to be into the fourth quarter here I mean subject to change certainly, but just kind of a snapshot of what youre seeing today would be would be great.
I always feel I need to also play it's a very dynamic cost environment.
But.
I would say that our exit rate was perhaps a little stronger than our entrance rate for the Q3, and so I do believe that you will probably have some some continued edging up from the range that we experienced in Q3 in Q4. So it wouldn't surprise me if that number is a little higher.
But we also keep a pretty good tab on when we expect to see container costs and things like that begin to flow through the model and I think youre going to see that edge up in Q4 as well.
You could see incremental pricing in Q4 relative to Q3, but I think youre going to see incremental cost I think we're sort of currently expecting that.
For for all intents and purposes that that price cost will remain neutral.
Got it thanks for the help but and again congrats to the team out and be able to maintain that price.
Price cost neutrality, so far so thanks, again and best of luck.
Thank you.
Our next question I'll, just throw a little added commentary on on the question about the customers that we didn't have before that are buying from us now.
Holden touched on the actual statistics I'll tell you I'll touch on the anecdote piece.
So if I go back in time.
Three years, four years ago, and I'd be out traveling prop.
Probably the only place I would hear about things that we were doing that were noteworthy as it related to either.
Government and government or healthcare I'd be traveling down in Florida, and Bob Hopper would be telling me about our COO.
12 School district that he had that we were doing business with or that had expanded made perhaps had visitor.
And we had a lot of we have a lot of.
On sites in K 12 school districts in the southeast, particularly in Florida early on and then.
Bob would tell everybody about it and pretty soon nobody else, who kind of dabbling in it and finding success there.
And then we moved into.
Expansion in some of the higher Ed and sign some on sites one thing that stands out for me when I think of the last.
Nine months.
I periodically here and it's not just coming from Bob anymore, but I periodically here about.
About a health care facility that we just signed up as an onsite.
So far most of those that I've heard about have been tethered to a university.
But but seeing traction there now the numbers are incredibly smart and theyre going to be wrong in the scheme of things.
But that's not something I heard about.
15% and 20 months ago that I am hearing about as we go through each quarter of 2021.
I see that as a positive because it widens the basket of potential customers out there. The other thing stands out Holden and I have ongoing conversations with our team about metropolitan areas and what's our plan for last Friday, we went through Minneapolis, St. Paul area, What's our plan for this market.
Every one of those discussions now include a discussion about some traction we're getting on the government and educational fronts and healthcare fronts as it relates to business activity and onsite and again.
You would have had to.
Drawn out of people in the past now it's offered up as.
The growth is a growth opportunity in individual markets.
With that we'll take the next question.
Thank you. Our next question is coming from Ryan Merkel with William Blair. Please go ahead.
Hey, guys nice job on gross margins this quarter.
So my first question is is there anything to call out on gross margins as we think about the fourth quarter should we expect normal seasonal declines.
So yes, I think if you look historically.
Again, you would typically expect to see call. It 20 to 40 basis points of decline from Q3 to Q4.
I feel pretty good about that to be honest, there could be a touch of upward bias to that 20 to 40 basis point range, but.
If I think about.
Price cost being relatively stable versus where we are et cetera.
Yes, I just think that the history here, probably is fairly instructive and again there might be a slight upward bias is at 2040 basis points history, but.
Probably how I would characterize my expectations for the quarter.
Okay. That's helpful. And then I wanted to ask about Ftes I noticed it was flat year over year in September down from January is this intentional or is this due to labor shortages and then are you seeing applications pick up now and some of the states for the benefit presented.
It is not intentional.
Yes.
I frankly would rather be on this call, saying, what we missed by a penny because we added more people with easier to add people.
And.
But.
My sense is it's improved some.
The most acute part for us.
We build pipelines, we built sales pipelines, we build we build pipelines of talent and our best pipeline for talent over the last 50 years has been get somebody with a year or two years left of college or does it go into whether that's a four year state college or a two year touched on college.
Asked him to come work for us.
Tom Hale.
We'll get you some experience you will get some cash coming in which is always helpful to have a student and we're looking at 15 to 20 hours a week, but what we're really doing is dating.
What's the thought process be when you graduate we think you will like US and we think we will like you and we will get married and then Youll joined the Blue team and grow your career.
That's a tough recruiting model in the last year and a half because.
If colleges clothes and kids go home.
We need them.
Model is to hire them when they're at school and not when there are three hours away at home so that just devastated that.
Kids are back in school now now we're only a month.
<unk> basically bumping maybe five weeks into school, we haven't seen an uptick.
You know that I can tangibly put my finger on most of it's anecdotal.
I believe that piece of hiring will get better and I don't know if I believe that because I am being a glass half full optimist and I am just wrong or.
I believe it because I think a lot of people.
Hungry to get back to some sense of normalcy.
And part of it is.
I need a part time job in college.
But it's not planned.
Yes.
Got it.
Thanks, Dan.
Okay.
Thank you. Our next question is coming from Michael Mcginn of Wells Fargo. Please go ahead.
Thanks, I was hoping to hone in on the fasteners import lead time, you alluded to in the release.
Is there a way to disaggregate what the total lead time is from mill to Port and then how those fasteners turn relative to your remaining products.
When they do get into the domestic stock and maybe if it makes sense to compare how that is normalized environment versus the congestion we're seeing now.
Holden I don't know if you have that slide deck that we were just looking at the other day.
So as you can appreciate sometimes at quarter end or during the quarter you are looking at so many different things.
I don't want to give you.
Inaccurate information what I can tell you is the.
The buffer we are building into our supply chain for import.
Is dramatic.
And it's measured in weeks not in days.
And those weeks R. R.
I could almost say months rather than weeks, but it's a.
I'm trying to stall so old and can look it up but I don't think I'm going to get that luxury.
Suffice it to say it's weak.
Yesterday, with our board a share and insight.
<unk> to them.
And that is.
As an organization one of the board's obligations towards to the shareholders is to manage risk.
And one of the things I said to the board from a risk standpoint that we have to be acutely aware of.
And I don't know if that acutely aware of is <unk>.
Six months from now or six years from now.
Honestly don't know how this is going to work its way out because a lot of a lot of capacity was taken out from the steamship lines last year and part of the issue is the capacity just isn't there.
So is this something thats part of our new normal that we're going to have this kind of consternation and we need to build.
An extra 30% or 45 days of time into supply chain.
The risk is.
When that flips.
And again I don't know if its six months from now or six years from now when that flips we have to be acutely aware it is happening when it's happening.
Right now, we sell $13 million worth of inventory a day.
If all of a sudden stuff comes in three weeks faster four weeks faster.
You get.
Well 13 times 20 business days in a month is $260 million. So you could add 100 $450.0 million of inventory really fast.
If youre not dialed in and managing it.
But but it's measured in weeks.
I apologize, we don't have it at our fingertips, but but.
30% to 45 day window wouldn't surprise me, but I just don't have the accurate number in my fingertips.
Not a problem.
I guess switching gears to the answer is I believe a normalized target remains 375 to 400 can you discuss the revenue per site normalization or baseline.
As this initiative continues to mature and with the backdrop being you started on site I think the average was 150 and now it's 100 per site.
This normalization create a wider than that for you to drive more signings in 2022.
The.
So in terms of the.
The revenue per site you are right I mean, when we started this we had a smaller cohort of on sites that did between 182 million in revenue per site and today frankly, that's probably more in the $1186.0 million annualized level and Thats an improvement over last year.
And frankly, it's actually an improvement over 2019 as well so we have begun to see that improvement occur.
Sure.
And it's one of those things I think is relevant to talk about because we talk about the signings being somewhat weaker.
But that team in the onsite group, we've seen the average size go up we've actually seen the margin on that group go up and we've seen the inventory on hand actually declined in terms of days on hand numbers. So we've talked a lot about as you sort of get out of this hyper growth process into sort of a more of a fast growth process that comes with a certain level of <unk>.
Productivity efficiency, we have seen that over the last 12 months.
And so when we get back to being able to sign $78.0 to 400, when the market normalizes I think we are doing so off of a.
The larger and more productive base and I think that's an exciting development does that answer the question or did I Miss the point of it.
No that answers the question appreciate it.
So I'm going to I'm going to pull back to the last question by pull up my notes here from some stuff from a two days ago.
In September.
So total transit time for deliveries in August hit a fastball record 58 days.
And September was trending higher at the time they provided this update and it was a couple of weeks ago.
If I look at that back in.
In the first quarter of 2020, which is the earliest bars on my chart here that number was in the thirties.
As far as days and this includes both the transit time to the Port and then the average time discharged from port the destination. So it's not just what it takes to cross the ocean and get to the port.
Are you sitting there for 10 days or nine days out in the Ocean Port.
Southern Cal or wherever it might be but then to getting it through the terminal and transferred and.
Probably the thing that jumps out the most for me.
As in the.
Typically when we're negotiating rates that's a rate that goes from the port and the original country.
To our destination, which is our distribution center.
Yes.
And the steamship lines handle that entire at tighter journey.
35% of our containers coming in in the in the third quarter, we actually couldnt get them to the destination because they werent available because there's such a shortage of containers.
35% had to be manually unloaded at the port.
Load it on a semi and driven to our distribution center.
And everything you read about is what's happening with the container cost are coming from from overseas.
That doesn't include that layer of expense because putting it on a semi and driving it across North America.
Is a lot more expensive than the container going on a train and going across North America and that actually I mean, we see a fourfold increase in container costs year over year. If you added that piece in the increase is more like six fold.
But.
That's down 35% of our containers coming in the only silver lining in that is that 35 was 45% in August and it was 28% in September.
So I don't know if it is coming down and it's going to continue that trend because one month isn't a trend it's a data point.
But thats been a brutal piece of the inflation as well.
I see we're at five minutes before the hour.
Trust, we've answered most of the questions satisfactorily and if you have any follow up holding I around for the balance of the day I would put one quick call out to the fasteners team.
EHS today.
Recognized fast and all along with nine other organizations.
As Americas as one of America's safest companies.
And I want to I want to say to our <unk> team our safety teams that.
<unk> developed our plan and our employees that that honor and respect that plan.
For keeping each other safe and 2020, thanks for what you did for society and congratulations on the recognition.
Take care everybody.
Thank you.
Okay. Thank you.
This concludes today's event you may disconnect your lines of I'll go off the webcast at this time and enjoy the rest of your day.
Yeah.
[music].
Yeah.
Yes.
Okay.