Q4 2021 Fastenal Co Earnings Call
Greetings and welcome to the fast and all of 2021 annual and fourth quarter earnings results Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. 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.
Now I'd like to turn the call over to al installed a fastener company. Thank you you may begin.
Welcome to the basketball company 2021 annual and fourth 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 annual and quarterly results and operations with the remainder of the time being opened for questions and answers.
Today's conference call is a proprietary fasteners presentation and is being recorded by fast at all no recording reproduction transmission or distribution of today's call is permitted without passing all kinds that this call is being audio simulcast on the internet via the <unk> Investor Relations homepage Investor Dot fasten, all dot com a replay of the webcast will be available on the website.
Until March one 2022 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 peer.
Attic 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 on our fourth quarter earned.
Earnings call.
Before I start I always.
I'd like to make sure my mind is cleared.
Thanks, Doug.
On the quarter and I, just thought I'd, Sara a personal story and that is.
A little after five this morning.
I received a text from my wife her father, Glenn Gustafson afternoon I discussed.
That's the way it needs to 90.
<unk>.
There wasn't a trip that he made to Winona he lived in eastern Wisconsin to sell to Green Bay. It wasn't a trip that he made the Winona, where he wants to tell me how many fast on trucks him out on the road.
Or he want.
Beam with pride when he would drive by Pierce manufacturing, that's in Wisconsin see those shiny.
Fire trucks, knowing that the blue team with a whole bunch of vending machines with Vincent we're inside that facility, helping peers manufacture those.
Both fire trucks.
This will be my first earnings call in 2006 years, where I won't be able to share.
Bits of it with us after the call.
And.
And just want to let guests know I love you and you will be missed and rest assured the Packers will figure out a way to win this weekend.
With that a bit on the fourth quarter.
So our sales we grew about 13% in the fourth quarter.
We had one less business days, we grew almost 15% on daily basis, and the quarter was game gaining momentum as we went through it with December growing at 16, 5%.
We leveraged stellar.
Our income statement and our operating margin grew almost 14%.
And the quarter really reflects strong underlying demand.
Good execution on pricing improved.
Improved product availability in our supply chain.
And.
In full disclosure, probably the benefit of fewer holiday related shutdowns that would be typical for this period.
Yeah.
It often gets a little bit dizzying trying to make comparisons in 2020, 2021 to the prior year given all the the wild Covid swings so thought I'd share a few vantage points by looking at a two year comparison when.
When we started the year.
Q1 was up just over 8% from two years earlier.
And that was a reflection of a weaker environment a lot of uncertainty I'm pleased to say that as we went through the year that picked up in the second quarter on a two year basis, we were up just over 10% in the third quarter on two year basis, we were up 13 in the fourth quarter. We were up 20, and if you look at it on a day.
Early basis, we were up almost 22, so very pleased with how the year was strengthening within our business as it progressed.
Our gross margin recovered from 2020 as we expected.
And it's down from 2019.
As we expected as is hold it as shared on earlier calls.
The way, we're growing the business and the way the mix is changing.
Does cause our gross margin to decline over time and again, it's a mixed function.
And but it also causes our operating expense to drop over time, and we think it's a very effective way to grow the business.
For our customers for our employees and for our shareholders.
The.
<unk>.
On a two year basis, our operating profit grew faster than sales, which really speaks to.
Greater productivity as I touched on a moment ago and very effective cost control.
Part of the Blue team throughout the organization.
When when we.
Talk and look at the impacts of COVID-19, and how we think about it on a future basis.
<unk> now considered COVID-19 to be merely an ongoing element of our global business environment.
And like all of Society, we have to learn how to live with it.
The first step for us is.
Recognizing it for what it is it's a serious.
Iris, but but our approach is not one of fear and chaos.
It's an approach of sharing the facts with our customers and our employees, what we're doing and how we're how we're handling it day to day.
I can share with you at the end of last year.
Cumulatively, we've had 3400 cases within the fast and all family over that almost two year period.
Since year end net 3400 has grown to 4000 as we've had about 600 cases in the first two weeks of the month about 400 of those occurring last week.
If patterns.
In January mirror, what we saw after Thanksgiving in the United States.
I would expect.
Our numbers to drop off in the next couple of weeks and to move back to kind of that 40 50 to 60 cases per week that we've seen before and time will tell if patterns repeat themselves.
The.
Again, the biggest focus that we've had in his sharing facts with our employees we have renovated.
Aggressively our facilities the air handling to make the air cleaner and all of our facilities quite frankly, not just for COVID-19 , but for flu season in general.
And it's one it's one way of addressing the comfort.
For everybody in the business.
The.
Gross driver details are laid out on page five and we continue to see expansion in sales through our digital footprint, which was 46, 4% of sales in the fourth quarter versus 37% in fourth quarter of 2020.
Again on page four this is just the comparison to 2019 thought it'd be helpful for folks looking at the call.
What emerges for me as a business that.
Exiting this two year period stronger as an organization than we entered this two year period.
And I think which bodes well for for our business because we move into the future.
One thing I think that probably understated in these comparisons when you're looking at the sales growth and our operating income growth in other words, how did we leveraged and how did we improve the business there.
The third three months period on a two year basis, it was actually slightly understated in our strength.
We had one less business day than when you do $25 million a day a lot of that gross profit flows right to the P&L in that 25, 9% operating income growth would have been meaningfully stronger.
Flipping to page five.
You know holding I've been stealing his thunder in recent weeks.
Based on a comment he made to an investor on a call I participated in some months back.
And he said you know.
In 2020 in 2021 our customers asked passed all for different things.
And in prior years.
If you look at prior years, our customers, who are increasingly asking us to move in with them and be on site and provide resources right in their facility rather than from a few miles away.
They also asked us to deploy technology to help their businesses be more efficient. Initially it was bending now it's a combination of vending bins and what we call fast stock our mobility applications or mobile or more broadly are semi technology, but it's really about helping customers be more successful inside their.
<unk>.
As you see from these the Jacobs charts.
Our onsite signings and our FMA device signings have been meaningfully impacted.
Bye bye COVID-19 over the last two years, however, we feel our opportunity for the future.
Is untainted by this and if anything it strengthened because the definition of who has the potential customer has expanded dramatically during this timeframe.
So the one thing that I think should jump out because of our branch footprint.
One thing Thats for US has always been a relatively small piece is the e-commerce component within our technology platform.
I'm pleased to say that our customers.
Are embracing that more and more and that's partly a function of the times and maybe its partly a function of us embracing it too, but our web sales were up almost 50%.
Our <unk> was up 47, eight and combined it was up about E. Commerce was up 48% in the fourth quarter of 2021.
Page six is a new chart as the holding to put in and it stem from a question one of our directors had in preparation for the board meeting those really looking at the fact that we've closed a lot of branches over the last six seven years.
And where do you see that going to and most of those closures have really occurred in our most mature market, the United States and to a lesser degree up in Canada.
But in those two markets combined we've seen the same pattern.
So our branch network peaked out in that 2013 timeframe.
At that point in time, if you just started in one of our branches.
And would it be hopped in a vehicle and drove 30 minutes.
Our network would have touched about 95% of the U S manufacturing base I don't have that exact statistic for Canada still you bear with me. Please.
But.
Today.
That number is about 94% as we've rationalized our network.
And we believe that ultimately our branch network in the U S and Canada will be about <unk> thousand 550 locations. So there's a few a few more to consolidate.
And that will be about a 93, 5% coverage rate on the manufacturing base the United States.
As I mentioned on the previous page.
Our.
<unk> has evolved and one of those elements is E. Commerce. So in March of 2020, we broke 10% of sales going through E. Commerce for the first time in our history.
As we exit 2021 that number is now 15% of sales.
As I mentioned on the previous page from Q4 to Q4, our volume in E Commerce was up about 48%.
And in that two year period from Q4 of <unk> 19 to Q4 of 2021, so going back to before Covid started we are up 105% and our e-commerce business and it's really a reflection of our customer base is embracing this way of ordering products from us.
But our thrust is first and foremost.
With <unk> technology.
If theres a discernible pattern to the usage of this product within a customer's facility.
Most businesses most distribution businesses focus on how do I make that an electronic order.
We look at it and say well if theres a discernible pattern why are you even ordering in the first place your supply chain partners should make it available when you need it and that's what I have to my technology is all about.
With that I'll switch it over to hold them great. Thanks, Dan.
Turning to slide seven.
As indicated our sales were up 12, 8% in the fourth quarter of 2021 on a same day basis sales were up 14, 6%, which includes up 16, 5% in December the period still had difficult COVID-19 related comparisons with government daily sales down 35, 7% and safety and janitorial products being up.
Three 5% and down three 5%, respectively in the fourth quarter of 2021.
As a result, we believe total growth in the period understates. The strength, we are seeing in our traditional manufacturing and construction customers.
Daily sales for our fastener products increased 24, 2% and if we look at sales excluding the COVID-19 affected safety and janitorial products. Our daily sales would have been up 21, 1% outside.
Outside of government and warehousing. This strength was experienced broadly across our end markets consistent with macro data points, such as the PMI and industrial production we.
We believe the period was also boosted by fewer holiday related shutdowns and somewhat improved availability of non fastener products.
Pricing contributed $440 to 470 basis points to growth in the fourth quarter of 2021 up from 230 to 260 basis points in the third quarter of 2021.
This reflects good execution on actions taken during the year to mitigate cost inflation higher costs will remain a challenge in the first half of 2022, while certain metals prices seem to be plateauing for the moment most remain at high levels product imported into our hubs in the first quarter of 2022 will have a higher cost and shipping costs continue to rise.
We do not currently have any broad pricing events queued up for the first quarter of 2022, but we'll be addressing specific product and product categories, particularly fasteners to offset higher costs expected in the first quarter.
We expect hub product availability to improve in the first quarter of 2022 and be more stable through the year, which should be a benefit to our customers who are still struggling with availability. However, this reflects shipment timing and our willingness to procure a supply of products several months longer than normal the supply chain otherwise remain strained.
The labor markets remain tight, but we have seen some improvement in our ability to hire in markets with less restricted on premises recruiting policies.
Now to slide eight.
Operating margin in the fourth quarter of 2021 was 19, 6% up 10 basis points versus the fourth quarter of 2020.
Our dynamics in the quarter, meaning for the full year with gross margin rising off a 2000, twenty's product driven low margin and operating expenses being deleveraged as cost reset off of 2000, twenty's artificially low level.
The gross margin was 46, 5% in the fourth quarter of 2021 up 90 basis points versus the fourth quarter of 2020. This relates to two items first we experienced strong absorption of overhead and on strong product demand and growth.
This exceeded our expectations largely due to the strong accelerating volumes in the period.
Second our safety product margin improved as lower margin Covid related PPE was a smaller proportion of total safety sales versus last year and the margin on those products increased.
The impact of product and customer mix in the fourth quarter of 2021 was immaterial as the favorable effect of strong fastener growth nearly matched the negative effect of relatively fast onsite growth.
As the gap between fastener and non fastener growth narrows as seems likely in 2022. This drag is likely to widen to 40 to 50 basis points higher.
Higher pricing continued to largely match higher costs, yielding a neutral price cost in the fourth quarter of 2021 or.
Our fourth quarter 2021 exit rate in first quarter 2022 plans suggest pricing will remain elevated in the first half of 2022 and sustain a neutral price cost relationship.
The increase in gross margin was partly offset by operating expenses growing faster than sales.
This primarily relates to cost resets, which are typical which are typical of the first year of any recovery, but exacerbated in 2021 due to the unique COVID-19 related cost restraints that existed a year ago to provide.
Perspective in the fourth quarter of 2021, we had four SG&A cost reset categories incentive pay health insurance fuel and travel were spending collectively increased 35% and which produced about 120 basis points of deleverage in the period on the remainder of our costs, most notably occupancy as we continue.
To rationalize the branch network and as we leveraged our strong growth, we achieved 40 basis points of leverage.
This should not be lost is the degree to which we improved our operating expense leverage in 2019 to 2021 as detailed on page four of this presentation. The first quarter of 2022 will still have COVID-19 related comparisons, albeit moderating aside from last year's math right off but comparisons will mostly normalize in the second quarter.
At that point provided volumes remain healthy in 2022, moving past the initial reset year combined with continued productivity gains from further penetration of our digital footprint and our branch initiatives should generate improved SG&A leverage.
Putting it altogether, we reported fourth quarter 2021, EPS of <unk> 40 up from 34 in the fourth quarter of 2020.
Now turning to slide nine.
Operating cash flow was $156 million in the fourth quarter of 2021 down 51% year over year, and representing 68% of net income.
For the full year operating cash flow was $770 million down, 30% and representing 83% of net income. We continue to believe our model produces a conversion rate north of 100% of net income additions to working capital caused us to fall short of this goal in 2021.
Year over year accounts receivable was up 17%. This reflects strong customer demand and a shift from PPE buyers last year and towards traditional customers. This year that slightly blended up days outstanding.
Inventory was up 13, 9%.
80% of that was from inflation.
Growth in product for stock remains modest given supply chain constraints the rate of sell through as product becomes available and our ongoing efforts to clean out slow moving hub branch inventory close branches and shift our stocking focus in the field.
We have a considerable amount of imported product in transit and we expect to see product availability, particularly for fasteners improve in the first and second quarters in the current environment, where product availability is a key differentiator we view our investments in working capital as an effective means of utilizing our balance sheet to support customer service and growth.
We finished the fourth quarter of 2021 with debt at 11, 4% of total capital down from 12, 9% at the end of the fourth quarter of 2020, we utilized roughly $25 million of our $700 million revolver. So we have ample liquidity.
To be available.
Net capital spending in 2021 was $148 million in 2022, we anticipate net capital spending in the range of $180 million to $200 million. This increases is committed to both upgrading and investing in new automation at a couple of hubs higher spending on semi devices to support expected higher signings and <unk>.
Additional manufacturing capacity.
That is all for our formal presentation, so with that operator, we'll turn it over to you for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, 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. It may be necessary to pick up your handset before.
<unk>, we ask that you please limit yourself to one question and one follow up question. One moment. Please while we poll for your questions.
Our first questions come from the line of David Manthey with Baird. Please proceed with your question.
Thank you good morning, everyone.
Dan our thoughts are with you and Jen sorry for your loss.
Thanks.
Yeah. So.
I didn't see in the slides it may be in here, but what percentage of the revenue mix was fasteners this quarter.
Revenue mix this quarter for fasteners was.
33, 5%.
Okay, alright that makes sense.
Is it possible that we could see that percentage remained flat or even rise as a percentage of the mix. This year I know sometimes early in these cycles when manufacturing in non res construction or picking up sometimes that mitigates the.
The mixed drift could you comment on that and then I have a quick follow up.
Yeah.
Yes. So at this point, we had a gap between fasteners and non fasteners. This year, then I think there's about 17 percentage points of growth I would not expect that to continue I think your question is how far does that come back.
Currently I'm kind of assuming that growth of fasteners and non fasteners will be comparable right.
I think the comps are going to be tougher in fasteners I think the comps are going be relatively easier than non fasteners, and I think youre going to see.
Youre going to see significant convergence.
Towards each other in that regard now that would be an outperformance against history, because historically I think the non fasteners have grown about.
Three percentage points faster than fasteners, and I think that might reflect some of what youre talking about but I would expect a significant retracing of that gap and right now I'd, probably assume they come in kind of in the same general ballpark from a growth standpoint.
Dave the only thing I'd add one.
The only thing I'd quick add to that is.
In the short term there are there are two things that can influence that a little bit there isn't placement fasteners right now so that's an element, but I think holden's contemplating that in his commentary.
The other thing.
That could that that will help fasteners.
From a mixed standpoint is if you think of our growth drivers, particularly the vending.
Element of our growth drivers. That's historically helped non fasteners, because you really don't put started fasteners and vending machine.
Really helped our safety products as you know over the last decade plus.
Our latest component of <unk> passed on aged inventory is fast Ben.
And in there is an RFID Ben.
That basically puts intelligence into a traditional kanban system.
That is very helpful to our fastener business, because that's really used with OEM fasteners. So if there is any any lift could be a little bit there, but I think that's relatively short lived because of the just.
Just the inherent growth differential in the two because of <unk>.
Our maturity level.
Okay. Thanks for that Dan.
As it relates to the puts and takes on gross margin.
<unk> mix is somewhat neutral.
Talk about the.
The higher priced inventory moving through and it may be you can scale that factor.
Inventory benefit you saw last year that would go away. This year and then anything else you need rebates or any other minor puts and takes we should be thinking about for 2022 gross margin.
Yeah, if I think they're actually are quite a few puts and takes and I remember I think from a price cost standpoint, we're fairly neutral right. So the impact of price on gross margin.
It was neutral in 2021, and we're operating under the assumption that will be neutral in 2022 as well.
But you are right our customer product and process.
And customer mix was also neutral in 2021.
And I think that as you get that gap narrowing between fasteners and non fasteners youre going to see that that neutral slipped back negative and so I am assuming that product customer mix will be sort of a 40 to 50 basis points.
Drag in 2022.
Another piece that I think will be perhaps a drag on gross margin in 2022 will simply be.
The absorption that we experienced this year. This year in addition to accelerating growth throughout the year. We also had to begin buying more product because of supply chain challenges. If those things begin to moderate I wouldn't expect the same degree of absorption benefit in 'twenty two as you get in 'twenty. One so those two things could work against gross margin.
As we get into 2022.
Some offsets on the other direction.
21 had a lot of mask write downs and I think that there is.
Not going to recur.
I do believe that we will have some product margin improvement in both the fastener and <unk>.
Safety side of the business not dramatic, but again I think that you can have some tens of basis points of contribution there and I think the one thing we'll be watching really closely is the impact of filling buys because in 2021, where we had very little or where we had a lot of restraints on our availability in our hubs because of the supply chain are.
Field did a remarkable job going out and finding product and when they do that they typically don't get the same margin that they would get if they were still within our supply chain and they often have to have to move a lot of product around on outside freight, which we would normally do and so to the degree that the supply chain normalizes in that fill in bi reverses.
I think that that would be favorable as well. So those are all the moving pieces.
Netting it all out I still think gross margin is going to be going to be slightly down in 2022 and.
That's kind of how long view on it at this point.
Very helpful. Thanks, a lot guys.
Sure.
Thank you. Our next question is coming from the line of Josh <unk> with Morgan Stanley . Please proceed with your questions.
Hey, good morning, guys and also shadow to the operator, unlike the totally legit or not in aviation.
That's all.
I was going to ask it sounds like you've got it right.
Yeah.
Three tally marks in my career of guys, who have gotten the debt right.
So hope I guess similar question on maybe the SG&A leverage you talked about that being a little bit better normally you don't get quite the same amount of colors, maybe you do on gross margin, but maybe.
And maybe anything that you could put around parameters for like how much better SG&A leverage just looks as a resolve maybe not quite at the same cost resets.
Well remember that part of it is simply comparison right I mean, I think two things happened in 2022 first we're going to move past the year one reset.
I continue to believe that our incentive pay will be up.
Where we exited with fuel fuel will be up.
Health care or who knows we'll see how that plays out and I don't think that our travel isn't necessarily gotten back to where what we would consider to be normal.
But I also don't think that youre going to see an order of magnitude of increase in those categories that looks like what it did in 2021. So I think you move past that year, one reset I think that takes a comp on a comp issue off the table and then we're also not going to be comping against those COVID-19 related cost takeouts from a year ago right. So I just the reason the opex leverage REIT.
<unk> is in part just because of the comparison gets easier right. We have a long string of improving our leverage and we had a little bit of a pause in that in 2021, but I think thats a unique circumstance in 2022, you'll begin to see something more normal take place, particularly as you get into Q2 and beyond.
So the comparison is normalized and then you fold into that.
Efforts that we're taking to be more efficient right. We talked about the structural changes that we've made at the branches, which is contributing to our ability to to rationalize the network a bit more we talked about the technology investments that we've made which also contributes to our ability to rationalize the network a bit more.
And those things are going to allow us to produce leverage off of occupancy and labor.
So in my mind, where this all comes together is.
We would see the operating margin being higher in 2022% in 2021 with Incrementals net 20% to 25% range, which has been our goal.
You're right I'm not overly specific I want to let you all project how effective at it you think we're going to be but.
I see the dynamics that existed as recently as 2018 in 2019, where we had gross margin coming down to a significant leverage of SG&A I see those dynamics begin to reassert themselves in 2022.
That's particularly true as you get into the second quarter. There is still a little bit of Covid related hangover in Q1, although it is moderating but once you get to Q2 I think all of those comparison issues are passed.
Barring any change in the Covid landscape in the next few months.
Got it that's super helpful detail and then Dan just a follow up on a comment you made in your prepared remarks.
On on site and kind of the way customers are engaging or want to be served.
Is there another kpis that you were sort of tilting more towards whether it's semi device signings or or something else E. Commerce that you think folks should pay maybe closer or disproportionate attention to given that on site.
Customers aren't really looking to engage quite that way at this time.
Yes.
First off I do believe.
<unk>.
The commentary I made about Covid and Covid, it's part of it's part of our life now.
I think.
Many organizations are coming to that same conclusion I don't think we're unique in that at all in that regard.
And so I think willingness.
To focus on things that are long term rather than short term chaotic will improve but I believe our onsite signings will improve.
The one aspect that that we've started talking about this year that we will continue to talk about in the in the months and quarters to come as our digital footprint.
And how that continues to expand.
Because it.
It really expand what we can illuminate for the customer.
It also.
Helps us.
Over time become an ever more efficient distribution model, because we're pulling more products through the system.
Because we know where it needs to go as opposed to pushing it not certain where it's going to go and you can do things a lot more efficiently and we've talked in recent months about.
About a concept called lift which is our local inventory fulfillment terminal, we have 17 of them now.
And some of those are inside distribution centers in some of those are external to distribution centers, but it's essentially.
We have those vending machine that we can look at the pattern the vending machine and say Hey, we know what it's going to need with pretty high certainty for.
For the next week.
Maybe we should be picking that product in a lift rather than one of our branches, where we can do it much more efficiently.
And it allows us to.
Right now one of the most precious resources to add to an organization of people.
So it allows us to better leverage that element of our of our business and allows the energy locally to be focused on.
Consultative discussions and pure service as opposed to picking inventory and so so I think digital footprints really important one and it's one that I am.
Pleased to say, we are uniquely poised to.
To step into because of our our branch network.
Got it that's helpful. Thanks, a lot.
Okay.
Thank you our next questions come from the line of Nigel Coe with Wolfe Research. Please proceed with your questions.
Thanks, Good morning, Thanks for the question.
Just hoping I wanted to go back to the inventory I think inventory was up 14%.
Year over year, and I think the comment was that.
The bulk of that is inflation is that correct.
The majority of that increase would be inflation.
On the back of that would be.
More inflation to come through the P&L from inventory and therefore to remain price cost neutral in the first half of the especially do you need to accelerate pricing from before the phone off the fence and <unk> and that's sort of like the spirit that question as you've got no price increases county plans, but you need to have further price.
Increases to maintain that neutrality.
Well I think what I said is we don't have a broad sort of business wide increase planned we do have changes that we need to make so to your first question, yes about 80% of our increase in inventory in the fourth quarter was because of inflation not because of widgets.
The.
When I look at the inflation, that's coming down the Pike you all know how we account for inventory.
Right now I would say that if we did nothing else, particularly on fasteners, we would be behind the ball, we know the cost coming through the system.
In the first half exceeds where our pricing is today for fasteners and so yes, we have other actions that we do intend to take.
We simply falls short of thing, we're raising prices on everything because a generalized inflation.
There are certain products within within our mix.
We didn't raise price as much as we think the market would have justified and we've gone back we've looked at that list. We've done the analysis and we're going to we're going to address those gaps.
There were certain.
Customer sets that we weren't as aggressive with initially intentionally that.
We always intended to sort of come back and revisit that group and that's a significant chunk of revenue that still has to be addressed.
And then we think that having availability of product, particularly fastener product when I think a lot of the market will not I think is also going to allow us.
To be somewhat aggressive versus some of our competitors. So.
We have at this point managed to really track the pricing and the cost effectively through the last three quarters and.
We've been able to see what our what our cost is one of the benefits of the long supply chain as we got visibility that extends and so we've known what's coming up in Q1 and Q2 of 2022, it's not a surprise and so some of our actions have been tracking that as well and so whereas we don't have.
Plans that are as broad as what we've seen through three or four events in 2022, I'm, sorry, 2021, and 2022 in the beginning we do have plans, particularly around fasteners, because if we don't execute those plans and we would fall behind but we manage that price cost delta well. None of this information is new or surprising to us.
And we anticipate managing it well in the first half of this year.
Great. Thanks, that's very helpful.
And then my follow on is on the <unk>.
The employee costs, I think up 17% from not mistaken.
This quarter, you've indicated better SG&A leverage going forward, but I'm, just wondering about 17% how much of that is sort of not onetime in nature, but discretionary bonuses, maybe some sign on bonuses for hiring and how much would be sort of base inflation within the employee base.
If we look at that wage inflation it hasn't changed much versus earlier in the year, if I if I look at our full timers.
We're probably sort of in the mid single digit type range, maybe a touch.
Can you touch below 5% in terms of what our base pay per head is looking like on full timers, if we look at the part timers.
That's still up double digits in terms of growth. So we are seeing some wage increases however.
However, they've been they've been relatively stable in terms of order of magnitude over the course of the year.
Incentive pay is another matter I mean incentive pay was up significantly.
Over the course of the year I think it was up about 25% and in <unk>.
Q4 is about 35% now.
That's a great story right that reflects the success, we've had as a business and growing our revenues and growing our profits and margins.
And I would expect that we're going to be successful in that again next year.
But that first year reset is real and in the second year I would expect our incentive comp to grow but I don't expect it to grow at the same rate that we saw in the in 2021.
Again, we've seen that pattern out year after year.
Thanks, guys.
Okay.
Thank you. Our next question is coming from the line of Hamzah <unk> with Jefferies. Please proceed with your questions.
Dan I am sorry to hear about your loss first of all and then my question is just around on site.
Could you maybe talk about expectation for onsite signings. This year and do you think there's pent up demand there because you did referenced sort of.
The sales cycle being pushed out and that has yet to sort of normalize.
Well.
So our expectations are at $3 50 to 400 onsite signings.
To be very clear I think the dynamics that maybe signings a challenge in 2021.
We're exiting the year with those dynamics still in place and so the reality is that in order to make $3 50 to 400.
And for that matter of 23000 to 25000 F N y devices.
We probably need to see the marketplace.
Normalized a little bit more and I think the challenge that we have is simply that when our customers are in short term crisis management mode. I think they have a harder time shifting their attention to long term strategic decision, making right now and I think that's the fundamental issue because we absolutely believe that over time the marketplace can support the kind of signings that we.
That we continue to project out so we.
We will see how it plays out hamzah, but at this point, we're assuming that we're going to have an <unk>.
Accelerated rate of signings for our growth drivers and we'll just see how the market plays out so that should hopefully give you some color in that respect.
And I'm sorry, what was your second question around that.
It was just around.
The sales cycle normalizing do you have a ramp up do you see pent up demand there.
I don't know if I would call it pent up demand because I think in many respects attention has just shifted right. We have stories from the field of.
We put an offer on the desk of our customer and its just still sitting there and its three months now right and so at some point that customer will return to that piece of paper on the desk and sign off on it and it'll be ready.
Does that mean that in 2022 or 2023 that $3 50 to 400 becomes temporarily $4 50 to 500 I.
I don't know.
I doubt it frankly.
We've had a bit of a pause.
As people have managed their businesses.
And as the management of that business begins to migrate away from crisis management I think that they got back and task is to do that but I do want to go back to what Dan had said before.
Because I think one of the concerns that the broader investment community hop has homes is well if youre not signing answer accident affect your ability to grow market share and I get the concern.
But to Dan's point earlier in 2020 in 2021, we grew market share, but we didn't do it because of the onsite signings as we all can see we did it because at that point customers are asking us to do something different which was get COVID-19 materials in 2020 and in 2021 get any materials and we grew market share because we.
Did that really effectively.
In 2022, we're expecting our customers' environments it become a little less chaotic and.
And we expect them to shift back to this question of long term sort of growth driver signings as we think about it and I think we're going to refill the pipeline.
I think thats, how this plays out and we'll see how right we are as the year progresses, but.
If.
If the environment remains chaotic in 2022, and our signings are low because of that.
We're going to gain market share because we meet the customer where the where they are at the time.
How do we think about it hamzah I'll just throw in a couple of thoughts first off thank you for your comment and I'll.
And on site.
Tweak, but holds and sit on it from the standpoint, our range and the release of 375 to 400 he misspoke.
And I'd like to.
Updated range better please turn slide 400.
I think there's three things that.
For things that that can help us.
In that regard with signings.
I don't know if theres, a backlog per se or pent up demand I know there is demand and that demand is is the same as it was 234 and five years ago I do know more customers are aware of our capabilities today than they were 234 and five years ago. If for no. Other reason from the discussions we've continued to have with them for the last.
Now several years.
I think that bodes well for our ability.
I think the commentary about people accepting COVID-19 for what it is now and depending on what happens with the slaves variance and how things play out as we move deeper into the year, we'll have a meaningful impact.
I do believe it's going to remain difficult to hire maybe not as difficult as it has been but it can be difficult to hire so it's difficult for me as a manufacturer to hire and I have a partner that is my supply chain partner, who.
<unk>.
<unk> resources efficiently deployed with technology to assist them to come into my building, that's the easiest way to higher.
I can say the past, though yes, I'll take that onsite model and you're going to put how many people can put in maybe one maybe two maybe its five people. So I think thats, a real real key to improving your ability to hire.
And finally.
There isn't the organization that hasnt been choked to its core shaken to its core in the last two years because of supply chain disruption I think that bodes really well.
People wanting to align with a great supply chain partner and I believe thats, what we are.
And the only thing I'll add on on site just to stick with the theme here.
Even though the the signings and the new active openings werent as high in 2021, as we expected frankly.
As we expected.
That group did improve its operating margin.
By about a percentage point.
Not only over 2020, but frankly over 2018 in 2019 as well and the days on hand in inventory in that group also has declined versus 2020 and 2019 and so.
This is a relatively new initiative for us and when conditions got a little bit more challenging from a signing standpoint that group used the opportunity to be a better business in 2021 than it was in 2019 and.
That's relevant to they got better and thats going to carry forward really well, even as our signings and sales.
Very helpful color just a follow up question I'll turn it over just on the National account business.
Customers are not growing I know you mentioned 82 of the top hundred are growing is there a particular bucket that they all fit into or is just sort of various.
Sort of end market.
Thank you it's mostly.
Talking about that few companies, it's mostly company specific items as opposed to market driven the one exception would be warehousing type customers.
That group was pretty strong as you can imagine during 2020 and so they had difficult comps. The other piece that's been a little bit slower would be food processing again for the same dynamic right. So, but it's mostly company specific and I might call out those two areas that were COVID-19 affected.
Got it thank you so much.
Thank you our next questions come from the line of Adam Uhlman with Cleveland Research. Please proceed with your questions.
Hey, guys. Good morning, Dan morning for your loss.
Thanks Sam.
Hey, I wanted to go back to <unk> question about price realization in a different way you had like four five points of price realization in the fourth quarter and based on the actions that you guys have taken and that you plan to take in the first quarter or should we be thinking about that benefiting.
Revenue growth by.
I don't know.
Five to six or 6% to 7% can you help us understand the magnitude of the inflation that's coming through yes.
We will particularly once you get into Q2, and especially Q3 Q4, youre going to start hitting you youre going to start lapping pretty big increases right. So I wouldnt view any incremental pricing in.
In 2022 as being purely.
Incremental pricing, it's going to it's going to comp. However, if if we take kind of the expectations for Q1, and then we just run those forward right.
So who knows what's going to happen in Q2, Q3 Q4 with the environment, but if you just take what we expect to do in Q1 and run those forward I do think that you are pricing contribution.
In 2022 could exceed 3%.
No again, we don't know how the market is going to play out over the course of the year, It's a long 12 months.
Based on what we know today.
But yes, I do believe that you could have pricing contribute to sales over the course of 2022 in the north North of 3% just based on what we've done today.
But I wouldn't expect 5% plus type type pricing in 2022.
Simply running the comps.
Gotcha, and then from a bigger picture perspective, I think some investors are starting to get worried that manufacturers are hurting some inventory because of the supply chain issues were.
No worries about that.
I guess im wondering if youre seeing any evidence of that across your customer base that there's pockets of inventory building up that eventually you might go from broadly in shortage to like an inventory issue next year that anything thats come up a concern.
You know the the only thing I could see Adam as you know and this is from anecdotal discussions during the year I know there are situations where.
The customer has product that that's near completion that setting that's still sitting in with because there is.
There's a half dozen chips that need to go into that piece of equipment.
And that piece of equipment can't be finished with both of those chips, but everything else is done around it.
But I think thats gotten better as we've gone through the year. So I don't think that's I think that's worked its way through may.
Maybe not perfectly but pretty well.
You know the probably the only place you would have.
I think.
Some inventory issues as you go into the new year and I think the market is.
On top of this and we really react to it would be.
We've talked about Ocean transit times for products, we're importing.
And if.
If I if I, if I think of if I think of the of the year and we talked about this on the third quarter call.
Is.
February and March were particularly ugly it didn't get worse in April and May It did get worse in June and then it kind of moderated September occupant September really ugly again.
And then it moderated in October .
November and December were the ugliest two months of the year. So that's the reality of the landscape right now, but at some point in time and I don't know when that point in time is that.
That will get better and all of a sudden when that works its way down there is a lot of product. That's that's queued up in some of our increase in inventory is because we have deeper inventories on certain things now than we would normally have because if it takes longer to get here you need a buffer that into your inventory.
So, let's just say it's taken.
Yes.
60 ish days to get product.
In the.
Across the ocean between Port the Port and then discharge port the destination and that goes back down into the upper thirties.
Youre going to have a little blip in inventory.
We will quickly fix itself, but it's still a blip nonetheless, but that's more on the raw material inbound then it isn't finished goods and I think your question was more of a finished goods at them.
Okay, great. Thanks, Dan.
And Adam Dan as you point out I think you also asked about maybe the first quarter or first half on the pricing question. It wouldn't surprise me if pricing approaches 5% in the first quarter and second quarter.
And comes in a little bit higher than we just saw in the fourth quarter that wouldn't surprise me, but for the full year I don't think youre going to be at that level.
Okay. Thanks, a lot.
Yep.
Thank you. Our next question is come from the line of Ryan Merkel with William Blair. Please proceed with your questions.
Okay.
Thanks, Congrats on the quarter Fellas I wanted to ask about digital Dan.
You mentioned digital maybe getting to 85% of sales.
What gives you what gives you confidence in that is it is it truly just it adds productivity for the customers. That's simple and then what will the makeup be roughly long term between E com bands and pending.
You know.
I think it is.
Its really predicated on the fact that when we really try to understand what our customer uses over the course of the year.
We think that.
That 65% of it.
Is really planned spend but unfortunately.
Customers, either don't have a supply chain view of it that way or they or we don't have the tools and supply chain historically to manage it that way, but we fully believe 65% is really predictable in some form or fashion. If you really understood. It and we think <unk> over time can grow to.
That 65%.
That's where the piece of it is.
And antibody started splitting it up between beats.
Between the components of <unk> vending of bins, and then of what we call fast stock, where you're just going out and scanning bins.
I wouldn't be surprised if.
If.
40% of that.
Im guessing with this number because we honestly don't know I wouldn't be surprised if 40% of that ends up being what we call fast stock.
And and.
Not 40 point, 40%, so 25 percentage points.
And I think the other.
60% is a combination of the vending in the bins and I think the bins ultimately can be a big piece because that's the bins are big and OEM.
Vending as big an MRO.
So it depends on how your mix plays out there.
But but that's where the 65 comes the the.
The next piece of the 85 is really we look at it and we say.
We think theres going be another 20 points of E comm on top of that now.
Now that doesn't mean E com and others, where the my stories that are getting really muddy and I apologize for this Ryan.
That doesn't mean, we think E comm is going to be 20%.
I personally think there.
That 65% of <unk>.
I can't Fathom, a world, where a big chunk of that doesn't get billed electronically. So let's say half of that gets build electronically.
So that's 30 points of E comm right, there, but it just <unk> billings.
And then the other 20% I talked about that gets at 65% to 85.
Is is another piece on top of that our E com in that scenario 50.
But 20 points of that is is incremental 30 points of that is this double counting EMI and now I would probably just lost everybody on the call, but I hope that's going to affect understood.
I suspect that some cleanup to do after this call.
Yeah.
My follow up most of it Dan.
But it's really a case of that sounds thats repetitive.
You know the most efficient way is why are you ordering in the first place.
And.
That's kind of like you know somebody that has a newborn kid and they set up diapers to get that get sent in and because we know.
The kids didn't need diapers, and we know that in two months the kid is bigger than it is today.
I, probably should say here see but the kid is going to be better.
That's a planet will thing why are you going out buying diapers.
Right.
That makes sense I mean, that's the trend and it allows you to grow with less labor and it's more productivity for the customer. So all makes sense. My follow up is on fasteners, how much of the 24% fastener growth was price and then historically if metal and transport prices fall do you have to lower fastener prices.
So our.
Our fastener pricing is probably neighborhood of 20%.
Now again, that's lagging cost that's coming through the channel that's the degree to which you've seen higher material cost and steel cost et cetera sort of influence so.
We've had significant impact from pricing on the fastener side.
I'll, probably defer to Dan on the history around giving up.
Giving up stuff when you sort of.
She goes the other way because you'll have the history that I may lack at this point.
Yeah.
The reality of the last few years.
He is our customer supply chain has become more expensive.
And we merely are a conduit.
Their supply chain partner.
When you look at it from the perspective of OEM fasteners.
If the costs go up the costs go up the cost per down the cost will go down in a competitive marketplace.
And.
That usually moves with the turn of inventory.
And that's not a new dynamic.
<unk>.
The challenging part is.
What's the timeframe in which that happens because you know a.
A big element of the increase is the dysfunction of the transportation element.
And.
That's not going to correct itself anytime soon in the dysfunction of that includes the ports. It includes capacity Ocean carriers. It includes availability of drivers part of the issue is the amount of product that's going on a semi today that should be going on rail because of all the disruption.
And but.
But we operate in a competitive marketplace on the MRO side, that's more dictated on on mix and what Youre on what Youre sourcing.
I'll start Dan Thanks.
Right.
That I see we're at two <unk>.
That's to the to the hour.
Again, thank you for participating in our call today I hope everybody has a successful 2022. Thank you everyone.
Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.