Q1 2022 Fastenal Co Earnings Call
Hello, and welcome to the first of all first quarter 2022 earnings results conference call and webcast. At this time all participants are in a listen only mode.
I shouldn't answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to turn the call over to Alan Sokol Investor Relations. Please go ahead.
Welcome to the fast in all company 2022 first quarter earnings Conference call. This call will be hosted by Dan <unk>, Our President and Chief Executive Officer, and Holden Lewis, Our Chief Financial Officer, Carl 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 is a proprietary fast.
Presentation and is being recorded by fast at all no recording reproduction transmission or distribution of today's call is permitted without fasten all is concerned.
This call is being audio simulcast on the Internet via the fast at all Investor Relations homepage Investor Dot fasten, all dot com a replay of the webcast will be available on the website until June 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.
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.
Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission and we encourage you to review those factors carefully I would now like to turn the call over to Mr. Dan for us.
Thank you Ellen and good morning, everybody and thank you for joining our Q1 earnings call.
Before I start I thought I'd just share.
A few tidbits from a conversation I had this morning with our regional leader a regional business unit leaders, our regional Vice presidents and our B piece of the business.
And he and I started that by sharing.
Yeah.
Oh last evening or late yesterday afternoon, My wife, and daughter returned from a week long band trip to Florida marching band.
And as with most high school trips it involved.
26, well if you're coming from went onto that is that involve the 26 hour bus ride down last Wednesday, 26 dollar bus ride back and I saw a bunch of them Hey, good kids in and a handful of the hagrid adults get off the bus yesterday at about four o'clock.
And when we get home that evening.
Uh huh.
Watching the video.
To watch my cellphone video, but it's a necessary evil to make sure you're.
You are presented as good a message that you can then presented in the style that isn't too painful to watch.
And my wife's commented on it and I think she probably worth commenting partly in fact, it was kind of tired from the bus right.
He thought it was a pretty under under inspiring video.
And so you had no problem in telling me that and you said you know for the last two years.
You come home you talk about things that people are doing it fast at all things you see from the leaders and everybody within the organization and how impressed you are.
In your video you just had a great quarter in your video doesn't speak to that at all it sounds like youre in the middle of Covid kind of disappointing.
And after brushing my Pride off I got in this morning, and I I, let our regional leadership now just how damn proud of him.
The quarter did you just put up but more important than that of what they've done in the last two years and all the hard work as we transition from tariffs to Covid and worrying about our own human safety and the safety of others to the surge in demand for products.
Pivoted into our supply chain globally that completely fell apart and how did we manage through that to support our customers and their needs.
And more recently managing through the chaos, but as inflation.
Frankly.
The first bullet on the on the Flipbook says that.
Has the statement good execution, others, a typo, there that should say great execution.
Thank the fastener Blue team did an unbelievable job in the last few years and I think that I think that extended into this quarter and I'm really proud to be associated with them.
I even.
Yesterday in our automated call.
We were picking on hold a little bit because he has been kind of crabby lately.
And then it's kind of refreshing when you have when you have a really good quarter and your CFO was kind of crabby and he was talking about our cash flow.
He wasn't pleased with it and like I said to him I said hold and take a look at the last six years.
And look at our growth and look what our operating cash flow to earnings was in our strongest year.
It was at 90% I think it was at 93% I think that was the first quarter of 2018 might have been 2017.
And.
And it cost money to grow our distribution business and that money is spent in working capital and that gets amplified when you have heavy inflation like we're seeing right now so I'm glad you're irritated and irritable, Kevin I can't imagine being a lease right now when you come home from work but.
Thanks for what you're doing but.
Dolby too hard on everybody.
So flipping to the.
Two the book here.
Net sales grew 22, 3% in the first quarter, our pre tax profit grew 28.
There was some amplifying effects.
Last years.
Whether in the Texas, Oklahoma area in February hurt our sales hurt the economy quite frankly.
And then we had a math right down and but adjusting for those.
Our our strongest top and bottomline growth that we've experienced in a decade.
It's really been since we were recovering from the <unk> nine in the 2011 2012 timeframe.
That we saw the growth that we're seeing right now so I'm really pleased with the performance.
And in the last two years since the.
Pandemic started we've put in a lot of energy to deploy technologies and strategies to just improve our efficiency.
And that served us really well because the environment has restrained our ability to add labor add energy into the organization.
But it hasnt hurt our ability to grow sales and also to continue the branch consolidation process that we started.
678 years ago.
So very very strong performance there.
The supply chains and labor markets remain tight however conditions have stabilized.
We're getting more product on the shelf to support the needs, which makes the business less chaotic.
And we are seeing an uptick in applications coming in and I'm hearing it mostly anecdotally from our regional leaders, but they.
We're seeing more and more people willing to come back into the workflow and and apply for jobs part of that is probably a function of our number one recruiting area is four year state colleges two year technical colleges as they've come back in full force.
That group of people.
Are looking for opportunities for the future.
Our international business reached a milestone in the month of March we broke we exceeded 100 million in sales for the first time.
And next week marks.
Two steps towards normalcy in our world.
One is our customer export are selling event is returning to an in person format. After after two years of not not occurring in person.
And that'll be Tuesday, and Wednesday next week, and then next Saturday, we will hold our annual meeting in person after two years of the Sanitised video.
<unk>.
On Air version, which is frankly less than satisfying and a community like this where we get a good local turn out.
At the event.
Flipping to.
Page four of the book, it's a comparison of the 2022 2022 periods and this will be the last quarter that we put this payable in because obviously as we exit this quarter and enter the new quarter.
Our two year comparison falls square into the Covid period, so it becomes less meaningful but we thought we'd continue it as we've done the last three quarters.
I think the only thing that.
Jumped out on here is at least for jumped off for me is the fact that.
Our operating and administrative expenses.
Have dropped.
26, 7% of sales two years ago to 25, 5% of sales today.
As we've worked to make the organization more efficient.
And.
And I'm really proud we were able to accomplish this during the distraction of the last two years.
One item that that's probably a little bit misleading in here. It shows our gross profit was actually flat in that two year period, it's actually down slightly.
January and February of 2020 were a bit higher and as we entered the Covid period in March 2020, we started selling.
Bulk quantities of masks and things like that at a lower margin and it actually pulled our margin down to $46. Six is trying to express with full disclosure there.
Flipping to page five.
Yeah.
When.
People get more confident of where we are today and theres less chaos in the world and Youre more comfortable engaging with others.
We always felt that our growth drivers would see an uptick and.
And we had to just get through this COVID-19 period, well, our onsite saw that uptick we signed 106.
In the quarter, finishing with 1400 40.
So we're up 12% from the number of active sites, we had a year ago and we continue to do the healthy business thing.
And that is just like we've done with our branches over the last decade, you Challenge every business unit is that onsite performing to what needed to be for both.
Our customer and for us.
Sometimes we run into situations, where we take a customer that was doing $25 to $30 a month in sales in our brands.
And we double that maybe even triple that.
But we get to the point, where we kind of get stuck at a number lets say at 70 to $80000. A month, we always have to evaluate what is the best solution there for the customer and for our ability to serve that business, sometimes it's pulling it back into the branch.
Sometimes it's the case the customer runs out of space for us, sometimes and we've seen this in the last six months, particularly we have some customers that have consolidated some of their operations and we've had a few on sites that have closed.
We pick it up somewhere else or it validates was announced that we have somewhere else.
And but we think it's a great business and we're really pleased with what we saw in the first quarter was signings and we're excited about that customer event next week and what it means to keep this thing going.
Semi technology, it's about bringing better.
Visual as Asian and service ability.
To the point of views it started with lending.
Decade, plus ago, and we've expanded with a bunch of other technologies.
A year ago, we were signing 74 day.
This quarter, we signed we signed 83, a day and we ended the quarter stronger than we started the quarter.
And for onsite and for fmri are our plans our goals for the year remain unchanged.
So the <unk> technology now represents 35, 5% of sales.
A year ago was 28, 7% and two years ago was $26 four we're going to keep driving that.
E Commerce.
55, 6% growth in the first quarter of 'twenty two.
Like our international through our E. Commerce team also hit a milestone in March we exceeded 100 million in revenue for the first time.
It is not too many years ago I think it was 2011.
When we pointed out the fact that international.
With now 10% of the company.
But it's still a relatively small piece and e-commerce .
It was something we dabbled in but we really wasn't a thing.
Times have changed in the last decade, and now both of them are $100 million month businesses.
Finally, if you roll up our <unk> technology, and our E Commerce, we talk about our digital footprint.
We hit 47% of sales in the quarter.
<unk> 39.1, a year ago $34 92 years ago. Our goal is to hit 55% of sales at some point later in the year.
And we still believe that long term that has the potential to be 85% of sales and we're gearing our supply chain and have been gearing our supply chain to support that kind of business in the future with that I'll turn it over to hold a great. Thanks Dan.
I'll be starting on slide six.
Total sales increased 23% in first quarter of 2022, if you adjust for the extra selling day in the period sales increased by 18, 4% both periods were impacted by adverse weather and the net effect contributed 50 to 100 basis points to the growth in the period.
I can recite all of the numbers that are on this page because we basically experienced consistent growth across all major product categories are large in our small customers in most end markets. The main exception to this broad based strength, where government customers, which fell six 2% year over year, but I would point out that they were up nearly 50% from pre.
Pandemic levels and I think that really reflects sustained share gains across that customer set so as always our business does not carry a lot of forward visibility, but our field sales force continues to maintain a very positive outlook about about their markets.
Pricing contributed $580 to 610 basis points to growth in the first quarter of 2022, reflecting actions taken over the last nine months to offset inflation.
Input costs have mostly stabilized at high levels with a few notable exceptions for instance, higher nickel prices will flow through to stainless steel fasteners, while higher oil prices will affect the cost of fuel for our captive vehicle fleet and the cost of overseas shipping services.
As described on this page. This is these are relatively smaller pieces of our business, which we believe we can address through targeted pricing on stainless steel fasteners in surcharges for transportation related increases.
<unk> contribution should remain high in the second quarter of 2022 before running into tougher comparisons in the second half of 2022.
The last thing I'll say about the marketplaces. It is still grappling with supply chain and labor constraints as well as high prices for inputs and products. What is changing is we and our customers are more effectively managing this environment. This is reflected in higher growth and higher growth drivers signings and improving internal supply chain.
And relatively strong FTE additions in February and March so while these disruptions persist the chaos surrounding them has receded, resulting in a more predictable business environment now.
Now to slide seven.
Operating margin in the first quarter of 2022 was 21% up from 19, 8% in the first quarter of 2021 and good for an incremental margin of 27, 1%, while the absence of last year's write down of masks favorably impacted the year over year compare even adjusting for this our incremental margin was a solid 24, 4%.
Gross margin was 46, 6% in the first quarter of 2022 up 120 basis points versus the first quarter of 2021.
Half of this increase relates to the absence of last year's mask right down the next largest contributor with safety product margin, which increased significantly even excluding the effect of the write down.
In the year earlier period, we were still supplying COVID-19 related supplies to key customers under supply commitments that we had entered into at the start of the pandemic, which had lower margins those commitments have since expired and COVID-19 related product margins have returned to pre pandemic levels.
A smaller contributor with a narrower loss on freight service through our branches as strong daily sales growth in freight sales of 37% provided improved cost leverage.
Our price cost remain largely neutral to gross margin in the quarter.
Product and customer mix was a roughly 10 basis points negative impact to gross margin with a drag produced by strong onsite and national account sales, having a slightly greater impact and the positive effect of favorable fastener mix.
Our operating leverage was modest in the first quarter of 2022 with an operating expense to sales ratio of being 10 basis points better at.
At 2025, 5%.
We achieved 60 basis points of leverage over occupancy expenses related to a 10% reduction in our traditional branch count and the effect of what has been to this point relatively slow expansion of our vending installed base.
We also achieved good leverage over employee base day one.
We are encouraged by the February and March growth in our FTE employee base. The tight labor market continues to produce FTE growth is lagging sales.
These areas were mostly offset by strong employee incentive payouts higher profit sharing expenses higher health care costs higher travel expenses and to a lesser degree rising fuel costs. If you put it all together, we reported first quarter 2020 to EPS of <unk> 47.
Up 27, 8% from 37 in the first quarter of 2021.
Now turning to slide eight.
We generated $230 million in operating cash in the first quarter of 2022, which is roughly 85% of our net income in the period traditionally first quarter conversion rates exceed net income. However, a combination of robust customer demand supply chain constraints and high inflation put a premium on product availability and investment in working capital as.
The result, we view the lower conversion rate is reflecting our commitment to supporting our customers our supply chain constraints and inflation rates ease we expect to see improved conversion rates as we go through the year.
Year over year accounts receivable was up 25, 9%. This reflects strong customer demand and an increase in the mix of traditional manufacturing and construction customers, which tend to have longer terms versus the prior year period.
Inventories were up 22, 6% inflation accounted for roughly two thirds of the total increase that's significant but it is a decline from the fourth quarter of 2021, when inflation accounted for roughly 80% of the rise in inventory and that is the result of an accelerating flow of physical products into our hubs, which is improving product availability and fulfillment rates.
Net capital spending in the first quarter of 2022 was $33 million up from $30 million in the first quarter of 2021 with increased spending for F&I equipment hub automation and upgrades and it equipment.
Quarterly capital spending level should pick up through the balance of the year as vehicle availability improves and hub projects advance as a result, we continue to anticipate 2022 net capital spending in a range of $180 million to $200 million, which is unchanged from the prior quarter.
We returned cash to shareholders in the quarter in the form of $178 million in dividends and from a liquidity standpoint. We finished the first quarter of 2022 with debt at 10, 4% of total capital down from $12 seven in the year ago period at 11, 4%.
4% versus the fourth quarter of 2021, all revolver remains available for use with that operator, we'll turn it over for Q&A.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad once again Thats star one to be placed in the question queue.
I'd like to remove yourself from the queue. Please press star two one moment, please where we pull for questions.
Our first question is coming from Chris Snyder from UBS. Your line is now live.
Thank you congratulations on the strong quarter. My question is on price cost going forward or the company noted that the prime loss costs are high but stable.
And theyre seeing inflation on a on a select few product lines, where it seems like there is opportunity for incremental pricing. So I guess my question is should we assume relatively unchanged price cost over the rest of 'twenty two relative to Q1 levels.
We continue to assume that we're going to be price cost neutral over the course of the year, but if your question is what is the level of pricing were expected bear in mind that to some degree as we move into Q2, but particularly as we get into Q3 and Q4, we're going to begin to comp against much higher pricing from a year over year standpoint.
So.
My expectation is that we will still be north of 5% on price in the second quarter, but that you'll begin to see that pricing contribution dropped fairly sharply in the Q3 and Q4 period as our own pricing actions remained fairly stable and runs into last year's tougher comparisons.
Appreciate that thank you and then for the follow up wanted to ask around the onsite model into a potential macro slowdown I know the company has spoken to on site revenue targets per location.
Wondering is there any sort of volume commitments that accompany these onsite agreements.
Maybe give the company a naturally higher wallet share of customer spend as their activity declines.
You know when we when we signed an onsite we will.
We'll have discussions about <unk>.
<unk> targets for that facility and based on.
The customers information about their spend or information about their spend and sometimes you can do some napkin calculations based on how many employees are there what types of activities OEM fastener demand et cetera.
There isn't a hard and fast rule.
Hey.
You would need to be at this number but it's really about it's a partnership.
And that partnership as you know.
Let's work together to grow the footprint.
What I often see when I visit on site.
As I find a very motivated customer.
Two AD wallet share too fast now because what does an onside represent to them. It represents fastener, putting personnel and inventory into their business to support their business, which frees up their need to add personnel frees up their need to add working capital. So so.
It's a great program for our customer.
And it's a way for them to have resources resources that we normally would've had working in our brands now are bringing product right to the point of views or doing different things and actively managing.
And it frees up resources for them.
That's ultimately what gets us our footprint is in a contractual obligation that.
You must do this or else.
Same thing with our vending program and our onset program.
We stayed with the customers. This is what it's about and we're not going to hold you to a contract, but if you demonstrate that you don't that six months into it that you really arent bought into it we reserve the right to take our ball and go home.
And.
That's what drives the.
The wallet share ultimately in the business.
So Chris I think you leave that I don't believe the onsite model necessarily diminishes our cyclicality.
We do have a tamped down cyclicality versus any industrials with our MRO exposure and that sort of thing, but I don't think the onsite does anything in that regard, but the onsite is a great platform as Dan indicated to gain market share whether we're in a period, where we're growing or a period where were the marketplaces contracting we gained market share in either environment, but we will still maintain a sick.
Global profile.
We will add to that we have relatively low market share.
We're always growing it's just that sometimes it doesn't shine through in the numbers because there's a lot of headwinds.
Thank you for all that color I appreciate it.
Sure.
Thank you next question is coming from David Manthey from Baird. Your line is now live.
Yeah. Thanks, good morning, guys.
First off could you discuss your expectations for FTE growth needed to fuel.
Revenue growth this year, and then Dan maybe longer term expectations for labor requirements versus historical trends, especially in light of these automation tools do is deployed and you will.
You need to deploy across the company and Thats, both customer facing and internal.
Type technologies.
I hesitate to throw out a percentage.
Only from the standpoint of what we've seen a pickup in applications.
We still are operating quite frankly with fewer employees than we'd like to see.
Even if you look at it.
If I was going to.
<unk> through the quarter and end point help some some positive some negatives one negative that would jump out as we didn't implement as many of the onsite because I'd like to have seen in the first quarter and I know part of that holdback, sometimes it is.
Sometimes it's just the transition process, but sometimes it's a case of do we have the staffing.
Because when we have the individual ready to step into that new onsite, but we have an individual back in the brands ready to step into their spot in the branch.
That will.
We add.
Let's say, we sign and add 100 onsite for the quarter.
That pulls employees with it and.
We need to have.
I said I wasn't going to say percentages, we need to have better than low single digit percentage growth in that environment. When our sales are growing.
Double digit and beyond.
But we'll see how that plays out as we move into the second and third quarter.
And one nuanced about that Dave is we tend to look at it less about the FTE and more about what the total labor dollars that we commit and when we talk about being more productive with labor. We tend to think about are we driving more gross profit dollars for every dollar of labor that we produce in our business and that's how we tend to think about it and to Dan's point I am not sure that we.
Have an exact percentage that we would communicate here is managed very well by the field.
But I think that as an organization, we understand that the growth in our labor dollars on our pathway from where we are today that that $10 billion company and beyond.
Has to come with labor dollars growing at a slower rate than gross profit dollars and as an organization I think pretty uniform and that objective.
Mhm.
Yes, Thanks, Holden, maybe we could drill down on that a little bit because in the first quarter I know, it's just one quarter, but opex.
Opex growth and revenue growth were pretty identical at 20%.
And you did have the 6%.
Price, so SG&A growth kind of outpaced your unit volume growth by quite a bit in.
Question is should we assume that based on what you just said that.
Despite the fact that in the generalized inflationary environment Youre cost stack is going to be elevated as we go forward here you should see better leverage on your on your op ex in future quarters.
That is the expectation.
Here's how I think the setup place the rest of the year, if I think about incentive pay for instance in the first quarter. It was up about 60% versus the prior year.
That's a that's a great thing to be able to talk about because it reflects the performance of the business.
I, just don't believe that youre going to see that rate of growth as you move into the second quarter third quarter and fourth quarter, partly because of the comps from the prior year. When we really begin to ramp in terms of our performance in the back half of last year coming out of the pandemic.
And so I wouldn't be surprised at the rate of growth and incentive pay as you get those comps is half in Q2, what it was in Q1 for instance, and I think you'll have very similar dynamics with health care costs and general insurance costs were the drags that they contributed in Q1.
I don't think youre going to see anywhere near that same order of magnitude a drag as you get into Q2 Q3 Q4.
Travel and supplies, something which really sort of came down as the pandemic settled in.
That was up 50% in the first quarter.
I think thats going to be up less less than 20% of second quarter could be flat in the back half. So I think a lot of the lack of leverage that you saw in the first quarter reflects on summer levels. The comparison versus the prior year and as we go into the balance of this year and in second quarter third quarter, our volumes should be higher just seasonally I don't think youre going to have the same day.
Gree of of cost drag in a lot of areas that we experienced in the first quarter. So my expectation is that for the balance of the year, we're going to leverage SG&A occupancy I think we'll continue to leverage based on what we're doing on.
The branch strategies.
Things of that nature. So yeah, my expectation as we leverage SG&A the balance of the year, Hey, Dave I'll, just throw a little tidbit in in.
In prior conversations you've talked about the shock absorbers.
In our in our operating expenses.
Do you think of what happened a year ago, because I talked about some of the amplifying effects earlier that the weather change and then the inventory write down a year ago.
There were two things going on in first quarter of 2021.
That didn't occur in first quarter 2022.
In the first quarter at approximately one <unk>.
55% of our branches were growing.
By the second quarter that has expanded the 70% and it's kind of hung that Thats 70 ish number in the second third and fourth quarter in the first quarter.
75% of our branches and onsite for growing.
That has a massive impact on the incentive comp paid locally too.
Ranch onsite employee because we believe it is harder to grow than it is to maintain and theres a premium for growth.
So that was part of that 60% expansion in incentive comp that we saw from a year ago. The other thing that happens is we have a big chunk of people that are paid off of incentives off earnings growth earnings the rate of <unk> earnings and earnings growth.
That $8 billion write down a year ago.
Hammered those programs.
But a year later.
It amplifies those programs.
When I look at at the 60% increase.
Over first quarter last year.
In the incentive comp.
It's amplified by those two hammering events in fact from Q1 to Q2, our incentive comp increased 32%.
And so that changes the picture dramatically and that was 130 basis points of.
Operating expense decrement.
Q1 to Q1.
Probably got went into the weeds there but.
But CLO insight on the impact of that write off actually is an important perspective to have.
Yeah very helpful guys. Thanks very much.
Thanks, Ed.
Next question is coming from Michael Mcginn from Wells Fargo. Your line is now live.
Hey, good morning, Thanks for the time.
Good morning.
Good morning, So I guess higher level, if you watch the news.
A recession is eminent and.
It doesn't seem to be the case with almost 90% of your top 100 national accounts grow growing I guess of those.
Top accounts, how many are growth constrained that maybe shape your outlook for <unk>.
Sales given the tougher comps as we approach the back half of the year and maybe any update on what you think your market share takeaway is in an environment with fasteners are the fastest growing category and it's been a while since we've seen that from you on a sustained basis.
What do you mean by growth going back to question one what do you mean by growth constrained in our largest customers.
Yes components, where youre not necessarily playing right now and they're trying to deliver longer cycle backlog driven product.
Can't get it out the door for.
<unk> that are beyond your control.
So other supply chain disruption other than what were supplied.
That's correct.
Okay.
If.
I will just fall back on some of the commentary from our regional Vice Presidents and I'll say that.
In general.
They believe that getting products is still a challenge, but easier than it was six months ago and that's not just for our product sets for that's for other products within the supply chain and so in general I think that our customers are figuring how to navigate that some so.
Relative to six months ago.
Do I think that production rates have gotten better and the ability to navigate some of this disruption has improved it feels that way to us just again based on some of that commentary.
So I'm not going to tell you that there are issues around ships and things like that that you hear about but I think that for the most part our customers are.
More more successfully navigating those issues than was the case six months ago, and so perhaps that.
What you are concerned about in the marketplace, probably is not as dramatic today as it was.
That's all anecdotal by the way.
Got it.
Does that answer the question.
It does yes.
I wanted to go back to kind of gross margin.
<unk>.
The strong results here and you mentioned price cost neutral it just feels like during when you are comparing that to pre COVID-19 levels, you shouldnt see some sort of national account mix erosion given your model.
It seems like something more is going right here. So when you guys.
I just wanted to I think flat or slightly down was the prior.
Framework and understanding you know everyone's a little shy to guide that line items, but I guess, what's your outlook now on the gross margin side of the side of equation.
Well a couple of things to think about one.
The 46, 6% in the first quarter of 2020, and the 46, 6% in the first quarter of 2020 was a little bit misleading as Dan alluded to if you look at only January and February because in March the back half of March we already start to see a lot of low margin.
Product getting shipped to deal with the pandemic. If you adjusted January and February of 2020 versus 2022.
The gross margin in January February 'twenty was 47, 1% and in January February of 'twenty, two was $46 five right. So so that decline you would have expected to see if you take out a month that would begin to get affected by the pandemic you would've seen it. Okay. So that's one element. The other thing I think you have to be a little bit careful of as there is more.
That drives our gross margin and just price cost.
And product customer mix, right and I think about things like mix within mix when we talk about.
Product and customer mix, we're really looking at large categories against one another but within safety there may be a mixture of the mix element, where we're improving our margin on the COVID-19 . The COVID-19 products, specifically that doesn't necessarily get captured in the.
The customer product mix between categories.
There's also things like we've done a great job with exclusive brands.
Over the course of the pandemic if I if I look at the mix of exclusive brands and on sites two years ago was 10% this quarter was 12.
Exclusive brands through vending two years ago is 21, 5%. This quarter. It's 24, 5%, so that's something which can actually mitigate the product and cost impact to some degree.
That has happened in Evs are great because it's lower cost to our customers and it's a higher margin to US and then I would also point out that you are looking over a two year period, all through last year, we talked about organizational leverage which wasn't a big factor in Q1, but it was a bigger factor last year and thats relates to the cycle. So.
There's more than just those two pieces that affects our gross margin trend certainly over over a multi year period of time.
That add some color to that.
Did I appreciate the time. Thank you, yes, sure a couple of structural changes and holding alluded to the <unk> component and again, that's expanded nicely in our vending.
Our vending offering that subset of business has expanded nicely.
<unk> brand component in the last two years as well as our preferred partner component in the last few years and some of that we believe in a continued to get amplified by things like our lift initiative, where we are.
We are.
Picking in supporting the product needs for our vending platform out of a handful of facilities and are pushed through our branch to turn that on as you need to have more standardized offering in the vending machine to make it work in that type of a supply chain. The second one is we talk about the consolidation of branch locations and what.
It does for occupancy.
We never talk about is the consolidation of locations and what it does.
For our trucking network.
Im going out to if it's two years ago and Theres a bunch of trucks that are leaving that eight 910 o'clock at night gone out and delivering the branches throughout the night and we're going to 800 locations and two years later, we're going to 600 locations, but those 600 locations are doing more revenue than the 1800 did two years ago.
As a more efficient network.
And all those things come into play.
<unk>.
The mix consciousness in the gut.
And it affects our gross margin downward and we have to keep clawing back up these little incremental gains and we find them in places like that.
Thank you next question today is coming from Tommy Moll from Stephens. Your line is now.
Good morning, and thanks for taking my questions.
Good morning, good morning.
And then I wanted to start by going back to your introductory slide.
You mentioned, some technologies and strategies all around efficiency.
Talked about restraining labor.
Hurting sales supporting gross margin branch consolidation et cetera can you give any more context on what some of those efficiency driven measures have been and what inning. We're in in terms of the deployment there.
Okay. So we talk.
We talk a bit about the digital footprint and so within that digital footprint.
We have if I went back two years ago.
When Covid started we probably had around.
Five 6% of our sales where we're used to.
<unk> device, but it gotten scan bins.
But we didn't really use that to be more efficient upstream in how we pick the product how we support that today that that's roughly 6% has expanded to about 12% of sales in the March month.
That's gone through what we can now call fast stock that's our mobile technology on a platform that we have written that interfaces directly with our point of sale system and of equal importance with our distribution.
Center network.
And and.
So not only are we are we gathering.
Gathering using technology.
Twice as much of our sales, but we're using that upstream where in the past that that have that doubling would've been we've been right on on yellow no pets and.
And getting orders in and pulling it in and then those orders transmit earlier in the day. So when they transmit earlier in the day or distribution center can start picking that product to support them.
At 10 o'clock in the morning, when they scan the bin not at four o'clock in the afternoon and they get back to the branch and a doctor EMC device and transmit all that in it.
It allows us to think differently about how we operate.
Same thing with our <unk>.
Our fast Ben and fast than platform SaaS, Ben is a relatively new thing and Thats, where we put.
In an environment, where you have OEM fasteners and Theres a kanban system.
Somebody has to go out and get the bins somebody asked about and figuring out what we need for replenishment. What we do today is where we've implemented the <unk> technology.
When that bin is empty the person that emptied it puts the been up above the shelf and there is a RFID chip in it and there is an RFID reader Thats thing Hey, Ben number $2 42, as empty as hungry it needs to be fed and transmit rate through our point of sale system to our distribution center and Thats, where lyft becomes important in the future.
<unk> will support more and more of that especially if it's standard product in a highly efficient distribution model, but even if it's done locally words, because its more special for that OEM need we're gathering information the need electronically. When it occurs you have fewer surprises, but you also remove the cost of that.
Data collection.
And then you can surface that information for your customer much more readily and you become a better supply chain partner.
And so that is a percentage when I started adding that up just the semi component.
<unk> has grown dramatically from two years ago.
And that there is no data collection effort going on.
Yeah.
I would probably add to that I mean, if you'll see the growth in our web for instance, right I mean, you're having better than 50% growth out of VDI within that net debt creates certain efficiencies for us when youre seeing that much growth there on the.
The web component is also growing north of 50% and that's allowing us to address.
Certain types of customers and a much more efficient way for us. So I think the growth that youre seeing there also introduces some of that.
And then some of the strategic things that we're doing right. The lift is still a relatively small component, but it's we're getting aggressive with it we're growing it faster and we will continue to do so that's going to bring efficiencies into the field in terms of how they supply.
The vending and frankly, the semi as well over time right and so that's going to bring efficiencies to how we use our time and I would say.
The things we've talked about with regards to our branches.
Also or is trying to bring efficiencies and focus to how we prioritize there. So it's really a combination of the technology as Dan talked about and some of the strategies all of which are really aimed at what we talked about earlier, which is making sure that our labor productivity goes up over time.
Thank you both that's helpful.
Follow up.
Looking through my notes from last quarter, and I think the framework that you laid out for the full year this year.
Gross margin may be down as much as 50 basis points.
For the full year versus full year last year, but incremental margins in the 20% to 25% range.
Coming out of the gate pretty strong here in the first quarter. So.
Really just to boil it all down is it is it fair to assume that both of those.
Ranges that you talked about a quarter ago.
Just on what you know now it could be positively biased.
Now if memory serves I think the 50 basis points might have related specifically to mix as opposed to the overall gross margin, but I think the expectation was that gross margin would would sort of lead down over the course of the year.
I would tend to agree with you that the <unk>.
First quarter was a good start to the year on gross margin and would it surprise me if that improve as it improves the overall annual picture a little bit and it pushes us closer to something Thats flat for the year, yes that Wouldnt surprise me and I want to give some credit because one of the reasons I think that we came out stronger this quarter.
It really does relate to the job the field is doing on freight revenue freight revenue in the first quarter is up 37%.
And it was at a dollar level that we haven't seen before and that really allowed us to narrow the losses that we that I, otherwise expected to see and I expected the losses related to our.
Our branch freight to be about $3 $5 million higher than they turned out to be and I think that that relates to real efforts on the part of the field and the strategies that we've put in place to try to improve that that freight profile and I expect it to sort of carry through for the rest of the year. So that's probably the piece that.
That provided more upside relative to our expectations in the first quarter and the good news is I think that that's going to sort.
Sort of carry through for the rest of the year as well.
I appreciate it I'll turn it back.
Thank you. Your next question today is coming from Chris Dankert from Loop capital. Your line is now live.
Hey, good morning, Thanks for taking the questions guys.
Good morning.
Yes, first off and then those questions can be very difficult to parse. So I appreciate that upfront, but I guess looking at the fastener growth I mean, it's pretty staggering is there any way to parse on a relative basis.
How much pricing versus restocking versus core demand is contributing there.
For an exact number but just can you give us a flavor for how those kind of three pieces might be contributing.
Yeah, and then actually if I could just add one more thing in my prior question I won't countered against you.
I want to make sure that when I when I think about gross margin being flattish.
In that ballpark for the year make sure you are including the write down from last year, because I'm comparing against that number including that number just so we're all on the same basis.
To your question about fastener margin.
Yes, we havent as we broke it out by product line in that fashion.
What I would tell you is the inflation that exists in fasteners is probably twice or more of that of what we're seeing in the non fastener lines.
And even though it might be a touch below neutral on the fastener line from a price cost standpoint.
In order to achieve that it's fair to assume that the pricing component would be greater for fasteners than it is for the non fastener piece and so I think there's probably a bit more balanced between between product and price.
As it relates to as it relates to the fastener side of the ledger.
Got it that's really helpful. Thanks, so much on that.
And I guess kind of bigger picture zooming out a bit.
I was kind of supply chain starts to normalize slowly here, how do we think about how some of these competitive dynamics shift, which certainly you've been taking share by just having inventory availability what changes on that front and then I guess, how do we think about your inventory levels versus customer inventory levels, but just any kind of big picture, how do we think about faster.
In the context of a normalizing supply chain here.
I don't know if we know the answer to that on the competitive shift Chris.
You know the reality of it is.
We performed well in the last two years, because we figured out how to find product.
And we figured out how to get product and sometimes that meant.
Spending money that was painful for us, where particular organization and sometimes that meant spending money to move stuff that was kind of expensive and our way of thinking and heck even today.
Cost of taking a container across the ocean is ridiculous, but that doesn't change that it is what it is.
But.
I think that I think.
Memories.
Memories.
Times are short paint.
Painful memories, often arent in.
And a lot of a lot of businesses that went through a really ugly period and they found a friend and fast now I think they I think they remember that because again thats a painful memory Holden has talked about.
On prior calls.
The number of customers that didnt buy from us before COVID-19 .
That discovered who fast all was because of a pain point they had during COVID-19 and a lot of that is government and.
Healthcare centered organizations, but a lot of other businesses too.
That's a $50 million a quarter business for US now so it's a $200 million business within fast mill that didn't exist.
Two years ago.
And I don't think supply chain, becoming a little bit.
Less chaotic.
Parts of that business I think that's a that's a customer segment that is realized for a lot of our traditional industrial construction customers have realized per year.
Fastener.
Does a pretty nice job supporting their supply chain needs.
The other thing I might add to that is we've also talked in prior quarters about how we tend to get sort of obsessive about growth drivers onsite, if those aren't going well, what's that mean for market share et cetera, what we've commented before as we meet the customer where they are at and for the last couple of years, our onsite signings have been relatively low, but we've been able to gain share through other means because.
Mers are asking us for different things.
I think we should all be encouraged by the fact that as as the environment does perhaps become a little a little less chaotic and therefore, a little easier for them to navigate and maybe that changes the dynamics a little bit.
By the same token, we just signed a record number of on sites and so if one element begins to normalize.
I think we're going to have coming up coming up from behind those on sites growing into mix at a faster rate driving market share from our more traditional growth drivers at the same time so.
One one might normalize a bit but I think the other one comes up.
That's really really excellent color. Thanks, Thank you both and again congrats on the quarter here.
Thank you thanks.
Thank you. Our next question is coming from Jake licensing from Melius Research. Your line is now live.
Good morning, everyone.
Good morning.
<unk>.
Good morning.
It sounds like most of your end markets are firing on all cylinders here, but.
And in particular positive or negative surprises.
We saw in the quarter as we walk across the different verticals.
Curious.
Bill.
Not really with 92% of your top 100 are growing there is not many that's not.
Even even areas I would say like oil and gas in areas that have been a little bit sluggish theyre not necessarily where everything else is but they are doing better but I think the marketplace is pretty uniformly strong Jacob it's hard for me to to find many areas of significant weakness and I'm not again, we don't have a lot of visibility into the future, but the field.
Still remains pretty optimistic about how things are playing out.
Yes.
The only thing I'd add to that is the.
Europe is a relatively small piece of our business.
The last few years that business has been on fire I mean, growing 40 50, 55%.
Right now that business is growing in single digits, because we have customers that are either impacted because of what's going on in Ukraine, or they're impacted by might be supply chain disruption, but it's probably linked to what's going on in Ukraine.
And so that has impacted our business there.
Each week I have about a half dozen conversations with district leaders within fast at all where they talk about their business and.
In the in the last week I had a conversation a couple of conversations with folks down in the Carolinas and one of them was a had a customer that supplies.
A product that goes into packaging for medical.
Products.
Were there one of their larger customers is in the is in Russia and that businesses in a standstill right now.
And I've.
I've heard but thats really small anecdotes in the scheme of the business.
Your comment about generally a robust environment.
Is spot on.
That's great color I appreciate it.
I'll pass it on.
Thanks.
Thank you. Our next question today is coming from Ken Newman from Keybanc capital markets. Your line is now live.
Hey, good morning, guys. Thanks for taking the question.
Good morning.
I just wanted to clarify the the operating leverage comments you made earlier in the call and sorry, if I missed it but.
I mean, just given your comments on potentially flat gross margins inclusive of the mass write down for the year.
And you were talking about expectations for better SG&A leverage through the remainder of the year.
Can I just take all of that to mean that you expect incrementals could stay in this mid 20% range or higher for the remainder of the year.
Our goal has always been to achieve a 20% to 25% and to expand our margin a little bit from where we are and that remains our goal I'll. Let you model. It. However, you model it based on what you've heard so far.
I think I think we've given you enough to play with but we feel good about how the market about how the business is performing today and we'll.
We will see how the how the macro environment plays out the rest of the year, but we feel pretty good about how things are playing out.
Understood.
And then for my follow up.
Obviously, I think Covid is unfortunately, a normal part of the operating environment now, but I am curious if you could just talk through any of the impacts that you may or may or may not be seeing from a recent lockdowns in China.
Im, particularly curious about your ability to secure inventory or your outlook on the margin progression for the rest of the year as it relates to.
Your suppliers within Asia.
Well I do first off so on the call. This morning, one thing I didn't touch on I did touched on the fact that.
Our leaders in our both our sourcing operation and our sales operations.
In China, they are based in Shanghai, and obviously, they're experiencing a pretty ugly locked down right now.
And first let them know that we're here to support and.
Really impressed with what Youre doing locally.
Our team has become especially the sourcing side of it.
But both both sides have become quite agile of operating in a remote fashion.
Fortunately there was enough warning that they were able to.
Set up that ability to do that again.
And.
I feel better about the fact that we have more inventory on the shelf right now because there will be disruptions from this theres no question.
We're not immune to that and nor does anybody else.
But sometimes the old adage possession is nine tenths of the law. The fact that we have.
Inventory on the shelf or inbound thats been a pretty high level, even though holden doesn't like the cash flow impact of that.
He does like the fact that there to support our business.
And.
But we have a sizable presence in Shanghai and we're worried about our team.
And when we talked about the supply chain being fairly predictable at this point there are components to that what I will say is you are seeing the time it takes to get product from a port in China due to our hubs has actually begun to shorten.
However, the time that it takes to put in a Po.
Manufacturer overseas and then get it to the port that actually has begun to lengthen and I suspect thats, a little bit of what Youre seeing.
The impact of Covid over there so there's a little bit of a difference there, but as Dan indicated I think that is.
Fact that we've been purchasing and floating over so much product over the past six to nine months and Thats now really beginning to hit the hubs nicely that's going to provide us a fairly decent runway of insulation from some of that.
Got it that's helpful. Thanks.
Thank you I see we're coming upon the hour and so I'll close with a philosophical thoughts for you and that is so a year ago holding there was about $8 million, we will up in inventory yes.
We wrote off $8 million of inventory.
Our leader of the supply chain team as well as quite a few members of the supply chain team were at pains. When we wrote that off and they were quite apologetic about it and I looked at them and I said it I said no here's what we did we made a conscious decision.
<unk> product to support our customer needs and our new customers needs.
The even factoring that that $8 million write off in if I had to do all over or do it in a second and.
And I believe it will build a better business for us in the future.
If we had never had gotten that business in the prior year and let's just say, we had an $8 million write off of a year ago, but that $8 million write off would have translated into $200 million business within fast all that now exist because we were willing to do that didn't exist before.
We're not an acquisitive organization, but I would have spent $8 million in the second for $200 million of annual business.
Within personal thanks for your time today everybody. Thank you.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.