Q3 2023 Fastenal Co Earnings Call
Speaker 1: What.
Speaker 2: Hello, and welcome to the FASINAL 2023 Q3 earnings results conference calling webcast. If anyone should require operator assistance, please press star 0 on your telephone keypad. A question and answer session will follow the formal presentation.
Hello, and welcome to the Festival 2023 Q3 earnings results conference call and webcast. If anyone should require operator assistance. Please press star zero on your telephone keypad.
And answer session will follow the formal presentation.
Speaker 2: You may ask a question at any time by pressing star 1 on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call to the next speaker.
They ask a question at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to turn the call over to Taylor Ranta, Although fastball company. Please go ahead Taylor.
Speaker 3: Welcome to the Faxnell Company 2023 Third Quarter Earnings Conference call. This call will be hosted by Dan Flourn as our President and Chief Executive Officer and Holden Lewis our Chief Financial Officer. The call will last for up to one hour and will start with a general overview of our quarterly results and operations with the remainder of the time being open for questions and answers.
Welcome to the Fastener Company 2023 third quarter earnings Conference call. This call will be hosted by Dan <unk>, Our President and Chief Executive Officer, and Holden Lewis, Our Chief Financial Officer, the call will last for up to one hour and we'll start with a general overview of our quarterly results and operations with the remainder of the time being open for questions and answers today's conference call. The proprietary thoughts on presentation and is being recorded.
Speaker 3: Today's conference call is a proprietary FASNOL presentation and is being recorded by FASNOL. No recording, reproduction, transmission, or distribution of today's call is permitted without FASNOL's consent.
That's now no recording reproduction transmission or distribution of today's call is permitted without <unk> consent.
Speaker 3: This call is the audio faml cast on the Internet via a fast Investor Relations home page: Investor asthanol com. A replay of the webcast will be available on the website until December first 2023 and 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.
Call is being audio simulcast on the Internet via the fast some investor relations homepage investor not pass on Dot Com a replay of the webcast will be available on the website until December 2023, and 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 ups.
Speaker 3: It is important to note that the company's actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission, and we encourage you to review those factors carefully. I would now like to turn the call over to Mr. Dan Sperling.
Get them. It is important to note that the company's actual results may differ materially from those anticipated factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission and we encourage you to review those factors carefully I would now like to turn the call over to Mr. Dan Florida.
Speaker 4: Thank you, Taylor. Good morning, everybody, and thank you for joining our third quarter call. I'll start on the reference, the flip book on page 3. Conditions remain challenging in the third quarter of 23. We reflected in a daily sales growth rate of 4%.
Thank you Taylor and good morning, everybody and thank you for joining our third quarter call.
The I'll start on the right.
The reference to the flipbook on page three.
Conditions remain challenging in the third quarter at 23 reflected in our daily sales growth rate of 4%.
Speaker 4: Still, regardless of the year, we celebrate milestones when they occur. I remember just over 10 years ago when we hit 10 billion in daily sales for the first time we recognized that.
Still regardless of the year, we celebrate milestones when they occur I remember just over 10 years ago, when we hit $10 billion in daily sales for the first time, we recognize that.
Speaker 4: on this call as well as internally to celebrate that milestone. Some years later we hit 20. Here in the month of September we broke 30 million dollars in sales per day for the first time in our history and my congratulations.
On this call as well as internally to celebrate that milestone. Some years later, we hit 20 here in the month of September we broke $30 million.
And sales per day for the first time in our history and my congratulations to the to the SaaS organization for hitting that milestone.
Speaker 4: to the FASTNEL organization for hitting that milestone.
Speaker 4: Our sales growth in the quarter translated into EPS growth, EPS of 52 cents, 4.1% growth, over the same period last year.
Our earnings our sales growth in the quarter translated into EPS growth or EPS of <unk> 40.
1% growth over the same period last year.
Speaker 4: Our results reflect the unique product profile of our business. Fasteners still constitute about a third of our sales and within that subcategory, about 63% is an OEM oriented fastener. And that business can be very cyclical because of the production needs.
Our results.
The unique profile product profile of our business faster still constitute about a third of our sales and within that subcategory about 63% is an OEM oriented faster.
That business can be very cyclical because of the production needs of.
Speaker 4: of each of the customers we're serving. If you look at the rest of the business, it tends to be much more MRO oriented. Our faster daily sales, as you've seen in our monthly sales release, have accelerated a faster rate than our non-faster business as we've gone through the calendar year. So, third.
Each of the customers, we're serving if you look at the rest of the business it tends to be much more MRO MRO oriented.
Our fastener daily sales as <unk> seen in our monthly sales release have decelerated, a faster rate than our non fastener business as we've gone through the calendar year.
The third quarter operating margin.
Speaker 4: hit was 21 percent which matched last year despite the one less selling day. And so, you know, earlier I spoke about the 30 million dollars we do in a day. The quarter had one less day. Some of our expenses are tethered to the day, most are not.
It was 21%, which matched last year, despite the one less selling day and so.
Earlier I spoke about.
The $30 million, we do on a day in the.
The quarter had one less day.
Many of our some of our expenses are tethered to the day, most or not.
Speaker 4: And so, please that the team was able to match the operating margin of 21% last year, but I believe that under state.
And so.
Im pleased that the team was able to match the operating margin of 21% from last year, but I believe that understates.
Speaker 4: the reality of the performance. If you looked at it on a same day basis, we believe we would have increased the operating margin because we had roughly $10 million more, about a third of that 30 million in operating income, because that good chunk of that flows through because of the change in the nature of the expense.
The reality of the performance to appear if you looked at it on a same day basis. We believe we would have increased the operating margin because we've had roughly $10 million more about a third of that $30 million.
<unk> operating income because a good chunk of that flows through because of the change in the nature of the expense.
Yeah.
Speaker 4: Blue team, if I think about the last several years, we had a unique opportunity to serve the marketplace because of our pristine balance.
Blue team, if I think about the last several years.
<unk> had a unique opportunity to serve the marketplace because of our pristine balance sheet.
Speaker 4: When COVID hit the globe back in 2020, we were able to step forward and secure and purchase and fund with cash.
When COVID-19.
Hit the hit the globe back in 2020, we were able to step forward and secure and purchased and fund with cash.
Speaker 4: a meaningful increase in inventory primarily centered on safety supplies because our customers and
A meaningful increase in inventory, primarily centered on safety supplies, because our customers and.
Operator: Hello, and welcome to the Fastenal 2023 Q3 Ernie's Results Conference Calling Webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may ask a question at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded.
Speaker 4: Society in general needed something to get through that period and we were we were proud to be part of this pollution We were able to do that because of our balance sheet
Society in general needed something to get through that period. We were we were proud to be part of the solution. We were able to do that because of our balance sheet.
Speaker 4: as the global economy re-emerged from the
As the global economy economy reemerged.
From the pandemic.
Speaker 4: Well, we saw firsthand and you saw it in daily newsclippings about the congestion that was going on in supply chains around the planet. Again, as supply chains became more rocky and you couldn't rely on how many days it would take to get product, there's a solution to that.
Well, we saw firsthand and you saw it in daily news clippings about the congestion that was going on in supply chains around the planet again as supply chain became more rocky.
Operator: It's not my pleasure to turn the call over to Taylor Ranta or the Fastenal Company. Please call the Fastenal Company 2023 Q3 Ernie's Conference Call.
Operator: This call will be hosted by Dan Slorn as our President and Chief Executive Officer, and Holden Lewis, our Chief Financial Officer. The call will last for up to one hour and we'll start with a general overview of our quarterly results and operations with the remainder of the time being open for questions and answers. Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal.
And you Couldnt rely on how many days it would take to get product there is a solution to that.
Speaker 4: it's Stockmore products. And we beefed up our balance sheet and our cash flow suffered as a result. But I believe our standing with our customers in the market place northern the marketplace.
Its stock more product and we beefed up our balance sheet and our and our cash flow suffered as a result.
But I believe our standing with our customers and in the marketplace.
Operator: No recording reproduction, transmission, or distribution of today's call is permitted without Fastenal's consent. This call is being audio sample cast on the Internet via the Fastenal Investor Relations homepage, investor.fastenal.com. A replay of the webcast will be available on the website until December 1, 2023 and mid-night 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.
Never performed better.
Speaker 4: because the market could rely on the covenant that's fast and all provided to them in being.
Because the market could rely on the covenant that fast all provided to them.
And being a great supply chain partner.
Speaker 4: As we moved deeper in 2022 and now in 2023, we've been able to unwind a piece of that. And as a result, our year-to-date basis, we have converted 121% of our net earnings into operating cash flow. That's our highest performance in a decade, it's averaged just shy of 100 to about 95%.
As we move deeper into 2022 and now in 2023.
We enabled unwind a piece of that.
And as a result, our year.
Year to date basis, we have converted 121% of our net earnings into operating cash flow that's our highest.
Operator: It is important to note that the company's actual results may differ materially from those anticipated. Factors that could cause actual results differ from anticipated results are contained in the company's latest Ernie's release and periodic filings with the Securities and Exchange Commission and we encourage you to review those factors carefully.
Performance in a decade, it's averaged just shy of 100 about 95%.
Speaker 4: If I look at it from the standpoint of relative to a year ago, in the quarter of operating cash grew about 51%, year-to-date our operating cash has grown 69%. Again.
If I if I look at it from the standpoint of relative to a year ago in the quarter operating cash grew about 51%.
Taylor Ranta: I would now like to turn the call over to Mr. Dan Flourness. Thank you, Taylor. Good morning, everybody and thank you for joining our third quarter call.
Year to date, our operating cash has grown 69% again.
Daniel Florness: I'll start on the reference to the flip book on page three. Conditions remain challenging in the third quarter of 23. We've collected in a daily sales growth rate of 4%. Still, regardless of the year, we celebrate milestones when they occur. I remember just over 10 years ago when we hit 10 billion in daily sales for the first time, we recognize that. On this call, as well as internally to celebrate that milestone, some years later, we hit 20.
Speaker 4: Part of that is the reflection of the investments we made to serve our marketplace and our ability to unwind that in the current environment.
Part of that is a reflection of the investments we made to serve our marketplace and our ability to unwind that in the current environment and.
Speaker 4: and translate it in the cash flow for the organization to serve our shareholders and to serve the business. I've been moving to the future.
And translate it into cash flow for the organization to serve our shareholders and to serve the business as we move into the future.
Speaker 4: Our onsite and FMI install basis and our digital footprint continue to expand.
Our onsite F&I installed basis in our digital footprint continue to expand.
Speaker 4: And earlier this year, we did some restructuring and we announced the elevation of Jeff Watts to see sales officer in the organization. We did some restructuring of the sales side of organization.
And earlier this year, we did some restructuring and we announced the elevation of Jeff Watts to Chief sales officer in the organization. We did some restructuring of the sales side of our organization.
Daniel Florness: Here in the month of September, we broke $30 million in sales per day for the first time in our history and my congratulations to the fastener organization for hitting that milestone. Our sales growth in the quarter translated into EPS growth or EPS at 52 cents, 4.1 percent growth were the same period last year. Our results reflect the unique product profile of our business. Fasters still talk to it about a third of our sales and within that subcategory, about 63 percent is an OEM-oriented faster.
Speaker 4: because we wanted to double down on the challenge we'd put in place in front of everybody, going back to the 2015 timeframe. And that was really...
Because we wanted to double down on the challenge we had put in place in front of everybody going back to the 2015 timeframe and that was really.
Stepping into.
Speaker 4: stepping into what we saw as an untapped opportunity to grow our business faster, and that was to expand our onsite presence. It was earlier this year that for the first time, the number of onsites in the organization outnumbered the number of branches in the organization, and that Delta continues to expand.
What we saw is an untapped opportunity to grow our business faster and that was to expand our onsite presence. It was earlier this year that for the first time the number of onsite Sydney organization outnumbered the number of branches in the organization and that Delta continues to expand.
Speaker 4: And we believe that each of our district managers has the potential in their market to land two on sites per year.
And we believe that each of our district managers has the potential in their market.
Daniel Florness: That business can be very cyclical because of the production needs of each of the customers we're serving. If you look at the rest of the business, it tends to be much more MRO-oriented. Our faster daily sales, as you've seen in our monthly sales release, have you celebrated the faster rate than our non-faster business as we've gone through the calendar year? The third quarter operating margin was 21 percent, which matched last year, despite the one less selling day.
Land tuan sites per year.
Speaker 4: And it's our job and part of the restructuring of the sales team.
And.
It's our job and part of the purpose of the restructuring of the sales team.
Speaker 4: was to really decide, hey, we believe it, but we haven't done it.
Was to really decide hey, we believe it but we haven't done it.
Speaker 4: Let's do this thing. We've expanded, not too many years ago, we were signing 80 onsites a year, and we laid out the plan to get the 400 a year. We expect, as you see on the next page, we'll do about 350 this year.
Let's do this thing.
We expanded.
Not too many years ago, we were signing on sites a year.
And we laid out the plan to get to 400, a year, we expect to see in the next phase will do about 350 this year.
Speaker 4: but we haven't hit that number. And we've been kind of stuck. Now COVID through some challenges our way, it's never an easy time to move in with somebody when they're trying to isolate from the rest of the world. And that challenge, our really the growth coming out of COVID.
But we havent hit that number and we've been kind of stuck now COVID-19 through some challenges our way it's never an easy time to move into move in with somebody when they're trying to isolate from the rest of the world and that challenged our ability to grow coming out of Covid.
Daniel Florness: Earlier, I spoke about the $30 million we do in a day. The quarter had one less day. Some of our expenses are tethered to the day, most are not, and so pleased that the team was able to match the operating margin of 21% last year, but I believe that understates the reality of the performance. If you looked at it on a same day basis, we believe we would have increased the operating margin because we had roughly $10 million more, about a third of that 30 million in operating income because that good chunk of that flows through because of the change in the nature of the expense.
But.
Speaker 4: Looking at the opportunity that's out there, I believe we can do that.
Looking at the opportunity that's out there I believe we can do that.
Speaker 4: We need to turn that belief into reality. Looking to page four.
We need to turn that belief until reality.
Flipping to page four.
Speaker 4: Speaking of onsite, we did sign 93 in the quarter. So our active sites are 1778, 13 and a half percent greater than they were at the end of 3rd quarter of 2022. And our daily sales in those onsites, excluding transferred business when you open it on site, is in the low double digit rate. So we're doing good growth there, we're just not signing enough.
Speaking of them on site, we did signed 93 in the quarter.
So our active sites are seven 770, 813, 5% greater than they were at the end of third quarter of 2022.
In our daily sales in those on sites, excluding transferred business. When you open. It on site is in the low double digit rates. So we're seeing good growth there, we're just not spending enough.
Daniel Florness: The blue team, if I think about the last several years, we had a unique opportunity to serve the marketplace because of our pristine balance sheet. When COVID hit the globe back in 2020, we were able to step forward and purchase and fund with cash a meaningful increase in inventory, primarily centered on safety supplies because our customers and society in general needed something to get through that period and we were proud to be part of the solution.
Speaker 4: And as I said, we still anticipate signing a roughly 350 this year.
And as I said, we still anticipate signing a roughly 350 this year.
Speaker 4: FMI technology, there we set opticals as well. We said, can we do 100 a day, not 100 a quarter, but 100 a day of our weighted device count.
<unk> technology, there, we set lofty goals as well we said can we do 100 to date at 100, a quarter, but 100 a day.
Of our weighted device count we did 5169 during the quarter 95 per day versus 81, a year ago.
Speaker 4: Now we did 5,069 during the quarter, 95 per day versus 81 a year ago. The team's performing really well here. We're not at the 100. The 100 is a goal and we will push and push and push till we get there. But I'm really proud of what the team is doing. And you see that shine through when you look at our sales by product line and our monthly and quarterly releases. One thing you do see is our safety business.
<unk> performing really well here, we're not at the 100 to 100 is a goal and we will pushed and pushed and pushed till we get there, but I'm really proud of what the team is doing and you see that shine through when you look at our sales by product line.
Daniel Florness: We were able to do that because of our balance sheet. As the global economy reemerged from the pandemic, we saw firsthand and you saw it in daily news clipping about congestion that was going on in supply chains around the planet. Again, as supply chains became more rocky and you couldn't rely on how many days it would take to get product. There's a solution to that. It's stock more products and we beefed up our balance sheet and our cash flow suffered as a result, but I believe our standing with our customers and in the marketplace never performed better because the market could rely on the covenant that fast enough provided to them in being a great supply chain partner.
On a monthly and quarterly releases one thing you do see is our safety business.
Speaker 4: You know, it grew almost 10% in the month of September . And a lot of that could be attributed to the success we're seeing in FMI. And at our anticipation, we'll find between 23 and 25,000 MEUs this year, not the combination of fast-bend and fast-bend.
<unk> grew almost 10% in the month of September.
And a lot of that can be attributed to the success, we're seeing in <unk> and it's our anticipation will sign between 23 and 25000 and we use this year and that's a combination of fast spin and fast event.
Speaker 4: e-commerce, we can, you know, it's still in the scheme of things a relatively small piece of our business. It's just under 25 percent.
E Commerce, we can it's still.
In the scheme of things a relatively small piece of our business, it's just under 25%.
Speaker 4: but it's up from single digits not too many years ago and it currently grows it grew about 41% during the quarter and that's really a case of the marketplace saying to us
But it's up from single digits, not too many years ago and it currently growth. It grew about 41% during the quarter and Thats really a case of the marketplace, saying to us.
Speaker 4: We'd prefer to purchase from you this way. And our team in the field and our team in technology, building an ever better mouse trap to serve into that market. As I've shared on prayer calls, we still have a ways to go on this piece of our business because the chunk of e-commerce is that unplanned spend. And our goal is to keep making that easier for our team to do in the field.
Daniel Florness: As we moved deeper in 2022 and now in 2023, we've been able to unwind a piece of that and as a result, on a year-to-date basis, we have converted 121% of our net earnings into operating cash flow. That's our highest performance in a decade at average, just shy of 100, about 95%. If I look at it from the standpoint of relative to a year ago, in the quarter our operating cash grew about 51%, year-to-date our operating cash has grown 69%.
We'd prefer to purchase from you this way.
Our team in the field and our team and technology building, an ever better mousetrap to serve into that market as I've shared on prior calls we still have ways to go on this piece of our business because a chunk of E. Commerce is that unplanned spend and our goal is to keep making that easier for our for our team to do in the field.
Speaker 4: Finally, if you roll up FMI and e-commerce, we talk about our digital footprint. How much of our revenue is touching some digital aspect of engagement?
Finally, if you roll up <unk> in E Commerce, we talked about our digital footprint how much of our revenue is touching some digital aspect of engagement.
Speaker 4: We were at 57% in the quarter versus 49 and a half a year ago. Our challenge to the team is targeting 60% sometime before we exit this year. Our long-term expectation is still at that 85% we've talked about in the past that we believe will be part of our digital footprint as we move into the future.
We're at 57% in the quarter versus <unk> 49, and a half.
Daniel Florness: Again, part of that is the reflection of the investments we made to serve our marketplace and our ability to unwind that in the current environment and translate it into cash flow for our de-organization to serve our shareholders and to serve the business as we move into the future.
A year ago.
Our challenge to the team is targeting 60% sometime before we exit this year and our long term expectation is still at that 85%. We've talked about in the past that we believe will be part of our digital footprint as we move into the future.
Daniel Florness: Our onsite and FMI install basis and our digital footprint continue to expand. Earlier this year, we did some restructuring and we announced the elevation of Jeff Watts to see sales officer in the organization. We did some restructuring of the sales side of organization because we wanted to double down on the challenge we'd put in place in front of everybody going back to the 2015 timeframe and that was really.., stepping into what we saw as an untapped opportunity to grow our business faster, and that was to expand our on-site presence.
Speaker 4: In addition to our earnings release, there's several occasions that have gone out around the earnings time. And I thought I'd share just an insight on the three. The first one, and I believe it went out yesterday evening after market closed. We announced, as we do typically on a quarterly basis, a dividend, we announced a 35 cent dividend, which is consistent with the dividend we've paid in each of the first three quarters of the year.
In addition to our earnings release Theres several use cases that have gone out.
Around the earnings time, and I thought I'd share some insight on the three the first one and I believe it went out yesterday evening after market close we announced as we do typically on a quarterly basis. The dividend, we announced the 35 cent dividend, which is consistent with the dividend we paid in each of the first three quarters of the year.
Speaker 4: We also announced a few leadership changes. One is, is a press release we put out. One of the individuals that's been very influential.
We also announced a few leadership changes one is.
As our press release, we put out.
One of the individuals' that's been very influential.
Daniel Florness: It was earlier this year that for the first time the number of on-site senior organization outnumbered the number of branches in the organization, and that Delta continues to expand. And we believe that each of our district managers has the potential in their market to land two on-site per year. And it's our job, and part of the restructuring of the sales team was to really decide, hey, we believe it, but we haven't done it.
Speaker 4: in our ability to beef up our inventory during COVID and a wrap it back down and overseeing the distribution and transportation teams as well is Tony Borisma. Tony's been with the organization of roughly 20 years.
In.
In our ability to beef up our inventory during COVID-19 and ramp it back down and the disk and overseeing the distribution and transportation teams as well as Tony Boersma, Tony has been with the organization roughly 20 years.
Speaker 4: And he's demonstrated through a career and we identify that we lay out his career in the press release.
And he has demonstrated.
Through our career and we identify that we lay out his career in the in the press release.
Speaker 4: The different roles he's had, but he's demonstrated the excellent. And yesterday I asked the board of directors to elevate him to executive vice president over operations. So essentially elevating his role in that his responsibility will be largely unchanged from what he had previously. But it's recognizing his performance and what we see in the future of Tony within your organization.
The different roles he's had but he has demonstrated excellence and yesterday I asked the board of directors to elevate him to.
Daniel Florness: Let's do this thing. You know, we expanded, you know, not too many years ago, we were signing 80 on-site year, and we laid out the plan to get the 400 a year. We expect, you know, as you see on the next page, we'll do about 350 this year. But we haven't hit that number, and we've been kind of stuck. Now, COVID, through some challenges our way, it's never an easy time to move in with somebody when they're trying to isolate from the rest of the world. And that challenge, our really the growth coming out of COVID. But looking at the opportunity that's out there, I believe we can do that. We need to turn that belief into reality.
Executive Vice President over operation, So essentially elevating his role in that his responsibility will be largely unchanged from what he had previously but it is recognizing his performance and what we see in the future of Tony within the organization.
Speaker 5: Second filing went out. It's a required filing related to one of our officers who has decided to move on to a new chapter in his career. And it's Terry On, our Chief Operations Officer, have known Terry for many years. He's been with the organization. I believe all told he's been at the organization about 28 years. The official documents say it's 24 and a half because he had
Our second filing went out.
Sure.
Required filing related to.
One of our officers, who has decided to move on to a new chapter in his career.
And it's Terry on our Chief operations Officer of known Terry for many years he has been with the organization.
I believe all told he has been with the organization about 28 years.
Daniel Florness: Looking to page four. Speaking of on-site, we did sign 93 in the quarter. So our active sites are 1778, 13.5% greater than they were at the end of quarter of 2022. And our daily sales in those on-site, excluding transferred business when you open an on-site, is in the low double digit rate. So we're doing good growth there. We're not signing enough. And as I said, we still anticipate signing roughly 350 this year.
The official documents say at 24 and a half because.
Speaker 5: He was in the early years, part time of the organization, but then he came full time and had a break and service there.
He was in the early years part time with the organization, but then he came fulltime and had a break in service there.
Speaker 5: But Terry's demonstrated a career of exemplary service to the organization. We'd had some conversation in recent months about some aspirations he had in the...
But Terry has demonstrated a career of exemplary service to the organization we'd had some conversation in recent months about some aspirations he had in the.
Speaker 5: He's looking at the number of years he has left in his career and what he wants to do as he moves into his next chapter life.
He is looking at the number of years. He has left in his in his career and what he wants to do.
As he moves into its next chapter of life. He had discovered an opportunity that you thought was quite compelling.
Speaker 5: He had discovered an opportunity that was quite compelling that would serve.
Daniel Florness: FMI technology, there we set lofty goals as well. We said, can we do 100 a day, not 100 a quarter, but 100 a day of our weighted device count. We did 5,969 during the quarter, 95 per day versus 81 a year ago. The team's performing really well here. We're not at the 100. The 100 is a goal. And we will push and push till we get there. But I'm really proud of what the team is doing.
That would serve.
Speaker 5: His desire for the future as well as his family Terry had relocated to the East Coast of the US several years ago for family reach.
His desire for the future as well as his family Terry relocated to the East coast of the U S. Several years ago for family reasons, and all I can say this areas of your good friend I wish you best of luck in your next endeavor.
Speaker 5: And all I can say that Terry is your good friend. I wish you best of luck in your next endeavor. And thank you for the team that.
And thank you for the team that you developed.
Speaker 5: Tony being one of them, but thank you for the team you developed. The organization has always prided itself on our ability to build leaders and
Tony being one of them, but thank you for the team you developed.
The organization has always prided itself on our ability.
Daniel Florness: And you see that sign through when you look at our sales by product line and our monthly and quarterly releases. One thing you do see is our safety business. You know, it grew almost 10% in the month of September. And a lot of that could be attributed to the success we're seeing in FMI. And at our anticipation, we'll sign between 23 and 25,000 MEUs this year, not the combination of fast bend and fast bend e-commerce.
To build leaders and promote from within.
Speaker 5: And every time we see a person decide to take a new chapter in life, whether that chapter is retirement, or going into a family business or whatever the case might be, we all...
And every time, we see a person decided to take a new chapter in life, whether that chapters retirement or going into a family business or whatever the case might be.
We always see.
Speaker 5: Another layer of talent right behind that person, ready to step in and discover their future and their opportunity. Without it, I'll turn it over to Holden.
Another layer of talent right behind that person ready to step in and discovered there their future and their opportunity with that I'll turn it over to hold them.
Speaker 6: Thank you, Dan. Good morning, everyone. I'm gonna start on the slide deck on slide five. Total sales in the third quarter of 2023 were up 2.4%. Adjusting for the fact that we had one fewer selling day in the quarter, our daily sales were up 4%. Frankly, the dynamics of the quarter varied very little from the second quarter of 2023. macro data points and feedback from the regional leadership continue to point to sluggish demand in a cautious outlook for spending and production.
Thank you Dan and good morning, everyone.
Daniel Florness: We can, you know, it's still in the scheme of things a relatively small piece of our business. It's just under 25%. But it's up from single digits, not too many years ago. And it currently grows. It grew about 41% during the quarter. And that's really a case of the marketplace saying to us, we'd prefer to purchase from you this way. And our team in the field and our team in technology building an ever better mouse trap to serve into that market.
I'm going to start on the slide deck on slide five total sales in the third quarter of 2023 were up two 4% adjusting for the fact that we had one fewer selling day in the quarter. Our daily sales were up 4% frankly, the dynamics of the quarter very very little from the second quarter of 2023 macro data point.
And feedback from the regional leadership continue to point to sluggish demand and a cautious outlook for spending in production.
Speaker 6: We are certainly encouraged by the improvement in our September daily sales rate to up 5%. However, it seems to have more to do with easing comparisons in certain parts of our business than a clear signal affirming customer demand or brightening outlook.
We are certainly encouraged by the improvement in our September daily sales rate to up 5%. However, it seems to have more to do with easing comparisons in certain parts of our business than a clear signal of firming customer demand or brightening outlooks.
Daniel Florness: As I've shared on prior calls, we still have a ways to go on this piece of our business because the chunk of e-commerce is that unplanned spend. And our goal is to keep making that easier for our team to do in the field.
Speaker 6: Dynamics around our products, customers, and end markets have also trended similarly over the past three and six months. Manufacturing grew 6.4% despite soft demand, benefiting from further growth in the unsightened stall base and initiatives in national accounts in the field, the target key account plan spend, which is disproportionately manufacturing orient.
Dynamics around our products customers and end markets have also trended similarly over the past three and six months manufacturing grew six 4% despite soft demand benefiting from further growth in the onsite installed base and initiatives in national accounts in the field that target key account planned spend which is disproportionately manufacturing oriented.
Daniel Florness: Executive. Finally, if you roll up FMI and e-commerce, we talk about our digital footprint. How much of our revenue is touching some digital aspect of engagement. We were at 57% in the quarter versus 49 and a half a year ago. Our challenge to the team is targeting 60% sometime before we exit this year. And our long-term expectation is still at that 85% we've talked about on the past that we believe will be part of our digital footprint as we move into the future.
Speaker 6: Non-manufacturing was down 1.3%, though the rate of decline moderated as we began to hit easier comparisons in non-residential construction, reseller, and warehousing costs.
Non manufacturing was down one 3%, though the rate of decline moderated as we began to hit easier comparisons in nonresidential construction reseller and warehousing customers.
Speaker 6: From a product standpoint, fasteners are relatively weak down 2% due to their more cyclical profile and rapid pricing moderation.
From a product standpoint, fasteners are relatively weak at down 2% due to their more cyclical profile and rapid pricing moderation.
Daniel Florness: In addition to our earnings release, there's several occasions that have gone out around the earnings time and I thought I'd share just an insight on the three. The first one and I believe it went out yesterday evening after market closed. We announced as we do typically on a quarterly basis a dividend, we announced a 35% dividend which is consistent with the dividend we paid in each of the first three quarters of the year.
Speaker 6: In contrast, non-fascener products remain healthy due to further growth in our vending installed base and improved comparison.
In contrast, non fastener products remained healthy due to further growth in our vending installed base and improved comparisons.
Speaker 6: As it relates to pricing, it remains positive, but has come back to a range of 0 to 2% that we consider to be typical under normal economic conditions. We did experience very modest deflation within our faster product line.
As it relates to pricing it remains positive but has come back to a range of zero to 2% that we consider to be typical under normal economic conditions, we did experienced very modest deflation within our fastener product line.
Now to slide six.
Daniel Florness: We also announced a few leadership changes. One is a press release we put out. One of the individuals that's been very influential in our ability to beef up our inventory during COVID and a wrap it back down and overseeing the distribution and transportation teams as well is Tony Borosma. Tony's been with the organization of roughly 20 years and he's demonstrated through a career and we identify that we lay out his career in the press release.
Speaker 6: Operating margin in the third quarter of 2023 was 21 percent, equalling our margin from the third quarter of 2022. We typically believe that given mid-single-digit daily sales growth, we should be able to defend our margin. However, that we were able to do so despite the headwinds related to the one fewer sales day that Dan described in his prepare remarks, points to what we believe was more effective cost management by the blue team relative to the second quarter of 2023.
Operating margin in the third quarter of 2023 was 21% equaling our margin from the third quarter of 2022, we typically believe that given mid single digit daily sales growth, we should be able to defend our margin. However that we were able to do so despite the headwinds related to the one fewer sales day that Dan described in his prepared remarks points.
Two what we believe was more effective cost management by the blue team relative to the second quarter of 2023.
Speaker 6: Gross margin was 45.9% flat in the period from the prior year. Freight remained favorable, reflecting modest leverage of our captive fleet expenses, reduced use of external freight providers, lower fuel and reduced shipping costs.
Gross margin was 45, 9% flat in the period from the prior year freight remained favorable reflecting modest leverage of our captive fleet expenses reduced use of external freight providers lower fuel and reduced shipping costs. We also benefited from the absence of last year's $3 4 million glove write down and slightly positive price cost.
Daniel Florness: The different roles he's had but he's demonstrated excellence and yesterday I asked the board of directors to elevate him to executive vice president over operations. So essentially elevating his role in that his responsibility will be largely unchanged from what he had previously but it's recognizing his performance and what we see in the future of Tony within the organization. The second filing went out.
Speaker 6: We also benefited from the absence of last year's 3.4 million glove write down and slightly positive price costs.
Speaker 6: These favorable variables match the margin drag related to product and customer mix. The impact of mix was slightly less negative and the impact of price cost was slightly more positive than anticipated at the second quarter call. We did not take any incremental pricing actions in the period and the favorable price cost in the current period largely regains the negative price cost we discussed in the third quarter of 2022. We expect price cost to trend to neutral incoming quarter.
These favorable variables match, the margin drag related to product and customer mix.
The impact of mix was slightly less negative and the impact of price cost was slightly more positive than anticipated at the second quarter call. We did not take any incremental pricing actions in the period and the favorable price cost in the current period largely regains the negative price costs. We discussed in the third quarter of 2022, we expect price cost to trend neutral in coming.
Daniel Florness: It's a required filing related to one of our officers who has decided to move on to a new chapter in his career and it's Terry on our chief operations officer known Terry for many years. He's been with the organization. I believe all told he's been at the organization about 28 years.
<unk>.
Speaker 6: STA was 25% of sales up from 24.8% of sales mostly due to the one fewer sales.
SG&A was 25% of sales up from 24, 8% of sales, mostly due to the one fewer sales day, we experienced modest payroll leverage with lower incentive play.
Speaker 6: We experienced modest payroll leverage with lower incentive pay, reflecting slower growth in the third quarter of 2023 versus the third quarter of 2022. This was more than offset by rising information technology spend that increase in general insurance costs.
Incentive pay reflecting slower growth in the third quarter of 2023 versus the third quarter of 2022. This.
Daniel Florness: The official documents say it's 24 and a half because he was in the early years part time with the organization but then he came full time and had a break in service there. But Terry's demonstrated a career of exemplary service to the organization. We'd had some conversation in recent months about some operations he had and he's looking at the number of years he has left in his career and what he wants to do as he moved into his next chapter life.
This was more than offset by rising information technology spend and increase in general insurance costs increased expenses to maintain our selling related truck fleet and higher bad debt.
Speaker 6: Increased expenses to maintain our selling related truck fleet and higher bad debt.
Speaker 6: Relative to the second quarter of 2023, the organization tightened its management of discretionary expenses, with spending on travel, meals, and supplies being down 0.6% year to year, and continued moderation of growth in our FTE.
Relative to the second quarter of 2023, the organization tightened its management of discretionary expenses, we're spending on travel meals and supplies being down 6% year to year and continued moderation of growth in our FTE count.
Daniel Florness: He had discovered an opportunity that was quite compelling that would serve his desire for the future as well as his family. Terry relocated to the east coast of the U.S, several years ago for family reasons and all I can say that Terry is your good friend.
Speaker 6: Putting everything together, we reported third quarter 2023 EPS of 52 cents of 4.1% from 50 cents in the third quarter of 2022.
Putting everything together, we reported third quarter 2023, EPS of <unk> 52.
Up four 1% from 50 in the third quarter of 2022.
Turning to slide seven.
Speaker 6: We generated 388 million in operating cash in the third quarter of 2023 or 131% of net income in the period.
We generated $388 million in operating cash in the third quarter of 2023 or 131% of net income in the period.
Daniel Florness: I wish you best of luck in your next endeavor and thank you for the team that you developed Tony being one of them. But thank you for the team you developed. The organization has always prided itself on our ability, to build leaders and promote from within.
Speaker 6: Cast generation is traditionally strong in third quarters, though conversion in the current quarter was stronger than its historically typical.
Cash generation is traditionally strong in third quarters the conversion in the current quarter was stronger than it's historically typical.
Daniel Florness: And every time we see a person decide to take a new chapter in life, whether that chapter is retirement, or going into a family business or whatever the case might be, we always see another layer of talent right behind that person, ready to step in and discovered their future and their opportunity without alternative over to hold them.
Speaker 6: This reflects reduced need for working capital as demand flows down and improvements in inventory.
This reflects reduced need for working capital as demand slows down and improvements in inventory.
Speaker 6: The resulting strong cash flow means our balance sheet remains conservatively capitalized at the end of the third quarter of 2023 with debt ending at 7% total capital versus 9.4% in the second quarter of 2023 and 14.9% in the third quarter of 2022.
The resulting strong cash flow means our balance sheet remains conservatively capitalized at the end of the third quarter of 2023 with that ending at 7% of total capital versus nine 4% in the second quarter of 2023 at 14, 9% in the third quarter of 2022.
Speaker 6: You're over a year accounts receivable, they're up 5.4%, which is a combination of sales growth and the impact of mix due to faster growth to larger customers which tend to have longer term.
Year over year accounts receivable were up five 4%, which is a combination of sales growth and the impact of mix due to faster growth from larger customers, which tend to have longer terms.
Holden Lewis: Thank you, Dan. Good morning, everybody.
Holden Lewis: I'm going to start on the slide deck on slide five, total sales in the third quarter of 2023 were up 2.4%. Adjusting for the fact that we had one fewer selling day in the quarter are daily sales were up 4%.
Speaker 6: Inventory spell 9.8%. Lower customer demand reduced working capital needs. We are unwinding inventory layers built in late 2021 and early 2022 to manage supply chain constraints.
Inventories fell nine 8% slower customer demand reduced working capital needs. We are unwinding inventory layers layers built in late 2021 in early 2022 to manage supply chain constraints.
Holden Lewis: Frankly, the dynamics of the quarter varied very little from the second quarter of 2023 macro data points and feedback from the regional leadership continue to point to sluggish demand and a cautious outlook for spending and production. We are certainly encouraged by the improvement in our September daily sales rate to up 5%. However, it seems to have more to do with easing comparisons in certain parts of our business than a clear signal affirming customer demand or brightening outlooks.
Speaker 6: and our field and hub operations have sustainably streamlined inventory processes. Our days on hand fell again to 134.6 days, the lowest since 2002, which reflects improved velocity of inventories through our internal network, a reduction of retail stock and branches and improvements in stocking process.
In our field and hub operations.
Sustainably streamlined inventory processes, our days on hand fell again to $134 six days the lowest since 2002, which reflects improved velocity of inventory through our internal network a reduction of retail stock in branches and improvements in stocking processes.
Speaker 6: We reduced our net capital spending range to 180 million to 190 million, down from 210 to 230 million. This largely reflects timing and deferrals related to hub automation and expansion projects that we do expect to be included next year's capital spending plan.
We reduced our net capital spending range to a $180 million to $190 million down from $210 million to $230 million. This largely reflects timing of deferrals related to hub automation and expansion projects that we do expect to be included in next year's capital spending plans.
Holden Lewis: Dynamics around our products, customers and end markets have also trended similarly over the past 3 and 6 months manufacturing grew 6.4% despite soft demand, benefiting from further growth in the unsight installed base and initiatives in national accounts in the field, the target key account plan spend, which is disproportionately manufacturing oriented. Non-manufacturing is down 1.3% though the rate of decline moderated as we began to hit easier comparisons in non residential construction reseller and warehousing customers.
Speaker 6: The third quarter of 2023 profiles very similarly to the second quarter of 2023. We continue to experience stagnant demand, a cyclical shift favoring non-fasteners, and a secular shift favoring larger manufacturing-oriented costs.
The third quarter of 2023 profiles very similarly to the second quarter of 2023, we continue to experience stagnant demand a cyclical shift favoring non fasteners and a secular shift favoring larger manufacturing oriented customers.
Speaker 6: Growth driver performance is not quite where we would like it to be, but is that level that continue to support good growth in our installed days? Success in providing differentiated value to our customers and further cost and asset efficient.
Growth driver performance is not quite where we'd like it to be but it's at levels that continue to support good growth in our installed base success in providing differentiated value to our customers and further cost and asset efficiency operating margin performance remained stable. Despite the slow growth in our capacity to generate cash to reinvest in the business remains strong we did begin to experience <unk>.
Holden Lewis: From a product standpoint, fasteners are relatively weak down 2% due to their more cyclical profile and rapid pricing moderation. In contrast, non-fastener products remain healthy due to further growth in our vending installed base and improved comparisons. As it relates to pricing, it remains positive but has come back to a range of 0-2% that we consider to be typical under normal economic conditions. We did experience very modest deflation within our fastener product line.
Speaker 6: Operating margin performance remains stable, despite the slow growth, and our capacity to generate cash to reinvest in the business remains strong. We did begin to experience easier comparisons in certain markets, and our management of discretionary expenses improved over the preceding quarter. We continue to believe we are positioned to meaningfully accelerate sales growth when underlying demand improves while sustaining strong profitability returns. With that operator, we'll turn it over to begin the Q&A.
Year comp comparisons in certain markets and our management of discretionary expenses improved over the preceding quarter. We continue to believe we are positioned to meaningfully accelerate sales growth when underlying demand improves while sustaining strong profitability and returns with that operator, we'll turn it over to begin the Q&A.
Holden Lewis: Now to slide 6. Operating margin in the third quarter of 2023 was 21%, equalling our margin from the third quarter of 2022. We typically believe that given mid-single-digit daily sales growth we should be able to defend our margin. However, that we were able to do so despite the headwinds related to the one fewer sales day that Dan described in his prepare remarks, points to what we believe was more effective cost management by the blue team relative to the second quarter of 2023.
Speaker 2: Certainly if you'd like to be placing the question cue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question cue.
Certainly if you'd like to be placed in the question queue. 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 you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing star one one moment. Please.
Speaker 2: For participants using speaker equipment, maybe necessary to pick up your handset before pressing star 1. One moment please, what we-
While we pull for questions. Our first question is coming from Nigel Coe from Wolfe Research. Your line is now live.
Speaker 2: Our first question is going from Nigel Coe from Wolf Research, Relight is not lost.
Holden Lewis: Gross margin was 45.9% flattened the period from the prior year. Freight remained favorable, reflecting modest leverage of our captive fleet expenses, reduced use of external freight providers, lower fuel and reduced shipping costs. We also benefited from the absence of last year's 3.4 million glove write down and slightly positive price cost. These favorable variables matched the margin drag related to product and customer mix. The impact of mix was slightly less negative and the impact of price cost was slightly more positive than anticipated at the second quarter call.
Speaker 7: Thank you for the morning everyone. Morning.
Thanks, Good morning, everyone.
Good morning.
Speaker 7: So the price cost definitely coming in a bit better than what we expected. It's just as simple as thinking about the ocean freight rate normalization. And we're starting to see that now coming through from inventory. So I'm just wondering if, you know, when we obviously talk about the freight benefits, just wondering if that's more ocean-bound freight as opposed to domestic.
So the price cost.
Commenting a bit better than that.
We expected.
Is this a simpler thinking about the ocean freight rate normalization and then we're starting to see that now coming through from inventory. So I'm just wondering if when do we obviously talk about the freight benefits just wondering if that's more ocean bound freight as opposed to domestic.
Speaker 6: I think Nigel there's a little bit of that that's flowing through but um
I think Nigel there's a little bit of that that's flowing through but.
Speaker 6: You know, we've definitely seen lower costs, you know, related specifically to our faster line. And...
We've definitely seen lower costs.
Holden Lewis: We did not take any incremental pricing actions in the period and the favorable price cost in the current period largely regained the negative price cost we discussed in the third quarter of 2022. We expect price cost to trend neutral income in quarter. StNA was 25% of sales up from 24.8% of sales, mostly due to the one fewer sales day. We experienced modest payroll leverage with lower incentive pay, reflecting slower growth in the third quarter of 2023 versus the third quarter of 2022.
Related specifically to our fastener line and.
Speaker 6: You know, I think that's largely what you're seeing. So yeah, when we think about what caused a lot of the inflation in our business.
I think that's largely what you're seeing so yes, when we think about what caused a lot of the inflation in our business. There was an element of it that was raw material, but there was a fairly significant element that was related to transportation and so yes, I think youre just seeing some of that that gradual impact play through.
Speaker 6: there was an element of it that was raw material but there was a fairly significant element that was related transportation and so yeah I think you're just seeing some of that that gradual impact play through you know but I you know I want to also give a lot of credit to the organization particularly sort of the field and the national counts teams and the folks at manage pricing I mean
But I want to also give a lot of credit to the organization, particularly sort of the field and the national accounts teams and the folks that manage pricing I mean I.
Holden Lewis: This was more than offset by rising information technology spend, an increase in general insurance costs, increased expenses to maintain our selling-related truck fleet and higher bad debt. Relative to the second quarter of 2023, the organization tightened its management of discretionary expenses with spending on travel, meals, and supplies being down 0.6% year to year and continued moderation of growth in our FTE count.
Speaker 6: I believe five years ago that we wouldn't, as effectively, have been able to align our pricing and cost in the way we have. The variance that we've had against what's going on in the market has been fairly tame.
I believe five years ago that we wouldnt as effectively have been able to align our pricing and cost in the way we have.
The variance that we've had against what's going on in the market has been fairly tame. If remember this quarter last year, we were talking about a 20 basis point deficit.
Speaker 6: This quarter last year we were talking about 20 basis point deficit.
Speaker 6: And we felt that that was going to, we felt at the time that we hadn't quite caught up.
And we felt that that was going to we felt at the time that we haven't quite caught up with where.
Holden Lewis: Putting everything together, we reported third quarter 2023 EPS of 52 cents of 4.1% from 50 cents in the third quarter of 2022. Turning to slide 7, we generated 388 million in operating cash in the third quarter of 2023 or 131% of net income in the period. Cash generation is traditionally strong in third quarters, though conversion in the current quarter was stronger than its historically typical. This reflects reduced need for working capital as demand flows down and improvements in inventory.
Speaker 6: with where costing went with fasteners. I think our guidance at the time was, we kind of expect that cost to catch up.
Costing went with fasteners and I think our guidance at the time was we kind of expect that cash that costing to catch up.
Speaker 6: It has caught up and probably came in a little bit, but I think over coming quarters, you're gonna see the benefit that we saw this quarter, which largely recaptures the deficit we saw a year ago. I think you're gonna see that begin to moderate. So it wasn't what we expected either. As you know, we target neutral, we continue to target neutral. But I don't think that it's a sustained trend either. I think as we go through the next couple of quarters, it's gonna trend back to neutral.
It has caught up and probably came in a little bit, but I think over coming quarters youre going to see the benefit that we saw this quarter, which largely recaptures that deficit. We saw a year ago, I think youre going to see that begin to moderate so.
Wasn't what we expected either as you know we target neutral we continue to target neutral.
Yes.
But I don't think that it's a I don't think its a sustained trend either I think as we go through the the next couple of quarters, it's going to trend back to neutral.
Holden Lewis: The resulting strong cash flow means our balance sheet remains conservatively capitalized at the end of the third quarter of 2023 with debt ending at 7% total capital versus 9.4% in the second quarter of 2023 and 14.9% in the third quarter of 2022. Year over year accounts receivable are up 5.4%, which is a combination of sales growth and the impact of mix due to faster growth of larger customers which tend to have longer terms.
Speaker 7: Okay, thanks, ThoFolding. And then on the CapEx, you know, the pushouts for the projects, was that an elected pushout? Just wanna see if it was maybe just...
Okay. Thanks, Thanks, Holden and then on the on the Capex.
Push out to the projects it was that an electric push outs just wanted to see if that was maybe just.
Speaker 7: I don't know, supply chain challenges or delay. Yeah. You know, from a supply third on that elective.
I dunno supply chain challenges or delays.
Holden Lewis: Inventory spell 9.8%, slower customer demand reduced working capital needs, we are unwinding inventory layers built in late 2021 and early 2022 to manage supply chain constraints, and our field and hub operations have sustainably streamlined inventory processes. Our days on hand fell again to 134.6 days, the lowest since 2002, which reflects improve velocity of inventory through our internal network, a reduction of retail stock and branches, and improvements in stocking processes. We reduced our net capital spending range to 180 million to 190 million down from 210 to 230 million. This largely reflects timing and deferrals related to hub automation and expansion projects that we do expect to be included next year's capital spending plans.
From a supply side elective.
Speaker 6: The majority of it was not elective. You know, we had a, there's a piece of property in there, the signing of which just got pushed out from fourth quarter to first quarter. That's just a calendar timing issue.
Yeah.
The majority of it was not elective.
We had a there is a piece of property in there the signing of which just got pushed out from fourth quarter to first quarter. That's just that's just the calendar timing issue. We did have some automation project projects, where it's just a matter of when the product is going to come in and we always knew it would be later in the year.
Speaker 6: We did have some automation projects where it's just a matter of when the product is going to come in. We always do it be later in the year and it's just going to sort of cross the calendar line.
It is just going to sort of cross the calendar lines. So.
Speaker 6: Yeah, the majority of it relates to projects that we remain committed and excited about.
The majority of it relates to projects that we remain committed and excited about.
Speaker 6: and we'll fall into the 2024 and it was more a function of timing. Now I will say that earlier in the year we did say look take a look at your budget.
And it will fall into the 2024 and it was more a function of timing.
I will say that earlier in the year, we did say look take a look at your budgets.
Speaker 6: It's not a great year in terms of demand and and tighten some stuff up So I think there's some elements in there of what you're talking about and that's just about you know enforcing discipline across the organization
Not a great year in terms of demand and tightens of stuff up. So I think there is some elements in there of what youre talking about Thats, just about enforcing discipline across the organization.
Speaker 6: I think the larger portion of it relates to projects that will be coming back into the business in 2024. Got it. Okay, thanks. Thank you.
The larger portion of it relates to projects that will be coming back into the business in 2024.
Holden Lewis: The third quarter of 2023 profiles very similarly to the second quarter of 2023. We continue to experience stagnant demand, a cyclical shift favoring non-fasteners, and a secular shift favoring larger manufacturing oriented customers. Growth driver performance is not quite where we would like it to be, but is at levels that continue to support good growth in our installed days, success in providing differentiated value to our customers, and further cost and asset efficiency.
Got it okay. Thanks, Bob.
Thank you.
Thank you next question is coming from Chris Snyder from UBS. Your line is now live.
Speaker 8: Thank you. I wanted to follow up on some of the price cost commentary. I understand that price cost was positive from a year on year perspective, but I think you said the deficit was largely caught up, which would maybe imply that you're still a bit price-caused negative at the moment. So when we think about that trajectory back to neutral, is that incremental price cost positive to get there, or is that incremental price cost give back to get there? Thank you.
Thank you I wanted to follow up on some of the price cost commentary.
I understand the price cost was positive from a year on year perspective, but.
But I think you said the deficit was largely caught up.
Holden Lewis: Operating margin performance remains stable, despite the slow growth, and our capacity to generate cash to reinvest in the business remains strong. We did begin to experience easier comparisons in certain markets, and our management of discretionary expenses improved over the preceding quarter.
Pilot may be imply that you are still a bit price cost negative at the moment. So when we think about that trajectory back to neutral is that incremental price cost positive to get four or is that incremental price give back to get there. Thank you.
Holden Lewis: We continue to believe we are positioned to meaningfully accelerate sales growth when underlying demand improves while sustaining strong profitability returns.
Speaker 6: I mean, I guess I'm viewing the next couple of quarters as being the inverse of the last few. Again, if you remember in Q3, we talked about fasteners. We had a little bit of a deficit in price cost. And the guidance at the time was that over the next few quarters, you would see that deficit begin to decline. Was there a faster deficit in Q4? Yes, there was.
I guess I'm viewing and viewing the next couple of quarters as being the inverse of the last few again, if you remember in Q3, we talked about fasteners, we had a little bit of a deficit and price cost in the guidance at the time was that over the next few quarters, you would see that deficit begin to decline was there a fastener deficit in Q.
Unknown Attendee: With that operator, we'll turn it over to begin the Q&A. Certainly, if you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. So the price cost definitely coming in a bit better than what we expected. It's just as simple as thinking about the ocean freight rate normalization and we start to see that now coming through from inventory.
<unk>, yes, there was is it possible that we get that fastener deficit from Q4 back in Q4 of this upcoming quarter, Yeah, I think that thats possible, but the deficit Q4 last year was not as wide as the deficit in Q3 and I'm not expecting the benefit in Q4 this year to be at the same level as the benefit we saw in Q.
Speaker 6: Is it possible that we get that faster deficit from Q4 back in Q4 of this upcoming quarter? Yeah, I think that that
Speaker 6: But the deficit Q4 last year was not as wide as the deficit in Q3, and I'm not expecting the benefit in Q4 this year to be at the same level as the benefit we saw in Q3. Really, again, this feels very much like the inverse of what occurred last year. And at the end of the day, yeah, we're probably wind up over the course of both the years, kind of being neutral from our price cost standpoint. But within that overall trend, there's been a little bit of swinging in.
Three really.
This feels very much like the inverse of.
Of what occurred last year and at the end of the day, Yes, we'll probably wind up over the course of multi years kind of being neutral from a price cost standpoint, but.
Unknown Attendee: So I'm just wondering if you know when we obviously talk about the freight benefits, just wondering about more ocean bomb freight as opposed to domestic. I think Nigel, there's a little bit of that that's flowing through but you know we've definitely seen lower costs, you know related specifically to our faster line and you know that I think that that's that's largely what you're seeing. So yeah, when we think about what caused a lot of the inflation in our business, there was an element of it that was raw material but there was a fairly significant element that was related transportation and so yeah, I think you're just seeing some of that that gradual impact play through.
Within that overall trend.
Yes, there has been a little bit of a little bit of swinging us.
Speaker 8: Thank you. I appreciate that. And then maybe could you just talk a little bit about pricing on the non-fascener side? And I think you know, understand that the fastener is being from price pressure, whether it's the metal or the phrase, it can't be about the non-fascener side of the business. Thank you.
Thank you I appreciate that and then.
Maybe could you just talk a little bit about pricing on the non fastener side I think I understand that the fastener.
So price pressure, whether it's metal or the freight but can you talk about the non fastener side of the business. Thank you.
Speaker 6: Yeah, we don't talk about a lot since behaving largely like we would expect it to. You know, pricing in the non-fascener areas has moderated, just like our overall pricing has. But much like our overall pricing levels at this point, it's kind of back in the range that we would normally expect it to be in. It's still positive. It's lower than it was a year ago. But frankly, you know, that area is performing largely as expected. Historically.
Yes, we don't talk about <unk> behaving largely like we would expect it to.
Pricing in the non fastener areas.
Has moderated just like our overall pricing has but much like our overall pricing levels. At this point, it's kind of it's kind of back in the range that we would normally expect it to be and it's still positive.
Unknown Attendee: You know, but I want to also give a lot of credit to the organization, particularly sort of the field and the national counts teams and the folks that manage pricing. I mean, I believe five years ago that we wouldn't as effectively have been able to align our pricing and costing the way we have. The variance that we've had against what's going on in the market has been fairly tame. If you remember, this quarter last year, we were talking about a 20 basis point deficit and we felt that that was going to we felt the time that we hadn't quite caught up with where costing went with fasteners.
It's lower than it was a year ago, but frankly that areas is performing largely as expected historically.
Speaker 6: We have not traditionally seen negative pricing in non-fascender products. And I don't expect that that's going to happen in this cycle either. So we view that conditions for pricing in those products to be pretty stable here.
We have not traditionally seen negative pricing in non fastener products.
And I don't expect that that's going to happen.
And this cycle either so we view, we view that the conditions for pricing and those those products to be pretty stable here.
Thank you.
Unknown Attendee: And I think our guidance at time was we kind of expect that that cost and to catch up. It has caught up and probably came in a little bit, but I think over coming quarters, you're going to see, you know, the benefit that we saw this quarter, which largely recaptures the deficit we saw a year ago. I think you're going to see that begin to moderate. So it wasn't what we expected either.
Thank you. Your next question is coming from David Manthey from Baird. Your line is now live.
Speaker 2: The next question is coming from David Manthey from Beargerline. It's not live.
Speaker 9: Dan, hold on. Good morning. Morning, morning. First question. Could you talk about the feedback in early returns after you reopen the front doors of each store last month?
Damn hold and good morning.
Good evening.
First question.
You talk about the feedback and early returns after you reopen the doors with new stores last month.
Unknown Attendee: As you know, we target neutral. We continue to target neutral. You know, but I don't think that it's a I don't think it's a sustained trend either. I think as we go through the next couple of quarters, it's going to trend back to neutral.
I don't.
Sure.
Speaker 5: hasn't meant a lot of feedback. One thing I do every day.
Hasnt been a lot of feedback one thing I do every day.
Speaker 5: And I've done this, I frankly have done this for a lot of eight years, is I, I, and each day, in every web feedback that comes in from customers.
And I've done this quite frankly have done this for last eight years.
And each day and every web feedback that comes in from customers.
Holden Lewis: Okay. Thanks. And then on the on the capex, you know, the push out to the projects, was that an elective push out? Just want to see if it was maybe just, I don't know, supply chain challenges or delay from a supply side or that elective. The majority of it was not elective. You know, we had a there's a piece of property in there. The the signing of which just got pushed out from fourth quarter to first quarter.
Speaker 5: I try to read. Not gonna say I read 100% but I try to. And that tells you it's a small enough number that I'm able to even try to.
I try to read I'm.
Not going to say I read, 100%, but I've tried to.
And that tells that tells you it's a small enough number that I'm able to even try to.
Speaker 4: when you consider the hundreds of thousands of customers we have and
When you consider the hundreds of thousands of customers we have and.
Speaker 5: You know, over time, you pick up different themes and obviously you could, if I go back to the COVID era, a boy where their themes jumping out.
Over over time, you pick up different themes.
And obviously you could.
Holden Lewis: That's just that that's just a calendar timing issue. We did have some automation project projects where it's just a matter of when the product is going to come in. We always do it would be later in the year. And it's just going to sort of cross the calendar line. So, you know, the majority of it relates to projects that we remain committed and excited about. And it will fall into the 2024 and it was more a function of timing.
If I go back to the Covid Euro boy, where their themes jumping out.
Speaker 4: The themes were a society really frustrated, not with us, just frustrated. Scared about what was going on, you know, most of our businesses in the US, and so scared about what was going on and things that were going on and chaos around them.
The themes, we're a society really frustrated not with US just with some just frustrated.
Scared about what was going on most of our businesses in the U S and so scared about what was going on and things that were going on in and chaos around them.
Speaker 4: And, uh, and oftentimes I would call, I would, I would once a week, maybe twice a week, call somebody up.
And oftentimes I would call it.
Once a week, maybe twice a week call somebody up kind of throws him a little off kilter when they get get a call for me right. After they've put something but you learn a lot that way.
Holden Lewis: Now, I will say that earlier in the year, we did say look, take a look at your budgets. It's not a great year in terms of demand and tighten some stuff up. So I think there's some elements in there of what you're talking about. And that's just about, you know, enforcing discipline across the organization. But I think the larger portion of it relates to projects that will be coming back into the business in 2024.
Speaker 5: kind of throws them a little off of kilter when they get get a call from me right after they've put something but you learn a lot that way.
Unknown Attendee: Got it. Okay. Thanks. Thank you.
<unk>.
Speaker 4: It's largely almost too quick to see, but, but,
It's largely almost too quick to see but.
But.
Speaker 4: My predecessor had a phrase he used, but he used to keep it on his computer screen. So if you want to grow your business, make it easy to buy.
My predecessor had a had a phrase you used sometimes used to keep it on his computer screen.
If you want to grow your business make it easy to buy.
Speaker 4: And sometimes if you can fuse the market, it's kind of like in today's world, you got to eat.
Chris Lager: Next question is coming from Chris Lager from UBS. How does that live? Thank you.
And sometimes if you if you confuse the market, it's kind of like an in.
Holden Lewis: I wanted to follow up on some of the price cost commentary. You know, I understand that price cost was positive from a year on year perspective, but I think you said the deficit was largely caught up, which would kind of maybe imply that you're still a bit price cost negative at the moment. So when we think about that trajectory back to neutral, is that like incremental price cost positive to get there?
In today's world.
<unk> got to eat.
Speaker 4: It's a rare time that I go out to eat that I don't check on my phone to see if the place is even open.
It's a rare time that I go out to eat that I don't check on on my phone to see if the places even open.
Speaker 5: You know, Mondays and Tuesdays, especially, you can't necessarily count on it, especially in a count of 25,000 people. The economics don't work, but that business will open certain nights. And so the biggest thing we needed to do is to be really, really consistent with what we're doing.
On Mondays and Tuesdays, especially you can't necessarily count on it, especially in a town of 25000 people.
Economics don't work for that business, we opened certain dates.
And so the biggest thing we needed to do is be really really consistent with what we're doing.
Speaker 4: And the market reacts to that by saying, okay, this makes sense.
And.
Holden Lewis: Or is that incremental price cost give back to get there? Thank you. I mean, I guess I'm viewing, I'm viewing the next couple of quarters as being the inverse of the last few. Again, if you're remembering Q3, we talked about fasteners, we had a little bit of a deficit and price cost. And the guidance at the time was that over the next few quarters, you would see that deficit begin to decline.
<unk>.
The market reacts to that by saying, Okay. This makes sense.
Speaker 5: And but if you get there and the door is closed and you were expecting to be open. So I don't have a lot of insight for you Dave, other than to say, there's probably a few, fewer comments about, you know, I stopped there at eight in the morning or 10 in the morning and your door was closed. What what what's going on? And on the flip side is also empathy the two way street and
And but if you get there in the doors closed then you were expecting it to be opened.
So I don't have a lot of insight for you Dave other than to say, there's probably a few fewer comments about I stopped there at eight in the morning or 10 in the morning in your door was closed.
Holden Lewis: Was there a faster deficit in Q4? Yes, there was. Is it possible that we get that faster deficit from Q4 back in Q4 of this upcoming quarter? Yeah, I think that that's possible, but the deficit Q4 last year was not as wide as the deficit in Q3, and I'm not expecting the benefit in Q4 this year to be at the same level as the benefit we saw in Q3. Really, again, this feels very much like the inverse of what occurred last year.
What's going on.
And.
On the flip side is also empathy is a two way street.
And.
Speaker 5: And it's really looking at it and saying, it's finding that spot where the business can meet the roads, the wheel can meet the road, or rubber meets the road, or that expression is. But it's good for both parties. And good is that we can provide a high level of service.
And it's really looked at it and saying is finding that spot where the where the business can meet the roads.
Neil can meet the roads rubber meets the road over that expression is.
But but it's good for both parties and good is that we can provide a high level of service.
Holden Lewis: And at the end of the day, yeah, we're probably wind up over the course of both the years, kind of being neutral from a price cost standpoint, but within that overall trend, yeah, there's been a little bit of a little bit of swinginess. Thank you. I appreciate that.
Speaker 4: and it's economically good business for again, both parties. I believe we can find it. A lot of that business has migrated, and we've seen it in our own internal statistics. Really since COVID started, the amount of that business that migrated to the internet.
And it's economically good business for again, both parties I believe we can find it a lot of that business is.
<unk> migrated and we've seen it in our in our own internal statistics really since Covid started the amount of that business that's migrated to the internet.
Holden Lewis: And then maybe could you just talk a little bit about pricing on the non-fastener side? I think we don't understand that the fastener is seeing from price pressure, whether it's the metal or the phrase, it can talk about the non-fastener side of the business. Thank you. Yeah, we don't talk about a lot since behaving largely like we would expect it to. You know, pricing in the non-fastener areas has moderated, just like our overall pricing has, but much like our overall pricing levels at this point, it's kind of it's kind of back in the range that we would normally expect it to be in.
Speaker 4: And it's really, in some ways, the market making that transition of, boy, it's a lot easier if I pop an order online and then go pick it up. It's easier for the customer. And so I think that's part of it. And it's also reminding our teams locally that our goal and everything we do.
And it's really in some ways.
The market, making making that transition of boy, it's a lot easier if I pop on order online and then go pick it up it's easy it's easier for the customer.
And so I think thats part of it and it's also reminding our.
Our teams locally.
But our goal in everything we do.
Speaker 4: is always trying to figure out how to make the market opportunity bigger.
Is always trying to figure out how to make the market opportunity bigger.
Speaker 4: and find good, productive use of our time to serve the marketplace and serve our customer. I like it from the standpoint, I think it's a better message for our team. Go out and grow the damn business.
And in and find good productive use of our time to serve the marketplace and serve our customer I like it from the standpoint.
Holden Lewis: It's still positive. It's lower than it was a year ago, but frankly, you know, that that area is performing largely as expected. Historically, we have not traditionally seen negative pricing in non-fastener products. You know, and I don't expect that that's going to happen. And, you know, in this cycle either. So we view that conditions for pricing in those products to be pretty stable here. Thank you.
I think it's a better message for our team.
Cant grow the dam business.
And stop spending time of what youre not going to do.
Speaker 6: Probably the one piece of perspective I might add, David. You know, for a long time, for several years.
And just what is probably the one piece of perspective I might add David.
For a long time for several years.
Speaker 6: We had a lot of different models occurring within the branch. There were some branches that did in fact close their doors. There were some branches that had very specific will-call hours. There were some branches that stayed open. There were branches that flipped their counters. You know, branches that didn't. And I think what you're really seeing and picking up on is is after several years of experimentation, which is really what Fast and All does.
We had a lot of different models occurring within the branch right. There were some branches that did in fact close their doors. There were some branches that had very specific will call hours. There were some branches of state opened branches that flipped their counters.
David Matthew: Next question is coming from David Matthew from Bearger line of our life. Dan Holden, good morning. Good morning.
Daniel Florness: First question, could you talk about the feedback in early returns after you reopened the front doors of your stores last month? You know, I don't, there hasn't been a lot of feedback. One thing I do every day. And I've done this, I frankly have done this for a lot of eight years, is I and each day in every web feedback that comes in from customers. Mercer, I try to read. I'm not going to say I read 100% but I try to.
Branches that didn't and I think what youre, what youre really seeing in picking up on us after several years of experimentation, which is really what <unk> does.
Speaker 6: You know, it came time to say, you know, let's settle on and align around kind of an agreed approach to it. And, you know, so what you've picked up is essentially us having looked at the various experimentation that were run throughout the organization for a number of years and saying, hey, here's the passport that we're gonna take. So, your are ?.
It came time to say, let's let's settle on and align around.
And agreed approach to it and so what you've picked up is essentially us having looked at the various experimentations that were run throughout the organization for a number of years and saying Hey, Here's the path forward that we're going to take.
I appreciate the color guys. Thank you.
Daniel Florness: And that tells you it's a small enough number that I'm able to even try to. When you consider the hundreds of thousands of customers we have. And you know, over over time, you pick up different themes. And obviously you could, if you go, if I go back to the COVID era, a boy where their themes jumping out, the themes were a society really frustrated. Not with us, just with some just frustrated, scared about what was going on, you know, most of our businesses in the US.
Yeah.
Speaker 2: Your next question is coming from Jacob Robinson from Millius Research, Rilana Zalive.
Thank you. Our next question is coming from Jacob Levenson from Melius Research. Your line is now live.
Good morning, Dan Holden.
Good morning.
Speaker 10: I know you guys fell into lots and lots of different end markets and maybe it's not always easy to tell exactly where the product's going at the end of the day But maybe you can just walk us through a what you're hearing from the field and in terms of some of the positive and negative outliers You know on a vertical base
I know you guys saw him so.
Lots and lots of different end markets.
Followers.
Back to where the products going after the end of the day, but maybe you can just walk us through what Youre hearing from the field in terms of some of the positive and negative outliers.
Daniel Florness: And so scared about what was going on and things that were going on and chaos around them. And oftentimes I would call, I would once a week, maybe twice a week, call somebody up, kind of throws them a little off, off kilter when they get, get a call from me right after they put something. But you learn a lot that way. It's largely almost too quick to see, but my predecessor had a phrase he used, sometimes he used to keep it on his computer screen.
On a vertical basis.
Yes. Unfortunately, we don't have great granular insight market by market.
Speaker 6: Yeah, you know, unfortunately, we don't have great granular insight market by market. You know, the example I often give is, there's a lot of manufacturers out there that are considered manufacturers in our business, but they might have enormous oil and gas exposure, but we don't see that oil and gas exposure. So I wish I could give you more detail and market by end market. We just don't have it. The data doesn't break out that way.
<unk>.
The example, I often give is theres a lot of manufacturers out there that are considered manufacturers in our business, but they might have enormous oil and gas exposure, but we don't see that oil and gas exposure. So I wish I could give you more detail end market by end market.
We just don't have it the data doesn't break out that way.
Speaker 6: The feedback from the field continues to be fairly uniform. I think aerospace is doing fairly well.
The feedback from the field continues to be.
Daniel Florness: If you want to grow your business, make it easy to buy. And sometimes if you if you confuse the market, it's kind of like in today's world, you got to eat. It's a rare time that I go out to eat that I don't check on, you know, on my phone to see if the place is even open. You know, Mondays and Tuesdays, especially you can't necessarily count on it, especially in a count of 25,000 people.
Fairly uniform I think aerospace is doing fairly well.
Speaker 6: I'm not getting a lot of feedback that anything else is really inflecting more favorably. I'm getting the feedback that everything else remains fairly, fairly tepid. And that generally speaking, managers across our business are fairly cautious on where the market is today. But I wish we could give you more granularity and market by end market. We just don't have the means to measure it.
I'm not getting a lot of feedback that anything else is really inflicting more favorably I'm getting the feedback that everything else remains fairly.
Fairly tepid.
And that generally speaking managers across our business are fairly cautious on where the market is today, but I wish I wish we could give you more granularity end market by end market. We just don't have the means to measure it that way.
Daniel Florness: There's economics don't work for that business, the open certain nights. And so the biggest thing we needed to do is be really, really consistent with what we're doing. And in the market reacts to that by saying, okay, this makes sense. And but if you get there and the doors closed and you were expecting to be open. So I don't have a lot of insight for you, Dave, other than to say, there's probably a few few comments about, you know, I stopped there at eight in the morning or 10 in the morning and your door was closed.
Speaker 5: The only thing I'll add to it and my ask of everybody hearing this, don't read too much into it because it's a relatively small piece of our business. But when I'm going through the numbers, the individual that posed the stuff together, I often wear him out a little bit with questions and just to understand it myself. And...
The only thing I'll add to it in my ask of everybody. During this don't read too much into it because it's a relatively small piece of our business, but we're not.
Im going through the numbers.
The individuals opposed the stuff together.
I, often where we're him out a little bit with questions and just to understand it myself and.
Speaker 4: The other end market, which is about 11% of our business, it's a bunch of stuff in there, since the term other. And in it.
The other end markets, which is about 11% of our business, it's a bunch of stuff in there.
The term other.
Daniel Florness: What's going on? And on the flip side is also empathy is a two way street. And and it's really looking at the saying is it's finding that spot where the, where the business can can meet the roads, the wheel can meet the roads rubber meets the road or that expression is. But but it's it's good for for both parties. And and good is is that we can provide a high level of service.
And.
And in it.
Speaker 4: It's it's it's peaked up and and One of the components of that is our government business and in our government business has been gaining strength as we've gone through the year But it didn't gain strength sequentially in in September and sometimes that's just a function of comp But because generally speaking it's been gaining because we've been really successful in onsite and in government locations that we have in the business
It is.
It peaked up.
And in one of the.
<unk> of that is our government business.
And our government business has been gaining strength as we've gone through the year, but it didn't gain strength sequentially in September and sometimes that's just a function of comp.
But because generally speaking it's been gaining because we've been really successful in on site and in government.
Locations that we have in the business.
Speaker 4: Yeah, and so I was asking, I said, I know government didn't take up. Why did that take up?
Daniel Florness: And it's economically good business for again, both parties. I believe we can find it. A lot of that business is, you know, has migrated and we've seen it in our in our own internal statistics. Really since COVID started, the amount of that business that migrated to the internet. And and it's really in some ways, the market making, making that transition of boy, it's a lot easier if I pop on order online and then go pick it up.
And so I asked him I said I know government didn't tick up why did that pick up.
Speaker 4: And a big chunk of that other is transportation. It's not automotive transportation. It's not in there. It's transportation that we fell into.
And.
A big chunk of that other is transportation and.
And it's not it's not automotive transportation is not in there its transportation that we sell into.
And.
That's all real uptick.
Speaker 4: I'm not sure what that means. So maybe I created more questions with that answer than an answer with that answer. But that was the one thing that jumped out at me. I'm still scratching my head on it, but at least I know that's what drove the other end markets to grow 12 and half.
Not sure what that means so maybe I had created more questions with that answer then in answer with that answer, but but that was the one thing that jumped out at me I was I'm still scratching my head on it but at least I know thats what drove the other end markets to grow 12, 5%.
Daniel Florness: It's easier for the customer. And and so I think that's part of it. And it's also reminding our our teams locally that there are goal and everything we do, is always trying to figure out how to make the market opportunity bigger, and find good, productive use of our time to serve the marketplace and serve our customer. I like it from the standpoint, I think it's a better message for our team, go out and grow the damn business, and stop spending time about what you're not going to do.
Speaker 10: Okay, and that's helpful, Caller, thanks. Maybe just switching gears quickly on, I think maybe in past cycles.
Okay. That's helpful color effects.
Maybe just switching gears quickly.
I think maybe in past cycles.
Fast forward a quarter, maybe it had trouble holding the margin line AD revenue growth at these lower levels.
Speaker 10: fast would have maybe had trouble holding the margin line at revenue growth at these lower levels. And I guess the question is structurally what's really changed in the business.
I guess the question is structurally what's really changed in that business today.
Speaker 5: today versus prior cycles and gives it that confidence and maybe being able to have higher incremental margins going forward even if the growth rates aren't necessarily in this macro backdrop at least. Yeah, higher. Yeah, I think there's a few things in there. One is when we came through the tariff period.
Today versus prior cycles, and gives us that confidence and maybe being able to.
Higher incremental margins going forward, even if the growth rates aren't necessarily.
And this macro backdrop at ways.
Holden Lewis: And just probably the one piece of perspective I might add, David, you know, for a long time, or for several years, we had a lot of different models occurring within the branch, right? There were some branches that did in fact close their doors. There were some branches that had very specific will call hours, there were some branches that stayed open, there were branches that flipped their counters, branches that didn't. And I think what you're, what you're really seeing and picking up on is, is after several years of experimentation, which is really what Fastenal does, you know, it came time to say, you know, let's, let's settle on an align around kind of an agreed approach to it.
Yes.
Higher.
Yes, I think there's I think there's.
A few things in there.
One is when we came through the tariff period.
Speaker 5: That was brutal from the standpoint of
That was brutal from the standpoint of.
Speaker 5: Our pricing tools being so decentralized.
Our pricing tools being so decentralized.
Speaker 4: Communicating what was changing almost on a week by week basis was incredibly difficult and There was one quarter right I sat down with our IT John Stoddbridard leader of IT and I said John
Holden Lewis: And, you know, so what you picked up is essentially us having looked at the various experimentation that were run throughout the organization for a number of years and saying, hey, here's the passport that we're going to take. Appreciate the color, guys. Thank you. Yeah.
Communicating what was changing almost on a week by week basis was it incredibly difficult.
And there was one quarter.
Sat down with our it.
John Soderberg, our leader of it and I said John.
Speaker 5: I'm going to ask you something that I told you I'd never ask you to do. We're going to shut down all IT development for...
I'm going to ask you something that I would never that I told you I would never ask you to do we're going to shut down all development for.
Unknown Attendee: Thank you.
Speaker 5: Whatever time it takes, and we're going to focus 100%
Whatever time, it takes and we're going to focus 100%.
Speaker 5: of our energy on a better pricing tool for our organization to use because this is a disaster we're going through right now and we can't handle these fluctuations because our system is built for that.
Of our energy on a better pricing tool.
For our organization to use because this is a this is a disaster, we're going through right now and we can't handle these fluctuations because our system is built for that.
Jacob Robinson: Our next question is coming from Jacob Robinson, from Millius Research, who line is alive? Good morning, Dan. Holden. Good morning. I know you guys fell into lots and lots of different end markets and maybe it's not always easy to tell exactly where the product's going up the end of the day, but maybe you can just walk us through what you're hearing from the field in terms of some of the positive and negative outliers, you know, on a vertical basis.
Speaker 5: And we shut down IT and we focus on building what we call our price review tool. And then we had other folks in your organization that took that our district managers. We have a key person here in Winona, Kevin Fitzgerald who took that and created a great tool.
And we shut down and we focused on building what we call our price review tool and then we had other folks in the organization that took that our district managers, we have a key person here in Winona, Kevin Fitzgerald, who took that and greater created a great tool and.
Speaker 5: and our ability to price. And pricing isn't as much about...
And our ability to price.
And pricing isn't as much about.
Speaker 5: not being too high as it is about not being too low. Sometimes if your price isn't precise and you're too high, you might actually hurt your margin because you don't sell enough of that. Or if you were three points lower, you would sell more of it and it'd help your margin.
That being too high as it is about not being too low sometimes if youre priced isn't precise and youre too high you might actually hurt your margin because you don't sell enough of that where if you were three points lower you would sell more of it and to help your margin.
Jacob Robinson: Yeah, you know, unfortunately, we don't have great granular insight market by market, you know, the example I often give is there's a lot of manufacturers out there that are considered manufacturers in our business, but they might have enormous oil and gas exposure, but we don't see that oil and gas exposure. So I wish I could give you more detail and market by end market. We just don't have it. The data doesn't break out that way.
Speaker 4: So on the Girl Smarge side, we've gotten better at our ability to price and in the recent years, our transportation team has gotten really agile at managing the expense side. So that's on the Girl Smarge in peace.
So on the gross margin side, we've gotten better at our ability to price and in the and in the recent years. Our transportation team has gotten really agile at manage the expense side. So thats on the gross margin piece.
Jacob Robinson: The feedback from the field continues to be fairly uniform. I think aerospace is doing fairly well. I'm not getting a lot of feedback that anything else is really inflecting more favorably. I'm getting the feedback that everything else remains fairly, you know, fairly kept it. You know, and that generally speaking managers across our business are fairly cautious on where the market is today. But I wish I wish we could give you more granularity and market by end market. We just don't have the means to measure it that way.
Speaker 5: And there's a bunch of other things, but I don't want to give you a 15 minute answer. On the operating expense side.
And Theres, a bunch of other things, but I don't want to give you a 15 minute answer.
On the operating expense side.
We focused a lot of energy on people development.
Speaker 4: We focused a lot of energy on people develop.
Speaker 5: on leadership development. You know, I, you know, earlier when I was talking about the transition with Terry, you know, one of the things that, that always makes me feel good about transition within FastKnow is the incredible bench of talent we have that exists throughout the organization that's from a promote within culture.
On leadership development.
Earlier, when I was talking about the transition with Terry one of the things that.
That always makes me feel good about transitioning within fast now is the incredible bench of talent we have.
<unk>.
That exists throughout the organization from a promote from within culture.
Daniel Florness: The only thing I'll add to it and my ask of everybody hearing this don't read too much into it because it's a relatively small piece of our business. But when I'm going through the numbers, the individual that posed the stuff together, I often wear him out a little bit with questions and just to understand it myself. And the other end market, you know, which is about 11% of our business, it's a bunch of stuff in there.
Speaker 5: Because of all that investment, our leadership team, whether it be in a support area, at the district level, at the regional level, our leadership team has never been better. And one thing I'll credit, especially to Casey Miller, who leaves our US business, and Jeff Watts,
Because of all that investment.
Our leadership team whether it be in the support area at the district level at the regional level, our leadership team has never been better.
And one thing I'll credit, especially to.
<unk> Miller, who leads our U S business.
And Jeff Watts, who leads our global business.
Speaker 4: They both have done an incredible job over the last five, six years.
They both have done an incredible job over the last five six years.
Speaker 4: of challenging their leaders to be better at managing the expense and brainstorming new stories such as reaching the core of the flow
Challenging their leaders to be better at managing the expense side.
Daniel Florness: That's the term other. And in it. It peaked up and one of the components of that is our government business and our government business has been gaining strength as we've gone through the year but it didn't gain strength sequentially in September and sometimes that's just a function of comp but because generally speaking it's been gaining because we've been really successful in onsite and in government locations that we have in the business.
Speaker 5: Because in a decentralized organization, there's nothing more difficult than that. You have to be out ahead of stuff.
In a decentralized organization there is nothing more difficult than that you have to be out ahead of stuff.
Speaker 4: And they've just done a wonderful job on that. And then the other piece, not to, not to slide anybody, our distribution team is, and their ability to manage expenses through the cycle is second to none. Sometimes I look at the information I see, and I, I, I, I quit my heels and I'm like, I can't believe how good this team.
And.
They've just done a wonderful job on that and then the other piece not to not display to anybody our distribution team and their ability to manage expenses through the cycle is.
Is second to none.
Now as I look at the information I see in him.
Quick my heels and I'm like I can't believe how good this team is.
Daniel Florness: And so I asked him, I said, I know government didn't tick up, why did that tick up? And a big chunk of that other is transportation and it's not, it's not automotive transportation, it's not in there, it's transportation that we fell into and that's all real up tick. I'm not sure what that means, so maybe I created more questions with that answer than an answer with that answer, but that was the one thing that jumped out at me, I'm still scratching my head on it but at least I know that's what drove the other end markets to grow 12.5%.
Speaker 4: And I think we're doing better at it. And that's not about one person. That's about an organization that's gotten better over time. If we have a break, you know the safety when we're building our own offices. This is something good for us because it's once just one-bedding out of the phase ?? and making us use it over time. Now, thank you Mr. Chair. But I owe you 200,000rolling????.
I think we're just better at it and Thats not about one person that's about an organization that has gotten better over time.
Thank you that's great color I'll pass it on.
Thanks.
Speaker 2: Thank you. Our next question is coming from Patrick Bowman from J.P. Morgan, your line is now live.
Thank you. Our next question is coming from Patrick Baumann from Jpmorgan. Your line is now live.
Speaker 11: Oh, hi, good morning. Thanks for taking my questions. Maybe one for holding first. Just wanted to follow up on the near-term gross margin expectations. It sounds like the price cost will be favorable year over year in the fourth quarter. And then you also have an easy comp. I think you would call that like weaker product margins last year. Maybe that's the non-fascener business. I guess just given that and your third quarter performance, are you thinking the gross margin in the fourth quarter is going to be up year over year? And then can it also be up maybe from the third quarter as well?
Hi, good morning, Thanks for taking my questions.
Maybe one for holding first I just wanted to follow up on the near term gross margin expectations. It sounds like price cost will be favorable year over year in the fourth quarter and then you also have an easy comp.
Unknown Attendee: Okay, and that's helpful, Caller, thanks.
Unknown Attendee: Maybe just switching gears quickly on I think maybe in past cycles fast would have maybe had trouble holding the margin line and revenue growth at these lower levels. And I guess the question is structurally what's really changed in the business today versus prior cycles and gives it that confidence and maybe being able to have higher incremental margins going forward even if the growth rates aren't necessarily in this macro backdrop at least higher.
I think you had called out like weaker product margins last year, maybe thats the non fastener business.
I guess, just given that in your third quarter performance, where you're thinking the gross margin in the fourth quarter is going to be up year over year, and then can also be up maybe from the third quarter as well.
Speaker 6: No, not up from the third quarter. The first off, I think you have a number of things from Q3 to Q4. The first is there is seasonality in play. And I think it's typically give or take 30 basis points of seasonality between third quarter and fourth quarter. That's just proven true over time. It relates to the mix of our business and the fourth quarter, et cetera. And the delivering of our trucking that one. And the delivering of our trucking that one.
No not up from the third quarter.
The first off I think you have a number of things from Q3 to Q4. The first is <unk>.
There is seasonality in play and I think it's typically give or take 30 30 basis points of seasonality between.
Third quarter and fourth quarter that that just proven true over time it relates to the mix of our business in the fourth quarter etcetera, and the Delevering of our trucking network and the Delevering of our trucking network.
Unknown Attendee: I think there's a few things in there, one is when we came through the tariff period, that was brutal from the standpoint of our pricing tools being so decentralized, communicating what was changing almost on a week by week basis was incredibly difficult. And there was one quarter where I sat down with our IT, John Stodberg, our leader of IT and I said, John, I'm going to ask you something that I told you I'd never ask you to do.
Speaker 6: So I think first off, you have that sequential headwind. Now, in the past, I've argued that it might be slightly more muted in the Q4, but that was also based on...
So I think first off you have that that sequential headwind now in the past I have argued that it might be slightly more muted in Q4, but that was also based on a lot of freight advantage I will tell you in the third quarter, we have begun to see cyclically, sometimes when things get challenging.
Speaker 6: a lot of freight advantage. Now I will tell you in the third quarter we've begun to see cyclically sometimes when things get challenging you know you can see some of your your freight revenue piece begin to soften a little bit and we saw some of that during the third quarter and the leverage that you get when you grow the freight revenues reverses
You can see some of your freight revenue piece begin to soften a little bit and we saw some of that during the third quarter and the leverage that you get when you grow the freight revenues reverses when you don't.
Unknown Attendee: We're going to shut down all IT development for whatever time it takes and we're going to focus 100% of our energy on a better pricing tool for our organization to use because this is a disaster we're going to write. Right now and we can't handle these fluctuations because our system isn't built for that. And we shut down IT and we focus on building what we call our price review tool. And then we had other folks in your organization that took that our district managers, we have a key person here in Winona, Kevin Fitzgerald who took that and created a great tool in our ability to price.
Speaker 6: And that was a bit of a challenge at the end of the third quarter that if that carries into the fourth quarter because the demand is still weak. I think that that goes from something that was doing fantastically for us in Q2. And becomes perhaps a little bit weaker. So I think that plays out perhaps a little bit softer as well. And then, you know, like I said, I do believe that there'll be some moderation in price costs. So, you know, I think relative to the, well, relative to the third quarter level.
And that was a bit of a challenge.
At the end of the third quarter that if that carries into the fourth quarter because demand is still weak.
I think that that goes from something that was doing fantastically for us in Q2.
And it becomes perhaps a little bit weaker so I think that plays out perhaps a little bit softer as well and then.
I do believe that there'll be some moderation in price cost so.
I think relative to the relative to the third quarter level.
Speaker 6: I think you're likely to see the fourth quarter come down you know a little bit greater than normal seasonality in this
I think youre likely to see the fourth quarter come down.
A little bit greater than normal seasonality in this case.
Speaker 11: Great. I'll help you call her. I really appreciate that. And then I got one more.
Unknown Attendee: And pricing isn't as much about not being too high as it is about not being too low. Sometimes if your price isn't precise and you're in your too high, you might actually hurt your margin because you don't sell enough of that. Or if you were three points lower, you would sell more of it and it would help your margin. So on the gross margin side, we've gotten better at our ability to price and in the recent years our transportation team has gotten really agile at managing the expense side.
Great that's helpful color.
I appreciate that.
And then I got one more.
Speaker 11: In terms of the branch size now, it looks like it's close to that target you laid out in the fourth quarter, around the fourth quarter conference club. You said 1450 for US plus Canada. So maybe if you could update us on.
In terms of the branch size now it looks like it's close to that target you laid out in the fourth quarter.
During the fourth quarter Conference call I think you said $14 50 for Us plus Canada.
So maybe if you could update us on.
And is that for now.
Speaker 11: Is that for now? And then a couple of things in context of that. Like how should we think about?
A couple of things in context of that like how should we think about.
Speaker 11: you know that that sells momentum in the non-resident reseller accounts, which I think has you know been hurt by some of this consolidation and then also the occupancy expense account where I think you've been benefiting from some
Sales momentum in the non res and reseller accounts, which I think is.
Unknown Attendee: So that's on the gross margin piece. And there's a bunch of other things, but I don't want to give you a 15 minute answer. On the operating expense side, we focused a lot of energy on people development, on leadership development. You know, earlier when I was talking about the transition with Terry, one of the things that always makes me feel good about transition within Fastenal is the incredible bench of talent we have, that exists throughout the organization, it's from a promote movement culture.
Been hurt by some of this consolidation and then also.
Occupancy expense account, where I think <unk> been benefiting from some of them.
Speaker 11: some of that in terms of cost coming out of the business. Thanks for any color and I appreciate it.
Some of that in terms of cost coming out of the business.
Any color and I appreciate it.
Speaker 5: That may be four questions. Yeah, I'll try to unpack that and reverse order. And if I missed something, help me out. But first off, branch count, 1450s are target number. That's not a, we're at this number in an edict comes out that says, thou shalt not close or thou shalt not open. That number could, you know,
Sure maybe four questions.
I'll try to unpack that in reverse order and if I, if I Miss something helped me out but.
First off.
The branch count.
$14 50 is our target number.
That's not a we're at this number and EBIT comes out that says now not close or that will not open.
Unknown Attendee: Because of all that investment, our leadership team, whether it be in a support area, at the district level, at the regional level, our leadership team has never been better. And in one thing I'll credit, especially to Casey Miller, who leads our US business and Jeff Watts, who leads our global business. They both have done an incredible job over the last five, six years of challenging their leaders to be better at managing the expense side.
That number.
No.
Speaker 5: Perhaps we should talk in ranges instead of exact points because 1450 was what our internal team identified.
Perhaps we should talk in ranges instead of exact points because.
$14 50 was what our internal team identified.
Speaker 5: as a target number looking at demographics. And I believe it, if I don't have the stat in front of me, so if I'm wrong, I apologize. It would have been in the flip-flook from the first from January . But I believe at 1450, we were within 30 minutes of 93% of the U.S. manufacturing base.
As a target number looking at demographics and I believe it is.
I don't have the stat in front of me, so if I'm wrong I apologize it would've been in the flipbook from the first from January but I believe that $14 50, we were within 30 minutes of 393% of the U S manufacturing base.
Unknown Attendee: Because in a decentralized organization, there's nothing more difficult than that. You have to be out ahead of the stuff. And they've just done a wonderful job on that. And then the other piece, not to, not to slide anybody, our distribution team and their ability to manage expenses through the cycle is second to none. Sometimes I look at the information I see and I can't believe how good this team is. And I think we're just better at it. And that's not about one person. That's about an organization that's gotten better over time.
Unknown Attendee: Thank you both.
Speaker 5: And so it's a theoretical number. Could I see it go down to 1,400? Yes. Could I see it go to 1,500? Yes. I, the closer piece will become ever quieter.
And.
So it's a theoretical number.
Could I could I see it go down in 2500, yes could I see it go to 500, yes.
At.
The closer piece will become ever quieter.
Speaker 5: and as we move into 2024. I know just yesterday I was chatting with KC and Jeff about some of that and what they're seeing because there's still a few closures on the horizon. Part of it's reminding folks that, you know, the openings are okay too.
And as we move into 2024, I know just yesterday I was chatting with Casey and Jeff about about some of that of what they're seeing because theres still a few closures on the horizon.
Unknown Attendee: That's great color.
Part of it is reminding folks that.
Unknown Attendee: I'll pass it on.
Unknown Attendee: Thanks.
Openings are okay too.
Speaker 5: And so I think we'll be in that 14, 1500 range. So, you know, don't read anything into it, moving up or down 20.
And so.
Unknown Attendee: Thank you.
Patrick Bowman: Next question is coming from Patrick Bowman from JP Morganer line. Is that live? All right.
It will be in that $14 500 range. So.
<unk>.
Holden Lewis: Good morning. Thanks for taking my questions. Maybe one for holding first. Just wanted to follow up on the near term gross margin expectations. It sounds like the price cost will be favorable year over year in the fourth quarter. And then you also have an easy comp. I think you had called that like weaker product margins last year. Maybe that's the non-fastener business. It's just given that and your third quarter performance. Are you thinking the gross margin in the fourth quarter is going to be up year over year?
Don't read anything into it moving up or down 20.
Speaker 6: And then, since it wraps into the concept, what you will see is as the rate of closings moderate versus the last several years, you're going to have a little bit less of an incremental, you know, sort of...
And then since it wraps into the concept what you will see is as the rate of closings moderate versus the last several years.
Youre going to have a little bit less of an incremental.
Sort of takeout of cost.
Speaker 6: than we've had over the last several years. We still believe occupancy is ultimately leverageable. But you've had inflation at the same time that you've had closures and those things have tended to offset one another. And that's gonna moderate as you go into 2024 and beyond to some degree.
Then we've had over the over the last several years, we still believe occupancy is ultimately leverages <unk>.
Holden Lewis: And then can it also be up maybe from the third quarter as well? No, not up from the third quarter. The first off, I think you have a number of things from Q3 to Q4. The first is there is seasonality in play. And I think it's typically give or take 30, 30 basis points of seasonality between third quarter and fourth quarter. That's just proven true over time. It relates to the mix of our business and the fourth quarter, et cetera.
But you had inflation at the same time that you've had closures and those things have tended to offset one another and that's that's going to moderate as you go into 2024 and beyond to some degree.
Speaker 5: If I look at occupancy in the third quarter, we actually didn't leverage it.
So.
If I look at occupancy in the third quarter, we actually didn't leverage it.
And.
Part of the reason for that is within occupancy we have two components, we have our branch and onsite network.
Speaker 5: Part of the reason for that is, within occupancy we have two components. We have our branch and on-site network.
Holden Lewis: And the delivering of our trucking network. So I think first off, you have that that sequential headwind. Now in the past, I've argued that it might be slightly more muted in the Q4, but that was also based on a lot of freight advantage. Now I will tell you, in the third quarter, we've begun to see cyclically, sometimes when things get challenging, you can see some of your freight revenue piece begin to soften a little bit.
Speaker 5: We have obviously our distribution centers, but we also have our FMI, our vending and fast bin. And the reason we classify that as occupancy, when we started vending 15 plus years ago, looked at it and said, vending machine is basically a shell.
We have obviously our distribution centers, but we also have our <unk>, our vending and fast Ben and the reason, we classify that as occupancy when we started vending 15 plus years ago looked at and said vending machine is basically a shelf.
Speaker 5: We've taken a shelf out of the branch, we've wrapped it in a metal box, and we've put that shelf in a customer's facility, but it's a shelf.
We've taken a shelf out of the branch we wrapped it in a metal box when you put that shelf in a customer's facility, but it's a shelf.
Speaker 5: And we really challenged our district leaders to think about that as occupancy. We, on our internal P&L, we classified as occupancy. Because if a branch grows from 100 to 150.
And we really challenged our district leaders to think about that as occupancy on our internal P&L, we classified as occupancy because if a branch grows from 100 to 150.
Holden Lewis: And we saw some of that during the third quarter. And the leverage that you get when you grow the freight revenues reverses when you don't. Court. And that was a bit of a challenge at the end of the third quarter that if that carries into the fourth quarter because demand is still weak, I think that that goes from something that it was doing fantastically for us in Q2, you know, and becomes perhaps a little bit weaker.
Speaker 5: And for simple purposes, let's just say that that 50,000 of growth is all vending.
And for simple purposes, let's just say that that 50000 of growth is all vending.
Speaker 5: I still need a bigger building. And my occupancy grows because I have the depreciation and I've been expense associated with my bending plan.
I shouldn't need a bigger building.
And my occupancy growth because I have the depreciation expense associated my vending platform.
Speaker 5: and it was a way of more holistically thinking about it. Our...
Holden Lewis: So I think that plays out perhaps a little bit softer as well. And then, you know, like I said, I do believe that there'll be some moderation in price costs. So, you know, I think relative to the third quarter level, I think you're likely to see the fourth quarter come down, you know, a little bit greater than normal seasonality in this case. Great, I'll help you call it. I really appreciate that.
And it was a way of more holistically thinking about it.
Our.
Speaker 5: FMI numbers, as you know, we're signing 95 devices a day. Our FMI grew 6% are expenses within occupancy. And that was about to 55% so our occupancy grew just under 4%.
<unk> numbers as you know, we're signing 95 devices a day.
Our <unk> grew 6%.
Our expenses within occupancy.
And that was about 55% so our occupancy grew.
Just under 4%.
Speaker 5: and about 55% of that related to vending. But even though we close them branches and close them locations, our rent has not gotten cheap.
And about 55% of that related to vending, but even though we closed some branches we closed some locations.
Holden Lewis: And then I got one more in terms of the branch size now. It looks like it's close to that target you laid out in the fourth quarter, or around the fourth quarter conference club that you said 1450 for US plus Canada. So maybe if you could update us on, is that right now? And then a couple of things in context of that, like how should we think about, you know, that sales momentum in the non-resident reseller accounts, which I think has, you know, been hurt by some of this consolidation and then also, you know, the occupancy expense account where I think you've been benefiting from some of that in terms of costs coming out of the business.
Rent has not gotten cheaper.
Speaker 5: in the last 12 months. And we will continue to be challenged with that. One of the things we've talked about in prior calls is the thing we call LIT.
In the last 12 months.
And we will continue to be challenged with that one of the things we've talked about on prior calls is a thing we call lift.
Speaker 4: And, this is about efficiency of where we're picking the product, the replenished FMI, bending today with FMI, or broadleaf.
And Lyft is about efficiency of where were picking the product the replenished fmri vending today, but <unk> broadly.
Speaker 5: But it also means if I have 50 venting machines out of a, that are serviced out of a branch.
But it also means if I ever if I have 50 vending machines out of.
Our serviced out of a branch.
Speaker 5: and I don't need to stock all of that inventory in the local branch, because I'm picking it in an automated distribution center in a highly efficient way. Now that distribution center is in free.
And I don't need to stack all of that inventory in the local branch because I'm picking it in an automated distribution center.
Holden Lewis: Thanks for any call or that. Appreciate it. Sure. That may be four questions. Yeah. I'll try to unpack that in reverse order. And if I missed something, help me out. But first off, branch count, 1450s are target number. That's not a, we're at this number in an edict comes out that says, thou shalt not close, or thou shalt not open. That number could, you know, perhaps we should talk in ranges instead of exact points because 1450 was what our internal team identified as a target number looking at demographics.
In a highly efficient way now that distribution distribution center is in free.
Speaker 4: But I also don't need to expand the footprint of my brand.
But I, but I also don't need to expand the footprint of my branch.
Holden Lewis: And I believe it, if I don't have a stat in front of me, so if I'm wrong, I apologize, it would have been in the flip book from the first from January. But I believe at 1450, we were within 30 minutes of 93% of the U.S, manufacturing base. And so it's a theoretical number. Could I see it go down the 1400? Yes. Could I see it go to 1500? Yes. The closure piece will become ever quieter.
Speaker 5: because I freed up 40 feet of shelving that was dedicated to fast the vending in the past. But, but, that's given us some challenges on the fact that occupancy has grown. And, as you can imagine, the further you get from the...
Because I freed up 40 feet of shelving that was dedicated to vending in the past.
But that has given us some challenges on the fact that.
Occupancy has grown and.
As you can imagine.
The further you get from the middle of the country.
The more expensive the space get that when you get into some of our businesses in Europe, it's more expensive than it is in Winona, Minnesota.
Speaker 5: The more expensive the space gets, and when you get into some of our businesses in Europe , it's more expensive than it is in one owner, Minnesota.
Speaker 6: But I feel good about our ability over time to continue to manage that. And, and leverage it, as I said with our FMI, that business is growing quite hand-simly and we grew our expense to 6%, we levered that nicely. Thanks so much for the.
But but.
But I feel good about the about our ability over time to continue to manage that.
Leverage as I said with the with our <unk> that business is growing quite handsomely and we grew our expense to 6%. So we levered that nicely.
Thanks, so much for the color best of luck.
Thank you.
Thank you. Your next question is coming from Tommy Moll from Stephens. Your line is now live.
Speaker 2: There's questions coming from Tommy Moll from Seabed, July . It is our lives. Morning and thanks for taking.
Good morning, and thanks for taking the questions.
You bet.
Speaker 6: I wanted to start on fasteners and ask whether it's possible to parse the down 2% DSR and 2, an MRO versus OEM component. And it's really the OEM side that's the crux of the question. But any context you could give there, then I'll have one follow up on OEM. Thanks.
I wanted to start on fasteners and ask whether it's possible to parse the down 2% DSR and two in MRO versus OEM component and it's really the OEM side.
Holden Lewis: And as we move into 2024, I know just yesterday, I was chatting with Casey and Jeff about some of that of what they're seeing. Because there's still a few closures on the horizon. Part of it's reminding folks that, you know, the openings are okay, too. And so I think we'll be in that 14500 range. So, you know, don't read anything into it moving up or down 20. And then since it wraps into the concept, what you will see is as the rate of closings moderate versus the last several years, you know, you're going to have a little bit less of an incremental.
That's the crux of the question, but any context, you could give there and then I'll have one follow up on OEM.
Speaker 6: Yeah, so what we're seeing in the quarter is you continue to have MRO fasteners down.
Yes.
What we're seeing in the quarter is you continue to have MRO fasteners down.
Speaker 6: And we actually had OEM fasteners that were still rising. The perspective you need to have though is...
And we actually had OEM fasteners that we are still rising the perspective, you need to have though is.
Speaker 6: We continuously are OEM fasteners grow as a proportion of the mix because they tend to benefit from the growth that are on site. So today, a lot of our growth is coming through on sites and therefore a lot of those new signings, those new implementations also bring in OEM fasteners. And so in the past, we've talked about OEM and I think people have been surprised that OEM hasn't gotten negative given sort of the behavior but if you go back to mid last year, OEM fasteners were...
We continue to see our OEM fasteners grow as a proportion of the mix because they tend to benefit from the growth in our on site. So today a lot of our growth is coming through on sites and therefore, a lot of those new signings those new implementations also bring in OEM fasteners and so in the past we've talked about OEM.
Holden Lewis: You know, sort of take out of costs than we've had over the last several years. We still believe occupancy is ultimately leverageable, you know, but, you know, you've had inflation at the same time that you've had closures and those things that tend to adopt that one another and that's going to moderate as you go into 2024 and beyond to some degree. So, you know, if I look at occupancy in the third quarter, we actually didn't leverage it.
Yes.
And I think people have been surprised that OEM hasnt got negative given given sort of the behavior, but if you go back to like mid of mid last year.
OEM fasteners were growing mid twenties.
Speaker 6: If you come to current period, it's growing low single digits. And so you've seen significant moderation in OEM fasteners as the production environment has softened over the past 12 months, but it's still growing because of the success we continue to have signing and implementing on.
If you come to current period, its growing low single digits, and so you've seen significant moderation and OEM fasteners as the production environment has softened over the past 12 months, but it's still growing because of the success we continue to have.
Holden Lewis: And, and. Part of the reason for that is within occupancy, we have two components, we have our branch and onsite network, we have obviously our distribution centers, but we also have our FMI, our vending and fast been. And the reason we classify that as occupancy, when we started vending 15 plus years ago, looked at it and said, vending machine is basically a shelf. We've taken a shelf out of the branch, we wrapped it in a metal box, we put that shelf in a customer's facility, but it's a shelf.
Signing and implementing on sites.
Speaker 6: That's helpful. Thanks, Holden. I guess to keep going with the same theme.
That's helpful. Thanks Holden.
I guess to keep going with the same theme.
Speaker 12: Some of the commentary you've offered today on the OEM side has...
Some of the commentary you've offered today on the OEM side has.
Speaker 12: has sounded similar to recent quarters. And recently, you talked about the destocking dynamic at customer locations, particularly for the OEM business. Is there anything you can do to parse?
Sounded similar to recent quarters recently.
You talked about the destocking dynamic at customer locations, particularly for the OEM business is there anything you can do to parse.
Holden Lewis: And we really challenged our district leaders to think about that as occupancy, we on our internal P and L, we classify it as occupancy, because if, if, if a branch grows from 100 to 150. And for simple purposes, let's just say that that 50,000 of growth is all vending. I still need a bigger building. And my occupancy grows because I have the depreciation and I be expense associated with my vending platform.
Speaker 12: real underlying demand there versus shorter product delivery cycles and maybe customers are just ordering later in their
Real underlying demand there versus shorter product delivery cycles, and maybe customers are just.
Ordering later in their production cycle.
Speaker 5: Yeah. You know, if you think about what we do,
Yeah.
If you think about what we do.
Speaker 5: In a perfect world where we're spying only on fasters.
In a perfect world, where we're supplying OEM fasteners.
Holden Lewis: And it was a way of more holistically thinking about it. Our FMI numbers, as you know, we're signing 95 devices a day. Our FMI grew six percent, our expenses within occupancy. And that was about to 55%. So our occupancy grew just under 4%. And about 55% of that related to vending. But even though we closed some branches and closed some locations, our rent has not gotten cheaper in the last 12 months.
Speaker 4: The customer isn't ordering it per se. Where's the client when they need it? And that shouldn't change down on the cycle. The question is, if you peer downstream from the manufacturing activity to our customer, or there's supply chain to the end market.
The customer isn't ordering it per se, we're supplying it when they need it.
And that shouldn't change depending on the cycle because the question is if you peer.
Downstream from the manufacturing activity to the to our customer or there.
Their supply chain to the end market.
Speaker 5: how much inventory is there? Because if there shouldn't be a different stage of where you're ordering OEM pass.
How much inventory is there because if.
<unk>.
There shouldn't be.
Different stage of where youre ordering OEM fasteners.
Speaker 4: The, the, the, the, the pole through is what the pole through is. Now, some of the, some of the changes from what Holden talked about a year ago, there was, there was elements of inflation in there, but there was also elements of,
The.
The pull through is what the pull through is now some of the some of the changes from what holds and talk about a year ago.
Holden Lewis: And we will continue to be challenged with that. One of the things we talked about on prior calls is a thing we call lift. And lift is about efficiency of where we're picking the product to replenish FMI vending today with FMI or broadly. But it also means if, if I have a, if I have 50 vending machines out of a, that are serviced out of a branch. And I don't need to stock all of that inventory in the local branch because I'm picking it in an automated distribution center in a highly efficient way.
There was elements of inflation in there, but there was also elements of.
Speaker 4: folks had had such an unstable supply chain for everything else fortunately the apartment with fastinal and their supply chain for fastener was great
Folks had had such an unstable supply chain for everything else. Fortunately there were partner with fast at all in their supply chain for fasteners was great.
Speaker 4: And I'm having a little fun with you there, but, but they might have had other stuff or their end markets, you know, possession is 9.10 so long so that they just ordered it because they were worried about getting it. And so I think you do have cases of downstream from our manufacturer customers. There's some stuff that piled up.
And I'm, having a little fun with you, there, but but but they might have had other stuff or are there end markets possess.
As soon as nine tenths of law and so they just ordered it because they were worried about getting it and so I think you do have pieces of downstream from our manufacturer customers.
Holden Lewis: Now that distribution, distribution center is in free. But I, but I also don't need to expand the footprint of my branch because I freed up 40 feet of shelving that was dedicated to fast vending in the past. But, but it's given us some challenges on the fact that occupancy has grown. And as you can imagine, the further you get from the middle of the country, the more expensive the space gets. And when you get into some of our businesses in Europe, it's more expensive than it is in one on a Minnesota.
There is some stuff that piled up but.
Speaker 4: I think that's worked through. I think the poll right now is the poll. I was talking with our leader in continental Europe and the other day and his business had ticked up.
I think that's worked through I think the pull right now is to pull I was talking with our leader in Continental Europe and the other day in his business had ticked up.
Speaker 4: And I was just asking some components about it. And he was talking about some of the transportation customers that they picked up. He said their businesses is pulling through what they're selling, but they're being very, very cautious about not getting ahead of anything. So I think there it's just true demand coming through.
And I'll just ask them some components about it and it was somewhat some of this transportation customers.
Picked up he said their business is pulling through what they're selling but theyre being very very cautious about not getting ahead of anything. So I think there it's just true demand coming through.
Speaker 6: Yeah, maybe another anecdote as well. You know, at the end of any given year, particularly years where demand is poor. Oftentimes we get suppliers that approach us to say, you know, we sold you something for a discount, you know, would you take some of this stuff off our hands so we can normalize our own production rates? And that's fairly typical.
Yes, maybe another anecdote as well.
Holden Lewis: But, but I feel good about the about our ability over time to continue to manage that and and leverage it as as I said with with our FMI. That business is growing quite handsomely and we grew our expense to six percent. So we levered that night.
At the end of any given year, particularly years years with demand is poor.
Oftentimes, we get suppliers that approach has to say.
We sold just something for a discount would you take some of this stuff off our hands. So we can normalize our own production rates and thats fairly typical.
Unknown Attendee: Leslie, thanks so much for the color, best of luck. Thanks. Thank you.
Speaker 6: And I'll say that still early, and we don't know what December's gonna look like in many respects, but we haven't seen as much activity from our suppliers inquiring about our willingness to enter into those kind of sort of year end types of deals. And what that might suggest to you is that a lot of our suppliers might have inventories that are pretty close to where they need to be.
And I'll say that.
<unk>.
It's still early and we don't know what December is going to look like in many respects, but we haven't been we haven't seen as much activity from our suppliers enquiring about our willingness to enter.
Tommy Moll: Next question is coming from Tommy Moll from Sieben's Relight, is that live?
Tommy Moll: Morning and thanks for taking the questions. Yeah. I wanted to start on fasteners and ask whether it's possible to parse the down 2% DSR into an MRO versus OEM component. And it's really the OEM side, that's the crux of the question, but any context you could give there and then I'll have one follow up on OEM. Thanks. Yeah, so what we're seeing in the corner is you continue to have MRO fasteners down.
Enter into those kind of sort of year end types of deals and what that might suggest to you is that.
A lot of our a lot of our suppliers might have inventories that are pretty close to where they need to be.
Speaker 6: Those are anecdotes. We're not even November , December yet. But I'm probably feeling somewhat encouraged about where the inventory levels within and throughout our supply chain are getting to.
Those are anecdotes, we're not even in November December yet.
But I'm, probably feeling somewhat encouraged about where the inventory levels within and throughout our supply chain or getting to.
That's all very helpful. Thank you both.
Tommy Moll: And we actually had OEM fasteners that were still rising. The perspective you need to have though is we continue to see our OEM fasteners grow as a proportion of the mix because they tend to benefit from the growth that are on site. So today, a lot of our growth is coming through on sites and therefore a lot of those new signings, those new implementations also bring in OEM fasteners. And so in the past, we've talked about OEM.
Speaker 2: The next question is coming from Ryan Merkel, from William Blair, your line is not lost.
Thank you next question is coming from Ryan Merkel from William Blair. Your line is now live.
Speaker 13: Hey guys, thanks for fitting me in. I had a couple questions on Gross Margin. So usually Gross Margin's kind of flat sequentialing a 3Q, and obviously it was up, you know, 40 bits. Can you just unpack what the drivers are there? Just because that was the surprise fact.
Yes.
Hey, guys. Thanks for fitting me in I had a couple questions on gross margin.
So usually gross margins kind of flat sequentially at <unk> and obviously it was up 40 bps can you just unpack what the drivers are there just because that was the surprise factor.
Speaker 6: Yeah, as I indicated in my preamble, mix wasn't quite the headwind that I expected it was going to be. And price cost was more of a tailwind than I expected it to be, relative to the guidance that I gave at the Q2 call.
Yes, as I indicated in my preamble.
Tommy Moll: And I think people have been surprised that OEM hasn't gotten negative given given sort of the behavior. But if you go back to mid last year, OEM fasteners were growing mid 20s. If you come to current period, it's growing low single digits. And so you've seen significant moderation in OEM fasteners as the production environment has softened over the past 12 months, but it's still growing because of the success we continue to have signing and implementing on sites. That's helpful. Thanks, Holden.
Mix wasn't quite the quite the headwind that I expected it was going to be.
And price cost was more of a tailwind than I expected it to be relative to the guidance that I gave at the Q2 call.
Those are the two pieces.
Speaker 6: And when you say price costs, you're talking on product, you're talking on brakes. It sounds like freight was the thing that you made in first driving the gross margin. Yeah, but in many cases, freight rolls into our product cost.
And when you say price cost you're talking on product you are talking to and breaks it. It sounds like freight was the thing that <unk> first driving the gross margin yes.
In many cases freight rolls into our product cost.
Speaker 6: Right? The biggest reason why there's been inflation and deflation over the past three or four years isn't the cost of steel. There's a bit of that. Has a lot more to do with the cost of moving products.
The biggest the biggest reason why there's been inflation and deflation over the past three or four years isn't the cost of steel there is a bit of that has a lot more to do with what the cost of moving product has been.
Holden Lewis: I guess to keep going with the same theme, some of the commentary you've offered today on the OEM side has sounded similar to recent quarters. And recently, you talked about the de-stocking dynamic at customer locations, particularly for the OEM business. Is there anything you can do to parse real underlying demand there versus shorter product delivery cycles and maybe customers are just ordering later in their production cycle? Yeah, you know, if you think about what we do in a perfect world or we're spying OEM fasteners, the customer isn't ordering it per se.
So our sort of price cost in our view and when we talk about price cost in many cases elements of freighter moved into our into into product price because we consider that our landed our landed cost to the shelf as opposed to when we're moving it around North America are moving around in our business now Theres transportation that does not fall into product costs. Those are our ram trucks in the field et.
Speaker 12: So price cost in our, when we talk about price cost, in many cases, elements of freight are moved into our, into product price. Yeah, because we consider that our landed cost to the shell as opposed to when we're moving it around North America or moving around in our business. Now this transportation that does not fall into product cost, those are our ramp trucks in the field, et cetera. But when you're talking about the cost of moving things from overseas to domestic, that goes into product cost as Dan says, part of landed. And that gets reflected in our price cost dynamics.
Cetera, but when youre talking about the cost of moving things from overseas to domestic.
It goes into a product cost.
So it's part of landed.
It gets reflected in our price cost dynamics.
Got it Okay. That's helpful and then.
Speaker 13: The coinchely you think maybe gross marks could come down a little bit more than seasonality. Is that because price cost is going to decline? In the reason they're going to lower faster prices to match the lower product cost? Or is it also this idea that maybe charging for freight is getting a little more?
Sequentially, you think maybe gross margin could come down a little bit more than seasonality is that <unk> price cost is going to decline and the reason there you're going to have lower fashion prices to match the lower product costs or is it also this idea that may be charging for freight is getting a little bit harder.
Holden Lewis: We're supplying it when they need it. And that shouldn't change then on the cycle. The question is, if you peer downstream from the manufacturing activity to our customer or their supply chain to the end market, how much inventory is there? Because if there shouldn't be a different stage of where you're ordering OEM fasteners, the poll through is what the poll through is. Now, some of the changes from what Holden talked about a year ago, there was elements of inflation in there.
Speaker 6: no i mean it's a few reasons why i think gross margin will come in a bit one of it is the seasonality talked about uh... the second thing i talked about a moment ago with simply you know freight revenues is often a little bit uh... in the face of a week or cycle and again we have a certain degree of leverage around our freight that
No I mean, there's a few reasons why I think gross margin will come in at day. One of it is the seasonality you talked about the second thing I talked about a moment ago was simply freight revenues has softened a little bit in the face of a weaker cycle and again, we have a certain degree of leverage around our freight that works.
Speaker 6: works great when the freight revenues are record levels and it's not quite as good when they're not.
Works great.
When the freight revenues are at record levels and it is not quite as good when they are not.
Speaker 6: That's the other element of it and then the moderation and price costs that I anticipate is It's probably probably has more to do with the field continuing to make modest adjustments Where they're required by contractor what have you to do so and again? We're talking about a relatively small
That's another element of it and then the moderation of price cost what I anticipate is yes, it's probably probably has more to do with the field continuing to make modest adjustments.
Holden Lewis: But there was also elements of Folks had such an unstable supply chain for everything else. Fortunately, they were partnered with Fastenal, and their supply chain for Fasteners was great. And I'm having a little fun with you there, but they might have had other stuff, or they're in markets. You know, possession is 9.10 so long so that they just ordered it because they were worried about getting it. And so I think you do have cases of downstream from our manufacturer customers.
They are required by contract or what have you to do so again.
We're talking about a relatively small number here.
Speaker 6: It's not dramatic. You know, but those are the moving pieces that I see playing out to a slightly, you know, slightly weaker. Fourth quarter, gross margin, well, the third.
It's not it's not dramatic.
But those are the moving pieces that I see playing out to a slightly.
Slightly weaker.
Fourth quarter gross margin relative to <unk>.
Alright, thank you.
Thanks.
Speaker 4: I see it's about two minutes before the hour and I realize everybody in this call has a busy week of learning conversations The engaged in thank you for your time I'm good luck in the fall and my thanks to the fastball team have a good day everybody. Thank you everyone
Thanks, Brian I see it's about two minutes before the hour.
Holden Lewis: There's some stuff that piled up, but I think that's worked through. I think the poll right now is the poll. I was talking with our leader in continental Europe and the other day, and his business had ticked up. And I was just asking some components about it, and he was talking about some of the transportation customers that it picked up. He said, their business is pulling through what they're selling, but they're being very, very cautious about not getting ahead of anything. So I think there it's just true demand coming through.
I realize everybody on this call as is a busy week of earnings conversations to be engaged in thank you for your time.
Good luck in the fall and my thanks to the fast on team.
Good day, everybody. Thank you everyone.
Speaker 2: Thank you. That does conclude today's telecompronsure webcast. Let me just connect your line at this time and have a wonderful day.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
Daniel Florness: Yeah, maybe another anecdote as well. You know, at the end of any given year, particularly years, years where demand is poor. Oftentimes, we get suppliers that approach us to say, you know, we sold just something for a discount. You know, would you take some of this stuff off our hands so we can normalize our own production rates. And that's fairly typical. You know, and I'll say that the it's still early and we don't know what December is going to look like in many respects, but we haven't been we haven't seen as much activity from our suppliers inquiring about our willingness to enter into those kind of sort of year end types of deals.
Daniel Florness: And what that might suggest to you is that a lot of our, a lot of our suppliers might have inventories that are pretty close to where they need to be. Those are anecdotes. We're not even in November, December yet. But I'm probably feeling somewhat encouraged about where the inventory levels within and throughout our supply chain are getting to. That's all very helpful.
Unknown Attendee: Thank you both. Thank you.
Ryan Merkel: Next question is coming from Ryan Merkel from William Blair. Your line is now live. Hey guys, thanks for fitting me in. I had a couple questions on gross margin. So usually gross margins kind of flat, the quenchling at 3Q. Now, obviously, it was up, you know, 40 bits. Can you just unpack what the drivers are there? Just because that was the surprise factor. Yeah, as I indicated in my preamble mix wasn't quite the, quite the headwind that I expected it was going to be.
Ryan Merkel: And price cost was more of a tailwind than I expected it to be relative to the guidance that I gave at the Q2 call. Those are the two pieces. And when you say price costs, you're talking on product, you're talking on brakes. It sounds like freight was the thing that you mentioned first driving the gross margin. You know, but you know, in many cases, freight rolls into our product cost, right? The biggest reason why there's been inflation and deflation over the past three or four years isn't the cost of steel.
Ryan Merkel: There's a bit of that has a lot more to do with the cost of moving product has been. So our price cost in our, when we talk about price, price cost, in many cases, elements of freight are moved into our into into product price. Yeah, because we consider that our landed, our landed cost to the shell as opposed to when we're moving it around North America or moving around our business. Now, this transportation that does not fall into product cost.
Ryan Merkel: Those are our ramp trucks in the field, etc. But when you're talking about the cost of moving things from overseas to domestic. That goes into product cost as Dan says part of landed and that gets reflected in our price cost. Dynamics. Got it. Okay, that's helpful. And then the quenchally, you think maybe gross marks could come down a little bit more than seasonality. Is that because price cost is going to decline in the reason they're going to lower faster prices to match the lower product costs?
Ryan Merkel: Or is it also this idea that maybe charging for freight is getting a little bit harder? No, I mean, there's a few reasons why I think gross margin will come in a day. One of it is the seasonality you talked about. The second thing I talked about a moment ago is simply, you know, freight revenues is softened a little bit in the face of a weaker cycle. And again, we have a certain degree of leverage around our freight that works great when when the when the freight revenues are record levels.
Ryan Merkel: And it's not quite as good when they're not that that's the other element of it. And then for the moderation and price costs that I anticipate is probably has probably has more to do with the field continuing to make modest adjustments where they're required by contractor would have you to do so. And again, we're talking about a relatively small number here. It's not it's not dramatic, you know, but those are the moving pieces that I see playing out to a slightly, you know, slightly weaker.
Ryan Merkel: Fourth quarter gross margin of the third. All right. Thank you. Thanks. Thanks, Brian. I see it's about two minutes before the hour. And I realize everybody in this call has as a busy week of learning conversations to be engaged in.
Daniel Florness: Thank you for your time. Good luck in the fall. And my thanks to the fast on team. Have a good day, everybody. Thank you, everyone. Thank you.
Operator: That does include today's telecom for the webcast.
Operator: Let me just connect your line at this time and have a wonderful day.