Q4 2024 Fastenal Co Earnings Call
Greetings and welcome to the festival 'twenty 'twenty four annual and Q4 earnings results Conference call. At this time, all participants are you listen only mode.
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Taylor: As a reminder, this conference is being recorded its now my pleasure to turn the call over to Taylor ramped up with the fast at all company. Please go ahead chiller.
Dan <unk>: Welcome to the fat in the company 2020 of our annual and fourth quarter earnings Conference call. Its called me hosted by Dan <unk>, Our Chief Executive Officer, Jeff Black, our President and Chief sales Officer, and Holden Lewis, Our Chief Financial Officer, and Pablo after after one hour and we 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.
Dan <unk>: The proprietary fasteners presentation and is being recorded by <unk> No no recording reproduction transmission or distribution of today's call is permitted without <unk> consent is causing audio simulcast on the internet via the fastener Investor Relations homepage Investor <unk> Com a replay of the webcast will be available under that that until March 1st 2025 at midnight Central time.
Dan <unk>: As a reminder, today's conference call May include statements regarding the company's future plans and prospects.
Speaker Change: Payments are based on our current expectations and we undertake no duty to update them 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.
Dan Florida: Thank you and good morning, everybody and welcome to the Q4 fast our earnings call and if.
If you would.
Dan Florida: In the flip book on page three.
Dan Florida: And.
Dan Florida: You know.
Dan Florida: Our business grew three 7% in the fourth quarter and an extra day, So daily was $2 one.
Dan Florida: Frankly, the frustrating finish to a challenging year.
Dan Florida: Our business.
Dan Florida: Gifts and loses leverage you know relatively quickly when when when our growth expands our growth contracts.
Dan Florida: And you saw evidence of that in the quarter, where we lost we lost him.
Dan Florida: <unk> and EPS came in at 46.
Dan Florida: Down about 2%.
Dan Florida: December.
Dan Florida: I think it's worthwhile to talk a little about December and then frankly, we've already moved on to 2025.
Dan Florida: Look at December from the standpoint of its two months going on there.
Dan Florida: The first roughly 15 days, so when I think of the Friday before Christmas.
Dan Florida: We were trending towards sales growth daily growth, we felt would be in excess of 3%, depending on which voice if you listen to when we were when we were comparing trends.
Dan Florida: Could have argued for 4%, but a 3% number.
Dan Florida: And in the last.
Dan Florida: You know that Christmas week, and then that new year's day week that collapsed.
Dan Florida: And.
Dan Florida: If I'm doing the math. It tells me if the first 15 days of the month were growing at 3% to 4%.
Dan Florida: Any weight that against the last five days and having all that evaporate that means in the last five days, we were probably negative.
Dan Florida: Somewhere between 9% and 12%.
Dan Florida: And.
However, we don't believe we believe the first.
Dan Florida: Part of the month is more indicative of where we are and where we're going to be in January and February than what we saw in the last area.
Dan Florida: If you look at.
Dan Florida: The.
Dan Florida: Data, what's happening we have a lot of anecdotal data, but I sat down on January 2nd with our vending team.
Dan Florida: And I said you know we have something unique here that we really start to understand better and that is we have vending machines and just over 20000 facilities on the planet.
Dan Florida: And the calendar is the calendar.
Dan Florida: And let's look at a baseline and I asked them, we get a lot of the information that comes in and we look at it in a weekly snapshots. So.
Dan Florida: Sunday to Saturday type snapshot.
Dan Florida: And I said.
Dan Florida: Look at the two weeks prior to the week the Christmas touches.
Dan Florida: And look at what our trends were and what our pace of business was in that timeframe.
Dan Florida: And then look at each week thereafter, so the week the Christmas touches the week that new year's touches the first clean week of January and the second clean week of January. So you can really look at that.
Dan Florida: Did something different happened there.
Dan Florida: The other thing that I asked them to do as we have.
Dan Florida: We're fortunate with a range of customers, obviously industrial is our biggest component.
Dan Florida: But in the vending area, we have a meaningful customer base.
Dan Florida: That represents non manufacturing entities and a handful of those are e-commerce companies, so and their trends would be completely different because they're really busy around the holidays.
Dan Florida: So take out our top 10 vending customers. So we did that and I said, let's analyze the rest.
Dan Florida: And excuse me the top 10 non manufacturing vendor customers. So if I look at and then I said determined a bright line of where you think the facility shutdown and the team came to the conclusion that if we're doing a 100 transactions on average a day.
Dan Florida: And that number goes to 25% or less we're going to consider that facility is essentially shut down.
Dan Florida: And.
Dan Florida: Because the only people there are maybe there is some maintenance folks that are in there.
Dan Florida: It's a good time to do maintenance, maybe theres a few production lines that are running because theyre behind or maybe there is an area you don't shut down like heat treatment, because it's too expensive to start it back up.
Dan Florida: So in 2000.
Dan Florida: And 'twenty.
Dan Florida: 'twenty two.
Dan Florida: Okay.
Dan Florida: 25% of the facilities, we sell into.
Dan Florida: That have.
Dan Florida: Vending.
Dan Florida: About 25%.
All the activity dropped more than 75% so they were running less than 25% of normal.
Dan Florida: In 2023 that was 30%.
Dan Florida: In 2024, that's 35%.
Dan Florida: So a meaningful uptick really sense the economy weakened in 'twenty to the industrial economy.
Dan Florida: We saw a meaningful uptick in each of the two years and that was accentuated this year.
Dan Florida: More telling was the week of new years.
So the week after Christmas, 5% were shut down.
Dan Florida: 6% were shut down this year at 17% were shutdown. So there were a tremendous number of companies that probably shut down the day after Christmas.
Dan Florida: And I don't know if they were open the Monday or Tuesday, before but the day after Christmas and these states shutdown in through January 2nd. They just said we're idling operations.
Dan Florida: That's that place very true to what we saw in our numbers. The only other item that was noteworthy is we looked also at.
Dan Florida: The activity is just down because if there is normally five work days in a week and youre down on the floor you would expect to be at about 80%.
Dan Florida: We did see the week after Christmas and two weeks after Christmas.
Dan Florida: Hey.
Dan Florida: Very strong increase in a number of customers that were down at least 25% and when I look at so last week that number.
Dan Florida: The.
Dan Florida: Activity at normalized as far as how many are shut down it's about 4%.
Dan Florida: But we saw an impact of the weather in the southeast.
Dan Florida: And we don't have this week's data yet.
Dan Florida: Anticipating is that that normalized and Holden will touch on a little bit of that when he looks at truck routes and things like that that we canceled during last week.
Dan Florida: So a lot of waiting into the weeds. There I hope that made sense. My guess is a few of you will have follow up questions for all the non us.
Dan Florida: After the call.
Dan Florida: But the next piece and I'll touch I'll dive a little deeper when we get on page two but in preparation for Investor day, We thought we would share some information we're going to be talking about and we're planning an investor day in March.
Dan Florida: We thought wed share a new view so when I joined the organization back in 1996 it was all about.
Dan Florida: Account numbers and dollars per active so active accounts, how many customers how many accounts bought from you and dollars per customer.
Dan Florida: And growing both of those over time.
Dan Florida: And we used to always say in a typical brands you had 100 active 100 active accounts 10 of those represented about 65 percentage of sales.
Dan Florida: If you would have looked at it not as an account base, but as a customer and what I mean by that is we might have three account numbers and are building because we are selling to the maintenance area, where selling until the production area and we are selling.
Dan Florida: Maybe a second production line. So you have three account numbers to track the activity, that's one customer, but we looked at it as three accounts.
Dan Florida: Three at the time I'll touch on that in a second on page two.
Dan Florida: Finally on page three we raised our quarterly dividend by roughly 10%. If you annualize the dividend. We just declared its about a buck 72, we feel very confident on our ability to continue the strong cash flow generation.
Dan Florida: Very indicative of our business model for many many years.
Dan Florida: So you see a new chart here.
Dan Florida: Probably an unfamiliar to look through the business, but.
Dan Florida: But some.
Dan Florida: The best way to address this and im not seeing my sheet of paper here. Unfortunately.
Dan Florida: Is too.
Dan Florida: Is to address a letter I did for our employees.
Dan Florida: And in that letter sorry, I'd to go back to my desk to grab it.
Dan Florida: I described to our employees what they are looking at in this information.
Dan Florida: Some quick definition each customer site is a roll up of revenue going into a unique site from a branch or onsite. It includes everything we provide whether it's dropped at a doc or a customer's desk.
Dan Florida: Applied VNS semi device shipped to the facility using a third party or picked up in our fastener location.
Dan Florida: Each customer site also rolls together all the individual accounts, our local team uses to summarize and build for the products and services we provide the.
Dan Florida: The information in the slide is based on analysis of roughly 270000 unique customer sites that we supply products into during 2024 again, it's a simple looking graphic but it tells a powerful story about our business.
Dan Florida: The top two buckets some.
Dan Florida: Summarize customers that are doing more than $10000 a month.
Dan Florida: And then the subset of that that do more than 50.
Dan Florida: So.
Dan Florida: The 10-K plus includes about 5% of the customer sites, we serve but represents about 77% of our total sales.
Dan Florida: Since 2017.
Dan Florida: Revenue through these customer sites has grown at a compound annual growth rate of 14%.
Dan Florida: When I look at these customers they really value, what we bring to the marketplace and we've been incredibly successful.
Dan Florida: In 2024, there are about 13000 customer sites in this group again about 5% a 270000.
Dan Florida: Which translates into about 54 sites in the average district 240 districts across our business the.
Dan Florida: The average customer site spends about spent about 38000 per month and the number of 10-K customer sites has increased about 9% a year since 2017.
Dan Florida: Thanks to the strength of our onsite program. There's a subset of this group that has grown even faster the customer sites, where spend is at least 50000 per month since 2017 revenue through the subset of customer sites has grown at a compound annual growth rate of 18% the scalable.
Dan Florida: This business changes the customer site economics, it allows us to operate more cost effectively hence the onsite program.
Dan Florida: This in turn expands the resources, we can provide it.
Dan Florida: Proves the opportunity for the customer and professional in 2024, there were 2547 customer sites in this bucket about 1% of the total sites we serve.
Dan Florida: Which translates to about 11 customer sites in average and an average district since 2017, the number of 50 K plus customers has grown 16% per year. So we've heavily heavily talked about onsite acquisition is and as you see of this 2500 about 2000 of them are physically in an onsite.
Dan Florida: We will talk in March about how we intend to deemphasize.
Dan Florida: Onsite numbers and changed it to talking about 50, K plus customers.
Dan Florida: We believe that positions the best story of telling the business to make it clear of what we're what we're striving to accomplish and how successful we are at that endeavor.
Dan Florida: On the lower half of the slide there are two buckets of customer sites, where we appear to have successful here's some thoughts on these <unk>.
Dan Florida: Customer sites spending between five and 10000 per month represent about 4% of the customer sites we serve.
Dan Florida: In 2024, there are about 10000 customer sites in this bucket roughly 42, and an average district and we've added about 4% more sites per year to this bucket since 2017.
Dan Florida: This would be mediocre except for one fact, we've been incredibly successful with many other customer site for me in this group in fact, many have become 10-K plus customer sites over the last seven years.
Dan Florida: This success has been driven by your efforts to introduce our supply chain.
Dan Florida: The transformational capabilities using F&I onsite production parts MRO products and many industrial services in fact.
Dan Florida: <unk> industrial services broke $100 million in revenue for the first time in 2024.
Dan Florida: It's been great for those customers for our employees for our shareholders and for our suppliers in this slide our performance isn't mediocre. However, its not great either that 4% CAGR should probably be upper single digits, if not 10%.
Dan Florida: The final customer site less than 5000 per month has borne the brunt of changes in our business in the world over the past several years.
Dan Florida: A decade of statistically closing locations COVID-19, and its impact on how customers purchase product think e-commerce, the removal products from our previously stock in our distribution centers.
Dan Florida: We reversed in 2024.
Dan Florida: Our strategic decision regarding sales time allocation and maybe some slippage in execution by the fast organization.
Dan Florida: I believe the critical aspect of this group as you closed a lot of locations that customer that sees us as convenient but not special that business falls off the way you make that special.
Dan Florida: As you push harder on your e-commerce capabilities and what it means for unplanned spend because what that do does it benefits every customer bucket you see on this page because we're more than planned spend where everything they need.
Dan Florida: Flipping to page five.
Dan Florida: Onsite, we signed 56 in the quarter.
Dan Florida: So we finished the year with 2031 increase of about 12% of what we saw a year ago customers and onsite World grew mid single digits. We did see similar to what we saw in 2000.
Dan Florida: Older Contingence of onsite go negative during the year and it is not uncommon on a call with a district manager to learn about two or three or four customers where their business is down 40, 50, 60, 70%, where it was a year ago. That's a sign of what the industrial economy is taking away.
Dan Florida: Our execution and our ability to take market share as a sign of how we do self help and fight back.
Dan Florida: All told we signed 358 onsite in 2024, we signed 326 last year, so an increase not at our goal, but a meaningful increase.
Dan Florida: Signings that are consistent with previous peaks in 2019, and the year before Covid and 2022, the first year, we came out.
<unk> technology huge huge aspect of the business here and strong success.
Dan Florida: We broke 100 miu signings per day for the first time, we feel.
Dan Florida: Very good about.
Dan Florida: How we exit the year and what that means for 2025.
Dan Florida: And in the in the fourth quarter.
Dan Florida: <unk> technology touched about 44% of our revenue versus 42 39 in the last two years.
Dan Florida: And we established a goal of 28 to 30000 Emmy used for 2025 versus the 28000, we just signed.
Speaker Change: Holden touched on that a bit and our capex expectations.
Dan Florida: E Commerce.
Speaker Change: A good story not a great story.
Dan Florida: <unk> grew by 28%.
Dan Florida: Each procurement, where we have established customer relations continues to grow almost 40% 37, six however, the E. Commerce piece that contains web we still struggle there.
Dan Florida: Putting double down efforts into that we've realigned some teams to <unk>.
Dan Florida: Make that a more relevant part of our business. All told you take E business in F&I technology about 62% of our sales just over 62%.
Dan Florida: Touch our digital footprint our goal is to get that to 63 in 2024, so just shy of that number.
Speaker Change: Our goal for next year is 66 to 68 and before I turn it over to Holden I just want to touch on a couple of things.
Dan Florida: First off.
Speaker Change: Some comments that Holden made to our regional leaders and our Vps. This morning, he talked about in 2020 for a cost structure that was effectively managed.
Speaker Change: And in one challenge I gave to the group.
Speaker Change: I believe our incremental margin will be stronger in 2025 and.
Speaker Change: And the challenge to them is.
Speaker Change: As as our momentum takes us through the year and time will tell what the economy allows that momentum to shine through as but as our momentum takes us into 2025. There is a lot of expenses that we've been squeezing really tightly on in the last couple of years, we have to maintain that because it puts us in a position.
Speaker Change: <unk> to allow for the reload of bonuses, we have a large group of folks within fast and all that haven't seen bonuses for close to two years year and a half at least and we need we need to allow the inherent capabilities of fast and all to reload that and the best way to do that is to get the revenue growth capture the gross profit.
Speaker Change: <unk> and manage our expenses incredibly well the <unk>.
Speaker Change: Other thing I touched on with the group. This morning was.
All of you saw in December Holden announced his decision to leave Arsenal effective April.
I think back to when.
Speaker Change: When Holden joined the organization I think back to that conversation you had with me in December when he told me I think it was probably a hard conversation for at least I hope it was.
Speaker Change: And.
Speaker Change: When Holden joined our organization back.
Speaker Change: A number of years ago, what we were looking for in a CFO was somebody to bring in a fresh perspective.
Speaker Change: Very analytical look who could pick a part of the business maybe in ways that the previous CFO into and give it a new set of eyes and from that I want to thank thank Holden for for what he brought to our organization from the standpoint of.
Speaker Change: Somebody that didn't grow up in the organization, but knew a lot about the industry and also had a keen mind towards analysis.
Speaker Change: The other thing that it will.
Holden Lewis: Holden I think.
Jeff Black: Saying to Jeff and Jeff stepped into the president role here at last fall is it allows Jeff the opportunity Jeff what's the opportunity to figure out who are who are CFO should be for our next 10 years.
Jeff Black: What skill set are we looking for to serve the business today at close to $8 billion versus the business.
Speaker Change: Eight years ago that around four and so I wish holding well and I applaud the humility to recognize that maybe Jeff needs a different CFO in the future.
Jeff Black: And finally before that comment sounds like Florida is out the door.
I thought I'd share conversation I had with my kids and in August we do a family vacation every year in our kids are in their late teens or twenties now and they ask me Hey, dad, what does it what does it mean being CEO versus president and I said, yes, 10 people here to get 13 different answers here's what it means to me.
Jeff Black: I think of the CEO side of the business as.
Jeff Black: As you are focused on the strategy, where youre going.
Jeff Black: And you are focused very keenly on what that means for people development and how and how the organization.
Jeff Black: Position itself for what it's going to be become whereas the president is much more about executing what youre doing every day every month every quarter every year.
Jeff Black: But I said.
Jeff is stepping into that president piece, but he is also stepping ae's training for that <unk>.
Jeff Black: But he still has his first title and that as Chief sales officer.
Jeff Black: And.
Jeff Black: As long as.
Jeff Black: As long as he has that title and even when he gives it up his number one priority.
Jeff Black: Is how we're executing to grow the business and the part of our strategy that's about growing the business.
Jeff Black: That's his focus.
Jeff Black: When we get to 10%, we can change that focus anyway, I'll turn it over to Holden.
Holden Lewis: Great. Thanks, Dan.
Holden Lewis: Yes, it was a very difficult conversation just so you know.
Holden Lewis: But this has been a tremendous opportunity I just want to make sure all investors understand IV unique opportunity to go try something different but this has been it's been an honor to work for fast at all and.
Holden Lewis: This is a great organization and.
Holden Lewis: And a great opportunity so.
Holden Lewis: Jumping into into slide six I know what the investors want to hear is what's going on with the quarter.
Holden Lewis: Sales in the fourth quarter of 2024 were up three 7% daily sales were up two 1% daily sales growth range from one 8% to two 1% throughout the year, our consistency that makes sense in the context of a PMI that spent most of the year signaling modest contraction in manufacturing.
Holden Lewis: The attributes of our sales in the fourth quarter of 2024 were similarly comparable to prior quarters.
Holden Lewis: Morrow oriented products outperformed OEM.
Holden Lewis: Re-entered products with safety up four 8% in fasteners down one 4% larger customers outperformed smaller customers with national accounts up four 2% and non national accounts down 1% and.
Holden Lewis: And manufacturing end markets were up three 3% outperforming non manufacturing end markets, which were down <unk>, 3% headlined by a four 1% decline in nonresidential construction and an 11, 3% decline in reseller there.
Holden Lewis: There is not a lot of variation in our high level top line trends through 2024.
Holden Lewis: That said the fourth quarter of 2024 can't be fully evaluated without addressing the cadence of activity in December Dan made this point is preventing transactions in his review we see the same thing in daily sales to our top 100 customers, which grew low to mid single digits. In the first 15 days of December but declined more than 20% in.
Holden Lewis: And the final five days, while holiday related production slowdowns occur most years sustained marketplace weakness in the mid week timing of Christmas and New year's produced uncommonly sharp cuts in December of 2024, we believe that the last five business days of December swung the months from trending towards 3% plus growth to finishing flat.
Holden Lewis: Now zooming back out we remain encouraged heading into 2025, the PMI is still sub 50 underlying business activity.
Holden Lewis: Activity remains slow and to start with January was impacted by new year's and winter storms. The latter disrupted business activity in our southern U S regions, reflecting in our needing to cancel 6% of our truck routes through January 10th.
Holden Lewis: On the other hand.
Holden Lewis: Regional leadership sites broadening post election customer optimism for 2025.
Holden Lewis: We continue to sign new business at a strong rate with our contract base growing double digits, including up 12% in December. We believe these wins are beginning to be reflected in sales or monthly daily sales rate exceeded the historical sequential in three of the last five months and we believe it would have been for the last five but for how December finished.
Holden Lewis: As we move forward, we anticipate we will see revenue from these customer signings continue to build.
Holden Lewis: Now to slide seven.
Holden Lewis: Operating margin in the fourth quarter of 2024 was 18, 9% down 120 basis points year to year gross margin was as expected on top of that our SG&A dollars in the fourth quarter of 2024 were largely in line with the first three quarters of 2024 as investments in on site staffing technology and data and sale.
Holden Lewis: Travel were offset with greater control over them over more discretionary costs.
Holden Lewis: We continue to believe we are managing cost effectively we expected operating margin to decline due to the effects of slow growth as we've seen all year.
Holden Lewis: The deleverage was sharper in the current period than experienced in the first three quarters of 2024 reflects our seasonally lowest volume quarter and the holiday shutdown impacts.
Holden Lewis: Gross margin in the fourth quarter of 2024 was 44, 8% down 70 basis points from the year ago period, primarily from product and customer mix. We also experienced product margin pressure, which was partly offset by higher rebates, reflecting year end opportunities to assist suppliers and leaning out their inventory.
Holden Lewis: The product margin pressure was largely due to shipping with higher container cost effecting fasteners and expedited shipments to warehousing customers during the holiday season affecting safety products.
Holden Lewis: We have made price adjustments to offset the higher container costs and the expedited shipments should not recur, meaning most of the product margin pressure in the fourth quarter of 2024 should not carry into the first quarter of 2025.
Holden Lewis: SG&A was 25, 9% of sales in the fourth quarter of 2024 up from 25, 3% from the year ago period.
Holden Lewis: The largest impacts from higher lease costs as we refresh our field pickup fleet and a currency revaluation on certain assets that relates to the stronger dollar the.
Holden Lewis: The effects of areas, such as <unk> expense and general insurance costs were marginally negative.
Holden Lewis: We continue to believe that as growth picks up we will leverage the P&L.
Holden Lewis: Putting it all together, we reported fourth quarter 2024, EPS of <unk> 46.
Holden Lewis: Flat with the fourth quarter of 2023 now.
Holden Lewis: Now turning to slide eight.
Holden Lewis: We generated $283 million in operating cash in the fourth quarter of 2024 or 108% of net income.
Holden Lewis: We generated $1 2 billion in operating cash for the full year of 2024 or 102% of net income or cash conversion in both periods was below the comparable periods. In 2023. However, this mostly reflects the effects of inventory buildup and subsequent wind down related to tight supply chains being fully passed us and review the conversion.
Holden Lewis: Rates in 2024, as being largely consistent with expectations. We continue to carry a conservatively capitalized balance sheet with yearend debt being five 2% of total capital give.
Holden Lewis: Given our current strong capital position and confidence in our future cash generating capability of our model, we increased our dividend by 10%.
Holden Lewis: Accounts receivable were up one 9% driven primarily by sales growth inventories were up 8%, we added 30% to $35 million related to our initiatives to improve product availability and our in market locations and improved picking efficiencies in our hubs.
Holden Lewis: Opportunistic year end buys added roughly $10 million and we added stock to support customer growth, including anticipated incremental growth in the warehousing space.
Holden Lewis: And we accelerated some inventory scheduled for future delivery in the current periods ahead of potential new tariffs.
Holden Lewis: Accounts payable were up eight 9%, reflecting the increasing inventories.
Holden Lewis: Net capital spending in 2024 was $214 million up versus 161 million in 2023, but below our projected range of 235 million to $265 million.
Holden Lewis: This related to lower purchases of <unk> and fewer installations of modular picking units in our end market locations looking.
Looking to 2025, we anticipate net capital spending of $265 million to $285 million, we're anticipating another step up in F&I signings, which will require additional device spend we're increasing spend to reflect projects that moved from 2024 to 2025 and an expansion of projects aimed at developing additional digital capabilities.
Holden Lewis: Lastly, distribution center spending is up to reflect completion of our new Utah hub. The beginning of construction of a new Atlanta hub and incremental automated picking additions across our hub network. We believe net capex is likely to be 3% to three 5% of sales over the next few years, an increase of two 7% to three 2%.
Holden Lewis: Largely related to greater incremental capacity upgrades across our distribution Center network.
Holden Lewis: Now before moving onto Q&A, a couple of items.
Holden Lewis: Keeping.
Holden Lewis: First a little color on our decision to not provide onsite signings targets beginning in 2025.
Holden Lewis: When we first unveiled the onsite strategy in 2014 to 15, we were challenged with driving internal participation in building scale to justify the investment in the initiative.
Holden Lewis: Today onstage represent nearly 45% of our sales and our fully integrated into the value proposition we offer customers getting to this point has prioritized wallet share with existing customers over winning new customers and at this time it is appropriate to seek greater balance between those two things on sites will continue to provide a market advantage for faster.
Holden Lewis: And we will continue to sign them. However, our success is not solely defined by how many onsite. We signed it is defined by how many customers. We signed that are doing or can do 10-K or more in sales per months, whether that's through an on site or through a branch to ensure internal and external stakeholders are focusing on organizationally meaningful data in the first.
Dan: 2025, we will begin providing customer data along the lines of what Dan discussed at the start of this call.
Dan: Second we are planning to host an investor day in Minneapolis on March 13th we plan on providing an update on our end market network, which remains critical to our success, but has evolved in the last few years to support our key account strategy. This will be reinforced through the tour of our local branch that is a great representation of our industrial supply house profile.
We will discuss not only our tools and capabilities, but how we deploy them in a truly integrated fashion to provide unparalleled value to our customers in terms of supply chain cost risk and scalability.
Dan: And last we will do a deeper dive into the strategic plan. We developed throughout 2024, which is heavily centered on the digitization of tools and capabilities, including AI to improve our service and addressable and addressable market, we will be sending out invites to the event over the next week with that operator, we'll turn it over to begin the Q&A.
Dan: Thank you, we'll now be conducting a question and answer session. As a reminder, we ask you. Please ask one question one follow up then return to the queue if you'd like to replace the question queue. Please press star one at this time one moment. Please while we poll for questions and as a reminder, please ask one question one follow up then return to the queue.
Speaker Change: Our first question is coming from Ryan Merkel from William Blair. Your line is now live.
Ryan Merkel: Hey, good morning, and thanks for taking the questions and Holden Congratulations it's been great working with you and wish you all the best.
Speaker Change: <unk>.
Speaker Change: So my first question.
Speaker Change: I guess I want to ask about the shutdowns and then sort of the comment that customer sentiment is more optimistic.
Speaker Change: How do you marry those two comments why do you think the shutdowns. This year were so intense and then what are you hearing on customer sentiment as you can be more specific.
Speaker Change: Do you expect trends to improve in 'twenty, five and why do you think that.
Good morning, Ryan and thanks for the question.
Speaker Change: I'll touch on the shutdowns piece.
Speaker Change: And then how that counters the sentiment I think every.
Speaker Change: Organization.
Speaker Change: January one.
Speaker Change: And it's a new year.
Speaker Change: And it's either.
Speaker Change: And it's always what can we do to improve upon what we just did whether you had a great year weak year.
I think many people are just wired so.
Speaker Change: But I also look at it and say you know there might be some folks that just got through.
Speaker Change: At this stage 'twenty, 'twenty, four and they're kind of like.
Speaker Change: It's been a it's been a mediocre year.
Speaker Change: And.
Speaker Change: We've been we've been leaning up our balance sheet may we've been leaning up or our inventory whatever it might be and that's this shutdown that get the equipment fixed up and ready for the new year get everybody's batteries recharged and I think you had a lot of folks that didn't have a reason to stay open.
Speaker Change: Over the holidays and so they chose not to.
Holden Lewis: Holden if you want to add on the sentiment part from a customer standpoint, you talked to a lot of our regionals, but but I think a lot of folks are looking at their trends.
Speaker Change: And does that make them feel better the.
Speaker Change: The recent election, and what that might mean for regulation, probably is a lift a burden from the a lot of our customers to marketplace Holden, Yes, I mean the.
Speaker Change: When I talked about the improving sentiment what I'll say is it in November when we reported sales I mean, there is clearly post election, a step up in terms of what the Rvp's are feeding back to me about.
Speaker Change: People are feeling a bit better about things I think theres, just the theres value in knowing and I think that a lot of uncertainty.
Speaker Change: <unk> dissipated once we got through the election, I will say that the tone from the Rvp's was fairly universal about that sentiment continuing to get better heading into next year and so that's a fairly qualitative read on things, but nonetheless.
Speaker Change: Overtime learned to really respect the feedback of the RVP because they really do feel what's going on in the marketplace in real time and pretty intimately. So I think there's value in that but I also would argue that im not sure. There is an inconsistency between aggressively shutting down in the back half of December and feeling better about 2025.
Speaker Change: Again as Dan indicated there is something magical about moving from $12 31 to one one.
Speaker Change: And I think there are a lot of companies and in the face of a second challenging year.
Speaker Change: We're looking to clear the decks and move into 2025.
Speaker Change: There's a little overhang from inventory and things of that nature as they can and I think that theres, probably a relationship between.
Speaker Change: Exactly what happened in the back half of December in the very beginning of January and customers feeling better about what comes next.
Speaker Change: Yes.
Speaker Change: I think that makes sense that's helpful.
Speaker Change: And then my second question.
Speaker Change: Thanks for the new disclosure and it makes sense and I think I'm, a little surprised by how concentrated your sales or its more than I thought I just want to make sure Im understanding this right 1% of sites or roughly 50% of sales in those sites tend to be on site like I think is what you.
Speaker Change: You said should we be reading that as 1% of onsite, which is like 20 on sites is 50% of sales my understanding that right.
Speaker Change: No no no no.
Speaker Change: We've always said when we started the onsite program a number of years ago. We said you know that time, but 10% of our revenue came from.
Speaker Change: A few hundred onsite.
Speaker Change: And what we saw was onsite was a lot of times our branch personnel.
Speaker Change: There was business. They didn't go after in a facility because the economics didn't work for them on how they were paid because.
Speaker Change: Not all of the spend is 50%.
Speaker Change: There's a bunch of production business that might be at in the thirties.
Speaker Change: Theres some other business that might be in the <unk>.
Speaker Change: And the way our cost structure works, if you think back to the time, our cost structure and the branch was 30% of sales 32% of sales.
Speaker Change: And you didn't want 35% margin business, but in an onsite when we started talking about it our average onsite had gross margins between 35% and 40, but the operating expenses were just just shy of in the upper teens. So from a from a pre tax and a return standpoint. It was a nice business, but you have to think about it differently had to re juggle.
Speaker Change: <unk> everything.
Speaker Change: And so we have roughly 2000 on sites and Thats, a little bit over 40% of revenue.
Speaker Change: In addition to those 2000 onsite we have another 500 customers roughly where we do 70000, a month 60000, a month 80000, a month, but we do it out of the branch and the and the branches just the general manager and that brand has looked at and said this I might get hurt on my pay plan, but this is good business for us.
Speaker Change: And it's good business for me and the team and.
Speaker Change: And it's good business and you think about it as a business person.
Speaker Change: And so.
Speaker Change: That.
Speaker Change: Those 25 100 locations.
Speaker Change: Represent about 48% of sales.
Speaker Change: And they all do more than 50000, a month, but there are a subset of customers that do more than 10000, a month that represent over 75% of our sales, but but but Ryan that's no different than if you think about it years ago, Hey, we have 100 active customers in this branch and 10 of them represent 65, 70% of sales and it was.
Speaker Change: Probably more like 80% of sales, but we didn't measure it that way because there was a bunch of customers that had multiple account numbers if that makes sense right.
Speaker Change: Yes, yes, and the color I may add to that is first off I'm not sure that 80 20 is unique the fastballs business I don't know I don't know anybody else's businesses, but I would suspect that there is an element of 80 20 in most businesses that are out there.
Speaker Change: Grant you were more like 810.
Speaker Change: But the other thing I think to think about is where we are where we're genuinely special in the marketplace is in engaging with customers that have very large very complex supply chain those tend to be larger multinational global or national businesses.
Speaker Change: And so that's because of the breadth of our toolbox in the ability of our services to uniquely affect that complexity.
Speaker Change: Those types of customers tend to tend to come to our business fairly organically simply because of that capability that we have in contrast to perhaps a purely transactional model, which might get you a lot more customers, but fewer sales right. So theres an element of our model in there as well.
Speaker Change: Added Nugget I will give you is if you go back to 2007, when we announced we were going to.
Speaker Change: We were seeing saturation in the location count and we were slowing it down and we were turning energy into things like automating our warehouse.
Speaker Change: Things like vending and what we call the pathway to profit we said here's the next step of our business at that point in time customers doing more than 10000 a month.
Speaker Change: There were about 2600 of them.
Speaker Change: And represented about 40% of sales.
Speaker Change: And so in.
Speaker Change: The years since 2007.
We weren't opening locations as fast, but we were rolling out vending devices.
A number of years later, we're rolling out onsite.
Speaker Change: And we're getting better and better and better at non fasteners, and so fasteners keep dropping as a percentage of our business.
Speaker Change: Our business blossomed, as we got deeper into that and our ability to grow actually accelerated.
Speaker Change: And.
Speaker Change: And so the concentration if you will is a sign of success with that group of customers because.
Speaker Change: When.
Speaker Change: If you look at customers doing less than say 5000 a month.
Speaker Change: They don't necessarily benefit from bending because if they did they won't be they won't be a $3000 month customer there'd be a $9000 a month customer because they have enough.
Speaker Change: The things we bring to the table.
Speaker Change: And to the supply chain benefits the business more.
Very helpful. Thanks, guys that's it on.
Speaker Change: Thank you. Your next question is coming from David Manthey from Baird. Your line is now live.
David Manthey: Yes, hi, good morning, Yes, clearly theres always been a 80 20 rule at fast at all but as we look at slide four and think about the big picture.
Speaker Change: And maybe you'll elucidate this.
Speaker Change: At the Investor day, but is 96% of the customer sites generating 22% of sales is that an opportunity or is it just the way. It is how do you view that.
Speaker Change: It's always an opportunity when I have throughout the course of the year, along with Jeff and hold in a handful of our leaders we have discussions with every one of our district managers.
Speaker Change: And in there we talk about.
Speaker Change: What's the opportunity and history has told me that we have.
Speaker Change: Approaching 10 on.
Speaker Change: Sites per DM, its about seven or eight on average onsite per DM.
Speaker Change: But we have identified the potential on average for 58.
Speaker Change: And so it's.
Speaker Change: It's an incredible opportunity in the marketplace.
Speaker Change: We're really really good at planned spend.
Speaker Change: And <unk>.
Speaker Change: And we're really really good at helping with supply chain and you think about what are some of the macro things going on in the marketplace right now one of the macro things is.
Speaker Change: Theres not enough.
Speaker Change: People.
Speaker Change: The jobs.
Speaker Change: This year five years from now 10 years from now so how does the manufacturer solve that well one of them might be hey, this spring and fast on help with supply chain. They are incredibly good at it.
Speaker Change: With their vending platform they move the product closer to the point of views that creates productivity in our facility and Oh by the way what we're doing with 10 people in a very inefficient manner fast and all I can do with three or four.
Speaker Change: And they can actually increase the level of supply chain service in my facility and we operate more effectively I see it as an incredible opportunity and Thats why we continue to invest in the things, we're doing and we're going to touch on a whole bunch of that data at our at our Investor day as well.
Speaker Change: I'm more excited about our opportunity to grow in the next 10 years than maybe I was 10 years ago.
Speaker Change: Yes, and I would probably add to that.
Speaker Change: You are right to think about it as the opportunity, but lets not narrowed that down too much either.
We measure we are successful in the buckets that were successful in because we bring something special to that type of customer.
Speaker Change: But we continue to broaden what it is that we're special that we didn't used to be special at safety, but the introduction of vending brought that into into a realm of specialness for fast and all that I think others have not figured out of scale the way that we have.
Speaker Change: I think the same is true for that onsite world.
Speaker Change: Is there an opportunity and so were very good with special in that planned world is there an opportunity to over time move down these buckets more effectively by figuring out ways to get special and service customers in different ways. Those are opportunities not necessarily for the next six months or what have you, but those are opportunities that exist over the next <unk>.
Speaker Change: <unk> 36, five years 10 years time.
Speaker Change: There is tremendous opportunity that exists within these buckets, but whether you want to think geographically by product what have you.
Speaker Change: Just to double down because we're doubling down on the question.
Speaker Change: I'll throw a little tidbit in two when you're holding just touch on we get better moving down those bucket sizes clearly the the.
Speaker Change: The bottom two buckets on that list.
Speaker Change: We're impacted by by Covid and by our decision a decade ago to not just slowdown opening branches, but to actually consolidate branches.
Speaker Change: In that less than five K bucket, what I can tell you is 98% of the decline in that bucket from a standpoint of both customers and the revenue came from there's two populations in that bucket.
Speaker Change: Theres customers that spend between 505000 that.
Speaker Change: That represent about 90% of the dollars in that bucket.
And and.
Speaker Change: And there is and they averaged about $1000 a month with us.
The majority of the customers represent about 10% of that bucket.
Speaker Change: And they on average spent $49 a month with us.
Speaker Change: And so it's really a case of being specially on all of them.
Speaker Change: But I believe over time all of these buckets grow.
Speaker Change: Because we as we become better and better at unplanned span the bottom two buckets is more about <unk>.
Speaker Change: Sales that looked like unplanned spend than planned spend and then you are successful in all of them.
Speaker Change: Got that.
Speaker Change: Thats smallest bucket customers under 500, it's a big group of customers.
Speaker Change: But it's about 2% of sales.
Speaker Change: And so it's really.
Speaker Change: In your energy and focus on being great supply chain partner to this group of customers, but that conveyor we have gone across North America.
Speaker Change: Anybody can grab a box office.
Speaker Change: And with our local footprint.
Speaker Change: We're better than anybody else out there or we could be.
Speaker Change: Thanks, Dave Okay. That's helpful. Thanks, a lot Dan.
Speaker Change: Maybe you can just touch on tariffs and for someone else had asked us to but yes.
Speaker Change: So obviously a hot topic right now could you talk about how those pass through your contracts and how Youre planning on.
Speaker Change: Making those happen assuming that comes down the pipe here.
Speaker Change: As we've talked on previous calls.
Speaker Change: We had to get good at tariffs.
Speaker Change: We were I mean, we've I think we've always been excellent supply chain, but we had to get good at tariffs back in the 2018 timeframe 2017 timeframe.
Speaker Change: A lot of times, we focus on tariffs that have been that come into the United States with tariffs are not something thats unique to the United States.
Speaker Change: Jeff and leading our international business in years past.
Speaker Change: We've been going through tariffs coming into Mexico for the last year and a half we've been going.
We've had tariffs as it relates to our Canadian market or other non north American businesses, so that scale isn't that knife isn't Dell.
Our ability to be surgical.
Speaker Change: We have great tools to manage that we have great ability to give visibility to our customers because it's not just about what we do and.
Speaker Change: And how to make sure we manage it in our P&L.
Speaker Change: That's important everybody on this call, but let me wrong.
Speaker Change: It's really important is our ability to give visibility to that to our customer and.
Speaker Change: And allow our customers make better decisions. Because then we're special to them, we're not special just us where special to both of us and Thats a great supply chain partner.
Speaker Change: And we're really really good at that we had a lot of conversations with our unrelated to tariffs we had a lot of conversations with customers and we diverted.
Speaker Change: Of containers late in the year, because there was a risk of a port strike and we were able to study all of the containers coming in and had conversations I think it was about 40 containers that we had.
Speaker Change: $35 40 containers, when we have conversations with customers and said we believe the best.
Speaker Change: The best risk avoidance for your business.
Speaker Change: We'll spend a little bit extra money, we'll bring them into the west coast, and we're bringing across North America, instead of bringing to the east coast because that shuts down Thats a production item that you need in February or that's something you need in March and we do not want to put your business at risk and we diverted $35 40 containers as it turned out it didn't need to be but that's what.
Speaker Change: A great supply chain partner does.
Speaker Change: But we are we are well poised to communicate and react to whatever happens and it's going to be an unpredictable world starting in on January 20th.
Speaker Change: Frankly, it's been an unpredictable world were less 10 years, so that's not new.
Speaker Change: Just maybe the.
Speaker Change: The intensity of how that happens quickly might change to.
Speaker Change: Thanks, a lot there.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Thank you. Your next question is coming from Tommy Moll from Stephens. Your line is now live.
Tommy Moll: Good morning, and thank you for taking my question.
Speaker Change: Good morning.
Speaker Change: Dan you made a comment early about e-commerce, and I think a nexus there with unplanned spend and an opportunity to improve can you just unpack.
Speaker Change: A little bit for us maybe give us a teaser of what's coming here in March.
Speaker Change: So.
Speaker Change: Some stuff we've talked about we've talked about.
Speaker Change: The fact that.
Speaker Change: Tom.
Speaker Change: We expanded the stocking levels of certain skus in our distribution centers.
Speaker Change: In 2019, we pulled back some stuff that was less common than in hindsight.
Speaker Change: I wasn't a mistake and we reverse that.
Speaker Change: There's three aspects to it one aspect to it is when you pull that from the shelf and distribution you create a lot more work for the local team because they have to go out the source that product down. The second thing is you delay when we can get that product for the customer and there might be some sales we lost as a result in the third is.
Speaker Change: When you are buying stuff in a rush.
Speaker Change: You don't buy better than when you buy stuff in a planned fashion.
Speaker Change: And so we believe there is some margin opportunities to all that inventory that were adding to the balance sheet as we move into 2025, and we need margin opportunities to generate a return or a CFO give me those think I look.
Speaker Change: And but more importantly, freeing up that time and given our ability to say, yes more as important.
Speaker Change: I think of the e-commerce and think of that that smaller customer.
Speaker Change: And that.
Speaker Change: Less than five K, they hop on the website to order something and it shows unavailable or contact the branch.
Speaker Change: And that's something that maybe it maybe it's a fairly common maybe itself.
Speaker Change: Infrequently purchased but not uncommon faster.
Speaker Change: In the mindset of the customer to 5000 and they should look at fast I'll ask these folks are awesome. It fasteners, they're awesome safety when I have on their website and order something it's easy to websites easy to use and their depth and this is incredible and they can say, yes, it's sitting in our distribution center in Winona will Havent Greenbay Tomorrow morning.
Speaker Change: <unk> do you need it because our <unk> five a M.
Speaker Change: And so that's different than harping on and seeing call the branch at Green Bay.
Speaker Change: And so part of it is by adding inventory it shows a different kind of availability. The other step we've been we've been doing is increasing with our supplier base.
Speaker Change: Better connection of show Us your availability.
Speaker Change: And your level of service so even if we don't have it in the hub, we can show on the website to the to the individual hey, it's it's.
Speaker Change: It's sitting in Saint Paul at our supplier and we can get it to you in two days, if you need a faster and that we can ship it overnight, but that gets expensive and we want to manage their costs, we want to minimize the cost of their supply chain and so we give them optionality.
Speaker Change: The.
The other piece of it does the other piece that we're in corporate we've incorporated late in the year is much better visibility to tracking.
Speaker Change: In other words it isn't just that it's available at the supplier in St. Paul It's been picked up and it's on our truck going to Winona than it is going to transfer and get on truckload Green Bay.
Speaker Change: My wife's Packer fan that's why I'm using all these green Bay examples.
Speaker Change: Yeah.
Speaker Change: It's a much different experience.
Speaker Change: My example was a smaller customer it could be the maintenance area about $200000, a month customer, but but the way they engage with us as they hop on there they're punch out list.
Speaker Change: On their internal portal or they have and so it's E business versus the versus web, but regardless of what it is that functionality exists for both.
Speaker Change: And we are rapidly rolling out those pieces.
Speaker Change: But you cant rollout those pieces are facing to the customer until you had the pieces built behind the scenes.
Speaker Change: To have it available in the first place.
Speaker Change: It makes sense Tony.
Speaker Change: Yes, Thank you and and we will look forward to furthering the discussion in March.
Speaker Change: Hold on a question for you on gross margins you called out some of the impacts in the fourth quarter just in terms of the cost of moving product highlighted.
Speaker Change: So that should moderate here in the first quarter.
Speaker Change: What can you do to frame for us what you view as your typical Q4 to Q1 other than the fact that I already mentioned is there any other call out for this year in particular.
Speaker Change: Yes.
Speaker Change: Q4 to Q1 can use to be fairly volatile. So it was a pretty wide range of outcomes, but typically youre going to see Q4, I'm, sorry, Q1, increasing over where Q4 is.
Speaker Change: Noticeably what I would tell you is I think at this point in the year are typically maybe give a little bit of color on the full year more than the next quarter.
Speaker Change: When I think about gross margin in 2025, I think we have a shot at having a flattish gross margin year over year in 2025.
Speaker Change: Now to some extent the market will have a say in that.
But we're getting a period where.
Speaker Change: The we've had very weak fasteners and very strong safety and I think that gap is going to narrow and if you get a little bit of improvement in the marketplace. You can see that gap narrow fairly meaningfully if not reverse a little bit.
Speaker Change: So I think that mix may not be the drag in 2025.
Speaker Change: It has been in 2024.
Speaker Change: I think particularly in that warehousing space, we've talked about a couple of things that impacted it through a couple of quarters. This year I think it was relatively easy comp there. So.
Speaker Change: I think that you have the usual pressures, but I think theyre going to be moderated in 2025 versus what you had in 2024.
Speaker Change: And that's the.
Speaker Change: That's I think how we can we can think through it but typically yes, Q1 will typically be above where Q4 is and.
Speaker Change: When you sort of walk through how the various seasonality work I think something around around flat to very very slightly negative in 2025 is probably how we build it out.
Speaker Change: Thanks, Holden will call that a setting the bar high but not too high for your successor.
Speaker Change: Looked at individually.
Okay I see.
Speaker Change: A couple of minutes before the hour. If there is a quick question, we'll take it.
Speaker Change: So I'll hold tight second.
Speaker Change: Our next question is coming from Stephen Volkmann from Jefferies. Your line is now live.
Speaker Change: Hold on I'll just ask you. The last quick follow on how should we think about operating expenses I assume you'll have the normal increase in employee costs or anything else to think about.
Speaker Change: Yes, I mean operating expense is 70% of our Opex of course is labor and so when we talk about being able to leverage against gross labor place to be part of that but the other 30% should still be leverages <unk>.
Speaker Change: I have always I don't think that the idea that the dynamic has changed I think that when we get to mid single digits or above mid single digits.
Speaker Change: We should be able to defend it mid single digit growth, we should be able to expand them above mid single digit growth and I don't see any change to that that profile at this point.
Speaker Change: And so as growth reasserts itself as we hope it does next year.
Speaker Change: We should be at the high end of that 20% to 25% incremental margin would be the expectation.
Speaker Change: Oftentimes I get asked why it's not more than that bear in mind and Dan alluded to this in his preamble and the first year of recovery, we have that shock absorber effect in our wages right. We haven't been paying a lot of bonuses this year.
Speaker Change: If and when business gets better in pre taxes growing strong more strongly bonuses.
Speaker Change: Sort of reassert themselves and that that gives us a little less volatility both on the upside and the downside and so.
Speaker Change: Why in a world, where we can see mid to high single digit growth getting to the high end of that 20% to 25% incremental in the first year, that's kind of what I think the expectation would be.
Speaker Change: Thank you that concludes our question and answer session I would like to turn the floor back over for any further or closing comments.
Speaker Change: Just want to thank everybody for participating our call today as always we'd like to stop.
Speaker Change: Frankly on the hour because we realize you have a lot of other companies you cover in a lot of other calls to hop on.
Speaker Change: My thank you to the <unk>.
Speaker Change: <unk> team listening to this call for what you did in 'twenty four and how you prepared the business for yourself for your customers and for the rest of the Blue team as we enter 2025 and to our shareholders. Thank you as always for your support we look forward to continuing to share the story of ethanol.
Speaker Change: Thanks, everybody.
Speaker Change: Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day.
Speaker Change: Thank you for your participation today.