Q3 2019 Earnings Call
Greetings and welcome to Fastenal third quarter 2019 earnings results Conference call.
At this time all participants are in listen only about a question answer session will follow the fall presentation.
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I'll now turn the conference over to elevate helps with Investor Relations Ellen you May now begin.
Welcome to the Fastenal Company 2019 third quarter earnings Conference call. This call will be hosted by Dan Florness, Our President and Chief Executive Officer, and Holden Lewis with our Chief Financial Officer. The call will last for up to one hour and we'll start with a general overview of our quarterly result, an operation, but the remainder of the timing open for questions and answers today's conference calls the propriety.
Sorry, Fastenal presentation is being recorded by Fastenal no recording reproduction transmission or distribution of today's call is permitted without fastenals consent. This call is being audio simulcast on the internet via the Fastenal Investor Relations home page Investor Dot Fastenal Dot com a replay of the webcast will be available on the website until December 1st 2019 at midnight Central time.
As a reminder, today's conference call May include statements regarding the company's future plans and prospects. These statements are based on our current expectations than we undertake no duty to update them. It is important to note that the company's actual results may differ materially from no with 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 Florness.
Thanks, Alan and good morning, everybody and thank you for joining the Q3, a fast earnings call.
Just a few observations on the businesses I started out.
It's no secret, but the industrial marketplace has weakened in the last 12 months.
Blue team has reacted.
I am impressed.
With the group I call friends Associates, there are talented group and shine through this quarter.
My next comment a isn't really a trade secret the third quarter of 2019 had one additional business say.
We generated about 21 million per day in revenue this helped our border.
I was a sarcastic side of me was thinking that perhaps everybody on this call competition, our respective governments about modifying the global calendar to add one business day and every county in every quarter going through is probably do more for our economy and all the the silliness that we typically see coming out of every.
Specs capitals and I'll leave it at that and no political party has a monopoly on.
On ridiculousness.
Kidding aside the supply chain for our customers.
Has become more expensive than the last year, and a half and more volatile.
Our job is really straightforward.
We provide supply chain solutions.
We challenge the status quo with both our customer and with our supplier.
Interesting they reciprocate that's a good constructive balance good a good friction balance.
John sometimes means considering a different product.
Our business model has as a as an advantage here over many of our local competitors.
Sometimes it means a different solution as you know from.
What you've learned about fastenal over the years in prior quarters.
We have many to offer.
Fortunately for us many of our competitors are one trick pony.
And this.
Helps us win in this type of environment.
I'd never lose sight of the the strength of an organization.
Where our team.
75% of our employees have intimate knowledge of our customers operation.
They have knowledge of their local one business.
The local and global business culture.
And the scale to stitched together this is more powerful and an abstract server study a customer's keystrokes that can only do fulfillment.
I believe we can win but we have to figure out where we win with that strategy.
I think the things that we do with our growth drivers played very well into understanding that that advantage.
All that technology, though does bring tremendous productivity wins, we are slowly introducing technology in our business and I believe you see it shine through in our ability to manage the labor side of our our business.
I'm getting to a holding slipped book, we reported earnings of 37 cents.
We're just with some discrete tax items in the quarter and actually in both years, but adjusting for these the PPS remained at 37 cents.
I'm pleased to see our our pretax profit growth accelerate from frankly, a disappointing second quarter.
Two things stood out.
First.
The team executed nicely.
On pricing.
Which produced a better gross margin.
It doesn't mean that that we're not behind on the price cost.
Yeah in the goal isn't about who wins on the price cost because this is a supply chain relationship between supplier.
Between our supplier our business and our customer and we need to supply chain that works for all so it's not about who wins, it's about who provides the best value to our customer.
Secondly, our team adjusted really well to the slowing business kind of justice passed and second quarter, We just look at bastard and third.
To provide nice incremental margins.
While at the same time, we continue to invest in the growth drivers or a business. That's what are the most important aspects of this is we still have the resources to invest in girls.
This is conditions remain sluggish and our customer tolling remains cautious.
Very pleased with the cash generated during the year to date the improvement during the period my compliments to our team in the field my comments compliments to hold and Sheryl in their respective teams performed really well I.
Managing working capital and the nice thing about this this is page.
In one page, we talked about two things that we haven't been able to talk about with competence and maybe even some pride and all in recent years and that is we performed well on gross margin and on working capital.
[noise], but we still have work to do.
Onsites, we signed 84 in the quarter, a little bit less than a second quarter I think there's two things driving that one.
Lot of discussions during the quarter with customers centered on supply chain challenging supply chain Simos discussions were about pricing.
And and also in environment like this and we see it in our vending as well when there is uncertainty in environment a natural human reaction is sometimes it's easier to not make a decision at all then to worry about what decision is the right one and sourcing so a little bit of slowdown.
But we're still at a up 30% over where we were a year ago at 1000 or 1076 on sites.
And the business continues to grow in the low teens.
And we believe we'll still see it will still signed between 375 to 400, it's little bit more difficult of other golden it would've been a three months ago or six months ago.
Only time will tell that belief will be turned into a reality.
We believe it's we can accomplish it.
The one thing might jump out at you is Oh, we closed 22 traditional branches during the quarter, that's not a surprising number we've been doing similar numbers are that over the last four or five six years.
But we did close 35 onsites.
I'm a firm believer some organizations.
Sometimes.
But not hide from the truth, but hold back the truth them on acknowledge things challenging the status quo.
And as a result, they don't do anything don't do anything and all the Sun do something big all at once.
And then spend all their efforts adjusting for the numbers to explain it to what was going on the world. We don't do that we challenge the business every day.
And if our team feels along with their customer there is some onsites that that don't make sense in today's environment, perhaps the business has slowed down perhaps a plants been consolidated we want to understand the why.
The standpoint and trends of our business, but I considered as a healthy thing.
I've ending.
We continue to have a up a very good clip with funding to me. The most noteworthy thing that stood out in our bending numbers.
So our install base is up 12.2% Q3 to Q3.
Our product sales are up in the mid teens.
I'm not really good numbers, but I do know that means our revenue per machine increased.
In the 12 month period.
I consider that a tremendous accomplishment in a in an economy, where things have weekend.
And you would expect your revenue from machine to decrease a little bit.
Think there's two things that are that are shining through there one lending is about a lot of the stuff to go sort of any machines is about PPD stuff people need we're in we're in a high employment environment. So there's still plenty of employees and employees need stuff I think that's part of it I think the other part is our team has it become really dial.
Then.
At managing their vending asset base and utilizing that asset base to the benefit their customer and it means sometimes you pull parts out you put new parts huh.
And that those two things drive the fact that that base of business actually expanded.
In a in a declining economy.
E Commerce was up about 28% Q3, Q3, I consider that a weaker number one thing that science Sterling that for me is a chunk of that E. Commerce is to larger customers and in a chunk of that was economically weakened.
With that I'll turn over to all right. Thanks, Dan.
Good morning, let's let's just jump onto slide five.
Total sales were up 7.8% in the third quarter adjusting for the one more selling day in the period, our daily sales were up 6.1%, which has a deceleration from the second quarter.
September daily sales growth was up 5.8%, which is fairly consistent with the July and August rates.
But business activity has continued to soften the leading purchasing managers index average 49.4 in the third quarter and it was 47.8 and September those are levels that are consistent with modest contraction in industrial production.
Brits part industrial production resistant was up just 0.3% in the July August period.
The cautious tone is reflected in the feedback of our regional leaders and in the trends of our end markets manufacturing was up 7.7% and heavy equipment was up 4.4% oil and gas and industrial end markets are also softening well transportation and consumer linked to customers are stable construction was up 2.9% in the third quarter with larger.
Customers outperforming smaller ones.
We estimate the price in the third quarter contributed 90 to 120 basis points, which is slightly improved on the second quarter. However, we think the degree of price realization of the period is partially masked by the current period, having to grow over last year's rising contribution from price because the third quarter 2018 marks the rollout of our pricing tool.
We're pleased with the efforts of the blue team to mitigate the effects of tariffs that inflation during this period.
For a product standpoint, non fasteners continued to lead but did decelerate with 8% growth in the third quarter, while our more cyclical fastener line was up 3% from a customer standpoint national accounts were up 10.2% in the quarter was 62 of our top 100 accounts growing.
Non national account growth was less than 1% with roughly 57% of our branches growing in the third quarter.
Our gross today is coming largely from the growth drivers, which only reinforces our commitment to them regardless of the market conditions Fastenal provides value to our customers that has a financial model that allows us to invest as others pull back and we intend to do so.
Now moving over to slide six.
Our gross margin was 47.2% in the third quarter down 90 basis points versus last year. The components of this decline are familiar product and customer mix price cost and transportation expense plus the absence of the difficult comparison, we had last quarter.
However, the third quarter was also up 30 basis points versus the second quarter, which bucks the more traditional flat to down sequential pattern. This largely reflects moderation in the variables that impacted the second quarter mixed drag was 70 to 80 basis points narrowing a bit as onsite growth rate slowed price cost improved for the quarter as pricing efforts to us.
Offset tariffs and inflation gain traction.
His comment for the fourth quarter gross margins the slipped versus the third quarter as has happened in four of the last five years typically by 20 to 40 basis points, where the momentum we built in the third quarter. However, we anticipate being able to sustain our gross margin above 47% in the fourth quarter.
Our operating margin was 20.4% in the third quarter down 10 basis points year over year.
DNA as a percentage of sales was 26.8% better by 80 basis points at a record low for the third quarter, we leveraged operating costs. Despite the slowdown in sales growth aided a bit by an extra selling day in the period.
Looking at the pieces, we achieved 65 basis points of leverage over employee related costs, which were up 4.2%. This growth was largely due to a 4.1% increase it ft growth at the end of the period.
We realized 20 basis points of leverage over occupancy related costs, which were up 2.8% comprised of higher vending expenses as we expand the installed base and flattish occupancy expenses.
Conditions remain challenging so we remain focused on adding resources as necessary to finance our growth drivers and support our ability to take market share while tightly managing other costs and investments.
If you put it altogether, we reported third quarter 2019, EPS of 37 cents, which is up 8% from 34 cents in the third quarter of 2018 as Dan mentioned, we did have discrete tax benefits in both the current and prior year periods and if you include a 3.6 million benefit in the third including a 3.6 million benefit in the third quarter 2019.
If you adjust for these third quarter 2019, EPS remains 37 cents up 7.3%.
Turning to slide seven.
Looking at cash flow, we generated 257 million in operating cash in the third quarter or 121% of net income.
Higher earnings combined with lower working capital needs to produce the cash flow year to date cash conversion is 96.4%.
Net capital spending in the third quarter was 60 million up from 35 million in the third quarter of 2018. This continues to reflect investments in hub property and vehicles that are necessary to support high service levels as well as investments in vending equipment to support growth in our installed base. Our 2018 range for total capital spending is unchanged between 195.
Million in 225 million with the same factors driving the third quarter increase impacting the full year.
We also paid out 126 million in dividends in the period and reduced debt by 55 million. We finished the quarter with debt at 14.7% of total capital inline with last year's 14.4%, but down sequentially and from year end.
Inventories were up 13.4% in the third quarter of 2019, nearly half of this growth related inventory to support new on sites. The remainder relates to higher hub inventories, we plan for growth in inventory to slow meaningfully in the fourth quarter as actions taken earlier in 2019 to reduce overseas purchasing in response to slower demand begins to be felt account.
[noise] receivable grew 5.8% in the third quarter of 2019 receivables benefited from slower growth and the timing of quarter end, if I try to adjust for the latter we estimate that receivables growth would have been roughly 7.5% where the roughly half day increase in d.. So the slowest rates of increase since the first half of 2017, our customers continued.
To aggressively pursue longer payment terms and withhold payment at quarter's end, we expect to growth in our working capital assets to be more modest into fourth quarter that it wasn't a third producing another strong cash flow quarter.
Thats all we have for our formal presentation. So with that operator, we'll take questions help before before we switched over to questions.
And when I was flipping through Holden's book.
One thing that hopefully standout in these calls is danas stability, unscripted, which probably makes for a frustrating listen from an audience perspective, holding it nicely scripted so you get maybe the how from debt firms and but you get the what in the meat from old and Thats a good one two punch there was an item that I added into the notes of my flipbook.
Last night that I did want to throw out there because I thought it might get a question on it.
I didn't want to give you an unsatisfied satisfactory answers I thought I'd preempt, yes that is the one item in the quarter that kind of makes me scratch My head is our construction business.
And yes, we had enjoyed nice growth in construction or last several years.
That growth has slowed dramatically as weve come into 2019 and in all honesty, we don't fully understand it.
It's too world. There are large account business continues to grow well, our local business isn't growing as well. It's in some of that you can attribute to the fact that Weve you know, we closed about five or 5% of our locations a year, so that but so thats going to take a toll on the local construction business.
But that's not a new phenomenon, we've been doing that for four or five years.
There is some slowing in our in our local construction business I thought I'd pointed out you I've given the unsatisfactory answer that we don't totally understand it I do know from talking to peers and other organizations and I know a number of folks and organizations that sell into this arena.
In the large account business or not really seeing it but they are seeing it and in the smaller account business as well.
So it's more of an observation than a conclusion I apologize for that but I thought I'd pointed out anyway with that will turn it over to questions and not sure. If if Ellen prompts the group, but we had asked for one question in a brief follow up if you still need.
Thank you had the site will be conducting a question and answer session.
Thanks to ask a question today. Please press star one from your telephone keypad confirmation to indicate your line is in the question Q.
Let me press Star too few later move your question from the Q.
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As a reminder, please ask one question one follow up question.
Thank you.
Our first question today comes from the line of David Mann with Robert W. Baird. Please proceed with your question.
Thank you good morning, everyone.
And if so first off can you talk about additional price increases that you may be thinking about in the fourth quarter to offset additional tariffs related cogs inflation.
Sure. The size you know there's going to be another round of tariffs that go into place in mid October and then there'll be another round in mid December our intention is as we get into the latter part of this quarter that we will adjust our pricing in our pricing tools to reflect the changes that are coming.
Because of those tariffs. So I think you can expect us to take action on on those should they should they ultimately materialize in the latter part of this quarter.
Okay. Thank you and second.
It's a small percentage I know, but I'm, hoping you can provide more details on the 35 on site closures, where these purely chance or a cyclical customer issues, rather than a bad that door or some sort of competitive losses or anything you can share with us regarding that or is there anything you learn from those closures that help you.
Better that potential customers for onsite in implementations in the future.
Sure, Yes, the quick yes, there's probably a little bit of all the above but you're right. Dave I mean, we closed more this quarter than Weve typically done and I think theres a couple of things to think about here. One is simply the installed base has gone up and as the installed base goes up there is going to be a natural degree of churn that happens and.
So the fact that that it's a high number but frankly the for three or four quarters that preceded this quarter were higher than the ones before that and so there's an element simply of it's become a big part of our business. We have a lot of them out there is going to be a national element of churn that goes up overtime, but the second piece is you're right as we've achieved a degree of critical mass and that initiative the review.
Use we always review our business not only in on sites, but elsewhere, but we get more active in terms of reviewing the business that we have as we get critical mass as we have more aged aged facilities and if I. If I look at the 35 that we closed in this quarter.
I was able to get a good explanation about 27 I'll just to let you know and if I look at that there's there's a handful where the plant closed there's a handful where the model changed right, where we opened the on site because the purchasing natural light the model and that purchasing managers now moved on a new ones in place doesn't like the model as much and so they have changed it and so there's a few.
Those are there are a few where we where we lost some business to competitors, usually that's because they decided to go for maybe better pricing scheme or what have you, but but those those do exist or somebody new in their procurement function or somebody new and their procurement by should rise. So those those elements do exist. They have existed every quarter before this now I will also say.
There were 11 on sites that frankly, we closed them because maybe the financials didn't play out as we would've expected in fact, if I look at those 11 on sites. There are running at about 20, K. a month, that's well below what we need to have in order to make that model makes sense and so we wound up closing that onsite, but in nine of those 11 classic case.
Is that business going back to the branch that's nearby right. So it's not lost business, even though it is a closed on site, but financial decision is better at the branch that it wasn't an onsite in those cases, so no I think that perspective that you have to have here is we always review our business and as the base goes up I think closures would go up as well, but that said I think that this quarter was.
Pretty high.
I don't expect to see that that level of closings in the fourth quarter and even at that high level, we're talking about roughly 3% of our installed base I mean, not a big numbers. So.
Which I think you kind of comment does that's probably how I'd respond to that.
I'll add just to item in there Dave and that is if you think about.
Growth drivers, if you think about our business in general.
We consider this a healthy part of the business take take our national accounts business. As an example, I know based on history that when we come into a new year I can assume that 5% of our national account revenue from last year will be gone not because we lost the customer but because across those thousand.
Basins.
There were a special projects going on in 2019 that won't happen in 2020, and so if we want to grow our national account business and I'll just pick an arbitrary number if we want to grow our international business, 15%. We have to go into the year with a plan to hit 20, because we know we're starting down five when I think of our.
Lending business.
This year, we will pull out.
About 13% of our vending machines based on our installed base and that's been true for years actually if I go back five years ago, we were pulling out.
25% of our install base every year from the prior year, because we put in 10, we realize we need to date.
We put into will realize that wasn't that great place to put vending and and we improved the business over the last decade, we've pulled out north of 40000 vending machines from locations we've installed.
And what do we have the show for it we have a business that went from zero to we'll do a 1.1 billion through vending. This year. It helps our overall organization grow faster, it's a nice discrete business in of itself.
And but I know that every time, we placed 10 machines are likely going to pull fuel them back and I love the business and I Love. The fact, we're always rationalizing.
I don't know ultimately like on the on site what is that what is the turn rate but.
I don't know maybe 5% of yours.
As a number.
I don't see that every darn report that comes out now that that Florness thinks that we'll do this but I'm just saying, it's it's a business in new approach it from a pragmatic business perspective, what's a win for your customer what's a win for your team and what's a win for up for the the.
The future of the business as well and we love the onsite business and and we think a healthy.
Look at it is good thing.
Alright, very helpful color as always thanks very much.
The next question is from the line of Nigel Coe with Wolfe Research. Please proceed with your question.
Thanks.
Good morning, guys.
Good detailing the questions.
Yes, hi, guys. So.
Just wanted to maybe just.
Address kind of what we see an up than a bit more detail.
It feels like September with a weaker month more broadly yet he so nice uptick in a in September sequentially. So you didnt seem to see that although you are talking about a greater proportion national accounts customers are declining. So I'm just wonder if you maybe just dig into the feedback you hearing from.
From branch managers and then most specifically you know you called out I think last quarter weakness in heavy industry and oil and gas you didn't call that out. So this quarter I'm just wondering what you're seeing in those two areas. Thank you.
Sure. So yes. The September number was a little bit below where July and August was I would agree that they were substantively in the same range, but we did do a little bit better with pricing in the quarter, obviously and I think that that kind of move through as the quarter went on as well I don't think I mean to get into disclosing month by month kind of what we think the pricing.
But I think it's fair to conclude that it got better as the quarter progressed and that probably.
Did you probably saw a little bit of a decline involved or a backing up in volume growth filled in a little bit by an improvement in the pricing side and I think that was probably an element of that because if I think about the markets.
Yes, they are getting softer and that probably no surprise anybody and you're right in Colorado oil and gas in heavy machinery, specifically it feels like it almost goes out say at this point.
But those areas are weak.
The industrial manufacturing sector broadly is weak and.
Hi, Ed I kind of feel like volume for us outside of our market share gains is probably in the area flattish.
And that's that's where we've gotten to at this point in terms of feedback from from the RVP groups. It's probably what you would expect most are talking about tone being cautious much as they have been they did call out obviously oil and gas heavy equipment, we've talked a bit before about.
Some of the automotive we don't have a lot of direct exposure to automotive very little if any but but indirectly some of the regions that are there have certainly called that out.
Im not sure that I'm, adding any markets still lifts that did that are soft, but I'm not seeing anything getting better either and so it's still a bit of a challenge.
What I will say is I think some of the commentary from the RVP is we've got added in the last month or too little bit more discussion about seeing some layoffs in their markets little bit more discussion about seeing people deciding are choosing to defer or spending decisions I would say those really begin to creep into the dialogue in the last quarter or too I think I just think it feeds.
This this narrative that debt conditions spiralling out of control by any means but they continue to soften up in our marketplace.
Great. Thanks, so much great color and then just on the gross margin you've kind of preemptively went out with a set number four.
For Q, obviously, that's tough our minds.
I understand just given your tens and the timing of tariffs that 25% live three star facility of into European now in full keeps Im just curious if you are seeing the incremental inflation what could be the offsets to that.
Well remember.
The list three tariffs went into place initially I think in December of 2018, and then there was an increasing the number in March of 19.
Those frankly, the cost of those actions were largely in our three Q I know I think I know what you're talking about we have turns of two times, but remember tariffs are a little bit different and that is not about when you purchased the prices about when it hits the shores and so far if art if our.
Six months.
Sort of supply chain lag is three months overseas and on the water in three months domestically than the impact from tariffs you're going to feel that once it hits the shore bits that from that period to the time that flows through the network that's way more like three months. So the list three tariffs those costs were largely in Threeq you I don't anticipate.
The incremental impact in Fourq you from the list three tariffs on lists for those go into play in October and then again in December if they ultimately go through.
And I expect that those costs would then roll forward into into the first quarter of next year and we'll adjust our business ahead of that to make sure that were neutral on it so.
Our intention is obviously not to fall behind based on sort of what the new tariffs are but I think I want to emphasize as well Nigel when we fell behind it had a lot more to do with general inflation in the marketplace than it did with the tariffs on I think general inflation was was sort of goose by the terrorist if you will but it.
I wasn't so much the tariffs that presented the challenge to us as it was the generalized inflation.
And I think the change of approach that we've taken in recent months.
In three areas one.
The group has new information and new tools in the field that they didnt have 18 months ago.
We have a new structure internally dealing with our pricing in our costing versus what we what we had 18 months ago and I think that that structure. The people involved that structure and its oversight I think we're doing a phenomenal job and then just the muscle memory. That's been built up in the field again very different from what exists in 18 months ago, and so I think our capabilities now.
Now versus what existed 18 months ago are far stronger I think the execution and speed of what you saw in Threeq reflects that and I think we can manage what comes.
As effectively today is as we've been able to at any point in this period, but I don't anticipate tariffs being an incremental drag to for Q relative to Threeq you at this point.
I'll just throw them as Holden was talking I was just looking through us some stats here on up on components of our business just as shed a little additional light on the first question about heavy equipment.
If I look at heavy manufacturing now heavy equipment, a subset of that I look at heavy manufacturing has a business thats about.
Between 35, and 40% of our breadth revenue such a big swath of our revenue.
That was growing about 13.5% in the first quarter.
Dropped a little over 8% second quarter and it was about 6% in third quarter, So mirrors up pretty well with what are our reported number is.
If I look at a heavy equipment subset in there which is about two thirds of that component, it's about 27% of revenue.
13.5% in first quarter. So in line with the overall heavy manufacturing, 7.5% in the second quarter. So it was starting to pull down.
The overall heavy manufacturing group it dropped to 4.5% in the third quarter.
So.
Two things jump on it that that's a lot OEM faster than a lot of production in there that weakened as we went through the year.
The interesting thing is that there was a divergence between the two thirds of the heavy manufacturing thats heavy equipment and the one third that isn't there is a divergence in.
Theres more resiliency in the other group.
So the overall number isn't declining as much and I go into the weeds and below walking annual only from the standpoint of that's that demonstrates what our team is doing our national accounts team. Our regional teams are doing that's market share gains.
We're picking up great market share there because our customers are struggling right now and it's an inch and shines through in our heavy manufacturing at shine through in some of the stats that Holden puts out as far as our top 100 customers. How many if I'm going to growing with us all that kind of information really sheds light.
Great. Thanks.
Thank you.
Our next question is from the line of Ryan Merkel William Blair. Please proceed with your question.
Hey, Thanks, a couple of question right off I'm.
Right.
Yes, thats really on a new baby.
Oh, thank you.
Lot of work, but a lot of thought.
Ago.
Thanks that must be time, because you get into Q earlier than this.
I'll tell you what three hour low, but yeah, I'm a little slow.
So on gross margin a follow up so if you do a little bit better than 47% in fourth quarter that would be a year over year decline like 56 bet. So how should we think about the components of mix price cost and break.
I think it's at that point, so the freight comparables will get easier no. The obviously our goal as a company is not rest on comparables, but actually execute the freight side better but at minimum the freight comparables get easier and so I'm not expecting a big drag on freight I think that will be I think that impact will be.
Diminished the real the real question Mark There is ultimately there is a cyclical element how much does our revenue go up or go down based on on sort of the macro but thats the expectation right now which means that most of what I would expect you to see is going to be related to.
Products customer mix I think if you look at the cadence of price cost.
One of those things, where I think the number for the quarter isn't terribly meaningful because every quarter and post quarter were two very different numbers.
Depending on the timing of when you were able to enact the strategy that we enacted but.
We.
By the time, you finished up the quarter, you're approaching kind of balance if you will on on sort of the price cost side and our expectation is to kind of maintain something around neutrality.
And as a result, whenever we achieve in in the fourth quarter I think it's going to be heavily a function of of mix.
Okay, Yeah, that's really helpful.
Actually the price cost cutting neutral that's really critical.
Okay and then next question. This is more theoretical but based on what you're hearing from customers and seeing in the macro what level of end market growth are you planning for 2020.
No so yes very theoretical the.
What I would tell you is as you know I've studied the PMI and its impact on our business for a long time and I always viewed the PMI is being a a bit of a leading indicator I think the PMI is probably signaling to us that.
The conditions that youre seeing today, which I think suggests very fairly flattish volumes.
That we're going to roll into 2020 in a very similar position now what the second half looks like I have no idea, but we're going to roll into 2020 in a very similar position and.
I think if volumes are flattish I think that next year, we what we will get whenever we get based on market share gains and called out between 5% to 7%, there's probably a little bit of incremental price that flows in there just because we recognize for full year, what weve, what we've put in as this year progresses.
And.
I think the.
You are looking at something in the 5% to 8% range based on where the PMI is today.
Depending where the PM eyes in December asked the question again that might all change, but that's probably how I would characterize how how I look at the PMI and its impact on our business.
Got it thanks, so much.
Thanks Ryan.
The next question turned in line of Robert Barry with Buckingham Research. Please proceed with your question.
Hi, guys good morning.
Morning.
Congrats on a solid quarter.
Thank you.
So just trying to get my head around this.
Tariff related math, a little more just wanted to clarify.
What's the full impact of terrorists on was three at 25% flowing through the piano in this quarter was that your earlier staff bronto relative to purposes, because again remember.
Our two times turns don't really apply.
Tariffs are concerned right because the moment tariffs go into effect, the first container that hits our shores.
Our tariff at that point and from that point call. It three months to move through our system from from the ports through the hubs through the branches to a customer right. So we're not talking about a six month window in which it takes to sort of realize the tariffs through our cost we're talking about something shorter than that yes, that's strictly based on that on the dining.
Mix of the tariff themselves I'll add one one is what I had one where does twist to that.
The the dynamic there's really a couple of things that come into play.
In a piece of it I agree with holding comments piece of it I disagree with holds comment.
If you think about a customer we're bringing in.
Say OEM pastors.
While we're bringing in its vending customers, we're bringing in we do a lot of.
Pan protection through our vending devices. So we are bringing in that kind of product.
Your your visibility to need and supply chain are much more dialed in so that element until the product turns faster.
You are bringing in you know product that that you might you might add a three month supply for months supply five months supply. So it turns a little faster and the variability in that is dependent on.
Now how quick it hits the cost impact, but how long how many months of how many days of inventory have can change evolve aside in a customer's business OEM passengers are down 20%. What you thought was up five month supply just instantly became a six month supply loops that means you have that you have the legacy of that problem, a little a little longer but but it's still hit.
It's relatively quickly same thing and a lot of our vending our hand protection now abuse. If you went in visited a bunch of our branches and you looked at a lot of the MRO fasteners and a lot of products that are in our branches, that's product, where we have less certainty less visibility to demand and we stock at a bit deeper because of that there you have product that might turn.
Once a year.
And so there's some elements of both a lot of our discussions with our customer is on the former not the latter because that's the product. That's that's a product in there in there there are known spend as opposed to their tail spend at the tail spend that becomes a little more difficult from a turn standpoint.
I hope that I'll I'll buy I said light there instead of yes, a little bit perhaps on I mean, what I'm getting trying to get my head around is if you look at your.
Sales, 34% is fasteners I assume a healthy chunk of that.
Subject to the tariffs and if you assume tariff definitely 5% on that Cogs. It seems like a much bigger number than the 1% price would cover so I mean, maybe some of the things you're talking about Dan or are the reasons why price cost can be almost neutral, even though that kind of headline math I just did suggest a much bigger.
Our.
Pressure.
There is other offsets.
Yes, good minallah at Hilton at end, but there is there's a bunch of faster product that we have moved out of tariff based country. The issue run into you remove it might be more expensive, but it's less expensive than.
10, 15 at 25% tariffs and and so there is some stuff that we've moved out but.
I'll, let Holden timed and it is the only other nuance I would add to that is it certainly true that we import the great majority of our of our fasteners, but recall that whereas China is one source, which as Dan indicated we've actually reduce that source over the over this period of time, we also get a lot from Taiwan and a handful of other countries out there that aren't subject.
Right. So you know don't overstate the impact of if it fasteners are heavily Terry fasteners are heavily tariff they are if they're coming from China.
But we get a lot of our fasteners from Taiwan and other areas.
In Asia as well as there is a major supplier in Canada that are quite as affected as much. So.
Those obviously aren't impacted the same way.
Would you be willing to just tell us what your lifts three analysts for exposures are.
No.
Yes, I mean, what we've always said is substantially all of our product that we sourced from China is covered by less three analysts for.
We have not disclosed historically, what what that number is specifically.
What it was when this all began 18 months ago, its little bit lower than that and our 12 months ago, its little bit lower than that now because of the work that we have done.
Again, as Dan pointed out to to improve the supply chain cost of our customer supply chains. We have moved a material amount of product out of China into other areas usually within the region.
But it's still a significant minority of our of our overall purchasing comes from from China, and what does come from China.
This is going to be captured by the Sthree analysts for.
Alright, alright, Ella I'll leave it there thank you.
Thanks picks up.
The next question is from the line of Josh present, you with Morgan Stanley . Please proceed with your question.
Hi, good morning, guys.
Morning.
Just maybe follow up on some of the Nonresi commentary.
Yes. In fact, there was a nice up tick in momentum there and in the September Dan I know you talked a little bit about some slowness otherwise there was a little bit of.
Head scratcher, but I think more broadly construction markets had some weather issues impacting earlier parts of the year did the season, just kind of go longer or have a bit more tayo at the end as a function of weather pushouts or any explanation for why maybe why September was was an uptick.
Yes, I hesitate to.
Being a farm kit from Wisconsin, I'm always attuned to the weather and I'm pleased of what that means for this time the year on people getting corn and soybeans in this part of the other country out.
I'll harvested.
I am hesitant to talk much about about whether short of that because we're in a lot of jurisdictions and unless there's something major that really hits.
It it's a regional issue more than a company issue.
The the one you point out September September did have a nice uptick and construction we grew 6.5%.
Production business versus.
The first couple months, we are growing between one and two.
I like what I saw in September .
One month is not a trend.
I would be I would love to see that that strength that strengthening we saw in September .
Shine through in October November and time will tell if that happens right now.
I honestly don't know, but I did like what we saw in September .
The other thing I might suggest is if you look at just the comparables.
August of 2018, our construction business was growing 18, 19% in September of 18. It was growing 13 14, so little bit easier comp I think also contributed to September looking better than the other two months in there.
I would consider that as well.
Got it and then just a follow up on on pricing, obviously, some some good momentum there.
Getting kind of caught up after two Q any kind of institutionalize moves I know, there's a lot of discretion at kind of the branch and sales person level on a.
On.
Price movement, and what it takes to win business or retain business has any of that discretion been lifted to higher parts of the organization.
There may be things like Twoq, you don't happen as often or.
Did it just seemed to be a catch up.
You know.
First off.
One of the ways, we circle the wagons so to speak is we.
We have a franken honest discussion with our our teams.
We talked to hear the Factset hand, here's here's what we need to do and.
Here is that some of the discussions we need to have with our customers and I can say you always lead the discussion with.
Here solutions.
That makes some of the issue go away, maybe maybe there's a different widget that has a similar form and function that you've suggested in the past, but there hasn't been a willingness to change that all of a sudden now can effectively offset this impact, but but you have a frank and honest discussion with you with your team and they have a franken honest discussion with our customers.
And Youd challenge them and say this isn't a mandatory thing. This is they need to do thing, which is which frankly I think is more important than a mandatory thing we need to do this and but we also need to have a mindset that this isn't a project.
Isn't a three month thing this isn't a 12 month thing. This is something you just do just that right now we need to reallocate a little more time to it.
Because the urgency is high because of volatility is high and you need to have that conversation your customer. Unfortunately, when you when you reallocate some of that energy.
Maybe your vending drops off a little bit your signings, maybe year onsite drops off a little bit on signings, because something theres always a finite amount of energy in the air.
Yes, so I mean, I would say, we really didnt fiddle with any elements of our culture right with the elements of allowing people in the field to make decisions.
Because they're the ones I know the customer far better than anybody in what I wanted us and so we really didn't fiddle with elements of culture. If that's what you're asking what we have filled with as I said before is the information and tools that are available to people in the field the structure internally by which we attack sort of price and cost questions.
And then obviously just again building up that muscle memory, the fuel getting used to having these conversations.
And that's sort of thing we filled with those elements, but we didnt fiddle with fundamental culture payroll anything or pay plan or anything like that due to achieve what we've done and the good news is I think that means that it should be more sustainable.
Understood good color thanks, a lot.
Alright, Selman up we're at 950, so we do I think we're running to the entered legal full hour now, Florida, Oh Holdover recently, we will pull our.
Makes my calls at the afterwards easier.
Yes.
Thank you Steve Ideally operator. Thanks next question comes from the line of Chris Dankert with Longbow Research. Please proceed with your question.
Hi, Good morning, guys. Thanks for all the color thus far.
I guess from my perspective, a so you guys stepped up the ITM technology investment in the quarter by several million Bucks.
And with right and home about there or any kind of no major project you'd highlight.
You know.
When it when I when I stepped into this role one of the things that I thought was important.
So you know the looking at the landscape out there, we decided to make a meaningful move and I started to talk about this with our shareholders back in that timeframe, we decided to increase our relative IP spend.
About a half a percent of sales so I think what our business today, it's a half a percent.
Less profitable.
Relative to it so 50 basis points less profitable because we decided up that spend now.
My gut believes that that 50 basis points.
We will we are I don't know if we've caught it all back, but we're calling it back because it brings productivity and improves our business if I I've always talk and John Soderbergh, our leader in the in the ITC area Johnston of Johnson in that area now at three and a half years, leading that that team. He's done a wonderful job we have great talent he's done.
A wonderful job better connecting our IP group with our business.
And we were and sold a talents the inherent town sobriety team really shine through that I think of some some recent wins just yesterday with our board of directors those channels them about.
About two days ago, we rolled out and some of your going earlier eyes at this comment because.
Companies have been doing the stuff for a long time, we haven't we started talking earlier this year about you know the.
The bought.
Implementing a bought within our business to improve and and our safety team. We've we've developed an incredible safety business over the last decade, obviously helped by vending 55% of our vending revenue is safety products.
And our safety team was looking for added resources, because they get bombarded with thousands of questions from the field.
And and it just takes away a lot of their energy and to me. The two things a couple of things jumped out there boy. That's a that's that's I'm glad to hear they're getting much better with questions.
But I'd, rather not add resources to answer questions because the ultimate is surface the information for our team.
So they get so they have a 24 hours they seven days a week in the field. So we created our first chat bought it rolled out two days ago, It's a safety, but we've lowered it with common questions that our safety team gets we've lowered it with information Osha Reagan see all the and I'm going to start feeling things I know nothing about.
But im information that are that our field means to address customer questions. We rolled it out the 50 branches couple of years ago.
I'm pleased to report the first morning. It was out there were 29 questions asked and 22 responses.
76% hit rate on responses as far as satisfactory responses to the questions.
And that's something we kind of done two years ago.
We are doing some things with rolling out some mobility, that's a that's a slow walk.
But what we're rolling some things out to me I fundamentally believe the wins are a better partner with our customer.
A more productive.
Product productive business, whats, which means we can inherently be more competitive in the marketplace and still provide better value.
And but thats something a couple of quick examples.
Again, you might roll your I'd say boy those are pretty small steps I think there are huge steps and I'm really proud of our team for doing it.
And you're right I mean, we're looking at IP spending this year just from PL standpoint, probably probably being up 10 10, 15% is an area that we continue to invest in our business.
Because we can do so even though things are slowing down that's not that's not necessarily an area that we're looking to restrict restrict our spend we invest but we get a return.
Got it got thanks for the call. It really helps kind of level set things and how growth goes there.
And just last one from me from a very high level, we talked about onsite already but just again thinking about total opportunity in the past you guys highlighted maybe 4000 vetted addressable opportunities today, that's still kind of what you see as the opportunity out there.
Yes, and will outset that way I believe that number has upside from the standpoint.
You know earlier, we're talking about the 35 onsite closures.
And and to me the the reason I believe it's okay to that to have what you could ours will be call failure.
Is it means we're testing the fringes. It means we're we're constantly trying things that may we haven't done before the safe at work I remember a trip I did with the try Parker who leads our business here in the upper Midwest, we're down in Milwaukee area, and we were visiting an onsite and and and there is nobody in our organization that knows more about on sites.
And Troy Oxys. He has been successful with a lot of over the years and he's talking about one is doing and he's kind of it's kinda shrugging and he said that damn I'm not sure if a work, but here's why did it bundled boom you laid out as reasons. Unlike that's awesome.
And so so I think there's a there's an upside that number but yeah. That's that's where our number sets now, but but I think we become more creative.
Because.
Bob Curling created an organization that trust people.
To try things and can be willing to make mystic and dancing correct me. If this is wrong. Because this is that number has put together before I necessarily was here, but I believe that number also didnt include construction government education opportunities right correct. So we're actually finding opportunities to be on site in environments like that as well, which Dan's point.
It's kind of expanding the envelope for what's possible within an onsite environment.
Got it Guy that's really helpful. Thanks, guys.
Sure.
With that it's five minutes of the hour Omena I'm going to call the the.
Call sort of five minutes, sorry about that.
I'm, a big believer an obligation one thing I constantly talk to my team load is obligations, we each have to each other to our customer.
To our shareholder and to our supplier.
And the one obligation I have to this group is the around to answer calls today I want to I won't be here for that obligation I'm, leaving in a few minutes.
A a friend and and brother is technically my brother in law, but a friend and brother pathway for pancreatic cancer here in September David Gustafson down in Madison and.
Going down to support my wife, My sister, along my nephew.
And so I won't be around for any questions. If you have any of me give me how her next week. Thank you. Thank you.
Thank you.
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