The Fastenal 2023 Annual and Q4 Earnings Results Conference Call is being recorded and hosted by Dan Florness, the President and CEO, and Holden Lewis, the CFO. The call will last for up to one hour and will include a general overview of quarterly results and operations, followed by a Q&A session. The call is being audio simulcast on the Fastenal Investor Relations homepage and a replay will be available on the website until March 1, 2024. The company may make statements about future plans and prospects, but actual results may differ. The call is now turned over to Dan Florness.

Despite facing struggles in 2023, Fastenal has seen some benefits from having Holden as part of their organization, who has extensive knowledge and experience in the industrial space. The company has also made leadership changes to improve execution and is poised for a strong 2024. In the fourth quarter, Fastenal saw growth in daily sales and managed expenses well, resulting in an 8.5% increase in EPS. While their growth initiatives have been uneven, they have seen positive developments in their Onsite locations and FMI devices.

The company has seen a significant increase in its digital footprint in recent years and generated a record operating cash flow of over $1.4 billion, a 52% increase from the previous year. They also paid out a fifth dividend, the fourth time they have done so since going public. The first three times were due to various uncertainties and the most recent one was due to the impact of COVID-19 on the company's supply chain.

The company faced challenges with getting containers through ports and getting products, which affected their reliability and cash flow. However, they were able to generate ample cash in 2023 and have a conservative balance sheet. They had 58 signings in the fourth quarter of 2023, which was not a strong number, but they anticipate signing 375 to 400 next year. The company also had a good year with FMI technology, signing an average of 95 devices per day and aiming for 100 per day in the future.

The team has successfully reached their goal of 95 sales per day and plans to sign 26,000 to 28,000 next year. E-commerce sales have grown to 25% of total sales, up from 5% a few years ago. The company's digital footprint, which includes electronic engagement with customers and e-commerce, has also increased significantly over the years. The company has 3,419 in-market locations, with 58-59% of sales coming from Onsite locations. This has been a successful strategy for the company and will continue to drive growth in the future.

The company's decision to expand its Onsite business model was initially driven by the need for a place to operate, but it soon became apparent that this model was beneficial for growth. The company reevaluated its branch network and decided to reduce the number of locations to 1,450, which would still provide access to 93.5% of the manufacturing base. The company's oldest four states saw a 5.7% annual growth in revenues, with 18% of sales coming from Onsite services. Since 2013, the company has closed numerous locations and shifted focus to expanding its Onsite services.

In the fourth quarter of 2023, Fastenal's total and daily sales were up 3.7%, with December sales outperforming historical patterns. This was largely due to growth in the warehousing end market, which has become a significant part of their sales since the pandemic. Excluding warehousing, demand remained sluggish, with manufacturing and fastener products experiencing moderate growth and contraction, respectively, due to sub-50 PMI readings and soft industrial production.

The muted feedback from regional leadership matches the stable conditions in the fourth quarter of 2023, with sales rates slightly ahead of normal. Pricing remained consistent and positive, with a modest deflation in the fastener line. The company is optimistic about 2024 due to easier comparisons, good channel inventories, and favorable customer outlooks. However, business activity remains subdued at the start of the year. The fourth quarter of 2023 saw solid execution with a 20.1% operating margin and a 33% incremental margin. Gross margin was up 20 basis points from the previous year, with a drag from product and customer mix offset by higher fastener and freight margins. SG&A improved slightly, with small improvements in multiple areas.

The company saw modest expenses and good cost control in the fourth quarter of 2023, resulting in an increase in EPS. They also generated record operating cash and were able to pay a supplemental dividend. Their debt decreased and working capital dynamics were similar to the rest of the year, with accounts receivable increasing and inventories decreasing due to slower customer demand and inventory streamlining.

In 2023, net capital spending finished at $161 million, which was slightly lower than expected due to slower business activity and timing delays. The company's net capital spending in 2024 is projected to be between $225 million to $245 million, with investments in hub automation, distribution centers, and information technology. Despite not meeting all of their goals, the company saw success in increasing their installed base and sales through their Digital Footprint. They also improved their balance sheet and returned record capital to shareholders. However, sales growth was not as strong as expected, but the company is optimistic about leadership changes made in 2023 and expects improved market share gains in 2024. The CEO shared this information with senior leadership during a meeting and also mentioned discussions about the company's Board meetings and thoughts on the quarter and 2024.

The speaker discusses the impact of branch closings on the company's P&L for 2023 and 2024. They mention that while these closings may free up some occupancy, it also creates a distraction for the business and its customers. Additionally, the lower bonus payouts in 2023 will not be a benefit in 2024, so the company must focus on other areas to maintain growth.

The final piece of the report discussed by Holden is the benefit of vending depreciation in the fourth quarter, which will continue to benefit the company in the first, second, and third quarters of 2024. Holden also challenges everyone on the call to focus on helping the branches and Onsite locations reach their sales goals in 2024. He also mentions the company's efforts in ESG and how they have been upgraded to a silver rating by EcoVadis. Holden concludes by mentioning his recent tour of the company's shop.

The CEO of the company is discussing the recent retirement of a long-time employee and their love for giving tours. He also challenges the regional leadership to continue giving virtual tours to customers, as it helps sell the company's capabilities. The CEO then opens the floor for questions and is asked about the current state of the company's end markets. While there are no clear signs of improvement, the CEO notes that there is more optimism for 2024.

The speaker discusses the markets they are involved in and mentions that there has not been much change in the past few months. They also mention their goal of 5% market share and the potential impact of inflation on their pricing. They believe that steel pricing has been stable and not a major factor in their pricing. However, they note that global conflicts and shipping costs may have a small impact on their business.

Dan Florness, Head of Transportation, shared an interesting update about the company's ability to track product. They can now track products at the truck and container level. Holden Lewis, CEO, mentioned that they did not achieve their expected market share this year, but they have the tools and leadership to improve it in 2024. David Manthey asked about the impact of shipping containers on the company, specifically those coming through the Red Sea or Panama Canal, and those coming directly from Asia to California.

The speaker is not familiar with the specifics of the situation, but they have noticed an increase in the cost of containers and are monitoring the situation closely. They also discuss the possibility of suppliers consolidating their distributor partners due to the decrease in demand.

The speaker discusses the consolidation of suppliers over time and the slower growth rate of Onsite sales in the current quarter. They attribute this to slower signings and the impact of the pandemic. The speaker also mentions their conversations with district managers throughout the year.

The average DM has the opportunity for about 60 Onsites and those who are really dialed in are able to communicate their potential and warming form effectively. With 240 district managers, a high percentage have a good plan to give them a couple of Onsites, resulting in meeting their numbers with cushion and having a strong pipeline. The year was marked by difficult markets and execution, with weakened industrial production in machinery and fabricated metals having a disproportionate impact on Onsites. This is a combination of market and company execution.

The speaker discusses the impact of mix on gross margin for the current quarter and predicts it will be less than previous years due to fewer branch closures and slower Onsite signings. They also mention the difference in growth between fasteners and non-fasteners and predict that the gap will not be as wide next year, potentially relieving some pressure on product mix. The speaker then answers a question about the increase in warehousing demand and attributes it to new customer acquisition and potential market share gains. They also mention that it is currently a small portion of their business but could potentially grow in the future.

The company has been making an effort to target the warehousing sector for the past five to six years, and this has paid off during the pandemic as their vending platform and strength in safety products have helped them become a reliable partner for these customers. Their business in this sector has grown significantly and they have gained market share by stepping up to help when other suppliers couldn't. Prior to the pandemic, this sector was less than 1% of their sales, but they have retained and gained business in this market due to their efforts.

The speaker discusses the involvement of a specific customer set and how their market was up 60% in December due to the holiday season. They do not expect this level of growth to continue in 2024. The speaker also mentions the potential impact of Onsites on quarterly ADS and sales trends, but states that it is difficult to predict with certainty.

Dan Florness, CEO of Fastenal, shared an example from their recent Board meeting where one of their team members had to participate remotely due to severe winter weather. The weather has been a challenge for the company and their customers, but their distribution network is still functioning. During the Q&A session, a question was raised about the impact of Onsites and potential structural factors such as e-commerce cannibalization and MSM's implant offerings. Florness believes the decrease in Onsite sales is more of a cyclical factor related to networking opportunities, rather than a structural issue.

The speaker explains that Onsite and e-commerce are not in competition, as Onsite is about operating inside a customer's facility and providing efficient logistics, while e-commerce is more relevant for smaller customers and was affected by the shift to remote work in 2020. The company's e-commerce business is not in competition with Onsite.

The company is seeing a lot of success in their e-commerce sales through Onsites, which is a combination of EDI and web sales. They believe that customers are looking for a range of solutions and there is no one channel approach. While they do face competition in their Onsite model, their natural strength is their branch network which provides redundancy and support for Onsites. They expect to see growth in 2024, but face competition from local businesses.

The company has made changes to its leadership team in order to accelerate its share gains. These changes include moving some people around within the National Accounts team and making changes in regional leadership. The US is now under one leader, which is a change from the past 15 years when the east and west were under two different leaders. These changes were made for economic and personality reasons.

The Eastern and Western US have different approaches to business success, with the Western US being better at deepening relationships with large customers and the Eastern US excelling at finding new customers. This is influenced by the leaders and industrial activity in each region. Additionally, the company's front doors are open in most places, except for a few states with strict regulations. The company's business in Canada operates differently due to restrictions on retail transactions.

The company has gone through a process of consolidating their approach to their business and evaluating different experiments. They wanted to create a more consistent model to avoid conflict with their customers. The impact on growth from smaller accounts is not significant. The CEO recently visited China and had positive experiences with the people there.

The speaker had a positive experience with the Fasco team during their visit to a branch in Suzhou. They were impressed with the dedication of the team and their grasp of the English language. The speaker thanks everyone for their time and the teleconference and webcast concludes.

This summary was generated with AI and may contain some inaccuracies.