Greetings, and welcome to the Fastenal 2020 Annual and Q4 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Ellen Stolts. Please go ahead.

Welcome to the Fastenal Company 2020 annual and fourth quarter earnings conference call. This call will be hosted by Dan Florness, our President and Chief Executive Officer; and Holden Lewis, our Chief Financial Officer. The call will last for up to one hour and will start with a general overview of our annual and quarterly results and operations, with the remainder of the time being open for questions and answers. Today’s conference call is the proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission, or distribution of today’s call is permitted without Fastenal’s consent. This call is being audio-simulcast on the Internet via the Fastenal Investor Relations' homepage. A replay of the webcast will be available on the website until March 1, 2021, 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, and we undertake no duty to update them. It is important to note that the company’s actual results may differ materially from those anticipated. Factors 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, Ellen, and good morning, everybody. And thank you for joining us for the Q4 2020 earnings call. I might not be on my A-game today, and I mention that only because typically, when I do this call, I'm very fortunate to have a moderator in the background, and that’s my wife, who listens and will text me if I'm speaking too fast or if I'm going too long. Today, I think she’s probably online trying to see if she can convert her Packers season tickets into two tickets for Sunday’s game. Time will tell. But if I go off on tangents, I apologize for that. I’d like to start with recapping our board meeting. Yesterday’s discussions with leadership earlier this morning included sharing our earnings and progress as we look more broadly within the organization. We also shared a video with the 20,000 plus employees within Fastenal. One piece is somber, as we have done in prior quarters; I want to share some COVID statistics with our shareholders. Though we can talk about a lot of things, we have to start with what is most important: we were not immune to the effects of COVID on the health of the Fastenal Blue Team family. Through September, I previously shared this information: we had 344 cases of COVID within the Fastenal organization. In September, we averaged about 17 new cases a week. In October, as we progressed into the fourth quarter, we experienced what was evident generally across the markets where we operate, and our case count increased dramatically. In October, we had 27 cases per week, a rise of 10 over the 17 in September. By November, that number essentially doubled; we had 430 cases, averaging 86 per week. In December, we began to see that trend down but still at a high of 60 per week with 238 cases. So cumulatively through the end of the year, we had 1,118 cases within Fastenal. That’s just over 5% of our employee population. When considering our business model, most of our employees engage in day-to-day interactions with other human beings, whether at our branch, on-site locations, working in distribution centers, manufacturing, or driving trucks. Therefore, we didn't have the luxury of being removed from society, and the fact that our number is approximately 5% is significantly lower than the U.S. population at around 7% that has had COVID. I believe our team has done a remarkable job exercising common sense and protecting themselves and those around them daily while being mindful of the widespread anxieties present in society. Reflecting on 2020, I recognize many initiatives we undertook to enhance our operations, widen our market reach, and improve our business as we enter into 2021 and beyond. One primary takeaway is that our growth drivers have proven their value, particularly in how we engage with our customers. During a time when many were turned away from customers’ doors, our folks were allowed entry due to our roles in stocking bins, filling vending machines, and providing support to their businesses. And that unique relationship has positioned us for success in Q2, Q3, and Q4. Additionally, we demonstrated our ability to engage with a whole new group of customers. I think it’s important to remind the analyst community that we entered this year having to pivot and adapt, which isn’t necessarily a negative. However, I want to highlight that this year is unusual. We will have a contract with fewer business days than usual. We will lose one business day in Q1, and while Q2 is unchanged, we do have some peculiar comparisons due to the significant surge in sales we witnessed in safety products during Q2 last year. As we approach Q3, it appears normal; however, we will lose a business day in Q4. This creates a situation where we have 253 business days in this year, compared to 255 last year. I want to highlight this, as you read the documents and hear our discussions. Also, consider the Apex transaction we completed in March. I’m genuinely excited about its potential to enhance our service to our customers as it supports our vending platform, which is the largest industrial vending platform globally. A lot of our previous systems were disjointed from what Apex represents, allowing us to extend our supply chain knowledge and visibility more broadly. We now refer to this suite as the Fastenal Managed Inventory or FMI Suite. This includes three distinct components: FAST Vend, our vending platform; FAST Bin, which provides open access storage for items like fasteners or pipe fittings; and FAST Stock, which improves our mobility technology, enhancing visibility for our customers regarding their inventory. On page three of Holden’s presentation, you can see our daily sales grew by 6.5% in the quarter, and we effectively managed our operating costs throughout 2020, leading to double-digit operating earnings of 10.6%. Safety has continued to outperform and has been significantly linked to our FAST Vend platform. Despite safety accounting for less than 20% of sales, it has contributed around 26% of our growth historically but swelled to 156% contribution in 2020. Our problem-solving culture has shone through, and this should open new customer opportunities moving forward. However, as demonstrated in 2020, our ability to sign new accounts was hindered due to the challenging environment, with customer engagement proving more difficult than usual. Apex’s acquisition aligns with our e-commerce efforts and is poised to significantly elevate our capabilities. We are deepening our engagement with our key accounts, mainly focusing on customer mix and product profile changes while matriculating margins. The last thing is regarding our branch model. We’ve evolved it considerably, almost splitting our branches into two main models: the Customer Service Branch (CSB) and the Customer Fulfillment Center (CFC). The first model resembles our traditional storefront with a customer-facing showroom, while the CFC focuses on enhanced operational efficiency, primarily through the back-end fulfillment process. So for our revenue generation, understanding these models is critical. The strengths of our team, and through supply chain challenges, would shine through in the cash flow we produced in 2020 allowing us to return dividends and engage in stock buybacks, maintaining a deployment of resources for growth. On page four, I regularly discuss our vending dispenses, which lets us reflect underlying trends to our shareholders. As history indicates, we ought to be at 103 by early March. This year, we were ahead at 105. Yet, as the economy shut down, dispensing activity fell to 76. By the end of June, we should have been at 109; we ended up at 93. Moving forward, we see currently subdued activity levels; however, we anticipate the resumption of our traditional customer engagement should alleviate some of those trends. In summary, the company continued its innovative efforts for customer engagement, showcasing resilience during the pandemic.

Good morning. Flipping over to Slide 7. For the fourth quarter of 2020, sales were up 6.4% annually. That's an acceleration from the third quarter. Holiday timing aided this improvement, but the overall market sentiment continues to improve. Sales of safety products increased by 34.6%, driven primarily by growth in state and local government and healthcare customers, reaching 98.3% in this period. This growth reflects a blend of COVID mitigation, PPE restocking, and share gains. Notably, 28% of accounts that purchased PPE for the first time in Q2 2020 returned to purchase from us in Q4, typically representing larger opportunities—a positive signal of our market share gains. Non-safety products increased by 0.3% annually, showing improvement from the third quarter. Janitorial products recorded a 30.3% rise, again driven by similar trends as with safety. While cyclical verticals remained negative in Q4, there was a moderation in the rates of decline. Fasteners and material handling entered growth territory by December. Overall, improving macro data indicates better trends in core markets, particularly in manufacturing, which grew by 1.7% in Q4. While our visibility is limited, regional VPs express optimism for continued improvement in activity levels. COVID has negatively impacted our growth driver signings, as labor markets and supply chains remain constrained, yet customers are adapting. We believe that absent COVID, the market could support 100 vending signings daily and 100 onsite signings quarterly. However, access limitations due to COVID protocols have delayed new commitments, representing a challenge entering Q1 2021 with uncertainty about when signing activities will return to potential. For gross margin, we recorded 45.6% in Q4 2020, a decline of 130 basis points attributable to product and channel mix and various organizational factors. Nevertheless, gross margin showed an uptick of 30 basis points sequentially, which is uncommon in a quarter that typically declines. Various positive factors contributed to a significant improvement in labor productivity in Q4, resulting in operating margins of 19.5%, reflecting an increase of 80 basis points year-over-year. In summary, we produced $321 million of operating cash flow in Q4 2020, achieving a remarkable 164% of net income.

If I consider 2021, while the previous-friendly comparisons indicate upward pressure might be present, I believe it’s important to frame expectations conservatively. I anticipate our gross margins may increase, given relatively easier comparatives. While inefficiencies observed in Q2 should not recur, we may maintain a higher COVID product mix throughout the year, which could negatively influence margins. Nevertheless, I anticipates labor and operating margins would improve as our sales grow, allowing for leverage that could yield upwards of 20% to 25% incremental margins depending on growth rates.

Hey guys, good morning. Congrats on the successful year. Hey, also, if you could help us out with some insights or a framework of how you're thinking about margins for this current year. The company did a great job controlling costs in a tough environment; seems like hiring could pick up and some other expenses like bonuses should probably be larger. Any rough framework you could provide?

You broke up a little bit there. I should probably interpret that as around 20 questions embedded in one. Let me try to keep it short. Starting with gross margin expectations, I believe it may be one of those years where, given the easier comparisons, our gross margin should be higher year-over-year. Having had discussions with others, I perceive some overly aggressive estimates floating around. It's important to understand that under normal circumstances, our gross margin was historically around 47.2%. If the product mix remains unchanged, we could see a downward shift over the coming years, pushing us around 46%. The performance in labor and incremental margin could contribute to our bottom line and maintain good operational efficiency moving forward.

Hi, good morning, guys. I wanted to ask about the bin stock and the FMI initiatives. Historically, when you've introduced initiatives like vending or on-site, you’ve outlined some key aspects. This one seems significant; could you share any margin metrics or thoughts on how you view the total addressable market to help us visualize the long-term opportunity of the bin stock or this FMI initiative?

I think of the FMI vending component, primarily the non-fastener aspect. Close to 50% of vending revenue stems from safety products. The FMI bin and Fast Stock solutions enhance inventory management, improving margins significantly. We’re optimistic about leveraging our resources to provide our customers with better labor efficiency while managing these aspects of working capital, even if it's early in the process. The goal is to further penetrate markets outside of fasteners creatively.

I'll contribute to that by expressing that the gross margin will largely depend on the products stored in FAST Bins. If structured correctly, these bins could help us streamline the fulfillment process, and while there’s potential for profit optimization with the right product mix, focusing on non-fastener categories can also yield some profitability.

Hey, good morning, guys. Thanks for taking my question. Thinking about FMI and increasing labor efficiency, are you able to quantify any working capital benefits that might arise from this initiative in 2021?

As for the Fast Bin, we prefer to approach this cautiously as it is still a newer initiative. In time, we anticipate that these bins could reflect working capital benefits, especially as we continue to grow our vending devices in structured inventory paradigms. Still, it’s too soon to project specific impacts for 2021 as we avoid getting ahead of ourselves.

To summarize, our goal is to enhance the visibility and management of our inventory. Achieving this could positively impact working capital as our methodologies evolve. As we progress with the FAST Bins initiative, aligning market needs with efficient fulfillment should improve our response to customer demands.

With that, we acknowledge the uncertainty ahead but view it as an opportunity to better engage with our customers based on learning from 2020. The team's adaptability and problem-solving capabilities are essential in this time of transition as we work to improve customer interaction and build on the relationships we have fostered.

Hey, Happy New Year. What do you think the impact of a vaccine rollout is on your business? Clearly, there are many moving parts, so any qualitative thoughts would be appreciated.

The most significant impact may be the resumption of business traditional engagement and increased customer confidence in our onsite models—as hesitance fades, I expect our metrics around onsite signings and vending to improve drastically. We will also see an uptick in overall economic stability, with both areas contributing to growth potential.

As we prepare for the future, while it is true that some safety sales may recede, the remarkable gains we made in non-safety segments provide a buffer for potential losses within COVID-related segments. The strategic focus on these non-safety market opportunities presents a bright outlook.

As we wrap up the call, I want to express pride in the resilience exhibited by our team and the trust our clients and suppliers demonstrated throughout 2020. Our proactive measures during the pandemic strengthened existing relationships, evidencing how important collaboration is. I look forward to seeing how we can build on our collective experience.

Thank you. That concludes the teleconference. You may disconnect your line at this time. Have a wonderful day, and thank you for your participation today.