Hello, and welcome to the Fastenal 2024 Q3 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Taylor Ranta of the Fastenal Company. Please go ahead, Taylor.

Welcome to the Fastenal Company 2024 third quarter earnings conference call. This call will be hosted by Dan Florness, our Chief Executive Officer; Jeff Watts, our President and Chief Sales Officer; and Holden Lewis, our Chief Financial Officer. The call will last for up to one hour, and we will start with a general overview of our quarterly results and operations with the remainder of the time being open for questions and answers. Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No reporting 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, investor.fastenal.com. A replay of the webcast will be available on the website until December 1, 2024 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, Taylor, and good morning everyone. Welcome to the Q3 2024 earnings call for Fastenal. Before I begin, I want to share a few thoughts. First, as many of you know, several hurricanes have impacted the Southeastern United States recently, and we extend our sympathies to all those affected. Each month, when we release our sales figures, either I or Jeff Watts, our President, share a video with our organization. Jeff is here on the call today to get a feel for this experience, although I jokingly told him that if a tough question arises, I'll send it his way. On a more serious note, when a hurricane or any significant weather event occurs, we set up an internal Teams page for agile communication. This was a skill we honed significantly during COVID, allowing us to provide our field team with vital information during chaotic times when they receive numerous requests from customers and employees. I want to recognize Zach Wise and DaNae Behrens, who have done an excellent job keeping our system updated. Bob Hopper, who leads our operations in Florida, has also been ensuring the well-being of his family, his Fastenal team, and our customers during this crisis. He thanked me this morning for recognizing Zach and DaNae, emphasizing their crucial role in our response. I would also like to announce that our Board has appointed Donnalee Papenfuss as a new officer at Fastenal. Donnalee has been with us since July 1999, marking 25 years with the company. She became our VP of Contract Development in February 2014 and has expanded her role significantly. As Jeff transitioned to Chief Sales Officer, we reevaluated our organizational strategy, aligning our goals for the future. Donnalee has been a tremendous asset in this process, including sharing our approach to ESG with the public. Congratulations to Donnalee and everyone who has supported her development over the past 25 years. Now, regarding our third quarter performance, net sales increased by 3.5%, resulting in earnings per share of $0.52, a 1% rise from the previous year. Excluding certain factors, our daily sales rate grew by 1.9%. Notably, the quarter ended stronger than it began, despite the hurricane impacting the last days of September. Our transportation and distribution teams showed remarkable flexibility in adapting truck routes to meet customer demands. Although I initially anticipated a weaker September, we ended the quarter better than expected. The daily sales rate for September reflects positive adjustments in personnel over the last year and a half, thanks to Jeff Watts and his team’s wise decisions. We continue to manage our current conditions while preparing for future growth. In July, we discussed our strategy to control expenses while planning for the future. Our shareholders expect us to be prudent; we aim for better than low single-digit growth, and I believe we are achieving that balance. The increase in headcount is primarily due to the addition of Onsite agreements, indicating our engagement with customers. Our IT group and business analytics are continuously improving, processing millions of transactions through our FMI platform, delivering valuable insights for our customers and our business. Recent asset efficiency improvements enhance our strategic flexibility. During the quarter, with more details to follow from Holden, we added inventory to our distribution network, and we plan to continue this into Q4 and Q1 to streamline branch-level sourcing. This enhancement will improve cost management and customer efficiency, ultimately aiming to lower costs and increase margins, supporting our growth initiatives. We signed 93 Onsite agreements this quarter, with a 12% rise in active sites from the end of Q3 2023. Our goal is to stay in the 375 to 400 range, leaning toward the lower end. We have faced challenges meeting this target, not due to numbers alone but reflecting our organization’s mindset. Since 1996, our focus has been on adding meaningful accounts and increasing spending per account, rather than just adding numbers. We've shifted from opening 25% to 30% more branches yearly to consolidating some. From 2007 to 2023, we added around 9,500 customer sites, contributing to 93% of our growth during this period. The remainder came from customers spending between $5,000 and $10,000 monthly. We are successfully bringing in new customers with stronger spending patterns and have redefined our Onsite and FMI acquisition strategies for sustained growth. Earlier this week, I shared with district managers how changes in Onsite and FMI correlate with robust growth patterns. In Q3, we signed 7,281 weighted devices, averaging 114 per day—surpassing our target of 100 machines daily. Although the current market presents challenges, we are capturing market share at an unprecedented pace for Fastenal. Our digital strategy, encompassing eCommerce, FMI, and FASTCrib, is under the FMI digital solutions umbrella, led by Jeff Hicks. I am optimistic that eCommerce will significantly boost our sales moving forward. Our digital sales footprint reached 61.1% this quarter, showing improvement compared to last year.

Great. Thanks, Dan, and good morning, everyone. I will begin on Slide 5. As Dan indicated, our daily sales rate in the third quarter of 2024 was up 1.9%. Hurricane Helene, which hit several Southeastern regions late in the quarter, reduced our daily sales rate by 5 to 25 basis points. Pricing was still slightly negative; however, targeted pricing actions moderated the drag compared to the second quarter of 2024. The primary challenge remains sluggish end markets. The Purchasing Manager's Index has been below 50, indicating manufacturing contraction for 22 of the last 23 months. Industrial production might be best described as flat, but key components for Fastenal such as machinery and fabricated metals remain weaker than the overall index with long strings of monthly declines. We continue to navigate a long but shallow contraction in the third quarter of 2024. In an otherwise unchanged environment, a couple of elements of the quarter are worth highlighting. First, our reseller end market weakened markedly with daily sales declining 11.3% in the quarter versus a decline of 6.4% in the second quarter of 2024. Though it's not a large segment for Fastenal, at roughly 5% of sales, these customers tend to be wholesalers, dealers, rental firms that sit between producers and OEMs, and this weakness suggests channel destocking in the period. Second, our September daily sales rate improved to 3.2% despite a 35 to 55 basis point negative impact from the hurricane in the month and moderating growth in our warehousing end market, where September growth was roughly half that of July and August as we begin to hit tougher comparisons. This is accompanied by a mixed tone from regional leadership; an improvement from the universal pessimism of preceding months. One month does not make a trend, but recent contract, FMI, and Onsite signings have yielded positive momentum around customer acquisition. The improved tone seems to reflect a marketplace willing to look past the November elections and into the first half of 2025. Still, in the immediate term, many markets remain weak, and uncertainty prevails over potential plant shutdowns during the November and December holiday seasons. We're not expecting a significant change from underlying business activity in Q4 2024. However, we believe that strong year-to-date signings should benefit sales trends in Q4 2024 and into 2025. Moving to Slide 6, operating margin in Q3 2024 was 20.3%, down 70 basis points year-over-year. Gross margin came in at 44.9%, down 100 basis points from the year-ago period. Product and customer mix played their customary roles. Additionally, two elements of our logistical operations impacted margins. First, certain countries have raised import duties, which has increased our costs for moving products across borders. Secondly, we did not receive a shipper rebate in Q3 2023, which recurred in this quarter. Also, we have experienced lower supplier rebates due to sustained weak demand, limiting our purchasing activity relative to last year. Price and cost did not materially impact Q3 2024. As it relates to operating costs, SG&A was 24.6% of sales, improved from 25% in the year-ago period. The most notable contributor to this leverage was the increase in supplier marketing credits. This, along with lower fuel costs and general insurance costs, contributed to modest improvements. Year-to-date, our SG&A is up 2.8%, above our DSR of 1.9%, contributing to the 60 basis points of margin compression over the period. Our goal remains to prioritize balancing cost management with growth investments. For example, in Q3 2024, our FTE was up 2.8%, exceeding our daily sales rate of 1.9%. However, we've invested in Onsite personnel to support strong signings momentum alongside IT and business analytics, all vital to future growth. Excluding these additions, FTE growth was 1%, lagging our DSR growth. Similarly, discretionary costs were up 3.7% in Q3 2024; however, if we remove sales-related travel, remaining spending decreased by 8.7%. We believe we are managing expenses effectively and expect to leverage when growth accelerates. Our third quarter 2024 EPS is $0.52, matching $0.52 from Q3 2023. To summarize, we generated $297 million in operating cash, representing 100% of net income. With good cash generation amid soft demand, we maintain a conservatively capitalized balance sheet with debt at 6.3% of total capital, down from 7% of total capital at the end of Q3 2023. Accounts receivable increased by 2.5%, reflecting sales growth and a shift towards larger customers with longer terms. Inventories were up 3%, marking the first annual increase since Q1 2023. We began adding incremental inventory of fasteners to improve on-site availability and reduce sourcing through less cost-effective channels. This is intended to support picking efficiency programs in our distribution centers. We added around $25 million in new inventory in Q3 2024 and anticipate adding another $5 million to $10 million in Q4 2024. Net capital spending for Q3 2024 was $55.8 million, up from $42.9 million in Q3 2023. Our expected full-year net capital spending range remains $235 million to $255 million, though we're currently trending toward the bottom of this range. The projected increase in CapEx for 2024 is driven by higher expenditures for hub automation, enhancements to a distribution center in Utah, and increased spending on FMI to support signings. Operator, we'll now turn it over to begin the Q&A.

Our first question is coming from Ryan Merkel from William Blair. Your line is now live.

Hey, good morning. Thanks for taking the question. I wanted to start with September. I know it's one month, but it finished stronger. Do you feel like some of the moves you've made are starting to lead to more new customer adds? Do you feel like you've turned a corner here and we should expect that we'll see outgrowth improve going forward?

Hey, Ryan, good morning and thanks for the question. I personally believe we've turned a corner. We made many changes in 2023 and early 2024. Changes can be distracting in any organization. When I assess the tools and the leaders we've put in place to get everyone aligned, I feel optimistic and expect outgrowth as we move into 2025.

Okay. Great to hear. And then maybe for Holden, on gross margin, how should we think about Q4? Usually, seasonality is down 30 basis points, but there was a bit of noise in Q3. So just curious if you can provide any guidance there.

The seasonality typically affects us by about 30 basis points. I believe we will perform slightly better than the usual seasonality in Q4. I do expect a decrease in gross margin compared to Q3 levels. However, I think the lower rebates seen in Q3 will not have as significant an effect in Q4, which should allow for a few million dollar improvements in Q4 gross margin. So you are correct about seasonality; there will be some, but we have offsets that will help mitigate it.

Thank you. Next question is coming from Ken Newman from KeyBanc Capital Markets. Your line is now live.

Hey, good morning. Thanks for taking the call, or the question, I should say. Holden, I was thinking about margins, and you've called out impacts from negative mix and rebates. As you contemplate the cost actions taken over the last 12 or 18 months, what do you think is now the minimum level of sales growth needed to return to those historical low 20% incremental margins?

The message is that while we've been tight on certain expenses, we've also invested in others. When we reach a point of strong growth, those tightly controlled expenses will certainly increase. I don’t believe the overall profile has changed significantly. Our reaction to the cycle has been adjusted. I believe that revenue growth above mid-single digits allows for effective leveraging of the P&L and margin growth.

One factor that comes into play is our fastener performance, especially in MRO. Improved performance tends to positively influence gross margin and overall efficiency, especially given our recent improvements in inventory and distribution strategies.

That makes sense. For my follow-up question just kind of tagging onto the end of your comment there, Dan. I know tracking visibility into the channel can be challenging due to fastener inventories. But I’m curious to know if you detected any meaningful shifts in the heavy manufacturing sector, whether it’s automotive or OE when considering the ongoing Boeing strike. How do you view these shifts for upcoming quarters?

Well, it's often joked that our visibility is about eight hours. However, we have one indicator of visibility—and that's ISM— which isn't providing much help. I'm cautiously optimistic about our outlook into 2025. Since November 2022, our customers have taken a step down. We don't need business to revert to its 2022 levels—a marginal improvement would suffice. Personally, I believe those scenarios have a greater probability than further decline, which would positively impact our growth moving forward.

To add to that, some markets showed weakness. Agriculture seems particularly weak, and we expect extended shutdowns going into Q4. Consumer durables and pulp, paper, and lumber sectors were also identified as weak. We have observed some impact from the Boeing strike in aerospace. Conversely, oil and gas remain stable, which is a positive note.

Thank you. Next question is coming from Tommy Moll from Stephens. Your line is now live.

Good morning, and thank you for taking my questions.

Good morning.

Good morning.

I wanted to touch on September. Do you sense that there was any help from the macro side? Or would you attribute all or a substantial portion of the benefit to market share? Looking at the market share, did something significant contribute, or does it seem more like the accumulation of various small improvements over time? Thank you.

Regarding markets, I think mix is a fair characterization. Some Midwestern markets indicated weakness in September compared to preceding months. Additionally, many markets described stability, while a few noted slight improvements. Although there has been an uptrend in sentiment compared to negativity previously observed, the improvements primarily stem from our new customer additions and their implementation rather than external macro factors.

I’ll add that a couple of aspects stood out in September: We observed a minor growth in our construction business, which had been negative for several quarters, now showing a 0.9% increase. While this may seem modest, it indicates that our changes are beginning to pay off. Additionally, government accounts exhibited strong growth, likely due to fiscal year-end budgets—time will tell if this trend continues.

Just keeping with the theme of Onsite signings, Dan, you’ve been vocal about the personnel changes made to increase Onsite signings. Any additional details on the maturity of these initiatives, and regional insights would be beneficial as well. Thank you.

The maturity of both Onsite and FMI initiatives is strong. Our average district manager is managing 58 potential Onsite opportunities in their geography that could generate over $100,000 per month in revenue. We've made significant strides in aligning our regional management structure with our national accounts team, leading to better engagement and execution of strategies going into 2025. Bill Drazkowski’s return to the National Accounts team has been beneficial in enhancing our customer acquisition strategy, which has positively impacted contract signings.

Thank you. Just a couple of quick follow-ups. Dan, you mentioned that while you've seasoned the headwinds in branches, you're still focusing on branch growth. Has that growth begun, or do you expect it to materialize in 2025?

I expect growth to materialize in 2025. Currently, we can track the impacts of Onsite signings and monitor any cannibalization effects with our branch locations. The Eastern United States is currently showing growth at 4.9%, in contrast to the Western United States, which has been slightly negative for several quarters.

Regarding inventory investments, we should expect some gross margin tailwind; however, it may take several quarters to manifest. Adding inventory is primarily intended to enhance availability for on-site customers, supporting our efficiency initiatives.

Thank you. I wanted to clarify regarding the gross margin dynamics related to imports. Specifically, the higher duties from Mexico, is this an ongoing concern, and how does it influence your logistics?

Mexico has recently been more aggressive in implementing duties on products crossing their borders, which has increased our logistics cost. This is a new dynamic we are dealing with, alongside similar challenges in Canada regarding gloves. These shifts reflect a broader trend of increasing charges by government authorities across various countries.

Keep in mind, we aren't strictly discussing moving products between countries under free trade agreements; rather, it's about products originating from non-North American countries. The new duties are part of a complex landscape we must navigate.

We haven't finalized discussions on CapEx for 2025; however, capital expenditures tend to be volatile based on specific project demands. Future CapEx will likely reflect a calmer trajectory after the bulk of our investments this year. Generally speaking, I would estimate a decline from our current $250 million run rate, targeting between $200 million and $225 million.

We aim to maintain approximately 3% of sales for capital investment, ensuring targeted improvements in our technology and distribution strategies. Our goal is maximizing the return on these investments, which are essential to facilitate our projections of adding $1 billion in annual revenue in the coming years.

Ultimately, expect capital expenditures to reflect our growth strategy, catering to our logistical needs, national accounts, IT, and the achievement of transformative projects. We’ll likely have a better picture of our financial strategy when we reconvene in three months.

Thank you. I wanted to follow up on the apparent disparity between Onsite signings being flat in Q3 and FMI signings comprehensively up 20%. Is this primarily due to existing customer penetration or the nature of new customer signings?

Onsite signings tend to be lumpier due to the investment intensity associated with customer implementation, while FMI deployments can occur at a quicker pace. We still see a robust growth of Onsite in our installed base, and the current year has reflected over 10% growth in our national accounts and the installed base across both Onsite and FMI.

The growth in FMI reflects how swiftly it generates revenue compared to Onsite's more gradual ramp-up. The partnership with FMI bolsters our service capabilities, engaging customers frequently and driving sustained growth in these areas. As we approach the call's conclusion, I want to express a significant thought tied to company growth objectives moving forward. Approximately ten years ago, we were navigating discussions about what strategies were necessary to achieve an annual $500 million growth. Fast forward to today, we're contemplating how to increment revenue by $1 billion a year. Internally, we have to prioritize our initiatives and solidify strategic alignment across our efforts, realizing that achieving that kind of growth will require deliberate focus and execution.

We plan to host an Analyst Day in April along with our annual customer expo, where we will be diving deeper into these strategies and growth initiatives. More information regarding that will be shared shortly.

Thank you, everyone, for joining our call today. Our employees in Florida have accounted for their safety amid the recent hurricane threat, reflecting the resilience of our team. We appreciate your time and interest, and we look forward to connecting soon.

Thank you.

That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.