Greetings, and welcome to the Fastenal 2024 Annual and Q4 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 with the Fastenal Company. Please go ahead, Taylor.

Welcome to the Fastenal Company 2024 annual and fourth 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'll 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 a 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 investor.fastenal.com. A replay of the webcast will be available on the website until March 1st, 2025 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.

Thank you, and good morning, everybody, and welcome to the Q4 Fastenal earnings call. If you would please turn to Page 3. Our business grew 3.7% in the fourth quarter, given an extra day. So daily growth was 2.1%. Frankly, it was a frustrating finish to a challenging year. Our business gains and loses leverage relatively quickly when our growth expands or contracts. You saw evidence of this in the quarter where we lost some leverage, and EPS came in at $0.46, down about 2%. It's worth discussing December in some detail. Initially, we were trending towards sales growth, with daily increases expected to be in excess of 3%. Depending on different analyses, some argued it could be 4%, but a number above 3% seemed achievable. However, that trend collapsed during the Christmas week and into the New Year. If my calculations are accurate, if the first 15 days of December were growing at 3% to 4%, and then that evaporates in the last five days, it suggests we dropped somewhere between 9% to 12% that week. However, we believe the initial part of the month is more indicative of where we are headed in January and February than the last week. Looking at data from our vending operations, we have unique insights into over 20,000 facilities where we have installed vending machines. I asked our vending team to analyze transaction trends in the weeks leading up to and following Christmas, separating insights from manufacturing and non-manufacturing customers to better understand the fluctuations. In 2022, around 25% of installations saw a significant drop in transactions during the holidays, while in 2023, that rose to 30%. This year, it reached 35%. As of the New Year, we noted a significant uptick in facilities that were shut down. For example, while we saw only 5% shut down post-Christmas last year, this year that number ballooned to 17%. This indicates many companies chose to close their doors after Christmas and remained closed through January 2nd. There was also an increase in the number of customers with reduced activity due to typical holiday work shortages. In the previous week, normal activity resumed at approximately 4%. We anticipate improvements, and Holden will touch on that regarding the impact of our truck routes cancellation due to weather conditions in the Southeast. On Page 2, we've prepared insights for our upcoming Investor Day, which we aim to share this March. When I joined Fastenal back in 1996, it was all about account numbers and dollars per active account. Typically, in a branch, out of 100 active accounts, 10 made up about 65% of our sales. This time around, I'm looking at it from the customer level rather than just accounts, recognizing our operations can have multiple accounts for one customer. On Page 3, I'm pleased to announce we have raised our quarterly dividend by roughly 10%. If you annualize the recently declared dividend, it amounts to about $1.72. We are confident in our ability to continue generating strong cash flow, reflective of our business model for many years to come. What you see is a new visual representation of our business that may look unfamiliar at first, but it conveys a powerful story. Each customer represents unique revenue contributions based on our services, which vary depending on how and where products are supplied. The data in the slide is based on our analysis of approximately 270,000 customer sites we serviced in 2024. The top two segments summarize customers spending more than $10,000 a month as well as those surpassing $50,000. In 2024, we saw about 5% of customer sites generating around 77% of our total sales. Since 2017, revenue through these sites has grown at a compound annual growth rate of 14%. This reflects how our clients truly value what we bring to the market. There are approximately 13,000 customer sites that correspond to this group, averaging about $38,000 spent monthly. Our 50,000 plus customers have also shown strength with a 18% growth rate since 2017. This encourages efficiency in operations and allows us to expand both our offerings and resources. We plan to deemphasize the onsite numbers discussion and instead highlight our growing customer base that generates over $50,000 per month. On the lower half of this slide, we lay out customer segments in which we appear less successful. Customer sites spending between $5,000 and $10,000 account for about 4% of revenues, with 10,000 sites identified in 2024, roughly 42 for an average district. While this performance may seem mediocre at first glance, we've been successful in transitioning many customer sites into the $10,000+ category over the last seven years, primarily through our efforts in MRO products, industrial services, and solutions. To recognize just how crucial industrial services are, we crossed a notable milestone, generating over $100 million in revenue for the first time this year. However, the segment of customer sites spending less than $5,000 has faced hurdles due to the effects of strategic branch closures, the pandemic, and shifts in purchasing trends. This decline has colored our prospect in the segment, but we are driving efforts to enhance offerings through e-commerce capabilities to boost convenience and attract again that spend. Moving to Page 5, we signed 56 new Onsite accounts in the quarter, concluding the year at 2,031, marking a 12% increase year-over-year. Our customer base within the Onsite area grew at mid-single-digits, but we also observed substantial downturns in older Onsite contracts. Unanticipated drops were seen in the industrial economy's performance. Overall, we signed 358 Onsites in 2024, an increase from 326 last year, although a bit below our expectations. In 2024, we achieved over 100 MAU signings per day for the first time, reflecting our positive outlook towards 2025. Our FMI Technology contributed to 44% of our revenue versus 42% and 39% from the last two years respectively with goals established for continued growth. E-commerce displayed a good story at a 28% growth, particularly in e-procurement, which saw almost a 40% boost. Still, we are seeing challenges in traditional online sales, prompting us to realign our strategies. Altogether, e-business and FMI Technology accounted for just over 62% of our sales. As for operating expenses, we expected to manage them effectively, aiming to maintain good controls on discretionary spending even as we anticipate reversibility of bonuses as growth resumes. To wrap up before I pass the call to Holden, I want to address Holden’s announcement regarding his list of goals, which included ensuring the organization’s momentum through 2025 while also seeking a new CFO who accommodates growth in a business that has almost doubled in size. Lastly, I want to clarify the difference between the roles of CEO and President, emphasizing each role's focus and collaboration in executing our strategy.

Great. Thanks, Dan. Yeah, it was a very difficult conversation, but this has been a tremendous opportunity. I want to ensure all investors understand that I have a unique opportunity to explore something different. That said, it has been an honor working for Fastenal, and it's a great organization. Jumping into Slide 6, I understand that investors are keen to hear about the quarter. Sales in Q4 of 2024 were up 3.7%, with daily sales increasing by 2.1%. Daily sales growth throughout the year ranged from 1.8% to 2.1%, aligning with PMI signaling modest contractions in manufacturing. Q4 sales trends mirrored prior quarters, with MRO-oriented products outperforming OEM-oriented products—safety up 4.8%, and Fastenal down 1.4%. Larger customer sales showed a 4.2% increase in national accounts while non-national accounts dropped by 1%. Moreover, the manufacturing end markets rose 3.3%, overshadowing a 0.3% decline in non-manufacturing end markets, particularly marked by a 4.1% drop in non-residential construction. It's key to remember that Q4 can't be fully assessed without considering December's activity cadence. Our top 100 customers experienced daily sales growth in the first 15 days of December, but declined more than 20% in the final five days, swinging the month from expected growth to flat. Nonetheless, we remain encouraged heading into 2025 despite some slowdown signals. PMI remains below 50, with business activities appearing slow. We faced impacts at the beginning of January, compounded by weather-related disruptions, resulting in the cancellation of about 6% of truck routes. Conversely, we see positivity among our regional leaders, noting optimism post-election, as our contract base grows in double digits, evidenced by a 12% increase in December. We believe these customer signings will eventually reflect positively in sales. As we move on to Slide 7, the operating margin for Q4 was 18.9%, down 120 basis points year-over-year, while SG&A dollars remained consistent with previous quarters. We believe cost management has been effective. Our anticipated operating margin decline reflects slow growth, especially as we navigate our seasonally lowest volume quarter and holiday shutdown effects. Gross margins in Q4 stood at 44.8%, dropping 70 basis points from the same quarter last year due to product and customer mix. We also encountered product margin pressures, figuring in shipping costs, but most of these pressures should not carry over into Q1 of 2025. SG&A accounted for 25.9% of sales in Q4, pushing up from 25.3% year-over-year, driven primarily by higher lease costs and currency impacts, among others. Ultimately, we reported fourth-quarter EPS of $0.46, flat relative to Q4 of 2023. Shifting to Slide 8, we generated $283 million in operating cash during Q4, equating to 108% of net income, with $1.2 billion generated for the full year. Despite a slight dip in cash conversion compared to 2023, we view the rates as consistent with expectations. We maintain a conservatively capitalized balance sheet, with year-end debt being 5.2% of total capital. With confidence in our future cash-generating capabilities, we increased our dividend by 10%. Our accounts receivable and inventories rose accordingly, driven primarily by sales growth and initiatives aimed toward improving product availability. Capital expenditures for 2024 were $214 million, below projections, but we anticipate stepping up spending in 2025 to push for anticipated growth and upgrades in facilities. Before moving to the Q&A, I want to address our decision to not provide Onsite signing targets starting in 2025. Previously, our focus was on building internal participation and investment justification. As Onsite accounts represent nearly 45% of our sales, our success will increasingly revolve around maintaining a balanced approach toward all customers generating robust revenue. We expect to provide more meaningful updates at our Investor Day on March 13th, where we will delve deeper into our strategic plans centered around supply chain solutions and customer engagement.

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

Hey, good morning, and thanks for taking the questions. And, Holden, congratulations. It's been great working with you and wish you all the best.

Thank you.

So my first question, I guess I want to ask about the shutdowns and then sort of the comment that customer sentiment is more optimistic. How do you marry those two comments? Why do you think the shutdowns this year were so intense? And what are you hearing on customer sentiment if you can be more specific? Do you expect trends to improve in '25 and why do you think that?

Good morning, Ryan, and thanks for the question. I'll touch on the shutdowns piece and then how that counters with sentiment. I think every organization gets to January 1st, it’s either looking to improve upon the previous year or just recoup from a mediocre year. Many companies may have decided to shut down operations during the holidays to recharge and update their equipment. This could be motivated by the fact that they did not have pressing business obligations during that period. Holden, would you like to add to the sentiment part?

When I discuss the improving sentiment, the feedback from our regional vice presidents post-election has been notably positive. There is a sense of relief that the uncertainties have started to dissipate. This sentiment has been fairly universal and it lends credibility to my perception that there could be an uplift heading into next year. Although it may seem contradictory for companies to shut down while feeling optimistic about the new year, many see shutting down as a way to clear the decks, gear up for growth, and deal with less overhanging inventory.

That makes sense, thanks. My second question is regarding your recent disclosures. I was surprised by the concentration of your sales. Just to confirm, should we be reading it that 1% of Onsites, which is about 20 Onsites, generates 50% of sales?

No, that's not correct. We have roughly 2,000 Onsites which translate to a little over 40% of revenue. It's essential to differentiate between the various customer segments. These prolific customers tend to develop over time and aren't easily categorized by looking solely at sales volume. The dynamics of our Onsite program have allowed us to engage with customers whose businesses align better with our services. We can be more flexible and present significant margins, while also retaining a keen eye on potential growth areas.

Right, that makes sense. Thank you. I'll pass it on.

Thank you. The next question is coming from David Manthey from Baird. Your line is now live.

Hi, good morning. Clearly, there's always been an 80/20 rule at Fastenal, but as we look at Slide 4, is 96% of the customer sites generating 22% of sales an opportunity or is that just the way it is?

That's definitely an opportunity. My conversations with district managers suggest we can maximize Onsite engagements — on average, we only have about 7-8 Onsites per district while we know there's potential for over 50. Moreover, we are really effective at planned spend and supply chain optimization. Through better product management and direct customer engagement, we can penetrate deeper into these segments.

I completely agree. The presence we have in the Onsite world reflects our special offerings. We initially targeted MRO products, expanded into safety, and have proven to adapt to customer needs effectively. Our challenge will be finding the right approach to service customers who fall into different spending categories, as that’s where our growth lies over time.

Thanks for that insight. Also, could you elaborate on the potential impacts of tariffs, particularly in relation to how that plays through your contracts?

Certainly, tariffs are something we've had to manage skillfully over the years, allowing us to adapt both domestically and globally. Our focus remains on providing visibility to our customers, empowering them to make informed decisions without losing sight of our financial management needs. The unpredictability of tariffs remains an ongoing challenge, yet we are prepared to guide our customers through potential changes.

Thank you. Our 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.

Dan, regarding e-commerce and its potential relation to unplanned expenditures, can you elaborate on your plans for March?

Indeed, we’ve recognized the importance of improving our inventory management, particularly as it relates to e-commerce and customer experience. There’s room for better stock levels to reduce unnecessary delays, and we are actively investing in our relationships with suppliers to bolster product availability. As we roll out these enhancements, they'll enable us to provide our customers with better visibility and tracking. This will enhance not only service efficiency but ultimately customer satisfaction.

For quality control purposes, gross margins are likely to stabilize moving forward. While Q1 typically demonstrates higher margins, we may see complete stability in 2025. Market conditions may influence our product diversification, where we’ve faced weak demand for fasteners but expect to see some balance and shifts in purchasing behavior. Our goal is to navigate them effectively.

Thank you, Holden. We'll call that a high bar, but still manageable for your successor.

We have a couple of minutes before the hour concludes. If there are quick questions remaining, we can address them.

Our next question is coming from Stephen Volkmann from Jefferies. Your line is now live.

Holden, can you provide insight into how we should consider operating expenses moving forward?

Certainly, about 70% of our operating expenses are tied to labor. This portion will play an important part in leveraging growth potentials. However, the other 30% presents an opportunity for optimization. As growth regains momentum, we aim to maintain a favorable margin performance in coordination with our expenses to create more balanced growth in various market conditions. Our goal remains to defend our margins effectively.

Thank you. That concludes our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

I want to thank everyone for participating in our call today. We appreciate your commitments and support as we head into 2025. A big thanks to the Fastenal team for their hard work in 2024, which has positioned us well for our future. We look forward to continuing to share our story. Thank you, everyone.

Thank you. This does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We appreciate your participation today.