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Daniel L. Florness; President, CEO and Director; Fastenal Company
Holden Lewis; Executive Vice President and Chief Financial Officer; Fastenal Company
Taylor Ranta Oborski; Financial Reporting & Compliance Accountant; Fastenal Company
Christopher M. Dankert; SVP; Loop Capital Markets LLC, Research Division
David John Manthey; Senior Research Analyst; Robert W. Baird
Ken Newman; Senior Analyst; KeyBanc Capital Markets Inc., Research Division
Michael Edward Hoffman; MD and leader of the diversified industrial products research group; Stifel, Nicolaus
Nigel Edward Coe; MD and Senior Research Analyst; Wolfe Research, LLC
Ryan James Merkel; Associate and Research Analyst; William Blair
Operator
Hello and welcome to Fastenal’s 2023 fourth quarter and annual earnings conference call. (Operator Instructions) As a reminder, this convention is being taped lately. Now I’m excited to speak with Taylor Ranta of Fastenal Company. Please go ahead, Taylor.
Taylor Ranta Oborski
Welcome to the Fastenal Company 2023 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 1 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 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 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.
Daniel L. Florness
Thank you, Taylor, and hello everyone, and welcome to Fastenal’s fourth quarter earnings call. I’m going to go directly to the footer, and on page 3, we have a bunch of slides here. Therefore, in 2023, 2 fights occurred in our organization. First of all, since November 2022, for four consecutive months, we have noticed a PMI below five0 and when you work very intensively in the commercial sector, that is a big challenge for you. And there are many benefits to Holden being a component of our organization, and one of them is his career before joining Fastenal, which he has access to: he overlooked things about things that I don’t even know . So I asked him. I said, “Hey, how often do consistent situations like this happen?” And he said, “Well, since 1970, there have been six times that it has been below 50 for a long, consistent period, the most recent being the Great Recession of 208 and 209. But it’s a pretty challenging time. And I said, ‘Okay. ‘ And he’s been pretty defiant and you can take a look at him. But the second piece, the second struggle is that we have done better. And in 2022, we are making smart numbers. Inflation has helped some. The rebound in the economy due to COVID-19 has helped some. The fact that we’re pretty savvy in the source chain and being able to source product and keep other people supplied helped us, because if you can’t get it anywhere else, you come get it from us. And. . . yet, there were things under the hood that we didn’t execute as well as we did. would like. And we made some leadership adjustments throughout the year. And I think we are very well prepared for 202four. But those are some things that have challenged the year. Despite all this, in the fourth quarter construction increased our daily sales by 3. 7%. The team did a very smart job managing expenses. We’ve had some things that, infrequently, you have some things that you find interesting. Sometimes things happen against you. On a comparable basis, things were rarely favorable and construction increased our EPS by 8. 5% to $0. 46. If I think about our expansion efforts, it is quite uneven. We continue to see attractive expansion in our installed base of local locations, although perhaps not as temporarily as we would like. FMI devices, we did a very smart job. And we have continued to build our virtual footprint that we have talked about in recent years. Constant coin flow hit a record high with over $1. 4 billion in constant coin flow we generated, and that’s a 52% increase over what we made in 2022. At first glance, it’s a little misleading taking into account 2022, and I’ll get to that in a moment, fueled with a lot of running capital because we were offering a trusted source chain to our consumers. This brings us to the last point on the page, and we have paid a fifth division. We paid $0. 38 consistently with a constant percentage here in December. This is the fourth time we have paid an additional dividend of this type since our IPO in the late 1980s. The first time was in December 2008. The world was in free fall. We had coins on hand. We thought that this liquidity belonged to our shareholders. We do not know what their liquidity desires are. We know that we probably won’t want it in 2009 if the economy goes the way it is because our business is countercyclical. And we knew we were wasting a lot of coins. And so we paid a significant division in December 2008. In December 2012 there was a lot of uncertainty in the United States. The federal government was arguing among itself about split tax rates. We didn’t know if tax rates would increase in 2013 and we thought we had a lot of coins. Let’s pay it to our consistent participants, and we don’t want it. We would generate many coins in the future. We’ll pay and let other people in Washington, D. C. resolve things. It’s smart to know that today in Washington, D. C. , things are much calmer. Sorry for the sarcasm, I’m from the Midwest. In December 2020, we paid: the world was in the grip of COVID. We had more coins than we wanted and paid an additional split. This one is different from the other three. We have invested a huge amount of coins in stock in 2021 and 2022, an incredible amount, because the evolution of the supply has become irregular. It cannot be counted: it was not a reliable deadline to get the boxes through the ports and get the products out. And we are not a sorry company. We don’t tell our consumers, “I’m sorry, but I can’t understand it either. » We are a chain of origin company. And if we calculate that it takes us another four or forty-five days to reach a container, we increase five0 days of stock, 6 days of stock. So we use a lot of coins. Fortunately, things have become more solid and we will raise these coins in 2023. And we will generate enough liquidity as we move towards 202four and beyond. We didn’t want it. We send it to our consistent percentage holders. We believe we have a literally conservative track record and we have plenty of gunpowder for whatever we want to do as we approach 202four. Let’s turn to page four. Five8 accusations in the last quarter of ’23. It is not a really impressive figure. Perhaps the environment has become a little more complicated at the end of the year for Onsite signage. This is not the year of peak productivity for many of our consumers. Maybe some district managers are looking for their expectations for 202four, and possibly some signs on the site are distributed in 202four. We are up 12. 3%. We ended the year with 1,822 places. Our old sites have had a pretty difficult year. I think this says more about the PMI than anything else. And yet, we still expect between 37 and 400 signals next year. We believe we are in a position to do so. We believe there is power behind this and we believe the team is literally focused on that. And that brings us back to some of our execution challenges that I talked about on the previous page. IMF Technology. We had a smart year with IMF. We did a smart signaling job. If I look just below the bullet where we say we signal 24,126 MEU, that breaks down into 253 days, or 95 per day for the entire year. One thing we talked about several years ago was building our infrastructure to help signal a hundred devices a day, and that was a far cry from what we were doing at the time, but it was kind of the number we had in our heads. And I’m pleased to say that the team essentially achieved that, and they hit 95 a day for the year. Our goal for next year is to sign between 26,000 and 28,000. That’s a big number. I think the team is up to the task. E-commerce continues to expand well. A lot of that, obviously: we may not have 28% growth. Much of this is because consumers are changing the way they interact with us, and we are not exclusive in this area. So I think e-commerce currently represents about 25% of our sales as a constant percentage of our business. If I look back not too long ago, this represented five% of sales. So it keeps growing. And finally, our virtual footprint. This is where we interact electronically with our consumers. We would possibly deploy IMF. So, a finishing device, a container with built-in technology, a mobile scanned container, whatever, but we have interaction with our visitor and then we load the e-commerce to the maximum of that, without the double cone. And in January 2020, this represented 36% of sales. A year ago, it was 38%. A year ago, it was 46%. A year ago, it was 53%. And there you have it, we ended this year with five8%, five9% community rate. Let’s turn to page five. This is the last time you will see this graph. We started it several years ago. Back, we have around 3,419 places in the market. This is a growth of 3. 5% compared to last year. In 2015, about 9% of our market locations were what we call local locations. Now, an on-site reaction can also simply mean that we are physically inside the visitor facility. We operate in a facility close to the consumer that is committed to that consumer. We would possibly be inconsistent with a setup in the back of a branch because the visitor doesn’t have enough domain for us to put everything there, and we only put a few things there. And we fill up: our back room is the back of the branch. But this is where we interact in a discrete activity with the visitor, and that accelerates our ability to grow. We literally see this as something that didn’t happen once or twice in the ’90s. And the first time was, frankly, we also can’t find a building to rent in the city. And the consumer said, “I have room,” and then we moved. So it was more of a necessity. But when we learned that this was actually a style of business that could also help us grow, it prompted us to review our company’s paintings. So we peaked in 2013. At that time, we estimated that we were within a 30-minute drive of 95% of the US manufacturing base, with our approximately 2,600 outlets or branches, and that included our net paints from USA and Canada. But we looked at it and said if we step back a little bit, given that some of the business that would be in a branch will be on site over time, what would that look like? And we settled on a number of around 1,450. At 1,450 sites, that 95% access to the production base drops to around 93. 5%. And we know that if there are consumers who are outdoors during that 30-minute period and they are on-site consumers, it doesn’t matter if our branch is four or five minutes away. Array So we think that’s the right density. And I will use, I do, one of the advantages of being an organic producer of the year is that all of our systems are integrated into one system. You have access to a huge amount of information. And I took a look at our four oldest states in the business. And if I go back to 2007, in Minnesota, Iowa, Wisconsin and Illinois, we made just under $400 million in profits. This represents approximately 19% of our sales. We had 236 branches in those four states. We had 20 sites. Over the next decade, this business (in the four states that we grew in) our CAGR was about 5. 7% consistent over the year. And as you can see, it is a very successful business. That’s above the company average by a few hundred basis points. And about 18% of our profits were made on-site. Since 2017 we have closed; Since 2013, we have closed several locations, but have opened several sites. In fact, we went from two hundred to 263 branches. We currently have 191, so we are down about 30% from our peak. Our number of stores is more than 221, so we have more locations than branches. Recently, since 2017, this domain has a CAGR not of 5. 7%, but of 8. 2%. So we took an old, mature, successful component of Fastenal’s business and grew it faster. Today, it is about a $1. 1 billion business. That’s about 15% of our sales, and about 46% of our sales are made through a site. Sorry to take us down memory lane, but I’d like to give a little insight into why we’re excited about the branch network paints and site rationalization and the prospect of expanding our expansion capacity. With that, I’ll hand it over to Holden.
Holden Lewis
Great. Thank you, Dan. Good morning, everybody. I’m going to start on Slide 6. Total and daily sales in the fourth quarter of 2023 were up 3.7%. The quarter finished strong, with daily sales in December being up 5.3% and outperforming historical sequential patterns. Much of this strength relates to our warehousing end market, which represents sales into the fulfillment centers of retail-oriented customers. This end market has grown significantly for us since the pandemic, helping to diversify our end market exposure and representing 3% to 4% of sales in 2023. It also grew 45% in the fourth quarter and roughly 60% in December. So strength in this end market was a significant contributor to the performance of our other end markets and our safety products categories in the period.Now if you remove warehousing, our sales results continue to reflect sluggish demand. For example, our manufacturing end market continues to grow, but at moderating rates, while our fastener product line experienced contraction in MRO and, for the first time this cycle, OEM products. Trends in these markets and product categories tend to be more reflective of cyclical trends and are being impacted by PMI readings that remain sub-50 and soft industrial production, particularly for key components such as fabricated metals and machinery. This setting is matched by muted feedback from regional leadership. But if conditions didn’t get better in the fourth quarter of ’23, they didn’t get worse either. If we adjust warehousing out of our November and December daily sales rates, then the months would still have been very slightly ahead of normal sequentials. As was the case in the third quarter of 2023, pricing was consistent and positive and within a typical range of 0% to 2%, with modest deflation within our fastener line. With the usual caveat that our forward vision is limited, we are constructive about 2024 with easier comparisons, channel inventories being in good shape and generally favorable customer outlooks from regional leadership. Entering the year, though, business activity remains subdued. Now to Slide 7. Operating margin in the fourth quarter of 2023 was 20.1%, up 50 basis points year-to-year and achieving a 33% incremental margin. We view this as solid execution against the backdrop of soft growth and low seasonal volumes. Gross margin in the fourth quarter of 2023 was 45.5%, up 20 basis points from the year ago period. We had year-over-year margin drag from product and customer mix, though the effect did moderate sequentially. This was offset by slightly higher fastener product margins and freight margins, though the impact of the latter moderated meaningfully from the prior quarter, and we had slightly positive price/cost. Our view of price/cost is unchanged from what we described in the third quarter of 2023. It does not reflect any incremental pricing actions in the most recent quarter, but rather, the recapture of the negative price/cost that we had discussed in the fourth quarter of 2022. Our objective remains to be price/cost neutral over time. SG&A was 25.3% of sales in the fourth quarter of 2023, improved from 25.7% in the year earlier period. This amounts to small improvements in a lot of areas, rather than significant improvement in just one or a few areas. For instance, more favorable comparisons and good expense discipline produced flattish costs and modest leverage around selling-related transportation, information technology and spending on travel, meals and supplies. We experienced modest occupancy leverage as a result of vending devices used in a past lease locker program passing their depreciable lives. These were joined by contributions stemming from improvements in our supplier contribution — collaboration programs. The Blue Team did a nice job tightening spending over the course of the year as business activity continued to slow. Putting everything together, we reported fourth quarter 2023 EPS of $0.46, up 8.4% from $0.43 in the fourth quarter of 2022. Now turning to Slide 8. We generated $354 million in operating cash in the fourth quarter of 2023 or 133% of net income, and $1.43 billion in operating cash for the full year of 2023. Both dollar amounts represent record operating cash generation that was driven by reduced working capital needs. This produced strong cash balances that allowed us to pay a supplemental fifth dividend in December of 2023, putting cash returned to shareholders through dividends at $1.02 billion for the full year. Even with this, we finished 2023 with a conservatively capitalized balance sheet, with debt being 7.2% of total capital, down from 14.9% of total capital at the end of 2022. Working capital dynamics were similar in the fourth quarter of 2023 to what we experienced throughout the full year. Accounts receivable were up 7.3%, which is primarily a combination of total sales growth and a shift in mix towards larger customers, which tend to have longer terms. Inventories were down 10.3%, owing primarily to the effects of slower customer demand, the unwinding of inventory layers built a year ago to manage supply constraints, our field and hub operations sustainably streamlining inventory processes and modest inventory deflation. Net capital spending in 2023 finished at $161 million, little changed from the $162 million in 2022 and below our forecasted range of $180 million to $190 million. This shortfall has less to do with deliberate project deferrals than it does the slower business activity, reducing the need for certain investments to support immediate growth and timing delays outside our control for certain expenditures. Our net capital spending expectations in 2024 is a range of $225 million to $245 million, which reflects catch-up spending for hub automation and capacity, the substantial completion of an upgraded distribution center in Utah, an increase in FMI spend in anticipation of increased signings and information technology. 2023 had its successes. While acknowledging that we didn’t hit all our goals, we nonetheless closed the year with a higher installed base of Onsites and FMI devices and a greater proportion of our sales moving through our Digital Footprint. The organization adapted to 1 less selling day and slower growth than originally anticipated, effectively controlling expenses and defending our operating margin. We improved our balance sheet and produced record operating cash, which allowed us to return record capital to our shareholders. Where we fell short of our expectations was in our ability to generate stronger sales growth. However, we are enthusiastic about the leadership changes made to our sales operations in 2023 and, regardless of macro conditions, expect these to lead to improved market share gains in 2024. With that, operator, we’ll turn it over to begin Q&A.
Daniel L. Florness
Before we get into the Q&A, I thought I’d share a few takeaways from a verbal exchange we had this morning with senior management across the company. And part of that was sharing with them a little summary of our board meetings over the last few days and some thoughts on the quarter and some thoughts on 2024, and I just thought I’d do a percentage. First, some P&L thoughts, and Holden touched on some of those, but I think he could possibly provide them in the way that we’ve talked about with our own team internally. The first was when I think about 2023 and then 2024, so that’s the last year that we have, that we will have branches. Branch lockers do 2 things for us. They lose some occupancy. What we’ve found over time is that typically when we consolidate two locations into one, some of that occupancy savings is spent perhaps on a larger location for either location because the business doesn’t match. Or as we’ve noted recently: during the COVID period, many of the buildings that we were opescore in have literally become hot buildings for many local distribution issues for much of e-commerce. So there was a festival for space, and the festival doesn’t make it cheaper. But having said that, we benefit from some savings on occupancy. These achievements will be behind us and we want to think about them as we approach 2024. There is a flip aspect to the coin. Consolidating 2 sites into 1 is a lot of work and is a big distraction for the company and our consumers. And this distraction from our own sales energy, our own local energy, is now behind us. And the challenge we offer everyone is to make sure that translates into sales activity to grow our damn business. Secondly, we will benefit from the reduction of bonuses in 2023, which will be earned by the source of income and not by the beneficiaries. But 2022 has been a very intelligent year for us and many of our painters are motivated by an undeniable growth of virtues. And we improved our virtues especially in 2022. Since they decreased as we moved towards 2023, the bonuses decreased. We don’t expect to have that merit in 2024 because we don’t expect P&L to do what they did in 2023. And that means we have to literally be careful with everything we do, so that it can work again. -expand. The last piece, and Holden talked about this, some depreciation of the sale. We had a circular moment and then enjoyed the fourth quarter. The smart thing about this is that you will also make profits during the first quarter, the second quarter, and the third quarter until our birthday. So this will bring us some merits in 2024. The next call was a challenge for everyone who participated in this call. Whether you’re in sales or not, we want to focus on everything we do. This helps our branches and stores achieve their goal. I really had to laugh after, in fact, after the call, and I think I have to thank John Soderberg for that. But on the printer there is a sign that says: “Help our branch and locations reach their sales goals by 2024. ” Thanks for that, Juan. And yet, that’s where we are. We don’t feel smart in 2023, and perhaps the most productive way to feel better is to make it grow a little faster. My congratulations to our team who worked on ESG. A few years ago we were probably a little diminished there, basically because of our opescore style, frugality, which is naturally conservative. And when we entered the ESG world, what we literally learned was that we wanted to tell our story in a more wonderful way. And I was pleased to say that while we would have possibly formalized some of our policies to the public and things like that, the most effort we put into it is understanding what we’re doing. It takes a lot of charts to quantify some of the things we do while telling a more wonderful story. And here in January, I’m pleased to say, for those of you who are familiar with EcoVadis, that it is a proper ESG rating agency. We’ve had a bronze medal in the past. Here in January we were promoted. We now have a silver medal in EcoVadis. I don’t know of any other North American distribution company that has silver coins. Maybe there is. I don’t know any of them. Congratulations to the team for doing a wonderful job telling our story. Finally, last week I had a chance to stop by our store, and I mean a chance. I already did. Tim Borkowski has directed much of our production for 29 years. He retired this week. And Tim excels at giving you a 20-minute guided tour, even though it takes him 60 minutes to do it because he loves what he does. He loves to explain it. He loves to describe it. It will have to be an engineering circular. But I had a wonderful stopover with it and a handful of us ate it. And one challenge I posed to our regional leaders today is that during COVID we have exhausted them with virtual tours. And it has been silent for the last 2 years. And I told the group, “When consumers see our features, it sells. ” We have 1,822 places. We hope to sign a maximum of 400 in the next 12 months. Well, I think so, if only the members of the site were on tour for 253 or 254 days a year, that would be 7 a day. Let’s use them. And because our internal production functions currently make up between 9% and 10% of our fastener sales. We are literally, literally smart at this. And when consumers see that, it makes us special to them. With this, I will close and open the discussion to questions and answers.
Operator
(Operator Instructions) Our first inquiry comes from Michael Hoffman of Stifel.
Michael Edward Hoffman
Therefore, one of the aspects such as looking for data inventories minus orders suggests that the PMI is above 50. So when you look at your end markets, can you see the wallet where this starts to validate that thesis?
Holden Lewis
For the maximum part, no. Feedback from regional leaders has been fairly consistent throughout the year, and well into the second half of the year, that our customers remain cautious. They are still quite tight in their spending. I will say that I think when I asked executives what their clients were saying about 2024, I would say that forward-looking statements are likely, overall, more positive than existing statements. I also suspect that’s still true. But if I look at the markets that I share with myself through regional leadership, in general, I don’t think there have been a lot of replacements in the last 3-6 months.
Michael Edward Hoffman
It is ok. And then you’ve all been constantly talking about some kind of 0% to 2% price. The market share is 5% or more. We had a slight inflation of metals at the end of the year. Do we have a chance of reaching the high end of that 0-2%?And then, how confident are you of a market share of 5% or more??
Holden Lewis
In terms of inflation, I mean, we follow various indices of the metal. I would argue that those types of Chinese and Taiwanese industries are probably more applicable to us than, say, those in the United States or Europe. In general, yes, there have been fluctuations and movements, but if you look at the long term, those fluctuations and movements are kind of a component of the context, I think, of a pretty solid metal value over the last 6 to 12 months. So I haven’t heard anything recommending that we think the value of metal is a catalyst for incremental increases in value in the future. The other thing you need to remember, Michael, is that when you think about the total cost of a fixing, only about 30% of it, I think it’s in the raw curtains. When you think about it, the cost of transportation and other items with an additional charge. . .
Daniel L. Florness
Processing.
Holden Lewis
Yes, transformation, it’s just not a huge thing. So I don’t hear anything to suggest that the environment is turning inflationary again, with one exception. Are. . . I think there have been a lot of global clashes around the Suez Canal. I hear a lot about too little water in the Panama Canal. And we’re starting to see shipping prices start to go up again. I don’t know how long-lasting this will be. I don’t know how far this will go. This doesn’t generate any action today, but it’s something we’re watching quite closely.
Daniel L. Florness
An interesting update we had this week, our transportation manager, we’ve done a lot of work over the last few years on our own ability to track products. So if I’m in a branch, I can now open a screen. And if I’m looking for a product, I can take a look at it and say, “Oh, the truck that’s bringing it is in central Nebraska. And you’ll be there in 30 minutes, you might be there in 3 hours. . . Or maybe it’s just in a container. ” And now we’re at the point where we’re tracking it, where we’re seeing it at the container level. So we can. . . then he opened the screen the other day and the number of dots that you saw on the map that rotated The southern tip of Africa was significant. And I didn’t see any point in going through the Suez Canal with the product we were transporting. And it was just a snapshot at the time of the news.
Holden Lewis
Yes, anything to keep an eye out for. And then in terms of market share, this year has been uncommon in the sense that we haven’t reached the market share that we expected from ourselves. I don’t think it reflects a change in our cultural attitude. We believe that by the end of the year today, our goal is to gain the percentage of place in the market. Structurally, we still have the equipment to be able to do it. And I think we’ve made some adjustments to our technique and leadership over the last 6-8 months, which we’re really excited about. reboot this market share device in 2024. So we expect it from ourselves, let me put it this way.
Operator
Our next query comes from David Manthey of Baird.
David John Manthey
First question, I did want to ask you about these shipping containers. Clearly, we’ve seen an uptick. But is that — is it primarily — or is it focused on those containers that are coming through the Red Sea or Panama Canal? Or is there any impact that rolls over on those containers coming directly from Asia to California, say? Just thinking about where your main exposures are and how we should think about that if it does extend.
Holden Lewis
I think you might have asked me a more explicit question than the one I studied, to be honest. What I can tell you is that we have noticed a slight increase in the last few weeks, a significant increase in the loading of a container. What that looks like, direction after direction, I don’t know.
Daniel L. Florness
Yes, many of our products, Dave, go through the West Coast. Over the last few years, as our volumes have increased, we’ve brought more boxes to the East Coast, that is, to our North Carolina facility, to our Atlanta facility, because when you bring in full boxes. But historically, many of our products make it to the West Coast.
Holden Lewis
And I think it’s probably speculation, but I would say that the disruption that’s moving from China to the West Coast ports is less than things going the other way. But if you have to take advantage of the existing capacity to travel through over a longer period, it will put pressure on the entire global network, which will ultimately have an effect on our costs as well. And that’s what we’re starting to see. Again, it’s very early. We don’t know how that happens, but it’s something we’re monitoring.
David John Manthey
Sí. Es fair enough. And then, through our distribution work, I learned that some vendors reduced the number of vendors they deal with directly. And I wonder if any of your suppliers have actively consolidated their distribution partners, that you know of.
Daniel L. Florness
I don’t know of any, but I wouldn’t be surprised. And because if you look at where this expansion is coming from, it’s coming less and less. So I wouldn’t be surprised, but I don’t know of any, David.
Holden Lewis
And I would say that over time – so I can’t speak – I don’t know what era you’re listening to. It seems like it’s probably more recent. Over time, you’ve noticed a slow consolidation just in terms of who we pass and interact with. It’s a long list, but obviously, you have titles. And I would say that our higher degrees have solidified over time, and that’s intentional, as relationships evolve. But I haven’t necessarily heard of a recent, planned move across many vendors to consolidate. I haven’t heard anything about that.
Operator
Next question is coming from Chris Dankert from Loop Capital Markets.
Christopher M. Dankert
My guess is that the expansion of on-site sales in the quarter was only slightly higher than the company’s average rate, which is a noticeable slowdown beyond the functionality here. I mean, do you think it’s a unique phenomenon because of some visiting factories?End at the end of the year? I guess, how much or how little do we deserve to get out of this lower rate of on-site sales expansion in the quarter?
Holden Lewis
Yes, that’s relevant. And I think what you see is that there was talk of the fact that our signings this year were not at the point that we expected. And I think at the beginning of the year, you were reaping advantages from the number of signatures passed compared to the past. year, which is affected by the pandemic, right?And so as you get advantages from that, but then you have it, you go up some other year where your signatures are slower, you’ll naturally see that effect continue. If we think about it in a lot of ways, it seems like it has a lot more to do with the transfer cadence, which, again, I think we report that we like the fact that our site continues to grow in the mix. We like that the installed base continues to grow, but the speed of the signings has not been what we expected. And I think what you’re seeing is a result of that.
Daniel L. Florness
One thing, I think I’ve shared in prior calls, I have conversations with all of our district managers throughout the course of the year. And one thing that I’ve seen that’s changed is our average DM has the opportunity for about 60 Onsites. And so we’re having these conversations. You could tell the ones that were really dialed in and the ones that aren’t. The ones that are really dialed in are sitting there with, “Hey, here’s my number of potential. Here’s what we have, that’s hot, that’s warm, that’s warming.” And how good they are at communicating that tells me, “Hey, do they have a plan that you feel comfortable come into the year their pipelines is going to give them a couple of Onsites?” With 240 district managers, if a high percentage have a really good plan to give them a couple of Onsites, maybe some have 3, maybe some have 1. But consistently, a couple of Onsites, you’re at your number with cushion and you feel good about what’s your pipeline.
Holden Lewis
I can also say that Dan started his remarks by talking about how the year was marked by two things. One of them was about complicated markets. The other was execution. I think I described the component that was execution. The other thing to think about is that if you look at the spaces where commercial production has weakened, it weakens in the machinery and steel products sectors of the commercial production spectrum. And those are spaces that are applicable to us as a company, but are specifically applicable. . .
Daniel L. Florness
Extremely relevant.
Holden Lewis
In this world in situ. And what we saw in the third and fourth quarters, to give you an idea, is that for the full year we had a pretty significant gap between the expansion of OEM fasteners and the contraction of MRO fasteners, reflecting the arrival of sites to the site. . Array In the fourth quarter, this hole narrowed significantly. And I think what they’re also seeing is that the relative weakness of production machinery and metals is having a disproportionate effect on spaces that are having a disproportionate effect on sites. That’s why I think, again, it’s a mix of the market and our own execution.
Christopher Dankert
They gave it to me. It’s a really useful color. And I guess maybe we’ll just touch on the last point. Since those expansion factors have an effect on gross margin, we found that the mix was larger this quarter. If those existing trends continue, I guess it’s kind of the same goes for 24. I guess, what do you think about the effect of the combination on gross margin this year, as you see it today?
Holden Lewis
Yes. I think I wait what the combination will be each year. To be honest, it’s a pretty thankless endeavor. But I think I’ve used between 50 and 70 base numbers in the past. I think it will be less than that, and I think it will be less than that for several reasons. First, we’re talking about fewer branch closures. If we close fewer branches, I think the attrition rate of our smaller visitor base will also slow. Therefore, it will not have the same effect of the same order of magnitude. We had slower in-person signings. And again, that ripple effect, I think at least early in the year, will put less pressure on the channel mix effect. I’d also like to point out that for the rest of this year, there was a dramatic difference in expansion between those who notice and those who don’t. And perhaps there is a small detail of comparison and market here. But I bet next year this hole probably won’t be as big. And it would also alleviate some of the stress on the details of the product mix. And that’s why I still think that the combination will be negative. This is simply the nature of our expansion engines. But I don’t think it’s as negative as the overall 50-70 rate I’ve talked about in the past. I think it could be narrower than that.
Operator
Next up is Ken Newman of KeyBanc Capital Markets.
Ken Newman
I just wanted to mention the color of some of the storage calls that you’ve noticed this quarter. I’m just curious what drove this increase. Is it literally a new visitor acquisition? Are you gaining market share from existing visitors? I know that’s not much to you right now, but where do you think it can lead in terms of long-term mix?
Daniel L. Florness
Well, over the last five or six years, we have made a concerted effort to take on this business. Because with our sales platform and our strength in the field of security, it is essential for us to be the ideal spouse for this type of visitor. And we have noticed very intelligent growth. And when I think about the time when COVID hit, it ended our government business. And our access to security products has been a lifeboat that has helped us get through this era very effectively because the commercial sector has been affected during this time. And so it has become an increasingly vital element. If I think about it silently now, several things are happening. There are, we’ve had, I wouldn’t necessarily attribute it to visitor acquisition. We are adding locations with those customers because they are growing. And yet, there continues to be deeper penetration, and we have had examples where other suppliers have not been able to get products to them, and we have stepped in and helped, which is contributing to our position as a more powerful company. spouse and gain market share with that visitor because you have other people you can trust. And those things really helped us. And they themselves have a strong business environment and are using more products. And we had some examples of products that they needed that we were uniquely positioned to help them with. Sometimes it was for the protection of his employees. Sometimes it was about moving a product. And things are going very well for us during the quarter.
Holden Lewis
I would point out maybe a couple of things. One, prior to the pandemic, that warehousing sector was less than 1% of our sales. And so oftentimes, you get asked, like what — can you show that you actually have improved your business coming out of the pandemic? This is an example of a market where we retained business coming out of the pandemic that we gained because of what we were able to do there. And so again, we think it’s — we love having that customer set involved.The other thing I think I would point out, I think I sort of indicated that market was up 60% in December. Christmas doesn’t come every month. President’s Day doesn’t have the same commercial value. I just wouldn’t expect that kind of order of magnitude from that customer set as we go forward into 2024 that we experienced over the most recent holiday period.
Ken Newman
No, it makes sense. That’s helpful. Just for my follow-up here. I’ll just take a look at this year’s seasonal mark, assuming 24 sticks to this seasonal mark for reference. This implies that quarterly ADSs are emerging quite strongly here and, let’s call it, the top single-digit diversity in the back half. Outside of the competitions and the general seasonality, I’m just looking to compare that maybe to the slower venues and how that can increase the year. Isn’t there anything that recommends that sales wouldn’t necessarily adhere to trends that we deserve to be aware of?
Holden Lewis
I’m not going to wait for the DSRs in January, February, and March. That’s it, I’ll tell you. It’s possible that sites simply have an effect. Does it have an effect on January specifically? I really don’t know, do I?I’ve said there’s a lot of value, a lot of value, and some kind of understanding of how those trends work. But there are a lot of error variables every time you report about 20 days of activity and find that they make a lot of sense. On the sites, over a period of several months, yes, I think they can grow a little bit slower in the absence of an improvement in the market due to some signings. But I will tell you, we’re also seeing a slight uptick in sales activity in the external domestic accounts. And I think that could be bounced back again, too. So, there’s a lot of things going on that make it hard for me to say for sure whether or not they deserve to expect us to exceed or not meet the DSR criteria.
Daniel L. Florness
The article I would publish on this topic is probably less about the se-consistent query than it is about an example. So we had our board meeting in the last few days. And one thing I ask of our entire leadership team is to participate in one of the board assembly weeks. You spend time with your teams, with other people, and you are here because we attend user board meetings. One user wasn’t there because he was sitting at an airport in Nashville, Tennessee, and there was 8 inches of snow. So he participated remotely, and I was sitting with him this morning, and now he’s a little scared because the winter weather hasn’t been our friend in January. And he is not the friend of our industry. He is not a friend of our clients. The other day I won a photo. He came from a supplier in the Memphis area, a little further west of Nashville. And I had a picture of his warehouse, his distribution center. And his sales manager sent it to our traffic manager and said, “All the trucks that were coming to pick up the product today have canceled, unless there is one. ” And he said, “There was a blue Fastenal truck that was here 15 minutes ago. I’m sorry it’s not in the picture, but it was great to see you racing in it again. ” pretty tough month. Well, there are many months left. We’ll see how we dig, no pun intended. But our distribution network works. It’s a beautiful thing and this truck was there to pick up the goods.
Operator
Next up is Nigel Coe of Wolfe Research.
Nigel Edward Coe
Yes, the weather is not our friend right now, that’s for sure. So let’s go back to the sites, and it seems very clear to you that this is more of a cyclical thing. Is there anything structural that we want to consider, maybe some cannibalization of e-commerce?MSM also discusses its offerings. I’m just curious if there’s a little bit more, I don’t know, of structural obstacles against us that we want to take into account.
Daniel L. Florness
When I think about Onsite, Onsite and e-Com don’t even come into play. You might just get it, because really, the goal of Onsite is for us to put ourselves in their shoes and function within their facility on whatever they were probably doing themselves before and didn’t really have the experience or the equipment. or the visibility of the source chain that we have to help it work better and more effectively. We then equip that local site with whatever equipment we have, whether it’s vending machines, technology-integrated bins, or spaces where we scan. It’s just a much more effective way to operate. And it’s as much about logistics as it is about orders because, frankly, when we were on site, anything that went through FMI, and FMI is a higher percentage of what went through the site, anything that went through FMI , consumers did not have it. I didn’t actually order it. he. Therefore, e-commerce is not really the solution. E-commerce is probably more vital with smaller consumers because smaller consumers shop and we rarely do it like you and me. I buy a lot of things online. The other thing that this can influence is, and we actually saw this in 2020, a change in market activity in the sense that when other people suddenly started working more remotely, you ask for more. things electronically than before, because we deliver products at one of the facilities, they may just catch us and order products. Maybe they are calling us and other people tend to call less when they are at home. They tend to do more things on the computer. At least that’s what we see.
Holden Lewis
And I would also say, Nigel, I’m not sure I agree with the underlying premise that there’s some discrepancy between local sites and e-commerce. I mean, the truth is that if we take a look at our ecommerce business, if you remember, it’s a combination of EDI and internet sales and a variety of other tactics that we interact with digitally. Approximately 50% of our e-commerce sales are made through sites. Therefore, there is no single channel. by consumers. I think consumers are looking for a variety of answers to solve other problems. And I don’t think they’re conflicted.
Daniel L. Florness
But a higher percentage of e-commerce that is being talked about is EDI.
Holden Lewis
Yes, although it shows me that 35% to 40% of our staff also work through Onsites.
Daniel L. Florness
Alright. That’s the way it is.
Nigel Edward Coe
Okay. That’s really helpful. And then just on the points that, are you seeing pocket competition on Onsite? Again, one of your biggest public competitors does talk about their in-plant offerings. And just thinking about, Dan, you were very honest about the out growth in ’23 fell below your expectations. Do you think that in ’24, you’d be back to that sort of 5 points-plus of out growth versus the market?
Daniel L. Florness
As the year approaches, this would be our expectation. And yet, when it comes to the festival, we have it in everything we do. There are many corporations that we compete with that are local corporations that paint on site. What they may not have are some tools. And one of the natural strengths of our local style is that we have a netpaintings branch, because what’s really complicated and where a lot of organizations fail in certain parts of the site is that we have a natural density of people. So let’s say you have an on-premise location with 2 painters. Well, let’s say a painter is on maternity leave. Let’s say a painter is on vacation. Let’s say a painter has turnover. How do you update this? Well, if you have 50 Fastenal painters in this market, it’s Omaha, it’s in the Twin Cities, and we have over 50 in the Twin Cities. But if you have painters in that market, you have redundancy in the facilities. So we have a natural merit in this market, not necessarily over a local competitor, but rather over a national competitor, because we have a footprint.
Holden Lewis
And maybe the only other thing I would add, this is largely anecdotal, again, I sort of asked the regionals how things are going every month. And they sort of just freewheeling give me answers. And oftentimes, there’s comments about our competitors there. Sometimes, it’s favorable to us. Sometimes, it’s not favorable to us. What I can tell you is I haven’t noticed any difference in the cadence of that conversation over the course of this year. So I mean, if part of the question is are you seeing things intensify, I haven’t gotten that from the feedback from the field.
Operator
The next one comes from William Blair’s Ryan Merkel.
Ryan James Merkel
Congratulations on a smart quarter. I had two inquiries and will do them right away. Leadership adjustments, Dan, what adjustments have you made, and why are you convinced that it will increase inventory profits?And then the question arises: Can you explain the adjustments to the business model?Are the front doors now open at all branches?And I think the question I’m being asked is: could these sales only in ’24?Or do they not have as much impact?
Daniel L. Florness
First, we made a series of adjustments. We’ve moved some people: Within our national accounts team, we’ve moved other people. There are other people who no longer occupy the roles they had before. We have made some adjustments to our regional leadership. It probably wasn’t necessarily an act. It was more of a case of herbs – we all get older and there are still herbal adjustments. I think the fact that we now have the United States under one leader, for the last 15 years, the eastern and western United States have been under two leaders: two others. And so, over time, there are economic reasons why the business has been replaced a little bit, and there are non-public reasons why the business has been replaced a little bit. If I were to compare the eastern United States and the western United States, I think about the leaders of two corporations over time, two incredibly successful corporations. I would say that the way they succeed is different. If I think about the Western United States, I think about a company that was a pioneer early on in some places, and specifically the Midwest component of the Western United States, because it was a more mature business and we needed to find tactics to continue. to grow. Array And so I think the business component is more, it’s bigger in: you have a big customer, we’re better at going deeper and deeper into our big customer. Previously I talked about our production division. I suspect there is a disproportionate distribution of their activities in the West compared to the East. And I may be wrong about that. This is just speculation. If I think about Eastern, there’s no one bigger in [Hunton]. Go out and locate new consumers and develop your business in relation to our Eastern business unit. And once again, it comes from the leaders who have existed over time. It also emanates from commercial activity over time. And as far as our business is concerned, our doors are open. And I think they still haven’t been closed that long and they haven’t been closed everywhere. They were closed in pockets. There are some exceptions. There are some states where the regulations are quite onerous. And we just said, you know what? California has too many requirements, so we’re just saying we’re going to keep them closed. And there is some other state, I what is at the beginning. I think it’s Louisiana. But we have been operating this way for years in Canada. And that was basically because as a wholesaler, you may not do retail transactions. Therefore, our doors are open, but we had a very different activity. We are developing faster in Canada. I hope I have answered your question.
Holden Lewis
And I think I can gain some perspective. I mean, Dan talked about that. When we started this process, we had a lot of other reports in areas, right? Some other people closed, some didn’t close. Some other people knocked over the meters, etcetera. Some other people have stuck with the old classic CSP model. And I think we were looking to create a more consistent model. And so, when we had the opportunity to compare all the other things that we were doing, we looked to consolidate them under a kind of single focus. We have many consumers in many places who share a percentage of a business and we must ensure that we do not create conflicts in that regard. So that was part of what happened. As far as the effect on growth, keep in mind that if you’re talking about smaller accounts, that’s typically what’s called walk-ins because when we’re talking about our largest consumers, we travel to their locations regularly. This represents an average figure of our global turnover. So you get an additional source of income? In all likelihood, we will. I wouldn’t overstate the overall effect on growth. I could push anything to the margins, but I wouldn’t overstate the prospects for it.
Daniel L. Florness
Most of our income source doesn’t even know where our location is.
Holden Lewis
Exactly.
Daniel L. Florness
I don’t know if there’s any other questions in queue. We’re at 3 minutes to the hour, so I think I’ll call it there. If anybody got cut off — if anybody was cut off, I apologize for that.I just want to close this one thought. I just got back 2 days ago from a week — 8-day trip. I was over in Shanghai and Ningbo, China. And there’s a lot of nascent level, global level wrangling that occurs in society, and I guess that’s just the nature of life. I have to say, I was over there. We celebrated 20 years of Fasco, our trading company, and 20 years of our sales organization over there. The people I met were incredible. I’ve spent a lot of time with our team right in Shanghai. I spent good time with our Fasco team, our handful of district managers, our RVP over there, our Senior VP that covers the European and Asian business. And I went down and visited a branch in South — down by Suzhou, and I hope I pronounced that correctly.And great people and really impressed with what I saw and the dedication they have to what we’re about, what our customers are about. And when I think of the — our branch manager, I met down in Suzhou, what an outstanding young man. And the team he had, really impressive people. And I’m always amazed, their grasp of the English language. It’s probably better than my grasp of the English language. With that, thanks for your time today. And everybody have a great rest of day. Thank you.
Operator
This concludes today’s conference call and webcast. You can disconnect your line right now and have a glorious day. Thank you for your participation today.