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

Welcome to the Fastenal Company 2020 annual and fourth quarter earnings conference call. This call will be hosted by Dan Florness, our President and Chief Executive Officer; and Holden Lewis, our Chief Financial Quarter. The call will last for up to one hour and will start with a general overview of our annual and quarterly results and operations, with the remainder of the time being open for questions and answers. Today’s conference call is the proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission, or distribution of today’s call is permitted without Fastenal’s consent. This call is being audio-simulcast on the Internet via the Fastenal Investor Relations' homepage, investor.fastenal.com. A replay of the webcast will be available on the website until March 1, 2021 at midnight Central Time. As a reminder, today’s conference call may include statements regarding the company’s future plans and prospects. These statements are based on our current expectations and we undertake no duty to update them. It is important to note that the company’s actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company’s latest earnings release and periodic filings with the Securities and Exchange Commission and we encourage you to review those factors carefully. I would now like to turn the call over to Mr. Dan Florness.

Thanks, Ellen and good morning, everybody. And thank you for joining us for the Q4 2020 earnings call. I might not be on my A game today. And I point that only because typically when I do this call, I'm very fortunate that I have a moderator in the background and that is my wife who listens and will text me if I'm speaking too fast or rapidly or if I'm going too long. And then somebody who might say she needs to step in sooner. But today, I think she's probably online trying to see if she can convert her Packers season tickets into two tickets for Sunday's game. Time will tell. But if I go off on tangents, I apologize for that. I'd like to start with recapping our board meeting. The last yesterday discussions with leadership earlier this morning as we were able to share our earnings and our progress we'll look more broadly within the organization. And a bit of the video that we share with the 20,000 plus employees within Fastenal. And one is a more somber piece. And that is, as we've done in prior quarters, just want to share some COVID statistics with our shareholders. Because we can talk about a lot of things, but we have to start with most important and that is we were not immune, if you will, to the effects of COVID on the health of the Fastenal Blue Team family. Through September, and I previously shared that -- this information, we had 344 cases of COVID within the Fastenal organization. In the month of September, we were averaging about 17 new cases a week. In October, and as we progress into the fourth quarter we experienced what was experienced generally speaking throughout the markets when we operate, our case count increased dramatically. In October, we had 27 cases per week, a 10 increase over the 17 in September. So 106 cases, so through October, we had cumulatively 450 cases within the Fastenal family. That number essentially doubled in November, in November, we had 430 cases 86 per week. And in December, we started to see that trend down but still quite high at 60 per week 238 cases. So cumulatively through the end of the year, we had 1,118 cases within Fastenal. That's just over 5% of our population of employees, when you consider the fact that our business, and the way we operate doesn't afford us the ability to remove ourselves from society. 93%, 94% of our employees are in roles that involve day-to-day interactions with other human beings, whether that's at our branch or on site locations, working in a distribution center, working in manufacturing, driving a truck. So we didn't have that luxury and the fact that our number, I believe the US population, if what I read is accurate, we're just over 7% of the US population has had COVID. And we're at about five. So I believe our team has done a really nice job of exercising common sense, and trying to protect themselves and those around them every day and being mindful of the anxieties that exist in society. When I think of 2020, I also think of things that we did, from the perspective of things we did to improve our mode, to widen our mode to improve our business as we move into 2021 and beyond. And I think one of the first things is we demonstrated to the market. And we demonstrated to ourselves perhaps a bit of our problem solving ability. Our growth drivers demonstrated their value, and value from the standpoint of, it's a special way to engage with our customer. And because of the vending devices we have deployed, because of the on sites we have deployed, because of the way we engage with our customer. When most people were turned away at a customer's door, our folks were allowed to enter. And they were allowed to enter because we were stocking bins; we were we were filling vending machines, we were staffing the supporting infrastructure of their business from within inside their facility. And that was a special place to be in a special relationship. And because of that, we saw the success that we did in Q2, Q3 and Q4 and our ability to react and serve that marketplace in a unique way. The other pieces we demonstrated to a whole new group of customers. Maybe it's something that's special about Fastenal. The other thing that it reminded our teams and I reminded our board is we're coming into a weird year where we're forced to pivot and that's a great thing. We look forward to this pivot versus the last. But the optics of the year is abnormal. And I just want to remind the analyst community of that is I don't recall in my 25 years with Fastenal, it might have happened. Maybe it happened back in the 90s or 80s or 70s. I don't recall a year where we entered and we're going to be down two business days. And it's all you know that's an important ingredient and our ability to grow and leverage the business. So in Q1 we will lose one business day. Q2, we don't lose any business days or gain in the business days. But we have some weird comps because of the extreme surge we saw in safety sales in Q2 last year. Q3 is a normal quarter, if you will, and then it's a push on days. And then Q4, we lose a business day. So it's a 253 business day year versus 255. Just want to point that out. When you read the document and you hear our conversation, we will touch on some things about the Apex transaction that we did back in March. And I’m really, really excited about what that means as far as our ability to broaden and illuminate how we serve our customer. And Apex is the technology that underpins our vending platform, and we have the largest industrial vending platform on the planet, and it’s a great platform. A lot of our other systems were disjointed from that because it was a captive platform. And so it allows us to broaden where we can bring supply chain knowledge and visibility to and we’re now referring to that as the FMI Suite of Things, Fastenal Managed Inventory. Within that are three distinct components, and Holden did a nice job illuminating it I think in the press release, and we’ll talk about it today. But in that is FAST Vend, which is our vending platform, as we’ve talked about for years. The second component is FAST Bin, that’s B-I-N. And that’s a suite of Bin technology, it’s not restricted access like you see in a vending machine, it’s open access, but it’s for a lot of things like fasteners or pipe fittings or things like that, but it’s smart in the standpoint, the system tells us when it’s hungry and needs to be fed, and we don’t need to have a person go check it or worse yet, our frequency of checking it means we have bin that runs out. And it allows us to lean down inventory and illuminate the supply chain for our customer over time. So it’s a better supply chain, but it’s also more efficient from a labor productivity supply chain. The third component is what we call FAST Stock. And that is, we deployed, as you all know, a tremendous amount of mobility technology. Now we’ve had a platform in the past, but that platform was very transactional-based. This is more system-based and allows us again to illuminate for the customer what they have in their facility, which is more efficient for the customer, more efficient for us. So we’ll talk about that in combined. But take nothing away from the individual components of vending, which is a great element to enhance growth and engagement with our customer. What is broadening it because the Apex transaction allows us to do that. If I move into Holden’s flip book, you can see, and I’m on Page 3, our daily sales grew 6.5% in the quarter. The team did a great job of managing our operating cost throughout 2020, and it was exemplified in the current quarter and we produced operating earnings that were double-digit, 10.6%. Safety, as we have talked about on numerous prior calls, and I suspect continue to talk about in the calls as we enter 2021 because COVID is not behind us. But safety has been an outperformer for years, largely because it’s a product line that messes really well with our FAST Vend, our vending platform. So despite safety being a little bit less than 20% of sales, it’s produced for the last several years about 26% of our growth, but the contribution swells to 156% in 2020. And as I touched on in when I was first talking, it highlighted our problem solving culture in the marketplace. And I believe this should open up new customer and end market opportunities to us in the future, and Holden will touch a little bit of that in his talk. Customer engagement and growth drivers have improved. However, as you saw in 2020, it ravaged our ability to sign because in an environment where you’re working really hard to protect your employees, maybe the last thing you want to do is all of a sudden, hey come on folks, fasten out. We love what you’re doing, let’s come in move in with us. It introduces a variable that many folks in a year like 2020 don’t want to introduce, and you saw that choking our standing numbers, and I’ll touch on that more in a few minutes. The Apex purchase I touched on already, utilization of e-commerce took a big step up in 2020. As I mentioned, commercialization of our FAST Vend and deployment of mobility, I believe will really evolve our model, evolve our ability to be efficient, because one thing that’s really critical in this path, and we’ve talked about this for four or five years now. What’s really critical is we’re going much deeper into what we call our key accounts group. Much deeper into a large customer. And the gross margin profile because of customer mix and product mix changes. And then it’s incumbent upon us to allow the natural leverage to shine through. In other words, if you’re doing more dollars, you have more places to spread your expense, but also to become more efficient, and that’s what all these things tie to. The last piece is our branch model. We’ve evolved it, and we’ll touch on this in the months to come. But there are two distinct Fastenal branch models that have emerged in 2020. One is what we refer to as the CSB, the Customer Service Branch. And that’s the traditional branch that many of you are familiar with where there is a showroom in front; there is walk-in element to our business. Still most of it’s going out the back door, but it’s a more traditional. It’s about half of our branch network today. During 2020, and actually we’ve been testing this within a handful of regions for the last two, three years. We have what’s referred to as the CFC, the Customer Fulfillment Center. Think of it as a branch where we closed the front door and the marketplace almost like that better or we’re able to operate more efficiently, and maybe we should keep it closed or maybe it’s closed to everything other than I will call or a pickup or maybe on a regular account base. And it allows everybody to go out the back door and most of our revenues go out the back door. And that is about half our branch network right now. And those are the things that are driving improvements to things like e-commerce that I’ll touch on in a few minutes. The last thing is, and I want to put a call out. I’m sitting at the table with Holden Lewis and Sheryl Lisowski, our Chief Financial Officer and our Chief Accounting Officer. Different circumstances allow folks to shine in different ways. And our team was able to shine this year from the standpoint of solving problems in supply chain for customers. Holden and Sheryl and the entire team were able to shine and that we produced an amazingly strong cash flow in 2020. And it put us in a position late in the year, similar to we’ve seen in prior occasions where we had some extra cash, we still see a need for that in our investments of the future, and we paid out a supplemental dividend late in the year. So my complements everybody on that as well. On Page 4, I started sharing this slide, I believe it was back in July, and this is looking at dispenses through vending. I think it’s a way for us to illuminate for you, our shareholder, what we’re seeing in underlying trends. So we index everything to 100, and these are weekly snapshots of dispenses going through those 95,000 plus vending devices in 25 countries. History would say if we’re at a 100, we should be at 103 by the early March. And the reason I call out that data point, that’s right before the world shutdown. This year, we were running two points ahead of that, we were at 105. And as the economy shut down, so did the dispensing activity at our vending devices and it dropped 29 from 105 to 76. By the end of June, history would say, we should be at 109; 2020 wasn’t historic in that regard, we were at 93. So we were down 16 still from that 29 drop-off in March and April. By the end of September, history says, hey, it should be 112, we were 104. So that negative 16 is now a negative eight. And we always ignore the last couple of year -- last couple of weeks of December because it’s world kind of shuts down because of the holidays. So if you look at the week just before that, history says, it should be about 121, we had about 115, we’re still down. A piece of that is economic activity. A piece of that is we didn’t sign as many vending devices because we weren’t able to move in with as many people as we would like to, and we’re down six. The next page said this is dispenses. The next page is unique users. So how many people are coming to work at these customers. If there is 100 employees coming in every week back in October of 2019, history would say, because we’ve signed some more machines that are a growth to 104, this year we were at 107 in early March. Well, when those businesses shut down and weren’t using as much as because they didn’t have as many employees. The number dropped 22 and it dropped from 107 to 85. The history says, by the end of June, we should be at 109. We were at a 101, we’re down eight. By the end of September, we should be at 115. We were at 109, we’re down six. By that week before Christmas, we should be at 123. We’re down 119, negative four. In the employment front, that negative four is probably more about we didn’t sign as many devices. So people are coming back to work and you’re seeing in our underlying numbers, but still the activity is still subdued. And the one thing I did point out on Page 4, and I apologize for that, a few of the blips you see. In early July, that’s obviously July 4th week. In late November, that’s obviously Thanksgiving week. Going to Page 6. Onsite; we signed 36 in the quarter. Again, really, really choppy year. So we signed -- our goal coming in the quarter is 375 to 400. We’re coming into the year; excuse me, with 375 to 400. It slowed in March. So in first quarter we signed about 85. Second quarter was 40. Came back a bit in Q3 at 62. In many ways, Q4 was a more chaotic environment than Q2 was. In that key search, I talked about our own surge internally and we only signed 36 of 223 for the year. But Holden included in the flip book and included in our write-up, our mindset is the same. The market we believe will support us signing 375 to 400 a year. Conditions need to open up to allow us to do that. I don’t want the investment community to read from what we said here. Things are back to normal. Everything is hunky-dory and we’re going to do 400 signings. This is going to play out in Q1 and Q2. And as we borne into the year, the way the economy and the marketplace and the COVID environment will allow it to happen. You saw how it played out in 2020. We don’t have a crystal ball. We’re not the burning bush. We can’t tell you what’s going to happen. What you can tell is we believe the marketplace likes what this onsite is about and is open to that onsite. And it’s really about engagement with the customer. The onsite signings is just a marker and time of what that engagement has translated into. But we’re very bullish on the fact that onsite proved its value in 2020. Vending, I talked earlier about the whole FMI concept. That’s meant to provide better information to the investment community not to confuse the issue with vending and bins and all that kind of stuff. So read it as, this is an outgrowth of the Apex transaction. E-commerce, 38% growth in the fourth quarter of 2020. In March, we broke 10% of our sales being e-commerce for the first time ever. And I’m pleased to say that, despite the fact that the surge actually hurt it, because most of surge orders, actually almost all of them, are outside of e-commerce. That’s people in a chaotic fashion order -- getting product from us, and a lot of that’s over the phone. But despite all that, for the first time in our history, e-commerce is more than 10% of our revenue. And again, that’s e-commerce measured the way this community measures it. I personally think that’s an inaccurate way to measure it, because I think 20% of our revenue being vending is e-commerce. I think 7% to 10% of our revenue being bins and FAST Stock is e-commerce, because the customer, but it’s better than e-commerce because the customer just have to order it. That’s the best digital flow there is. And then the final being this 10% that true is e-commerce. With that, I’m going to turn it over to Holden because I don’t have my text or my wife tell me to shut up.

Great self-control, Dan. Good morning. All right, good morning. Flipping over to Slide 7. Fourth quarter of 2020, sales were up 6.4% annually. That’s acceleration from the third quarter. Holiday timing was favorable this year, but even so, the overall tenor of the marketplace continues to improve during the period. Sales of safety products were up 34.6%, driven by growth to state and local government and healthcare customers, which is at 98.3% in the period. This continues to be some blend of COVID mitigation, PPE restocking and pre-stocking as well as share gains. The most encouraging data point is that 28% of the accounts that bought PPE from us for the first time in the second quarter of 2020, bought from us in the fourth quarter, and they tended to be the larger opportunities. So this continues to reinforce that we have gained share and increased our growth prospects in state and local government and healthcare customers that’s going to carry into 2021. Non-safety products were up 0.3% annually, accelerating versus the third quarter of 2020. Janitorial products, driven by the same trends as safety, were up 30.3%. More cyclical verticals remained negative in the fourth quarter of 2020, but generally saw moderation in the rates of decline. In fact, fasteners and material handling added into growth territory in December. Improving macro data is producing better trends in core markets, particularly in manufacturing, which grew 1.7% in the fourth quarter of 2020. We don’t have a lot of visibility, but our regional VPs remain optimistic that activity will continue to improve. The exception to this normalization is our growth driver signings. COVID continues to negatively affect labor markets and supply chains, but our customers are operating around those conditions. We believe that absent COVID, the market will support 100 vending signings per day and 100 onsite signings per quarter. However, lack of access to facilities and decision makers in light of COVID protocols is delaying new commitments. The challenge that is carrying into the first quarter of 2021 and makes it difficult to determine when signings activity will return to potential. Now to Slide 8. Gross margin was 45.6% in the fourth quarter of 2020, down 130 basis points due to product and channel mix, relative growth of lower margin COVID products and organizational factors such as further clearance, lower vendor rebates and overhead deleveraging. Gross margin was up 30 basis points sequentially in a quarter that more commonly sees a decline. Relative to the third quarter of 2020, we saw the revenue share of lower margin COVID-related products declined by 200 basis points, even as the margin on those products improved by 200 basis points on selective pricing actions taken in the quarter. We also experienced more favorable shipping and fleet costs in the period, largely from having rationalized our weekly routes earlier in the year. Strong growth and continued tight control of cost generated 210 basis points of SG&A leverage to produce an operating margin of 19.5%, up 80 basis points year-to-year. Nearly half this leverage came over labor costs as our record fourth quarter sales were achieved with headcount that was down mid-single-digits versus last year. Labor productivity improved meaningfully in the fourth quarter and full year of 2020, and we will look to sustain this in 2021. We also leveraged occupancy on lower branch count and vending costs as well as other expenses on tight control of travel, lower freight cost as we rationalized our branch pickup fleet and lower insurance costs. Our incremental margin was 31%. If you put it all together, we reported a fourth quarter 2020 earnings per share of $0.34, up 9.6% from $0.31 in the fourth quarter of 2019. Turning to Slide 9. We produced $321 million of operating cash flow in the fourth quarter of 2020, representing 164% of net income. For the full year, we produced $1.1 billion of operating cash flow or 128% of net income. Weak demand freed up cash working capital and we did benefit from $30 million in CARES Act-related deferred payroll taxes and about $20 million in payables that moved from the fourth quarter of 2020 to the first quarter of 2021. However, we also believe we are taking steps to be more productive with working capital. Accounts receivable were up 3.7% with growth related to higher sales mitigated by improved collections with past dues down 23% year-over-year. Inventories were down 2.1%. We have taken steps to make it easier to move inventory internally to get it where it can best be used, which has been particularly useful as we have closed branches and migrated other branches to a leaner inventory model. We put energy into clearing older stock from our branches and hubs. As a result, branch inventory was down nearly 8% at year end, while onsite and hub inventory was up just low-single-digits. Net capital spending was $158 million in 2020, the lower end of our $155 million to $180 million range. In 2021, we expect net capital spending to be $170 million to $200 million with the increase over the prior year being a combination of catch-up maintenance spending following tight spending controls in 2020 as well as higher spending for a non-hub facility project in Winona to support our growth. Record net income and operating cash flow in 2020 allowed us to acquire the assets of Apex, deploy significant resources to secure critical product and carry working capital for customers and return $855 million to investors in the form of dividends, including a special dividend in December and share repurchase. At the same time, net debt is just 5.1% of total capital, and substantially all of our revolvers are available for use. Now before turning it over to Q&A, there is one change to reporting I wanted to discuss, and Dan alluded to this. The bin stocks have long been used in distribution to hold product in customer facilities. Over the last few years, we have taken these bins and we’ve equipped them with scales or sensors that turn them into digital tools that provide product visibility, continuously monitor those products and generate fulfillment efficiencies. These FAST Bins complement vending, expand the products that can be digitally managed and round out our Fastenal Managed Inventory or FMI offering, and we anticipate commercializing them more aggressively in 2021. As a result, in 2021, we will replace reporting on vending signings with weighted FMI signings. This is going to convert each vending device and FAST Bin device into a standard unit based on the target output of our FAST 5,000 vending machines, which is 2,000 a month and combine that into a single data point. In 2020, our weighted FMI signings were 15,724. In 2021, we are targeting 23,000 to 25,000 weighted FMI signings. With that operator, we’ll take questions.

[Operator Instructions] Our first question today is coming from Adam Uhlman from Cleveland Research.

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

You broke up a little bit there. I guess I should probably interpret about 20 questions in that one. So I will try to keep it short. If I think about starting at gross margin, if I think about 202, this might be one of those years where given the easy comps that we have, I would expect our gross margin to be up year-over-year. Now, I've had some conversations with folks that are getting really, really high numbers and that sort of thing. So I don't think that the concept surprises anybody but order of magnitude, I think, we need to think about in 2019, our gross margin is 47.2%. If nothing else had changed, let's assume that mix would have pulled that down 60 basis points a year in 2020 and 2021, which puts it about 46% just naturally on mix if nothing else had changed. But if I think about it; so if I think about that as kind of a baseline, it's true that I don't expect the inefficiencies, particularly in the second quarter to repeat. But I do expect that we're going to have higher COVID mix in 2020, just those types of projects in 2021, than we did in 2019. And I think that's going to work against that 2019 baseline a little bit. If I think about, we're still going to be selling through mask inventory, through the first two or three quarters of the year, and that's going to pull margin down a little bit. I will tell you, I think the shipping costs are showing every indication of probably moving up as we get towards the end of first quarter into second quarter. And so I think there's a pressure there. And so, like I said, I do believe that our gross margin will be up a bit in 2021 or 2020. But as I said, I think we need to be somewhat tempered in our expectations of the order of magnitude. And I say that only because I've had some conversations where I think people are being a bit over aggressive with that. So hopefully that gives you, Adam, a little bit of a framework to think about gross margin. As relates to operating margin, I would expect that labor would get better, or that we would add labor. I do say they are getting better because it means we are adding selling energy. But whatever our growth winds up being at the top line. I would expect that our increase in FTEs would be no more than 50% of that gross and then perhaps somewhat less than that, and I think that's kind of the objective of the organization. And so I think that we will leverage labor when we grow this year. And so when you tie it all together, I'm still thinking in terms of the framework of 20% to 25% incremental margins, based on whatever level of growth that we can achieve this year, and those are I think, the pieces that I would think about.

The question today is coming from David Manthey from Baird.

Hi, good morning, guys. How are you? Well, I wanted to ask you about the Bin stock or the FMI initiatives historically, when you've come out with initiatives like vending or on site, or CSP, or whatever; you've outlined some of the key aspects of the strategy. And this one seems fairly significant. Just wondering, can you share any margin metrics or how you view the TAM to help us visualize the long-term opportunity of the Bin stock or this FMI initiative?

One, I just, I think I'll add a little bit of, I think of the FMI vending, FMI vend component that is really a non fastener thing. And close to 50% of the revenue is on through vending is a safety product. So as we were evolving through that go back to earlier part of the last decade, we were having most discussions about what that meant from a mix standpoint. If I think of the FMI bin, and then I think of the FMI, excuse me, Fast Bin and Fast Stock. Fast Bin especially the RFID component of that is built in a lot of cases that might be in a production environment, where it's a current month system in the net, bin is empty, you throw in a tub of above your shelf, and it tells us you have an empty bin. So it's pretty basic technology. If you think about it that way, resilient technology, that's probably more production environments. So that probably has a gross margin profile. That's more akin to the vending, if I think of it from the standpoint of FMI, the third piece, Fast Stock. That's a lot of MRO or a nice mix of MRO. And so that's probably and it's very fastener centered. And so that has a margin that's more like the fastener piece. Does that helped, Dave?

Yes, it does. I guess you've outlined these pie charts that should give us an idea of where you think you're headed in terms of revenues. And yes, that does help in terms of the profitability. So we'll talk at offline.

Yes. The other piece I'll point out is the best part about Fast Bin, and Fast Stock is it's a labor efficiency, it's productivity, because that's business we want to go after, allows us to go after that with the best cost structure. Because that's been a really critical part of our path the last five years, and it's going to be a critical part of our path for the next five years. Holden, you would like --

Yes, and I might contribute this to that, I get asked a lot. What is the gross margin of a vending machine? My answer is often a vending machine doesn't have a gross margin, it really depends on the product that's vended, and what margin comes with that product. And I would think about the Fast Bin the same way, I don't think the Bin has an inherent margin; it depends on what is being stored in that bin. And so when we think about the bins, we've always had Fast stock, which has been heavily oriented towards fasteners. And so you would argue that that bin has a fastener type of margin, what we believe will happen, in addition to the efficiencies that Dan talked about in terms of the fulfillment process, we think that these Fast Bin will actually lend themselves to our being able to be more involved with other lines outside of fasteners, power transmission and fluid power come to mind, for instance. And so, we've always done fasteners in these bins, we'll continue to fasteners in these bins, and we will continue to do fasteners in these bins. We will the benefits and efficiencies for fulfillment. We'll certainly try to leverage that in even more market share in fasteners, we've always done that, but to the extent that we can use Fast Bin to get into some of our other nine product verticals, a little bit more deeply. Those verticals will typically have a lower gross margin than fasteners, and they'll probably be more consistent with our non fastener business, which is in that sort of low to mid-40s type of range.

Our next question is coming from Chris Dankert from Longbow Research.

Hey, good morning, guys. Thanks for taking my question. I guess first off, just thinking about FMI again, to kind of further pull that thread, we're talking about increasing labor efficiency, just any additional benefit that you guys could supposedly call out on working capital in 2021 from that initiative?

For Fast Bin, with the Fast bins?

Yes, if you're increasing inventory turn, just kind of is there any explicit benefit to working capital there?

Yes, probably don't want to get ahead of ourselves and what that means for 2021, because it's still going to be, it's still something new and to be honest with you the only reason -- when we started vending years ago, we didn't start talking about it till we were about three years into it. And here, we're actually talking about it when we're about a year into it. And the other reason being is because in some cases where we would have put a vending machine in the past, I think we'll put some bins in now, because we now have a better suite of products because we own the underlying technology. And it improves our ability to bring the most efficient tool to bear. We talked in previous calls about what we call our LIFT concept, local inventory, fulfillment terminal. And really, what that's about is perhaps, sometimes the best place to stock product and the pick product is in the local branch or on site. Sometimes where to do put that product is in the regional distribution center. And in really what we're doing with LIFT is something we talked about years ago is supporting vending, with maybe a third type of distribution, and that's the fulfillment terminal. We're just, what's going in that vending machine is what's in that little LIFT facility. And we're managing it there and we're able to strip, these are high frequency turnover products, we're able to strip some of that out of our branch and rake it into LIFT facility, which is from a labor standpoint more efficient. But from a working capital standpoint incredibly attractive over time. We have nine LIFT facilities that are operating at the end of the year. We're still just touching a really, really small percentage of our vending devices. I think we're touching about 2,500 right now. And our goal is to double that LIFT from nine operating at the end of this year to 18 at the end of next year. We'll still be even with our optimistic projections, still touching a relatively small number of vending devices at the end of the year, but it's ever growing. And that that will work some working capital out, but it's still on a relatively small base, that logic equally applies to Fast Bin and Fast Stock.

And what I will contribute to that is if you think about the core value add that fastener brings to our customers, it's our being able to go to them and say, look, today you have 100 widgets on the shelf, because we're better at managing the supply chain. Because what we do, we can reduce those 100 widgets to 80 widgets. Now those 80 widgets will probably include some safety stock from our perspective, because we want to make sure that we don't shut the customer down and we need to make sure that we go and we check those bins and check those machines et cetera. And so those 80 widgets are an improvement. But when you think about what Fast Bin can do in terms of informing us in real time about need, it's possible that those 80 widgets can be 75 because we're much more aware of -- and of what the quantities on hand are. I agree with Dan, I think 2021 is far too early to talk about what the impact of this is on working capital. This is the first year we're really aggressively commercializing what we've built and worked on. But I mean, intuitively, if we market this correctly, and I think we will, there should be some benefit over time to working capital from the efficiencies it brings to the fulfillment.

Understood. And does it make sense just very briefly, to follow up, when I look at 2Q obviously a lot of noise from some of the surge sales. Does it make sense to kind of benchmark, 2Q EBIT margin on 2Q 2019? Is that how we should really be thinking about it? It sounds like kind of in your prepared remarks, how you're trying to walk people there a bit?

Well, I'll answer that this way. It's the way we spoke at our virtual leadership meeting back in December, and it's centered on our government business, which was a huge recipient of a lot of these COVID type certain sales. Our government business historically is a relatively small part of our business about 4%. In the second quarter, it surged over 10% of our business. And I don't know what the final number was for the year, but it was -- for most of the year on a year-to-date basis was up over 100% year-over-year. And so when we come into the year like 2021, so what do we talk about it internally is, okay, normally that business, which is still at a young business; we would expect it to grow, say 20% a year. So when we're looking at second quarter of 2021, for our government business, we're saying to our teams, ignore your year-over-year numbers, because all that matters right now is where are we in January and where are we building to in September and October. And then what does that mean for 2022. But in the case of the second quarter, as an example, take your 2019 Q2 numbers, if you're in the government, if you're leading our government team, add to it the 20%, we would have expected in Q2, 2020, ignoring the COVID thing, and then add another 20% to it for 2021. So 2019 plus 2020, 20 plus 20, 20%, twice over. And that's where your head should be on where you're growing to going to be in the second quarter. And that's going to be a negative number for government in the second quarter, unless there's a different way to do math. And then the challenge to them is because of the broader exposure, we received in the marketplace and the fact that more government customers know about us, and the only area where our onsite signings accelerated in 2020 over 2019 was with government customers, the rest of the world you saw our overall numbers. And does that 20 plus 20 contemplates the fact that more people want to buy from us or more people are aware of us and maybe that second 20 can become a 25 or 30? I don't know. But that's the way we're thinking about it.

Yes, and I would say also, it as much as 2020 is an unusual year from a traditional seasonality standpoint, when you think about full year numbers and how the quarter is played out. I would expect 2021 to be more traditional from a seasonality standpoint, depending on what your sort of outlook is for the macro economy. Maybe it's a little stronger in the back half than in the front half. I don't know your call. But, I think that, what you're probably ultimately going to do is build out your annual expectations. And if you think about the traditional seasonality of our business, that'll probably allow you to back into the answer.

Your next question is coming from Ryan Merkel from William Blair.

Hey, guys, two questions for me. So first off construction was still pretty slow. What's the outlook there? And then on pricing, it looks like prices were flat this quarter. What are you expecting for price increases in 2021, for both product and freight?

As it relates to construction, I wish I had different color to give you that I have the last few months, which is to say that conditions are still soft, but the expectations continue to improve. So if I think about heading into 2021, my expectation for construction is still that the weakness that we're seeing today is beginning to be remedied through projects coming back on the board and things like that. And that results in better results in 2021 than what we saw in 2020. That would be my expectation. But yes, at least at this point, it's still fairly soft. So we'll see, obviously comps play a role in that but from the feedback from the regions, for the most part, they're talking about seeing some improvement in the overall tenor of the construction market. So I'm waiting like you guys are to see that actually translate in the numbers.

Don't lose perspective, one element of our construction is there is a tethered to oil and gas.

Yes, absolutely. And that remains probably soft, though again, there too I think that is regionals are sort of eyeing that Q2 is perhaps being a period where you might start seeing some strength there. So we'll see. I would say that's pricing, but and then on the pricing side, yes, I would say the pricing was not meaningfully different in Q4 as it has been the last couple of quarters. I would say going forward, the question really is going to relate to what happens to material costs and we have seen an uptick in steel. I think many of you have talked about that very same dynamic and if that continues or persists then I would anticipate that we would have to take some sort of action to mitigate that. So, right now, we're not taking broad pricing actions. We're certainly doing things from a tactical standpoint, as we did to some degree with some of the safety products. But if the trends continue on steel the way that they've begun or ended, I guess, ended 2021. Sorry, ended 2020, then, I would anticipate that we'd have to take some actions as you roll into the end of Q1 and into Q2 to mitigate that effect.

The next question today is coming from Josh Pokrzywinski from Morgan Stanley.

Hi, good morning, guys. Just a follow up on the price cost question, I guess, really over the past three or four years, I don't know if we've been in what you would call a normal pricing environment, especially with tariffs kind of flying in a couple years ago. Any reason to believe that this will be anything but a normal pricing cycle in terms of your ability to offset it, kind of evenness to the market? I know, it's still early, Holden, and you talked about, maybe later this quarter, that we are all hitting the road on that, and even put those out there in the market. But anything you're seeing so far, whether it's competitively or from your suppliers, that would indicate this is something beyond kind of the longer term historical framework for pricing or price cost.

I don't think so. Obviously conditions around tariffs were unique. If we get into a situation where pricing is necessary because of more ECON101 variables, like, steel prices going up and things like that, I think that we would be able to address that in the same manner that we've addressed it historically. The only difference, I would say, is that the structure that we've put in place internally to analyze and act on, where cost increases are happening. I think we're in a far better place today than we were pre-tariff. I think that tariff really prompted us to shore up the technologies that we use, the analytics that we use, and the internal structure and personnel that we rely on to make us more effective with that. So I haven't seen any changes to the market dynamics, I think that our internal dynamics are in a better position today than even was the case two years ago, pre-tariff.

Got it. That's helpful. And then just related to kind of the Fastenal captive fleet. Is there a point at which the absorption benefit from kind of keeping those folks busy or again, or keeping those assets busy or, starts to level off and what's normal? Because I know, on the way down or in software patches, you talk about the deleveraging there, but at what point does that kind of get back to normal, whether that's number of points of growth or a dollar number, any way you would conceptualize it to think about that dynamic.

I think that we're like any other industrial company or cyclical company, I guess, in the sense that when conditions are somewhat soft, that's a bit of a challenge, and you under absorb certain of your structure. A captive fleet is part of that, but rightfully so is manufacturing, so is our purchasing, our Asian purchasing, et cetera, right. So when demand is weak, that you tend to deleverage. Now this is an odd year because you look at our revenue, our demand was weak, but a lot of our demand didn't necessarily run through a lot of our physical structure. There's a lot more direct ship type of business in 2020, than is typical. The sort of opposite side of that is if demand begins to go up begins to improve. And that improvement is impacting the core of our business, which is our field sales and our branches and taking advantage of the business that we've built over 50 plus years, then we're going to leverage those assets. And so part of the, I think, part of the answer to your question is what do you expect next year in terms of industrial production growth and market growth, if you believe that we're going to be growing next year, then I would expect the 2021 we would be leveraging and we would be getting some benefit from that as in contrast to what we saw in 2020. So I think that it depends heavily on what your expectations for underlying market growth is. But there's no ceiling where that becomes more difficult. I don't think so. Because I'm wrestling with what that ceiling is right. I mean we have a certain amount that we invest in manufacturing. We have a certain amount that we invest in our fleet. And other elements of our infrastructure that, if we see demand begin to get better, I would expect that you might see increases in that but at the same rate, that demand grows. And so we would leverage it. So I don't know that I see a ceiling in that.

There's some dynamics in there, we took out a truck a day of service earlier in the year, when that truck is filled again, or is overfilled. And we need to add another day of distribution, another truck service to that branch. That's something we've been doing for years. And so that that grows with it, that the challenge for us is we did a really nice job in 2020 when we pulled that truck service out. We didn't see our third party spend go up because we needed some service that wasn't there. And our team did a great job with that. We need to keep that reined in as well as we go into 2021. And I feel we're better poised to do than we have historically because we have better tracking information. We've deployed a lot of new technology over the last few years in order to continue to deploy it. And one of those is better illuminating what's where in our system. Just like when you ship a small parcel, you never know exactly where it is in a given point in time. We're getting better at those ourselves. The only other nuance that probably introduces I mean, yes, we are cyclical; we're viewed within investing circles as a cyclical play company. Remember that we don't have anywhere near the amount of fixed costs in our gross profit, or I guess in our cost of goods as say an average manufacturer does, right. So does our leverage and deleverage work the same way? Yes, it does. Does it have the same order of magnitude on the upside or the downside as an average manufacturer does? No, we tend to be a little bit more muted in that regard. But it behaves the same way as your classic cyclical.

Our next question is coming from Hamzah Mazari from Jefferies.

Hey, Happy New Year. Thanks for taking my question. My question is largely around what do you think the impact is on a vaccine rollout to your business? Clearly, there's a lot of moving parts, maybe you can speak to it qualitatively. Safety maybe slows, but, maybe that helps gross margin, maybe the sales cycle accelerates onsite, just any thoughts as to, vaccine impact on the business, thank you.

Well, I think the biggest thing is the markers I talked about our growth drivers improve because the market has stated to us. And they stated to us from the standpoint of our success, they stated to us, we liked this onsite model, we liked this vending and bins. And in fast stock model, we like it a lot. We're just nervous about change right now. We're worried about what's happening in the next eight hours, two weeks, two months; we're more worried about that than we are about strategically improving our business because we don't have that luxury. And we don't want to invite new rescue and have you move in. And so I think it would manifest itself in the fact that our pipeline that would expand and you would see a resumption of the goals we talked, the targets we talked about onsite signings, and vending, signings, et cetera. And again, those are markers to engagement with our customer. That's where we'd see it, I think you'd see the underlying economy improve because people, let's face it, we all, we already tired of this. We want to get back to something that's closer to normal and retains. There's a whole bunch of things that we learned in the last 10 months that frankly, would have taken us years to accomplish. But the necessity is the mother of invention. And we invented a lot in the last 10 months as a society. And there's a whole bunch of things that are positive coming out of it. Perhaps that makes our whole society a little bit better.

Yes, I could use it. And I might contribute maybe a little bit of perspective, right? Because I know that everybody's very concerned about if things normalize, that we're going to lose all that safety business, we don't lose all of it, lose some of it. But let's not lose sight of the fact that as much as everybody is concerned about safety, not growing at 116%. We look at and we say fasteners were down almost 20 in the same period of time. If COVID gets resolved, we may -- we have that tough comp in safety but we have really easy comps in everything that's not safety which is a bigger part of our mix, right? People might be concerned about our market share gains and safety, and government if COVID normalized, but it didn't do as well on signings because of it. And so we might lose one, but we gained the other. I think if you stand back from the specifics and look at the overall results for the year, it was, actually I think Dan and I both used in some writings, it was kind of a boring year, or an unremarkable year if you step back and don't think about the specifics and just look at our results. And that combines remarkable performance in safety, terrible performance because the market in non safety and if COVID gets resolved, that flips, and that's how -- that's the perspective out an offer.

With that, Ellen, we're almost on the hour. Again, thank you for joining us. I would share one closing thought. I've talked in the past about the pride that that we all feel. And I hope you as shareholders feel in the Blue Team, and what we were able to accomplish in 2020. I'm also quite proud of the trust that was part of that and important ingredients of that with our customer and our supplier because we had to communicate like crazy and have trust throughout that supply chain that we could pull some stuff off. And I'll share an example of tomorrow is an important milestone for us. It was a year ago on January 21; we did something we'd never done after conversations with one of our trusted suppliers, company upriver called 3M. We locked down in our network N95 masks respirators because of what we were learning from our team in China from our supplier base. We locked it down that we'd never done that before. And we did it with some really crude tools. We just basically shut off our request system for one part for several part numbers. But it was all about trust between what our supplier would, could do and what our customer believed us, the supplier and Fastenal can do to support them. Thanks, everybody. Have a good day. Thank you.

Thank you. That concludes the teleconference. You may disconnect your line at this time. And have a wonderful day. We thank you for your participation today.