Fastenal: A Nuts & Bolts Success Story - [Business Breakdowns, EP.191]
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This is act bus. And today we're breaking down fashioner, starting as a small fascinate retailer in minnesota. The company has evolved into a mission critical supplier partner for its industrial customers. Today, the business sports are nearly fifty billion dollar market cap and produces nearly eight billion dollars in sales. The impact of fascines founder, but Caroline unfashioned commercial success can't be understated.

The industrial of vending machine was his original idea, a vision he made a reality years later, through its network of local branches, on site locations and bedded with customers and innovative, eventful management technologies, fascinate has cared that over eight percent annually, far out passing the industrial economy that IT serves and produced returns on capital exceeding thirty percent today will unpack the strategic choices in cultural DNA, as well as the relentless customer focus to have fuelled fascines remarkable accent to break down fascination. L. I, joined by dalian and chips, a portfolio manager, have A R, S investment management.

We hope you enjoy this conversation. R I delay. Thank you for joining us to break down fast. And all of those fascinating businesses in that is this powerhouse of forty billion dollar market cap industrial distribute that I think outside of people who work in industry that they serve and a loyal culture industrial investors.

It's not as well appreciated as a business despite the fact that it's been an incredible shell to return and growth story. The business history comes from humble beginnings and it's really found a story. And so I thought maybe to set the stage to provide us some other context around the size and scope of the business and the key things that are important to note as we dive a bit deeper here.

Yeah, shows. I clime start with what the business stars for those that are familiar with fast. Now it's commonly described as one of the largest distributors of industrial supplies in north amErica particularly.

But I think that actually understates what the company does wide in business. IT doesn't just ship boxes from a to b. As you might associate with the distribution business, I would actually describe IT as more than outsource.

But human function for its customers is a supply chain partner that helped his customers manage their evening more specially. And I might bring that to live. For an example, you might be surprised to learn that amazon is actually one of fast as largest customers globally.

You might think amazon's really good at helping things for made to be. So why does IT need faster al health? While amazon's warehouses, they need a continuous sub cape of things like cleaning supplies, components to maintain their equipment, like the convery ables.

They need safety equipment for their staff, like gloves and goggles and earplugs and fast. Make sure that amazon always has a supply of these products on hand so amazon can focus on doing what is good at so fast. I'll make sure customers always have the parts they need.

Even one missing screw in a 2 air machine can hold up me home manufacturing lines。 That's important. You can relieve customers of the burden of having to source products themselves and are planning ing their inventory. They can just focus on doing their job.

And IT manages all the invention for its customers, sir, even if IT sits at the customer site, it's on fast as baLanced and IT means the customers require us capital and finally can help customers analyze the usage of their supplies and try to reduce wastage and death. They can attribute usage to certain products or employs and help customers monitor that. So you can see that it's more of a service provides not just distributing things from one place to another of that does that very well, of course, as well.

And I think get the most basic level. It's crazy to think that this is a business that provides essentially nuts invoice to its customers. I guess there's not a pretty rich evolution in the business, and we'll go through the history. But can we just talk about how they went from a retail concept to one it's more integrated with their customers and how they Operate within their customer code?

Stem, yeah, sure. The business was sounded by a man called bob killed and four of his friends in nineteen sixty seven. And bob's father actually ran and auto part store.

And bob was quite entrepreneur. He noticed that some of the common parts that customers purchased regularly, a fast notes, which are screwed, not involved. And you notice two things.

Firstly, that these components come in award to different permutations, and his father could possibly stock all. The first is that the customers might need in a store, so they had to go until to different shops to get all their needs. And secondly, he noticed, is not symbols come free package in standardize boxes around the size of a cigarette package.

Any had this idea of using venning machines as a more efficient way to distribute the fascinates, sir, he wanted to set up this retail store with no star, just rose and rose of vending machines, allowing them to stop more parts in the store, and customers can come in inventing things automatically. So that was the original business idea. And as many startups end up doing ahead to pivot a bit, because he found out very quickly that the any technology at the time wasn't ready, you cannot deal with the different sizes of the nuts involves.

IT couldn't attribute the purchases are reliably enough, and IT was a pain to restock. And so he pivoted to setting up his own retail store, but one that only focus on selling fascinate. So he went to stop a broadest range possible of far sense cycle, one stop shot.

That's where the company name comes from, fast, onal debt customers, faster, all kinds of things. And he said that service shop up in this town called banana, where faster still got a population about twenty six thousand. Its a tiny town, fast as the biggest employer in the town.

And from there the original concept was serving local people. IT was more like a hardware or to targeted the general public at contractors, at farmers who need to repair their track is another equipment. And what they found is more and more business customers were coming into the store.

So I customers that Operate mechanics, customers Operate manufacturing sites, are now going to pay premium Price for availability that fast. Now just had these products in stopped in one place and they also purchasing greater volumes, which was more lucrative. And so pretty quickly, that pivoted to serving business customers and local manufacturing businesses especially.

And then from there, none of the sounds way too much about money PyTorch. They made a habitat asking their customers about their business, understanding their needs. And from day one, there's a culture of the business that rooted in customer service, understanding what your customer needs and serving those needs.

As one of the internal model is growth for customer service to even today, over seventy percent of fascinating employees directly, certain customers, things like managing their sales account, providing advice or race, stocking inventory up customer IDE. How did they grow the business from that one store in na? They hired ambitious Young people to manage the stores they want to, people that were hungry to grow their business.

They don't give him much. They just gave some some inventory of these nuts and volts, a desk gna chair. And they said, off you go, you can find IT like your own business.

You're a responsible for their own piano. And that culture of believing in its people, empowering its people, that's been a key contributor to fast. Those long term success is a business of when they will have a problem, they don't just wait for approvals, then I could tell what to do, have to fix themselves.

And bob killed in the sound up here a book called the power of fast people. In that book, you write about what makes fast and special. And he says ordinary people can achieve extraordinary things if they are giving opportunity. And that's what fast is all about. The company will will tell you, if you speak to them, that ninety five percent of the branch managers and above, including the executive team where internal promotions, there is a people that journalist that is a graduate or a part time employee and they're be given more, more accountability of time and they're proven themselves ground their careers with fast, small and it's common to find people people overwork. There's for thirty, forty years plus outside kind of organization.

It's funny. In the last conversation the unit I had we discuss in toss, which in many ways culturally seems to have some parallels you gave with some examples of the difference in culture here. But IT seems like everything comes back to a degree of fruit allness.

I think in that article that you side of the cheap, A C, O and amErica talks about the fact that bob themselves would only buy sixty eight dollar suits. He would famously, I think, the C, O and C, C, F share hotel room when they travel. That's still the case. But can you just speak more about that culture and how it's differentiated?

I think it's important not to confuse forget he with stingeth. So it's not a company that cuts corners or doesn't invest enough. It's not a company that's focused on expanding its own margins at the expensive customer service for that is all about treating the companies is money as if it's you're wrong.

And that's why I believe IT or not, even today, the C, E, O and C, F, R sleep in the same way when I travel. If sends a message from the top down that you want to act as an owner of this business. And most fast employees actually shared as in the business.

On the other hand, the company, by being figure on earning crime margins, allows them to invest more in the distribution infrastructure, in their technology, in their people to improve its service proposition. So its his virtuous cycle that actually running lane and being more profitable, that allows fast to grow faster. Another example is that by having a leaner cost space, fast now can afford to Operate in smaller markets where the competitions can't.

When on a minnesota mentioned that as a population of twenty six thousand, fast has multiple brands there because I can support a law revenue based per branch, the lower cost based per bridge. So it's a road advantage for the business. And again, I don't ic view with the impression that it's about cutting class, cutting corners.

I think bob killing the foundation, he is on that. And still this frugal culture and his legacy influence is still quite strongly in the business. So if you read one of their annual share letters, managed not then referred to these standing principles.

Bob himself actually still go into hag Q A few times. A Q lives in one or not. So chats with employees off as advice, a rights internal memo to congratulate employees.

But this is really a driven from the top down. People know what's expected of them, but they also noted that it's a business that can work for for thirty, forty years. I can build a career. And the sky's a limit is just how much they willing to put in.

And so from the humble beginnings in the seventies, one store shop at the today is a business approaching seven billion dollars in sales. I love the debt to deeper the size, scope of the business of its financial profiles from top line, the bottom line, what's sticks out to you and how you think about the compounding of earnings going forward shows.

So let's dive into how evolve on that one retail store. So as I mentioned, they began expanding the retail network and they initially work sing one employee stores. They expand from there and from that one branch at its peak, fast and I had about twenty seven hundred branches, close to three thousand branches.

Each of those serve their local markets. Even though fast or has some nationally the multinational customers like amazon, they still serve local sites. It's the local warehouse manager or factory manager that chooses who its suppliers are.

And so very fast to win at the local level. The next way the business brought them out and grow is by expanding the category of products to cells. So worked down, okay, people need screws not involved, but very fast now.

Needs to be applauded with the tool. So to started selling tools as well. Then what are other products to our customers? Need to purchase safety equipment, janitor oral supplies, midd working tools like wires and pipes.

So too much broader business today fast than us, just a third of revenue, even though that the foundation of the business, the next thing is I K will wake up these branches. But is that the best way to serve our customers? And what faster and really well is keep coming up with new ways to deliver the services.

As I mention some chest that shipping things might to be. It's about hack away, simplify, help customers reduce costs in the participant function. So in one thousand nine hundred and ninety two, IT opened what's called in onside, its first onsite within a customer facility.

This is really important. So on sides aware, there's a full time fast than play working in the customer site. They attended internal meetings that always around and available to help customer with any problems around sourcing and supply chain.

And namic fast or more deeply embedded its customer, they can complete more solutions to their business needs at the deep relationship. And IT makes easy to expand its sure of testing the spending into their everyday now what those customers are buying, what else you can do for them. So the business mix is changed quite a bit actually the last ten or fifteen years.

Over the last decade, fashion was actually closed, about forty percent of its branches. I think about, I guess, how debt would would have to be to make that change. This is how you were growing your business by growing your branch for print.

And one day to sad, actually there's a Better way to serve my customers and i'm just onna hit reverse somewhat else doing for a few decades. Meanwhile, the number of on sides they have today exceeds the number of branches they have, and these on sides represent forty percent of the companies. Is revenue today up from about ten percent a decade ago at the company thinks they can grow the number of on sides from about two thousand locations to eight to fifteen thousand of the time.

They're still a long runway to grow that service line. That's how serves the customer. And then the question is, what's the best way to get products to a customer? How can I simplify that? A punishment of their inventory.

And they created its own solutions that these products went available in the market before then. So one of those is called fast bins, where uses waited scales, our five deal blue tours technology, what you might find in one of those, those automated and on first stores. So I can detect when i've been with supplies as running more and the alerts go look fashionable.

Red for the onsite rep. There is one to restock the sign so the customer doesn't have to touch anything. That bin is always replying shed with the supplies. You might be a screen, not a ball that they need. Then in thousand and four, after they tried of federations faster, finally cracked the code on industrial vending machines that actually acquired the company of years ago.

That made those machines, because they saw as a proprietary advantage, finally managed to fulfill division of bob killing in today, fasten the largest supply of industrial products to revenge machines. And it's a great solution, not every product to suit to vending, but for larger skills like safety goggles, like cause of while things that can be end daily. IT allows the customer to attribute purchases to a particular employee or project that cuts down on diff in wastage because is not out in yoga.

And again, it's a fascinating rip that automatic replenishes first machines without any input from the customer. So today, it's is revenue from those automated replunged ment sources, about forty percent. So forty percent of the business citizen soul through the branches.

That's quite important evolution as well. The final evolution, I guess, is opening international branches. IT started in canada in nineteen and ninety seven, and now rights in mexico, contempt europe and across asia as well.

IT expanded by slowing its customers in response to customer demand. Sir, someone like amazon has warehouses in european, in asia. They really very fast onal services, and they want fast to help them make their Operations more efficient in as other markets.

So it's still early at only seventeen percent of its revenue from outside the U. S, which is well asked to the share of G, D P. From those markets to but a large long term growth opportunity.

And I don't think there's any other business and equivalent for fast and dozen. These markets. I have sound one personally and maybe some have vending machines, but none have these outsource actual services away.

Fast does. So can you just tie all that together for us in terms of faster as financial profile as IT stands today?

So revenue in twenty twenty three was just over seven billion. Seven point three billion, as I mentioned, forty percent of that is from on sites. I just have a half to serve out branches.

It's ea margin is twenty percent. It's been very consistent and it's an important internal K P. I, as I mentioned, to frugal business.

So branch managers and onsite managers that held accountable for their revenue growth for the ever margin and for the asset turn and acid intensity. So the logic behind that is there's not a floor want to start giving away your margin. So it's always tempting to sign one.

Eighteen percent business or fifteen percent business than a ten percent business are naturally a marginal term rate. But the force for here is we want customers that value our services and they were going to pay panier for our services. They are not just buying products that was the paying for our staff and our expertise.

And so we should command a premium margin. That's why fast not earn needed margin to the three times that of other industrial distributors. And with the insides, they tend to be larger customers.

The cost is large enough to justify allocating dedicated fast in staff to that vocation. And third, those customers Carry a lot gross margin. They get Better terms because they're bigger.

They have Better of earning power, but offsetting that fastest Operating costs, the offsides is lower that you have to pay rent for the facility. They don't have to distribute stuff through the branch and then to the customer direct to the customer. I was a bit more efficient for an all big perspective that at the ebit, ryan, the same margin on the on sight as a dozing the branches.

So kind of struck me is the way that they integrate themselves about only from the service perspective but also financially for these businesses in that effectively, they're providing working capital to their customers and financing the elementary in having IT on their baLance sheet. What is that basic financial model at play here that allows them not ready to deep in their relationship in in bed themselves, but also be affecting business partner with the customers of their service.

he assured of fast or sell to customers based on a lower total cost of ownership. You won't find the cheapest Price from fast. If you just need one product to publish, find a cheap Price from peers like granger, maybe local distributors I made even on mine retailers.

So that is not faster in proposition, but its proposition is you don't have to be the warm that has to go out and find the product. You can be assured that will always have IT in stocks to you, and we can also help you analyze the stuff you use and make the your own Operations more efficient. Even be on my fast, when does fit a Thomas consultant? So I need you some examples, which I think can bring this to life.

So IT believes that for its average customer, IT saves about twenty percent on the total cost of managing their inventory, and they analyzed their customer accounts over a three year period. I found, on average, faster reduced the customer hours spent on pretty and distribution by half. IT reduced the value of elementary that customers had to hold by thirty seven percent.

And again, that's some fast as own bound sheet on the customers bound sheet, IT reduced the employee travel time in the customers plans by over a third. So fast now can locate their bans and their any machines and convenient places. They can help customers even reconfigure the manufacturing plans to reduce workplace.

Again, this is part of the service proposition for the many machines consumption of products from before they had venning to after they implemented. Venting at a customer is reduced by twenty percent and some because the customer needless of this stuff. That's because you you get rid of a waste and death of the employee knows that are attributing the purchase of their own account.

So again, this not a business. That's everything to everyone. Not every customer will value these services. Some businesses just want the cheap est Price. And as long as they get at next day or adding within a week, that's fine to them as fast as not trying to serve as customers.

It'll learn a low margin on those customers and other services, but IT focuses on the types of customers and the types of products as they die that differentiates services. There's interesting statistics that came to light in one of our discussions with the company. So every year, about one hundred and twenty new accounts sign up as fast onal, and those are most individual facilities.

So amazon might be thousands of accounts were enforcing. And of those, seventy two percent are not doing any business with fast or five years later. And only two percent of new accounts every year ever grown into a meaning long term account for far now financially meaningful out.

So they're very selective under their service is they validated employees to a customer site and the customers not spending enough through fast. 你 saying for a wedding machine， there's not from cost of the customer but is not pretty tough spend to that betting machine. Faster will take IT away. They told us that the fast is not losing any customers and it's getting too much away because data valued service and voted.

Walk through a real world example of how the onsite business works and more practical terms. So i'm just thinking through perhaps example of an architect of a single customer that we can use to illustrate exactly how ebell ded, the fast mal represented IT, is in their customer and the data day Operation to what IT looks like.

Usually, they work inside the customer facility so they could a desk summer on the customer's floor. They attend all the internal meetings with the customers. Employees there are first name basis with them, and they are always available on sight to help the customer with any sourcing or supplier chain problems.

Fast more refers to the solution in, I guess, three buckets. The first is providing the experts, the people. The second is inventory so fast or invests in inventory either onside the customer, or some are local with the branch or a warehouse close to the customer site.

And that element is dedicated to the customer, its customers based on what they use frequently. And as the all fast in all services, IT stays on fast in's bound shit until the customer checks out the item. And the final piller is technology, such technology to dispense the items, to monitor and control supplies.

There can be anything from verify day bands, or can even be what they call fast crib, which is almost like a canteen inside that's managed by far more employees. And they can dispense lies, they can cut metal working tools and are the customer components for the customer in the crib. And the other aspect of technology, which is becoming increasingly important, is to give customers data analytics on their intravital ability or what they're using and recommending how they can improve their supply chain practices.

And you mentioned to give an example of an onsite facility. The trick with the insight says every onsite is different. Every onsite is customized for what a particularly a facility AIDS and an amazon warehouse in sydney's australia may actually Operate quite differently to an amazon warehouse in seattle.

Different customers, consumer supplies in different ways. For instance, some may not have the space on site for evening machine, so the supplies had lived instead from a local branch. Or IT might be important for a specific component to be like at a close to part of the manufacturing lot.

And they managed around that. Do not to insider are alike, but the kid, the on sight is the proximity to the customer, the intimacy of the customer relationship. You have fast on employees that they act like your customers, employees in a dad to help with whatever the customer needs.

It's been quite an evolution. Basically, customers that may be served out of a local branch previously once to get to a certain size justifies investing in dedicated people in inventory of arsenal. Move among to the onside program doesn't always budget the way they expect. Some customers don't grow into those resources. So it's a testing and learn process, but does on sides of growing steadily over time.

When you think about those customer accounts in the importance of choosing true partners, i'd be serious kind of like what the average count books like the a business they're doing.

If you have a sense, if there are some extremely large accounts that are just the eighty twenty rule or is IT pretty Normal ally distributed, what does that look like? Am I doing five thousand, ten thousand, one hundred thousand dollars of them? I just seem curious what their relationships are.

Economically, fast now has a very, very broad range of customers. And I guess that even its largest customer, which is amazon, what can they be a lost in wrage centage of revenue at most, if I think about you ever spend a customer, a good way to give is some context around that is that davers on site does about a hundred thousand dollars per month of revenue.

So that dedicated to just one customer, you can imagine the average customer spends less than that, are you so you can afford to serve really small customers with fruitful cost structure. And the hope is that, that spend grows over time. Maybe a customer stand into more of their facilities ties across the country that you can imagine IT justify dedicating a whole full time employee to the customer that has to make that minimum spend for IT to make economic sense for fast or at the branch level.

I mentioned there still about seventeen under brands across the U. S. They are about thousand thousand those revenue per month. So really might have a dozen also customers per branch, some of those quite small, some of those a bit larger.

And as a customer gets large enough to justify inside resources and a fast or wall call people out of the branch and give them to the customer is a really common sense approach, as I mentioned, to IT down to the bridge managers they get to run the business, says they see fit whatever makes sense to them, whatever they think will be Better for the customer and more profitable for fashionable. So there's no one. Could you try the model? Imagine every branch might be quite different, any on the mix of customers in the area and how the branch manager decided to service them.

And so when you think about the relationship with their customer is clearly, there's a bit of a secret sellers here, but the basic blocking in packaging is to service to customers as well, have the parts available when they need them, keep mentally level stocked. But how would you kind of steal that all downing what the secret sauce behind their economic success?

I think a secret source for fasting is first to die. Proposition IT delivers real valued for customers. Never going to pay for that.

I think it's a good place to be in a world web. The working edge population is shrinking in many developed countries. Customers have to navigate labor shortages and inflation themselves, and they can outsource these burns to foco.

Y I can help them around their supply chains more efficiently. So I think I deliver this dally, and that's what helps to grow. IT has a reason for being, so to speak.

I think its focus really helps that IT doesn't want to be everything to everyone. It's being pier, which is granger stocks so much, much bor range of skills and fast does so fast and selected about what IT does. I think its culture is a road advantage.

So empowering people to make whatever decisions unnecessary, to privy the best possible service to the customer, one hundred grow to remove fully customer. And that's way special. I think fragility is special.

A crates business opportunities like Operating in the small markets profitably. To put some numbers around that, I think about a quarter of the U. S.

Population lives in cities with western half mine residents. But arsenal earns half of the revenue from their areas. So over index to small as townson cities.

And then there's lots of other local distributors that fasten competes with day today. IT actually doesn't come up head to head that march with the likes of ground or MC. Sometimes it's tempting to limit competition to just what you can see the public sphere.

But a day today, fast and competing with local distributors in middle relationships with a local branch. And most of its customers use multiple suppliers and fast jobs to a maximized share. But IT has scale relative to those local providers in procured IT can negotiate Better terms with its suppliers.

They can invest more in technology, things like the many machines in the bins, and on minor systems, more sophisticated ted than more local distributors can provide. They can invest them dense and network of branches and on sights, distribution senators, not bright to own trucks. They can get pride to the customers quickly, reliably adding more, control the infrastructure and being close to the customer as valuable.

I think IT benefits from its national multination reach, a local, distributed, probably concerned a customer with the sophistication of amazon. How in today about half the tree many comes from national accounts. Fast is an approved supplier for all the customer sites in the country.

A twice to win the business branch by bridge, but it's on that approved supply list. And these customers don't want to do with thousands of different suppliers. So as a limited number of distributors that can make the maize of the national customers and just in one of them, but IT has to earn its customers business every day, does not any contractual obligation the customer sign.

They do agree on pricing, but pasta spend can fortunate. And that's what leads to this agile culture where fast l can disrupt itself. Then IT looks very different to how I did a few decades go.

And IT may take different again. Twenty years from now, I may have no branches. I can see a future where IT just has on sights in the customer site and distribution centers, the shipping customer order to and IT doesn't have work in branches.

I can see that being the future that's actually how Operate its business outside the U. S. Where not the benefit of starting with a clean shade of paper, just to Better .

illustrate how powerful the economic model of this businesses that not be interesting exercise, highlight how things have trended over the last call IT decade of us have been speed bombs along the way and given the pandemic. But just just really show just how remarkable of the business model this is from a purely economic standpoint.

So if you consider that fast and all serves broadly the industrial economy, seventy percent of its revenue is from manufacturing businesses, at least in the U. S. The industrial economy has grown about two to three percent on a Normal basis to blow the rate of a mogi p rose and against that benchmark fast and all organic growth is average about eight percent per um maybe in the behind eight and half percent print um of the lost decade.

So really impressive and consistent outgrowth of the industrial economy, which comes from winning new customers and winning greater of customer spending and doing more for customers, more services, creative arive products and so on. Interestingly, many of fast small customers are grappling with labour shortages in our key proposition here is that fast onal outsources some of these services, so IT believes customers, the burden of having a procurement, a manager or someone raised talking shelves, and those labor shortages have hit the industrial economy, these front line workers, blue collar workers, hard and other industries. So far, sens, outsourcing of those employees is increasingly valuable to its customers, and I can charge a premium for their service sets.

The growth line, as I mentioned previously, its margins have been very consistent internally. The target is to keep a twenty percent of party margin, and managers are told you want you to stick to that target as soon as you lose the post strings and lose some of the discipline around margins. And he started giving away business at uncompetitive rates.

We also don't want your winning business where the customer doesn't value what we do. We provide customers are lower total cost of otherness, so they should be going to pay a premium on the retail Prices of the product given in corporates, all these other services within that Price so that twenty percent margin the'd been very disciplined with. And even through industrial downturns, theyve held that level signal. Y draw straight line through the Operating margin of the last ten years and as evidence of the value that fascinate provides its blood to public listed peers, which are arranger and M A A A industrial there even margins ranging about ten to fifty percent, and they're really the largest peers in the public domain.

I'm curious whether the market share or expanded services, what are other paths to growth for a business like this? And what are some examples of things that I ve done brought in the address of market in a way that means that there's .

a lot more to the story. I took good questions like because IT serves a very fragmented market, even in the category that is best known for, which is fast. The company only has a seven percent market chair in the U. S. Little one overseas.

There's still so much fast to grow and grow an excess of industrial economy by signing your accounts by growing and share they are spending most of its customers use multiple suppliers so far, can demonstrate that does a Better job and can do with a lower total cost of service. Then actually have the ground share of customer spending by broadly into new categories of products by growing overseas. International is still only seventeen percent of its revenue stock quite earlier in the journey.

And I think many of its customers from the U. S. That have Operations overseas would value are having the same service deliver overseas. And beyond that, fast one can also grow with local clients as IT establishes a relationship sales force, people on the ground, that exciting long term opportunity. I so one of .

things I find is that when a company suggest that it's quite differentiation is that people and culture as an outside, it's tougher to really appreciate all that can truly be appointed differentiation. And so I wondered if there's a way that you can best capture the more quality of nature of what makes this business so special.

If you were to speak with the management team, the way they would describe fast or is is not one single business, although is lot of ties fast more together in its values and its mission, but it's more like collection of thirty seven hundred locations that across branches, in on sites. And each of those managers has four tony y to run their business subject to the guidelines set around expectations for growth and profitability.

So they are in charge of their harn decisions. They are in charge of which customers they choose to serve, what business they choose to chase, what services they choose to provide de, even what products say, stock can provide their customers are a statistic that about forty percent of revenue from fashion al locations is not patuit centrally. So it's actually the branch manager choosing what to provide its customers.

If the customer really needs A T, V to set up the conference facility or to have quality metric show up on the manufacturing line, will fast will go on pure tvs for them. So it's whatever the customer needs, and that's inherent in the business from day one, when faster set up its second store outside were on a minnesota in the one thousand nine and eighties, they gave the storm manager a senators was the matter and organical desk and chair and told him to get on with IT. And IT was really his domain, how he grew that business.

And then the managers rewarded and incentivise commentary based on the business outcomes that they can drive. So it's a business that empowers people to make decisions to serve customers, and it's not the right model for everyone. So within the first one to three years of joining fashion, the attrition rate for your employees is reasonably high because that model doesn't work.

Everyone, some people need direction, more guidance, and that's fine. I want to stay with fast for a few years in this, stay with the business for life. And it's deeply entrench culture.

There was one of the first businesses is something that in very these days, but one of the first public U. S. Companies to build out a corporate university in house. So there four or five dozen staff that work full time training employees.

And last year, every fast or four time employee receives an average twenty five hours of training at this university so people can not skill they can move into different areas of the business and welcome something with more interesting to them. They're really given the freedom to do whatever they think is best for themselves and to the business outcome. So that's quite special. I think it's a lasting legacy of this culture that the founder and still decades ago, which is persevered.

And so this is a business that produces a tonic. Cash flow is not particularly capital intensive. IT had little in the way of emini historically. And if you look at the returns on couple that they ve ve enjoyed, which seed thirty percent, how do you think about the reinvest running way here? What do they do with access free cash flow as IT relates to a broader capital allocation strategy .

in the same way that fast as mission is to deliver simplicity to its customers, IT likes to keep things simple, hit its own business. So IT Operates with zero nett. It's all internally funded.

Its Operations, IT doesn't really make acquisitions. Largest acquisition is made was acquiring its manufactured of any machines of years ago, but that was small. So organically driven growth that's quite important, means fast can keep doing things its own way rather than having to accommodate, integrate the cultures of other businesses. IT doesn't really, really purchase the shares regularly every now. Then is, as the period is, have Normal share Price declines, management become a bit opportunistic with the share of purchases. But really, IT pays our most of the text assertors as a dividend after accounting for staying business investment needs and growth investment needs to Steven, year is about two percent today, but really what you want as an investor is the growth in value of the business sets what you're participating in that a person organic revenue growth. So yeah, it's about your confidence in the durability of that grows that is going to make a business valuable .

in the magis a corner to that question, what does the baLance should look like if how is the business that has itself historically.

it's always had a conservative bound sheet, actually a delhi history Operated with a net cash bound sheet. IT goes back to this fruit culture that we've been discussing. And today, IT has effective with zero at debt.

So it's stead is equal to its cash baLance, and I expect that to continue. This is a no nonsense boy blood midwest business. They recognize that they do Operate in cyclical markets and they don't want the business to come under bounce tary pressure.

And for that to limit what I can do in a downtown is such important to a fast car or tour, sustain that conservative bound sheet IT also lows IT to the opportunity in investing more in inventory through a period of supply chain chAllenges and build god will and out and market shaggy with its customers. And the pandemic was a great example of that. A farmer inal build more inventory, not just of the stuff that already did the customers, but IT when up there, and both more cover testing kits and hand sanitizer and face mosques and whatever customers needed.

They help sustain business, run their Operations, get out or some other bird for them, and customers are very grateful for. That said, human g grew about thirty percent between two armed and twenty twenty two. But that's an investment they were willing to make and they end a return on IT. But financially and three goodwill .

with customers. And then if I look at a business like fast to all the Candy trades at a pretty aggressive multiple, I think the push back I would be their success is highly linked to the industrial economy in the six cali of IT. How do you consider what the risks are here and how they try to defend themselves from those risk are seemingly quite known, and perhaps others that are less obvious.

There's no a doubt that fast, a subject to special quality in its own markets, IT serves the industrial economy. And in years where the industrial economy is soft, like in twenty sixteen, organist great was only two percent quite of the below Normal. In years like twenty twenty four, where we expect at that three to four percent organic growth, which is quite below Normal.

This is a slow up year in times industrial activity. So is a school in its revenue. But I think there's the expectation that IT will gain market here every year.

Its branch managers are incentivised to grow their business that I get both as if they don't grow. So in in the downed, there's always more we can be doing for customers. That's a really important minded.

And its revenue growth actually hasn't been negative a single years since the G F, C, which is understandably was an extraordinary event. And to margins are also incredibly stable that each margin of twenty percent, you can throw a straight line through a historically, and that comes from this discipline. I have only thirty customers that your services not getting a ARM Price.

So even though I was its been remarkably consistent tempted profitability, and I think it's become a broader business as well. So I will support a range of customers with a broader range of products. It's slowly expanding internationally so that create resiliency as well.

But every business is subject to cycles. Every business inevitably goes through changing periods that we assess the business on up for a disciple basis. Eos ate to the very conserved barn street, basically known a bit. So there's no scenario which physical downturn can meaningfully in one time, vie the business because of baLanced stress. And at the moment, it's probably the slowest period fast.

And was saying in the G, F, C, they said that U S P, M I, which is a survey manufacturing activity, it's been contractions twenty two of the last twenty three months, but its revenue knows so much less well. Tell them what you're seeing in industry production. Our customer concluded .

question are lessons that can be learned through your studies have asked and all on your experience with the business that could then be applied to other prospective investments. And also from the perspective of the company, what they can do to Better emulate a business like fascinating and improve their business. I have given to you to help us to Better understand those lessons.

One interesting one for us was the value of canada and creative communication from management. Nothing faster really excels in this respect. In their annual letters, they've been shared steps from their internal communications to employees is anything is not going to plan in the business, if anything, changing the business even IT says external conditions that infected fast as growth.

They are markedly transparent in the last twenty four months, fast as management team, they spoken openly on their core the earnings calls that anyone can listen in, but the sales processes, one of their services wasn't as effective as everyone. I have made personal changes to their sales force to address the issue, but they told us that can only they communicate ated the closure of the branch in network and what implications are as for the business and how customers are served, they've been very transparent without whole process. Every business inevitable, makes mistakes and goes for charting periods.

And for investors, you can only test your confidence in the quality that business in the management team is is a typical issue or structural issue. This is the market is a sheer Price. To tell me wrong, you can really difficult to stay the course.

And so it's been very available to us for a business like this to receive honest downs feedback on how the businesses performing. And IT helps us state a calls to make the run western decisions through those periods. So that's not really viable lesson for us.

We've had other book foy companies, but that hasn't been the case. Another interesting one is just a value of going out to visit these businesses and person. In our case, that's from sydney's australia.

So it's a long trick. But every time we've made the assertive going out to one earner in minnesota involves a three hour drive down from mini plus. We've been given at least half a day of management's precious time.

We spoken to many of its executives ves and walked before of its distribution facility, packing facilities and so on and will come away with the deeper appreciation of the culture attributes to the business, of the service offering. Just being there, seeing in in petition and funding enough. You mentioned it's a forty five hundred billion dollars at business.

It's in the five hundred to see if I told us the company only gets about a dozen or two investor visit as a year that bother to garden, visit them and learn some of these things. Something come, is that in skettle? But we sound.

I think after revealing that to bit, they make him balls for a few more visits for Better or for worst. Kelly, and we appreciate IT fascination is a fascinating business, one that's been an economic or over the course of the last cost forty to fifty years. And clearly, growth is going to continue at a steady pace. And they will navigate silicon ties of the industrial and markets, but the way with which they are embedded with their customers clearly boats, all for their future success.

To find more episodes of breakdowns ranging from costco to VISA to moderna, or to sign up for a weekly summary, check out joint colosse dot com. That's J O I N C O L S S U S dot com.

We hope you enjoy the episode. Next, stay tuned for our conversation with kd elenora, head of investment Operations and portfolio administration and geneva capital management. Kitty gets into detail about her experience with today's sponsor ridge line and how SHE benefits the most from their offering. To learn more about ridge line, make sure to click the .

link in the show notes. K, to begin by just describing what IT is that you are focused on at geneva to make things work as well as they possibly can on the.

I am the head of investment Operations and portfolio administration here at geneva capital, and my focus is on providing the best support for the firm, for the investment team.

Tears describe what you need IT does.

We are an independent investment advisor, currently about over six billion and assets under management. We specialize in us small and midcap growth stocks. So you guys some .

investors at the high and they want to buy himselve to have you got all sorts of investors whose money have collected in different ways. I'm sure everything in between. I'm interested in what are the errors of how you solve this chAllenge of building infrastructure for the investors.

We are using our previous provider for over thirty years. They've done very well for us. We had the entire products from the portfolio accounting to trade order management reporting, the reconciler ation features with been on our current system for thirty years, I didn't think that we would ever be able to switch to anything else.

So IT wasn't even in my mind. And your head traders suggested that I meet with ridge line. He got a call from nick, he who works with ridge line, and neither.

And here I heard of ridge line, and I really did IT more as a favor to end, not because I was really interested in meeting them. We just moved into our office. We didn't have any furniture.

Can we just moved locations until I agree to meet with them in the down's cafeteria? I thought, okay, this, i'll be perfect for meeting on esty, Patrick. I didn't even dress up.

I was in jeans. I had my hair thrown up. I completely was doing with as a favor.

I go down stairs in the cafeteria, and I think I meeting with nick and in walks to other people with him, jack and allies. I'm like, now there's three of them. One am I getting myself into really my intention was to make a quick.

And they started off right away by introducing their company, but who they were hiring, and that caught my attention. They were very much putting in place a dream team of technical experts to develop this whole software system, bringing in people from Charles river. In fact, bloomberg and I thought, how brilliant is that to bring in the best of the best? So then they started talking about this single source of data.

And I was like, what in the world? I couldn't even conceptualize that because i'm so used to all of these different systems in these different modules that sit on top of each other. And so I wanted to hear more about that.

As I was meeting with a lot of other vendors, they always gave me this very high level sales pitch, oh, transition to our company. It's gonna so easy. Acta, well, I knew thirty years of data was not going to be an easy transition.

And so I like to give them chAllenging questions right away, which often times, in most cases, the other vendors couldn't even answer those details. So I thought, OK, i'm going to try the same approach with ridge line. And I asked them a question about our security master file.

And IT was ali right away who answered my question with such expertise, and he knew right away that I was talking about these dot old securities and told me how they would solve for that. So for the first time when I met rich line, IT was the first company that I walk back to my office and I made a note and I said, now this is a company to watch for. So we did go ahead.

And we renewed our contract for a couple of years with our vender. When they had merged in with a larger company, we had noticed a decrease in our service. I knew that we wanted Better service.

The same time, nick was keeping in touch with me and telling me updates with ridge line. So they invited me to base camp. And i'll tell you that, that is where I really made up my mind with which direction I wanted to go.

And IT was then after I left that conference, where I felt that comfort in knowing that, okay, I think that these guys really could sell for something for the future. They were selling for all of the critical tasks that I needed completely intact, and impressed by everything that they had to offer. My three favorite aspects.

Obviously, IT is that single source data. I would have to mention the A I capabilities yet to come plant portal, that something that we haven't had before. That's gonna. Just further, if make things sufficient for our corner and processing.

But on the other side of IT, it's the fact that we've built these relationships with the rich line team, I mean, their experts or no longer just a number when we call service, they know who we are. They completely have our backs. I knew that they were not gona let us fail in this transition.

We're able to now wish further than what we've ever been able to do before. Now we can really start thinking out of the box with where can we take this bridge line is the entire package. So when I was looking at other companies, they could only solve for part of what we had and part of what we needed rich line is the entire package. And it's more than that in that, again, it's built for the entire firm and not just Operational. The original team has become family to us.