Fastenal Company Earnings Call Insights: Store Growth, Vending Placements
Hamzah Mazari – Credit Suisse: The first question was just on store growth, you talked about 2% to 4% growth next year. How should investors think about that number? Is that more of a normalized growth rate for you guys on stores or do you plan on increasing store growth, if you get more comfortable on the economy? Just curious to see, how we should think about store growth given where Fastenal is right now?
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Willard D. Oberton – President and CEO: Hamzah, to be perfectly honest, I don’t know that we know and I’ll say that in a couple of ways. We still don’t know yet from our non-North American business what that means for store openings into future. We just don’t know. If I center the answer on North America, what we know about the market is, its big, $140 billion to $150 billion, $160 billion a year, depending on whose math you are looking at. We have somewhere between 2% and 3% market share. Historically, lot of our eggs were in the store opening basket and with that way to profit, we really took a step away from that and said, there is a whole bunch of ways for us to go out and go after this market share. We have this network that’s out there that has unbelievable capabilities and that’s balanced our total growth drivers across more channels. So, we put tools in the hand not just of an area where we were more sparse but area where we were more dense. When I look at the growth, we continue to see in the upper Midwest, in a business that we have been in for 40 plus years and we are doing it with a combination of store openings, vending, government, the whole gamut, as far as growth drivers. We think 2 to 4 is a good number for 2013. 2014 and 2015 we will see when we get there. Long way of answering the question but saying the opportunity is so big that we don’t want to pin ourselves into the corner of saying it has come from this one thing. It comes from a variety but when I think of for example the government business and I don’t know in our products how big the government is, but if you read the headlines the government is 20% of our economy. So we have 2,500 locations, I’m using that if I do the math in my head and we add a 20% potential to that, that’s like opening 500 stores. So is that a better route to go down in the short term or to go with store openings, I think it’s a combination of the two, but I will take that government business.
Hamzah Mazari – Credit Suisse: Just one last follow-up question. On the vending could you maybe talk about how your vending offering is different from some of your larger competitors, specifically is your machine different, what are you stocking in there, relative to what others are stocking? Do you won the inventory, does the customer own the inventory? I know there is a bit of difference between your offering and some of your competition, maybe if you could touch on that?
Willard D. Oberton – President and CEO: I think a lot of it is quite similar. Our machines are internet based appliances which we think is an advantage because they are more dependable. Some of the other companies offer a machine that has a PC built into it, same system that we used to offer four or five years ago and we find ours are far more dependable. Because it’s a PC based client it’s also a lower cost system and so we’re able to provide them at somewhat lower cost. The inventory in some customers that’s consigned inventory and other customers, the customers choose on it, but the majority is consigned. Some of our competitions have consigned inventory and some of them have the customers on it. I think one of our biggest advantages compared to the big public companies that we all know is our local branch network, because this is a physical business. If you think about the person, who is supplying your soda machines or pot machines in the office, those people are driving from three or four hours away and in many cases. Our local branch adds a service element that’s going to be very hard to duplicate for some of our competitors. I know some of our competitors, their strategy is to ship it into the factory and then the factory workers put the product away. But I would guess if you’re a person providing the vending machine at your office and they’ll shift the product to the dock and you guys can put it away in the morning. Probably, you’d find in there, you may find a new supplier. So, we have that local advantage that really gave us some leverage and we have this distribution network to move the product more efficiently with machine-to-machine, product-to-product, it’s not that dissimilar.
David Manthey – Robert W. Baird: First off, just Dan, back in the third quarter of last year, you said that you can take your leverage point down to maybe 12% or 13% growth with energy, and you said lower, if you hit the wall and it seems like you’ve taken the leverage point down at that level or lower. I’m just wondering about the strengths you saw here in September relative to an uncertain economy. Are you happy with where the set point is right now that you’ll maintain that unless things change one way or the other into 2013? That’s the first question and then I’ll just sneak a second one in there too. In terms of vending placements, the number of vending machines by my math is up over 300% in the past year and revenues to customers with vending machines looks like it’s up a little bit less than 100% and I’m trying to understand that dynamic, does that mean you are now getting into smaller customers, are you placing more of the FAST 3000 machines, or is there less yields per customers or what is the implication from that math?
Daniel L. Florness – EVP and CFO: First off, couple of different questions there. First on the breakpoint, my comment a year ago in ’12 and ’13, I’m glad to say I was wrong. I think part of it is maybe our Midwestern and I’m accountant, so it’s makes me probably too conservative and I want to put my neck out and say we could do to 10, but I didn’t think we could. So, actually I think it’s good execution, especially in the face of the gross profit dynamic going on which made it more challenging. On the vending machine, I am not sure if I am following your math on the 100% piece, and so I think I will kind of restate it back the way we have it and I think I will allow the second and then I’ll give you a third question to follow-up on my answer. But the way I think about it is the customers that are coming into that group when we introduced vending. The overall business is growing at 30% and that includes the weight if you will of the customers that have anniversaried, the customers that have vending a year ago and two years ago. So, we’re looking at combined group. I think if you’re talking about vending being up over 100% because you’re looking at the new machines and the dollar going through it, you’ve taken the math of saying, okay, 24% of your sales are to customers with vending, and that number is X% bigger than it was a year ago, you are comparing apples and oranges, because we have customers that we had a year ago that didn’t have vending, that have vending today. So, we talk about the percentage of sales that is vending that includes customers who have been buying from us for years. We are just now looking at it and saying how big is that pool growing and how big was that customer base a year ago, which I think is the best way to look at it, because it’s really how much is it impacting your business, not what is the dollar growth that is going through a machine, because that’s really not a meaningful number. I am not sure it I answered your question or didn’t. The other thing I guess I would look at it and say is, I look at our dollars per machine and I try to understand that dynamic, is it improving or getting worse, it’s at or even better than it was a year ago. So, from that standpoint I don’t think there is any dilution going on because of the different models of machines. There is some impact when we reported our machine count. We are reporting just our absolute count, here are only machines we have out there. In that mix there is the traditional FAST 5000, there are the locker systems, there are some hydration machines, I think that are what we call it, and there are some cutting tool machines. So, there is a variety of machines, and they have different potentials as far as throughput and the way we measure it as we look at lockers and we say, we think they have about half a potential. So, when we are looking at dollars per machine, we look at that as a half. I don’t know if I just thought out loud, did a brain dump and didn’t answer the question and maybe you (indiscernible) better answer.
Daniel L. Florness – EVP and CFO: The way I look at it Dave is I look at the incremental growth off of those groups of customers. This group of customers represented almost 60%. If you take roughly 25%, your (indiscernible) grew 20 points faster than the overall Company. Well, that represents majority of our incremental growth and we lay that against the expense of the vending program, and then from the vending program we can also look at a different way and we are putting expense of all these machines into our occupancy because we really think it’s just off-site storage and our occupancy is not growing our revenue because Dan’s group is doing such a great job, so really building this into our old P&L working model and so it’s very accretive business when you look at it that way. It’s a great growth driver, but we didn’t talk more and trying clear up. I’m a little confused too with the question.
David Manthey – Robert W. Baird: I appreciate the color on that. Just a follow-up on that first question, Dan, in terms of how you feel about it and as you’re looking at the business level for next year, I’m just trying to a get a read – I know you don’t have tremendous amount of visibility, but there is a lot of cross trends here in terms of the data that we’re seeing out there in the marketplace, some of the economic data and then relative to what you’re saying for your June through September. I’m just trying to get a relative read on your feeling as you look to 2013, are you feeling pretty good or are you still fairly cautious about this industrial environment just as a Company?
Daniel L. Florness – EVP and CFO: We are cautious. We’re investing aggressively. I mean we’re putting vending machines out there. We are adding sales potential into our organization every day, but we are cautious when we are looking at how we manage our expenses.
Willard D. Oberton – President and CEO: One thing that we didn’t mention on the call is that, we have introduced a lot of new technologies and efficiencies into our business that have helped us lower that breakeven down to somewhere below 10%, I guess if you look at the numbers. Those are things that will continue to benefit us for years, throughout our organization electronic billing and accounting, the automation in our warehouses and we have introduced two or three major things, the stores from point-of-sale simplifying the process of – processing of orders, with the goal of being the most efficient distributor in the industry, these are things that have a long tail on and we’ll continue to benefit, so where that breakeven is in any given time will depend on our deal. We’re bullish and we will invest heavier. We’ve better levels on that than we’ve ever had, because we’re not adding the cost of fixed overhead of the stores, that was a big thing that you couldn’t do much about once you had it, it should answer that.
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