Fastenal 3Q17 Earnings Call Notes

Dan Florness – President and CEO

Didn’t take price this quarter, but there is still inflation

“As you roll into 3Q, we feel like we got a little bit of incremental price but we also began to see a little bit of the incremental cost flowing through. And frankly, those probably balanced out relative to where we were in Q2. So, yes, we feel like the price that we envisioned getting, we got. The costs have begun to come through. We talked about that, perhaps hitting in Q4 that will certainly be the case but we saw some of that hit in Q3 as well to result in sort of stability in that dynamic, if you will.

There is still inflation; that hasn’t changed. And I think I would probably answer the question of how we address that the same way I have answered in the past which is that if at some point we determine that we can’t protect our level of profitability without resorting to some sort of price action, then we will take that step, and we believe that we would be successful in that. But we didn’t do anything along those lines in the third quarter.”

Continuing to see really good trends

“Luke, if I look at what we’re seeing, I have a few observations. One is we’re continuing to see really good trends in the numbers. Averages are in line with what you are seeing. Averages can be deceiving; you have some that are well above it, some that are below it. That’s the nature of the averages I guess. But very pleased with the run rates we are seeing from the standpoint of what we would have expected”

Fastenal 2Q17 Earnings Call Notes

Daniel Florness – President and CEO

Able to take a little more advantage with price

” if we continue to see demand get better and the environment remains somewhat inflationary, then a window would probably open for us to take advantage of a little bit of pricing if the market affords. And we sort of deemed the second quarter to be consistent with those themes”

Holden Lewis

Growth accelerated

Great. Thank you, Dan, and good morning, everybody. Thanks for joining the call. So just to hit on what Dan covered on Slide 3, our total and daily sales in the second quarter were up 10.6%, that’s an acceleration from up 6.2% in the first quarter. The timing of the Good Friday shift into April from March this year did cost the quarter about 50 basis points. But on the other hand, we included Mansco this quarter, which we acquired on March 31, and that added about 130 basis points. If you adjust those 2 factors, the second quarter daily sales rate was around 9.7%. Either way, growth accelerated to the quarter. And even better than that, in June, the daily sales were up 13% or up 11.6%, excluding Mansco.

*Benefiting from macro strength

“some of our improvement clearly reflects a favorable macro backdrop. The Purchasing Managers Index in the U.S., it represents 88% of our revenue, that averaged a healthy 55.8 reading. Industrial production growth was still modest in the quarter, but did speed up a bit over the prior quarter. These metrics underpin the improvement in our industrial and construction end markets in the second quarter as well as acceleration in both our fastener and non-fastener lines, as you can see from the charts in the presentation. In fact, it’s difficult to identify a major market that is acting particularly poorly at this point. And the feedback that we’re getting from our RVPs remains overall very favorable.”

Fastenal FY 1Q17 Earnings Call Notes

Dan Florness – President and CEO

Holden Lewis

Industrial production returned to growth

“Industrial production returned to growth with an even stronger showing from key subcomponents like primary metal, fabricated metal and machinery areas that are more pertinent to our business. And this broadening of industrial demand was reflected by the fact that as Dan alluded to the significantly greater number of our stores were actually growing in the first quarter relative to the 53% to 54% pace that had been set through 2016.”

Transportation markets are the only laggard

“here remains a great deal of enthusiasm around oil and gas, and during the quarter the outlook for the general manufacturing space and the construction space also improved even as the quarter we’re on. The only laggard we could see would be manufacturing that’s going into transportation markets, things like heavy duty truck, rail et cetera. But other than that, frankly on the hold customer demand strengthened and broadened throughout the quarter and we remain encouraged about the near-term trend.”

Fastenal 4Q16 Earnings Call Notes

Fastenal’s (FAST) CEO Dan Florness on Q4 2016 Results

Upbeat finish to a tough year

“First off we had an upbeat finish to a tough year. Secondly, I believe we’ve changed the trends of our business. Third, I believe we’ve improved the health of our business.”

Holden Lewis

General industrial companies are still challenged, but more enthusiasm especially in oil and gas

“On the second question, where we saw the most encouraging signs I would say would have been in the process industries and we go about this a couple of ways. We listen to our Regional Vice Presidents and what they’re seeing in the marketplace and then we look at our top 100 accounts to get a sense of which areas are doing well, which ones are not and what I would tell you is, the general industrial companies on our lists, they’re still challenged. That’s been the case most of the year and I’m not sure that I saw or have heard any meaningful difference in the fourth quarter as it relates to general industrial firms. As it relates to the process industries, I would tell you that a lot of those including oil and gas looked better among our top 100 and then if you sort of listen to some of our RVPs talk about energy there definitely is more of an enthusiasm and some more encouraging facts on the ground in those regions that are heavier in oil and gas. ”

40-45% of COGS are derived from overseas

“So what we have said is that we think that 40% to 45% of our COGS are probably derived from overseas. I don’t know what the competitor, how he is defining the number. I will tell you that of that 40% to 45% not all of that is directly sourced, obviously have a significant operation with passcode that directly sources product, but that does not rise to near the level of 40% to 45%. So the number that we use includes not only the directly sourced, but also that product that we may buy domestically, but ultimately is sourced from an overseas customer.”

Fastenal (FAST) 3Q 2016 Earnings Call

Fastenal (FAST) CEO Daniel Florness said they have been shrinking the amount of employees in the company after hiring a substantial amount in 2015

“During the last twelve months, we have reduced our headcount by 430 people in our stores and 115 people in total. We continue to add headcount where necessary to support our growth initiatives, notably our Onsite business (defined as dedicated sales and service provided from within the customer’s facility). However, the continued softness of the North American industrial economy has caused us to more intensively scrutinize our full- and part-time staffing levels outside of these initiatives. Indeed, after increasing our total headcount every quarter during 2015, it has declined during every quarter of 2016.”

They saw business conditions in the 3rd quarter of 2016 that were very similar to conditions in the first 2 quarters

“Business conditions in the third quarter of 2016 looked very similar to those in the first half of 2016. Daily sales growth remained slow at 1.8% in the third quarter of 2016, versus growth of 1.9% and 1.6%, respectively, in the first and second quarters of 2016. Our OEM and construction fastener sales remain relatively weak, reflecting the sustained relative weakness of our heavy equipment and construction end markets.”

Operating in a tough business environment

“It’s not a great environment to do business in. But that’s the world we live in and that’s the world we need to contend with. And there is a lot of uncertainty. But the certainty I do know is that we have a great organization, a great group of people out there managing our business. And we are going to continue to focus on our growth drivers and we are going to continue to let our regional vice presidents, our district managers, our hub managers, our support leads run their perspective groups. But we will need to be mindful of the environment we are in.”

Fastenal (FAST) CFO Holden Lewis said large customers are slowing their oders

“Qualitatively, it’s not clear to us that the tone changed much in the third quarter. We saw that the sales of fasteners into heavy manufacturing construction end markets were relatively weak as we have seen before. The same could be said of our largest customers. Our top 100 was flat to maybe down slightly during the period. But again, these are the same dynamics that have persisted throughout 2016.”

Fastenal 3Q16 Earnings Call Notes

Fastenal’s (FAST) CEO Dan Florness on Q3 2016 Results

DOL rules on exempt employees caused us to close stores

“in May of 2016, the Department of Labor published some new rules regarding exempt employees. This rule, while it doesn’t impact our company in totality, because it essentially raised the threshold of what qualifies as an exempt employee from – there is rules for duties that qualify you and there is also a rule for pay, and those rules were increased dramatically in 2016. Because of that change, it does impact our smaller stores, because in our smaller stores, we don’t always compensate above that $48,000 level, because we have folks that are building a business and we are a sales minded organization, but the opportunity is huge. But as you all know from the years of us publishing our pathway to profit data, stores under $75,000 a month are not profitable – are marginally profitable and this damages that. And we decided to close some stores.”

I’m not sharing a secret that it’s not a great environment

“, you all watch the news, I am not sharing a secret here. It’s not a great environment to do business in. But that’s the world we live in and that’s the world we need to contend with. And there is a lot of uncertainty. But the certainty I do know is that we have a great organization”

Coming into this year we took some growth for granted, but I don’t think we’re expecting that anymore

“I think it’s also fair, Ryan, to suggest that coming into this year, we sort of took it for granted that we grow mid single-digits and plan to invest around that. I am not sure that we are making such – that we are making any such assumption about the go forward market given that we haven’t seen any meaningful improvement in the markets. And so we are not necessarily going to assume that we are going to make those same investments for that same level of growth.”

We’re boring midwesterners

” One of the – personally, one of the advantages of bringing in somebody like Holden into the organization is the perspective of Fastenal has historically been we are boringly conservative Midwesterners and we tend to look at the business probably not as financially as still as we should and that’s probably a reflection of the old CFO. I like the fact that we have a voice at the table that is going to challenge us to think about our business differently.”

Holden Lewis

Not a lot of changes in September. US may have been a little bit weaker than international

“when we look at sort of our customers by category or end market grouping, we didn’t see a lot of changes in September. We might be lapping some of the issues around the energy side, but that would be one month in hand with that. We will see how that plays out through fourth quarter. But there may have been some indication on that in some of those customers. We probably saw a little bit of incremental weakness in the heavy-duty truck customers that we might have. But beyond those two items, there is not a lot more to add in terms of end markets. Regionally, we indicated the U.S. was a little bit weaker than the international. Some of that might simply reflect changes in currencies more than anything else”

Fastenal (FAST) Q2 2016 Earnings

Fastenal (FAST) cited a weak economic climate in their earnings press release 

“As we indicated last fall, our customers are struggling with a weak economy. During the first quarter of 2016, the impact of seasonal plant shutdowns subsided and the economy showed signs of improvement.  The decline in daily sales growth in May and June of 2016 was driven by continued weakness with our manufacturing and construction customers. This is evidenced by the trends with our top 100 customers and by additional plant shutdowns/slowdowns before and after Memorial Day. We expect the plant shutdowns/slowdowns to continue into the third quarter.”

Fastenal (FAST) CEO Daniel Florness said business has decelerated as we got closer to the summer season

“In the month of April that group of customers grew 6.5%. In the month of May that group of customers contracted about 2%, in the month of June that group of customers contracted about 2.5%. For the quarter that group of customers which grew almost 5%, 4.5% in the first quarter grew 0.7% percent in the second quarter.  When I look at that group of customers, I see that sudden fall of as an example not of the momentum we are building but of slowdowns with the momentum we have built in the past with customers we have had in the past where we have a large market presence and that business fell off later in the quarter.  The perspective part that we failed on is we didn’t react fast enough locally and companywide to that falling revenue in the month of May and June.”

Fastenal (FAST) CEO Daniel Florness highlighted the construction sector for energy as notably weak

“In a construction front we saw slowdown in our energy customers in both May and June. And a piece of that is we’re seeing projects that were still going on from year ago that just are not being replaced. I would not look at that as a temporary one.”

 

Fastenal 2Q16 Earnings Call Notes

Daniel Florness

We saw longer term slowdowns in construction but also temporary shutdowns affected the quarter

“In a construction front we saw slowdown in our energy customers in both May and June. And a piece of that is we’re seeing projects that were still going on from year ago that just are not being replaced. I would not look at that as a temporary one. On the temporary front we saw quite a few customers that were shutdown, I think our largest impact was actually on-site we have, where the customer was shutdown for three weeks or the month in doing maintenance, but the week of Memorial Day in early June we saw shutdowns, we saw some shutdowns here in the over the week of July 4th and I believe those are temporary will impact third quarter as well because of the July 4th and I would suspect there’ll be some over Labor Day as well.”

Steel price increases haven’t led to much pricing power

“We were seeing probably more propensity for Fastener prices to rise two and three months ago, while there still is – still our examples of that, some of the propensity had lessen, but I won’t – I’m less certain. I that’s probably more of a – we need some traction in the economy to make some of that becoming a little stickier.”

I think things potentially got a little worse but it’s tough to tell

“I think they potentially got a little bit worse. And sometimes that’s a hard one to gauge Ryan because a lot of our internal information as it relates to some of the plant shutdowns is more anecdotal of talking to our regional VPs around the country and kind of getting from them a feel for what we are seeing or what the impact is, but very much a weakening.”

Some of the shutdowns are back in full force now

“some of the shutdowns which were extended in June they are back in full force now, and so that will give us some lift from June to July and I don’t even want to speculate on July fourth week.”

Fastenal 1Q16 Earnings Call Notes

Daniel Florness CEO

Benefit of extra business day and buybacks

“In the quarter, we grew our sales about 3.5%. We had the benefit of additional business day during the quarter. So on a daily basis, we grew about two. Our earnings per share grew just over 2%, primarily driven by the fact we had bought a considerable amount of our stock in the last 15 months, because our actual earnings were down slightly from a year ago.”

January and Feb were fine but March was weak

“But when I look at March, we’re a little disappointed in the month. The month weakened as we got through it. Easter is part of it. The calendar is part of it, but the month did weaken a little bit and so, it was a soft finish to the quarter. ”

Lower costs starting to show up as inventories have turned

“what we were seeing through most of last year is deflation somewhere in that 1.5% to 2% neighborhood. We are still operating in that zone. As far as the cost coming through, we are starting to see some lower cost now. Our overall inventory turns about twice a year. The fastener piece of our inventory turns slower than that. The non-fastener piece turns faster than that and so some of the lower cost we are starting to see come through our cost of goods now.”

Energy was weak

“the oil and gas areas did continue to weaken when I look at it on a sequential basis and time will tell if some of the recent pricing influence is that positive in the upcoming months, but it continue to weaken.””

It was a weak finish to March

“But setting that aside, the month finished very poorly with five days, six days, seven days, eight days, less than a month, I felt we’d be closer to 2% and the month really deteriorated late. And that’s probably a function – that’s probably described some things that we saw in the patterns of our larger account base, because they tend to be somewhat loaded little bit towards the back end of the month. But, frankly a weak finish.”

Only April and May will start to answer for us what happened in March

“January, February and I can’t quite say that for March, but in January, February, felt more like where we were in October and I think if I look at the last five or six months, I really think the outliers was the extreme weakness we saw in November and December and I think that was a function of companies that’s shutting down around the holidays more extensively than normal. March, only April and May will start to answer for us what really happened in March.”

Sheryl Lisowski

JS Notes: BLK, WFC, FAST, SLP, RMCF

Blackrock (BLK) CFO Gary Shedlin said the the company remains the #1 global provider of ETF’s, followed closely by Vanguard

“Global iShares generated $60 billion of net new business in the fourth quarter and record flows of $130 billion for the year; representing full-year organic growth of 13%. iShares captured the number one share of global, U.S., and European ETF industry flows for both the fourth quarter and the full-year. For the quarter and for the year, iShares captured the number one share of flows in the U.S., Europe globally with 37% global market share for the full-year.”

Blackrock (BLK) CEO Larry Fink mentioned the company’s wide breadth of product offerings as a key competitive strength

“In a more fragmented investment landscape impacted by continual low rate, modest beta driven returns, investors will search for income, they will search for capital appreciation, through a combination of both active and alternative investments, factors, smart beta strategies, and hybrid solutions. No other firm in the world can provide all of these capabilities on a single platform, supported by superior risk management, technology, and investment performance.”

Blackrock (BLK) CEO Larry Fink said their insurance clients have been adding to their fixed income exposure

“Well, the widening in spreads is a blessing for our insurance clients. That’s first and foremost. Insurance companies are adding to their fixed income exposures now. And so, as spreads widen, we expect to see more demand institutionally.”

Blackrock (BLK) CEO Larry Fink said he thinks some companies may have to lower their dividend but he is adamant that they will maintain theirs

“If you look at some of the high paying dividend stocks today, I think you’re going to see quite a few companies are going to have to lower their dividends. One of the histories of our platform, we never lowered our dividends ever even in the financial crisis. And so, to me it’s about a discipline, it’s a commitment. We are always committed of having a proposed dividend rate of somewhere between the 40% and 50% level.”

Wells Fargo (WFC) CEO John Stumpf reminded investors of the magnitude of loans the company made during Fiscal 2015

“Our contribution to the real economy in 2015 was broad-based and included originating $213 billion in residential mortgage loans, $31 billion of auto loans, almost in $19 billion in new loan commitments to our small business customers who primarily have less than $20 million in annual revenue, $34 billion of middle market loans and $29 billion of commercial real estate loans.”

Wells Fargo generates a large majority of its revenue in the U.S. so it is less affected by turmoil in other countries than some of its peers

“Turning to the economic environment, while parts of the global economy have continued to experience stress and the markets have reacted negatively in the early weeks of 2016, domestic economic conditions remain generally favorable. As you know, Wells Fargo is a U.S.-centric company and the strength and diversity of the U.S. economy benefited our results in 2015.”

Automobiles remain a particular area of strength

“While falling energy prices have hurt certain sectors of the U.S. economy, most consumers and many businesses are benefiting from lower power costs which results in more discretionary cash that can be used for other purposes. Auto vehicle sales were the best ever in 2015 and Wells Fargo originated a record number of auto loans during the year. If gas prices continue to remain low, 2016 should be another strong year for the auto market.”

Wells Fargo (WFC) CEO John Stumpf said housing had its best year in nearly a decade and they expect broad real estate prices to remain firm

“The housing market also continued its steady improvement, with price appreciation of 6% helping homeowners build equity and improving the credit quality of our consumer real estate portfolio where net charge-offs were down 44% from a year ago. While December housing data is not yet available, 2015 appears to be the best year for home sales and housing starts since 2007.”

They are able to fund their business with very low cost deposits

“We had $1.2 trillion of average deposits in the fourth quarter, up $67 billion or 6% from a year ago. Our average deposit cost was 8 basis points, down 1 basis point from a year ago and stable with third quarter.”

Wells Fargo (WFC) CEO John Stumpf said he is prepared to operate and adapt to the rate environment regardless of how many times the Federal Reserve hikes interest rates this year

“So we’ve got a one hike, two hike, three hike and four hike scenario that we’re operating with because like you we can’t say for sure what’s going to happen we work very hard to produce the type of net interest income growth that we have in a no hike environment for the last several years so we’ll see what the future holds because it feels a little bit different every day.”

Fastental (FAST) CEO Dan Florness sounded the industrial recession alarm bells when he said a majority of their top customers are seeing a slowdown in their business

“In the first quarter of this year, 72 of our top 100 customers grew. In the second quarter, that dropped to 63. In the third quarter that dropped to 56. In the fourth quarter, that dropped to 49. So in the fourth quarter, half of our top 100 customers grew and half contracted. In the month of December to amplify that a little bit, 41 of our top 100 customers grew and 59 contracted.”

Fastental (FAST) CEO Dan Florness blamed himself for the company’s poor quarter

“This quarter was largely under my watch and I think from an expense standpoint, we frankly did a mediocre job and I put that squarely on my shoulders.”

Fastental (FAST) CEO Dan Florness believes that their tightly knit relationships with their customers is one of their competitive advantages

“Fastenal is uniquely situated, to go after those businesses unlike any other company out there because one of the things that I always tell our folks internally and I try to remember myself is I am world where everybody is talking about building the last mile in this online world, we’re a company that’s built the last mile already. It’s a very efficient last mile and how can we take that last mile, take our employees at the store, take our employees that are supporting the store and together growth a great business and that’s what we focus on.”

Simulations Plus (SLP) CEO Walt Woltosz said the company remains heavily linked to their pharmaceutical customer’s research and development budgets

“So overall we are a major provider of software and consulting services for pharma R&D, all the way from the very earliest drug discovery when a chemist first sits down maybe with MedChem Designer or some other software and draws a molecule or uses a computer program to generate a million molecules automatically that never existed before. We work all the way from there through the preclinical development and laboratory experiments, and animal experiments into – first in human trials and then into phase two and phase three clinical trials, and then even beyond that when a patent expires supporting quite a number of now generic companies.”

And their pharmaceutical consulting business is done on a project by project basis

“As of the end of the first quarter of this year we are working with 19 companies on 32 different drugs and for those products we have a total of 56 projects. 15 of those projects actually started in this first quarter. We’ve expanded the scope of projects with three companies and that happens when as we perform analyses we discover new factors that need to be explored and clients approve the additional expenditures or revenue to delve with some of those questions and issues to address them for regulatory submissions, for example.

And if the consulting project continues to progress, they may end up meeting with the FDA to seek regulatory approval on behalf of their clients

“The most common therapeutic area that we work in now is oncology and that’s followed by neurology and drugs for immunologic disorders. On average, every year about 25 of the work that we do on projects results directly in regulatory interactions and these are either the submissions of new drug applications to regulatory agencies or meetings with the FDA to resolve certain issues or questions that either the FDA or the pharmaceutical companies have about advancing the drug and securing approval.”

Simulations Plus (SLP) CEO Walt Woltosz emphasized their customers high renewal rate of their software products

“Our software renewal rates of 89% based on the number of accounts and 94% based on the fees that those accounts bring in.”

Rocky Mountain Chocolate Factory (RMCF) COO Bryan Merryman cited higher input costs as a reason for the company’s recent poor financial performance

“Also we had higher commodity cost specifically cocoa nuts and dairy. We’re near historical highs during the first six months of year.”

Rocky Mountain Chocolate Factory (RMCF) President Frank Crail said they are selling many of their products outside of their store base

“The sales to customers outside of our system of franchised stores consists of a variety of customers, the bulk of the sales that we have are sold to partners that primarily sell their product over the Internet and that’s what most of our sales are now. Our biggest customer is ProFlowers and we also sell to other companies who feature our product on their websites and recently we’ve started to sell into the food & drug markets as well and we also sell products over our Internet site rmcf.com. So that’s sort of the customer make up of our outside of our system. We also have master licensees, international master licensees that we sell products to and we have co-branded stores that are licensed to sell Rocky Mountain Chocolate Factory, our biggest partner in that area is Cold Stone Creamery and then we also co-brand with a number of our frozen yogurt stores.”

And they expect this channel to remain a growth driver going forward

“That in the future will be we believe most of the growth in the company will come from that area, we think our domestic franchise system right now looks like it all be about the same number of units going forward maybe declined slightly just depending on the economic environment and the availability and financing.”

Rocky Mountain Chocolate Factory (RMCF) President Frank Crail said they do not compete against See’s Candy

“We don’t really compete against See’s Candy, except for during the holiday season. Rocky Mountain Chocolate Factory is an everyday chocolatier, See’s is primarily given as a gift, 90% of their volume during holidays. We’re way, way less seasonal of a concept, we co-exist nicely with See’s in California. See’s is definitely the gift of choice and chocolate in the West Coast less so in the rest of the country and so we have many customers that will buy a gift of See’s to give away as a gift and buy our product for themselves at our stores in California. So we’ve coexisted with See’s, we have more stores in California than in any other state that’s where See’s is strongest. We’ve coexisted with See’s for really the whole 35 year history of Rocky Mountain Chocolate Factory.”