Fastenal 4Q15 Earnings Call Notes

Fastenal’s (FAST) CEO Dan Florness on Q4 2015 Results

59 of our top 100 customers contracted in December of last year

“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.”

A lot of companies are feeling pain

“We sell across the continent around the planet, most of our business is in North America and we sell to a lot of different industries. And when you start looking through the list, of lot of names that you recognize standout and you can see the pain they are feeling in their business.”

Before Christmas sales looked like they were trending flat and then in the ensuing days we saw that erode

“In the month of December, the Monday before Christmas looking at the numbers and consulting with a few of our folks internally about what they were seeing in the trends. And trends looked a lot like 2014 in that, the Monday before Christmas, I felt we had a very good chance of having sales being flat December to December. And in the ensuing days, the balance of that week and then the week between Christmas and New Year quickly saw that erode as customers were falling off in their business activity and we produced a number we reported this morning.”

January is trending positive though

“The start of January and again you could question the wisdom of making this commentary with — as of yesterday, our month of January is trending, it looks like there is a potential for us to be positive in the month of January.”

New CEO as of Jan 1

“I officially became CEO on January 1 of this year”

You can’t really tell a lot from November or December

” One thing I have always said over the years is the history in this business, for Fastenal’s business that is, the trends from January to October, the trends that really matter, November and December are months you go through, but history has said they’re never really indicative of anything. We saw some patterns in November and December. I thought they were worth noting, but I don’t think there is anything that we’ve learned in the last two months that tell us if it’s spreading, if it’s stabilized, other than what we saw with 10 days left in December and what we’re seeing in the first eight days or so of January.”

We try to share more when there’s uncertainty, but the month can change on a dime

“when there is more uncertainty, I do believe and I’ve always believed this that we have an obligation to maybe share a little more insight. And so we’re trying to share as much as we can, but always mindful of the fact that the month can change on a dime. One of the reasons we had never talked about January, in the January call, or we’ve done it very infrequently is that we’re always wrong. The question is how much, but I can’t say that we know anything about the contagion.”

Deflation has held pretty steady

“From the standpoint of the pressure on deflation, that’s holding pretty steady to what we were seeing in the third quarter. I wouldn’t say it’s gotten worse. I wouldn’t say it’s gotten better. So I would say that’s holding pretty steady’

JS Earnings Call Notes 10/15/2015 – Colfax, Fastenal, Johnson & Johnson, CSX, Blackrock, Bank of America, Wells Fargo, Winnebago

Colfax (CFX) CEO Matt Trerotola doesn’t expect a recovery in his industrial end markets until 2017 

We must be more aggressive at managing our cost structure in the short-term as we work through the down cycles in several of our important end markets, especially oil and gas, and marine. Through our strategic planning process, we believe these downturns are cyclical, not structural but the timing of recovery in these markets is uncertain and may not be seen before 2017.”

And they will cut costs to remain lean 

“We’ve identified additional cost structure actions that we can take without limiting our operational capacity to accelerate growth. These actions are broad based across all three of our businesses and address manufacturing, operating and corporate expenses.”

Colfax (CFX) CEO Matt Trerotola said the company is actively looking for acquisitions as prices have come down in the cyclical sector

And as far as the acquisition pipeline, we continue to have an active acquisition pipeline. As I mentioned, we did a small one recently. We have some others in the pipeline as well. And the rate at which we complete any of those will be related to the deal processes but also will be connected to our ability to be comfortable with the value in light of the current dynamic situation in the economy.”

Colfax (CFX) CEO Matt Trerotola said the Chinese government is balancing environmental reform and economic growth challenges

I was over in China a few times earlier this year and there’s a significant amount of tension there right now between a real commitment from the government to make substantial progress quickly on the environmental front or at least a commitment from that portion of the government, at the same time as they’re having the industrial growth challenges and have other parts of the government wanting and needing to work very proactively on those. And so, our challenge is how do we figure out a way to work with customers to get these investments, further up the priority scheme and ideally maybe make them not just about environmental but have some productivity benefits.”

 

 

 

 

Fastenal (FAST) CFO Daniel Forness said their industrial customers are in a recession

Right now in the third quarter, 44 of our top 100 customers are negative. We have not lost any business with that group. They are negative in their spend. In some cases, they are negative because their business is very negative and they are somewhat negative with us. In some case, their business is treading water and they decided to tighten their belt.  The industrial environment is in a recession – I don’t care what anybody says, because nobody knows that market better than we do. You know, we touch 250,000 active customers a month.”

Fastenal (FAST) said the slowdown in the oil & gas sector continues to affect their business

“The first nine months of 2015 were hit hard by a slowdown in our business with customers connected to the oil and gas industry. This connection includes direct industry participants as well as those with a geographic connection.  Our end markets remain choppy, as demonstrated by our weak sequential patterns.”

And they are selectively choosing to open stores again

“After several years of holding back on store openings and even contracting our total store base, we plan to expand our pace of store openings in 2016 with a goal of opening 60 to 75 new stores.”

Fastenal said it would be difficult for their fastener customers to switch to another provider as it would be a time consuming process 

“We have strong capabilities at sourcing and procurement, at quality control, at logistics, and at local customer service. Each of these capabilities is focused on the customer at the end of the supply chain. This business is split about 50% production/construction needs and about 50% maintenance needs. The former is a great business, but it can be cyclical because about 75% of our manufacturing customer base is engaged in some type of heavy manufacturing. The sale of production fasteners is also a sticky business in the short-term as it is expensive and time consuming for our customers to change their supplier relationships.”

Weakness in some of their larger accounts hurt profitability

“The relationship between sales and gross profit depends on our success within our large account business (an area that is still under-represented in our customer mix). The large account end market produces a below company average gross profit; however, as demonstrated in recent quarters, it leverages our existing network of capabilities and allows us to enjoy strong incremental operating income growth. Given the sequential weakness with our largest customers, we saw a sequential improvement in our gross profit. Our gross profit is also impacted by supplier incentives. With weaker net sales growth and our tight management of inventory levels, the growth of spending with our suppliers is lower; hence, our supplier incentives are reduced.”

And they spent some time discussing how they view capital allocation

“Finally, some thoughts on capital allocation: During the latter half of 2014 and the first nine months of 2015, we have been modifying our capital allocation by buying back some stock. This is in response to several factors. The first centers on our external valuation. Our relative stock valuation has weakened over the last several years, which prompted us to reassess our cash deployment.  We are mindful of our shareholders expectations relative to our dividend paying history and have primarily funded this buyback with debt. Over the last three to four years, we had dramatically increased our capital expenditures, relative to our net earnings, for the rapid deployment of distribution automation and industrial vending.”

The company highlighted what makes the economics of the industrial fastener business compelling

“It is helpful to appreciate several aspects of our marketplace: (1) it’s big, the North American marketplace for industrial supplies is estimated to be in excess of $160 billion per year (and we have expanded beyond North America), (2) no company has a significant portion of this market, (3) many of the products we sell are individually inexpensive, (4) when our customer needs something quickly or unexpectedly our local store is a quick source, (5) the cost and time to manage and procure these products is meaningful, (6) the cost to move these products, many of which are bulky, can be significant, (7) many customers would prefer to reduce their number of suppliers to simplify their business, and (8) many customers would prefer to utilize various technologies to improve availability and reduce waste.”

And they view their geographic proximity to their customer base as a competitive advantage

“We believe our ability to grow is amplified if we can service our customers at the closest economic point of contact. For us, this ‘closest economic point of contact’ is the local store; therefore, our focus centers on understanding our customers’ day, their opportunities, and their obstacles.”

 

 

 

 

Johnson & Johnson (JNJ) Chairmen of Medical Devices reiterated the company’s goal of being a market leader in their 

We have a companywide premise that we should be number one or number two in the categories where we’re committed and have a clear technology path to getting through either a number one or number two position.”

And he expects an accelerated pace of acquisitions going forward

“So I think in a disciplined focused approach where we divest we will also look at opportunities to acquire. I think certainly accelerating our pace of tuck-in deals would be a good opportunity for medical device we seek, considering our scale in the market, especially in surgery and orthopaedics is large, and we anticipate accelerating that pace over the next 12 to 18 months.”

 

 

 

 

CSX Chief Financial Officer Frank Lonegro said the company is increasing train length to improve cost & labor efficiency

“To illustrate our progress, in the third quarter we increased overall train length by about 10% versus the prior year, which drove a significant reduction in crew starts.”

And they were able to combat the slowdown in volume by lowering their employee expenses and fuel expenses

“Looking at labor and fringe, we expect the fourth quarter head count to be down approximately 2% on a sequential basis, which reflects about a 6% reduction from the prior year.  Fuel expense in the fourth quarter will be driven by lower cost per gallon, reflecting the current price environment, volume-related savings, and continued focus on fuel efficiency.”

And oil shipments by rail, which was a huge growth segment for the railroads just a few years ago, is down substantially 

“In addition, we expect headwinds in our coal and crude oil markets to increase in the fourth quarter, driven by sustained low commodity prices. As I mentioned earlier, domestic coal volume is expected to be down around 20% versus the prior year. And crude oil volume is expected to decline at least 25% sequentially.”

Intermodal has been an area of strength 

On the domestic side, we are seeing the benefit of the investment and the service product that we are seeing. We have been able to grow that business somewhere between 5 and 10% over last several years. We are seeing a little bit of an enhanced growth here this quarter, as we know one of our customers who has the contractual ability to further diversify their portfolio is doing just that here in the quarter. So we are seeing a little bit of an uptick in the growth with that customer right now, beyond what we would normally see. But we feel good about that business, feel good about the ability to continue to grow that at a multiple economic output for a period of time here going forward.”    

CSX Fredrik Eliasson Executive VP said there is an opportunity to re-price legacy contracts in the coming years

So, I think you know that in our merchandise business, only about half of our business is up on the annual basis. And most of our other businesses, they are mostly 3 to 5 year contracts. We do feel that we will have good opportunities to reflect what the value we have in the marketplace, and with improving service on top of that, we do feel good about our pricing opportunities going forward as well.”

 

 

 

 

 

Blackrock (BLK) CFO Gary Shedlin said the company saw lower fees during the quarter as clients shifted money out of higher fee based products, such as emerging markets & commodities, into lower fee based products, like index funds 

“Sequentially, base fees were down 3% due to lower quarterly average AUM, a seasonal decline in security’s lending activity and the impact of divergent data on our fee rate as emerging and commodities market underperformed developed market.”

Blackrock (BLK) CEO Larry Fink said Blackrock maintains the #1 global market share of ETF’s with 38% of the market

iShares captured the number one market share of the net new business globally in the U.S. and in Europe and in the third quarter year-to-date. iShares flows were driven by fixed income as investors utilized fixed income ETF as an effective tool for diversification and liquidity.  Equity flows were driven by $5 billion into European listed iShares and we saw positive inflows in Canada and Asia Pacific as well.”

Blackrock (BLK) President Robert Kapito said the lower price of ETF’s when compared to traditional funds is only one component of what makes the offering compelling 

But just to step back on the price, please keep in mind that prices are only one reason why people buy ETF. They are looking for precision or what you’re discussing a new approach in smart beta or factored investing, they’re certainly looking for liquidity, which means, you have to have a fund and have some sort of size depending upon the type investor they could get core investor which we call it buy and hold or they are looking to be more active. So, price is important but its only one aspect.”

Blackrock (BLK) President Robert Kapito said ETF’s are now being used as an alternative to futures contracts

So, this is the beauty of ETFs that we constantly have been finding new uses for the products, so as futures becomes more expensive to use than ETFs had opened up a whole new world that we didn’t even think about because of the collateral cost behind futures contracts.  So as you know now ETFs are being use as a surrogate for futures across many institutional accounts, so we think that’s going to continue, how big that can be, just think about the size of the futures markets and certainly regulation is going to play a big role in that as well.”

Blackrock (BLK) CEO Larry Fink said the company could potentially benefit from Department of Labor regulation which may potentially emphasize ETF’s in retirement accounts

I think one thing is very clear how this outplays that it means greater emphasis on beta products and ETFs.  I would also say that if investors feel more confident because of however the DOL reform plays out that if investors feel more confident that they can invest fairly, securely we are all benefited by that. Now, I’m not sure how that will play out, but we’ve always believed that we could have a market place where our clients feel more secure that they have an opportunity to earn a fair return over a long cycle everyone will be benefited by that.”

And their active equity unit, which has been a poor performer over the last several years, is starting to perform 

So where we are starting to see the biggest turnaround is from the fundamental equity business. We spent a lot of time and money I should know in trying to rebuild our efforts there and the teams. And I feel very good about this, certainly in Europe our team there has been together longer. Their record across the board is now very strong and now we are starting to see the same efforts in the U.S. through our capital appreciation fund, our equity dividend fund. So the performance is actually really good.  So when you see better performance it translates directly into flow and we are starting to see those flows or having much better dialogue with our consultants who are now putting us in the mix for proposals and we’re also internally very focused on building out the equity effort and you are going to hear a lot more from us, from our marketing teams and the rest of the teams across the firm, because we are going to be much bigger in the active equity space and we are very happy to have the performance to back that up, so very important part and we’re still adding people but we are getting results at the same time, good positive feedback from our clients.”

 

 

 

 

Bank of America (BAC) CEO Brian Moynihan said the bank’s performance is improving in a tough economic environment

the key message is we continued to make good progress in a tough revenue environment due to low interest rates and a sluggish economic recovery. In addition with the late summer’s volatility, especially the fixed income trading markets are remaining challenging. So with that we produced another good quarter of progress in all the businesses.  We continued to make progress towards our full earnings capacity here at Bank of America, and this quarter represents the fourth consecutive quarter of solid results following the resolution of our large legacy exposures in the third quarter of last year.”

Bank of America (BAC) CEO Brian Moynihan emphasized the evolving nature that the retail bank has with its customers as it seeks to right size their banking branching

As a reminder, our consumer franchise is the largest retail bank in the United States. In our consumer banking business, as you can see, we grew revenue and earnings year-over-year despite the low interest rate environment. We have been restructuring our branch structure, selling some branches, closing some branches, and changing account structures, and with that this quarter our core consumer checking accounts continued to grow. We grew those accounts and improved the percentage of those customers who use us as a primary bank, and importantly the average balance per account continues to grow.”

And mobile banking is becoming a larger and larger component of the customers banking experience

When you go to the change in our financial services business for mobile and digital banking, we now have 18.4 million active mobile customers and 31 million active online customers.  More customers are using mobile device to deposit checks and access their accounts, and now are starting to buy products as well as book appointments. To get a sense of that, we are now booking 15,000 appointments a week off of our mobile devices.”

And mobile banking is more cost efficient for the bank as well 

“Mobile processing is better for us and it is better for our customers. It is one-tenth the cost relative to processing of financial centers and more convenient for customers.”

Bank of America (BAC) Paul Donofrio said the company’s retirement solutions business is gaining momentum from its ability to cross sell products 

The last thing I would note that’s not shown here is referral rates across the company remained strong. For example, our retirement solutions business continues to win in the marketplace. We have won more than 1200 retirement plans year-to-date, many of which were referred from global banking. On a year-to-date basis, this is up more than 40% from 2014.”

 

 

 

 

Wells Fargo (WFC) CFO John Shrewsberry reminded investors that the bank is positioned for interest rates remaining “lower for longer” than most anticipate

As I have discussed previously our view on interest rates has evolved over the past year to be more of a lower for longer expectation for both short term and long term rates. As a result, we’ve been adding duration to our balance sheet, however our balance sheet remains asset sensitive and we are positioned to benefit from higher rates and we expect to be able to grow net interest income over the long term even if the rate environment continues to be challenging.”

Like many of the other banks, they continue investing in their IT infrastructure and effectiveness

We continued to invest in our businesses with particular focus on risk, cyber and technology projects. These investments partially reflected in higher outside professional services expense in the quarter.  Our new and existing customers are increasingly using our digital offerings with active online customers up 8% and active mobile customers up 17% from a year ago.”

 

 

 

 

Winnebago (WGO) CFO Sarah Nielson said the company has decided to exit the bus business

“We made the decision to enter the bus business as announced earlier this week and have sold the related inventory and tooling to our distributor partner at cost. In light of the labor constraints that we have experienced this past year, we determine that our resources were better used to focus on the design and manufacturing of our motor homes. Also, we had not achieved profitability within this operation since the interception. We’ve recorded 1 million in operating losses in fiscal 2015.”  

Winnebago (WGO) CFO Sarah Nielson wants the company to be reactive, as opposed to proactive, in terms of figuring out which RV models the customer wants

We’re going to have to kind of monitor kind of quarter by quarter, what makes the most sense from a production plans. When we plan in an aggregate for the year we’re looking a lot at the labor resources we have to allocate and assuming a certain mix, but it’s a market where we want to be very reactive to what the deals want, what the consumers want. So, we want to be able to change as needed in them, so it potentially could but its hard to predict how all that will play out as we set today for the whole fiscal year for 2016.”

Fastenal 3Q15 Earnings Call Notes

Willard Oberton – President, Chief Executive Officer

CFO will be new CEO

“I’d first like to start out telling you how happy the board, Fastenal board and myself are to announce Dan as our new CEO.’

Fastener business now negative but we don’t think we’re losing share

“As you know, it’s been a difficult quarter for Fastenal. Talked a little bit about our sales – September slowed down slightly, and really it’s a story of industrial fasteners and the slowness within or the slowdown within that part of our business. In the first quarter, we grew our fastener business 5.5%, not great but market taking share, and then by the third quarter it dropped to negative 4.4, driven by not only volume but also some deflation in the markets, weak steel prices. We do not believe we are losing share. Actually, we believe we are still taking some share, not at the rate we would like to take or expect, but still taking share”

We need to make our own luck

“The attitude at Fastenal, the mindset that we’re in right now is a mindset of we need to create our own luck. We’re not economists; we don’t know what the economy will do over the next two to three quarters, but we’re not real optimistic that it’s going to bounce back quickly, so we need to create our own luck as an organization. ”

Deflation we experienced this year will help margin comps in 2016 as inventory is marked lower

“our inventory turns about twice a year. That’s our overall inventory. Our fasteners turn slower than that, and so the deflation has been a full this year. It’s hurt our top line, it’s hurt our gross margin, but we really haven’t seen much of the benefits through our cost of goods because that inventory was coming on our shelves, and if you think about the pace of our business, if our business is growing faster than we expect, that inventory is turning a little faster. If we’re growing a bit slower, that inventory stretches out a little bit. But that bodes well for us going into 2016. That will be a friend to our business.”

I’m not real optimistic

“personally, I’m not real optimistic when I look at everything going on in the world, and that’s the way the thinking is, is let’s create our own luck. If I’m wrong, I’ll be the happiest guy in the room, but right now when you look at election year, you look at the turmoil in the Middle East, China, and many other parts of the world, weak economy in Europe, there’s nothing that points–it doesn’t like oil is going to come back, and corn is probably low for a long time. There aren’t a lot of strong economic indicators that are going to push us up”

This is not a non recessionary environment

“First off, the premise of the question, I would argue that anybody selling into the industrial market is not selling into a non-recessionary environment.”

Daniel Florness – Executive Vice President, Chief Financial Officer

Put great people in a low cost organization

“if you put great people closer to customer and you have a business model with a low–with a structurally low operating cost, you can compensate people fairly for what they are doing and you build a great machine over time, and you build a great organization over time.”

Our customers have been hit hard

“the reality of it is, in 2015 we, our customers have been hit hard by the slowdown in the oil and gas sector, and hit hard by the strength of the U.S. dollar and the ability of our customers to compete effectively across the globe.”

Some geographic areas hit harder than others

“If I looked at individual regions around the country, there is a lot of similar stories to our business. It’s just that you have some geographic areas that are getting really–hit really hard, and those areas are big areas for us”

Saw some things worsen in September

“We were disappointed by the September number as well. With 10 days left in the month, it was looking to be slightly negative, as we saw, and so it wasn’t a case of strong finish, weak finish, that kind of thing. It was pretty steady throughout the month. It was more pronounced in certain geographic areas, like I talked about. Like I say, I look around the country and I see a lot of positive things, but saw some things that did worsen.”

Business is slow

“Business is slow, and I don’t think it’s going to–I don’t see anything externally that’s going to cause it to pick up in the next three months, so Will’s point of we need to make our own luck.”

The industrial environment is in a recession, I don’t care what anybody says

“The industrial environment is in a recession – I don’t care what anybody says, because nobody knows that market better than we do.”

44 of our top 100 customers are negative

“Right now in the third quarter, 44 of our top 100 customers are negative. We have not lost any business with that group. They are negative in their spend…Of that 44 that were negative, 32 of them were negative more than 10%. Of that 44 that’s negative, 17 of them were negative more than 25%. That’s a sign of a recessionary environment”

JS Earnings Call Notes SLP, FAST, JPM, WFC

Jeremy S., an investment analyst here in Southern California, has started to contribute to Avondale’s company notes database. Below are quotes from some of the calls that Jeremy has read this week.

 

Simulations Plus (SLP) CEO Walt Woltosz says the firm continues to see high retention rates amongst its customers

“Our software renewal rates continue to be very, very high, 99% based on fees, based on actual number of licenses that would be slightly lower but typically when we lose a license its an academic license or something that is not being full retail price.”

 

 

 

Fastenal CEO (FAST) Lee Hein says the company continues to sustain its maniacal focus on cost controls

“To execute, you must be disciplined. And so we put a call out to our folks to the blue team we call them and we ask them to scrutinize every expense and to reduce where possible. The reason we did this and we tell our folks over and over why are we doing what we do. And in this point, we look to reduce expenses so we could add energy into the stores.  We’re starting again to show discipline and balance and what we’re trying to do in our growth initiative of offering or getting more energy into our stores, again to offer a high level of service, immediate service when needed to stay in line on these large key customers and to serve our customers on a local level.

Fastenal CEO (FAST) Lee Hein says his customers loathe to switch suppliers

“If I look at that fastener business, a lot of production business in there. The beauty of that business is incredibly sticky. It’s really invasive and complicated and painful to switch a fastener supplier. Because that’s a very tight relationship because I’m supplying you the stuff you need in what your producing and the quality, the source supply, all those things we bring to the table are critical and it’s very, very disrupted to change your supplier.”

And they believe they are taking market share from competitors

“That’s about Fastenal taking market share that’s not about Fastenal being impacted by the economy. We’re out taking market share as fast as we’ve ever done. I look at our signings in the first six months of this year; they are ahead of our signings in the first six months of last year. So, I feel very good about the underlying business as far as our ability to take market share.”

 

 

 

Wells Fargo (WFC) CFO John Shrewsberry did say they saw an uptick of oil & gas firms defaulting on their loans during the quarter

“We had an increase in non-performing loans in our energy portfolio. Oil and gas loans are only 2% of our total loan portfolio and balances in this portfolio declined by approximately $700 million from first quarter reflecting pay downs.  Our energy team completed their spring re-determination process during the second quarter and as expected, the drop in energy prices did impact the cash flow and collateral values of a number of our borrowers leading to downward portfolio migration.”

Wells Fargo (WFC) CFO John Shrewsberry said the firm continues its shift to a digital-centric bank and is thinking about launching it’s own robo investment offering

There are a number of initiatives underway in that business to modernize and to create service capability to attract new investors and to better serve the investors that we have. And that turns up in the – sort of primary systems that our financial advisors use to interact with our customers. It will turn up in our mobile and online offerings that allow people to do more for themselves and at some point, it could even include service or capability that competes with some of the sort of the robo advisory people out there today who rely primarily on technology to construct portfolios and make offerings to customers.”

 

 

 

JP Morgan (JPM) CFO Marianne Lake says the firm intends to further increase profitability by reducing expenses

“We remain focused on our commitment to reduce expenses by $2 billion in 2017 relative to 2014, while continuing to self fund investments in the business. In the first half of this year, expenses were down approximately $0.5 billion versus the same period last year, and our headcount down roughly 6,000 year-to-date.”

JP Morgan (JPM) CFO Marianne Lake said the functionality of the banking branch is changing

And then as you know really looking at the nature of branches as a footprint the way we’re using them, the way we’re staffing them importantly moving them to more advice and less transaction, more automation. So, definitely responses to the evolution in customer preferences and mobile and online is not only a fantastic customer experience evidenced in our experience that, but it’s also a lower cost to serve. So we’re also improving the profitability of the very highly transactional customers. So, I mean I think Gordon used the word omni-channel. It’s, we have a place for everything in our fleet and branches are very important. And we’re just going to be evolving them to continue to meet customer needs.”

JP Morgan (JPM) CEO Jamie Dimon said he continues to see corporations take advantage of low interest rates and issue bonds denominated in Euros

“We’ve almost never seen before in the EU, the volume of American companies financing in euro, because it’s cheaper to do that even if you swap back to dollars. So a lot of American companies go to Europe to do that.”

Fastenal 2Q15 Earnings Call Notes

Tough economy tough environment but solid execution

“when I say that it’s a tough economy in a tough environment, I’m really centering it around five areas for us: It’s non-res; it’s oil and gas; ag; manufacturing; and of course the currency. And so tough environment but when I look at it given this quarter, I think it’s a solid quarter of execution given the revenue number.”

We’ve been hit hard by oil and currencies this year

“we’ve been hit hard this year by a number of factors. In here, I talk about oil and gas. I don’t think there is any surprise by that. Our customers have been hit hard by the strength of the U.S. dollar. Most of our business is in the U.S. and anything that impairs the manufacturing output of this country, impacts us and the strong dollar has done some of that.”

Trends are starting to move closer to normal

“our year-over-year numbers are pretty weak right now but sequentially the trends are starting to move closer to normal and that makes me feel better about what it means for third quarter and fourth quarter and going into next year as far as the health of that underlying business.”

Fasteners and MRO are really two different businesses

“we’re really two distributors in one. We’re this fastener distributor that has built up a book of business over the last 50 years; and we’re an MRO distributor, really built up that business in the last 20 years. We really started to expand our product lines beyond fasteners in the early, the mid 1990s and have grown that non-fastener business now to [ph] 60% of our sales and that’s 40% fasteners and 60% non-fasteners are really different businesses, different end markets going through a common channel.”

Fasteners are sticky, but directly tied to production

I look at that fastener business, a lot of production business in there. The beauty of that business is incredibly sticky. It’s really invasive and complicated and painful to switch a fastener supplier. Because that’s a very tight relationship because I’m supplying you the stuff you need in what your producing and the quality, the source supply, all those things we bring to the table are critical and it’s very, very disrupted to change your supplier. That’s the good news of that business. The bad news of that business is linked directly to production.”

11 of 25 top fastener customers were down in June

“If I look at our top 25 customers, and I took a good hard look at that group of business, 11 of those 25 customers were negative in June; 7 of those 11 were negative double-digit; and 5 of those 11 were negative in excess of 25%. That’s a negative of being directly linked to their business.”

June was disappointing, no question

“June was disappointing, there is no question and even at the 1% on the extra day it was not where we wanted it. And when you look at and you talk about outside of the oil and gas, some bright spots for us I look at some things that are happening taking place within the business in Florida and California in some of our Midwest regions, we’re starting to see Canada when you really factor in the native currency is actually performing well. And so this oil and gas thing as we’ve talked before Ryan, it’s just got such a ripple effect through the economy and through the business that it’s just waiting astound. But if you look at non-res, that’s we think and when we look at our information, we believe that’s heavily tied to oil and gas. So that’s a factor. We look at ag and heavy manufacturing, all headwinds right now for us.”

Fastenal FY 1Q15 Earnings Call Notes

There were things we could control and things we couldn’t this quarter

“The quarter was when you look at it’s really two stories. One of things we can control and things we cannot control. Obviously the things outside our control the currency, weather, oil and gas and the port situation in California. But the things we can control, I think when I look at the Fastenal team I think it was a solid quarter.”

Not happy with single digit revenue growth. (8.8% growth doesn’t sound too bad to me

“But that being said I will always say this that when we see single digit revenue growth, we are not satisfied nor we happy. But with 8.8% growth we did some things and I think hats off to the Fastenal team when you look at some different areas”

Grew head count in stores by 1k people

“we’ve added 1,000 people into our stores. Now most of those heads came in the last half of Q1. January, folks I got to tell you January coupled with the weather affected the kids aren’t back to school. It’s a rough month for recruiting. But in the second half of February and in the month of March, that’s when you started to see the team really start to bring people into the stores.”

It was a tough environment out there

“talk about the environment, tough environment out there. Our sales growth softened as we got deeper into the quarter. Weather hit us hard in the January, February timeframe. Oil and gas and some of our customers that involved with export markets, the currency is — US strong US dollar is not helping export. So our business did weaken as we went through the quarter. You really see it showing up in the industrial, the production side of our business”

The Fastener business slowed more

“Our fastener grew about 6% for the quarter. They were growing 10% and 11% in the third and fourth quarter of last year. So that business really slowdown. We didn’t lose any customers but those customers are producing fewer widgets and therefore they need fewer fasteners. ”

There’s a lot of tentativeness in the marketplace right now

“I think there is a lot of tentativeness in the marketplace right now.”

Everyone is just getting a little nervous

“export and oil and gas. That casts one heck of a shadow; it is not just the folks that are directly involved in that business. If you are in the same geographic area and the manufacturing pace, the manufacturing heartbeat of that area is weaker, everything else is kind of takes a step down. If you are working at industrial business and you are kind of worried about what’s going on your business, people aren’t as quick to other things to buy a car, to buy a thing to make a renovation to their home. People just say let’s wait and hold because I don’t need to replace this television set today. Stuffs like that, you just become a little bit more conservative because everybody is little nervous.”

Deflation makes things challenging

“the lower steel prices, any time you have deflation it creates a challenging environment and we have been in a situation having deflation now for a few years. And so it makes challenging as we go through the year.”

The Canadian dollar has weakened too

“That business there is held up reasonably well. If I am looking at in Canadian dollar. Obviously, the Canadian currency is very much tied to the fact that their economy is tied to extractive industries. And the weakness in oil and gas, weakness in energy in general is not helped their currency. So we are in a local currency basis we are growing reasonably well. But when compared to the USD, that’s what we report in, picture isn’t quite so good”

We don’t know where we are in the weakening cycle

“That the business really weakened in this three months period. We don’t know where we are in the weakening cycle. We don’t know if it is 90% behind us or 50% behind us. We don’t know.”

Local mom and pops still have 70% of the business

“There are a lot of very, very good local and regional distributors out there. And they have probably 70% of the market.”

Fastenal 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Double digit sales growth

“I’d like to report that it was a good quarter for our company, 13.8% sales growth, that’s 15% or 15.7% on the daily average and there will be some questions I am sure on Christmas and December was in line with the rest of the quarter.”

Continue to add people

“we continue to add people at the company and especially in the part-time ranks and I would say in 2015 with the good economy we are committed to putting selling energy into our stores”

Retail presence is the best way to reach industrial customers

“again when we talk internally we are committed to a store-based model, we are committed to the fact that we really believe being close to our customers offering a high level of service is really the best — is best way to really approach the industrial market.”

Fuel costs are a source of margin expansion

“We get couple other positives on the margin. We do have a couple tailwinds. One is we still have a tremendous opportunity on upside for our exclusive brands, our private brands. And other is our transportation costs with fuel where it is or oil situation is going to drop.”

It takes time to train people

“we made very heavy investments at the end of ’13 in our district managers, a lot of outside — sales people outside of the stores and so we’re in a heavy investment mode. We can — we don’t have to do much of that this year. In fact, in the leadership roles, district, regional, outside sales people were very set for at least the first six months of the year. And so we’ll able to — that will come through in the P&L and incremental gross margins or incremental margins.”

About 12-13% of our sales are effected by oil

“When you look at our sales about 12% to 13% of our sales, I would say are effected in some way shape or form from oil dropping, especially under 50 bucks barrel…Now what happens is I think, when you look back in time when oil drop, by the time it drops to the net effect where it hits us, it could be six months out there or something. There is that lag. So we are keeping an eye on it and we are definitely going to feel it in those regions.”

But what does it do to our other customers

“The flipside is we don’t quite understand what it’s going to do to our other customers because it actually puts a little wind in their sales so to speak from a bottom line. So that’s kind of how we look at it and how it affects company today.”

I always like to note when a company mentions other companies

“Metal working continues to do well. Our relationship with Kennametal is good. People, I think, had too high of an expectation going in thinking we are going to be as big as MSC in overnight and that doesn’t happen. Our metal working business has grown not double digit, but almost double digit above the Fastenal growth over the last — over 2014.”

“although Kennametal is a very good supplier, they don’t have full spectrum of what the customers need and neither does any of the other suppliers.”

Energy sales may really only be 6% of sales

“10% to 12% of our sales are in those geographic areas and shooting from the hip, I would say probably half of that would be closer to the energy piece. But that’s somewhat anecdotal talking to our regional leaders in those geographic areas. ”

There’s still plenty of room to consolidate MRO markets

“Well, things have changed. But if you look at the big players and whoever you throw into that group, we’ve all grown nicely, but so maybe we’ve gone from 25% market share to 28% or 30%. So it has consolidated at pretty slow rate when you look at the — combined if you look at us, MSC and Grainger combined and there is others I know, but our growth is probably 10% if you add us all up.

Takes a long time to consolidate the industry. It’s always been competitive and I think it will remain competitive, but there is a tremendous amount of opportunity out there”

Fastenal 3Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Numbers got better throughout the quarter

“Starting out with sales July was a little bit weak. We had a very good August and actually September was a good number. We had a very slow start after the holiday but once we got through the first four days we had a very good run rate, very much on pattern of what we would expect after historical numbers.”

Is this facetious?

“Before I turn over to Dan I apologize for stumbling. I was looking at the stock going down at the same time and I couldn’t speak clearly. With that I will turn it over to Dan. He will cover some more things and then we will come back and answer questions.’

We have a structural advantage in cost

“I think an important thing to ask yourself is Fastenal has an average store size of 107,000 which means that some time in our history, 20-30 years ago we figured out how to make money in a store doing $50,000 a month. There aren’t too many players in the industry have done that.

If you look at the average store size of most private and public players in the industry their average store size is a multiple of ours, eight, nine, ten times larger average store but the operating expenses really don’t change appreciably. In fact they are in many cases when I look at them, they are at or slightly higher than ours, which always makes me scratch my head a little bit, of why the industry is so different. And maybe it’s just a case of we developed a frugal nature 30 years ago and that frugal nature continues to shine through in our business and gives us just a structural delta to everybody else, I am not sure.”

Ya agg is slowing but we don’t have as much exposure there

“yeah I have been reading that too, some of the large farm equipment manufacturers are slowing down. I guess fortunately we don’t have a lot of that business right now. We would like to have it but the timing is probably good that we don’t. I guess our exposure really trends more with the overall manufacturing than any specific area of manufacturing”

Fastenal 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

Not a great quarter but a good quarter…sales up 12%

“Looking at the second quarter 2014, I would rate it as a good quarter, not a great quarter, but a good quarter. The most positive numbers being in the sales area, we had 12.1% sales growth for the quarter.”

Feeling good about the top line

“from a sales standpoint, we’re feeling very good about what we’ve done. We believe a lot has to do with us adding the people back at the end of or during 2013 and continuing to be committed to drive more sales cost.”

Disappointed with the margins though

“On the EPS side, we were somewhat disappointed, we thought we would do a better job or produced higher earnings per share and it’s really a margin story. I think, Dan, did a nice job in the earnings release stating our margin and some of the pressures we’re having with larger accounts and things like that, and that we are not going to push the margins so hard internally that we make start — put our people in a position to make bad business decisions.”

What’s driving the margin disappointment

“freight slipped just a little bit, which we have to work on that, that’s really about pounding the drum and making sure that we make that work, and some of our measurements on pricing habits slipped slightly”

We have great sales momentum

“we have great momentum going into the second half of the year.”

We’re investing in people, going to drive results going forward

“we’re investing in people at the store, we’re investing in selling energy at the store, that’s going to provide us the energy to ramp up our growth and that’s what you are seeing in the year-over-year numbers, but more importantly, that’s what you are seeing in the sequential patterns and I think that’s really strong statement going in.”

Investing in people is a headwind to margins

“There are some sacrifices that come along the way and right now one of those sacrifices is a weaker gross margin than we would prefer.”

The good news is that it’s about what’s going on in the business, not with our habits

“when you start peeling back it’s really about what’s happening in the business more so than what’s happening our habits. Although, our habits like anything else in life we can tweak and make a moment better and we should have been in the range, now there is no question about that.”

We get frustrated when the margin doesn’t have a 2 in front of it

“because of the short-term sacrifice we didn’t hit, we get frustrated internally when our incremental margin does not have a two — at least a two in front of it.”

I believe margins will get better in the second half

“I believe looking into the second half of the year, we have incremental margin that we’ll be proud of. And it pushes us well as we approach 2015 and beyond.”

If we push margin too hard, we make bad business decisions

“what we have discovered as if we push margin too hard that we make bad business decisions and we’re walking away from very — what might be very profitable business.”

Search your soul

“We’ve done a lot of soul searching on the margin and we found as if we push it too hard it throws breaks on sales. I don’t know if that helps yet, it’s a fine line.”

Lots of market share to take

“What we do know is the market opportunity, depending on whose set of numbers I’m going to look at is maybe its $160 billion, maybe its $140 billion, maybe its $110 billion. At $3.5 billion, we have a tremendous opportunity to go out to take market share for years into the future.”

It’s about returns

“One thing, Bob Kierlin taught us years ago that we can never forget, at the end of the day, it’s about returns. At the end of the day, it’s about your operating margin. Are you generating cash to support your growth in terms of the business? And if you do that everyday and you service your customer well, you’ll grow your business. And you’ll build a better business tomorrow than you have today.”

We are seeing a lot of growth right now

“are seeing a tremendous amount of growth in our business right now, from non-fasteners, we are seeing improvements in fasteners, we see great trends in fasteners, but the year over numbers are what they are and it’s disproportionate to large account business.”

You have to educate new people

“I would throw in a fourth there and that is the education of our stores to charge for the value that they provide our customers. That is — I know that’s an intangible but I’ll tell you we were adding 16% to 17% more hours in the store. They are inexperienced people. As they gain experience and they gain confidence, things will change but that goes right back to the habits of pricing our customer or a sale appropriately. And that is an ongoing item for us too.”

Fastenal 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“Looking at the results for the second quarter, I think the main story is slow sales growth, and we believe that’s really caused by a few things. One is a slow economic condition. It’s very slow out there from an industrial side…

the other would be that we have just become too tight — or we were too tight on adding people in the fourth quarter and for the — basically the last 3 quarters…Our plan going forward to try and address that is to add between 100 and 150 FTE per month for the next 6 months throughout the rest of the year, adding 600 to 900 FTE for the year.”

“we can’t do anything about the economy, but we do have the balance sheet and the strength to go out and add the people to grow the stores.”

“we’ve spent time talking to our store managers and asking them what it would take to free up some time or to get out there and make more calls, and that was the common theme, was, “Hey, give us a little help, we’ll grow the business.””

“The only other item that stood out for me that frustrates me a little bit is on Page 15, our AR grew a little faster than it should. And there’s really 2 dynamics going on there. One is the calendar. Now both June of 2012 and June of 2013 ended on a weekend. So the calendar is similar, so my comment about the calendar might sound a little odd. But what we’re — and I don’t know if this is a post office, logistics thing or what’s driving this, but we’re slowly seeing more and more of our cash come in, in the first 2 and 3 days of the week than what’s historically the norm. Historically, we had a big cash come in on Monday, which is really weekend processing of mail coming through the post office because the goods — most of our cash still comes in via the U.S. mail…So if we held our books open until Tuesday instead of closing on the weekend, our AR would look a lot better. But bottom line is calendar is impacting and just the way the mail comes in is impacting our days…But we’re also getting a lot of hard push from our customers on extending some days, and we’re working on that on a case-by-case basis.”

“part of the — where we went wrong with the decision was I thought that vending was going to be automatically more — it was going to automatically increase the efficiency in our stores. What I was missing on that is the tremendous amount of work to get to the position where it becomes more efficient, which it does, but there’s a lot of work of introducing it and training it and setting it up. And all that work was taking away from sales calls. And that’s what we’re hearing from our managers when we spend time with them. So we’re really getting back on the Fastenal model, the pathway to profit model, add 15% to 20% more — or 15% more hours in the store, and you should get close to 20% more growth. “