Fastenal Co (FAST) CEO Will Oberton discusses Q2 2014 earnings results – conference call transcript
Company: Fastenal Company (FAST)
Event: Q2 2014 Results Earnings Conference Call
Date: July 11, 2014 10:00 AM ET
FAST Q2 2014 Earnings Call – Webcast Audio
Operator: Good day, ladies and gentlemen. And welcome to the Fastenal Company second quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions)As a reminder, this call is being recorded.
I would now like to introduce your host for today’s conference, Ellen Trester of Investor Relations. Please go ahead, ma’am.
Ellen Trester – IR
Welcome to the Fastenal Company 2014 second quarter earnings conference call. This call will be hosted by Will Oberton, our Chief Executive Officer; and Dan Florness, our Chief Financial Officer. Also present for today’s call is Lee Hein, our President.
The call will last for up to 45 minutes. The call will start with a general overview of our quarterly results and operations by Will and Dan, with the remainder of the time being open for questions-and-answers. Today’s conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission, or distribution of today’s call is permitted without Fastenal’s consent.
This call is being audio simulcast on the internet via the Fastenal Investor Relations homepage, investor.fastenal.com. A replay of the webcast will be available on the website until September 1, 2014, at midnight, Central Time.
As a reminder, today’s conference call includes statements regarding the company’s anticipated financial and operating results, as well as other forward-looking statements based on current expectations as defined by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming, or similar indications of future expectations. It is important to note that the company’s actual results may differ materially from those anticipated. Information on factors that could cause results to differ materially from these forward-looking statements are contained in the company’s periodic filings with the Securities and Exchange Commission, and we encourage you to review those carefully.
Investors are cautioned not to place undue reliance on such forward-looking statements, as there is no assurance that the matter contained in such statements will occur. Forward-looking statements are made as of today’s date only and we undertake no duty to update the information provided on this call.
I would now like to turn the call over to Will Oberton. Go ahead, Mr. Oberton.
Will Oberton – CEO
Thank you, Ellen, and thank you for everybody who is joining us on the call today. 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.
Some of the highlights as I see it, our older stores grew right at 10% and even stronger in the last two months of the quarter. So, when our store historically – when our older stores are growing in the double-digit Fastenal does very well.
Our sequential pattern from January to June, which we follow the sequential pattern very closely was up 14.8% from January to June. Our fastener sequential growth was up 15.1% from January to June and our construction business was up more than 20%. To see those number — to see number similar to that you would have to go back, all the way back to 2010, where we had similar results and you can see how it came out after that.
So, 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 costs.
On the EPS side, we were somewhat disappointed, we thought we would do a better job or produce 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.
A couple of things in the margin though that that were disappointing other than the net result, 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. So we are looking at that very hard, we are working very hard on the margin and I believe we will continue to do well there.
On the expense side, team did a nice job. We grew our SG&A by 10%. And that was with 15% more FTEs. So we added the people, we got the sales results, we produced the sales results and we still maintain our expense level at a very well. So we are happy about that.
And also on the sales side, our vending performance remained strong. We had good signings. Our sales growth was good, it’s still about 20% and we saw improvement in the margin. We have a tremendous upside on the margin with the vending. It will take time to do it, but with things we are doing with T-HUB and buying better packaging. There are a lot of initiatives going on with vending and so we are very excited about the vending opportunity and believe it’s a big part of our future along with fasteners and many other things.
So to summarize, I am going to keep my comments short today. To summarize, as I see it, we have very good sales momentum. Our fastener sales are recovering. Our vending remains strong. We have — we did — done a very nice job on our expense control and we need to continue to work hard on our margin.
So as looking at our business, that’s what you can expect from the future is continue to work hard in the sales, work on the margin, manage our expense and hopefully be a very good company for you to own.
With that, I am going to turn it over to, Dan, who will give you more color on all of the numbers. Thank you.
Dan Florness – CFO
Thanks, Will, and good morning, everybody, and also thank you for joining us on our call today. I’ll just add a few noteworthy points on the patterns, primarily looking at the sequential patterns.
As Will touched on, since January our business is up about 15%, daily average and he touched on some of the components and he touched on the fasteners growing with the company. He touched on construction growing faster than the company. Now, my guess is for the analytical folks listening to this, you look at them and saying, yeah, but you are comparing to a January that wasn’t that impressive, because the weather really dampened it.
If you take four points, three or four points out of each of the numbers that Will cited, it’s still a number that nobody is coming close to and we haven’t come close to since 2010, 2011 timeframe. So we have great momentum going into the second half of the year.
And I think the real impressive part of that is, we talked a year ago about 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.
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. With that an industry leading gross margin and 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 them and make them a little bit better and we should have been in the range, now there is no question about that.
We’re less concerned today about the noise in the range and more concerned about whatever our patterns with sales growth. The — but the sacrifice that comes with the hangover we have in gross margin, a hangover that I think everybody is aware of, that hangover changes dramatically as we transition now from Q2 to Q3. Because of the dynamics of our gross margin a year ago. And so, 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.
We are in the mid teens. 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.
Will touched on T-HUB. Our T-HUB facility is ramping up. You know, like any new business that’s taken us some time to work through the pains. Quite a few of the regions have now turned on. I was looking at our picking activity as it relates to our T-HUB facility and our vending replenishments and our picking activity from May to June went up 2.5 times. So 2.5 times is the ramp-up. And we still have ton of opportunity.
And what comes as that improves is it creates great efficiency at the store level. It helps us on working capital but it creates greater efficiency at the store level because we’re picking that product of replenishment for those machines as high frequency product. We’re picking that in a more efficient manner. It also allows us to drive towards product consolidation of what’s in T-HUB.
Efficiency is the win at the store. The gravy on top of that is as we drive consolidation, we improve the gross margin of our vending business because we’re consolidating the brand of SKUs that are going through the machines.
Finally, touching on our cash flow, we — I missed one point, sorry. We did announce also in our release that we’re closing some stores in the second half of the year. And we’ve closed a number of stores over the last several years. And like — and as we’ve said in the past, we’re always challenging ourselves of looking at our business today, based on how we go to market today and say what is the best thing for this local market. Because the key to our success long term is being the best distribution company where we’re located.
If that’s Eau Claire, Wisconsin, we’re the best distribution business in Eau Claire, Wisconsin for serving the customers’ needs there and serving the growing opportunity of the marketplace. So we announced in the latter half of the year, we’re going to close about 45 stores. And the way we approach that internally is we reached out to our regional leaders with 20 plus regional leaders gathered around North America. And we said to them, hey folks, if you could do a do over, if you could look at your business right now and identify where you want to open stores because there is still lot of stores for us to open. Where you want to open stores, where you would prefer to consolidate some businesses into fewer locations in this market because it makes more sense for our business today. It makes more sense because of our vending, because of our distribution capabilities, because of all the tools we have in place. What would you do and they identified 45 stores.
So during the second quarter, we accrued up some cost for the future leases related to those facilities and we’re moving on to our future. But I think that’s a good healthy thing for our organization to do.
Touching on the cash flow which I was getting to a second ago, I’m still proud of all the things we’re doing. As a growth company, we produce operating cash as a percentage of earnings, that’s in the 90s, was 92% in the first six months of this year, it was 93% in the first six months of last year. That’s impressive number when you look at what our growth is doing today versus a year ago at this time because that takes cash to fund that growth.
We continue to invest heavily in both the vending side as well as our distribution infrastructure. And if you look at the numbers, we have published in our annual report looking at CapEx for the year and you will apply that to our patterns of business. Historically, our investing activities are just shy of 30% of earnings. Last year, we were in the mid-40s so we invested a lot of cash into the infrastructure of the business.