快扣 (FAST) 2006 Q4 法說會逐字稿

Welcome to the Fastenal Company 2006 annual and 2006 fourth-quarter earnings conference call.

This call will be hosted by Mr. Will Overton, Chief Executive Officer, and Mr. Dan Florness, Chief Financial Officer.

The call will last up to 40 minutes.

The call will start with a general overview by our Fastenal hosts, Mr. Overton and Mr. Dan Florness.

The remainder of the time will be open for questions and answers.

As a reminder, certain statements contained in this discussion are not historical facts but are forward-looking statements and are thus prospective.

These forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.

More information regarding such risks can be found in Fastenal's quarterly and annual SEC filings.

I will now turn the call over to Mr. Florness.

Please go ahead, sir.

Thank you, Maria.

First off, I would like to welcome everybody to this call.

I know some folks are listening to the phone and some over the Internet.

One item that I wanted to touch on, a question I've received is why are you doing a conference call and will it continue?

First off on the why, there's really four overriding reasons why we are doing a conference call.

One, we believe it enhances our ability to be more transparent to our shoulders, to explain what we're doing as we progress through the year and into the next.

Second, we believe it's a more efficient venue for both Fastenal and for our shareholders that either own and/or follow the stock.

Third, we believe it provides more flexibility for our shareholders to be able to listen to the information, whether it be currently or at a later date.

This recording will be out on the Internet on our Web site for a two-week period following today.

Finally, as with all companies, we're conscious of Reg FD and we believe it enhances our ability to remain in compliance with the intent of that law.

As far as will it continue, it's really going to--we're going to do this for several calls.

We're going to get feedback from our shareholders on do they like it, does it enhance our communications with them.

If the answer to that is yes, we will continue it.

If not, we will revert back to our press releases as we've historically done.

With that I will switch over to Will to give some highlights on the quarter.

Good morning.

Before I start, I'd also like to say that Nick Lundquist, our Chief Operating Officer, is also with us today, so when it comes to Q&A, if you have any specific sales questions, you could address them to Nick also.

Touching on the quarter, from a sales standpoint, as you know, we came in at 16.8%.

What we're really seeing on sales is a pretty steady pattern from the late summertime period throughout the rest of the year.

We are a little disappointed with December but we always have a very hard time determining where December is going to come in with holidays and plant shutdowns.

It's the most wild-card month that we have throughout the year.

Looking forward a little bit, the first two weeks of January, we are in a similar trend.

We see our growth rates similar to where we were in the fourth quarter, which with that we are pretty comfortable from a standpoint that it's not slowing down any more or we're not seeing a slowdown at this point, so we are very happy about that.

Earnings standpoint--we came in at 16.4% earnings growth.

We are disappointed that we missed the Street consensus but we are really pretty comfortable with our expense control.

We've actually moved the fulcrum of the breakeven point down over the years.

It was not many years ago that we needed at least 25% topline growth to have any earnings leverage.

With 16.8% sales growth and 16.4% earnings growth, we are kind of in the balance there and it really wasn't an expense issue.

We lost a little few basis points on the margin.

So from expense control, we are in good shape, especially considering the investments that we made in 2006 with the store openings and the big push on 163 CSP2 stores.

We are in a good position with labor.

We've done a nice job of controlling our headcount and we are very comfortable with where we are from a labor standpoint, again going into the new year.

I mentioned margin.

Our margin came in at 49.9%, which is a little lower than we had hoped for but Dan and I have stated many times that we believe we are a 50% margin company.

For the year, we came in the 50.2%.

We had two quarters below 50, two quarters above 50, and we are really staying right where we think we can stay going forward.

We're running the Company based on a 50% margin return or report, excuse me.

The one area of our earnings release that really the biggest negative in it would be our inventory growth.

I just want to touch a little bit on the inventory growth and Dan is going to touch more there.

The first thing is that a lot of what happened was actually planned.

Our Indianapolis distribution project, which I've talked about many times throughout the year, where we are expanding our stocking SKUs from about 28,000 to 120,000.

We are about 90% complete on that project now and that added an additional $8 million of inventory in the quarter.

The year-end buys came in--year-end buys (indiscernible) say that.

That's when our suppliers come to us with deals that in many cases are too good to pass up.

Considering where the inventory came in at the end, maybe we were a little aggressive there but most of these deals when you annualize the return, the deals that Dan and I accepted, which added up to $8 million, give us an annualized return between 30 and 60%.

Hopefully, we never get to the point where we are so concerned about a short-term problem that we are passing up those deals, and that's where we still are today.

People are just giving us great deals so they can make their numbers and we are normally in a cash position to take advantage of that.

That was, as I said, another $8 million.

The third part of the inventory growth and really the biggest part is concerning our import products that we bring in from our Fastco trading company.

The way they operate is, when the product that comes in in the fourth quarter, that's normally going to be purchased in the June-July time frame, about three to five months out.

So when they were placing these orders in the June-July time frame, they were looking at a higher sales growth rate; we were looking at low 20s or in the 20% range, not 17% range.

So they were buying a little heavier than we should have.

But then something else happened.

There's been a slight slowdown with our producers in China, and so the leadtime shortened up.

When you put the two pieces together of our lower sales or higher projections along with the shorter lead times, we had an import or a buildup in our import inventories of $10 million in the quarter that we did not expect.

That really was the wild-card that through us off.

On a positive note on that, this is all very good inventory bought at a great price, and it's product that we will sell through.

If you look at the difference of where we came in and where we should have came in, it's about a four or five-day selling period that it takes to sell through that inventory.

We've worked very hard to communicate this problem to the field.

I'm very confident that we will correct it very quickly and be back in good shape for sure within the first six months of the year and we should make some very good progress in the first three months.

With that, I'll turn it--oh, excuse me, I missed one point.

Going into 2007, based on the way the fourth quarter ended from a sales standpoint and where January is starting out, we plan to run it business as usual.

We will continue to open stores at our rate of somewhere between 13 and 16% or 13 and 17.

I'm not sure that's the latest but roughly 265 to 300 stores on the very high-end for 2007.

We plan to continue to convert stores to the CSP2 format.

We are still comfortable with how that's going.

And it is really business as usual going into 2007 from our current viewpoint.

Now with that, I will turn back over to Dan.

Thank you.

What I would like to cover is just highlight a few points in our earnings release that went out at 7 o'clock this morning.

The first one relates really to the Page 1, which is primarily about the results for the quarter and really topline.

As Will touched on, we believe that our sales trends are in a stable fashion.

Again, December has always been some of an oddity month.

I think, in my ten years with the Fastenal organization, there's very few where I've actually understood what happens in December, again because of the things that can happen in the latter half or latter week of the month.

From a current initiative standpoint on Page 2, we continue to make progress and improve on our freight initiative.

When I look at the improvements that we continue to see in our ability to product and how that enhances with our master hub strategy with Indianapolis, I think that positions us well going into 2007.

On a working capital standpoint, the AR call center, which we put in place in early 2005, we continued to yield benefits from that.

As you can see from our table actually on Page 4, our Accounts Receivable growth continued to lag behind sales growth.

While that gap is narrowing as we continue to improve and to come across more difficult comps, it has freed up a tremendous amount of cash for us to reinvest in the business.

On the inventory, as Will indicated, there's some work we need to do there.

Looking back at history--and history is often a good indicator of ability to respond to growth--if I go back to the 2003 time frame, in reaction to the growth that occurred late in '02 and the early part of '03, we actually had a six-month period where we not only held inventory flat, we contracted inventory by about 12 million.

So I feel comfortable that, in the first three to six months of 2007, we will correct the inventory buildup that occurred late in the year.

Then to reiterate a few of the points that Will made, we did exercise some opportunities late in the year.

We feel, from a financial standpoint, they were very attractive opportunities for the Fastenal organization.

We would do that again, given the opportunity.

Secondly, as we indicated, if we look at our projections from last summer, the sales did moderate in the latter third of the year and some outbound products, some selling of product didn't occur that we originally anticipated.

The import products that we held, the speed of that process, some of it related to manufacturing capacity in southeast Asia, as well as improvements in our Fastco organization in Southeast Asia.

We have gotten better at procuring.

Now we need to correct some of our purchasing patterns to reflect the ability we have to move products around the continent--around the globe.

Looking into 2007, we have identified some very nice opportunities within both our stores and our distribution centers.

On the distribution center side, we are looking at--with the buildup in inventory in our Indianapolis facility, we have been really challenging ourselves on the amount of safety stock that we need to stock in our remaining distribution centers.

We've identified dollars, both CSP and non-CSP, and then there's primarily non-Fastenal dollars that we feel we can lean up in our distribution centers because of the safety stock we now have built into our master hub.

If I look at our master hub, we finished the year with about $45 million of inventory in Indianapolis.

That includes both the inventory that is there and has been there historically, related to their role as a primary servicing hub to that part of the continent, but also includes the inventory we've added in the current year related to the master hub concept we've talked about earlier.

If I look at the remaining distribution centers, our average inventory at the end of 2006 is just under $10 million, about $9.6 million.

We believe we can manage that number down in 2007 in response to some of these opportunities again with primarily non-fasteners of reducing safety stock in our existing hubs.

From a store standpoint, as we had talked about both back at our investor day in 2005 and again in the spring of 2006, we really put in place early in 2005 some specific financial measurements on how we handle non-CSP2 inventory in our stores.

The first one relates to customer-specific inventory, and I'm pleased to state that we had identified the number of milestone markers in that initiative, and it's really customer-specific inventory is inventory we stock at the store level that is unique to a particular customer's needs.

It might be used in multiple locations, but it is unique to a customer.

We identified some financial targets in October of 2006.

Our financial targets for these kinds of things typically center on October.

Quite a few of the things that we do as a company will center on October, so those of you that have owned us or covered us for years, you know that's a bit of a benchmark month for us.

It really tells us where the next year is probably going to start out.

In October of 2006m we did hit a milestone marker on customer-specific inventory.

Now, our targets get progressively more difficult going forward.

I believe we are on track to keep meeting that challenge and improving our operational efficiency on that inventory.

As it relates to store inventory, excluding CSP, we have, with the expansion of our inventory in Indianapolis, our master hub, we now have an enhanced ability to continue to manage the safety stock down at the store level.

That provides good opportunities in 2007.

The next item I wanted to touch on was on Page 3.

As we all know, fuel has moderated as we've gone through the last third of 2006.

We saw nice improvements on the gasoline side of the equation, really in the post-Labor Day fashion.

As we got into the December time frame, we've started to see improvements as well in the diesel pricing.

That tends to not track exactly with gasoline, especially in the heating season period because of the needs for fuel oil in heating of businesses and homes.

But that puts us in an excellent position going into 2007 with the fuel prices at a fairly moderate level.

As Will mentioned, we're very pleased with our ability to leverage operating expense.

Again, I think it really demonstrates our ability to lower the fulcrum point on where we can manage our operating expenses as an organization and still invest in the future with new stores, CSP2 and expansion of our master hub concept.

Finally, on Page 5, I wanted to note that we put out a press release last night.

Our Board yesterday authorized an expansion of our stock repurchase plan with the press release put out last night, also indicating our first-half dividend, which we paid in early March.

With that, I will now turn it back over to the operator.

Great.

The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS).

Michael Cox, Piper Jaffray.

Good morning.

First, I'd just like to thank you for hosting this conference call;

I think it's a great venue to explain the results and get in front of investors.

But my first question is on the gross margin.

You mentioned that you lost some traction in the fourth quarter;

I know that it's within the range that you guys have talked about in the past of a 50% gross margin business.

I was just wondering if you could give maybe a little bit more clarity as to what changed there.

Was that a product mix change that did result in the year-over-year decline?

Then any expectation for '07 from a gross margin perspective?

Thanks, Mike, this is Will.

We really think it was more two things.

One is there are some fixed costs in the [margin] from a transportation standpoint, inbound transportation where you can't adjust on a quarterly basis or it's difficult to adjust.

So you give up a little bit there.

The other thing is we're pushing very hard on sales in the fourth quarter, and I think maybe we lost just a little bit of focus trying to hit our sales numbers.

But going into 2007, we are very comfortable that we're still going to be in that 50% range, and hopefully pick that ground up.

It goes to what I said.

If you look over the last eight quarters, we've been bouncing around the 50%, gaining a little bit each time.

Another thing that will help us going into 2007 is lower fuel costs.

I know our transportation managers are already working with our outside carriers trying to beat down the fuel surcharges.

It's amazing how that works.

When the fuel goes up, they are two weeks early and when the fuel goes down, they are two months late, but that's just business and we understand it.

Okay, sure.

Shifting gears a bit, I was wondering if you could touch on the CSP2 conversions, what the plan is for 2007 and any qualitative comments around the performance of those stores.

We aren't going to comment on the performance right now; we are still gathering data.

As far as the openings, our plan for 2006 is that we--or 2007, excuse me, is we're going to open between--or convert between 150 and 180 stores to the CSP2 format.

We're still very comfortable with the program.

Probably the biggest problem we've had with the CSP2 conversion is keeping the staffing level at the right level.

What you have to understand about this is these are our most profitable stores and the people who manage them at the district level are paid for profitability, so we beat these people up continually to be efficient and grow the profits and then we come back the next day and say add two more salespeople and suck it up.

We're trying to find that balance between those but what we've seen in some of the earlier conversions is the headcount is slipping back a little bit, the profits are showing up very nicely, and it's going to be a continual tug-of-war to keep them properly staffed at the levels we want for the CSP2 growth.

But overall, we're comfortable with our inventory selections; we're comfortable with the concept as being a winner for us.

That being said, though, we're working very hard on lowering the incremental inventory investment by going into the stores before we convert them and really doing a good house cleaning, bringing out anything that may be duplicated in this new inventory set.

We believe we can reduce it by about 30 to $40,000 per opening, which over a year's period adds up some serious savings.

Okay, great.

My last question, on the inventory side, you related to the store level safety stock.

I'm curious if that's just a function of getting the store managers comfortable with the master hub concept and their willingness to carry less safety stock and relying more on their master hub?

Well, it actually isn't the store level safety stock.

The way--it's the distribution centers outside of Indianapolis.

On the items that we have very good store inventories, we currently have three levels of defense, the store inventory, the local distribution center, and the Indianapolis distribution center.

We are seeing, based on all of our analysis, but because of our good store inventories, we can reduce the safety factor in the hubs outside of Indianapolis because we know we can depend on the good stocking levels of Indianapolis.

That's a tremendous opportunity for us because that's where over half of the inventory in the distribution centers, the--I think Dan said about $100 million is in that type of product.

We're not pulling half of it out but we can greatly reduce the safety and still go comfortable that we can service our customers.

The reason we couldn't do it in the past is we didn't have the confidence in our Indianapolis inventories.

It took us all year to get to that point.

This is something we've been planning all year, where we were not able to talk about it or pull the trigger on it until we felt comfortable with the stocking level.

Great, thank you very much.

I appreciate it.

Jeffrey Germanotta, William Blair.

Good morning.

I have a few questions.

First, can you comment on national accounts and key accounts activity in the quarter?

Last year, we really restructured that program-- this is Nick.

We really restructured that program, Jeff, and put in a completely different model instead of national accounts, which used to be crossing state boundaries, multiple locations, over 0.5 million in spend.

We really decided to put in more of a strategic account model by individual location.

So during that process, what we did is we took our district managers who had some strategic accounts looking for them, so regional managers who had some strategic accounts working for them, and put them all under one program, took our national accounts group and put them all under one program.

It's very early to see how the progress has gone because of the way the economy followed at the end of the year, but we're very optimistic.

We have seen some slight increase but I think it's difficult to gauge how our performance, because of the economic environment that we went through in the last six months.

Do you have any numbers on how national accounts grew in recent months, Dan?

No.

My next question then, could you comment a little bit on selling price inflation trends from the beginning of '06 towards the end of '06?

Really, we've seen a very state pricing environment.

The only exception to that would be certain fasteners that are made out of--stainless-steel fasteners particularly have grown; prices have increased throughout 2006.

But the general business, we've had very little help from inflation and we think a lot of it is due to just a little nervousness in the market.

A lot of our suppliers, especially the domestic ones, are heavily dependent on housing economies so they are not in the mood to be raising prices because they are afraid there's going to be pushback.

But right now, the pricing environment is very steady.

When you say "steady", are we talking about low single digits?

Very low single digits.

Then my last question--you know, when we talk about 13 to 18% growth in new store count and the numbers you're talking about for reinvesting in CSP2, which is in my understanding is about an equivalent investment to a new store, we are really talking about reinvestment rates in your store base going forward of 20 to 25%.

That's a very high level, relative to history, that should pay some great long-term dividends.

You know, am I thinking correctly on that?

I think you are.

The 25 may be high.

We would have to get to the end of the bulk numbers to get there.

Really, you are thinking correctly.

We're working very hard and we stated this last year at our investor day, that we're going to do everything we can to keep the investment level high and manage all of the other expenses well.

That's why I made positive comments on our expense control.

In 2006, we invested to a level around 21, 22%, but we were still able to hold our earnings with the lower sales rate.

So we're going to continue to invest for the future because we believe we have a winner, our model is a winner, and long-term, these investments will pay us back.

Thank you very much.

You keep up the good work.

Brent Rakers, Morgan Keegan.

Good morning.

I was hoping to first start with, Will, if you will, maybe elaborate a little bit more on the trends you saw in December and then also maybe extending those in January.

I guess in light of the fact that maybe the December comp was a fairly easy comp, if you will, and then the January comp is a particularly tough comp.

I'm not going to say too much more about January other than we are in a growth trend similar to what we put out--that we reported for the fourth quarter, so you can look at the range and figure out what we are seeing for the first two weeks.

From a December standpoint--and I will go with what Dan said--every year, we have trouble trying to figure out and really the biggest change is how many factory shutdowns for that week between Christmas and New Year's.

When a high number of factories shut down, that business just doesn't get shipped.

These people have orders.

Everything gets moved into January.

It's not like we ship early.

They are saying okay, we're going to shut the factory down, show up January 2 and we you deliver the product.

We lose that revenue into the next month.

This December is pretty much on track.

We thought we would grow maybe 1 percentage point higher or in the roughly 19% range.

So it's really difficult to say exactly what happened.

We think the economy today has been relatively steady since the late summer period.

One thing I will add to that is the store fleet, you know, the correlations between October and January, is quite strong.

In the last six-year period, I believe that correlation has been somewhere between 100 and 102% of October.

So January (multiple speakers) January's daily average would be somewhere between 100 and 102% of the previous October.

We feel, at this juncture, we see no reason why we won't be in that range.

On that vein, obviously the manufacturing economy looks like it pulled in a little but towards the back half of 2006.

By your comments for January, it sounds like you are seeing a stability or maybe an uplift there.

Can I take that away from those comments?

Stability, I would say.

Okay, great.

Then, one last question and maybe--

Also remember, it's two weeks worth of data.

Yes, exactly.

Then maybe lastly, I think probably for Dan, on the comments that you made about the year-end purchases and then also some of the Fastco product that came over here, does that have direct implications for gross margins over the near-term?

Then maybe if you can give us a sense for how much that could help gross margin, new term?

Then does the also have maybe intermediate-term implications for gross margins, meaning lower purchases over the near-term as well?

It really doesn't have an impact on gross margins in the short term.

I say that because our gross margins in the ensuing months are really dependent on what we're selling to whom and when.

The fact that we are a little deeper in some of this inventory doesn't change that.

With that said, the effort we've had in place the last several years to really go more and more direct to the ultimate supplier rather than buying through another master reseller has allowed us to enhance some margin as it relates to our ability to source better.

That's allowed us to do two things.

In one vein, over the last several years, you've seen us improve our gross margin.

It's also allowed us to get into some products and/or some customer situations where we historically would not have.

As I have been stating this as well, as I have been saying for years, our importing efforts are really a defensive move to balance the product mix change from all fasteners to other products, and I've been saying that for four years.

Again, we come out at 50.2% in 2006.

I wish we could accelerate a little more to maybe go to a higher percent, but we are very, very happy with the efforts of our people and our Fastco trading company and what they have been able to accomplish.

We're working for another very good year in 2007 out of that group.

Thanks a lot, guys.

Michael Hamilton, RBC Dain.

I was wondering, on the CapEx front, if there's anything unusual coming in, in '07, in your planning.

You know, there really is not.

The CapEx, I do see that--we haven't finalized our numbers for '07 yet.

We will be putting those out with our annual report here in about just over a month.

I do expect the CapEx to drop from 2006 to 2007.

If you look at big-ticket items, big items that are in one year the aren't in the next, 2006, one big component of 2006, and 2005 for that matter, was our new distribution center in northern California in Modesto.

That distribution center we moved into in the month of December, so we are now operating out of our Modesto distribution center.

In 2007, the big-ticket item, if you will, that's on the horizon is our Dallas distribution center.

That's where we are looking at relocating that within the Dallas Metro area but expanding that distribution capability down there, which is normal.

Over the last five years, we've done that with varying distribution centers, whether it be our Kansas City facility, our North Carolina facility, our Atlanta facility, etc.

But those are the big-ticket items that come to mind.

But I would expect to see the CapEx drop off some from '06 to '07.

Just to add a little more, one thing we're working on, from a CapEx standpoint, is we've tasked our team over in Shanghai to start looking for products that we would have normally bought here in the United States--shelving, wrecking systems, forklifts, all the things--non-products that we sell but things that we use in large quantities.

So we think going forward we're going to find some nice opportunities to lower our CapEx in the future.

It's just another way to try and run our business more efficiently.

In terms of fourth-quarter revenue by region, did anything stand out to you, Dan?

You know, the only thing I would note--and I will let Nick add to this if he thinks I'm all wet--would be we have seen some strengthening in our Indianapolis-based region as we got into the latter third of the year.

It's not really in the state of Michigan, which is part of the Indianapolis region; it's in the balance of it.

But other than that, nothing really stands out.

Nick, I don't know if you have anything you'd want to add to that.

No, it's pretty much across the board.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS).

John Baliotti, FTN Midwest Securities Corporation.

Good morning.

Will, I was wondering.

Could you talk about store growth?

In the release, you talk about maintaining that 13 to 18%.

I think you reiterated that earlier in your opening comments.

Could you kind of maybe walk us through a comfort at the 360 level for '07?

It seems like that would be a very crude average of about 30 a month, which I know is probably not the right way to look at it.

I said 260 to 300, John.

Right.

In the press release, it says, it says 260 to 360, so (multiple speakers).

(multiple speakers) 13 to 18%.

I was just seeing if that was--

That's a very high-end; we really want to be in the middle of that range.

I would be very surprised--and we really use that range pre-CSP2.

If business really picked up and the economy was tearing along, we would move the level closer to that.

But in our current view of the economy, we would be at the lower end of that 260 to 360 range.

Right, so you are pretty flexible on it; you can adjust that as demanded.

It's about a three-month horizon, three to four months that we can move them in and out.

That really has to do with leasing real estate.

You know, we buy--basically every new store is in a leased property, and so our people are out looking for that real estate about four to five months before the opening date.

But we normally would never sign a lease for more than 90 days before the move-in date.

And the lease the really the hard--you know, that's the legal document that says okay, we are committed here.

On the working capital side of that, if you end up being sort of toward the lower end of that, does that help you as you try to improve the inventory turns of it?

Well, really the lower end is similar to where we were in 2006, but we are continuing to invest heavily in the CSP2.

So we're not slowing down our investments in sales, sales initiatives.

We believe that the inventory correction is going to come in two things.

One is distribution centers, which we talked about.

The other is in some of the brand-special stock that Dan also mentioned in his commentary.

Okay, great.

Thanks very much.

Dan Whang, Lehman Brothers.

Yes, good morning.

Just my first question was regarding the current demand environment, if you could the could provide any additional color regarding your manufacturing customers versus the non-res construction demand.

I think the non-res has been holding up through the latter part of '06.

We have seen very good demand on (indiscernible)

Yes.

We have seen very good demand on what we call commercial construction, basically non-res.

Jobs continue to be strong and our national construction group has done a really nice job of moving us more into the energy and things like that, the gas or alcohol, corn alcohol plant, energy builds.

I just spent a few minutes with the national construction manager from the northern section, basically the Midwest, this morning.

He said it's really--he told me if he doesn't hit his goal I have no one to call but him.

There's plenty of business out there.

So we're comfortable, at least for the foreseeable future, that commercial construction will remain in a good state.

Manufacturing, it seems like the big manufacturing customers we talk to, everyone is optimistic, but there is a reserved optimism.

They are not buying out; they're not committing.

And they are very, very focused on beating us down on price to save money because they all want the same kind of return that we want, and so that's good and it's bad.

The fact that they are price conscious says they're willing to change if we have a better deal, but it also means that we have to be on our toes from a purchasing pricing standpoint, more so than we ever had.

But generally it's a steady but it's not gangbusters with the manufacturers.

They are all very cautious, the ones that we talk to.

But do you get a sense that any sort of inventory-related belt-tightening that particularly on your OEM customers, that that has pretty much been worked through at this point?

I think, over the last five years, most of the companies we deal with have figured out how to really reduce their inventory and they've never built it back from 2001 through 2003.

They reduced their inventories and they found out that they didn't need as much and they were leaning on companies like Fastenal and our competitors to provide the inventory for them.

So for the most part, that's a positive because the value that we bring is worth more to them and also, the cycles aren't quite as whipsaw as they were ten years ago.

Okay, very well.

The second question was regarding your plans for new store openings, and you know obviously working off a base of 2000 stores.

So going into '07, will there be a particular focus in terms of the site selection?

Would it be a particular geography or targeting particular end markets?

Well, we've really tried to spread the workload out all across the country, including Canada and Mexico.

So from a percentage standpoint, it's really, on a state-to-state standpoint, it's pretty even across the country.

Okay.

I think, previously, I mean you've talked about the calculations that you made that you believe the North American economy could support up to a 3500 store network, and you still feel comfortable around that or has that number moved up or\--?

We're still stating that as our number.

Okay, I will let someone else have a try.

Thank you.

David Manthey, Robert W. Baird.

I was wondering.

In terms of the December sales that you said were delayed and would show up in January, are those held for sale?

Would that show up at the end of January, or does that show up at the beginning of January?

Dave, I probably didn't state that clearly.

I said sometimes when plants were closed, but then what I followed up with on that is that this was the pretty normal December and we didn't see an unusual number of plants being closed.

We don't see a lot of carryover into January, but if they did carryover into January, we would normally see that.

Well actually, some would show up early, but in the large customers that we do end-month billing, they would show up in the last actually in the last days.

But we're not anticipating a big bump in our January numbers to account for any December rollover.

Okay.

Then second, on SG&A, your SG&A was up about 20% in '06, and you were able to show leverage there because gross margin was up and so forth.

But if you're saying that you expect gross margin to be here around 50, and you are seeing right now growth sort of in the 16, 17% range, it looks like it's continuing.

Does that lead to the conclusion that you are expecting growth to accelerate through the year, or is there a possibility that the investment rate would lead to an SG&A growth lower than we saw last year?

Well, part of the higher SG&A is that our sales rate was also 2 points higher than you just said, so it supported a higher growth, or a higher SG&A rate, SG&A, because it's really labor-driven.

One thing we have going for us into 2007 is we did a better job in the second half of the year last year, on headcount growth, than we did in the second half of 2005.

We are not giving sales or we're not giving guidance on sales right now, and so we believe we can do a nice job of managing our expenses.

We're going to manage our headcount to what we see our sales growth to be.

I don't know, Dan, if you want to jump in there?

You know, as Will mentioned, when we look into next year, the position we are from where we would manage our headcount really since the June timeframe--traditionally we are, with the fuel expense (indiscernible) and cost of goods and the pieces in operating expense and the fact that if you look over the last several years, we have upgraded a lot of our store locations.

One component of our operating expense of our SG&A is our occupancy expense.

Which is the second-largest line item after labor.

What we've been seeing as we get deeper through 2006 is our actual annual growth number, year-over-year growth number, is dropping.

As we go into 2007, (indiscernible) work in our favor which quite frankly hasn't worked in our favor since 2001.

Okay.

Then the final question--I think this was asked previously and I'm not sure that you addressed it in terms of the pricing that you expect in 2007.

I think you said low single digits, and it's progressing at a steady rate currently '06 and currently.

Do you have an expectation for price increases in '07?

The earlier question I believe was really--or I was referring to 2006, not looking forward.

In 2007, from what we've seen early in a lot of the price increases, you almost have to break it into two buckets of product.

The fastener product is more of a commodity product and the economy will dictate what happens to that throughout the year of 2007.

The non-fastener product, the branded product, the power tools and things like that, most of those price increases come through in the fourth quarter of the previous year.

We didn't see a lot of pricing pressure there.

Again, I think a lot of that had to do with the fact the economy was a little slower and people were a little bit nervous about pushing pricing.

So the non-fastener product we will probably see a 1 to 2% increase in pricing for the year of 2007.

The fastener product is really, we will have to see how the economy goes and what happens with the supply and demand on that product throughout there.

It's really an international market.

Great, thanks a lot you guys.

(OPERATOR INSTRUCTIONS).

Holden Lewis, BB&T.

Good morning, thank you.

Can you just comment?

D&A looks like it was up quite a bit in the fourth quarter over sort of the rate you've been running.

Is that a function of the DC coming on, on the West Coast, or what's sort of behind that?

I don't know that it was up appreciably;

I don't have that figure right in front of me.

The things that would have influenced that in the latter half of the year would be the distribution center coming online, would be some of our ordering patterns for vehicles sometimes can lean more heavily towards the first half of the year or the second half of the year.

We really have two orders of the year.

In this year, some of it was in the second half of the year, so that would be a piece of it.

But other than that, there wasn't, I don't think, a meaningful impact.

Because I think this quarter, right, you reported full year was 33.53.

But I think, as of the nine-month release, I think that was 22.942.

I mean, that suggests like a 10.6 million D&A.

You've been running, I think, what, between 7.5 and 8 for the balance of the year.

Holden, that number I just don't have in front of me, so I can't answer that one.

Okay.

Then some gross margin questions--since you pre-bought so much product, I mean are you expecting that's going to have an immediate impact or benefit to the gross margin as we start in '07?

I mean what kind of order of magnitude might that have?

Well, first off, when you look at the dollars we brought in and what our pull, our cost of goods dollars will be in 2007, we're really talking about, on a day basis, about 2 to 2.5 days worth of inventory.

As I stated earlier, I don't really see that having an appreciable impact on our gross margin because that is product that we were buying.

And in many cases, the opportunities were really related to either some pricing or some [additional] [overly-paid] discount if we pay before end of December.

It was very much a financial decision.

As far as the impact of a couple of days worth of inventory on calendar 2007, it doesn't even really hit the radar.

Then what's sort of your thoughts as far as sort of rebates, discounts, sort of where you finish in '06 and what you're expecting for '07?

Is that going to be better, worse than we've sort of seen of late?

I think that will be pretty much on a straight line fashion, you know, improving because of changes in volumes.

I mean, the business will be larger; we expect the business to be larger in '07 than it was in '06.

But from a relative standpoint, I expect that to be fairly straight.

So even though you're seeing things slow down versus where you were for at least half if not three-quarters of last year, you think that, as a percentage of sales, your rebates aren't going to change a lot despite the slowdown?

No, Holden, this is Will.

They are really not based on the slow down; they are based on last year's numbers.

If we can throw 15 or 20% additional business to the supplier, we will stay at least in that category if we don't move--or else we will move up one category in their scale.

So we shouldn't slip unless we really miss the numbers, which we don't foresee happening.

We are comfortable that is steady as we go on rebates and deals like that.

Okay.

Additional incentives, we call them.

Fair enough.

Then I think, in your release, you also sort of commented that, on the direct sourcing, you had made comments that direct sourcing operations, that the improvement lost traction in the fourth quarter of '06.

Can you sort of address that?

I'm not sure I got that in your prior comments.

Actually, no, that comment was in to start a section on gross margin. (technical difficulty) improvements we've had over the prior year, and that our gross margin in general, not direct importing but our gross margin in general lost some traction.

That was really in reference to the fact that our gross margin, like it did in the second quarter, slipped a little bit.

We are unhappy when it doesn't have a 5 in front of it.

Okay, but that had nothing to do with any changes in the direct sourcing?

Absolutely not.

The direct sourcing is going, as I said earlier, very well.

We have no complaints about that other than we would like them to move faster, but they are already moving faster than us.

Got it.

Okay, I just sort of misread that.

Then I guess, lastly, the allowance for bad receivables, I mean great progress.

I think that's probably a $0.04 contributor in '06.

What's kind of the expectation for '07?

Can you continue to sort of work away at that, or does that 2.1 million you finish the year at, is that kind of the run-rate?

What's the expectation there?

Well, the allowance is really the residual on the balance sheet that we believe we will write off in the future.

Really that one we've been able to lower quite nicely in the last two-year period because, in connection with our call center, really what we did is, in lowering our days from the 52/53-day neighborhood to the mid 40s, we not only collected cash faster, we improved the quality of our Accounts Receivable.

The dollars over 60 days old dropped from 2004 to 2005 and stayed flat from 2005 to 2006.

So the reserve that we need on that residual balance drops with it because we just don't have dollars that are outstanding that are old any more.

Right.

Are you going to make further progress on that, or is this kind of the rate that you anticipate?

I anticipate us making further progress.

All right, great.

Thanks.

At this time, I would like to turn the call back over to Mr. Florness for any additional or closing remarks.

Thank you, Maria.

A few things I would throw out--I hope this venue was useful to our shareholders and the analyst community that covers us.

I hope it's also useful to some of our employees who I believe either are listing currently or will listen later.

One of our goals is also to not only be more transparent to the Street, but also internally.

I think it's useful for our employee base to hear some of the questions and some of the discussion we are having with the shareholders of the Company.

I hope this was useful.

I would encourage anybody on this call or anybody listing--we rolled out a new Web site for investor relations several days ago.

I would encourage folks to hop on and try it out.

There are probably a few things in there that--a few bugs need to be worked out yet but hopefully it's a nice enhancement.

One of the enhancements we have on the new Web site, we're getting closer to the 21st century on it.

That is if you want in email updates (technical difficulty) releases, that will be available for you to get.

Our next sales release date is scheduled for Monday, February 5.

I just want to remind everybody on their calendar.

Our next earnings release date for first quarter is scheduled for Thursday, April 12.

Our annual meeting in Winona is scheduled for Tuesday, April 17.

And my final comment--as most of you who have known as over the years know we tend to be non-flashy Midwesterners, some might even say "boring" at times.

Will just told me to speak for myself.

There's an item that I would be remiss if I didn't mention, and that is on behalf of the employees of Fastenal, I would like to congratulate Will Oberton on an award he received several weeks ago.

Many of you probably are aware of this; some of you may not be.

But Will was named CEO of the Year by Morningstar and I think it's well-deserved and I congratulate him on that.

With that, I will turn this back over to Maria to complete the call.

Thank you and have a good day.

That includes today's teleconference.

Have a wonderful day.

You may now disconnect.