快扣 (FAST) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fastenal quarterly earnings call.

At this time all participants are in a listen only mode.

Later we will conduct a question and answer session and instructions will follow at that time.

(Operator Instructions).

As a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference, Ellen Trester.

Welcome to the Fastenal Company 2010 third-quarter and earnings conference call.

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

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 home page, investor.fastenal.com.

A replay of the webcast will be available on the website until December 1, 2010, 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 actual 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.

Thank you, Ellen.

I'd also like to thank everyone for joining us this morning.

I'm very proud of the results we produced in the third quarter of 2010.

Overall I think we did a very good job.

We continue to see strength in our top line revenue in all areas of our business.

Geographically in the United States we really don't see any weak spots at this time.

We have stores in small areas that may not be doing as well but overall we're seeing strength in all parts of the country, which is very encouraging.

It's been a long time since we've seen that.

Even back in 2008 when we were doing well there were certain areas that were very slow.

We had a particularly strong September.

And when you look at September, year-over-year the number was good at 23.5% but really the strength, -- the good numbers from September looked at sequential growth.

September is really the most difficult comp that we had from last year because we had a very good August, September last year and we improved upon that in 2010, so we are very happy with those results.

Both our Canadian and Mexican businesses are growing above the Company average and they are both becoming larger and actually a meaningful part of our growth number at this point.

The other international businesses, mainly Asia and Europe, are both doing very well and are also growing above the Company averages.

So outside of the United States, our business is very strong and the profitability of those businesses continues to improve as we become better at running the businesses and have greater sales revenue.

At this time, the real strength in our business is being driven by our manufacturing customers.

And if you broke down the manufacturing customers, it's mainly the large ones.

We're doing well with all sections and sizes and types of manufacturing businesses but the large customers are driving our business, we're seeing the best growth out of that group of customers.

But because of this we're also seeing pressure on our margin.

Traditionally, the large manufacturing customers are also our lowest margin customers, so although our margin did go backwards from the second quarter, we're pretty comfortable with where we are and we're still very comfortable with that 52% margin range that we've stated over the last year or two.

We're going to have to work hard for it but we also believe that over time our smaller customers in our construction business will pick back up and the mix will change more positively for our growth going forward.

The entire Fastenal team did a really nice job in expense control, not only in the third quarter but throughout the entire year.

The only area of expenses that really outgrew or was disproportionate to our sales growth was the commission and bonuses which is, as we say, a very good problem.

But even that will normalize in 2011 because in 2009 the commission and bonuses were at basically all-time low levels as a percentage of revenue.

2010 is at an almost all-time high level and so 2011, that will normalize and should be able to show very good growth over those numbers from an earnings standpoint.

We continue to add new stores in the third quarter.

We added 45 new stores.

We plan to end the year at somewhere between 125 and 130 new stores for the year which would give us about 35 to 40 stores for the rest of the year.

And we're comfortable that we can get that done mainly in the next two months, in the beginning of December.

From a headcount standpoint, we continue to add people in our stores.

We're not real aggressive with that.

We do continue to add people in our stores mainly to support our existing and growing business but also some additional salespeople.

On the support side, we've been really pretty tight.

We've added, if you do a comparison, we were looking back at the numbers, if you look back to the start of our pathway to profit which was the first quarter of 2007, we actually, if you take out the 90 people we added for the Holo-Krome acquisition, we have fewer people in support today than we did in the first quarter of 2007.

And I don't think we're squeezing it too hard.

I think we're just working really hard at becoming more efficient with how we run our business and finding things that we maybe didn't have to do or we can't do in the future.

But overall the business seems to be running well.

We're seeing very low turnover with our support help so I don't think we're driving them out the door by driving them too hard.

So we're very comfortable with where we are on the support help, and we believe we can continue to see that trend going forward.

We'll have to add some additional people but the trend to becoming more efficient should stay with us for a long time.

Just changing to more of an overview or some thoughts on the business.

I had a Fastenal board meeting yesterday and I was talking to our board members and the one thing that I pointed out at the end of the meeting that I think is helping us do as well as we are, and it's really the strength of our team.

If you look at everywhere from starting at the store managers, district managers, warehouse managers, RVPs, and all the way to the top, our turnover has continued to go down, and especially at the district, regional and hub manager levels, really the core of people running our business.

And we continue to get stronger in those positions.

And I believe that trend and the work that the people are doing there should bode well for the Company and the shareholders for a long time going forward.

I really pounded that point yesterday with the board and I want to make that point with our shareholders because it really is important.

All of the numbers don't mean anything if you don't have the team on the field that really wants to win and that wants to work here, and at that part of our business I think we're doing very well.

With that I'm going to turn it over to Dan.

Dan will give you a lot more color and granularity to the numbers.

Thank you.

Thank you, Will, and good morning, everybody.

Again thank you for participating in our call today.

As you saw, our sales trends continue to improve.

If I look at the information that we break out on page two of our Earnings Release, we talk about the sequential patterns.

In the first quarter, if you look at what our sequential patterns are doing relative to our benchmark period, we were beating those numbers on a sequential basis on average about 1%, so our sequential change, the delta was about 1% above.

In the second quarter that moderated slightly down to about 0.4%.

We are still beating it but it moderated slightly.

In the third quarter -- to be honest with you I was surprised by this -- we saw that turnaround and we were beating that sequential pattern by about 1.4%.

As Will mentioned, a lot of that can be attributed to strength in our large account business which is just growing quite well right now.

Our largest account business, what we call our key account business, is growing closer to low 30% neighborhood versus the overall business, and gave us a nice surge in top line and gross profit dollars.

And while that business, as Will mentioned, might carry a lower gross margin, the operating margin in that business is very attractive because over time there's enough volume going there that you can manage your operating expenses quite effectively and garner a very attractive operating margin on the business.

In addition to the sequential patterns, if you look at the chart we have on page three, you can see that we now for the year, every month except for February, and February was really hurt a little bit because of weather, every other month of the year has been at or above our trend line, so we feel some comfort and sustainability of these trends.

Therefore, as I'll touch on a little bit later, we allowed our inventory dollars to grow a little bit to support that business, but I'll touch on that in a few minutes.

From an end market perspective, and we added a couple new graphs to our Earnings Release, manufacturing business continued the positive trends and we continued to see some upticks in our non-res construction business that we started to see in the June, July time frame.

If I look at where our daily average was in January and I fast forward that to September, our manufacturing business year-to-date is up 17%, daily average, our construction business is actually up 24.4% from where it was January to September.

Now most of that is normal seasonality.

Obviously, especially in the northern states, January is not exactly the best month to be doing outside construction work.

September is a much better month.

But that is a stronger number than we had seen in recent years.

When I look at active account growth, active accounts up 2.8% in the month of September.

That's a weaker number than we would like to see.

When you really look at it, if you look at our business and look under the hood of our business, we actually have more non-residential customers than we do manufacturing customers.

We have a lot of small non-residential customers that do nominal amounts with us.

The non-res construction segment, the active accounts are actually down year-over-year.

There's a lot of two, three, four, five, 10 person firms that have disappeared into the woodwork over the last 12 to 18 months and that's really hurting that number.

But overall, our manufacturing business's active account growth is in the mid single digits.

As Will mentioned in the pathway to profit, our store end count has been stabilized since last fall.

We're starting to grow that number.

And I think we continue to do a nice job of managing the remaining piece of our headcount, both the distribution and manufacturing group as well as the administrative support.

Gross profit margin, as Will touched on, did slip a bit from Q2 to Q3.

It dropped about 35 basis points.

And again, when you look under the hood, really driven by the end market mix change, our transactional margins slipped about 25 basis points and our organizational profit, the second point of that, slipped about 10, but it's really driven by the end market change largely on customers, fewer non-res construction customers, smaller customers in the mix.

Operating and administrative expenses, overall managed it well.

The growth there is all centered on incentive compensation, store commission, profitability bonuses throughout the organization, profit-sharing contributions throughout the organization.

And if I look at that year-over-year, that number is up, those three things combined are up over 100% from where they were a year ago.

Sequentially, though, they are up about 6.5% which is much more in line with the 7.6% sequential growth in pre-tax.

From a working capital standpoint we continue to manage our working capital, I believe, well.

Accounts receivable grew nominally more than sales, and that's really attributed to the fact that, again, similar to our gross margin discussion, large accounts, large customers drove a lot of our sales growth, and they oftentimes have the ability to negotiate terms that maybe are slightly better than our overall average business.

Inventory, our goal was to hold it flat.

We did allow it to grow to support the added business because what we provide to our customers, we are their source of supply.

They essentially outsource procurement of a lot of these products to us.

We will not betray that trust.

We will stand ready to support their needs throughout their business cycle and therefore we allowed the inventory to grow somewhat.

From a cash flow standpoint, when we started the pathway to profit, our stated goal consisted of really three numbers; an operating cash flow that would run somewhere between 80% and 90% of our net earnings, we would spend somewhere in the neighborhood of 25% of that number over time, we felt, on capital expenditures, which would leave 55% to 65% of our net earnings available in the form of free cash.

Year-to-date we generated 83.1% of earnings in operating cash flow.

We spent about 20% of that in CapEx infrastructure to support future growth.

Free cash flow, which in our definition is operating cash flow less CapEx, came in at 63.4%.

With that, I will turn it over to the narrator for Q&A and take your calls.

Thank you.

Thank you.

(Operator Instructions).

Our first question comes from David Manthey from Robert W.

Baird.

Hi guys, good morning.

I was wondering, could you tell us are the large manufacturing customers growing faster on a same customer basis or do you think you're gaining disproportionate market share there?

First off, I do know when we look at not just 2010 but we look at 2009 and even, quite frankly, 2008, when I sit down with Lee, Nick, and Steve who head up our three business units, the one comment they had for me throughout 2009 and again in 2010 is the rate at which we were signing up our large account business.

It was faster in that time frame than it had been in '05 and '06.

And sometimes what happens is, when companies are busy, sometimes you're less inclined to make changes to things because you're too busy to do it.

Because changing a supplier or making changes to your business requires a tremendous amount of energy and sometimes you just don't have that energy left over at the end of the day to make those changes.

So we saw -- so I do know in 2008, 2009 and 2010, we have been gaining market share.

With that said, when I look at it on a customer by customer basis that business was mauled a year ago.

That business was off dramatically.

It wasn't uncommon to see a customer down 35%, 40%, 45%.

So a good chunk of this is sheer dollar per customer gain on a year-over-year basis.

But we are taking market share.

Okay.

And then second, could you maybe discuss the pricing environment?

I believe you were getting some positive movement earlier in the year and now it sounds like it's about zero.

Based on what you're buying today what is your outlook over the next, say, three to six months for the pricing environment on fasteners?

Yes, Dave, this is Will.

Based on what we're seeing today we don't see much change going over the next two to three -- let's say the next two quarters.

Steel had been going up, it went back down, and it's leveled out at the level it has been for quite some time.

So right now there's almost nothing going on with pricing.

We have had some of our suppliers coming in looking to push some pricing for the beginning of next year.

Right now we're fighting that off.

Some will probably stick, most of it will get pushed back.

The demand is still not great.

Right.

Okay, guys.

Thanks very much.

Our next question comes from the line of Jeff Germanotta from William Blair.

--what you're gleaning from your larger manufacturing and construction customers regarding the 2011 outlook?

Jeff, could you do me a favor?

The first part of your question didn't come through.

Could you restate it please?

Sure.

Regarding your larger accounts, can you share any insights into what you're hearing from them regarding their 2011 outlook for manufacturing in non-residential construction?

I can't comment on the non-residential construction, Jeff, because I haven't been out with many of our large construction customers.

But I have visited with several large manufacturing customers and pretty much -- I can't think of any that were not positive for 2011, at least the first half of 2011, and many of them are basing it on their order backlogs, that they continue to see a certain amount of strength.

It's not like on fire but they are seeing strength in the backlogs, they are looking at adding people and they are actually looking for a very good 2011.

And that has been a broad group of customers I spoke with over the last probably eight weeks.

So we're feeling very good about that from what we're hearing from those customers.

And as you look to next year, and assuming we're in a moderate economic growth environment, do you think that incremental operating profit margins, which have been running upper 30's, 40%, can still be sustained above the 30% level in 2011?

Yes, we do.

Thank you.

The one thing I'll add there, Jeff, the reason we believe we can is because we're not going to have that unusual growth in the bonuses and commissions.

Yes, all of the variable expenses should pretty much be back at this point so we're going to have a flat, or more level year-over-year comparison.

And an easier comparison to understand and model.

Okay, thank you.

Our next question comes from the line of San Darkatsh with Raymond James.

Good morning, Will, Dan, how are you?

Could you give us an early read as to your store opening plans for 2011?

Do you still anticipate this 14 to 15 stores per month level or would that accelerate a little bit based on what you're seeing now from a comp standpoint?

Right now, if our sales continue strong, if we see the trends that we're seeing today with nice sequential pattern at or above the line, we would envision going back to a more normalized rate of that 7% to 9% or 6% to 10% range of new store openings in 2011.

And we're feeling pretty good about that sticking after September and what we're seeing today.

So I guess I'd have to do the math in my head but it would be something like 150 to 170 stores.

So would there be a mile post in terms of the comparisons get more difficult, I suppose, by year-end around November-December.

So is that when the decision for the store opening plans for next year get made or what should we look at from that standpoint?

Sam, I don't think it's so much about the year-over-year growth numbers.

I think it's more about what's the sequential pattern.

When you look at the dramatic fluctuations you've had over the last 18 to 24 months, sometimes the only sanity you can get, or clarity you can get, to your business is looking at the sequential patterns because, again, when your comparisons are changing so wildly they become less meaningful.

So it's really about us.

When we look out to, historically September-October is our high watermark of the year as far as daily sales average.

From October to January, you pick up maybe 90 basis points in additional daily sales.

And then you start that stairway for the next year of where do we get to by September-October.

Providing we continue to see things we're seeing today, which are positive to that historical trend line, that's what really builds confidence in your business and it's just where we are today.

The only wildcard that comes into play, in my mind, is when you look at things that are going on.

For example, a lot of the investments we're making internationally, that Will touched on earlier, doesn't necessarily translate into always so many stores because we're going into new markets and sometimes the footprints of that market manifest itself a little differently.

But generally speaking, we're fairly optimistic when we look out to 2011.

And we're Midwestern and conservative, almost on the verge of being boring.

Maybe beyond the verge.

But one of the things I would clarify is our comps don't really get a lot more difficult, Sam, because on a sequential basis we've started seeing our improvement in August of 2009 and we had very good sequential trends.

Like I said, August to September last year was very strong, so the comps don't get anymore difficult as long as we keep hitting our monthly numbers.

The second question I have, the share repurchase activity, you have the authorization.

Is it a matter of being price sensitive?

Is it a matter of you paid the dividend twice a year so your free cash flow will be better next quarter than this?

What are your thoughts, Dan, in terms of incremental share repurchase from here?

We've been pretty quiet on it.

We bought some late in 2009.

The thing you struggle with on it is -- and we had this issue even late in 2008.

We decided to make a supplemental dividend payment because we looked at it at the time and we said is our valuation low from an historical standpoint?

Absolutely.

But you could say that about virtually every company that was out there.

And we really looked at it at the time and we continue to think this way and look at it and say that the cash that's sitting on our balance sheet belongs to shareholders that hold 150 million shares of Fastenal stock, and try to understand what's the best way to utilize that cash for them.

In 2008 we saw it as additional dividend.

We increased our dividend meaningfully in each of the last two years.

However, we, in 2010, have chosen not to be in the market because we still waiver between what is the best value, what is the best return for our shareholders.

And we're also consciously paying attention to what's going on in the marketplace as far as tax rates on different types of activities and where that might go in the future.

Not to get too far ahead of myself but a long way of saying we don't have a definitive plan on where do we step in and buy, where do we not.

But we continue to make the problem worse for ourself by throwing off one heck of a lot of cash with our business.

That's a good problem.

But for a company our size to have a couple hundred million dollars in cash is not an unusually high number.

We're pretty comfortable with that going forward.

Thank you much.

Our next question comes from the line of Brent Rakers from Morgan Keegan.

Yes, good morning.

Just wanted to follow-up with an earlier question on the compensation, the payroll growth numbers.

Was hoping you could maybe give us a little bit.

You've talked about how much the bonus comp and some of the incentive comp was up year-over-year but maybe if you could dissect a little bit more.

Your FTE numbers Company-wide went up about 700 year-to-date.

I was hoping you could give us a sense for how much contribution the employee additions, the new employee additions are actually contributing to that number.

About that, about 6% or 7%.

It would actually be a little lower than that because they have come in below the Company average.

And our non-incentive compensation is up greater than that number but the delta between that 6% point, or whatever, and the actual number is really because, as we've gotten busier, our hours worked per employee have gone up as well, so that's driven a piece of the increase, probably 40% of the increase.

And then somewhat related to that, you've done a good job of holding down the support employee numbers but I think in this quarter sequentially the support employee growth actually exceeded the store based employee growth, and just wondering if you can give us a better sense for direction of where you think those two classes will go in the future.

The support employee growth will go down.

A lot of what drove it in the third quarter was hours in the warehouses.

Go ahead, Dan.

And we added a few support people into a few subsets of business.

In the manufacturing area we added some sales reps and we added some people in the regional business units to support some of our large account business, and then we added some additional government personnel.

And so at some level support versus sales is really not correct because all of our outside salespeople that are working in national accounts and those areas fall into the support side.

So a lot of the support side is actually sales.

But anyway, going forward we believe that most of our growth will be coming on the store side of the group of people and the support side with the exception of adding some sales specialists will be very flat.

Great.

Just last question, on the occupancy costs in the quarter, a bigger jump than we've been seeing recently.

We had a record summer heat wave I think nationally.

Just wondered how much, if utility costs were a significant component of that?

Utility costs was a very meaningful piece of that sequential increase.

And a couple things in there, one, obviously the cooling costs were quite a bit higher than they were a year ago.

Another piece that falls into our occupancy that is new is our new Holo-Krome business.

Their business is wrapping up nicely and there's some additional costs there on the heat treatment costs.

It's a big energy consumer, heat treating steel fasteners.

Great, thank you.

Our next question comes from [Dan Garafalo] with Piper Jaffray.

Hi guys, it's Dan on for Tom Hayes today.

Just wondering if anything other than the mix that you've brought up in your comments perhaps something from a promotional standpoint contributed to a sequential easing in gross margins that we saw?

No.

I think it was pretty much driven by customer mix.

We do have a big promotion.

We have big promotions twice a year, once in March and once in August/September.

I suppose it has a little effect but it's pretty minimal.

It would be hard to measure that.

But the way we slice it up, we sold more product to large metal manufactures and they traditionally carry a lower gross margin.

Very good.

And so you had mentioned in your prepared comments with the non-res segment likely coming back slow but you mentioned the 24.4% January to September delta which was above the historic norm.

How has that matched up with your expectations?

And heading into 2011 would you say that trajectory seems sustainable?

Well, I guess from our standpoint, it matches up reasonably well with what we expected earlier in the year.

Maybe that 24%, to be honest with you, if you'd asked me in January I'd have probably looked at a 22-ish number, because that's really, so much of that is about seasonality.

What it demonstrates for me, and we really started seeing this when we got into about the May time frame, April time frame, is that last August, we believe was the bottom month for the non-res construction business in our business as far as from a trend standpoint.

And that's really what caused August of 2009 to be our bottom month as far as overall business because that last piece stopped killing us.

You don't feel real comfortable in getting too excited about it when you're looking at trend numbers in October, November, and December because it's seasonally such a weak period for construction, you don't know if you're reading it wrong.

When you get into April and May and you see the trends continuing to be positive, what you know is normal seasonality has kicked in and yes indeed that business is not getting worse, it's getting slightly better.

But it's not like it's on fire.

It just hasn't gotten worse.

It's gotten slightly better.

The areas of non-res construction that we will need to see improvement in order to continue to do well would be power generation, all of the energy areas because we're just not going to see a lot of non-res construction in building shopping centers in residential areas that we did five and six, seven years ago.

They aren't putting up Home Depots and Targets by the hundreds today.

That was a great part of our business.

It has to come in energy infrastructure and highway and bridge for us to do well.

So it sounds like maybe cautiously optimistic for the seasonal ramp up in 2011 at this point, right?

Yes.

Okay.

And just one last quick one.

What does the mix look like in the new store openings?

Are a lot of those non-res or manufacturing?

Or can you give us any color on the mix of the new openings?

You mean who the end markets are?

Yes.

There really wouldn't be an appreciable difference.

If there is any difference it's because of what geography it's in.

If it's in this state or that state it might have a bias because that state has a bias.

But short of that, a new store we open should mirror a store that's two hours away or an hour away.

I think if you took the growth, if you took the 90 stores we've opened this year and blended their business, it would look very similar to the Company numbers statistically.

Thanks for taking the questions.

Our next question comes from the line of Holden Lewis with BB&T.

Great, thank you, good morning.

You generally alluded I think to the fact that your cost structure right now is kind of in the process or has largely normalized.

And so, I guess being aware that you're so close to historical peak margins at this point, I guess I was just curious, when you look forward, without necessarily getting into the exact dates, what pieces of the margin pie do you think that there's good progress being made on?

Because obviously vendor rebates are flattening out and the price cost piece looks like it's flattening out.

I don't know how much more you have in terms of the transportation initiative or if you think there's something on occupancy.

But when you think about all your margin pieces, what pieces do you think that you have meaningful margin opportunity in the next 12 months or the next 24 months to continue to drive the margins higher and keep those incremental margins above 30%?

You mean drive the operating margins higher or the gross margins?

Well, I mean pieces that might affect one or both.

Well, on the gross margin, which will drive to the bottom, I think importing and private label we still have a lot of opportunity there.

That got slowed down a little bit because we weren't growing our business a year ago so it's hard to introduce new products when you don't have the growth.

And we're in that inventory contraction mode.

Yes.

So we have a nice opportunity there.

Other things, one is support labor.

Support labor makes up something like 7% or 7.5% of sales.

If we grow our business by, say, 20% next year -- I'm not saying we will but if we were to -- and that only grows by 5% to 10%, there's a nice incremental improvement.

Occupancy is another one.

If we were to grow our business well above our 6% to 10% store opening rate, another very big improvement because occupancy is our second largest expense behind labor.

I'll just add in a piece on occupancy.

When we started the pathway to profit and we talked about the 500 basis point increase improvement in our operating margin, it was largely an operating expense discussion.

About 60% of that was going to come from labor efficiencies over time because we didn't need to add as much support infrastructure to support that sales growth.

So about 300 basis points of labor efficiency and about 200 basis points of occupancy efficiency.

And that efficiency in occupancy was all about growing our average store size because the occupancy expense on a per store basis doesn't change when you go from $50,000 to $100,000 appreciably.

And when I look at the third-quarter numbers, as an example, of that 200 basis points of operating margin expansion that we were getting from occupancy alone, 160 of that is still on the table.

But what needs to happen to get that is our average store size needs to continue to grow and run away from, if you will, that occupancy, that fixed occupancy expense.

The one thing I'll point out, talking about pathway to profit, that I was very happy with when I saw it, if you look on the report where we show the profitability by store size, the group that shows $60,000 to $100,000 in monthly revenue was at 22.7% pre-tax which is only 30 basis points off our pathway to profit goal, but these stores are about only 60% the size.

So we've really done a nice job.

What it really tells me is that we don't need to get to the $125,000 because of all the things we're doing and so the goal of pathway to profit 23% is not as far away as we once thought it was.

So those are very encouraging numbers and we still have a lot of opportunity.

One other thing, we also have opportunity in distribution for next year because we don't plan to open any large distribution centers.

In the last couple years we've invested very heavily in Indianapolis and some of our other distribution centers, Dallas to mention another one.

That's pretty much behind us so we're going to start leveraging that fixed cost as we go forward with higher revenue mix.

Okay, so there's really not a lot of internal initiatives that you're working on.

It's mostly just eliminating the cost creep as the revenues go up at this point.

So you're kind of in farming mode?

No.

I think we're continuing to work on the same things -- transportation, support.

There's only so many pieces to our business that we can't go out and create new things to say.

But just looking at the business, we believe that we have a lot of head room on all of the things we mentioned to improve those areas of the business as a percentage of revenue, even though we have no new initiatives like we did when we started our transportation initiative.

All right, thanks, guys.

Our next question comes from the line of Adam Uhlman with Cleveland Research.

Hi guys, good morning.

Just a couple of quick clarifications.

First of all, for the fourth-quarter store openings, is it correct to say you're looking at the lower end of the second half target of 80 to 95 stores?

Did I hear you correctly, you're looking at 35 to 40; is that right?

Yes.

It was 80 to 95, about midpoint of that range.

Okay.

And then, Dan, you mentioned that non-res active accounts are a greater percent of the customer base than the revenue from those customers.

Could you flesh that out with some data behind it?

Is it actually half of the actives or what would that look like?

It is not quite half the actives.

If you look at all of our customer groups we have a lot of active customers in the respective groups.

But if I looked at it relative to our manufacturing group of customers, it's about 20% bigger.

Sometimes it gets a little dizzying because there's different pieces that we identify in different ways.

Suffice it to say, non-res construction is our largest customer group by number of customers, but clearly not our largest revenue group.

Because if you think about our business model and what we bring to the table, a lot of those subcontractors that are working on these jobs, we are a great supplier to them because we provide them the ability to be unbelievably flexible in their day-to-day business plans.

Okay, got it.

And then the last question, the new stores that are under two years old seem to be generating a bit more revenue per location than they did in the past, and I'm wondering if the new stores that are being opened up are larger format or if you're just having better success with location planning?

Could you just talk to that dynamic a little bit?

When I look at it, really I think that's been something that's been -- the comment you make has been true for a number of years now.

I attribute a good part of that to our CSP initiative we did earlier in the decade.

When we open a store, we're putting in a better offering of inventory, we're going into a better location.

But this isn't something that's new in the last two years.

This is something that's really been going on four or five years where we just have a better business when we start out.

And I think at some level when you open fewer stores you pick the best locations, the best managers, everything.

You're picking the top quartile just because that's all you have to do, in the top half.

So we should expect a little better results when we open fewer stores, especially from a personnel standpoint.

We have more qualified people because we pick the best ones that are lined up.

Got it.

Great.

Thanks.

Our next question comes from Matt Warren from Morningstar.

This is actually Steven Gregory with Mandalay Research.

A couple of questions.

A couple months ago in the Wall Street Journal they talked about how in 2011 e-commerce was going to be a driving initiative for a lot of companies to provide incremental leverage to the bottom line, or top line.

What are you guys doing in terms of, can you provide some color as to what some of your e-commerce visions are going forward and how do you plan to take the Company there?

From an e-commerce standpoint, we push very hard internally to go out.

We see e-commerce a little different than others because we have the brick and mortar out there, so our plan for e-commerce, and it seems to be working well, although it's small, is to get our customers in the local market to place orders off the web, using it as a search method and an order placing mechanism through our local place of business.

Now if they want to buy it just like they do from Amazon and have it shipped in, we're happy to do that.

But most customers would rather have the product delivered locally if they can.

So what we need to do as an organization, we need to go out to our existing customers and all the customers in the area, introduce them to Fastenal.com, which is a very good website, has a very good search engine, show them what we're capable of doing and change their habits from picking up the telephone and calling us to turning around to their keyboard and placing an order with us electronically.

The benefit to us, one is they see a lot broader product offering.

Two is we can download their customized pricing to them so we don't have to look it up every time they call.

And three is if the order comes in electronically it does save us time and energy in processing the order because it's already in the system.

They entered it instead of one of our people entering it.

So we recognize the benefits of it.

We have a very strong initiative internally.

Over the last, well basically throughout 2010, we've seen a tremendous increase in the activity, but we have a long ways to go.

I'm the first one to admit that's one area where Fastenal is probably not the leader in industrial distribution but we plan to catch up and pass people as time goes on, and we're going to do it fast.

What are your percentages of revenue that you're actually getting from the Fastenal site?

Where would you like that to be?

We don't actually put those numbers up.

The number is low.

Okay.

But you're really trying to drive more people inside to improve that revenue stream?

Could you repeat it?

We're really having a difficult time understanding your question.

You're looking to drive more people to the site to definitely improve revenue stream, that's probably a good top initiative this year?

Our top initiative is introducing the site to our customers and driving revenue so that we have more customers familiar with it.

I don't think we'll ever have a very high -- we'll never be more than 50% because it doesn't really work well for our bin stock business, our vending business and our line stock business.

So it's really about the MRO unplanned spend part of our business.

It should realistically, it could grow to 20% or 30% of our revenue some day but that's far into the future.

I thought you guys were doing a lot through social media in terms of like Facebook and Twitter.

What are you doing in terms of mobile?

Is that something you've already done or looked into, where customers could download an App and then go directly to your store and order from their iPhone?

I think we have.

I know they are working -- I'm probably the wrong guy to be talking about it but I'd be happy to put you in touch with the person who runs that for us.

I can barely run my own cell phone.

Final question.

Going forward for 2011, what would you like to say to everyone on the call, the shareholders, is your top goal for really taking the Company to the next level and what you had to get there?

What is our top goal to take the Company to the next level?

Yes.

Continue to drive the pathway to profitability, basically the revenue and the pathway to profit.

So we're working very, very hard at making our business more efficient.

I'm a very strong believer -- and the Company that wins in the long run is the one that has the most efficient machine for delivering product to the customers -- simple, efficient.

And so we're going to continue to work on pathway to profit and just improve our model from a manufacturer somewhere in the world to a customer somewhere else.

And the one who can do that the most efficient way is the one who's going to give the greatest return to their employees and their shareholders.

Good job.

Thank you very much.

This is Dan.

With that, we are at 9.47 Central time.

So we've hit the limit of our call.

Again, thank you for your interest in Fastenal and your support of Fastenal.

We hope this call was informative as well as the earnings release we put out early this morning.

Typical at the end of a call, it's not uncommon for me to get a couple calls from our Analyst community.

I would ask that you hold those calls off for about an hour this morning.

A few minutes before the call I got word that my 90-year-old uncle passed away and I'm going to give my cousin a call and share some memories with him.

I was blessed from the standpoint of having an uncle that he lived 90 years, was a pilot in World War II in North Africa and I have a ton of respect for and I want to make sure my cousin knows that.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program.

You may all disconnect.

Have a great day.