快扣 (FAST) 2011 Q4 法說會逐字稿

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

(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, with Investor Relations.

Welcome to the Fastenal Company 2011 annual and fourth quarter 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 web cast will be available on the website until March 1, 2012 at midnight, Central Time.

As a reminder, today's conference call includes statements regarding the Company's anticipated financial operating results, as well as other forward-looking statements based on current expectations as defined by the Private Security 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 material from those anticipated.

Information on factors that could cause material results to differ -- 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 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 Mr.

Will Oberton.

Go ahead, Mr.

Oberton.

Thank you, Ellen, and thank you, everyone, for joining us today.

We're proud to announce another good quarter.

In fact, it is our seventh quarter in a row where we've had EPS growth north of 30%.

We're very proud of that.

It is also our second year in a row, that we've had EPS growth north of 30%.

So we're feeling good about the accomplishments that the team has done, and I want to thank all of the Fastenal people for a hard -- a job well-done.

For the quarter, our sales, we had a very good quarter for sales, coming in about the same as third quarter.

And I guess the way I would describe our sales over the last six quarters, is very consistent.

If you look at it, we've been in the 20% to 22% range, almost every month for the past 18 months.

So they've done a nice job with just growing, and consistently over a long period of time.

December, a little bit of color on December.

December was actually, in my view, a better month than we reported at just over 21%, because we had a very strong first three weeks, and then we slowed down for the holidays.

And my own personal opinion is, every year it seems like holidays become longer, or businesses take more time off.

If you look at the 4th of July and different holidays, it is probably just a cultural thing they -- but it is very hard to read, looking at the month.

But the positive is, is we came into the month strong, and had a great three weeks, which led us to still having a good month, even with a disappointing finish.

On the margin side, we did take a dip in the margin, as you see reporting 51.2%, still within our range of 51% to 53%.

I guess, and I've looked at the numbers closely to -- things just didn't line up for us.

There were some seasonal things there, a little bit of pressure from mix.

But overall, it was a disappointing quarter on margin.

But we're still very comfortable with our range, and believe that some of it will snap back in the first quarter.

But Dan will also give more color on the pieces of where our margin deteriorated some.

Earnings standpoint, I really feel comfortable with what we did there.

Nice earnings growth.

And I'm very proud of the fact that we reported pre-tax of 20.2%.

That's the first time in our history that we've ever had pre-tax above 20% in the fourth quarter.

So, that was a good achievement.

For the year, our pre-tax came in at 20.8%, the first time that we had been over 20% in actually more than 15 years.

We were there in 1995.

So, another good accomplishment, I think.

It just shows that the power of our Pathway to Profit is working, and we're still able to get the good growth.

So, we're very happy with that.

From an expense standpoint, it is kind of a tale of two -- there's two stories here.

On the non-payroll expenses, which make up about our third -- one-third of our SG&A, we did a great job.

Those expenses grew for the quarter, in a -- low to mid single digits, and for the year, very similar numbers.

The payroll on the other hand, grew faster.

For the quarter, our payroll grew 16%.

For the year, it grew just under 21% -- I believe it was 20.9%, which was a little higher than we had expected.

So, we do have some work to do on payroll.

On a positive note there, because of the -- what is normally better sales in the first quarter, we can work that through very quickly, and feel that we are going to see leverage in 2012.

But we talked to all of our people about it.

We understand where it is going on.

Some of it is make-up from the slowdown or lower bonuses in 2010.

But some of it is, we just have to pay a little closer attention.

And the way we do it here, is we tell you what we think, where we have to work on, and we're comfortable that we can correct that situation very quickly.

Vending, vending was a little slower than we had expected.

But actually, vending was very similar to what I described December.

We had two good months, October and November, and then December kind of fell on it's face with vending.

And it did not surprise us, because it is very hard to get people to make decisions, and sign contracts at the end of the year, and around the holidays.

So, we're -- we're not at all discouraged by it.

We knew it would be a tough quarter with December in there.

But from an overall standpoint with industrial vending, the concept and the long-term opportunities continue to look better every day.

And as we study the results, we look at all of the things that are going on, the opportunities are out there, we're more excited about what it could do for Fastenal over the next several years than we've ever been.

Structurally, we are very well-positioned with our store network, with our distribution, and with our large work force in the field, out in these small communities.

We're very, very well-positioned to service this business, and it should work well for us.

And the thing I like to say, when I talk to people who don't really understand the concept, and they're trying to understand what we're doing, it very -- there is a note on my desk, a little -- like a fortune cookie sign, that's been on my computer for about 10 or 15 years -- and what is says is, the best way to sell, is make it convenient to buy.

Now as we -- and I always remind myself of that.

And that's really the essence of vending.

Vending is a more convenient way for our customers to buy products from Fastenal.

And if we can make things more convenient, and more efficient, we believe we will sell more product, and it will give us long-term growth opportunities.

And that's why we're so heavily invested in this project, and we're so bullish on it, whenever we talk to the investment community, the customer community, the supplier community, and any other community that's willing to listen to us about this prospect.

So, very, very positive on vending, and believe that -- have a long run there.

So, overall, I believe Fastenal had a very good year.

We had a very good -- excuse me, we had a very good quarter, and we had a very good year.

And we believe with the strength that we saw in the fourth quarter in our sales, we're well-positioned to launch the business into 2012.

And hopefully maintain our string of north of 30% EPS growth in quarters to come.

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

Dan will give you some more color.

And then we'll open up for questions.

Thank you.

Thanks, Will, and good morning, everybody.

And thank you for sitting in on our call today.

Before I start, I'm going to touch on one housekeeping note.

And that is related to a change we plan to do, next quarter, for our first quarter release.

So that would be our release scheduled in April.

What we've done over the last -- gosh, most of our public life is, that before market opens at 7 o'clock in the morning, Central Time approximately, we publish -- we publicly release our earnings for the previous quarter.

And one thing I've learned over time, is that you always keep your ears open for suggested improvements, or changes that you could make, that maybe improve the process.

Something we're going to try in April, and our scheduled conference call is for Thursday, April 19, I believe I wrote that date down correctly, and -- or April 12, excuse me.

But -- but instead of releasing at 7 o'clock in the morning before market opens, we're going to release the evening before.

Typically the way our process works currently is, that we'll queue up all of our documents for release somewhere between 7.00 and 8.00 PM in the evening, and schedule them to come out the following morning.

We're going to queue them up between 7.00 and 8.0,0 as we've done in the past, go through our normal process, but make them immediately available.

We believe that will help inform the market place, the analyst community, and the market place in general, on our quarter.

And we'll -- and we'll add to the quality of this earnings call -- potentially some of the questions, and also help with the dissemination of information.

So, that will be a change.

We'll try it next quarter.

We'll do it for this year, and we'll see how it goes, and continue to try to improve the process of communicating with the street.

I will echo some comments that Will made, and delve a little deeper on a couple of them.

This morning at 7 o'clock, I had my typical call with our regional Vice Presidents, basically it's our leaders, our regional CEOs if you will, that manage our business, and are a large part of the success behind our business.

And some of the messages I shared with them, first and foremost, was nice quarter, nice year.

And we did a really nice job, in a lot of fronts.

And like always, we identified the things we did well, we identified the things we can improve on.

And we'll work on those as we move into 2012.

As Will mentioned, and I would echo the comment, continue to be impressed by our top line performance.

As all of you know, over the last several years, especially in the -- when we we're in the bottom of the 2009 dip, we tried to do a lot of things, we tried look at our seasonal trend patterns, to try and really understand and communicate what our business normally does.

And we use that '98 to 2003, as a benchmark for that.

If you look at the chart we published in our press release and in our quarterly documents, you can see that we have soundly been at or above the trend line now for about 2010 and 2011.

So, it is not about the recovery or easy comps or hard comps, or all of that kind of stuff you can talk about.

It is really what happened from June to July, July to August, August to September.

Are we building the fundamentals of our business every day, to launch us into the next year?

And that's the secret of Fastenal's top-line growth for the last 40 years, as we build a little bit more every day, and we step higher.

And when I look at that, we continue to handily outperform those numbers, which makes us feel very good as we go into 2012.

And as you see in the ISN numbers, they continue to support what we're doing, and we feel very good going into the new year.

On the expense side, Will touched on both the labor and non-labor side.

I'll add a few more tidbits to the non-labor side.

If I look at 2009, 2010 and 2011, our total operating expenses have gone from 35.6% of sales in 2009 -- granted, that was a high number because of the recession, to 32.8% in 2010, and 31.1% in 2011.

So we've dropped 450 basis points from 2009 -- probably the more meaningful comparison is we've dropped 170 from 2010, 2011, because 2010 was a good number.

If I look at that, we've always talked about labor being about 70% of operating expenses -- labor and labor-related, so payroll, healthcare, [school business] those types of expenses, versus all of the other expenses.

Our occupancy, our store fleet, our gasoline going into that fleet, all the expenses we have in operating our business, day in and day out, that represents about 30% of our operating expenses.

The 30% piece has performed so well in the last two years, that 80% of our improvements in operating expenses have come from there.

And a big piece of that would be on the occupancy side, and that's Pathway to Profit.

It is not complicated math, it's just we're leveraging our store base.

When I look at that, the good news, good news in that story is, we've done a great job with that component.

And I think we're poised really well coming into 2012 to have another piece, a big piece of our operating expenses that we can leverage quite attractively.

And we've jumped on that, midway through the fourth quarter to really go into the New Year and attack that well.

And with the rising sales and gross profit dollars, because of the seasonality of our business, it poises us well for 2012.

And the other thing that I think is real compelling, when I look at that, the non-payroll piece, is that non-payroll piece also contains all of our vending expenses.

So, we've gone from 567 units in service at the end of 2009, or said another way, at the start of 2010, to almost 7,500 machines in service at the end of 2011, a 13-fold increase.

And all of those expenses have been absorbed in an area where we saw great leverage in our P&L.

So that means everything else, but even better.

And I don't want that to be lost in the whole message.

Speaking of vending, there is one clarification I do want to make, when I look at the information we released.

And this is on top of page 6 of our earnings release.

In there we have a table of information, and that table goes through, and it talks about the number of machines we added -- that we signed contracts on during the quarter, to try to give you a current touch on what activity is happening, of machines there, that go online, today and in the future.

And what those trends look like.

The cumulative machines installed -- so how many machines did we end up each quarter with, the machines in service.

The percent of total sales to vending customers, so that's customers -- total sales to that customer group, both vended and non-vended dollars, so we can measure the impact, of how big the business is.

And the final is, what's happening with that business, how fast is it growing?

You would -- if you take a good, close look at the numbers compared to prior quarters, you would see some slight changes in the numbers.

Really what's happened is, we've -- as vending ramped up we've -- we're compiling a lot of that information in a very manual process -- we've migrated now to a more automated platform -- decided that -- we took another look at the data, and we slightly modified a few of the definitions.

The first group, if any changes there, would just be clean up, and the changes are very modest.

The second group, you would see some changes, really what happened was a definitional change.

Instead of the number of machines installed and scheduled at the end of the quarter, it is now a very clean number.

It is the number of machines installed, and producing revenue at the end of the quarter, which I think is a cleaner number.

None of it changes the trends, but whenever you see numbers that change, I think it's worth while pointing it out.

The third category, slight changes, very modest.

The fourth category, if you look at Q2 and Q3, instead of growth in the upper 40s, it's growth in lower 40s.

Still a very attractive number, but slightly lower than what we've previously reported, and I wanted to point that out in the release.

My take, when I look at all four sets of data, unbelievable numbers.

And it doesn't change my opinion.

It only enhances our opinion of vending, as we go into 2012 in the future.

I think it's a very compelling growth component to our business, one of many.

The -- as always, as I mentioned earlier, we talk internally.

We talk externally about the good things in our business, and some of the things that were -- proved more challenging, or maybe the work side of the business, if you will.

Two things jump out in my mind when I look at 2011, particularly fourth quarter.

Our gross margin did drop about 70 basis points from 51.9% to 51.2%.

Hopefully, the narrative I put in the release helps to explain it some.

I will provide a little more insight.

Historically, we talk about the transactional piece of our gross margin, the organizational piece of our gross margin, and the vendor incentive.

And the transactional is about things we do every day, day in and day out.

The organizational is more about leveraging our trucking network, as well as our ability to source products domestically and globally, using tremendous volume capabilities to buy, as well as a dedicated focus to improve our source of supply.

And the third, vendor incentive, while it is a smaller component of the gross margin, it is a piece that can move around some.

So that's why we mention it periodically.

If I look at those three pieces, and I take an even a deeper dive into some components, one component of the transactional and organizational -- it crosses actually a little bit of both, is the freight side.

How are we utilizing our trucks?

How are we doing charging freight?

How are we doing with our -- how much LTL shipping are we doing, because we don't have volume on certain lanes, et cetera?

And Will touched on this earlier.

But when I look at that piece, one thing you see -- whenever you're predicting numbers coming into a quarter, looking at a year, or you're looking at what you think you can do, you always have kind of a mind of where those pieces are.

And one piece is going to be higher, one piece is going to be lower, and that's just life.

What we really saw in the fourth quarter is, directionally, they all moved the same direction.

We gave up 6 basis points here.

We gave up 7 basis points there, 12 in another spot, 15 in another.

If I look at all of those pieces, we gave up about 40 basis points.

Now a piece of that -- about a third of that, ends up being in our ending inventory.

So it doesn't hit the P&L, because it's capitalized in the ending inventory.

But most of that, 25, 27 basis points, does impact our gross margin in the fourth quarter.

A second piece in an -- almost equal size is, the rebate number does fluctuate as I said, from quarter to quarter.

Typically, in the fourth quarter, you have some true-ups, they might increase the number slightly, might lower the number slightly, because you are truing up.

Most programs are calendar-based.

We gave up about 25 basis points there.

That's the bad news.

The good news is, when I look at those pieces, that is a seasonal piece of our business.

And now, the freight piece, we have got to do some hard work to improve those.

Some of it occurs naturally, because we better leverage our trucking network.

Our trucks have more product on them, so our relative cost is lower.

Some of it takes -- sometimes taking a good, hard look at it, kicking a few people in the butt, including ourselves, and saying, we need to do better at this, as we go into the New Year.

The last piece I'll touch on is the -- what we talk about, our organizational gross profit.

It came up a little bit in the quarter -- that always moves around a bit, from quarter to quarter, some natural gives and takes.

Things that we're doing with exclusive brands tends to improve that number over time.

Our large national account program tends to erode a little bit of that number.

So the real case is to manage the mix over time, to constantly improve it.

Long story, short, gave up some gross margin in the fourth quarter.

I believe we're poised well as we go into 2012.

The last one is on the working capital.

We continue to improve our working capital.

That's part of the Pathway to Profit.

Our inventory utilization should improve over time.

My issue there is, we're just not making fast enough progress.

And that's something that we'll work on.

Our internal calculation really looks at the ending inventory, and looks back in time against cost of goods, to come up with the days of inventory, and days of AR on hand -- so how much working capital.

Our business, as everybody on this call knows, historically, uses quite a bit of working capital, but we get great returns on that working capitol, so we can afford it.

But we operate in that 220, 225 days of working capital neighborhood, when you combine the two together.

Our challenge is, how do we get that sub 200 down in the 185, 190 neighborhood, and how long does it take us to get there?

Not to say we can't improve beyond that, but you always have short and long term -- shorter and longer term goals.

We made about eight days of improvement from last year.

That should have been twice that number, so that's our challenge for 2012, is to continuing to improve those days, and do what we think we should do, not what we did in 2011.

So I think we have good opportunity there.

And that just enhances our cash flow, and our ability to get returns, as we go forward.

I believe our operating margin and our pre-tax margin will continue to improve.

If we can improve the relative performance of our working capital, it's a great one-two punch.

With that, I will stop talking, and we'll open up for some questions.

Thank you.

Thank you.

(Operator Instructions).

First question is from Ryan Merkel with William Blair.

Good morning, very nice quarter.

Thanks, Ryan.

Thanks, Ryan.

So, my first question has to do with your sales outlook for 2012.

I guess in your view, is this another year we could do 15% to 20% top line growth, given the many initiatives you have working?

Yes, Ryan, as you know, we don't give guidance.

But if you look at our sequential pattern, historical patterns for the first half of the year, which is pretty well mapped out, we should be able to do the high teens, if not better.

But we're comfortable, 15 to 20, we're very comfortable saying, we should be at that or maybe a little better.

Okay, great.

And then secondly, vending initiative was a major success this year.

From what I hear, there is a lot of momentum heading into 2012.

Are there any tweaks or changes that you have made that should make 2012 potentially a better year for vending?

I think on the last call, you mentioned new software that could increase efficiency.

Well, we've actually -- I could talk all day, but I'll just give you two of them.

One is, we are developing new software.

And we're testing it in two districts, so probably 25 stores, and the feedback has been huge.

The estimate is that it could save up to an hour per machine per day -- or excuse me, per week.

So, you look at that, and it is $4.00 for a machine out there in labor savings just because of the software.

It just streamlines the flow of the product and the invoicing, a great opportunity to save some dollars and some time.

The second is we implemented or introduced a vending incentive to give our store managers, district managers and all of our outside sales people, a meaningful opportunity to make more money if they sell a certain number of machines.

What we're really doing, is we're trying to buy their time.

They're getting pulled in over 100 different directions, and this is a way for us to get them more focused.

And believe it will give us a little boost going into the New Year.

Okay.

And lastly -- sorry, Dan.

Go ahead.

Just lastly, it sounds like 2,500 machines signed per quarter is a reasonable target at some point next year.

Yes.

We're still very comfortable with that goal.

Okay, great.

Thanks for the color.

Our next question comes from David Manthey with Robert W.

Baird.

Hi.

Good morning, guys.

First off, on the gross margin, I guess given the seasonal factors might abate, would it be safe to say you would expect gross margin to be roughly in the same range next year?

And the reason I asked the question, is we've heard that steel carbon rod is down about 10% in the last six months.

And I'm wondering what your expectations are in terms of fastener pricing, and then other finished goods pricing?

On the fastener pricing, we haven't heard much yet.

We believe that -- it is also saying that iron ore will be down.

So there could be a little deflation on the fasteners next year, but we've historically have been pretty good at keeping that, not having to pass as much of it along.

But right now, we haven't seen anything from our suppliers.

We haven't seen pressure from our customers to push it down, or to pass it along, or our suppliers to give it to us.

So, it is a pretty long cycle thing from ore, all the way to a process fastener.

But as far as your question on our margin range, we state 51 to 53 this year.

We came -- for the last two years, we've been right at 51.8.

And I think that's a good number for 2012, looking at it right now.

We're ten days into the year, or 12 days.

Okay.

And then just on vending, we've looked at this.

We have estimates, but I'm interested in hearing your view on it.

As you look at the trade-off of vending, relative to outside selling sales force, or other opportunities might add new store openings, et cetera, do you have an idea of what incremental growth you're driving to take in vending?

I guess, you look at it in a vacuum, but you have to consider that you're also offsetting that, by not pursuing other growth avenues.

Do you have an estimate for what you think, just incremental growth from vending alone, is generating today?

We don't have an exact number, because it blends into the store.

But the trade-off is actually very small, because the more our people are out selling vending, the key to the sentence, is they're out selling.

And so they make hundreds of calls to sell one or two machines or dozens.

It is a small ratio.

And the more that we keep them of out selling, the overall business benefits.

And I've talked with our managers about this recently.

If they were to assign one machine per month, and I -- this the group last week, the 25 managers, I said if you were to sell one machine per month, how many days per month would it disrupt your business?

And the answer from the group was, one day, it takes one day to install it.

So they have 19 to 20 days to go out and sell everything else.

If we could sell one machine per month per store, you can do the math, and see what it would do for us.

It would be tremendous.

I'm not saying we would, but it is a very small disruption for the gain.

And we are going to continue to open stores.

So, it is not a one-to-one trade.

It is probably a 9 to 1 positive.

Got it.

Okay.

Thanks, Will.

(Operator Instructions).

And our next question comes from Sam Darkatsh with Raymond James.

Good morning, Will, Dan.

Good morning, Sam.

Good morning.

The - a couple of questions here.

Again, regarding the vending, and just trying to get a little bit deeper into the data here.

What percentage of or ballpark of your installed machines are going into customers who never before used vending solutions, as opposed to machines going into customers that are rolling out vending machines into more of their own locations?

Okay.

What is added on to -- I think I follow you.

The majority of our machines today are going into customers that have never had vending Tool Fast, or in probably most cases, never had vending.

There is a number of machines going into existing customers that signed up a year ago, and they want more.

But I actually don't have a break out on that.

But still the majority of them are new signings, I would say at least 70%.

But that's -- the importance I think in that question is, that as we sign up more customers, I looked at the top 100 list at the end of the year, the customers with vending, number of machines per customer.

And going through it and adding up in my head, I think that we're less than 10% penetrated into these customers, many of them big Fortune companies.

We're just planting seeds is the way I look at it.

So we -- I hope the ratio changes with growth, if they're going into customers who already have it.

And that leads me into perfectly into my next question then.

And so it look like your average sales per -- or your vending customer is on average maybe 8 to 10 times the size of your average customer across the whole network, and obviously growing much faster, 2 or 3 times the rate of the overall Company.

Get a sense of how many of those types of customers that you have of that size, and of that ilk, so we can get a sense of what the -- at least the low hanging fruit might be?

Well, here's one way to think about it, Sam.

We've often talked about our, our average -- the proverbial average store, that $83,000, $84,000 a month store.

It's top 10 customers represent about 65% of sales in that store, and the other third of the customers represent about 25%, and then there's some cash business on the tail end, some retail business.

And the one way I think about it real simplistically, if I think of it -- we have 2,600 stores times the top 10 customers per store, there is a group of 26,000 customers -- and some of the customers -- and that's based on account numbers, so you might have some replication in a given store.

But you essentially have 26,000 customers in our business, that represent a big percentage of our business, and are very prime candidates for vending.

As we develop the additional machines over time, that's where you start scratching your head, and you wonder, how deep in the organization you can go, with what size of customer.

And I guess I would say a lot of the 90% that are smaller customers, are smaller customers because we don't do that much business with them today.

They don't have smaller potential.

I think, and I'll add one point, and that's the 26,000 customers we sell to, does not include all of the potentials that aren't buying from us today, which is a much greater number.

And the last question as it relates to vending.

Obviously, the productivity per machine is down, but that's understandable because of the amount of machines that you're installing.

Are you seeing the sales growth in like machines accelerate?

And in machines that have been installed for at least a year, the volumes through those particular machines, are -- the growth is accelerating?

We are.

And some of that comes from the fact that, you get six months into having a machine, three months into having a machine, you're always challenging that what's in that machine, from a SKU basis to say, is that the right fit for this customer because what kind of velocity are you getting from SKU to SKU.

And so -- and then in the next six to12 months, you're always fine tuning that.

And then if you're introducing additional machines, you're still fine tuning that, so we are seeing a growth in it.

But what I can't tell you, when you get into the second and third year, what happens.

Because when you get to fine tuning in there, it's in there plus -- we just don't have enough machines with history.

Understand 70% of our install base has been in the last 12 months.

Right.

Got it.

Thank you, both.

Thanks.

And our next question comes from Adam Uhlman with Cleveland Research.

Hi, good morning.

I guess, just a clarification first.

Of the 16% of revenues that are with customers that have machines, have you guys taken a stab at how much of the volume is actually going through it?

Is it half of that 16% or?

No, it's only about -- it is just under 20%, Adam.

Okay.

It moves around a little bit, but just below 20% is usually right.

I get an 18% or 19% or 20%.

Okay.

And then, can you give us an update on the metal working opportunity?

I think, last quarter, you talked about the first quarter is the one that would start to take off.

Do you have the SKUs and the distribution centers yet?

And are the new metal working vending machines available for installation?

Yes, we're still very optimistic about the metal working.

In fact, we made a decision in October to add another -- to recruit and add another 20 to 25 metal working specialists, which will get us up into the mid 60s.

The machines are available.

We've signed some, but I don't have the exact number, but they are going out, being installed.

I've seen a few pictures come back of installed machines.

So those are available, and from reports back, they seem to be working well, the machines out there.

We continue to expand the inventory in the warehouse.

Actually, that's gone a little slower than we planned.

And part of it is a little bit of caution from our suppliers which I appreciate, because they're saying, let's not put it all in, until we really understand what you need, because they don't want to return.

So, it is a lot -- been more thoughtful process.

But we continue to add every month, continue to add SKUs and continue to add suppliers.

So, we have the customers in the field that are buying the product, and our Fastener customer base.

We have sales expertise out there.

We've also done a good job, where our salespeople have in the stores, of taking this training through Tooling U, we have the online training.

We have hundreds of store people that are certified, not to an expert level, but a very high knowledge level.

So they can go out, and talk the talk with their customers.

And then if there is an interest, they can bring in a higher level expert, or either from our team or from the supply team.

Really nothing new there, other than continued effort, and still believe the opportunity is a very good opportunity for the long run.

Thank you.

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

Hi, yes, good morning.

Was hoping maybe you could talk a little bit about the strategy on the store closings?

I think the number was 28 for the year.

And then also maybe, give us specifically what the occupancy numbers were down year-over-year for the fourth quarter?

Well, first off, the closings, what we constantly do, we are a look-forward only organization.

We look at where we are at today, and we look at a given market.

And what prompts it sometimes, as we've disclosed in the past, we have a fair number of leases that come due every year, because we generally speaking, sign short-term leases.

And we look at -- look at it market by market, and allow our district and regional teams to look at their business, and say this market, where we have 3 stores or 2 stores or 5 stores could be better served with 1 fewer store.

And whether or not that is the right decision long-term, we'll find that right answer over time.

But it is not a bad decision in the short term.

And I always fall back on the premise of, I don't get too caught up in that in the short term.

I look at it and say, it is a great -- it is a vast market out there.

We have 2% market share.

And our -- what's going to drive our ability to take the market share over time?

And I look at all of the growth drivers we have in place.

That's what's going to drive that.

Not one component of it.

And but when I look at the total store closings in the current year, as well as accumulatively in our life, it is a pretty small number in the scheme of life.

As far as the actual occupancy reduction, I believe that -- let me pull up -- occupancy was up 7.4% up -- sorry.

That's an annual number.

I don't have that number right in front of me, Brent.

But I'll get the number, and get it to you.

It was about 6%.

I don't have my P&L in front of me.

Okay.

Then just maybe the follow-up to that, you talked about some of the -- the benefits on the non-payroll side for the year and the cost side.

Any sense, materiality of those 28 closings, positively lowering cost structure overall?

Oh, it is -- yes, it did but the measurement is immaterial because only thing you would have would be the occupancy component.

Because when we go from three stores to two stores in the market, the folks that were in the third store moved to one of the other two.

So, there isn't a labor differential.

It would be -- and the vehicles we still have, because we still have them for those people.

It is really -- the $3,000 a month we're spending, $4,000 in rent, utilities.

And in the first year being 2011, it probably actually adds expense because we have to clean up the store, we have to move the product.

We have to -- many times pay out a lease.

Net-net, it is just about going forward with our business, a more efficient business model.

There is nothing in there that we saved a bunch of money by closing a handful of stores.

Okay.

Thank you.

Our next question comes from Robert Barry with UBS.

Hi, good morning.

Good morning.

I was wondering if you could just comment as you look across the business, if there were any end markets that are looking especially better or worse during the quarter?

I guess -- our construction business improved during the quarter.

I think the mild weather everywhere, sure didn't hurt that business.

But I guess, nothing jumps out that I think is unusual.

From a geographic standpoint, we really saw pretty good growth throughout North America, and our international business.

There isn't an area where we're looking at it, and saying that area of the country or the world is slow because of economic reasons.

And I know it is a small percent for you but the government business, if you could just maybe comment on if possible, a same-store basis, kind of what's happening in government?

On a same store basis, well --

I know you're adding a lot of share there, so I'm guessing a growth number -- a big growth number?

But --

I don't know of a good way to quantify it --

I'm trying to think -- (Multiple Speakers).

So overall number is growing handsomely above the Company number.

We don't really think of it on a per store basis, because our approach is one of a -- primarily, a US approach, but just because of the way it's -- some of the early contracts we've picked up.

But it tends to be something we're doing it across a state.

So, we sign a state contract, we don't really think of what is happening in Redwing, Minnesota versus Winona, Minnesota, we're thinking what's happening in Minnesota.

Yes.

That's kind of what I had meant, on a same contract basis would have been the better way to say it.

Our state and local business is dense, and growing well above the Company.

We have the teams in place.

We have 32 people in the states -- we have a person in every state that we have a contract, focusing on the government, believe, we're hitting our progress goals.

What we look at it, internally, the way we think of this, and we think of it the same way as vending, metal working, government, is that we're expanding the market for the local store.

So if you're in a local business here in Winona, Minnesota, and we just picked up a state contract which we did, now that store has more opportunity to go out, and grow their market over a long period of time.

If we introduce a new product line that we've really sourced well, and we believe we can sell through to the customers like metal working, we've just expanded the market for that store.

So we think about it a little different than I think do you in your industry.

We're building market opportunity -- increasing market opportunity every day with these initiatives.

And the better we get at it, the easier it is for that individual that runs the store, or sells every day to do their job and create an opportunity for themselves and their family.

Okay.

Thank you.

To have the best store.

And one thing I would add to that, I think when you look at some of the data we provide on growth in different age of store, if you look at the five year old plus store, or the -- on our annual stuff, we talk about some of the 10 year plus stores, what allows them to keep growing -- because those are substantial business in their local markets -- and the way you allow them to keep growing, is obviously they continue to add active new customers.

You give them tools like vending and government and metal working to give them again, more avenues to expand, the potential wallet in that local market.

And our next question comes from Hamzah Mazari with Credit Suisse.

Thank you.

A question on store growth.

You've guided the 4% to 6% store growth in 2012.

Could you maybe talk about longer term -- do you --is your store base where it needs to be?

Is 4% to 6% the new normalized growth going forward, given initiatives on vending, et cetera, relative to the 8% historical growth, if you will, or higher historically?

How should we think about that?

I think that's a good way to think about it.

That it is probably the new normal.

What we've really tried to do over the last two years is go to our business leaders, as Dan called them, our regional CEOs.

And give them growth goals, work with them on their goals, and let them determine for the most part how they're going to achieve those goals, whether it is new stores, adding outside salespeople, sales specialists.

But at the same time, we post different goals.

We will continue to open stores.

But the reason we're a little soft in committing to how many, is it really depends on how the other initiatives roll out, what we find with vending, with metal working.

And over a long period of time, I think we'll continue to open stores.

We're still comfortable that we could open up to 3,500 in North America.

It is just over what period of time that happens, and what we need to do that.

We need to find the most efficient growth model that we can and then stick with that, or work on that.

Right.

That makes sense.

Just a last follow-up question.

Do you have any thoughts or how do you view the eCommerce sales channel?

And I know you talk about vending recently.

How should we think about your strategy in using that channel?

Thank you.

We're working very hard on developing our eCommerce strategy.

We introduced a new website in 2010.

We had great results in 2011.

We know that we'll probably always be behind many of the companies that just have a warehouse operation, because we have all of the keep fill, all the line stock, and all of these other things.

But it is a great way to receive orders and a great way for our customers to search for product and place orders.

Our business on eCommerce, I believe was 5-fold last year, Dan?

It grew 5-fold from 2010 to 2011.

We don't expect it to grow that much this year, but we expect above average growth.

It is simply another very good tool for customers to buy from us.

An easy way to buy, goes back to what I said, the most convenient way to sell is make it -- or make it -- easy way to sell it.

I'm losing my mind here.

Sorry about that.

Convenient to buy.

Make it convenient to buy.

And that's what we're trying to do with all of these tools, vending, delivery, local service, and eCommerce.

I think one thing, too, is a definitional question.

What is eCommerce?

I look at vending as eCommerce.

I look at electronic systems we use in our bin stock programs as, you could you could call it eCommerce.

It is electronically gathered data, it's not just web, it's not just EDI.

Historically, we talk about it from the standpoint of, what's our web business?

But, it is really a case, are we making it convenient for our customer to buy?

And if we're making it convenient for our customers, and it is very efficient for us to serve, that is the best business model that we can develop.

Efficient way to serve, and make it easy for the customer.

Very good.

I appreciate it.

Thank you.

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

Thank you.

Good morning.

Hi, Holden.

How is it going?

Fine, thanks.

Since you guys started Pathway to Profit back in '07, you've had a fantastic run, in terms of the incremental margins, well in excess of kind of the true Pathway to Profit run, which obviously is part of the goal.

The last, I guess, four quarters or so, you've seen moderation in that, sort of an incremental margin.

Q4, it was modest, but still continued that pattern.

What do you expect as you go into 2012, in terms of where those incremental margins might settle out?

And is there a broader statement as to the gating process, the maturity of the Pathway to Profit at this point?

Well, one thing I will say, and then I'll hand it to Dan.

We did add 180 basis points in 2011 over 2010.

Our goal was 100.

But I'll give it to Dan.

Yes.

I just -- the better way to think about it is, we've seen great success with the Pathway to Profit.

But I would argue most of the benefit of Pathway to Profit, haven't been realized yet.

Because if you look at what's happened from 2007 to 2011, our improvement in operating margin -- as I touched on earlier, we've seen nice leverage in our occupancy.

But our occupancy leverage hasn't come because we raised our average store size, because we have raised it.

Don't get me wrong, but we haven't raised it.

When we started Pathway to Profit, we said 200 basis points of improvement, because we go from 70,000 a month to 125,000.

We've gone from 70s to the mid 80s.

And we've taken out a meaningful piece of our operating expenses, as it relates to occupancy, just by lowering our rent and being smarter, re-approaching how we look at it.

Fourth quarter of 2009, our rent was 540 basis points.

Today it's 395.

And that's just a rent component, there are utilities and other things.

But a lot of the improvement came from, we've raised our gross margin.

So when I look at the Pathway to Profit, we've gotten a piece from occupancy.

We've gotten a piece from labor.

Don't get me wrong.

And that's probably been in the non-selling areas.

As we look at the data on head count, you really see we've done a great job managing our support head count, a great job managing our distribution and manufacturing head count.

We've invested in a lot of selling energy, both store and non-store.

And so as the average store size grows, we still have a lot of runway left, as it relates to the labor side, and nice runway on the occupancy side.

We've also -- kept our sales above the numbers that we put out in 2007.

Our goal then was 18%, the center of the range, and we've actually for the last two years, have been 4 points above that.

And we're spending some money to stay there, but we think that's a great investment.

And I'll add one thing, Holden.

We are still very committed to meet or exceed our 100 basis point improvement annually, going over the next several years with that.

So the follow-up to that, you commented about how you sort of saw the holidays, carve a little momentum out of the revenue, that to be very strong earlier.

Have you seen sort of a return to the early December levels of activity in the beginning of January?

Or how's that -- given the difference in that pattern, how have you seen that play out so far this year?

Holden.

I'll answer it this way.

On February 3, I'll give you insight on what we saw in the January sales.

As we enter the year, as we enter every year, we're optimistic about the trend pattern we've created in 2011, and how it feeds into 2012, and the pieces of growth that we held, to drive our business to grow, and grow profitably into the future.

With that, I see where we're 3 minutes past our 45 minute call limit.

So, I'm going to close by saying again, thank you, everybody, for participating in our call.

And thank you for continued support and ownership of Fastenal stock.

Have a good day.

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

This concludes the program.

You may all disconnect.

Everyone, have a great day.