快扣 (FAST) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fastenal Company Q4 and Fiscal Year 2014 earnings results conference 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 of Investor Relations.

Please go ahead.

Welcome to the Fastenal Company 2014 annual and fourth-quarter earnings conference call.

This call will be hosted by Lee Hein, our President and Chief Executive Officer; and Dan Florness, our Chief Financial Officer.

Also present for today's call is Will Oberton, our Chairman.

The call will last for up to 45 minutes.

The call will start with a general overview of our quarterly results and operations with Lee and Dan, with the remainder of the time being open for questions and answers.

Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal.

No recording, reproduction, transmission or distribution of today's call is permitted without Fastenal's consent.

This call is being audio simulcast on the internet via the Fastenal Investor Relations homepage, investor.fastenal.com.

A replay of the webcast will be available on the website until March 1, 2015 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 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 materially from those anticipated.

Information on factors that could cause results to differ materially from these forward-looking statements are contained in the Company's periodic filings with the Securities and Exchange Commission, and we encourage you to review those carefully.

Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance that the matter contained in such statements will occur.

Forward-looking statements are made as of today's date only, and we undertake no duty to update the information provided on this call.

I would now like to turn the call over to Mr. Lee Hein.

Thanks, Ellen.

Good morning.

Before I start, I'd like to just say thank you to the Fastenal members on the call.

I know there's a lot of you that tune into this, and we're so appreciative of the work that you did in the fourth quarter.

So, just a great job.

And I'd like to report that it was a good quarter for our Company.

13.8% sales growth; that's 15.7% on the daily average.

There will be some questions, I'm sure, on Christmas.

And December was in line with the rest of the quarter.

We just felt it was the right thing to do, to take the 26th off.

20.1% on earnings growth; and that equated to 28% incremental margin growth.

Which, again -- these are strong numbers for our Company.

And how we got there, really, was, we continued to work hard on our gross margin.

But in this quarter, we really focused our attention on our expenses.

And the Fastenal Company and the members, I've got to tell you, really did a nice job looking at all the different types of expenses; and we really clamped down.

One thing that really came out is our ability to manage our labor.

Historically, our daily average is going to decline somewhere around 10% from the end of October to the end of the year.

We know that.

And what we simply did is, we turned down the hours or pulled back the hours, and we looked at the timing of Thanksgiving, Christmas, et cetera.

And just with the natural decline in our daily average.

But we continue to add people at the Company, and especially in the part-time ranks.

And I would say in 2015, with a good economy, we are committed to putting selling energy into our stores.

And I just again, when we talk internally, we are committed to a store-based model.

We are committed to the fact that we really believe being close to our customers, offering a high level of service, is really the best ?- is the best way to really approach the industrial market.

The other question we get is, if you're going to add 10% to 15% more hours in the store, can you afford it?

That really equates to about a 7% net effect on the labor dollar impact.

So it's a good model for us.

It really bodes well for our stores and for, most importantly, our customers.

So, strong quarter.

We continue to stay disciplined on the gross margin.

And there's pressure there, but we really like the momentum and the direction we're moving.

With that, I'll turn it over to Dan.

Thank you, Lee, and good morning, everybody.

And thanks again for participating in our call today.

I think our press release is certainly self-explanatory on the quarter.

We published monthly numbers.

So I think, as Lee touched on, our sales trends remained strong throughout the quarter.

We think that bodes well as we go into 2015.

I tried to highlight on the bottom page of page 1, top of page 2 a handful of bullets of things that I think were important to the business.

One of them I wanted to -- and some of this commentary is based on questions that I might get.

And so I did want to touch on the headcount patterns as we were going through the fourth quarter, especially at the store level, because we've talked in the past about the investment in selling energy and adding hours.

The one position we were in this year that we really weren't in last year is we were in a position to much more acutely manage the expense, because we weren't in a ramp-up mode; we were in a manage-the-business mode.

So we did a much better job of managing our expenses.

And we went through the fourth quarter, we were able to dial up and down the variable components of our expense, a big piece of that being store-based labor, to really match the needs of the business, and really the needs of the customer -- to serve the customer.

One item that I typically touch on or get questions on is the table we have on Pathway to Profit.

I think it's a good way to assess some of the underlying things going on in our business.

One of the things is always helpful I think is to appreciate how we look at our business.

And one thing that we do is -- we're an organization that rewards our personnel internally.

Whether that be people at the store, at the district level, in a distribution center or in some other support roles, we reward folks based on our ability to grow the business.

We reward more for growth sales than we do for maintenance sales, as an example.

We reward for managing, containing the costs of our business, and growing the profits of the business.

Those are the three things that are really critical when we look at how we compensate.

One thing to keep in mind when we look at that Pathway to Profit table over the three years -- because I always look at different buckets.

And my poster child is always looking at the 150,000-plus store, or I look at the last two groups combined.

Because it helps me understand what's really going on in the business.

And I'm pleased to say when I look at 2014, when I look at that group, the number, the level of profitability, the components of the profitability make a lot of sense to me and position us well to go forward.

One thing you'll notice is, the profit in that group slipped slightly from a year ago.

Now, we're largely beyond the noise we've had in the past month, so what's going on with gross margin year over year.

So it's really about how are we managing the expenses of the business and investing to grow the business.

When I look at that slight leakage, what really drove it is a decision we made a year ago to dramatically expand our district and regional leadership.

We went from roughly 230 district managers to just shy of 300.

We expanded the key accounts teams.

We expanded our ability to manage the business and grow the business.

The other thing that happens is, if you look at the business this year -- Lee just mentioned we grew it 20.1%.

Our top line 15.7% on daily, about 14% on an absolute basis.

A year ago, those numbers were 9% pretax growth and about 7.5% sales growth.

So the other component of our P&L that changed dramatically is folks at the district level, folks at the regional level, our teams throughout the organization were paid a premium to grow our earnings.

Bonuses and store compensation were up meaningfully from a year ago.

And so when I look at that, we picked up about 70 basis points of expense because of the fact that we're now growing earnings at 20% versus 9%.

And I don't want to get too deep into the weeds here, but that?s -- but despite that 70 basis points, our profitability in that group only went down 20.

The other 50 is Pathway to Profit leverage, which is -- which not only did we improve the profitability of the organization because the mix change, but the underlying health of the business improved.

And where we did get deterioration, it's because of the investments we made, A. And the way our incentive compensation works, B. And I think that's a winning combination.

With that, again, I think our press release probably gives most people more details than they want to know about the world within Fastenal.

With that, I'll stop.

And Will, if you have anything you want to add, otherwise, I'll turn it over to Q & A.

No, I'll wait for questions.

(Operator Instructions)

Our first question comes from the line of Sam Darkatsh with Raymond James.

Good morning, Lee, Dan, Will.

How are you?

Very nice quarter with respect to expense control.

First question, the spread between vending customers and non-vending customers, in terms of the growth rates, continues to moderate.

How should we look at that?

The concern obviously would be, it's a reflection of the maturation of the initiative.

But there's got to be some other factors or components driving the contraction of the spread.

Well, yes, I think it's really a function -- if you look at the growth of the customers with vending, they've been in the neighborhood of representing about 40% of our sales, so that group of customers.

It inches up a little bit every quarter, but it?s been in the upper 30%s, now it?s approaching 40%.

The growth has been basically at 20% all year.

I would say that the moderation of spread is really about the fact that the other 60% of our business, the investments we made in people at the store and at the district level, the rest of the business has lifted itself up.

It isn't so much that the gap has narrowed; it's the performance of the other 60% has improved and it's raised our Company number.

Because we've been basically at 20% growth in that group the entire year.

And part of that is a little bit resurgence in the fastener business.

If you look a year ago, the fastener business was seeing almost no growth at all.

Bringing that growth back, which basically does not come through vending, it's non-vending business, it changes the mix a little bit about where our business is coming from.

And that business is about half of the 60% that isn't vending.

Yes.

So that really influences the gap.

Helpful.

And my follow-up question, how do you look -- and it's I guess a million dollar question -- how do you look at gross margins here in 2015, both early on and for the year?

I know you voiced a 51% expectation.

What are your thoughts around pricing in fasteners and non-fasteners, and how realistic the 51% expectation should be for the year and for near-term?

You know, on the 51%, I frankly don't know.

What I can tell you is, I think what we demonstrated this quarter is, we can invest heavily in the business.

We can manage the expenses, we can let the Pathway to Profit mechanics shine through in our profit growth.

We can do that without expansion of gross margin.

And to me, that's the most critical.

It's a competitive market out there right now.

Our mix, as we've talked on prior calls, isn't inherent to raising margin, if you look at the growth drivers of our business.

But the profitability on those growth drivers is great when it comes to the pre-tax line.

I think a couple other positives on the margin are, we do have a couple tailwinds.

One is, we still have a tremendous opportunity on upside for our exclusive brands, our private brands.

And the other is, our transportation cost with fuel where it is, or oil situation, is going to drop.

And as you see in the fourth quarter and other quarters or late quarters, the flexibility of our fuel and the costs going up in our fuel and utilization -- our utilization will be high in the first quarter of our transportation.

And as it looks right now, fuel costs will be down.

So however you get to gross margins, that?s great.

So exclusive brands, tailwind there on the fuel, and also our fastener business is doing a little bit better.

There are gives and takes all over the place in margin, and it's always going to be a fight.

But I tell you what, the team has done a great job of managing our margin through a changing business environment.

So, no reason to think why the 28% to 33% incremental margins should not hold true in 2015?

We feel very good about our ability to get strong incremental margins.

In July ?- well in April, we talked about getting to 20% in the third quarter -- or excuse me.

On the third-quarter call, we talked about this quarter really being in the upper 20%s, and we feel very good about where we're positioned going into 2015.

I think one of the other reasons I feel good about that is, we made very heavy investments at the end of 2013 in our district managers, a lot of salespeople outside of the stores.

And so we were in a heavy investment mode.

We don't have to do much of that this year.

In fact, in the leadership roles -- district, regional, outside salespeople, we're very set for at least the first six months of the year.

So that will come through in the P&L, and incremental gross margins, or incremental margins.

Very helpful, thank you, both --- thank you all.

Our next question comes from the line of John Baliotti with Janney Capital Markets.

Good morning, thanks for taking the question.

Dan, is part of the assumption for 2015 -- I know it's early in the year, but with respect to gross margins -- the fact that you've pointed out that the mix of business being larger customers?

Is it -- are you, for the time being, expecting the mix to kind of stay where it is?

Well, the mix has been changing over many years, our large-account business.

You see it when you look at our vending numbers.

Because a good chunk of that is large-account business, our national account business.

And you see that the rest of the group -- like we talked on that first question -- the rest of the group has stepped up and gotten closer to it.

So we actually have a little bit more balanced growth impact on gross margin in the next 12 months than we probably did in the last 24.

Because by adding -- selling energy into the store, the local business is stepping up to the plate a little bit more.

So when it's not being pulled by the vending, the large-account business.

But there's still a little bit of mixed drag there.

But Will touched on about the fuel, and our private brands is really powerful.

Yes, I mean the mix is not -- other distributors have said the same thing.

It's not unusual as an industry now that the larger customers are contributing more.

But to the point earlier, I think Lee brought this up, in terms of adding heads, and you put it in your release, adding more in 2015.

As you said, you did a nice job of controlling your SG&A costs.

Do you see that, as a percent of sales, more level with 2014 this year, given that you're going to add more heads, but maybe offset with some further focus on costs?

Or how do you see that shaping up?

I'm not sure if I clearly follow your question.

Yes.

SG&A as a percent of sales was down about 54 basis points this year to just under 30%.

And you pointed out that you had pretty tight controls on expenses, especially in the fourth quarter.

And you also said that you're going to add some more heads in 2015 to resume what you were doing in 2014.

I was just curious, how do you see those two in aggregate -- focus on cost control, but also adding heads?

How do you see that aggregating into your SG&A as a percent of sales?

If you think about the Pathway to Profit, everything about that, including adding heads, is about leveraging your SG&A.

So in order to get the 28% to 30%, low 30%s incremental margin we talked about, from our perspective that's all coming from SG&A.

The position we're in is that when you look at the labor growth for next year, the SG&A growth for next year, a lot of the incentive pieces like I talked -- where I touched on what we gave up in the fourth quarter year over year because there's actually bonuses paid out again, that's in our numbers now.

That's been growing into our numbers as we've gone through the year; it's been stepping up a little bit every quarter.

And so it really puts us in a position to make investments.

But the rest of the expense pool really isn't growing that fast.

So we think we're in a great position to manage the SG&A going into 2015.

Great, okay, thanks.

And Lee, congratulations on your new position.

Oh, thank you.

Our next question comes from the line of Winnie Clark with UBS.

Good morning.

Good morning, Winnie.

In terms of the store count, you closed 52 stores in the second half, ahead of that initial 45 target.

Are closings largely completed at this point?

And how should we think about net store-count additions in 2015?

Net store-count additions I would expect to be positive in 2015 -- marginally positive.

We're always looking at our business.

And even before we announced the 45 in the second quarter, I think we had closed around 20 stores in the first half of the year.

And we think that's a healthy thing, because in our business -- our locations are about, in my mind -- and Lee, you can chime in if you disagree with my approach on this, but my thought about our locations.

It's a base for our salespeople that stocks inventory, and customers have the ability to stop in.

So we can do a great same-day service and a high-level service for our customers.

But if one of our district or regional leaders looks at a market and says, you know what, I think this market is better served having us operate out of four points than five, or three points than four.

When we know we're going to retain an incredibly high percentage of that business, we always look at it and say, what's the smartest way to grow?

But to answer your question, I would expect it to be nominally positive in 2015.

Okay, great, that's helpful.

And then just finally, was hoping you would give us a sense of what your exposure to oil and gas regions is, and how sales growth has been trending in those areas relative to the Company average?

And then maybe just how you think about the various puts and takes for your business, of lower oil prices?

Sure.

Winnie, I'll take that.

When you look at our sales, about 12% to 13% of our sales, I would say, are affected in some way, shape or form from oil dropping, especially under $50 a barrel.

And when you look at that, there's a percentage -- and I'm kind of framing up from Pennsylvania to Texas to North Dakota, Tulsa, Western Canada, Alaska --we really looked at that, and it's about 10% to 12%.

We're going to feel it.

Now, what happens is I think when you look back in time when oil dropped, by the time it drops to the net effect where it hits us, it could be six months out there or something.

There is that lag.

So we're keeping an eye on it, and we're definitely going to feel it in those regions.

The flip side is, we don't quite understand what it's going to do to our other customers, because it actually puts a little wind in their sails, so to speak, from a bottom line.

So that's kind of how we look at it and how it affects the Company today.

Great.

Thanks for taking my question.

You bet.

Our next question comes from the line of David Manthey with Robert W. Baird.

Thanks.

Hi guys, good morning.

Hi, Dave.

First off, back on the contribution margin side, just given the level of profitability and the earnings growth that you're seeing right now.

I know on the upside and the downside, we've had these stabilizers or shock absorbers through bonuses and profit-sharing and things, and I just want to press a little bit more on that contribution margin side.

It sounds like you took a little bit of that in the fourth quarter here.

But as we look to next year, is there a possibility that those things kick in?

And even at a flat gross margin, it's a little bit more difficult to get to that 30% level, Dan?

Well, with growth where we've talked about it -- in that mid-teens neighborhood, we're in a position to invest in energy at our stores, and really get in the neighborhood of those operating margin ?, I mean incremental margins, Dave.

Because when I look at our bonus pools, our incentive comp, it really stepped up.

When I look at it in the four quarters of this year, it really stepped up when we got into the second quarter.

And in the first quarter, it was a pretty healthy number too.

But it really stepped up.

And so I think that layer of added expense is really in our numbers, when I look at the totality of 2015, and I think it positions us well.

The offset to that, some of the pieces you normally don't count on -- and Lee just touched on it, and Will touched on it earlier -- is, you have some SG&A that's going the other way in the short-term.

I mean we have some nice benefit coming into the first quarter as it relates to energy.

I know you're down in Florida, so you don't always appreciate this anymore, now that you're no longer from the Midwest, but it's cold up here.

And energy prices for heating a lot of our locations in the northern half of the country and throughout Canada is a meaningful piece too.

So it gives us some tailwind coming into the first part of the year.

Dave, I'll jump in here.

This is Will.

But if you -- the biggest component by far of our SG&A, as you know, is our labor.

And with the plan that Lee and his team have laid out for adding the vast majority of our new selling energy -- or not selling energy, but store energy, so our salespeople can get out, by hiring college students.

We can add 15% -- not saying we are going to add 15%, but the math says we could add 15% more hours in our stores.

And that would translate into just under 7% labor, not including bonuses, so the base labor to fuel that or to support that 15% more hours.

And those are the scenarios we're looking at.

So that gives us a tremendous amount of leverage when you look at that labor is by far our biggest expense, we can add the hours with just under half of the expense as a percentage.

That's where a lot of it comes from.

And it allows us to be very bullish out there with our customers, and serve our customers at a very high-level.

Okay, all right, thanks Will.

And then on the gross margin -- I know this gets far too much attention here lately -- but the 51%.

As I look historically at -- the Company has maintained that level of gross profit, profitability.

And I know that historically there's been offsets, whether that was direct sourcing of fasteners or ramp-up of the exclusive brands or changes to the logistics network, et cetera.

So I know that historically, even though national accounts have moved up in the mix and non-fasteners as a percentage of the mix, you've been able to maintain that level.

What I'm wondering about is, as those secular changes continue, as they have for the past several decades, are there offsets that will allow you to remain in that range?

Or is it just we've reached a point where gross margins could potentially just be lower, and we're going to have to rely on better cost leverage?

Well, if you recall, on the last call, Dave, we -- I -- probably not so artfully but I tried to walk through what happens on the Pathway to Profit as our average store size gets bigger.

Because I think that's really the underlying cause of a lot of what we're talking about.

Our average store size gets bigger because we're more and more successful with our larger customers and we drive some key accounts into those individual stores.

And that's what pushes a store from $80,000 to $100,000, or $100,000 to $150,000, or $150,000 to $200,000.

Over time, you have some $40,000- and $50,000-a-month customers, or maybe an $80,000-a-month customer.

But you have some big business that's coming into those stores.

And like I talked about on the last call, if I look at our stores that do more than $100,000 a month in sales -- at the time it was about just over 1,000 of our 2,700 stores, that group operates at a lower gross margin.

I think it was about ?-.

70 basis points.

70 basis points lower than the Company does.

So as we move from $100,000 to $110,000 to $130,000 to $160,000 average store over the next few years -- because we're only nominally adding units, so that means our average store size is going to grow, I would expect our gross margin to compress.

And right now, I would expect it to be closer to 50% than that, say, 51% or 50.5% that we just reported, because of the impact of that.

But as I also talked about, giving up that 70 basis points, you pick up about 450 basis points in operating leverage.

And that's the secret.

That's going out over one, two, three years?

Oh, absolutely.

I just want to make sure we?re clear on that.

That's looking out into the future.

Because that group of stores averages a little over $160,000 a month.

In this quarter, that group of stores was a 24.5% pre-tax.

And that's the fourth quarter.

So that gives you an idea of the potential of the profitability of the organization.

All right, got it.

Okay, guys, thanks a lot.

Stay warm.

Thanks, Dave.

Our next question comes from the line of Eli Lustgarten with Longbow Security.

Thank you, good morning, everyone.

Good morning.

I?m glad to listen that the overemphasis of gross margin has finally been recognized.

I have two questions.

One, can we talk about current business conditions as we look out into 2015?

Particularly, first quarter has a very easy comp as we did in December from the weather impact a year ago, assuming it doesn't repeat.

Last year, if you lived through it, you're not going to forget January and February so quickly.

Can you give us some idea of some benefits from there?

And the second part of that thing, can you talk about the heavy manufacturing impact?

You took 20% of your business.

You know, oil.

But can you talk about the impact of ag and the Canadian economy?

Which are now starting to show signs of stress on Fastenal, particularly the ag market is the one that we know was crashing at the moment.

And whether Canada is becoming a bit of a problem or not?

Quite a few items there, but I'll try to bounce through a few.

And Lee or Will, if you want to chime in, feel free.

First off, on the end-market piece, the manufacturing, that business really improved for us.

And I think that really shines through in the fact that we exit the year with our fastener business growing double-digit.

We started the year with our fastener business growing low-singles -- 1%, 1.5% in first quarter, 1.9% fourth quarter of last year.

That says a lot to the health of our OEM manufacturing customer out there.

So I think that has very good trends going into the new year.

When I think of our Canadian business, and I know enough about a lot of the details, I sometimes get myself in trouble in the conversation.

To me, the biggest issue we have with our Canadian business right now isn't how well it's growing; it's the value of the currency.

That business grew for us in the mid-double-digits here, when I looking at the last few months.

But what shines through on our Company level, when you look at it in USD, it cuts that down by almost 2/3, because of deflation in the currency.

But the underlying business up there is -- for us, it's healthy.

Yes.

Now, one thing you have to keep in mind when you look at our business in Canada, it is weighted towards the Eastern part of the country.

We went into Ontario first because we were expanding from basically the Great Lakes states in the US, when we first entered Canada, mid-90s.

So we have a big chunk of business that's in the Ontario province, and then out towards the maritimes.

It was later that we more expanded into Western Canada, from the standpoint of where our dollars are.

And that business -- the eastern part of the country is stronger than the western part.

Obviously the western part is much more linked to extractive industries.

Can you talk about the weather impact in ag and the farm sector?

Well, the weather -- coming into last year, we had a tough start to the year.

Weather really beat us up.

And weather, while it?s been cold in the Upper Midwest, hasn't been pounded by the weather you saw.

And time will tell how that plays out in the rest of January and into February, but I don't see weather as a threat right now.

But we did have good March last year, so that balances it out, too, weather-wise.

We came back very strong.

So it wasn't the entire quarter that was affected; it was mainly January.

Yes.

One other question.

You've had an initiative in metal working that was started several years ago, which really hasn't done very much.

Your relationship with Kennametal really just seems to be plodding along.

Is that still a focus of the Company or our future growth, whoever?

Or has that just been put on the back burner?

I'll jump in on that.

Metal working continues to do well.

Our relationship with Kennametal is good.

People, I think, had too high of an expectation going in, thinking we are going to be as big as MSC overnight, and that doesn't happen.

But our metalworking business has grown -- not double-digit, but almost double-digit above the Fastenal growth over the last -- in 2014.

It even did better than that in 2013, and we've grown a very nice sized business.

We're doing well with it and we think the upside is great.

It's just hard to grow a business that -- right now it represents about just under 10% of our total revenue.

So it's a meaningful sized business.

It's hard to grow it more than 20%, 20%-plus year over year with a business that big.

So we're very committed and we think we're going to continue to do well in it for a long time.

And part of what we learned is that, although Kennametal is a very good supplier, they don't have the full spectrum of what the customers need, and neither does any of the other suppliers.

So we've developed relationships with a wide range of suppliers, and most of them are enjoying very good growth through Fastenal.

So we're still very committed, and believe it's a great opportunity for the future of Fastenal.

The main thing that makes sense is our fastener and MRO customers, most of those are using metalworking products.

We already have developed relationships; now we have to develop the product relationship in this specific area.

Okay, thank you very much.

Our next question comes from the line of Ryan Merkel with William Blair.

Thanks, just want to clarify the 10% to 12% you said was tied to oil and gas.

Is that direct-to-energy customers, or were you saying that 10% to 12% of our stores are in energy-levered states?

10% to 12% of our sales are in those geographic areas.

And shooting from the hip, I'd say probably half of that would be closer to the energy piece.

But that's somewhat anecdotal, talking to our regional leaders in those geographic areas.

But it's really looking at the Gulf Coast, the Texas market, Western Pennsylvania, Western North Dakota, up into Oklahoma and Western Canada, kind of looking at those and gauging it.

It's pretty close to 12%.

And more information -- that group in the third quarter grew at about 24% versus the Company.

We have enjoyed very nice growth.

So that?s the -- so we have that 12% of our business; it will probably slow down, I mean that probably pretty good -- but the other part of our business, that 90% or 88% remaining, we're hoping we get a little tailwind through lower energy costs, and maybe it balances.

If it doesn't balance, we also have about a $12 million quarter -- or $10 million energy bill ?-

Yes.

That we think is going to go down by $3 million or $4 million.

So we could give up a little revenue and balance it with the expense.

We're hoping we don't give up any revenue and we get to capitalize on the expense.

So we've looked at it hard, Ryan, and we're trying to figure it out, but there's no crystal ball for this right now.

It's all about how the rest of the economy is affected because of lower fuel prices.

Okay, yes, I just wanted to clarify that.

So you were kind of saying that 10% to 12% is direct and indirect, and direct would be more like 5%?

It's those geographies.

It's the geographies --.

Yes, okay, I just wanted to be clear.

Because that would have been a little bigger than I would have thought.

But 5% makes sense, which would be direct.

Okay.

Second question -- given the decline in steel prices, should we be worried about deflation in fasteners?

And can you just remind us how your fastener contracts work, with regard to price?

The large contracts, which probably make up 20% to 25% of our fastener business, are tied to a CRU index, which is a steel index.

And when the triggers on that are typically -- they're not all the same, but most -- the majority of them have a 5% trigger.

So if steel goes down more than 5% --.

Or up.

Or up more than 5% over a six-month period, it's always on the calendar, January and July are the trigger points, that we will either raise our prices or lower our prices, accordingly.

And then based on that, we're figuring out what percent.

So if steel goes up 5% or down -- it doesn't mean we lower our price, because they factor in the labor, so there's a formula there.

So the other 75% of our business is not on these contracts.

When steel goes down, we have some upside for margin if we can hold onto that pricing.

And that's really where we think the balance is.

There's always margin pressure exposure if there's a lot of deflation in the business.

So far, we have not seen a lot, but that -- time will tell.

We've been staying very close with our guys in Asia that run our business for us over there, our trading business, and trying to understand what the manufacturers are saying and seeing.

And what would the lag be?

Pardon?

What would the lag be?

So steel prices go up or down 5%, you have to change your pricing.

Is it a quarter lag, or is it right away?

It's usually six months.

It?s usually six months.

Okay, great.

And then if I can slip one more in, kind of a big-picture question.

There's a view by some that the MRO industry is more competitive, more consolidated today, and therefore, the growth going forward will be slower, potentially less profitable.

So what is your view, and has anything changed in your view over the past 10 years?

Well, things have changed, but if you look at the big players and whoever you throw into that group, we've all grown nicely.

So maybe we've gone from 25% market share to 28% or 30%.

So it has consolidated, but pretty slow rate when you look at the combined -- if you look at us, MSC and Grainger combined, and there's others, I know.

But our growth is probably 10% if you add us all up.

It takes a long time to consolidate the industry.

It's always been competitive, and I think it will remain competitive.

But there's a tremendous amount of opportunity out there, and we think the opportunity is as good as it?s ever been.

And that's why we're so focused, as Lee talked earlier, about staying close to our customers, using our same-day store model to grow our business and take market share.

Very good, thank you.

Thanks, Ryan.

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

Hi guys, good morning, congrats.

Hi, Adam.

Can we go through the cash flow outlook for next year?

Pretty good job this year in getting cash conversion, I guess how should we be thinking about CapEx?

What are you thinking from an inventory side?

That would be helpful.

Our CapEx will drop as we go into the new year.

The number I would expect us to be citing in our annual report will be a number around 150, and plus or minus $5 million.

And I think we're positioned well.

I think we're in a good position to manage the working capital needs.

The biggest component of need there will be more on the AR side than the inventory, because I expect our business to keep growing nicely.

And I think it puts us in a great position to generate very, very strong cash flow.

Our operating cash flow this year was, even high by our norm, because we basically had operating cash essentially in line with earnings.

Part of that was the fact that our friends in Washington DC saw fit to continue the bonus depreciation and a few other things there, so we didn't get that tax bill coming and that defers that off.

But really a strong cash flow year.

And I think we have a great position for next year, because a lot of those investments in distribution are in the rear view mirror rather than in the windshield.

Okay, got you, thanks.

And then, clarification on the headcount add.

It's [Fastenal time], but it's still not clear to me.

We had 2% year-over-year growth in December on FTEs, and I'm just wondering how you think about that.

For the first half of this next year, are we going to bounce back to the 10% to 15% that was mentioned earlier?

Or are we going to remain in the single-digits and then ramp back up?

You're talking about at the store level?

No, the total headcount growth on an FTE basis.

Year over year in December -- do we stay there some time?

Yes.

You really have to discount a lot of what the year-over-year numbers are in November and December.

Because in November and December of a year ago, as I touched on earlier, we were in this massive ramp-up stage, and we kept the hours just dialed up, because we wanted to get our salespeople out of the store, selling.

And this year, as we managed through it, we were able to dial down the part-time hours in November and in December, and that?s really what ?- that drives the FTE.

And one of the reasons I put that bullet in on Page 1 was really to talk about, hey, you know, on the headlines, it looks like we dropped our numbers at the store.

Our FTE did go down, because we dialed down the hours, but we actually added people.

And so coming into January and February, that will dial back up, because we have the need.

And when we looked at it, trying to normalize it, taking out the people going home for the holidays and all that, we're in the high-single-digits.

I think we have 8% to 9% more selling energy if everybody was at work all week long.

And that's a little lower than we want, but it's in the neighborhood.

Does that make sense, Adam?

Yes, and so that we get back to that normalized 8% to 9%, and then maybe grow from there, as you have need.

Yes, we want to push it up from there.

Yes.

Okay, thank you.

Thanks.

I see we're at 9:45.

Again, I want to thank everybody for joining on the call this morning.

And Will, good luck.

I'll be here.

Take care, everybody.

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

This does conclude the program, and you may all disconnect.

Everyone have a good day.