Fastenal Company Earnings Call Insights: Profitability Expectations and Non-Residential Construction

Fastenal Company (NASDAQ:FAST) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Profitability Expectations

Hamzah Mazari – Credit Suisse: The first question is just on vending, just trying to better understand what has led to the change in strategy from maybe Q1 where you wanted to grow your installed base as fast as possible and now to sort of taking a little more of a measured approach. I realize some of this may be you’re running too lean, maybe your profitability expectations have changed on vending, just any color you can provide there.

Willard D. Oberton – CEO: I’ll start out with, no, our profitability expectations have not changed at all. It really comes to what I said in the call is that, we are getting the signings by working very hard with the managers and pushing them hard on signing vending machines. But when we really looked hard and listen to our managers about how we can improve our sales quickly, month-to-month versus year-over-year, the word was, let us go out and just make regular sales calls, call on contractors and small accounts and pick up orders. The vending cycle – if we sign a vending machine, typically it takes about five to six months to be producing revenue for us. It’s a great business. It’s just a longer cycle business. So, we said, okay, let’s just let it flow naturally. And the fact that we signed almost 5400 machines without putting all the pressure on, to me was actually a pretty impressive number. So, it’s nothing about our view long-term of vending. We think it’s still a fantastic opportunity for us. It’s just about how much time you can consumer in the store for just one initiative that’s a longer cycle initiative.

Hamzah Mazari – Credit Suisse: And just a follow-up. You mentioned the June number was pretty good, 6% relative to 5.3% in May. Has there been any change in July what you’re seeing? I know it’s early days in July, but any change versus expectation?

Daniel L. Florness – EVP and CFO: Hamzah, this is Dan. First off, experience has taught us whenever we try to predict on the 10th of the month, our odds of being incorrect or incredibly high. So, we tend not to go down that path, especially in the July month because with the 4th of July it even adds a little more uncertainty. But our expectations went into the last year; we think we’re doing some things on the headcount side, on the vending side, on a whole bunch of aspects of our business to position us better for the upcoming months in the last months.

Non-Residential Construction

Josh – Raymond James: This is (Josh) filling in for Sam. I wanted to get your thoughts. You called out the non-residential construction industry is being a bit of a headwind to margins and the lackluster growth there. Could you give me any thoughts on your outlook for that vertical and what you think of it in the coming months?

Daniel L. Florness – EVP and CFO: Well, as we touched on, it’s an essentially treading water for some time and earlier in the spring, we thought it was very weather centered because we really had a tough weather pattern. I mean I know from first-hand knowledge, we had snowstorm here in the first week of May and a lot of the upper Midwest was hit hard and so those weather going on. But when I look at the May numbers in total, I look at the June numbers, I mean, the construction is weak. As I alluded to earlier, there are some things that we’re doing, test in a few hundred stores with putting some more products in that we’ve seen some positive results and it’s going to cause us to expand that more in some additional locations. As far as predicting where it could go? Your guess is as good as mine.

Leland J. Hein – President: But that isn’t applying pressure on our margin. I don’t think Dan didn’t say.

Daniel L. Florness – EVP and CFO: On the gross margin, it does gets a little pressure because our construction business does runs at a slightly higher gross margin, so it’s a little mix issue there and I was just trying to identify pluses and minuses to gross margin.

Josh – Raymond James: Then could you maybe just elaborate a little bit more going back to the vending program on how you are defining a quality of an installation? Is it purely the revenue potential of the machine or are there other factors that you are considering?

Daniel L. Florness – EVP and CFO: It’s really above the revenue potential of the customer and there were just two things. One is the revenue potential of the customer and how many machines per customer. What we identified is that in some cases because of aggressive salespeople there saying, hey, we need to put six machines in here and as we went in and size up the customer, we found that really four was – or four or five was a more appropriate number. And so what we’re really doing is just a screening process, now that we have so many machines out and so many customers we have great data, and that’s really looking very hard to say is that the correct number for that customer or is this customer even capable of getting one machine. We’ve always done and we just have better data today.

Josh – Raymond James: If I could just get one more and you mentioned wholesale pricing not necessarily being a component of your bullishness on gross margin, could you talk about the pricing environment in the industry?

Willard D. Oberton – CEO: Pricing environment is always difficult, but with the economies slow like it is it’s more difficult to go in and ask for a price increase. I think some of it is just reluctant to salespeople and your customers already putting pressure on you it’s harder to go in and push pricing, so it’s just a more difficult environment. It’s not, there is not real dynamic, not a lot going on it just – when business is robust it’s a lot easier to walk in with the price increase than it is when business is slow; timing is tough.