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Fastenal Company (FAST)

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Fastenal (FAST)

Q3 2012 Earnings Call

October 11, 2012 10:00 am ET

Executives

Ellen Trester

Willard D. Oberton - Chief Executive Officer and Executive Director

Daniel L. Florness - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

LeLand J. Hein - President

Analysts

Hamzah Mazari - Crédit Suisse AG, Research Division

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

Ryan Merkel - William Blair & Company L.L.C., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Fastenal Company's Third Quarter 2012 Earnings Results. [Operator Instructions] As a reminder, this conference is being recorded. Now I'll turn the conference over to Ellen Trester of Investor Relations. Please begin.

Ellen Trester

Welcome to the Fastenal Company 2012 third quarter earnings conference call. Present for today's call are Will Oberton, our Chief Executive Officer; Dan Florness, our Chief Financial Officer; and Lee Hein, our President. The call will last for up to 45 minutes. The call will start with a general overview of our quarterly results in 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 homepage, investor.fastenal.com. A replay of the webcast will be available on the website until December 1, 2012, at midnight, Central Time.

As a reminder, today's conference call includes statements regarding the company's anticipated financial and operating results as well as other forward-looking statements based on current expectations as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming or similar indications of future expectations. It is important to note that the company's actual results may differ material from those anticipated. Information on factors that could cause actual results to differ materially from these forward-looking statements are contained in the company's periodic filings with the Securities and Exchange Commission, and we encourage you to review those carefully. Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance that the matter contained in such statements will occur. Forward-looking statements are made as of today's date only, and we undertake no duty to update the information provided on this call.

I would now like to turn the call over to Will Oberton. Go ahead, Mr. Oberton.

Willard D. Oberton

Good morning. Thank you, Ellen, and good morning, everybody, and thanks for joining our call. I'm going to spend a few minutes with some brief comments on my view of the quarter, then I'm going to turn it over to Dan.

Overall, I felt that we did a very good job in the quarter considering a little bit of economic headwind. Sales were slow, but we did see an uptick in September. So we're very optimistic about that. Another thing on a positive note is on a sequential basis, from June to September, we're really on track with what our historical numbers are. So we also see that as a positive. We had a very weak April-May time frame, although we lost a lot of ground for the year. But since then, we've really been tracking very consistent. So there is a little life underneath all of this.

We've seen very slow growth in both Asia and Europe. That's also been holding us back. If you compare it to last year, in 2011, we actually were getting about a 200-basis-point bump in our sales because of our foreign activity. And this year, it's about equal to the U.S. business. So we're just not getting any tailwind from our Asia and European businesses.

Mexico remains very strong, which is very positive. They've just done great over the last 3 or 4 years, and we continue to invest. I believe we've opened 7 stores in the last year in Mexico, and they continue to perform at a very high level.

A little bit on some of the vertical markets. Construction actually bounced back a little bit in September, but if you look at the number, August was a -- was like the low point. And so September is more on a normal number or more a traditional number, almost 10% growth on the construction. In manufacturing, we just haven't seen much change. I think it went -- moved about 10 basis points over the 3-month period, up 10, down 10. So manufacturing has been very consistent, which we actually look as a positive, because it had been moving down prior to that. So we're holding our own in manufacturing. And hopefully, things will pick up as time goes on here.

On the margin -- I'm a little disappointed in the margin. We've been working very hard on improving our margin. We didn't lose any ground. We also didn't make up much ground in the quarter. One thing to note on that, though, is that steel remains soft. If you follow the steel markets at all, steel continues to decline a little bit. If you look at -- we look at the Asian steel markets, because a lot of our fasteners come out of Asia. A lot of their prices are down 10% to 20% from a year ago. And so that continues to put pressure on our margin. But I think the team is doing a good job of holding the prices up as they can, but it's more difficult to make gains in a deflationary market. And with fasteners making up close to 50% of our business, that makes a big difference in our margin opportunities. We will continue to work on it and believe we can -- we will show some improvement as we go forward.

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