Manufacturing has clearly slowed, but not abruptly. Although it is much slower than it had been, people are not panicking. There has been a step-down in the economy across the country and internationally. Construction has also slowed, but it is hard to make comparisons due to the warm winter and hot summer. Overall, the economy is somewhat weaker, but there is still a lot of business and a lot of opportunity. Fastenal believes it can continue at the same level in the current economic environment.
Production on fasteners, which was growing 15 percent in the first quarter, dropped dramatically in the second quarter, although there was a slight rebound in June to about 9 percent growth. Fastenal believes the decline in growth in fasteners is due to the economy and the growth it had is the result of Fastenal taking market share. The non-fastener growth, which is vending, is still up about 20 percent.
Fastenal is continuing to see nice progress on sales initiatives. Its sales drivers initiatives are getting stronger.
Metalworking has a long way to go, but is showing progress.
Fastenal is making good progress with its government initiatives and there's a lot of opportunity ahead. The company expects to see incremental quarter-over-quarter improvement going forward.
Vending is making great progress. The feedback from the larger customers employing the vending solutions has been very positive and customers are seeing the savings. The customers like controlling their inventory and the software is working well to see what product the customer is using and how it is using it. Fastenal is still working on its internal processes for how it receives orders and sets up equipment . As it improves, the cost for the customer gets lower.
The growth in Fastenal's vending customers increased during the second quarter from Q1, even though the trends were softening in that quarter. The stores that have 10 or more vending machines are growing at double the rate of their peer group. The types of customers that are adopting vending are broad-based.
Fastenal's goal for the year is 10,000 machines and it believes it will exceed that goal and will install more vending machines in the Q3 than in Q2. It is still selling more of the FAST 5000 than any other machine. It is also having success with the a new standalone locker system. It has not been able to keep up with production on the locker machine. The cutting tool machine is moving slower than expected, probably because it is more useful for smaller customers and Fastenal is still focusing its vending on larger customers.
Fastenal's IT group has developed software to use in stores to automate different processes like receiving product, processing orders and several other areas. The feedback on the software has been very positive and store managers have noted that the software is saving them several hours during the week that can now be diverted toward sales. Fastenal will be rolling out this software to more stores in the next 2 to 7 quarters.
Fastenal's warehouse and transportation group continues is continuing to automate their system and Fastenal will be starting a new automated warehouse at the Winona facility in August, which should shorten cycle times to produce the orders and lower expenses. The transportation group is also experimenting with using compressed natural gas (CNG) to run its trucks, with good results so far. The semis would save between $1,500 and $2,000 per month in operating expenses (after paying a higher price for the vehicle and the tanks) if they used CNG. Fastenal is making money on its transportation and has already made more than it made in all of 2011.
Fastenal has seen a slowing in its international business, part of which is related to currencies. Fastenal also did not do as good a job of signing new large accounts. It has taken longer than expected to get starting in Brazil due to bureaucracy and taxes. However, profitability internationally increased in Q2. !4 of Fastenal's 53 locations are international and 26 percent of its earnings are international.
Evaluation of markets
The economy is okay, but not great. The ISM index dropped below 50 in June for the first time since August 2009, and a reading below 50 means there is no underlying growth.
From talking with a handful of customers, it appears that companies are slowing down production. The backlogs have flattened out, and when backlogs stop building, companies stretch out production so they don't burn through their backlog and have nothing to do.
Financials
In looking at the first six months of the year, March largely beat the company's historical patterns, April and June were in line, and February and May were below. Because of February and May, Fastenal is about 330 basis points behind its historical pattern.
Looking forward to the second half of 2012, Fastenal has built some good momentum with its vending machines that will be installed and have been installed in the last 6 months. On the other hand, the current state of the economy and currencies are creating headwinds.
Fastenal's exclusive brands are about 9.5 percent of its sales, much of which is being driven by vending.
Fastenal's margins for Q2 were 22.2 percent, which may be the best quarter yet for Fastenal in terms of margins. The margins improved by 80 basis points from Q2/2011, which was lower than the goal of 100 basis points. Since margins were declining in the second half of 2011, it may be easier to meet the 100 basis point goal in the second half of the year.
The gross margins are lower in vending because Fastenal is selling to larger customers, which are lower margin customers. However, with vending, the operating margins are larger because it is a far more efficient process.
Fastenal has improved on expense management and had SG&A expenses under 30 percent for the first time in its history. It believes this level is sustainable.
Year to date, Fastenal's free
cash flow is about 66 to 67 percent of earnings. This is a
particularly strong number because Fastenal needs the most
working capital growth in the first half of the year because of the
seasonality in its business.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
No comments:
Post a Comment