Good day ladies and gentlemen and welcome to the Fastenal Company Fourth Quarter and Fiscal Year 2015 Earnings Results Conference Call. At a reminder, this conference is being recorded. I would now like to hand the meeting over to Ellen Trester, Investor Relations. Please go ahead.

Welcome to the Fastenal Company 2015 annual and fourth quarter earnings conference call. This call will be hosted by Dan Florness, our President and Chief Executive Officer. The call will last for up to 45 minutes. It will start with a general overview of our quarterly results and operations, 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, 2016 at midnight Central time. As a reminder, today’s conference call may include statements regarding the company’s future plans and prospects. These statements are based on our current expectations and we undertake no duty to update them. It is important to note that the company’s actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company’s latest earnings release and periodic filings with the Securities and Exchange Commission and we encourage you to review those carefully. I would now like to turn the call over to Mr. Dan Florness.

Good morning, everybody and thank you for joining our fourth quarter call. 2015 was a tough year for our customers. As the year progressed and as we reported our various quarters, we touched on how that was playing out and I think the best way to look at 2015 is to look at a subset of customers where we have a substantial market share presence with and that's our top 100 customers. That group represents about 24% of our revenues and it isn’t about that group, what's going on in that group? It's about what's going on there relative to what we've seen in the past. If I look at that top 100 group of customers and look at it over the last four years, history says at any given point in time, 75% -- 75 of those 100 customers should be growing. And the reason that number is high as it is, is because of the growth drivers that Fastenal has at its disposal between our store operation, our vending operation and all the other things we can bring to our customer's table. In the first quarter of this year, 72 of our top 100 customers grew. In the second quarter, that dropped to 63. In the third quarter that dropped to 56. In the fourth quarter, that dropped to 49. So in the fourth quarter, half of our top 100 customers grew and half contracted. In the month of December to amplify that a little bit, 41 of our top 100 customers grew and 59 contracted. The next thing I looked at is try to gauge of the customers that are contracting, how severe is their pain. And history says, of the 25 that are contracting, about half of that number, about 13 will contract more than 10%.…

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Ryan Merkel from William Blair.

Hey good morning. Dan, how are you?

Good. Thanks.

So starting with demand, I think you said there is reason to expect stabilization and I’m wondering what signs are you seeing or is it just early January trend that makes you think we could see some stabilization?

My comment Ryan is solely on the early January trends and what we were seeing in December before we saw the business just dial down.

And that was kind of the first two weeks of December were tracking fairly good and it was really just the last two weeks that may have been impacted by the shutdowns and just the tighter spending by customers, which could be a transitory issue. Is that the summary?

Yes, and time will tell if I’m seeing that number -- seeing that in the data because I want to or if it’s truly there, but with 10 days left in the month, our trends were looking a lot like last year.

Right. Well then my second question is in the press release you mentioned 2015 started slow because of oil and gas, but then as the year progressed, it spread into other industries and other geographies that aren’t typically driven by oil and gas. So can you expand on this a bit? Has this broadening of the weakness may be stopped at this point based on everything you’re seeing and hearing?

The broadening related to everything from other industries that you don’t normally associate with oil and gas that are impacted in other parts of the country, companies that are involved in export, just companies that are involved in really a weak industrial economy. I can’t say that I’ve seen the contingent change. One thing I have always said over the years is the history in this business, for Fastenal's business that is, the trends from January to October, the trends that really matter, November and December are months you go through, but history has said they're never really indicative of anything. We saw some patterns in November and December. I thought they were worth noting, but I don’t think there is anything that we’ve learned in the last two months that tell us if it’s spreading, if it’s stabilized, other than what we saw with 10 days left in December and what we’re seeing in the first eight days or so of January. And again, I throw that out there only because when there is more uncertainty, I do believe and I’ve always believed this that we have an obligation to maybe share a little more insight. And so we’re trying to share as much as we can, but always mindful of the fact that the month can change on a dime. One of the reasons we had never talked about January, in the January call, or we've done it very infrequently is that we’re always wrong. The question is how much, but I can’t say that we know anything about the contagion.

Yeah, I think it’s fair in the past extrapolating December hasn’t been the right move. That month is goofy. So I think that that's fair. I guess just lastly, you think initiatives that you announced at the Investor Day could add maybe three to six points of sales growth in 2016. So I am wondering do we see that right away in January or is that build as we go through the year?

Well I think that builds. If you think about it, in that discussion we talked about the concept of what 200 new onsites mean? And you really can count them half because if they're turning on throughout the year because the 82 onsites that we signed last year, not all those are operational yet. We have I believe 58 of the 82 are operational as of December because someone just signed in November and December and like a vending machine you sign it November, it might take you 60 days, 90 days to turn it on. It's about -- to me, it's about momentum, but as far as what it means for the year my belief of these growth drivers and what they mean for calendar 2016 is completely unchanged from what I believed in November. Lot of what I believe is -- I am a very practical person and what I believe is based on what I see in fact and what I see in fact is a tremendous advantage we have in the pieces we talked about in November, whether it be vending or onsite. Fastenal is uniquely situated, to go after those businesses unlike any other company out there because one of the things that I always tell our folks internally and I try to remember myself is I am world where everybody is talking about building the last mile in this online world, we're a company that's built the last mile already. It's a very efficient last mile and how can we take that last mile, take our employees at the store, take our employees that are supporting the store and together growth a great business and that's what we focus on.

Right. Very helpful. Thank you.

And Ryan I am going to look, I am going to keep you from working in a fourth one there.

Thanks.

Thank you. And our next question comes from the line of Robert Barry from Susquehanna.

Hey Dan, good morning.

Good morning.

Just a quick follow-up actually on that and I really don't want to dwell on the first two weeks of January, but in assessing how to read it, there is a 500 basis point easier comp and one less selling day. So how does that factor into how we should interpret what you're seeing in January?

The one less selling day helps our number. Maybe I don't know, 0.5%. I don't know, when we consider a month, you could probably look at and say yes, we were helped slightly from a daily basis by the fact that we have one less day.

Yeah, what was your commentary about daily sales or…

My commentary was about daily sales. So maybe that means, if I am looking at it right now and thinking we'll be nominally positive, maybe that means we're flat. If you ignored out the day, but I guess the point wasn’t about getting lost and it is a 40 basis point of growth or 40 basis points contraction. It was really about right trend we're seeing and again January and February in the northern half of the country, weather can change things dramatically, but I was trying to give a pulse on what we're seeing right now.

Yeah, appreciate it. I think what I really wanted to focus was just on the gross margin commentary in the release you mentioned that substantially I think was the word all the year-over-year decline was on this lower discretionary spend. And you also in that paragraph talked about pressures from lower rebates and mix and deflation if it's all from lower discretionary spend, it doesn’t seem to leave much room for those other factors. So I am curious like what the commentary is really kind of on gross margin and especially going forward, is there any reason to think that the trend will change in '16 versus what we saw in '15?

Yeah, two hours ago, I had a call with our regional leaders to talk about what we're seeing and some things that we need to do on the gross margin front. And our team that really challenges our gross margin and finds opportunities for us to improve it had a lengthy discussion with them over the last two weeks and I said, you know what? What really happened? Did our gross margin structurally change or is there more to it because the usual suspects are still there. There is always a nominal impact in the fourth quarter based on what's going on with our rebates? What's going on with utilization of our trucking network? The same trucks are running in November and December that are running in October and September, but they're carrying fewer packages. So you always have some leakage there in our gross margin and depending on the year, if it's a strong year, you get a little lift form some of your suppliers allowances. Some years you get a little drag. So those are your suspects. The wild card in it is there were a layer of transactions that just disappeared and they disappeared. We saw them disappear in both November and December and that was shining through in our gross margin and that really was the cause of our gross margin change. I honestly don't know if that layer comes back in January and February. I don't know if the belts are really tight and start to come back for a few months or this is stuff that was needed and people were towards the end of their fiscal year and they just turned it off [the figures] [ph] and they just closed their PO books and they didn't buy anything. History -- I am firm believer that trends have meaning and if history says these transactions are there because the business needs them over time, I believe they’ll return and I don't believe it's structural, but only time will tell.

Yes, but does that mean the impact from deflation and mix and rebates was absent in the quarter?

No, it means that most of the impact came from this piece. Not all of it. Most of the impact.

Yeah. Okay. So it would imply that if it does rebound this discretionary spend that your best guess now is that the gross margin in '16 would be, I don't know, flattish or modestly down? Is that kind of your take?

Well, my commentary really is centered on here is what we were in Q3, here is what we are in Q4 and here is the piece -- here is some of leakage, here is where it came from. I believe these transactions come back again. Nobody knows right now, but I believe they’ll come back because I think businesses need these products, but we will be working to crawl back our gross margin every month of the year on the leakage we're seeing through the year. The long term trends are still there that we talked about. On the positive side, our ability to continue improving our trucking network, its utilization, this is over time. Our ability to drive our exclusive brands to channel spend with preferred suppliers, those positives are always there. The drag that comes if onsite truly takes off the way I believe it can over the next five, six, seven years, that's going to lower our gross margin over time, but it's also going to lower our operating expense over time because we like the onsite business, but in the short term, I believe this business resumes and returns.

Dan, thank you.

You bet Rob.

Thank you. And our next question comes from the line of David Manthey from Robert W. Baird.

Hey Dan, happy new year.

Thanks Dave, you too.

So I guess, I'll stay on your favorite topic here gross margin, could you tell us in the fourth quarter were there any yearend accrual adjustments up or down that impacted the number? And second, could you quantify for us the average gross margin differential between national account customers and the rest of the business? And then finally last quarter, you mentioned about 2% price degradation on Fastenal and I am just wondering if you can give us an update on Fastenal pricing or other product pricing as well/

Sure. The national accounts piece, the delta between that and the rest of our -- and our company average is really been unchanged for quite some time. There is a eight to ten point delta there. If it's an onsite that delta moves down, the margin there moves down into the 30s as we talked about and it's prevalent in that 16% of our business that is onsite or onsite like business in our existing mix. From the standpoint of the pressure on deflation, that's holding pretty steady to what we were seeing in the third quarter. I wouldn't say it's gotten worse. I wouldn't say it's gotten better. So I would say that's holding pretty steady and it was third piece sorry. I didn't jot the first one down.

Just any yearend accrual true-ups that impacted gross margin?

Nothing outside of norm.

Okay.

So is always little bit of noise, but nothing outside the norm.

All right. And then just one quick one here, the $4 million charge for this Brazil joint venture, could you tell us what that amount was after tax?

Yes, the $4 million is not solely related to Brazil. We try to identify several things that were unusual in the quarter to get and again felt the need to give some insight. The after-tax piece of Brazil, that piece of itself and I don’t want to get into the details of each one, but the after-tax number was bigger than the pretax number -- was not helped by the tax because we’ve been incurring losses in that business and therefore there is no tax benefit. So further right off was looking at what we’re going to net realize on that business because we're selling it to our partner for an amount. And then there is no tax benefit from that. So it actually impacted our tax slightly as well.

Okay. I guess we'll follow-up on the rest of that $4 million.

Thank you. And our next question comes from the line of Adam Uhlman from Cleveland Research.

Hi Dan, happy New Year.

Happy New Year Adam.

Just a clarification first, how much of your business would you describe as being that discretionary spend, the spotlight business that melted away?

I don’t have a definitive number for you. I would venture to guess and this is a little bit of guess, it's around that 10%.

Okay. That’s helpful, thanks. And then, could you walk through how you’re thinking about the cash flow for the year? There seems to be several moving pieces in terms of capital spending? I think you had previously guided that down somewhat materially for the year, but then you had the CSP 16 program that’s coming through. You took up the dividend. I guess I’m trying to think through, how much cash generation you think you can do and if you're planning on paying down debt?

The CapEx as we talked about early November, we came in on a net basis because we sold our old distribution center up in Kitchener. So we had some proceeds there, but on a net basis, we spent about $145 million on CapEx in 2015, which was about a 15% drop from what we had seen in 2014, which was about a 8%, 9% drop from what we saw in 2013. And really what had happened is in -- back in 2011 timeframe, we had an Investor Day and we talked about how our CapEx was going to be going up. History has said our CapEx should be somewhere between 25% and 30% of our earnings. It's pretty good accurate number over a decade and we noted that for a multiyear period, that number was going to materially go up. And the two things that were really going to drive that increase centered on we putting automation into our distribution centers and today over 80% of our picking activity occurs in automated distribution centers. The most meaningful project we have right now we're placing -- we're adding automation into our distribution center in North Carolina. That's a 2016 project, but we were going to have about a three-year period where we're putting in a massive amount of automation and that came with a price tag and so that is largely behind us. This year our CapEx as it relates to facilities is centered on the North Carolina facility I talked about and then investments in Indianapolis related to manufacturing and expansion of our automated warehouse. The other piece was we were very optimistic what vending could be and we knew that we were going to be spending tremendous amount of dollars on vending over a multiyear period. Two, we felt…

Got it. Okay. Thank you.

Yep.

Thank you. And our next question comes from the line of Chris Dankert from Longbow Research.

Hi. Good morning, Dan. Thanks for taking my question.

Good morning.

Just first off thinking about the fasteners going to the vending machines and the quarter seems to kind of rough down about 8%. I was wondering just kind of given the utilization numbers and the production numbers we’re seeing this morning and your optimism on the early start in January, is there any commentary you can give us on just the fasteners so far? Have you seen an uptick in those numbers?

I guess I’m a little confused by your question Chris only from you started it by talking about the fasteners and vending. Fasteners, there is no connection between fasteners and vending size. Maybe I just misheard your question.

I’m sorry…

Only non-fasteners go through the vending platform.

But I guess the upshot was your fasteners, have they improved in January commensurate with kind of what you’re seeing on total sales?

I typically don’t get too caught up in the total numbers. I don’t even look at product line mix during the month because it’s not a meaningful exercise. So I don’t even know the number.

No. Fair enough. I guess the other question I had was as far as the IT cost, kind of the investments you’re talking about back at the Analyst Day, can you break out how much of that is dollar value for the year? And then is it going to be classified OpEx, CapEx or a mix of the two?

Well, our biggest investment we’ve made over the last several years is we've grown and built a development team and we've over last two years I believe we now have somewhere between 75 and 80 people in India that are solely about development, a great team. I’ve not personally been over to meet with them, but everybody that has met with them, they’re really impressed with the quality of the people we have there. That obviously goes through our P&L. Historically for us most of the investments we make in IT go through the P&L in the period because they are ongoing coding investments. Obviously things like equipment or third party software, those are capitalized and would be spread out over a multiyear period is one would expect. But most of the expense would be the cost of those 75 people and we’re continuing to grow that group. I talked about some of the places we’re adding or we’re not adding. I think that number will continue to grow and will probably get to the point we have about 100 people over there because we want to build up our capabilities in that area to support our business more thoroughly but you can back into a number pretty fast just with the 75 people.

Okay. That's helpful. Thank you.

Yep.

Thank you. And our next question comes from the line of Ryan Cieslak from KeyBanc Capital Markets.

Hey Dan. Good morning.

Good morning.

I wanted to just first maybe hit the margin question again and you took a step back and you guys clearly have some strategic growth opportunities in the top line, but clearly have some puts and takes still on the margin side. And just directional when you think about incentive comp, the mix with onsite maybe ramping what’s going on with vending, is this a year if you’re able to hit your topline internal goals or grow the topline? Directionally how should operating margins trend for you guys relative to 2015?

If we are able to hit our topline, to the extent we’re doing that because of the onsite, that’s going to be a little bit of leakage, but again we’re talking a relatively small piece of the pie. Our ability to grow our earnings long term has always been centered on the fact that what we call pathway to profit and that is our stores has a mature -- the level of profits improved dramatically. The 900 stores we had in the fourth quarter that did more than $100,000 a month in revenue, the profitability in that group is completely on a different, just in a different place and the profitability of the remaining stores that do less than $100,000 a month. So to the extent all these programs, the vending, these initiatives cause our average store size to grow. There is no reason why that will enhance our profitability and fund any leakage what we might have as it relates to the onsite. Now if our onsite were widely successful. Let's say our onsites were frontend loaded and we get them turned on faster than we expect such that you don't have this wave coming in during the course of the year and the wave hits us earlier and the wave keeping increasing and we do materially more than the 200 million. I can see our growth being better than we expected and our operating margins being a little bit worse. I don't think anybody can call with a complaint about that.

And then Dan with the onsite onboarding, is there incremental one-time or onboarding cost that comes through initially that might weigh on the incremental EBIT contribution this year versus maybe what it looks like into the out year in '17?

Oh! Sure, but that's a constant in our business. That's true of any new business turning on any new year, a new large national account. The first few months are kind of tough. First six to nine month, you're selling resources at it. You weren’t as good at sourcing the products. So your gross margin isn’t where you would like. If I look at the onsites that we turned on in the -- in 2015, their performance would be materially different than the existing book and that's what we talked about in November and that would true of every year. Again it's really about -- I think at the end of the day, the real question is does it allow us to grow our business faster? And do you have confidence that Fastenal, if we're getting the growth can manage the operating expenses? I believe we can manage the operating expenses if we're getting the growth. I believe these growth drivers allow us to grow faster and take market share at a faster clip than our competitors. And we were at -- well I see, we were at 9.46 and so I don't have to ask you that if there is a follow-on, we'll take it offline. One rule we've always had is we realize its earnings season and everybody has a very, very busy day and so we try to hold this call to 45 minutes. So I guess I'll close on that note of again thank you to everybody for listening to our earnings call this morning. Hope you didn't mind hearing just my voice. In the past, it's typically been two. Felt that was appropriate to talk a bit about the quarter, but more importantly to talk about the growth drivers we have going into 2016 because that's why we held the Investor Day back in November because we think it's really about where is our business going long term. Thank you and have a good day.