Fastenal Company (NASDAQ:FAST)
Q1 2010 Earnings Call
April 13, 2010 10:00 am ET
[Ellen Tressler – IR]
Will Oberton – President & CEO
Dan Florness – EVP & CFO
David Manthey - Robert W. Baird
Jeff Germanotta – William Blair
Brent Rakers - Morgan Keegan
Adam Uhlman - Cleveland Research
Tom Hayes – Piper Jaffray
Sam Darkatsh – Raymond James
Hamzah Mazari - Credit Suisse
Good day ladies and gentlemen and welcome to the Fastenal Company first quarter earnings results conference call. (Operator Instructions) I would now like to introduce your host for today, Ms. Ellen Tressler; please go ahead.
Welcome to Fastenal Company’s 2010 first quarter earnings conference call. This call will be hosted by Will Oberton, our Chief Executive Officer and Dan Florness, our Chief Financial Officer. The call will last for up to 45 minutes.
The call will start with a general overview of our quarterly results and 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’s Investor Relations home page at www.investor.fastenal.com. A replay of this webcast will be available on this website until June 1, 2010, 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 maybe often are 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 material 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 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.
Thank you Ellen, and if I speak as fast as you do, we’ll be out of here in three minutes, nice job. Just joking. Good morning everybody. I want to thank everyone for joining us on the call. I want to thank all the Fastenal people because we were able to produce good numbers this quarter due to a lot of hard work by all the people on the team.
As you can see our sales grew faster than we had thought or than were estimated coming in at 6.4% growth but very close to the pattern that Dan and I had talked about on the fourth quarter call, very similar to the pattern. What we’ve seen is geographically its spread wide.
We’ve seen improvement in every geographic area of the country and internationally we’ve seen nice improvement month to month, so its not coming back from just one area or one group of customers, its very widespread. It seems like somewhat of an economic rebound, not fast, coming back slow but it is more positive.
And I have been out with a lot of customers in different companies recently and I’m hearing more of that, that people are becoming slightly more optimistic about the future. From an end market standpoint our manufacturing customers grew at 16% year over year so very nice growth there but our construction, our non-residential construction customers actually dropped 15% year over year and so that’s very much a concern and right now we don’t foresee that coming back much in 2010 if at all.
And so we’re really looking beyond 2010 for some good growth, meaningful improvement in the non-residential construction customers. Fortunately they only make up less than 25% of our business, but still it’s a meaningful hit and I believe that’s why we’re not breaking out of the improvement pattern that we talked about.
I thought we would actually go above the pattern but the construction is holding us back somewhat. But all in all, I think we’re making nice improvement sequentially from a sales standpoint. And its also encouraging that its widespread geographically.
From a gross margin standpoint we talked about three different areas, inflation, rebates, and incentives and then our regular point of sale or sales margin over the counter. For this first quarter inflation was pretty much neutral. We’ve kind of reached the point where we’re kind of annualizing over last year where it was.
Going forward though steel prices are going up and we see that will be coming into our selling prices somewhat in the second quarter but more in the second half of this year. We’re watching steel very closely trying to determine how much we should be buying and how long we think this will, if it will continue to go up and right now it appears that it probably will for a while.
There’s a lot of Asian demand for steel. On the rebate side we picked up about 120 basis points, March came in 51.1, so 120 basis points improvement quarter to quarter, 35 basis points came from our rebates and that will continue to improve as we go into the year as that inventory makes up more of our, those purchases make up more of our overall inventory.
So that’s a tailwind that we have going right now and we expect about a 70 basis point improvement for the year so that kind of plays out into the second, third, and fourth quarters. But the most positive thing on the gross margin is what we call our point of sale margin, POS margin, was up 85 basis points for the quarter and that’s about transactions at the counter.
That’s about passing price increases or just getting better at how we transact our business. And so that’s a very positive sign going forward and we’re very optimistic that we’ll continue to see improvement in our margin.
From an expense standpoint I have to applaud the team. I think most people have done a nice job of controlling the expenses, looking at the little things. The big stuff is easy to find, it’s the little every day transactions and saving a few dollars here and a few dollars there that really make the difference, especially at year end because we found a lot of the big stuff early.
We were able to grow our business at almost 6.5% and reduce our SG&A at 2.5% so that’s really the difference in the growth in our profitability against the difficult margin comparisons. We gave up some on the gross margin but we picked it all back up plus some on the expense.
Our labor was down 4% year over year and that’s a positive but the real positive in that is that the bonuses grew substantially. Our district managers, which are the group of people that oversee the stores, there’s about 200 of those, of that group, 208 people I believe, their bonuses more than doubled from the fourth quarter.
So that’s very positive. We’re also in a position to start contributing to our 401K match again which formula where we don’t contribute unless our pre-tax earnings is greater than 16% and because we have that we were able to contribute $800,000 to our 401K match. So labor was down 4% but bonuses are up and the 401K match is back in place, so the morale should be good and we’re very, very positive, good sign of what we’re doing and good sign of the work that’s being done in the field.
Another positive was we were able to hold our inventory flat for the quarter, actually reduce it about a million dollars from the fourth quarter. Year over year we’re done 9% or just over $40 million. Again good work by the team. We’re going to see a little pressure as steel prices go up in the second half of the year, but even with that pressure we think that we can manage our inventory without much increase at all throughout the 2010 calendar year.
New store openings, we opened 29 stores in the first quarter, about what we had said that we’re going to be conservative in the first half of the year and then if business trends continue to be strong we’ll open it up in the second half. We see the second quarter with similar store openings, somewhere in that high 20’s, maybe low 30’s.
The quarter will start out very slow, April if any, we’ll have one or two stores. I’m not sure. We have a big customer show in Indianapolis this week. We started late with Easter and then we have a big customer event which really takes the time of almost all of our people. So April will be very slow but for the quarter we’re looking at about, somewhere around the same number as the first quarter, around 30 openings, which we’re comfortable with.
At that pace, if we kept it all year it would give us 5% openings, but if things pick up we’d turn that up a little bit in the second half of the year. We also see that we’ll be doing some hiring in the second half and that will only be in the store locations. We don’t foresee any additional support staff, even in distribution.
We’re working very, very hard, our distribution people are, to find new and better ways to run their distribution centers, providing a high level of service without adding a lot of additional expense. There’s a lot of motivation out there because these people get paid off the way they manage their expenses and right now they’d like to increase their bonuses and the best way to do that is productivity.
There’s no better way in distribution to improve their pay than becoming more productive. So that’s a real positive. So in summarizing what we see for the second quarter and going forward into the year, we see improved sales growth. We think our daily numbers will improve throughout the second quarter basically what we had talked about in the first quarter staying right on pattern, the historical pattern.
We see our margin improving again in the second quarter, up from where we ended the first quarter or reported in the first quarter. We see holding our inventory flat for the second quarter and depending on what steel does, we think we can hold it flat for the entire calendar year or very close. We won’t see much build in inventory this year because we’re doing a lot of things to try and become more efficient with the use and still provide very good customer service.
We’ll open, as I said, a similar number of stores and we will be doing some hiring so if you look at your models and you look at where Fastenal is going to be at the end of the second quarter, those are some things that you can consider when you’re doing your work.
With that I’m going to turn it over to Dan, Dan is going to give you more in depth information on what we saw in the quarter, thank you very much.
Thank you Will, and good morning everybody and thank you for participating on our call. As Will touched on, two important factors in the quarter, our sales trends continued to improve and the gross margin percentage improved from what we saw in the fourth quarter.
As Will mentioned our end market information, our manufacturing business is coming back nicely as we expected. Non-residential is going to continue to be a headwind for us as we go through 2010, at least we believe it is.
On page two of the release we talk about some of the mechanical pieces of the business, the growth of stores over a certain age. Very pleased to see the progress we made in the March month especially as it relates to our five-plus year old stores. Those stores historically are much more economically sensitive because of the market share they have in their local market and that group of stores grew 7.5% in April and we hadn’t seen growth out of that group of stores since late in 2008.
So it was nice to see that group on the positive side of the ledger again. And because of the sales volume of that group, they meaningfully moved our two-plus year old stores, so our same store comps which were positive in each month of the first quarter moved almost 10% growth in the month of March.
The sales trends, the stairway analogy we started talking about last year as we were really looking at, sometimes the year over year numbers become a little bit confusing when you’re in a period of dramatic change in our top line and so sometimes looking at from the standpoint of where am I today, where will I be tomorrow, and the next day and the next day, is a better frame of reference.
On the January call we talked a lot about the sales trends and when you lay out where we were at the end of the year, we really felt that based on historical pattern that we laid out that our growth in March, our daily average growth would be somewhere in the 11%, 11.5% neighborhood.
The Holo-Krome acquisition added about 60 basis points to that number and essentially got us to the 12.1% where we’re at. We slightly beat the trends that we laid out starting in January. If you follow that progression, and in the press release they also introduced not only the mechanical view of the plus percent or minus percent month to month, but a graph that starts it out and you can see on that that our 2010 to date numbers are trending very closely to that past pattern that we’ve talked about.
We believe our sales growth will based on that trend, will hit the high watermark as we’re going through the second quarter and into July and then as history would say, our daily average number we believe will peak out in the September/October timeframe which will set us up then for 2011. But very pleased thus far with the trends in the pattern relative to the historical pattern and as Will mentioned, if construction were helping us out at all, we’d be in a position to be beating that trend line and beating it nicely.
The pathway to profit, I’m happy to say we’re back on the path and tried to incorporate a few more details of headcount numbers and store locations so you can get a good view from our business. In first quarter of 2007 the quarter immediately before we started the pathway to profit in April of 2007 and where we are today, if you look at some of the pieces since Q1 of 2007, our store count is up about 15.5%.
Our store FTE headcount is up about 10% and our remaining FTE including distribution, manufacturing, and support, is down about 7% and that plays into what we had talked about when we started the pathway to profit, that it was really a top line growth model that we believe would allow us to leverage our infrastructure, leverage our support cost, and drive our operating margin up over time as our average store size grew.
In 2009, it put quite a damper into our ability to grow our average store size, in fact it contracted in 2009, but the pathway to profit and what we laid out in 2007 we feel is committed to and as strongly about today as we did then, with the benefit of a few, now three years of history under the pathway.
Gross profit margin as Will mentioned we improved 120 basis points from where we were in Q4 of 2009, largely by our transactional margin, our point of sale margin improvement and in a piece also from vendor volume allowances, rebate programs, etc.
As Will mentioned we anticipate that portion continuing to improve mechanically whereas the transactional margin we believe will continue to improve because of execution and I believe we’ve positioned ourselves well as we go into Q2 and Q3 to continue to improve that because we still are about 180 basis points below where we were first quarter of 2009 and we want that back.
Looking at the operating and administrative expenses, did I believe a nice job with that. The total payroll costs as Will mentioned, down from a year ago despite the fact that our bonus payouts were nicely increased from what we saw in most of 2009 as well as the 401K contribution. Occupancy improved year over year, that’s one we still need some work on.
We still need work on the base front side of it, improvement was largely centered on the fact that our store personnel and our district personnel did a nice job of getting green and when I talk about getting green, I’m talking about the money kind of green and the fact that they’re just being smarter with how we manage our heating and cooling costs.
They’re being smarter with how we manage that when we’re not at the locations and we lowered our utility costs year over year despite the fact that fuel prices are moving upward and so I believe that’s something that’s a sustainable item. We’ve done nice progress on lowering our base rents but we still need to push hard on that because our goal under the pathway to profit was to lower over time as our average store size grew, our occupancy cost as a percentage of sales from just over 600, 650 basis points down to about 400 basis points as our average store size grows.
And so we still have some work to do there but we have made nice progress over the last 12 months. Working capital again came in very much in line with what we were thinking. The accounts receivable on a year over year basis grew actually nominally better than our sales growth so we obtained a little improvement in our days out and our inventory we continued to manage that very closely and will anticipate that, as Will mentioned, continuing through the balance of the year.
Because of the improvement in earnings and the working capital management, did a nice job with our operating cash flow. We produced 141% of sales in operating cash. If you take out our capital expenditures we produced 128% of earnings in free cash flow, operating cash minus capital expenditures.
With that I will turn it back over for the question-and-answer session. Thank you.
(Operator Instructions) Your first question comes from the line of David Manthey - Robert W. Baird
David Manthey - Robert W. Baird
Really strong contribution margin in the quarter, come up about 38%, how should we think about that going forward both in the near-term and the longer-term as you start to open stores and you get hiring again.
I look at that for the balance of the year and I consider that a number that we’ll continue to produce actually above that level because of, as we get into the later part of the year, the dynamics change quite dramatically on the gross profit side.
And the fact that the top line growth on a year over year basis we believe will continue to improve and those two pieces combined with the position we’re in right now from the standpoint of operating expenses, we’re in a very good spot to manage from I believe puts us in a great position for incremental margin.
David Manthey - Robert W. Baird
And then a quick follow-up, could you talk about the impact of pricing on sales in March and kind of how that progressed through the first quarter and just how we should think about that going forward.
We look at inflation as about neutral. We haven’t increased our prices really in the last year. A few here and there but overall we have not done a price increase. Going forward in the second quarter we may see some, later in the year will probably play out to more price increases really due to what’s going on with steel.
But as our fastener business, a high percentage of that is imported so it’s a slower process that takes us eight to 12 weeks to bring it into inventory. Its slow turning inventory so if you looked at the entire year, the first half very little inflation, and the second half we’ll probably see some positive price increases and historically we’ve done a good job, or been able to pass that through to the customer in the last couple of times when its gone up so we’re comfortable we can do that again.
Your next question comes from the line of Jeff Germanotta – William Blair
Jeff Germanotta – William Blair
Congratulations on a great quarter gentlemen, a few questions, the first one April sales trends, can you talk about what kind of start we’re off to in April.
I think we’re going to stay away from April but we’re still comfortable that we can stay on our pattern. April is early is tough to read because Easter came early. Its kind of goofed up but we’re very confident that nothing has changed since the first quarter.
Jeff Germanotta – William Blair
Then the inventory, I’m curious to explore your statement that you hopefully won’t grow inventory dollars a lot this year because I would guess that your sales growth for the year would be somewhere in 10 to, at the conservative to a 15% range at the high, how do you not grow inventory in that environment.
Like selling more than you buy.
You’ve been the one who’s pointed this out to me so painfully, no, our trend over the last eight to nine years has been that we’ve gotten less efficient with our inventory over a long period of time and Dan and I have spent a lot of time with a lot of our leaders talking this through and looking for opportunities and we believe that we can make better use of the inventory we have. Even if we grow the entire year, or spend the entire year without adding inventory, we’re still not at a real hot spot for inventory turns historically speaking.
And so we’re going to work very hard and we’re not going to do it by lowering service to our customers, we’re going to look at all of our inventories, see what we could reduce and how we can just become more efficient.
I’ll just add to that, if you really look across all of our stores, there still is, if you think about the massive changes we’ve made to our distribution model over the last three, four years, with the expansion of Indianapolis, the automation of Indianapolis, the improvement of our trucking lanes and our trucking routes in general, there’s still a fair amount of what I would call redundant inventory scattered across our stores that we have good distribution support on now.
And the transaction frequency is low enough and its an inventory item that isn’t a problem-solver. The one thing we’re always very cautious of or very conscious of when we’re looking at what we want in our stores, is the inventory that at the end of the day solves problems for customers because that’s the stuff you need right then and there.
And having a base of inventory in the store that would service, that would get the customer started if they needed it right now, so maybe they need 2,000 of something, we have 800 in the store but we can get the 1,200 in by 6:30 tomorrow morning off the distribution center. We’re being very conscious of balancing that over time. Because the inventory reduction of 2009 really what we did is we eliminated the inventory growth that occurred in 2008 when the economy shut off.
Your next question comes from the line of Brent Rakers - Morgan Keegan
Brent Rakers - Morgan Keegan
There was something you could maybe expand a bit on the 85 bps improvement in point of sale pricing, maybe as the reference point being how much of that do you think is relief from kind of the competitive pressure that had existed this past year and how much of that may have been specific company initiatives or focus and then maybe if it’s the latter, could you maybe expand upon a couple of those initiatives.
Well you know its almost impossible to measure the relief from competitive pressure because we’re doing thousands of transactions in thousands of locations. But anecdotally you listen to people, you talk to people, and there’s not as much crazy price, we’re not hearing the stories that we heard a year ago about this guys giving it away or these prices are ridiculous.
That has toned down a lot so there’s something to that but its like I said, almost impossible to measure. The initiatives have been about, we’ve done a much better job of dissecting our business and thinking at the transactional level, not looking at a district with 10 stores, and saying, hey your margin is up a point or down a point.
We’re breaking it down to the transaction and saying, why did we do, discount at this level for this type of customer. And about nine months ago Dan tapped a couple of young guys that worked for us for several years, two bright guys, and said, would you like to work for me and do nothing but break this data down and tell us where we’re doing a good job and where we aren’t.
And as you can guess we’ve discovered a lot of areas, and we’re very decentralized, you have to understand that our people make prices in the field, some are really good at it, and some aren’t. And so part of this improvement is coming from their hard work just identifying opportunities, identifying prices, or stores, that are selling the same product to the same type of customer for five or ten or 15 points less.
And that’s where a lot of the improvement is coming from. So it’s the combination of a little less pressure from the guy next door, or the competitor, and more good information to drive our middle managers, our district managers, to make better decisions, or train better decision making.
One thing to keep in mind when you look at 2009 and the margin decrease, there was some over lying mechanical things going on, with the rebates, the vendor allowances we talked about but when you really look under the hood a lot of our decline did come from 2,300 stores. It came from about 40% of those stores.
Brent Rakers - Morgan Keegan
Just one more if I might and I think you talked about some numbers in terms of the impact of gross margin percentage on SG&A and comp, if you could just talk about this 120 bps impact and how much of that might have moved SG&A up in terms of dollars in the quarter.
If you look at it, the gross margin improvement, probably 25% of our store labor cost increase, gets a little difficult to measure sometimes because we’ve also flipped from contraction to growth and there’s a growth component too but the gross margin is the biggest driver.
Historically when we look at, if we add a dollar of gross margin, by the time everybody that’s paid on that gets paid from our product development to the district to the store, we pay out about 25% of any incremental growth in gross margin in some kind of compensation and so of the 120 basis points we probably paid out roughly 30 bps of that out in increased commissions or bonuses to different people.
Because its all about the hierarchy of how the bonuses get paid and this is a great problem to have when it goes up because its great for employees.
Your next question comes from the line of Adam Uhlman - Cleveland Research
Adam Uhlman - Cleveland Research
It looks like you’ve done a really good job of containing the losses across the new stores over the last couple of quarters, could you talk about what’s unfolding there and then on the flipside, you’re largest and oldest stores, the margin contracted a bit relative to a year ago levels, can you talk about what’s happening there.
On the small stores, it was really an initiative. With pathway to profit we had put in more investment in some of these small stores, extra trucks, extra people and in the downturn we didn’t seem to be getting much benefit so in July of last year I went to some of my director parts, Dan included, and we divided up the regions, we each took two or three of them, and just started working with the regional’s on the identifying opportunities in these small stores.
Kind of a game, not in a, it was fun because we had a project, not a game and we really focused on, as you can see we reduced our losses from basically by about 10 percentage points. So we did a really nice job there and we think that’s sustainable and actually we think we’ll improve from there because the first quarter is a little difficult because you have your higher occupancy and lower revenue.
So what it really was, was purely attention. On the larger stores it was reduction in gross margin. If you look at our growth, a lot of its coming from manufacturing, a lot of the manufacturing is large customers that typically run at a slightly lower margin and a lot of that business runs through those bigger stores.
So the bigger stores have given up some margin but when you can report 25%, 26% operating profit I’m not as concerned if I give up a half or a point of gross margin when you can still get those kinds of returns. As Bob Kierlin, our founder has always beat into my head for 30 years, Will its not about the gross margins, its about where it comes out on the return.
Or even the pre-tax, its about what we get on return on that business and those businesses are highly profitable and great businesses to own.
Adam Uhlman - Cleveland Research
And then just a follow-up, you need to report what your strategic account or the large account growth was, can you talk about what that was in the quarter.
We’re waiting on that information but from what are the preliminary numbers that I’ve seen, they’re actually tracking slightly ahead of the company and the reason for that is, is that a lot of that is driven by manufacturing. And so they’re ahead, we’re trying to sort out and see as far as the construction and the manufacturing business, they are running ahead of the company numbers, but I don’t have the exact number today.
Your next question comes from the line of Tom Hayes – Piper Jaffray
Tom Hayes – Piper Jaffray
Great quarter, I was just wondering if maybe you could talk a little bit about what we talked about previously, the opportunities that you see for picking up government business both on the federal and the state levels.
We think there’s a tremendous opportunity not only federal and state but also the local level, the schools, all the cities and things like that, there’s a tremendous amount of spend there and we’ve openly admitted that we were behind in that to some of our competitors.
So what we’ve done is we’ve restructured that internally, we tapped one of our regional vice presidents that actually has a, he was the guy that got us into it 10 or 15 years ago, as a district manager, he opened our first government store, that was John Soderberg, he was running our Seattle region.
He’s going to be moving back to Winona, he’s already taken the role, will be moving back to Winona, and really increasing our efforts, increasing our sales force. What we’ve determined is that we need specialists to really, especially the state level more than anything, to get involved in those and understand the pricing, understand the programs.
And so we’re going to renew our efforts, we’re going to work hard, but the opportunity is tremendous when you look at the percentage of the GDP that’s controlled by some type of government spending. We’re just not getting our share at this point but we believe we’re really well positioned to do that because we have the model where we can ship direct from a warehouse if that’s what the customer or the state wants, or we can ship from a local store and a lot of the smaller entities really prefer the local service.
So we have kind of a one-two punch that some of our competitors don’t have.
Tom Hayes – Piper Jaffray
And then just a follow-up if I may, you’ve done a nice job of building up your cash balance and I noticed you didn’t use any available cash for any of your stock repurchase, I was wondering if you could maybe provide some of your thinking on uses of cash going through the year.
The cash has continued to build nicely both within cash and marketable securities, historically we’ve done limited buybacks, we’ve been doing a little bit more of that the last three, four years, have increased our dividend in a meaningful fashion. We did a supplemental dividend back in 2008 when the economy first slowed down.
As I look out to 2010 and we will continue to look at that from the standpoint of do we increase that dividend because our ability to generate both operating cash and free cash is quite substantial and we’ve only improved that over that last couple of years.
But outside of as you know historically our MO has not been one of being [inaudible], and so the excess cash we accumulate over time that we don’t need in the business to fund working capital, historically we’ve returned to our shareholders.
Your next question comes from the line of Sam Darkatsh – Raymond James
Sam Darkatsh – Raymond James
Congratulations on the good results here, my first question I was hoping you could expand a little on the non-res construction side of the business, I understand obviously that’s going to be a lagging factor as we go through the year, but if the declines there are moderating and the comparisons later in the year get easy enough where it kind of implies you could see that business flat by the time we get to Q3 on a year over year basis, am I looking at that correctly.
We probably won’t see it flat by Q3 because we had some very big projects that were driving that in the second half of last year, mainly energy, some Bechtel jobs that we’re selling heavily into. We can see it flattening out but our concern is there are a lot of starts and there’s a lot of concern in the commercial real estate business which is really the start of our commercial development.
Where we do see some positives, there’s a lot of talk about energy, there’s still a lot of money with a little higher oil prices, there’s a lot of money going into refineries and things like that. But you really get the bump that we need from construction, we need small to medium jobs starting up in communities like Winona and all over the country.
The only construction that we’re seeing outside of big energy right now is either healthcare or government. We see hospitals and clinics getting built and that’s very good business for us. We see government like here in Winona, there’s a big new health complex at the university getting built which is good for us, but we’re not seeing the Targets and the Wal-Marts and all these other strip malls that were being built a few years ago.
So it may flatten out, my comments were more based on its just, we don’t see a lot of rebound where we’re going to be growing that business at 20%, 30% in the next two to three quarters, or 10% to 20%.
Sam Darkatsh – Raymond James
And then my follow-up is on the other side of the business, from your manufacturing customers, wondering if you’re seeing any restocking at this point, and whether or not you expect that to happen over the next three to six months.
I have not heard much about restocking. I’ve talk to a lot of companies, my thought right now or the gut feeling that I have is that there’s not going to be a lot of restocking soon because there’s still uncertainty in our economy. Most of the people I talk to are going to be very slow to rehire people unless its for production, that’s what they’re telling me. We’re not going to add a lot of support and they’re not going to spend any money they don’t have to.
And I think I said this in the third quarter conference call, it was one of the earlier ones, I don’t foresee a lot of restocking at any point because people learn that they can live with less and that’s actually very good for our business if they don’t restock because if you have local inventory, like a Fastenal store, and you can depend on that then you don't need inventory.
The less they have the more our value proposition plays well for us and plays well for them. But I really would be surprised to see a lot of manufacturers coming back and putting in big inventories of things that they maybe could live without at this point.
The one thing we are seeing a nice improvement on is a lot more interest in our vending systems because we can control spend and they know exactly what they have but I’m very bullish on vending, it’s a very small part of our business but it just makes complete sense to me where you put a small store, essentially a store of 10 or 20 or 100 items, into a plant, a warehouse, a site, and then they have complete control and it reduces what they need.
Your final question comes from the line of Hamzah Mazari - Credit Suisse
Hamzah Mazari - Credit Suisse
Just one question, given the ramp up in the demand environment you’re seeing and you talked about stocking inventory at the DC during the quarter but you also mentioned inventory levels are likely going to stay flat from here depending on what you see with steel, do you still expect working capital to be a source of cash this year, how should we think about that.
Working capital will be a little bit of a drain because of accounts receivable as we go through the year, because you saw that even in the first quarter, we consumed some cash to fund our receivables and that will continue as our seasonality of our business ramps up into second and third quarters. But outside of the accounts receivable standpoint we should be in a good position with our working capital and its ability to throw off cash.
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.
Again thank you everybody for participating on our call this morning. Hope you find this call combined with our release informative in understanding the Fastenal business. Have a good day.
Thanks for your support. Good-bye.
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