Good day, ladies and gentlemen, and welcome to the Fastenal Fourth Quarter Conference Call. I would now like to introduce Chelsea's conference call, Ms. Ellen Treaster. You may begin.
Welcome to the Fastenal Company 2016 Annual and 4th Quarter Earnings Conference Call. This call will be hosted by Dan Flores, our President and Chief Executive Officer and Holden Lewis, our Chief Financial Officer. The call will last for up to 45 minutes, and we'll 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 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, 2017 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 factors carefully. I would now like to turn the call over to Mr. Dan Flores.
Good morning, everybody, and thank you for joining our call today. And I'll start by just apologizing for the state of my voice on today's call. I'm recovering from a bit of a cold, so I'll try to speak clearly. My comments this morning will be relatively brief. I just want to touch on 5 points.
First off, we had an upbeat finish to a tough year. Secondly, I believe we've changed the trends of our business. 3rd, I believe we've improved the health of our business. The 4th and 5th aren't comments so much on 2016, but I think they're comments that we should always remind ourselves of. One is, we have great people close to the customer, and we have great people behind the scenes to support our local business.
Those are structurally important components to the success of our business today, historically, and I believe going forward. In regards to the upbeat finish, our sales trends and our gross profit stabilized and or improved depending on if you're looking at a comparison to Q3 or comparison to Q4 of a year ago. And we grew our earnings. And for a new CEO, you can appreciate the importance that comes with having a release that doesn't have some either parentheses or dashes in front of a number or 2 after we've come through quite frankly a pretty tough 2015 2016 period. Secondly, our trends have improved.
In both in the last several years, primarily 2014 and 2015, we had significantly added people cost to our organization as we grew our headcount, primarily at the store, but throughout the organization. These costs, when I look at the trends that come with it, had about peaked in the Q2 of 2016. And as we have gone through the year, those costs have cycled down a bit. And I believe we are poised quite well to manage that expense as we go into the New Year. We also have added occupancy cost quite dramatically in the last several years.
A piece of it relates to our vending platform, a piece of it relates to the automation we put into our distribution centers And a piece of it relates to our store network. There's always some built in inflation in the store network. And our job every day is to manage that well. But whether it might be property taxes or some other or some CAM charges or some inflation in the lease, we have to be very mindful how we manage that in the long term, especially as the business is evolving. And again, similar to the people cost, I believe we exit the year in a much better spot.
But we still have some work ahead of us on the occupancy side of the equation because we want to plan for and allow for growth there that comes from a continued expansion of our vending platform. In regards to business health, we upgraded around 2,100 stores to our CSP 16 format. And while we haven't talked about it a lot on our calls, that's a tremendous undertaking when you look at our store based business. And this 2,100 upgrade was primarily in our U. S.-based business.
We have some upgrades for our Canadian business as we enter 2017. We also upgraded over 50 excuse me, upgraded or optimized, if you will, over 50,000 vending machines. And that's more about improving our cost to serve than it is about a revenue enhancer. There are some revenue improvements because of it. But we had rapidly rolled out those 50,000 plus machines over the last 5 years.
And in 20 16, we took the opportunity to go and visit each and every machine and to challenge how we could be more efficient with that machine. And I believe that will that improves the health of that vending business and improves our ability to serve and grow the business in the future. We also changed our mindset over the last several years as it relates to On-site. We've been our first On-site occurred in 1992. And at the end of 2014, we had around 200 Onsites that we've slowly grown in our business.
If I think of 2014, just under 5% of our district leaders and we have today roughly 255 district managers across the company. Just under 5% of them signed an On-site. We signed, I don't know the exact number, it was around 14 on sites that year. In 2015, we took a big step forward and around 25 percent of our district leaders signed an on-site that year and we signed around 80 on sites. In 2016, Fastenal has a hallmark of finding great people, challenging them to be successful but not micromanaging.
In 2016, over 50%, I believe 54% is the exact number, but over 50% of our district leaders had an On-site signed in their business. And that translated into 176 signings during the year. Our goal going into 2017 is quite simple, to keep moving that participation up and for 80% of our district managers, our district leaders to have an on-site signed in their district. If we're able to accomplish that, we believe we could sign somewhere between 275300 on sites. We believe that's an achievable number from a signings perspective.
It's an absorbable number from an execution standpoint because very much of the work is spread across 255 business units, 2,600 stores not concentrated in 1 small support group. So we're very excited about that. And we also believe with the CSP-sixteen in place, the team that helped roll that out is there to also help with the implementation of our on-site. So we believe we've improved our capacity to implement. Finally, we talked about excuse me, 4th, we talked about great people close to the customer.
75% of our employees know our customers on a first name basis, and yet we have a very efficient cost structure. I don't believe any other nationwide distributor can lay claim to that and we're proud of that fact. Finally, the team behind the scene. Our team is strong. We are wired for change and we're frugal.
All of these things help us serve our customer well. I'll close with one thought. We believe in our people. We challenge each other to improve and we challenge each other to grow each day. With that, I'm going to turn over to Holden.
But before Holden starts in, I just want to so this is Holden's 2nd earnings call. Many of you know Holden Lewis from his previous career as a sell side analyst. He'd covered us for quite a few years. We knew Holden well. We're not quick to bring in somebody from the outside into our organization in the senior role, But we really liked Holden's ability, we felt to culturally fit with us.
And the fact that he could bring a new set of eyes, a new critique and a tremendous skill set to our organization. So with that, I'll
turn it over to Holden. All right. Thank you, Dan. Good morning, and thanks for joining the Fastenal 4th quarter call. I'm going to begin with a quick recap of our full year 2016 results and then I'll move on to a discussion of the quarterly performance.
So in 2016, Fastenal generated $3,960,000,000 in sales. That's up 2.4% from 2015. We did have an extra day in the year. So on a day's basis, we were up about 2%. I'm not going to belabor the tough conditions that persisted through the year.
I feel like that's well understood by you. But I would like to highlight some of the drivers that allowed us to grow despite it. First, on vending. We finished 2016 with 62,822 machines, that's about up 7,300 units or 13% over 2015. At this point, 46.1% of our sales now go to customers that use vending.
So it's fairly well represented in the field. Revenues to our machines increased by more than 10% in the 4th quarter. Signings of 18,059 machines were up 1 percent year over year. Note that these figures exclude the nearly 15,000 units that we installed related to our lease locker program. Despite all those successes, vending did not quite reach the goals we'd set for in 2016, but note that signings were at a 3 year high, we think that with the distractions related to our optimization efforts and the lease locker initiative now past us, we're targeting more than 20,000 signings in 2017.
Secondly, on our Onsites, we signed 176 new agreements in 2016, a little shy of our goal of 200, but substantially above the 80 that we signed last year. And this frankly contributed to driving sales through these sites up at a better than 25% rate for the year. We're gaining momentum here, and we are targeting 2 75 to 300 signings in 2017. With respect to national accounts, we signed 190 new agreements, that's up 14% from 2015. Even with softness among our largest 100 customers, these signings contributed to our total national accounts revenues being up by a bit more than 4% on the year.
We still see significant opportunity with new and existing customers and even with national accounts now being about 47% of our total sales. Lastly, the SKUs related to our CSP 16 initiative, they also grew at a little bit better than a 4% rate in 2016. So we feel good overall about the strides that we're making in our growth drivers. We remain convinced of their effectiveness in driving share gains, and we look forward to further progress in 2017. Margins in 2016 were a challenge.
Our gross margin finished the year at 49.6%. That's down 80 basis points, which is primarily from mix and pressure on product margins, the latter being particularly early in the year. Our operating margin finished 2016 at 20.1%. That was down about 130 basis points. In addition to the gross margin decline, occupancy was up as we continue to invest in our vending initiative.
We're likely to remain challenged by mix and vending related occupancy, but some of the product pressures that we experienced in the first half of this year have eased at this point. We've been tighter with costs in the second half of twenty sixteen and some of the minor expenses for things like store closures or CSP 16 rollout hopefully don't recur. So as a result, we think we're better equipped to defend our margin in a slow growth environment or even expand it if growth accelerates from here than was the case in 2016. Our interest expense on the year roughly doubled, while our average share count was down 1%. Both those facts reflect our share buyback activity over the last 8 quarters.
Our tax rate was down from 37.5% to 36.8% in the year, which really just owes to some jurisdictional shifts as well as the resolution of certain state tax matters. It all blended into a 2016 EPS figure of $1.73 which was down about 2.3% for the year. Now moving on to the Q4 results. Total and daily sales in the 4th quarter were up 2.7%. That's a modest acceleration from the prior 9 months.
We can't ignore the easier comparison relative to last year's Q4, when our daily sales rate was actually down 2%. Still the December daily sales were up 3.2% and that was likely understated because of holiday timing. So in contrast to a poor November, frankly, we considered December to have been as expected. Now the details of the quarter remain a bit of a mixed bag. Growth from our top 100 accounts remained flattish on weakness among general industrial companies.
The proportion of stores and national accounts that were growing in the Q4 was largely unchanged from the Q3 and construction fasteners actually weakened in the period. So in the end, growth of 1.6% in North America really wasn't much change from the prior period. On the other hand, it's notable that heavy manufacturing was up 2.3% in the 4th quarter. That's the first time that's been up since the Q2 of 2015. Similarly, OEM fasteners were weak, but the down 2.8% was also the narrowest decline we've seen since the Q2 of 2015.
Further, I would note that there is a more favorable tone surrounding process industries as we enter 2017. We're going to continue to assume the sluggish business conditions that have prevailed through 2016 are going to continue into 2017, but there does remain and there remains a great deal of uncertainty on a number of fronts. But that said, the environment has become more optimistic. Our gross margin was 49.8 percent in the 4th quarter. That's down 10 basis points versus the prior year, but it's up 50 basis points against the Q3.
With respect to the year over year change, mix continues to weigh as the fasteners fell 180 basis points to now represent 35.6 percent of our sales. Given this, we view the stability in the period favorably. There was no single meaningful offset rather it was small improvements in areas like purchase discounts and freight that benefited the quarter relative to the prior year. As it relates to the Q4, we were pleased to see the margin rebound from the Q3 of 2016. Similar to the annual result, this is less from a single item than it is from the accumulation of many small but favorable improvements, including better margins on non fasteners, a higher mix of exclusive brands, building revenue associated with our lease locker program, better purchasing and other variables like that.
A lot of these things worked in our favor at the gross margin in Q4, but there is nothing in this improvement that strikes us as one time or temporary in nature. And at this point, we would characterize the margin environment as stable. Our operating margin was 19.3% in the 4th quarter, also down 10 basis points on a year over year basis. SG and A as a percentage of sales was unchanged at 30.6 percent of revenues. Payroll, which is 65% to 70% of our SG and A, was down 30 basis points as a percentage of sales.
Persistently sluggish demand has had two effects here. First, they continued to temper the incentive pay in the 4th quarter. 2nd, we spent much of 2016 letting attrition unwind the rise in staffing we experienced in 2015. We finished 2016 with headcount being down 5.4 percent or down 4.1% on an FTE basis. These variables more than offset the effect of higher health insurance costs.
Occupancy, which is 15% to 20% of total SG and A was up 30 basis points as a percentage of sales. Vending was the primary catalyst behind this, and we don't expect that dynamic to change in 2017. We did expect efforts to rationalize our store base in the second half of 'sixteen would provide a larger benefit than wound up being the case, and that's going to be a point of emphasis for our company in 2017. In 2016, we trimmed staffing in stores, we invested in growth drivers and technology and used our balance sheet to invest strategically in inventory. We like where our cost structure sits as we exit the Q4.
We're going to continue to invest in our growth drivers, but given the investments and rationalization we've already made, we believe that with a little faster growth, we can leverage the income statement in 2017. Finally, we generated $133,000,000 in operating cash in the 4th quarter. That's down 8 point percent versus last year. It also represents 116 percent of the quarter's net income, which is below last year. This decline year over year reflects 3 things.
First, in the Q4 of 'sixteen, we took advantage of favorable year end buys. 2nd, our payables were much higher in the Q4 of 2015 related to adding CSP-sixteen inventory in that period. And then 3rd, our receivables fell at a faster rate in the Q4 of 'fifteen due to the relatively sharper pullback in demand in that period. These factors all served to inflate the cash flow in Q4 of 'fifteen relative to Q4 of 'sixteen. That said, we generated free cash flow after dividends of $18,500,000 Our capital expenditures were down 23% year over year and down 63% sequentially as we wind up the rollout of our lease locker program.
As a result, we reduced our net debt by roughly $21,000,000 and retained flexible leverage of net debt being 12.5 percent of total capital. We expect cash generation to be improved and free cash flow after dividends to be positive in 2017. We don't anticipate a CSP program of the sort that we had in 2016, and we expect capital spending to come in around 120,000,000 dollars With that, we'll turn it over to Kevin to take your questions.
Our first question comes from Robert Barry with Susquehanna.
Hey guys, good morning.
Good morning Rob. Morning.
So I guess the broader question is just to provide a little bit more color about what you're seeing in some of the key end markets, in particular heavy and light manufacturing in oil and gas. But also more specifically, I noticed But also more specifically, I noticed you updated the monthly sequentials. And I think if you plug those into the model, it implies 1Q growth would be just over 5%. I know that's not meant as an outlook, but is that how you're thinking that growth could track in 1Q?
Sure. So to address your second question first, we all know how the math works. Yes, we've updated the sequentials. As we go into 2017, we're going to begin discussing those sequential rates of change in terms of the prior 5 year averages as opposed to what we've done historically with 'ninety eight going from 19 98 forward. So the numbers are what the numbers are.
I'll let you plug them in and kind of figure out where it is. But I think that you're on the right track in terms of how that should fall out given those sequential rates of change. On the second question, where we saw the most encouraging signs, I would say, would have been in the process industries. And we go about this a couple of ways. We listen to our regional vice presidents and what they're seeing in the marketplace.
And then we look at our top 100 accounts to get a sense of which areas are doing well, which ones are not. And what I would tell you is the general industrial companies on our list, they're still challenged. That's been the case most of the year and I'm not sure that I saw or have heard any meaningful difference in the Q4 as it relates to general industrial firms. As it relates to the process industries, I would tell you that a lot of those, including oil and gas, looked better among our top 100. And then if you sort of listen to some of our RVPs talk about energy, there definitely is more of an enthusiasm and some more encouraging facts on the ground in those regions that are heavier in oil and gas.
So what I would tell you is, I don't feel like the Q4 felt a lot different in a lot of places than what we saw in the Q3, but the notable exception would have been in those process industries in that oil and gas space. As you know, we were surprised by how oil and gas had some legs and did better from here, but we'll see how that plays out. Okay. And then, oil and gas had some legs and did better from here. But we'll see how that plays out.
Right, right. Maybe just my second question, just on the gross margin, nice sequential rise. You listed a number of reasons for the improvement, but one of them was not price. And I was just wondering if you can comment on what's happening in the pricing environment. And in particular, given we've started to see some inflation, and in fact, I think we've seen inflation for several quarters now, how do you feel about the ability to start getting price, especially if some of these end markets are still a little sluggish?
Sure. We've seen the same thing that you have with respect to commodity prices. I would tell you that those increases are relatively new. We've seen it happen before only to sort of retrace, if you will. So I think it's probably premature to be saying that we have clearly entered a reflation period, if you will.
But that said, we're watching it. And we believe that if those raw material increases prove to be durable, we believe that as we have in the past, we will be able to pass that through price increases. Yes, we don't have any reason at this point to think that that would not be a part of the equation. However, we have not at this point taken significant strides to begin that process yet.
Yes. I mean, how much of a lag historically would there be, like several quarters or how do you think about it? Hey, Rob. Yes.
I'm going to chime in so we can keep going through the roster of your questions. Sorry.
Okay. Yes, of course. Sorry. Thanks.
Our next question comes from Andrew Buscaglia with Credit Suisse.
Hey, guys. Congrats on a good quarter.
Thank you.
Thank
you. Yes, can you touch on it sounds like you didn't have a ton of commentary, I guess, in the press release or your prepared remarks just on trends improving. Can you comment maybe what you're seeing through January? And just it sounds like December was a little bit muddled with timing and stuff like that, but just any recent update would be great.
I'm going to just interject one thing and then I'll shut up and let Holden talk. In regards to January, we've learned over the years there are certain places you don't go because invariably what we talk about, we're always wrong. And the question is how wrong. So I'll stop Holden before he starts on January phase. But with that, I'll let Holden have to say.
Yes. And I don't think there's a whole lot to add. Q4 was a lot richer on, Q4 was a lot richer on optimism than it was real progress. But you have to we listen to the people in the field. We look at the same data that you guys tend to look at.
And it's it hopefully will translate into better results as we go through 2017. But I'll just leave it as in Q4 general industrial companies were still fairly slow. And if there was a favorable inflection, it was in the process in the oil and gas industries, and that's very early. So let's see how that plays out. And I don't think that I noted anything that inflected negatively.
Okay. All right, got it. And then, just switching on to the gross margins. Some of the things you had been experiencing with regards to customer negative customer mix, product mix, how are you feeling about gross margins in 2017 versus 2016 just relative to some of those sort of longer term headwinds we had been experiencing?
If you think of the growth drivers we've talked about for a number of years and again growth drivers are I always want to question, our sales plan at the local level is what drives our business. The growth drivers that we talk about serves as the means to the end of how you serve your customer. The impact of we had a a I believe we had a very successful year on taking some first steps, steps that started 1 2 years ago of expanding our on-site presence. All those things continue a pattern that's been in place for 20 years and that is our mix of customers is continually changing. Our product mix continues to move a bit away from FASTERS.
Perhaps we can slow that down a little bit if there is some recovery that helps our FASTERS business in calendar 2017. But the underlying long term pattern is still what it is. And what we need to be smart about every day is identifying those pieces we can grab on to and make a little a decade ago a piece we grabbed on to was freight. In the last 5 to 7 years, a piece we've grabbed on to is our exclusive brands, our private labels and making sure we have a great strategy to support our supplier base and our product mix in serving our customers. And but the underlying trends are still there.
We just need to defend the position every day. And I think we gained some footing on that as we went through 2016, but it was still a tough year to go through 2015 2016, I should say, because the trend has been going on for several years.
Right. Okay. All right. Thank you, guys.
Our next question comes from Hamzah Mazariq with Macquarie.
Good morning. Thank you. Good morning. Good morning. I just had a big picture question around the store network.
How should we be thinking about the store network longer term given the aggressive push on On-site? Does On-site cannibalize any of the store revenues? Just any color on that piece? And then you talked about participation rate going up with district managers on On-site, but could you give some color on the sales cycle as well? Does it take a year or 6 months?
Any color around the On-site business would be helpful.
Sure. Probably the best way to think about the big picture from a store network standpoint is over the last 20 years, we've been quietly growing On-site in some of our Midwestern business units. So last week, I was in Southern Wisconsin, all of our general managers were in. And in that discussion, one of the things that stands out when I think of our business in Wisconsin and Illinois, Close over a third of our revenue in that business unit, about 35% comes through the on-site type of strategy, where we've been incredibly successful over time on developing our business in a broader fashion. But if I think of that business over the last 20 years, we continue to open stores.
We continue to grow our footprint. And some of that stem from the fact that we had things going on. We had non fasteners growing in our business. So a lot of markets that traditionally weren't viable became viable. In more recent years, we made improvements from the vending side of the equation.
But we believe long term, it's a huge market out there, number 1, and we espouse that often. We're not wed to one strategy. We're wed to getting close to our customer where it economically works and providing them a level of service that our competitors either can't or unwilling to do. And we believe it's a complement of both. Only time will tell if structurally the fact patterns of our industry change and it prompts our ultimate store count to go up or go down.
But the market is still there and we need to evolve to serve that market. But history has shown, they're very complementary to each other, on-site and store. In relation to on-site, it's typically a multiyear endeavor. Part of it is us getting it's like anything, it's incremental. So we move when we move in, if you will, in the case of an On-site, it depends sometimes on the product lines we're starting with.
It might move faster if we're moving in with an OEM relationship or a broad bending platform relationship. It might move a little slower if it's a broader mix of products and we're picking up particular commodities as we go along. I believe it's probably in many cases a 2 to 4 year endeavor to get in deeper, maybe it's 1 to 5, but it takes time. And that's one of the points that we stressed earlier in the year is we want to build momentum back into our business and getting traction in the on-site is a big piece of that.
Hamzah, you also asked something about cannibalization. And in fact, we do, generally speaking, take some sales out of the store and that becomes the seed revenue for that On-site. And what we find is that inside of 12 to 24 months that seed revenue has grown dramatically from its original number. As it relates to the store, our expectation generally is that, that store, which now doesn't have to provide a disproportionate service to a single customer, can sort of have its selling energy reinvigorated and then they can go out and from an admittedly lower base begin to grow that business again. And we've sort of altered the compensation with the on-site business to make it neutral from that standpoint.
But the expectation is that the store sort of no longer responsible for that piece of revenue, will go out and find new active accounts and just begin to grow that business again from that new level.
I'll just throw one additional piece in. When I think of the cannibalization, that comment would have been true of store openings for the last 30 years as well. And so on-site isn't a new piece of the equation. Really what we're doing and I think Holden described it best, we're taking some seed dollars where we have a great relationship and we're going after business that historically our store network wouldn't go after because it wasn't geared to service that business given the profile of the gross margin in that business and we need to structurally change our cost components to go after that business.
That's very helpful color. I appreciate it. Just a follow-up and I'll turn it over. How much of your cost of goods sold is foreign sourcing? A competitor of yours mentioned theirs is 15%.
Just trying to get a sense of what you guys run at. Thank you.
So what we have said is that we think that 40% to 45% of our COGS probably derives from overseas. I don't know what the competitor how he's defining the number. I will tell you that of that 40% to 45%, not all of that is directly sourced. Obviously, we have a significant operation with FastCo that directly sources product, but that does not rise to near the level of 40% to 45 percent. So the number that we use includes not only the directly sourced, but also that product that we may buy domestically, but ultimately is sourced from an overseas customer.
But we talk about it in terms of 40% to 45% of our COGS And that's kind of how we discussed it.
Got it. Makes sense. Thank you.
I'll add on one piece there as well. The fastener production moved offshore of North America. So Fast On in 2017, we're celebrating our 50th year in business. Largely, the trends within fasteners were moving offshore well before we even became a company. And a lot of that was driven by the automotive sector back in the late '50s early '60s.
So our percentage is a little bit higher because of the faster concentration in our business. With that said, our concentration wouldn't be any different than any of our peers in the industry given similar product mix. And so I see us as being in a similar boat, if you will, with everybody else with a lower cost structure in our underlying business.
Got it. Thank you.
Our next question comes from Ryan Merkel with William Blair.
Hey, thanks. Good morning, guys.
Good morning, Ryan. Good morning.
So first, Holden, you said with a little faster growth, you could leverage the income statement in 2017. So two questions. What level of sales growth do you think you need to see SG and A leverage? And then secondly, is SG and A growing half the rate of sales in a reasonable goal in 2017?
So I don't think that our original guidance was changed. I think we said that at sort of lowtomidtypeofrevenuegrowth that we'll look to sustain the margin. And if we can get mid to high type of growth, we can expand it. I still think that, that is, generally speaking, where we see the model. In terms of the rate of growth of SG and A, bear in mind that if we do in fact get better growth, then we would expect to see our incentive comp go up.
We're going to continue to invest in vending. And so we have talked about achieving 20% to 25% type incrementals in sort of a lowtomid type single digit growth environment and maybe 25% to 30% type incrementals if you get into mid to high. That was sort of where we were I think in Q3 and we haven't seen anything that actually changes that.
Perfect. Got it. Okay. And then second, back to the Onsites. How are the installations you've done working?
And how much did On-site add to growth in 2016, if you have that number handy? Because I think you were hoping for maybe 300, 400 basis points of growth from On-site this year.
The On-site grew as a category about 25% for the year. But that's including the transfer to cannibalized dollars. Correct.
And that's the challenge, right? So we're up 120. Let me why don't we talk about the specific numbers offline. We have them, but I'm not going to do the math on this form. So why don't we touch base on it offline.
No worries. But just you signed up a lot of Onsites. Are they working as you expected? And are the stores starting to add new active accounts with the freed up selling energy?
Yes. I'll answer that from a standpoint. We took a deep dive look at the on sites that had been turned on and had sufficient history. And for us, sufficient history meant they had to be operating at least 9 months. And so we looked at that to see what's happening in that group.
And we liked what we saw, and we weren't surprised by what we saw. We saw a group of accounts. And the numbers that we really analyzed, it was just over 50 of our on sites that have been operating long enough that we could really get a feel for it. And the trends were solid and it wasn't driven by a few that were pulling it up or pulling it down and which is good to see. It was a good performance, generally speaking, across the group.
We saw that the gross margin of the store that spawned, I don't know if that's the right word, but that spawned the on-site business, their gross margin went up post separating the business, which is what we would expect because typically you're taking a larger customer, it might be a $10,000 or $20,000 or $30,000 month customer and you're extracting it from $100,000 to $120,000 to $150,000 store. And the remaining business actually has a slightly higher gross margin. So we saw that as we expected. We saw that business with a little bit with a lower gross margin than our average On-site, but that is very typical because oftentimes when you're stepping into a new On-site, you're stepping into some products that you might be not sourcing optimally yet. You might not truly understand some of the products from the standpoint of and it gets back to that optimal sourcing component.
You might have product where you know the optimal source, but you aren't going to get the product in for 3, 4, 5, 6 months. And so you have some lower margin sales that are going out. You might have some product that the customer had a meaningful supply on and you don't pick up that business for a period of time. But when I look at those on sites that we've studied, again, we were pleased with the results and weren't surprised by the results. I suspect when Holden runs his numbers, he's going to find a low single digit, probably a 1% to 2% kind of number, given the fact that so much of our business was ramping up in the latter half of the year.
But I'll give Holden as a very
helpful call. Yes. So the incremental revenues through On-site would have increased our revenue probably a little bit over 3% for the year. Fair enough. Now do remember that does include some cannibalization that would take that down a little bit.
That's a total number. But the On-site revenue did in fact contribute 3% a little more than 3% of our growth.
I would suspect it would probably cut it by a third to a half. Yes. Okay.
That's probably right.
Okay. That's very helpful. Thank you.
You bet, Ryan.
Our next question comes from Robert McCarthy with Stifel.
Good morning, everybody.
Hey, Rob.
Hey. So just following up on a couple of issues. I suppose first, just maybe, Holden, you could talk about the process industries and oil and gas and maybe give us some sense of what you think the exposure is, just maybe walk us through the number of stores in the right regions. Give us a sense beyond kind of the SIC codes of how big the overall exposure could be to your network for sales?
Yes. The so the direct impact is fairly light. I think we've talked about sort of low mid single digit direct impact from the oil and gas industry. Exactly on sort of a number we think it is. It clearly does matter.
And perhaps Dan can give more historical perspective in terms of what the full year impact is. But bear in mind that where that full year impact comes from, companies like Flowserve or Ware Group that are not oil and gas companies, if you will. They're pump companies or engineering companies, but they have significant exposure to the oil and gas within their overall customer mix. That's where our exposure comes from. So the challenge in figuring out the full exposure comes from that fact.
Dan, do you know what a full year indirect impact might be? I don't in
the past, I think we've talked about a number of somewhere between 10% 12%. But we it's really difficult to pinpoint it because there's so much indirect impact. The example I've often cited is if I travel an hour and a half upriver to visit my mom, there's a sand mine up there's 2 sand mines within 2 miles of the farm I grew up on. One was they both were operating 2 years ago. The one was operating 24 hours a day.
The other one was operating 16 hours a day. One of them has shut down, the other one has one shift. So our Red Wing store was impacted by oil and gas, but I wouldn't have thought of our Red Wing Minnesota store as having an impact of oil and gas. So it's very hard to shift it out.
Okay. Well, and Holden perhaps will table that for a little probing offline. The second major question for this call is maybe you just talk about On-site. I mean, obviously, people have been talking about the opportunities there terms of what's going on. But maybe just talk about really how important it is from an optimization of network potential.
I mean, I think you cited in the past, at least anecdotally, how high the margin is in your legacy stores and kind of your Berke Desgaden, which is the upper peninsula of the Midwest and Minnesota in terms of where the margins are? And could you just talk about really what you think the margin opportunity long term could be for the company, at least qualitatively, given On-site?
Well, I'll throw out a few pieces and then we'll wrap the call because we're running up against 45 minutes. For us, profitability at the end of the day really stems from where's our average store size in that region and how well are we doing managing our operating the growth of our business over time. So if I look at the Midwest where we have the greatest concentration of on-site, it's also an area of the country where we have the largest average store size because it's grown over time, because they have our West Coast opened up started opening up 20 years ago, our Midwest started opening up 50 years ago. So we have a 25 20 to 30 year head start. And our highest operating margin business is in the Midwest.
With that said, one thing Bob Kerlin has always reminded us in the 20 years that I've been here and probably in the 50 years that he's been here is at the end of the day, gross margin is a marker we look at to understand our business. Operating margin is a marker we look at to understand our business. But great organizations long term focus on where they can provide their shareholders with their employees with an opportunity, their customer with a service and their shareholders with a return on investment. And we like the various businesses within Fastenal because they all provide a very attractive return. And that is, at the end of the day, the ultimate test of a business.
And if you're providing opportunities to your employees, you have a great organization to serve your customer long term. We believe we have all those components in our store network and in On-site. With that, I see we're at 45 minutes. And similar to prior quarters, we realize we're in the thick of earnings season and everybody has a pretty busy plate. We'll sign off for now.
Again, thank you for your support of Fastenal and you for welcoming Holden to the team. Thank you.
Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.