Good day, ladies and gentlemen, and welcome to the Fastenal Company fourth quarter and fiscal year 2015 earnings results conference call. As 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 Daniel 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 1st, 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, 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, we encourage you to review those carefully. I would now like to turn the call over to Mr. Daniel Florness.
Good morning, everybody, thank you for joining our fourth quarter call. 2015 was a tough year for our customers. As the year progressed, as we've reported our various quarters, we touched on how that was playing out. 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, it isn't about 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 of those 100 customers should be growing.
The reason that number is as high as it 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 customers' 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. In the fourth quarter, half 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?
History says of the 25 that are contracting, about half of that number, about 13, will contract more than 10%, and about half that number again, about six, are going to contract more than 25%. With that last group, that's really a sign of the severity of their pain and what's going on in their industry. We sell across the continent, around the planet. Most of our business is in North America, and we sell to a lot of different industries. When you start looking through the list, a lot of names that you recognize stand out, and you can see the pain they're feeling in their business. In the first quarter, that 13 that are down more than 10 and the six that are down more than 25 look like our numbers. We had 13 and three in that bucket.
By the third quarter, that had slid to 32 of our customers that were down, were down more than 10%, and 17 of those were down more than 25. After looking at that data in the third quarter, on our third quarter call in October, when Will and I went through our commentary on the quarter, you could question the wisdom of the statement, but I made the statement that the industrial economy is in a recession. I use this as my reference point. Again, you could question the wisdom of saying it out loud. In the fourth quarter, 37 of our top 100 customers were down more than 10%. 22 of that group were down more than 25. There's one customer in that group where we did lose some business because of an acquisition.
Other than that, this is pain those customers are feeling as they progress through calendar 2015. In the month of December, November and December, I noted in the earnings release, we saw some shutdowns of our customers. We really saw it in the month of December. In the month of December, the Monday before Christmas, looking at the numbers and consulting with a few of our folks internally about what they were seeing in the trends, the trends looked a lot like 2014 in that the Monday before Christmas, I felt we had a very good chance of having sales being flat December to December. In the ensuing days, the balance of that week and then the week between Christmas and New Year, quickly saw that erode as customers were falling off in their business activity. We produced the number we reported this morning.
Start of January, again, you could question the wisdom of making this commentary with, as of yesterday, our month of January is trending to looks like there's a potential for us to be positive in the month of January. A lot can change between now and the end of the month, as we saw in the month of December. We don't have holidays, but we do have weather. As of the 14th, we are trending in a pattern that looks like we should be able to tread water or be slightly positive, and time will tell how that plays out. The next item probably of note in the earnings release is our gross margin. Long-term trends that we've talked about on previous calls, that we talked about on our investor day in early November, are unchanged.
One thing we did see in the quarter, it was most acute in November and December, as our customers were tightening their belts, we saw a layer of transactions just evaporate from our business. The layer of transactions, if you look at our business, there's stuff that we sell every day. Vending is a perfect example of products we sell every day. Through our store operations, through our regular sales channel, through our bin stocking and our OEM stocking, there's products that we sell every week and every month. There's also a subset of products that we sell on a less frequent basis, some of those out of our stores, some of those out of our distribution centers. A layer of that transaction disappeared, and that's higher margin business for us. Our gross margin drop was largely attributed to that disappearing. That's the bad news.
The good news, I believe, we did not see a structural change in our gross margin. Time will tell if that layer returns and how much it returns. I am hopeful and expecting that it largely will. On the expense side, I officially became CEO on January first of this year. From a practical standpoint, after the board informed me of the decision, I was stepping in the role in mid-October. Will and I tag-teamed it a bit, but this quarter was largely under my watch. I think from an expense standpoint, we frankly did a mediocre job. I put that squarely on my shoulders. Full-time and part-time expense trends. Our biggest expense on the P&L after cost of goods is people. We have just over 20,000 employees.
The fourth quarter and the seasonality of our business is no secret to anybody who owns our stock, it's no secret to anybody who works at Fastenal. In 2014, if I look at our expense trends for full-time headcount from Q3 to Q4, we managed it well. There's always some attrition in the business. We try not to replace that attrition in the fourth quarter. In the fourth quarter of last year, our full-time dollars paid, and this is base pay only, dropped about three-tenths of a %. Our part-time, we can manage hours quite well, as we typically go into the post-Thanksgiving season, we see our expense falling off because there's less work to do, and therefore we need fewer hours. Last year, from Q3 to Q4, our expense dropped about 13 and a half % for our part-time labor.
In total, our expense was down about 2.5%, 2.4% to be exact. In 2015, full-time headcount crept up a little bit. It increased about 3.5%. Our part-time dropped about 4.5%. I'm throwing a lot of percentages out here, and it's not about the percentages, and quite frankly, it's not even about the expense itself. It's about managing the business through the seasonality of the year, and we could have done a better job. In total, our labor costs were down from Q3 to Q4. That's really more of a function of when we don't do a good job, the leaders of our business at the district, the region, and at the national level, as well as our support areas, feel the impact of that in their bonus program. Our bonus programs are largely mechanically produced numbers.
Our overall expenses were down, despite the fact we didn't manage the expense well. They could have been down more. The message I've conveyed to our regional and national leadership is, right now, we are in an uncertain economy. We made substantial investments in calendar 2015. We added about 1,700 people into our stores. We added about 2,300 people into our organization in general. We are well-staffed. To that end, I would expect our headcount to not grow between now and March 31st. As we see some stabilization, it's assuming we see some stabilization, and we believe there's reason for that belief to be there. As we see stabilization, we'll revisit our willingness to make investments in both store and support areas as we go into the new year.
If I look at the rest of our SG&A expense, we did a nice job on the occupancy side. The increase in that area was solely related to vending. As I've talked about in the past, I see that as a good expense increase because we know vending, where it touches our business, improves our interaction, our interface, our engagement with our customer, and improves our growth. I'm approaching this conference call in the vein of I've stepped out of my CFO role and I'm stepping into the CEO role. I'm trying to avoid the weeds as much as possible. Probably got into it a bit with the last few sets of numbers. It's hard to change habits. I will point out one thing. If you look at expense trends, history has said from Q4 to Q1, we're going into winter.
Last week here in Minnesota, it's been subzero. Winter is definitely here. I typically expect to see our utilities increase about $2.3 million from Q4 to Q1. That's solely related to heating locations. Thought I'd throw that out there for those of you that find that of interest. We also had an item that we highlighted, or several items we highlighted in the positives and negatives of our earnings release. We made the decision, and we've been bantering this around for a number of months, a number of quarters, excuse me. We made the decision to close down our joint venture manufacturing facility or to exit participating in our joint venture manufacturing facility in Brazil. We had several other disputes unrelated to that we also resolved during the quarter. The tally of all those items was about a $4 million impact to the quarter.
I thought it was worth noting, again, in the for what it's worth department. Finally, let's talk about 2016 and some of the things we've told you to prepare for 2016. At our investor day in early November, we had a great participation. For those of you that made it, thank you for attending. For those of you that had the opportunity to listen to it, I hope you found it informative. We really focused on four items that day. The one was our FAST Solutions, our industrial vending program. That's not new to anybody. We've grown that business wonderfully over the last five years. We're very excited about that business. When I look at that business today, about 45% of our districts in the company have more than 200 machines in their business scattered across 10, 11, 12 stores.
We made the decision that at this stage in our Fastenal vending business, we wanted to place more dedicated resources within our districts to support that business and really challenge them in a two-prong attack. The first one was what we called optimizing of our machines, and that's really looking at the data across these 200 machines, 300 machines, 100 machines, depending on the district you're looking at, looking at those machines and optimizing the machines. The math is really quite simple when you think about our Helix machines, and most of the machines out there are Helix. That is, if we want a machine to do, pick a number, $1,500 a month, and every time a coil spins, on average, it drops $5 worth of product. That means in the course of a month, we need to spin a coil 300 times in that machine.
20 days in the month, 15 times a day, a coil needs to spin. We need to look at the product that's in that machine and say, "Can we get 15 spins a day?" If we can, we know we have a home run. If we can't, we need to work to optimize the machine. That's what we're doing right now. When we spoke to you in early November, about 11% of our machines across the company had been optimized already. As of the end of December, that number is up to 18%. The team that is driving that, clearly, it's everybody in the organization. It's the folks in the stores, it's our district managers, it's our regional leaders, it's folks involved in our vending program. The actual dedicated team, we started the quarter with about 60 individuals.
We added just over 130, so we have about 191. Our goal is to get to about 230 people to support our 260 district managers in North America. The way we pay for that group is through optimization, and we're 18% of the way complete, we have a ways to go. After they get that piece, their next prong of attack will be helping to grow our signings, helping to grow that business. It's a wonderful business. It's a business when you truly inform your customer what it's about, it sells itself. The second half that we talked about is related to vending in our November investor day, centered on the use of what we call our vending tab, and that's really about the efficiencies behind the scene.
About 13% of our stores were using the vending tab. It's really how we replenish the machines and how automated that process becomes. As of the end of December, we're at 29% of our stores are now using the vending tab. The second item we talked about was a relatively new concept for us to talk openly about externally, and that was our Onsite program. History has said we'll add about nine a year. It's a program where we take a store and we essentially set up a store on-site inside the customer's facility, and it takes engagement one step further, even deeper than vending does. It changes the relationship with the customer. In the current year, we signed 82 Onsites. Again, our average was nine. Those 82 Onsites came from 71 districts in the company. It means, presumably, 10 people signed two. Those districts grew double digits.
In 2015, the company grew 3.5% roughly for the year. The 71 districts on it, if you average the group out, grew double digits in 2015 because they had a means to combat what the economy was doing to them. They grew their business. They took market share at an even faster pace. Our goal as we enter 2015, 2016, excuse me, is to do 200. Through Wednesday of this week, we've signed five this month. If you take that to the month, it would imply a run rate of about 12 or 13 for the month. If you take that times 12, it would imply a number just under 150. We have a little ways to go, but I think we're off to a good start, and I'm optimistic what this means for 2016, but as importantly, for 2017, 2018, 2019, and 2020.
This customer-specific business, if I take our Onsites, add to it what we call our strategic account stores, which is an Onsite that's just down the street or near the customer, but not physically in the building. If you add this all together, it's about 16% of our business today. I'm very optimistic about what this can be in the future, because with our low-cost model, we're uniquely designed as a business to go after it. The third item we touched on in November was eCommerce. Our 2016 plans centered on our website rollout for Canada and then ultimately the U.S. That's not really a 2016 story. That's more of a 2017 story, but we wanted to provide an update on things that are in the works as it relates to the eCommerce strategy. Finally, we talked about CSP 2016. That is a remerchandising of our stores.
We converted about 800 stores to this format in the fourth quarter. We intend to do a similar number in the first. Really, it's about positioning our store locations to be even better equipped at same-day service and efficient replenishment for our customers, and we're excited about what that means for our future. With that, I will open it up to Q&A. Thank you.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star followed by the number 1 key on your touchtone telephone. If your question has been answered or if you'd like to remove your line from the queue, you may press the pound key. In the interest of time, we are asking that you limit yourself to one question and a follow-up only. Thank you. Our first question comes from the line of Ryan Merkel from William Blair.
Hey, good morning, Dan. How are you?
Good.
Starting with demand, I think you said there's reason to expect stabilization, and I'm wondering what signs are you seeing, or is it just the early January trend that sort of makes you think we could see some stabilization?
My comment, Ryan, is solely on the early January trend and what we were seeing in December before we saw the business just dial down.
That was kind of the first two weeks of December were tracking fairly good, 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. Time will tell if I'm seeing that in the data because I want to or if it's truly there. With 10 days left in the month, our trends were looking a lot like last year.
Right. My second question is, in the press release you mentioned 2015 started slow because of oil and gas, as the year progressed, it spread into other industries and other geographies that aren't typically driven by oil and gas. Can you expand on this a bit? Has this broadening of the weakness maybe 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 contagion change. One thing I've always said over the years is the history in this business, for Fastenal's business that is, the trends from January to October are 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. I don't think there's 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. Again, I throw that out there only because when there's more uncertainty, I do believe, and I've always believed this, that we have an obligation to maybe share a little more insight. 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've 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.
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. 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. I'm wondering, do we see that right away in January, or does that build as we go through the year?
I think that builds. If you think about it, in that discussion, we talked about the concept of what 200 new Onsites mean. 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 of those are operational yet.
Right.
We have, I believe, 58 of the 82 are operational as of December because some of them we just signed in November and December. Like a vending machine, you sign it in November, it might take you 60 days, 90 days to turn it on. To me, it's about momentum. 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. I'm 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 two 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 in a world where everybody's 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. How can we take that last mile, take our employees at the store, take our employees that are supporting the store, and together grow a great business? That's all we have. That's what we focus on.
Right. Very helpful. Thank you.
Ryan, I'm going to keep you from working on a fourth one there, we can go to the next person. Sorry.
Fair. Thanks.
Yeah.
Thank you. Our next question comes from the line of Robert Barry from Susquehanna.
Hey, Dan. Good morning.
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. How does that factor into how we should interpret what you're seeing in January?
The one less selling day helps our number.
Yeah.
Maybe, I don't know, adds a half percent. I don't know. When we get to the end of the month, you could probably look at it and say, yeah, we were helped slightly on a 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.
Yeah
maybe that means if I'm looking at it right now and thinking we'll be nominally positive, maybe that means we're flat.
Yeah.
If you ignore out the day. I guess the point wasn't about getting lost in, is it 40 basis points of growth or 40 basis points contraction? It was really about.
Right
the trend we're seeing. Again, January and February, in the northern half of the country, weather can change things dramatically.
Yeah.
I'm trying to give a pulse.
Okay
on what we're seeing right now.
Yeah, appreciate it. I guess where I really wanted to focus was just on the gross margin commentary and the release. You mentioned that substantially, I think was the word, all the year-over-year decline was on this lower discretionary spend. 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. I'm curious, like, what the commentary is really on gross margin and especially going forward. Is there any reason-
Yeah
to think that the trend will change in 2016 versus what we saw in 2015?
Yep. 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. 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 few weeks. After them providing us with a dizzying amount of data, I just said, "You know what? What really happened? Did our gross margin structurally change or is there more to it?" The usual suspects are still there. There's always a nominal impact in the fourth quarter based on what's going on with our rebates, what's going on with the 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.
You always have some leakage there in our gross margin. Depending on the year, if it's a strong year, you get a little lift from some of the supplier allowances. Some years you get a little drag. Those are usual suspects. The wild card in it is there were a layer of transactions that just disappeared. They disappeared, we saw them disappear in both November and December, and that was shining through on 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 it's not going to come back for a few months.
This is stuff that was needed and people were towards the end of their fiscal year, and they just turned off the spigots and they closed their PO books, and they didn't buy anything. I'm a firm believer that trends have meaning, and if history says these transactions are there because a business needs them over time, I believe they'll return, and I don't believe it's structural, but only time will tell.
Yeah. 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. It would imply that if it does rebound, this discretionary spend, that your best guess now is that the gross margin in 2016 would be, I don't know, flattish, modestly down. Is that kind of your take?
Well, my commentary really centered on here's where we were in Q3, here's where we are in Q4.
Yeah.
Here's some of the leakage, here's where it came from. I believe these transactions come back. Again, nobody knows right now, I believe they come back because I think businesses need these products. We will be working to claw back our gross margin every month of the year on the leakage we've seen 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 operating expense over time because we like the Onsite business. In the short term, I believe this business resumes and returns.
Dan, thank you.
You bet, Rob.
Thank you. Our next question comes from the line of David Manthey from Robert W. Baird.
Hey, Dan. Happy New Year.
Thanks, Dave. You too.
I guess I'll stay on your favorite topic here, gross margin. Could you tell us in the fourth quarter, were there any year-end accrual adjustments up or down that impacted the number? Second, could you quantify for us the average gross margin differential between national account customers and the rest of the business? Finally, last quarter you mentioned about 2% price degradation on fasteners, and I'm just wondering if you can give us an update on fastener pricing or other product pricing as well.
Sure. The national accounts piece, the delta between that and the rest of our, in our company average has really been unchanged for quite some time. There's an 8-10 point delta there. If it's an Onsite, that delta moves down. The margin there moves down into the thirties, as we talked about, and is prevalent in that 16% of our business that is Onsite or Onsite-like business in our existing mix.
Okay.
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. I'd say that's holding pretty steady. There was a third piece, sorry, I didn't jot the first one down.
Just any year-end accrual true ups that impacted gross margin?
Nothing outside the norm.
Okay.
There's always a little bit of noise, but nothing outside the norm.
All right. Just one quick one here. The $4 million charge for this Brazil joint venture, could you tell us what that amount was after tax?
Yeah. That $4 million is not solely related to Brazil. We tried to identify several things that were unusual in the quarter to get, felt the need to give some insight. The after-tax piece of Brazil, that piece of itself, I don't want to get into the details of each one, but the after-tax number was bigger than the pre-tax number. Was not helped by the tax because we had been incurring losses in that business, and therefore there is no tax benefit. Part of the write-off was looking at what we're going to net realize on that business, because we are selling it to our partner for an amount. There is no tax benefit from that. It actually impacted our tax slightly as well.
Okay. I guess we'll follow up on the rest of that $4 million.
Thank you. Our next question comes the line of Adam Uhlman from Cleveland Research.
Hi, Dan. Happy New Year.
Happy New Year, Adam.
Hey, just a clarification first. How much of your business would you describe as being that discretionary spend, the spot buy 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 a guess, it's around that 10%.
Okay. That's helpful. Thanks. Could you kind of 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. You have 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.
Yep. The CapEx, as we talked about in 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. On a net basis, we spent about $145 million on CapEx in 2015, which was about a 15% drop from what we'd seen in 2014, which was about an 8%, 9% drop from what we saw in 2013. Really what had happened is 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. That was a pretty good accurate number over a decade. We noted that for a multi-year period, that number was going to materially go up.
The two things that were really going to drive that increase centered on we were 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 going right now, we're adding automation into our distribution center in North Carolina. That's a 2016 project. We were going to have about a three-year period where we were putting in a massive amount of automation, and that came with a price tag. That is largely behind us. This year, our CapEx as relates to facilities 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 about what vending could be, and we knew that we were going to be spending a tremendous amount of dollars on vending over a multi-year period. Two, we felt very good about the ability for us to grow the business. The second half of that equation is we didn't want to run out of supply, so we built an inventory of machines. Today, our spend is coming down in both of those, largely because the automation is behind us. In the vending standpoint, our patterns are more stable today, and we're able to burn in a little bit of that inventory as well. All those pieces we identified in November, an expectation that CapEx would drop probably around 12% to just under $130 million.
The only wildcard on that centers on the pace of what we do with vending as we go through the year. There's some things I'm optimistic about, and we'll see how they play out, but that's probably the only wildcard, whereas the rest of the projects are pretty well known at this vantage point. Dividend, we just announced a $0.30 dividend last night. We've been running at $0.28. If that were to continue throughout the year, that would imply about a $344 million dividend versus the $327 million last year based on where our share count is right now. The wildcard is what we do in buybacks. We did a fair amount of buybacks in the current year. If you look at our debt we have on the books right now, it's really about the buybacks we've done in the last year and a half.
I would expect some additional buybacks as we go through 2016. How that plays out is going to be largely dependent on the marketplace. A distribution business by its nature throws off a lot of cash. This year, our operating cash flow, as we saw last year, is just over 100% of earnings. For a distribution business to throw off operating cash that's greater than the earnings tells me you had a year you didn't grow very well and you didn't need that much in working capital. That gives us prospects for strong cash flow generation as we go into 2016. Frankly, I'd prefer to see a number in the upper 90s because they'd tell me we're growing better.
Got you. Okay. Thank you.
Yep.
Thank you. Our next question comes from the line of Chris Dankert from Longbow Research.
Hi. Morning, Dan. Thanks for taking my question.
Morning.
I guess, just first off, thinking about fasteners going through the vending machines in the quarter seems 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 kind of optimism on the early start to January, is there any commentary you can give us on just fasteners so far? Have you seen kind of an uptick in those numbers?
I guess I'm a little confused by your question, Chris, only from you started it by talking about fasteners and vending. Fasteners, there's no connection between fasteners and vending. Maybe I just misheard your question.
I'm sorry.
Only non-fasteners go through the vending platform.
I guess the upshot was, your fastener sales, have they improved in January commensurate with kind of what you're seeing on total sales?
Yeah. 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 costs, kind of the investments you were talking about back at the Analyst Day, can you break out how much that is, dollar value for the year, kind of, and then is it going to be classified OpEx, CapEx, or kind of 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. Over the 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're ongoing coding investments. Obviously, things like equipment or third-party software, those are capitalized and would be spread out over a multi-year period as one would expect. 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 we'll 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. You can back into a number pretty fast just with the 75 people.
Okay. That's helpful. Thank you.
Yep.
Thank you. Our next question comes from the line of Brian Szalczyk from KeyBanc Capital Markets.
Hey, Dan. Good morning.
Morning.
I wanted to just first maybe hit the margin question again and take a step back. You guys clearly have some strategic growth opportunities on the top line, but clearly have some puts and takes still on the margin side. Directionally, 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 top-line internal goals or grow the top line directionally, how should operating margins trend for you guys relative to 2015?
If we're able to hit our top line, to the extent we're doing that because of the Onsite, that's going to be a little bit of leakage. 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, that is our stores as they mature, the level of profits improve 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 in a different place than the profitability of the remaining stores that do less than $100,000 a month.
To the extent all these programs, the vending, these initiatives cause our average store size to grow, there's no reason why that won't enhance our profitability and fund any leakage we might have as it relates to the Onsite. Now, if our Onsites were wildly successful, let's say our Onsites were front-end 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 keeps increasing, and we do materially more than the 200, I could see our growth being better than we expected and our operating margins being a little worse. I don't think anybody on the call would complain about that.
Dan, with the Onsite onboarding, is there incremental one-time or onboarding costs that come through initially that might weigh on the incremental EBITDA contribution this year versus maybe what it looks like into the out year in 2017?
Oh, sure. That's a constant in our business. That's true of any new business we're turning on in any year. A new large national account, the first few months are kind of tough. First six to nine months, you're throwing resources at it. You aren't as good at sourcing the product, so your gross margin isn't where you'd like. If I look at the Onsites that we turned on in 2015, their performance would be materially different than the existing book, and that's something we talked about in November, and that'd be true of every year. I think at the end of the day, the real question is, does it allow us to grow our business faster? 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.
Okay, great.
I see we're at 9:46 A.M., Ryan, I'm going to have to ask you that if there's a follow on, we'll take it offline. One rule we've always had is we realize it's earnings season and everybody has a very busy day, we try to hold this call to 45 minutes. I guess I'd 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 it 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.
Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.