Good day, ladies and gentlemen, and welcome to the Fastenal Company Q4 and Fiscal Year 20 14 Earnings Results Conference Call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ellen Trester of Investor Relations. Please go ahead. Welcome to the Fastenal Company 2014 Annual and 4th Quarter Earnings Conference Call.
This call will be hosted by Lee Hine, our President and Chief Executive Officer and Dan Flores, our Chief Financial Officer. Also present for today's call is Will Overton, our Chairman. The call will last for up to 45 minutes. The call will start with a general overview of our quarterly results and operations with Lee 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 Investor Relations homepage, investor. Fastenal.com. A replay of the webcast will be available on the website until March 1, 20 15 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 may often be 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 materially from those Information on factors that could cause results to differ materially 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 as 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 Mr.
Lee Hine.
Thanks, Ellen. Good morning. Before I start, I'd like to just say thank to the Fastenal members on the call. I know there's a lot of you that tune into this. And we're so appreciative of the work that you did in the Q4.
So just a great job. And I'd like to report that it was a good quarter for our company. 13.8% sales growth that's 15% or 15.7% on the daily average. And there'll be some questions I'm sure on Christmas and December was in line with the rest of the quarter. We just felt it was the right thing to do to take the 26% off.
20.1% on earnings growth and that equated to 28% incremental margin growth, which again these are strong numbers for our company. And how we got there really was we continue to work hard on our gross margin. But in this quarter, we really focused our attention on our expenses. And the Fastenal company and the members, I got to tell you really did a nice job looking at all different types of expenses and we really clamped down. And one thing that really came out is our ability to manage our labor.
Historically, our daily average is going to decline somewhere around 10% from the end of October to the end of the year. We know that. And what we simply did is we turned down the hours or pulled back the hours when we looked at the timing of Thanksgiving, Christmas, etcetera and just with the natural decline in our daily average. But we continue to add people at the company especially in the part time ranks. And I would say in 2015 with a good economy, we are committed to putting selling energy into our stores.
And I just again when we talk internally, we are committed to a store based model. We are committed to the fact that we really believe being close to our customers offering a high level of service is really the best is the best way to really approach the industrial market. The other question we get is, if you're going to add 10% to 15% more hours in the store, can you afford it? That really equates to about a 7% net effect on the labor dollar impact. And so it's a good model for us.
It really bodes well for our stores and for most importantly our customers. So strong quarter. We continue to stay disciplined in on the gross margin and there's pressure there, but we really like the momentum and the direction we're moving. With that, I'll turn it over to Dan.
Thank you, Lee and good morning everybody and thanks again for participating in our call today. I think the our press release is fairly self explanatory on the quarter. We published monthly numbers. So I think as we touched on, our sales trends remained strong throughout the quarter. We think that bodes well as we go into 2015.
I tried to highlight on the bottom page 1, top of page 2, a handful of bullets of things that I think were important to the business. One of them I wanted to and some of these commentary is based on questions that I might get. And so I did want to touch on the headcount patterns as we were going through the Q4, especially at the store level, because we've talked in the past about the investment in selling energy and adding hours. The one position we were in this year that we really weren't in last year is we were in a position to much more acutely manage the expense because we weren't in a ramp up mode. We were in a manage the business mode.
And so we did a much better job of managing our expenses. We went through the Q4. We were able to dial up and down the variable components of our expense, a big piece of that being store based labor to really match the needs of the business and really the needs of the customer to serve the customer. One item that I typically touch on or get questions on is the table we have on path path to profit. I think it's a good way to assess some of the underlying things going on in our business.
And one of the things that's always helpful I think is to appreciate how we look at our business. And one thing that we do is we're an organization that rewards our personnel internally, whether that be people at the store, at the district level, in a distribution center or in some other support roles. We reward folks based on our ability to grow the business. We reward more for growth sales than we do for maintenance sales as an example. We reward for managing containing the cost of our business and growing the profits of the business.
Those are the three things that are really critical when we look at how we compensate. And so one thing to keep in mind when we look at that pathway to profit table over the 3 years, because I always look at different buckets. And my poster child is always looking at the 150,000 plus store or I look at the last two groups combined, because it helps me understand what's really going on in the business. And I'm pleased to say when I look at 2014 and I look at that group, the number the level of profitability, the components of the profitability make a lot of sense to me and position us well to go forward. One thing you'll notice is the profit in that group slipped slightly from a year ago.
Now we're largely beyond the noise we've had in the past months of what's going on with gross margin year over year. So it's really about how are we managing the expenses of the business and investing to grow the business. When I look at that slight leakage, what really drove it is a decision we made a year ago to dramatically expand our district and regional leadership. We went from roughly 230 district managers to shy of 300. We expanded the key accounts teams.
We expanded our ability to manage the business and grow the business. The other thing that happens is if you look at the business this year, Lee just mentioned, we grew at 20.1%. Our top line, 15.7% on daily, about 14% on an on an absolute basis. A year ago, those numbers were 9% pretax growth and about 7.5% sales growth. So the other component of our P and L that changed dramatically is folks at the district level, folks at the region level, our teams throughout the organization were paid a premium to grow our earnings.
Bonuses and store compensation were up meaningfully from a year ago. And so when I look at that, we picked up about 70 basis points of expense because of the fact we're now growing earnings at 20% versus 9%. And I don't want to get too deep into the weeds here. But that's but despite that 70 basis points, our profitability in that group only went down 20. The other 50 is pathway to profit leverage, which is the which not only did we improve the profitability of the organization because the mix change, but the underlying health of the business improved and where we did get deterioration, it's because of the investments we made A, and the way our incentive compensation works B.
I think that's a winning combination. With that, again, I think our press release probably gives most people more details than they want to know about the world within Fastenal. With that, I'll stop. And Will, if you have anything you want to add, I'll turn it over to Q and A.
No, I'll wait for questions.
You. Our first question comes from the line of Sam Darktash with Raymond James. Your line is open.
Good morning, Lee, Dan, Will. How are you? Very nice quarter with respect to expense control. First question, the spread between vending customers and nonvending customers in terms of the growth rates is continues to moderate. How should we look at that?
The concern obviously would be it's a reflection of the maturation of the initiative, but there's got to be some other factors or components driving the contraction of the spread?
Well, yes, I think it's really a function. If you look at the growth of the customers with vending, they've been in the neighborhood of representing about 40% of our sales, so that group of customers. It inches up a little bit every quarter, but it's been in the upper 30s now, it's approaching 40%. The growth has been basically at 20% all year. I would say that the moderation of spread is really about the fact that the other 60% of our business, the investments we made in people at the store and at the district level, the rest of the business has lifted itself up.
It isn't so much that the gap has narrowed. It's the performance of the other 60 has improved and it's raised our company number. Because we've been basically at 20% growth in that group for the entire year.
And part of that is a little bit of resurgence in the fastener business. If you look a year ago, the fastener business was seeing almost no growth at all, bringing that growth back which basically does not come through vending, it's nonvending business. It changes the mix a little bit while we're
a business owner. And that business is about half of the
60 that isn't vending. Yes. So that really influences the gap.
Very helpful. And my follow-up question, how do you look and this is I guess $1,000,000 question. How do you look at gross margins here in 20 15 both early on and for the year? I know you voiced a 51% expectation. What are your thoughts around pricing in fasteners and non fasteners?
And how realistic the 51% expectation should be for the year and for near term?
On the 51, I frankly don't know. What I can tell you is, I think what we've demonstrated this quarter is we can invest heavily in the business. We can manage the expenses. We can let the Pathway to Profit mechanics shine through in our profit growth. And we can do that without expansion of gross margin.
And to me that's the most critical. It's a competitive market out there right now. Our mix as we've talked on prior calls is not doesn't it isn't inherent to raising margin, if you look at the growth drivers of our business. But the profitability on those growth drivers is great when it comes to the pretax line.
I think a couple other positives on the margin and we do have a couple of tailwinds. One is we still have a tremendous opportunity on upside for our exclusive brands, our private brands. And the other is our transportation costs with fuel where it is or oil situation is going to drop. And as you saw in the 4th or as you see in the Q4 and other quarters or late quarters, the flexibility of our fuel and the cost going up in our fuel and utilization. Our utilization will be high in the Q1 of our transportation.
And as it looks right now fuel costs will be down. So however we get the gross margin that's great. So exclusive brands Tailwind there on the fuel. And also our fastener business is doing a little bit better. So there are gives and takes all over the place in margin and it's always going to be a fight.
But I tell you what the team has done a great job of managing our margin through a changing business environment.
So no reason to think why the 28% to 30% 28% to 33% incremental margins should not hold true in 2015?
We feel very good about our ability to get strong incremental margins. We had in July well, in April, we talked about getting the 20% or excuse me, in the Q3 on the Q3 call, we talked about this quarter really being in the upper 20s and we feel very good about where we're positioned going into 2015.
I think one of the other reasons I feel good about that is we made very heavy investments at the end of 2013 in our district managers, a lot of outside salespeople outside of the stores. And so we were in a heavy investment mode. We can we don't have to do much of that this year. In fact, in the leadership roles district, regional, outside salespeople, we're very set for at least the 1st 6 months of the year. And so we'll be able that will come through in the P and L and incremental gross margins or incremental margins.
Very helpful. Thank you both. Thank you all.
Our next question comes from the line of John Belloni with Janney Capital Markets. Your line is open.
Good morning. Thanks for taking the question. Dan, as part of the assumption for 2015, I know it's early in the year, but with respect to gross margins, the fact that you pointed out the mix of business being larger customers, is it are you for the time being expecting that the mix to kind of stay where it is?
Well,
the mix has been changing over many years. That our large account business, you see it when you look at our vending numbers, because a good chunk of that is large account business, our national business. And you see that the rest of the group, like we talked on that first question, the rest of the group has stepped up and gotten closer to it. So we actually have a little bit more balanced growth and impact on gross margin in the next 12 months. And we probably did in the last 24, because by adding selling energy into the store, the local business is stepping up to the plate a little bit more.
So when it's not being pulled by the vending really the large account business. But there's still a little bit of mix drag there, but what Will touched on about the fuel and our private brands is really powerful.
Yes. I mean the mix is not I mean other distributors have said the same thing. It's not unusual as an industry right now that the larger customers are contributing more. But to the point earlier, I think Lee brought this up. In terms of adding heads and you put it in your release, adding more in 2015.
As you said, you did a nice job of controlling your SG and A cost. Do you see that as a percent of sales more level with 14 this year given that you're going to add more heads, but maybe offset with some further focus on costs? Or how do you see that shaping up?
I don't I'll answer if I could
fully follow your question.
SG and A as a percent of sales was down about 54 basis points this year to just under 30%. And you pointed out that you had pretty tight controls on expenses, especially in the Q4. You also said that you're going to add some more heads in 2015 to kind of resume what you were doing in 2014. I was just curious how do you see those 2 in aggregate focus on cost control, but also adding heads? How do you see that aggregating into your SG and A as a percent of sales?
If you think about the pathway to profit, everything about that including adding heads is about leveraging your SG and A. And so that in order to get the 28% to 30% low 30% s incremental margin talked about, from our perspective, that's all coming from SG and A. The position we're in is that when you look at the labor growth for next year, the SG and A growth for next year, A lot of the incentive pieces like I talked where I touched on what we gave up in the Q4 year over year because there's actually bonuses paid out again. That's in our numbers now. That's been growing into our numbers as we've gone through the year.
It's been stepping up a little bit every quarter. And so it really puts us in a position to make investments, but the rest of the expense pool really isn't growing that fast. And so we think we're in a great position to manage the SG and A going in 2015.
Great. Okay. Thanks. And Lee congratulations on your new position.
Thank you.
Our next question comes from the line of Winnie Clark with UBS. Your line is open.
Good morning. Good morning, Winnie. So in terms of the store count, you closed 52 stores in the second half ahead of that initial 45 target. Are closings largely completed at this point? And how should we think about net store count additions in 2015?
Net store count additions, I would expect to be positive in 2015, marginally positive. There's we're always looking at our business. And even before we announced the 45 in the second quarter, I think we closed around 20 stores in the first half of the year. And we think that's a healthy thing, because in our business, our locations are about in my mind and we can chime in if you disagree with my approach on this. But my thought about our locations, it's a base for our salespeople that stocks inventory and customers have the ability to stop in.
So we can do a great same day service and a high level of service for our customers. But if we come to if one of our or regional leaders looks at a market and says, you know what, I think this market is better served having us operate out of 4 points than 5 or 3 points than 4 when we know we're going to retain an incredibly high percentage of that business. We always look at it and say what's the smartest way to grow. But to answer your question, I would expect it to be nominally positive in 2015.
Okay, great. That's helpful. And then just finally, I was hoping you could give us a sense of what your exposure to oil and gas regions is and how sales growth has been trending in those areas relative to the company average? And then maybe just how you think about the various puts and takes for your business of lower oil prices?
Sure. Winnie, I'll take that. When you look at our sales about 12% to 13% of our sales, I would say are affected in some way shape or form from oil dropping especially under $50 a barrel. And when you look at that, there's a percentage and I'm kind of framing up from Pennsylvania to Texas to North Dakota, Tulsa Western Canada. Western Canada, Alaska.
We've really looked at that and it's about 10% to 12%. We're going to fill it now. What happens is I think when you look back in time when oil dropped, by the time it drops to the net effect where it hits us, it could be 6 months out there or something. There is that lag. So we're keeping an eye on it and we're definitely going to feel it in those regions.
The flip side is we don't quite understand what it's going to do to our other customers because it actually puts a little wind in their sails so to speak from a bottom line. So that's kind of how we look at it and how it affects the company today.
Great. Thanks for taking my question.
You bet.
Our next question comes from the line of David Manthey with Robert W. Baird. Your line is open.
Thanks. Hi, guys. Good morning.
Good morning, David.
First off, back on the contribution margin side, just given the level of profitability and the earnings growth that you're seeing right now, I know on the side and the downside we've had these stabilizers or shock absorbers through bonuses and profit sharing and things. And I'm just I just want to press a little bit more on that contribution margin side. It sounds like you took a little bit of that in the Q4 here. But as we look to next year, is there a possibility that those things kick in? And even at a flat gross margin, we it's a little bit more difficult to get to that 30% level Dan?
Well,
with growth where we've talked about it in that mid teens neighborhood, we're in a position to invest in energy at our stores and really get in the neighborhood of those operating margin I mean incremental margins, Dave, because when I look at our bonus pools, our incentive comp, it really stepped up when I look at it in the 4 quarters of this year, it really stepped up when we got into the 2nd quarter. And in the first quarter, it was a pretty healthy number 2, but it really stepped up. And so I think that layer of added expense is really in our numbers when I look at the totality of 15%. And I think it positions us well. And the offsets of that some of the pieces you normally don't count on and Lee just touched on it and Will touched on it earlier is you have some SG and A that's going the other way in the short term.
I mean we have some nice benefit coming into the Q1 as it relates to energy. I know you're down in Florida, so you don't always appreciate this anymore now that you're no longer from the Midwest, but it's cold up here. And energy prices for heating a lot of our locations in the in the northern half of the country and throughout Canada is a meaningful piece too. So it gives us some tailwind coming into the 1st part of
year. Hey, Dave, I'll jump in here. This is Will. But if you the biggest component by far of our SG and A as you know is our labor. And with the plan that Lee and his team have laid out for adding the vast majority of our new selling energy or not selling energy, but store energy so our salespeople can get out by hiring college students.
We can add 15 not saying we are going to add 7% labor not including bonuses. So the base labor to fuel that or to support that 15% more hours. And those are the scenarios we're looking at. So that gives us a tremendous amount of leverage when you look at that labor is by far biggest expense where we can add the hours with only about just under half of the expense as a percentage. That's where a lot of it comes from.
And it allows us to be very bullish out there with our customers and serve our customers at a very high level.
Okay. All right. Thanks, Will. And then on the gross margin, I know this gets far too much attention here lately, but the 51%, I'm just as I look historically at the company has maintained that level of gross profit profitability. And I know that historically there's been offsets whether that was direct sourcing of fasteners or ramp up the exclusive brands or changes to the logistics network, etcetera.
So I know that historically, mix and non fasteners as a percentage of the mix, you've been able to maintain that level. What I'm wondering about is, as those secular changes continue as they have for the past several decades, I mean are there offsets that will allow you to remain in that range? Or is it just we've reached a point where gross margins could potentially just be lower and we're going to have to rely on better cost leverage?
Well, if you recall on the last call Dave, we I probably not so artfully, but I tried to walk through what happens on the pathway to profit as our average storage size gets bigger. I think that's really the underlying cause of a lot of what we're talking about. Our average store size gets bigger because we're more and more successful with our larger customers and we drive some key accounts into those individual stores. And that's what pushes the store from 80 to 100 or from 100 to 150 or 150 to 200 over time. You have some $40,050,000 a month customers and or maybe an $80,000 a month customer.
But you have some big business that's coming into those stores. And like I talked about in the last call, if I look at our stores that are that do more than $100,000 a month in sales, so at the time it was about just over 1,000 of our 2,700 stores. That group operates at a lower gross
margin. I
think it was about basis points lower than the company does. And so as we move from 100,000 to 110,000 to 130,000 to 160,000 average store over the next few years, because we're only nominally adding units. So that means our average store size is going to grow. I would expect our gross margin to compress. And right now, I would expect it to be closer to 50 than that say 51 or 50.5 that we just reported because of the impact of that.
But as I also talked about, given up that 70 basis points, you give up you pick up about 4.50 basis points in operating leverage and that's the secret.
And that's going out over 1, 2, 3 years. Absolutely.
I mean, I want to make sure that's looking out into the future because that group of stores averages a little over $160,000 a month.
Yes. In this quarter that group of stores was at 24.5 percent pretax and that's the Q4. So that gives you an idea of the potential of the profitability of the organization.
All right. Yes, got it. Okay, guys. Thanks a lot. Stay warm.
Thanks, Dave. Thanks, Dave.
Our next question comes from the line of Eli Westgaarden with Longbow Securities. Your line is open.
Thank you. Good morning, everyone. Good morning. I'm glad to at least listen that the overemphasis of gross margin has finally been recognized. I have two questions.
1, can we talk about sort of current business conditions as we look out in the 2015 particularly Q1 has a very easy comp as we did in December from the weather impact a year ago, Can you Can you give us some idea of some benefits from there? And the second part of that thing, can you talk about the heavy manufacturing impact, you talked 20% of your business, oil. But can you talk about the impact of ag and the Canadian economy, which you're now starting to show signs of stress on fasteneral, particularly the ag market is the one that we know was crashing
at the
moment and whether Canada is becoming a bit of a problem or not. Yes.
A bunch of quite a few items there. I'll try to bounce through a few. And Lee or Will, if you want to chime in, feel free. First off on the end market piece, the manufacturing that business really improved for us and I think that's really shines through in the fact that we exit the year with our fastener business growing double digit. We started the year with our fastener business growing low singles, 1%, 1.5% in the 1st quarter, 1.9% Q4 of last year.
That says a lot to the health of our OEM manufacturing customer out there. So I think that has very good trends going into the New Year. When I think of our Canadian business and I know enough about a lot of the details sometimes get myself in trouble in the conversation. To me, the biggest issue we have with our Canadian business right now isn't how well it's growing. It's the value of the currency.
That business grew for us in the mid double digits, excuse me, here when I'm looking at the last few months. But what shines through on our company level when you look at it in USD, it cuts that down by almost 2 thirds because of deflation in the currency. But the underlying business up there is for us it's healthy. Now one thing you have to keep in mind when you look at our business in Canada, it is weighted towards the eastern part of the country. We went into Ontario first because we were expanding from the basically the Great Lakes states in the U.
S. When we first entered Canada in mid-90s. So we have a big chunk of business that's in the Ontario province and then out towards the Maritimes. It was later that we more expanded into Western Canada from the standpoint of where our dollars are. And that business, the eastern part of the country is stronger than the western part.
Obviously, the western part is much more linked to extractive industries.
So can you talk about the weather impact in ag and the farm sector?
Well, the weather coming into last year, we had a tough start to the year. Weather really beat us up. And weather, while it's been cold in the upper Midwest, hasn't been pounded by the weather you saw. And time will tell how that plays out in the rest of January and into February, but I don't see weather as a threat right now.
But we did have a good March last year, so that balances it out too weather wise. We came back very strong. So it wasn't the entire quarter that was affected. It was mainly January. Yes.
Can I one other question? You had an initiative in metalworking that was started several years ago, which really hasn't done very much. I mean, the relationship with Kennametal really just seems to be plotting along. Is that still a focus of the company or a future growth lever? Or is that sort of just being put on the back burner?
No, I'll jump in on that. Metalworking continues to do well. Our relationship with Kennametal is good. People I think had too high of an expectation going in thinking we are going to be as big as MSC overnight and that doesn't happen. But our Metal Working business has grown not double digit, but almost double digit above the Fastenal growth over the last over 2014.
It even did better than that in 2013. And we've grown a very nice sized business. We're doing well with it. We think the upside is great. It's just hard to grow a business.
Right now represents about 10% just under 10% of our total revenue. So it's a meaningful size business and it's hard to grow it more than 20% plus year over year with a business that big. So we're very committed. We think we're going to continue to do well in it for a long time. And part of it is what we learned is that, although Kennametal is a very good supplier, they don't have the full spectrum of what the customers need and neither does any of the other suppliers.
So we've developed relationships with a wide range of suppliers and most of them are enjoying very good growth through Fastenal. So we're still very committed to and believe it's a great opportunity for the future of Fastenal. The main thing that makes sense is our fastener and MRO customers, most of those are using metalworking products. We already have developed relationships. Now we have to develop the product relationship in this specific area.
Great. Thank you very much.
Our next question comes from the line of Ryan Merkel with William Blair. Your line is
open. Thanks. Just want to clarify the 10% to 12% you said was tied to oil and gas. Is that direct to energy customers? Or were you saying that 10% to 12% of our stores are in energy levered states?
10% to 12% of our sales are in those geographic areas. And I would shooting from the hip, I'd say probably half of that would be closer to the energy piece. But that's somewhat anecdotal talking to our regional leaders in those geographic areas. But it's really looking at the Gulf Coast, the Texas market, Western Pennsylvania, Western North Dakota up into Oklahoma and Western Canada kind of looking at those and engaging it.
Yes. It is. It's pretty close to 12%. And more information that grew in the 3rd quarter grew at about 24% versus the company now. So we are we have enjoyed very nice growth.
So that's the so we have that 12% of our business. It will probably slow down. I mean that's probably pretty good at our thought. But the other part of our business is 90% or 88% remaining. We're hoping we get a little tailwind through lower energy costs and maybe If it doesn't balance, we also have about a $12,000,000 a quarter or $10,000,000 energy bill that we think is going to go down by $3,000,000 or $4,000,000 So we could give up a little revenue and balance it with the expense.
We're hoping we don't give up any revenue and we get to capitalize on the expense. So we've looked at it hard Ryan and we're trying to figure it out, but it's there's no crystal ball for this right now. It's all about how the rest of the economy is affected because of lower fuel prices.
Okay. Yes, I just want to clarify that. So you were kind of saying that 10% to 12% is direct and direct would be more like 5%.
Geography. It's the geography. Yes.
Okay. I just want to be clear. That would have been a little bigger than I would have thought, but 5% makes sense, which would be direct. Okay. Second question, given the decline in steel prices, should we be worried about deflation in fasteners?
And can you just remind us how your fastener contracts work with regard to price?
The large contracts which And when the triggers on that are typically they're not all the same, but most the majority of them have a 5% trigger. So if steel goes down more than 5% or up more than 5% over a 6 month period, It's always on the calendar January July are the trigger points that we will either raise our prices or lower our prices accordingly. And then based on that, we're figuring out what percent so if steel goes up 5% or down, it doesn't mean we lower price because they factor in the labor. So there's a formula there. So the other 75 percent of our business is not on these contracts.
When steel goes down, we have some upside for margin if we can hold on to that pricing. And that's really where we think the balance is. There's always margin pressure exposure if there's a lot of deflation in the business. So far, we have not seen a lot, but that time will tell. We've been staying very close with our guys in Asia that run our business for us or they're our trading business and trying to understand what the manufacturers are saying and seeing.
And what would the lag be?
Pardon?
What would the lag be? So steel prices go up or down 5 percent, you have to change your pricing. Is it a quarter lag or is it right away?
Usually 6
months. It's usually 6 months.
Okay. Great. And then if I can slip one more in kind of a big picture question. There's a view by some that the MRO industry is more competitive, more consolidated today and therefore the growth going forward will be slower, potentially less profitable. So what is your view and has anything changed in your view over the past 10 years?
Well, things have changed. But if you look at the players and whoever you throw into that group, we've all grown nicely. But so maybe we've gone from 25% market share to 28% or 30%. So it has consolidated, but pretty slow rate when you look at the combined if you probably 10%, if you add us all up. It takes a long time to consolidate the industry.
It's always been competitive. And I think it will remain competitive, but there's a tremendous amount of opportunity out there. And we think the opportunity is as good as it's ever been. That's why we're so focused as Lee talked earlier about staying close to our customers using our same day store model to grow our business and take market share.
Very good. Thank you.
Thanks, Ryan.
Our next question comes from the line of Adam Uhlman with Cleveland Research. Your line is open.
Hi guys. Good morning. Congrats on
Good morning, Adam. Hey Adam.
Hey, can we go through the cash flow outlook for next year? Pretty good job this year in getting cash conversion, I guess. How should we be thinking about CapEx? What are you thinking from an inventory side? That'd be helpful.
Our CapEx will drop as we go into the New Year. The number I would expect us to be citing in our annual report will be a number of around 150 and plus or minus $5,000,000 And I think we're positioned well. I think we're in a good position to manage the working capital needs. The biggest component of need there will be more on the AR side than the inventory, because I expect our business to keep growing nicely. And I think it puts us in a great position to generate very, very strong cash flow.
And our operating cash flow this year was even high by our norm, because we basically had operating cash essentially in line with earnings. Part of that was the fact that our friends in Washington D. C. Saw fit to continue the bonus depreciation and a few other things there. So we didn't get that tax bill coming and that defers that off.
But really a strong operating cash flow year and I think we have a great position for next year, because a lot of those investments in distribution are in the rearview mirror rather than in the windshield.
Okay. Got you. Thanks. And then, clarification on the headcount adds. It's been asked several times.
It's still not clear to me. We had 2% year over year growth in December on FTEs. And I'm just wondering how you think about that for the first half of this next year? Are we going to bounce back to the 10% to 15% that was mentioned earlier? Or is going to remain in the single digits and then ramp back up?
So you're talking about at the store level?
The total headcount growth on an FTE basis grew year over year in December, we'd stay there sometime? Yes.
You really have to discount a lot of what the year over year numbers are in November December, because in November December of a year ago, as I touched on earlier, we were in this massive ramp up stage and we kept the hours just dialed up, because we wanted to get our sales people out of the store selling. And this year as we managed through it, we were able to dial down the part time hours in November in December. And that's really what that drives the FTE. And one of the reasons I put that bullet in on page 1 was really to talk about, hey, on the headline, it looks like we dropped our numbers at the store. Our FTE did go down because we dialed down the hours, but we actually added people.
And so coming into January February that will dial back up because we have the need.
And when we looked at it trying to normalize it taking out the people going home for the holidays and all that, we're in the high single digits. We think we have 8% to 9% more selling energy if everybody was at work all week long. And that's a little lower than we want, but it's in the neighborhood. Does that make sense Adam?
Yes. And so that we kind of get back to that normalized 8% to 9% and then maybe grow from there as you have need?
Yes. We want to push it up from there. Yes.
Okay. Thank you.
Thanks.
I see we're at 9:45. Again, I want to thank everybody for joining on the call this morning. And Will, good luck.
I'll be here.
Take care, everybody.
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