Investor Teleconference Presentation Second Quarter 2018 Fastenal - - PowerPoint PPT Presentation

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Fastenal Company July 11, 2018

Investor Teleconference Presentation Second Quarter 2018

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Safe Harbor Statement

All statements made herein that are not historical facts (e.g., goals regarding Onsite and vending signings as well as expectations regarding FTE, leverage, cash flow, and capital expenditures) are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. More information regarding such risks can be found in the Form 10-K for Fastenal Company for the year ended December 31, 2017 filed with the Securities & Exchange Commission and our earnings release issued on July 11, 2018. Any numerical or other representations in this presentation do not represent guidance by management and should not be construed as such. The appendix to the following presentation includes a discussion of certain non-GAAP financial measures. Information required by Regulation G with respect to such non-GAAP financial measures can be found in the appendix.

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CEO Messages on 2Q18

• Non-residential construction sales accelerated while

manufacturing demand was stable at healthy levels. This contributed to 2Q18 sales growth of 13.1%, a fifth straight quarter of double-digit growth.

• 2Q18 operating income grew 13.3%. Reported EPS

were $0.74; however, a discrete tax item added $0.04 in 2Q18. Beyond the discrete items, we estimate Tax Reform added $0.11 to EPS in 2Q18.

• Onsite and vending signings are on pace to achieve
• ur 2018 targets.
• We achieved significant operating cost leverage in the

period, including employee-related expenses. Lower gross margin partly reflects a difficult comparison, but also a continued challenging price/cost landscape.

• In the context of normal seasonality, operating cash

flow improved in 2Q18. We repurchased stock and raised the 3Q18 dividend.

EPS

$0.90 $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18

Daily Sales Rate (DSR) Growth

18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18

1.9% 1.6% 1.8% 2.7% 6.2% 10.6% 13.6% 14.8% 13.2% (Fully-Diluted) $0.52 $0.74 13.1%

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2Q18 Growth Driver Update

• We signed 81 Onsites in 2Q18, +19.1% from 2Q17 and

finished 2Q18 with 761 active sites, +56.6%. Our 2018 goal for Onsite signings remains 360-385.

• Total in-market1 locations were 3,051 at the end of

2Q18, up from 2,937 at the end of 2Q17, with growth in Onsites outpacing a decline in public branches.

• We signed 5,537 vending devices in 2Q18, +13.4%

from 2Q17. Our installed base of devices is +14.3%

• annually. Product sales through our vending devices

were +20%-plus. Our 2018 goal for vending device signings remains 21,000-23,000.

• National Accounts daily sales rose 19.1% in 2Q18 from

2Q17 (and 20.4% in June).

• Non-U.S. daily sales, which approximates 15% of total

sales, rose 20%-plus in 2Q18 from 2Q17.

1In-market locations include public branches (U.S. and ROW) plus Onsites 2Vending data excludes units related to our leased locker program

Active Locations Signings 150 120 90 60 30 780 650 520 390 260 130 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18

81 Installed Base Signings 8 7 6 5 4 3 2 1 80 70 60 50 40 30 20 10

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18

Vending Device Signings and Installed Base2

(in thousands)

Onsite Signings and Active Locations

761 76.069 5.537

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2Q18 Business Cadence

• The U.S. PMI averaged 58.7 in 2Q18, vs. 55.8 in 2Q17

and 59.7 in 1Q18. U.S. Industrial Production was +3.5% in Apr./May 2018 vs. 2Q17 and +1.4% vs. 1Q18.

• Non-Residential Construction daily sales were +15.5%

in 2Q18, accelerating to a new cycle high.

• Manufacturing was +13.3% in 2Q18 and is exhibiting

stable trends at high levels. Most sub-verticals are growing at healthy levels.

• Fastener daily sales were +11.1% in 2Q18, with June's

+13.5% representing a new cycle high in organic

• terms. Non-fastener daily sales were +14.8% in 2Q18.
• Non-National Account customer growth remains in

the mid-to-high single digit range, with 66% of our branches growing in 2Q18. Of our Top 100 National Accounts, 80 grew in 2Q18, up from 78 in 1Q18.

1 In July 2017, we reclassified certain end market designations. Values

shown in the chart at the top of this page will differ from prior presentations.

Heavy Equipment Total Mftring Construction

20% 15% 10% 5% 0%

• 5%

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18

15.3% 13.3% 15.5%

Fasteners (35.4% of Sales)

Non-Fasteners (64.6% of Sales)

20% 15% 10% 5% 0%

• 5%

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18

11.1%

14.8%

End Market Daily Sales Rate (DSR) Growth1 Product Category Daily Sales Rate (DSR) Growth

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2Q18 Results Summary

• Steps taken in 4Q17 to mitigate inflation impact added

50-100 bps of sales growth in 2Q18. Conditions remain a challenge, though we expect further progress in 3Q18.

• Gross margin was 48.7% in 2Q18, down 110 bps from

49.8% in 2Q17 due mostly to a tough comparison and product and freight inflation. Sequentially, a modest price-cost headwind was mostly offset by modest freight leverage.

• Our 2Q18 operating margin was flat at 21.2%. Lower

gross margin was offset by leveraging operating costs. Year-to-date SG&A is a record low of 28.2% of sales even as we invest in growth for the business.

• Employee-related costs were leveraged as growth in

FTE and incentive comp moderated. Occupancy costs were leveraged, with growth in vending charges mitigated by lower branch-related costs.

Percentage calculations may not be able to be reproduced due to rounding of dollar values.

Annual Rates of Change 2Q18 2Q17 % Chg.

Dollar amounts in millions, except per share amounts

Net Sales $1,267.9 $1,121.5 13.1% DSR Yr./Yr. % Chg. — — 13.1% Gross Profit $617.7 $558.5 10.6% Gross Profit Margin 48.7% 49.8% (110) bps Employee-Related Exp. — — 10.0% Occupancy-Related Exp. — — 3.0% Selling Transportation Exp. — — 17.6% Operating Income $269.0 $237.5 13.3% Operating Income Margin 21.2% 21.2% — EPS (Fully-Diluted) $0.74 $0.52 42.6% Onsite Signings 81 68 19.1% Vending Device Signings 5,537 4,881 13.4% Branch Count 2,290 2,451 (6.6%) In-market location FTE 12,214 11,760 3.9% Total FTE 18,444 17,612 4.7% Operating Cash Flow $151.9 $82.9 83.2% % of Net Earnings 71.9% 55.7% — Capital Expenditures (Net) $25.0 $33.7 (25.8%) Dividends $106.3 $92.5 14.9% Dividends Per Share $0.37 $0.32 15.6% Share Repurchases $40.4 $56.7 (28.7%) Total Debt $425.0 $445.0 (4.5%)

• Tot. Debt/Capital

16.0% 18.3% (12.6%)

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2Q18 Cash Flow Profile

• Generated operating cash flow of $151.9M in 2Q18, a

conversion rate of 71.9%. Second quarters are usually lower cash conversion periods; the preceding five years averaged 57.1%.

• Accounts receivable were +19.6% reflecting activity

levels, our mix of growth, and customers pushing payments out at quarter end. Inventory was +11.4%, and our days on hand continues to decline.

• Net capital spending in 2Q18 was $25.0, -25.8% from
• 2Q17. We expect higher spending in the second half

based on timing of projects and on accelerated need for additional vending machines. Based on the latter, we are lifting our 2018 net capital spending goal to $158.0 (was $149.0).

• Total debt was 16.0% of total capital in 2Q18, steady

with 1Q18 (15.7%) but below 2Q17 (18.3%).

• We have increased our dividend payable in 3Q18 to

$0.40 (was $0.37), an increase of 8%.

250 225 200 175 150 125 100 75 50 25 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 * Percentages above the bar represent OCF as a % of Net Earnings

Depreciation Net Capital Expenditures Net Capital Expenditures and Depreciation 80 70 60 50 40 30 20 10

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18

2018 Net CapEx Target: ~$158.0M

(in millions)

Operating Cash Flow

(in millions)

55.7% $25.0 71.9% $33.7

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Non-GAAP Financial Measures The appendix includes information on our Return on Invested Capital (‘ROIC’), which is a non-GAAP financial measure. We define ROIC as net operating profit less income tax expense divided by average invested capital over the trailing 12 months. We believe ROIC is a useful financial measure for investors in evaluating the efficiency and effectiveness of our use of capital and believe ROIC is an important driver of shareholder return over the long-term. Our method of determining ROIC may differ from the methods of other companies, and therefore may not be comparable to those used by other companies. Management does not use ROIC for any purpose other than the reasons stated above. The tables that follow on page 9 include a reconciliation of the calculation of our return on total assets (‘ROA’) (which is the most closely comparable GAAP financial measure) to the calculation of our ROIC for the periods presented. On December 22, 2017, new tax legislation commonly referred to as the Tax Cuts and Jobs Act (the 'Tax Act') was signed into law. The information presented on the appendix including the impact of the Tax Act noted on page 9 is a non-GAAP financial measure. Management believes reporting this measure will help investors understand the effect of tax reform

• n comparable reported results.

Appendix

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Return on Invested Capital*

1Reflects application of our expected post-Tax Act tax rate to periods

in 2017 and exclusion of one-time discrete items in 2018 for purposes of comparison. *Amounts may not foot due to rounding differences.

(Amounts in millions)

TTM 2Q18 TTM 2Q17

Operating Income

$ 935.3 835.4

(Income Tax Expense)

(243.6) (303.5)

Tax Act Adjustment1

18.4 100.5

NOPAT

$ 710.1 632.4

Total Current Assets

$ 2,006.8 1,831.9

Cash and Cash Equivalents

(125.3) (135.3)

Accounts Payable

(156.7) (149.9)

Accrued Expenses

(192.4) (178.5)

Property & Equipment, Net

887.7 877.3

Other Assets

81.3 66.0

Invested Capital

$ 2,501.4 2,311.6

ROIC

28 .4% 27.4%

(Amounts in millions)

TTM 2Q18 TTM 2Q17

Net Earnings

$ 681.0 524.8

Total Assets

$ 2,975.8 2,775.3

ROA

22.9% 18 .9%

NOPAT

$ 710.1 632.4

Add: Income Tax Expense

243.6 303.5

Subtract: Tax Act Adj.1

(18.4) (100.5)

Operating Income

935.3 835.4

Add: Interest Income

0.4 0.5

Subtract: Interest Expense

(11.1) (7.6)

Subtract: Income Tax Expense

(243.6) (303.5)

Net Earnings

$ 6 8 1.0 524.8

Invested Capital

$ 2,501.4 2,311.6

Add: Cash and Cash Equivalents

125.3 135.3

Add: Accounts Payable

156.7 149.9

Add: Accrued Expenses

192.4 178.5

Total Assets

$2,975.8 2,775.3

Calculation of Return on Invested Capital Reconciliation of ROIC to Return on Assets (ROA)

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Sequential Trends*

• Good Friday was during March in 2018 vs. April in 2017.
• Amounts may not foot due to rounding differences.

* Acquisition of Mansco lifted the 2017 DSRs for April along with the Jan. to June, Jan. to Sep., and Jan. to Oct. Cumulative Changes by 1.3pps each. ** The January average is based on the historical change in January vs. October. All other months are sequential.

DSR BENCHMARKS

• Cum. Chg.,
• Jan. to Mar.
• Cum. Chg.,
• Jan. to Jun.
• Cum. Chg.,
• Jan. to Sep.
• Cum. Chg.,
• Jan. to Oct.

Jan.** Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec.

BENCHMARK

(1.0%) 1.1% 3.9% 5.1% (0.6%) 2.1% 1.9% 8.7% (3.7%) 4.0% 1.7% 10.7% (1.9%) 8.6% (3.8%) (7.1%)

2018 DSR

(1.3%) 4.0% 2.1% 6.2% 2.4% 0.6% 3.7% 13.5%

Delta v.. Benchmark

(0.4%) 2.9% (1.9%) 1.0% 3.1% (1.5%) 1.9% 4.8%

2017 DSR

0.2% 1.5% 3.6% 5.1% 2.2% 1.4% 2.8% 12.0% (2.4%) 2.2% 3.8% 16.0% (2.1%) 13.5% (4.2%) (7.1%)

Delta v. Benchmark

1.2% 0.4% (0.4%) 0.0% 2.8% (0.7%) 1.0% 3.3% 1.3% (1.8%) 2.1% 5.3% (0.3%) 4.9% (0.4%) 0.0%

2016 DSR

0.4% (0.8%) 1.5% 0.7% 1.7% 0.6% (0.2%) 2.9% (2.3%) 2.4% 1.5% 4.5% (0.9%) 3.6% (5.5%) (6.6%)

Delta v. Benchmark

1.3% (1.9%) (2.5%) (4.4%) 2.3% (1.5%) (2.0%) (5.8%) 1.4% (1.7%) (0.1%) (6.2%) 1.0% (5.1%) (1.7%) 0.5%

2015 DSR

(3.6%) (0.1%) 4.2% 4.0% (2.1%) 3.4% 0.9% 6.3% (4.3%) 4.1% (0.9%) 5.0% (2.0%) 2.9% (3.0%) (8.4%)

Delta v. Benchmark

(2.7%) (1.2%) 0.2% (1.1%) (1.5%) 1.3% (0.9%) (2.4%) (0.6%) 0.1% (2.6%) (5.7%) (0.1%) (5.7%) 0.8% (1.3%)

Days Count Total 2018 22 20 22 21 22 21 21 23 19 23 21 19 254 2017 21 20 23 20 22 22 20 23 20 22 21 20 254 2016 20 21 23 21 21 22 20 23 21 21 21 21 255 2015 21 20 22 22 20 22 22 21 21 22 20 21 254

Notes:

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Employee Statistics

NOTES:

• FTE – “Full-Time Equivalent”. FTE is based on 40 hours per week.

Absolute Count HEADCOUNT STATISTICS 2Q18 2Q17 Change 4Q17 Change Branches/Onsites 13,688 13,335 2.6 % 13,424 2.0 % Non-Branch Selling 1,752 1,664 5.3 % 1,711 2.4 % Selling Personnel 15,440 14,999 2.9 % 15,135 2.0 % Distribution 3,492 3,438 1.6 % 3,575 (2.3)% Manufacturing 682 625 9.1 % 652 4.6 % Administrative 1,241 1,112 11.6 % 1,203 3.2 % Non-Selling Personnel 5,415 5,175 4.6 % 5,430 (0.3)% Total Personnel 20,855 20,174 3.4 % 20,565 1.4 % FTE Count 2Q18 2Q17 Change 4Q17 Change 12,214 11,760 3.9 % 11,549 5.8 % 1,712 1,635 4.7 % 1,676 2.1 % 13,926 13,395 4.0 % 13,225 5.3 % 2,672 2,549 4.8 % 2,525 5.8 % 652 600 8.7 % 619 5.3 % 1,194 1,068 11.8 % 1,150 3.8 % 4,518 4,217 7.1 % 4,294 5.2 % 18,444 17,612 4.7 % 17,519 5.3 %

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In-Market Location Statistics

NOTES:

• As of June 30, 2018, includes 1,996 branches in the U.S., 187 in Canada, and 107 in the rest of the world.
• Branch Count includes all locations that sell to multiple customer accounts (traditional branches, overseas branches, and strategic accounts branches). It

excludes locations that sell to single customer accounts (strategic accounts sites and Onsite locations).

• Onsite location information prior to 2014 is intentionally omitted. While such locations have existed since 1992, we did not specifically track their number until

we identified our Onsite program as a growth driver in 2014.

BRANCH STATISTICS 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 New Branch openings 1Q

53 33 29 37 28 11 9 2 17 5

2Q

59 9 16 38 25 22 8 6 10 5 5

3Q

28 3 45 19 20 11 5 5 8 5

4Q

21 24 37 28 7 9 2 28 5 3

Cumulative

161 69 127 122 80 53 24 41 40 18 5

Closed/Converted Branches Closed Branches Closed (Curr. Quarter)

(1) (2) (2) (1) (4) (8) (13) (22) (31) (43)

Closed (Annual)

(8) (10) (7) (28) (16) (16) (73) (50) (144) (130) (92)

Converted Branches (Annual) Branch-to-Customer Only

(2) (1) (1) (2) (2) (6) (16) (8) (6)

Customer Only-to-Branch

2 1 3 1 1

Cumulative

(10) (11) (6) (27) (13) (18) (74) (56) (159) (138) (98)

Branch Count

2,311 2,36 9 2,490 2,58 5 2,6 52 2,6 8 7 2,6 37 2,6 22 2,503 2,38 3 2,290

Active Onsites

214 26 4 401 6 05 76 1

TOTAL IN-MARKET LOCATIONS

2,311 2,36 9 2,490 2,58 5 2,6 52 2,6 8 7 2,8 51 2,8 8 6 2,904 2,98 8 3,051

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End Market Profile

MAJOR SEGMENT GROWTH Full Year (Daily Sales rates)

Jan. Feb. Mar.

• Apr. May

June July Aug. Sep. Oct. Nov. Dec.

Manufacturing

2018 13.3% 15.9% 14.0% 14.4% 11.9% 14.0% 13.8%

(incl. Heavy Equip.)

2017 3.6% 6.4% 8.4% 9.2% 10.3% 14.9% 14.4% 14.6% 16.9% 15.7% 17.2% 16.2% 12.3%

Construction

2018 7.9% 10.5% 10.9% 13.1% 15.9% 17.4% 12.6% 2017 0.1% 4.8% 6.6% 5.8% 6.0% 5.7% 5.7% 5.0% 4.9% 6.0% 10.8% 11.9% 6.1%

End Market Mix -- 2017

Manufacturing, 41.1% Mfg - Heavy Equip., 25.4% Construction, 13.0% Reseller, 9.1% Gov't/Education, 3.7% Transportation, 2.3% Other, 5.3%