快扣 (FAST) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the Fastenal Company 2007 quarter two earnings conference call.

This call will be hosted by Mr.

Will Oberton, Chief Executive Officer, and Mr.

Dan Florness, Chief Financial Officer.

The call will last for up to 45 minutes.

The call will start with a general overview by our Fastenal hosts, Mr.

Oberton and Mr.

Florness.

The remainder of the time will be open for questions and answers.

As a reminder, certain statements contained in this presentation that are not historical facts are forward-looking statements and are thus perspective.

These forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.

More information regarding such risks can be found in Fastenal's quarterly and annual SEC filings.

Just a reminder that today's call is being recorded, And now at this time I would like to turn the call over to Mr.

Will Oberton.

Please go ahead, sir.

Thank you very much, and I want to thank everyone for joining us today to talk about the quarter.

Happily we're able to report that overall we had a good quarter.

I'm going to go through and talk about my view of how things came out in different categories or areas.

From a sales standpoint, I would say we had an okay quarter.

We started out slow, just over 12% in April, but saw some nice recovery in June, coming in at 14.8%, so we're very happy with the finish.

But overall at 13.3%, it's, it's okay performance based on where we normally are.

From a regional standpoint, where we saw strength and weakness, we really saw a -- had a slower quarter in the entire West Coast ab=nd Florida.

Now we have heard feedback from other areas that because of the fires in Florida, the entire state has been slow, which would make sense to us, but the West Coast has been slow to us.

Qualify that a little bit though, we have made some changes from a regional standpoint out there and so we have new regional managers.

They're getting their -- kind of getting their feet on the ground and we hope that it's -- actually hope it's a little more execution and that we can correct it ourselves, so going forward, we're pretty optimistic there.

The rest of the country seemed very steady -- and Canada all seemed very steady, very close to the same percentage of goal and all of them showing improvement in the month of June, so we're very optimistic from the standpoint of where we're trending.

Our five-year and older stores showed improvement each month.

We are at 4.5%, 5.4% and 6.2% as the quarter went on.

From a strategic account standpoint, it was actually very similar.

We saw each month continue to improve, with June showing more strength in the larger accounts.

We're hoping that that's an overall economic trend and not just a bump in the graph, so we're going to watch it very close in July and see where it comes in.

On the margin standpoint I think we did a good job and I'm very optimistic going forward that we have an opportunity to improve our margin even more.

We're really working hard on pricing discipline, making sure that we're doing price increases and looking at all of our sales, developing new software to make sure that we don't have business going through just for the sake of growing our sales.

And we think we have some opportunity there to raise some prices, not overall but just in cases where we're haven't done a nice job -- or a good job of raising prices in the past.

Also, working hard to develop better methodologies to promote our highest margin products from merchandising, training and of all the flyers that we do.

And the last thing on the margin is we're still very optimistic about what we're doing with our trading company in China.

FastCo continues to grow and develop.

I spent about eight days there or ten days there in May.

The people are getting better and what we really have today that we didn't have a year, and for sure two years ago is a pretty big group of middle managers, people who have now been with us three, four years that really understand our business and are really starting -- I believe really starting to become good at understanding how they can find new sources and I think we'll continue to see growth and improvement in our purchasing business there.

Also on the margin, we actually -- we had an inventory adjustment that's Dan's going to talk about, but without that our margin would have been at about 50.9%, which is, I think, as high as we've reported -- same as first quarter and as high as we've reported over several quarters, so nice job on the margin.

I'm saying that for our people that are on the phone also.

Earnings standpoint, I think we did a nice job also.

We had the lowest leverage point -- we've never been able to leverage our earnings to sales below 15%.

Dan and I looked back at it this morning trying to find the low point, and I think we came up with 16.8% sales growth as the lowest sales growth we've ever seen earnings leverage, and that came from good control on labor, hard work on the margin and general expense control, looking at all the categories.

Now I'm very proud that we're able to do that, but it's kind of one of those low grade at-a-boys, because I'd be happier if our sales were growing at 18% or 22% and we could leverage up from there.

But we are doing a good job and I think we're learning some things on how to control expenses in a slow environment that should come through and help us as things pick up.

As far as our plans going forward, we've spent a lot of time, Dan and I have -- Nick Lundquist, talking to the investors about our Pathway to Profit, our new plan to slow down store growth to about eight -- we're saying 7% to 10% this year.

We're stating 8% and add additional outside sales people.

For 2007, we will only open another -- about 37 to 40 stores for the rest of the year.

The majority of those -- the vast majority of those will be opened in the third quarter and the fourth quarter.

I mean if we have five openings, I would be surprised.

It's probably two or three openings just catching up for things that slid out of September with leases or buildings that aren't complete, and so we're moving ahead -- we're moving ahead well with that plan.

The big key to making this work is going to be the development of an outside sales program.

We've been working on it for a long time, but we've really put a lot more energy in it, in the components that are going to be important -- and I'm very confident that we're going do a good job with this because we've rearranged the group doing it, put some more strength at the top of that group, so we have a very good organization.

We need to provide better information for our sales people -- which we're well on the way of doing -- as far as the territories, the customers, the potential of those customers, better training.

I've been meeting with our people in FSB, and so have our sales people -- our sales leads on what we need to train these people.

So our Fastenal school of business is doing a -- like a 180 shift from inside store to outside sales, and I believe they're up for the task.

Better tools for our sales people.

We're testing -- I believe, in 77 locations we have the handheld computers out there so people can do a lot more at the point of customer contact.

It's really like taking my store information out to the customer site.

We're mentoring -- we're developing programs to mentor these people where we're only putting the new sales people with our best store managers and our best district managers, another point that we think will help us in the future.

And then the last part of it is we need to continue to measure our people, so we're reevaluating our outside sales scorecard.

We're finding some weaknesses in it or things that don't really match up to what we think we need to see, and that new scorecard -- well, it's really an evolution of our old scorecard, so we really know where the sales people are, how good they're doing.

And we're working with some of our statistical people to really model out, to understand where they should be at each point, and so we can determine, is this person going to make it or not way before the obvious comes, where they just aren't -- it isn't working out.

As far as the overall plan, I think we've done a nice job of communicating it to the investors.

We've had, I don't know, dozens of meetings throughout the last -- or throughout the second quarter, and I believe we've done a nice job of communicating it out to our troops.

Nick Lundquist has been -- I don't know, he's probably been in 20 or 30 states talking to groups of managers about this plan and need to do it.

And I believe the team really understands why we're making the change and that they're on board to get the things done and support the program because they see that if we do this right that there's a great opportunity for them going forward.

So overall on the Pathway to Profit, our new plan to slow down store growth, I think we've made good progress.

I think we're at least where we need to be, if not ahead of where I thought we would be at this point, and I think some of the improvement in our earnings growth that we saw in the second quarter was due to this push that we're working on and it's really just a sign of what we can bring to you in the future.

With that, I'm going to turn it over to Dan Florness.

He's going to give you a little more color on the quarter and then we'll open it up for questions.

Thank you.

Thanks, Will.

A few things I wanted to touch on through the earnings release and hopefully you found it to be informative and answer questions you have about the quarter and about progress on our Pathway to Profit.

First off I just wanted to touch on a few things Will had touched on.

On the sales growth side, we put a fair amount of information on the bottom of the first page of the release about trends in our five-plus group, our two-plus group and in our overall business.

Some things that stand out in my looking at the numbers really look at -- from a trends perspective, the first five months of 2007 really continued the weakness we saw, generally speaking, in the latter half of last year,.

It was [amongst] different things, but the general weakness in environment that we've been seeing.

And when I looked at June, we have seen good ISM numbers the last several months and we did see an improvement in our business in June.

And one month doesn't make a trend, but it was a strong note to finish the quarter on and we're optimistic looking into the future.

From a headcount growth perspective -- when I get down to the operating expense, I'll touch on this a little bit more -- but from a headcount growth perspective, you saw in our monthly release the -- the FTE numbers, as well as the overall headcount numbers that we've historically put out, we did a -- I think we've done a nice job of investing headcount growth in the areas that are going to drive our top line in the future.

They play in hand-in-hand with our outside sales initiative, as well as our effort to leverage the fixed costs of the organization, and really I'm talking about the support labor aspect of it.

And from that standpoint I think we're executing at a very high level.

Looking at the initiatives that we continue to talk about each quarter, I'm going to really touch on the four items.

From a freight initiative perspective, we continue to eke out improvements in that.

That's been a tremendous contribution to the organization over the last several years and we continue to get better at that.

Do (inaudible) a little headwind in the current quarter because of changes in freight costs -- excuse me, fuel costs, but continue to see improvements in our overall performance on the freight initiative.

On the working capital -- I'm going to touch on that a little bit more in a few minutes -- but I continue to be pleased with our progress there on working capital initiatives.

The only negative I would note is we've lost some momentum on our bad debt management and we're working very hard to understand what's driving that, to turn that around and improve it.

The CSP2, the third item on the list, we have really expanded the outside sales initiative component of that and we're continuing to refine the inventory that's going into our CSP2 stores.

Finally on the master hub -- and this one, I want to think -- I want to talk a little slower on, for one, and I want to just talk through that because we had an investor meeting down in Indianapolis.

Our master hub here in late April, gave a group of folks to come in and see the facility, to kick the tires, so to speak.

One thing that I think that's missing when I talk to the investment community in general is, I think people still don't appreciate how a big deal this is for our organization of putting this very wide selection of inventory that's readily available for our store base to tap into and that inventory, combined with our distribution network, what that can mean for our stores.

If you think about our store locations and their proximity to customers and our outside sales initiative, our sales personnel at our store are armed with the technology that Will touched on and a readily available selection of inventory.

I really don't believe there's somebody that can compete with that from the standpoint of a service level in a distribution machine that can support industrial needs in North America, as Fastenal will be able to with the master hub concept.

In the future, as we've talked, as the West Coast continues to grow, we'll do similar things on the west coast, but it really puts our stores in a position to be able to say yes to their customer when they're -- when their inquiries are made and it's a powerful advantage.

And hopefully I didn't beat that to death, but I really think it's something that is a huge business advantage to our organization.

Looking at the gross margin aspect of the quarter, as Will touched on, we continued to see nice year-over-year improvement in gross margin.

There was one negative item here, and that was we -- as I mentioned in the earnings release, we implemented really the final major piece of our ERP system and it really related to the procurement mechanics at our distribution centers and how we track those -- that procurement activity, how we track the liability amounts, et cetera.

And our old system, which, as I mentioned, had been built back in the 1980s and has served us well over time, was a fairly manual process and when we turned on the new system we realized we had some liabilities we needed to true up.

That resulted in a cost-of-goods adjustment to the quarter of about $2.9 million, so it impacted our gross margin by about 60 basis points.

You know, when I was going through information last week and that number was being finalized and I'm looking through that, I'll tell you that the negative that popped in my head, it was -- talking about it to the shareholder obviously it's not something I'm particularly proud of, but more important, it was the negative impact it had on our regional and district leadership within the organization, because they are paid off of the profits of the organization at district level, but we allocate all costs of the organization out to every store so that we have a true fully-loaded P&L.

And the impact, while we had a -- our trends in gross margin improvement masked it to some extent, from a regional VP standpoint, from a district manager standpoint, it was costly on the bonus plan in this quarter, that adjustment.

And -- but moving forward I'm confident we will continue to see strong gross margin performance, because I think we have a good plan in place.

Looking at our operating expenses, I think we did a very nice job on operating expenses.

As Will mentioned, our ability to leverage at a sub-15% top line growth has not been in our making historically.

I think we're doing a nice job.

Some of that leverage came because of our gross margin improvement.

Some of it came because we did a nice job of leveraging our SG&A.

And the biggest component of our operating expenses is our labor.

When I look at that entire category within our P&L, our labor costs increased under 10% year over year, and that's despite the fact that we had a 35% increase in our profit sharing contribution for the quarter, which we include in our labor expense on the P&L., and the impact of stock option accounting when I look at 2006 -- the first six months versus 2000 -- excuse me, 2007 versus 2006 for both the six and three-month periods.

Finally on the working capital section, we continue to produce strong cash flow and improving cash flow.

From a working capital standpoint, we leveraged the accounts receivable growth relative to sales growth.

Obviously, as we get deeper and deeper into the call center, which was established back in 2005, the ability to leverage on that becomes more and more challenging because we've really moved the needle on our performance there.

We believe we still have the ability over the next several years to squeeze out approximately five days of AR and that's what we're working towards.

That's a goal.

It's nice that I throw those numbers out, but I want to be cautious to qualify those, but that's a goal of ours.

We believe it's a goal that's achievable and we've done a nice job to continue moving that number down over time.

Inventory has beco -- (inaudible) the first quarter we've really, in my mind, turned the corner on execution with inventory management about having the right product in the right location for our cust -- to satisfy our customer needs and to do it as efficiently as possible for our store and distribution personnel.

The improvement in inventory, when I look at the first six months of the year, is really about -- when I look at that $15 million of inventory we added, about 80% of that number is really dollars that went into new store openings, CSP2 conversions and CSP3 conversions, and so 80% of that number is investment dollars for the future.

The other 20% is really dollars we've been able to -- we'd add into our distribution network to support our store base and we've actually added at a little bit higher pace than that 20% would indicate because we have efficiently relocated inven -- surplus inventory that was physically in our stores before and we have great momentum on that right now going into the future.

Looking at our cash flow statement, I'm going to call that out, primarily because when we had our fourth quarter conference call, I expressed my genuine frustration with our performance on cash flow, especially from an operating cash perspective.

The -- historically I've looked at -- if I look at operating cash flow relative to net income, historically we produce somewhere in the mid -- for every dollar of earnings, we produce somewhere between $0.50 and $0.70 of operating cash flow.

Last year we were at the absolute low end of that range.

We were at 50% and that was personally frustrating.

In the first six months of this year, we produced for every dollar of earnings $0.94 of cash.

I contrast that to the same period last year, for every dollar of earnings we produced $0.61 of cash.

Now that's above and beyond where I see our numbers over the next five years.

I think we'll be in that 80% to 85% neighborhood, but it really demonstrates the improvement we're seeing from the inventory component of working capital.

Finally, a couple of things I wanted to touch on before we go over to the questions, is we did announce last night -- and I did put a blurp in here on the earnings release -- we did announce that our second half dividend, first half of the year, we paid out a $0.21 dividend.

We increased that to $0.23 and it'll be payable this fall and we did increase the authorization on our stock repurchase plan by adding another million shares.

As you saw from our cash flow in our earnings release, we have it in the market in the first six months of this year and we'll continue to look for opportunities to buy back stock for our shareholders.

With that, I'll turn it over to Dana to moderate our questions.

One item I would ask of people making questions is we want to have opportunity for as many people to ask questions as possible.

If you would limit yourself to one question, we would appreciate it.

Thank you.

Thank you, sir.

(OPERATOR INSTRUCTIONS) We'll take our first question from David Manthey of Robert W.

Baird.

Hi, guys.

Thanks for taking the question.

Was wondering if you could help me with -- really just one in terms of the P&L and then just a quick one, and then a philosophical question after that.

First of all, on the $2.9 million, what was the corresponding bonus reduction related to that number?

It would be about 20 -- probably about 20% of that number, so six -- roughly $550,000 to $600,000.

Okay, thank you.

And then the key question here, as you look at the Pathway to Profit and you think about making the transition from the store growth model over to the people growth model, even though the Fastenal story's always been about the people in the stores, not the stores themselves, could you talk about what are some of the risks as we transition to the Pathway to Profit and how you're going to overcome those?

Well, the real risk is that we're not able to execute on the outside sales program, but the reason we're comfortable with making the move in spite of that is that the new stores that we're not opening this year, the hundred stores, really don't contribute a lot in 2008 or even in 2009.

So if we were to decide or determine that, boy, this was just not a good move, we could regroup.

We have the machine in place to open those stores and it's really just a time issue that we're going to be a step back.

But we're very confident that we can make the outside sales program work.

Dan talks about it being neutral to our top line.

Internally we're optimistic that maybe it's better than neutral because we're going to be touching a lot more customers, and with all the things we're doing, we can be pretty good out in the field.

Really the big risk is top line sales because the operating expense, that's going to go down if you don't have as many buildings.

That's pretty much a given.

It's about revenue driving revenue.

Right, okay.

Thanks very much.

And we'll take our next question from Jeff Germanotta of William Blair.

Good morning.

You talked about sales trends being a little weak in the West Coast and Florida in the quarter.

Can you talk how that -- was that weak throughout the quarter or did it improve towards the end and how is it trending in the first part of July?

I have not looked at it close in the first part of July, so I won't comment on that, Jeff.

But it was weak throughout the quarter.

And it was really weak in the -- for the most part all year long, but it seemed to get weaker in the May/June timeframe.

As a percentage of goal, that's what we use a lot, is our benchmark.

We set the goals and we try and make them in all attainable.

Those areas were slightly lower as a percentage of goal in May/June than they had been in the March/April timeframe and Florida -- May was the real -- May and June were real tough months.

Thank you.

And we'll take our next question from John Baliotti of FTN Midwest Securities.

Good morning.

Dan, I was just curious on the gross margin side, you guys identified the $2.9 million on the inventory that you absorbed in the quarter.

Do you feel that you -- even though it's early on the -- turning on the ERP, do you feel like you've uncovered most of that, or do you feel like -- in other words, is that -- do you think that that's a good trend that we should be looking at for gross margin or do you think that you have still some areas that you want to weed out in terms of running the ERP through the rest of the system?

No.

The ERP system actually turned on May 20th and so we've had -- we've had a fair amount of time to really, really -- we spent a fair amount of time developing that system and had some time to really beat that number up, so I'm very comfortable with -- we've identified what there is.

Okay, so you think you've got that pretty much cleared up?

Yes.

Okay, great.

Thanks.

And we'll go next to Holden Lewis of BB&T.

Great.

Good morning, thank you.

On the revenue side first quarter and second quarter looked a lot alike in that the first two months of the quarter looked somewhat softer and then the quarters got saved a bit by a very strong margin, in this case a very strong June.

Should we read anything into that pattern?

Is maybe the fact that they had a couple tough months sort of filter through to the sales force and maybe they act a little bit differently or is it just a coincidence?

How should we look at that?

When I -- I follow your point.

The only thing I would contrast on that, Holden, is when I look at the blip up, if you will, in March, part of that was influenced by the fact that, if you look at our comps in the first quarter, January's was the toughest comp and then it got easier as the quarter progressed.

Second quarter was a flip of that.

June was the toughest comp and we produced the best growth numbers.

And so, I think it was more a case of June -- when (inaudible) those six months, I believe June is the outlier, not March and June, although March was a strong month.

Okay, fair enough.

And then on the profit side, the -- you mentioned the diesel costs.

You mentioned that it began to kick in on the Q2.

To what extent -- if you know what the diesel nut is at current levels, to what -- what percentage of that nut did you feel in Q2 and how much is going to be incremental to Q3?

The increase in diesel that we saw, it was really there at the end of March.

It wasn't a case -- so when I looked at the three months, it was really -- it was ramping up.

It was -- it had really shot up from March to April and it was fairly stable.

So when I look at the -- the dollar impacts that we threw into the earnings release from a trends standpoint, I think that trend plays into Q3, and I'll qualify that only from the standpoint of, obviously, the energy prices could change from Q2 to Q3.

It could change next week and because of some of that.

But absent something like that, I really think the number is -- the impact's embedded in the second quarter and will trend into the third.

Okay, but you feel like -- at the current level, you felt it all in Q2 and so what you feel in Q3 will basically be the same kind of impact?

Correct.

And Holden, this is Will.

Diesel is a far smaller part than regular gasoline.

Right.

Oh, it is?

Dan corrected me.

It's 50/50 now, so running more trucks.

Okay.

But the point being it's not like there's an incremental piece to be felt in Q3.

No.

(inaudible) the whole impact in Q2 from those things?

Correct.

Unless we see a big bump in the next few weeks.

Right.

(inaudible) now.

And then talk a little bit about the support side of things, because you are doing a great job leveraging that.

You haven't really made any substantive hires on the support side now for -- let's call it the past year or so.

How long do you think you can go without adding more support staff, given that you do continue to grow north of 10% and well north of 10%?

We're going to -- we have added some people.

I think they're up 3% or 4%.

Our goal is to grow our support staff expense, not headcount, at half the rate of sales going on a go-forward.

We're a little tighter than that right now.

One thing you have to understand is the new stores really take a lot of support help from a standpoint of training, opening, mentoring, leadership, and the fewer new stores, the less support we need.

We would spend more time supporting a new $20,000 store than we would a larger store that has good leadership because they don't need all the help.

So a lot of our system is really built around supporting this new store growth and development.

By slowing that down it really takes a big demand off the support group.

So going forward our stated goal is grow our support labor at half the growth of sales.

So if we're able to grow it 15% for the year, you'll see that 6% to 8% labor growth in support.

(OPERATOR INSTRUCTIONS) We'll go next to Michael Cox of Piper Jaffray.

Good morning, and congratulations on a very nice quarter.

Thanks, Mike.

With the improvement in the working capital and the step-up in share purchase activity in the second quarter, is that something we should continue to see as we move through the balance of the year with the plan to slow the store growth?

Well, I'll -- I think I'm answering and if I don't, circle back on me, Mike.

When I look at -- the second half dividend is a fairly normal thing for us.

We did decide to increase it roughly 10% because of the strong cash flow, but that's -- to me, that was a fairly normal piece for us.

In the case of the stock repurchase, I asked the board for an additional million share authorization.

And it -- as we've done in the past, we've always endeavored -- when we do have stock options out there -- actually what we did two years ago is we wanted to go out and purchase enough stock at an attractive price for our shareholders to cover the dilutive impact of the options.

We were able to double down on that last year because we had a -- unfortunately for our shareholders we had a buying opportunity and we took the proceeds coming from our employees on the stock option exercises and added another $6 million, $7 million to that and went out and bought a bunch of stock.

The million share authorization back in January and the second million authorization we just announced yesterday is really a continuation of that effort to go out and buy, when it makes sense, stock in the open market to cover our stock options.

And then beyond that, we'll really be more dictated, I think, by our cash flow and the [offset] at the board level to do additional stock repurchase.

That hasn't historically been our MO, but we are in a position.

with extremely strong cash flow that we expect to continue into the future, be enhanced as we continue to improve our working capital And I wouldn't rule it out, but traditionally hasn't been our MO.

Okay.

Just one quick follow up to that then.

If the share repurchase would not be the priority, what would be the other use for that cash as you build your cash balance?

You know, I'm thinking out loud with this a little bit, Mike.

The one answer I've said is we -- in the past is we do have -- if we have one problem in our organization, it is a high-class problem than if we throw off more cash than what we need at our current rates of growth.

We will -- we're going to learn a lot.

As I touched on in my narrative about the Indianapolis facility, we really think that's that hidden gem that nobody really realizes the power of and as we can see -- look at that over the next several years and how that makes our business more efficient, how that allows us to say yes more and more where it makes good sense, would we consider expanding inventory in there in the future?

Absolutely.

I don't want to come out and [all of the sudden] take away from that, oh, geeze, we're going to add another $20 million of inventory to Indianapolis.

That's not what I'm saying, but we would consider that in the future if we saw the returns made sense.

But some patterns we've had over the last several years is we -- we have been increasing our dividend level, and for the most part updating the cash problem, but that cash problem will grow over the next five years with our Pathway to Profit execution.

And Mike, we're also going to look real hard to find other ways to use that cash to grow our business profitably and create higher returns.

At our board meeting yesterday there was a subtle, but a challenge there, about you're throwing off a lot of cash, what ideas do you have to continue to consume this because that's what the shareholders really want.

They want us to take the cash and give you back great returns.

So I like the challenge and I don't know what we'll come up with, but we're always looking and we're trying to run the business better wherever we can.

Great.

Thanks a lot.

And we'll take our next question from Dan Whang of Lehman Brothers.

Yes, this morning.

This question was on gross margin performance in the quarter.

Making that adjustment for that inventory liability, it was up 100 basis points year over year.

How much of that came from the freight initiative versus the direct sourcing and what could have -- what can we expect in the second half of the year in terms of year-over-year gross margin trends?

When I look the a the freight initiative, we started that back in '05 and we really have made a very meaningful progress on that by the fall of last year.

Just a little bit of a number from the hip, I'd probably look at it and say there's probably 20 basis points of freight component in the mix.

It's really about two things.

It's about the execution that Will touched on related to our sourcing activities and discipline at the store level on pricing and sales mix.

You know, we -- we're very decentralized and our stores do most of the pricing.

Other than strategic accounts they're doing pricing and we've really raised the awareness on remembering our business rules, identifying opportunities, not going out and raising prices on customers who are already paying good prices, identifying sales that maybe don't make as much sense to us and putting a little more risk by raising prices on those orders.

And if we lose them, it's not the end of the world because they weren't highly profitable and we're finding a lot of success with that.

And I equate that to raising the bottom more than raising the effort.

Exactly.

Okay.

I guess related to that,\with the ERP system fully implemented, would that enable you to establish some of that additional pricing discipline that you would like to work towards?

No, I don't think that has anything to do with it.

It's really about making sure that our people in the field understand our view on business, what business we want, what business we don't, and then monitoring the activity and identifying the stores that aren't hitting that in the districts.

It's really about education and opportunity.

Okay.

And (inaudible) throw another one about the -- obviously one of the key lynch pins of this new strategy, the Pathway to Profit, is the whole sales force execution and how is that process going as you ramp up that whole expanded sales force?

Right now I feel it's going very well.

We don't have a lot of solid measurements back because we've only been working on it hard for about three months now, but the people organizing it seem to be doing a great job.

The feedback is good.

The regional managers that I've been talking to are saying things are going well in the field, so I'm very optimistic that we're making the right steps, investing in the right areas to make this project very successful.

So at this point, I'm very confident they're doing the right things.

And we'll take our next question from Brent Rakers of Morgan Keegan.

Yes, good morning.

Dan, you talked a little bit about labor costs increasing under 10% and I was hoping maybe you could elaborate on that beyond just the hiring numbers itself.

Has there been any changes to the compensation schemes, maybe to offset the initiation of some of the stock option plans?

No, there have not.

One reason we're able to do is our programs are heavily weighted to growth and when we're putting up 13% growth, the percentage of commission is lower than if we were at 18% or a higher growth number, So there's this built-in squeeze and it's been in there for years.

It's just we're normally not at 13% growth.

And just one other question, if I might.

Any comment on the revenues in terms of the trend of fasteners restrengthening relative to the non-fastener sales?

And then on the monthly sales trend, do you make anything of the strengthening?

How much do you make of this in terms of the number of business days that ended up fall in the April and June month of the quarter?

It really doesn't have, I don't think, anything to do with the business days.

I haven't thought of it that way.

Remember what I saw, I've been talking about pushing the more profitable products.

We're working real hard to promote fasteners.

Fasteners are fun, as you know, and so we're working hard to do more to promote it.

We have a really aggressive group in our fastener product development area and when they started working hard a year ago on marketing it I was kind of scratching my head, but they came up with some creative ideas.

A couple product lines in particular they have worked real hard at working on and we've seen great results and I think this is a -- this is a reflection of their hard work more than anything else promoting the high-margin product.

Hopefully this is a trend that we can continue to see improved, or even maintain would be fine.

And one other thing I would add is when we were looking at our CSP 1 and as we were morphing into CSP2, we did identify additional fastener products in our CSP2 that we rolled out to all locations.

We call it our CSP1.5, and -- but we have a great selection of fastener product in our stores today and a great support infrastructure and through our distribution centers for the fastener product.

The things we talk about in Indianapolis about the strength of the -- of the support that we can provide to our stores.

A lot of that we have in fasteners we're improving with Indianapolis, but a lot of that we haven't.

And due to time constraints for today's call, that will conclude today's question-and-answer session.

Gentlemen, I'll turn the call back over to you for any additional or closing remarks.

I want to thank everybody for listening in on this conference call, either via phone or via the internet.

I want to thank the individuals for the call, for the questions they had.

I hope this was useful for our shareholder base and hopefully provided sufficient information in our press release.

Thanks to everybody and have a good day.

Thanks.

And that does conclude today's conference call.

Thank you for your participation.

You may disconnect at this time.