快扣 (FAST) 2008 Q1 法說會逐字稿

Good day everyone and welcome to the Fastenal Company 2008 quarter one earnings conference call.

This call is being hosted by Mr.

Will Oberton, Chief Executive Officer, and Mr.

Dan Florness, Chief Financial Officer.

The call will last roughly 50 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 prospective.

These forward-looking statements are subject to risks and 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.

Also as reminder, today's call is being recorded.

And at this time I would like to turn the call over to Mr.

Will Oberton.

Please go ahead, sir.

Thanks Dana.

And thank everybody for joining us today.

If you have seen our numbers, you have seen that we had a good quarter.

First quarter came in very well for Fastenal, sales growth of 15.8%.

And I think for us the most impressive thing was our March growth of 16.9.

With Good Friday in there we weren't expecting to do quite so well.

I think it is really a testament about our sales program, what we're doing with the outside sales program.

March is the month of our bounty hunter sales promotion, but that is a promotion we have been running for about four years now, so year-over-year it is the same promotion, a lot of the same products.

It went a little better this year than it has in the past.

We really think that was due to the outside sales initiative that we started.

We had a lot of people out pounding on a lot of doors and ended up with some very strong results in March.

One other point I would like to make is there was really nothing unusual in the month as far as large sales or onetime events.

We had some questions on that.

But it was pretty much business as usual.

Just a little higher daily sales rate.

All ages of stores grew well.

Our large older stores grew at 9.9%.

I was a little disappointed.

We were looking at it.

I think, ah, we're going to hit 10.

We were very close, but double digits would have been nice.

But it is the best growth in the large stores we have had since all the way back in August of 2006.

So good growth in the older stores.

It probably shows that the U.S.

economy, at least that we deal in, is still chugging along fairly well.

We haven't seen a lot of change since probably the beginning of 2007.

When we look at what is going on out there, we believe the improvement is really more due to execution than the economic environment at this point.

We're working a little harder and hopefully working a little smarter.

Geographically there was really nothing unusual.

Most of the country did very well.

On a very positive note though, we saw nice improvement out of the West Coast and Florida, two areas that I mentioned on both of the last conference calls that have been holding us back.

Now both of them are smaller areas for us because they are newer for the Company, but the West Coast was just shy of goal, and Florida showed very nice growth for the first -- actually the best growth they have shown in I think about 16 to 18 months.

So I don't know if -- that is somewhat probably economic and also again execution.

Some of the changes we made with management and the focus on those areas, and we are seeing some nice developments there.

The margin, we did a nice job on the margin.

I think -- I know there are several initiatives that have really been improving our margin.

We had nice growth or improvement in margin in the fourth quarter, and we continued on that program.

The things that I would state that have probably made the best -- the biggest year-over-year difference in our margin, the first one is our Indianapolis expansion project.

We're identifying more and more parts that are sold every day in our stores that in the past were out purchased by the stores, and in many cases at a higher price with freight involved.

We have been putting them on the shelf, and that project is going extremely well.

It continues to grow much faster than the Company -- the product being shipped out of that facility.

That really helps our margin.

Another part that we have done a better job of -- another piece that we've done a better job of as a company is working to develop better systems to implement price increases when we need to, really monitor better.

We have been working on this for quite some time.

Some of our improvement in the fourth quarter was due to that.

And again, improvement in the first quarter where we identified -- we're gleaning through the customer information.

One of the challenges that we have in identifying low margins and things like that is we're very decentralized.

We don't want to set all the rules here in Winona.

We want to give our store people a large discretion in pricing to the market and understanding the market.

But at the same time, we need to have good systems to identify opportunities, and we also have to identify sales that just don't make sense to us.

So we have done a much better job of developing systems to monitor our pricing.

That really leads to what I think is the biggest reason for our margin improvement, and that is really about bringing better discipline on low margin, unprofitable sales.

Early in 2007 we really started working on this -- I spent a lot of time on it myself -- identifying from all different angles.

One is we started with customers saying, what business make sense to us and what doesn't.

Based on a lot of things, how much work do we do bin stocking, freight -- is it a standard item?

We have a lot of criteria that we sort through because when the same -- a low margin on one sale may be very profitable -- or one sale with a low margin might be quite profitable.

Other sales might be very unprofitable, so we had to get more sophisticated in how he looked at it.

Then we started bringing more discipline to the process, and really just putting in minimums for different types of products.

That has been -- in a very decentralized world that Fastenal lives in -- it has been kind of throw the gloves off and fight your way through it for the last 12 months.

But we're starting to get a lot of traction.

One example that I would like to use, a product that I had been watching very close for about the last nine months, is our power tool business.

About 2% of our revenue is generated by power tools, the -- Bosch, DEWALT, Metabo, companies like that.

And that is traditionally our lowest margin productline, and is because we're competing against the big boxes, and it is just generally a lower margin productline.

We sell it because it also drives accessories sales, which are higher margin products, and our customers need those.

Six months ago -- excuse me -- in the April/May timeframe I got together with our team, and a lot of our guys led it actually.

We brought in some new discipline.

And what we really decided is we're going to quit chasing the Internet sales.

You can always find a better price from Amazon or somewhere on eBay.

We said, you know what, we are going to put in competitive pricing.

We're going to stick to our model, and we going to walk away from some business.

Now it wasn't a real popular decision throughout the Company.

We had people saying I was crazy, or we were crazy, but we stuck to it anyway.

For the last six months of 2007 our power tools sales only grew less than 1%.

That is about a $20 million piece of business over that six-month period, and we grew it at 0.6%.

But our gross margin on those products grew 32.5%.

So we didn't grow the business, but we culled out of that a lot of sales that just didn't make any sense to us.

And so we had very nice growth in the gross margin.

And now we're starting in the first quarter -- we're starting to see the growth come back into the power tools.

So we have maintained the gross margin and grow the business, we're just basically lost a year of sales growth, but we gained a lot of profitability.

We're making more sense out of the business.

That is an example of one big productline, but we have been doing that with the small productlines.

We have been doing that looking at customer segments.

And with all of this hard work we have made a lot more sense -- we are rationalizing some of that business.

That is the biggest change in our year-over-year margin that we can see, is just not raising prices across the board.

It is looking at each order and trying to make sense -- does that work for us and bring discipline to the sale.

One other thing I would like to touch on, on the margin is we have been seeing inflation in our product.

Most of the inflation is really limited to the steel fasteners that we bring in from Asia, for the most part limited to steel fasteners that we brought in from Asia.

The biggest increase has been in the low carbon, the lower cost per pound fasteners, mainly coming from Taiwan and China.

And those prices -- since about the first of October, those products have gone up anywhere from 8 to more than 20%, with the average being probably in the mid teens.

Now that product only makes up about 15 to 20% of our cost of goods.

So when you net it down it adds about 1, 1.5 to 2% to our overall cost of goods.

And that we have been working very hard to pass-through.

We raised our wholesale price on these products.

That is our printed fastener price, our price on those fastener products, March 1.

And so we sent that out.

And the way the process kind of works is the small customer walks in the door.

We will probably get the higher price the first day they walk in, March 1.

The medium customer usually has a 30 to 60 day notice that we would contact them and say, in 60 days I'm going to raise your price, really out of respect and respect for their business.

And the large customers, the customers doing $200,000 to $1 million a month, is more on a six -- probably three to six-month program, sometimes as far out as the end of the year and the end of the one year contract, depending on where that started.

So is a long linear processor of pricing increases.

And so we will continue to see a little bit of incremental gain on that as we go forward.

But at the same time our costs will move up from the bottom.

Now when you think about the products I am talking about, these are our slowest turning products, less than 2 turns per year, because they are coming in from Asia.

So it is very hard to map it out, but if you just picture that product starting to come in, we are purchasing it.

We purchase it between October and March, and it comes in and sells through six to seven months after that.

And the price increases will probably flow at about that same rate.

So we may see a little incremental gain in the margin upfront, but generally it is more of just mapping together where the cost goes up and the price goes up at the same time over a long period of time.

The last thing I'm going to touch on, and then I'm going to turn it over go Dan, is our path -- the progress on our 'pathway to profit'.

I guess the way I would say it is the arrows are all pointed in the right direction.

The things that we talked about when we rolled this out in April of last year, with store openings, our store openings are on track.

We had planned, I believe, to open 60 stores, and we opened in the mid-50s.

A pretty nice job by our folks.

Our sales program is progressing very well.

We have -- Nick Lundquist, [Lee Hine] went out and met with all their salespeople, the same way that I did last year.

They are saying, hey, it is just getting better.

Well these guys, they are fired up, they are out there selling.

We have a long ways go in developing that program, but we came a long way in the last year.

Our average store size grew, just like we said it would.

A little lower than we thought because our topline revenue is only in the 15s.

We hope to get into the 20s over a period of time, and then we'll even get greater growth per store site.

Better return on assets, higher profit, lower inventory, better return.

And we exceeded our pretax goal that we had stated of 1% year-over-year.

As I said, I think everything is lined up.

If you looked at our earnings release, we also put some more information in there that shows how that rollup works -- or how it rolls out.

Dan is going to talk a little bit more about that.

But I think if you spend time looking at that, and just look at the percentages and the age of stores, it will start making sense to you what we're trying to accomplish with our 'pathway to profit'.

With that I thank you, and I will turn it over to Dan, and I will be back for questions in a few minutes.

There are four primary points I'm going to touch on, and come a few other items of note I will add-on towards the tail end.

They really center on these four things, gross margins, 'pathway to profit', some discussion on our operating expenses, and a few points of note on our balance sheet.

First off as it relates to gross margin, I think Will touched on it well.

When he started his conversation he was talking about discipline.

Nick and Lee and Steve, when I look at working with their 17 regional VPs around North America, actually around the globe, have done a really nice job of instilling discipline to the process, to really go after it more with a scalpel than with a dial.

And go after the business where we can either look at it and say, challenge this business, can we improve it or some of it?

Are we willing to give up some business?

And, yes, there is some business that we have given up, and yet we are able to put a very attractive growth number for each of the months, as well as the quarter.

As Will mentioned, some inflation benefits.

However, when I look at that in the context of the quarter versus other quarters that is a relatively nominal figure.

When I look at the piece about being willing to give up some business, I think the two examples are very good cases in point.

And then, finally, the fuel.

I probably put more in the release than normal on fuel, because I think it is very important detail for our shareholder base to understand, both from the standpoint of impact and maintenances.

And from a gross margin standpoint the impact was fairly nominal, which I really credit to our distribution folks of being creative on how we move product, and how we can manage other aspects of cost.

Because the 30% plus increase we saw in both gasoline and diesel, that is a very much uncontrollable thing.

But what we can control is how we maneuver around those costs.

And I will close the gross margin by throwing out one more time, it is really about discipline and how we price and go after business.

A second item on 'pathway to profit', probably the biggest thing -- I think the information is fairly self-explanatory, but one thing I would like to emphasize, and I would emphasize on every call when we cover this, it is really about morphing the mix of our stores over time.

If I look at the March 31, 2007 data, you would see that about 53% of our stores are in the first two categories, either the 0 to $30,000 a month group or the $30,000 to $60,000 a month group.

The other 47% is in the upper three, the more mature groups of stores, where we really drive our profitability.

That mix in the last 12 months has split to now it is 50-50.

Half our stores are in the first two categories, half in the last three.

Probably an easy way to think about it is we basically took 40 stores out of the first group and put 40 stores into -- and 30 some stores into the top group, and the stuff in the middle just shuffled little bit.

As I look at that over the next -- over the five-year period of our 'pathway to profit', going up to 2012, we are opening about 40% fewer stores a year.

So I would naturally look for the first two categories to move down about 40% when I look at that number five years from now, naturally.

And so that 50% in the first two categories I believe moves down closer to 30, such that the last three categories, the real profit engines of the organization, are at about 70% of our store base.

Now that is a natural progression if you ignore the impact of adding additional outside sales and growing -- and pushing that faster, and growing the groups into the larger categories a little bit faster.

I really believe five years from now that we will have about 25% of our stores in the first two categories, and about 75% in the last three.

You look at that based on opening 8% new stores a year, and you get a feel both in the morphing -- the change morph and the number of stores we will have in each of those respective categories, looking out five years.

In the operating expense category, again a simple way to look at our operating expenses is about 65 to 70% of the dollars in that number are related to payroll.

We did not enjoy leverage on that cost this quarter.

I really look at it, when I start looking at the components of the cost, our base in hourly costs did leverage in the quarter.

What didn't leverage is our commission and bonus payouts.

And those are really more centered on the store side of it, where we did a very nice job of raising our gross margin and were able to improve that.

It is about gross profit dollar increases and how we leverage relative to that.

The second component of our operating expenses is occupancy.

It is about 20% of our dollars.

I am pleased to say, and I haven't been able to say this since about 2000 and -- I would say about 2000.

We did leverage our occupancy expenses this quarter.

And I would expect us to continue to enjoy that going into the future.

Again, really predicated on the fact we are opening 8% stores, and we're able to move that needle down from about 6% of sales, what it is today, down 1 or 2 percentage points over the next five years.

That is our internal goal.

The third category, all the remaining items, the biggest individual component in that is store fleet.

And again, the fuel prices did beat that expense up a little bit.

And we will see how that plays out as we go through the year.

I put some information in the release as well about where our fuel costs are running.

Finally, on the balance sheet.

From a working capital standpoint, accounts receivable, we continue to eke out modest improvement in that.

We're in the third year now of our call center, and so the numbers we're going after our getting more challenging.

But I am pleased to say we're still seeing incremental improvements in our accounts receivable.

Inventory, extremely pleased with the execution at the store district and regional level, as well as our distribution centers, on managing inventory growth of about 10.8% year-over-year versus our sales growth for the same period.

Finally, on fixed assets, as I had mentioned in the annual report last year, there are some significant capital expenditures going on in 2008, and they really center on four items.

One is the replacement of our Dallas distribution center, which is occurring currently.

Some of the construction on that was delayed in 2007 into 2008 because of bad weather.

So significant dollars being spent there currently.

Indianapolis, and there's really two pieces to that.

We purchased some adjoining property to our distribution center down there in the first quarter.

And on a portion of that adjoining property we are in the process of expanding our distribution center, as we speak.

And then the final piece is our Cold Heading Division in Rockford, Illinois.

We purchased a new 100,000 square foot facility in the first three months of this year and plan to be into that midsummer of 2008.

There are a few other items I wanted to mention.

It is interesting when you start looking at different components of your business, what you can do to affect numbers.

I am very pleased to look at -- if I ignore our U.S.

and Canada business for a second and look at our other foreign business, our profits there -- those are relatively new operations -- our profits are fairly nominal.

In fact, they were marginally profitable as a group in the first quarter of 2007.

Our profits in that group improved by $1 million from first quarter of 2007 to first quarter of 2008.

And I really credit it to the people that we have put in -- when I looked at our new leadership in Mexico, our new leadership in the other foreign operations, really doing a nice job to stimulate the profitability and the growth of that business.

Then one other items I wanted to make note of, next Tuesday at 10 AM Central time, we're going to be hosting our annual meeting here in Winona, Minnesota.

And I invite those of you that can make it to please attend.

If you can't, please listen to it over the Internet.

We will be webcasting it.

Two things I would highlight, two of our senior regional VPs are going to be in and speaking at the annual meeting this year.

Randy Miller, who is our VP of our Indianapolis business unit, he is going to focus on talking about the role of store manager.

Ken Nance, who is our regional VP down in our Dallas region, he is going to be talking about the role of our outside sales personnel within the organization.

I think those two discussions are really important for both our shareholders to hear, as well as our employees at Fastenal, because it really helps understand what is driving the organization.

And those two roles are key to our success.

With that, I will turn it back to the moderator and we can start Q&A.

And again, I do want to thank everybody for taking time this morning to listen to our conference call.

(OPERATOR INSTRUCTIONS).

Michael Cox, Piper Jaffray.

Good morning guys and congratulations on a great quarter.

Thanks for your nice words this morning.

My question is on the goal towards the 100 basis points of operating margin expansion for the full year.

You are off to a very good start here through the first quarter.

I was just curious how you feel about that now three months into the year?

And what level of sales growth would be required to reach that goal as you see it today?

As I see it today, if we can maintain the level of sales growth that we have, that 15, maybe a little north of 15, right around 15, we can make that happen.

Really it is going to be driven by our real good job on support labor.

And also we think that most -- I don't know how much of the margin will remain -- but we're going to have a strong margin for the -- relative to where we have been over the last couple of years.

So at 15 to 16% sales growth we should be able to get our 100 basis points for the year.

Dave Manthey, Robert W.

Baird.

I wonder if you can talk a little bit about other things in the gross profit?

It was really a great number.

I'm wondering if you can talk a little bit about mix and inventory type gains in terms of pricing?

I think you mentioned that a little bit, Will.

Rebates, any other factors in there?

And then last quarter, Will, you had mentioned that you thought the 51 and change type level was sustainable.

Based on what you said, it sounds like a lot of the changes that have been made are also sustainable.

So is the 52 to 53 level the new plateau here?

I'm not sure if it is the new plateau, but I have been talking 52 for a long time, the last two or three years, saying that I think those numbers -- really what I have been saying is the margin of old is not done forever.

And that is what we used to run at, 52 or 53%.

Our goal and what we have stated is we're going to be above -- 51 or above is what we said last year.

We still think we can do that, and probably even higher than that.

I don't want to paint myself into a corner and everyone expect 53 next quarter, because you're the first one that said that, Dave.

But as far as the mix though there is nothing unusual with the rebates at all.

Product mix is very similar.

Nothing has changed there.

We are working hard internally to push our people to sell fasteners and the more profitable products, because is how we pay them.

As far as inventory going through and that, nothing has really changed in that.

Understand that our fasteners pricing was slowly moving up last year.

It is not like just the light went on and everything took a big jump.

It was an a lot of little pieces coming together, and a lot of it is sustainable.

Dan might make a comment there.

A couple of things I would add in.

If you look at what we're doing on a working capital standpoint, managing our inventory, if I look at our rebate number, it is actually a slight negative over last year.

And it is really about we're doing such a good job managing our spend, that hurt just a little bit on some of those avenues.

If I look at what concerns me and what makes me optimistic looking out three, six, nine months, probably the biggest thing that concerns me is what is going on with fuel.

When I look at -- just intuitively, there is two types of fuel that are predominately used, diesel and unleaded gasoline.

Diesel has a lot less ability to move consumption-wise.

I am a farm kid, and I know in the spring there's a certain amount of diesel that is going into a tractor that is putting crops in.

That doesn't changed based on the price.

When I look at our distribution fleet, when I look at the trucking fleet, generally speaking nationally, if the miles are driven, fuel is being consumed, and the ability to manage that is a different animal.

Gasoline is a little bit different animal.

When I look out in the three and nine month horizon, everybody has said when it hits $3 there are going to be changes in demand.

Everybody said when it hits $2.50 there are going to be changes in demand.

As fuel prices are well -- gasoline are well north of $3, that has to start having an influence on consumer consumption.

The only other item I would throw in there when I look at -- looking out, the big piece of it, and we probably said it four or five times, is about discipline.

And that is sustainable.

Nick Lundquist is with us.

He is just going to make one more comment that he has brought up to me on margin.

In the last three months I have had the opportunity to travel and visit with all of my outside salespeople in our Eastern business unit in meeting settings, as well as all the branch managers.

And there has been a lot of enthusiasm out there.

And I also believe that with our outside sales program our level of service to the customer is actually increasing.

We're getting more touches with the customer.

Not necessarily our large, big strategic customers, but with the other than our medium and small customers.

And I believe our service level is increasing and is having a positive impact on our margins as well.

All right guys, thanks and congratulations.

(OPERATOR INSTRUCTIONS).

Adam Uhlman, Cleveland Research.

Dan, could you quantify how much pricing impacted revenue growth in the quarter, and also how that impacted the March daily sales rate?

And then kind of related to that, what kind of trends you are seeing so far here into April in terms of revenue growth?

On the part about inflation, I would say we're probably looking at somewhere in the 2.5 to 3% inflation neighborhood.

Almost all of that is narrowed down into that small group, the core fastener group.

So when I look at the March timeframe, it is isn't a case of that really changed dramatically from what we were seeing in January or February.

Could it have been influenced 0.5 point?

Yes, maybe.

But the change is fairly nominal.

On the question about April, in January Will and I talked a little bit about what we were saying in January trends.

And that at least was deep into the month.

And the day after we did it, I think both Will and I looked at each other and saying, you know, let's just shut up about the current month because things can change and you would hate to set a false hope until it is done.

And we had a lousy day that Friday sales in, and I thought I had jinxed it.

But it is the 11th of April, and so any trends we have are pretty meaningless at this point.

Holden Lewis, BB&T.

Can you address the 'pathway to growth' initiative, obviously it is heavy on hiring people upfront.

And new people aren't known to necessarily have an immediate impact from a profit standpoint.

Can you address the degree to which you think that your pathway initiative is currently impacting the margin in a favorable way or a negative way?

And if it is less of a positive at the margin line, can you give a sense of when you expect that crossover to take place?

You mean the operating margin line?

) when you hire a new person typically they may start to generate some revenues, but it takes a while for them to actually be a net positive to the margin.

Since you have been ramping the hiring recently, of the new vehicle that you have added in the 'pathway to profit', are they a net positive to this margin that you are seeing or are they still a bit of a drag?

Or where are we in the evolution of the margin of pathway?

This is Nick, Holden.

I will address that one.

I believe it is relatively neutral.

But one thing that is very important is that we are working very hard to continue to staff our stores with more part-timers, so that they become better educated in our business model before we hire them to come full time outside sales.

We have really ramped up our outside salespeople to help -- our part-time people to help our outside salespeople go make sales calls.

At the same time, they're learning the business.

And that is really where we're trying to pull the majority of our pool of outside salespeople from, and that is our part-timers.

I think it is pretty neutral, but I don't believe it is a drag.

I think the way we are setting it up is actually going to help the business.

And I think if you compare it to the old-growth initiative, the additional salespeople are costing us no more than the rent that we saved on those buildings.

And those salespeople are probably gaining us more than the brick and mortar would have at the same cost.

So the new strategy is probably incrementally positive, but the person for person, they are barely paying for themselves after 12 months.

Mike Hamilton, RBC.

It was just wondering if you could spend a little bit of time on what your -- some of your larger customers are doing and talking about as they look at some of the fairly stiff inflation and price increases that are likely to roll through over the next year.

How do you expect them to respond?

Actually that was one of our top five customers last week on a sales call.

And they are responding, they are throwing the door up on it.

But one of the good things that is a positive is that the steel guys always beat us to the door.

Because we have a lot more inventory in the pipeline than the steel manufactures, so we're never the first one there with the price increase.

And typically they will spend at least ten times on steel that they would on fasteners, although they still don't want the price increases.

With the biggest customers it is a longer process.

Like I said, in many cases we will have like a CRU index put in and we will have to wait it out.

They understand our inventory terms.

They monitor our financials, and they say, we know when it started out up.

We know when the stuff is coming through.

We know when we will accept the price increase.

And we work through it.

And as long as we can maintain our profitability, we understand their demands or the pressures they have, and we work through it.

But most of them are reasonable, and they know that the service we offer, they don't want to lose, because there is in line in the sand.

If we do not make money on the business, the saying we have is we don't do it for the sales, we do it for the profit.

And so if they absolutely refuse the price increases, at some point we will walk from the business.

These companies are smart.

They realize that other people aren't going to do it for a loss either.

And if we are one of the best distributors out there, which we believe we are, we should be able to pass these through.

It is all a matter of time and inventory and getting the price up before the new inventory is in.

Or sometimes we will give up a little, and it is a little wavy as it goes through.

We have also -- I have been actually in touch with probably four of our last -- of our top 10 customers, and they know it is coming.

Nobody is happy about it.

On the other hand, most of them seem pretty positive about business sales.

In fact, the one I was with last week, one of the owners is a large private company, took me aside to see what I was seeing.

He said, you know, our business is okay.

It was kind of a knock on wood conversation.

Well, it was.

He was surprised as -- I say, our business is pretty good.

I couldn't say much because it was after the quarter.

He said, you know, ours is also doing pretty good.

And neither one of us quite knew why.

Echoing what everybody else has said, congratulations on fabulous execution.

John Baliotti, FTN Midwest Securities.

I think the -- at least from the surveys that I've seen, and probably to your benefit as well that prices are generally not the highest criteria for -- service seems to be a higher criteria for customers.

But I'm wondering as pricing on the steel and the raw materials stays up, it seems like you're able to more than offset that.

And with respect to where the gross margin is today, are you feeling that you've got control over that, sort of that 52% level you're at now, if let's say the global demand for steel subsides a bit and that raw material price comes down, how do you feel about cost of inventory with respect to pricing?

I know you would probably benefit on the fuel side because there might be some related pullback in the cost of fuel.

But in terms of that mix, how do you feel about if we start to see raw materials start to moderate or actually decline?

(multiple speakers).

What will happen is the big customers will start pushing us right away for lower pricing, of course.

But we will go back and say, remember that six-month inventory lag?

Well, we get to wait.

So I think the fuel change is the other foot, and you work it through it, and you give back the price increases over time.

So from a margin standpoint, I'm not worried about that, but it would hurt our top line revenue as it happened -- as it went through.

But on the positive side, the bottom half of our customers are -- numbers, you know, the thousands of small customers, most of what we pass through in the higher prices will stick, because it is small orders and a lot of that.

So we will actually expand our margin with that group of customers.

Over time compress the marginal little bit with the large customers.

At the end of the day, we will probably have an incremental gain because there has been a new higher price level established.

Just like if oil drops, there's a whole new level -- there is a new mindset and people are not looking at this as close.

As long as it doesn't come real fast, I think we're fine.

And looking at the world market, looking at what we see, we don't see a real quick decline unless there is a really slow international world economic slowdown, because of the oil pricing is already guaranteed through -- Asian oil pricing getting sent to Asia has already been contracted for several months.

So in terms of the gross margin, you said that pricing helped about 2.5 to 3% on the top line.

Does that have a similar impact on the gross margin or the other initiatives --?

No, the gross margin wasn't driven much at all by the pricing.

The gross margin was driven by the initiatives.

And the real initiative is not about what we did, it is about what we didn't do.

What we didn't do was chase unprofitable business.

We have been under a lot of pressure for years to do top line revenue growth, and we've gotten a little sloppier and a little sloppier in taking business and trying to talk ourselves into it being profitable.

Nick Lundquist, myself and Dan and a bunch of us got together and said, you know what, sales are slow right now in 2007.

Let's just clean this thing up.

And we worked really hard on it all of 2007.

Every week I get a report that actually I'm working between myself and the district managers, and it is an unprofitable list.

It is business below a certain level and there is different criteria.

So I probably do 30, 40 e-mails a week between myself and the DMs, it is just my little part of the project because I want to raise the awareness.

And it is not like we went out and raised prices, we just brought the bottom up.

As Dan mentioned, it has had a slight negative effect on our top line revenue, but the timing was good because we weren't doing that well anyway.

(OPERATOR INSTRUCTIONS).

[Zachary Kleinhandler], Forest Capital Management.

I am just wondering for your (inaudible), most of the guidance you have given is about 20% growth, specifically on both sales per store and also on the pretax profit margin increase.

Do you have any guidance for below 20% growth, what you would expect?

You mean on the 1% incremental gain?

Yes, what would you expect on the sales per store (multiple speakers).

It is really not guidance, it is more laying out what our plan is.

I want to make sure that we are not saying that we're guiding to that number.

All of our planning to hit 1% growth in pretax profit over a five-year period is done on 17.5% revenue growth.

That is the number that we worked with.

That is where we did all of our planning.

We are investing to grow in salespeople to grow our business at 20% over a cycle.

That is what our investment is, and that is, hopefully if we can execute, we will get there.

If we can execute, we will get there, and hopefully we can do that.

17.5% right now is the kind of the fulcrum point.

I said earlier that we could do it at 15%.

That is because we haven't been investing quite as heavily in salespeople because of the lower revenue growth, and our gross margin is up a little more than we had expected.

We had not baked any gross margin into our plan.

But with that, we can lower the sales growth number.

Does that answer your question?

It does, and if I can -- since that was a quick answer, I can ask just one more quick question?

Go for it.

Thank you.

The active account growth, you offer I know usually yearly, but do you have a quarterly number for that?

We're up in the mid teens right now on year-over-year store growth of about 7 or 8%.

We are in the mid teens.

And Nick and I talked a lot about this, we are very happy with that because one of our concerns with slowing the store opening was active account growth.

And actually our active account growth are growing faster than they were last year over the same period.

A very positive number.

And we look at that as taking marketshare simply by, not just sales revenue, but number of customers that are buying from us this year versus last year.

Mid teens.

Gentlemen, there are no further questions at this time.

I will turn the call back over to you for any additional or closing remarks.

Once again, I would like to thank everybody for taking time to listen on our call today.

And have a good weekend.

Thank you.

Thanks a lot.

That does conclude today's conference call.

Thank you for your participation.

You may disconnect at this time.