快扣 (FAST) 2008 Q3 法說會逐字稿

Good day, everyone.

Welcome to the Fastenal company 2008 quarter three earnings conference call.

Today's call will be hosted by Will Oberton, Chief Executive Officer, and Mr.

Dan Florness, Chief Financial Officer.

The call will last 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.

In the interest of time we ask that you please limit yourself to one question and one related follow-up only.

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

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

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

At this time, I would like to turn the call over to Mr.

Will Oberton.

Please go ahead, sir.

Good morning, and thank you for joining us on the call this morning.

Dan and I are happy to report another solid earnings quarter or growth and earnings quarter, third quarter of 2008.

We're happy about that.

Today when we're speaking, the numbers we're going to be talking about are taking out the $10 million charge for the class action suit.

We're trying to normalize the numbers, we talk in a comparison over last year.

When we talk about growth numbers and earnings numbers, we're looking at it that way.

As far as the sales trends, basically through September, we have seen pretty much very little change in our sales trends.

Our older stores continue to comp very positively.

It was slightly lower in September, but that was against a much more difficult comp in September of 2007.

So although we continue to invest at a higher level to grow our sales faster, it seems very steady as we go and we're going to continue to push hard to improve that number.

We had a very strong margin, another strong quarter on the margin.

At the risk of repeating myself, I'm going to list the same three factors, the first and I think the strongest factor to our margin improvement, our largest factor would be the outside sales program, reminding you that most of these people are calling on the small to medium sized customers.

That program is going very well and on the average, it carries about a 4% margin premium over the rest of our business.

So outside people call on small customers, outgrowing the Company and carrying a much higher margin.

Second is our pricing discipline.

We continue to work very hard on that.

Walking away from business that doesn't make any sense to us and doing a better job at that than we've done in several years.

The third would be inflation to a lesser degree.

The reason we don't get more out of the inflation is we run these 2300 stores like independent businesses and the store managers have a lot of discretion and they're not going to push price increases until the cost goes up to them, and it starts pinching their bonus programs, so it's a very natural market condition which prevents us from getting a lot of help on the way up but it also helps us on the way down as things soften up so we think it's a good system for our company to use and it's worked well over history.

From an expense standpoint, we did a good but not a great job.

The fuel and utilities continued to beat us up pretty hard.

I know fuel dropped off in the September time frame but there's always a lag to that and so it's still very high year-over-year.

Our incentive pay was up nicely, which is a positive.

Because of the higher gross margin and similar sales growth.

Our travel airline expense, mainly for training and sales events, jumped year-over-year very sharply and that was due to the higher fuel price and higher airline tickets but it really jumped up in the last quarter, in the third quarter and then we had the legal fees from the class action suit.

That added about $400,000 in the third quarter on top of about $700,000 that we had absorbed in the second quarter.

So that was in there, that we didn't have last year.

Some positives on the expense.

We continue to do a great job on our freight program and the people who run that, the group that runs that, they're really pushing.

I get complaints almost regularly from other people in the company, tell those guys to quit e-mailing us.

I say I just want to find more people like that, that are willing to push so hard to make the program work.

Dan and his team have done a nice job, along with the HR group on our insurances.

That is not growing you like the rest of our business.

For years it had outpaced the business.

It's a happier, a good relief there.

And then we've done a nice job, I believe the folks have done a nice job on base labor increases.

Our headcount is not growing as fast as sales, especially in the support area.

So although our incentive pays are way up, the base labor is growing much slower, which will help us if things do slow down in the future.

We're not predicting that, but if it does happen, if the economy slows in the next three to six months, we have a lot lower base labor than -- it's grown much less.

Overall from an earnings standpoint, I think we've done a very good job in somewhat tough times and I think that just points to our continued confidence in our pathway to profit program that we really think we made a good decision, that our team has made a good decision in rolling out the pathway to profit and developing this new model for strategic growth.

And I would just like to point out a couple things on the pathway to profit, then I'm going to turn it over to Dan to talk about some of the expense and asset areas.

If you look at the charts that we sent out with our press release, on page 3, 3 of 7, last year we had 189 stores that were over $150,000 in revenue.

This year, that number grew by 42% to 269 stores.

Now, looking at the average size of those stores, they're each producing about $150,000 in operating profit per quarter.

We have approximately 73 less stores in the bottom category that are losing us money, so it's a little bit like musical chairs, every store moves over one group.

But if you take those 73 stores out of the bottom, take them right to the top, doesn't actually work that way.

That's really the key to pathway to profit.

Everybody moves up a level, profitability moves up, and not only do we have more stores in the higher category, the top category, the stores over $150,000, their operating profit went from 26% to the third quarter in 2007 to 28.3% in the third quarter of 2008.

So they continue to improve, more stores are into the category, and it's real simple.

We've taken about half of our growth dollars, the way we used to do it, and we've deployed those in the older, more profitable stores.

So when we do grow the stores or the sales in those stores, a far higher percentage of it drops to the bottom line, because they're just more efficient businesses, they're better-ran businesses and from a future standpoint, looking out there to where this thing can go, we still have about 88% of our stores in the lower categories.

And I believe most of the markets that we're in support that $150,000 per month store or even greater, so we're just going to continue to invest in growing all of our stores, but really focus on the medium to large stores, as far as our growth investments.

We'll focus on all of them from a growth investment standpoint, it's put the salespeople in the best stores and watch them grow.

With that I'm going to turn it over to Dan and then we'll open it up for questions.

Thank you very much.

Good morning, everybody and again, thank you for joining our call today.

I have a number of points that I'll cover.

I think this will probably one of our shorter calls because laid out quite a few pieces in the earnings release and don't anticipate a ton of questions but we'll see how that plays out.

A few things I want to touch on.

First off in the first paragraph we touched about the legal settlement.

That cost us about $0.03, the cost of that $10 million settlement was reduced as we disclosed in the earnings release by about a $1.8 million reduction in profit bonuses paid out and I'll talk to those profit bonuses a little bit.

Roughly speaking, it lowered our district manager bonuses about 25%.

It lowered our regional leadership bonuses by about 30.

And it lowered our national leadership bonuses by about 40% and again, that was driven by the profit side of the equation and, one point I'll make that while nobody in the organization was pleased with the settlement, was pleased with what they say should be behind us or pleased with seeing their bonus amounts reduced from a leadership perspective, it's also a case I have a certain pride in the fact that there were a handful of Board members that talked to me and said boy, that's pretty harsh impact and my response to them is yes, it is, and so is the $10 million settlement for our shareholders.

I think it's an equitable treating of the program and don't lose sight of the fact that our leadership is rewarded well for profit growth and feel the pain when the profit growth does not occur.

I think that's something to be cherished especially in this age.

One second item I'd add is while it did cause our bonus and labor numbers to drop by $1.8 million, there was no impact felt at the store level.

Store level as we talked about in the past is more about sales growth, but more importantly, gross profit growth.

Whereas that wasn't impacted at all due to this, our store personnel did not feel any impact and I think that's important to know from the standpoint of the built-in cushions, the built-in measurements within our business that reward all our personnel for sales, gross profit and pretax profit growth, but also provides some cushions in the event that any of those numbers are impacted negatively, either by the economy or in this case by an event during the quarter such as this legal settlement.

If I looked at our store pay, it represents about 65% of the payroll for the company.

One item that we did this quarter that was a little bit unusual and that is we did release our September sales numbers early.

We did that as indicated in the release to let our shareholders know what had happened in our business in September in this chaotic world we're living in right now.

It's nice to see some normalcy.

And when we get to end of fourth quarter and end of next year, we will go back to our typical pattern of releasing monthly sales numbers after the first and second months of the quarter and we'll not release until our earnings release the third month information.

On store openings, it is still our intention to open 7 to 10% new stores this year.

We will continue to push to add individuals into the OSP position.

And on the administrative support side, you can expect to see that number hold steady through year-end and into the first few months of next year or drop slightly as any attrition will virtually all cases not be replaced until we start getting into next year -- have a little more feeling of how the year is progressing.

Pathway to profit, Will touched on all those points.

One item would point out, again, we indicated both the impact before and after the $10 million settlement.

Hopefully it was in an uncluttered fashion.

And again, we continue to see the morphing of our store mix as we laid out last year and as Will touched on several minutes ago.

Fuel prices, as Will touched on have moderated.

During the quarter, our average diesel costs were approximately $4.38 a gallon.

As of last week, that diesel price nationwide had dropped to $3.88.

So that gives us a nice tail wind coming into fourth quarter and into the early part of next quarter as it relates to the impact of diesel and those dollars are all in cost of goods.

On the gasoline front, going into our store delivery vehicles and our sales vehicles, that price for the quarter averaged $3.85.

As of last week, it was at $3.48 and I anticipate both of those numbers have dropped since last week.

Looking at the operating expense side of the equation, I'll just touch on some points and run through them fairly quickly.

As we indicated in the sales release, sales grew at 17.1% for the quarter.

Adjusted for days, that's 15.3%.

Our payroll numbers grew as I indicated, 14.2%.

Would have been at 15.9 with the 1.8 added back in.

Support labor count, going into fourth quarter, again, we anticipate no additions.

In fact, the number is probably dropping slightly as we go through the balance of the quarter, into next year.

Insurance, this is looking at general and health combined.

We did see a leverage on that this quarter and that was against a fairly difficult comp, looking at third quarter of last year, 14.4% was our growth in insurance.

Occupancy, we continue to push hard on occupancy.

Especially as it relates to -- we're through the CSP process earlier in this decade and are really pushing hard to gain leverage there.

One stat I would put out there and I'm proud of our district managers and our regional leadership for this fact and that is when I look at the stores opened during calendar 2008 and compare it to stores opened at year-to-date in 2007, so I'm really looking at, we have a good chunk of stores opened thus far this year versus a good chunk last year, our average rent paid on those new stores we're opening is about 15% below what it was running last year.

What that tells me is there are opportunities for good values to be had in the real estate market in today's environment.

Our district and regional leadership are taking advantage of them.

It also puts us in a lower base of expense going into fourth quarter and more importantly, into next year.

And we are continuing to challenge that on all new store openings, on all store relocations and pushing hard to -- on lease renewals or as we're approaching lease renewals, to negotiate very aggressively and again, in exchange for a good tenant that has the ability to pay cash and will be here two, three, four years from now, a lot of landlords are very interested in that because cash is very precious in today's environment.

The bad debt, a little painful in the quarter, a little painful year-to-date.

What I can tell you is we're taking a very aggressive stance on assessing collectability of receivables and we're really doing that for a number of reasons.

Probably the most important, a lot of our employees at the store level, a lot of our employees at the district level might not have been in their role back in 2001 or back in the early 1990's when you saw a very weak environment.

We want to stay on top of our accounts receivable portfolio and I'm pleased to say when I look at our agings and I look at the overall quality of our receivables, they're in very good shape and we have a very good monitoring program for them.

On the other front, as Will mentioned, the operating expenses contained about a $10 million legal settlement and about $400,000 in legal costs.

Those legal costs are behind us as we go into the fourth quarter.

And as they were incurred early part of the quarter and there isn't any tail to that of cleaning up.

From a working capital standpoint, just some general thoughts.

As it relates to inventory, I was a little disappointed in our number.

I think we should have been about $10 million lower where we ended up the quarter.

Some things I'll throw in there that did cause the third quarter to increase, we did take advantage of some opportunities to beat some price increases, to get some pricing on certain products.

Those dollars and the inventory added will trickle off as we go the fourth quarter, into the first, so it's not a case we changed the trend pattern.

We just took advantage of some dollars to stay ahead of some price increases.

And there is -- if I look at that overall increase from last year, about 40% of the year-over-year increase is driven either by new store openings or by inflation in the underlying commodities.

On the accounts receivable side, the accounts receivable grew 19.5% year-over-year.

Probably the biggest point I can make there is accounts receivable at the end of any period, at the end of any quarter, end of the year are driven by the last 30 to 40 days in the quarter.

As you saw with the added business day in September, we had growth in September about 26% and that translated into accounts receivable growth of about 19.5.

So very important to make that connection that it's not about days -- average days to pay changing, it's really a function of the calendar.

Some housekeeping items I touched on briefly, hopefully this will avoid needing to cover it on a question.

In our supplemental data, we did not include the large customer information.

Largely because we had reshuffled some of our regional business units.

The numbers weren't that meaningful.

We believe those numbers are in the low double digits as far as growth.

Will touched on some OSP information.

Hopefully you found that useful.

Going into fourth quarter there are some changes to the calendar I'd point out.

In October, we'll have 23 days, which is a push to October of 2007.

In November, we'll have 19 days, which is a drop of two business days from October -- from November of 2007.

And in the final month of the quarter, December, we'll have 20 business days, which is an increase of one over prior year.

So the day we picked up in the third quarter will be given back in the fourth quarter as we'll have 62 days versus 63 a year ago.

With that, I'll turn it over to Marisa for the Q&A section.

Thank you.

The question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS) .

We'll go first to Sam Darkatsh with Raymond

Good morning, Will, good morning, Dan, how are you?

Good.

Two quick questions.

First off, you made a mention in the release of the budget effects of some of your customers in September with the different business day count.

Can I then infer from that that what you've seen in October, which would be a month that has the same business days year on year, that your store -- your sales from existing stores has improved from the September levels?

This is Dan.

Really, our point, putting it in there, it really gets back down to the dampening effect you see in the daily average when you have added days, and it really doesn't infer anything to October.

Since October has the same number of business days, we would expect this to have no impact on October, going into the month.

But you had a dampening effect in September, so all else equal, October would be better than September in a vacuum?

The dampening effect is purely on a daily rate, not an absolute dollar, sales dollar number.

Okay.

So have you seen October be similar?

You said that the sales rates through September were fairly similar.

Is October a similar sort of run rate on a daily sales basis?

We don't comment on quarters in the middle -- or months in the middle of the quarter.

Dan and I have made that mistake a few times before.

Every time we say it's positive we end up the other way.

We think we're jinxing it when we bring it up.

We're really commenting through September at this point.

My follow-up question would be your store personnel and distribution manufacturing full-time equivalents fell sequentially from August to September.

Is there a -- is that just a funky way the month was playing out or how should we look at that, based on pathway to profit and your inclination to add as many salespeople as you can?

We're not -- really what it is, is it's school starting up.

We have a lot of part-time people in our support system.

If you look historically, many years we'll drop in September from August because we lose a lot of people going back to school and we replace them in the September, October time frame so it's kind of just a natural dip based on who we hire and when we hire them.

There's really nothing to be read into it for September.

We'll take our next question from Jeff Germanotta with William Blair.

Good morning, gentlemen and great job in the quarter.

Thanks.

You know, we're all a little nervous about the economy right now with all the heightened economic uncertainty.

Can you talk about if you saw slowing, what tools are in the toolbox and actions would you take to prepare for a different environment going forward than perhaps you've seen in the recent past?

Well, we're already, because we're going into the fourth quarter, which is always a slower period, we're already looking hard at everything we do.

We're slowing down some of our travel, as Dan said, we're not going to add any support people throughout the rest of the year until we get better clarity on to where the economy is really going from our standpoint.

We have the flexibility or the -- as Dan put it, the cushion built into our labor model so as sales growth slows, the bonuses, the incentive pays drop dramatically, so we have that going for us.

If things get real ugly, then we start looking at store openings.

One thing that we have going for us today that we wouldn't have had seven or eight years ago in a slowdown is our pathway to profit, and the proven strategy of outside salespeople.

So we may be a little quicker to pull back our store openings than we would have in the past, continue to add the salespeople and when the economy picks back up drop the brick and mortar into the zones and the business is already there and growing.

So we've talked about a lot of different things but we're very, very committed to grow our company and grow our earnings because as you know, Jeff, that if the earnings don't grow, there are a lot of people within our organization whose bonuses aren't going to grow and so we're very committed to making it happen going forward in any environment.

And the follow-up question to that, is there a -- have you estimated the growth rate that represents the inflection -- sales growth rate that represents the inflection point between positive earnings leverage and how low does that go this cycle versus perhaps the slowdown we had in 2001.

It's much lower than the slowdown that we had in 2001 because we've made so many changes.

I believe in 2001 it was about 19 to 20% which is actually down from about 26 to 28% in the mid- '90s.

Today we estimate that level in the very low double digits, 10 to 11%.

We did some modeling on it about three to four months ago and not much has changed.

What happens with fuel, utilities, things like that.

And how quickly we would pull back store openings because occupancy -- behind labor, occupancy is our second biggest expense.

So it's below where we are by probably 4 points.

Where our growth is today, is what I mean.

We'll take our next question from Holden Lewis with BB&T.

Good morning, guys.

Can you comment on the impact of pricing on the quarter, but also I know that you've put through several price increases.

I think you had another one queued up for the end of Q3, heading into Q4 for some amount.

Can you talk about sort of the status of that price increase as well as the impact in the quarter?

The impact on the quarter is very similar to what we had in the second quarter, because our September 1st price increase was the lowest one we've had in the year.

Not that we've seen anything going down yet, but the increase has flattened out or softened, so we decided not to push any harder than we had to.

It looks like maybe we're getting closer to the top or close to the top of where it was going to go.

So we're saying I believe we stated three to four points, Dan, in the second quarter and we're still very comfortable with that.

That's about where it is, not as much as -- part of the reason it hasn't grown as much is the anniversarying over '07 increases with the RMB inflation or the Chinese tax changes or subsidy, whatever you want to call them, basically what it is.

Going forward, it's a little bit murky but steel prices have dropped in the last month or so on a world market.

We believe that will be coming through.

But we're actually doing right now is we have slowed our purchasing down, trying to see where it goes.

We don't believe prices are going to go up.

So we said we're going into the fourth quarter, which we don't need as much products.

Our sales will be down slightly.

We pull our purchases back just a little bit.

Don't do any speculation and if prices drop, we can take advantage of it and turn our inventory, our higher priced inventory more quickly.

And as you saw, our margin numbers, we've been able to pass the higher prices through very successfully as we go through the inflationary period in the first three quarters of this year.

You want to add anything, Dan?

Okay, and further following up on that, your SG&A growth, your SG&A expenses have grown at a rate faster than revenues the last few quarters and that has been offset nicely by the gross margin also going up.

But part of the gross margin I guess is a function of the accounting treatment for your inventory and so I guess I'm kind of curious, when you look for to 2009 in an environment where you're going to sort of catch up on the accounting treatment and where pricing isn't going up any further, you know, is there a natural sort of offset to SG&A wherein if gross margin comes off because of that accounting treatment, that the SG&A, sales ratio should also come off or should we be concerned that maybe some of the impetus for gross margin increases is going away in 2009 and yet the SG&A lever or the SG&A level is so high.

Holden, this is Dan.

A few things I'll throw out there.

When Will was talking earlier, he talked about the drivers of the gross margin expansion being three things, the outside sales program, the discipline in pricing in general and then the impact of inflation.

And he listed them in that order for that reason, inflation is the smallest impact.

When I look at going into -- the added pricing, that's in our cost today.

It was in our -- it's been working into our costs over the last 12 months because of our FIFO accounting.

But the -- as you look into what offsets there are, you know, the biggest one relates to the store pay because the store pay is linked directly to -- it's a sales-growth driven formula but it levers up and levers down based on gross margin and so 65% of our payroll dollars are physically at the store and that has grown well above company sales numbers for the entire -- really, for the past four or five quarters.

And -- but especially the last three.

And that's a cushion that's built in.

A cushion we prefer not to use, but it's a cushion that's built in, just like on the profit side, you saw that this quarter.

The profit bonus is paid on the support side, whether the district, regional or national level, had a cushion built in on the profitability.

There's one other point that I would throw in, and that is that about 40% of our transportation or our product movement cost that goes into cost of goods is outside carriers.

That will go down as fuel goes down.

That will go down if the economy slows, which will improve our margin and our internal costs will go down as fuel drops so that will also improve our margin.

So there are forces in both directions.

We think on the whole, it will probably equal out to normalize about where it is.

We'll take our next question from Adam Uhlman with Cleveland Research.

Hi, good morning.

Good morning, Adam.

I guess the first clarification is on -- what was the FIFO benefit to gross margin in the third quarter that you can tell, Dan?

You know, what we saw earlier in the year, it was running about 50 basis points.

We take that number right now, somewhere between 30 and 40.

It's dropping because our product turns about six months and so the prices we were paying in the early part of this year were going through cost of goods in the third quarter and so you're probably still looking at 30 on the low side, maybe 40 on the high side but that number is moderating.

Okay.

Great.

Then, could you talk about the company sales growth trends across MRO customers, OEM customers and your non-residential construction customers, what did you see through the quarter?

What we saw through the quarter is the MRO business continues strong.

The construction business remains strong because most of our commercial construction business isn't building office towers and things like that, it's working in the energy industry, the wind energy is doing very, very good, general petroleum down in the Gulf Coast, we're doing great up in the Edmonton area, the oilsands.

We also do a lot of commercial construction on road and bridge work which the government is still spreading pretty heavily.

The only area we've seen weakness is really the large industrial companies, and Dan and I have stated earlier that our large business we estimate to grow just over 10% and I'm not sure if that's slowdown in business, which it may be but I think some of it is being cautious.

I've actually had the opportunity to be in the offices of several of our large customers in the last probably six weeks, and most of them are saying, business is pretty good.

It's kind of knock on wood, cross your fingers mentality that their visibility isn't great either but overall, their businesses still remain pretty strong with a very cautious tone.

We'll take our next question from Michael Cox with Piper Jaffray.

Good morning, congratulations on the quarter, guys.

Thanks, Mike.

The mix of fastener sales moved higher in the quarter which I usually thought of associated with stronger economic conditions.

Can you explain this mix shift in the quarter?

This is Dan.

It did tick up slightly.

It's hard sometimes to really peg that.

You've seen it tick up in consecutive quarters now, you know, this is the third consecutive quarter where it's ticked up.

There's certain things that assist it.

I think the OSP program, quite frankly, is part of the reason because you think about a new person selling, you're going to sell what you're best at.

You're going to sell what you really have great supply on and where you can differentiate yourself, the people you're talking to where you can gain the best experience.

I look at a lot of the training materials we provide through the school of business and you really see the wealth of knowledge that we have in that faster area.

I think that's a piece of it because as you see the inflation impact, which has been a driver of it, has been moderating as we look at it.

Sequentially.

I think one of the biggest things, Mike, is that we're pounding hard on margin and fasteners are by far our highest margin product.

If I could only sell one thing, I'm going to sell fasteners.

We're really good at distributing fasteners into the marketplace and people know that and our stores and outside salespeople are pushing it because they want to pay themselves.

Run them like small businesses.

That's helpful.

And a follow-up on that, I guess on an unrelated topic a bit, but sales rep hiring it slowed down in the month of September.

Could you describe your plans in the next three to six months.

Will that pick up to the mid-teens rate?

There's always a natural bias as we come into the tail part of the year.

One of the things that's caused it to moderate some, the further we get away from April 2007, the comp numbers, if you will, of OSPs tends to moderate a little bit because you're adding especially in the last four months of last year, are really playing into the year over comparison numbers.

We are continuing to add OSPs.

We'll continue to push hard to add OSPs.

Probably we'll moderate some -- probably similar to the mid-teens like we're seeing now rather than what we were seeing in the upper teens earlier in the year.

It's a function of comp.

We also indicated in the past when our growth is nearing 15, the OSP growth is going to be pulling down in that range.

If on the other hand our daily growth was averaging upper teens, maybe even low 20s, that number would be driving into the upper teens as well.

One thing, Mike -- excuse me, not Mike.

Oh, it is Mike, sorry.

That I would add is we're in a better position as an organization than we have ever been to add outside salespeople because over the last year we've almost doubled our headcount part-time associates in people in stores.

Our plan is to add, when we do add an outside salesperson there's a greater than 90% chance they will come out of our part-time ranks which allows us to do it much smoother.

If I have someone working in a store, I know they want full-time work, I can plan it very nicely.

Instead of saying, hey, I need a job in November.

If you like, you'll go full-time with us, we'll start you January 1, which is perfect for us, many people will understand that, and they'll wait for the opportunity.

We've never had that luxury as an organization before, and it's here because we improved or increased our investment in part-timers at such a level that we have all these people out there, looking for full-time opportunities.

And considering a slowing economy, there's even more of them that are going to want to stay with Fastenal to develop their careers.

So I'm very excited about that.

I've been out to a lot of manager's meetings in the last couple months and I talked about everywhere, this is our people, these 3,000 people are Fastenal's future, very flexible work model.

We'll take our next question from Brent Rakers with Morgan Keegan.

Yes, good morning.

Dan, just wanted to follow up, trying to understand a little bit more about the sensitivity of payroll and SG&A to the gross margin movements.

You referred to I think 30 to 40 bips, estimated benefit from FIFO in the quarter to gross margin.

Could you maybe translate how much of that impact would have been to increasing payroll costs in the quarter?

Well, at the store level, you know, it's --

Are you saying if we didn't have that, how much lower would your labor have been?

That is the question?

That's exactly the question.

Typically, our gross margin goes up $1, 25% of that goes into store incentive.

$0.25.

Then on top of that, we have district and regional incentives, so it's probably about 35% of that.

So if we picked up 30 bips, we would have got 10 of them back.

That's exactly what I --

I wasn't sure of the question, I'm sorry.

You're right on.

Just last question, and I think you guys have mentioned this the last couple quarters, but do you have a number in terms of what the total commission and bonus component was up year-over-year and maybe pro forma for the charge?

I don't have that handy.

Okay.

I can get that offline, then, Dan.

We'll take our next question from Mike Hamilton with RBC.

Good morning.

Hi, Mike.

Wondering if you could comment a little bit, you noted in the September sales data that ISM had surprised you, the kind of gulf that was there leads me to believe you'd seen some fairly big ticket pullback, industrially, transportation as an example, auto, airlines, et cetera where they're pulling back steel purchases.

Is that accurate?

Have you been able to see enough to get some feel for why the discrepancy and how that's likely to play for you?

We haven't seen a lot of the big pullback like you describe, but we're not doing much in the auto industry and places like that.

What I mean by being surprised is we estimated our sales, Dan and I, at the beginning of the quarter, when we're doing our earnings estimates and we believed that at that point, back in July, that September would come in about 13.8% daily growth rate because we had a very good September in '07.

We came in at 14.4, so we were actually positive.

So if someone would have asked me where I thought the ISM was, I would say that's probably about where it was 49, somewhere in there, I think that's what they had in August.

When they came out at 43.3, I was going wow, either we're doing a fantastic job or there's something going on in there that we don't understand and it may be -- it may be the hurricanes and some of the energy production.

So I don't know exactly how that works.

So my comment was based on our daily trends, we were surprised by that low of a number.

Dan has a comment.

Mike, the only thing I would add to that is the ISM tends to be a little bit of a peek -- it's a confidence index, it's a little bit of a peek possibly into the future as well and it didn't really sit with -- as Will mentioned a few minutes ago, over the last two to six weeks he's been tracking, he's met face-to-face with a lot of our larger customers and we're just not -- I'm not saying things are rosy, because they're not, but we're not hearing the type of dialogue or discussion with those customers that would lend itself to an ISM dropping so dramatically.

Right.

Right.

Then also, Will, I means on your comments on seeing more caution in the big companies, typically that's exactly what we would expect in a slowing environment; correct?

I think so.

But part of it with the big companies is they're more cautious by nature because they're public companies and they have a lot more voice -- outside people are looking at them a lot closer.

The medium sized company, if it slows down a little bit, if I still have cash flow I'm going to continue to hammer away.

Whereas if you're a big, large public company you can't do that.

We're taking it literally one day at a time, looking at our sales numbers, trying to understand what's going on, looking at it regionally, and we didn't see anything regionally in September that points that it's slow, north, whatever.

It's a very similar trend to what we've seen over the last two or three months, or even the last two or three quarters.

It's very interesting to watch because when you look at the ISM, you'd think there would have been a big drop in September but there just wasn't.

We'll take our next question from John Baliotti with FTN Midwest securities.

Good morning.

Just a housekeeping question.

Dan, I think I may have misheard you.

I think you said December this year you had 20 days?

We have 20 business days.

Okay.

So -- go ahead, sorry.

And the impact is the 26th, which is the Friday after Christmas,.

We are actually closed that day.

Okay.

And you're not -- because I was just trying to -- some of the distributors and so you're not open on Christmas Eve or New Year's Eve either, then.

We're open New Year's Eve.

On Christmas Eve, a lot of stores might be open for a half a day.

New Year's Eve we are open for the full day.

It is the 26th, the day after Christmas, it's a Friday, that we will be closed.

Okay.

Well, so I would count, then, if you're open all the days except for Christmas and the 26th, wouldn't that be 21 days?

Historically we've never counted Christmas Eve day as a business day.

Oh, okay.

We don't sell much on Christmas Eve day.

So it's more of an accounting, I mean just the way you look at it from a comp standpoint?

Yes.

But that's true of all of our historical numbers, none of them include Christmas Eve day as a day.

Okay.

I just wanted to make sure I got the right number of days for the growth rate.

Yeah.

Okay.

Thanks.

And that does conclude our question-and-answer session today.

At this time, I would like to turn the call back over to our speakers for any additional or closing remarks.

Marissa, thank you for your assistance this morning.

Thank you to everybody on the call.

Hopefully, you find this useful way of peering into Fastenal and seeing what we're seeing in the market and we look forward to a good fourth quarter and a good 2009.

Thank you.

Thanks.

Once again, that does conclude today's call.

We do appreciate your participation.

You may disconnect.