快扣 (FAST) 2009 Q1 法說會逐字稿

Welcome to the Fastenal Company 2009 quarter one 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 opened for questions and answers.

Today's conference call is the proprietary Fastenal presentation and is being recorded by Fastenal.

No recording, reproduction, transmission or distribution of today's call is permitted without Fastenal's consent.

This call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage, www.investor.Fastenal.com.

A replay of the webcast will be available on the website until June 1 at Midnight Central Time.

As a reminder, today's conference call includes statements regarding the Company's anticipated financial and operating results as well as other forward-looking statements based on current expectations.

It is important to note that the Company's actual results may differ materially from those anticipated.

Information on factors that could cause actual results to differ materially from these forward-looking statements are contained in the Company's periodic filings with the Securities and Exchange Commission, and we encourage you to review those carefully.

Forward-looking statements are made as of today's date and we undertake no duty to update the information provided on this call.

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

Will Oberton, President and Chief Executive Officer.

Please go ahead, sir.

Thank you, and I would like to thank everyone for joining us on the call today.

All of the first quarter was a difficult quarter, I kind of call it a good news, bad news quarter.

I really think we have more good things going on than we do negative things, but I'm going to start out with the bad news.

And it really starts out with the first quarter sales.

As you know, the first quarter started out very slow for us and then continued to deteriorate and March was a very tough month.

By far the worst month we've ever had in Company history from a sales growth standpoint.

But although it's difficult to tell, we do seem to be seeing some signs that we're getting near the bottom.

One of them is that three of our regions that fell very hard early in this, in the October, November, and December time frame actually showed sequential growth from February to March.

That would be the mid-South which is the Kentucky, Tennessee area, the Southeast and the Northeast, all areas that were really, really crushed early.

So we see that as very much a positive.

The entire Eastern side of the United States, which went in quicker or went in earlier, we talked about that on the last conference call, also did better in March.

They were still down from their February daily numbers, but ever so slightly, and it seems to be stabilizing.

So we're also encouraged by that.

Although the West in March took a hard drop.

It seems to be a timing issue going across the country and trying to figure out where it is, but the East, which had gone in early, has smoothed out.

Again, it's difficult to tell but it appears that April has not deteriorated as much and is running at a similar daily average rate to March.

Now, the difficulty in trying to determine that is where Good Friday falls, holiday early in the month, but so far we're looking at it saying, okay, it doesn't seem to be getting a lot worse and maybe, again, we're getting close to the bottom.

So we're encouraged by all of that and we'll continue to work hard.

A couple of statistics to give you just a little color as to what's happening with our customers.

We watch very closely our dollar per invoice, average transaction.

In March of 2008, our average invoice per customer was $204.

In March of 2009 that dropped to $178 a 13% decrease.

The other stat that we look at very closely is our dollars per customer on a monthly basis.

In March of 2009 -- March of 2008, excuse me, that was at $954, and it dropped to $768, a drop of almost 20%, customers are just buying less.

So that's really what's going on with the customers.

What we're seeing out there in the markets.

On the good news front, things that we believe we're doing well or I believe that our troops, the people in the field are doing a great job on, considering the environment, the first one is the gross margin.

Year-over-year, we improved our gross margin by 50 basis points from 52.4% to 52.9%.

What that's really made up of is really an improvement in transportation.

The product's about the same, but we saw a 40-basis-point improvement in transportation.

Some of that's driven by fuel, but year-over-year, fuel is lower but not a huge amount.

It's really being driven by making smarter decisions, how we run our trucks, really working hard on the routing.

The guys that are doing it are working very, very hard on the routing and just trying to make better decisions on everything we do.

So the margin is definitely a positive.

That's one thing with the pressure from the customers, we were worried about.

But we've done a nice job there.

Another one is the expense control, SG&A.

In the last call, Dan and I had said that we believe that our SG&A would only grow between, I believe, 0% and 3% I believe is what we stated.

We were actually down 3.5%.

Really driven by labor.

Our labor expense was down 8.5% in the quarter with really the same sized group of people, actually almost identical head count numbers.

Really driven by the variability in our pay.

Bonuses were down, overtime was down, all the things that are out there, we have driven them down to save money and continue to be very profitable.

Another positive, again, I touch on transportation again, very positive from what we've done there.

On the head count, we actually reduced our head count from the fourth quarter by 849 people and we did that through natural attrition.

So we didn't have to do a mass layoff.

We still don't believe we're going to have to do that unless things were to get a lot worse, which right now we don't believe they will but as murky as it is out there, I don't think anyone could tell that.

If I had a crystal ball I would be in a lot better shape, but nice job on the quarter-to-quarter improvement and year-over-year we are actually within, on the average, I think, one person off from 11,033 to this year, 11,032 last year.

I was kind of surprised to see that number yesterday, how close it was.

Active account growth.

Another very positive.

We grew our actives, and actives we define as number of customers buying from us in a given month by 6.1% which in any other time we would have not been impressed with, but when you look at the gap from there to our sales growth were, we're taking market share.

There's no question.

When you look at the average customer bought 20% less from us but we sold to 6% more customers.

The people are out selling, and taking market share.

Inventory, did a nice job, reducing our inventory.

We still have a lot of work to do there.

Dan is going to be touching on that, some of the things we're doing.

We're going to continue to see decreases in our inventory over next several quarters and Dan will give you more color.

And the last item that I want to touch on are accounts receivable, another very positive one that going into this mess, back in the October, November time frame, we were getting lots of questions from the investment community about what are your DSOs doing, what's going on out there.

We've held that very nicely.

Some of it, due to changes that Dan's made and I think a lot of it just due to hard work, the people in our collections department and out in our stores.

I think it's a tribute to the relationships we have with many of our customers.

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

Dan has a lot of material to cover and then we'll circle back for questions.

Thank you.

Thanks, Will, and good morning, everybody, and, again, thank you for being on the call.

Going to touch through a few things that are in the press release.

I would point out on the first page, the bottom two-thirds of the page, is new commentary that we decided to put in just to give a little more lead-in flavor to the release and touch on, as Will said a second ago, our sales trends did weaken as we went through the quarter.

However, we were able to put a very strong showing from a cash flow perspective in the quarter and continue to build cash in total, despite the fact of the dramatic increase we had in the first quarter of our dividend payout.

Sometimes when you're in a period of change, you try to analyze numbers a few different ways and half of it probably drives you crazy, half of it probably gives you some insight.

There's some statistics I thought I would share with the group, but I'm going to take a couple minutes to explain the character of what I'm looking at and how that's changed over the last, basically since 2000.

What I did is took a look at customers that purchased from us in the month of October.

And the reason I chose October, October historically has been a high water mark for us in a calendar year.

We're typically looking at our sales trends from January to October to see what we're building and how that leads into the next year and so October is a very good indicator of the next calendar year of what our business is going to look like.

And so I looked at October, the customers that bought from us and then took the subset of those customers that also bought from us the following March.

So five months later.

And tried to understand the trends and, again, there is some seasonality to our business, so you have trends that come ask into play, but here's some numbers I'll throw out and hopefully at the end of the day or at the end of this little blurb, everybody listening has more insight than when they started and aren't just confused.

If I look at the 2001 to 2003 time frame, so the first data point in that would be October 2000 to March of 2001, looking at the group of customers that bought in both of those months.

And if I look at that three-year range, the dollars dropped and if you recall, in the 2001, 2002, even 2003 time frame we were in a recessionary environment.

In 2003, we had a low point late in the first quarter and throughout the second quarter when the Iraq war started.

But if you look at the trends from October to March, a static group of customers that bought in both periods, our sales with that group of customers dropped on average about 7%.

The range was down 6% to down 9% over the three-year period but the average was a 7% drop.

In the next three-year period, from 2004 to 2006, again, looking at March customers versus the same customers the previous October, our sales actually were increased, approximately 9%.

A range of -- a low of 5% to a high of 11%, but on average were up 9%.

And then in each of the last three years, here's what the numbers did.

March 2007 versus October 2006, that static group of customers, their sales were identical.

They changed by less than half -- a point of a percent.

March 2008 versus October 2007, the sales mirrored what was going on in the early part of this decade.

They were off 7%.

That entire time frame from 2001 to 2008, the average was 0.4% drop.

So basically March in the previous October, customers did the same volume.

March of 2009 versus October of 2008, our sales with a static group of customers were off 27%.

And for me, it at least -- it helped me understand what is the norm.

When we were seeing sales growth weaken in 2008, we were seeing an environment very similar to what we saw in the early part of the decade.

And that environment post-October of 2008 declined quite dramatically to the tune of four times worse than what we were seeing a year earlier.

When I look at the number of active customers and I look at those time frames, interestingly enough, the number of -- the customer drop-off from October to March in total was consistent for every year within a few percentage points from 2001 through 2008, but was about 4% lower in 2009.

And so that talks a little bit about frequency of customers, whereas the real story is about sheer volume drop-offs in dollars that are purchased, March of 2009 versus March of 2008.

Excuse me, October of 2008.

Again, I hope that was informative and not just confusing as heck.

Sometimes I'm not sure.

In regards to the pathway to profit, Will touched on some points but I'll add a couple to it.

Our head count as we talked about on our first quarter call, dropped dramatically from the high water mark we had in the October, November time frame.

Our FTE in the first quarter was down 849 people, or 7.1% from a fourth quarter of 2008 and as Will mentioned, a good chunk of that was related to normal attrition.

A piece of that was related to a conscious reduction in part-time hours, from roughly 27, 28 hours a week to about I believe right now we're running at about 18.

And so it was a combination of head count reduction and pulling back the hours worked because of less product going through the store, less hours are needed to move that product.

When I look at the profitability of the business, the table that we put in the press release on page four tells a little bit of a story about the quarter as well.

Last year, approximately 50% of our stores did greater than $60,000 a month in sales.

In the first quarter of this year, that number had dropped to about 38%.

So you really had two things going on that affected our overall profitability.

One was downgrade in the category end, and as everybody knows from seeing previous releases, the change in profitability from category one to two to three to four to five is quite dramatic.

The other thing that impacted us was the stores, for example, in the 100 to 150 category.

Where they are, the average in that group deteriorated from last year and so you saw the profitability of each category drop between 50 and 100 basis points.

Although when I look at the changes in our gross profit dollars available to pay operating expenses in the last six months, I believe the reaction and what you saw in our operating expenses was quite dramatic and I applaud the Fastenal team for their efforts.

The other item I talk about is, as we mention in the release, we are consciously slowing the head count at our stores, the increase, as well as the number of store openings this year.

But some figures I thought I would share when I look at the two years since we started Pathway to Profit, in that two-year -- since first quarter of 2007 to first quarter of 2009, our FTE at the store level is up 1,319 or about 20.7%.

So we have a tremendous amount of additional selling dollars we've put into the organization over the last two years as well as we've opened the stores in that two-year time frame.

If I look at our DC operations, our FTE head count is actually down 20 or about 0.10%.

And our support head count is up six or 0.4%, so in total we've added 1,306 FTEs in the last two years.

All of those FTEs have gone into our store to put us in a position to continue to grow, as Will mentioned, take market share and propel the business forward.

Some items on expense control I'll touch on.

Payroll expense cycled down and when I look at it versus fourth quarter, and versus first quarter, all components dropped within the category.

So some of the natural shock absorbers we have in the system that moved north and south, whether that be commissions or profitability bonuses, moved as we would have expected.

And other components dropped because of head count and hours reductions.

A few costs also helped out the quarter as I called out in the release.

Occupancy costs for the quarter grew 6% year-over-year and in the first quarter call we talked about the progress we're making with renewals.

Approximately 50% of our 2009 renewals had been renegotiated and we've made very nice progress with our reductions that we identified in the first quarter call.

I'm pleased with that.

We're pushing real hard right now on the 2010 renewals as well.

We want to hit while the iron is hot.

And where we've I think done a very good job is -- especially on the West Coast, our California regions as well as our Salt Lake regions have done a very nice job or Salt Lake region, excuse me, has done a nice job of reducing their occupancy through renegotiations.

Will touched on accounts receivable.

There's really two components to accounts receivable that are worth mentioning.

One is the income statement risk and the other one is the cash flow risk.

I'll touch on the income statement risk first.

And that is in this environment customers of ours our suffering.

Some are -- have gone through some bankruptcy issues.

We can manage through the turmoil.

We saw our bad debt expense increase as a percentage of sales year-over-year.

We can manage through that.

Thankfully, from a cash flow standpoint, we've been able to maintain reasonably well our DSOs and I'll touch on a few of the drivers of that in a second.

Finally, on working capital changes, as Will mentioned we were able to reduce our inventory in the first quarter and what I can touch on with inventory is that we will continue to work aggressively to size our inventory to the size of our business today.

Now, what that means, I expect our inventory to continue to drop as we go through the year.

I was pleased to see the drop in March.

As you can appreciate, when the sales numbers dropped off as dramatically as they did, it was challenging to correct the direction of the ship in the short term and we struggled in January and February, but we were able to make a nice dent into inventory in the third month of the quarter.

And I believe that sets us up nicely for Q2 and Q3 to see additional reductions.

A couple of the things that we're really focusing that on is most of our inventory is physically located at one of our stores.

Over the last year and-a-half to two years we've built some nice mechanisms internally for sharing inventories between stores and that puts us in a position to continue to drive our inventory down and lean up our inventory with tools that just weren't available to our business two, three, four, five years ago.

As it relates to accounts receivable, several things have been driving it.

I believe a very good job at our district and store level with managing the relationships with our customers.

Our customers know us well.

Our customers have been doing business with us for years and I believe treat us well and we treat them well.

And continue to pay their bills in a timely fashion.

One other item I touched on in the first quarter call is we have continued to modify how we bill our customers.

In our first quarter call, I talked about the number of customers that we were now billing, ignoring the customers that we bill with EDI and that's a sizable number.

There's a lot of customers we do less than $1,000 a month with, less than $300 a month with, that we're slowly driving that business from sending an invoice in the mail to sending an invoice either via fax or e-mail.

In January on the call I talked about we had converted approximately 8,000 of our customers over to this new method of billing.

As of last week, we have approximately 73,000 customers switched over to receiving their invoices either via e-mail or e-fax.

And what that means is a lot of customers are getting their invoice several days faster than they would have historically.

I believe that's one of the components that helps us continue to manage our DSOs because we're getting our bills to our customers faster, and getting paid in a timely fashion.

As we look out to the balance of the year, and as I mentioned in the call, we will strive to manage our operating expenses and our cash flow in a prudent fashion, and I believe we'll have a very strong cash flow for the year, as we saw in the first quarter.

With that, I will turn it back over to Chad for the Q&A session.

Thank you.

Thank you.

(Operator Instructions).

And at this time, we'll go first to David Manthey from Robert W.

Baird.

Hi, guys.

Good morning.

Good morning, Dave.

I can't guarantee a logical follow-up.

But I'll try.

First of all, Will, in terms of you saying that the business is stabilizing, are you referring to average daily sales dollars flattening out or are you talking about year-to-year change in average daily sales, that sort of year-to-year rate?

We're saying that in our April right now, it looks like the year-to-year decline right now appears to be similar, but it's just it's not -- neither are dropping as fast.

That's really what I'm saying.

And like I said, three of the regions actually showed sequential growth from February to March and they had been falling off the face of -- it appears that the areas that fell earlier are starting to flatten out and show more of a normal sequential trend of improvement from month-to-month as the year goes through.

Okay.

And would you attribute that to inventory destocking sort of running its course at this point or -- ?

You know, we don't know.

I get that question all the time, Dave, and I have talked to several of our large customers about it and they're saying that their business dropped off so hard that they're struggling to manage their inventory also.

But at this point, that may be the case, that they're selling just by -- because some of the customers said, you know, we just turned it off.

We just quit buying anything we didn't absolutely have to.

Okay, one more, I apologize.

Dan, do you have the growth in actives in March specifically?

I'll -- we'll get back to you on that.

I'll grab that and we'll circle back.

The growth in actives in March was lower than the quarter.

Dan's getting -- we'll circle back with you.

Dan's grabbing it right now.

All right.

Thanks a lot.

Yes.

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

Good morning, gentlemen.

My first question is on inventory levels, up about 10% and you're holding gross margins nicely.

I was hoping you could talk a little bit about the pricing pressures that you're seeing out in the marketplace and perhaps your willingness to accept lower gross margins to preserve sales and market share?

Well, we're seeing pressure out there.

But right now we don't believe we're losing a lot of business to not being competitive.

Otherwise, we wouldn't be adding to our actives.

We believe we're taking share right now, so it's finding that balance, you know, between lowering margins.

So the customers are coming to us, asking for better pricing.

With most of our large national type accounts, we have indexes put into the contracts based on the CRU steel index and that will slowly migrate down, but it's a long process.

It goes up slow and it goes down slow over a period of time the way it's managed.

The small customers, we did reduce our wholesale price which is our published list price on commodity fasteners by 10% March 1st.

We lowered it.

What that really translates into is probably about a 2% to 3% reduction in about a third of our product or maybe 1% to 1.5% of our decline in sales came from that lowering of price.

You have to bring it down, a lot of customers get discounts off that or set pricing so it's a little difficult.

We're going to continue to see pressure on the steel fasteners because those prices are dropping.

So far, we've been able to hold up pricing.

One thing that's happening out there in the marketplace and we're hearing this from the customers is a lot of our competitors are low on inventory and so we have the product.

We're hearing that from the field saying you know what, right now the fact that we have product on the shelf is helping us in the marketplace.

Because when they need it, our customers don't want to stock it and so our ability to present or provide product is very big right now.

Okay.

That's helpful.

And my follow-up question is on the buckets of stores and the different categories of sales per month, there's a pretty significant, I think, one of the more significant moves we've seen into this $0 to $30,000 per month category and I guess I'm curious, were there a lot of stores that were just hovering just above $30,000 a month or was there a weaker performance out of some of these newer stores that would cause such a big shift in that -- in those buckets?

You know, there's, I guess I'm not conscious of where stores are within categories.

But there's no doubt about it that this environment negatively impacted every group of stores because so many customers are just -- business is just dropping off rapidly and so unfortunately it didn't spare any of our categories, even our smaller stores.

But you saw stores in that 30 to 60 categories that had significant customers that were pummeled.

Sometimes you can have a smaller store where one or two customers can have a much more pronounced effect on the business than they would in a store doing $200,000 a month.

Because sometimes one or two customers can really skew the numbers and unfortunately pummel them unnecessarily.

All right.

Great.

Thanks, again, and I hope you're right, that business is -- the economy is stabilizing out there.

I'm going to circle back quickly and answer Dave's question.

Dave, on a daily rate our actives in March were up 2.5%.

On an absolute rate, 7.3%.

So we still saw good growth in the active accounts in March.

We'll take the next question, please.

Thank you.

Our next question comes from Adam Uhlman from Cleveland Research.

Yes, hi, good morning, guys.

Good morning, Adam.

I was wondering if you could slice the revenue performance for the quarter and for the month of March by a couple of different ways.

One, between your manufacturing versus your construction customers.

And then also, that large account versus your smaller customer.

What are the trends that you're seeing there?

In the large account versus small, there's different ways we talked about it in the past.

Will's taking a look at what we call our top 10 customers but when I look at it from what we call our top 300 customers, so this is looking at every one of our regional business units and looking at their top 300 customers versus the pack, you saw the -- when I look at the Q1 numbers, a number that almost mirrors what we saw at the Company level for contraction for the quarter, and so that group, we're in the fourth quarter they fared a little bit worse than the Company, in the first quarter they operated about the same as the Company.

And in our top 10 customers, Adam, which represents about 66% of our total business, 65%, the top 10 were down 18% in March and the other was down 17.2%.

So really, very similar trends.

It's across the board.

On the construction versus manufacturing, we don't have good numbers on that.

Been working on the reports and --

I suspect you would see a similar deterioration in both groups, maybe a little bit skewed towards the manufacturing.

Yes, and we -- part of it is on -- we have a few big job sites that are really driving our construction numbers.

There's some energy plants going on.

We're trying to normalize that and that's where we're struggling to get a really clean number out of it because they don't really represent the trend of construction companies, the big multi-million dollar jobs.

Okay.

And then for an unrelated follow-up, pardon me, but Dan, how would you envision gross margin unfolding through the year with -- we have these price cuts that are starting to unfold across the commodity fasteners and presumably you will as you work down inventories that will impact supplier purchase incentives and I suspect that there's still some FIFO accounting that needs to be worked through the P&L, how do you see gross margin unfold with all of those dynamics this year?

I'll take a couple of those, Adam.

On the price deflation, what we're seeing right now is our cost of goods on the shelf will drop as our prices drop.

That we will manage down through that and we'll see -- we'll see a headwind there but we should be able to manage through that quite nicely.

As far as the vendor incentives, our purchasing group, our product development group has done a very nice job.

They went in early back in December and renegotiated a lot of those programs so that we don't have to get even close to the target that's we did this year.

We put in some very low targets and said, you know, we -- business is unusual or business is different and what we use on all of them is, hey, if you think you can grow your business next year overall, then we'll sign up for growing our business and if you can't, then we want the same deal that you think you can do and most of our suppliers came up.

So our rebates and our incentive programs are pretty safe unless it gets a lot worse and there will be a little headwind on the margin.

Maybe, Dan, you could add some color?

One thing I'd add to some of the thoughts about the vendor programs, there's a variety of programs, some relate to how we transport our products, some relate to how we grow our business.

When I look at the dollars, when I look at the impact, they tend to skew a little bit away from fasteners to the non-fastener product lines and it's our fastener, i.e., steel-based products that are really being hurt the most in the current environment.

Whereas our non-fasteners, I'm not saying that business is rosy compared to others because they're moving relatively the same, but the impact to non-fasteners is less of a downturn than it is on fasteners.

So that helps us somewhat as well in some of these programs.

So we see a headwind on margin, but we don't see a very large -- a big change from this year-over-year going forward.

Is that -- ?

The idea is that you think that you can hold gross margin declines to a reasonable level?

I guess I'm kind of confused on what the conclusion is.

Okay.

The conclusion is that we'll probably see some deterioration, but not a lot.

I mean, that's -- the other positive we have on gross margin is the transportation will continue to get better with increased volume.

So our transportation costs won't go up, but our volume will spread.

As we go through the year, our volume should increase even if our month over, or year-over-year declines are at 17%, the volume goes up.

I mean, if it didn't get any better from that standpoint we still have more volume to ship and we'll get more benefit from transportation as we go into the year.

Also, fuel was at its peak at the middle of last year so we'll get that benefit also.

So fasteners will be difficult to hold margin on.

The other products will be a portion and transportation will offset some of the fastener decline.

To give you a gauge on what we've seen already, when I look at where we were in Q3 and where we were in Q1 of last year, our transportation gross margin added between 35 and 40 basis points to our gross margin.

So we've seen degradation in our gross margin sequentially from the dynamics of the environment of rising cost pool and stagnant, if not slightly deflationary sale prices, I think we've managed through pretty well thus far.

But we will have some gross margin pressure.

I think we can manage through it through of the balance of the year.

Sorry, we're sort of vague, Adam, but it's a very, very difficult thing to put a handle on because it really depends on what customers are doing well and what product lines are doing well.

There are thousands of moving parts that come together to that one number or millions of moving parts.

Understood.

Great, thanks very much.

And we'll go next to Brent Rakers with Morgan, Keegan.

Yes, good morning.

Will, I guess you made a lot of comments about some of the regions that actually improved.

You specifically cited three regions that got better sequentially from February to March.

I was hoping that maybe you could offset that from the other side and talk a little bit about the regions that weakened and maybe if you could share some of what you think the similarities are in some of those regions that have weakened sequentially?

Okay.

The regions that we've really seen weaken, that really came off hard in March, would be just take the Mississippi, south on the west side of it, basically Minnesota, Dakotas, all the way to Texas.

That part of the country, all the way to the Rocky Mountains, really got hit hard.

It had held up well before.

We think it was being held up by two things, energy and agriculture.

As we know, farming got ugly late last year.

It seemed to hold up through the winter, this area, and oil, a lot of the projects with oil were ongoing and they were at full steam last fall.

Even oil prices started dropping.

Well, now they're not starting new projects so we got hit real hard, Louisiana, Texas, Oklahoma with energy and we got hit real hard Kansas north with agriculture.

Those are the areas that really affected us.

Now, the West Coast, California, we're doing actually quite well there.

Florida, the one area that went down early and we haven't seen much improvement is that auto belt, the Ohio, Indiana, Michigan area, still having, really struggling in that area, which with all the turmoil going on with auto, we don't see anything coming back real soon.

So that's kind of gives you a flavor for the entire country.

The other area that we've really seen deteriorate would be Eastern Canada and Mexico and Mexico's really being driven by a handful of large customers that have just really pulled back manufacturing.

We're still doing well in China and we're doing reasonably well in Singapore, actually doing really well adding business.

We had a couple large customers that have almost shut down.

And, Will, maybe -- that was very helpful and I guess as a follow-up to that, particularly within the energy and agriculture segments, can you give us a better sense of how large a component those two end markets are to your overall business?

And then also, when would you start anniversarying some of the easier comparisons, if you will, in those categories?

Well, I don't think it's so much how much they are of our overall business, it's how much they drive the economies in those areas.

When you look at the Texas area, the big areas along the Gulf Coast, those economies are completely driven by energy.

Just like Detroit, for the most part, is driven by automotive.

And so as energy goes, those markets go.

The support industry, the construction, the project growth, taxes, roads and bridges.

And the Midwest is still somewhat similar to them.

Not as much in Minnesota as it is in Iowa, the Dakotas, Kansas, Missouri, where there's a heavier components.

What I'm saying is that's what we believe held it up and that's what really dropped.

When we sit back and go what's going on in these markets, the ag, you look at Deere and Cat and those people have pulled way back and our business dropped off right with that.

One clarification on that, Will.

When did you see those regions start to weaken relative to some of the other ones, in terms of was it in the fall of last year?

Winter?

Or just this spring?

Really, they started weakening with everything else, but when you draw the lines, the Eastern half of the United States dropped quickly.

The Ohio area, that area dropped off much more quickly.

And the West, excuse me, kind of came along, February dropped a little bit but then March was -- March was a month where we really got hit in the Texas area.

I mean, here growth as a region dropped off by something like 10 or 12 points in one month.

Both those regions, the Oklahoma, Louisiana, Texas area, those were the areas that really surprised us in March and really pulled us down hard.

Because they're pretty good, large piece of business, a lot of older stores and they are very profitable stores and that was the one -- across the entire Company, that's the one area where we just went, "Whoa."

And we know, I've talked to a lot of people, a lot of our people down there, these are long-term Fastenal people, they just didn't go to sleep and quit working.

They're out there working harder than they ever have and their customers just aren't buying.

Thanks.

We'll go next to Mike Hamilton with RBC.

Good morning.

Good morning, Mike.

If we look at infrastructure spend as a comeback driver in the economy, what's your feeling on what kind of relative share you see versus a lot of your other markets?

In other words, if that's the driver, do you lag a little bit off of that?

I'm not sure what you mean by do we lag -- the they.

Do you have less of a share in every dollar that you would have as soon spent in infrastructure dollar than you would in industrial energy?

Well, there's probably less of our product used in infrastructure because so much of that is engineering.

But we will do do a lot of business in infrastructure.

Our Senior Vice Presidents have already been meeting with product -- with suppliers of product, several of the ITW companies, people that are making American made because a lot of that is put into the bill that it has to be produced in America, products that we can go in, concrete anchors, structural fastening systems, where we can go in and take advantage of those bills.

We've actually mapped out all of the highway projects and a lot of the infrastructure projects that are going on and we're prepared to go in and take that business, if we can as quickly as possible, and we're positioned really well for it because we have the product and we have it out there in the field.

So we're looking for a boost from that.

We just -- it's a little bit unclear as to when it will start.

The states are moving at different speed.

But we've really worked a lot on it already.

Thanks.

Could you comment on what you're seeing out of Canada at this stage?

What we're seeing in Canada is two things.

One is the currency.

That's hit us hard.

But Eastern Canada is basically very similar to the Indiana, Michigan area, where the unit growth, currency aside, business is down close to 20%.

One thing to keep in mind, our Eastern Canada business is very much centered on the Province of Ontario.

Some Maritimes as well there, but the dollars are really in Ontario.

Probably more than three quarters of our business is in Ontario.

Western Canada, we're holding up better, but it's still slow.

We were doing really well up in the oil sands and that's really slowed down because of $50 -- you know, $40, $50 oil.

Still a lot of activity but not the frenzy that it was.

So Canada does -- East and West really reacts very similar to East and West United States, because the markets are similar, the West is driven by energy and agriculture and the East is driven by metal manufacturing.

Thanks for the insights.

Thanks, Mike.

And our last question comes from Sam Darkatsh with Raymond James.

Good morning, Will.

Good morning, Dan, how are you?

Doing well, thanks.

Just a couple of follow-up questions.

Most of my questions were answered.

If you mentioned this and I missed it I apologize.

The Easter effect in March and perhaps the expected effect in April because of the change in the calendar, and then also, Dan, bad debt allowance or uncollectible allowance has been creeping up the last couple quarters as would be expected.

But what are your thoughts moving forward?

Are you seeing a stabilization of collections as a percentage of gross or how should we look at that?

I missed the last part about the collections.

The allowance for uncollectible accounts as a percentage of the gross receivables has been ticking up the last couple quarters, as one might expect in these type of economic conditions.

Was just curious as to what you're seeing in terms of the quality of the receivables and has that begun to stabilize in terms of the ratio of uncollectibles?

Yes, if I look at our AR portfolio in total, as we talked earlier, the payment patterns have held up reasonably well.

And when I look at it across the board, our bad debts are holding up reasonably well.

What really has hurt the bad debts in the last, say, four months, has been the frequency of bankruptcies increasing and the reserves on those balances.

That's really what drove our reserve balance and there was some increase because of bad debt.

I mean, don't get me wrong, but the real change to the reserve balance itself related to some bankruptcies.

So I looked at the rest of the portfolio and say, it's hanging in there reasonably well and I think one of the things that helped us inherently is the fact that we have long-standing relationships with a lot of our larger customers and we have a lot of smaller customers, customers where we represent a relatively small piece of their spend, and I think that helps us with the diversification of our customer base across multiple industries and multiple geographies.

Very helpful.

The Easter effect, do you have a sense of what that might have helped, the March or may impact April?

Well, I guess I can't comment on March.

March was such a bad month that we want to think that nothing could have helped it.

No, I'm just kidding.

As far as April, Good Friday is never a good day for business.

It takes off.

It's roughly like losing half the day.

You normalize that in and it appears that our daily average for April is running at about the same rate as March.

It's early in the month.

Business is slow.

There's no question about it.

We think we're starting to bounce or maybe touch the bottom a little bit, but we have a long ways to go in this and that's really the message we have to get out there, is that we understand sales are going to be difficult.

We're going to work really hard to build for the future.

We're going to work really hard to add active customers.

Make sure that we keep the best people on the field, our best people.

We keep them employed and we've had very, very low turnover for the people we want to keep and grow the business going forward and think that we're going to come out the winner by taking market share long term.

We're hearing from our fastener suppliers and some of our other suppliers, they're saying you guys are doing fantastic, they saw our February numbers only being down 10%, 12% compared to the industry.

They're out there saying a lot of our competitors are down 30%, 40%, 50% which is hard to understand but it's really slow.

Thank you for the level of granularity, very much obliged.

Thank you.

That's all the time we have for questions today.

I would like to turn the call back over to Mr.

Florness for any additional or closing remarks.

Thank you, Chad, and, again, thanks to everybody for listening.

One item I wanted to touch on that I neglected cover in my notes and probably because something that we historically haven't done, we did it last quarter, we talked about where we thought our SG&A would grow in the first quarter over first quarter of last year.

Looking at where our trends are and where we're seeing head count and where we're seeing the trends there and that, again, is the biggest driver, payroll dollars within our operating expense category.

Our expectation would be that operating expenses would be down Q2 2008 to Q2 2009, somewhere between 6% and 9%.

And so I just wanted to throw that out there as some vision into the future.

And other than that, again, I would like to thank everybody for taking the time this morning to listen to our conference call and hope our release was informative as well as the call was informative.

Hopefully, my information earlier on some groups of customers wasn't just confusing and hopefully we look forward -- hopefully, we are at the bottom of the cycle and we'll be trending better in the coming months.

Thank you.

Thanks.

And this does conclude our conference for today.

We thank you so much for your participation and please have a great day.