快扣 (FAST) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by.

Welcome to the Fastenal Company first quarter earnings results.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions) As a reminder, this conference may be recorded.

I would now like to introduce your host for today, Ms Ellen Trester.

Ma'am please go ahead.

Welcome to the Fastenal Company 2010 first quarter and earnings conference call.

This call will be hosted by Will Oberton, our Chief Executive Officer and Dan Florness, our Chief Financial Officer.

The call will last for up to 45 minutes.

The call will start with a general overview of our quarterly results and operations by Will and Dan with the remainder of the time being opened for questions and answers.

Today's conference call is a 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 home page, investor.fastenal.com.

A replay of the webcast will be available on the website until June 1, 2010 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 as defined by the Private Securities Litigation Reform Act of 1995.

Forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming or similar indications of future 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.

Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance that the matter contained in such statements will occur.

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

I would now like to turn the call over to Will Oberton.

Go ahead Mr Oberton.

Thank you, Ellen and if I speak as fast as you do we'll be out of here in three minutes.

Nice job.

Just joking.

Good morning everybody.

I want to thank everyone for joining us on the call.

I want to thank all the Fastenal people because we were able to produce good numbers this quarter due to a lot of hard work by all the people on the team.

As you can see, our sales grew faster than we had thought or were estimated, coming in at 6.4% growth.

But very close to the pattern that Dan and I had talked about on the fourth quarter call.

Very similar to the pattern.

What we've seen is geographically it's spread wide.

We've seen improvement in every geographic area of the country, and internationally we've seen nice improvement month to month.

So it's not coming back from just one area or one group of customers, it's very widespread.

It seems like somewhat of an economic rebound, not fast, coming back slow, but it is more positive.

And I've been out with a lot of customers and different companies recently and I'm hearing more of that, that people are becoming slightly more optimistic about the future.

From an end market standpoint, our manufacturing customers grew at 16% year-over-year, so very nice growth there.

But our construction, our non-residential construction customers actually dropped 15% year-over-year and so that's very much a concern and right now we don't foresee that coming back much in 2010, if at all.

And so we're really looking beyond 2010 for some good growth, meaningful improvement in the non-residential construction customers.

Fortunately, they only make up less than 25% of our business.

But it's still -- it's a meaningful hit.

And I believe that's why we're not breaking out of the improvement pattern that we talked about.

I thought we would actually go above the pattern, but the construction is holding us back somewhat.

But all in all, I think we're making nice improvement sequentially from a sales standpoint.

And it's also encouraging that it's widespread geographically.

From a gross margin standpoint, we talked about three different areas.

Inflation, rebates and incentives and then our regular point of sale or sales margin over-the-the counter.

For the first quarter, inflation was pretty much neutral.

We've kind of reached the point where we're kind of annualizing over last year where it was.

Going forward, though, steel prices are going up and we see that we'll be coming into our selling prices somewhat in the second quarter, but more in the second half of this year.

We're watching steel very closely, trying to determine how much we should be buying and how long we think this will -- if t it will continue to go up and right now it appears that it probably will for a while.

There's a lot of Asian demand for steel.

On the rebate side, we picked up about 35 points of -- of the 120 basis points, our margin came in at 51.1.

120 basis point improvement quarter to quarter.

35 basis points came from our rebates and that will continue to improve as we go into the year, as they come -- as that inventory makes up more of our -- those purchases make up more of our overall inventory.

So that's a tailwind that we have going right now and we expect about a 70 basis point improvement for the year.

So that kind of plays out into the second, third and fourth quarters.

The most positive thing on the gross margin is what we call our point of sale margin, POS margin, was up 85 basis points for the quarter.

And that's about transactions at the counter, that's about passing price increases or just getting better at how we transact our business.

And so that's a very positive sign going forward and we're very optimistic that we'll continue to see improvement in our margin.

From an expense standpoint, I have to applaud the team.

I think most people have done a nice job of controlling expenses.

Looking at the little things.

The big stuff's easy to find.

It's the little, everyday transactions and saving a few dollars here and a few dollars there that really make the difference, especially a year into it, because we found a lot of the big stuff early.

We were able to grow our business almost 6.5% and reduce our SG&A at 2.5, so that's really the difference in the growth in our profitability.

Against a difficult margin comparison, so we gave up some of the gross margin, but we picked it all back up plus some on the expense.

Our labor was down 4% year-over-year.

And that's a positive.

But the real positive in that is that the bonuses grew substantially.

Our district managers, which are the group of people that oversee the stores, there's about 200 of those, that group, 208 people, I believe, their bonuses more than doubled from the fourth quarter.

So that's very positive.

We were also in a position to start contributing to our 401-K match again, a formula where we don't contribute unless our pretax earnings is greater than 16%.

And because we had that, we were able to contribute $800,000 to our 401-K match.

So our labor was down 4%, but bonuses are up and the 401-K match is back in place.

So the morale should be good.

And we're very positive, good sign of what we're doing and good sign of the work that's being done in the field.

Another positive was we were able to hold our inventory flat for the quarter, actually reduce it about $1 million from the fourth quarter.

Year-over-year, we're down $9 million, or 9%, or just over $40 million.

Again, good work by the team.

We're going to see a little pressure if steel prices or as steel prices go up in the second half of the year, but even with that pressure, we think that we can manage our inventory without much increase at all throughout the 2010 calendar year.

New store openings, we opened 29 stores in the first quarter, about what we had said that we were going to be conservative in the first half of the year and then if business trends continue to be strong, we'll open it up in the second half.

We see the second quarter with similar store openings, somewhere in that high 20s, maybe low 30s.

The quarter will start out very slow.

April, we only -- if any, we'll have one or two stores.

I'm not sure.

We have a big customer show in Indianapolis this week.

We start late with Easter and then we have a big customer event which really takes the time of almost all of our people.

So April will be very slow, but for the quarter we're looking at about somewhere around the same number as the first quarter, around 30 openings which we're comfortable with.

At that pace, if we kept it all year, it would give us 5% openings, but if things pick up we would turn that up a little bit in the second half of the year.

We also see that we'll be doing some hiring in the second half and that will only be in the store locations.

We don't foresee any additional support staff, even in distribution.

We're working very hard.

Our distribution people are to find new and better ways to run their distribution centers, providing a high level of service without adding a lot of additional expense.

There's a lot of motivation out there because these people get paid off the way they manage their expenses and right now they would like to increase their bonuses and the best way to do that is productivity.

There's no better way in distribution to improve their pay than becoming more productive.

So that's a real positive.

So in summarizing what we see for the second quarter and going forward into the year, we see improved sales growth.

We think our daily numbers will improve throughout the second quarter, basically what we had talked about in the first quarter, staying right on pattern, historical pattern.

We see our margin improving again in the second quarter, up from where we ended the first quarter, reported in the first quarter.

We see holding our inventory flat for the second quarter and depending on what steel does, we think we can hold it flat for the entire calendar year or very close.

We won't see much build in inventory this year because we're doing a lot of things to try and become more efficient with the use and still provide very good customer service.

We'll open, as I said, a similar number of stores and we will be doing some hiring.

If you look at your models and you look at where Fastenal is going to be at the end of the second quarter, those are some things you can consider when you're doing your work.

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

Dan is going to give you more in depth information on what we saw in the quarter.

Thank you very much.

Thank you, Will and good morning everybody and thank you for participating in our call.

As Will touched on, two important factors in the quarter, our sales trends continue to improve and the gross margin percentage improved from what we saw in the fourth quarter.

As Will mentioned, our end market information, our manufacturing business is coming back nicely, as we expected.

Non-residential is going to continue to be a headwind for us as we go through 2010, at least we believe it is.

On page two of the release, we talk about some of the mechanical pieces of the business, the growth of stores over a certain age.

Very pleased to see the progress we made in the March month, especially, as it relates to our five plus year old stores.

Those stores historically are much more economically sensitive because of the significant market share they have in their local market and that group of stores grew 7.5% in April.

And so -- and we hadn't seen growth out of that store, group of stores, since late in 2008.

So it was nice to see those -- that group on the positive side of the ledger again.

And because of the sales volume of that group, they meaningfully moved our two plus year old stores to our same store comps, which were positive in each month of the first quarter, moved almost 10% growth in the month of March.

The sales trends, the stairway analogy we started talking about last year as we were really looking at not -- sometimes the year-over-year numbers become a little bit confusing when you're in a period of dramatic change in our top line and so sometimes looking at it from the standpoint of where am I today, where will I be tomorrow and the next day and the next day is a better frame of reference.

On the January call we talked a lot about the sales trends and when you lay out where we were in -- at the end of the year, we really felt that based on historical pattern that we laid out, that our growth in March, our daily average growth, would be somewhere in the 11%, 11.5% neighborhood.

The Holo-Krome acquisition added about 60 basis points to that number and essentially got it to the 12.1 where we're at.

We slightly beat the trends that we laid out starting in January.

If you follow that progression, in the press release I also introduced not just -- not only the mechanical view of the plus percent or minus percent month to month, but a graph that starts it out and you can see on that that our 2010 to date numbers are trending very closely to that past pattern that we've talked about.

We believe our sales growth will, based on that trend, will hit the high water mark as we're going through the second quarter and into July, and as history would say our average daily number would peak out in the September, October time frame which will set us up then for 2011.

But very pleased thus far with the trends in the pattern, relative to the historical pattern.

And as Will mentioned, if construction were helping us out at all we would be in a position to be beating that trend line and beating it nicely.

The Pathway to Profit, I'm happy to say we're back on the path.

And I tried to incorporate a few more details of headcount numbers and store locations so you can get a good view from our business.

In first quarter of 2007, the quarter immediately before we started the Pathway to Profit in April of 2007 and where we are today, if you look at some of the pieces since Q1 of 2007, our store count is up about 15.5%, our store FTE headcount is up about 10%, and our remaining FTE including distribution, manufacturing and support is down about 7%.

And that plays into what we had talked about when we started the Pathway to Profit that it was really a top line growth model that we believe would allow us to leverage our infrastructure, leverage our support cost, and drive our operating margin up over time as our average store size grew.

2009 put quite a damper into our ability to grow our average store size.

In fact, it contracted in 2009.

But the Pathway to Profit and what we laid out in 2007 we feel is committed to and is strongly about today as we did then with the benefit of a few -- now three years of history under the pathway.

Gross profit margin, as Will mentioned, we improved 120 basis points from where we were in Q4 of 2009, largely by our transactional margin, our point of sale margin improvement, and in a piece also from vendor volume allowances, rebate programs, et cetera.

As Will mentioned we would anticipate that portion continuing to improve mechanically.

Whereas the transactional margin, we believe, will continue to improve because of execution and I believe we have positioned ourself well as we go into Q2 and Q3 to continue to improve that, because we still are about 180 basis points below where we were first quarter of 2009 and we want that back.

Looking at the operating and administrative expenses did, I believe, a nice job with that.

The payroll, total payroll cost, as Will mentioned, down from a year ago, despite the fact that our bonus, net payouts were nicely increased from what we saw in the -- in most of 2009, as well as the 401-K contribution.

Occupancy improved year-over-year.

That's one we still need some work on.

We still need work on the base rent side of it.

Our improvement was largely centered on the fact that our store personnel and our district personnel did a nice job of getting green.

And when I talk about getting green, I'm talking about the money kind of green and the fact that they're just being smarter with how we manage our heating and cooling costs, they're being smarter with how we manage that when we're not at the locations, and we lowered our utility costs year-over-year despite the fact that a few prices are moving upward.

So I believe that's something that's a sustainable item.

We've done nice progress on lowering our base rents, but we still need to push hard on that because our goal under the Pathway to Profit was to lower over time, as our average store size grew, our occupancy costs as a percentage of sales from just over 600, 600, 650 basis points, down to about 400 basis points, as our average store size grows.

And so we still have some work to do there but we've made nice progress over the last 12 months.

Working capital, again, came in very much in line with what we were thinking.

The accounts receivable on a year-over-year basis grew actually nominally better than our sales growth, so we obtained a little improvement in our days out and our inventory, we continued to manage that very closely and will anticipate that, as Will mentioned, continuing through the balance of the year.

Because of the improvement in earnings and the working capital management, did a nice job with our operating cash, cash flow, we produced 141% of sales in operating cash.

If you take out our capital expenditures we produced 128% of earnings, excuse me, in free cash flow, operating cash minus capital expenditures.

With that I will turn it back over to the moderator for the question and answer.

And as we have done in the past, we would ask that folks ask one question and we will try to cycle back through to allow as many people that have questions to jump in the queue and have those questions answered.

Thank you.

(Operator Instructions) And our first question is from the line of David Manthey of Robert W Baird.

This is Kyle O'Meara on the line for Dave.

Hi, Kyle.

Really strong contribution margin in the quarter, coming up with about 38%.

How should we think about that going forward both in the near term and the longer term as you start to open stores and begin hiring again?

I look at that for the balance of the year, and I consider that a number that we will continue to produce actually above that level.

Because of -- as we get into the later part of the year, the dynamics change quite dramatically on the gross profit side and the fact that the top line growth on a year-over-year basis, we believe will continue to improve and those two pieces combined with the position we're in right now from the standpoint of operating expenses, where we're in a very good spot to manage from, I believe it puts us in a great position for incremental margin.

All right.

Great.

And then a quick follow-up.

Could you talk about the impact of pricing on sales in March and kind of how that progressed through the first quarter and just how we should think about that going forward?

Thanks.

This is Will.

We look at inflation as about neutral.

We haven't increased our prices really in the last year.

A few here and there, but overall we have not done a price increase.

Going forward, in the second quarter we may see some.

Later in the year it will probably play out to more price increases really due to what's going on with steel.

But as our fastener business, a high percentage of that is imported.

It's a slower process.

It takes us eight to twelve weeks to bring it into inventory.

It's slow-turning inventory.

If you looked at the entire year, the first half, very little inflation.

And the second half we'll probably see some positive price increases.

Historically, we've done a good job or been able to pass that through to the customer, in the last couple times that it's gone up, so we're comfortable we can do that again.

Great.

Thanks.

Thank you.

Our next question in queue is from the line of Jeff Germanotta of William Blair.

Congratulations on a great quarter, gentlemen.

Thanks, Jeff.

A few questions.

The first one, April sales trends, can you talk about what kind of start we're off to in April?

I think we're going to stay away from April, Jeff, but we're still comfortable that we can stay on our pattern.

April early is tough to read because Easter came early.

It's kind of goofed up, but we're kind of confident that nothing has changed since the first quarter -- our patterns.

Thank you.

Then the inventory, I'm curious to explore your statement that you hopefully won't grow inventory dollars a lot this year.

I would guess that your sales growth for the year would be somewhere in a 10% to -- as a conservative to 15% range at a high.

How do you not grow inventory in that environment?

By selling more than you buy.

Sorry.

Jeff, you've been the one who's pointed this out to me so painfully.

Our trend over the last eight to nine years has been that we've gotten less efficient with our inventory over a long period of time and Dan and I have spent a lot of time with a lot of our leaders, talking this through and looking for opportunities and we believe that we're -- we can make better use of the inventory we have.

Even if we grow the entire year or spend the entire year without adding inventory, we're still not at a real hot spot for inventory turns, historically speaking.

And so we're going to work very hard and we're not going to do it by lowering service to our customers.

We're going to look at all of our inventories, see what we could reduce and how we could just become more efficient.

I'll just add to that.

If you really look across all of our stores, there still is -- if you think about the massive changes we made to our distribution model over the last three, four years, with the expansion of Indianapolis, the automation of Indianapolis, the improvement of our trucking lanes and our trucking routes in general, there is still a fair amount of what I would call redundant inventory scattered across our stores that we have good distribution support on now and the transaction frequency is low enough, and it's an inventory item that isn't a problem solver.

The one thing we're always very cautious of very conscious of when we're looking at what we want in our stores is the inventory that at the end of the day solves problems for customers because that's the stuff that solves problems right then and there.

And having a base of inventory in the store that would service -- that would get the customer started if they needed it right now.

So maybe they need 2,000 of something, we have 800 in the store, but we can get the other 1200 in by six-thirty tomorrow morning out of the distribution center.

So being very conscious of balancing that over time.

Because the inventory reduction of 2009, really what we did was we eliminated the inventory growth that occurred in 2008 when the economy shut off.

Thank you.

I'm very hopeful you'll achieve that.

Thank you.

Our next question in queue is from the line of Brent Rakers of Morgan Keegan.

Yes, good morning.

Will, I was hoping you could maybe expand a bit on the 85 bip improvement in point of sale pricing, maybe as a reference point being how much of that do you think is relief from kind of the competitive pressures that have existed this past year and how much of that may have been specific Company initiatives and focus, and maybe if it's the latter could you maybe expand on a couple of those initiatives.

It's almost impossible to measure the relief from competitive pressure because we are doing thousands of transactions in thousands of locations.

Anecdotally, you listen to people, you talk to people, and there's not as much crazy price.

We're not hearing the stories that we heard a year ago about this guy's giving it away or these prices are ridiculous.

That has toned down a lot.

There's something to that, but it's almost impossible to measure.

The initiatives have been about -- we've done a much better job of dissecting our business and thinking at the transactional level.

Not looking at a district with ten stores and saying your margin is up a point or down a point.

We are breaking it down to the transaction and say why did we do discount at this level for this type of customer.

About nine months ago, Dan tapped a couple young guys that worked for us, worked for us for several years, two bright guys and said would you like to work for me and do nothing but break this data down and tell us where we're doing a good job and where we aren't.

As you can guess we've discovered a lot of areas -- we're very decentralized and understand that our people make prices in the field, some are really good at it and some aren't.

So part of this improvement is coming from their hard work.

Just identifying opportunities, identifying prices or stores that are selling the same product to the same type of customer for 5 or 10 or 15 points less and that's where a lot of the improvement is coming from.

So it's the combination of a little less pressure from the guy next door, the competitor, and more good information to drive our middle manager, our district managers to make better decisions or train better decision making.

One thing to keep in mind, when you look at 2009 and the margin decreased.

There was some overlying mechanical things going on, the rebates, the vendor allowances we talked about.

But when you really look under the hood, a lot of our decline did come from 2300 stores.

It came from about 40% of those stores.

Were more scared.

That's very helpful.

Just one more, if I might.

And Will, I think you've talked about some numbers in terms of the impact of gross margin percentage on SG&A and comp.

If you could just talk about this 120 bip impact and how much of that might have moved SG&A up in terms of dollars in the quarter.

You mean from a labor percentage?

I'll let Dan.

If you look at it, the gross margin improvement -- probably 25% of our store labor cost increase, it gets a little difficult to measure it sometimes because we've also flipped from contraction to growth and there's a growth component too.

But the gross margin is the biggest driver.

Historically when we look at, if we add a dollar of gross margin, by the time that everybody's that's paid on that gets paid from the product development to the district to the store, we pay out about 25% of any incremental growth in gross margin in some kind of compensation.

And so of the 120 basis points, we probably paid out roughly 30, 30 bips of that out in increased margins or commissions or bonuses to different people because it's all about the hierarchy of how the bonuses get paid.

This is a great problem to have when it goes up because it's great for our employees.

Thank you.

Thank you.

Our next question is from the line of Adam Uhlman of Cleveland Research.

Hi, good morning.

Good morning.

Looks like you've done a really good job of containing the losses across the new stores over the last couple of quarters.

Could you talk about what's unfolding there?

And then on the flip side, your largest and oldest stores, the margin contracted a bit relative to year-ago levels.

Could you talk about what's happening there?

Yes, I'll hit both of those.

On the small stores it was really an initiative.

With Pathway to Profit we had put in more investment in some of these small truck or small stores, extra trucks, extra people, and in the downturn we didn't seem to be getting much benefit.

So in July of last year, I went to some of my direct reports, Dan included and we divided up the regions.

We each took two or three of them and just started working with the regionals on identifying opportunities in these small stores, kind of a game.

It was fun because we had a project, not a game.

And we really focused on it.

As you can see, we reduced our losses from basically 25 -- by about 10 percentage points, so we did a really nice job there and we think that's sustainable.

Actually, we think we'll improve from there.

Because the first quarter is a little difficult because you have your higher occupancy and lower revenues.

What it really was is purely attention.

On the larger stores it was reduction in gross margin.

If you look at our growth, a lot of it's coming from manufacturing.

A lot of the manufacturing is large customers.

Typically run into slightly lower margin and a lot of of that business runs through those bigger stores.

The bigger stores have given up some margin, but when you can report 25%, 26% operating profit, I'm not as concerned if I give up a half or a point of gross margin when you can still get those kinds of returns.

As Bob Kierlin and our founders always beat into my head for 30 years, Will, it's not about the gross margins, is about where it comes out on the return or even the operating or pretax, it's about what we get on return on that business and those businesses are highly profitable and great businesses to own.

And then just a follow-up.

You used to report what your strategic account of the large account growth was.

Can you talk about what that was in the quarter?

We don't have -- we're waiting on that information but from what I -- the preliminary numbers that I've seen, they're actually tracking slightly ahead of the Company and the reason for that is a lot of that's driven by manufacturing.

And so they're ahead of -- we're trying to sort it out and see as far as the construction and the manufacturing business.

They are running ahead of the Company numbers, but I don't have the exact number today.

Okay.

Thank you.

Our next question is from the line of Tom Hayes of Piper Jaffray.

Great.

Good morning.

Great quarter.

Thanks, Tom.

Just wondering if maybe you could talk a little bit about -- we talked about previously, the opportunities that you see for picking up government business, both on the federal and the state level.

Yes, the -- we think there's a tremendous opportunity, not only federal and state, but also the local level, the schools, all the cities and things like that.

There's a tremendous amount of spend there and we've openly admitted that we're behind in that to some of our competitors.

So what we've done is we've restructured that internally.

We tapped one of our regional vice presidents that actually has a -- he was the guy that got us into it 10 or 15 years ago as a district manager.

He opened our first government store.

His name is John Soderberg.

He was running our Seattle region.

He is going to be moving back to Winona, has already taken the role, will be moving back to Winona and really increasing our efforts, increasing our sales force.

What we determined is that we need specialists to really get -- especially the state level more than anything, to get involved in those and understand the pricing, understand the programs.

And so we're going to renew our efforts.

We're going to work hard.

But the opportunity is tremendous when you look at the percentage of the GDP that's controlled by some type of government spending.

We're just not getting our share at this point.

But we believe we're really well-positioned to do that because we have the model where we can ship direct from a warehouse if that's what the customer or the state wants, or we can ship from a local store and a lot of the smaller entities really prefer the local service.

So we have kind of a one, two punch that some of our competitors don't have.

Okay.

Then just a follow-up, if I may.

You've done a nice job of building up your cash balance and I notice you didn't use any available cash for any stock repurchases.

Just wondering if you could maybe provide some your thinking on uses of cash going through the year?

The cash has continued to build nicely, both between cash and marketable securities.

Historically, we've done limited buybacks.

We've been doing a little bit more the last three years, three, four years, have increased our dividend in a meaningful fashion.

We supplemented -- we did a supplemental dividend back in 2008 when the economy first slowed down.

As I look out to 2010 and we will continue to look at that from the standpoint of do we increase that dividend, because our ability to generate both operating cash and free cash is quite substantial and we've only improved that over the last couple of years.

But outside of -- as you know, historically our MO has not been one of being [acquiviative] and so the excess cash we accumulate over time that we don't need in the business to fund working capital, historically we've returned to our shareholders.

Great.

Thank you.

(Operator Instructions) And our next question in queue is from the line of Sam Darkatsh of Raymond James.

This is actually Jeff calling in for Sam.

Thank you for taking my questions and congratulations on the good results here.

Thank you.

My first question is I was hoping you could expand a little on the non-res construction side of the business.

I understand obviously that's going to be a lagging factor as we go through the year, but as the declines there are moderating and the comparisons later in the year get easy enough where it kind of implies you could see that business flat by the time we get to Q3,Q3 on a year-over-year basis.

Am I looking at that correctly?

We probably won't see it flat by Q3 because we have some very big projects that were driving that in the second half of last year, mainly energy, some Bechtel jobs that we were selling heavily into.

We could see it flattening out, but our concern is there aren't a lot of starts and there's a lot of concern in the commercial real estate business which is really the start of our commercial development.

Where we do see some positives, there's a lot of talk about energy.

There's still a lot of money, with a little higher oil prices there's a lot of money going into refineries and things like that, but to really get the bump that we need from construction, we need small to medium jobs starting up in communities like Winona and all over the country.

The only construction that we're seeing outside of big energy right now is either healthcare or government.

We see hospitals and clinics getting built and that's very good business for us.

We see government like here in Winona, there's a big new health complex at the university getting built which is good for us, but we're not seeing the Targets and the Wal-Marts and all these other strip malls that were being built a few years ago.

It might flatten out.

My comments were more based on it's just we don't see a lot of rebound where we're going to be growing that business at 20%, 30% in the next two to three quarters or 10% to 20%.

Okay.

And then my follow-up is on the other side of the business from your manufacturing customers.

Wondering if you're seeing any restocking at this point and whether or not you expect that to happen over the next three to six months?

I have not heard much about restocking.

I talked to a lot of companies.

My thought right now or the gut feeling that I have is there's not going to be a lot of restocking soon because there's still uncertainty in our economy.

Most of the people I talk to are going to be very slow to rehire people unless it's for production.

That's what they're telling me, we're not going to add a lot of support.

They're not going to spend any money they don't have to.

I think I said this in the third quarter conference call, it was one of the earlier ones.

I don't foresee a lot of restocking at any point because people learn that they can live with less and that's actually very good for our business if they don't restock because if you have local inventory, like a Fastenal store, you can depend on that, then you don't need inventory.

The less they have, the more our value proposition plays well for us and plays well for them.

But I really would be surprised to see a lot of manufacturers coming back and putting in big inventories of things that they maybe could live without at this point.

The one thing we are seeing a nice improvement on is a lot more interest in our vending systems because we can control spend and they know exactly what they have.

I am -- I'm very bullish on vending.

It's a very small part of our business, but it just makes complete sense to me where you put a small store, essentially a store of 10 or 20 or 100 items into a plant, a warehouse, a site, and then they have complete control and it reduces what they need.

Thank you.

Thank you.

Our next question in queue is from the line of Hamzah Mazari of Credit Suisse.

Thank you.

Most of my questions have been answered, but just one question.

Given the ramp-up in the demand environment you're seeing and you talked about stocking inventories at the DC during the quarter, but you also mentioned inventory levels are likely going to stay flat from here, depending on what you see with steel.

Do you still expect working capital to be a source of cash this year?

How should we think about that?

Working capital will be a little bit of a drain because of accounts receivable as we go through the year because -- you saw that even in the first quarter.

We consumed some cash to fund our receivables and that will continue as our seasonality of our business ramps up into second and third quarters.

But outside of the accounts receivable standpoint we should be in a good position with our working capital and its ability to trough off cash.

Thank you very much.

Thank you.

I show no further questions in queue at this time.

Very good.

Again, thank you everybody for participating in our call this morning.

Hope you find this call, combined with our release, informative in understanding the Fastenal business.

Have a good day.

Thanks for your support.

Good-bye.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program.

You may now disconnect.

Everyone have a great day.