快扣 (FAST) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Fastenal Company 2010 second-quarter and earnings conference call.

(Operator Instructions).

As a reminder, this program is being recorded.

I would now like to introduce Ms.

Ellen Trester.

Welcome to the Fastenal Company 2010 second-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 open 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.fastner.com.

A replay of the webcast will be available on the website until September 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 be 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.

Thank you, Ellen, and thank everybody for joining us today.

Also, thank everybody for the support you have given us over the last several quarters, because things have been a little tougher and we are starting to bring it back.

I am very proud to report that we had a nice quarter.

The second quarter turned out very well for Fastenal.

Our sales are really on track with where we thought they would be.

If you recall back to our January conference call, Dan and I talked about the sequential trends and where we thought they would come out.

And after the call we got some people that were cautioning us on being a little bit optimistic, but fortunately they played out exactly where we thought they would be.

If you look at the trendline, I believe, five out of six months have been at or above the sequential pattern -- historical sequential pattern.

June came in right at 21.1%.

At the end of May we thought maybe June would do a little bit better, but actually as it turns out I think May was just a blockbuster month.

We had a lot of things lined up for us, and so we are not at all disappointed with June; May was just a spectacular month.

Sales really were driven by our manufacturing customers, which were up 29.8% for the Company -- or for the quarter, excuse me.

Very, very good pattern.

Construction customers did come back just a little bit.

They were way down in the first quarter, came back to flat to plus 0.5%.

So that is actually a very positive sign.

We don't see a lot of activity there, but in some of the areas, like oil and gas, and some of the other more mechanical areas of construction we are seeing some life coming into that business.

Our active accounts have not been growing the way that we would like them to; they were up 3% for the quarter.

We have done a lot of research trying to understand that better, and what we found it is really being driven by -- or the lack of actives is being caused by two things.

One is that our construction customers -- a lot of the residential, which isn't a big piece of our business, but it is a big piece of our actives, and the small commercial contractors are just not showing up with the frequency they did at one time.

Many of them are just very -- not a lot of business.

The other thing that is hurting our active accounts is that we have opened fewer stores, and new stores have always been one of the greatest drivers of active accounts.

So although the actives are only up 3%, we are pretty comfortable with where we are after we have looked at the data.

But on the manufacturing side we have very nice growth in actives, and that is driving that 29.8% growth in manufacturing business.

Gross margins came in at 52.1%, right on track with where we thought they would be.

Dan is going to give a little more color later in the call telling you where the breakdown is, but we are improving in all areas of our business with the gross margin.

We are comfortable that trend will continue going forward based on everything that we are seeing.

I am very happy with the progress of the results that we are able to show on expense control.

Our expenses were up 7.9% against a 20% sales growth.

If you take out the labor, we did a great job in pretty much every area of expense control.

The reason I say take out the labor is the two components of labor are base salary -- our standard pay was in great shape, but our commissions and bonuses were way up, and that is a great problem.

It is great for our employees to come back and make good bonuses and good commissions, and that is a problem that we would take every day.

So overall expense is up less than 8%.

I think everybody in the field, everybody on the Fastenal team has done a really nice job of hold the line when things are picking up.

It is not easy at this time, because we have been really tight for about 18 months, but it seems like everyone is rallying to make that happen.

At the beginning of the year we talked -- Dan and I and all the regionals and senior people talk to people all year long, and we said we really have -- well, if things go well, our expenses are going to go up, and they're going to go up for one of two reasons.

Either we get a little bit loose and just spend the money on miscellaneous things or we stay real tight and we spend the money on bonuses.

I'm happy to report to you and to the Fastenal employees that we are able to spend it on bonuses, not the other things.

So the people did their job.

Headcount standpoint, our headcount was up a little bit.

I actually had hoped that our store headcount would have grown a little more.

We will see headcount growth throughout the year.

Not much in support; we are going to hold very tight in support and distribution.

You may see a little bit in the distribution as volume picks up, but through the rest of the year I can see between 300 and 500 FTE at the store site spread throughout the year.

That is really just to deal with the volume and make sure that we continue on the offense, off calling on customers.

Most of that at the store will be part-time employees and a handful of full-time salespeople.

Another group of sales specialists are people that we are going to be adding, and these people will come out of our stores and be replaced by newer employees.

We are adding between 80 and 85 sales specialists.

And some of those came into the second quarter and the rest will be added mainly in the third and the fourth quarter.

These people will be sales specialists in various areas from government sales, vending sales, manufacturing sales, product specialists that will be out working with our customers, driving business through our stores to help drive up the average store size.

We have had some very good results with people we put in earlier in the year, and so we are going to continue to add that, again, to drive people and drive revenue through our existing store sites.

Another area that I am very happy with our progress is our Pathway to Profit, or our pretax profit goal.

If you look on page 6 of our earnings release, we have the chart that shows the profitability per store -- or per store size.

The one area that is probably the best progress that we've made is in the small stores.

We had talked about that in both the first and the second quarter conference calls that we've been working very hard on that, and probably the calls last year.

Working very hard in those small stores that -- to reduce the expenses and get them to give grow faster.

So we have really made progress in two areas.

One, is we greatly reduced the number of stores in that category.

And the other half is we cut the losses by a half in that group of stores.

But in every category our profitability has moved up nicely.

The 30 to 60, 60 to 100, the 100 as you go down that list, everyone is up, I think, a minimum of 2 percentage points over the previous year.

And that is due to hard work, good expense control, improvement in margin, and everybody just focusing on their business and taking it -- looking at one store at a time to improve the profitability.

So I am not ready to say that we are right back on track to Pathway to Profit, but we are getting really close.

And I think we're going to start marching forward, assuming that the economy holds up for us, and so far, so good in that regard.

The last thing I want to touch on is store openings.

We were very cautious in the second quarter opening stores.

In June we thought we would open a few more stores.

One thing that is happening there is that we have to break the district managers loose a little bit.

We have been really tight on them with adding people and controlling their expenses.

So when things started to pick up they were holding onto the rope pretty tight, didn't want to let go.

So we have to nudge them to open the stores.

They are doing that.

We believe that we will open between 80 and 95 stores in the back half of the year.

And we will really be right back on track with our Pathway to Profit.

That will give us 6% to 7% store openings for the second half of the year basis.

We are comfortable that we can get that.

With that, I am going to turn it over to Dan.

Dan is going to give you a lot more color on the financials, and then when he is done, we will open up for questions.

Again, thank you very much for your support.

Thank you, Will, and good morning everybody.

I will touch on some of the things that Will touched on.

I will try to give a little more color about doing too much.

But just some highlights.

As Will mentioned, and I refer everybody to that table we have on the bottom of page 3, and again, we started talking about this back in January.

We looked at a period in history.

The period it shows was '98 to 2003.

We felt the characteristics of that timeframe has many similarities to this timeframe.

We had a prolonged period of industrial slowdown that started with the Asian flu in '98.

It really continues until the 2003 timeframe when it started picking up.

We pulled back our store openings in that timeframe, so a lot of similar dynamics in play.

As you can see on the pattern, five out of six months were at or above it.

February was below because of weather impacts.

May jumped out a little bit.

Again, that was just a blockbuster month.

So very pleased with the progress we have seen.

And based on what we have seen thus far in July, anticipate that trend line to continue, and see how that plays out.

From a gross margin standpoint, and this is a sequential comparison, we picked up 100 basis points of additional margin, gross margin.

If I split that apart, about half that improvement came at what I would consider the -- excuse me, 30% of that improvement came at the transactional level.

That was our day-to-day activity at our stores, people pricing product, challenging themselves to raise our margin.

About 20% of it came at the organizational level, what we would call the profit of our buying programs.

About -- so that is about half the improvement, those two pieces combined.

We talked earlier in the year about our rebates continuing in our vendor programs, which are really volume-centric programs, which were mauled pretty severely.

And as we went through 2009, we made nice progress there from Q4 to Q1.

We continued to make progress from Q1 to Q2, picking up about 25 basis points of our improvement.

So that is 75% of the improvement.

The last 25% is all the other stuff.

We continue to make great progress in this timeframe with what we are doing with our freight programs.

We continue to make -- eek out 5 basis point here, 8 basis points there of additional improvements.

And if you lump them all together it adds up to about 25 basis point.

So there is 100 basis point of improvement.

As I look at that going forward I think we have nice momentum on the transactional side and the organizational side.

The rebate piece, we still have some incremental gains, but they are becoming more marginal because we have really recouped back to historical patterns.

As Will mentioned, in the end market arena, our manufacturing business, when I compare to Q1 to Q2 on a year-over-year basis our improvement almost doubled.

Of the non-residential piece beginning in May that flipped positive.

It is not helping our growth, but it is not going backwards.

And we don't see anything in the near term that would cause that to change.

But that is, again when I get back to that trend pattern we talked about, the sequential patterns, that is really inherent in what we are looking at is continued weakness in the construction.

I won't touch on any more, other than as Will mentioned, our store statistics, meaningful improvement in all categories.

Particularly proud of that first group, because that is not a case of business coming back or our manufacturing business picking up that we saw the improvement.

When you look at those stories doing less than $30,000, and the fact that our losses in that group dropped in half from a year ago as a percentage of sales, that is just hard work by our district managers and focused effort to say, I'm going to break these stores.

I'm going to break them even faster.

And they're making really nice progress in that area.

Our Pathway to Profit information.

One item I will give a little color to FTE headcount.

If we look at since we began the Pathway to Profit, and break up that information in the middle of the page, our store FTE is up about 11.5%.

So very during that timeframe we have continued to invest heavily in store personnel as we move down that Pathway to Profit.

Obviously, took a bit of a step back in the last 12 months because of the economy, but continued to invest in our selling capabilities at the store.

The remaining headcount is about 4.8% down, if you look at the last two groups combined from where it was in Q1 2007.

That really plays into the fact that a lot of our support headcount are predicated on store locations, not sales, and we are getting very nice leverage there.

One item I would point out.

If you look at the distribution and manufacturing numbers on a year-over-year basis, you would see they are up.

That up is caused -- that increase is caused entirely from the Holo-Krome acquisition.

If you strip that out, that headcount would be down nominally from last year as well.

As Will mentioned, operating administrative expenses saw really nice leverage.

I will share a few pieces of information.

As everybody knows, our earnings are up roughly 60% on a year-over-year basis.

If we look at all the incentive compensation we pay out, store commissions, profitability bonus, project area bonuses, etc., and you lump all those together, our incentive comp was up almost 80% on a year-over-year basis.

And our profit was up 60%.

We did a nice job.

When I think about our support areas, when I think about our store personnel, in 2009 a lot of conversations talking folks through about what was going to happen as that year played out.

A lot of it was believe in where we can go as an organization, and we are going to get through 2009 together.

I think the second quarter of 2010 is a nice explanation point to being through with 2009 in that we were able to reward our personnel for a job well done as we look through the year.

I believe a lot of legs to that.

Also, I am happy to say our profit sharing bonus, which disappeared in 2009, was up nicely when I look at 2010 year-to-date and the second quarter.

One other item I would touch on in the non-payroll operating expenses our occupancy improved sequentially, as we would expect with we are out of the heating season.

We still have a lot of opportunity there and a lot of work to do, and we expect to see continued improvements in our occupancy expense.

An interesting statistic, I looking at our fuel consumption over the weekend, and from 2008 our fuel expense -- and a piece of this is in operating expenses; a piece of this is in margin, because the diesel fuel and our semi fleet is in margin -- that is down 38.3% from the second quarter of 2003.

If I average out the drop in fuel prices, both diesel and gasoline, combined they are down about 26%.

So we did a nice job of picking up a whole bunch of efficiencies in that two-year period above and beyond just the unit cost differences.

Working capital, (inaudible) are up 23% on a June to June basis.

Essentially in line with sales growth, we are at about 21.1% the last two months.

So a little bit of added.

A lot of that is really driven by the fact that our industrial business is growing faster, our large account business is growing faster, as well as some of our international business is growing faster.

And some of those customer bases have terms that go slightly longer, and then pulls up our days a fraction of a day, but a very nice job on the [comps payable] side.

Our bad debt expense essentially dropped in half from where it was running in the timeframe last year.

Inventories, one item on the quarter I am frankly disappointed in.

If I look at our store inventory, the store component, year-to-date that is down about $2 million.

That should be downed around $10 million.

So I look at what we have done year-to-date overall with our inventory being up about $14 million, I am disappointed that it is that high.

We still have very nice momentum.

The $2 million that we have taken out occurred in the last several months.

So we have nice momentum, but we need to push hard in Q3 and Q4 to continue to manage the inventory number as we move forward.

Cash flow standpoint -- done a nice job here today.

96% of our earnings have -- is our operating cash flow as a percentage of earnings.

Free cash flow is just north of 70%.

If you recall from previous calls, our target number is 80% to 90% for operating cash flow as a percentage of earnings and free cash flow of 50% to 60%, and we are well above those numbers six months into the year.

With that, I will turn it over to the Q&A.

(Operator Instructions).

Tom Hayes, Piper Jaffray.

Just wondering if you could maybe elaborate a little bit on your expectations on the -- you had mentioned some great performance on the profit by store size.

Just your thoughts on timing on those smaller stores -- on your expectations on timing to get those doors at more breakeven.

That size of build, the 0 to 30, will probably never be at a breakeven.

What they do is they migrate out and then we offer new stores.

So that pool is somewhat consistent, if that makes sense.

But based on where they are, we think that the operating losses should be anywhere from 8% to 12%, not 24%.

We were putting additional expense in there trying to drive growth, and we weren't getting much -- seeing much improvement in the growth, so we backed off the expenses.

They are still growing at the same rate, just spending less money to get there.

We don't never foreseen them going to profitability.

If you think about that growth, the average store in there probably does around $20,000 a month.

So there is about $10,000 of gross profit dollars, and there is -- right now there is $12,000 of operating expenses.

That math doesn't really change.

The fact that we took that $12,000 down from $14,000 a year ago is quite an accomplishment.

It is.

You have done a great job across the whole spectrum of store sizes.

Just as a quick follow-up, we haven't talked much lately about the private label progress as far as your growth in that area.

I was just wondering if you could provide any kind of an update as far as [Q] volumes or their growth rates in the private label versus a broader perspective on the products.

I actually don't have the growth rate on it, but we continue to work hard developing our private label brands, and continue to find success and higher margin.

But the actual numbers, I don't have with me.

David Manthey, Robert W.

Baird.

This is actually (inaudible) for Dave this morning.

My first question is, as we are getting back on track with Pathway to Profit here, could you maybe talk a little bit about how you're thinking about contribution margins going forward on whether -- the very strong 44% year-over-year that we saw this quarter?

When I look out at Q3 and Q4, as an example, and I look at year-over-year basis and look at sales growth, as you see in that table on the bottom of page two and you look at those patterns, what we are getting to the point -- or we get midway through third quarter we start to anniversary the comparisons.

And then our real operating leverage is getting back to two things, Pathway to Profit, because our growth now is on a constant year-over-year basis.

And the second piece is our ability to enhance our gross margin.

We were very pleased with the 44%.

We are hopeful that when we move out through the balance of the year in Q3 and dropping off a little bit in Q4, that they are able to maintain upper 30%s type of incremental margin.

That's helpful.

Then if we turn to pricing, I know you mentioned in the release the bias would be positive this year.

And we have been hearing from some of our contacts (inaudible) some higher fastener prices coming over from Asia in the second half.

How can you see that hitting the market as we move forward?

There are some -- well, the higher fastening prices they have kind of backed off a little bit recently over the last month or so.

It has backed off a little bit.

We see pricing going up, but it is going to be in the low single digits.

The fastener product line has a long tail because people have a lot of inventory.

If we see any benefit it will be the latter half of the third quarter going into the fourth quarter, as we see a little bit of benefit.

But right now it is a little bit murky, because of the uncertainty in the overall economy.

It is not like it was back in late 2007 where the angles are going up, but just a huge angle, it is slight increases here and there.

Adam Uhlman, Cleveland Research.

I was wondering if you could just give us a little bit more color about the sales trend that you have been seeing.

If you could talk about sales by geography across the US.

What did you see in Canada?

And I guess Mexico is still kind of small for you, but --.

And then also if you could just talk a little bit more about how you guys are growing your non-residential construction sales right now, if you have done any work and how much of that is new account growth versus better oil and gas and mechanical customers, as you mentioned earlier?

I can touch on the geographical, as far as the construction we don't have all the fine detail on that.

But geographically we have actually seen a nice pickup across the country.

There is no area that is weak.

We are particularly strong in Eastern Canada.

Western Canada is growing about at the same level as the other part of the business.

The one area, I guess if there was one area that we are seeing a little bit of weakness is basically the Rocky Mountains.

Basically from Montana to New Mexico, that strip is a little bit soft for us.

But some of that is that we did real -- we were doing better last year.

It didn't taper off as fast, and so it is not coming back as fast.

The brighter spot that we have is our international business.

Asia is doing very well for us.

Singapore, Malaysia, China is growing well above 50%.

We are seeing just a lot of good things going on there.

In the US it is really pretty even coming back, other than that Rocky Mountain area.

As far as the construction, most of the large jobs that we are seeing are energy related, either coal-fired power plants that are going on.

There is a lot of oil and gas in North Dakota, some construction up there putting in wells and infrastructure.

We are doing a lot of business with that.

We are seeing rebuilding down in the Houston area with a lot of the refineries.

We are doing some really nice business there.

Most of the business that we are seeing though is coming from existing mechanical contractors that are doing well.

The part of commercial construction that is missing is you just don't see a crane up and down in the cities.

Another area that we have really seen basically completely gone is where they're putting up big boxes.

Throughout the first half of 2000 to 2006 there was a Target, a Wal-Mart, a Home Depot going up in about 100 or 200 of our cities at any given time.

That is really nice business for us because it is usually local, regional contractors, and they are locking in the store.

If there is a Home Depot going up, you will pick up $3,000 to $5,000 a month in miscellaneous business until the project is done.

That business is just nonexistent today.

Great, thanks for the color.

Then just a follow-up on the international business.

Some time ago you had some aspirations of opening up quite a few of international stores.

Can you just update us on your thoughts there?

Dan is going to show -- he is pointing out the number, but I can't read it.

International locations, when I look at this year, close to -- almost 10% of our openings are international.

So you look at that from a percentage standpoint that is meaningfully above where they are (inaudible) business.

And that trend is going to continue to broaden.

The limiting factor always on locations, especially if you have international business, is two things.

One, when I think of our -- I'm going to exclude Canada when I say this, because Canada is far enough along developed that these two pieces don't really come into play.

It operates very much like our US-centric store base business.

But when I think of international, I always think of the two limiting factors.

One is always the development of people and the ability to open stores.

That is the limitation that we have always had in this organization.

The second one is when you look at particularly our Asian business, our model there is a little bit different.

It is more of an OEM-centric fastner model, where we have fewer locations with larger business per location.

So the dynamics of pure store openings are a little bit different.

But we will continue to invest heavily in people into those international locations.

Thanks, guys.

On a positive note, the international business is trending -- from a profit standpoint is trending at or above the Company numbers, so that is not a concern.

Brent Rakers, Morgan Keegan.

First, there is a comment in the release that reads, payroll was tracking in the 60% to 65% of SG&A range through the first quarter, and now it has moved back to the 65% to 70% historic range.

I was hoping you maybe give me a little color, because obviously there is not that kind of sequential jump Q1 to Q2, but I was hoping you could just talk through that in a little bit more detail.

Well, if you look at it, historically, when you look at all the components of payroll, base pay, bonus pay, profit sharing, our school of business dollars, our health care dollars, historically we were in that upper range.

Last year, unfortunately, because if you think about the business model and you think about components of operating expense, that is the most variable expense we have.

Occupancy in the short term is much less variable, because you have your locations and your expense is your expense.

You can change a thermostat; you can renegotiate leases, but those are -- that is about it.

You still have a base of locations.

So that dropped last year because that variable expense dropped dramatically.

When you look on a year-over-year basis, and a sequential basis for that matter, earlier I mentioned that our profitability -- our commissions and profit bonuses combined were up almost 80% on a year-over-year basis.

That, combined with our FTE stabilizing and growing on a sequential basis, is causing that expense as a percentage to grow faster than everything else.

So it is getting -- it has moved back to where its norm is.

Last year wasn't the norm.

Great, that's helpful.

Then, Will, just maybe -- just to make sure -- I want to clarify this.

The target for the second half of the year in terms of FTE additons, 300 to 500, plus you also referenced another 80, so that means maybe approximately 400 to 600 salesforce oriented additons on an FTE basis second half.

Did I hear that correct?

About half of the 80 had been put in place.

So it is correct if you just took it down by -- take it down by 40 to 50, and you are right.

Okay, great.

Then just one --.

Most of that -- understand though that most of that at the store level will be part-time.

So as a percentage of labor it is not nearly as high as it sounds, because it is at a lower cost level, a lower rate.

Then maybe just a follow-up, just to tie what Dan said earlier.

There is also talk about keeping the non-store-based headcount relatively constant with where it is now.

Is that as a percentage of total numbers or just constant with current levels, because as you add more stores would that provide the need for more additions there?

We believe we can hold our support labor -- there will be some additions in distribution, but it will not be nearly as high as our sales growth should be.

We are going to work very hard to hold the support pretty much flat.

Whatever dollars we have, we want to put them into sales positions, growth drivers.

We really believe, if you can only invest in certain parts of the business, closer to the customer will give us a greater return.

We found through the slowdown of 2009 that -- do we compromise a few things when we have fewer support people?

Absolutely, you always do.

That our people have got better at prioritizing and really getting things -- getting the things done that are necessary that are most important.

So hold support very tight, invest in sales, and see how it plays out, and grow our business.

(Operator Instructions).

Sam Darkatsh, Raymond James.

Simple quickie there.

First off, with respect to the rebates, Dan, I thought I recalled last quarter you mentioned that you expected the rebates to continue to improve in terms of having a positive contribution as the year progressed.

Now it looks like -- was there a pull forward or an acceleration of that timeframe into Q2?

I'm just trying to get a sense of juxtaposing what you said last quarter with what you are looking at now.

Historically that component of our margin is worth about 100 basis points.

Last year what happened, as we went through the year, that 100 dropped down to in the fourth quarter it was at about 30 basis points.

So we lost about -- sequentially through the year we lost about 70 basis points.

We gained about half of that back in the first quarter.

First quarter we had about 65 basis points.

That number, if you look at what we earned in the second quarter, we are at about 97 basis -- we are basically back to 100 basis points.

A little piece of that fits in ending inventory, because of the way turns were.

So in our P&L we picked up 25 basis points, and we are running right now at 90.

I see no reason why we won't get back to 100.

When I talk about the contribution going forward, I see that being at about 100 basis points.

I didn't think a 10 basis point sequential improvement was enough to talk about.

Got you.

Very helpful.

Thank you.

With respect to the new store productivity, very impressive getting the younger stores -- less of a lost leadership standpoint.

Talk about the new store productivity from a sales basis, where you're looking at from stores maybe a year old, what the average sales rate is for those stores versus perhaps a year or two ago.

Is it a combination of additional leverage or is it more heavy lifting at the store level irrespective of sales trends?

I don't have those facts in front of me, so I'm going to talk a bit from the hip.

As Will mentioned earlier, when we have improving trends in sales growth, what happens is stores graduate out of that group and they moved to the second group, and then to the third group, the fourth group, the fifth group, etc.

So when I look at that group, could the average store in there be 5% or 10% higher than it would have been a year ago?

Maybe.

But that wouldn't really change that number, because a piece of that would be getting paid out in added commissions, and we would be adding people because that store is growing, or adding powers to the part timer.

It really changed because we lowered -- essentially we took a couple of grand worth of monthly expenses out of those stores, because the district manager decided it wasn't bringing value to my business, and I am going to do it without it.

Now the fact that we might have given the DM a nudge to do that, that is irrelevant.

That DM took dollars out of that store, because if the store is growing faster and it is hitting to a higher level, that is what drives us to graduate from that group.

Got you.

Last question, if I might.

Will, you mentioned last quarter that your econometric model was suggesting that organic growth rates would perhaps peak at around September or October.

Anything you are seeing now that would perhaps push that a little bit or bring it forward, or is that still the time frame you are looking at?

You mean year-over-year sales growth numbers?

Yes, sir.

Actually, I will let Dan -- Dan is jumping on me here.

Actually, if you look at that trend pattern, once we get past July and into August you really see a pattern that starts to mirror that historical pattern.

Actually both the historical pattern.

Yes, but then so the growth then is on more of a steady-state business.

That is what I was alluding to earlier when I was talking about the Pathway to Profit and what is going to drive our profitability improvements in the future.

When we talk about September and October, that is really a comment not unique to 2010; that is every year in our business.

Those are our peak sales months on an absolute dollar basis for the year, because our business -- our business is always running forward and growing.

What happens in November and December is there just aren't enough business days, and you have so many holiday impacts with businesses that are shut down for part of the Thanksgiving week, they are shut down from the Christmas/New Year timeframe.

So the quality of the business days in November and December, plus construction business slowing because of seasonality, fall off.

Historically we look at our business, and once we get through October -- we now are developing our plans for the next year on our sales trends, because January and October -- really September, October the daily average in that timeframe tends to mirror historically what we are going to see the following January.

So it was an absolute dollar peak, not a sales growth peak.

I understand completely.

Thank you much.

Hamzah Mazari, Credit Suisse.

Just wondering if you could comment about sales trends between your larger accounts versus your smaller customers?

As well as, is it fair to say that everything you're seeing in the market right now is just a straight sell-through?

Are -- your customers are still pretty cautious regarding restocking.

Any color you can give there would be appreciated.

Thank you.

As far as the large accounts versus the small accounts, we are seeing better growth numbers out of the large accounts, but it is probably more about what type of account.

Typically our manufacturing customers are our largest customers and they are growing nicely.

Many of the small accounts, as I said earlier, are the residential and non-residential contractors, which aren't growing very well at all.

So I think it is more about the type of company than -- what the business they're in versus the size that they are.

Because even our small manufacturing customers are growing nicely.

What was the second half of your (multiple speakers)?

I can answer that.

The second half was about sell-through versus inventory.

This is a belief; I don't know this to be a fact.

But I know -- businesses that I talk to, people that I talk to, nobody is too excited about putting their neck out too far right now on two fronts.

I don't think people are adding -- are willing to put their neck out adding people too fast right now, because they're not -- there is enough uncertainty still about the future, so you're not seeing a lot of headcount added by any company.

The second one is inventory.

I think a lot of people have a very good memory of 2009.

A lot of businesses got squeezed really hard, where they have a certain inventory level to support their business.

The business falls through the floor, and all of a sudden the stuff that is coming in the one door is greater than the stuff that is going out the other door.

And a lot of companies built up inventory, and that is what amplified what happened in 2009.

We were in no different.

Late in '08 our inventory grew dramatically.

And the inventory we dropped in the first half of '09 was really working up the bubble that built in the last three months of '08.

So I don't believe people are adding to their inventory, other than to meet their shipping needs of the next few weeks or the next month, depending on their business cycle and their supply chain.

So I believe the business we are seeing is real, and it is not being lifted by inventory build.

If you think of the historical pattern, where Dan is us talking about with customers stocking less inventory, it goes all the way back to the early '90s, the early recession -- or recession in the early 90s.

Coming out of that companies started just-in-time inventory and a whole bunch of trends throughout our industry to lower what they had.

Then in the early 2000 slowdown it became much greater.

CFOs are getting involved in their businesses.

Call it a Class C item and say, you know, we don't need that tool crib worth $600,000 to $800,000 -- millions of dollars.

Let's get rid of that and let the distributors do it for us.

That has been good for our business for 20 years.

We believe this trend is even stronger, because the hit was even worse with the economy.

And what I am hearing, and I have been out talking to lots of customers, what can you do to close down my tool crib and you guys just take care of it?

That is a very positive trend for Fastenal, because we have more inventory closer to more customers than almost -- probably than anyone out there.

So we are very optimistic that no one will ever rebuild their inventory, and they will depend on Fastenal to be their supply store for their factory.

So it is very positive.

What that (multiple speakers).

With that -- you're welcome, thank you.

With that, I will close out the call.

We are at 9.44.

Close out the call.

But again, thank you to the shareholders listening to this call for your support and belief in Fastenal over the last 18 months through some pretty trying times.

Thank you to the employees that are listening to this call for weathering through 2009.

It wasn't a lot of fun.

And a last item I will throw out there, and this is from -- I have been traveling for a month -- the last couple of months, and I was with Ken Nance, who heads up our business in -- basically Dallas into Southern California.

And when I was out visiting with the Southern California DMs back in May, a very impressive group.

He said something, and he repeated yesterday in the Board meeting, that I thought was interesting.

And one thing he preaches to his guys, and I am not sure if you read it in a book or if he came up with it, or if he heard it from somebody else.

But he said, the first thing I always impress upon my folks, you have to believe that we can do something.

Once you believe it then it gets a lot easier.

You plan, you execute and you repeat.

That is all we do every day.

Will, anything you want to add?

No, thank you very much.

Thank you.

Ladies and gentlemen, this does conclude today's program.

You may now disconnect.

And have a wonderful day.