快扣 (FAST) 2011 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Fastenal Company's Q2 2011 earnings results conference call.

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, today's conference call is being recorded.

I would now like to turn the conference over to your host, Ms.

Ellen Tester.

Please go ahead.

Welcome to the Fastenal Company 2011 second-quarter 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.

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

A replay of the webcast will be available on the website until September 1, 2011, 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 material from those anticipated.

Information on factors that could cause actual results to differ material 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.

Thanks, Ellen, and thank you, everyone, for joining us this morning.

I am pleased to announce our second-quarter earnings.

We are very happy with the results.

Sales came in, as you know, at 22.9%.

Comfortable with that and we are happy that June came in as strong as it did.

Looking at the ISM in May and other indications said it might be slowing down a little bit, but based on our June numbers we think it's pretty steady and we are happy with that.

Probably the most impressive thing for me and the sales results is our sequential pattern from January to June.

Historically, we would have grown our daily average sales from January to June at about 12.5%, 12.6%, but this year we are actually up 16.3% over that same time period.

So it really puts us in a good position for good growth through the rest of the year.

If we can maintain even our historical pattern, it will put us in a good position for starting out 2012.

From an earnings standpoint, we did see some nice leverage.

We have reported 36.1% earnings growth, and the thing that makes me smile on this is that our operating margin came in at 21.4%.

It was a 180 basis points gain over last year.

And those of you that know the story well, we are talking about the Pathway to Profit and trying to pick up 100 basis points year-over-year each year going forward, and we are able to do 180.

If you have the earnings release by you and if you look at page eight on that, if you look at the information on Pathway to Profit and the store profitability -- I sat and looked at this a lot because it's exactly the model that Dan and I had laid out two or three years ago when we talked about moving stores into larger categories.

At the bottom if you look at the two small categories of stores basically the $30,000 through $60,000 -- $0 to $30,000 and $30,000 to $60,000 -- 2009 61% of our stores were in that category.

It dropped to 54% in 2010 and down to 36% this year.

The largest two categories was stores that are doing more than $100,000 per month.

In 2009 13.2% of our stores were there.

That grew to 18.1% in 2010 and 23.3% combined in 2011, and so the actual profitability per store size has not changed much.

We really haven't improved that, especially in the large stores.

You look at the over $150,000 stores -- excuse me, Dan is correcting one of my numbers as I am going here.

I added something wrong.

The small group of stores in the 2011 timeframe is actually 42.6% -- 46% excuse me.

I put a three instead of a four, my mistake.

But anyway if you look at the larger stores over $150,000 we were at 28.3% last year, 28.3% this year.

But everything moves up into a larger category and we add 180 basis points, that is really the point I am trying to make.

If we can continue to do that we will march forward as our Pathway to Profit, reach our 23% operating goal.

To understand the 23% operating goal is really just a point in time for us.

If we do a great job, maybe we can exceed that further into the future.

From a margin standpoint -- excuse me, I missed the expense.

On the expense control I think we did a nice job.

Our labor came in slightly higher than we expected it, but we did a better-than-average job on the rest of the expenses so it offset it.

So a little extra labor, a little better job at occupancy, and some of the other things so it balanced out to come in right where Dan and I had expected beginning the quarter.

And the margin, we are in a good range with the margin.

I know earlier in the quarter there was a lot of talk from the investment community that we should be able to expand our margin.

We were being very cautious on that because we weren't seeing the inflation that maybe some other companies were.

So we are comfortable in the range we are in in that 51% to 53% range.

I would describe this as a stable pricing environment.

We also have some opportunities going forward, and probably the biggest opportunity going forward from a margin standpoint, is our Fastenal private-label brands.

Right now they represent about 7% of our total revenue, about 13% to 14% of the non-fastener revenue.

And on the non-fastener side there is a tremendous opportunity.

We have been meeting and working on that, and over the next one to three years we should be able to expand the product area and take that to the bottom line.

So we are pretty excited about the opportunity for Fastenal private-label going forward.

Back onto the sales a little bit, some of our initiatives.

Our government sales initiative continues to move forward.

Combining those, a year ago, well, actually a year and a half ago now at the beginning of 2010, we greatly increased our investment in trying to sell to the government.

Since then we have gone from a handful of state contracts to 27 state contracts at the end of this quarter, very good progress.

We are also working on some very nice federal government opportunities and we think some of those will come through over the next three to six months.

So a lot of opportunity.

The way that we view this government opportunity is we are just expanding the local market for our stores, because without these contracts that market doesn't really exist for us.

With the contracts it creates more opportunity for every store in each state that we have a contract, so it's a pretty exciting thing going forward for our store people when we are able to sign up this business.

Another initiative that we have been working on is expanding our cutting tool business and going after someone more of the production cutting tools.

As a reminder, we do about $100 million in cutting tool today so it's not a new product line for us.

We are probably, I would estimate, at least the top five distributor in North America and maybe closer to the two or three spot.

So we are a large distributor of cutting tools.

But we believe the opportunity is much bigger.

The areas that -- first the reason we went after is we have hundreds of thousands of customers that are industrial customers that buy industrial cutting tools.

The things that we needed to improve to be effective in it is we needed a broader product line, more in depth and broader inventory, we needed sales expertise, and I believe we needed the vending solutions to be able to deliver that product within the plant.

We feel very good about each of those areas.

We have expanded them; we put people in teams to go after each area and expand and become better at it.

At this point we are moving forward with what I believe is a very good plan.

Just yesterday I received a report back from a large industrial customer that we are working with that is experimenting using our vending systems to deliver their carbide inserts.

And somewhat to my surprise the report came back that they had -- this customer has actually seen a 45% reduction in their consumption of carbide inserts.

What they attribute it to is people are just more aware and they are being watched.

I would not have expected that kind of a reduction so it's a really positive message for not only the cutting tool business but also our vending business, our automated supply.

Switching to another growth initiative with the automated supply, if you saw in the release Dan put some very good information in there explaining our progress on vending and automated supply.

Before I go to the numbers just a little bit of background or even go forward.

Today most of our automated supply business is driven through our FAST 5000 and our locker system, which is a helix machine and then a locker to put other bigger products.

Currently we are just taking first deliveries on our cutting tool machines.

We have two of them, a smaller version and a larger version.

We won't see serious traction with that probably till late in the fourth quarter, early in next year.

We are bringing machines in but it will take us a while to get that up and going.

We also have other machines that were in the development phase that should be rolling out the end of fourth quarter and beginning of first quarter.

Our goal is to build -- help design and build machines that would distribute a wide range of our products, the more the better, and do it in a cost-effective way so that the machines are economical and bring value to both us and to our customers.

If you look at the second-quarter earnings report, the numbers are, as you can see, the first set of numbers if you look at our signings -- you go back to the third quarter of 2010 where we signed 419 machines that was really where we cranked up our initiative, started putting in the reps and started building what we call the machine behind the machine.

All the company infrastructure to push this forward from the build centers to the technicians to the packaging department, all the things that are necessary.

So we went from 419 to 776; 1,391 in the first quarter of 2011 to 2,100 so the momentum is with us.

At our investor day in Indianapolis I said that our goal was to hit one machine per quarter per store which would put us at about 2,500 to 2,600.

That is our goal, I am not sure that we will -- I am not saying we will hit it in the third quarter, but I am comfortable that we will hit that goal sometime in the next two to three quarters.

So we have good momentum and we keep pushing that up.

As far as the percent of our total revenues, you can see it went from 6.4% in Q3 of last year up to 10.8%, so it's a much broader base of business for us.

And probably the most exciting thing is that that group of customers, the 10.8% of the customer business we represent, grew at 49.8% in the quarter.

It's too big of a group to be just a coincidence.

They vending is doing something or it's even broader than that.

We are providing greater service to this group of customers and they are reciprocating with a greater share of their business, and that is really what our goal was going in.

Very efficient business, growing very rapidly so we are excited about that.

So before I turn it over to Dan, looking at all the things we have going on our margin is stable, good expense control, and good sales momentum, I am very optimistic about the second half of the year that we can stay in a similar range and continue to see above average growth for the rest of the year.

Thank you very much and I will turn it over to Dan.

Thanks, Will, and good morning, everybody.

I would also wish to thank you for joining in our call today.

I will touch on a handful of things, I will be fairly brief but I will try not to repeat too many things that Will touched on as well.

But if I flip through the earnings release some things stand out for me.

As Will mentioned, our sales trends continue to improve.

Our gross margin continues to stay in that zone we have talked about it.

It did uptick in the quarter, which was helpful, but it continues to stay in that zone.

When I look at the monthly store statistics to me what is particularly powerful in there is what we are seeing from our older and more established stores.

They continue to put up very attractive numbers.

I think they are held by a number of things.

These initiatives that Will talked all feed well into that group of stores.

Whether that be the vending, government business, selling to our manufacturing business, and now the cutting tools, those all serve well that population, as well as all sorts but particularly about population.

And you are seeing exceedingly strong numbers from that group.

Sequential sales trends, as Will touched on.

History says by the middle of the year we should be up about 12.5% from where we were in January.

We are up over 16% and I think that bodes well for the second half of the year, and as Will mentioned, establishing our starting point for 2012.

End-market sales trends; manufacturing picked up some steam in the quarter.

That is really what drove a big part of the driver of our strong sales trends.

Our manufacturing business -- and here I am talking not about our manufacturing; I am talking about selling to a manufacturing customer base -- that business continues to do well.

I believe vending is helping that business in a meaningful fashion.

On the non-residential side, as I read the newspapers I continue to be somewhat pleasantly surprised by our numbers.

Our numbers could be stronger, but if you read what is in the newspaper our numbers are pretty darn good because construction is not exactly a strong business right now.

As Will mentioned, we put in some vending stats this quarter.

The thoughts that come to me when I look at that is, A), here is some new information.

We are just laying out facts, here are the numbers.

We don't completely understand the percentage growth numbers, how much of that comes from vending, how much of that comes from just the expanding relationship.

I don't know that we, frankly, care to a certain degree, but we do know that the vending, the customer base with vending is growing far in excess than what that type of customer base would historically grow.

And it's a big enough swath of customers I think the trend is meaningful.

When I look at things like the vending or different initiatives that we have done over the last several years and plan to do over the next several years, I believe we are continuing to position ourselves to put our local store in that position to be just the best supplier in that local market.

As long as we continue to do that I believe we will be successful as an organization because we become the best partner for our customer base out there.

Pathway to Profit, average store is size now at $80,000.

Previous high was in Q3 of 2008, we were at $82,000 but we have continued to open stores since third quarter 2008, but we are almost back to that average store size.

That is really what is driving our profitability.

It's simply the math.

And if you look at that table on page eight and really understand the dynamics of the changing mix, you appreciate how the profitability continues to drive.

The conclusion I get from it is the Pathway to Profit just works.

The gross profit margin, as Will mentioned, stable gross profit.

I believe private-label opportunities are compelling and I look forward to seeing how that impacts our ability to manage our business over the next several years.

Operating and administrative expenses; good expense control.

As Will mentioned, our payroll increased a little bit more than we expected but with the nice profits that drives a lot of our incentive compensation, both at the store level and at the district and regional level as well.

Healthcare, which was problematic for us in 2009 and improved in 2010, continues to manage very well in the current environment.

Occupancy, as disclosed in our report, was up 5.1% for the quarter.

The real story there is the energy cost component.

We continue to do well on our rent costs.

If you look at our actual rent dollars paid, they were up 3% for the quarter, second quarter to second quarter, on a base of 6.3% more stores.

So continue to manage well through that.

I still believe there is opportunities for savings as we go forward and we continue to work hard on getting after those savings.

Fuel dollars spent, as you saw, are up over 50% from a year ago, really driven by diesel increases of over [30] and gasoline per gallon cost at the mid [30s].

That is [in-house], but we are managing through it and we are managing through it well.

Working capital; I believe we continue to manage that appropriately.

If I look at the May/June time frame, which really drives the sales, drives the accounts receivable at the end of the quarter, we had an extra day -- we were down a day in April but we gained that day back in May, so our dollars billed in May and June were up 25.5%.

Our accounts receivable were up just over 27%.

A little bit of adder too that, the postal strike up in Canada added some AR but that will correct itself.

The postal strike will settle by the end of the quarter and so that will correct itself as we go on to July.

Inventory we are up 16.5% in the six-month period.

That is, quite frankly, more than we would like to see but we continue to, I believe, manage that well.

And with the initiatives we have going on starting some of the increase but we will work hard to manage (inaudible) through the tail-end of the year.

We just announced last night, yesterday evening our third-quarter dividend, $0.13 per share.

That will be payable in August.

And as I close out of my comments and prepare for the questions, I guess the five things that stand out to me is when I look at the quarter just to summarize.

Number one, Pathway to Profit, it just -- the fundamentals of it just work.

Number two, very good sales patterns.

Number three, very good traction with our sales initiatives, international, national account, manufacturing business, our automated solutions.

And cutting tool, which is pretty early in the game, so it's hard to really assess that at this point but very good opportunities there.

Number four, very good opportunities with private-label to help our gross margin over time.

And finally, the employees at Fastenal performing at a high level and I thank them for their efforts this quarter.

With that we will turn it over to questions.

(Operator Instructions) Dave Manthey, Robert W.

Baird.

Good morning, guys.

First question, in terms of the current quarter, was there any benefit from price at all this quarter?

And then given the significant lags, particularly in fasteners, could we expect any incremental pricing as we get to the back half of this year?

You are just seeing very, very limited impact and I expect to see limited impact on the tail end of the year.

Okay.

And then second, in terms of the vending machines, you say that close to 11% of your sales are to customers that have vending solutions.

Could you talk about the revenues per machine?

Is it working towards your goal of 25,000 -- I believe your goal was 25,000 per unit per year.

Yes, our goal is to add 2,000 incremental per machine from each customer.

So if I had a truck -- and not all of that will come through the machine and that is fine with us.

It's just new business.

And, yes, the numbers are playing out if you -- to really make, get a look at that you have to only look at the customers that have been installed in the last 12 months.

And we are ahead of that goal by about 10% to 15% right now.

Because the customers then -- we can't get 2,000 incremental year over year over year.

It's a one-time punch.

Right, okay.

All right, thanks very much.

Sam Darkatsh, Raymond James.

Good morning, Will, Dan.

Will, in your prepared remarks you mentioned expectations of gross margin the rest of the year between 51% and 53%.

Is there a way we could hone in a little bit on that?

Based on that --?

Sam, I didn't say the rest of the year.

I said our long-term range of gross margin is 51% to 53%; we have been stating that for a long time.

Right now I think our gross margin is pretty stable in that range where we have been operating, which is right in the center of that, about where we are now -- 52%, 52.5%, 51.9%.

But I always like to make sure everyone understands Dan and I are comfortable pretty much anywhere between 51% and 53% that we are operating our business well, because we think that at some level the investment community gets too narrowed down on 5 basis points one way or the other.

And when you have 2,500 businesses putting numbers together over a wide range of area and they are doing their own pricing, it's very hard to get it down to the 10th.

But right now we are comfortable in this range which is just above 52%.

Thank you for the clarification on that.

The last question I have before deferring to others, you mention the cutting tool initiative.

Any sense of -- it might be too early right now to really gauge early returns on that, but how ultimately are you going to define success on that initiative with some mileposts?

And how are we are going to ascertain how that initiative is coming along from a quantification standpoint?

It's too early to know that but really how we are going to measure it is by sales growth.

We expect that group of products starting out in the third quarter at some level but probably not reporting till fourth or first, to outgrow the Company by a pretty wide margin.

(multiple speakers) Same thing as we expect out of government and it's the same thing we expect out of vending.

If we focus an initiative, invest heavily, and don't outgrow the Company, then it has probably been a bad investment for us.

Okay.

So you anticipate disclosing those sales then perhaps by year-end for the investment community?

Well, if you look at our 10-K, our 10-K does have product group contribution and so it will come out automatically in that.

And I am not sure what Dan will do beyond that.

But I guess we are always reluctant to put more information because then we have to continue to support it.

But we will do it in the 10-K for sure and then we will decide going forward beyond that.

Very good.

Thank you both.

Holden Lewis, BB&T.

Thank you.

Good morning, guys.

On this vending machine, I guess you sort of talked about what it's doing from a volume standpoint, and if you have any greater input as to why maybe those revenues are growing as much that would be great.

I know you only alluded to it.

But I am mostly curious, as those play out and grow in the mix how do you expect the vending model to affect the rate of employee adds?

What is the margin profile?

Are there any differences that accrue to those areas as well from vending picking up?

I don't think it will affect our rate of employees added.

If it pushed our growth up disproportionate, we would have to have more but vending itself doesn't change it.

It is a little more efficient, but it will -- and it will take greater scale to bring that efficiency out.

Other margin things we are -- what we have done is we have taken the expense, the depreciation, and the capital expense of vending and put that against our operating expense, because we look at it as nothing other than offsite storage and we want our leadership, our managers and DMs, to think of it that way.

So if they have a big vending base they need a smaller store.

We don't want incremental expenses out of this and we believe we have that pretty well understood and positioned within our P&L and our paid programs.

It's really a growth driver and it's a solution for our customers to save money and run their businesses better.

And if it truly plays out to be better for our customers, it should give us long-term growth and that is really what we are focused on.

I am probably the most bullish person on this maybe in industrial distribution.

It's a solution that works and we continue to hear that from our customers.

The report I mentioned yesterday on the cutting tool initiative with 45% reduction in consumption that is pretty strong argument that this solution is going to work.

Only just one and we have a stack of those case studies that look just very much the same.

One thing I would add to that, Holden, is when the question of why are you seeing the impact.

In May we talked about this and then in previous calls we have touched on that, but picture yourself from the standpoint of our customer.

You have a Fastenal vending machine or machines physically in your plant.

From the standpoint of the people that are using the product, we are a convenient way to get your usage 24/7.

We are -- the Fastenal billboard physically in the plant lends itself to our name just becoming more familiar to everybody, and people think of us as the supplier of choice in that facility.

And to the person who is heading up the effort on purchasing or managing the facility, if our solutions come in there and we do [tier] consumption by 20%, 30%, 40% the question I would have as the person who is doing the buying, can I get more machines in here?

Can I run more products with these kinds of solutions?

And so it really puts you in a position to be the supplier of choice for that plant.

It also gives our people a reason that they have to be in that plant on a regular basis, which leads a higher level of familiarity, a little bit of home-court advantage.

Okay, great.

And then just to follow up, the margins have obviously been solid.

The one thing that is sort of know is that the incremental margin, which last year was around 43.5%, that has kind of backed off each quarter to the point that in Q2 it's still good but lower at 29.3%.

As the cycle ages, what do you think that incremental margin sort of goes down to and settles in?

As we look towards 2012/2013, what is kind of the mature cycle and margin that you guys would be targeting?

Well, like I said on previous calls, I really think a number around 30% is a number that is achievable.

Does that become more challenging over time?

Sure it does.

As your comparison number keeps rising and your comps become more difficult it becomes more challenging.

But in an environment where we are growing north of 20%, in an environment where our gross margins are stable to moderately improving, and there is things that can moderately improve over time -- one we touched on earlier was the private-label -- in that environment where you are getting good growth, good gross margin, and you are effectively managing your operating expenses, which I believe we are doing, that puts you in a position where -- I am not saying a 30% number is easy, as you see, this quarter.

I was disappointed we didn't hit 30%, but 29.3% or 29.4%, whatever the number was, very attractive number nonetheless.

I think that is a number we can continue to strive for.

Obviously that is a challenging goal for us, but it's a goal that can be achieved.

We just need to manage our -- get good sales grow, maintain our gross margin, now (inaudible), and manage our operating expenses well.

We have also been investing heavily, intentionally investing heavily in some of these sales initiatives and knew it might affect us a little bit there, but think the decisions are -- really feel comfortable with those decisions.

And they are paying off in our sales growth.

Okay, thank you.

Tom Hayes, Piper Jaffray.

Thank you.

Good morning, gentlemen.

I was just wondering if you could maybe talk a little bit about the plans for store openings in the back half of the year.

Is there a geography that you are focusing on?

And then thoughts on timing over 3Q and 4Q.

Our stated number for the year of 150 to 200; we have opened 75 in the first six months of the year.

We have talked about on our first-quarter call, we touched on it a little bit in our May conference that would anticipate that, given the energy that is going into vending and all of the other initiatives, that if anything we would be on the low end of that range.

But in the first -- like I say, if you analyze our first six months, we are right at the low end of the range.

We will continue opening stores in the third and fourth quarter.

I think that range is still good, but we are putting a lot of energy into our vending which is I think great for our business and great for our customers.

Great, thanks.

Then as kind of a follow-up question, you touched on it briefly but I was hoping maybe you could talk about the contribution you are seeing from the specialized sales initiatives, including the national accounts and the dedicated sales team.

I think on the store break down it represents about 3% of your sales.

I am not sure if that is the exact representation of that group, but what are your expectations for those groups over the next couple years?

Great.

I think when you refer to that you are talking about our strategic count stores when you say the 3%.

There is a little disconnect there and maybe we could improve the crispness on how we disclose that.

When we talk about our national accounts we talk about our sales initiatives.

These are initiatives to raise the tide in all of our stores.

They are things to help our stores grow faster, whether that store is the $150,000 a month store down the street here or, excuse me, over in the middle of Wisconsin or if it's the $40,000 a month store out on the West Coast.

It's things that can help raise the tide and give that store manager and district manager more things in their arsenal for growing their business.

When we talk about our strategic account stores that is just a subset of stores and we have really carved those out is we like to show the economics of the store model, especially when we started the Pathway to Profit, because it really you to -- it allows us a better means to explain it.

But the initiatives are not solely in the [straight to account] stores, they are across all stores.

All we are trying to do in that table is show you a peer look at here is your $60,000 to $100,000 store, here is your $100,000 to $150,000 store and what their economics look like.

And we have carved out both our strategic account stores and our overseas stores, but short of that a sale is a sale and it goes through any business unit.

Okay, thank you.

Ryan Merkel, William Blair.

Thanks for the nice quarter, gentlemen.

My first question is on vending.

So once some of the more recent contract signings become installed units is the real current cumulative installed base closer to 5,000 machines?

Is that the right way to look at it?

(multiple speakers) 2,900 machines -- the cumulative installed machines at the end of the quarter was just over 4,000 machines.

In the first figure what we were really trying to do is communicate what is the pace, how many machines are we signing that quarter.

There is always going to be a lag.

The machine that we signed up the last week of June or in June in general, those machines -- what happens after a machine is signed you have -- you sit down with the customer and you go through and you decide what SKUs are going to go into this machine.

We are working every day to shorten that window up and provide our customers with better information.

Basically provide them here is what we think would work for your business, but there is always going to be that lag between the deciding process of what products go in and then actually placing the machine in the plant.

But at the end of the quarter we had just over 4,000 machines.

If you look at it, the jump up from Q3 to Q4 and then from Q4 to Q1 and then Q1 to Q2 really is a lag from the signings in the table right above it.

We have -- basically most of the machines we sign in the second quarter have not been installed.

We have about a 90-day backlog, which is great from a go-forward on sales, but our frustration, mine's and Dan's and the other leaders', is let's shorten that up to 50 or 60.

Most of that is being held up at the customer's site with them struggling to make the decision on what do I put in the machine.

We are working hard to give them, give the customers better tools, give our people better tools.

And our goal is to get that down -- we will probably not get it much below 60 days.

It just takes a certain amount of time to do that.

So part of it is they have to bring in clean Internet lines outside of their system, and that is always -- in many cases takes eight weeks just to get the Internet lines because the customer doesn't want this running through their IT system.

They want a fresh line outside of the plant.

So there is a lot of details that I am not -- I am familiar with but I don't know exactly how they work.

So we have a big backlog install and we have great momentum on signings.

Okay, thanks.

That is what I figured; I just thought I would get some clarification.

Then second question, can you just talk about June, how did the month play out?

And then maybe speak to geographic or customer strength?

Yes, June -- actually June started out a little soft and I was starting to believe the ISM for a few days there.

Actually I believe anyway.

But it started out soft, it came in -- we had a very strong finish in June, the strongest finish we have ever had which has really turned out to be a good month.

Geographically it was pretty even.

We don't have any real soft spots.

If anything, the eastern half of the United States is a little softer than the west.

I think a little bit of that is driven by a little uncertainty in the auto industry or there was some uncertainty there for late May and some of that.

Overall the entire business did well.

International did exceptionally well, grew at about almost 50%.

Regionally there was no one that was doing great.

Some of the areas like the Southwest, the oil belt down there, has cooled off a little bit.

They are still ahead of the Company but in the first quarter they were well ahead of the Company.

So that has softened up a little bit.

Midwest remains strong, and I think a lot of that is being driven by optimism in the Ag industry.

A lot of the agricultural business is doing really well with $7 corn.

(inaudible) I looked at numbers closely -- there is really no area that is soft.

I think what helps balance that and one of the things that helped us put up the type of sales growth we saw in the second quarter is we just -- there are so many things that are working under the surface.

And by working I mean so many pieces in motion under the surface -- store openings, adding people, adding sales energy, the vending, the government, the cutting tool, the manufacturing.

You look at all these pieces -- the international.

You have all these pieces so if you -- as Will mentioned, you have an area that is red hot, that is just hot but then five other areas step up to fill the void a little bit, and you continue to put up really attractive numbers.

So nothing really stands out as a particular geographic area that is unusually strong or unusually weak.

Okay.

Thank you very much.

Robert Barry, UBS.

Good morning.

I wanted to just clarify earlier comment about pricing and inflation.

It sounds like in the quarter you didn't see much benefit from pricing, nor did you see much impact from product inflation.

Is that accurate?

That is correct.

In the fasteners we saw six, eight months ago a little bit of price increase, but it's like a rolling hill that has been moving up and down for the last 12 months.

If you look at the CRM steel index, it moves up and then slides down.

I spent the last week of April in Asia visiting factories, talking to a lot of people I have known for years about pricing because I was curious.

And the Taiwanese and Chinese they are going -- it's not going to go up a lot and a lot of it is because the demand is ho-hum.

The demand is good but not great, and they just don't feel they can push price increase.

And so we look at it as very stable.

Chances of it going up are probably greater than going down, but we don't see a lot of movement in either direction.

And even on the non-fastener side?

You know, on the non-fastener side -- because oil has been stable.

It has been stable at about $100 a barrel but it has been in a similar range.

It hasn't been going up and down a lot outside of the range, and so that is a big component in the plastics and some of the other products we sell.

I think part of it, too, is the industrial economy is good, but still not an environment where you can push price increases a lot from the supplier base.

Our suppliers are pushing and we are fighting back, and in most cases we win more than we lose.

Yes.

And then I also wanted to get in a vending question.

Given you are cutting the usage so much for the customers but still seeing that significant growth at the customers with vending it implies some pretty significant share gain.

I am just wondering where that is coming from.

Is that share gain coming from other large suppliers -- I am sorry, distributors or are you wresting it more from the small mom-and-pops?

It's really impossible for us to tell.

You have to look at it in the scheme of things.

We are doing roughly $30 million, less than $30 million coming from a broad range.

It's hard to tell a little bit from here, a little bit from there so every customer is buying from someone else.

It's no different than opening a store and taking market.

We take a little from everyone if we can.

If we win two and lose one, we are going to end up stronger tomorrow.

Okay.

And then just finally, if I could sneak one last one in on the government contracts; you are clearly making a bigger push there.

As that becomes a more significant part of the business I was just wondering how you think about pricing on the government contracts could impact pricing across the rest of the business.

My sense is that sometimes governments require that they get, quote-unquote, the best price.

Does that start to have implications for the way you think about pricing across the rest of the business as the government piece gets bigger?

Well, the contracts that we have picked up are -- it's the Western States Cooperative Alliance, which is was a WSCA state cooperative alliance contract.

We bid that and it doesn't say best pricing everywhere; it's very competitive.

Federal governments are usually the ones that dictate that they always get the lowest price, and at this time we don't have a federal government contract that says that.

We have to be very cautious with that because we have a lot of decentralization within our markets so we are very aware of the rules.

We are not going to pick up any business that would affect our overall pricing strategy, because that would be detrimental to the rest of the team.

(multiple speakers) put you at a disadvantage as you go after that federal business?

No, we just have to understand what the contracts are.

If it does put us at a disadvantage, we will walk away from it because again we are not going to take on one piece of business, even if it was a large piece, that affects the other $2 billion or $3 billion that we do.

So we are not set up for all business.

There is a lot of things that we do that puts us in a better position and a worse position for things in life.

We like to make money on all of our business.

Some customers, some situations you can't make money and you walk away from it.

Yes, and we have to look at the effect on the overall business.

You bid something so low and then you have to reduce the rest of your business that is bad business.

So we are looking at all the opportunities and not all of them have those clauses in them.

Many of them don't.

Okay, fair enough.

Thanks very much, guys.

Hamzah Mazari, Credit Suisse.

Thank you.

Just a question on your store closings.

It seems like those have picked up slightly.

Could you maybe comment on what you are thinking going forward on shutting down stores and any potential cannibalization that you are seeing in terms of your store numbers?

Actually our store closings in the first six months of this year were identical to our store closings in the first six months of last year.

I think being willing to look objectively at everything you do and assessing everything you do every day is a healthy thing for a business.

If I look at where we have had closings, it's typically a situation where our districts or regional leadership has looked at their opportunities in a market and said, you know what, I have a great market.

It might be a market that I had three stores and I went to four.

I have a lease coming due in one of the stores and I think I could serve the market better with three than four.

In an environment where I have all the things in my arsenal, including vending, that might be a better solution.

When I look at cumulatively how many have we closed over a 40-year period, the number is inconsequential.

So I think it's a healthy way to look at your business every day of saying what do I do to make my business better in this market, in this district, in this region.

And so I don't think it means a lot for our business on a go-forward basis.

It just means we will look at a good, healthy assessment of everything we do.

That is very helpful.

And then just a follow-up question, did you guys see any benefit from weather in Q2?

What I mean by that is any negative sales growth due to weather in Q1?

Did you see any of that get pushed out into the second quarter?

No, normally when there are weather delays or when you lose weather or lose business to weather you very seldom ever make it up because it just gets pushed further out.

If a construction job gets shut down for a week, the whole thing slides back a week.

So really didn't see any of that.

We did have generally good weather in the second quarter other than all the tornadoes and the flooding.

That usually balances out, but initially what happens after a big flood or a tornado is most of the plants shut down because the people are working with their -- people are working to take care of their parents' houses and other things.

So overall too small to measure if there was an affect.

(multiple speakers) With that we are just past 45 minutes past the hour and so I would like to conclude the call.

And I would thank again our shareholders for their continued support in the Fastenal business and our employees for a very good quarter and very good execution.

Thank you.

Thanks.

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

You may all disconnect and have a wonderful day.