快扣 (FAST) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fastenal Company 2015 second-quarter earnings conference call.

(Operator Instructions)

I'd now like to turn the conference over to your host for today, Ms. Ellen Trester.

Ma'am you may begin.

Thank you.

Welcome to the Fastenal Company 2015 second-quarter earnings conference call.

This call will be hosted by Lee Hein, our President and 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 Lee 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.

Fastenal.com.

A replay of the webcast will be available on the website until September 1, 2015, 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 Mr. Lee Hein.

Thanks, Ellen.

Good morning.

Today I'd like to begin the call to answer the question on what is our opinion of the economy.

And when I say that it's a tough economy in a tough environment, I'm really centering it around five areas for us; it's non-res; it's oil and gas; ag, manufacturing; and of course, the currency.

And so, tough environment but when I look at it, given this quarter, I think it's a solid quarter of execution, given the revenue number.

We were able to leverage our growth of 5% into 8.9% pretax growth.

We were able to raise our pretax percentage to 22.6%, and incremental to 40%.

Now, when we talk about execution, the word that comes to mind for me -- I think many of our folks within Fastenal -- is discipline.

To execute, you must be disciplined and so we put a call out to our folks to the Blue Team, we call them, and we asked them to scrutinize every expense, and to reduce where possible.

The reason we did this -- and we tell our folks over and over: why are we doing what we do?

And we make it very clear in this point -- we look to reduce expenses so we could add energy into the stores.

And to that point, year over year, we're up about 1,129 people.

910 folks we've added in the stores.

That's a 9.4% increase.

And what's nice, and what I want to point out here is, a few quarters back, our ads were almost identical, whether it was non-selling or selling.

Today that 9.4% year over year, it is 4.9% on the non-selling.

We're starting to again show discipline and balance in what we're trying to do in our growth initiative of offering or getting more energy into our stores, again, to offer a high-level of service, immediate service when needed, to stay in line on these large key customers, and to serve our customers on a local level.

And so the other point that I look at for the quarter that's a highlight is, we were able to sign 5,144 machines compared to 3,962 in the previous quarter.

And today, it's our pleasure to point out that we have hit a milestone of 50,000 installs, and we've done this all in just over five years.

So all in all, a solid quarter.

But we will continue to pour energy into our growth drivers.

Dan?

Thanks, Lee, and good morning, everybody.

Thank you for joining on the Fastenal call today.

We changed up the look of our press release with this quarter.

Hopefully, you'll find it useful.

We tried to really boil it down and summarize it a little better than I think we've done in the past.

Our Q which will go out on Friday still has a little bit more of the meat that you've grown accustomed to in the past.

But we felt the best way to communicate is to get to the points fast, and if you want a little more detail, we can cover some stuff on the call and cover some stuff in the general Q.

The cash flow for the quarter -- I'll touch on a few things, and then I'll work back through the press release a little bit.

Operating cash, year to date: 97.5% of our earnings, we feel good about that number.

Typically, we think of a good number for Fastenal is a net low-90%s -- 90%, 95% neighborhood.

So we'll feel good about what we're doing.

We're doing a nice job.

Obviously, the accounts receivable growth really centers on what's going on with our sales growth.

But I think we're doing a nice job managing the growth of inventory.

There's a lot of places we have found where we can free up some inventory dollars.

There's a lot places where, quite frankly, we want to invest some additional inventory dollars.

But I think all in all, in total, we're doing a nice job managing it in the first six months of the year, and I'm confident in our ability to continue managing that in the future.

If I look at our CapEx, no surprises there.

We talked in our annual report about what we expect our CapEx for the year to be.

That number was moderating from what it had been the last few years.

A lot of our big distribution projects are behind us, with automation in a bunch of our DCs over the last three years.

Our vending -- we spent a lot of money for about three years building up our vending capacity, both from the standpoint of the teams and our equipment and now we're in more of a steady-state mode, so that number has come down a little bit to better-match what we're actually installing, as opposed to building up a base of machines.

And so feel good about our CapEx in the first six months of this year.

Free cash, which is operating, minus our net CapEx of about $177 million -- so about 66% of earnings -- again, I believe, a very good number for Fastenal.

We, in the first six months of this year, paid out about $165 million in dividends, so about 61% of our earnings.

So most of our free cash went to funding dividends thus far this year.

As you all know, we bought back some stock in the latter half of 2014, and we've been busy buying back some stock in the first 4.5 months of 2015.

We think it's a good, wise decision for our shareholders.

So year to date, we've bought back about $250 million worth of stock.

And we borrowed about $240 million to fund it.

And that's a quick snapshot of our cash flow.

We think it's good decisions for our shareholders, short-term and long-term.

In the first page of the press release -- continuing on to the second page of the press release -- I touched on four bullets about the business that I wanted to accent, and I'm going to touch on it again here.

The first one, I think Lee did a great job talking about the people side of the business.

We're putting people into the stores.

We're trying to really allow the efficiency of the organization -- between the automation we've put in, some of the technology we've put in, everybody working smarter every day to minimize what we're adding outside the store -- to minimize the expense growth there.

And I think we did a nice job of adding people into the right spots in the first six months.

Item two touches on -- we've been hit hard this year by a number of factors.

In here I talk about oil and gas; I don't think any surprise about that.

Our customer has been hit hard by the strength of the US dollar.

Most of our businesses in the US, and anything that impairs the manufacturing output of this country, impacts us and the strong dollar has done some of that.

We also sell a fair amount into Canada, and that business is all denominated into Canadian currency.

So that's created some headwinds for us.

I cite in bullet 2 that we see some signs of stabilization in the oil and gas, and I want to share a little bit more insight what I mean by that.

As you know from our press releases and our filings over the years, we've put a lot of emphasis -- we try to really understand the trends of our business and what's going on to improve our business, what's going on to hurt our business.

And if I look at the Texas and Louisiana geography within our business, and I look at that business and look at their sequential patterns -- so not the Company numbers, but those two states.

And look at those sequential patterns and what's actually happening in our business, the story is really different in three distinct time periods this year.

In the January and February time period, if I look at history and I look at actual results, there's about a 9 or 10 percentage-point delta between what history says should happen and what's actually happening.

So from January to February, if history says we should be up 2% sequentially, we're 9 or 10 points off that, and we're down 7 or 8 points.

So I wanted to explain what I'm talking about.

In the March, April and May timeframe, that 9- or 10-point delta -- the deficiency in our sequential pattern contracted to about 4. In June it contracted to 2 and change.

Now, our year-over-year numbers are pretty weak right now.

But sequentially, the trends are starting to move closer to normal.

And that makes me feel better about what it means for third quarter and fourth quarter and going into next year, as far as the health of that underlying business.

So I just wanted to touch on that.

Point number three: gross profit is hit by large accounts.

It's no secret that our growth has been driven by the success we've enjoyed in leveraging this network we've built into growing a large-account business.

Because for so many years, most of our growth centered on local customers, local business, as we were rolling out our store network.

As we've developed that store network in the last 15, 20 years, we've very aggressively gone after large-account business.

We've had great success there.

That business does not operate at company-wide gross margins.

But the beauty of going after that business is, we can afford to go after that business even with the lower gross profit, because it leverages the network we already have in place.

And so those gross-profit dollars shine right through quite well to the bottom line.

In fact this quarter, if you look at it, for every $1 in sales, we picked up about $0.41 in gross profit.

$0.40 of that $0.41 actually made its way down to our pretax line, because our operating expenses were essentially flat.

Now, that's in spite of the fact that we were adding people at a very fast clip.

As we cite in the release, in the last 12 months, we've added almost 1,400 people into the organization -- an increase of 7.7%.

We funded that by not spending dollars everywhere else and that's the exciting part about what we were able to accomplish in the last 12 months, in my opinion.

And again, the fourth point -- this touches on what I just said: the strong incremental margins.

I'm sure there's been periods in our history where we've had incremental margins of 40%.

I'd have to go back to Bob Kierlin and see -- back in the 1970s, quarter by quarter -- if he has that information still.

I can't recall a time in my 19 years here at Fastenal that we've done it.

And so I'm really impressed with that.

Some thoughts on revenue growth.

In the past, I've touched on this in passing, in the calls.

Sometimes I don't want to get too deep into the numbers, into the weeds, because I'll lose everybody on the call.

But I think it's helpful to understand our business.

And in the press release, I touched on: we're really two distributors in one.

We're this fastener distributor that has built up a book of business over the last 50 years, and we're an MRO distributor that's really built up that business in the last 20 years.

We really started to expand our product lines beyond fasteners in the early to mid-1990s, and have grown that non-fastener business, now it will be 60% of our sales.

And that's 40% fasteners and 60% non-fasteners -- are really different businesses, different end-markets going through a common channel.

And so if I look at that fastener business, a lot of production business in there.

The beauty of that business: it's incredibly sticky.

It's really invasive and complicated and painful to switch a fastener supplier, because that's a very tight relationship.

Because I'm supplying you with the stuff you need in what you're producing.

And the quality, the source of supply -- all those things we bring to the table are critical.

And it's very disruptive to change your supplier; that's the good news of that business.

The bad news of that business: it's linked directly to production.

If our customers' production is down 10%, that business is down 10%.

If our customers' production is down 30%, that business is down 30%.

The good news is, if it's up 20%, our business grows by 20%.

And that's really what we've been seeing in the last few months.

If I look at our top 25 customers, and I took a good hard look at that group of business, 11 of those 25 customers were negative in June.

7 of those 11 were negative double-digit, and 5 of those 11 were negative in excess of 25%.

That's the negative of being directly linked to their business.

The positive is, when I look at those relationships, these are solid relationships.

I've visited with most of those customers in the last six months.

We have a great relationship.

We're continuing to strengthen.

Most of those customers, we are growing our business with them.

There's only one on that list that I can think of where we're not growing our business, and it's actually going backwards a little bit.

The other 24, we're growing our relationship.

But their business is struggling in this economy.

That's a function of the end-market economy.

If I take that a step further and go beyond the 25 and I look at our top 100 customers in the Company, that group of customers represents a little bit over 20% of our sales.

That group of customers has gone from 7% growth four months ago, to 2% growth in June.

It's still growing, but it's struggling, because there's so many in that group that are negative.

The good news is, if I look at all of our other large account customers -- so all of our national accounts outside of our top 100 -- that business is growing, and growing well.

In March, that business grew at 11.3%, in April it grew at 13.5%, in May it grew at 14.5%, and in June it grew at 14.2%.

That's about Fastenal taking market share; that's not about Fastenal being impacted by the economy.

We are out taking market share as fast as we've ever done.

I look at our signings in the first six months of this year, they're ahead of our signings in the first six months of last year.

So I feel very good about the underlying business, as far as our ability to take market share.

What we're struggling with is some headwinds right now.

With that, I have used up a little bit more time than I planned on.

I'll be quiet and we'll take some questions.

(Operator Instructions)

Sam Darkatsh, Raymond James.

Hi, this is Josh Wilson filling in for Sam.

Congratulations on the operating expense control.

Could you talk a little bit about what your expectations would be going forward under a range of growth assumptions?

What would it look like if it's flat, what would be in a low single-digit environment, in the mid-single, and that sort of thing?

That question gets pretty involved, because there's so many dynamics that kick into play.

For example, at the start of the year, we talked about a goal that we had expressed to our people in December, of adding 3,000 people into our stores.

Now, that was anticipating a top-line growth a world away from what we're actually seeing.

And so what you've seen is, that number in first six months is just over 900 people into our stores.

And I would suspect that when the dust settles, end of this year, we won't double that number, because November and December, we typically pull back.

But you're probably going to see a 1,600, 1,700 increase.

But the dynamic that comes into play is, if we saw our business picking up for some reason, we'd ramp that number up.

In a single-digit environment, we will endeavor to keep our operating expenses growing in a fashion that you saw in the second quarter.

It will be a little challenging.

The one thing that helps us is last year is: last year, we had a little bit stronger growth, and so some of our incentive comp was a little bit higher.

And that's providing one of the puts and takes to helping us keep our operating expenses low.

But if all of a sudden our sales growth was to take off, you'd see us adding people a little bit faster, you'd see our incentive expense expand quite quickly.

And you'd see your operating expense growth move from that low single-digit into the middle single-digit.

To me, I always think about it in context of, what do I think about our incremental margin?

And I feel very good about our ability to -- I was surprised, quite frankly, by the fact that we hit 40%.

I thought a number in the 30%s would be pretty good.

And I think a number of around that 30% neighborhood is a pretty good target for us to strive for in the next few quarters.

Thanks for that color.

And I didn't see -- unless I missed it in the press release -- an update on your guidance for store-count openings for 2015.

Could you give us an update on that?

No change in our guidance.

Thanks.

Good luck with the next quarter.

Thank you.

David Manthey, Robert W. Baird.

Looking at gross margin -- I don't want to dwell too much on this, but with all the ongoing mix shifts and this rebate situation, is there any reason to believe that third-quarter gross margin, or fourth-quarter for that matter, should be any material difference from what we saw here in the second quarter, all else being equal?

I would expect pretty quiet on the gross margin front in the third and fourth.

There's really -- the drop in rebates, I indicated, I see that as a transitory issue.

If our growth gets stronger, that number improves as well.

Yes, okay.

And then on SG&A, it's rare to see a down-tick from the first quarter to the second quarter.

So clearly, you were doing what you said you were doing here, and keeping a lid on costs.

But assuming a slow growth environment going forward, should we just see normal expenses flex up with volume into the third quarter?

And the $5 million to $10 million uptick in SG&A that we normally see from the second quarter into the third and fourth quarters?

Or again, is there anything that hit the second quarter that was unusual, that will unwind in the third, that we shouldn't expect to see?

Probably the most noteworthy thing that hits from first to second is, we get out of the heating season.

And even though energy prices are better than they have been in the past, it still costs money to heat.

That steps out, and you see that benefit from first to second.

Second to third, I don't see anything that would cause me to think last year's sequential pattern would be anything outside the norm.

Okay, all right.

And final question, philosophical here.

You mentioned your CapEx requirements relative to your earnings power, lower in the future.

And now that you're paying dividends and buying back stock, can you tell us, going forward, will both of those be a part of your capital allocation plan?

And do you favor one versus the other longer-term?

Well, first off, on the CapEx, if you looked at that number over an extended period of years -- say 10 years or so -- what you'd see is our CapEx kind of hovered in a 25% to 30% of earnings zone, typically.

And that number -- as we'd indicated about three, four years ago, that number moved up dramatically when we were doing to two big things at once.

We were automating our distribution centers, we were rapidly building up an inventory of machines to deploy, so we never had to be in a situation where a customer wanted a machine and we didn't have one to deploy.

And so I think we had a high watermark of CapEx at 44% of earnings.

And we really saw this year going down closer to that 30% number, and probably being in that kind of zone going forward.

So that gives us flexibility from the standpoint of free cash.

Free cash -- I think our bias still leans towards the dividend.

We have a level of shareholders that I believe have grown accustomed to that.

We have attracted some shareholders because of that aspect of our business: a growth organization over time that pays out a meaningful yield on the stock.

Quite frankly, the marketplace has pushed us to buy back some stock, by how you price the stock.

If our stock had a price that was materially higher than it is today, we wouldn't be having this discussion, I don't think.

So I think the question on allocation in the future is really going to center on: where is our valuation?

And I don't mean from an absolute perspective.

I mean where's our valuation from a relative perspective?

Where's our valuation relative to our peers?

And the tighter that number is, we're probably more inclined to buy back a little stock.

Got it.

All right, thanks a lot, Dan.

You bet.

Flavio Campos, Credit Suisse.

Just wanted a little bit more color on the SG&A line.

We didn't get the fuel disclosure this time around, so if you could talk a little bit about what the impact of fuel was there?

And also, how much of those savings were coming from the field itself and from discretionary expense?

And how much is that tied to the fact that you have net 13 store closures this quarter?

The 13 store closures really doesn't affect the numbers that much.

Typically, most of those employees go into a neighboring store, and it increases our selling potential, because you don't have all that labor that's tethered to the store.

But in the short-term, that expense is pretty nominal on its impact.

I'm looking at the copy of the Q here, and our employee-related expenses were up about 1% in the second quarter.

Our occupancy-related expenses were up about 3.5%, and most of that centers on vending.

And then our selling/transportation expenses -- similar to what we saw in the first quarter, it's down around 20%, 21%.

And if I look at our field component of that, in the first quarter, we spent just under $9 million in fuel.

That's total fuel.

That's in cost of goods -- about half of that's in cost of goods for diesel going into semi's, about half of that's in operating expenses -- the gas that goes into our pickups at the store.

And that number was just over $9 million in the second quarter.

So similar savings to what we saw last year -- about $3 million it saved us.

Perfect, that's very helpful color.

Thank you for that.

And on the vending side, we saw that growth of customers with vending drop to single digits for the first time in the time series.

How much of that is that replay of the national accounts that you were talking about on the call -- that the top 100 is slower, and the smaller national accounts are growing faster?

And is there a strategy to increase penetration of vending on those faster-growing vending accounts -- national accounts on the tail?

Absolutely.

First off, the first half of your question was the linkage.

It's a direct linkage.

Those customers that we have a lot of OEM relationships with -- [Alice] just had a plant last week in Redmond, Washington, that we are on site with.

A lot of OEM business.

And I saw a lot of blue vending machines as I was walking around those two facilities I was in.

So they're very tightly related.

But the weakness we're seeing in our top 100 customers heavily weighs on what you're seeing on the vending.

Because vending -- quite frankly, if you think about the vending machine, our goal with the FAST 5000 is, when we place it, our goal is to get $2,000 in monthly revenue.

And so vending by its nature tends to lend itself to a larger customer, rather than a smaller customer.

Because a $500-a-month customer, if we're getting the lion's share of their business, they're not a target for a vending machine where you're targeting $2,000, as they just don't have that spend.

Perfect.

But do you have a strategy to target those at that end of -- those smaller customers as well?

Or they are just not as attractive for any solution as a top 100?

We are targeting every customer that has the business potential to justify it, whether that customer's a national account or a local account in Eau Claire, Wisconsin.

We are bringing that value to customers.

But the vending machine is valuable too.

So if that customer has the spend to make economic sense for their business to have vending, we're bringing it to them.

We don't care what group they're in.

And Flavio, we don't care whether it's gloves, office supplies, beverage, water.

We look at the customer.

We go in, we do a process mapping, and we try to tailor our deployment by size of machine, number of machines, to really give them the benefit of vending.

We have a smaller 3000, we have a 5000, we have lockers.

So we really try to come to the customer with some type of solution that fits their business needs.

Perfect, very helpful.

Thank you for taking my questions.

You bet.

Adam Uhlman, Cleveland Research.

The first point of clarification -- it seems pricing is still a headwind to revenue growth.

I was wondering if you could detail how much that was a drag on your year-over-year sales growth?

And then secondly, it sounds like you have a good amount of traction with the smaller accounts coming through.

And I might have missed it, but what was your active account growth for the quarter?

I don't have that number handy, right off the cuff.

That number is probably mid-single digits, I'd guess.

Yes, three to four.

That number is -- so much of our growth is coming from -- there's two components to our growth.

There's active account growth, and there's dollars per active.

So much of our growth has been centered on dollars per active in this environment.

Because all of our growth drivers, with the exception of the people we've been adding now in the last 12 months -- but the growth drivers of the last three or four years have really centered on means to add dollars per active.

Because it's very profitable growth for us.

Got you.

Thanks for that.

And on the (inaudible) question?

Go ahead.

What was the drag on revenue growth this quarter?

Well, the exchange rate drag, from a pricing standpoint, was about 1%.

If you look at our year-over-year number, most of the drag comes from mix, and not from pricing.

I'd say probably a 0.25% drag -- or a quarter of our drop, excuse me, in the gross profit, was more about pricing.

Got you.

Thank you.

You bet.

Ryan Merkel, William Blair.

I wanted to start with a bit more color on June.

I know there was an extra day in the month, and also an it ended midweek.

But you still missed the sequential pattern by a decent amount.

So I'm just wondering, how did the month play out?

And then, are there any other signs of life outside of the energy delta coming in a bit?

June was disappointing, there's no question.

And even at the 1% on the extra day, it was not where we wanted it.

And when you look at -- when you talk about outside of the oil and gas, some bright spots for us, I look at some things that are happening and taking place within the business in Florida, in California, in some of our Midwest regions.

We're starting to see Canada, when you really factor in the native currency, is actually performing well.

And so this oil and gas thing, as we've talked before, Ryan, it's just got such a ripple effect through the economy and through the business, that it's just weighting us down.

But if you look at non-res, we think when we look at our information, we believe that's heavily tied to oil and gas.

So that's a factor.

We look at ag and heavy manufacturing -- all headwinds right now for us.

And a follow-up is, lacking anything else, should we assume normal sequential patterns for the rest of the year, just because there's really no obvious catalyst that you're seeing in your business?

Is that a fair statement?

That's a fair statement.

That's the assumption I'm going on, too.

Okay.

The second question -- Dan, you hit on this, but I want to ask it again.

I thought that the higher EBIT margin year over year, with lower gross margins, was a big positive.

But it's hard to tell how much of that is one-time cost cutting versus Pathway to Profit really starting to shine through.

And Pathway to Profit really wasn't shining through last year, for example, because gross margins were coming down so much and offsetting it.

So my question is, should investors view your results this quarter as a positive long-term signal that you can raise EBIT margins, even if gross margin moderates due to mix?

I believe so.

We've touched on that and really talked about the mix and what it does to gross profit.

But the inherent cost structure that we have and the ability to leverage that cost structure -- one of the things I shared with our Board yesterday is, if you look at our business, we have the 80% of our business that's going through either a US or Canadian store.

And 20% of our business that's either going through what we call an on-site situation -- or a strategic account store where we have a very close, tight relationship with a large customer -- or our non-US and Canadian store business.

If I set those aside and look at the 80% that is the store business, when we set up the Pathway to Profit back in 2007, most of our business was going through that store piece.

And we said as this piece continues to mature, we could take the operating margins from the 18.3% we are at, to north of 23%.

This quarter, if I look at strictly the store subset -- so that chunk of business that represents about 80% of our sales -- we were at north of 23%.

So we actually hit our Pathway to Profit target in that subset of stores.

And we've always said that's a point-in-time number, because that group of stores is about $106,000 a month in business.

So I think it's a very bullish for our long-term ability to drive the profit machine that is Fastenal.

Perfect.

That's what I was looking for.

Thanks.

You bet.

Robert Barry, Susquehanna.

I wanted to actually again follow-up on the SG&A.

I understand you're in a low-growth environment and so it makes sense to really double down and try and dial back the costs.

But Dan, you did mention you haven't seen this kind of performance in the 19 years you've been at Fastenal.

So I'm curious, beyond the next couple of quarters, were changes made in the way you're running the business that are permanent and sustainable?

Can you share a little bit more color on that?

Well, the leverage that we described in Pathway to Profit, that's structural.

That's a case of, our occupancy as a percentage of sales continues to decline, because we're running more dollars through that same building.

The portion of our labor that's tethered to the store becomes a smaller and smaller portion of our labor pool.

Those kinds of things are structural.

The things that aren't structural that are part of the tug-of-war of life, if you will, is one of the challenges Lee put out to the team, and I think the team responded tremendously to, is: folks, we're investing and adding all these people.

We can't spend money doing other things.

We've always been [prival] to traveling.

And sometimes we joke about some of the things we do when we travel, because that's who we are.

We doubled down on that.

Now, how permanent that component is, is a function of the tug-of-war of life.

If we were growing faster, Lee's message might not have resonated quite as deeply with our district managers, our national accounts folks, our regionals.

Because they might be traveling a little bit more because they're visiting more customers, they're visiting more people, they're doing more things.

And sometimes you dial that back.

Maybe you don't need to have that meeting.

Maybe you have that meeting as a conference call rather than a face-to-face.

Maybe you do these things in the short-term.

But those in the scheme of our expense pool are relatively small, but they're very symbolic.

And the fact that we managed our travel, our non-store operating expenses, as well as we did, I think, was enhanced by the call to action that Lee put out there three, six and 12 months ago.

But we demonstrated we can do it when we need to do it.

Because when you're growing your top line 5%, you've got to do things like that, that may maybe you wouldn't have to do if you were growing at 12% or 14%.

Right, fair enough.

Rob, I would just add one thing, though, and you have to link this together.

That when you put a call out to the troops, and you get them into the why -- and I said that at the opening -- they were asking and they want to grow.

Their commission plans are set up that way.

So they want to grow, they want to take market share, they want to serve at a high level.

When you put out there that we want to add energy into your store, but I need a little help over here -- that's what we're talking about.

They saw the reason, and they responded.

Like Dan said, the team just did a tremendous job.

Yes.

Could I also just follow up on the vending?

Some of the disclosure absent this quarter was also the signings and installs on a machine-equivalent basis.

Is that something that you can provide?

Oh, that will be in our Q. Let me see if I have that page handy here.

Let's see.

On a machine-equivalent basis, okay, the signings number would be 3,931 versus the 2,916 that we did in the first quarter.

The installed at the end of the period would be 37,714 versus 35,997 at the end of first quarter.

And I think the rest of the stuff was in our release.

So even on an equivalent basis, that's pretty good acceleration year over year.

Anything in particular driving the acceleration and the signings?

We have a group of store employees, district managers and national account members that are key to driving that number.

Because one thing that we know about our business that we keep reiterating with our team: the vending machine is a sign of engagement with your customer.

If you are truly engaged with your customer, you should be able to put vending machines out there and it makes the business stickier.

And it's just good common sense.

Have a reason to be in talking to your customer multiple times a week.

I think the other thing too, Rob, is, again, I worked in the store and when you -- again, it's a world of competition, and we like that.

We love it.

And so when a competitor comes in and they see our blue machines in there, our folks are starting to understand that how tough it is for the competition to get us out.

It's a learning curve with 2,600 stores, 2700 stores.

But more and more stores are adopting, more and more stores are seeing the benefit.

More customers -- and for me personally, if I'm in a store and I have a customer with vending, and I show you and take you to that customer, and you see it in action, that is how we continue to see more engagement and more adoption in the field.

Right.

I think you had actually purposely dialed down the pace a little bit a year or so ago, in an effort to improve the efficiency and the profitability.

Do you think, given you've made progress there, you're dialing up the aggression a little bit?

I think it's what we said earlier.

I think this is actually linked to what's going on with our national accounts.

Everybody's engaged with vending, whether it's the local store, district managers, regionals and national accounts.

But as our national accounts are providing the growth, they're also providing a lot of what we're seeing on our vending right now.

Great, thank you.

Yes, sir.

And it's 9:42, Central.

It looks like we have time for one quick question, if there's any left.

Robert McCarthy, Stifel.

In terms of -- I don't know if I missed this earlier, but did you talk about what you thought incremental margins could be in the back half of the year?

Did you talk about the 20%s range or the 30%s range?

I forget.

Our goal is always to be as close to 30% as we can.

And I was pleasantly surprised by the fact we were able to hit 40%, despite the fact that June came a little bit weaker than we thought it was going to be.

And I noted that on the last call; we get antsy when that number is below 25%.

Because if that number isn't at least better than our operating profit, what's causing us to lose that?

Right.

Now, if we're losing that because we are consciously making an investment in something, that's one thing.

But our anxiousness rises if we're not meaningfully beating that number.

Could you talk about the effect of the rollover in steel prices?

Have you seen any impact in terms of pricing and gross margin?

How would you quantify it?

We've seen the impact in our revenue, we've seen the impact in our gross profit.

It's difficult to quantify it, because sometimes there's a lot of noise in the numbers.

We have different customers in there.

You have customers we are changing the source of supply, because you're bringing a better cost value to them.

It's not just in steel; it can be in non-steel products as well.

But there's no doubt about it, steel is creating headwind for us, and it's creating some challenges.

It also creates some opportunities.

Earlier, when asked about our gross margin change, I indicated about half the drop from Q1 to Q2 centered on our supplier incentives, and probably about a quarter of the drop related to the impacts of pricing.

Of pricing, okay.

And then in terms of the back half of the year, obviously you can look at the sequential patterns, but also, the compares are a little tougher.

Do you still see the prospect for positive organic growth in the back half of the year, given what we've seen in terms of June?

Yes.

Okay.

Well, I will leave it there.

Thank you very much.

Thank you.

It is 9.45.

We'd like to thank everybody again for your listening on the call and your interest in Fastenal.

And we'll talk to everybody soon.

Thank you.

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

This does conclude the program, and you may all disconnect.

Have a great rest of your day.