快扣 (FAST) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fastenal Company first-quarter 2016 earnings results conference call.

(Operator Instructions)

I would now like to hand the meeting over to Ellen Trester, Investor Relations.

Please go ahead.

Welcome to the Fastenal Company 2016 first-quarter earnings conference call.

This call will be hosted by Dan Florness, our President and Chief Executive Officer, and Sheryl Lisowski, our Interim Chief Financial Officer, Controller and Chief Accounting Officer.

The call will last for up to 45 minutes, and we'll start with a general overview of our quarterly results and operations, 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 investors homepage, investor.fastenal.com.

A replay of the webcast will be available on the website until June 1, 2016 at midnight Central Time.

As a reminder, today's conference call may include statements regarding the Company's future plans and prospects.

These statements are based on our current expectations and we undertake no duty to update them.

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

Factors that could cause actual results to differ from anticipated results are contained in the Company's latest earnings release and periodic filings with the Securities and Exchange Commission, and we encourage you to review those factors carefully.

I would now like to turn the call over to Mr. Dan Florness.

Thank you, Ellen, and good morning, everybody.

Thank you for joining in on the first-quarter 2016 Fastenal Company earnings call.

Press release went out first thing this morning.

Hopefully you all saw, as well, we put out a press release yesterday evening announcing our second-quarter dividend.

In the quarter, we grew our sales about 3.5%.

We had the benefit of an additional business day during the quarter so on a daily base else we grew about 2%.

Our earnings per share grew just over 2%, primarily driven by the fact that we had bought a considerable amount of our stock in the last 15 months because our actual earnings were down slightly from a year ago.

A bit of a noisy quarter in that the calendar had some stuff going on.

The daily number, which is what we typically report, can be influenced positively or negatively by the change from year over year and the number of business days in a calendar month.

In January, it was a 20-day month versus 21.

In February we had an additional day so it was a 21 versus a 20, and in March we had an additional day so it was a 23 versus a 22.

And March also had Easter which had been in April in each of the last two years.

I throw these in to the equation because they can influence the number.

So, if you look at our numbers as reported, in January we grew at 3.3% daily average, February grew at 2.6%, in March we dropped to 0.0 so we basically had no growth in the final month of the quarter.

If I factor in the change in days, I think of the months as being January we grew between 2.5% and 3%, February we probably grew closer to 3%, in March we probably grew just under 1%.

If I add Easter into the equation, that March number probably is closer to a 2%.

So, I'll start the call by saying I'm very pleased with the fact in January and February we started out with a nice improvement after really struggling through the fourth quarter.

And struggling through the fourth quarter in the latter nine months of 2015 is more of a statement of what our customers were enduring as their business weakened, particularly those involved in the oil and gas industry and those involved in export.

But when I look at March, we're a little disappointed in the month.

The month weakened as we got through it.

Easter is part of it, the calendar is part of it, but the month did weaken a little bit, so it was a soft finish to the quarter.

There's really no other noise in the numbers because the acquisition we did last fall added about 0.8% to our number and FX removed about 0.8%.

So, other than the calendar, there wasn't a lot of noise.

Speaking of FX, really talking about our foreign business in general, one of the items that we touched on in the call centered on Canada.

Canada has an economy that's very much influenced by commodities, particularly energy commodities but commodities in general.

That business for a lot of distributors had been struggling throughout 2015, ours included.

In the fourth quarter our business in Canada grew.

Using local currency -- so, removing the FX impact -- and local days, our business grew about 4%.

I'm pleased to say that business improved in the first quarter and grew about 7%.

I think that is probably a good teller of some underlying strength that we're seeing in that business, and our execution.

From a P&L perspective, and this is a lot of the comments that I've shared with our folks internally, sometimes you need to take a step back and look at what you've been investing in and what it's translated into to help understand the puts and takes of your P&L.

From 10,000 feet, the best way I can think about the P&L is this -- we added about $33 million in additional revenue from the first quarter of last year to the first quarter of this year.

As you see in our published statements, and you saw this in our fourth quarter and you saw it, quite frankly, throughout 2015, with the growth drivers we have in place, particularly the large account emphasis within our growth drivers, the larger our customer gets typically the lower the gross margin because in many cases you're supplying a concentrated offering into a business.

It's a more competitive landscape because it's a more efficient landscape to operate.

So, our gross margin in that business is typically lower but, again, it's more efficient so our operating expenses are lower, as well.

So, as we've seen great success in that business we've seen some tradeoff in gross margin.

Also, as we went through 2015 our fastener business was particularly hit by the slowdown in the economy.

So, we had some product mix as well as customer mix impacts to our margin, and, with the weaker environment, a very competitive landscape.

So, we did lose gross margin on a year-over-year basis.

Our gross margin was largely in line with fourth quarter.

And that $33 million in additional revenue translated into about $7 million of additional gross profit because of the contraction in gross margin.

We talked a lot in the latter part of 2014 and 2015 about adding people to our store base network.

As we got later into the year we also talked about slowing down the growth, and we've continued that discussion of slowing down the growth of people.

We think we're to a point where our stores are well staffed and now we need the business to catch up and, quite frankly, get ahead of our headcount growth a bit.

But in the last 12 months we've added about $12 million in additional payroll expense because of all the people we've added.

Because a high percentage of our compensation is incentive based, if I look at incentive compensation at the district, regional, national, local level, as well as profit-sharing contributions, those are down on a year-over-year basis.

So, about $7 million of the $12 million was funded by our collective group of employees and our payroll expenses are up about $5 million in total against $7 million of additional gross profit.

We also have been heavily investing in vending, heavily investing in onsite, heavily investing in growth drivers.

And our operating expenses outside of payroll were up about $5 million.

So, total expenses are up about $10 million year over year and our earnings down about $3 million.

We took on some debt in the last year, year and a half to fund the buyback of stock, so our interest expense is up about $1 million.

So, our earnings are down just under $4 million a year ago.

When I look at the investments we made in people and the investments we made in growth drivers to our business, I believe they're great investments for our business short term and long term.

However, we don't have the gross profit dollars in the short term to pay for it and that's why we're holding tight on headcount as we go into the year.

And also you'll notice that we softened a bit our store opening expectations for the year.

Within the last year we cited a range of 60 to 75.

We've pulled that down to a range of 40 to 60.

While still a meaningful number of stores were opened we really felt, given all the growth drivers we had in place, it was a wise decision to slow that down a little bit.

Last November, we had an Investor Day.

In that Investor Day, we really talked about four primary things.

They centered on vending, our industrial vending deployment.

We talked about onsite where we set up a store inside the four walls of our customer.

We talked about eCommerce, investments we're making to make it easier for our customers to interact with us.

And we talked about what we call CSP 2016, and that was expanding the merchandising that we have locally in our store to improve our ability to fulfill on a same-day basis, to improve the spectrum of customers we would appeal to -- frankly, to improve our business.

When I look at our progress on those I'm extremely pleased with what we've done not only in the fourth quarter but what we've done in the first quarter.

From a vending perspective, we really talked about the team we were adding.

We added about 230 people to drive the optimization of our vending, to drive the signing of our vending, and to drive the efficiency of vending.

When I look at where we are at the end of March, about 60% of our machines have now been optimized.

When we talked about it last November at the Investor Day we were at about 11, so we've made great progress on that.

And, really, what it translates into is a better utilization of our vending platform within our customer business but also a better value proposition for our customer because we know product that goes through a vending machine lowers the consumption, lowers the waste and lowers the expense for our customer, and we think that's a winning combination in our business.

About 80% of our store locations use the vending tab.

And what that is -- and we talked about this on our Investor Day -- that is a better integration of the vending within our own point-of-sale platform.

It helps our store personnel be more efficient with the replenishment.

It helps streamline the supply chain.

And we've made great progress on that and that's going to serve us well as we go into 2016 and beyond.

As important to those two pieces, our pace of signings improved.

In the first quarter of 2015 and the fourth quarter of 2015, we signed roughly 4,000 vending devices.

In the first quarter that number improved.

We signed about 4,700.

So, I think we're off to a great start and that's an important growth driver to our business.

In the case of onsite, last year we signed about 82 onsites.

Our historical run rate or pace of annual signings was about 9, so we took a big leap forward in 2015.

In fall of 2015 at our Investor Day we talked about a lofty goal.

We said our goal is 200 signings of onsites in 2016.

In the first quarter, we signed 48.

Frankly, that's a number that was better than I was expecting.

I was very hopeful coming into the year we would have a number that would start with a 4 because I knew that was a big step up from the run rate we had in the latter half of 2015.

Our team came through and worked with our customers and signed additional 48.

Those will turn on as we go through the year but I'm very optimistic about our onsite program as we go through the balance of the year.

ECommerce, as I mentioned, is more about the ease of our customer ability to interact with us.

There will be more updates in future meetings.

That's more of when I think of a late 2016, 2017, 2018 type of item.

And then, finally, CSP 2016, we made a hard push late in the year.

We've continued that hard push.

We currently have just under 1,000 locations converted to the CSP16 format.

And I believe when we get to the end of the second quarter that number will be closer to a 1,700 or 1,800 number that are substantially converted, which position us well not only for the efficiency of our business but our ability to appeal to a broader range of customers and fulfill their needs as we go into the summer.

With that I'm going to turn it over to Sheryl to talk a little bit more in detail about the quarter.

Good morning.

I'm going to provide an update on our cash flow.

Our operating cash flow for the quarter was 128% of net earnings compared to 141% of net earnings during the first quarter of 2015.

The operating cash flow is slightly lower in the first quarter of 2016 due to our current initiative to add additional products into our store inventory under our CSP16 format.

The Q1 operating cash flow is also benefited by minimal tax payments occurring in the first quarter.

That will reverse itself in the second, third and fourth quarter of the year.

Our operational working capital year-over-year inventory growth was approximately $97 million.

The main drivers of the increase in the inventory were driven by the CSP16 initiative which was approximately 35% of the increase.

International inventory growth and the acquisition of Fasteners, Inc contributed approximately another 25% of the increase.

And then the last main driver was the onsite and large customer impacts which were approximately an increase of 10%.

We also disclosed in our Earnings Release that we had previously indicated our net capital expenditures would be approximately $128 million in 2016.

We now believe, given the new vending locker lease agreement and a strong start to vending signings in the first quarter, that we will have total net capital expenditures of approximately $197 million to $200 million in 2016.

We do plan to fund this increase as well as some of our previously planned capital expenditures with the proceeds of a proposed private placement of debt.

During the first quarter of 2016 we purchased approximately 1.6 million shares of our common stock at an average price of $37.15 per share for a total of approximately $59 million.

And during the last seven quarters we have purchased 8.7 million shares of our stock or approximately $396 million worth of stock, which represents about 3.3% of our outstanding shares from the start of this time frame.

As Dan mentioned earlier, last night we announced a dividend of $0.30 per share.

This will be our second quarter dividend for the year.

So we have strong cash flow and we're optimistic about our cash flow potential throughout the year.

And with that I will open it up to questions from the group.

(Operator Instructions)

Our first question comes from David Manthey with Robert W. Baird.

Hi, good morning.

First of all, in terms of the new onsites that you turned on last year, can you estimate how additive to growth the onsites that were operating in the first quarter of 2016 were?

Probably the way I think about it, Dave, the numbers start getting a little bit double counting when you look at the vending and you look at the onsite.

The best way to look at it is, when I think of the districts that are signing onsites, districts that added onsites last year are growing double digit right now.

The districts that did not are growing low single digit.

We really look at the onsite business as being when we go on an onsite, what Chris had talked about last fall in our Investor Day was we really believe that when we exit a 12-month period after rolling out the onsite -- and we have onsites that turned on throughout the year so that's where the numbers start getting a little muddy -- but we really believe, based on our data, that when we exit the 12-month period we'll add close to $80,000 to $120,000 of additional monthly revenue on a per onsite basis.

Okay.

And then, second, on pricing and gross margin, you mentioned the fastener pricing being lower, if you could quantify that.

And then if you saw anything across the other 60%-plus of your product lines.

And as it relates to gross margin, I know there's some timing issues with the FIFO inventory and so forth but typically first-quarter gross margin is the highest of the year and then it declines from there or is lower through the rest of the year.

Is that your expectation for this year or are there other factors in 2016?

Our expectations, given where our growth is coming from, is that 50% is probably a good target number for us to have.

When I look at the components of our gross margin, a couple things that were going on in the fourth quarter and in the first quarter, it was in a declining mode as we were going through the fourth quarter -- quite frankly, a declining mode throughout 2015.

We really saw the stabilization start to occur in the February-March time frame from the standpoint of what was going on with gross margin.

So, I really believe when I look out to the balance of the year, 50% is probably a better target.

When I look out long term it's really going to be a function more of how successful we are with the onsite program because that will materially change longer term our customer mix.

But it's very attractive in the ability to grow the business long term and the operating leverage long term.

Okay.

And on the pricing, Dan, the fastener pricing?

What we were seeing through most of last year is deflation somewhere in that 1.5% to 2% neighborhood.

We are still operating in that zone.

As far as the costs coming through, we're starting to see some lower costs now.

Our overall inventory turns about twice a year.

The fastener piece of our inventory turns slower than that, the non-fastener piece turns faster than that.

So, some of the lower costs we're starting to see come through our cost of goods now.

As it relates to the non-fastener product, I would say that area is pretty quiet.

Any changes we have in pricing there would be solely related to customer mix and not to what's going on in the underlying product.

Got it.

Thanks, Dan.

Thank you.

Our next question comes from Robert McCarthy with Stifel.

Good morning, Dan, how are you doing today?

In terms of April, I think you did take some pains to talk about the noise of the quarter in terms of not only the days and the Easter shift.

But how should we think -- without commenting on April in terms of the demand trends because you haven't disclosed it yet -- about the impact of the normalization for Easter?

Do we think about a 1 point benefit for April or how do we think about it in terms of the day in the Easter shift?

That's how I think about it.

If you walk through the math I walked through on the March, so here is the ugly part of Easter moving, I think it's 1 point maybe 1.2 points out of March.

You should see the flip side of that coin in April.

Okay.

And remind us of what the days is in April year over year in terms of the difference?

In the second quarter -- Sheryl, you can correct me if I'm wrong -- in April we're at 21 versus 22 a year ago.

That's correct.

May we're at 21 versus 20 a year ago, and June it's a push at 22.

Got it.

Okay.

And then as a follow-up in terms of what you're seeing in terms of industrial vending growth, are you still committed to that 16,000 in deployments for the full year?

And I think you saw, you highlighted an interesting statistic in association with your vending, which was basically your daily sales to customers to industrial vending grew 3.6% in the first quarter of 2016 and then daily sales of non-fastener products to customers with vending grew 7.4%, but daily sales of fasteners to customers with vending contracted 5.5%.

So, the question is, obviously a lot of your business to go with your vending is not fasteners but what do you account for that kind of contraction?

And I'm referring to, I think, the final paragraph on the second page of the press release.

Yes.

When I think of vending, you're dead on with your question and comment about vending is really about our non-fastener business.

Vending really isn't used for dispensing of fasteners now.

There's some extensions of vending that over time, how our bin stocks works and things like that, we'll incorporate potentially some of the vending type technology for replenishment cycle.

But vending is about non-fasteners.

We've done a great job deploying vending to our existing customers over the last five years.

The fastener piece is about their economic activity and our ability to take market share.

And I think the story when I look at the fastener piece is about the economic activity.

The non-fastener piece is about the activity and our ability to grow and deploy vending.

So, we can have a customer whose business in the fastener piece is down because we have a great market penetration already and their business is just off.

But we can grow the non-fastener piece because of vending because we're deploying a better supply chain to our customer.

But when I think about our deal with our customer and what our customer truly needs, put yourself in the shoes of the purchasing manager, the plant manager, they live in a world where there's constant demands on them for improvement.

They are working with fewer resources every day.

So what they need from their supplier isn't just great fulfillment.

I think that's a starting point.

They need a better supply chain partner.

In the case of vending, in the case of bin stock, in the case of our onsite model, we're a better supply chain partner.

And we highlight this point because it demonstrates that even in a weak economy, we can grow our business because we're a better supply chain partner for our customer.

Thanks for your time.

Thank you.

Our next question comes from Adam Uhlman with Cleveland Research.

Hi, good morning, thank you.

If we could just step back and talk about the cash flow outlook for the year.

It seems like we have growing demands on cash from the CSP16 rollout as additional stores are added and the vending growth is going to unfold from the year.

Can you help me understand better how much debt do you expect to take on to fund these growth investments?

And at what point do you start to pull back on other CapEx projects?

I'll answer the last part and then Sheryl can answer the numbers part.

But as far as pulling back on other projects, the only thing that we've pulled back on consciously is we slowed down a bit the pace of store openings.

But other than that I don't really see us pulling back on the initiatives that we have in place.

As we talked about in 2015, a lot of the big initiatives we had from a CapEx standpoint are in our rear view mirror.

I'm talking about automation of our distribution centers and the initial build of creating and growing a vending business.

So, I don't see a lot of other pullback.

But, Sheryl, you can touch on exact numbers.

Sure.

We're still, as we're projecting our cash flow for the year, we feel very confident that operating cash flow will continue to exceed historical percentages of net earnings.

Our total CapEx will be a little bit higher than the historical percentage of net earnings due to the increase in our vending spend for the year.

And our free cash flow will continue to fall within the historical percentage of net earnings throughout the year.

So, we feel very confident that we have adequate cash flow to continue to support our initiatives throughout the year.

Sheryl, could I just follow up on the bad debt expense for the quarter?

Could you talk through what you guys are seeing there and expectations going forward?

We continue to see our bad debt expense trend to historical norms.

We are not seeing a significant increase in bankruptcies or anything that causes us great alarm or concern.

It's a pretty quiet quarter from that perspective, so really no surprises from our end.

Okay.

Thank you.

Our next question comes from Ryan Cieslak with KeyBanc Capital Markets.

Hi, good morning.

Dan, sorry if I missed this but do you have an initial view of how April is trending for you right now?

I know it's early, only two weeks in.

Maybe excluding the benefit you might get from how Easter fell and the extra day or so in the quarter, has it gotten any better from what I think I heard you said the quarter ended off soft?

I just would be curious to know the sequential trend so far into April.

Whenever I touch on the current month I'm always wrong and the question is how much.

I don't know that with basically a week into the month that we've had some chance to look at the data.

I don't think it's meaningful enough to even talk intelligently about it so I'm going to defer that until early May when we report it.

Okay, fair enough.

And then I think last quarter you talked about discretionary spending being down and a head wind, and in the release today you mentioned a slight improvement.

I would be curious to maybe get some more color around that, how the discretionary spending looked in the first quarter relative to maybe a normal first quarter, or your expectations coming out of the fourth quarter.

And how much of a drag on gross margins was that this quarter relative to the fourth quarter?

Sure.

The commentary on that, both in the fourth quarter and in the first quarter is as much art as it is science.

The team that analyzes all of our sales data, slices and dices it about 18 ways to Sunday.

One of the things that jumped out for them was, they looked at frequency of items and stuff that's purchased in a less frequent basis, how that was performing in the fourth quarter, and we did see a drop off in that.

We saw some of that come back as we got into February, didn't see much of it in January.

But I'd say it's still tepid.

I think there a lot of organizations out there -- similar to comments I started the conversation with about what we're doing with headcount, what we're doing with expenses in general, what we're doing with store openings -- a lot of organizations out there have their belts really tightened down.

And I think you're seeing that, coming into the new year, holding pretty firm.

To quantify it -- this is a from-the-hip number -- but, I don't know, 10 basis points.

That's more of a guess.

Got you.

That's helpful.

And then just really quick, if I may, I'd just be curious to know, at the Investor Day you'd talked about maybe a greater appetite for M&A this year.

Maybe just an update on what you're seeing there with regard to some M&A opportunities for you guys in 2016.

Sure.

Late in 2014 we started to take probably a more serious look -- rather than stumbling upon stuff periodically, let's take a little more serious look at it.

We looked at a bunch of companies last year, one of them that we met early in the year in April to be exact, we ended up acquiring later in the year.

There is a few companies we're in discussions with right now.

We're constantly looking, both on the distribution side as well as some of the support service side.

That might be a manufacturing entity or some type of support service for our stores.

Only time will tell how that plays out.

I think the biggest thing is that we're open to it and we're actively looking rather than just seeing what jumps up and hits us.

But nothing in the works.

Okay, thanks for the time.

Thank you.

Our next question comes from Ryan Merkel from William Blair.

Hi, guys good morning.

Back to March, Dan, is there anything that stood out to drive the softer finish, either by customer or geography?

Geography -- the only thing that stood out there is that we did continue to see weakening deeper than we probably would have expected, or maybe a better way to say, hoped for when we were looking at it back in the latter part of 2015.

But the oil and gas areas did continue to weaken when I look at it on a sequential basis.

And time will tell if some of the recent pricing influences that positive in the upcoming months, but it continued to weaken.

But, setting that aside, the month finished very poorly.

With five days, six days, seven days, eight days left in the month, I felt we would be closer to 2%, and the month really deteriorated late.

That probably describes some things that we saw in the patterns of our larger account base because they tend to be somewhat loaded a little bit towards the back end of the month.

But, frankly, a weak finish.

Okay.

Should this frame our thinking at all as we think about April?

Or would you just have us adjust March for Easter and then just use normal sequentials?

Is that the best way to think about April at this point?

That's how I'm thinking about it.

Okay.

And then on the macro, in the press release you said you're seeing some improvement but an economy that is still very weak.

Where are you seeing the improvements?

And then when you talk to customers, are they optimistic that we found a bottom for industrial demand or is that still a little optimistic at this point?

On the latter part, I don't know.

One thing that I will have the benefit of, this week is our national customer show.

We'll have a little over 5,000 customers over a three-day period in, meeting with suppliers, meeting with our employees, meeting with our onsite folks, all of our teams, our vending folks, et cetera.

So, I'll get more of a chance to get a pulse on that this week because this afternoon I'm leaving for that show myself.

But when I think of what are some of the positives, in the fourth quarter that was probably as bleak a period as you could see.

And I was not hesitant to share my thoughts on it during the fourth quarter.

But our fasteners, as an example, were down about 6% in the fourth quarter.

In the first quarter they're down around 2%.

Our non-fasteners were struggling in the fourth quarter.

I don't have the exact stat in front of me, I'm sorry, but they improved to mid single digits, upper single digits, in the first quarter.

We saw, generally speaking, an improvement in our business and that's I think what we are really talking about.

I think what we see is the business in January, February -- and I can't quite say that for March -- but in January and February felt more like where we were in October.

And I think, if I look at the last five or six months, I really think the outliers was the extreme weakness we saw in November and December.

And I think that was a function of companies just shutting down around the holidays more extensively than normal.

March -- only April and May will start to answer for us what really happened in March.

Right, very good.

Okay, thank you.

Thank you.

Our next question comes from Robert Barry with Susquehanna.

Hi, guys, good morning.

I wanted to circle back to the gross margin.

The pace of decline last year, 40, 50 basis points a quarter, now we're looking at down 100.

Just curious what drove that step change and the pace of decline.

You mean down 10 on a sequential when you talk about pace?

On a year-over-year basis.

We had been tracking down 40, 50 and now we're down 100.

There's a number of things.

One, our growth is primarily coming from large accounts.

That deepened as we went through the year.

It's primarily coming from -- if I think of our sales number and the weakness, we've done a nice job signing new customers, both onsites and traditional national account customers that aren't onsite.

When you're doing a nice job taking market share, you're turning on a lot of new business and a lot of times when you're turning on a lot of new business you do get some short-term mix issues going on in that a new large customer isn't at average margins for that group on day one because it takes you time, 6, 9 and 12 months, to work through some of the hiccups in the system of finding the best source of supply, finding the best part match for this item when you're turning on new business.

Typically you have your existing business that is supporting that because that existing business, you've done a better job of improving your supply chain already.

If you think of what's really hurting us right now from a revenue and revenue growth perspective, we're doing a wonderful job signing new national accounts, we're doing a wonderful job signing onsites, we're doing a wonderful job signing vending, and growing those pieces of business.

So, we're taking market share at a very good clip.

What's causing us to struggle is our existing book of business.

Our existing customers are struggling in a weak environment.

So, the more mature component of our business is going backwards, and that more mature piece has a better gross margin profile, because if I had a customer for two or three years, I've already, in many cases, established a lot of the best parts, a lot of the best sources of supply to serve that customer's needs.

That's in my mix and that mix has weakened right now.

So, that's a piece of it.

The other piece of it is on an execution standpoint we slipped a little bit as we went through 2015.

We slipped a little bit on the freight, how good we are on our freight expense versus our freight that we charge the customer.

Part of that, I think it became more difficult for our stores to operate as effectively given that fuel prices were lower.

Fuel prices is an important part of our distribution cost but it's not the only component.

But it might make it harder for you to charge freight on this item or that.

And the fact that it's a weak environment, it's a competitive marketplace.

I feel we're at a point where our gross margins are stable from a sequential standpoint but that still has been a painful process on a year-over-year basis.

There's no question about that.

Actually I did want to just follow up and clarify that.

So, it's your expectation that you can hold the gross margin stable here now at about 50% as we look in the next few quarters?

Yes.

And my question would be, what's changing as we move forward, because the pace of decline seems to be accelerating.

As you say, onsite's gaining traction, national accounts gaining traction, the product and customer mix issues have been there, they will probably continue to be there.

So, what's going to diminish the pace of decline in gross margin?

What are the offsets?

I think the biggest one is the offset we've had in the last 12 months.

You've had dramatic weakening of our existing customer base and that's hurt our gross margin because that's business where we have a very established, efficient source of supply.

That's put a pinch on that.

I believe the pace of that deterioration is slowing.

And I think that shines through in what you're seeing, what's happening in our fastener business, in our non-fastener business from a growth perspective.

So, I think that's the wild card.

Just to clarify, Dan, because I think there's some confusion out there, what product lines at this point are accretive to the gross margin?

Is it just the maintenance fasteners or is it all fasteners?

How would you describe that?

I'd say it probably leans towards the maintenance as well as the construction fasteners, in many cases.

I think you said the maintenance was 40% of the business.

How much of the fastener business is the construction piece?

That's a relatively small piece.

I don't have the exact stat in front of me but relatively small.

Single digits.

Got you.

Fair enough.

Thank you, Dan.

Thank you.

With that, I see that we're at 9:44.

Hopefully there wasn't anybody else in queue that didn't get to ask a question.

I'll finish the call the same way I started the call.

Thank you for taking time this morning to listen to our first-quarter earnings call.

I hope you find our Earnings Release today as well as our 10-Q, which I believe will go out later in the week, to be informative of helping to understand the Fastenal story.

I also invite anybody that's interested to either make a trip to Winona next Tuesday for our annual meeting or listen to it in our webcast.

Thank you very much.

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

This does conclude today's program.

You may all disconnect.

Everyone have a great day.