Fastenal Company (FAST) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fastenal Co. Q1 2011 Earnings Results Conference Call. [Operator Instructions] I would now like to turn the conference over to your host today, Ellen Trester, Investor Relations. Please begin.

Welcome to the Fastenal Co. 2011 First 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. This 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 June 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 those forward-looking statements are contained in the company's periodic filings with the Securities and Exchange Commission, and we encourage you to review those carefully. Investors are cautioned not to place undue reliance on such forward-looking statements, as there is no assurance that the matter contained in such statements will occur. Forward-looking statements are made as of today's date only, and we undertake no duty to update the information provided on this call. I would now like to turn the call over to Will Oberton. Go ahead, Mr. Oberton.

Thank you, Ellen, and thanks, everyone, for joining us today. I'm very happy about the quarter. I think the Fastenal team performed well in the first quarter. We had sales growth of 23%. We were helped by an extra day, but we'll take it. The real exciting thing or the thing that makes us very optimistic about going into the year is our strong sequential trend. The way the quarter played out, we had a good January, and then it went a little bit soft in February. We believe it was due to weather, but then, we came back very strong in March, where our March daily average was 7% higher than our February daily average, much above our normal sequential trend. For the January to March trend, more historically, we would be up 6.2%. But this year, we're up 8.6%. So moving forward at a nice pace, and we're excited by the progress that we've made. I feel good about our progress on the gross margin. Our gross margin was up 90 basis points over the first quarter of last year. It was even with the fourth quarter, but a lot of that is geography, and Dan's going to give a better report on that. But we're making nice progress working on our margin, and we're well within our 51% to 53% range that we talk about right in the middle of that. From an expense standpoint, our SG&A grew at 16.7%. And that's, I believe, they did a really good job or the group did a really good job on that. Labor was up when you put in all the health costs and all the other things, about 26% well above sales growth. But it's really being driven by the rebound of our bonuses, which we're very happy that, that's happening. Bonuses were up more than 100% year-over-year. So if we're going to spend money, that's the place to spend it. The other expenses, once you take the labor out, were actually flat to slightly down year-over-year, and that's just due to a strong focus on all the details. We learned a lot in the 2009 recession about where we needed to spend money and where we shouldn't be spending money, and it's coming through in the quarterly results in 2011. From a pretax profit standpoint, we reported 20.1%. The first time that we've been over 20% in the first quarter for well over a decade. So we're proud of that. And it really puts us on a good track for our 'pathway to profit' progress that we talked about in the fourth quarter of being over 20%. So we're really moving towards the goals that we need to hit. From a future standpoint, what we're looking for going forward, I'll start with a little history on that. At the beginning of 2010 -- really, the end of 2009, the beginning of 2010, we were really working hard to determine where we should invest in growth drivers outside of our normal new store openings. And the decisions we made were to add additional sales people at a higher level -- National Accounts, government sales, Automated Supply or vending and some product specialists, which we did. So looking at those groups, our National Accounts business, we over invested in that group, was drawing very nicely. We have a lot of activity with the large customers. We've seen tremendous success with our government sales efforts. At the beginning of 2010, we've put in a Vice President of Government Sales. We restructured how we approach that business because we hadn't done is what we felt to be a very good job at chasing that business or trying to go out and get that business. John and his team, that new government sales rep, were very active in the last year, trying to understand the business. And at the end of 2010, we signed a contract with the TPCN, which is a purchasing network that represents state buyers. The beginning of this year, we signed a contract with WSCA, which is Western States Cooperative Alliance, which is also a large purchasing alliance that represents state and political subgroups. Basically, they negotiate deals for states and then states can opt-in with the bids. That business is not coming through yet because we're working out all the details. We think it has a lot potential for the future. Our large competitors have done a very nice job with that. So we're very optimistic with what we're doing with government sales going forward. And what it really does, if you think about it, it just expands the local market for a store because without these agreements, we really don't have the ability to sell to these local entities. With the agreement, it expands the market for the local store. Another area that we're optimistic about going into the future is our Fastenal Automated Supply Technology, otherwise known as vending. We've been investing in that program for about the last two to two and a half years. We really started at the beginning of 2009. We're seeing very nice progress. We're seeing good adoption from our customers, and our plan is to continue to invest in the automated supply and continue to roll that out to our customers. The other growth driver and probably the most important growth driver that we have is hiring quality people. What we foresee going into the rest of the year or the remainder of the year is, we'll continue to hire sales people, sales in the store and around the store at a rate of about 60% to 70% of sales growth. So that if we're able to grow our sales at 20%, we would put in 12% to 14% new head count into the stores. And then we will continue to hire support people at a lower rate but at a rate sufficient to support the sales growth, and that we had really seen most of those people would in distribution and manufacturing roles because that's really where we need the people to drive and support the sales going forward. So although this is a brief report, I'm very happy with the quarter. I'd like to congratulate the Fastenal people that are on here today, and thank them for the effort that they put forth. And with that, I'll turn it over to Dan to report and give us a more in-depth report.

Thank you, Will, and good morning, everybody. And again, thank you for participating in our call. Today, much to everybody's pleasure, I will be very brief. Some of the highlights I'd note from our earnings release, again, on Pages 1 and 2, we highlight year-over-year growth patterns in our stores and in a subset of our stores, our two plus and our five plus. And I'm happy to report that the two and five year-old plus stores, they saw nice gains in the second half of 2010 as their growth was taking off. And we're seeing that continue in the first three months of 2011. From a sequential sales pattern, as Will said, from January to March, despite the weather impacts in February, we've seen sequential gains that are well above our expected. In fact, March was about 2.4%, sequentially better than history would tell us it should be. And that bodes well if we go into the second and third quarters. And the information you hear out of ISM also bodes well as I look forward into the second and third quarters. From an end market perspective, manufacturing continues to hold strong. We are seeing a pickup in momentum in our construction end markets, which is one piece of our business that was lagging as we went through 2010 and seeing very nice sequential gains from that business. 'Pathway to profit', Will mentioned some of the investments we've been making on the people side. A few things that I'd point out. If I look at the store FTE, which is up about 12% from a year ago, since we started the 'pathway to profit', our store FTE is up about almost 23%. Our non-store selling personnel, the three areas that Will mentioned, as well as the investments and manufacturing sales personnel, is up 27% from where it was at the start of 2007. So a lot of additional selling energy embedded in our organization, not only over the last 12 months but over the last four years. If you look at DC and Manufacturing, our previous peak month was September 2008, and that's where our head count and distribution manufacturing had peaked. Right now, we're actually about 8.5% below that. A lot of that from the efficiencies we've gained in our investments in distribution over the last four to five years. If I would remove the Holo-Krome acquisition of late 2009, our manufacturing distribution head count is actually down about 12.5% from the peak in the fall 2008. And, again, largely credited to the efficiency gains that we've incorporated into our distribution systems over the last several years. One of the things that we highlighted when we started the 'pathway to profit' was the efficiency we'd also seen in our support personnel because of the overhead that's associated with opening stores more than growing sales. And if I look at our support FTE, we're actually flat, down slightly, in fact, from where we were in the first quarter of 2007, the last quarter before the 'pathway to profit'. When we look at gross profit margin, as Will touched on, we're soundly in the middle of our long-term stated range of 51% to 53%, a range that we think allows for good, efficient growth of our business and serves well on our 'pathway to profit' initiative. If I look at the components of our gross margin on a year-over-year basis and a sequential basis, our transactional margin improves. So it improved both from Q1 to Q1 and from Q4 2010 to Q1 2011. Our organizational gross profit, which is really our buying scale -- that improved from Q1 to Q1 and from Q4 to Q1. So we have nice momentum in the components that make up our gross margin. The third piece, when we look at the vendor allowances, everything from rebate programs to the way we move product with freight, et cetera, on a year-over-year basis, that's up nicely. On a Q4-to-Q1 basis, Q1 is more than normalized number. Q4 was actually a little bit higher than normal because of some rebate programs coming in stronger than we expected in late last year. So despite about a 30 basis point drop in that from Q4 to Q1, again, now we're back to a more normalized number. We were able to maintain our gross margins and that 30 basis point improvement all came from the first two categories I mentioned. As Will touched on, our payroll and health care, our people cost included in SG&A, increased about 27% from a year ago. If you look at all the remaining expenses within SG&A, they're actually flat with the year ago, and that's our overall increase of about 17%. If I peel back that onion a little bit, there's a few things in there that were working against us. One is, as a distribution organization, we spend a fair amount on energy, both at our store locations and within our vehicles suite. If you look at some of the information we put into the earnings release, our diesel fuel is up about 25% from first quarter to first quarter. That's a per gallon cost. Our gasoline is up about 20% at a per gallon cost. All I can say that those two stats is ouch because that raised our fuel dollar spend by about 34% when you combine that with the growth in our business. If you look at occupancy, we did a nice job on that. We had some increases due to both energy costs that I've just mentioned, the new Holo-Krome facility in Connecticut that we moved into and increases in real estate taxes. But if I look at the actual rent dollars that we paid out, they were up about 2.5% from first quarter 2010. Lastly, on the balance sheet side, on the working capital piece, I think we did a nice job managing both our accounts receivable growth and inventory growth when you factor in the added sales March to March. When I look at cash flow as a percentage of earnings, our operating cash came in at 93.4%. Typically, first quarter is seasonally high. Our stated range for that is 80% to 90% on annualized basis. We were able to announce for the first time in our history, a dividend for the second quarter. We announced a $0.26 dividend last night. And we also announced the intention of our board to migrate from a semi-annual dividend payment frequency to a quarterly payment frequency, and this is the first evidence of that. The final thing I'll touch on, and this is just a little tidbit for the day. One thing that jumped out of me as I was looking at not only the quarter, but also the month of March and some activity in our stock price recently, this quarter appeared to be the quarter of tens for us. Now it's the first time in our history, our market capitalization snapped above $10 billion. And congratulations to all the Fastenal employees and shareholders on the call. Second, our International business is now 10.3% of sales. That's what it came out to in the first quarter. So we've made a nice transition over the last decade from primarily a North American business, but primarily a U.S. to truly an International Distribution business. And then the final piece is, if you noticed in our monthly sales release, our daily average for the month of March was $10,501,000 per day. That is the first month since September of 2008, where our daily average is over $10 million a day. And so it's nice to have the, finally, the shadow of the meltdown of late '08, early '09 behind us as we move into the rest of the year. With that, Will and I are open to questions. Thank you.

[Operator Instructions] Our first question comes from David Manthey with Robert W. Baird. David Manthey - Robert W. Baird & Co. Incorporated: First off, I was wondering, was there any impact from price increases in the first quarter, and if you could discuss fasteners and all the rest of your products separately. And then second related question is, do you plan to hold prices down in order to gain share until your cost of goods sold rises via FIFO? Or will you raise prices with the market as fasteners go up and try to capture incremental margin earlier?

This is Will. I'll answer the second question first, Dave. We plan to push prices up as soon as we can and hopefully capture incremental margin. But we're not seeing a tremendous amount of inflation. If you look at the Asian steel and actually CRU, if you look at the April, May price per ton and you look at the December price per ton, steel was very flat throughout 2010. It has gone up in the first three months of this year. We have to understand, on the fastener side of our business, it's a long cycle. The product we buy, say in October of 2010, we'll be selling in June to October of 2011. We have about six to seven months worth of inventory, and it takes three to four months to get the product so it's a very long cycle. So we have not seen a lot of inflation in either the fasteners -- we've seen a little bit more in the non-fastener business, but we do anticipate inflation coming through, and we're hearing that from our suppliers. One of the reasons, we believe, we've not seen more inflation on the fasteners is the Taiwanese -- mainly Taiwanese but some Chinese factories we're buying from are running at about anywhere between 75% and 85% capacity and they're reluctant to push real hard on pricing because volume is the game for them. Our purchasing manager was just over there in Asia about two or three weeks ago and, in fact, Dan was with them, and that's what they saw when they were there. David Manthey - Robert W. Baird & Co. Incorporated: All right. Thanks, Will. And just as a quick follow-up to that, to our surveys, all the things we've been hearing about significant price increases in fasteners, some of our contacts from overseas, do you think you have an advantage relative to others in the markets, I mean, you look at competitively, are you seeing others being forced to raise prices at this time or in the near future? And, again, you might be able to operate under that umbrella for a while?

We're hearing more about price increases from the investment community than we are from the industrial distribution community. We've talked to our guys a lot about it. We're pushing some, and we pushed some of our wholesale prices up, but it's a little bit of a longer cycle. And one of the things that happened in the fastener industry is Heads & Threads, which was the largest middle person. They were the largest distributor in the U.S. They bought from Asia and sold to distributors. They went out of business and this kind of settled the market a little bit right now. We're not sure where it's going. Again, we do anticipate fasteners going up. We're seeing increases as we speak, but we have to push those through to the customers. One big difference between now and 2007 and '08 is, in 2007 and '08, the angle was very clear. It was sharp and it was moving up. If you look at steel over the last year and a half, it's been rolling. It's generally rolling up, but it's going up and going down. It's a little bit harder to peg.

Our next question comes from Ryan Merkel with William Blair. Ryan Merkel - William Blair & Company L.L.C.: Two questions from me. First is on gross margins. Is 52% a number we can improve as the year goes along or does the mix shift to larger OEM accounts and away from fasteners hold that back a little bit?

Well, good morning, Ryan. The mix shift is definitely keeping being both away from fasteners and with a lot of OEM business. Those two mix shifts have been holding our margin in check, quite frankly, for the last 15, 16 months. And it still holds it somewhat in check. The wildcard is, as Will just touched on, some of the inflation and how that plays out as we go into the year. We think there is a potential for some upside and as we cycle through our inventory that's on the shelf and the stuff we ordered last fall. But at the end of the day, you always have to take a step back and appreciate the way we go to market and the way we price our product. We have 2,500 locations out there. We influence those locations, don't get me wrong, by periodic adjustments to our wholesale prices, pushing the group of stores, the group of districts that maybe are performing on the bottom half of the group that is out there -- pushing them to rise to the performance of the remaining group. But at the end of the day, our pricing from day-to-day and from week to week is dictated by those 2,500 store managers and their support group and their local marketplace and their compensation programs, as we have always touched on. And that's why we always cite that 51% to 53% range. We think in a period of inflation, we can be in the upper half of that. In a period of deflation like we saw in 2009, it can dip a little bit. Ryan Merkel - William Blair & Company L.L.C.: Okay. And then I noticed that fasteners were below 48% of sales in the quarter. What is driving this mix change and should this trend continue or does it slow down a bit as we move throughout the year?

Well, I guess I would phrase it a little differently. I'd say our non-fasteners are growing exceptionally well. Our fasteners are growing very well, and our non-fasteners have grown to close to 52% rather than the other has dropped to 48% because I think it's supportive of the improvements we're seeing right now in our Construction business, the headway that we're making in some of the government business trend up because that tends to have a pretty strong non-fastener balance to it as well. And so it's more of a function of other things that are gaining momentum more than I'd say fasteners slowing down because the fasteners are doing quite well for us. Ryan Merkel - William Blair & Company L.L.C.: Okay, that makes sense. And then the last question, just touch briefly on what you're seeing for growth in terms of the reseller, international and government end markets.

They're growing above the company number.

Our next question comes from Sam Darkatsh with Raymond James. Sam Darkatsh - Raymond James & Associates, Inc.: A couple of quick ones. First off, the inventory per store was up less than the organic sales growth. I'm curious as to, is this a function of better efficiency? Was this a strategic decision? How should we look at inventory levels on a go-forward basis?

The inventories will continue to grow well below overall sales growth. And actually, if you looked at our inventory per stores, it's close to flat with where it was a year ago. We continued to expand the inventories in our distribution centers to support the growth of the business and the initiatives we have in place, supporting a broader category and good fulfillment as we enter into some of these other arenas such as the manufacturing growth, the government sales growth and the industrial vending. Sam Darkatsh - Raymond James & Associates, Inc.: Last question before I defer to others, how much do you suppose was the very strong March results a result of, perhaps, some get back from the poor weather in February and January and how much of that do you believe is reflective of the underlying strength in your end markets?

This is Will. I think that the vast majority is due to the underlying strength in our end markets and our execution. Historically, we've never really gotten back much from weather because when plants don't open up, they don't make that up. And so, there may be a little bit, but very little, truly driven by, I think, good execution at the field and the strong economy. And we see that with what our competitors are putting up to.

The only thing I would add into support that is, if you look at February and what happened with our business, the weather impacts of February was all centered on the first seven to eight days of the month. I mean, it was that -- think of a Super Bowl week. You saw our business, especially in the Texas markets, what we call Mid South -- Oklahoma, et cetera, that whole areas there were just hammered. And so some of that was able the snap back, but I know there was in month of February just a hole. Sam Darkatsh - Raymond James & Associates, Inc.: That would suggest that April is still running above seasonal trend then?

We don't comment on April. Sam Darkatsh - Raymond James & Associates, Inc.: But March definitely ran above seasonal trend?

Yes.

Our next question comes from Holden Lewis with BB&T. Holden Lewis - BB&T Capital Markets: Just speak about your expectations for these four SG&A elements that you talked about, the payroll cost, the healthcare occupancy, selling? And I guess, obviously, payroll goes up as revenues go up and profits. But what are you expecting out of healthcare, occupancy and selling transportation? Do you expect that those will remain leveraged? Have they been -- had the spending been really squeezed and therefore that needs to pick up? I mean, how do we look at that?

Well, let's start with the components. If you look at payroll and you think back to what was going on in our business as we emerged from 2009 to 2010, our incentive compensation -- commissions at the store, profit daily bonuses, profit sharing dollars are going to our 401(k). If you look at those things, they really took off in the second quarter of 2010 because that's when our growth really took off because first quarter of 2010, we still had a pretty weak quarter. Our year-over-year sales numbers were very weak. Our performance, again, driven by the economy was weaker. So this is really the fourth quarter of a period where our year-over-year comparisons on the labor side are in the situation we're in. When I look at Q2, Q3, and Q4, I would expect that payroll numbers as a percentage increase over the last year, it will come back dramatically.

Probably drove very similar to sales growth.

Lower than sales growth. if I look at the remaining operating expenses, health insurance really peaked up as we got into the summer month of 2009 and the latter half of 2009. That was quite strong in the first half of 2010, but we even started seeing it last year where because the healthcare was getting more normal. Some things that really drove it up for us were, we had a lot of employees that switched from single coverage to family coverage and a lot of those situations where their spouse either lost insurance coverage or lost their job and they came on board, and family coverage is more expensive than single coverage. And part of it is because you're insuring more people, part of it because the population is typically a little bit older and whereas 20-year olds don't incur a lot of healthcare. And so when I look through the balance of the year, I feel very confident about our ability to manage both our payroll cost and that will improve as not only a percentage of sales, but the percent increase, and the remaining expenses will improve as well. You have to keep in mind, in 2010, we also had our settlement with the GSA and that was recorded throughout the 2010 year. That won't reoccur in 2011, so there's a bit of advantage there. Holden Lewis - BB&T Capital Markets: Okay, so all four of those categories then continued to look leverageable to you is what I'm hearing.

Yes. Holden Lewis - BB&T Capital Markets: The second question, I guess following-up on that is, if you look at just your incremental margins, each quarter over the last four, I mean, it’s come down from the 44% to 39% to 37% and about 32% in Q1. Where do expect those incrementals to go to? Do you expect them to keep coming down into the mid-20s or can we sustain at this level, what's sort of the thought process with that?

I expect those to remain in the 30s as we go through the year. And, again, I believe the bias is positive for us when I look at the gross margin side. When I look at the operating expenses, I believe the bias is positive. And so, I believe in our ability to maintain incremental margin in the 30s is very achievable as we go through the year. Holden Lewis - BB&T Capital Markets: Does that require pricing to achieve that or you can do it even if pricing doesn't materialize?

If you look at our gross margin from Q4 to Q1, we actually improved our transactional gross margin in from Q4 to Q1 and that was absent any type of meaningful price increase.

And the signs are that we will have pricing. We are paying more for product today. It's just the cycle coming through.

Our next question comes from Brent Rakers with Morgan Keegan. Brent Rakers - Morgan Keegan & Company, Inc.: Dan, I think in your earlier comments, you, I believe, referenced the international contribution to overall revenues in the month of March being 10.3%. Last year, I'm showing that number was only was 8% of revenue. So I was just wondering if you could maybe talk through over the last couple two, three months, what is going on in the international markets, where you're seeing particular strength in such.

This is Will. It really isn't the last two or three months. We've had well above average growth out of our international markets throughout 2010, continuing in 2011. All of the markets that we are in outside the United States are very strong. Canada is above the U.S., not nearly as much as the rest of the markets. Mexico is very strong right now. China, Singapore, U.K. and Eastern Europe are the areas that we're seeing unusually good growth. Our International business as a whole was up. So you have, I think, about 49% -- I knew it was right at 50%, so that group of business grew at 50% or 49% year-over-year. But there is nothing unusual in that and Steven Rucinski, our Executive Vice President who runs that, is investing to maintain growth levels far above Fastenal. I'm not saying 49%, but he believes he can outpace the company by double digit margins for years to come if he continues to invest. If you look back historically at Fastenal, the constraints to investing were finding enough people and having enough cash. Steve doesn't have the cash problem because we can support him, and he has a large population of U.S. citizens that are willing to go and support his business in other areas of the world, so those are two things that he can work -- use to drive his growth for years to come. Brent Rakers - Morgan Keegan & Company, Inc.: Great, and then I guess my other question, in terms of all the additions you've made in some of the strategic selling areas, some of the non-store selling areas, is there any way, I mean, I know in the past you've signaled on data points about strategic account growth or maybe government international accounts, is there any other data points you can show us in terms of revenue growth contribution from some of these initiatives or as most of that -- how performance still in front of us?

I can share this much and part of that, we're being a little closed with some of the information, but I can tell you that all those areas you talked about are growing well above what the company is performing and as we've mentioned, one of the things that we're making investments in is the industrial vending. And as we go through 2011, we'll be sharing more of that information.

Our next question comes from Adam Uhlman with Cleveland Research.

I was hoping maybe you could give us a little bit more color on the strength that you're seeing in your construction-related business? And then secondly, could you just address the cadence of store openings this year, how you'd expect that to progress and what was behind the five store closings in the first quarter?

Well, first off, on the construction, I'll be honest with you. Our information is always a bit cryptic because you have so many active accounts out there that make up the number. What I can tell you is, we're seeing nice improvements in the trends, and it's not geographically limited. It's pretty well diverse across the continent. And so it's just you're seeing a pickup in activity. And like we saw when the markets really melted down, that was the last one to slow down because the projects, once they're funded -- you don't stop a building when you have 10-story building, you have two stories left. But you might not start a new one or you might not start a new road project or a bridge. But when the energy starts going into getting that re-lit, again, there's a latency because there's funding constraints, there is permitting constraints, there is construction constraints, once it starts being lit, you see nice improvements, and they tend to be sustainable improvements. And that's really what we're seeing right now. But it's well split across the country. As far as store openings, the 37 was a nice start to the year. It's on pace with the 150 to 200 we talked about. When I look at second quarter, we have a big customer show coming up in May, and so you will see some slippage in the openings probably in April and May because of that because all of our new stores ship out of that facility. We're trying to work around as much as possible, pre-prepping, if that's the correct word, some of the materials so we can maintain our store openings. But we're still confident about our 150 to 200 range for the year. As far as the closings, over the last several years, you've seen some closings. It's typically a case of people doing a nice job everyday of assessing their investments, their locations and where the best investment dollars need to be. In some markets, where we've seen very depressed situations, we've actually consolidated some of our stores. And part of that was on the managing of occupancy side. You had a market where we could easily service -- instead of having three locations, you could easily service the market out of two, you had a lease that was coming due, when you combine those stores. And I think that's always a good move and something that's healthy for a company to do every year. With that said, when I look at those markets, I still believe those markets will support additional stores in the future. I don't think this is a statement about any given markets or stores, it's really a statement about being prudent in the time that still is a weakened financial period, and our districts and regional leadership are making our decisions every day.

I think, Adam, if you look at our small stores and how much they're losing, that number continues to drop because of this focus, and part of that focus is the guys that are in the field are saying, you know what, this one's on the bottom of that losing list. Let's make a business decision and move on.

Our next question comes from Hamzah Mazari with Credit Suisse. Hamzah Mazari - Crédit Suisse AG: Just a question on your inventory levels. It seems like you've been building for the last couple of quarters. Are you going to continue to build given where your demand environment is right now, given that you're seeing stronger-than-expected seasonality, just wondering how to think about that going forward.

For us, the opportunity cost that comes from not staying ahead of your customer's needs is -- so periodically, when you run out of product, you have to do what’s called the fill-in buy. That fill-in buy is an extremely expensive proposition for us. In a situation where we have a very strong balance sheet and we have products that have very strong attributes from a gross margin standpoint, and we have a very, very good distribution system, we've been willing to let that inventory grow faster over the last few years. Two years ago, we contracted it quite dramatically as it reacts to the economic slowdown. But what we're really focusing our energy on everyday is, obviously, managing the growth and being smart about it. Buying a little bit of extra product last fall or even in the first quarter of this year, we floored some potential inflation, I think, so it’s a good move as long as you don’t get carried away with it. Then we're working every day to better position where our inventory is, does this belong -- is it better for this group of products to be in a store or in a distribution center to support our customers and their needs. So, I'm sure we'll grow this year, but we're very confident in our ability to continue to improve our inventory turns and our days on hand. Hamzah Mazari - Crédit Suisse AG: All right. Thank you. Just a follow-up question, when you look at your long-term 23% EBIT margin target, are you assuming that your mix goes back to normal or the fasteners go back above 50%? Just wondering what that assumes in terms of mix or does that not really matter?

Mix matters, but we are not assuming, to be honest with you, I would be surprised if our fasteners ever go above 50% again. This is a long trend that we knew would happen 15 years ago when we started selling other products. This fastener, as a percentage of industrial consumption or Distribution business only represents 8% to 10% of the overall opportunity. So, our 23% target is based on the integrated gross margin between 51% and 53%, and driving our average store size to between 100,000 and 110,000. And if you look at the information that we provide, if you put the pieces together, that will point you in that direction. And if we're able to maintain that margin at the average store size where it is or where I just stated, we will be in that 23% EBIT margin range at that point in history, and we're confident that we can do that.

Our next question comes from Robert Barry with UBS.

I wanted to follow up on the non-res question. I think last quarter, you had mentioned that you were seeing signs of strength in energy, healthcare, education and government. And I was wondering if the comment today indicated that there are now other areas in non-res besides those that are starting to see momentum?

The real strength we're seeing is in the ones that you just stated. But because of the improvement or based on the improvement, we've dug deeper and it looks like there's some other project, but nothing of size. There's just more activity, which lends us to believe that other companies are spending money. We know that some factories are being built. We know there is improvement within factories to make capacity, and we're doing some things within our business we're expanding. We just expanded our IT area and put in a bunch of mechanicals because we had to. There is more of that activity going on. But it's not big projects where they're getting out the bulldozer and putting up 50-story buildings. The real core of our construction strength non-res would first be energy, and a lot of that has to do with power plants and oil refineries. There is still some government spending, which would be typically buildings, courthouses, things like that, colleges, and then the medical industry continues to build -- a lot of it is like smaller clinics in rural -- new facilities. That's been good business for us. But overall, there is more activity and what we're seeing in a small scale is these renovations and things like that for people to pick up capacity. We're still seeing nothing on the -- like in retail, the Targets, the Home Depots, the strip malls, the towers downtown. That's pretty much non-existent from what we're seeing.

Okay, and then just a little shift in focus to the growth outlook. I mean, really good performance in the first quarter, up 23% organic. The comps get much tougher as we move through the year. I'm wondering how you're thinking about the top line growth outlook in the context of those much more difficult comps.

Well, if you look at the sequential patterns to our business, it's all about where we are now and where do we think we'll be in June or we think we'll be in September. And when I look at 2010 -- and if you look at that chart we have -- that graph, excuse me, that we have on the Page 3 of our press release, I think it really tells that story that the sequential patterns, it sometimes amazes me how close 2010 mirrored the sequential pattern. And when I look at 2011, we're mirroring to exceeding that pattern. Some of the points where we exceeded the pattern were on the last -- once we get past July of last year, but even that wasn't excessive. And I think we're in a great position to have very nice growth throughout 2011 because of our sequential pattern and the momentum it creates and some other data points, the strong IFM, et cetera.

Our comps really have been consistent since our sequential patterns since the July of 2009, coming off of the bottom. If you look at month-to-month and map it out, there's been tremendous amount of consistency. What we have to do to produce above-average results is on month-to-month improvement, which we've been able to do for three months this year, but there's nine months left.

Okay, and then just finally, on the distribution side, can you remind us what initiatives, if any, that are noteworthy or are still to come in terms of the distribution network or was Indianapolis kind of the last big...

If you look out further into the future, what we did in both Dallas and Indianapolis is, we installed automation that reduced our labor and improved our throughput. We're testing the automation. We're very comfortable with what we did. And in the future, we would foresee putting that automation eventually in most of our distribution centers. But we're not going to install it until we have volume issues because it really only pays for itself if you need the capacity increase and throughput. So what we're doing at this point is, we're looking at all of our distribution centers. We have it kind of mapped out in a time line and where we predict, foresee the greatest sales growth and demand in over the next three to five years, we will be rolling this technology out into most of our distribution centers. Or, I'd say, it's three to seven years. And I'm sure as we go on, we'll find new technologies and new automation that make it even better and give us even a greater return, is what we would foresee because that's been our history.

How significant a component is that to the margin growth expectation? I mean, I know it's mostly is focused on...

You mean the operating margin?

Yes.

It really isn't. It's not built in. We're going to -- our gross or operating margin is really what I said, average store size and gross margin in the 51% to 53% range. I mean, it sounds simple. It's not. It's hard work, but that's what we're...

But the math is simple.

The math is simple.

With that, it is 45 minutes past the hour, actually 47. Again, thank you, everybody, for participating in our call this morning, and we look forward to progressing through the balance of the year. Have a good day.

Thank you, ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.