Fastenal Company (FAST) Q2 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fastenal Company Q2 2011 Earnings Results Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Ms. Ellen Trester. Please go ahead.

Welcome to the Fastenal Company 2011 Second Quarter Earnings Conference Call. This call will be hosted by Will Oberton, our Chief Executive Officer; and Dan Florness, our Chief Financial Officer. The call will last for 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 September 1, 2011, at midnight, Central Time. As a reminder, today's conference call includes statements regarding the company's anticipated financial and operating results, as well as other forward-looking statements based on current expectations as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming or similar indications of future expectations. It is important to note that the company's actual results may differ 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 Will Oberton. Go ahead, Mr. Oberton.

Thanks, Ellen, and thank you, everyone, for joining us this morning. I'm pleased to announce our second quarter earnings. We're very happy with the results. Sales came in, as you know, at 22.9%. Comfortable with that, and we're happy that June came in as strong as it did, looking at the ISM in May and other indications that it might be slowing down a little bit. But based on our June numbers, we think it's pretty steady, and we're happy with that. Probably the most impressive thing for me in the sales results is our sequential pattern from January to June. Historically, we would've grown our sales, daily average sales, from January to June at about 12.5%, 12.6%. But this year we're actually up 16.3% over that same time period. So it really put us in a good position for good growth through the rest of the year. If we can maintain even our historical pattern, it would put us in a good position for starting out 2012. From an earnings standpoint, we did see some nice leverage. We reported 36.1% earnings growth, and the thing that makes me smile on this is that our operating margin came in at 21.4%. It was a 180-basis-point gain over last year. And those of you that know the story well, we're talking about the “pathway to profit” and trying to pick up 100 bps or basis points year-over-year each year going forward, and we're able to do 180. If you have the earnings release by you and if you look at Page 8 on that, if you look at the information on “pathway to profit” and the store profitability, I sat and looked at this a lot because it's exactly the model that Dan and I had laid out 2 or 3 years ago when we talked about moving stores into larger categories. At the bottom, if you look at the 2 small categories of stores, basically the $30,000 to $60,000 -- or $0 to $30,000 and $30,000 to $60,000, in 2009, 61% of our stores are in that category. It dropped to 54% in 2010 and down to 36% this year. In the largest 2 categories, the stores that are doing more than $100,000 per month, in 2009, 13.2% of our stores were there. That grew to 18.1% in 2010 and 23.3% combined in 2011. And so the actual profitability per store size has not changed much. We really haven't improved that, especially in the large stores. You look at the over $150,000 stores -- excuse me, Dan's correcting one of my numbers as I'm going here. I added something wrong. The small group of stores in the 2011 timeframe is actually 42.6, -- 46 -- excuse me, I put a 3 instead of a 4, my mistake. But anyway, if you look at the larger stores, over $150,000, we were at 28.3% last year, 28.3% this year. But everything moves up into a larger category, and we had 180 basis points. That's really the point I'm trying to make. If we can continue to do that, we will march forward as our “pathway to profit,” reach our 23% operating goal. But understand the 23% operating goal is really just a point in time for us. If we do a great job, maybe we can exceed that further into the future. From a margin standpoint -- excuse me, I missed the expense. On the expense control, I think we did a nice job. Our labor came in slightly higher than we expected it. But we did a better than average job on the rest of the expenses, so it offset it. So a little extra labor, a little better job at occupancy and some of the other things, so it balanced out to come in right where Dan and I had expected beginning the quarter. For the margin. We’re in a good range with the margin. I know earlier in the quarter there was a lot of talk from the investment community that we should be able to expand our margin, and we were being very cautious on that because we weren't seeing the inflation that maybe some other companies were. So we're comfortable in the range we're in, in that 51% to 53% range. I would describe this as a stable pricing environment. We also have some opportunities going forward and probably the biggest opportunity going forward from a margin standpoint is our Fastenal private label brands. Right now they represent about 7% of our total revenue, about 13% to 14% of the non-fastener revenue. And in the non-fastener side, there's a tremendous opportunity. We've been meeting and working on that, and over the next 1 to 3 years we should be able to expand that product area and take that to the bottom line. So we're pretty excited about the opportunity for Fastenal private label going forward. Back onto the sales a little bit, some of our initiatives. Our government sales initiative continues to move forward, reminding those a year ago -- well, actually 1.5 years ago now in the beginning of 2010, we greatly increased our investment in trying to sell to the government. Since then, we've gone from a handful of state contracts to 27 state contracts at the end of this quarter. Very good progress. We're also working on some very nice federal government opportunities that we think some of those will come through over the next 3 to 6 months. So a lot of opportunity. And the way that we view this government opportunity is we're just expanding the local market for our stores because without these contracts, that market doesn't really exist for us. With the contracts, it creates more opportunity for every store in each state that we have a contract. So it's a pretty exciting thing going forward for our store people when we're able to sign up this business. Another initiative that we've been working on is expanding our cutting tool business and going after some of more of the production cutting tools. As a reminder, we do about $100 million in cutting tools today. So it's not a new product line for us. We're probably, I would estimate, at least a top 5 distributor in North America and maybe closer to the 2 or 3 spot. So we are a large distributor of cutting tools, but we believe the opportunity is much bigger in the areas that -- first, the reason we went after is we have hundreds of thousands of customers that are industrial customers that buy industrial cutting tools. The things that we needed to improve to be effective in it is we needed a broader product line, more in-depth and broader inventory. We needed sales expertise, and I believe we needed the vending solutions to be able to deliver that product within the plant. We feel very good about each of those areas. We've expanded them. We put people in teams to go after each area and expand and become better at it. And at this point, we're moving forward with what I believe is a very good plan. Just yesterday, I received a report back from a large industrial customer that we're working with that is experimenting using our vending systems to deliver their carbide inserts. And somewhat to my surprise, the report came back that they have -- this customer has actually seen a 45% reduction in their consumption of carbide inserts. And what they attributed to it is people are just more aware, and they’re being watched. And I would not have expected that kind of a reduction. So it's a really positive message for not only our cutting tool business but also our vending business, our automated supply. And switching to another growth initiative would be automated supply. If you saw on Dan -- in the release, Dan put some very good information in there, explaining our progress on vending and automated supply. Before I go to the numbers, just a little bit of background, even go forward. Today, most of our automated supply business is driven through our FAST 5000 and our locker system, which is a helix machine and then a locker to put other bigger products. Currently, we're just taking first deliveries on our cutting tool machines. We have 2 of them, a smaller version and a larger version. And we won’t see serious traction with that, probably till late in the fourth quarter, early in next year, we're bringing machines in but it'll take us a while to get that up and going. We also have other machines that are in the development phase that should be rolling out at the end of fourth quarter and beginning of first quarter. Our goal is to build these -- help design and build machines that would distribute a wide range of our products, the more the better and do it in a cost-effective way so that the machines are economical and bring value to both us and to our customers. And if you look at the second quarter earnings report, the numbers there, as you can see, the first set of numbers, if you look at our signings, you go back to the third quarter of 2010 where we signed 419 machines. That was really where we really cranked up our initiative, started putting in the reps and started building what we call the machine behind the machine, all the company infrastructure to push this forward from the build centers to the technicians to the packaging department, all the things that are necessary. So it went from 419 to 776, 1,391 in the first quarter of 2011 to 2,100. So the momentum is with us. At our Investor Day in May in Indianapolis, I said that our goal was to hit 1 machine per quarter per store, which would put us at about 2,500 to 2,600. That is our goal. I'm not sure that we will -- I'm not saying we will hit it in the third quarter, but I'm comfortable that we will hit that goal sometime in the next 2 to 3 quarters. So we have good momentum, and we keep pushing that up. As far as the percent of our total revenue, as you can see, it went from 6.4% in Q3 of last year, up to 10.8%, so it's a much broader base of business for us. And probably the most exciting thing is that, that group of customers, the 10.8% of the customer business we represent, grew at 49.8% in the quarter. It's too big of a group to be just a coincidence. The vending is doing something or -- it's even broader than that. We're providing greater service to this group of customers, and they're reciprocating with a greater share of their business. And that's really what our goal was going in. Very efficient business, growing very rapidly. So we're excited about that. So before I turn it over to the Dan, looking at all the things we have going on, our margin is stable, good expense control and good sales momentum, I'm very optimistic about the second half of the year that we can stay in a similar range and continue to see above average growth for the rest of the year. Thank you very much, and I'll turn it over to Dan.

Thanks, Will, and good morning, everybody. And I would also wish to thank you for joining in our call today. I'll touch on a handful of things. I'll be fairly brief, but I'll try not to repeat too many things that Will touched on as well. But if I flip through the earnings release, some things stand out for me. As Will mentioned, our sales trend continued to improve. Our gross margin continues to stay in that zone we talked about it. It did uptick in the quarter, which was helpful, but it continues to stay in that zone. When I look at the monthly store statistics, to me what's particularly powerful in there is seeing from our older and more established stores. They continue to put out very attractive numbers. I think they're helped by a number of things. The initiates that Will talked about all feed well into that group of stores, whether that be the vending, the government business, the selling through our manufacturing business and now the cutting tools. Those all serve well that population, as well as all stores, but particularly that population. And you're seeing exceedingly strong numbers from that group. Sequential sales trends, as Will touched on. History says by the middle of the year, we should be up about 12.5% from where we were in January. We're up over 16%. And I think that bodes well for the second half of the year and, as Will mentioned, establishing our starting point for 2012. End market sales trends. Manufacturing picked up some steam in the quarter. That's really what drove a big part of the driver of our strong sales trends, our manufacturing business. And here I'm talking not about our manufacturing. I'm talking about selling to manufacturing customer base. That business continues to do well. I believe vending is helping that business in a meaningful fashion. On the non-residential side, if I read the newspapers, I continue to be somewhat pleasantly surprised by our numbers. Our numbers could be stronger, but if you read what's in the newspaper, our numbers are pretty darn good because construction is not exactly our strong business right now. As Will mentioned, we put in some vending stats this quarter. The thoughts that come to me when I look at that is, A, there's new information -- we're just laying out facts. Here are the numbers. We don't completely understand the percentage growth numbers, how much of that comes from vending, how much of that comes from just the expanding relationship. I don't know that we frankly care to a certain degree. But we do know that the vending, the customer base with vending is growing far in excess than what that type of customer base would historically grow. And it's a big enough swathe of customers. I think the trend is meaningful. And when I look at things like the vending or different initiatives that we've done over the last several years and plan to do over the next several years, I believe we're continuing to position ourselves to put our local store in that position to be just the best supplier in that local market. And as long as we continue to do that, I believe we'll be successful as an organization because we become the best partner for our customer base out there. “Pathway to profit.” Average store size is now at 80,000. Previous high was in Q3 of 2008, we were at 82,000. But we've continued to open stores since third quarter 2008, but we're almost back to that average store size. That's really what's driving our profitability. It's simply the math. And if you look at that table on Page 8 and really understand the dynamics of the changing mix, you appreciate how the profitability continues to drive. And the conclusion I get from it is the “pathway to profit” just works. The gross profit margin. As Will mentioned, stable gross profit. I believe private label opportunities are compelling. And I look forward to seeing how that impacts our ability to manage our business for the next several years. Operating and administrative expenses. Good expense control. As Will mentioned, our payroll increased a little bit more than we expected, but with the nice profits, that drives a lot of our incentive compensation both at the store level and at the district and regional level as well. Health care, which was problematic for us in 2009, improved in 2010. It continues to manage very well in the current environment. Occupancy. As was disclosed in our report, it was up 5.1% for the quarter. The real story there is the energy cost component. We continue to do well on our rent costs. If you look at our actual rent dollars paid, they were up 3% for the quarter -- for second quarter to second quarter on a base of 6.3% more stores. So we continue to manage well through that. I still believe there's opportunities for savings as we go forward, and we continue to work hard on getting after those savings. Fuel dollars spent, as you saw, are up over 50% from year ago, really driven by diesel increases of over $30 and gasoline per gallon cost up mid-30s. That’s [indiscernible] but we're managing through it. We're managing through it well. Working capital. I believe we continue to manage that appropriately. If I look at the May, June timeframe, which really drives the sales -- I mean, it drives the accounts receivable at the end of the quarter. We had an extra day. We were down a day in April, but we've gained that day back in May. So our dollars sales in May and June were up 25.5%. Our accounts receivable are up just over 27%. A little bit of adder [ph] to that. The postal strike up in Canada added some AR, but that will correct itself. The postal strike will settle by the end of the quarter, and so that will correct itself as we go into July. Inventory were up 16.5% in the 6-month period. That's quite frankly one we like to see. But we continue to, I believe, manage that well and with the initiatives we have going on driving some of the increase, but we'll work hard to manage that as we go through the tail end of the year. We just announced last night, yesterday evening, our third quarter dividend, $0.13 per share. That'll be payable in August. And as I close out of my comments and prepare for the questions, I guess the 5 things that stand out for me when I look at the quarter, just to summarize: Number one, “pathway to profit.” The fundamentals of it just work. Number two, very good sales patterns. Number three, very good traction with our sales initiatives. International, national account, manufacturing business, our automated solutions and cutting tools, which is pretty early in the game so it's hard to really assess that at this point, but very good opportunities there. Number four, very good opportunities with private label to help our gross margin over time. And finally, our employees at Fastenal are performing at a high level. And I thank them for their efforts this quarter. With that, we'll turn it over to questions.

[Operator Instructions] Our first question comes from David Manthey of Robert W. Baird. David Manthey - Robert W. Baird & Co. Incorporated: First question. In terms of the current quarter, was there any benefit from price at all this quarter? And then given the significant lags, particularly in fasteners, should we expect any incremental pricing as we get to the back half of this year?

You're just seeing very, very limited impact. And I expect to see limited impact as we go to the tail end of the year. David Manthey - Robert W. Baird & Co. Incorporated: Okay, and then second, in terms of the vending machines, you say that close to 11% of your sales are to customers that have vending solutions. Could you talk about the revenues per machine? Is it working towards your goal of 25,000? I believe your goal is 25,000 per unit per year.

Yes, our goal is to add 2,000 incremental per machine from each customer. And not all of that will come through the machine, and that's fine with us. It's just new business. And yes, the numbers are playing out. If you really make -- if you look at that, you have to only look at the customers that have been installed in the last 12 months. And we're above -- ahead of that goal by about 10% to 15% right now. Because the customers then -- we can get 2,000 incremental year-over-year over year. It's a one-time punch.

Our next question comes from Sam Darkatsh of Raymond James. Sam Darkatsh - Raymond James & Associates, Inc.: Will, in your prepared remarks, you mentioned expectations in gross margin the rest of the year between 51% and 53%. Is there a way we could hone in a little bit on that based on...

Sam, I didn't say the rest of the year. I said our long-term range of gross margin is 51% to 53%. We've been stating that for a long time. Right now I think our gross margin is pretty stable in that range where we've been operating, which is much more -- right in the center of that, about where we are now, a little 52%, 52.5%, 51.9%. But I always like to make sure everyone understands Dan and I are comfortable pretty much anywhere between 51% and 53% that we're operating our business well. Because we think that at some level, the investment community gets too narrowed down on 5 basis points one way or the other. And when you have 2,500 businesses putting numbers together over a wide range of area and they're doing their own pricing, it's very hard to get it down to the tenth. But right now we're comfortable in this range, which is just above 52%. Sam Darkatsh - Raymond James & Associates, Inc.: Thank you for the clarification on that. The last question I had before deferring to others, you mentioned that the cutting tool initiative, any sense of -- it might be too early right now to really gauge early returns on that, but how ultimately are you going to define success on that initiative with some mileposts? And how are we going to ascertain how that initiative is coming along from a quantification standpoint?

Yes. It's too early to know that. But really how we're going to measure it is by sales growth. We expect that group of products starting out in the third quarter at some level, but probably not reporting till fourth or first to outgrow the company by a pretty wide margin. And at the same time, we expect out of government the same thing we expect out of vending. If we focus on initiative, invest heavily and don't outgrow the company, then it's probably been a bad investment for us. Sam Darkatsh - Raymond James & Associates, Inc.: So you anticipate disclosing those sales then perhaps by year end for the investment community?

Well, if you look at our 10-K, the 10-K does have product growth contribution, and so it'll come out automatically in that. And I'm not sure what Dan will do beyond that. But I guess we're always reluctant to put more information because we then have to continue to support it. But we'll do it in the 10-K for sure, and then we'll decide going forward beyond that.

Our next question comes from Holden Lewis of BB&T. Holden Lewis - BB&T Capital Markets: On this vending machine, I guess you sort of talked about what it's doing from a volume standpoint. If you have any greater insights as to why maybe those revenues are growing as much, that'd be great. You only alluded to it. But seriously, guys [ph], as those play out and grow in the mix, how do you expect the vending model to affect rate of employee adds and sort of what's the margin profile? Are there any differences that accrue to those areas as well from vending picking up?

I don't think it will affect our rate of employees added. I mean, if it pushed our growth up disproportionate, we'd have to add more. But vending in itself doesn't change that. It is a little more efficient, but it will take greater scale to bring that efficiency out. Other margin things, what we've done is we've taken the expense, the depreciation, the capital expense of vending, put that against our operating expense because we look at it as nothing other than offsite storage. And we want our leadership, our managers and DMs to think of it that way, so if they have a big vending base, they need a smaller store. We don't want incremental expenses out of this, and we believe we have that pretty well understood and positioned within our P&L and our paid programs. It's really a growth driver, and it's a solution for our customers to save money and run their businesses better. And if it truly plays out to be better for our customers, it should give us long-term growth. And that's really what we're focused on. I'm probably the most bullish person on this and maybe in industrial distribution. It's a solution that works. And we continue to hear that from our customers. And the report I mentioned yesterday on the cutting tool initiative was 45% reduction in consumption. That's pretty strong argument that this solution is going to work. That is [ph] just one and we have a stack of those case studies that look just very much the same.

One thing I'd add to that, Holden, is the question of why are you seeing the impact. I think in May, we talked about this and then in previous calls, we touched on that. But picture yourself from the standpoint of our customer. And you have a Fastenal vending machine or a machine physically in your plant. From the standpoint of the people that are using the product, we're a convenient way to get your usage 24/7. We are -- the Fastenal billboard physically in the plant lends itself to our name just becoming more familiar to everybody, and people think of us as the supplier of choice in that facility. And to the person who's heading up the effort on purchasing or managing the facility, if our solutions come in there and reduce your consumption by 20%, 30%, 40%, the question I'd have as the person who's doing the buying, jeez, can I get more machines here, can I run more products through these kinds of solutions? And so it really puts you in a position to be the supplier of choice for that plant.

It also gives our people a reason that they have to be in that plant on a regular basis, which leads a higher level of familiarity, a little bit of home court advantage. Holden Lewis - BB&T Capital Markets: Okay. Great. And then just to follow up, the margins have obviously been solid. The one thing that sort of narrowed is that the incremental margin, which Q2 last year was 43.5%. That's kind of backed off each quarter from a point that in Q2, it’s still good but lower at 29.3%. As the cycle ages, what do you think that incremental margin sort of goes down to and settles in? As we look towards 2012, 2013, what kind of a mature cycle incremental margin that you guys would be targeting?

Well, like I said on previous calls, I really think a number around 30% is a number that's achievable. Does that become more challenging over time? Sure, it does. As your comparison number keeps rising and your comps become more difficult, it becomes more challenging. But in an environment where we're growing north of 20%, in an environment where our gross margins are stable to moderately improving and there's things that can moderately improve over time -- one we touched on earlier was the private label. In that environment, where you're getting good growth, good gross margin and you're effectively managing your operating expenses, which I believe we are doing, that puts you in a position where -- I'm not saying a 30% number is easy. As you see, this quarter, I mean, I was disappointed we didn't hit 30% but 29.3% or 29.4%, whatever the number was, very attractive number nonetheless. I think that's a number we can continue to strive for. Obviously, that's a challenging goal for us, but it's a goal that can be achieved. We just need to manage our -- get good sales growth. Maintain our gross margin, nominally improve it and manage our operating expenses well.

We've also been investing heavily -- intentionally investing heavily in some of these sales initiatives and knew it might affect us a little bit there. But I think the decisions are very -- we really feel comfortable with those decisions, and they're paying off in our sales growth.

Our next question comes from Tom Hayes of Piper Jaffray.

I'm just wondering if you can maybe talk a little bit about the plans for store openings in the back half of the year. Is there a geography that you're focusing on and then kind of thoughts on timing over 3Q and 4Q?

Our stated number for the year, the 150 to 200, we've opened 75 in the first 6 months of the year. We talked about on our first quarter call, we've touched on it a little bit in our May conference that we'd anticipate that given the energy that's going into vending and all the other initiatives, that if anything, we’d be on the low end of that range. But if the first -- like I say, if you annualize our first 6 months, we're right at the low end of the range. We'll continue opening stores in the third and fourth quarter. And I think that range is still good, but we're putting a lot of energy into our vending, which is, I think, great for our business and great for our customers.

And then kind of a follow-up question. You touched on it briefly, but I was hoping maybe you could talk about the contribution you're seeing from the specialized sales initiatives, including the National Accounts and the dedicated sales team. I think on the store breakdown, it represents about 3% of your sales. I'm not sure if that's the exact representation of that. But what are your expectations for those groups over the next couple of years?

I think when you refer to that, you're talking about our strategic account stores when you say that 3%. There's a little disconnect there, and maybe we could improve the crispness on how we disclose that. When we talk about our national accounts, we talk about our sales initiatives, these are initiatives to raise the tide in all of our stores. They’re things that help our stores grow faster, whether that store is the $150,000 a month store down the street here or -- excuse me, over in the middle of Wisconsin or if it's the $40,000 a month store out on the West Coast. It's things that can help raise the tide and give that store manager and district manager more things in their arsenal for growing their business. When we talk about our strategic account stores, that's just a subset of stores, and the reason we carve those out is we like to show the economics of the store model especially when we started the “pathway to profit” because it really allows us a better means to explain it. But the initiatives are not solely in that strategic account stores. They're across all stores. All we're trying to do in that table is show you a peer [ph] look at here is your $60,000 to $100,000 store. Here's your $100,000 to $150,000 store and what their economics look like. And we carved out both our strategic account stores and our overseas stores. But short of that, a sale is a sale, and it goes through any business unit.

Our next question comes from Ryan Merkel of William Blair. Ryan Merkel - William Blair & Company L.L.C.: My first question is on the vending. So once some of the more recent contract signings become installed units, is the real current cumulative installed base closer to 5,000 machines? Is that the right way to look at it? 2,900 machines?

The cumulative installed machines at the end of the quarter was just over 4,000 machines. And in the first figure, what we're really trying to do is communicate what's the pace. How many machines are we signing that quarter, and there's always going to be a lag. The machine that we signed up the last week of June, or in June in general, those machines -- what happens after a machine is signed, you sit down with a customer and you go through and you decide what SKUs are going to go into this machine. And we're working every day to shorten that window up and provide our customers with better information. Basically, provide them here's what we think would work for your business. But there's always going to be that lag between the deciding process of what products go in and then actually placing the machines in the plant. But at the end of the quarter, we had just over 4,000 machines. If you look at it, we -- the jump up from Q3 to Q4 and then from Q4 to Q1 and then Q1 to Q2, really is a lag from the signings in the table right above it.

We have -- basically, most of the machines we signed in the second quarter have not been installed. We have about a 90-day backlog, which is great from a go-forward on sales. But our frustration, mine and Dan's and the other leaders', is let's shorten that up to 50 or 60. Most of that is being held up at the customer’s side with them struggling to make the decision on what do I put in the machine. And we're working hard to give them, to give the customers better tools, give our people better tools. And our goal is to get that down. We'll probably not get it much below 60 days. It just takes a certain amount of time to do the install. Part of it is they have to bring in clean Internet lines outside of their system. And that's always -- in many cases, it takes 8 weeks just to get the Internet lines. Because the customer doesn't want this running through their IT system. They want a fresh line outside of the plant. There are a lot of details that I'm not familiar with, that I don't know exactly how they work. So we have a big backlog installed, and we have great momentum on signings. Ryan Merkel - William Blair & Company L.L.C.: That's what I figured. I just thought I'd get some clarification. And then second question, can you just talk about June, how did the month play out, and then maybe speak to geographic or customer strength?

Yes. Actually, June started out a little soft and I was starting to believe the ISM for a few days there. Actually, I believed in it, but it started off soft. It came in at a very strong finish in June, the strongest finish we've ever had, which has really turned out to be a good month. Geographically, it was pretty even. We don't have any real soft spots. If anything, the eastern half of the United States is a little softer than the west. I think a little bit of that is driven by a little uncertainty in the auto industry or there was some uncertainty there for late May and some of that. Overall, the entire business did well. International did exceptionally well. It grew at about almost 50%. Regionally, there was no one that was doing great. Some of the areas like the Southwest, the oil belt down there has cooled off a little bit. They're still ahead of the company, but in the first quarter, they were well ahead of the company. So that softened up a little bit. Midwest remained strong. And I think a lot of that is being driven by optimism in the ag industry, and a lot of the agricultural business is doing really well with $7 corn. Any other -- I looked at the numbers close. There's really no area that's soft.

I think what helps balance that and one of the things that helped us put up the [indiscernible] sales growth we saw in the second quarter is we just -- there's so many things that are working under the surface. And by working, I mean so many pieces in motion under the surface. Store openings, adding people, adding sales energy, the vending, the government, the cutting tools, the manufacturing. You look at all these pieces -- the international. You have all these pieces. So if you, as Will mentioned, you have an area that's red hot that's just hot. But then, 5 other areas step up to fill the void a little bit and you continue to put up really attractive numbers. So nothing really stands out as a particular geographic area that's unusually strong or unusually weak.

Our next question comes from Robert Barry of UBS.

I wanted to just clarify earlier comment about pricing and inflation. It sounds like, in the quarter, you didn't see much benefit from pricing nor did you see much impact from product inflation. Is that accurate?

That is correct.

Yes. In the fasteners, we saw 6, 8 months ago a little bit of price increase. But it's like a rolling hill. It's been moving up and down for the last 12 months. If you look at the CRM [ph] Steel Index, it moves up and then slides down. I spent the last week of April in Asia visiting factories, talking to a lot of people I've known for years about pricing because I was curious. And the Taiwanese and Chinese, they're going -- it's not going to go up a lot. A lot of it is because the demand is ho hum. The demand is good but not great. And they just don't feel they can push price increases. So we look at it as very stable. Chances of it going up are probably greater than going down, but we don't see a lot of movement in either direction.

Even on the non-fastener side?

Even on the non-fastener side because oil has been stable. It's been stable at about $100 a barrel, but it's been in a similar range. It hasn't been going up and down a lot outside of the range, and so that's a big component in the plastics and some of the other products we sell. And I think part of it, too, is the industrial economy is good but still not an environment where you can push price increases a lot from the supplier base. Our suppliers are pushing, and we're fighting back, and in most cases, we win more than we lose.

And then I also wanted to get in a vending question. Given you're cutting the usage so much for the customers but still seeing that significant growth at the customers with vending, it implies some pretty significant share gain. I'm just wondering where that's coming from? Is that share gain coming from other large suppliers -- I'm sorry, distributors? Or are you resting it more from the small mom and pops?

It's really impossible for us to tell. And you have to look at it in the scheme of things. We're doing roughly $30 million -- less than $30 million coming from a broad range. It's hard to tell. A little bit from here, a little bit from there. So every customer is buying from someone else. It's no different than opening a store and taking market. We take a little from everyone if we can. And if we win 2 and lose 1, we're going to end up stronger tomorrow.

Okay. Then, just finally if I could sneak one last one in on the government contracts. You're clearly making a bigger push there. As that becomes a more significant part of the business, I was just wondering how you think about pricing on the government contracts could impact pricing across the rest of the business. My sense is that sometimes governments require that they get "the best price." Does that start to have implications for the way you think about pricing across the rest of the business as the government piece gets bigger?

Well, the contracts that we are picking picked up our -- it's the Western States Cooperative Alliance, which is a WSCA state cooperative alliance contract. We bid that, and it doesn't say best pricing everywhere. It's very competitive. Federal governments are usually the ones that dictate that they always get the lowest price. And at this time, we don't have a federal government contract that says that. And we have to be very cautious with that because we have a lot of decentralization within our markets. So we're very aware of the rules. We're not going to pick up any business that would affect our overall pricing strategy because that would be detrimental to the rest of the team.

[indiscernible] a disadvantage as you go after that federal business?

No, we just have to understand what the contracts are. You know what, if it does put us at a disadvantage, we'll walk away from it. Because again we're not going to take on one piece of business even if it was a large piece that affects the other $2 billion or $3 billion that we do. So we're not set up for all business.

There's a lot of things that we do that puts us in a better position and a worse position for things in life. We like to make money on all of our business. Some customers -- some situations you can't make money, and you walk away from it.

Yes. And we have to look at the effect on the overall business. You bid something so low, and then you have to reduce the rest of your business. That's bad business. So we're looking at all the opportunities and not all of them have those clauses in them. Many of them don't.

Our next question comes from Hamzah Mazari of Crédit Suisse. Hamzah Mazari - Crédit Suisse AG: Just a question on your store closings. It seems like those have picked up slightly. Could you maybe comment on what you're thinking going forward on shutting down stores and any potential cannibalization that you're seeing in terms of your store numbers?

Actually, our store closings in the first 6 months of this year were identical to our store closings in the first 6 months of last year. I think being willing to look objectively at everything you do and assessing everything you do every day is a healthy thing for a business. And if I look at where we have had closings, it's typically a situation where our district or regional leadership has looked at their opportunities in a market and said, “You know what, I have a great market. It might be a market that I had 3 stores. I went to 4. I have a lease coming due in one of the stores, and I think I could serve the market better with 3 than 4. And in an environment where I have all the things in my arsenal, including vending, that might be a better solution. When I look at cumulatively how many we've closed over a 40-year period, the number is inconsequential.” So I think it's a healthy way to look at your business everyday of saying, what do I do to make my business better in this market, in this district, in this region. And so I don't think it means a lot for our business on a go-forward basis. It just means we'll take a good, healthy assessment of everything we do. Hamzah Mazari - Crédit Suisse AG: That's very helpful. And then, just a follow-up question. Did you guys see any benefit from weather in Q2? What I mean by that is any negative sales growth due to weather in Q1? Did you see any of that get pushed out into the second quarter?

No. Normally, when there are weather delays or when you lose weather -- or lose business to weather, you very seldom ever make it up because it just gets pushed further out. If a construction job gets shut down for a week, the whole thing slides back a week. So really didn't see any of that. We did have generally good weather in the second quarter, other than all the tornadoes and the flooding. And that usually balances out. But initially, what happens after a big flood or a tornado is most of the plants shut down because the people are working with their -- sorry, Dan's phone is ringing -- people are working to take care of their parents' houses and other things. So overall, too small to measure if there was an effect.

With that, we are just past -- 45 minutes past the hour. And so we'd like to conclude the call. And we thank again our shareholders for their continued support in the Fastenal business and our employees for a very good quarter and very good execution. Thank you.

Thanks.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.