Good day, ladies and gentlemen. And welcome to the Fastenal Company 2015 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to turn the conference over to your host for today Ms. Ellen Trester. Ma’am, you may begin.

Thank you. Welcome to the Fastenal Company 2015 second quarter earnings conference call. This call will be hosted by Lee Hein, our President and Chief Executive Officer; and Dan Florness, our Chief Financial Officer. The call will last for up to 45 minutes. The call will start with a general overview of our quarterly results and operations by Lee and Dan, with the remainder of the time being opened 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, 2015, at midnight, Central Time. As a reminder, today’s conference call includes statements regarding the company’s anticipated financial and operating results, as well as other forward-looking statements based on current expectations as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming, or similar indications of future expectations. It is important to note that the company’s actual results may differ materially from those anticipated. Information on factors that could cause actual results to differ materially from these forward-looking statements are contained in the company’s periodic filings with the Securities and Exchange Commission, and we encourage you to review those carefully. Investors are cautioned not to place undue reliance on such forward-looking statements, as there is no assurance that the matter contained in such statements will occur. Forward-looking statements are made as of today’s date only and we undertake no duty to update the information provided on this call. I would now like to turn the call over to Mr. Lee Hein.

Thanks Ellen, good morning. Today, I’d like to begin the call to answer the question on what is our opinion of the economy. And when I say that it’s a tough economy in a tough environment, I’m really centering it around five areas for us: It’s non-res; it’s oil and gas; ag; manufacturing; and of course the currency. And so tough environment but when I look at it given this quarter, I think it’s a solid quarter of execution given the revenue number. We were able to leverage our growth of 5% into 8.9% pretax growth; we were able to raise our pretax percentage to 22.6 and incremental to 40%. Now when we talk about execution, the word that comes to mind for me and I think many of our folks within Fastenal, is discipline. To execute, you must be disciplined. And so we put a call out to our folks to the blue team we call them and we ask them to scrutinize every expense and to reduce where possible. The reason we did this and we tell our folks over and over why are we doing what we do. And we make it very clear. And in this point, we look to reduce expenses so we could add energy into the stores. And to that point, year-over-year, we’re up about 1,129 people, 910 folks we’ve added in the stores; that’s a 9.4% increase. And what’s nice and what I want to point out here is a few quarters back our adds were almost identical whether it was non-selling or selling. Today that 9.4% year-over-year, it is 4.9 on the non-selling. We’re starting again show discipline and balance and what we’re trying to do in our growth initiative of offering or getting more energy into our stores, again to offer a high level of service, immediate service when needed to stay in line on these large key customers and to serve our customers on a local level. And so the other point that I look at for the quarter that’s a highlight is we were able to sign 5,144 machines compared to 3,962 in the previous quarter. And today, it’s our pleasure to point out that we have hit a milestone of 50,000 installs. And we’ve done this all in just over five years. So all-in-all, solid quarter but we will continue to pour energy into our growth drivers. Dan?

Thanks Lee and good morning everybody. Thank you for joining on the Fastenal call today. We changed up the look of our press release with this quarter. Hopefully, you find it useful. We tried to really boil it down and summarize little bit better than I think we’ve done in the past. Our Q which will go out on Friday, still has a little bit more than meat [ph] that you’ve grown accustomed to in the past, but we felt the best way to communicate is to get to the point fast. And if you want a little more detail, we can cover some stuff on the call and cover some stuff in the general Q. The cash flow for the quarter, I’ll touch on a few things and then I’ll kind of work back through the press release little bit. Operating cash year-to-date, 97.5% of our earnings, we feel good about that number. Typically we think a good number for Fastenal’s in that low 90s 90% to 95% neighborhood. So, we feel good about what we’re doing. We’re doing nice job. Obviously the accounts receivable growth really centers on what’s going on with our sales growth. But I think we’re doing a nice job managing the growth of inventory. There is a lot of places we have found where we can free up some inventory dollars; there is lot of places where quite frankly, we want to invest some additional inventory dollars. But I think all in all in total, we’re doing a nice job managing the first six months of the year and I’m confident in our ability to continue managing that in the future. If I look at our CapEx, no surprises there; we talked in our annual report about what we expected our CapEx for the…

[Operator Instructions] Our first question comes from the line of Sam Darkatsh of Raymond James. Your line is open. Please go ahead.

Hi. This is Josh Wilson filling in for Sam. Thanks for taking my questions. Congratulations on the operating expense control. Could you talk a little bit about what your expectations would be going forward, under a range of growth assumptions? It looked like, if it’s what would be in kind of low single digit environment that mid single and that sort of thing?

That question gets pretty involved, because there is so many dynamics that kick into play. For example, at the start of the year, we talked about a goal that we expressed to our people in December of adding 3,000 people into our stores. Now that was anticipating a top-line growth a world away from what we’re actually seeing. And so what you have seen is that number in the first six months is just over 900 people into our stores. And I would suspect that when the dust settles at the end of this year, we won’t double that number because November and December, we typically pull back but you’re probably going to see a 1,600 1,700 [ph] kind of increase. But the dynamic that comes into play is if we saw our business picking up for some reason, we’d ramp that number up. In a single-digit environment, we will endeavor to keep our operating expenses growing in a fashion that you saw in the second quarter. It will be a little challenging. The one thing that helps us is last year, we had a little bit stronger growth and so some of our incentive comp was a little bit higher. And that’s providing one of the puts and takes to keep helping us, keep our operating expenses low. But if all of a sudden our sales growth was to take off, you’d see us adding people little bit faster, you would see our incentive expense expand quite quickly and you would see your operating expense growth move from that low single-digit into the middle single-digit. To me, I wish to think about it in context of what do I think about our incremental margin and I feel very good about our ability to -- I was surprised quite frankly by the fact that we hit 40. I thought a number in the 30s would be pretty good. And I think a number of -- around that 30% neighborhood is a pretty good target for us to strive for in the next few quarters.

Thanks for that color. And I didn’t see unless I missed it in the press release, an update on your guidance for store account openings for 2015. Could you give us an update on that?

No change in our guidance.

Thank you. Our next question comes from the line of David Manthey of Robert W. Baird. Your line is open. Please go ahead.

Hi guys, good morning. I’m looking at a gross margin and I don’t want to dwell too much on this. But with all the ongoing mix shifts and this rebate situation, is there any reason to believe that third quarter gross margin or fourth quarter for that matter should be any material difference from what we saw here in the second quarter all else being equal?

I would expect pretty quiet on the gross margin front in the third and fourth. There is really -- the drop in rebate side, I indicated -- I see that’s a transitory issue. If our growth gets stronger that number improves as well.

And then on SG&A, it’s rare to see a downtick from the first quarter to the second quarter, so fairly, you’re doing what you said you’re doing here and keeping a lid on cost. But assuming a slow growth environment going forward, should we just see normal expenses flex up with volume into the third quarter and sort of the 5 million to 10 million uptick in SG&A that we normally see from the second quarter into the third and fourth quarters or -- again is there anything that sort of hit the second quarter that was unusual that will unwind in the third that we shouldn’t expect to see?

Probably the most noteworthy thing that hits from first to second is we get out of the heating season. And even though energy prices are better than they have been in the past, it still costs money to heat; and that steps out and you see that benefit from first to second. Second to third, I don’t see anything that would cause me to think last year’s sequential pattern would be anything outside the norm.

And then just final question kind of philosophical here, you have mentioned your CapEx requirements relative to your earnings power lower in the future and now that you’re paying dividends and buying back stock, can you tell us, going forward will both of those be a part of your capital allocation plan and do you favor one versus the other longer term?

Well, first off on the CapEx, if you look at that number over an extended period of years, say, ten years or so, what you would see is our CapEx kind of hovered in 25% to 30% of earnings zone typically. And that number as we’ve indicated about three to four years ago, that number moved up dramatically when we were doing two big things at once. We were automating our distribution centers; we were rapidly building up an inventory of machines to deploy. And so we never had to be in a situation where a customer wanted a machine and we didn’t have one to deploy. And so I think we had a high watermark of CapEx at 44% of earnings. And we really saw this year going down closer to that 30% number and probably being in that kind of zone going forward. So that gives us flexibility from the standpoint of free cash. Free cash, I think our bias still leads towards the dividend. We have a lot of shareholders that I believe have grown accustom to that. We have attracted some shareholders because of that aspect of our business, a growth organization over time that pays out a meaningful yield on the stock. Quite frankly, the marketplace has pushed us to buy back some stock by how you price the stock. If our stock had a price that was materially higher than it is today, we won’t be having this discussion, I don’t think. And so, I think the question on allocation in the future is really going to center on where is our valuation. And I don’t mean from an absolute perspective, I mean where is our valuation from a relative perspective, where is our valuation relative to our peers. And the tighter that number is we’re probably more inclined to buy back all the stock.

Thank you. Our next question comes from the line of Flavio Campos of Credit Suisse. Your line is open. Please go ahead.

I just wanted a little bit more color on the SG&A line. We didn’t get the fuel disclosure this time around. So if you could talk a little bit about what the impact of fuel was there. And also how much of that of those savings were coming from the fuel itself and some discretionary expense and how much is that tied to the fact that you had net 13 store closures this quarter?

The 13 store closures really doesn’t affect the numbers that much. Typically most of those employees go into an adjoining -- a neighboring store and it increases our selling potential because you don’t have any -- you don’t have all that labor that’s tethered to the store. But in the short-term that expense is pretty nominal on its impact. I am looking at the copy of the Q here. And our employee related expenses were up about 1% in the second quarter. Our occupancy related expenses were up about 3.5%, and most of that centers on vending. And then our selling transportation expenses, similar to what we saw in the first quarter, it’s down around 20%, 21%. And if I look at our fuel component of that, in the first quarter, we spent just under $9 million in fuel, that’s total fuel, that’s in cost of goods; about half of that’s in cost of goods for diesel going to semis, about half of that’s in operating expenses, the gas that goes into our pickups at the store. And that number was just over $9 million in the second quarter. So, similar savings what we saw last year, about $3 million saved us.

And on the vending side, we saw that growth of customers with vending to drop to single-digits for the first time in the time series. How much of that is the replay of the national accounts that you are talking about in the call that the top 100 is lower and the lower and the smaller national accounts are growing faster, and is there a strategy to increase penetration of vending on those faster growing vending accounts, national accounts on the tail?

Absolutely. I mean first half of your question was -- the linkage, is a direct language. Those customers that we have a lot of OEM relationship with, I was just at a plant last week in Redmond, Washington that we are on site with a lot of OEM business and I saw a lot of blue vending machines I was walking around those two facilities I was in. And so they are very tightly related. But the weakness we are seeing in our top 100 customers, heavily, heavily weights on what you are seeing on the vending because vending quite frankly, if you think about the vending machine, our goal with the FAST 5000 is when we place it, our goal is to get $2,000 in monthly revenue. And so vending by its nature tends to lend itself to a larger customer rather than a smaller customer because the $500 a month customer, if we’re getting a lion’s share of the business, they are probably -- they are not a target for a vending machine where you are targeting 2,000 -- that I spend.

But are you -- do you have a strategy to target those -- that end of -- those smaller customers as well or they’re just not as attractive for any solution as a top 100?

We are targeting every customer that has the business potential to justify it, whether that customer is a national account or a local account and in Eau Claire, Wisconsin. We are bringing that value to customers that the vending machine is valuable to. So that customer has to spend to make economic sense for their business to have vending, we’re bringing it to them; we don’t care what group they’re in.

And Flavio, we don’t care whether it’s gloves, office supplies, beverage, water. We look at the customer and we go in; we do a process mapping and we try to tailor our deployment by size of machine, number of machines to really give them the benefit of vending. We have a smaller 3000 we have a 5000, we have lockers. And so we really try to come to the customer with some type of solution that fits their business needs.

Our next question comes from the line of Adam Uhlman of Cleveland Research. Your line is open. Please go ahead.

I guess the first point of clarification seems pricing is still a headwind to revenue growth. I was wondering if you could detail how much that was a drag on your year-over-year sales growth. And then secondly, it sounds like you have a good amount of traction with the smaller accounts coming through and I might have missed it but what was your active account growth for the quarter?

I don’t have that number handy right off the cuff. That number is probably mid single digits I guess.

Yes, 3 to 4.

And that number is -- so much of our growth is coming from -- there is two components to our growth. There is active account growth and there is dollars per active. So much of our growth has been centered on dollars per active in this environment because all of our growth drivers with the exception of the people we’ve been adding now in the last 12 months. But the growth drivers of the last three or four years have really centered on means to additional dollars per active because it’s very, very profitable growth for us.

What was the drag on revenue growth this quarter from pricing?

The exchange rate drag from a pricing standpoint was about 1%. If you look at our year-over-year number, most of the drag comes from mix and not from pricing. I’d say probably a quarter of a 1% drag -- a quarter of our drop in the gross profit was more about pricing.

Our next question comes from the line of Ryan Merkel of William Blair. Your line is open. Please go ahead.

I wanted to start with a bit more color on June. I know there was an extra day in the month and also it ended in mid week but you still missed the sequential pattern by a decent amount. So, I’m just wondering how the months play out and then are there any other signs of life outside of the energy delta coming in a bit?

June was disappointing, there is no question and even at the 1% on the extra day it was not where we wanted it. And when you look at and you talk about outside of the oil and gas, some bright spots for us I look at some things that are happening taking place within the business in Florida and California in some of our Midwest regions, we’re starting to see Canada when you really factor in the native currency is actually performing well. And so this oil and gas thing as we’ve talked before Ryan, it’s just got such a ripple effect through the economy and through the business that it’s just waiting astound. But if you look at non-res, that’s we think and when we look at our information, we believe that’s heavily tied to oil and gas. So that’s a factor. We look at ag and heavy manufacturing, all headwinds right now for us.

And I guess maybe a follow up is lacking anything else, should we just sort of assume normal sequential patterns for sort of the rest of the year just because there is really no obvious catalysts that you’re seeing in your business, is that a fair statement?

That’s a fair statement.

The second question and Dan you sort of hit on this but I want to ask it again. I thought that the higher EBIT margin year-over-year with lower gross margins was a big positive. But it’s hard to tell how much of that is one-time cost cutting versus Pathway to Profit really starting to shine through. And Pathway to Profit really wasn’t shinning through last year for example because gross margins were sort of coming down so much and offsetting it. So my question is, should investors view your results this quarter as a positive long-term signal that you can raise EBIT margins even if gross margin moderates due to mix?

I believe so. We’ve touched on that and really talked about the mix; what it does to gross profit but the inherent cost structure that we have and the ability to leverage that cost structure. One of the things I shared with our board yesterday is if you look at our business, we have the 80% of our business that’s gone through either U.S. or Canadian store and 20% of our business that’s either going through what we call an onsite situation or a strategic account store where we have a very close tight relationship with a large customer or our non-U.S. and Canadian store business. If I set those aside and look at the 80% of store business, when we set up the Pathway to Profit back in 2007, most of our business was going through that piece that store piece. And we said as this piece continues to mature, we could take the operating margins from the 18.3 we are at, to north of 23. This quarter if I look at strictly the store subset, so that chunk of business that represents about 80% of our sales, we were at north of 23%. So we actually hit our pathway to profit target in that subset of stores. And we’ve always said that’s a point in time number because that group of stores is about 106,000 a month in business. So, I think it’s very, very bullish for our long-term ability to drive the profit machine that is Fastenal.

Our next question comes from the line of Robert Barry of Susquehanna. Your line is open. Please go ahead.

I wanted to just actually again follow up on the SG&A. I mean I understand you are in low growth environment and so it makes sense to really double down and try and dial back the costs. But Dan, you did mention you haven’t seen this kind of performance in the 19 years you’ve been at Fastenal. So, I’m curious, beyond the next couple of quarters, were changes made in the way you’re running the business that are permanent and sustainable? Can you maybe share a little more color on that?

Well, I mean the leverage that we described in Pathway to Profit, that’s structural. That’s a case of our occupancy, as a percentage of sales, continues to decline because we’re running more dollars through that same building. The portion of our labor that’s tethered to the store becomes the smaller and smaller portion of our labor pool. Those kinds of things are structural. The things that aren’t structural that are part of the tug-of-war of life if you will is one of the challenges Lee put out to the team and I think the team responded tremendously to is hey folks, we’re investing and adding all these people; we can’t spend money doing other things; we’ve always been frugal with travel and sometimes we joke about some of the things we do when we travel because that’s who we are. We’ve doubled down on that. Now, how permanent that component is, is a function of the tug-of-war of life. If we were growing faster, Lee’s message might not have resonated quite as deeply with our district managers, our national accounts folks, our regionals because they might be traveling a little bit more because they are visiting more customers, they visiting more people, they are more things. And sometimes you dial that back, maybe you don’t need to have that meeting; maybe you have that meeting as a conference call rather than a face-to-face; maybe you do these things in the short-term, but those in the scheme of our expense pool are relatively small but they are very symbolic. And the fact that we managed our travel, our non-store operating expenses as well as we did, I think was enhanced by the called action that Lee put out there, three, six and 12 months ago but we demonstrated we can do it when we need to do it because when you are growing your top line 5%, you’ve got to do things like that that maybe you won’t have to do if you were growing at 12 to 14.

Right. Fair enough.

Let me just add here -- yes, Rob, I’d just add one thing though and you have to link this together that when you put a call out to the troops and you get them into the why and I said that at the opening, they were asking and they want to grow; their commission plans are setup that ways. So, they want to grow; they want to take market share; they want to serve at a higher level. So, when you put out that we want to add energy in your store but I need a little help over here; that’s what we’re talking about. They saw the reason and they responded like Dan said, the team just did a tremendous job.

Could I also just follow-up on the vending some of the disclosure absent this third quarter was also the signings and installs on a machine equivalent basis; is that something that you could provide?

That will be in our Q. Let me see if I have that page handy here. Let’s see, on a machine equivalent basis, okay, the signings number would be 3,931 versus the 2,916 we did in the first quarter. The installs at the end of the period would be 37,714 versus 35,997 at the end of first quarter and I think the rest of stuff was in our release.

So, even on an equivalent basis, that’s pretty good acceleration year-over-year. And anything in particular driving the acceleration in the signings?

We have a group of store employees, district managers and national account members that are keyed at driving that number because one thing that we know about our business that we keep reiterating with our team, the vending machine is a sign of engagement with your customer. If you are truly engaged with your customer, you should be able to put vending machines out there and it makes the business stickier and it’s good common sense, have a reason to be in talking to your customer multiple times a week.

I think the other thing too Rob is again I worked in the store and when you -- and again, it’s a world of competition and we like that, we love it. And so when a competitor comes in and they see our blue machines in there, our folks are starting to understand that how tough it is for the competition to get us out. And it’s a learning curve with 2,600 stores, 2,700 that more and more stores are adopting, more and more stores are seeing the benefit, more customers. And for me personally, if I am in a store and I have a customer with vending and I show you and take you to that customer and you see it in action, that is how we continue to see more engagement and more adoption in the field.

I you had actually purposefully dialed down the pace a little bit a year or so ago in an effort to improve the efficiency and the profitability. I mean, do you think given you’ve made progress there you’re dialing up the aggression a little bit?

I think it’s -- what we said earlier, I think, this is actually linked to what’s going on with our national accounts. Everybody is engaged with vending, whether it’s a local store; district managers; regionals; and national accounts, but as our national accounts are providing the growth, are also providing a lot of what we’re seeing on our vending right now.

And it’s 09:42 Central. It looks like we have time for one quick question, if there is any left.

Our final question will come from the line of Robert McCarthy of Stifel. Your line is open. Please go ahead.

Now, in terms of -- I mean, I don’t know if I missed this earlier, but did you talk about what you thought incremental margins could be in the back half for the year? Did you talk about kind of the 20s range or the 30s range, I forget?

Our goal is always to be as close to 30 as we can. And I was frankly surprised by -- pleasantly surprised by the fact we were able to hit 40 despite the fact that June came a little weaker than we thought it was going to be. And I noted that on the last calls, we get antsy when that number is below 25. Because that number isn’t at least better than our operating profit, what’s causing us to…

Right.

If we’re losing that because we’re consciously making an investment in something, that’s one thing but our anxiousness rises if we’re not meaningfully beating that number.

Could you just talk about the effective -- kind of the roll over steel prices, have you seen any impact in terms of pricing and gross margin, how would you quantify it?

We have seen the impact in our revenue; we have seen the impact in our gross profit. It’s difficult to quantify it, because sometimes there is a lot of noise in the numbers. We have different customers and there you have customers we are changing the source of supply because you’re bringing a better cost value to them. It’s not just in steel; it could be in non-steel products as well. But there is no doubt about steel is creating headwind for us and it’s creating some challenges; it also creates some opportunities. Earlier on -- when I asked about our gross margin change, I indicated about half of the drop from Q1 to Q2, centered on our supplier incentives and probably about quarter of the drop related to the impacts of pricing.

Pricing, okay. And then in terms of the back half of the year, I mean obviously, you can look at the sequential patterns but also the compares are little tougher. I mean, I guess, you still see the prospects for positive organic growth in the back half for the year, given what we’ve seen in terms of June?

Yes.

It is 9:45. We’d like to thank everybody again for your listening on the call and your interest in Fastenal. And we’ll talk to everybody soon.

Thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Have a great rest of your day.