Good day ladies and gentlemen and welcome to the Fastenal Company First Quarter 2016 Earnings Results Conference Call. At a reminder, this conference is being recorded. I would now like to hand the meeting over to Ellen Trester, Investor Relations. Please go ahead.

Welcome to the Fastenal Company 2016 first quarter earnings conference call. This call will be hosted by Dan Florness, our President and Chief Executive Officer and Sheryl Lisowski, our Interim Chief Financial Officer, Controller, and Chief Accounting Officer. The call will last for up to 45 minutes and we’ll start with a general overview of our quarterly results and operations with the remainder of the time being open for questions and answers. Today’s conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission or distribution of today’s call is permitted without Fastenal’s consent. This call is being audio simulcast on the internet via the Fastenal Investor Relations homepage, investor.fastenal.com. A replay of the webcast will be available on the website until June 1, 2016 at midnight Central time. As a reminder, today’s conference call may include statements regarding the Company’s future plans and prospects. These statements are based on our current expectations and we undertake no duty to update them. It is important to note that the Company’s actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the Company’s latest earnings release and periodic filings with the Securities and Exchange Commission and we encourage you to review those factors carefully. I would now like to turn the call over to Mr. Dan Florness.

Thank you, Ellen, and good morning, everybody and thank you for joining in on the first quarter 2016 Fastenal Company earnings call. Press release went out first in this morning. Hopefully you all saw as well we put our press release yesterday evening announcing our dividend, our second quarter dividend. In the quarter, we grew our sales about 3.5%. We had the benefit of additional business day during the quarter. So on a daily basis, we grew about two. Our earnings per share grew just over 2%, primarily driven by the fact we had bought a considerable amount of our stock in the last 15 months, because our actual earnings were down slightly from a year ago. Bit of a noisy quarter in that the calendar had some stuff going on. We – the daily number which is what we typically report can be influenced positively or negatively by the change in year-over-year and the number of business days in a calendar month. So, in January, it was a 20 day month versus 21, February we had an additional day, so it was a 21 versus a 20 and in March, we had an additional day, so it was a 23 versus the 22 and March also had Easter which had been in April in each of the last two years. I throw these in to the equation because they can influence the number. So if you look at our numbers as reported, in January, we grew at 3.3, daily average, February grew at 2.6 and March we dropped to 0.0, so we basically had no growth in the final month of the quarter. If I factor in the day – the change in days, I think of the month as being, January we grew, between 2.5 and 3. February…

Good morning. I am going to provide an update on our cash flow. Our operating cash flow for the quarter was 128% of net earnings, compared to 141% of net earnings during the first quarter of 2015. The operating cash flow is slightly lower in the first quarter of 2016 due to our current initiative to add additional products into our store inventory under our CSP 2016 format. The Q1 operating cash flow also benefited by minimal tax payments occurring in the first quarter, that will reverse itself in the second, third and fourth quarter of the year. Our operational working capital year-over-year inventory growth was approximately $97 million. The main drivers of the increase in the inventory were driven by the CSP 2016 initiative which was approximately 35% in the increase. International inventory growth and the acquisition of Fasteners Inc. contributed approximately another 25% of the increase and then the last main driver was the on-site and large customer impacts which were approximately an increase of 10%. We also disclosed in our earnings release that we had previously indicated our net capital expenditures would be approximately $120 million in 2016. We now believe, given the new vending locker lease agreement and a strong start to vending signings in the first quarter, that we will have total net capital expenditures of approximately $197 million to $200 million in 2016. We do plan to fund this increase as well as add some of our previously planned capital expenditures with the proceeds of our proposed private placement of debt. During the first quarter of 2016, we purchased approximately 1.6 million shares of our common stock at an average price of $37.15 per share for a total of approximately $59 million and during the last seven quarters, we have purchased 8.7 million shares of our stock or approximately $396 million worth of stock, which represents about 3.3% of our outstanding shares from the start of this timeframe. As Dan mentioned earlier, last night we announced a dividend of $0.30 per share. This will be our second quarter dividend for the year. So we have strong cash flow and we are optimistic about our cash flow potential throughout the year. And with that, I will open it up to questions from the group.

Thank you. [Operator Instructions] And our first question comes from David Manthey with Robert W. Baird. Your line is open.

Hi, good morning.

Good morning, Dave.

Good morning.

First of all, in terms of the new on-sites that you turned on last year, can you estimate how additive to growth these – the on-sites that we are operating in the first quarter of 2016 were?

Probably the way I think about it Dave – the numbers start getting a little bit double counting when you look at the vending and you look at the on-site. The best way to look at it is, when I think of the districts that are signing on-sites, districts that added on-site last year are growing double-digits right now. The districts that did not are growing low single-digits. We really look at the on-site business as being, when we go and sign on an on-site, what Christian talked about last fall, in our Investor Day was we really believe that when we exit a 12 months period after rolling out the on-site. We have on-sites that turned on throughout the year, so that’s where the numbers start getting a little muddy. But we really believe based on our data that when we exit the 12 months period, we will add close to $80,000 to $120,000 of additional monthly revenue on a per on-site basis.

Got it. Okay, and then second on pricing and gross margin, you mentioned that fastener pricing being lower, if you could quantify that and then if you saw anything in across the other 60% plus of your product lines and as it relates to gross margin and there is some timing issues with the FIFO inventory and so forth, but typically, first quarter gross margin is the highest of the year and then it declines from there or it’s lower through the rest of the year. Is that your expectation for this year or are there other factors in 2016?

Our expectations, given where our growth is coming from is that, 50% is probably a good target number for us to have. There is – when I look at the components of our gross margins, couple of things that were going on in the fourth quarter and in the first quarter, it was in the declining mode as we were going through the fourth quarter, quite frankly declining mode throughout 2015. We really saw the stabilization start to occur in the February, March timeframe from a standpoint what was going on with gross margin. So, I were to believe when I look out through the balance of the year, 50% is probably a better target. When I look out long-term, it’s really going to be a function more of how successful we are with the on-site program. So that will materially change longer-term our customer mix, but it’s very attractive an ability to grow the business long-term and the operating leverage long-term.

And on the pricing, Dan, the fact that price…

Sorry, yes, what we were seeing through most of last year is deflation somewhere in that 1.5% to 2% neighborhood. We are still operating in that zone. As far as the cost coming through, we are starting to see some lower cost now. Our overall inventory turns about twice a year. The fastener piece of our inventory turns slower than that. The non-fastener piece turns faster than that and so some of the lower cost we are starting to see come through our cost of goods now. As it relates to the non-fastener product, I would say that area is pretty quiet. Any changes we have in pricing there would be solely related to customer mix and not to what’s going on in the underlying product.

Got it. Thanks. Dan.

You bet, Dave.

Thank you. Our next question comes from Robert McCarthy with Stifel. Your line is open.

Hi, good morning, Dan. How are you doing today?

Good, good morning, Rob.

So, I guess, in terms of April, I mean, I think you did take some pay-ins to kind of talk about the noise of the quarter in terms of not only the days of the Easter shift, but how should we think without commenting on April in terms of the demand trends because you haven’t disclosed it yet. Just, how do we think about the impact of the normalization for Easter? Would we think about a point benefit for April, or how do we think about in terms of the days in the Easter shifts?

That’s how I think about it. When I – if you walk through the math, I walk through on the March, so hey, here is the ugly part of Easter moving. I think it took a point, maybe a point two out of March, you should see the flip side of that going in April.

Okay. And, why don’t you remind us on what the days is in April, year-over-year, in terms of the difference?

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

That’s correct.

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

Got it. Okay, and then, I guess, as a follow-up, in terms of what you are seeing in terms of industrial vending growth, are you still kind of committed kind of to that kind of 16,000 in deployments for the full year and I think you saw in your – your highlight is interesting statistic in association with your vending which was basically, your daily sales to customers to industrial vending grew about, 3.6 in the first quarter of 2016 and then daily sales of non-fastener products to customers of vending grew 7.4% but daily sales of fasteners to customers of vending contracted 5.5%. So, I guess the question is, obviously, a lot of your business goes whether vending, it’s not fasteners, but what do you account for that kind of contraction? And I am referring to, I think the final paragraph on the second page of the press release.

Yes, yes. When I think of vending, your data on with your comment or your question and comment about, vending is really about our non-fastener business. Vending really isn’t used for dispensing of fasteners, now there is some extension of vending that over time are how our beanstalk for things like that will include – will incorporate essentially some of the vending type technology for replenishment cycle. But vending is about non-fasteners and so, we’ve done a great job deploying vending to our existing customers over the last five years. And the fastener piece is about their economic activity and our ability to take market share. And I think the story, when I look at the fastener piece is about the economic activity. The non-fastener piece is about the activity and our ability to grow and deploy vending. So we can have a customer whose business in the fastener piece is down because we have a great market penetration already in their business off. But we can grow the non-fastener piece because of vending, because we are deploying a better supply chain to our customer, because when I think about our deal with our customer. And what our customer truly needs is, put yourself in the shoes of the purchasing manager, the plant manager. They live in a world where there is constant demands on them for improvement. They are working with fewer resources everyday. So what they need from their supplier isn’t just great fulfillment. I think that’s a starting point. They need a better supply chain partner and in the case of vending and in the case of beanstalk and in the case of our on-site model, we are a better supply chain partner and we highlight this point because it demonstrates that even in a weak economy, we can grow our business, because we are a better supply chain partner for our customer.

Thanks for your time.

You bet.

Thank you. Our next question comes from Adam Uhlman with Cleveland Research. Your line is open.

Hi, good morning. Thank you.

Good morning.

I guess, if we go just back and talk about the cash flow outlook to the year, it seems like we have been growing demands on cash from the CSP 2016 rollout, additional stores are added, the vending growth kind of unfolds through the year. Can you help me understand better I guess, how much debt do you expect to take on to fund these growth investments and at what point do you start to pull back on the other CapEx projects?

Well, I’ll answer the last part and Sheryl can answer the numbers part, but as far as pulling back on the other projects, I don’t really, the biggest thing that we – the only thing that we’ve pulled back on kind of just is, we slowed down a bit the pace of store openings. But other net, I don’t really see us pulling back on the initiatives that we’ll have in place, as we talked about in 2015, a lot of the big, big initiatives we had from a CapEx standpoint are in our rear, I am talking about automation of our distribution of centers and the initial build of growing of vending – of creating and growing our vending business. So I don’t see a lot of other pullback, but Sheryl you can touch on the exact numbers.

Sure. So we are still – as we are projecting our cash flow for the year, we feel very confident that operating cash flow will continue to exceed historical percentages of net earnings. Our total CapEx, it will be a little bit higher than the historical percentage of net earnings due to the increase in our vending spend for the year and our free cash flow will continue to fall within the historical percentage of net earnings throughout the year. So we are still very confident that we have adequate cash flow to continue to support our initiatives throughout the year.

Okay, thanks. And then, Sheryl, could I just follow-up on the bad debt expense for the quarter, could you talk through what you guys are seeing there and the expectations going forward?

Yes, we continue to see our bad debt expense trends to historical norms. We are not seeing a significant increase in bankruptcies or anything that causes us creates alarm or concern. Pretty quiet I guess quarter from that perspective and so, really no surprises from our end.

Thank you. And our next question comes from Ryan Cieslak with KeyBanc Capital Markets. Your line is open.

Hi, good morning.

Good morning.

Good morning.

Dan, sorry, if I missed this, but, do you have sort of an initial view of how April is trending for you right now? I know it’s early or in two weeks in, maybe excluding the benefit you might get from how Easter fell in the extra day or so in the quarter. Is it gotten any better from – I think I heard you right, you said the quarter ended off soft. I guess, I would be curious to know just the sequential trend so far into April?

Yes, whenever I touch on the current month, I am always wrong and the question is how much. I don’t know that was basically a weekend to the month that we had some chance to look at the data, I don’t think it’s meaningful not even talk and tell something about it, so I am going to defer that and tell early May when we report it.

Okay, fair enough. And then, I think last quarter, you had talked about discretionary spending being down and a headwind and in the release today, you mentioned a slight improvement. I would be curious maybe just some more color around that how the discretionary spending looked in the first quarter relative to maybe a normal first quarter or your expectations coming out of the fourth quarter? And how much of a drag on gross margins was that this quarter relative to the fourth quarter?

Sure. The commentary on that, both in the fourth quarter and in the first quarter is as much art as it is science and the team that analyzes all of our sales data slices and dices it about 18 ways to Sunday and one of the things that John taught for them was they looked at frequency of items and stuff that’s purchased in a less frequent basis, how that was performing in the fourth quarter and we did see a drop-off in that. We saw some of that comeback as we got into February, didn’t see much of it in January and – but I’d say it’s still kind of tepid. I think there is a lot of organizations out there, similar to comments I started the conversation with about what we are doing with headcount, what we are doing with expenses in general, what we are doing with store openings. A lot of organizations out there have their belts really tightened down and I think you are seeing that coming into the New Year holding pretty firm.

And is there a way of things….

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

Okay.

But that’s more of a guess.

Gotcha. Now, that’s helpful. And then, as really quick as if I may, I’d just be curious to know, at the Investor Day, you had talked about, maybe a greater appetite for M&A this year in – maybe just sort of an update on what you are seeing there with regard to maybe some M&A opportunities for you guys in 2016?

Sure. Well, late in 2014, we started to take – probably a more serious look rather than stumbling upon the stuff periodically let’s take a little more serious look at it. We looked at a bunch of companies last year, one of them that we met early in the year in April, be exact, that we ended up acquiring later in the year. There is a few companies we are in discussions with right now. And we are constantly looking both on the distribution side as well as some of the support service side that might be a manufacturing entity or some other type of support service for our stores. Only time will tell how that plays out. I think the biggest thing is that we are open to it and we are actively looking rather than just seeing what, jumps up and hits us. But nothing in the works.

Okay, thanks for the time.

You bet.

Thank you. Our next question comes from Ryan Merkel. Your line is open, with William & Blair.

Hey guys. Good morning.

Good morning, Ryan.

Good morning.

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

You know, geography, only thing that stood out there is that we did continue to see weakening deeper than we probably would have expected or maybe better way to say hope for when we are looking at it back in the latter part of 2015, but the oil and gas areas did continue to weaken when I look at it on a sequential basis and time will tell if some of the recent pricing influence is that positive in the upcoming months, but it continue to weaken. But setting that aside, the month finished very poorly with five days, six days, seven days, eight days, less than a month, I felt we’d be closer to 2% and the month really deteriorated late. And that’s probably a function – that’s probably described some things that we saw in the patterns of our larger account base, because they tend to be somewhat loaded little bit towards the back end of the month. But, frankly a weak finish.

Okay. And I mean, should this frame our thinking at all, as we think about April or would you just have us adjust March for Easter and then just you saw a normal sequential, is that sort of the best way to think about April at this point?

That’s how I am thinking about it.

Okay. And then, on the macro, in the press release, you said you are seeing some improvement but an economy that is still very weak. Where are seeing the improvements? And then, when you talk to customers, are they optimistic that we found a bottom for industrial demand or is that still real optimistic at this point?

You know, on the latter part, I don’t know. One thing that I will have the benefit of, this week is our National Customer Show and so we’ll have little over 5000 customers over a three day period in meeting with suppliers, meeting with our employees, meeting with our on-site folks, all of our teams, our vending folks, et cetera. So, I’ll be at more of a chance to get a pulse on that this week, this afternoon I am leaving to that show myself. But when I think of what are some of the positives, in the fourth quarter that was probably a bleak a period is you could see and I was not hesitant to share my thoughts on it during the fourth quarter, but our fasteners as an example were down about 6% in the fourth quarter. In the first quarter, they are down around two. Our non-fasteners were struggling in the fourth quarter and I don’t have the exact stat in front of me, I am sorry. But, they improved to mid-single-digits, upper single-digits in the first quarter. And so, we saw generally speaking an improvement in our business and that’s I think what we are really talking about. I think what we see is, the business in January, February and I can’t quite say that for March, but in January, February, felt more like where we were in October and I think if I look at the last five or six months, I really think the outliers was the extreme weakness we saw in November and December and I think that was a function of companies that’s shutting down around the holidays more extensively than normal. March, only April and May will start to answer for us what really happened in March.

Right, very good. Okay. Thank you.

Thanks, Ryan.

Thank you. Our next question comes from Robert Barry with Susquehanna. Your line is open.

Hey guys, good morning.

Good morning, Rob.

Good morning.

Wanted to circle back to the gross margin. So the pace of decline last year, 40, 50 basis points a quarter, now we’re looking at down 100. Just curious what drove that kind of step change in the pace of decline?

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

On a year-over-year basis?

Yes.

Like we’ve been tracking down 40, 50 and now we are down 100.

Yes, you know, there is a number of things. One, our growth is primarily coming from large accounts and that deepened as we went through the year. It’s primarily coming from – if I think of our sales number in the weakness, when you – we’ve done a nice job of signing new customers both on-sites and traditional national account customers that aren’t on-site. When you are doing a nice job taking market share, you are turning on a lot of new business and that’s – lot of times when you are turning on a lot of new business, you do get some short-term mix issues going on in that you – a new large customer isn’t at average margins for that group on day one, because it takes you time, six, nine, and 12 months to work through some of the hiccups in the system of finding the best source of supply, finding the best part match for this item when you are turning on new business and typically you have your existing business that is supporting that, because that existing business, you’ve done a better job of improving your supply chain already. If you think of what’s really hurting us right now is from a revenue and revenue growth perspective, we are doing a wonderful job signing new national accounts. We are doing a wonderful job signing on-sites. We are doing a wonderful job signing vending and growing those pieces of business. So we are taking market share at a very good cliff. What’s causing us the struggle is our existing book of business, our existing customers are struggling in a weak environment. And so, the more mature component of our business is going backwards. And that more mature piece has a better gross margin profile, because if I’ve had a customer – excuse – for two or three years, I have already in many cases established a best part, so lot of the best source of supply to serve that customers’ needs and that’s in my mix and that mix has weakened right now. So that’s a piece of it. The other piece of it is, on an execution standpoint, we slipped a little bit as we went through 2015, we slipped a little bit on the freight, how good we are on our freight expense versus our freight that we charge a customer. Part of that I think it became more difficult for our stores operates effectively given that fuel prices were lower. Fuel price is an important part of our distribution cost, but it’s not the only component, but it might make it harder for you to charge freight on this item or that. And the fact that it’s a weak environment, it’s a competitive marketplace. I feel we are at a point where our gross margins are stable from a sequential standpoint. But that’s still has been a painful process on a year-over-year basis. There is no question about that.

Yes, actually, I did want to just follow-up and clarify that. So it’s your expectation that you can hold the gross margins stable here now at about 50?

Yes.

As we look in the next few quarters?

Yes.

And I guess, my questions would be, what’s changing as we move forward because the pace of decline seems to be accelerating as you say on-sites gaining traction, national accounts gaining traction, the product and customer mix issues have been there, they’ll probably continue to be there. So what’s going to, kind of diminish the pace of decline in the gross margin? What are the offsets?

I think the biggest one is, well, I think the biggest one is, the offset we’ve had in the last 12 months, you had dramatic weakening of our existing customer base and that’s hurt our gross margin because that business where we have a very, very established efficient source of supply and so that’s put a pinch on that.

Yes.

I believe the pace of that deterioration is slowing and I think that shines through in what you are seeing what’s happening in our fastener business, in our non-fastener business from a growth perspective. So I think that’s the wildcard.

Yes. Just to clarify, Dan, at this point, because I think there is some confusion out there, what product lines at this point are accretive to the gross margins? Is it just the maintenance fasteners, or is it all fasteners? Or how would you describe that?

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

Yes. I think you said the maintenance was 40% of the business. How much of the business - of the fastener business is the construction base?

That’s a relatively small piece.

Yes. Okay.

I don’t have the exact stat front of me, but relatively small, single-digits.

Got you, fair enough. Thank you, Dan.

Thank you. With that, I see we are at 9:44. Hopefully there wasn't anybody else in queue that didn't get to ask a question. I'll finish the call the same way I started the call. Thank you for taking time this morning to listen to our first quarter earnings call. I hope you find our earnings release today as well as our 10-Q which I believe will be out later in the week to be informative of helping to understand the Fastenal story. I also invite anybody that’s interested to either make a trip to Winona next Tuesday for our Annual Meeting or listen to it in our webcast. Thank you very much.

Ladies and gentlemen, thank you for your participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.