Good day ladies and gentlemen and welcome to the Fastenal Company Second Quarter 2016 Earnings Results Conference Call. As 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 second 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 September 1st, 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.

Good morning, everybody and thank you for joining our earnings call for the second quarter of 2016. I've been in my role here at Fastenal as CEO and President or -- I'm in my seventh month, started in January, unofficially stepped into the role last October. I'm a firm believer, and I have some CEOs that came before me at Fastenal that did an excellent job of doing two things; providing vision to our shareholders and to the employees at Fastenal and providing perspective periodically on what we are doing for course correction as we go through a period of time. In the case of vision, I like to believe the vision that we laid out last November on our investor day and the vision that we believe, I believe is a correct one for Fastenal is being presented in a meaningful fashion. I think we are seeing traction on it. From the vantage point of the second item perspective, perspective is looking at the business in my mind as you go through the quarter again pointing things out as you go through the quarter you go through the year, you go through the month pointing things out and seeing a cause and effect from the standpoint of a reaction and the improvement on certain things, or you accelerate on certain things that aren't moving fast enough. In that regard, I would have to say I let the Fastenal organisation and our shareholders down in the second quarter, there were some miss steps we made, but let's look at vision first. We talked last November about the vision of Fastenal and one thing that I think is critical to our success as we go forward in this year and into the years to follow is the momentum we are building…

I will start by providing an overview of our operating and administrative expenses. Regarding employee related expenses we added approximately 800 people to the Fastenal organization in the last 12 months. Approximately 37% of these people were added to a store or some other type of selling location. During the first half of 2016 our payroll related expenses increased due to the addition of personnel related to the acquisition of Fastener's Inc which occurred in November 2015, and the addition of vending specialists, information, technology, development resources and distribution personnel, and we also experienced an increased in our healthcare cost. These increases were partially offset by contraction in our performance bonuses and commission and in our profit sharing contribution, primarily due to lower sales growth and due to lower operating income both on a dollar basis and a relative basis. The increase in the second quarter of 2013 when compared to the second quarter of 2015 was driven by the same factors as the six-month period. Regarding occupancy expenses, the increase in the first half of 2016 when compared to the first half of 2015 was driven by an increase in industrial vending equipment and also an increase in investment in our distribution infrastructure over the last several years primarily related to automation, the largest impact related to the industrial vending equipment. The increase in the second quarter of 2016 when compared to the second quarter of 2015 was driven by the same factors as the six months period. Selling transportation costs included in operating and administrative expenses increase in the first half of 2016, when compared to the first half of 2015. This was driven by an increase in the number of vehicles for sales personnel and the timing of leased vehicles sales which was partially offset by a…

[Operator Instructions] Our first question comes from Robert Barry with Susquehanna. Your line is open.

Hey, guys. Good morning.

Good morning, Rob.

Good morning.

Dan, I wondered if you could just provide a little bit more color on June sales, what verticals slowed especially in light the ISM which seems to be showing improving conditions? And I wondered if you would attribute any of the pressure to things that might consider temporary or like these extended shutdowns you mentioned?

In the construction front we saw slowdown in our energy customers in both May and June. And a piece of that is we're seeing projects that were still going on from a year ago that just are not being replaced. I would not look at that as a temporary one. On the temporary front we saw quite a few customers that were shut down, I think our largest impact was actually on-site we have where the customer was shut down for three weeks of the month in doing maintenance, but the week of Memorial Day in early June we saw shutdowns, we saw some shutdowns here in the over the week of July 4th and I believe those are – while they are temporary will impact third quarter as well because of the July 4th and I would suspect there'll be some over Labor Day as well.

Yes. I mean, I know it's probably hard to quantify, but any rough estimate of the extent which these temporary items weighed on June or the quarter?

Well, in the case in June I could comfortably say a point – a percentage point of revenue; going beyond that I wouldn't be as comfortable.

You also mentioned pricing has an impact from deflation, can you dimension that and given steel prices have started to rise how should we think about that potentially becoming a benefit?

We were seeing probably more propensity for fastener prices to rise two and three months ago, while there still is – there still are examples of that, some of the propensity had lessened, but I won't – I'm less certain. I think that's probably more of a – we need some traction in the economy to make some of that become a little stickier.

Yes. So the steel prices rises aren't yet potential tailwind, just not enough or long enough or…?

There are not as pronounced. I guess, we were seeing more of that two and three months ago, and while there's still a lot of discussions both on the fasteners and the non-fasteners, I would say its probably less noise from it now than there was two or three months ago.

Got you. Thank you.

Our next question comes from Chris Dankert with Longbow Research. Your line is open.

Hi. Morning, guys.

Good morning.

Last call you've been talking about being able to hold the gross margin flat or roughly flat kind of through the rest of the year. Just kind of given what we've seen pricing wise and demand wise, I guess, can you kind of give us some sort of size of what you do expect for the full year now as far as is 49.5 a new - better benchmark now?

I don't know that my credibility is real good on that right now, given some of the statements made in the past. What I touched on is we saw about 25 basis point, 25 to 30 basis points drop largely because of a few what I'd consider internal shorter term things that we've decided that we're moving quickly on and decided to do to be honest with you. I felt we had enough momentum of other things in place to match that in short term. And my comments here are short term centered and short-term being 2016, because longer term our on-site business which runs in the mid 30s will become a -- as we gain traction in there will become a more meaningful piece. And so if you look at now a longer term three to five years I would expect some progression in our gross margin solely because of mix of business.

Okay. That's helpful. Thank you. And then I guess, I don't believe I've missed it, but is there any way to quantify these ex-sales impact, you know, sales impact from CSP or some of the on-siting stuff, I know you've given us some decent progress numbers as far as how those have rolled out, but is there any kind of revenue impact you can give us?

I plan to do a little more that in the Q3 call only because the last of our CSP convergence were occurring in that early June timeframe, so we really don't have enough time under our belt because there was a lot of activity going on in the first and second quarter and a lot of in the second quarter. In the case of the on-site, we want to get a little deeper into the year and then do some discussions on the 80 we saw in last year what we've seeing and what we're learning from it. The 92 we've signed in the first six months of this year, what we're seeing, so for the time being I'll hold off on that.

All right. Thanks, Dan.

Our next question comes from David Manthey with Robert W. Baird. Your line is open.

Thank you. Hey, Dan. Good morning.

Good morning.

When you think about the growth of the company today and the build up of sort of a secular growth rate, market growth, share gain, vending on-sites, price et cetera, how do you think about the growth of Fastenal as it stands today?

You know, give me a timeframe Dave, so I can…

Yes, I'm talking…

You're looking at multi – you're looking at kind of a multiyear thing?

Definitely, definitely, I'm talking three to five years, kind of either from here over the next several years?

I believe we have – we talked in the November Investor Day about the number of on-site potential, the number of vending potential, and our existing store potential outside of those two, because there's a lot of national – only a third of our national account business today goes through on on-site, two-thirds of it’s outside the on-site. So there's a whole bunch of pieces to growth and I'm not even including in that the impact of international which is now getting to be a meaningful piece of our business, and a piece of our business that grew nicely both from a revenue and a profit perspective in the current quarter. But if I look at it, let's say over multiyear period we can sign 200, 300 on-sites a year. And if they truly turned into a 1 million to 1.5 million revenue growers as we move forward. A piece of our business would migrate there, but more importantly, that would provide us, I believe five points of growth when we were looking at this three and four and five years out right there. On top of what vending would do and part of the vending I'm double counting, because some of the vending would to that group of customers and then what our store base would do. I really believe from a – just doing the math and assuming we can, we have the horsepower, because I know the markets there. The horsepower to pull it off, which I believe we have or can add, it’s a business that over a multiyear perspective could grow in low double-digits. Now we need our store piece to execute well on that environment. We need our vending piece to execute well in that environment. But I believe that's achievable. If I'm wrong on the store piece and how much we can add there it would translate that from lower double-digits to an upper single-digit, but I think in either scenario its very attractive and profitable growth.

Right. And then earlier when you were talking about the growth in on-sites and the traction you're getting there and the factors that's coming through at a slightly lower margin, I guess in terms of the contribution margin I think you use to talk about 25% to 30% was a targeted range and when I look over the past five years and periods where you've grown 5% or greater its been about 25%, should we assume that maybe 20% to 25% is a better range given the importance of on-sites in that growth algorithm?

It plays into it, yes. And that might not be a bad way to think about it. The one perspective that you know the pathway to profit that's underlying in our business within our store network is still there and so that's store network will continue to see that tick up over time. But if we go from on-sites being 15% -- you know on-sites and customer sites that group we've talked about being mid-teens, 15% of our business and that effectively doubles over six to eight year horizon. It would take a little bit out of our incremental margin, yes.

Okay. All right. Thanks very much Dan.

Our next question comes from Scott Graham with BMO Capital Markets. Your line is open.

Hi, good morning, Dan.

Good morning.

Just wondering in the – really the two questions are in the current environment where sales are tough to come by and shareholder value tough as a result. Is there any thought behind accelerating share repurchases in the second half of the year? And my second question relates more to the vending program with respect to Fastener side. Just hoping if you can give us a little bit more color on I think what you said was a minus five in that area for the company?

Well, the minus five with the customers that have vending, and that's really a function what their underlying activity is. And the reason I call that out is really want to talk about the market, you know, the market share gains we're seeing in that group, in that there is a world of difference between what our fasteners and our non-fasteners are doing and I look at those as two distinctly different businesses, but its really demonstrating how the growth potential of the latter. And so I'm not sure if I addressed your fasteners side question because fasteners and vending really don't go hand-in-hand, the reason I was talking about it is if the subset of our business with that group of customers that has vending, and I think it’s a pretty good proxy to their underlying activity.

Right. No, I did understand what you – how you were framing that for us, so I just kind of wondering why at a minus five you would consider that market share gain?

No, no, I'm talking about the – the minus five is what is, what I would consider the market with that group of customers that relates to fasteners. The market share gain would be the fact that, that group of customers is growing at close to 3% and their non-fastener business is growing at close to 6%, 5.9% to be exact, that's clearly a market share gain, because that is not a rising tide in that customer.

I got you.

But we're taking market from other people.

All right. Got you. Okay. And on the share repurchases, is there now stock a little weak today and have been below 45 more than it's been about recently, is that an opportunity?

Yes, it is. We have – I believe 1.3 million under our current authorization. I have not had discussions with my board about going deeper than that. However what I found in the past is it’s a board willing to discuss it. And so I don't want to commit the board anything deeper than that, but it’s a case of -- we had a debt free balance sheet two and half, three years ago. The debt we have on the balance sheet has solely been from buying back of shares and our in an environment where we continue to pay dividend at a very similar rate that we paid in the past. And so we demonstrated willingness to do in the past – in the past, I believe the willingness would exist during the future and I'll couch it with one caveat. We are boringly Midwestern conservative and it took us some discussions to take on the first layer of debt that we did, but we also looked at it from a standpoint from a financial decision. I don't want to say it no-brainer, but it wasn't an easy decision. And I think I would had board that would be open to the conversation, but I've not had that conversation beyond the 1.3 authorization we have right now.

Okay. And if you don't mind my squeezing one last question here. Is there any update that you can provide us for with on the store openings and closings for the rest of the year?

I would say the piece that you've seen in 2015 and 2016 as it relates to store closings. That remains. One of things that I believe its important to our business today is that everyday you rationalize your business with a view towards five to 10 years from now. It’s a health exercise everyday are there markets where I believe we'll have more stores today than we -- five years from now we have to take absolutely, but there are markets where I believe in an environment we are adding on-sites where you are adding vending that our business might morph in certain markets. I'm not ready to you know commit to what that means, but it means that from an absolute number standpoint but from a philosophical perspective we are always looking at what is the best business model, what is the best structure to our channel to grow our business long term.

Thanks very much.

Our next question comes from Ryan Merkel with William Blair. Your line is open.

Hey Dan, just want to go back to June, you mentioned construction was a bit slower and that might continue, but the fastener number was pretty weak. And I'm just curious, can you flush that out a little bit, what drove that weakness, is that temporary? And then just comment, you had a pretty weak May and June, is the industrial economy still stabilizing your mind or are things maybe potentially getting a bit worse here?

I think they potentially got a little bit worse. And sometimes that's a hard one to gauge Ryan because a lot of our internal information as it relates to some of the plant shutdowns is more anecdotal of talking to our regional VPs around the country and kind of getting from them a feel for what we are seeing or what the impact is, but very much a weakening. In the case of the construction question you raised, the point I was making there is the fact that we saw it particularly weak with energy customers and I don't know that there is enough, I don't know if the overprice is such that there is a -- that there's going to be a rush back to any kind of new construction there, new activity there I think some will be ideal for a period of time. In the case of fasteners, again that was very much related, that was amplified by the fact that with some large customers that were shut down and it really hit the radar. And that's what you really see when that shut down occurs it hits the OEM faster, because they are shutting down their production. They are still doing some maintenance, so you might not see it in the non-fastener, but you see it in the fastener number.

It's strange I guess to hear about shutdown in June and then there is going to be yet more shutdowns in July, is this just the…

Its different customers. And that June was a spell over the Memorial Day week.

Got you, okay.

But it's different customers.

Right, okay. And then I guess on the July commentary you already mentioned that you saw some weakness and shutdowns around the fourth. You know can you just help us I guess qualitatively I know you don't like to talk about the current months, but you know is it going to show up in the July numbers, do we need to consider it for modelling purposes, I guess should we think about normal sequential possibly missing that again in July?

The June had some big impacts and so from a sequential perspective I'm not willing to concede that enormous sequential won't be there. I honestly don't know Ryan.

Right.

But I'm not -- necessarily willing to concede it because some of the shutdowns which were extended in June they are back in full force now, and so that will give us some lift from June to July and I don't even want to speculate on July fourth week.

Okay, fair enough. I guess just lastly with on-sites do you have enough examples now that you could be pretty confident the store is going to replace the loss sales to on-site?

We don't have enough time yet.

Okay.

We believe it to be true, history has said it's true but that history is on a relatively small sampling and but its enough that we think its -- if you think of what's really happening is we are taken existing relationship and we are stepping deeper into the business and we have proven history that says we can grow faster with that customer. Let's say the part about the remaining stores, you have a $100,000 store that we pull a $30,000 customer out of it and it becomes a $70,000 store. I believe based on history a $70,000 store can grow faster than a $100,000 store and I believe with the market presence they already have, they will have the ability to stand back quickly. But that's to say we are completely wrong and that, that 70,000 residual store can't grow any faster. I think what we are doing with that $30,000 customer is the right decision regardless of the aftermath, but that other 70,000 of business won't be harmed by carving that customer out, it can only be helped.

Right. Okay. Great, thank you.

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

Hi, good morning.

Hi, Adam.

Good morning.

Hi, I guess the first question is a clarification for Sheryl; you had gone through some of the cost drivers for the quarter between you know employee occupancy and transport. I guess, could you tell us what the year-over-year expense increase was for each of those categories just for the second quarter please?

Yes I will. Year-over-year and the employee cost were up about $7 million. Occupancy year-over-year was up about $6 million, transportation expenses year-over-year were up about $1.2 million.

Okay. Thank you. And then back to the gross margin question, you know from earlier historically that the second half has been a bit weaker than what we have seen in the second quarter and you guys have provided some good detail on the inventory write down headwinds that you have in the second quarter. I guess beyond that are there any other items that we should keep in mind as to being perhaps you know tailwind or additional headwinds through gross margin, just for the back half of the year.

Well I guess the primary tailwind would be the piece of the activity in the second quarter that I believe is largely left behind us which is about 10 basis points. Short of that it's about what we do is from an execution standpoint and what happens to our fastener business.

Okay, got you. Thanks very much.

With that, I see we're at actually 46 minutes past the hour. Again want to thank everybody for taking time this morning to listen to the Fastenal earnings call, and for the vision and perspective portion and I think is important, we will do better. Thank you.

Thank you ladies and gentlemen. That does conclude today's conference. You may all disconnect and everyone have a great day.