Good day, ladies and gentlemen, and welcome to the Fastenal Company First Quarter 2019 Earnings Results 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 follow at that time. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to hand the call over to Ms. Ellen Stolts. You may begin.

Welcome to the Fastenal Company 2019 first quarter earnings conference call. This call will be hosted by Dan Florness, our President and Chief Executive Officer; and Holden Lewis, our Chief Financial Officer. The call will last for up to one hour and will start with a general overview of our quarterly results and operations, 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 June 1, 2019 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 us for our first quarter earnings call. I’m going to – before I step into Holden’s flipbook, just going to touch on a few comments that I had with our leadership in our normal call at 7 o’clock this morning to talk about the quarter to give them a little insight about some things we’ll be focusing on in the call as well as just some off-the-cuff comments I made to them. My first comment to them this morning was a sincere thank you for a job well done. I think, this is a really nice start to the year and I’m pleased with the performance we’re seeing across our business units throughout the planet and a very positive start to the year. Also mentioned to them about the challenge that comes when you get into the – a multi-year improvement in business. So, when I think back to stepping into this role back in 2000 – late in 2015, we’ve had a tough year. The economy had not been our friend that year. And when you’re exposed to the industrial marketplace and it flips on you, it can cause some pain in the short-term, but we kept focusing on what we focused on, that’s our customer. We kept focusing on things to make our business better, and we really started the transition to a much more focused approach on some of our growth drivers, particularly breathing some new life into vending and challenging ourselves to look at Onsites as a – as not a solution when there’s not an alternative, but as a means to grow faster and a new growth driver within our business because it’s a wonderful way to extend what is the traditional Fastenal…

Great. Thank you very much. Good morning. So let’s just jump on to Slide 5. Total sales, as Dan indicated, were up 10.4%. There was one fewer sales day in the first quarter versus last year’s. On a same day’s basis, sales were up 12.2%. We estimate the severe weather in the Northern U.S. and Central Canada reduced sales by between 60 and 90 basis points. Though remember, last year there was a weather issue as well, so net of last year’s weather impact. The total effect is probably 20 to 30 basis points. In March, our daily sales growth was 12.7%. Pricing in response to tariffs and general inflation contributed 90 to 120 basis points in the period. This is below the level of the fourth quarter of 2018, but incremental progress is being masked by the current – in the current period by having to grow over the price increases that began to benefit last year’s 1Q. We do look at it and believe that sequentially our price realize – realization was slightly higher. From a macro standpoint, as Dan said, the PMI averaged 55.4 in the first quarter of 2019. This is the lowest level in nine quarters, which is what is getting a lot of the print, but it does still constitute a healthy level as reflected in continued low to mid single-digit growth in industrial production. Relatedly, our manufacturing end markets were up 13.4%, with recent trends remaining in force. Most sub verticals that we track are healthy. The main exception being oil and gas, which remain soft. Construction was up 13.1% in the first quarter of 2019. The January comparison was easy, but February and March also continue to grow double digits as a result of healthy markets and strong internal selling energy. From…

Thank you. [Operator Instructions] Our first question comes from the line of Robert Barry of Buckingham. Your line is open.

Hey, guys, good morning.

Good morning.

Good morning.

Congrats solid start to the year.

Thank you.

So, you mentioned in the slide deck that reminded us that Good Friday is in April this year versus in March last year. How much did that impact the March number? And adjusting for that is your read that things may be decelerated a little bit in March?

Yes. So, I think it’s difficult to really burrow into what that number meant. I mean, last year, Good Friday felt on – fell on the last day of the month and it fell on a Friday. And so we have a lot of sort of month-end payments coming through. So was there a modest impact as a result of the timing of the holidays in the month, there probably was. But look, I guess, the perspective that I would give to you, Rob, is this, if we’re going to try to parse out the impact of a holiday, the impact of a – of days in the month, et cetera, we also should probably be talking about variables such as foreign exchange and weather and all these other things that impact our month. And if I look at – if I try to adjust for all of these things, the fact is the growth that we experienced in the first quarter, if I adjust for acquisitions over the past 22 months, if I adjust for foreign exchange, if I adjust for weather events that we call out, we grew north of 13% adjusting for all of those things. If I look at the six-month growth rate, it was a little over 13%. If I look at the 12-month growth rate, it was a little over 13%. So the question that you’re trying to get at, at the end of the day is, if you take out one piece, does that suggest that we’re growing more slowly? And the answer I would give you is, that’s not what we’re experiencing in the market through March. I would say that if you try to adjust for all the pieces, our growth rate has been remarkably stable at a fairly high level. And I think that with the exception of oil and gas, it’s reflective of a business environment that remains fairly healthy through March. So that’s probably how I’d characterize it. So no, I think, you’re right. But let’s not lose sight of the fact that foreign exchange was as big of a drag on this quarter as we’ve seen since we began to grow. There’s a lot of moving pieces that go into it, but generally speaking, the environment feels healthy to us.

Rob, I want to throw a little add on, Holden’s dead on right. And he comes at it, I can always tell, he worked in your world for many years. He thinks about stuff. I enjoy our conversations because he thinks about things fundamentally different. My answer probably would have been a little briefer, Rob. I probably have said, "You know what? I honestly don’t know." If I ask 10 people, I would get 14 answers. Historically, internally, I’ve always said to our team, you know what, when we pick up a day or lose a day or Good Friday comes into play, I usually throw in the joke that Easter is on a Sunday this year and a Good Friday is on Friday. But I’ve always had in my head, it’s probably half a point. And when Holden asked me earlier about this question, I said, yeah, I said it helped us. Weather hurt us. This morning, my kids are at home driving my dog is crazy, because we have a snowstorm in Winona, and it was thunder and lightning all night long. Weather impacted us. Good Friday impacted us. Good Friday will hurt us here in April. And if I were to put a number on it, probably 0.5%. But your underlying question is, did the tone change, and I honestly don’t think it did.

All right, great. I guess, my other question was just on seeing the FTEs grow just over six and kind of looking at data from the BLF, it looks like wage inflation in manufacturing is running 2%, 3%. So to see your employee-related expense up only 7, seems like a pretty noteworthy performance. And I was just wondering if you can comment on kind of what’s driving that and kind of how sustainable you think the ability to kind of leverage that line at this level is as we kind of look out over the next several quarters?

I’ll chime in on that and Holden can add some nuance and some things that I might not be sharing or appreciating. And if you think of what was going on the last couple of years, we were seeing massive inflation in our numbers, not because of the marketplace, but because of our performance. We pay a lot of incentive comp, and so this morning as an example, I was talking – when I was – when we were talking to the RVPs, our Regional Vice Presidents, one of the things I said to them, I said, “Hey folks, congratulations on a nice first quarter.” But I gave them a little bit of a cautious tone going in the second quarter. I said “Second quarter this year is our most challenging year from a comp stand –from a comparison standpoint and earnings, the incremental margin standpoint.” Because last year in the first quarter, we grew our earnings, I believe, it was. $21 million. And then from Q1 to Q2 that number – that earnings growth number went to $30 million. And so our incentive comp expanded dramatically. And if you look in our proxy, you could see from a leadership standpoint and that proportion works out throughout the organization. We pay off earnings growth. And so, I gave them a caution for Q2. But an answer to your question, are we seeing underlying inflation in labor rates if I think people that are working in our distribution centers that are throughout the organization, yes, we’re seeing inflation rates of the economy. One of the thing that’s masking a bit right now is the fact that our incentive comp isn’t expanding at the pace it was the last couple of years, and that’s why our incremental margin is shining through things we talked about in the past. But it gives a buffer, and one of your peers described it really well years ago when he talked about the shock absorbers in our system. When we’re getting great earnings growth, we share a chunk up with our employees and we take the little leverage out in a weaker environment, everybody steps up to the plate and loses a little bit of pay, because the incentive comp contracts. And so that’s part of the dynamic you’re going on there is, yes, is there underlying inflation in wage rates? Yes. We’re employing the same base of people everybody else is from the standpoint, where we draw from. But our incentive comp is at a high watermark a year ago and it’s at a high watermark now, but incrementally it’s not growing the same way.

That’s right. And – but yes, Rob, there definitely was a little bit of inflation as it relates to just sort of our base pay to our full timers and our part timers. But when you marry that up with the increase that we had in FTEs and headcount, we were still able to leverage that piece of our business. And then what do you throw on top of that that the incentive pay piece, we actually didn’t leverage that, because the good news is, we’re growing like we’re growing. Incentive pay is a big piece that shock absorber, if you will, when we’re growing. We didn’t leverage the incentive pay, because we’re – the folks are driving our business are being fairly successful. But that dynamic has been in place. I would expect a very similar dynamic going forward. We’ll continue to expand our headcount. We’ll probably could see some wage inflation in the market that’s out there today. But this isn’t the first quarter that dynamics has been in place. It existed for much or all of last year as well. And I think that the first quarter labor dynamics are very similar to what we experienced all last year, too. And I would anticipate experiencing much of the rest of this year as well. If we grow double digits, we should be able to leverage that.

Got it. All right. I’ll pass it on. Thanks, guys.

You bet. Thanks.

Thank you. Our next question is from the line of Evelyn Chow with Goldman Sachs. Your line is open.

Hi, good morning, Dan and Holden. Maybe just starting on price realization this quarter, fantastic job and encouraging to see that price cost gap narrow. I noticed on pricing specifically. I think your comps on a standalone basis continue to get even harder throughout the year. So would it be your expectation that though the price cost gap turns positive, the actual standalone pricing level maybe is – at its highest point in 1Q?

Well, you’re right that in 1Q what began to happen relative to 4Q was that, we had to grow over price increases that we put in essentially at the beginning of last year. And we’ll have that dynamic in Q2, Q3, Q4 as well, where we’ll have to grow with our same price increases. And in Q2, they probably got a little bit better. So, from a sequential standpoint, would I expect the fact that we grew pricing at 1%, little better than 1% in the quarter. Do I expect that necessarily to meaningfully increase? Perhaps not given the comps. But all that said, we do believe that there is incremental sequential pricing to be had in the business over the next – certainly, over the next quarter or two, as we continue to adjust to what the marketplace – to the marketplace realities. And regardless of what sort of the year-over-year comp number looks like, as I said, I still believe there is opportunity for us to be constructive on pricing sequentially in the next quarter or two, and that should allow us to continue to mitigate and eliminate the deficit. So, I think what you’re describing is kind of a comp issue and I get it. But I think, if you get the substance of the matter, I don’t see our ability to pursue prices being worse today than it was in first quarter. And I don’t see our ability to narrow that deficit on price cost as being any more difficult today than it was in the first quarter or fourth quarter. So I guess, hopefully that answers the question, Evelyn.

That’s very helpful, Holden. And then maybe just on Onsites. Obviously, nice to see the pace of signings and the continued commitment there. I noticed you called out you had 66 activations and 15 closures this quarter. So is that about the level of attrition you would expect going forward?

Attrition regarding the closures you’re talking about?

Yes, exactly.

So it does a little bit higher this quarter than what we typically see. We will typically see some attrition, right? Looking into the reason behind those 15 closures, there was nothing unusual there. I would say that about half of them were simply because a plant closed or moved. I think that there was probably an equal number where frankly, we went Onsite. We didn’t get the kind of revenue that we anticipated getting. So we decided to leave or their business was off right, or their business was off. But one way or the other what made sense at the time didn’t make sense today. And so we closed up that Onsite and we’ll service them from the branches we always have. And there’s, I think, there might be one or two in there, where maybe we didn’t deliver the performance we told them we would or another competitor sort of made some inroads and we left. And – but those things do happen every quarter. It was a little bit higher this quarter than normal. But I don’t see that as a trend necessarily, and we didn’t see any unusual reasons for the number, seem to be the usual stuff.

The – I’ll just throw a little tidbit in there and I’ll use vending as my example. When we started vending and it really was ramping up by six, seven years ago. We didn’t know what type of attrition there, because there’s a new industry. And what we found when we got into 2014 and 2015, that a lot of those machines that we had signed in 2011 and 2012 and 2013 were extremely successful. But there was a handful that we signed that were just either, oops, maybe we shouldn’t put this one in there. And we were pulling out on going to a given year. I looked at what we had for installed base and we were pulling out about, and I don’t step in front of you, but my recollection is about 15% a year. But when we really look at the underlying data, we saw that five of those – probably a third of those were ones where you know what, we need to continue to get better at how we make it easy for our branches to serve these machines, because we thought we could lower that number 10. What we’ve done in the last three years is, we’ve lowered that number to about 11. And we think we still believe we can get it to 10, so if we have 80,000 machines out there and tell me we’re probably going to pull out in a good year 8,000 and less than a good year 9,000 or 10,000. And the bottom line is, we think a reasonable proposition, because it helps us grow faster. In Onsite, if I look at historically, we pull out about 10 a year, but we had 200 of them. And so we didn’t really know what it would be and we still don’t frankly know, because it’s still a newer animal. But signing those Onsites, we want to be mindful. We’re really cautious about where we do it and where we don’t do it, because it’s more expensive to pull out an Onsite than it id to pull out a vending machine. But I love the fact that we’re engaging with our customers and growing faster. But it’s going to take sometime to figure out what that number is. When we’re at 1,000 Onsites, how many do we pull out a year, because either the customer closed its facility or – I mean, the customer gets acquired, and acquiring company doesn’t use Fastenal. There are few of those out there and we’re trying to reduce that number every day.

Yes. And then with regards to the new actives, new actives is a little bit lower in the quarter. We would expect to have a greater rate of active growth as you go through the rest of the year.

All right. Well, thanks, again, for the time today, guys.

Thanks, Evelyn.

Thank you. Our next question is from the line of David Manthey with Baird. Your line is open.

Hey, guys, good morning. First off, could you talk about the cost structure of the business today? I’m wondering if you think that the model is more or less variable than it was 10 years ago in terms of costs getting – what I’m getting at here is if growth does moderate slightly, are you still going to be able to sustain 20% contribution margins in that environment?

The first in your underlying, when I think back to a decade ago when we started what we call the pathway to profit. One of the things that we were truly doing is, we were slowly making the model more variable in that by not opening branches as fast. That added to the fixed cost infrastructure of the business. We’re making it more variable. One of the things that hurt our ability to leverage as we kind of picking up is, a, I personally felt, we needed to make some additional investments and some people resources to support Onsite to our vending, but also we made significant advancements in our infrastructure to do great things from a technology standpoint and we talked about those dollars that we are willing to spend and consume some of the leverage. But also the variable nature consume some of the leverage and incentive comp is a good example. To the extent we’re talking about incentive comp and the people energy. The model is more variable today than it was in the past. The question about incremental margin really becomes challenging in the short-term, because it really falls back to how much do you want to dial back on certain growth drivers. Because the deleverage comes from – if we were to branch out, they’re doing 200,000 and that market softens and they go to 180. That’s a painful downhill, because that’s a highly profitable branch that’s levered like crazy and there it’s going to delever and it’s not very and it’s more fixed than variable. The incentive comp piece obviously comes into play. So it’s probably a long – not very – a long, long answer to your question, Dave, but it depends on the timeframe. In the short-term, we could – incentive comp pulls back automatically and you’re the one that use the historical reference of the shock absorbers, which I think is a great descriptor. And in the shorter-term, it’s not as difficult. In the longer-term, it really comes down to do you want to start cutting away on some of the flesh when the economy we sell into is huge. The opportunity is huge, but our installed base has contracted, because we have all these customer spend, but their spend is down 20%. And so what makes it really challenging to do that, because I’m a firm believer. I’m more interested in the going after the $100 billion-plus market than I’m about reigning everything in, in the short-term.

Yes. Okay. Sounds like different, but it’s still manageable, so that’s fair. second question. In previous quarters, you’ve talked about the customer conversations you’re having around tariff-related price increases. And Holden, you answered this question to some extent. But I guess to refine it, have those sort of negotiated price changes been reflected already in the first quarter results? And also on the inventory side, you’re now seeing the the tariff cost increases flow through FIFO, or do those two things continued to evolve with a glide path from first quarter into second quarter?

Well, yes, on all of it first off. Yes. So the conversations were aggressive through Q4 and frankly, fairly constructive. When we said we were encouraged, I see no reason to sort of step away from the fact that we thought the conversations with our customers went fairly well. And I think there’s a lot of reasons why that has been the case. One was simply the plan that was put together to address the issue of tariffs. We feel that was fairly open and fair. And I think our customers responded in – as we would have hoped they would have given that. We also put a lot of energy into having those conversations face to face with our customers. And so, yes, they went fairly well. Now our expectation at the time and I think it’s played out this way is that, we would begin to see those costs flow through the business in Q1. And so we had to be timed to start getting some of the pricing flowing through the business in Q1. And I believe that happened. And when we talk about seeing some sequential increase in pricing, I think, that some of that is increases coming as a result of tariffs in that February/March period. And we talk about being able to see some sequential increases in pricing, I think, there’s going to be some additional relationships and that come online as we go through the early part of the second quarter and third quarter. So, but at this point, I wouldn’t say that we’ve been able to narrow the deficit with those things happening. The timing has worked out like we had planned for it to work out and the dialogue with the customers has been positive around it. So, I guess, that’s where I’d leave that.

Dave, the only thing I’d throw in as an adder is sudden jolts are disruptive as heck. And what it really requires is all of us. Our suppliers, Fastenal, our customers having a really informed frank discussion about what’s happening, because it’s been incredibly disruptive in the last four months. In fact, it probably took away some growth because you’re having – a lot of our sales teams are having discussions about pricing when I’d rather have discussions about growing the business. And – but it’s going to be disruptive. If anybody on the call has a crystal ball and can tell me what’s going to happen with the tariff six and 12 months from now and do they get bigger? Do they get smaller? Do they unwind? Is it messy? It’s going to be disruptive? Just disruptive on the unwind is – was on the wind and only time will tell how that works. Fortunately, on an unwind whenever it occurs, while it might be disruptive to pricing. It’s probably going to be helpful to the underlying economy. So there’d be a lot of noise to our numbers, but in disruptive times and times of radical change, the best cure is just good, open, honest dialogue with your customer and you manage through it.

Yes. Okay. Thanks very much.

Thanks, Dave.

Thanks, Dave.

Thank you. Our next question is from the line of Ryan Merkel of William Blair. Your line is open.

Thanks. Hey, everyone, nice quarter.

Thanks. Good morning, Ryan.

Yes. So first question I had was on oil and gas. I recall going back to maybe February that the RVPs were saying this was just a pull back in spending. It was just a pause. Is this still the case? And what are you hearing today?

Yes. Well, and so the RVPs obviously respond to what their customers are telling them. And the – what we’re hearing is that, it’s a challenging marketplace. We’re not seeing wholesale sort of layoffs and cutting of capital spending and things like that. Frankly, the weakness that we’re seeing seems to be fairly measured in temper which doesn’t always sound like what oil and gas has been like historically, right? And so if I think about the RVP tone around oil and gas, some of them are more encouraged about what the second-half looks like than what the first-half looks like. But all of them say, what oil price is going to do, right? And so I think if I think about the tone around oil and gas, like I said, it began to weaken. I think, we’ve begun talking about this probably November/December last year. And the degree of weakness hasn’t necessarily gotten more severe. Over that period of time, it has persisted, but it’s also broadened. So what something which began in Houston and Dallas has spread to other regions, right, in terms of commentary. And like I said, some of them feel like this is going to clear itself out by the second-half. Some of them feel like they don’t know. And all of them understand that it’s about what happens to the price of oil and how their customers feel and we just don’t have a great answer to it. But that’s where we have oil and gas today.

Okay, that’s helpful. And then second question on Onsite margin inflection, I recall 2020 could be the year where more mature Onsites at higher margins start to offset the newer Onsites. Is this still the case based on what we know today? And then how much do you think you could lift overall company margin?

Yes. So we haven’t seen any real change in kind of the pacing of how we expect that to play out. And so what I’ve said before is, today, where we’ve got so many new Onsites, you don’t have sort of an equal ratio between how they’re aging versus how we’re adding them. But over time, that’s going to change. And I think the proxy for that will be when does the average size for Onsite stop declining, right? And my feeling is that, that is probably the late 2019, but probably more in 2020, which means by the time you get to 2021, 2022, instead of this continuing to work against our overall level of gross profitability that, it’ll begin to diminish in terms of the impact on the mix. We still feel like that is the case. Now what we’ve said before is and I think Dan laid this out last time, right? I mean, when we’re – when we double our revenues, we want to be a 22% operating margin company thereabouts. And in order for that to happen from 20% today, we need to see some of those Onsites begin to mature and become more profitable. And we think that, that will happen. And so what is the impact? I would tell you today, the overall impact is a drag more so on the gross margin, the operating margin, but it’s in both. But over the next, let’s call it, 18 months, I think, you’re going to begin to see that drag really flatten out and then it begins to contribute more towards our goal of being a 22% operating margin company.

And one thing to keep in mind, it’s a two-pronged drag in the short – in – or the last few years. The one drag is the mix of Onsites and the average revenue per Onsite going down. The other drag is, we went from not really signing Onsites to 80 and then 180 and then 280 and, of course, to 400. And every time we sign an Onsite, I actually shouldn’t say that. Most of the times that when we sign an Onsite, we’re taking a customer relationship out of the branch, highly profitable branch and we’re delevering it. So you kind of have a two for going on. Not only are you pulling down the average of your Onsites, you’re actually hurting the probability of your branch network a little bit in the short-term. And when you get to a steady state of how many are coming in and going out, that’s when life becomes a little easier. No different than think about how the math changed decade ago and when we slowed down opening branches to the pathway to profit. All of a sudden, your mix of branch has changed.

So it’s kind of the trajectory. And frankly, what’s been great is that really has been playing out largely as we would have modeled it out a year ago, two years ago.

Perfect. That’s good to hear. That’s kind of what I was getting at. Thanks, guys. I’ll pass it on.

Thanks, Ryan.

Thank you.

Thank you. And our next question is from the line of Hamzah Mazari of Macquarie. Your line is open.

Hi, guys, this is actually Mario Cortellacci filling in for Hamzah. I know there has been questions about pricing already. But I mean, do you think it’s harder for distributors in general to get pricing during the cycle versus prior cycles, or maybe as a different way, I mean, given where the demand environment is and where commodity inflation is? Should pricing be higher than where it is?

Yes. Since I’ve been here longer, I’ll take a shot at that and Holden, I can say, can chime in and correct me on some things he disagrees with. But pricing is always hard. People talk about transparency in today’s world and it is greater. But frankly, our customers knew what they were spending for product, what product costs were around 10 and 20 and 30 years ago, so it’s always been hard. It’s about are you bringing a great value to a customer and their willingness to pay for that value. And if you think of it that way, I think that probably the toughest one right now on a pricing front is pricing is always hard. But I think the one that’s got a little harder is the freight one. Now for us, it’s twofold. One, the freight dynamic is a little bit different, because Onsites are a different dynamic for freight than the branch network. And so we almost have to understand the two pieces individually. But in today’s world, there’s a lot of examples of where freights included and freights this or freights flatten. It’s fundamentally different models. And it’s always just having a good discussion about your freight – the freight side of your picture, and that’s probably the more challenging element in today’s world setting mix aside.

Yes, and I would say, I mean, I don’t know what it should be compared to history. I would say this. I mean, every quarter going back to the beginning of 2018, we have made sequential progress in raising price. We’ve done that, because there has also been sequential increase in cost. And so we don’t love obviously that we have a deficit on the price cost dynamic, but part of that is perhaps we needed to be more aggressive than we were. But that shouldn’t be read to mean that we weren’t doing what we had to do to protect the margins, because as I said, pricing has gone up every quarter. But we also have to acknowledge that, we’ve had some pretty significant increases in cost. If I look at how much our cost has increased in the first quarter? It’s more than twice what that same increase was in the first quarter of last year. And so we’re kind of chasing – we’re chasing that piece of it as well. But I don’t want to give the impression that because we have a price cost deficit that, that doesn’t mean that we haven’t been able to pass price through, because we’ve passed more price through every quarter in response to marketplace. But if you give us a flattening in the cost environment, we’ll catch up. But the – I don’t want to give the impression that we haven’t been able to pass price through, because we have.

Great. And just one more and I’ll turn it over. And you actually mentioned freight and just want to see if the benefit essentially running your own captive fleet, it has been fully optimized, or do you think there’s more room to go there? I guess, if there is anymore room for improvement, I guess, how much do you think that could be?

Well, first off, the advantage of having our captive fleet, it’s indescribable from the standpoint of – set the cost aside for a second. Our ability to provide service is night and day different from all our competitors. Earlier, I used the example of that outdoor locker. A year from now, I fully expect us to be able to take an order from a customer that comes in late in a day, may be in the evening. And let’s say one-time in a hundred that customers in a jam and they need it like two hours ago. Our competitors are going to be providing that. They’re probably going to freight that in using small parcel and it’s not getting there till 10 o’clock tomorrow morning, and that’s a really expensive trip. Our driver gets to that branch at 4:00 in the morning or 2:00 in the morning or 6:00 in the morning. You pick enough of the time, because it’s different for each branch. But let’s say, this branch is 4:00 in the morning. Our driver could throw that item in an outdoor locker and that customer get a text at 4:00 in the morning to the item you ordered at 5 o’clock last night is here, and nobody else in that market can do that. So to me, the value of a captive trucking is you can provide a level of service that’s – that just separates you in the marketplace. From a cost standpoint, we have a great cost structure compared to our peers. And we’re able to use that cost structure part of our gross margin difference in our industry is because of that freight advantage. Our cost structure is lower. But it puts you in a position to challenge it everyday. It also puts you in a position of conversations with your customer and maybe move some product for them on the backhaul. So one of the reasons that we’ve always been successful as we do a nice job with backhauls from our suppliers and more recently from some customers. That’s where I think we have some more legs to, especially on the Onsite piece of saying to customers get some pallets you need moved? We’ll move it for you and maybe we can freight that way to quantify the potential, I’m not going to – I’m not ready to go there right now, because I don’t know if we know it.

Yes. And the only thing I would add is, I mean, I think one direction you’re going is, it is more cost effective to move product on our trucks than on third parties. And from the fourth quarter of 2017, we really begin to see the field utilizing our truck network at a greater rate because of what was going on outside of our truck network. That kind of hit a level in Q3 of 2018 that we sustained, a very high level. So, the question is, what can you ship more and more onto your trucks? Yes, there’s always good reasons to use a third-party, whether it’s a customer required or what have you. So we’re probably at a good level for that. But I can’t emphasize enough that in a period like this of inflation, third-party inflation is going up at a far greater rate than the cost that we’re experiencing at our own captive fleet. And what that means is, we have a huge advantage in the marketplace that is only getting wider by having that fleet. So, what we can never tell you is, how much of an advantage are we getting in winning business, because we have our captive fleet even in an environment where there’s inflation, especially in an environment where there’s inflation. I can’t answer that question for you, but it goes into our calculations and it’s a reason why we went. So I guess, the tenor of the question is, when are they going to stop impacting gross margin? I wanted to take the answer a little bit more broadly, because we’ve done things to sort of minimize the impact. But you can’t underestimate the value of that trucking fleet and our ability to manage cost and our ability to win business.

Got it. Thanks for the time, guys.

Thank you.

So I show in my watch 9:57 and very mindful that we’re in earnings season and everybody on this call has a busy schedule and so I don’t want to go long. Just want to close out with a few thoughts. I mentioned earlier in the question and I thought I’d just touch on it again to make sure I didn’t freak anybody out with my kind of off-the-cuff comment. The message I have to our team is as we go forward, just like it’s more challenging to grow when you start stacking years together, it’s more challenging for incremental margin. And that means we need to work harder at every day to achieve it. It doesn’t mean if this is – that is a cautionary tale, that’s just a statement of fact. And I feel great about the team we have and their ability to manage this business and to grow this business. The second item, we talked about the weather impact and you see discussion centers on impact to sales and the impact to our customers. One thing I’m really proud of is the – because the biggest impact quite frankly is to the folks that drive our semis down the road. We were talking about freight. Picture you’re driving through the middle of night and they’re in the middle of a snowstorm, that’s a tough thing. And I think I mentioned on last call or I may have mentioned it to our team internally about it, a semi driver who was stranded outside of Chicago, because their fuel line jelled up, because it was so cold and our branch manager on the last day of the month went and rescued that person and got him into a warm environment, because it was 30 below zero. And one thing I’m really proud of is the way our branches and our district – and our distribution managers treat our drivers from the standpoint of, hey, make sure your back dock is – snows are removed and it’s a safe environment for your driver, because that driver is the lifeblood of your business. And really pleased to say we came through it with a very safe circumstance for our semi drivers. Last thing, great people pursuing a common goal can do great things. Learned that from Bob 23 years ago and it’s as true today as it was then. Thanks, everybody. Have a good day.

Thank you.

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude the program. You may now disconnect. Everyone, have a great day.