Ellen Stolts - Investor Relations Dan Florness - President and Chief Executive Officer Holden Lewis - Chief Financial Officer

Ryan Cieslak - Northcoast Research Scott Graham - BMO Capital Markets David Manthey - Baird Hamzah Mazari - Macquarie Capital Ryan Merkel - William Blair Adam Uhlman - Cleveland Research

Good day, ladies and gentlemen and welcome to the Fastenal Company 2018 Second Quarter 2018 Earnings Conference Call. At this time, all lines are in a listen-only mode. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the call over to Ms. Ellen Stolts of Investor Relations. Ma’am, you may begin.

Welcome to the Fastenal Company 2018 second 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 1 hour and we 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 September 1, 2018 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 participating in today’s call. I realize at this stage of the economic cycle, our industry is a bit out of favor, but however, I believe we have a great story to tell. And I believe our moat is expanding in the marketplace. Let’s start out by going to Holden’s flipbook. If I look at some of the highlights he called out, I will start with, it will be probably good if I got on the right page, I’d start with our non-residential construction business is accelerating. In June, we hit 17%. In all honesty, I don’t understand the strength behind it. I know the things we have done to build momentum there, but I was very pleased with the progress we saw in the second quarter. Our manufacturing demand is stable at very healthy levels. We rolled that together. We grew our sales 13.1% in the second quarter. That’s our fifth straight quarter of double-digit growth. So, when I think about it I think there is two things that are noteworthy there. One is we are growing on some good growth numbers and I think that’s a pretty strong statement. The second thing is a year ago in late March 2017 we acquired a great organization in Michigan called Mansco, we anniversaried that acquisition on March 31. So, our growth in the second quarter was 100% organic. And we put up I think a great number. If I look at on the operating income side, our operating income grew 13.3%, which is a beautiful thing. Our reported EPS was $0.74. However, there was a discrete tax item in there, so really pleased with the earnings growth we saw in the quarter and our ability to manage our expenses. Holden will touch on some of this a little bit deeper later. Onsite and vending signings are on pace to achieve our 2018 targets. As mentioned, we had significant operating leverage in the second quarter, including employee-related expenses and our gross margin was stable on a sequential basis, which I think was an important thing to note. And the real key to the stability from Q1 to Q2 from my perspective is we did a little bit better job using our own trucks. We have always talked about the fact that we have a great trucking network we built over the last 35 years. We have a structural advantage in the marketplace. And frankly, the marketplace is becoming increasingly more expensive and so our ability to divert some of our shipments off of third-party carriers on to our own network serve us well in any economy. It served us really well in the second quarter. In the context of normal seasonality, our operating cash flow improved in the second quarter. We repurchased some stock. And as we announced last night, we increased our third quarter dividend from the $0.37 we had been doing in the first two quarters to $0.40. Flipping to the Page 4 of Holden’s book, we signed 81 Onsites in the second quarter, that’s a 19% increase over the second quarter of 2017 and we finished the quarter with 761 active sites, that’s a 57% increase over last year. Our 2018 goal for Onsite signings remains somewhere between 360 and 385. Total in-market locations were 3,051 at the end of the quarter, up over the 2,937 a year ago. What you are seeing before your eyes is a morphing of the Fastenal distribution model. We are consolidating some locations throughout the marketplace probably a little bit more in the major metros where we have a wide smattering and some of those locations are morphing into Onsites. And so we continue to expand our in-market presence. We signed 5,537 vending devices in the second quarter, a 13.5% increase over the second quarter of ‘17. Our installed base grew 14.3% and the sales through our vending devices grew in excess of 20%. Our 2018 goal is to sign 21,000 to 23,000 and we feel good about that goal at this point. National accounts, our daily sales grew 19% in the second quarter. In June, we broke 20%. I have to say that tasted pretty good and I was proud of the team and everything they are doing to grow their business. Outside the U.S., our sales continued to well outpace the company and we are seeing great results within the U.S. and throughout the rest of the world. Before I turn it over to Holden, just wanted to share some commentary and call this in the category of trying to be ever more transparent of what we do and what we are seeing in the marketplace. And at 7 o’clock this morning, Holden had his typical call with our leadership group, our regional Vice Presidents, our VPs that lead up support areas as well as our officers. He discussed through the earnings release to give them more insight into what we saw in the business and he gives me a few minutes at the end to throw in a few thoughts and I just thought I’d share with you some of the thoughts that were covered on that call. The first one we talked about with the group is we have really decided that hitting goal matters. We have hit goal – at January, we missed goal. Weather messes us up a little bit. So, we came in just shy of goal. Since February, we have hit goal every month and we had a big goal number in June and I was pleased to say we hit it. And in total for the first and second quarters, we hit goal. Hitting goal consistently gives you confidence to invest in where you are going. From a gross margin perspective, we maintained our gross margin and the mantra of, hey, just use our trucks, played out really well. We have, as I mentioned earlier, a great trucking network and we are tapping into it a little bit more. We have been having a lot of discussions about expenses. And this is one where if I am looking at myself in the mirror, I have to say either we are not communicating really well or you are not listening. And I think it’s probably more we need to step it up on how we communicate. So I am taking that piece on from the standpoint – after the first quarter, when we grew our labor expense about 14%, I got a lot of phone calls from shareholders in the sell side community really wondering, what the heck is going on that you are growing your expenses so fast and you are not able to leverage. What we have been talking about the last 2 years is the investments we are making in growth drivers. We made dramatic investments in our ability to sign vending devices. We made tremendous investments in our ability to implement and improve our Onsite network. We made sizable investments a little over a year ago in our ability to grow our e-commerce locally, and the other piece is understanding the fundamentals of how we compensate. Historically, a sizable piece of conversation within Fastenal has been incentive-based. If you read our proxy, you can see that if we don’t grow our earnings, our leadership better enjoy living on base pay because that’s the key driver of incentive comp. In the first quarter of 2018, we added $21 million in pre-tax to our business that was double the $11 million we had added the year before when we compare ‘17 to ‘16. That causes our incentive comp to grow quite dramatically. And if I look at the 14% labor growth in the first quarter, 6 points of it comes just from expanding incentive comp, 1 point of it comes from Mansco acquisition, and the other 7 comes from adding people in the organization. If I look at the transition from Q1 to Q2, you saw our labor expense growth drop 400 basis points from 14 to 10. What really changed there? We put a little bit of a pause on hiring. We had gotten ahead of ourselves, but that wasn’t the real change. The real change was we anniversaried Mansco and our incentive comp, while at a high level, is not disproportionately higher than second quarter of 2017, because in the second quarter of 2017 we added about $27 million in pre-tax. In the second quarter of ‘18, we added $31. The delta there isn’t as great. So, our team throughout the organization are enjoying enhanced incentive, but they were second quarter last year. So, the comp is different. I apologize that I haven’t communicated that better, but we saw a nice change in our ability to leverage. Frankly, I didn’t think it was going to happen until the third quarter and the team did a nice job of deciding to move it up 3 months. If I look at the MSAs and I have started to talk about that more, talked about that in the President’s letter, talked about that at our annual meeting and in previous discussions, we are really learning a lot by really taking a good look at those 100 large MSAs, communities little over 0.5 million, what is our plan in those markets? And there was something that’s jumped out for me and this isn’t an exclusive thing to the MSAs, but it stands out when I look at it from things we are doing. And so, yesterday at our board meeting, the individual that leads the e-commerce drive is within Fastenal, it’s a relatively small business, because there is so many things we do that don’t lend themselves to e-commerce. We do Onsites. We do our local branch network. In many cases, we are fulfilling things for our customers that they don’t even have to order and so e-commerce really isn’t part of the Fastenal model. But one thing that’s really was interesting to see is that as we have been quietly building momentum in our ability to go to market in a bunch of different ways. And if I look at true, local e-commerce transactions where we are taking advantage of our last mile advantages, that’s about a $100 million business and it’s growing 30% a year. I think that speaks well and forget the fact that it’s e-commerce. It speaks well to the capabilities of the Fastenal organization to fulfill and to serve customers’ needs. And the interesting thing is we are seeing really nice growth within our Onsites as well. It’s about ease of doing business. If I – I am also – and bear with me a second, I like milestones. Sometimes they are fun to point out. And this is probably a ridiculous one, but bear with me. If I go back to 1987, the year we went public, we had about 50 locations back then. We had 300 and some employees. For the year, we did just under $20.3 million. I believe it was $20,294,000 or something like that. In the month of June, on a daily basis, we broke $20.3 million. So, in June of 2018, we did more revenue everyday than we did 31 years ago that the company that went public. I think that’s a pretty neat milestone and I am proud of what our team has done in that 30 some years to accomplish that. Said another way, we are 254 times bigger than we were 31 years ago, that’s kind of fun. I also thanked our regionals and our VPs and RVPs for a great quarter. I think they really demonstrated the power of the Blue Team and what we can accomplish in the marketplace and some of our structural advantages. I am blessed from the standpoint I have a wife that’s not afraid to challenge me in most things in life, personal and business. And the other day, she was asking me some questions about the quarter. And I told her I can’t tell you, because it’s not public yet. But all kidding aside, she was asking about what we are seeing from the tariffs, she said, you are thinking any of your strength you are seeing is coming from the tariffs in the marketplace. And I answered really quickly and with confidence I said, absolutely not. I said what our business is about is we are a supply chain partner. And most of our customers are able to operate in a very lean environment because of what we do. And I don’t believe there is any impact from the lift other than if there is any impact to any of our customers and their activity that would create but there is no inventory build in the cycle from what I am seeing, which caused me to immediately go to Holden and say, hey, Holden, this is what I told my wife, am I accurate? And he canvassed our RVP group and he got a resounding, no, we are not seeing that at all. So, I thought I’d address that in the context of the time. Second question she had which was actually just as good as the first was how does Fastenal react in an environment like this? And I looked at her, and I said, well I gave her the proverbial, I’m a farm kid. And I learned at a young age, you don’t react to the weather. You plan for it because you can’t change it. This is just like the weather. It seems to change on a daily basis. What I can tell you is Fastenal’s biggest strength is our field network, our branch and Onsite network we unlike any other regional, national, or global distributor, we source a tremendous amount of product locally and so, we don’t have a small, centralized group that has to be really agile, although they are. We have 15,000 people working in our branch and Onsite network that are agile every day so our ability it is not easy to manage through it, but our ability to manage through it is stronger than anybody else in the marketplace. And I would be going into a period like this, the confidence I have comes from the team we have on the ground. And that makes it pretty exciting. When I was finishing up with the RVPs this morning, I didn’t say this to them because I didn’t want to get weird on the call but I thought back to a movie – Gene Hackman is one of my favorite actors of all time. And I thought back to a movie he made back in the early ‘80s called Hoosiers. And at the end of the movie, he cites a line as the scene is going dark to his team that, I love you guys. 22 years ago, I joined the Fastenal organization. And I didn’t join because of the growth of the organization. I didn’t join because of the opportunities of the marketplace. And I didn’t even join because of the great people. All three of those were true. I joined because I saw in Fastenal an organization that treats people differently than other organizations I’d seen in my prior experience. And I wanted to be a part of that. In an organization where you’re inclusive, and you treat others well, and you invite others to join, and the only requirement to join us a willingness to learn and change, a willingness to help each other succeed, and a willingness to be challenged by others and to be willing to challenge others to think big, when you have all that, you have a home at Fastenal. Come join us. We can do great things together. And I think you see it come through in a quarter like this and in what we’re doing in the evolution of the last few years. I’ll close with two thoughts, and then I’ll turn it over to Holden. My mom is having a double mastectomy at 11:00 this morning. I wish her well on that. I’m going to visit her after the call and Godspeed on her recovery. 60 days ago, my wife had the same surgery, and I’m proud to say that today, she looks and feels better than she ever has. So, I’m thankful for organizations like Gundersen Health down on La Crosse. Our medical in this nation can do great things. With that, I’ll shut up and turn over to Holden. Thank you.

Thank you. Good morning. Why don’t we go over to Slide 5 five? As covered, the total and daily sales were up 13.1% in the second quarter. That’s consistent with the growth that we logged in the first quarter of 2018. We estimate that pricing contributed between 50 and 100 basis points in the period which is also in line with last quarter. Although, we should say that this quarter did have to grow over what were modest price increases from last year’s Q2. And that did mask what was some incremental progress on price in the period. The quarter finished on a healthy note with June’s daily sales growing up 13.5%. This represents the 13th straight month of organic daily sales growth ranging between 11.5% and 14.5%. And that’s despite the stiffening comparisons we’ve seen over the period. In addition to contribution from our growth drivers as Dan discussed, this growth is supported by what remains healthy macro conditions. The PMI averaged 58.7 in the second quarter and industrial production continued to expand at a low to mid single-digit rate. Non-residential construction continued to accelerate for us leading our mix this quarter with growth of 15.5%. This includes growth of 17.4% in June. Manufacturing end-markets remain stable at high levels, growing 13.3% with sustained strength in most sub-verticals and from a product standpoint, non-fasteners were up 14.8% and fasteners were up 11.1%, both were in line with the first quarter levels. Though it’s worth noting that fasteners in June grew 13.5% which is the fastest rate we have seen this cycle. From a customer’s standpoint, national accounts were up 19.1% with 80 of our top 100 accounts growing. And in June, our national accounts grew 20.4%. Growth in non-national accounts continues to run in the mid to high single-digits with roughly 66% of our branches growing in the second quarter. In terms of market tone, sentiment in the field remains constructive, especially as it relates to the non-residential construction market and the good demand of the past few quarters appears to be carrying into the third quarter of 2018. Now over to Slide 6, our gross margin was 48.7% in the first quarter of 2018, down 110 basis points versus the second quarter – I am sorry, our gross margin was 48.7% in the second quarter of 2018, down 110 basis points versus the second quarter of 2017. While mix is always a factor given where we are seeing our strongest growth, it was a relatively minor factor this quarter. There were two larger impacts. In the second quarter of 2017, we had a modest price increase ahead of anticipated higher product costs. So, the large decline in the current period reflects the degree to which those costs have caught up. Higher freight expenses were also a meaningful drag on a year-over-year basis. Sequentially, on the other hand, our gross margin was flat. There were no big movers in either direction, but seasonality was offset by a little extra leverage due to the strong growth, a slightly lower mix drag and steps to counter increasing cost of freight and imports. Price cost was slightly negative in the quarter and there is further work to do here. We do believe we will make further progress in coming quarters. Our operating margin was 21.2% in the second quarter of 2018, flat on a year-over-year basis. Stronger seasonal volumes and the lapping of certain cost resets generated 110 basis points of cost leverage and an incremental margin of 21.5%. Looking at the pieces, we achieved 80 basis points of leverage over general corporate expenses and occupancy related costs. The latter was up 3% with growth in vending being partly offset by flattish facility expenses. Employee related costs were up 10% and that generated 50 basis points of leverage. We were restrained in our headcount additions this quarter with total and FTE headcount being up just 3.4% and 4.7% respectively. This was aided further by inclusion of Mansco expenses in both periods and a moderation in the growth of incentive comp now that we have entered our second year of stronger growth. Putting it altogether, the second quarter of 2018 EPS were $0.74 though excluding a one-time tax item, this would have been $0.70 or up 36% from the second quarter of 2017. In the absence of tax reform and the lower rate that it provides to us, EPS would have been $0.59 and growth would have been 13.8. We continue to anticipate a tax rate of 24.5% to 25% absent refinements in the application of or discrete events arising from recent tax reform. Turning to Slide 7, we generated $152 million in operating cash in the second quarter of 2018 or 72% of our net income. Second quarters are usually lower cash generating periods due to our having two tax payments. Still we were pleased that the conversion rate in the current quarter was above the 57% average conversion of the past 5 years which reflects the lower tax rates. Based on our expectations for continued favorable cash flow, we have increased our quarterly dividend from $0.37, which we established in the first quarter of 2018 to $0.40 for the third quarter. Net capital spending in the second quarter of ‘18 was $25 million bringing our year-to-date outlays to $53.8 million, consistent with the first two quarters of 2017. However, this reflects mostly timing. And we would expect higher capital spending in the second half of 2018 for expansions and upgrades at hubs and for property purchases. We have also identified a need to increase our spend for vending equipment given the strength that we are seeing in that growth driver. And as such, we are increasing our full year of 2018 net capital spending projection to $158 million from our previous $149 million. We increased funds paid out in dividends by 15% to $106 million and repurchased $40 million in stock in the period. We finished the quarter with debt at 16% of total capital below last year and at levels that provide ample equity to invest in our business and pay our dividend which we actually increased for the third quarter. The picture for working capital was improved versus the first quarter. Inventories were up 11.4% in the second quarter of ‘18. Inventory on hand fell 5.5 days, which we view favorably in light of inflationary pressures and plans for additional inventory investments in the field throughout 2018. Receivables grew 19.6% in the second quarter of ‘18, expanding days by a little more than 3.5. This continued to be affected by growth in our national accounts and international businesses as well as customers pushing payments past quarter end. Fortunately, the intensity of this latter factor has moderated, and we have not seen any meaningful change in hard to collect balances. That’s all that we have for our formal presentation. And with that, operator, we’ll take questions.

Thank you. [Operator Instructions] And our first question will come from the line of Ryan Cieslak with Northcoast Research. Your line is open.

Hi good morning, guys. Nice quarter.

Thank you.

Thank you.

The first question I had is looking at the June sales growth rate, particularly with fasteners, big acceleration there from maybe what you guys were trending in May. Dan or Holden, maybe if you could peel back the onion a little bit and think about what’s ultimately driving that, do you feel like it’s a combination of both the market accelerating there but also maybe some share gains just trying to get a better understanding on what’s driving the acceleration in fastener growth here?

I’m not sure that I have a tremendous amount of granularity there for you I would say that if I look at June, our fastener growth in most of our categories actually stepped up pretty nicely right and that’s true of our OEM fasteners which no doubt, the Onsite growth is playing a role on that as is the general economic strength that we’ve seen but construction fasteners were up quite a bit in June relative to even May as well or March or April. MRO was up as well. So, I would say that it’s fairly broad but we’ve definitely seen the same sort of acceleration that we’ve seen in the construction business broadly, we’ve seen that in the construction fasteners too and so, I would look at it, and I would say that we’re seeing stability relative to prior quarters in many categories. And then the construction piece which is accelerating broadly also we are seeing that from the fastener component of construction too so, that’s probably what I would say about those pieces.

Okay, great. And then for my second question, really nice to see the operating leverage here in the quarter and the incremental margins within that range you’ve talked about. It feels like as you get in the back half of the year, you continue to lap some of the headwinds you saw last year from an expense standpoint and if I hear you right, you said price cost dynamics maybe there’s some additional opportunity there how do we think about incremental margins then into the back half of the year is there anything that we should be keeping in mind from a negative standpoint or an offset that comes in that maybe keeps you at the low end of that range versus potentially getting to the higher end of that range? Thanks.

Yes. So what I would say is the components that drove it in the second quarter, I think those are intact in the third quarter and when we’re talking about the occupancy leverage, the general corporate leverage those should continue to be leverage able pieces of our overall mix. From an employee expense piece, yes you are right we have lapped those resets and that’ll certainly be true in Q3 so those pieces that led to this leverage this quarter, those are still very much intact as we go forward you combine that with double digit revenue growth, assuming that that’s what we achieve in the third quarter, and I think that that is a formula to continue to make progress on the incremental margins, particularly because I would not expect the gross margin comp to be anywhere near as difficult. So, that we did 21.5 against that gross margin is fairly satisfying and I think that where you’re going with this is should we do better, we should be I think that the math would tell you that we should do better in Q3 than we did in Q2 from an incremental margins standpoint the one piece that I will contribute to that is the strong work that was done by everybody at Fastenal to deliver that leverage in the quarter, that does also afford us the opportunity to keep investing in growth and so, there is the potential that we may choose to take some of that growth and reinvest it in the business to sustain the type of growth rates that we’re having but yes I would concur, Ryan I think that the pieces that drove this incremental margin are still intact as you go to Q3 we shouldn’t have the same difficulty with the gross margin comp and if we continue to grow quickly, I think that the prospects were doing better on incremental margin in the back half are still pretty strong.

Okay. Thanks. I’ll get back in queue.

Thank you. Our next question will come from Scott Graham with BMO Capital Markets. Your line is open.

Hi good morning. Three questions for you all. Number one, Holden, I harken back to the comments you made about a year ago that you have to deal with 20 to 30 basis points of gross margin headwind from mix. Is that still a number that you would go with and maybe talk a little bit about how you will backfill in the second half on that a little bit more. Secondly...

Hi, Scott. Let me take them in order and also, we’re going to take two so, think about the second question carefully before.

Sure. No problem.

As it relates to your first question, yes, the mix elements aren’t changing. Again, with national accounts growing as quickly as they are within the mix and with the Onsites growing as quickly as they are within the mix, they continue to contribute more to our growth overall each quarter, I think this quarter, the Onsites were contributed 4% growth in our business and a year ago, that was 3.2% Those are mix issues that we’re happy to take those on. But it does push the margin down and I still believe that 20% to 30% mix drag per year is the right number to think about. I haven’t changed off those terms.

Good thank you. Secondly, you’ve got some really good operating leverage at the operating expense line, could you talk about the sustainability of that and how you’re looking at that in the second half toward some of the incremental margin comments you made?

Yes, not a lot to add versus what I just contributed again, the pieces that drove it this quarter, I think those pieces are intact as you go into Q3 and Q4 in terms of lapping some of these expenses but what we won’t have is we won’t have the difficult gross margin comp and so, you blend all that together, and there certainly is a path to doing better incremental margins in the third quarter and fourth quarter than what we did this quarter the only caution I threw out there was we’re afforded the opportunity to invest in our business because of the leverage that we achieved this quarter and we might reroute some of that into sustaining the type of growth that we’ve enjoyed and so, I don’t have a lot to add to that.

Well, I guess what I’m trying to get at, Holden, simply is you have this gross margin headwind, it is not going to go away. Does that get the entire company, particularly at the regional level much more focused on their operating expenses to generate the leverage to offset that gross margin issue?

This is Dan. I will just chime in quick if you go back in time, a decade ago, we were talking about the pathway to profit and in that discussion, we talked about the inherent profitability of the Fastenal business and how that gets enhanced over time and how when I look at our most mature regions that frankly have a higher percentage of Onsite and in many cases, [indiscernible] business than the company average, they’re also our lowest operating expense businesses and typically, our highest operating margin businesses and it comes from part of the expense management, comes from doing - it’s hard work, you do it every day you don’t let things slip through your fingertips, you understand what’s best in class across the organization but part of it comes from the inherent leverage that comes in the Fastenal model when the average branch is doing 120 versus 100, you pick up hundreds of points of operating margin, when it goes from 120 to 150, you pick up expense leverage and only partial offset to that can come from the fact that your gross margin typically, a branch doing 100 will lose 100 basis points of gross margin on its journey to 150 a month but it’ll also shed 450 basis points of operating expense and your net win is a 350 point win and so, it’s really not allowing being a little bit lazy or a little bit lax on expense management today to let any of that slip through your fingertips, that economic model is what affords us to do what we’re doing with Onsite.

Thank you.

And at the Analyst Day, if you recall, we showed a couple of lines one was the gross margin declining over the past 30 years as we’ve invested in these growth drivers and the other one was the SG&A as a percentage of revenues declining over 30 years as we leverage and I would just point you to the SG&A percentage in the first half of this year has never been lower in the history of our company and that’s how the model is supposed to work. As Dan said, this leverage came through perhaps a quarter sooner than we might have expected, but the model is working as we would have expected it to.

Great. Thank you, both.

Sure.

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

Hey, good morning guys. First off, looking at that number of top 100 national account customers experiencing growth, I guess it was 80 this quarter. And Dan in the earlier part of this decade, I think you were talking about 75 out of 100 was normal, what is the historical low and high in that figure?

I am going off the hip here, Dave. So, bear with me on that. I believe when I go back to 2015, I think we had a quarter where it got down in the 40s and as you know that was not helpful to our business. What I don’t know here is obviously we have a solid economy. We also have some growth drivers at our fingertips that either weren’t there or weren’t contributing at as high a level when I go back to 2015. The Onsite, as Holden mentioned has changed the game and 75% of our Onsites are with national account customers. I believe that’s the stat. It’s in the 70s. And so we are seeing – so, what’s the cause, what’s the effect or chicken and egg or whatever analogy you want to use. The economy is given lift, but are the growth drivers getting lift? The fact that our vending is operating at a really high level that benefits all customers, including national accounts, but 80 is a really strong number. And when I go back to prior periods where we were able to grow our fasteners, especially at this kind of rate you needed to be in the 70s.

Okay. Maybe I will follow-up on that. But the second question for Holden, were you saying you picked up I guess $5 million to $10 million year-over-year due to price and you are saying that the price cost equation isn’t quite there yet. So, I assume you are not fully recapturing your COGS increases. But am I right to assume that you are capturing enough of it that you are picking up incremental gross profit dollars, Holden, you are not getting lower gross profit dollars because you are upside down on that price cost equation, are you?

No, we are not, we are not. As I said, we are slightly under water just with regards to a price cost standpoint, but yes, as we said in the first quarter, we got a little incremental pricing in the first quarter from efforts that we put into place in the fourth. We actually got incremental pricing in the second quarter over the first. That was masked a little bit, because in the second quarter we were growing over last year’s modest price increases where we weren’t in the first quarter, but we made some incremental progress on pricing. There was certainly some incremental moves on the inflation side as well, but yes, we are not backwards in that regard.

Yes, sounds good. Thank you.

Thank you.

Thank you. Our next question comes from Hamzah Mazari with Macquarie Capital. Your line is open.

Hey, good morning. The first question is just around tariffs, you mentioned sort of they are not leading to strength. Does that mean that you didn’t see any pre-buy related to tariffs? And then maybe if you could just update us what your sort of direct and indirect exposure is to China sourcing.

Sure. With regards to pre-buying, I actually canvassed the RVPs this morning to get a sense of what they are seeing in the field and it came back fairly uniformly that we really aren’t seeing anything or at least nothing is being discussed with us about pre-buying product ahead of time. Now to be fair, I am not sure that gloves and goggles are necessarily the type of product that people load up on ahead of demand. So, we may not be that kind of product or that kind of company, but we don’t believe that that is impacting our revenue growth rates in any meaningful way. As it relates to the 232s and 301, 232 at this point is just meeting inflation generally speaking with regards to that one. As it relates to 301 I think there is a couple of threads here, one is the first $50 billion that has been talked about. There is not a huge impact on us from that. Now that we have had a chance to see how our products are being affected, I will probably stick with about $10 million of COGS perhaps being affected by that. Although, it’s in places we hadn’t necessarily expected sort of indirect shipments on things like ball bearings and welding consumables and things like that, but it’s a pretty small number. I don’t think particularly meaningful. And so if it stops there, I am not overly concerned about the direct impact to tariffs. I think the question you are really getting at is what happens with the other $200 billion, should they go into effect? And honestly, at this point, we are not sure. I mean, it’s hard to sort of speculate on that. I think you can make a case that somewhere in the neighborhood of 10% of our COGS may come from China directly and indirectly, but I am only guessing at the indirect piece. Again, that’s more art than science figuring that one out. And also I don’t assume that everything that we get from China will be tariffed, so that would pull the number down, the impact down. And of course, we would expect to be able to shift product perhaps from China to Taiwan or Vietnam or other sources. I think one of the great values of having a significant local sourcing operation on the ground in that region is that we know where there is alternative source of product that we can shift as quickly as anybody else. And so, it’s conjecture as to what the impact will be if any, you would expect that it could have an impact, but we have mechanisms and such to manage that.

Great. And then just secondly, any color on just improvement in non-resi? For you, it was pretty dramatic. I know you have oil and gas in non-resi. Do you attribute it to that? And then is the margin mix on non-resi better than manufacturing, any color there? Thank you.

I think that the oil and gas and things around that are certainly helpful. The other thing I would point out is relative to manufacturing, right we talked about how our growth has been up between organically 11.5% and 14.5% for 13 months. That is not necessarily true of non-residential. I mean, for most of that period, our manufacturing was really driving that. If you look at the quarter a year ago in non-res, we were up about 5.5%, 6%. And so to some extent, I think what you are seeing is an acceleration off of some easier comps, but I do think that also we are benefiting from having injected energy over the last two or three years into the effort. If you remember, we really started talking about the tone around non-res starting to get better in March of last year and I think that that tone transformed into actual facts on the ground in November, December of 2017. And it’s just continued to run from that point. And right now, it’s running against relatively easy comps. And so that’s about the color that I have for that. And from a margin standpoint, we always think about from a gross margin standpoint, construction fasteners fall somewhere in between the OEM fastener on the low end and the MRO fastener at the high end.

Great. Thank you.

Sure.

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

Hey, thanks. Good morning, guys.

Hi, Ryan.

Good morning.

Congratulations on making me look completely wrong in my preview to you by the way. Nice quarter.

Don’t take it personally, Ryan.

So, just to follow-up on price cost and it was slightly negative. So, I don’t want to make a big deal here, but can you just articulate for us why is price cost negative, what are the key issues there?

Well, I mean, the key issue is that inflation continues to run very quickly. As I said, we got some incremental pricing, but the quick math is we had feedstock or product cost that was going up somewhat faster. And so, yes, that’s the environment. I don’t know what more to add to it, I mean, it is inflationary for products and that inflation has not stopped.

I will add just one thought to that. And I touched on this in April. I think we really started the hard press about 4 to 5 months later than we should have. We did some things last summer. Holden touched on that where we were raising some prices. Actually, in the second quarter last year, we got some nice lift in our gross margins. So, we were actually ahead of it a little bit. But in November, December time, we really should have been putting on the hard press. We have our meeting in December every year with our leadership. We should have had the hard press on. And I didn’t really turn it on until April and that’s completely on me. And so we are a little bit behind.

And to give you a sense, right so in Q1, we were sort of reacting to things. I think in Q2, we actually put a lot of discipline in the field just in terms of the messaging and that messaging flowed down to the RVPs and into the field and that was a part of that. And then in Q3, we have some additional tools that are going into the field to hopefully make this pricing process easier and so, that’s why we struggle like everyone else does with what is ramping inflation but we believe that we continue to make incremental improvement each quarter, and I think that’s going to continue into Q3.

Got it, yes. I am just clarifying that it’s transitory and it’s not anything that’s structural different than the past it was more just being late, not passing through the pricing so, that’s good to hear and then my second question okay and then my second question, the non-national accounts, I think you said it was up mid-single digits and I don’t think that has accelerated much correct me if I’m wrong over the past couple quarters but my real question is that a market growth rate are the smaller customers or non-national account customers just not growing as well or is it just not a focus for you, and that’s why the growth rate just isn’t anywhere near the national account growth rate?

Yes, I think there is a couple things going on our growth drivers, when it relates to Onsite really benefits the national accounts and a piece of the non-national if I think of the strength we’re seeing internationally, that’s much more akin to our national accounts Heck, our national accounts are doing a great job if I think of our local business, one thing that is impacting that and Holden, refresh me on the number I believe our branch count is down about 6% Q2 to Q2 when we consolidate a branch in a market, historically we’ve talked about 65% to 70% of our business is our top ten customers in that branch frankly, you can retain that business without a great plan because that’s a group of customers you’re naturally engaging with and you do enough business that everybody matters to each other from the standpoint of they know Fastenal’s an important part of their team and we’re typically delivering the product to their backdoor so, the fact that we’re coming from a branch two miles away or seven miles away doesn’t really matter if you think of the other third of our business, so the other 35%, 5 of that is retail business and a piece of that retail business, when you consolidate, you have a high risk of losing now, in a $50,000 branch that you consolidate, there’s three grand that’s there and you’re going to lose a piece of it the other 30 of the 35, you need to have a really good plan in place to make sure you don’t lose touch with that customer because that’s a customer doing $300, $500, $700 a month with you and your relative importance to them might be different and so, there, we have to have a really good plan and so, some of the delta you’re seeing, I don’t think it’s because it’s industry growth, which it happens to be I think it’s a case of 6% of our branches disappeared and so, there is some impact from that. Now does that account for why it’s single-digit versus double-digit, I honestly don’t know, but that comes into play.

And Ryan, I might contribute as well so, we are growing in the non-national account business faster than industrial production, which I think is meaningful in addition to what Dan talks about in terms of the branch closures, the Onsite growth most of our Onsites are within national accounts, but some portion of our Onsites are not within national accounts and remember, we do shift revenue from a branch into an Onsite and so, for those Onsites we sign up, maybe some of those have been serviced out of a store that wasn’t a national account business and there might be a little bit of an impact there as well so there are a few pieces that are working against that number being better than what it is today but it is outperforming industrial production and we think the field is doing a nice job.

And it’s helped for farming the organic growth for the industry.

Perfect. Thank you.

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

Hi good morning.

Good morning, Adam.

Hi, I was wondering if we could cycle back to the.

Hi, Adam. Adam?

Yes?

Good report yesterday.

Thank you. I wanted to circle back on the investment drivers I guess as we think about the back half of the year here we touched on it maybe a little bit but the headcount growth has been relatively low and it would seem as if there might be some need to add additional heads into the back half of the year to support the growth that you are seeing and I’m just trying to understand how you guys are conceptualizing that investment spend into headcount could it be only a couple of points of extra growth or is there something where we should be expecting a bigger ramp?

The message we’ve had to the team is where you’re signing Onsites, where you have business growth, add people and we’ve been investing at a pretty healthy clip and as I mentioned, by the first quarter, in all honesty, we probably got a little bit ahead of our self and so, we just put a pause on we didn’t stop hiring we put a pause on but if you actually drift into the weeds a little bit, you’d see that from a pure headcount standpoint, there was more drop in the part-time than there was in the fulltime so, the loss of hours and energy wasn’t as great the other thing is as we migrate to a bigger and ever bigger piece of our business being Onsite, we become more efficient if I think about some time ago and I forget the exact time it was a little over a year ago we took over the hosting of our vending network what that afforded us to do is to interconnect the vending information much more directly into our point of sales system so, the lift, the workload for servicing vending, while it’s still sizable and we are doing things every day that make it a little bit more efficient, it’s much more efficient today than it would have been 12 months ago because the interconnectedness within our point of sales system and our trajectory system that runs the vending platform is much more seamless today but we will continue to add headcount to support our growth but we’re working against comps that are really different and that really is what speaks to Holden’s confidence in our ability to achieve leverage.

Okay, got it. And then secondarily, thanks for the disclosure on the e-commerce business that’s a lot of incremental revenue off of a small base I was just wondering if you could touch on anything new or different that you’re doing there relative to what you’ve talked about in the past and how big do you think it could get for you within your current business model? Thanks.

Yes, at this point, on the last part of your question, I’d be just posing a wild guess and my wild guess would be, frankly, no better than anybody else’s wild guess but to the part about what we are doing different for 3 years, our e-commerce was negative, nominal and it was a relatively small business, because it wasn’t an emphasis point we started investing in resources into our team early part of 2017 and we added an RESS and I hope I have the acronym right help me out, Holden, regional e-commerce sales specialist.

There you go.

Okay. And it’s a small team, but really what they are about is engaging with our branch network, our Onsite network to go out and drive that our IT team is operating at a higher level today than I’ve ever seen in my 22 years what the team has put in place we’ve always had great talent, but we weren’t always able to muster up the resources to do great things and right now, we’re doing some great things and the system they put in place that we rolled out what we call FAST 360 a year ago and that’s really a visibility tool for our customers to see what’s on their plant floor, whether it’s in a vending machine or in a bin stock location so many times historically, customers don’t know always what’s in their facility because a lot of what we sell is coined MRO so, when it’s bought, it’s expense. So, there’s no visibility to where stuff is even on the OEM side, most ERP systems don’t give you the level of visibility to know where stuff is our FAST 360 does that for our customers and we rolled that out a year ago and that’s growing nicely in our business and it works out really well in our Onsites as well the team is really leveraging that start and our same day capabilities at our branch network to really tap into we can do today what many companies aspire to do and we’ve connected some of the dots electronically to do it but I don’t want to get ahead of myself it is still a relatively small number, but we’re tapping into making it easier to buy from us today, 90% of our sales go through an omni-channel, goes through we only have – we have 10% of our sales where the customer buys through one channel and that’s typically our retail business and our what we call Tier 1 customers, so relatively small customers that interact with us only at the branch level. But when you start layering in where you source at the branch through an Onsite, through vending, through a bin stock internationally, e-commerce and put all those together, that’s 90% of our revenue. So, we are doing things today and we have been naturally for years what other companies aspire to do and you are just seeing it shine through because we have a group that has a really good plan and they are executing to it, but it’s still a relatively small part of the business and I have the foggiest idea where it will go to.

Best of luck to your mom and wife.

Thank you. With that, I see that we are at just a few minutes before the hour. I hope I am not cutting anybody off who had a question, but thanks again for your interest this morning. And I do sincerely believe we have a great story to tell. The Blue Team is blessed with great people. And I believe we do something special for our customers and they recognize it and it affords us the ability to grow. Have a good day, everybody.

Thank you.

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