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Fastenal Company (NASDAQ:FAST)

Q1 2009 Earnings Call

April 14, 2009 10:00 am ET

Executives

Willard Oberton – Chief Executive Officer

Daniel Florness – Chief Financial Officer

Analysts

David Manthey – Robert W. Baird

Michael Cox – Piper Jaffray

Adam Uhlman – Cleveland Research

Brent Rakers – Morgan Keegan

Michael Hamilton – RBC

Sam Darkatsh – Raymond James

Operator

Welcome to the Fastenal Company's 2009 quarter one earnings conference call. This call will be hosted by Mr. Will Oberton, Chief Executive Officer and Mr. Dan Florness, Chief Financial Officer. The call will last for up to 45 minutes.

The call will start with a general overview by our Fastenal hosts, Mr. Oberton and Mr. Florness. The remainder of the time will be open for questions and answers. Today's conference call is a proprietary 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 over the internet via the Fastenal Investor Relations home page at www.investor.fastenal.com. A replay of the web cast will be available on the website until June 1 at midnight central standard time.

As a reminder today's conference call includes statements regarding the company's anticipated financial and operating results as well as other forward-looking statements based on current expectations. It is important to note that the company's actual results may differ materially from those anticipated. Information on factors that could cause actual results to differ materially from these forward-looking statements are contained in the company's periodic filings with the Securities and Exchange Commission, and we encourage you to review those carefully.

Forward-looking statements are made as of today's date and we will undertake no duty to update the information provided on this call.

At this time, I would now like to turn the conference over to Mr. Willard Oberton, President and Chief Executive Officer.

Willard Oberton

Thank you. I’d like to thank everyone for joining us on the call today. Although the first quarter was a difficult quarter I kind of call it a “good news/bad news” quarter. I really think we had more good things going on than we do negative things but I’m going to start out with the bad news. It really starts out with the first quarter sales.

As you know, the first quarter started out very slow for us and then continued to deteriorate and March was a very tough month, by far the worst month we have had in company history from a sales growth standpoint. We do seem to be seeing some signs we are getting near the bottom. One of them is three of our regions that fell very hard early in this in the October/November/December timeframe actually showed sequential growth from February to March. That would be the mid-South; which is the Kentucky/Tennessee area, the southeast and the northeast, all areas that were really crushed early.

So we see that as very much a positive. The entire eastern side of the United States which went in earlier, and we talked about that on the last conference call, also did better in March. They were still down from their February numbers but ever so slightly and it seems to be stabilizing to where we are also encouraged by that although the west in March took a hard drop which seems to be a timing issue going across the country in trying to figure out where it is. The east, which had gone in early, has smoothed out.

Again, it is difficult to tell but it appears that April has not deteriorated as much and is running at a similar daily average rate to March. Now the difficulty in trying to determine that is where Good Friday falls, holiday early in the month, but so far we are looking at it and saying okay it doesn’t seem to be getting a lot worse and maybe again we are getting close to the bottom. So we are encouraged by all of that and we will continue to work hard.

A couple of statistics to give you with just a little color as to what is happening with our customers, we watch very closely our dollar per invoice and average transaction. In March 2008 our average invoice per customer was $204. In March of 2009 that dropped to $178, a 13% decrease. The other stat we look at very closely is our dollars per customer on a monthly basis. In March of 2008 that was at $954 and it dropped to $768, a drop of almost 20%. Customers are just buying less. So that is really what is going on with the customers and what we are seeing out there in the markets.

On the good news front, we believe we are doing well or I believe our troops and our people in the field are doing a great job considering the environment. The first one is the gross margin. Year-over-year we improved our gross margin by 50 basis points from 52.4 to 52.9. What that is really made up of is really an improvement in transportation. The product is about the same but we saw a 40 basis point improvement in transportation. Some of that is driven by fuel, the year-over-year fuel is lower but not a huge amount, and it is really being driven by making smarter decisions on how we run our trucks, really working hard on the routing. The guys that are doing it are working very, very hard on the routing and just trying to make better decisions on everything we do. So the margin is definitely a positive. That is one thing that the pressure from the customers we were worried about but we have done a nice job there.

Another one is the expense control and SG&A. In the last call Dan and I had said we believed our SG&A would only grow between I believe 0-3% is what we stated. We are actually down 3.5%, really driven by labor. Our labor expense was down 8.5% for the quarter with really the same size group of people. Actually almost identical headcount numbers. Really driven by the variability in our pay. Bonuses were down. Overtime was down. All the things that are out there we have driven down to save money and continue to be very profitable.

Another positive, again I will touch on transportation again. Very positive from what we have done there. On the headcount we actually reduced our headcount from the fourth quarter by 849 people and we did that through natural attrition. We didn’t have to do a mass lay off. We still don’t believe we are going to have to do that unless things were to get a lot worse which right now we don’t believe they will but as murky as it is out there I don’t think anyone could tell. If I had a crystal ball I would be in a lot better shape.

Nice job on the quarter-to-quarter improvement and year-over-year we are actually within on average I think one person off from 11,033 this year and 11,032 last year. I was kind of surprised to see that number yesterday how close it was.

Active account growth is another very positive. We drew our actives, actives we define as number of customers buying from us in a given month, by 6.1% which in any other time we would not have been impressed with when you look at the gap from there to what our sales growth were we are taking market share. There is no question when you look at the average customer buys 20% less from us but we sold to 6% more customers. The people are out selling and taking market share.

Inventory, we did a nice job reducing our inventory. We still have a lot of work to do there. Dan is going to be touching on some of the things we are doing. We are going to continue to see decreases in our inventory over the next several quarters and Dan will give you more color.

The last item that I want to touch on are accounts receivable, another really positive one. Going into this mess back in the October timeframe we were getting lots of questions from the investment community about what are your DSO’s doing and what is going on out there. We have held on very nicely. Some of it due to changes that Dan has made and I think a lot of it just due to hard work by the people in our collections department and out in our stores. I think it is a tribute to the relationships we have with many of our customers.

With that I’m going to turn it over to Dan. Dan has a lot of material to cover and then we will circle back for questions.

Dan Florness

Thanks Will. Good morning everybody and again thank you for being on the call. I’m going to touch through a few things that are in the press release. I would point out on the first page, the bottom 2/3 of the page is new commentary that we decided to put in just to give a little more lead-in flavor to the release and touch on, as Will said a second ago, our sales trends did weaken as we went through the quarter. However, we were able to put in a very strong showing from a cash flow perspective in the quarter and continued to build cash in total despite the fact of the dramatic increase we had in our first quarter of our dividend pay out.

Sometimes when you are in a period of change you try to analyze numbers a few different ways and half of it probably drives you crazy and half of it gives you some insight. There is some information, some statistics I thought I would share with the group. I’m going to take a couple of minutes first to explain the character of what I’m looking at and how that has changed basically since 2000.

What I did was I took a look at customers that purchased from us in the month of October. The reason I chose October is October historically has been a high water mark for us in a calendar year. We are typically looking at our sales trends from January through October to see what we are building and how that leads into the next year. So October is a very good indicator of our next calendar year what our business is going to look like.

So looking at October the customers that bought from us and then took the subset of those customers that also bought from us the following March; five months later. Trying to understand the trends. Again there is some seasonality to our business so you have trends that come into play but here are some numbers I will throw out and hopefully at the end of the day or the end of this blurb everybody listening has more insight than when we started and aren’t just confused.

If I look at the 2001 to 2003 timeframe, the first data point in that would be October 2000 to March 2001 looking at the group of customers that bought in both of those months. If I look at that three-year range, the dollars dropped. If you recall in 2001/2002 and even 2003 timeframe we were in a recessionary environment. In 2003 we hit a low point late in the first quarter and throughout the second quarter when the Iraq war started. If you look at the trends from the October to March the static group of customers that bought in both periods, our sales with that group of customers dropped on average about 7%. The range was down 6 to down 9 over the three-year period but the average was about 7% drop.

In the next three-year period from 2004 to 2006, again looking at March customers versus the same customers the previous October, our sales actually increased approximately 9%, a low of 5 to high 11, but on average up were 9%. Then in each of the last three years here is what the numbers did. March 2007 versus October 2006, a static group of customers their sales were identical. They changed by less than 1 point of a percent. March 2008 versus October 2007 the sales mirrored what was going on in the earlier part of this decade. They were off 7%.

That entire timeframe from 2001 to 2008, the average was 0.4% drop. So basically March to the previous October customers did the same volume. March of 2009 versus October 2008 our sales with a static group of customers were off 27%. For me it helped me understand what is the norm. When we were seeing sales growth weaken in 2008 we were seeing an environment very similar to what we saw in the early part of the decade. That environment post October 2008 declined quite dramatically to the tune of four times worse than what we were seeing a year earlier.

When I look at the number of active customers and I look at those time frames interestingly enough the customer drop off from October to March in total was consistent for every year within a few percentage points from 2001 through 2008 but was about 4% lower in 2009. So that talks a little bit about frequency of customers whereas the real story is about sheer volume drop off in dollars that are purchased March 2009 versus October 2008. Again, I hope that was informative and not just confusing as heck. Sometimes I’m not sure.

With regards to the pathway to profit, Will touched on some points and I will add a couple to it. Our headcount as we talked about in our first quarter call dropped dramatically from the high watermark we had in the October timeframe. Our FTE in the first quarter was down 849 people or 7.1% from the fourth quarter of 2008 and as Will mentioned a good chunk of that was related to normal attrition. A piece of that was related to a conscious reduction in part-time hours from roughly 27-28 hours a week to I believe right now we are running about 18. So it was a combination of headcount reduction and pulling back the hours worked because of less product going through the store, less hours are needed to move that product.

When I look at the profitability of the business the table we put in the press release on page four tells a little bit of a story about the quarter as well. Last year approximately 50% of our stores did greater than $60,000 a month in sales. In the first quarter of this year that number had dropped to about 38%. So you really had two things going on that affected our overall profitability. One was downgrade in the category end and as everybody knows from seeing previous releases the change in profitability from Category One to Two to Three to Four To Five is quite dramatic.

The other thing that impacted us was the stores for example in the 100-150 category. Where they are, the average in that group deteriorated from last year and so you saw the profitability of each category drop between 50-100 basis points. Although when I look at the changes in our gross profit dollars available to pay operating expenses in the last six months I believe the reaction in what you saw in our operating expenses was quite dramatic and I applaud the Fastenal team for their efforts.

The other item I’d talk about is as we mentioned in the release we are consciously slowing the headcount at our stores, the increase, as well as the number of store openings this year. Some figures I thought I would share when I look at the two years since we started Pathway to Profit, since first quarter 2007 to first quarter of 2009 our FTE at the store level is up $1,319 or about 20.7%. So we have a tremendous amount of additional selling dollars we have put into the organization over the last two years as well as we have opened stores in that two-year timeframe.

If I look at our D.C. operations, our FTE headcount is actually down 20 or about 1/10th of a percent and our support headcount is up 6 or 0.4% so in total we have added 1,306 FTE’s in the last two years. All of those FTE’s have gone into our store to put us in a position to continue to grow, as Will mentioned to take market share and propel the business forward.

Some items on expense control I will touch on. Payroll expense cycled down and when I look at it versus fourth quarter and versus first quarter all components dropped within the category. So some of the natural shock absorbers we have in the system that move North and South whether that be commissions or profitability bonuses moved as we would have expected. Other components dropped because of headcount and hours reductions.

Fuel costs also helped out the quarter as I called out in the release. Occupancy costs for the quarter grew 6% year-over-year and in the first quarter call we talked about the progress we are making with renewals. Approximately 50% of our 2009 renewals have been renegotiated and we have made very nice progress with our reductions that we identified in the first quarter call. I am pleased with that. We are pushing real hard right now on the 2010 renewals as well. We want to hit while the iron is hot. I think where we have done a very good job is especially on the west coast, our California region, as well as our Salt Lake region have done a nice job of reducing their occupancy through re-negotiations.

Will touched on accounts receivable. There are really two components in accounts receivable worth mentioning. One is the income statement risk and the other one is the cash flow risk. I’ll touch on the income statement risk first and that is in this environment customers of ours are suffering. Some have gone through some bankruptcy issues. We can manage through the turmoil. We saw our bad debt expense increase as a percentage of sales year-over-year. We have managed through that. Thankfully from a cash flow standpoint we have been able to maintain reasonably well our DSO’s and I will touch on a few drivers of that in a second.

Finally, on working capital changes as Will mentioned we were able to reduce our inventory in the quarter and what I can touch on with inventory is that we will continue to work aggressively to size our inventory to the size of our business today. That means I expect our inventory to continue to drop as we go through the year. I was pleased to see the drop in March. As you can appreciate, when the sales numbers dropped off as dramatically as they did it was challenging to correct the direction of the ship in the short-term. We struggled in January and February but were able to make a nice dent into inventory in the third month of the quarter and I believe that sets us up nicely for Q2 and Q3 to see additional reductions.

A couple of the things that we are really focusing that on is most of our inventory is physically located at one of our stores. Over the last 1-1/2 to 2 years we have built some nice mechanisms internally for sharing inventory between stores and that puts us in a position to continue to drive our inventory down and lean up our inventory with tools that just weren’t available to our business 2-5 years ago. As it relates to accounts receivable, several things have been driving it. I believe a very good job at our district and store level with managing the relationships with our customers.

Our customers know us well. Our customers have been doing business with us for years and I believe treat us well and we treat them well and they continue to pay their bills in a timely fashion. One other item I touched on in the first quarter call is we have continued to modify how we bill our customers. In our first quarter call I talked about the number of customers that we were now billing, ignoring the customers that we bill with EDI and that is a sizeable number. There are a lot of customers we do less than $1,000 per month with. Less than $300 a month with. We are slowly driving that business from sending an invoice in the mail to sending an invoice either via fax or email.

In January on the call I talked about we had converted approximately 8,000 of our customers over to this new method of billing. As of last week we have approximately 73,000 customers switched over to receiving their invoices either via email or e-fax. What that means is a lot of customers are getting their invoice several days faster than they would have historically. I believe that is one of the components that helps us manage our DSO’s through getting our bills to our customers faster and getting paid in a timely fashion.

As we look out through the balance of the year, as I mentioned in the call, we will strive to manage our operating expenses and our cash flow in a prudent fashion and I believe we will have a very strong cash flow for the year as we saw in the first quarter.

With that I will turn it back over to the operator for the question-and-answer session. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Manthey – Robert W. Baird.

David Manthey – Robert W. Baird

I can’t guarantee a logical follow-up but I will try. First of all, Will in terms of you saying the business is stabilizing are you referring to average daily sales dollars flattening out? Are you talking about year-to-year change in average daily sales, that sort of year to year rate?

Willard Oberton

We are saying our April right now it looks like the year-over-year decline right now appears to be similar but neither are dropping as fast. That is really what I am saying. Like I said, three of the regions actually showed sequential growth from February to March and they had been falling off the face. It appears that the areas that fell earlier are starting to flatten out and show more of a normal sequential trend of improvement from month-to-month as the year goes through.

David Manthey – Robert W. Baird

Would you attribute that to sort of inventory de-stocking sort of running its course at this point?

Willard Oberton

We don’t know. I get that question all the time and I have talked to several of our large customers about it and they are saying that their business dropped off so hard that they are struggling to manage their inventory also. At this point that may be the case. They are starting to just buy…because several of the customers said we just turned it off. We just quit buying anything we didn’t absolutely have to.

David Manthey – Robert W. Baird

Dan, do you have the growth in actives in March specifically?

Willard Oberton

We’ll get back to you on that. The growth in actives in March was lower than the quarter. We will circle back with you. Dan is grabbing it right now.

Operator

The next question comes from Michael Cox – Piper Jaffray.

Michael Cox – Piper Jaffray

My first question is on inventory levels. Up about 10% and you are holding gross margins nicely. I was hoping you could talk a little bit about the pricing pressures you are seeing out in the market place and perhaps your willingness to accept lower gross margins to preserve sales and market share?

Willard Oberton

We are seeing pressure out there but right now we don’t believe we are losing a lot of business to not being competitive. Otherwise we wouldn’t be adding to our actives. We believe we are taking share right now. It is finding that balance between lowering margins…so the customers are coming to us asking for better pricing. With most of our large, national type accounts we have indexes put into the contracts based on the CRU steel index and that will slowly migrate down but it is a long process. It goes up slow and it comes down slow over a period of time the way it is managed.

The smaller customers, we did reduce our wholesale price which is our published list price on commodity fasteners by 10% March 1. We lowered it. What that really translates into is probably about a 2-3% reduction in about 1/3 of our products or maybe 1-1.5% of our decline in sales came from that lowering of price. You have to bring it down, a lot of customers get discounts off that or our set pricing so it is a lift. We are going to continue to see pressure on the steel fasteners because those prices are dropping. So far we have been able to hold our pricing.

One thing that is happening out there in the marketplace and we are hearing this from the customers is a lot of our competitors are low on inventory and so we have the product. We are hearing that from the field saying you know what right now the fact that we have product on the shelf is helping us in the marketplace. When they need it, our customers don’t want to stock it. So our ability to provide product is very big right now.

Michael Cox – Piper Jaffray

On the buckets of stores in the different categories of sales per month there is a pretty significant, I think one of the more significant moves we have seen into this $0-30,000 per month category. I guess I am curious were there a lot of stores just hovering just above $30,000 a month? Was there a weaker performance out of some of these newer stores that would cause such a big shift in those buckets?

Daniel Florness

I guess I’m not conscious of where stores are within categories. There is no doubt about it this environment negatively impacted every group of stores because so many customers’ businesses are just dropping off rapidly. So unfortunately it didn’t spare any of our categories, even our smaller stores. You saw stores in that 30-60 category that had significant customers that were pummeled. Sometimes you can have a smaller store where one or two customers can have a much more pronounced effect on the business than they would in a store doing $200,000 a month because sometimes one or two customers can really skew the numbers and unfortunately pummel them unnecessarily.

Willard Oberton

I’m going to circle back quickly and answer Dave’s question. Dave, on a daily rate our actives in March were up 2.5%. On an absolute rate 7.3%. So we still saw good growth in the active accounts in March.

Operator

The next question comes from Adam Uhlman – Cleveland Research.

Adam Uhlman – Cleveland Research

I was wondering if you could slice the revenue performance for the quarter and for the month of March by a couple of different ways; one between manufacturing versus your construction customers. Also that large account versus your smaller customer. What are the trends you are seeing there?

Daniel Florness

In the large account versus small in the different ways we have talked about it in the past we also take a look at what we call our top-ten customers. But when I look at it from what I call our top-300 customers, so this is looking at every one of our regional business units, and looking at their top 300 customers versus the pack when I look at the Q1 numbers, a number that almost mirrors what we saw at the company level for traction for the quarter and so that group were in the fourth quarter they fared a little bit worse than the company. In the first quarter they operated about the same as the company.

Willard Oberton

Our top-ten customers which represent about 66% of our total business, 65%, the top ten were down 18% in March and the other were down 17.2%. So really very similar trends. It is across the board.

On the construction versus manufacturing we don’t have good numbers on that. We have been working on the reports.

Daniel Florness

I suspect you would see a similar deterioration in both groups, maybe a little bit skewed towards manufacturing.

Willard Oberton

Part of it is we have a few big job sites that are really driving our construction numbers. There are some energy plants going on. We are trying to normalize that and that is where we are struggling to get a really clean number out of it because they don’t really represent the trend of construction companies. These are big multi-million dollar jobs.

Adam Uhlman – Cleveland Research

How would you envision gross margin unfolding through the year? We have these price cuts that are starting to unfold across the commodity fasteners and presumably as you work down inventories that will impact supplier purchase incentives. I would suspect there is still some FICO accounting that needs to be worked through the P&L. How do you see gross margin unfold with all those other dynamics this year?

Willard Oberton

On the price deflation what we are seeing right now is our cost of goods on the shelf will drop as our prices drop. We will manage down through that and we will see a headwind there but we should be able to manage through that quite nicely. As far as the vendor incentives our purchasing group or product development group has done a very nice job. They went in early back in December and renegotiated a lot of those programs so that we don’t have to get even close to the targets we did this year. We put in some very low targets and said business is unusual and our business is different. What we use in all of them is say if you think you can grow your business next year overall then we will sign up to growing our business and if you can’t then we want the same deal you think you can do. Most of our suppliers, our rebates and our incentive programs are pretty safe unless it gets a lot worse. There will be a little headwind on the margin. Dan maybe you could add some color?

Daniel Florness

One thing I would add to some of the thoughts about the vendor programs, there are a variety of programs that relate to how we transport to our products, some relate to how we grow our business. When I look at the dollars and I look at the impact they tend to skew a little bit away from fasteners to the non-fastener product lines. It is our fastener, i.e. steel based products that are really being hurt the most in the current environment. Whereas our non-fasteners, I’m not saying that business is rosy compared to others because they are moving directionally the same but the impact on non-fasteners is less of a downturn than it is on fasteners. So that helps us somewhat as well in some of these programs.

Willard Oberton

So we see a headwind on margin but we don’t see a very large or big change from this year-over-year going forward.

Adam Uhlman – Cleveland Research

So the idea is that you think you can hold gross margin declines to a reasonable level? I guess I’m kind of confused on what the conclusion is.

Willard Oberton

The conclusion is we will probably see some deterioration but not a lot. The other positive we have on gross margin is the transportation will continue to get better with increased volume so our transportation costs won’t go up but our volume will spread. As we go through the year our volume should increase even if our month over or year-over-year declines are 17% the volume goes up. If it didn’t get any better from that standpoint we still have more volume to ship and we will get more benefit from transportation as we go through the year. Also fuel was at its peak in the middle of last year so we will get that benefit also. So fasteners are going to be difficult to hold margin on. The other products will be a push and transportation will offset some of the fastener decline.

Daniel Florness

To give you a gauge of what we are seeing already when I look at where we were in Q3 and where we were in Q1 of last year our transportation gross margin added between 35-40 basis points to our gross margin. So we have seen degradation in our gross margin sequentially from the dynamics of the environment, rising cost pool and stagnant if not slightly deflationary sale prices. So I think we have managed through pretty well thus far but we will have some gross margin pressure but I think we can manage through it in the balance of the year.

Willard Oberton

Sorry we are somewhat vague but it is a very, very difficult thing to put a handle on because it really depends on what customers are doing well and what product lines are doing well. There are thousands of moving parts that come together to that one number, or millions of moving parts.

Operator

The next question comes from Brent Rakers – Morgan Keegan.

Brent Rakers – Morgan Keegan

Will, I guess you made a lot of comments about some of the regions that actually improved. You specifically cited three regions that got better sequentially from February to March. I was hoping maybe you could offset that from the other side and talk a little about the regions that weakened and maybe if you can share some of what you think the similarities are in some of those regions that have weakened sequentially?

Willard Oberton

The regions that we have really seen weakened that really came off hard in March would be just take the Mississippi south on the west side of it. Basically Minnesota, Dakotas, all the way to Texas. That part of the country all the way to the Rocky Mountains really got hit hard. It held up well before. We think it was being held up by two things; energy and agriculture. As we know, farming got ugly late last year but it seemed to hold up well through the winter in this area and oil a lot of the projects with oil were ongoing and they were at full steam last fall even though oil prices were dropping. Now they are not starting new projects so we got hit real hard in Louisiana, Texas, Oklahoma with energy and we got hit real hard Kansas north with Agriculture. Those are the areas that really affected us.

Now the west coast, California we are doing actually quite well there. Florida…the one area that went down early and we haven’t seen much improvement is that auto belt, the Ohio, Indiana and Michigan area still really struggling in that area which with all the turmoil going on we don’t see anything coming back real soon.

So that kind of gives you a flavor for the country. The other area that we have really seen deteriorate is eastern Canada and Mexico. Mexico is really being driven by a handful of large customers that have just really pulled back manufacturing. We are still doing well in China and we are doing reasonably well in Singapore. Actually doing really well adding business. We have a couple of large customers that have almost shut down.

Brent Rakers – Morgan Keegan

As a follow-up to that particularly within the energy and agriculture segments can you give us a better sense of how large a component those two end markets are to your overall business? Then also when would you start anniversarying some of the easier comparisons if you will in those categories?

Willard Oberton

I don’t think it is so much how much they are of our overall business it is how much they drive the economies in those areas. When you look at the Texas areas, the big areas along the Gulf Coast, those economies are completely driven by energy just like Detroit for the most part is driven by automotive. So as energy goes, those markets go. The support industry, the construction and project growth, taxes and roads and bridges in the Midwest is still somewhat similar. Not as much in Minnesota as it is in Iowa, the Dakotas, Kansas and Missouri where there is a heavier component. What I am saying is that is what we believe held it up and that is what really dropped. We sit back and say what is going on in these markets? The ag, you look at Deere and Cat and those people have pulled way back and our business dropped off right with that.

Brent Rakers – Morgan Keegan

One last clarification on that, when did you see those regions start to weaken relative to some of the other ones? Was it in the fall of last year? Winter? Or just this spring?

Willard Oberton

They started weakening with everything else. But when you draw the lines the eastern half of the United States dropped quickly. The Ohio area dropped much more quickly. In the west, excuse me, kind of came along…February dropped a little bit but then March was a month where we really got hit in the Texas area. Here is a growth as a region where growth dropped off by something like 10-12 points in one month. Both those regions, the Oklahoma, Louisiana and Texas areas those were the areas that really surprised us in March and really pulled us down hard. They are a pretty good, large piece of business. A lot of the older stores in the area are very profitable stores and across the entire company that is the one area where we just won’t [inaudible.] We know and I have talked to a lot of people, a lot of our people down there. These are long-term Fastenal people. They just didn’t go to sleep and quit working. They are out there working harder than they ever have and their customers just aren’t buying.

Operator

The next question comes from Michael Hamilton – RBC.

Michael Hamilton – RBC

If we look at infrastructure spend as a come back driver in the economy what is your feeling on what kind of relative share you see versus a lot of your other markets? In other words, if that is the driver do you lag a little bit off of that?

Willard Oberton

I’m not sure what you mean by…

Michael Hamilton – RBC

Do you have less of a share in every dollar that you would assume you spent in infrastructure than you do in industrial, energy?

Willard Oberton

Well there is probably less of our product used in infrastructure because so much of that is engineering. We will do a lot of business in infrastructure. Our Senior Vice Presidents have already been meeting with suppliers of products, several of the ITW companies, people that are making American-Made because a lot of that is put into the bill that it has to be produced in America. Products we can go in, concrete anchors, structural fastening systems where we can go in and take advantage of those builds. We have actually mapped out all of the highway projects and a lot of the infrastructure projects that are going on and we are prepared to go in and take that business as quickly as possible. We are positioned really well for it because we have the product and we have it out there in the field. We are looking for a boost from that.

It is a little bit unclear as to when it will start. States are moving at different speeds but we have really worked a lot on it already.

Michael Hamilton – RBC

Could you comment on what you are seeing out of Canada at this stage?

Willard Oberton

What we are seeing in Canada is two things. One is the currency. That has hit us hard. Eastern Canada is basically very similar to the Indiana/Michigan area where the unit growth, currency aside, business is down close to 20%.

Daniel Florness

One thing to keep in mind is our Eastern Canada business is very much centered on the province of Ontario. Some Maritimes are out there but the dollars are really in Ontario.

Willard Oberton

Probably more than ¾ of our business is in Ontario. Western Canada we are holding up better but it is still slow. We were doing really well up in the oil sands and that has really slowed down because of $40-50 oil. Still a lot of activity but not the frenzy that it was. Canada east and west really reacts similar to east and west in the United States. The markets are similar. The west is driven by energy and agriculture and the east is driven by metal manufacturing.

Operator

The next question comes from Sam Darkatsh – Raymond James.

Sam Darkatsh – Raymond James

If you mentioned this and I missed it I apologize, the Easter effect in March and perhaps the expected effect in April because of the change in the calendar? Then also, Dan bad debt allowance or uncollectible allowance has been creeping up the last couple of quarters as would be expected. What are your thoughts moving forward? Are you seeing a stabilization of collections as a percentage of gross or how should we look at that?

Daniel Florness

I missed the last part about the collections.

Sam Darkatsh – Raymond James

The allowance for uncollectible accounts as a percentage of the gross receivables has been ticking up the last couple of quarters as one might expect in this type of economic conditions. I was just curious as to what you are seeing in terms of the quality of the receivables and has that begun to stabilize in terms of the ratio of uncollectibles?

Daniel Florness

If I look at our AR portfolio in total as we talked earlier the payment patterns have held up reasonably well. When I look at it across the board our bad debts are holding up reasonably well. What really has hurt the bad debts in the last 4 months has been the frequency of bankruptcies increasing and the reserves on those balances. That is really what drove our reserve balance. There was some increase because of bad debt, don’t get me wrong, but the real change to the reserve balance itself related to some bankruptcies. So I would look at the rest of the portfolio and say it is hanging in there reasonably well.

I think one of the things that helps us inherently is the fact we have long-standing relationships with a lot of our larger customers and we have a lot of smaller customers, customers where we represent a relatively small piece of their spend. I think that helps us with the diversification of our customer base across multiple industries and multiple geographies.

Sam Darkatsh – Raymond James

The Easter effect? Do you have a sense of what that might have helped in March or may impact April?

Willard Oberton

I guess I can’t comment on March. March was such a bad month that we don’t think nothing could have helped it. As far as April, Good Friday is never a good day for business. It takes off roughly like losing ½ the day. You normalize that in and it appears that our daily average for April is running at about the same rate as March. It is early in the month. Business is slow. There is no question about it. We think we are starting to bounce or maybe touch the bottom a little bit but we have a long ways to go and that is really the message we have to get out there. We understand sales are going to be difficult. We are going to work really hard to build for the future. We are going to work really hard to add active customers. Make sure we keep the best people in the field. Our best people, we keep them employed. We have very, very low turnover for the people we want to keep. Grow the business going forward. We think we are going to come out the winner by taking market share long-term.

We are hearing from our fastener suppliers and some of our other suppliers they are saying you guys are doing fantastic only being down 10-12% compared to the industry. They are out there saying a lot of our competitors are down 30-50% which is hard to understand but it is really slow.

Operator

That is all the time we have for questions today. I would like to turn the call back over to Mr. Florness for any additional or closing remarks.

Daniel Florness

Thank you. Again thank everybody for listening. One item that I wanted to touch on that I neglected to cover in my notes and probably it is something we historically haven’t done. We did it last quarter and we talked about we thought our SG&A would grow in the first quarter over the first quarter of last year. Looking at where our trends are and where we are seeing headcount and where we are seeing the trends there, and that again is the biggest driver of payroll dollars within our operating expense category, our expectation would be that operating expenses would be down Q2 2008 to Q2 2009 somewhere between 6-9%. So I just wanted to throw that out there. It is some vision into the future.

Other than that, again I would like to thank everybody for taking the time this morning to listen to our conference call and hopefully our release was informative as well as the call was informative. I am hoping my information earlier on with groups of customers wasn’t just confusing. Hopefully we are at the bottom of the cycle and will be trending better in the coming months. Thank you.

Operator

This does conclude our conference for today. We thank you so much for your participation. Please have a great day.

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