Fastenal Company (FAST) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fastenal Company Third Quarter 2011 Earnings Results. [Operator Instructions] I would now like to turn the conference over to your host today, Ellen Trester, Investor Relations. Please begin.

Welcome to the Fastenal Company 2011 Third Quarter Earnings Conference Call. This call will be hosted by Will Oberton, our Chief Executive Officer; and Dan Florness, our Chief Financial Officer. The call will last for up to 45 minutes. The call will start with a general overview of our quarterly results and operations by Will and Dan, with the remainder of the time being open for questions and answers. Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission or distribution of today's call is permitted without Fastenal's consent. This call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage, investor. fastenal.com. A replay of the webcast will be available on the website until December 1, 2011, at midnight, Central 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 as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming or similar indications of future 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. Investors are cautioned not to place undue reliance on such forward-looking statements, as there is no assurance that the matter contained in such statements will occur. Forward-looking statements are made as of today's date only, and we undertake no duty to update the information provided on this call. I would now like turn the call over to Will Oberton. Go ahead, Mr. Oberton.

Thank you, Ellen. Good morning, everybody, and I want to thank you for joining us on the call today. Dan and I are going to both give some brief comments, and we're going to open it up for questions. I'd like to start by saying I think we had another good quarter. Our sales came in at 20.4% for the third quarter. Year-to-date, we're at 22%. For the third quarter, we were a little lower than the first 2 quarters, but we're still above the sequential trend -- our historical sequential trends. We're very optimistic about that. Our Manufacturing customers, as we stated, grew at 18.3% as compared to 18.5% in the second quarter and 15.5% in the first quarter. So there has not been a lot of change, but if anything, it's remained strong. So we're very optimistic about that. Non-Residential Construction grew at 15.8%, the same as the second quarter, and that's an area that there isn't a tremendous amount of activity. Most of that's coming in energy jobs and larger construction jobs in infrastructure, but you don't see much as you drive around in these tower cranes and things like that. So I think our team's doing a nice job digging it out wherever they can. So overall, the sales trends are good, and we remain optimistic in somewhat of an uncertain time. We don't have a tremendous amount of visibility, but the anecdotal stuff that we're getting from our people in the field is still quite positive, although there are a few signs of things slowing a little bit. But for the most part, it's very positive. On the earnings growth, we grew our earnings at 29.1%. Very good number. It's interesting though about perspective. I was looking at it going, "Boy, we didn't even grow over 30%." Because we've had such a good run, 29% is still a strong number. I feel very good about our expense control. I think that the team did a nice job. We picked up 140 basis points of pretax earnings over last year. Our goal of 'pathway to profit' is to pick up 100 points, so we've been able to exceed that goal. And I really feel good about the job the team did on controlling expenses. Pretax profit at 21.4% of sales. That's a record. And net income, north of 13% at 13.3%. That's a number I think we can also be proud of. There's only been -- I think last quarter is the only time we've ever exceeded 13% on a net income basis. Switching gears, talk about store openings a little bit. Our store openings came in lower than we had earlier -- than we had planned and thought we would earlier in the year. But I'm not overly concerned with this because at this point, I'd rather see -- if we can only get so many things done, which is really the case, I'd rather see that our people put more energy into our Automated Supply, our vending solutions, because it's more timely. Our competitors are not out opening stores in the markets that we plan to open in the future, but they are talking about Automated Supply and vending. So I think the faster we can move that project along, long term, that will be a better long-term strategic decision, and the store openings and the opportunities will probably be there in the future -- I believe will be there in the future. So we're working very hard on the Automated Supply. Talking about Automated Supply, I stated to anyone who would listen I think that I thought we could do or wanted to do 2,500 signings in the second quarter -- or, excuse me, in the third quarter. We fell short of that. We came in at 2,260. So I was disappointed with that. But when I look at the 2,260 and I compare it to where I thought we would be a year ago, it's a great number, and by any other measure, it's a very good number. But we're going to continue to push hard. What really happened is we dug a hole for ourselves in July. We didn't have a very good month of signings in July. We got behind in the first holiday week and never made it up for the rest of the quarter. On a very positive note, the team did a great job on the installations. We set up or we installed and turned on more than 1,700 machines in the quarter, and that's just a lot of hard work going into those customers, setting it up and getting these machines up and running. And I like the signings with the installs. It's really where the revenue starts, and so that's a positive. As Dan noted in the release, the overall sales growth, our year-over-year sales growth of the customers that have implemented vending Automated Supply remains strong at 49%. It's been 49%, right at 49% each quarter. And so that's a very positive note. We just need more customers to have Automated Supply, is kind of what we're thinking. Other initiatives that we've talked a lot about. Our Government sales initiative continues to do well. We had very strong sequential growth into the state and local business. Most of our Government business that we're focusing on is state and local business at this point. In the future, we would look at doing more federal, but right now, our focus is state and local. We think with our branch network, we're better positioned for that type of business. And so far, it's proving to be correct. On the metalworking initiative that we talked about, we feel very good about where we are. We have added a lot of product into our distribution system. That's part of our inventory growth. We continue to work at signing up strategic partners, the partners we need to fill out our product line, and that's gone very well. And we had said that we're going to put in 42 trained specialists. We have 37 in place, and 34 of them have gotten through our level 2 training, which is a training designed by an outside firm, again, working with our suppliers. And it's a very intense training. Our people are coming back with great feedback. So we really hope to see the results of this effort probably late, well, probably late in the first quarter into the second quarter of next year. These people are out selling now. Start gaining some traction and start seeing the results into 2012, but we're very optimistic. We met with our product development lead yesterday, and he gave us an update, and things seem to be moving in the direction that we had planned for them to move. On the personnel side, we have continued to invest in people. I believe this will flatten out in the fourth quarter really due to normal seasonal slowdown that we see in our business. The majority of our efforts go into the sales effort on the administrative and warehouse side, where we've added more people, if you've noticed that. Our Manufacturing business is doing very well, and we've added more people in there. And on the administrative side, most of those additions have been people that we put in to help push the vending systems. So it's really more of a sales service effort, the people setting up the machines and those things. And I'm really proud of this. As a leader, I'm proud of the fact that Fastenal is in a position to be adding employees. When you listen to the news and you see the slow economy and all the things that are going on, and I tell our employees this, I think we should be very proud of the fact we've added about 2,000 great opportunities this year to people out and trying to push the economy forward. With that, I'll turn it over to Dan, and he'll make a few comments. Then we'll open it up for questions.

Thanks, Will, and good morning, everybody, and thank you for joining our call. Reiterate a few things that Will touched on. First off, sales trends continue to follow or exceed our benchmark trend line. If you look at history, history would indicate that we should be at about 16% growth from our daily average in January to our daily average in September. This year, we're actually up 20.8%. So we're running about 5 points ahead of that trend line, which has given us nice launching pad as we go into 2012. Digging a lot deeper into the release, one thing I wanted to add on the end-market trends -- Will touched on them already -- is that we've been in a situation where the ISM index has been moderating now for about 5 months, and we continue to perform well. And as we mentioned in the second quarter, we really think our vending and our international is helping giving a nice boost to this, but our domestic, our North American business is doing just fine in and of itself. On the Non-Residential side, Will touched on some of the energy projects that we're supplying into. I think at the end of the day, it's that and it's the fact that our store employees are just resourceful at turning over stones to find business. We're really well positioned to go after a lot of the small projects that a lot of other companies either aren't as aggressive with or aren't as interested in going after. And our stores sell on smaller projects all day long, and that's really a lot of little dollars are really what's driving our Non-Residential Construction. The vending stats. I'll touch on a few things that Will mentioned as well, but I guess the 2 things that jumped out for me when we were pooling together the earnings release was the fivefold increase in the number of installs from Q3 2010 to Q3 2011. And my comments there would be nice job to Russ and his team in ramping up not just what we're doing to promote vending, but what we're doing to install. Because Will is right. The revenue starts after the machine is installed, not after the contract is signed. The other item is taking a step back and thinking for a second.13% of our sales now going to customers that have vending as part of their operation, and that customer base is growing at basically 50%. And to me the part that's most meaningful there is the fact that this is a predominantly Manufacturing customer base. It's medium-sized customers. It's not small customers or large customers. It's been driven by a broad brush, but the dollars to move the needle on those kind of dollars and the way we're moving it is quite staggering. And the fact that this business becomes very sticky because we're really providing a better solution than the competitor down the street. 'Pathway to profit' on Page 7 of the release, we've hit a new high on the average store size, 83,000 a month. Our previous high was in third quarter of 2008 when we were at 82,000, and it's no coincidence that our record high for pretax earnings is this quarter because the 'pathway to profit,' the mechanics and the fundamentals of it are just kicking in, as we've seen in prior quarters. The -- if I look through some of the mix of employees, our store FTE is up about 16% on a year-over-year basis. Since we started the 'pathway to profit,' we've added 35% more employees on an FTE basis into our store. On the non-store selling side, we've added 44 people in the last 12 months. We've added 49 -- 44% in the last 12 months, 49% since the first quarter of 2007. So you can really see the energy that's being invested into the growth drivers of our business over the last 12 months. And those are the types of things that are driving the vending, that are driving the Government, that are driving our strength in Manufacturing business. On the DC side, up about 7 -- 16.7%. Since we started the 'pathway to profit', we're up 19.5% FTE. 5 points of that came from the Holo-Krome acquisition. So we've done a nice job of leveraging that side of the business over the last -- since 2007. And I believe we have the ability to keep leveraging that into the future. And then finally, as Will touched on, on the support side, we've added about 11.7% in the last year. A good meaningful piece of that is centered on back office support for our initiatives. But since 2007, we've added 5.7% more people, but we have 42.5% more sales dollars flowing through our stores today than we did back in 2007. All those really promotes the 'pathway to profit' leverage and the improvement in profitability of the business. On Page 9, there's few paragraphs. We talked a bit about gross profit margin. Bottom line, I'd say there's a lot of noise in the numbers right now. We're kind of in the middle of that 51, 53 zone we've always cited. We still look optimistically at that number as we go forward because some of the things we talked about on our second quarter call, opportunities with our exclusive brands, how those opportunities are enhanced with our vending because they really go hand-in-hand. We really see over the upcoming quarters our ability to move that gross margin north and enhance the operating leverage of the business. So we're optimistic. Right now, there's a lot of noise in the numbers. One the thing that probably we don't talk about enough is the fact that with the strong growth in our large OEM business, both domestically and internationally, that puts quite a dampening effect on our gross margin. It doesn't hurt our operating margin at all because it's attractive operating margin business. But it has put a dampening effect on gross margin. So if anything, if you compare gross margin to a year or 2 ago, it's probably a little bit understated in that regard. But with that said, the number is what it is, and we believe we have growth drivers to move that number north in the future. On the operating administrative expense side, our payroll increased about 17.4%, and you see a dynamic going through the numbers now. Whereas last year, our quarterly number was quite a bit higher growth than our year-to-date number because we were in a pattern of bonuses in rising. Now we're in a situation where we're anniversary-ing some of those higher bonus numbers from a year ago, and that's why you're really seeing that payroll growth moderating quite dramatically because we're getting back to the point of growth for activity growth rather than moving out of easier comparisons. So while our growth is -- our net earnings are slightly below 30%, it's a powerful statement because we had a pretty good third quarter last year. The final item I'll touch on. Working capital, we continue, I believe, to manage it well. We still believe we have opportunities in inventory to keep tightening that and tightening that. But all things considered, I think we're operating that well, and most of you probably saw this last night, but we announced our fourth quarter dividend -- or our third quarter dividend payable in fourth quarter, $0.14, and that will be paid out here in November. With that, I will take some questions, and we'll go from there.

[Operator Instructions] Our first question comes from Holden Lewis with BB&T. Holden Lewis - BB&T Capital Markets, Research Division: I'm curious, I guess, first, if you could maybe expand on some of those, maybe anecdotes that you cited in your preamble about maybe some signs of slowing. And then along those lines, how are you viewing sort of your margin breakeven at this point? I mean, what level of revenue growth do you feel that you can continue to expand margins versus seeing margins begin to maybe come down a little bit just cyclically? Can you sort of comment about sort of breakeven on margins and earnings as it relates to revenue level?

I'll take the first question, and I'll give the second one to Dan. The anecdotal stuff is what all of our regional vice presidents are in town this week for meetings, and I was talking to them over dinner last night. It sounds like some of the larger consumer products companies are saying, "Pull back just a little bit." The heavy metal guy, people producing more of the metal parts, they haven't heard much of that. So I think the consumer goods probably are not going to pick up much. But overall, the tone was positive with the group, and I spent several hours with them. But there are -- yes, this one backing off a little bit. Our sales are down 8% or 10% from last year on this one. So there's caution in the tone.

Holden, on the second part, just looking at our third quarter operating expense increase, so it was at about 15.7%. So you could break that leverage point down to 15% really fast, and with some energy, get it down closer to 12% or 13%.

I'd say because we haven't added a lot of stores, we could drop it well below that just through our payroll system because of the bonuses very quickly. I mean, if things really hit the wall. Holden Lewis - BB&T Capital Markets, Research Division: So then overall, you think if your revenues grow 12% or 13%, you can still expand margins, and below that, maybe you get some contraction. Did I understand that correctly or no?

I would say we could hold margins at the 12% to 13% rate.

Our next question comes from David Manthey with Robert W. Baird. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: First of all, on the vending solutions. I think you said historically that the products that go into the vending machines are used less. And so with the growth at 50% overall from the customers that have these Automated Supply solutions, I assume that most or all of that growth is coming from adding lines that you didn't have before. Am I assuming that correctly?

That is correct. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then when you look at that 50%, I'm interested in the dispersion around that. Are there some customers that are up 300%, and some that are flattish? Or is it pretty consistent at 50%? And then as you look out, I guess, the number that we're looking at here is aggregate, but if you just isolate the vending solutions you've put in a year ago or longer ago, does that 50%, I would imagine it goes down, but does it remain above the corporate average for customers' vending solutions after year 2, year 3?

We really don't have any good data for year 2. Year 2 we do, but not year 3 because we only had a handful of machines out there. Yes, the customers that are in their second full year of vending, and I have to qualify this, this is information from second quarter because I haven't looked at this for the third quarter data, just had a lot going on. Those customers were growing at about 30% versus the 50%. The customers that are in their first year are growing at 70%, that's the 30 plus the 50 balances out to the -- plus 70% balances out to it. So yes, the growth slows, but the growth is still greater than the company average with that group, and these are larger customers. So it's still...

So it's meaningfully above the company average of that group.

Still exceptional growth for that group of customers. And again, it's all about taking a bigger share of their wallet because we have very few customers that we have the majority of their wallet that are sizable customers. The small ones, that's different. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay. Great. Just one quick one on the end here. Could you discuss pricing on the fasteners you're purchasing in Asia today?

We haven't seen a lot there. It's been kind of a roller coaster year with small bumps, meaning we hear that it's going to go up. No, we don't see much. There is -- one of our largest fastener suppliers out of Taiwan was here this week, and I just spent some time talking to them. And there's just not much going on, and I think it has more to do with slower, somewhat of a slower economy than anything else. Especially the Taiwanese are very concerned about capacity. They want to run this machine wide open. So they're willing to take a little hit even if steel's up to keep the machines running. That's a historical pattern, and so we haven't seen much. A little bit here and there, but it's probably pretty easy, pretty soft year, flat year.

Our next question comes from Tom Hayes with Piper Jaffray.

Just a question on -- back to the vending machine. If you're gaining a larger share of the current customers' wallet, which is a great idea, is there a transactional margin benefit where it's not as -- the pricing is not as competitive as you're delivering a better service than a cost savings for them?

I guess I'm not quite following your question, Tom.

Well, I guess is there a margin, a meaningful margin benefit for the customers -- or to you for the customers that have the vending solutions versus your non-vending solution customers?

What do you mean a need for more margin? Do you mean for us to give them a bigger discount?

No, I guess let me just start over. The customers that you have the vending solutions, is your margin profile better than the non-vending solution customer?

No, it's not. Actually the -- when we match up by customer size, we match up -- what I really do is I look at the customer last year and this year and even with the growth, the margin in most cases hasn't moved much. I mean, if there were a low-margin customer, we might be up or we might be down, but the trend is basically the customer margin changes very little when we add vending. The sales just go up. And it really, I think, has to do more with the pricing habits of our stores. So the store looks at this customer -- in many cases, they were a customer in the past. So the store looks at the customer and they were a 40% margin customer. When they've bid the vending product, they're probably bidding it in that range because it's just incremental business for the store. So it's actually very consistent. I've spent some time looking at that. I wish it was higher, but it's not. Now the opportunity we have is as we put in more Fastenal exclusive brands in those machines, we will see a margin improvement. But in many cases, we start out with a lot of branded product because that's what they were using. And then over time we plan to convert that.

I guess just last is a follow-up on the CapEx. There's a meaningful increase in the CapEx year-over-year. Can you just kind of talk to the balance of the year and going forward?

Yes, if you think about where our CapEx dollars are centered this year, they're really centered on the vending equipment, and unlike a lot of our CapEx in most years, a lot of our CapEx centers on construction. We're expanding a distribution center. We're adding on to a distribution center. We're doing things like that, and even with store additions. Those tend to be maybe back-end loaded from the standpoint of -- they really don't get going as fast in the spring until the frost is out and then those type of projects take off and they push into the November time frame, maybe over December depending on exactly where we are. Whereas our vending dollars, that was much more first 3 quarters loaded. So I think we cited $95 million, $100 million in our annual report as far as our CapEx for the year. That was going to be more front-end loaded than our traditional year.

Okay. And you're still comfortable with that going down [ph], whatever, the $95 million...

We're going to be in that $95 million to $105 million number, I suspect. One item that we're doing that I probably didn't have as much dollars planned on for this year just because we're running a little ahead of schedule, so we're doing a meaningful expansion of our distribution center here in Winona. We're adding a mini-load system, an ASRS-type system that we've done in Dallas and Indianapolis in the past, and they're actually doing groundwork on that right now.

And we pushed that forward because our Midwest region is showing very good sales growth this year, and they're pushed to the wall. So we moved that up a few months, try to beat the winter, which we're not going to do.

. Our next question comes from Ryan Merkel with William Blair. Ryan Merkel - William Blair & Company L.L.C., Research Division: Wanted to start with September sales. Can you just talk about how the month finished and then maybe speak to end market and geographic strength?

Month played out well. We saw it was going to be solid month with a week or 2 weeks left in the month. So the month played out well, pleased with the trend pattern. End market, I don't think anything jumps out. With one exception, I continue to be pleased with what we're seeing in our Manufacturing number. Just from the standpoint of -- we're all sometimes guilty of reading the newspapers too much or reading stuff too much and letting that change your view of the world or life. And the ISM, we didn't make a big deal of it back in May and June when it split [ph], but we also noticed it. And to see that we're able to grow our Manufacturing despite, us again, it's still north of 50%. And I think people got a little accustomed to that 60% number, which really wasn't sustainable. But pleased what we're seeing in the end markets. Geographically, I guess, nothing jumps out outside the norm. Ryan Merkel - William Blair & Company L.L.C., Research Division: Okay. And I wanted to -- go ahead, Will.

Geographically, the oil pact remains strong, but that's been strong all year long. If there's one area of the country that we're doing better, it would be Texas, Oklahoma, Louisiana. Ryan Merkel - William Blair & Company L.L.C., Research Division: Okay. Appreciate the color. And then I wanted to slip in a question on vending. The growth rate of the vending customers remains very impressive and it's clearly a wallet share gainer. But am I right that vending is not only a wallet share story but also a tool to help you win new customers?

Actually, that's been coming in very strong from the field is that we're getting calls and opportunities from customers because they want this solution. Large companies and again, talking to our regional vice presidents this week at meetings, the thing that I ask our regionals every time I talk to them is say, is this solution as good as I believe. What I tell them is I don't want to be the crazy guy running around with the flag and everyone's laughing at me. And they're saying the solution is better than I believed because of that reason, Ryan, because it's getting us in doors we would have otherwise not had a chance to go in, and we're signing up new customers every day because of that, because we really do have a better solution from a cost standpoint. There's some other good solutions out there, but the machines themselves and the systems are far more expensive, and the fact that we built the machine behind the machine, all these install people, all these technical people, we inherently have a more value-oriented system to deliver products than most of our competitors at this time.

The other thing I would just add to that, I think some of the calls we're getting and some of the energy we're seeing from the customer inquiry side is coming from the fact that we have a lot of machines out on the road. We have our trucks that are out on the road that are demonstrating the equipment. There's been a number of articles written in recent months about our vending solution, both in local newspapers as well as some national newspapers. And one comment I'd make for the analysts listening to this call, on your next report, put a nice big bold headline about how much vending solutions save manufacturers in North America. And if you need a copy of a flyer, we'd be happy to send you some.

And we can send you pictures.

Our next question comes from Sam Darkatsh with Raymond James. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Two questions. First off, I mean, you mentioned ratcheting lower the store count expectations due to both the PMI and also the vending initiative. Are there other actions or plans that you're either undertaking or considering based on the prospects of a lower growth period? And what are the next things you would do from an operational standpoint? And then my second question would be you mentioned the payroll or the labor leverage expected on the OpEx line. Can you talk about occupancy and selling and transportation? Also, I'm guessing that occupancy would continue to grow faster because of the vending and the selling, transportation would come off because of where diesel is, but if you could throw a little color on that, Dan, that would be very helpful.

I'm going to guess that's 6 questions, Sam, but go ahead, Dan.

Well, I'll kind of go -- as far as the steps, in addition to the moderating the store openings, I think if you look at kind of where we were trending and where we came out, I can't take a number right off the cuff, but I know we have fewer employees at the store level today. And fewer employees than the organization in general because of the moderating ISM. We're very decentralized, and we try to share a lot of information with our regional and district leaders about what we're seeing. And with the moderating ISM, our folks pay attention. They're smart business people. They know not to get ahead of themselves. And so we're working diligently to have staffing where we need it. We don't want to hamper our growth. On the flip side, you'd be careful not to get ahead of yourself on certain things when there's uncertainty when you look out the next 6 to 12 months. As far as some of the other expenses, if I look at occupancy, about 1 point, I think it's 1.3% of our -- we grew at about 8.5%.1.3 points of that came just from vending. And one thing that did pop our occupancy up a little bit more than I would have expected is energy prices are meaningfully higher than they were a year ago. And I don't know how it was nationwide, but we had some warm weather here in the third quarter, so we're probably doing a little more cooling than we normally had. But still, look at our occupancy in general, we still have legs on that. When I look out to 2012, we typically will have 600 to 700 leases up for renewal in a given year, and one thing that you still have is there's still empty spaces out there. And there's also willingness on the part of the real estate community, if you will. I mean, if you look at the value of money and borrowing cost or incremental borrowing costs, the need for a 10% return on real estate that you might have seen 5 years ago, people are willing to take a lower return, a, to keep the building occupied, and b, because their costs have gone down in many cases, or the ultimate use of that cash, probably a better way to say it, isn't as attractive as it might have been 4 or 5 years ago.

On the transportation and product movement, we've done a very nice job of that in the face of higher diesel prices. Now that diesel and gasoline prices are coming down over the last 4 to 6 weeks, going forward, we think we'll be in a good position in product movement. We're actually launching some new initiatives kind of stirring the pot, believing we can do better on transportation, turn it into a meaningful profit center over the next 2 years, and you'll hear more about that because that's kind of my pet. So we have some good initiatives going there. A couple of other things to note as far as how do you pull expenses back, maybe just not grow them as fast. If you look at 2012 or '11, we built the machine behind the machine, the vending group, which is well over 150 people. That group was in place, and we believe that they can do well over 1,000 machines both sell and install at their current level, so we have some built-in headroom per month -- excuse me, yes. Government sales, we put that in place this year. We're really not seeing the benefits yet. We have nice growth but not big dollars. Our metalworking team, we spent a lot of money there putting these people in and training them. And our district managers and regional vice presidents, we won't be adding many because of the lower store counts. So if you look at this group, these are higher paid individuals. And also in that group, you'd put our National Accounts group. We've over-invested in the last 12 months in all of these groups. The real benefits will come in 2012, and we don't -- we'll continue to invest but not at even close to the level that we did in 2011, and we should really see the benefits of that and drive our incremental profits.

If you recall earlier, we touched on the non-sales FTE growth.90% of our growth since 2007 occurred in the last 12 months.

Our next question comes from Robert Barry of UBS.

It looks like in each of the last few quarters that conversion rate has ticked down. And Dan, I think you mentioned something in your prepared remarks about how you could see the margin starting to tick back up. I was wondering if you could just expand on that and what the drivers will be.

Well, probably the biggest short term one is -- we've talked about in the last several calls some of the things we're doing to build our momentum with exclusive brands. And that takes a while to get that inertia going because it's a huge undertaking. Currently, between 6.5% and 7% of our sales are exclusive brands, and we have goals, too, in the shorter term, in the upcoming quarters. And I'm not saying 2 or 3 or 4. I'm saying upcoming quarters to double that. And that is very attractive from the opportunity not only to go after business that maybe you wouldn't go after before because the margin wasn't attractive enough. Or to enhance your margins so you can use it to grow a little faster or you can use it to drive some gross margin. We believe there is ample opportunity for both. And then the question is what other things are there to drive it. And Will touched on a second ago some of the freight initiatives. I think we call it FI 2012.

I name everything.

Yes, and our goal is over the upcoming quarters to again, turn that into a more meaning -- it's a profit center today, but turn it into a more meaningful profit center and add gross margin because that's all at the gross margin line. So those are 2 shorter-term things that I think have the ability to move that needle north.

How about pricing?

Well, right now, there isn't a tremendous amount of pricing out there. And historically, we've been pretty steady there unless there's a large upswing where we can get some timing. The opportunity there will be somewhat limited, I believe, because the economy's slow and everybody's a little reluctant to push it. Normally, where you see good pricing is when things are robust, and we're all confident. Our sales people, because we're decentralized, are going to be somewhat reluctant to go out and push price increase if their cost doesn't go up to their bigger customers. And you know what, we're okay with that because we want to keep that business.

Yes. And maybe just finally on the vending. I'm curious as you're going through and presenting the opportunity. What's the most common pushback you get on why customers don't want the vending machine?

Change. The most common problem in the stake we make is calling on the wrong individual. If we call on the purchasing agent, our success rate is relatively low because it's a big change in their environment. It changes their day. If we call on a CFO or plant manager or CEO, our results are much better because really it's new, and it changes the thing -- the way they do their day. But the very positive is the customers that have it, it's like 99-some percent of these customers are saying fantastic, and they're adding more machines. Change is a difficult thing, and I continued to remind our regionals yesterday that is just pure hard work to get these things in there, but once we have them, it's very efficient business. And to that point, we're developing new and better software for the machines we have that will greatly reduce the workload at our stores as we implement this to fulfill the machines and get the product out there. It's going to be an extremely efficient business to support. It's already efficient, but it's going to become much more efficient going forward.

Our next question comes from Hamzah Mazari with Crédit Suisse. Hamzah Mazari - Crédit Suisse AG, Research Division: Just a first question is just if -- can you quantify or maybe make some comments as to how much of the slowing in store growth is just economic due to the macro situation and uncertainty that you mentioned relative to growing the vending solutions?

We really can't break that down. But the reality of how it works is the way we get the stores opened is by keeping the volume loud because you have to understand our district managers and regional managers are never crazy about it because they open a business that doesn't add a lot of revenue initially and loses them money. That's why we've set it up.

And loses the money personally.

Yes, personally, bonus. So we keep the volume high and we open the stores. As vending started picking up, I started changing my message, not saying don't open stores, but really put the pressure on vending. Little back off there and people came back, maybe we don't have to open this one. So it's really about how much effort, how much energy an individual has at the district or regional level. But there's no way for us to quantify 10 openings were because of economic and 20 were because of vending. It just doesn't break out that way in our business. It's all lumped in. Hamzah Mazari - Crédit Suisse AG, Research Division: Okay. That's fair enough. How big as a percent of sales do you expect vending to get? And also if you could just comment on just update us on your metalworking and National Account initiatives.

On the vending, the percentage of revenue going through vending machines, we're not sure. But of the customers that we sell to that have the systems, I would predict that within the next year, or say 2 years, it'll be north of 60%.60% to 70% of our customers will have some kind of automated solution, then maybe only 20% of their business will go through that machine. We're really not too concerned about that, whether they vend it or whether we deliver it. We're just concerned that they buy from us.

But they buy from us.

It's revenue, so we're not going to pick it apart. What was the second half of your question? I apologize. Hamzah Mazari - Crédit Suisse AG, Research Division: Yes, the second half was just if you could just update us on metalworking and the National Accounts.

On the metalworking, we don't disclose numbers. Our goal is to grow the business disproportionate to our other revenue next year, and we'll start reporting that as it comes through. What we really spent 2011 doing, building the team, getting the inventory and getting the suppliers lined up and then the inventory lined up, in that order. And now we're out there hitting it. Now we're working hard to get our store people to start taking the training. And then over in just the month of September, we had our store people take 2,000 1-hour classes online. Just got that report yesterday. So that's nice forward motion. I mean, a bunch of people are out there learning about this product. On the National Accounts, we continue to sign accounts at a very nice rate, and a lot of that has to do with the vending, and that's what we hear from our National Accounts people, that we're getting continued opportunities. So we have very good momentum with National Accounts, and we will continue to invest in additional resources, i.e. people for the National Accounts team in 2012 because the ones that we've given them have given us above average returns.

Our next question comes from Adam Uhlman with Cleveland Research.

I was wondering if we could look at the vending customers a little bit more closely, what percent of the customers that you have today were existing customers? And what percent would you think would be new?

I honestly don't know that number off the cuff.

I looked at the report that shows last year's sales. And if I were to have to -- it shows the 2 columns, this year's sales and last year's. The ones with 0s are probably only about 10%, no more than 15%. But that isn't really a fair representation because many of them were buying from us but in a very small way. So they went from being a $2,000-a-month customer to a $10,000. So we were a spot-buy third choice for them, and we became maybe a second or -- first or second. The majority of the customers were buying from us a year ago, and then we just ramped this up. But with larger customers, that's not uncommon where we'll sell to a customer for years but never get any real spend from them, meaningful spend.

Okay. And then related to that, have you run into any capacity constraints from your suppliers to do installation?

No, we haven't. The manufacturer of the machines, we worked well with them, and that's part of what Dan said about front-loading the CapEx. We have not wanted to get behind. We put these build centers in all of our distribution centers. We trained our technicians, and we overstaffed those groups because the guy who runs it for us, Russ Rubie, a great Fastenal employee. I said, "Russ, we need to be in a position from both phone support and installations to do at least 1,000 machines a month. " Build the machines, size it that way, build your team and size it that way and they're kind of standing ready saying, "We're ready to go. " So the only delay in installing the machines is we need to become better at figuring out what goes in each machine, and we continue to work on ways. But the customers want to be very involved, and many of them are slow. It always takes a little longer than we think. In cases where the customer is just ready to go, many times we'll get an order and they'll be in place in 2 weeks because our guys can get them in if we can get the data set up or the information about what we're going to set in, put in the machines.

Yes. One thing I'll add to that is think about when we were coming into this year and the tail end of last year. We were looking at how we believe this would ramp up, and I might be over at certain times on what we spend for inventory or spend for fixed capital. But message to both our purchasing group, as well as our vending group is don't get caught naked here. We added some inventory early on because we wanted to have vendable products ready on the shelf. We have a backlog of machines. So we are ready to handle it from the standpoint of that product, if we end up having a few months too much because we over stretched ourselves, that product's a great product without a shelf life. But the cost of running out is too high, and so a little bit of our inventory, a little bit of our CapEx is there because we were willing to front load because we saw the potential in the opportunity here. With that, I'm going to cut off the call. We're at 45 minutes past the hour. And again, I want to thank everybody for joining in on the call this morning. Just a couple takeaway items I jotted down during the call. I probably sound a little like a stuck record here, but maybe in today's world, sometimes hearing the same thing from a company consecutive quarters is a sign of good things rather than being boring. But first off, our 'pathway to profit,' we're more convinced than ever that it just works. It's a logical profession for our business, and it's working well throughout the organization. Very good sales patterns. One thing that I noted the other day when I was looking at some of the numbers, if I look at the last 6 months, so the second and third quarter of this year, on a 2-year comparison, our growth is in excess of 45% every month. We had actually one month over 50%. I have to go back at 2006 to see that type of a 2-year comparison. And 2006 was pre- 'pathway to profit'. So we were opening stores at about a 14% clip. So what that demonstrates to me is with focus, with energy and a bunch of growth drivers, we can continue to take market share at a very aggressive fashion in this marketplace, and it isn't strictly store centered. It's all facets of the business. The sales initiatives, we have great traction with them. Very good opportunity with our exclusive brands, and finally, as I mentioned last quarter, the employees of Fastenal continue to perform at a very high level. Thank you to them whoever's on the call. Have a good day, everybody.

Thanks.

Thank you, ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.