Fastenal Company (FAST) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fastenal Quarterly Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ellen Trester, with Investor Relations.

Welcome to the Fastenal Company 2011 Annual and Fourth 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 March 1, 2012, 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 material from those anticipated. Information on factors that could cause material results to differ -- 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 to turn the call over to Mr. Will Oberton. Go ahead, Mr. Oberton.

Thank you, Ellen, and thank you, everyone, for joining us today. We're proud to announce another good quarter. In fact, it's our seventh quarter in a row where we've had EPS growth north of 30%. We're very proud of that. It's also our second year in a row that we've had EPS growth north of 30%. So we're feeling good about the accomplishments that the team has done, and I want to thank all the Fastenal people for a hard -- a job well done. For the quarter, our sales -- we had a very good quarter for sales, coming in about the same as third quarter. And I guess the way I would describe our sales over the last 6 quarters is very consistent. If you look at it, we've been in that 20% to 22% range almost every month for the past 18 months. So they've done a nice job with just growing it consistently over a long period of time. December, a little bit of color on December. December was actually, in my view, a better month than we reported, at just over 21%, because we had a very strong first 3 weeks and then we slowed down for the holidays. And my own personal opinion is, every year, it seems like holidays become longer or businesses take more time off if you look at the Fourth of July and different holidays. It's probably just a cultural thing. But it's very hard to read looking at the month, but the positive is we came into the month strong and had a great 3 weeks, which led us to still having a good month even with a disappointing finish. On the margin side, we did take a dip in the margin. As you see, reporting 51.2%, still within our range of 51% to 53%. I guess, and I'd look at the numbers closely to -- things just didn't line up for us. There was some seasonal things, there -- a little bit of pressure from mix, but overall it was a disappointing quarter on margin, but we're still very comfortable with our range and believe that some of it will snap back in the first quarter. But Dan will also give more color on the pieces of where our margin deteriorated some. Earnings standpoint. I really feel comfortable with what we did there, nice earnings growth, and I'm very proud of the fact that we reported pretax of 20.2%. That's the first time in our history that we've ever had pretax above 20% in the fourth quarter, so that was a good achievement. For the year, our pretax came in at 20.8%, the first time that we've been over 20% in actually more than 15 years. We were there in 1995. So another good accomplishment, I think, and it just shows that the power of our 'pathway to profit' is working and we're still able to get the good growth. So we're very happy with that. From an expense standpoint, it's kind of a tale of 2 -- or there's 2 stories here. On the non-payroll expenses, which make up about 1/3 of our SG&A, we did a great job. Those expenses grew, for the quarter, in the low to mid-single digits, and for the year, very similar numbers. The payroll on the other hand grew faster. For the quarter, our payroll grew 16%. For the year, it grew just under 21%. I believe it was 20.9%, which was a little higher than we had expected. So we do have some work to do on payroll. On a positive note there, because of the -- what is normally cutter sales in the first quarter, we can work that through very quickly and feel that we're going to see leverage in 2012. But we talked to all our people about it, we understand where it's going. And some of it is make-up from the slowdown or lower bonuses in 2010, but some of it is we just have to pay a little closer attention. And the way we do it here is we tell you what we think, where we have to work on, and we're comfortable that we can correct that situation very quickly. Vending. Vending was a little slower than we had expected. But we actually -- vending was very similar to what I've described December. We had 2 good months, October and November, and then December kind of fell on its face with vending. And did not surprise us because it's very hard to get people to make decisions and sign contracts at the end of the year and around the holidays. So we're not at all discouraged by it. We knew it would be a tough quarter with December in there. But from an overall standpoint, with industrial vending, the concept and the long-term opportunities continue to look better every day. And as we study the results, we look at all the things that are going on, the opportunities that are out there, we are more excited about what it could do for Fastenal over the next several years than we've ever been. Structurally, we are very well positioned with our store network, with our distribution and with our large workforce in the field out in these small communities. We're very, very well positioned to service this business and should work well for us. And the thing I'd like to say when I talk to people who don't really understand the concept and they're trying to understand what we're doing, very -- there's a note on my desk, a little -- it's like a fortune cookie sign, it's been on my computer for about 10 or 15 years. And what it says is, "The best way to sell is make it convenient to buy." And I always remind myself of that and that's really the essence of vending. Vending is a more convenient way for our customers to buy product from Fastenal. And if we can make things more convenient and more efficient, we believe we will sell more product and it will give us long-term growth opportunities, and that's why we're so heavily invested in this project and we're so bullish on it whenever we talk to the investment community, the customer community, the supplier community and any other community that's willing to listen to us about this prospect. So very, very positive on vending and believe that -- have a long run there. So overall, I believe Fastenal had a very good year. We had a very good -- excuse me, we had a very good quarter and we had a very good year. And we believe, with the strength we saw in the fourth quarter in our sales, we're well positioned to launch the business into 2012 and hopefully maintain our string of north of 30% EPS growth in quarters to come. With that, I'm going to turn it over to Dan. Dan will give you some more color and then we'll open it up for questions. Thank you.

Thanks, Will, and good morning, everybody, and thank you for participating on our call today. Before I start, I'm going to touch on one housekeeping note, and that is related to a change we plan to do next quarters -- for our first quarter release, so that would be our release scheduled in April. What we have done over the last, gosh -- most of our public life is that before market opens, at 7:00 in the morning Central Time approximately, we publish -- we publicly release our earnings for the previous quarter. And one thing I've learned over time is that you always keep your ears open for suggested improvements or changes that you could make that maybe improve the process. Something we're going to try in April, and in our scheduled conference call is for Thursday, April 19, I believe I wrote that date down correctly, and -- or April 12, excuse me. But instead of releasing at 7:00 in the morning, before market opens, we're going to release the evening before. Typically, the way our process works currently is that we will queue up all of our documents for release somewhere between 7 and 8 p.m. in the evening and schedule them to come out the following morning. We're going to queue them up between 7 and 8 as we've done in the past, go through our normal process, but make them immediately available. We believe that will help inform the marketplace, the analyst community and the marketplace in general on our quarter; and will add to the quality of this earnings call, potentially some of the questions; and also help with the dissemination of information. So that will be a change. We'll try it next quarter. We'll do it for this year, and we'll see how it goes and continue to try to improve the process of communicating with The Street. I will echo some comments that Will made and delve a little deeper on a couple of them. This morning at 7:00, I had my typical call with our Regional Vice President. It's basically -- it's our group of leaders, our regional CEOs if you will, that manage our business and are a large part of the success behind our business. And some of the messages I've shared with them, first and foremost, was nice quarter, nice year. And we did a really nice job in a lot of fronts and like always, we identified the things that we did well, we identified the things that we can improve on, and we'll work on those as we move into 2012. As Will mentioned, and I would echo the comment, continue to be impressed by our top line performance. As all of you know, over the last several years, especially in the bottom of the 2009 dip, tried to do a lot of things to try to look at our seasonal trend patterns, to try to really understand and communicate what our business normally does, and we used that '98 to 2003 as a benchmark for that. If you look at the chart we published in our press release and in our quarterly documents, you can see that we have soundly been at or above that trend line now for both 2010 and 2011. So it's not about the recovery or easy comps or hard comps or all that kind of stuff you can talk about. It's really what happened from June to July, July to August, August to September. Are we building the fundamentals of our business every day to launch us into the next year? And that's the secret of Fastenal's top line growth for the last 40 years, is we build a little bit more everyday and we step higher. And when I look at that, we continue to handily outperform those numbers, which makes me feel very good as we go on into 2012. And as you see in the ISM numbers, they continue to support what we're doing, and we feel very good going into the new year. On the expense side, Will touched on both the labor and the nonlabor side. I'll add a few more tidbits to the nonlabor side. If I look at 2009, 2010 and 2011, our total operating expenses have gone from 35.6% of sales in 2009, granted that was a high number because of the recession, to 32.8% in 2010 and 31.1% in 2011. So we dropped 450 basis points in 2009. Probably the more meaningful comparison is we dropped 170 from 2010, 2011, because 2010 was a good number. If I look at that, we've always talked about labor being about 70% of operating expenses, labor and labor-related. So payroll, health care, school business, those types of expenses, versus all the other expenses. Our occupancy, our store fleet, our gasoline going into that fleet, all the expenses we have to operate our business day in and day out. That represents about 30% of our operating expenses. That 30% piece has performed so well in the last 2 years that 80% of our improvements in operating expenses have come there. And a big piece of that would be on the occupancy side, and that's 'pathway to profit'. It's not complicated math, it's just we're leveraging our store base. When I look at that, the good news, good news in that story is we've done a great job with that component. And I think we're poised really well coming into 2012 to have another piece, a big piece of our operating expenses, that we can leverage quite attractively, and we've jumped on that midway through the fourth quarter to really go into the new year and attack that well. And with the rising sales and gross profit dollars because seasonality of our business, it poises us well for 2012. The other thing that I think is real compelling when I look at that, the non-payroll piece, is that non-payroll piece also contains all of our vending expenses. So we've gone from 567 units in service at the end of 2009, or said another way, the start of 2010, to almost 7,500 machines in service at the end of 2011, a thirteen-fold increase. And all those expenses have been absorbed in an area where we saw great leverage in our P&L, frankly [ph] everything else, but even better. And I don't want that to be lost in the whole message. Speaking of vending, there is one clarification I do want to make when I look at the information we've released, and this is on top of Page 6 of our earnings release. In there, we have a table of information, and that table goes through -- and it talks about the number of machines we added, that we signed contracts on during the quarter. That's to try to give you a current touch on what activity is happening, of machines that will go online today and in the future and what those trends look like: The cumulative machines installed, so how many machines did we end up each quarter with, the machines in service; the percent of total sales to vending customers, so that's customers -- total sales for that customer group, both vended and non-vended dollars so we can measure the impact of it, how big that business is; and then the final is what's happening with that business, how fast is it growing. If you take a good close look at some of the numbers compared to prior quarters, you'll see some slight changes in the numbers. Really what's happened is we've -- as vending ramped up, we were compiling a lot of that information in a very manual process. We've migrated now to a more automated platform. Decided that -- we took another look at the data, and we slightly modified the field of definitions. The first group, any changes there would just be cleaned up and the changes are very modest. The second group, you would see some changes. Really, what happened was a definitional change. Instead of the number of machines installed and scheduled at the end of the quarter, it is now very clean number. It's the number of machines installed and producing revenue at the end of the quarter, which I think is a cleaner number. None of it changes the trends, but whenever you see numbers that change, I think it's worthwhile pointing it out. The third category, slight changes, very modest. The fourth category, if you look at Q2 and Q3, instead of growth in the upper 40s, it's growth in the lower 40s. Still a very attractive number but slightly lower than what we previously reported, and I wanted to point that out in the release. My take, when I look at all 4 sets of data, unbelievable numbers and doesn't change my opinion, it only enhances our opinion of vending as we go into 2012 and the future. I think it's a very compelling growth component to our business, one of many. The -- as always, as I mentioned earlier, we talk internally and we talk externally about the good things in our business and some of the things that were proved more challenging or maybe the work side of the business, if you will. Two things jump out in my mind when I look at 2011, particularly fourth quarter. Our gross margin did drop about 70 basis points from 51.9% to 51.2%. Hopefully, the narrative I put in the release helps to explain the sum. I will provide a little more insight. Historically, we talk about the transactional piece of our gross margin, the organizational piece of our gross margin and the vendor incentive. And the transactional is about things we do every day, day in and day out. Organizational is more about leveraging our trucking network, as well as our ability to source products domestically and globally, using tremendous volume capabilities to buy, as well as a dedicated focus to improve our source of supply. And the third, vendor incentive, while it's a smaller component of the gross margin, it's a piece that can move around some. So that's why we mention it periodically. If I look at those 3 pieces and I take even a deeper dive into some components, one component of the transactional and organizational, it crosses actually a little bit of both, is the freight side. How are we utilizing our trucks, how are we doing charging freight, how we are doing with our -- how much LTL shipping are we doing because we don't have volume on certain lanes, et cetera. And Will touched on this earlier but when I look at that piece, one thing you see -- whenever you're predicting numbers coming into a quarter or looking at a year or you're looking at what you think you can do, you always have kind of a mind of where those pieces are. And one piece is going to be higher, one piece is going to be lower, and that's just life. What we really saw in the fourth quarter is, directionally, they all moved the same direction. We gave up 6 basis points here, we gave up 7 basis points there, 12 in another spot, 15 in another. If I look at all those pieces, we gave up about 40 basis points. Now a piece of that, about 1/3 of that, ends up being in our ending inventory. So it doesn't hit the P&L because it's capitalized in the inventory. But most of that, 25, 27 basis points does impact our gross margin in the fourth quarter. A second piece and an almost equal size is the rebate number does fluctuate a bit from quarter-to-quarter. Typically, in the fourth quarter, you have some true-ups. It might increase the number slightly, it might lower the numbers slightly because trueing up, most programs are calendar based. Gave up about 25 basis points there. That's the bad news. The good news is when I look at those pieces, that is a seasonal piece of our business and now the freight piece, we got to do some hard work to improve those. Some of it occurs naturally because we better leverage our trucking network. Our trucks have more product on them. So our relative cost is lower. Some of it takes -- sometimes taking a good hard look at it, kicking a few people in the butt, including ourselves, and saying we need to be better at this as we go into the new year. The last piece I'll touch on is what we talked about our organizational gross profit. Gave up a little bit in the quarter. That always moves around a bit from quarter-to-quarter, some natural gives and takes. Things that we're doing to exclusive brands tend to improve that number over time. Our large national account program tends to erode a little bit of that number. The real case is managing the mix over time to constantly improve it. Long story short, gave up some gross margin in the fourth quarter. I believe we're poised well as we go into 2012. So the last one is on the working capital. We continue to improve our working capital. That's part of the 'pathway to profit.' Our inventory utilization should improve over time. My issue there is we're just not making fast enough progress and that's something we'll work on. Our internal calculation really looks at the ending inventory and looks back in time against cost of goods to comp with the days of inventory and days that they are on hand. So how much working capital. Our business, as everybody on this call knows, historically uses quite a bit of working capital but we get great returns on that working capital, so we can afford it. But we operate in that 220, 225 days of working capital neighborhood when you combine the 2 together. Our challenge is how do we get to that sub-200, down in the 185, 190 neighborhood and how long does it take us to get there. Not to say we can't improve beyond that, but you always have shorter and longer-term goals. We made about 8 days of improvement from last year. That should have been twice that number. So that's our challenge for 2012, is continuing to improve those days and do what we think we should do, not what we did in 2011. So I think we have good opportunity there, and that just enhances our cash flow and our ability to get returns as we go forward. I believe our operating margin and our pretax margin will continue to improve if we can improve the relative performance of our working capital. It's a great one-two punch. With that, I will stop talking, and we'll open up for some questions. Thank you.

[Operator Instructions] And our first question comes from Ryan Merkel with William Blair. Ryan Merkel - William Blair & Company L.L.C., Research Division: So my first question has to do with your sales outlook for 2012. I guess, in your view, is this another year we could do 15% to 20% top line growth, given the many initiatives you have working?

Yes, Ryan, as you know, we don't give guidance, but if you look at our sequential pattern, historical patterns for the first half of the year, which is pretty well mapped out, we should be able to do the high teens if not better. But we're comfortable, 15% to 20%, we're very comfortable saying we should be at that or maybe a little better. Ryan Merkel - William Blair & Company L.L.C., Research Division: Okay, great. And then secondly, the vending initiative was a major success this year and from what I hear, there's a lot of momentum heading into 2012. Are there any tweaks or changes you have made that should make 2012 potentially a better year for vending? I think, in the last call, you mentioned new software that could increase efficiency.

There's actually -- we could talk all day, but I'll just give you 2 of them. One is we are developing new software and we're testing it in 2 districts, so probably 25 stores, and the feedback has been huge. The estimate is that it could save up to an hour per machine per day -- or excuse me, per week. So you look at that and you're -- it's $4 per machine out there in labor savings just because of the software. Just streamlines the flow of the product and the invoicing. Great opportunity to save some dollars and some time. The second is we implemented or introduced a vending incentive to give our store managers, district managers and all of our outside sales people a meaningful opportunity to make more money if they sell a certain number of machines. What we're really doing we're trying to buy their time. They're getting pulled in a hundred different directions and this is a way for us to get them more focused, and believe it will give us a little boost going into the new year. Ryan Merkel - William Blair & Company L.L.C., Research Division: Just lastly, it sounds like 2,500 machines signs per quarter is a reasonable target at some point next year.

Yes, we're still very comfortable with that goal.

Our next question comes from David Manthey with Robert W. Baird. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: First off, on the gross margin. I guess, given that some of these seasonal factors might abate, would it be safe to say you'd expect gross margin to be roughly the same range next year? And the reason I asked the questions is we've heard that steel carbon rod is down about 10% in the last 6 months, and I'm just wondering what your expectations are in terms of fastener pricing and then other finished goods pricing.

On the fastener pricing, we haven't heard much yet. We believe that -- it's also saying that iron ore's going to be down. So there could be a little deflation on the fasteners next year, but we historically have been pretty good at keeping that, not having to pass as much of it along. But right now, we haven't seen anything from our suppliers. We haven't seen pressure from our customers to push it down or to pass it along our suppliers to give it to us. So it's a pretty long-cycle thing from ore all the way to a processed fastener. But as far as your question on our margin range, we state 51% to 53% this year. We came -- for the last 2 years, we've been right at 51.8%, and I think that's a good number for 2012. Looking at it right now, we're 10 days into the year -- or 12 days. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then just on vending, and we've looked at this, we have asked on this, but I'm interested in hearing your view on it. As you look at the trade-off of vending relative to outside selling sales force or other opportunities, you might have new store openings, et cetera. Do you have an idea of what incremental growth you're driving today from vending? I guess you can look at it in a vacuum, but you have to consider that you're also offsetting that by not pursuing other growth avenues. Do you have an estimate for what you think, just incremental growth from vending alone is generating today?

We don't have an exact number because it blends in with the store, but the trade-off is actually very small because the more our people are out selling vending, the key to that sentence is about selling. And so they make hundreds of calls to sell 1 or 2 machines or dozens. It's a small ratio. And the more we keep them out selling, the overall business benefits. And I've actually talked to our managers about this recently, if they were to sell 1 machine per month -- and this is the group last week, 25 managers, I said if you were to sign 1 machine per month, how many days per month would it disrupt your business? And the answer from the group was 1 day, it takes one day to install it. So they have 19 to 20 days to go out and sell everything else. If we could sell 1 machine per month per store, you can do the math and see what it would do for us. It would be -- and I'm not saying we would. But it's a very small disruption for the gain. And we are going to continue to open stores. It's not a 1:1 trade, it's probably a 9:1 positive.

[Operator Instructions] And our next question comes from Sam Darkatsh with Raymond James. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: A couple of questions here, again regarding the vending and sort of trying to get a little bit deeper into the data here. What percentage, or ballpark, of your installed machines are going into customers who never before used vending solutions as opposed to machines going into customers that are rolling out vending, of machines, into more of their own locations?

Okay. What is added on to -- I think if I -- the majority of our machines today are going into customers that have never had vending through Fastenal or probably in most cases never had vending. There is a number of the machines that are going into existing customers that signed up a year ago and they want more, but I actually don't have a breakout on that. But still the majority of them are new signings. I would say at least 70%. But the importance, I think, in that question is that as we sign up more customers -- I looked at our top 100 list at the end of the year, of customers with -- number of machines per customer, and going through it and adding up in my head, I think that we're probably less than 10% penetrated into these customers, many of them big Fortune companies. We're just planting seeds is the way I look at it. So I hope the ratio changes with growth if they're going into customers that already have it. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: And that leads me perfectly to my next question then. So I mean, it looks like your average sales per -- your vending customer is on average maybe 8 to 10x the size of your average customer across the whole network and obviously growing much, much faster, 2 or 3x the rate of the overall company. You get a sense of how many of those types of customers that you have of that size and of that ilk, we can get a sense of what the, at least, the low-hanging fruit might be.

Well, here's one way to think about it, Sam. We've often talked about our average -- the proverbial average store, that $83,000, $84,000 a month store. It's top 10 customers represent about 65% of sales in that store and the other 1/3 of the customers represent about 25%, and then there's some cash business on the tail end, so retail business. And one way I think about it, real simplistically, if I think that we have 2,600 stores times the top 10 customers per store, there's a group of 26,000 customers. And some of those customers -- that's based on account numbers, so you might have some replication in a given store. But you essentially have 26,000 customers in our business that represent a big percentage of our business and are very prime candidates for vending. As we develop the additional machines over time, that's where you start to scratch your head and you wonder how deep in the organization you can go with what size of customer. And I guess I would say a lot of those 90% that are smaller customers are smaller customers because we don't do that much business with them today. They don't have smaller potential.

I think I'll add one point, and that's the 26,000 customers we sell to does not include all the potentials that are not buying from us today, which is a much greater number. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: And then the last question as it relates to vending. Obviously, the productivity per machine is down but that's understandable because of the amount of machines that you're installing. Are you seeing the sales growth in like machines accelerate? And then the machines that have been installed for at least a year, the volumes through those particular machines, the growth is accelerating?

We are, and some of that comes from the fact that, you get 6 months into heavy machine, 3 months into heavy machine, you're always challenging what's in that machine from a SKU basis. To say, is that the right fit for this customer because what kind of velocity are you getting from SKU to SKU. And then in the next 6 to 12 months, you're always fine-tuning that, and then if you're introducing additional machines, you're still fine-tuning that. So we are seeing growth in it. But what I can't tell you, when you get into that second and third year, what happens. Because when you get to fine-tuning in there, it's in there, plus we just don't have enough machines with history.

Understand, 70% of our installed base has been in the last 12 months.

Our next question comes from Adam Uhlman with Cleveland Research.

I guess just a clarification first, of the 16% of revenues that are with customers that have machines. Have you guys taken a stab at how much of the volume is actually going through it? Is it half of that 16% or...

Well, it's only about -- it's just under 20%, Adam. It moves around a little bit, but just below 20%. As you do, I get an 18%, a 19%, a 20%.

Okay. And then could you give us an update on the metalworking opportunity? I think last quarter you talked about the first quarter is the one that would start to take off. Do you have the SKUs in the distribution centers you add, and are the new metalworking vending machines available for installation?

Yes, we're still very optimistic about the metalworking. In fact, we made a decision in October to recruit and add another 20 to 25 metalworking specialists, which will get us up into the mid-60s. The machines are available. We've signed some, but I don't have the exact number, but they are going out being installed. I've seen a few pictures come back of installed machines. So those are available, and from the reports back, they seem to be working well, the machines out there. We continue to expand the inventory in the warehouse. Actually, that's kind of a little slower than we planned. And part of it is a little bit of caution from our suppliers, which I appreciate, because they're saying, "Let's not put it all in until we really understand what you need because they don't want to return." So it's a lot -- a more thoughtful process, but we continue to add every month, continue to add SKUs and continue to add suppliers. So we have the customers in the field that are buying the product, our fastener customer base. We have sales expertise out there. We've also done a good job with our sales people having the stores of taking this training through Tooling U. We have the online training. We have hundreds of store people that are certified. Not to an expert level but a very high knowledge level, so they can go out and talk the talk with their customers. And then if there's an interest, they can bring in a higher-level expert either from our team or from the supply team. Really nothing new there other than continued effort and still believe the opportunity is a very good opportunity for the long run.

Our next question comes from the line of Brent Rakers with Morgan Keegan. Brent D. Rakers - Morgan Keegan & Company, Inc., Research Division: I was hoping maybe you can talk a little bit about the strategy and the store closings, I think the number was 28 for the year. And then also maybe give us, specifically, what the occupancy numbers were down year-over-year for the fourth quarter.

Well, first off, the closings. What we constantly do, we are a look-forward-only organization. We look at where we're at today and we look at a given market. And what process sometimes is we -- as we've disclosed in the past, we have a fair number of leases that come due every year because we, generally speaking, sign short-term leases. And we look at it market by market and allow our district and regional teams to look at their business and say, "This market where we have 3 stores or 2 stores or 5 stores could be better served with one fewer store." And whether or not that is the right decision long term, we'll find it, we'll find that right answer over time, but it's not a bad decision in the short term. And I always fall back on the premise of I don't get too caught up in that in the short term. I look at it and say, it's a great -- it's a vast market out there, we have 2% market share and what's going to drive our ability to take that market share over time. And I look at all the growth drivers we have in place, that's what's going to drive that, not one component of it. And but when I look at the total store closings in the current year as well as cumulatively in our life, it's a pretty small number in the scheme of life. As far as the actual occupancy reduction, I believe that's -- occupancy was up 7.4% -- I'm sorry, that's an annual number. I don't have that number right in front of me, Brent. But I'll get that number and get it to you.

It was about 6%. I don't have my P&L in front of me. Brent D. Rakers - Morgan Keegan & Company, Inc., Research Division: Okay, and then just maybe the follow-up to that. You talked about some of the benefits on the non-payroll side for the year on the cost side. Any sense, materiality, of those 28 closings positively lowering cost structure overall?

Yes, it did, but the measurement is immaterial because the only thing you would have would be the occupancy component. Because when we go from 3 stores to 2 stores in a market, the folks that were in that third store moved to one of the other 2. So there isn't a labor differential. It would be -- and the vehicles we still have because we still have them for those people. It's really the $3,000 a month we're spending, $4,000 in rent and utilities.

And in the first year, being 2011, it probably actually adds expense because we have to clean up the store. We have to move the product. We have to, many times, pay out a lease. Net-net, it's just about going forward with our business, a more efficient business model. There's nothing in there that we saved a bunch of money by closing a handful stores.

Our next question comes from Robert Barry with UBS.

I was wondering if you could just comment, as you look across the business, if there are any end markets that are looking especially better or worse during the quarter.

I guess our construction business improved during the quarter. I think the mild weather everywhere sure didn't hurt that business, but I guess nothing jumps out that I think is unusual.

And from a geographic standpoint, we really saw pretty good growth throughout North America and our International business. There isn't an area where we're looking at it and saying that area of the country or the world is just slow because of economic reasons.

And I know it's a small percent for you, but the Government business, if you could just maybe comment on, if possible, on a same-store basis kind of what's happening in Government. I mean, I know you're adding a lot of share there, so it's probably a, I'm guessing, a big growth number, but...

The overall number is growing handsomely above the company number. We don't really think of it on a per store basis because our approach is one of a -- primarily U.S. approach, but just because of the way it's -- some of the early contracts we picked up, but it tends to be something we're doing at across a state. So we sign a state contract. We don't want to think of what is happening in Redwing, Minnesota versus Winona, Minnesota. We're thinking what's happening in Minnesota.

Yes, that's kind of what I meant. Kind of on a same-contract basis maybe would have been the better way to say it.

Well, our state and local business, as Dan said, is growing well above the company. We have the teams in place, we have 32 people in the states, we have a person in every state that we have a contract focusing on the government. I believe we're hitting our progress goals. What we look at -- internally, the way we think of this, and we think of it the same way as vending, metalworking, government, is that we're expanding the market for the local store. So if you're in a local business here in Winona, Minnesota and we just picked up the state contract, which we did, now that store has more opportunity to go out and grow their mark over a long period of time. If we introduce a new product line that we've really sourced well and we believe we can sell through to the customers, like metalworking, we have just expanded the market for that store. So we think about it a little different than I think you do in your industry. We're building market opportunity, increasing market opportunity, everyday with these initiatives. And the better we get at it, the easier it is for that individual that runs the store or sells everyday to do their job and create an opportunity for themselves and their family. They only have the best store.

And one thing I'd add to that. I think when you look at some of the data we provide on growth in different age of store. You look at the 5-year-old-plus store or the -- our annual stuff we talk about from the 10-year-plus stores, what allows them to keep growing, because those are substantial businesses in their local markets. And the way you allow them to keep growing is -- obviously, they continue to add new customers. You give them tools like vending and government and metalworking to give them, again, more avenues to expand the potential wallet in that local market.

And so our next question comes from Hamzah Mazari with Crédit Suisse. Hamzah Mazari - Crédit Suisse AG, Research Division: A question on store growth. You've guided the 4% to 6% store growth in 2012. Could you maybe talk about longer term? Is your store base where it needs to be? Is 4% to 6% the new normalized growth going forward, given initiatives on vending, et cetera, relative to the 8% historical growth, if you will, or higher historically? How should we think about that?

I think that's a good way to think about it because it's probably the new normal. What we've really tried to do over the last 2 years is go to our business leaders, as Dan called them, our regional CEOs, and give them growth goals, work with them on their goals and let them determine, for the most part, how they're going to achieve those goals. Whether it's new stores, adding outside sales people, sales specialists. But at the same time, we post different goals. We will continue to open stores, but the reason we're a little soft in committing to how many is it really depends on how these other initiatives will allow it. What we find with vending, with metalworking, and over a long period of time, I think we'll continue to open stores. We're still comfortable that we could open up to 3,500 in North America. It's just over what period of time that happens and what we need to do that. We want to find the most efficient growth model that we can and then stick with that. Or work on that. Hamzah Mazari - Crédit Suisse AG, Research Division: Right, that makes sense. And just a last follow-up question. Do you have any thoughts, or how do you view the e-commerce sales channel? And I know you talk a lot about vending recently. How should we think about your strategy in using that channel?

We're working very hard on developing our e-commerce strategy. We introduced a new website in 2010, we had great results in 2011. We know that we'll probably always be behind many of the companies that just have a warehouse operation because we have all the keep-fail [ph], all the Line-Stock and all these other things. But it's a great way to receive orders and it's a great way for our customers to search for product and place orders. Our business on e-commerce, I believe, was fivefold last year, Dan?

Yes, yes.

It grew fivefold from 2010 to 2011. We don't expect it to grow that much this year but we expect above-average growth. It's simply another very good tool for customers to buy from us, an easy way to buy. It goes back to what I said, the most convenient way to sell is make it -- or make easier to sell -- I'm losing my mind here, sorry about that -- make it convenient to buy, and that's what we're trying to do with all of these tools, vending, delivery, local service, and e-commerce.

And I think one thing, too, is a definitional question. What is e-commerce? I look at vending as e-commerce. I look as electronic systems we use in our Bin-Stock programs. You can call that e-commerce, it's electronically gathered data. It's not just web, it's not just EDI. Historically, we talked about it from the standpoint, what's our web business. But it's really a case, are we making it convenient for our customer to buy?

And if we're making it convenient for our customers to buy, and it's very efficient for us to serve, that is the best business model that we can develop. Efficient way to serve and make it easy for the customer.

Our next question comes from Holden Lewis with BB&T. Holden Lewis - BB&T Capital Markets, Research Division: Since you guys started the 'pathway to profit' back in '07, you've had a fantastic run in terms of the incremental margins. Well in excess of kind of the pre 'pathway to profit' you all have done, which obviously was part of the goal. The last, I guess, 4 quarters or so, you've seen moderation sort of in that incremental margin. Q4, it was modest, but it sort of continued that pattern. What do you expect as you go into 2012, in terms of where incremental margins might settle out? And is there a broader statement as sort of about the aging process, the maturity of the 'pathway to profit' at this point?

Well, the one thing I'll say, then I'll hand it to Dan, is we did add 180 basis points in 2011 over 2010, and our goal was 100. But I'll give it to Dan.

I guess the better way to think about it is we've seen great success with the 'pathway to profit'. But I would argue most of the benefit of 'pathway to profit' haven't been realized yet. Because if you look at what's happened from 2007 to 2011, our improvement in operating margin -- as I touched on earlier, we've seen nice leverage in our occupancy. But our occupancy leverage hasn't come because we raised our average store size. Because we have raised it, don't get me wrong, but we haven't raised it -- when we started 'pathway to profit' we said 200 basis points of improvement because we go from 70,000 a month to 125. We've gone from 70 to the mid-80s, and we've taken out a meaningful piece of our operating expenses as it relates to occupancy just by lowering our rents and being smarter, re-approaching how we look at it. Fourth quarter of 2009, our rent was 540 basis points, today it's 395. And that's just the rent component, there's utilities and other things. But a lot of the improvement came from we raised our gross margin. So when I look at the 'pathway to profit', we've gotten a piece from occupancy. We've gotten a piece from labor, don't get me wrong, but that's primarily been in the non-selling areas. If we look at the data on headcount, you really see we've done a great job managing our support headcount, a great job managing our distribution and manufacturing headcount. We've invested in a lot of selling energy, both store and non-store. And so as the average store size grows, we still have a lot of runway left as it relates to the labor side and nice runway on the occupancy side.

We've also kept our sales above the numbers that we put out in 2007. Our goal then was 18% the center of the range, and we've actually, for the last 2 years, have been 4 points above that. And we were spending some money to stay there. But we think that's a great investment. I'll add one thing, Holden. We are still very committed to meet or exceed our 100-basis point improvement, annually, going over the next several years. Holden Lewis - BB&T Capital Markets, Research Division: And just as sort of the follow-up to that. You commented about how you sort of saw the holidays carve a little bit of momentum out of the revenues after being very strong earlier. Have you seen sort of a return to the early December levels of activity in the beginning of January? Or how is that -- given the difference in that pattern, how have you seen that play out so far this year?

Holden, I'll answer this way. On February 3, I'll give you some insight on what we saw in the January sales. As we enter the year, and as we enter every year, we're optimistic about the trend pattern we've created in 2011 and how it feeds into 2012, and the pieces of growth that we held to drive our business to grow and grow profitably into the future. With that, I see we're 3 minutes past our 45-minute call limit. So I'm going to close by saying, again thank you, everybody, for participating on our call. And thank you for continued support and ownership of Fastenal stock. Have a good day.

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