Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Fastenal Company Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to Ellen Trester of Investor Relations. Ma'am, please go ahead.

Welcome to the Fastenal Company 2013 Third Quarter Earnings Conference Call. This call will be hosted by Will Oberton, our Chief Executive Officer; and Dan Florness, our Chief Financial Officer. Also present for today's call is Lee Hein, our President. 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, 2013, 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 material -- 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 Will Oberton. Go ahead, Mr. Oberton.

Thank you, Ellen, and thank you, everyone, for joining us today for our third quarter 2013 conference call. Thinking about the quarter, overall, I would consider that we -- or I believe that we had a good quarter considering the environmental -- excuse me, the challenging environment that we're into. I need to get warmed up here. Starting out with sales growth. Sales growth came in about where we thought it would be for the quarter. On a sequential basis, we showed improvement over our historical numbers in 2 out of 3 months. July was a tough month but we came back nicely in August, had a good growth month in September. And 3 out of the last 4 months, we actually had -- we're over the sequential pattern that we look at the historical pattern. So we're moving ahead nicely although there are still low growth numbers in the high single-digit -- mid- to high-single digits. On the margin, we had 51.7%. We were very disappointed with the margin. But saying that, I do believe the team is doing a very good job and they're working very hard on the margin. There are several factors that weighed in to this quarter's margin and are weighing into the year that I'd like to talk about. The first, in no particular order here, our slow growth in fasteners. Fasteners has been a difficult market this year. We've seen basically no inflation in the product, and we've had very slow growth in the product line. And it's historically -- or it is the highest margin product that we sell. We had growth of 1% in the quarter. So that's hurting, so it's a mix issue. On the other side of that, our non-fastener products grew about 12% roughly, and they're traditionally lower-margin…

Thanks, Will, and good morning, everybody. And I also want to thank you for joining in on Fastenal's earnings call today. Just want to touch on a few items. The store headcount, we go through quite a bit of discussion of stats, probably sometimes you might argue too many, but on Page 11 of our release goes through stats of headcount in various pieces of the business. And some things that I think are worth noting, as Will touched on, we added just over 400 people to the store -- FTE to the store in the fourth quarter, 4.6%. One thing that probably isn't as well-known is in addition to supporting our store, because really what we're doing is -- our goal here is we want to support every store, every vending machine, every key account, and grow our business. And in addition to the headcount we're putting into the store, we're adding resources behind the store to support the sales and leadership -- the sales leadership of the store. And that is we went from having just over 220 district managers throughout our organization, and we added 50 during the quarter. And so those are folks that are stepping in to expanded roles, reducing the number of stores per district manager to put more selling energy, more attention on each and every store every day, every week of every month. In addition, we expanded our regional VP pool by 3, went from 18 to 21 during the quarter. So we put in a lot of selling energy to support our store, again, it's all about supporting every store, every vending machine, every key account, every day, week and month. There is -- reading through the analyst reports that have come out during the course of the month, I think…

[Operator Instructions] Our first question comes from the line of Ryan Merkel from William Blair. Ryan Merkel - William Blair & Company L.L.C., Research Division: So on the last call, you talked about average daily sales growth potentially improving back to a double-digit pace at some point during the next few quarters, and this was primarily based on adding sales FTEs, which it sounds like you're on track for that. But then if I also start to look at the -- if you have the normal sequential math, which you had the last 2 months, this also implies that average daily sales could start to pick up from here. So I guess I'm wondering is there anything you see out there today that would change this outlook.

No.

No. Ryan Merkel - William Blair & Company L.L.C., Research Division: Okay. Care to elaborate anymore or...

The market doesn't seem to be changing a lot, Ryan. I mean, it's a soft industrial market. We don't believe it's getting any worse. We don't see signs that it's improving, but our attitude internally is we have to deal with the environment out there and go take share, and we're adding the people. Our comps in October are softer than September. So we have good opportunity to improve our growth nicely in October and going out through the rest of the year setting ourselves up for a stronger first quarter.

The only thing I'd echo in on that is if you think of trends going forward, we're adding selling energy, we're adding vending quality to the organization. And I don't know if this third one will be -- will prove indicative or not, but the ISM is improving. Ryan Merkel - William Blair & Company L.L.C., Research Division: Right. Okay. And then on gross margin, I understand the mix headwind but I guess I'm wondering if you believe further sales re-acceleration might come at the expense of gross margin unless the macro improves. What's kind of the outlook there?

No, we don't think that our gross margin is -- results are a reflection of our hard push on sell -- or on sales. I really believe it's the normal environment that we're in. We were probably overly optimistic going in. So we're still confident or comfortable with our 51% to 53% range, and believe that's what we have to work or that's -- we have to try and stay in that range. We see nothing that would push us out of that. And if sales really took off, could it affect our margin, yes, but we'd be happy with that problem. I mean, if we had unusually great sequential growth. We're not pushing so hard to reduce it.

[Operator Instructions] Our next question comes from the line of Hamzah Mazari from Crédit Suisse. Hamzah Mazari - Crédit Suisse AG, Research Division: The first question is just on the production side of your business, you guys highlighted mix as a negative but also some competitive pressures. I'm just curious if you're seeing any impact of some of your larger publicly traded peers getting more aggressive on the manufacturing end market side, particularly on production consumables. Any sense of -- I realize the market is big enough for a lot of players, but just any sense of is that leading to increased competitiveness in the industry? Any thoughts?

I think the competitive aspects we're talking about really relate to more what the -- our customers are expecting and asking of us more so than what competitors are doing. Other than the fact that we're all -- we are all reacting to the competitive marketplace. But it's really being driven, I think, not so much by everybody else taking shots at us. It's really being driven by what customers need, because if -- we're squeezing our expenses tremendously as you can see when you look at our operating expenses. Our customers are doing that too, because in the absence, as Will mentioned, of sales growth, I need to squeeze profit if I want to get profit growth -- expenses to get profit growth.

And we're seeing that from the large public companies. We're seeing it from the small private companies. Everybody is out to keep the business they have and try and grow the business the best they can. And I agree completely with Dan, it's customer-driven and we're all reacting to the pressures. Hamzah Mazari - Crédit Suisse AG, Research Division: Got you. And just a follow-up question on the vending. Clearly, you're taking a more measured approach on the vending side. Could you give us a sense of maybe what inning you are in terms of moving towards higher quality vending? I'm trying to get a sense of out of your installed base in vending, what percent of that do you really need to prune? How much is low quality in that installed base? Any sense of that?

I don't know if we know the quality answer yet, Hamzah, because one of the things that we're seeing, and I touched on earlier is that the THUB rollout -- the quality is not about THUB. I don't want to confuse the issue. THUB is about efficiency behind the scenes. But some of the steps our stores are taking to implement THUB support expanding the quality, in addition to what we're doing with our vending improvement program. For example, looking at the activity of the actual machine and are there tweaks you could make to it. I go to our warehouse or I go to a place with a lot of younger folks, and you might see, in a soda machine, 5 out of 6 offerings are Mountain Dew. It's because that's what's turning that machine and that's what that marketplace wants. Even though I don't want Mountain Dew, I'll take the Dr. Pepper, but Mountain Dew is what's being drawn. It's taking a step back and looking at the machine and saying, what coils are really spinning on this machine for the replenishment from THUB, but that also optimizes the machine. So I think after we get THUB turned on and we've had the opportunity to optimize more of our machines, we've had our vending improvement program in place for a longer period of time, I think at that point in time, we'll be able to take a step back and say, you know what, here is the portion of the machines that were sub-optimal 6 months ago, and here's the portion that still are, and we need to scratch our head a little deeper on those. But it's a small, I believe, a small subset. The machine is just a better way of delivering products. Where we have issues is we have too many machines relative to the customer. I think that we'll run into more than we have a machine where it doesn't belong.

And our next question comes from the line of David Manthey from Robert W. Baird. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: First, I was hoping you can discuss the impact to date of your full-time equivalent additions. Have you seen measurable improvements in stores where you added them? And then also if you could talk about the success you had in pulling back and asking customers to make good on the commitment to add an incremental $2,000 per month per machine? You talked a little bit about optimizing the machines but I understand that some of those are -- they're not operating at the level that customers had committed to. So could you talk about those 2 growth drivers?

On the first one, Dave, as far as the improvement of adding people, it's too early to tell. But if you look over a long period of time, we know when we have more hours, our businesses grow faster. So it's very straightforward. On the -- we've had very good success ongoing to visit the customers on the $2,000 per machine. And I don't know the exact percentages, but it's a very low percentage where we've decided to take the machine out. In most cases, it isn't about the customer giving us other business which we would like. It's about resetting the machine so that we have the right product in there. Dan mentioned that with his Mountain Dew analogy. It's really about looking at the customers needs and understanding what we should put in there. And our vending team who runs the system has developed some very good software to look at what's spinning and what isn't, or what's falling out of the machine and what isn't. So they have good analytics to go to the customer, identify what we need to put into it. And most customers want that conversation because if they don't use the machine, they don't save any money, and they don't run their plants as efficiently. So we're going down the list. We continue to see very good progress, and the quality of each machine continues to rise, basically, on a weekly basis. The team has done a very good job. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then in terms of this -- the emphasis on shorter cycle sales efforts, sort of unclear what the impact there was on growth. But it seems like you cited that it had a negative impact on gross margin, clearly. Could you put that in the context of the price guidance system where you've had such good success year-to-date? It seems like it overwhelmed the benefits that you had there, and I'm just wondering do you expect future improvement in sort of that underlying gross margin exclusive of mix.

On the last part of your question about gross margin, I'm going to shy away from answering that. We're going to hold to the 51%, 53%, and the fasteners move a little bit and half of this discussion goes away. And -- but in regards to the shorter cycle sales, to me, the best indicator I can point to of everything we're doing, going after some shorter cycle sales, going -- having some of our national accounts folks work in stores, the FTE we're adding, the district manager energy we're adding, if you look at all of those things, I go back to the sequential patterns. In the sequential patterns, we've now strung a couple of months together where we beat the pattern -- beaten the pattern, excuse me. And there's positive energy going into that. Since -- I don't know if I touched on this earlier, if I did, I apologize for repeating myself, it must be because I'm almost 50 years of age.

Next week.

Moving in a little bit. But if I look at it since May, and I'll probably lose the group with this comment. Since May, we've beaten 3 out of 4 months in pattern. And if you look at the delta, the -- if we beat the pattern by 0.5%, missed the pattern by 0.5%, cumulatively, our beating is giving us 0.5 point of lift. In the last 2 years, from May to September, we were down about 0.2% or 0.3%. So we've gone from negative. In 2011, it was negative, and that was the stronger year. 2012 it was negative, and that was a negative year. In 2013, if you look at the sequential beats and misses since May, we're up 0.4% and we've beaten 3 out of 4. I think all those tied together, the focus on just grow the business is impacting our business.

And, Dave, I didn't mean to indicate that our short cycle sales are affecting our reported gross margin. I'm not saying they are or they aren't. But I really think our gross margin is more about the 2 mix-related issues and the customer pressure for them trying to hit their bottom line. Like I said in the last 2 quarters, every industrial report I read was "short on the top line, we did a nice job on expense control", and that affects all of us, us and all of our direct competitors.

And our next question comes from the line of Sam Darkatsh from Raymond James. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: A couple of quick questions. First off, I noticed that your store count expectations -- or the store additions were trimmed on the high end, now 55 to 60 instead of 55 to 80 before. Are you rolling those into next year? Or what's the reasoning behind the trimming there?

Yes, I think the reason for the trimming is we're now 9 months through the year and we have a better idea where we're going to finish at. And so you narrow the range down. There's nothing more than that. And then we also indicated a starting point range for next year. And I don't think either one of those are horribly surprising. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Okay. Secondly, Will, you mentioned that you're looking incentive-wise to create an environment where you may be ramping up the vending signages next year. Could you quantify that in terms of what goals or reasonable expectations might be for installs, both from the FAST 5000 machines and otherwise?

Well, on the overall number, our goal would be to, 2014, we'd like to get to the roughly 2,000 per month signing. We think that's a good number. And so that's what our incentives are going to designed to do. It's too early to say whether we're going to get there. But if you look at the fact where basically we've signed 18,000 without putting any pressure on based on last quarter, it doesn't take a lot more energy to crank that up. We think that we have some built-in energy when THUB is up and running because right now, if a store is struggling to serve the machines because it's a lot of work packaging the product and filling the machines, there's a reluctance to go out and sign more machines. And I talked to a group of managers this week about the very subject. So if we can get THUB up and running the way we believe it will, we reduce the workload at the store, the stores see, "Hey, this is pretty good business", they're going to go out and work harder to sell them, and they're going to have more time to work harder to sell them. So based on that, based on a little incentive, right now, looking at the year internally, we're saying, "Hey, we'd like to get the number up around 2,000 machines per month". We signed 23,000 to 25,000 or 22,000 to 26,000 for the year. That gives us great growth. It's very manageable and it doesn't overload any particular area of the company as far as stores and regions. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: And, Dan, if I could sneak one more in if I could. I noticed your accounts payable, this might be nothing, but it's spiked and I was wondering if perhaps you were building inventory late in the quarter as a result of why that was the case?

There's a few things driving that. One is the timing of some of the inventory spend. We were building some inventory. Some of that is inventory is going in to THUB. Another one, which is a relatively minor event but it's still meaningful dollars is we changed the organization we use for processing our fuel cards in our vehicle fleet and their cut off is 5 days earlier in the month. So there's an added accrual in there for some fuel that's more mechanical than anything. The third one is all the distribution stuff we're doing, there's a piece of that sitting in accounts payables in the quarters and it will be paid out here in October. But nothing horribly meaningful other than that.

And our next question comes from the line of Adam Uhlman from Cleveland Research.

I was wondering on the fastener mix, the business really hasn't been growing too much. And it sounds like there has been some added pressure to try to increase the company's sales there. I'm just wondering how you think you're doing from a market share perspective on fasteners overall. And then where you think, over the medium-term, where that settles out in terms of your mix as you've been addressing non-fastener products more aggressively?

Adam, it's hard to understand because there's not a lot of data out there. If you look at the fastener index that BB&T uses, that Holden Lewis sends out. Holden, you're probably in the call, thanks for that. It shows that fasteners are in a pretty tough spot. I think it came out at 46 and change, with 50 being the center point on that index, very slow growth. And our purchasing, director of purchasing and the person who heads up our fastener initiative just came back from Taiwan, which is -- China and Taiwan, about 3 weeks ago, and I met with them. And they said that the factories that we support very heavily are very slow. The U.S. imports coming out of Asia are at a very, very low level, which tells me demand is slow, the fastener index from Holden tells me that demand is slow, and we know that there's no inflation in the product. You put all those together and it says we're probably doing a little bit better than average with our fantastic 1% growth, sarcastically. But we are working very hard at it. We have a lot of small projects and medium projects. Things we're working on, better bin stock technology, doing a better job of culling on the large customers. Lee has implemented some new quoting tools, or his team has. Tools to speed up the process to try and turn an inquiry into an order. We had kind of slowed that down with price guidance. They recognized that. They developed some software that the store managers, and I, again, spent a lot of time with store managers this week, are high-fiving us for doing this for them, and I get no credit. But -- so we're doing a lot of things to speed that up. And we're pretty confident that we're going to start taking share when that opportunity per share growth comes back.

Okay. And then just a follow-up. Could you talk about where we stand with the metalworking initiatives, are the trends getting better or worse? The overall...

Yes. Well, the trends are slow. In the quarter, we grew our metalworking by just over 10%, basically, a little -- almost double where the Fastenal growth is. Metalworking is a tough area right now. Two-year pattern, we're up 37%. So we had a great first year, it slowed down this year. But we're still very motivated and believe it's a great opportunity for us. Based on what we're hearing from industrial -- or industry data, from other competitor data, metalworking may be one of the toughest areas out there right now. And we're still growing the business at 10%, off a pretty good base. I mean, we're not huge, but it's a nice piece of business for us, and we're still very optimistic. I believe the team is doing a nice job of growing that business.

Year-to-date on that, we're up about 13%.

Okay. Yes, I didn't have that.

And our next question comes from the line of John Baliotti from Janney Capital Markets.

You guys have pointed out the correlation you've had or sequential pattern with ISM, and you pointed out that fasteners have been growing a little bit slower than you think you had hoped. And I was wondering, do you think that all the points you -- that, Will, you mentioned about the headwinds and tailwinds to gross margin, do you think that customers are still pruning their inventories? Because ISM picked up quite a bit in the third quarter versus the second quarter in every one of those months. And I'm just -- I'm wondering given your high correlation to that, do you think that maybe they're just working down some inventory in the short term?

No, I don't believe that. I don't -- since 2007, '08, '09, most of our competitors have been -- not competitors, customers, they don't have a lot of excess inventory in the system anymore. They're all living. And part of it has to do with there's a lot bigger pressure on taking cash out of the business, and the other thing that's going on is the suppliers are better. We're better, our competitors are better, so you don't need as much inventory. I have been scratching my head just as Dan has over the ISM. And when you look at the -- like I said, I've been out with a lot of customers over the last few months, it's hard to find one that's just booming. And it'll be interesting to see the reports coming out over the next 2 weeks from the big industrials, but it doesn't sound like any of them are seeing robust growth. It's hard to understand where that 56 is coming from. Hopefully, it's a leading indicator, as Dan mentioned, and we're seeing it in the next 2, 3, 4 months. But I do not believe it's inventory.

Yes, it seems like it's an encouraging number because it did move up markedly from the second quarter. And to your point, the things that you've flagged about gross margins, do you think that, I guess, we should expect those to continue through the balance of the year or so if we're kind of thinking about your range, your long-term range of gross margin, do you think it's smarter for us to be on the sort of in the vicinity we are now through the year?

We're not going to give guidance on gross margin. But unless the fasteners pick up and unless the business just picks up in general, unless fasteners pick up, that pressure is going to stay there. If the economy doesn't turn around, the competitive pressures from both our competition and our customer base are going to remain the same. So we don't see a lot of change, we don't foresee a lot of change over the next 3 to 4 months.

Okay. And just finally, Dan, you pointed out historically, the sequential patterns and how, more recently, you've outgrown them by about 0.5 point or so. And do you have any kind of feel of what we should expect that exceedance? What would you guys view as a successful delta from, I guess, historical sequential trends?

I think that would be called guidance.

John, to be honest with you, we don't know. We know what we're doing that we believe positively influences our business, and I would hope to positively influence our benchmark -- our performance to our benchmark, what we're doing with adding energy into the store, what we're doing with working to improve the vending, what we're doing to drive our key accounts. Those pieces are ultimately good means to grow our business. Expanding our district manager roles will do 2 things: a, we'd be better at recruiting; and b, we'll have better -- we'll have a higher level of sales energy in our business to support our stores every day, every week, every month.

And if the ISM is an indicator of future opportunity, that is going in our direction. We do have some tailwinds from that perspective.

And our next question comes from the line of Eli Lustgarten from Longbow Securities.

Somebody has to ask the obvious question. All the data we've gotten before the insanity in Washington, and now we have a combination of a government shutdown, we have ObamaCare scaring a lot of businesses from hiring. And I was just wondering whether you foresee or anticipate or looking for any impact from the environment that nobody chose but we're sort of stuck with those for now?

We're both kind of looking at each other, shrugging our shoulders. I...

I'm positive.

I think as a nation, and I'll go out on a little limb here, I think, as a nation, we've grown a little bit accustomed to the fact that we have a bunch of folks in our nation's capital that a high percentage of the time, do things that are pretty damn dumb. And that's unfortunate, speaking as a U.S. citizen. With that said, I'm a firm believer, if there's core demand for the things that we sell, that core demand will be there. And I don't think that distraction is going to be that destructive longer term, but we don't know.

I was just pointing out the small business optimism index is weakening. And there's a lot of commentary coming out of the small business side about ObamaCare and their unwillingness to change their business conditions, and that's an important part of profitability as a company would say. But at this point, you're not seeing anything that -- or in the plans for the fourth quarter, is that fair?

That's fair.

All right. And the incremental profitability, we talked about gross margins, the cost going, which really weighted on incremental profitability that we saw in the third quarter. And from the sound of it, you expect no real material improvement in those metrics as we go towards the end of this year. If volume is good, obviously, it would be better, but at this point, the conditions you're laying out don't so much improvement in incremental profitability or is there a distinct moving inside to control cost a little tighter to get the improvement in profitability up for the fourth quarter?

When you're operating at a level of profitability that we are, at 22%, and you're in an environment where you're not sure what mix is going to do to your margin and we're heavily investing in selling energy, that does create challenges for us to obtain incremental margin. We've talked in the past about the pathway to profit. Our stated goal, and this was a point in time goal, this is an end mark, end place, but our stated goal was, a number of years ago, was to drive the pretax to 23%, which would imply we have another 100 basis points of incremental margin to pick up at some point in time and beyond. But again, that 23% is not a target, it's just a number. But it's really predicated on the average size of the store. And the average size of the store right now, I forgot what it was in the release...

$94,000.

$94,000. That's what needs to happen to drive that up, and we need the top line to drive that. It gets a little easier at the top line if we have a good mix of products and our gross margin is giving us a little bit of tailwind. It's good if we're getting a little bit of tailwind in the operating leverage. But we're investing in a lot of things right now. We're adding folks into the store, great investments, because we focus on long term.

Our main focus is getting our growth back because if we can do that, that takes care of most of the other things: pretax profit percent, all the other things. And so we have to stay very focused on that, and we believe we're doing the right things to make that happen.

And that is all the time we have for questions today. I would like to turn the conference back to Fastenal management for any concluding remarks.

Again, speaking for Will and Lee and myself, we want to thank you again for your support and interest in the Fastenal business and for participating in the call, and have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.