快扣 (FAST) 2007 Q3 法說會逐字稿

Good day and welcome to the Fastenal Company 2007 quarter three earnings conference.

This call will be hosted by Mr.

Will Oberton, Chief Executive Officer, and Mr.

Dan Florness, Chief Financial Officer.

The call will last for up to 45 minutes.

Today's conference will start with a general overview by our Fastenal hosts, Mr.

Will Oberton and Mr.

Dan Florness.

The remainder of the time will be open for questions and answers.

As a reminder certain statements contained that are not historical -- excuse me -- historical facts are forward-looking statements and are thus perspective.

These forward-looking statements are subject to risks, uncertainties and any other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.

More information regarding such risks can be found in Fastenal's quarter earnings and annual SEC filings.

Mr.

Oberton, please go ahead.

Thank you very much, Sarah, and thank everyone for coming out and joining us for our conference call this morning.

This morning I'm actually reporting in from -- or calling in from Nashua, New Hampshire.

I'm out here for some sales meetings and so my comments will be more brief and Dan will be covering more of the information.

Give you my thoughts on the overall quarter, generally, we are very pleased with the quarter.

The one area of disappointment was revenue growth.

We were one to two points below what we thought we would be and that caused the shortfall in earnings, but if you break the numbers out and look at all of the pieces, most things actually came in very good.

We're pleased with our progress in margin.

We're back to 51%.

That's really what we had stated earlier in the year; you'd continue to see improvement there.

We believe going forward that we still have a lot of room to move the margin over time through transportation initiatives, purchasing, and just good business practices.

From the earnings standpoint, as I said earlier, it was a little lower than we had expected and it was really due to the revenue.

It was not an expense issue at all.

With one to two points higher revenue which we had thought we would have going into the quarter, the earnings would have came in more on plan.

From a balance sheet side, I'm very pleased with the progress we've made.

I have to give a lot of credit to that for the balance sheet to Dan and his group.

The inventories are in good shape.

AR continues to track very well, and we're in a very strong position.

As far as our Pathway to Profit and our hiring plan, we're right on track where we thought we would be.

Our sales headcount is up 18.4% year over year.

Our support group is up about 7.5% when you blend the distribution with the other support people.

So overall we're right where we need to be.

The aggressive hiring also made it higher -- harder to hit the earnings estimate, but I really think we're doing the right thing by hiring the outside sales people, controlling our support growth, because we're setting ourselves up very well going into 2008 and beyond.

So overall, if I had to talk about the quarter and explain the quarter, which I did yesterday in my board meeting, is I explained the third quarter of 2007 as a good quarter.

Not a great quarter but a good quarter.

What you can look for going forward from a hiring and expense standpoint is we see -- I would forecast lower hiring in the fourth quarter -- in the second half of the fourth quarter.

That's very typical that we'll slow it down through the holidays and then pick it up again in the first quarter.

So for the most part, business is on track.

Revenue is tracking a little slower than we had hoped, but other than that I'm very positive with the way the business is running at this time.

With that -- and I'll also be on for Q&A.

With that I'd turn it over to Dan Florness and Dan will give you a lot more color into the specifics of the quarter.

Thanks, Dan.

Good morning, everyone.

I'm going to use the earnings release itself as somewhat of my outline of things I'm going to cover to make it easier for everybody following.

As noted in the first page of the earnings release, we're pleased that for both the three-month period, the quarter ended September 30th, as well as the nine-month period, we have been able to leverage operating earnings, net earnings and earnings per share.

The operating earnings leverage has been enhanced by the fact of what Will alluded to earlier with our gross margin improvement has really allowed us in the year of 2000 to move aggressively into our Pathway to Profit which really from a standpoint of the three months and the nine months ended September has been a net drag because of the investments [we're making in additional people]-- and I'll touch more on that in the few minutes.

But the added gross margin has given us the ability to add some of that SG&A costs and for the impact we will [accure] into 2008 and into the future -- as we discussed back in April at our investor conference -- of allowing us to continue to grow the organization handsomely, increase the average size of our store over time and let the natural profitability enhancements that come with migrating from the less than 50 group to the 50-100 group to the 100-150 group to the 150 plus and the profitability that moves with that.

As noted in the earnings release, the net earnings saw a leverage up in the third quarter.

It's pretty much in line with the operating earnings in the nine-month period, and that was largely attributed to an income tax item that I'll cover a little bit later.

And the EPS did leverage up slightly above net earnings because of the stock buybacks we've been doing last year and into this year.

Moving down the page, when we look at the sales growth in the different categories, as Will mentioned in his discussion about the top line, it is a challenging environment out there.

With the June numbers coming in close to 15% growth, we really hoped that growth would extend into the third quarter and give us added lift and allow us to leverage up additionally.

Looking at the third quarter with the added lift that would have come from the 15% we feel our earnings growth would have been around in the 18% category and it'd given us a nice leverage point.

As that move closer to 13.5% that leverage point started to dry up pretty fast.

Looking into some specifics of the deleverage, I broke out a few, because I think it's useful for the reader of the financial to understand some components of our SG&A and how that really factored into our ability to leverage or not to leverage and how we see that going forward.

In the case of the payroll category, year to date our payroll growth is around 12%.

For the fourth --excuse me -- third quarter that number was approximately 14%, so we had some negative leverage on payroll.

And as we've discussed in the past, payroll and related costs -- i.e., healthcare, et cetera -- represent about 70% of our SG&A, so when we lose some leverage there, it has a pretty dramatic impact on our overall performance.

If I look at occupancy, we really haven't seen a benefit in occupancy related to Pathway to Profit.

We'll really see that going into fourth quarter and more pronounced going into next year, when the fact that we're opening about 8% in the stores this year versus 14% really starts to be felt when we aren't seeing many stores added in the fourth quarter of the year.

On an occupancy standpoint, year to date our occupancy is up about 22%.

For the quarter occupancy was up about 18%, and so what we've been able to do is we're starting to move that closer and closer to getting that into the low double digits, which is our goal, and really accomplishing that by being very, very cautious and very, very creative about how we merchandise our stores, how much space we take for that product, how we structure that product within the store to make it as efficient use of the square footage as possible, so we can stay in locations longer, open in locations -- good locations but be very, very aggressive with what kind of space we need for that location to make it as efficient as possible from an occupancy standpoint.

The other biggest item within SG&A is our vehicle pool, which includes our store delivery vehicles, the fuel that goes into them.

Year to date that expense category's up about 15.5%, and in the third quarter we saw some challenging trends in fuel prices and that category was up about 18%.

So I thought I'd at least give some insight into some deleverage items or items that gave us some challenges during the quarter and where that is year to date, because I think that helps you look into fourth quarter and look into next quarter -- next year to understand where are those leverage points.

For us where the leverage really took off was when got -- if we had gotten them above 13.5%, gotten closer to 15% we'd have seen a meaningful change in our leverage.

Looking at current initiatives, I think they speak for themselves in our earnings release.

I will add a couple things.

Touched on in the release, the movement away a little bit from the CSP2 and CSP3 distinctions and moving more to an a la carte.

One thing we found in CSP2 is that we were adding a lot of good products.

They're products that sell well for us, but depending on the local demographics of our customer they might sell better or not as well or maybe you need more or less depth of certain items given the local market demographics, and the a la carte really allows us to move that direction.

It goes -- in my mind it compliments very well to our Pathway to Profit of arming our sales folks with the best products that will sell in their market and also products they're comfortable selling.

If we have a market that the individual selling is really comfortable with the commercial construction segment, they might emphasize some of that more because it's a good strength for them in the local environment and they have good experience in it, and so I think it works very well.

I think it also allows us -- as we've mentioned in previous quarters, it allows us to really address our working capital and our inventory and getting the best utilization of that inventory throughout the network.

In the case of IHUB, I am happy to say we continue to move -- and that's our master stocking hub in Indianapolis, sorry I used an internal reference.

We have continued to add inventory into that.

It's that, as well as store openings year to date are the big drivers of the inventory growth that we do have.

And I'm pleased to say the 130,000 SKUs that we've talked about last spring and the year ago, we are at that number now so we really are in a position where we have an in-stock catalog and that's a great selling tool for our sales organization.

And as Will mentioned in our April meeting, we made a lot of changes in our Indianapolis facility in a relatively short time.

We put a lot of weight on their shoulders and frankly almost buried them with some of the -- with the weight and they really have stepped up and are in position now to really react well and service the needs of their local region as well as the inventory needs of the Company, and think that's a great tool for us going into the future.

The income taxes, as I mentioned earlier, we did see a lower tax rate during the quarter; touched on it on Page 4 of our release.

Really was a case of under FIN 48 the defining term is discrete event, FIN 48 did change the number for the quarter.

In fact, circumstances did, we just call it a different thing, we call it discrete event.

But we did have some outstanding years that were under review.

We settled on those outstanding years, and we settled out better than we thought we would, and we were able to pick up a slight adjustment to the quarter of approximately $770,000, which lowered our tax rate.

Going forward, these events really don't have an impact on our core booking rate and that 38.2% neighborhood we've been in we believe is our rate going forward.

Looking at working capital, as Will touched on, pleased with the progress on the balance sheet side of the equation.

I'm extremely pleased with the progress on the balance sheet side of the equation.

Several years ago we talked about our call center in [Caledonia].

They made dramatic impacts on our accounts receivable and our cash flow starting from February of '05 in through the las -- end of 2006.

The impacts are starting to lessen some and it's really a function of the numbers they're coming up against on a year-over-year basis are becoming much more challenging, which is causing them to become much more creative and innovative with how they -- how we present invoices to our customer, how we -- our calling patterns, et cetera.

And I'm pleased to say we continue to make progress, growing our accounts receivable year over year 11.5% on 13.5% sales growth, 13.7% September, I think is still a testament to innovative ideas that we're putting into place there and I credit my team for that.

On the inventory side, the inventory growth that we do have year to date of 7.2%, I'm very pleased with that number.

In the first nine months of last year we grew our inventory about 16%.

Most of that inventory growth is really about product that's going into distribution, particularly our master hub in Indianapolis, as well as into the new stores that we have opened thus far this year, so from that standpoint, I think we're doing a great job of managing inventory elsewhere.

One item I touched on in the release -- and I'll try not to go into too much detail to keep from boring the audience -- we've implemented starting in July a process at our store level we call inventory redistribution.

And really what the concept is a year and a half ago we talked about inventory drawdowns where we were pulling surplus inventories out of our stores and doing it in lumps at a time.

Inventory redistribution is really about identifying need at the store level on a geographic region of the country and finding actionable inventory we can pull from another store that constantly rebalance our inventory every day, a little bit at a time.

And right now we do just over 100,000 picks in our distribution centers a day.

I believe about 118,000,120,000 picks.

We do about 6,000 picks a day at our store, so really, our stores are now an extension of our distribution centers from the standpoint of getting product to our customer when it's needed most, and it allows us to be much more efficient at utilizing our inventory,

And I look very optimistic towards continual improvements we can make at our inventory balance of this year and into next.

And I think we're very much on path with the plan we talked about earlier in the year, in April.

Looking at -- over the next five years, we've challenged ourself to raise our operating cash flow from that $0.50 to $0.70 on the dollar.

So for every dollar of earnings throwing off operating cash of $0.50 to $0.70 challenged ourself to raise that up to the mid 80's and really believe we can through a combination of improving our profitability and improving the leverage of AR and inventory -- but really the inventory side -- over the next five years.

And as I noted in the -- I didn't note in the release but I noted as I was preparing for the call and preparing some of our projections, I'm pleased to say that in the first nine months of last year, our operating cash to earnings came in at 53% -- or $0.53 on the dollar, excuse me.

In the first nine months of 2007 that number is $0.91 on the dollar, and continues to be a very strong cash flow position for the Company.

The Pathway to Profit, only thing I'll touch on that is I'll point out that we added some additional disclosures to the release this quarter.

Really the stuff that we're putting in our monthly sales releases I added to our earnings release, talking about store personnel growth and FTE, really investing our growth labor dollars at the store level directly into the selling energy of the organization and leveraging the support infrastructure of the organization, which as we mentioned earlier is really more akin to the -- the added personnel we had in the past and administrative support was more akin to store openings and less related to sales growth.

We did do some additional stock repurchases during the quarter.

Year to date we've bought back 884,000 shares

And at that I'm getting to about the 20 minute point so I'm going to stop.

I'm going to turn it back to Sarah and I would open it up for questions.

Thank you.

(OPERATOR INSTRUCTIONS) We'll go first to David Manthey of Robert W.

Baird.

Hi, good morning.

Morning Dave.

Wondering in terms of the SG&A growth rate, it seemed like that fulcrum had been driven down significantly or recently and it ticked up a little bit sequentially.

Will, you mentioned that your hiring trends and the Pathway to Profit was right on target.

I'm wondering what we should expect there going forward in terms of that leverage point?

I know the sales came in a little bit lighter than you thought this quarter, but should we ex --

I lost you.

Please press star --

-- how (inaudible) should we --

Sarah?

Again, caller, please press star 1.

Did we lose everyone?

I'm still here.

Again, please press star 1 caller.

Yes, Dan?

My guess is Dave was just going towards a little more visibility on leverage point and labor trends going into fourth quarter and into next year, if you want to touch on that?

Okay, but is he there?

Can you hear me Will?

I can hear Dave.

Anyone else?

Mr.

Manthey, your line is open again, sir.

Okay, thank you.

Yes, Dan, that summarized it well.

That's what I'm looking for just in terms of SG&A --

From -- okay, Dave.

I'll try and cover that.

Got it.

Going forward we'll have very low store openings.

We will open eight to ten stores this quarter so that'll help us from a growth -- or expense standpoint, and from a hiring standpoint, we will add additional people in October and then it will be very flat.

So our leverage point for the fourth quarter should be at -- roughly the second and third quarter it's going to be about where it has been if you leveled it out, meaning the hiring will slowdown but our sales are going to slowdown at the same level.

So if we're able to grow our business -- if we grow our business in the 13% to 14% range, it will be hard to see a lot of earnings leverage.

If we're able to get an uptick in our sales up to the 15% range, then we should show earnings leverage, as Dan described in his commentary.

Does that help you?

Yes, that does.

And I know comps get easier as we move forward here.

Is your outlook that things do tic up just because of easier comps or any comments you have in the fourth quarter in '08?

Well, the comps don't -- they get a little bit easier but not a lot easier on the overall because if you look at -- well, I guess two or three points.

We're really hoping that we can drive revenue by doing a better job out selling.

I recognize that revenue is our biggest prob -- revenue growth is probably our biggest problem -- that's why I'm in New Hampshire today working on sales initiatives, so we're going to work very hard at driving that growth up with a -- the 18% additional people should translate into higher revenue going forward.

Great.

Thanks, guys.

We'll go next to Mike Hamilton of RBC/Dain Rauscher.

Morning.

Hi, Mike.

Wondering if you could comment a little bit on what you're seeing geographically at this stage, walk through the regions?

For the most part, Mike, we're seeing the West Coast, mainly California, and Florida are slower for us.

And really it's the areas that have the really bad housing problems or appear to have bad housing problems based on what's reported.

You take out the southwest and you take out the very part of the Southeast, mainly Florida, the rest of the country is very consistent, where we're seeing regions slightly above, slightly below that 13% throughout the country with nobody way above or way below.

So it seems like it's pretty much flat other than those two areas, and those two areas are way down.

And we're also seeing good growth in Canada.

Thanks.

As a follow on there, you commented on desire to tighten down occupancy.

Are there parts of the country where you're not pleased with what you've got in terms of efficiency there?

It's really not parts of the country.

We think we got a little bit ahead of ourselves trying to upgrade our stores and we're just taking a tighter approach, like Dan said, to merchandising and display.

So when we open a new store, we don't need 5,000 feet, we maybe only go to 3,500.

And we got a little bit ahead of ourselves and it's a little hard to hit our other goals with that occupancy where it is.

Thanks and thanks for all of the detail.

Thanks, Mike.

We'll go next to Daniel Whang with of Lehman Brothers.

Mr.

Whang, you're line is open.

Morning, Dan.

Oh, good morning.

Sorry.

First question was regarding the sales force ramp-up process.

Seems like that's tracking, but could you go into a little bit more detail about the amount of training that's being required?

And I think when you initially rolled out the Pathway to Profit strategy, you talked about some of the infrastructure needed to hone in terms of performance measurement and perhaps some of the productivity technology.

Maybe just an update on those items.

Okay, there's a lot of pieces of that.

We've -- starting at the training, we have been revaluing our new employee training to focus far more on outside the store versus inside the store.

That's a two-week program.

We've rolled out our handheld computer -- it's called a Symbol MC70 -- to over half the sales force.

That rollout will complete in the first quarter so everyone will have the handheld computer.

By the middle of November, we'll have almost all of the upgrades and software downloaded to the system.

We are doing a lot of -- we have all the measurements in place as far as a scorecard, the expectations -- that's actually what I'm doing.

I'm doing a 14-city tour, working with everybody in small groups.

It's an all-day sales session with six meetings going through the expectations.

So now it's really about being who's performing, who's not, and then addressing it at the district, the store, and the sales level, so going through the process.

We know that we have to become far better as a sales organization from a management standpoint.

We've always been very good at the store, but we need to organize the companywide, and I'm confident that we are seeing a lot of improvement there.

But I'm also out here looking to see what are the people telling me, what do they know.

And for the most part we've done a nice job but there's still too many people who aren't completely informed as to what our Company goals are and that's the purpose of these trips.

Okay.

And in terms of the -- at least this first round of the sales force expansion, have you been focusing on certain geographic markets or end markets, strategic accounts?

No, we haven't.

What we've been focused on is adding them in our most successful stores, wherever those happen to be in the Company.

Meaning that if you're in the bottom half of the performance ranking at the store level, you won't be getting people added -- addition until you perform at a higher level.

It's basically investing good money with good money.

Okay and finally, I think you had commented that the end markets remain challenging and I was wondering if you could just perhaps provide a little bit more color.

I think --?

Dan?

Yes.

I'm going to jump in.

Last call we ran into a few folks that couldn't get on, so I'm going to ask you to get back in queue with that one.

Okay.

Thank you.

Holden Lewis with BB&T has our next question.

Good morning, thank you.

Hi, Holden.

Good morning.

On the gross margin side, rebounded nicely in Q2, which was expected, but you're sustaining that 51% level and I think the headwind in the quarter would have been that your mix of fastener business, which I think is traditionally better margin, that kind of hit historic lows, and so one could argue you did a good job keeping gross margin where it was despite that headwind.

Can you talk about what were the incremental contributors to sustaining that gross margin and whether or not that mix drag and the national accounts drag sort of -- how you're going to continue to offset that going forward?

Just further detail on that,

Will, I'll take that one.

Okay.

There's really two headwinds in the quarter.

Holden, you're exactly right, our fasteners as a percentage of sales dropped from the -- dropped down to about 50.5% and it's actually the lowest percent we've ever reported and so that did create some headwind.

And the second one is fuel cost created some headwind because the fuel that goes in -- the diesel fuel that goes into our distribution fleet really is a meaningful thing for us in the scheme of our gross margin.

If I look at a piece of the equation that help us, one of them is the initiative we've talked in the past about and that is our direct sourcing.

Scott Camp and his team have built a great organization for us on our direct sourcing and we've improved dramatically over the last several years and that continues to give us incremental gains when I look at from quarter to quarter and year over year.

So that's one piece in there that comes into play and that helps us in the fastener line but it also helps us dramatically in the non-fastener line.

The other piece of the equation is when I look at our transportation and our distribution costs in general, we were able to hold the line, if you will, from the standpoint we were able to offset the added fuel cost by just being more efficient with the amount of product we're hauling on our trucks, the amount of will call, and how we're handling the distribution and the trucking in general.

And so it's really a case of those two headwinds we were able to offset.

I think one thing going forward, Holden, that we are counting on to help us as we grow, the outside sales force that we're adding, most of these people are focused on small to medium customers.

The margin for the group as a whole -- the accounts that are assigned to the outside sales people runs three points ahead of the Company average, actually just slightly higher than that.

So if they were to outgrow the Company, which we believe they can -- or grow their piece -- it will help us overall with the margin mix, besides the better sourcing as we go forward.

Okay.

And just to quickly follow up on the fuel stuff, I think where you gave the dollars in your release, I think you indicated that so far this year your fuel costs have averaged $2.1 million, $2.5 million, $2.4 million.

Were those numbers for each month during the quarter, or were those the last three quarters numbers?

Those numbers were the average monthly number for each of the quarters we talked about, so if we say $2.4 million that's the average month in that quarter.

Right, okay.

And so for the prior year it was $1.9 million, $2.1 million, $2 million.

It actually looks like the fuel impact was less of an issue in Q3 than it was in Q2.

Yes, and that's what I was alluding to, the fact that despite the increase in per gallon costs, we were able to continue improving how we're moving product and how we're picking up product, how we're transferring product from hub to hub --

Got it.

-- to more than -- to offset it.

Okay, and that's just routing efficiencies?

All of the above.

Yes.

Okay.

We're working hard on it.

And that's largely sustainable, right?

Yes.

Okay.

Great.

Thank you, guys.

You bet.

We'll move next to Adam Uhlman of Cleveland Research.

Hi, good morning.

Good morning, Adam.

I guess I'll steal Dan's question here.

Could you talk about what you're hearing from your store base and your customers, specifically regarding your big end markets; industrial, MRO, OEM, and also non-res construction?

I'll take that and if you want to follow up, Dan.

I'm starting at the back on the non-res construction.

It seems to be slowing some.

Job starts are not where they were, but there are certain areas that are real hot.

Energy is red hot, the ethanol especially in the Midwest where we operate is very good, but fewer office buildings and some of the other things, so it's more mechanical.

The petrochem is still going well on the non-res.

From a large manufacturing perspective, our big customers and our big suppliers, all of them are very cautious.

Most of them are doing very well on an international basis and that's what's driving their numbers but their North American businesses are slow.

And I talk to a lot of the leaders of these businesses and they're very cautious saying what's going to go into 2008, so we're playing our cards the same.

From the MRO, the MRO has always been the most consistent part of our business because if you don't build new you have to maintain old, and so that is a very smooth business with the construction and the manufacturing being the two that seem to be far more cyclical.

Okay, got it.

And then my second question, could you comment as to what the benefits -- or revenue growth was this quarter from price increases and how should we think about that going forward?

Have you gotten any signals from your suppliers regarding pending price increases?

We saw very, very little gain going for -- or this quarter in price increases, because normally price increases would come at the end or the beginning of a year, fourth and first quarter, (inaudible) the suppliers.

Right now the steel prices are going up slightly out of Asia, but the biggest thing that we have going right now with price increases is the repeal of the VAT tax in China -- or the tax credit they were giving for export product.

And on our fastener products that we buy from China, there will be between an 8% and a 13% increase representing -- that's on about 10% of our spend.

Those products will go up.

We're working through that now and that'll come in between now and the end of the year.

The prices actually went up in China July 1st, but everything we had purchased and had in the pipeline, it's really just starting to come through.

As far as other price increases we'll have better color on that in January because no one's coming through with a regular annual price increases at this time.

Great.

Thanks.

Up next from FTN Midwest Securities we'll go to John Baliotti.

Good morning.

I was just curious about the --

Hi, John.

How you guys doing?

I was just curious about the -- that client ratio, Dan, that you guys talk about, the receivables and inventory ratio.

And as you mentioned in the earnings release, you've been able to keep the growth and receivables lower than that of sales, but obviously, the balance sheet impact, the receivables is significantly smaller than the inventory.

So I was just wondering, do you feel that you can get a meaningful pick up in that receivable turn on its own that would -- obviously as you grow out the master hub and the other initiatives with the stores and inventory that obviously has a little bit of headwind but in total, do you feel that the receivable future benefit can be meaningfully better than where it is today?

I do, because as we see with the things we're still doing to challenge ourself on how do we just -- a lot of it comes down to make -- and I'm talking about the AR here -- a lot of it comes down to just being an easy company to deal with.

Simple presentation of your invoice, making it convenient for your customer.

One thing that we did several years ago with our customers that do less than $1,000 a month in business with us, we migrated them more to a statement concept of billing where -- we instead of mailing out invoices each week, we'd mailed them several invoices mid month and then at the end of the month, we mailed the balance of their invoices with a statement, and it just made it easier for them to pay us because you're pushing less paper around.

There's much more openness to going to other ways of billing , whether that's presentment by e-mail or presentment in some type of electronic fashion, and what that can do from the standpoint of not only presentment but how the payment comes back, whether that's paper-based payment or electronic payment, really gives you tools to improve your days to collect without it being a negative to your customer base.

And so I think there still is opportunities there to continue to move that number down from the low 40s where we're at into the upper 30s.

But I think the working capital on that three-to-one relationship we talk about, the real improvements we'll see over the next several years, is more akin to the inventory side of the

Right.

We're just going to leverage that because the investment's going into our master hub are dropping off quickly as far as incremental investments.

Right.

And slower store openings.

It seems like maybe even a 20 or 30 basis point improvement in the inventory turn alone would work and even if you have the receivables stay where it was would be a huge benefit to that client ratio.

Absolutely because for every dollar of AR we have over $2 of -- or about $2 of inventory.

Right.

And just quickly to wrap that up, how long do you think that that -- you're going to see the short-term impact or the impact of the inventory build as -- do you think you start to see that decline, let's say, some time in the next year or do you still think that's (inaudible) out?

Well, I think we've already started to see the decline, and I think -- and I anticipate that decline continuing relative to our business.

And the only challenge that we'll have introduced into that that will be new is some of the inflation in Drexor's product that Will mentioned a few minutes ago.

Yes, I guess what I was was just mentioning was the growth rate of that relative to your sales seems to be a little bit wider this year than it was last year and I'm just wondering, does '08 present -- looking back on '07 present easier comparison for that?

In other words you did almost 17% growth in inventory and 13.5% in sales, which you pointed out, whereas last year that difference is only about 200 basis points.

I'm just -- (inaudible) '08 [can it moderate more there]?

By the end of the year that will look much better because most of the inventory build was in the fourth quarter last year.

Right.

Year to date we're only up 7% and we think going towards the end of the year, the year-over-year number will be much closer to that than it is today.

Okay, great.

Thanks, Will.

We'll go to Michael Cox of Piper Jaffrey.

Thanks, good morning.

My question is related to the gestation period of new sales reps.

I was wondering if you could comment on the time it takes from hire to training and then on to becoming a more productive sales person, how long that takes?

And during that time period, given the macro backdrop you're operating in, if you could highlight any specific internal initiatives you have to try and drive sales back to that 15% level?

We're still working on really dialing in what is the necessary amount of time.

Right now, based on the productivity of the people we hired in 2006, 15 months is where we're really starting to make money off that individual.

Three months to get them up and going and then 12 months of selling ,and by the end of the 15th month, it's been a ver -- it's a very profitable investment for us.

But we're still trying to work that down through better training and doing some different things.

The initiatives that we're doing trying to drive the number up right now is getting out to the people who have been around and explaining the expectations and doing a better job of making sure that all of our store managers and district managers are leading the people.

What I'm finding out that in too high of a percent -- and that meaning 25% to 30% of the cases where I'm out talking to the people -- in the last three weeks I've been in front of about 700 sales people in small group meetings, 25 or less -- that about a quarter of the people aren't really being led.

They're good people but we're just letting them go, and so we have to work with our managers and our district managers to bring these people closer, explain the expectations.

And hopefully that alone will drive greater sales growth from these people because they understand the objectives and the Company goals.

Okay, thanks.

So one quick question on the cash flows, with the improvement in working capital should we expect you to become a little bit more aggressive repurchasing stock over the next couple, two to three quarters?

That's yours, Dan.

Yes.

We will continue to be buying back stock.

I think we've made a good stride thus far this year.

One thing to keep in perspective on stock repurchases, for us it's a relatively new phenomenon and we're still trying to figure our way through it, but I would anticipate we'll continue to be in the market and I wouldn't -- I don't want to go out on a limb here but I would expect us to continue to make meaningful buybacks.

And we have Dan with an authorization up to about a million shares at this point.

Yes, I think we have 1.2 million left on our authorization.

So that gives you an idea of what Dan and I can approve.

Great.

Thank you very much.

Yes.

And our final question today comes from Jeff Germanotta from William Blair.

Hey, Jeff.

Hello.

I really wanted to explore a little longer term the ramp of sales people and the -- in terms of number and quantity, but then also at what point do they get to -- a sales person to breakeven and then peak productivity?

Well, the sales to breakeven, if they hit the averages they're going to breakeven at about ten months.

Ten months of selling which is actually 13 months of being -- we're looking at about three months to get them into the role.

It takes one quarter and they're green, understand that.

By their eighth to 12th month, depending on how they're doing, they'll be producing enough sales to pay for themselves and paying back the overhead of the Company and start paying to hire new people.

So, that's where that is.

Maximum productivity, we don't know where that is.

We have sales people that have been in five years, managing $100,000 a month that are still growing nicely, so as they become better there's almost no limit.

And it's like saying what's the biggest Fastenal Store ever going to be?

Ten years ago we would have said maybe $100,000 and now they 're $500,000 and $600,000.

As we develop people they will get better and they'll continue to grow to a higher level.

As far as our headcount going forward, right now we're -- based on where we think the sales are going to come in, for 2008 we're looking at adding between 15% and 20% more outside sales people or full-time people to our stores, and that range is really based on our ability to grow the sales faster.

If we're able to get our -- drive our top-line revenue closer to 20%, our hiring will be close to 20% for outside sales people and full-time people in the stores.

We'll continue to work very hard at controlling our growth and our distribution and all other support areas so we can create positive earnings leverage, not by slowing down sales but by saving it in other areas.

Would it be fair to say that you'll try to manage the hiring rate in the field to a level consistent with the sales growth rate?

That's a good rule of thumb.

So we're going to be somewhere in there, but it really depends on if we're at the lower end or the upper end of that range.

If we were at the upper -- if we were 20% we could probably hire a few more people and still have very positive leverage, because then we're going to get more benefit out of the store -- slower store openings with the higher revenue.

But it's safe to say we're going to be aggressive with trying to grow our business because we believe it's the best opportunity long term for our shareholders.

We agree.

Thank you.

Sarah, I just have one comment I wanted to throw in and that was just clarification.

I jotted down a few notes as we were going through the Q&A , and it related to -- I believe it was Dave's question towards the front end -- might have been Mike's.

We talked about the leverage as we look into fourth quarter and just wanted to clarify, we will -- based on where gross margins are trending that would imply a gross margin leverage.

Where we talked about having challenging in the ability to leverage, that's in the SG&A line, not in the operating income line.

I just wanted to clarify that because looking in the fourth quarter we -- as we have experienced in previous quarters of this year, the gross margin is giving us a nice leverage point to allow us to proceed quite aggressively in the Pathway to

And one final comment from me.

I am traveling today, but I know some of you usually call me on earnings day.

Leave a message and I'll get back to you.

I do have some time today to return calls if anyone has questions.

Thank you very much.

And that concludes today's conference.

We thank you all for joining us.

Hey, Sarah?

One moment.

Is there everyone on?