快扣 (FAST) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fastenal Company third-quarter 2011 earnings results.

At this time all lines are in a listen-only mode.

Later we will conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions) I would now like to turn the conference over to your host today, Ellen Trester, Investor Relations.

Please begin.

Welcome to the Fastenal Company 2011 third-quarter earnings conference call.

This call will be hosted by Will Oberton, our Chief Executive Officer and Dan Florness, our Chief Financial Officer.

The call will last for up to 45 minutes.

The call will start with a general overview of our quarterly results and operations by Will and Dan with the remainder of the time being open for questions and answers.

Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal.

No recording, reproduction, transmission, or distribution of today's call is permitted without Fastenal's consent.

The call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage, Investor.Fastenal.com.

A replay of the webcast will be available on the website until December 1, 2011, at midnight Central time.

As a reminder, today's conference call includes statements regarding the Company's anticipated financial and operating results, as well as other forward-looking statements based on current expectations as defined by the Private Securities Litigation Reform Act of 1995.

Forward-looking statements may often be identified with words such as, we expect, we anticipate, upcoming or similar indications of future expectations.

It is important to note that the Company's actual results may differ material from those anticipated.

Information on factors that could cause actual results to differ material 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.

Good morning, everybody, and I want to thank you for joining us on the call today.

Dan and I are going to both give some brief comments, and then we are going to open it up for questions.

I would like to start by saying I think we had another good quarter.

Our sales came in at 20.4% for the third quarter.

Year-to-date, we are at 22%.

For the third quarter they were a little lower than the first 2 quarters, but we are still above the sequential trend, our historical sequential trend, so we're very optimistic about that.

Our manufacturing customers, as was stated, grew at 18.3% as compared to 18.5% in the second quarter and 15.5% in the first quarter, so there has not been a lot of change.

If anything, it's remained strong, so we are very optimistic about that.

Nonresidential construction grew at 15.8% in the second -- the same as the second quarter and that's an area that there isn't a tremendous amount of activity.

Most of that is coming in energy jobs and larger construction jobs and infrastructure, but you don't see much as you drive around and there's tower cranes, and things like that, so I think our team's doing a nice job digging it out wherever they can.

So overall, the sales trends are good; and we remain optimistic in somewhat of an uncertain time.

We don't have a tremendous amount of visibility, but the anecdotal stuff that we are getting from our people in the field is still quite positive, although there are a few signs of things slowing a little bit, but for the most part it is very positive.

On the earnings growth, we grew our earnings at 29.1%, a very good number.

It is interesting, though, about perspective.

I was looking at it, going, boy, we didn't even go over 30%.

Because we have had such a good run, 29% is still a strong number.

I feel very good about our expense control.

I think that the team did a nice job.

We picked up 140 basis points of pre-tax earnings over last year.

Our goal with Pathway to Profit is to pick up 100 points, so we have been able to exceed that goal, and I really feel good about the job that the team did on controlling expenses.

Pre-tax profit at 21.4% of sales, that is a record and net income north of 13%, at 13.3%; that is a number I think we can also be proud of.

I think last quarter is the only time we've ever exceeded 13% on a net income basis.

Switching gears to talk about store openings a little bit.

Our store openings came in lower than we had planned and thought we would earlier in the year.

But I am not overly concerned with this, because at this point I would rather see, if we can only get so many things done, which is really the case, I'd rather see that our people put more energy into our automated supply, our vending solutions, because it is more timely.

Our competitors are not out opening stores in the markets that we plan to open in the future, but they are talking about automated supply and vending.

So I think the faster we can move that project along, long-term, that will be a better, long-term strategic decision, and the store openings and the opportunities will probably be there in the future; I believe will be there in the future.

So we are working very hard on the automated supply.

Talking about automated supply, I stated to anyone that would listen, that I thought we could do, or what I wanted to do, 2,500 signings in the third quarter.

We fell short of that.

We came in at 2,260, so I was disappointed with that, but when I look at the 2,260, and I compared to where I thought we would be a year ago, it's a great number.

And by any other measure, it is a very good number.

We are going to continue to push hard.

What really happened is we dug a hole for ourselves in July.

We didn't have a very good month of signings in July.

We got behind in the first holiday week and never made it up for the rest of the quarter.

On a very positive note, the team did a great job on the installations.

We set up, or we installed and turned on, more than 1,700 machines in the quarter; and that is just a lot of hard work going into those customers, setting it up and getting these machines up and running.

And I like the signings, but the install is really where the revenue starts and so that's a positive.

As Dan noted in the Release, the overall sales growth, our year-over-year sales growth of the customers that have implemented, vending, automated supply, remained strong at 49%.

It's been 49%, right at 49%, each quarter.

And so that is a very positive note.

We just need more customers to have automated supply is what we are thinking.

Other initiatives that we've talked a lot about -- our government sales initiative continues to do well.

We had very strong sequential growth into the state and local business.

Most of our government business that we are focusing on is state and local business at this point.

In the future, we would look at doing more federal, but right now our focus is state and local.

We think with our branch network, we are better positioned for that type of business and so far it is proving to be correct.

On the metalworking initiative that we talked about, we feel very good about where we are.

We have added a lot of product into our distribution system; that is part of our inventory growth.

We've continued to work at signing up strategic partners, the partners we need to fill out our product line and that's gone very well.

And we had said we were going to put in 42 trained specialists.

We have 37 in place, and 34 of them have gotten through our level 2 training, which is a training designed by an outside firm, again working with our suppliers.

And it is a very intense training.

Our people are coming back with great feedback.

So we really hope to see the results of this effort probably in the late of the first quarter, into the second quarter of next year.

And these people are out selling now, start gaining some traction and start seeing the results into 2012.

But we are very optimistic.

We met with our product development lead yesterday, and he gave us an update and things seem to be moving in the direction that we had planned for them to move.

On the personnel side, we have continued to invest in people.

I believe this will flatten out in the fourth quarter, really due to normal seasonal slowdown that we see in our business.

The majority of our efforts go into the sales effort on the administrative and warehouse side where we have added more people, if you've noticed that.

Our manufacturing business is doing very well and we have added more people in there.

And on the administrative side, most of those additions have been people that we have put in to help push the vending systems, so it is really more of a sales service effort, the people setting up the machines, and those things.

As a leader I'm proud of the fact that Fastenal is in a position to be adding employees.

When you listen to the news and you see the slow economy and all the things that are going on, and I tell our employees this, I think we should be very proud of the fact that we have added about 2000 great opportunities this year to people out -- and trying to push the economy forward.

With that I will turn it over to Dan and he will make a few comments, and then we will open it up to questions.

Thanks, Will, and good morning, everybody, and thank you for joining our call.

I'll reiterate a few things that Will touched on, first off, sales trends continue to follow or exceed our benchmark trend line.

If you look at history, history would indicate that we should be at about 16% growth from our daily average in January to our daily average in September.

This year we are actually up 20.8%, so we are running about 5 points ahead of that trend line, which has given us a nice launching pad as we go into 2012.

Digging along deeper into the Release, 1 thing I wanted to add on the end market trends -- Will touched on them already -- is that we have been in a situation where the ISM index has been moderating now for about 5 months, and we continue to perform well.

And as we mentioned in the second quarter, we really think our vending and our international is helping, giving a nice boost to this, but our domestic, our North American, business is doing just fine in and of itself.

On the nonresidential side, Will touched on some of the energy projects that we are supplying into.

I think at the end of the day, it is that, and it is the fact that our store employees are just resourceful at turning over stones to find business.

We are really well-positioned to go after a lot of the small projects that a lot of other companies either aren't as aggressive with or aren't as interested in going after.

Our stores sell on smaller projects all day long, and a lot of little dollars are really what's driving our nonresidential construction.

The vending stats, I will touch on a few things that Will mentioned as well, but I guess the 2 things that jumped out for me when we were pulling together the earnings release, was the five-fold increase in the number of installs from Q3 2010 to Q3 2011.

And my comment there would be -- nice job to Russ and his team in ramping up not just what we are doing to promote vending, but what we are doing to install, because Will is right, the revenue starts after the machine is installed, not after the contract is signed.

The other item is taking a step back and thinking for a second; we have 13% of our sales now going to customers that have vending as part of their operation.

And that customer base is growing at basically 50%.

And to me, the part that is most meaningful there is the fact that this is a predominately manufacturing customer base.

It is medium-sized customers; it is not small customers or large customers.

It is being driven by a broad brush, but the dollars, to move the needle on those kind of dollars, and the way we are moving it, is quite staggering.

And the fact that this business becomes very sticky, because we are really providing a better solution than the competitor down the street.

Pathway to Profit on page 7 of the Release, we've hit a new high on the average store size, $83,000 a month.

Our previous high was in the third quarter of 2008, when we were at $82,000.

And it is no coincidence that our record high for pre-tax earnings is this quarter, because the Pathway to Profit, the mechanics and the fundamentals of it, are just kicking in as we have seen in prior quarters.

If I look through some of the mix of employees, our store FTE is up about 16% on a year-over-year basis.

Since we've started the Pathway to Profit, we have added 35% more employees on an FTE basis into our store.

On the non-store selling side, we've added 44 people in the last 12 months.

We have added 44% in the last 12 months.

49% since the first quarter of 2007.

You can really see the energy that is being invested into the growth drivers of our business over the last 12 months.

And those are the types of things that are driving the vending, that are driving the government, that are driving our strength in manufacturing business.

On the DC side, up about 16.7%.

Since we've started the Pathway to Profit, we are up 19.5% FTE.

5 points of that came from the Holo-Krome acquisition.

So we've done a nice job of leveraging that side of the business over the last -- since 2007, and believe we have the ability to keep leveraging that into the future.

And then finally, as Will touched on in the support side, we have added about 11.7% in the last year.

A meaningful piece of that is centered on back-office support for our initiatives.

But since 2007, we have added 5.7% more people, but we have 42.5% more sales dollars flowing through our stores today than we did back in 2007.

All those are really for most of the Pathway to Profit leverage and the improvement profitability of the business.

On page 9, there's 2 paragraphs.

We talked a bit about gross profit margin.

Bottom line, I'd say there's a lot of noise in the numbers right now.

We are kind of in the middle of that 51 to 53 zone that we've always cited.

We still look optimistically at that number as we go forward because some of the things we talked about on our second quarter call -- opportunities with our exclusive brands -- how those opportunities are enhanced with our vending, because they really go hand-in-hand.

We really see over the upcoming quarters our ability to move that gross margin north and enhance the operating leverage of the business.

So we are optimistic.

Right now there's a lot of noise in the numbers.

1 of the things that probably we don't talk about enough is the fact that with the strong growth in our large OEM business, both domestically and internationally, that puts quite a dampening effect on our gross margin.

It doesn't hurt our operating margin at all, because it is an attractive operating margin business, but it is putting a dampening effect on gross margin.

So if anything, if you compare gross margin to a year or 2 ago, it is probably a little bit understated in that regard.

But with that said, the number is what it is, and we believe we have growth drivers to move that number north in the future.

On the operating administrative expense side, our payroll increased about 17.4%, and you see a dynamic going through the numbers now, whereas last year, our quarterly number was quite a bit higher growth than our year-to-date number, because we were in a pattern of bonuses in rising.

Now we are in a situation where we are anniversarying some of those higher bonus numbers from a year ago, and that's what you're really seeing; that payroll growth moderating quite dramatically, because we are getting back to the point of growth for activity growth rather than moving out of easier comparisons.

So, while our growth is -- our net earnings are slightly below 30%, it's a powerful statement, because we had a pretty good third quarter last year.

The final item I will touch on, working capital, we continue, I believe, to manage it well.

We still believe we have opportunities in inventory to keep tightening that and tightening that.

But all things considered, I think we are operating that well.

And most of you probably saw this last night, but we announced our third-quarter dividend payable in the fourth quarter, $0.14 that we pay out here in November.

With that, I will take some questions and we will go from there.

(Operator Instructions) Our first question comes from Holden Lewis with BB&T.

Please go ahead with your question.

Great, thank you, good morning.

I'm curious, I guess first if you could maybe expand on some of those anecdotes that you cited in your preamble about maybe some signs of slowing.

And then along those lines, how are you viewing your margin breakeven at this point?

What level of revenue growth do you feel that you can continue to expand margins versus seeing margins begin to maybe come down a little bit just cyclically.

Can you comment about breakeven on margins and earnings as it relates to revenue levels?

I'll take the first question.

I'll give the second one to Dan.

The anecdotal stuff is what -- all of our regional vice presidents are in town this week for meetings.

And in talking to them over dinner last night, it sounds like some of the larger consumer products companies are saying, pull back just a little bit.

The heavy metal guy, people producing more of the metal parts, they haven't heard much of that.

So, I think the consumer goods probably not going to pick up much, but overall the tone was positive with the group.

And I spent several hours with them, but there are, this one's backing up a little bit, our sales are down 8% or 10% from last year on this one, so there -- caution in the tone.

Holden, on the second part, just looking at our third-quarter operating expense increase, it was at about 15.7%, so you could break that leverage point down to about 15% really fast.

And with some energy, get it down closer to 12% or 13%.

(multiple speakers)

Because we haven't added a lot of stores, we can drop it well below that just through our payroll system because of the bonuses very quickly.

If things really hit the wall.

So then overall, you think if your revenues grow 12% to 13%, you can still expand margins and below that maybe you get some contraction; did I understand that correctly or no?

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

Got it, okay.

Thank you.

Our next question comes from David Manthey with Robert W.

Baird.

Please go ahead with your question.

Hi, good morning, guys.

First of all, on the vending solutions, I think you said, historically that the products that go into the vending machines are used less.

And so, with the growth at 50% overall from the customers that have these automated supply solutions, I assume that most or all of that growth is coming from adding lines that you did not have before.

Am I assuming that correctly?

That is correct.

Okay, and then when we look at that 50%, I'm interested in the dispersion around that.

Are there some customers that are up 300% and some that are flattish or is it pretty consistent at 50%?

And then as you look out, I guess the number that we are looking at here is aggregate, but if you just isolate the vending solutions you put in a year ago or longer ago, does that 50% -- I would imagine it goes down -- but does it remain above the corporate average for customers with vending solutions after year 2 or year 3?

We really don't have any good data for year 2 -- year 2 we do, but not year 3, because we only had a handful of machines out there.

Yes, the customers that are in their second full year of vending -- and I have to qualify this.

This is information from second quarter, because I haven't looked at this for the third quarter data.

I've just had a lot going on.

Those customers were growing at about 30% versus the 50%.

The customers that are in their first year growing at 70%, that is the 30% plus the 50% balances out to -- plus 70% balances out to 50% -- so yes, the growth slows, but the growth is still greater than the Company average with that group.

And these are larger customers, so it is still -- (multiple speakers)

It's meaningful above the Company average with that group.

(multiple speakers)

Yes, still exceptional growth for that group of customers.

And again, it's all about taking a bigger share of their wallet, because we have very few customers that we have the majority of their wallet, that are sizable customers.

The small ones, that is different.

Okay, great, thanks.

Just one quick one on the end here.

Could you discuss pricing on the fasteners you're purchasing in Asia today?

We haven't seen a lot there.

It's been kind of roller coaster year with small bumps, meaning that we hear that it's going to go up, and we don't see much.

There's a -- 1 of our largest fasteners, as far as in Taiwan, was here this week; and I spent some time talking to them and there's just not much going on.

And I think it has more to do with somewhat of a slower economy than anything else.

Especially the Taiwanese are very concerned about capacity.

They want to run the machine wide open, so they are willing to take a little hit even if steel is up to keep the machines running; that is their historical pattern.

And so we haven't seen much.

A little bit here and there, but it is probably pretty easy -- or pretty soft year, flat year.

Thanks, guys.

Our next question comes from Tom Hayes with Piper Jaffray.

Please go ahead with your question.

Thanks, good morning gentlemen.

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

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

Is there any margin, a meaningful margin, benefit for the customers -- or to you for the customers that have the vending solutions versus your non-vending solution customers?

What do you mean a need for more margin?

(multiple speakers)

Well, are you -- (multiple speakers)

You mean for us to give them a bigger discount?

No.

I guess, let me just start over.

The customers that you have the vending solutions in, is your margin profile better than the non-vending solution customers?

No, it's not.

Actually, we match up by customer size.

We match up -- what I really do is, I look at the customer last year and this year, and even with the growth, the margin in most cases hasn't moved much.

If they're a low margin customer, we might be up or we might be down, but the trend is basically, the customer margin changes very little when we add vending, their sales just go up.

Really I think it has to do more with the pricing habits of our stores.

If the store looks at this customer -- in many cases they were a customer in the past.

So the store looks at the customer, and they're a 40% margin customer, when they bid the vending product, they are probably bidding it in that range, because it is just incremental business for the store.

So it is actually very consistent.

I spent some time looking at that.

I wish it was higher but it is not.

Now the opportunity we have is, as we put in more Fastenal exclusive brands in those machines, we will see a margin improvement, but in many cases we start out with a lot of branded product, because that is what they were using, and then over time we plan to convert that.

Great, thanks for clarifying my confusing question.

I guess just lastly, on the CapEx, there's a meaningful increase in the CapEx year-over-year.

Any thoughts on the balance of the year going forward?

Yes, if you think about where our CapEx dollars are centered this year, they are really centered on the vending equipment.

And unlike a lot of our CapEx in most years, a lot of our CapEx centers on construction.

We are expanding a distribution center.

We are adding on to a distribution center.

We're doing things like that, and even with store additions, those tend to be maybe back end loaded from the standpoint of they really do not get going as fast in the spring until the frost is out.

And then those type of projects take off; and they push into the November timeframe, maybe earlier December, depending on exactly where you are.

Whereas our vending dollars, that was much more first 3 quarters loaded.

So I think we cited $95 million, $100 million in our annual report as far as our CapEx for the year.

That was going to be more front end loaded than our to traditional year.

Okay, and you are still comfortable with that result or whatever -- the $95 million (multiple speakers)

We are going to be in that $95 million to $105 million number, I suspect.

One item that we're doing that I probably didn't have as much dollars planned on for this year, just because we're running a little ahead of schedule, we are doing a meaningful expansion of our distribution center here in Winona.

We're adding a [bidding] load system, an AS/RS type system that we have done in Dallas and Indianapolis in the past.

And they're actually doing groundwork on that right now.

We pushed that forward because our Midwest region is showing very good sales growth this year, and they are pushed to the walls, so we moved that up a few months, tried to beat the winter, which we are not going to do.

Thanks.

Our next question comes from Ryan Merkel with William Blair.

Please go ahead with your question.

Thanks.

I wanted to start with September sales.

Can you just talk about how the month finished and then maybe speak to end market and geographic strength?

Month played out well.

We thought it was going to be a solid month with 1 week or 2 weeks left in the month.

The month played out well.

I am pleased with the trend pattern.

End market, I don't think anything jumps out.

With one exception, I continue be pleased with what we are seeing in our manufacturing number.

Just from the standpoint of, we are all sometimes guilty of reading the newspapers too much or reading stuff too much and letting that taint your view of the world or of life.

And the ISM, we didn't make a big deal of it back in May or June when it flipped, but we also noticed it.

And to see that we are able to grow our manufacturing despite -- again, it is still north of 50, and I think that people got a little accustomed to that 60 number, which was not sustainable, but we are pleased with what we are seeing in the end market.

Geographically, I guess nothing jumps out outside the norm.

Okay, and then I wanted -- (multiple speakers)

Geographically the oil pack remains strong, but that's been strong all year long.

There is 1 area of the country that we are doing better, it would be Texas and Oklahoma and Louisiana.

Okay, I appreciate the color.

And then I wanted to slip in a question on vending.

The growth rates of the vending customers remain very impressive and it is clearly a wallet share gainer.

But am I right that vending is not only a wallet share story but also a tool to help you win new customers?

Actually, that has been coming in very strong from the field is that we are getting calls and opportunities from customers because they want this solution, large companies.

And again talking to our regional vice presidents this week in meetings, the thing that I ask our regionals every time I talk to them is, say, is this solution as good as I believe.

What I tell them is, I don't want to be the crazy guy running around with the flag and everyone's laughing at me.

And they are saying that the solution is better than I believed because of that reason, Ryan, because it is getting us in doors that we would have otherwise not had a chance to go in.

And we are signing up new customers every day because of it.

Because we really do have a better solution from a cost standpoint.

There are some other good solutions out there, but the machines themselves and the systems are far more expensive.

And the fact that we built the machine behind the machine, all these install people, all these technical people, we inherently have a more value-oriented system to deliver products than most of our competitors at this time.

The other thing I will just add to that, I think some of the calls we're getting and some of the energy we are seeing from the customer inquiry side is coming from the fact that we have a lot of machines on the road.

We have our trucks that are out on the road with our -- that are demonstrating the equipment.

They had a number of articles written in recent months about our vending solutions both in the local newspapers as well as some national newspapers.

One comment I'd make for the analysts listening to this call, on your next report, put a nice, big, bold headline about how much vending solutions saved manufacturers in North America.

And if you need a copy of the flyer, we'd be happy to send you some.

And we could send you pictures.

Thanks for the color, guys.

Our next question comes from Sam Darkatsh with Raymond James.

Please go ahead with your question.

Good morning, Will.

Good morning, Dan.

How are you?

Two questions, first off, you mentioned ratcheting lower the store count expectations due to both the PMI and also the vending initiative.

Are there other actions or plans that you are either undertaking or considering based on the prospects of a lower growth period?

And what are the next things you would do from an operational standpoint?

And then my second question would be, you mentioned the payroll or the labor leverage expected on the OpEx line.

Can you talk about occupancy and selling and transportation also?

I'm guessing that occupancy would continue to grow faster, because of the vending and the selling transportation would come off because of where diesel is.

But if you could throw little color on that, Dan, that would be real helpful.

I think that is about 6 questions, Sam.

(laughter) Go ahead, Dan.

I will kind of go -- as far as the steps, in addition to moderating the store openings, if you look at where we were trending and where we came out, I can't take a number to it right off the cuff, but I know we have fewer employees at the store level today, and fewer employees in the organization in general, because of the moderating ISM.

We're very decentralized and we try to share a lot of information with our regional and district leaders about what we are seeing.

And with the moderating ISM, our folks pay attention.

They are smart business people.

They know not to get ahead of themselves.

And so, we are working diligently to add staffing where we need it, because we don't want to hamper our growth.

On the flip side we have to be careful not to get ahead of yourself on certain things when there is uncertainty when you look out the next 6 to 12 months.

As far as some of the other expenses, if I look at occupancy, about, I think it's 1.3% of our -- we grew at about 8.5%.

1.3 points of that came just from vending.

One thing that did pop our occupancy up a little bit, more than I would have expected, is that energy prices are meaningful higher than they were 1 year ago.

And I don't know how it was nationwide, but we had some warm weather here in the third quarter.

So we're probably doing a little more cooling than we normally had, but still look at our occupancy in general, that we still have legs on that.

When I look out to 2012, we typically will have 600 to 700 leases up for renewal in a given year.

And one thing that you still have is there is still empty spaces out there.

And there is also willingness on the part of the real estate community, if you will.

If you look at the value of money and borrowing cost or incremental borrowing costs, the need for a 10% return on real estate that you might have seen 5 years ago, people are willing to take a lower return, A., to keep the building occupied, and B., because their costs have gone down in many cases, or an alternate use of that cash, is probably a better way to say it, isn't as attractive as it might have been 4 or 5 years ago.

On the transportation and product movement, we have done a very nice job of that in the face of higher diesel prices.

Now that diesel and gasoline prices are coming down over the last 4 to 6 weeks.

Going forward we think we will be in a good position in product movement.

We are actually launching some new initiatives trying to stir in the pot, believing we can do better in transportation, turn it into a meaningful profit center over the next 2 years.

You'll hear more about that because that's kind of my pet.

So we have some good initiatives going there.

A couple of other things to note as far as how you pull expenses back.

Maybe just not grow them as fast.

If you look at 2011, we built the machine behind the machine, the vending group, which is well over 150 people.

That group is in place and we believe that they can do well over 1000 machines, both sell and install, at their current levels, so we have some built-in head room -- per month, excuse me, yes.

Government sales, we've put that in place this year.

Really not seeing the benefits yet.

We have nice growth, but not big dollars.

Our metalworking team, we've spent a lot of money there, putting these people in and training them.

And our district managers and regional vice presidents, we won't be adding many because of the lower store counts.

If you look at this group, these are higher-paid individuals; and also in that group, you'd put our international accounts group.

We have over-invested in the last 12 months in all of these groups and the real benefits will come in 2012, and we will continue to invest, but not at even close to the level that we did in 2011; and we should really see benefits of that and drive our incremental profits.

If you recall earlier we touched on the non-sales FTE growth.

90% of our growth since 2007 occurred in the last 12 months.

Very helpful, thank you, gentlemen.

Our next question comes from Robert Barry of UBS.

Please go ahead with your question.

Hi, guys, good morning.

It looks like in each of the last few quarters, the conversion rate has ticked down.

And Dan, I think you mentioned something in your prepared remarks about how you could see the margins starting to pick back up.

I was wondering if you could expand on that and what the drivers will be?

Well, probably the biggest short-term one is, we have talked about in the last several calls some of the things we are doing to build our momentum with exclusive brands.

And that takes a while to get that inertia going because it is a huge undertaking.

Currently, between 6.5% and 7% of our sales are exclusive brands.

And we have goals too in the shorter term and in the upcoming quarters -- I'm not saying 2 or 3 or 4 -- I'm saying, upcoming quarters to double that.

And that is very attractive from the opportunity not only to go after business that maybe you wouldn't go after before because the margin wasn't attractive enough or to enhance your margins.

So you can use it to grow a little faster or you can use it to drive some operating -- some gross margin.

We believe there is ample opportunity for both, and then the question is what other things are there to drive it?

And Will touched on it a second ago, some of the freight initiatives.

I think we call it FY 2012.

I name everything.

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

How about pricing?

Well, right now there isn't a tremendous amount of pricing out there.

In our -- historically we have been pretty steady there unless there is a large upswing where we can get some timing.

The opportunity there will be somewhat limited, I believe, because the economy is slow and everyone is a little reluctant to push it.

Normally where you see good pricing is when things are robust and we are all confident.

Our salespeople, because they're decentralized, are going to be somewhat reluctant to go out and push a price increase, if their cost doesn't go up, to their bigger customers.

And we are okay with that, because we want to keep that business.

Yes, and then maybe just finally on the vending.

I'm curious, as you're going through and presenting the opportunity, what is the most common pushback you get on why customers don't want the vending machine?

Change.

The most common problem and mistake we make is calling on the wrong individual.

If we call on the purchasing agent, our success rate is relatively low, because it is a big change in their environment; it changes their day.

If we call on a CFO or a plant manager or a CEO, our results are much better.

Because it is new and it changes the way they do their day.

But the very positive is, that the customers that have it, it's like 99%-some of these customers are saying, fantastic; and they are adding more machines.

Change is a difficult thing; and I continued to remind our regionals yesterday that this is just pure hard work to get these things in there.

But once we have them, it is very efficient business.

And to that point, we are developing new and better software for the machines we have that will greatly reduce the workload at our stores.

We implement this to fulfill the machines and get the product out there.

It is going to be extremely efficient business to support.

It is already efficient, but it is going to become much more efficient going forward.

Thank you.

Our next question comes from Hamzah Mazari with Credit Suisse.

Please go ahead with your question.

Thank you.

The first question is just, can you quantify or maybe make some comments as to how much of the slowing in store growth is just economic due to the macro situation and uncertainty that you mentioned relative to growing the vending solutions?

We really can't break that down.

The reality of how it works is the way we get the stores open is by keeping the volume loud, because you have to understand, our district managers and regional managers are never crazy about it, because they open a business that doesn't add a lot of revenue initially and loses them money.

That's the way we've set it up.

And loses the money personally.

Yes, personally, bonus.

So we keep the volume high and we open the store.

As vending started picking up, I started changing my message, not saying don't open stores, but really put the pressure on vending, a little back off there and people come back, maybe we don't have to open one, so it is really about how much effort, how much energy an individual has at the district or regional level.

But there is no way for us to quantify 10 openings were because of economic and 20 were because of vending.

It just doesn't break out that way in our business.

It is all lumped in.

Okay, that is fair enough.

How big as a percent of sales do you expect vending to get?

And also, if you could just comment on, just update us on, your metalworking and national account initiatives?

Thank you.

On the vending, the percentage of revenue going through vending machines, we are not sure.

But of the customers that we sell to that have the systems, I would predict that within the next year, or, say, 2 years, it will be north of 60%.

60% to 70% of our customers will have some kind of automated solution and maybe only 20% of their business will go through that machine.

We are really not too concerned about that, whether they vend it or whether we deliver it.

We are concerned that they buy from us.

It's revenue.

(multiple speakers)

That they buy from us.

We are not going to pick it apart.

What was the second half of your question, I apologize?

Yes, the second half was just if you could update us on -- (multiple speakers)

It's my -- (multiple speakers)

Metalworking and the national accounts?

On the metalworking, we don't disclose numbers.

Our goal is to grow the business disproportionate to our other revenue next year, and we will start reporting that as it comes through.

What we really spent 2011 doing, building the team, getting the inventory -- getting the suppliers lined up then the inventory lined up in that order.

And now we are out there hitting it and we're working hard to get our store people to start taking the training.

And in just the month of September, we had our store people take 2000, 1-hour classes online.

Just got that report yesterday, so that is nice, forward motion, a bunch of people are out there learning about this product.

On the national accounts, we continue to sign accounts at a very nice rate.

A lot of that has to do with the vending, and that is what we hear from our national accounts people, that we are getting continued opportunities.

So, we have very good momentum with national accounts, and we will continue to invest in additional resources, i.e., people for the national accounts team in 2012, because the ones that we have given them have given us above average returns.

Great, thank you, appreciate it.

Our next question comes from Adam Uhlman with Cleveland Research.

Please go ahead with your question.

Good morning.

I was wondering, looking at the vending customers a little bit more closely.

What percent of the customers that you have today were existing customers and what percent would you think would be new?

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

I'd look at the report that shows last year's sales, and if I were to have to -- it shows the 2 columns, this year's sales and last year's.

The ones with 0s are probably only about 10%, no more than 15%, but that isn't really a fair representation, because many of them were buying from us, but in a very small way.

So they went from being a $2000-a-month customer to a $10,000, so we were a spot-buy, third choice for them, and we became maybe a second, first or second.

The majority of the customers were buying from us 1 year ago and then we just ramped this up, but with larger customers, that is not uncommon, where we will sell to a customer for years, but never get any real spend from them, meaningful spend.

Okay, and then related to that, have you run into any capacity constraints from your suppliers to do installations?

No, we haven't.

The manufacturer of the machines, we worked well with them and that is part of what Dan said about front loading the CapEx.

We have not wanted to get behind.

We put these build centers in all of our distribution centers.

We trained our technicians, and we overstuffed those groups because we -- the guy who runs it for us, Russ Rubie, a great Fastenal employee.

Said, Russ, we need to be in a position from both phone support and installation to do at least 1,000 machines a month.

Build the machines, size it that way -- build your team and size it that way.

And they're kind of standing ready, saying we're ready to go.

The only delay in installing the machines is we need to become better at figuring out what goes in each machine, and we're continuing to work on ways, but the customers want to be very involved and many of them are slow.

It always takes a little longer than we think.

In cases where the customer is just ready to go, many times we will get an order and they will be in place in 2 weeks, because our guys can get them if we can get the data set up or the information about what we are going to send in to put in the machines.

One thing I will add to that is just think about, when we were coming into this year and the tail end of last year, we were looking about how we believed this would ramp up.

And I might be over at certain times on what we spend for inventory or spend for fixed capital, but message to both our purchasing group as well as our vending group is don't get caught naked here.

We added some inventory early on, because we wanted to have vendible products ready on the shelf.

We have a backlog of machines, so we are ready to handle it from the standpoint of -- that product, if we end up having a few months too much because we overstretched ourselves, that product is a great product without a shelf life, but the cost of running out is too high, and so a little bit of our inventory and a little bit of our CapEx is there because we were willing to front load because we saw the potential and the opportunity here.

That's helpful.

With that, I'm going to cut off the call.

We are at 45 minutes past the hour.

And again we want to thank everybody for joining in the call this morning.

Just a couple takeaway items that I jotted down during the call.

I probably sound a little bit like a stuck record here, but maybe in today's world, sometimes hearing the same thing from a company in consecutive quarters is a sign of good things rather than of being boring.

First off, our Pathway to Profit we are more convinced than ever that it just works; it is a logical progression for our business and it is working well throughout the organization.

Very good sales patterns.

One thing that I noted the other day when I was looking at some of the numbers, if I look at the last 6 months, so the second, third quarter of this year, on a 2-year comparison, our growth is in excess of 45% every month.

We had actually 1 month over 50%.

I have to go back to 2006 to see that type of a 2-year comparison.

And 2006 was a pre-Pathway to Profit, so we were openings doors at about a 14% clip.

So what it demonstrates to me is with focus, with energy and a bunch of growth drivers, we can continue to take market at a very aggressive fashion in this marketplace; and it isn't strictly store centered.

It is all facets of the business.

The sales initiatives, we have had great traction with them, very good opportunity with our exclusive brands and finally as I mentioned last quarter, the employees at Fastenal continue to perform at a very high level.

Thank you to them, whoever's on the call.

Have a good day everybody.

Thanks.

Thank you, ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the conference.

You may now disconnect.