快扣 (FAST) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Fastenal Company first-quarter 2012 earnings results call.

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

Later we will conduct a question-and-answer session with instructions following at that time.

(Operator Instructions)

As a reminder this conference call is being recorded.

Now I'll turn the conference over to Ellen Trester of Investor Relations.

Please begin.

Welcome to the Fastenal Company 2012 first-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 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 at Fastenal Investor Relations homepage, investor.fastenal.com.

A replay of the webcast will be available the website until June 1, 2012 at midnight central time.

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

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

It is important to note that the Company's actual results may differ materially 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 Mr.

Will Oberton.

Go ahead, Mr.

Oberton.

Good morning everybody and thanks for joining us on our first-quarter conference call.

Starting out I would like to say that I feel it was a good quarter.

Our sales growth was right on plan.

Looking at our internal sales goals in January, we are 100.6% of goal; February, 98.8% of goal; and March 101.3% of goal.

So for the quarter we are at 100.3% of goal.

I'm not sure if it's good sales growth or good forecasting but whatever, we are right on target this far into the year.

I also take a look at the two-year growth numbers, because as we look at the sequential numbers and try to understand what the patterns are, but sometimes it's easier to look at the two-year.

And if you look at the two-year growth numbers that we put in the report, and combine 2010 and 2011, it was 40.1% growth in January, 41.5% in February, and 42.1% in March.

So we continue to march forward and also show very consistent growth.

The other reason I feel pretty good about the sales growth is if you look at the purchasing index that was also in the release, last year through the first three months the average for the country -- US -- market was at 59.8%, a very high reading.

This year, still a good reading, but it is down to 53.3% so it is really 6.5 points lower and we had similar -- our growth is off a little bit -- but very similar, so I think the initiatives we are putting in place are working well.

This week I had the opportunity to visit -- this week we are holding our customer show down in Indianapolis where we bring in about 4,000 to 5,000 customers and 200 suppliers and we let our customers visit with our suppliers of the product.

But anyway, that gave me the opportunity to visit with dozens of companies, both suppliers and our customers, also to speak with many of our managers and the mood is very upbeat so I was optimistic about that.

Many of our customers believe they are going to have a good year, continue to have a good year and many of the suppliers are hearing that not only from the Fastenal people but also from other customers.

So it was a very upbeat show and gave us a good feel for the next couple of months.

In the report, there was, I believe, moving on there is only one negative in our report this quarter, one major negative and that was the margin.

Spent a lot of time looking at the margin trying to analyze what we are doing and what we need to do.

And after spending a time analyzing it and discussing it with most of our sales leaders down in Indianapolis this week, the conclusion I came to, and I hate to say this, but my conclusion is that we've basically taken our eye off the ball a little bit working on other things.

But after the discussions I had with the regionals, with our sales leaders and with our national account sales leaders, I'm very confident that we know what we need to do and we will see improvement in the second quarter, so, we are going to work very hard on that.

We are not off a long ways; we are still in our range of between 51% and 53% but as the competitive people that we are, we would rather be in the high end of the range rather than the low end.

So we are going to work very hard to move that up over the next two to three quarters and get into the upper end of our margin range.

On the expense control side I have to say the Fastenal team, the blue team did a great job.

Our expenses grew about six percentage points below sales, exactly what we needed to do.

Labor grew a little faster than the other expenses but some of that is planned.

We did a lot of things, changing some pay programs, trying to make sure that we are taking care of our people and it is working very well.

So, not a lot to say on expense control.

Dan will probably touch more on that but I'm really proud of what we were able to do on expense control.

One other area that you may have noticed that we had a little drop-off was the store profitability that we show on Page 7, where some of the store groups had lower profitability per size than they had in the previous year and that is all explained in one word -- margin.

As we look at that, because margin was a little lower, the profitability per store size is a little lower, so if we can correct the margin, or as we correct the margin problem, we will also correct that problem.

But overall our pretax profit at 21%, I'm proud of the number.

We only picked up 90 basis points from last year, which our goal is 100, so we missed it by a tenth.

But I'm very confident we'll get that back.

And the most positive thing on that chart on Page 7 is the number of stores that moved up a category.

So we continue to do what we have laid out in Pathway to Profit -- move the average store size up, the profitability goes up and the system continues to work.

One area on the report that I'm also very happy about was the inventory control.

We had stated in the fourth quarter call that we thought we could improve our turns.

Through the quarter we only added, we added less than $2 million in inventory and so we've done a nice job both sequentially through the quarter but also year-over-year very nice job on inventory growth, or controlling our inventory growth, deploying our assets in better ways.

Switching gears a little bit, talking about the initiatives that we have, our sales initiatives.

I'm happy to report that all of our initiatives are going well.

Our government project that we started two years ago is ahead of plan from a standpoint of sales growth.

We are fully staffed, or I mean, very few openings.

We have the people in place that we need, we have the coverage in the states.

Our WSCA contract which is our big state contract is going very well.

It is at or ahead of plan and some states are doing better than others but overall it is doing very well.

And we feel very good about the knowledge that we are gaining through the people in the field.

Five years ago we probably had two or three people in the Company that had a real good knowledge of how to do this; now we have a team of about 40 and I think we are just going to continue to gain traction in the government business, mainly in the state areas, but we are looking at other pieces of government business as well.

Our web sales continue to grow; that's been an initiative since really the end of 2010.

We did well in 2011, but we continue to see traction in 2012.

Buying off the web is good for our customers; it's good for our stores also, because it is more efficient.

That continues to do well.

Metal working, we're very happy with the results in metal working.

And at the show this week I had the opportunity to visit with several of our large suppliers that just came on and on a very positive note they're happy with the results.

Because that is one of the keys to making this work.

We have to be able to sell it -- grow fast enough to make the suppliers happy with the results and that's going well.

Our salespeople that we've been hiring and training in the field are doing a nice job.

We have about 52 people that are sales specialists just in metal working; our plan is to add another 10 as the year goes on or as we can find the right people to do that.

I also had the opportunity to speak with many customers who are looking at us for metal working.

The theme was, now there is another national player.

There is another Company that I can look at to provide my metal-working supplies.

And so we've had some very nice opportunities that fits in well with our vending program and so we are very optimistic about that for the future.

It is a large market and there is good tough competition in it, but we think we can continue to take share.

And the main reason is because of the relationships we've developed with these customers over the years.

We are not taking it out to new customers per se; it is really developed relationships that are looking for a possible alternative.

And our biggest initiative that we talk about is vending and as you saw on the results we had a great quarter.

As I've been stating for the last four quarters, our goal would be to hit 2,500 machines for the quarter; we exceeded that by more than 2,000 at 4,500 machines.

We installed more than 2,300 machines, so we are moving along nicely.

I am more convinced than ever that it is a long-term change in industrial distribution.

Again, I keep talking about the show, but I just got back last night.

I had the opportunity to speak with probably 20 to 30 customers that have deployed vending and not one of them is disappointed with the results.

They are all talking about the savings.

There are really two themes that come out from the customers -- one is inventory control and how much time it saves them to not have to distribute the product and the other is the consumption or the savings.

But I think the biggest theme is about the inventory control more than the savings; it's just there when we need it and it's just out of sight, out of mind in a positive way.

So, we are working very hard on that and believe we will continue to see good results going forward.

So overall, looking at the quarter looking at the information, I'll put it out down is a good quarter.

If we had improved the margin I would say it was a great quarter because everything else looks good.

So we have some things to work on; we're focused on that and hopefully we'll see improvement this quarter.

With that I'm going to turn it over to Dan and he'll give you some more detailed color on other things in the quarter.

Thank you.

Thanks, Will and good morning everybody and thanks for listening in on our call today.

One thing I wanted to touch on, most of you have probably noticed I changed the format of the earnings release a bit this quarter.

I felt there was pieces of it that were getting a bit stale.

Removed out the explicit discussion of Pathway to Profit and more integrated it just into the general layout of the earnings release.

I know reading a document written by an accountant can be painful; hopefully this makes it a little less painful this quarter.

One item on Page 3 that I thought was worthwhile to point out and that is looking at the sequential trends of the business.

Will talked a bit about the year-over-year information but one thing I think is worthwhile to note and added actually three years' worth of data rather than the typical two years' worth of data that we cover is a similar trend that we have seen in the last several years and that trend played out again this year in the first quarter, is actually from my perspective, a little bit of softness in the January-February timeframe followed by a huge leap forward from February to March.

We saw it in 2010, we saw it in 2011, and we saw it again here in 2012.

And hopefully that sets us up for continued nice performance as we go into the future, but it is an interesting dynamic to our business.

The March timeframe in each of the last three years, we've more than doubled the sequential norm of February to March gains in daily average.

And I think it is worthwhile to note, especially when you look at the month of March.

Because one thing that is noteworthy in our numbers as well is our construction numbers -- and construction is roughly 20% of our business -- our construction numbers were actually a little bit weak in March.

And my perception looking at the data is really that with the very mild winter, there was some work that moved into January and February that normally would've been in February and March.

And I think it softened February a little bit, I think it softened March little bit.

And I have some first-hand knowledge of this only from the standpoint, my wife and I had some work done on our home here last year.

And I told the contractor which, this is always a dangerous thing to tell a contractor, I told the contractor, I'm in no particular rush so when you get a chance to fit it in, come back and finish the work.

It was some stuff on an outside garage.

Well, in early March, I got a call from my contractor and he says, yes Dan, I'm running a little low on work, I got some time to finish that project up.

I didn't think he'd get to it till late summer.

So that tells me there's probably some truth to the fact, some work got pushed up into the early part of the quarter and made the latter half a little bit softer.

As Will mentioned, ISM Index I think continues to hold up well for us.

It came in at 53.4 in March.

When I look at the growth drivers I talked about on Page 5, as Will mentioned, all of our areas our operating above plan and when I look at the FAST Solutions in particular.

We touched on it in our February sales release that we had exceeded our 2,500 number and as you see we exceeded it soundly.

But the other thing that jumped out for me was, it was a case of, it was solid in all three months of the quarter.

It wasn't a case of January was big, because of a weaker December; it was solid in January, February, and March and building.

So very nice performance when I look at the vending for the quarter.

The profit drivers on Pages 6 and 7, I don't recall us ever having a first quarter with 21% pretax so that's a nice milestone marker for the organization.

As Will touched on earlier, we did lose some of the what I refer to as amplification effect on Pathway to Profit with weaker gross margin and so our relative profitability per group fell off a little bit from last year.

It's still nicely above where was in 2010.

But our $150,000 store group did hold up and actually improved nicely.

I believe they improved by about 90 basis points year-over-year, so continue to see some nice performance.

The other thing I think is worthwhile to note, when we started the Pathway to Profit back into 2007, if you would've told me that at sometime in the future, with an average store size of just over $86,000 that would be at 21% pretax I would've given you a pretty skeptical look because I wouldn't have thought it was possible and I think we've done a nice job of lowering our operating expenses during that timeframe and moving the mix, but having nice profits with an average store size which is still relatively small in the scheme of Pathway to Profit.

As Will touched on a few minutes ago, our only wart in this release from my perspective is our gross margin.

We just aren't executing very well in this regard, but we've always said gross margin is about attitude and we need to develop some attitude.

I believe we have opportunity.

With that said there are some positives when I look at components.

Our exclusive brands, our private label, if you will, brands that we talked about in the past, a year ago that was at about 8.5% of our sales, today that is at 9.3%, so we continue to inch forward on that.

Not moving as fast as we'd like but still moving forward in improving the mix.

Operating and administrative expenses on Page 11, I'll just cut to the chase and say that I think we managed that well as we went into the first quarter and I think we're poised well to go into second and third with a good position on operating expenses; get some lift in gross margin, we'll have some nice numbers.

The final item I'll point out is really in the working capital and cash flow on Page 13.

Nice numbers, we did a nice job with both accounts receivable and inventory growth year-over-year.

The challenging thing we've had the last several years on all fronts is the expansion of our large account business, the expansion of our international business which is challenging with working capital because, especially on the international, we don't have the same distribution support that we have domestically or in North America in general.

And finally from a cash flow perspective, operating cash flow was 132% of earnings.

About 40% of that comes from the fact that we don't have any tax payments.

So a 90%-plus number in the first quarter is extremely unusual because of the growth we need in accounts receivable because of the sequential increase in sales.

So I think a great number from the standpoint of cash flow.

We spent about 27% of earnings for CapEx, right in line with what we had expected, so free cash flow of over 100% in the first quarter versus 68% a year ago.

With that, I will turn it over to the Q&A.

As we've asked in the past, please try to limit yourself to a question and if you need a quick follow-up for clarification, but that way more people get a chance to ask questions.

(Operator Instructions) David Manthey, Robert W.

Baird.

First off are you currently taking orders for that half-size vending unit and if you could tell us what your vending installation capacity is today?

I think initially it was about 3000 units.

The answer to the first question is, yes, it is the FAST 3000, if anyone wants one.

It is actually about 2/3 the size and we are taking orders.

It is going actually very well so far.

And our capacity for installs is actually very scalable.

I would say it's probably about 1000 a month right now.

But with the centers we put in, it is really just a matter of adding more people and that's not been an issue because there is a lot of pretty basic work around that.

We have good leaders in all the center; we could probably double that very quickly.

Okay, thanks Will.

And then quickly, I was wondering just so we can get an understanding of these growth drivers and the scale of them, could you give us what percentage of revenues approximately today are attributable to government cutting tools, international, and Internet?

I can do some -- I have three out of four of those in my head and give you a give good number.

The metal working, and I'm not going to go in the order you're in, is roughly 8% of our revenue today.

The Internet business is also about the same.

But understand Internet business isn't different business -- it is a different channel for receiving business.

For receiving the order.

Receiving the order.

Got it.

So many of the same customers.

It's always a clarification point, but about 8% of our orders.

And that does not include our EDI, which if we added all of the other electronic interchange on top of that, it would almost double.

We look at it a little different than our competitors.

The one I don't have on the top of my head is government because that's moving rapidly I believe it's about 4%.

I would say between 3.5% and 4%.

And what was the last one Dave?

I missed the fourth one?

International sales.

International sales, yes, is running just over, it's about 10.5% to 11%, depending on the month.

And the vast, vast majority of that is Canada.

Any number outside of North America?

Outside of North America, well, outside of Canada, because Mexico we kind of look at as more truly international business, about 3% to 3.5% of our revenue comes outside of US and Canada.

Great.

Actually in the quarter it was almost 4%.

Almost 4%.

Adam Uhlman, Cleveland Research.

Just a follow-up on the vending question, and the capacity to install the units, we're looking at the total cumulative contract signed for just over 17,000 machines and fully installed, like 9800, and so there's always been somewhat of a lag.

But I guess this is somewhat of a bigger lag than we've seen in the past.

I'm just wondering, one, when what should we start to see a catch-up of that contract signing?

When will that get closer to the installs?

And then secondly, the revenue that you are asking customers to step up with, the extra couple thousand bucks a month, is that coming through as you had expected it or what has been the trends there?

I'll take the second question and give the first because he has better --.

Yes, the revenue is coming through.

The trends have been that it has been running just above -- most of our machines are the FAST 5000.

Our requirement on that is $2000 a month; we've been running just above that number for the last year and a half.

I was hoping it would be a little higher than that but it in the $2000 to $2200 depending on any a month that you look at.

The other part about the cumulative, it's probably worthwhile to point out and we mentioned this last May at our investor conference, but I think it is worthwhile to point out.

The data we disclose -- keep in mind, when we started disclosing this data, this is a new animal for us and with a lot of information that we disclose, we have a very time-tested intuitive feel about how things will play out.

When we look at that first number, the contracts signed during the period, and we look at two years ago we're at 257, and that grew a year ago we were at 1400, and now we are about 4500.

That is the raw number, that is the gross number of contracts signed.

And there are is always things that happen downstream that caused some of those not to be installed.

It might be a case of -- it gets delayed because the customer changes their mind or maybe the person that signed for it wasn't sure what they wanted and they pull back and maybe -- and it expires and we don't actually install it.

Over time, when I look at that first statistic, about 90% of those signings turn into a vending machine.

And about 10%, that contract signing expires.

It might be subsequently signed as a new contract because maybe we get inertia going again four months later, six months later.

But what we are trying to do on that first number is, we are trying to just give you, here is a raw number of in the contracts we signed that quarter.

So, when you add up all those raw numbers, and compare that to what is actually installed, you are kind of comparing apples and oranges.

And to your question of when we will catch up, we would like to say it should be a 60-day backlog.

It's probably going to take 90 to 100 days on average and so we continued to ramp up our signings.

There is always going to be, you can basically take the last 90 to 100 days of signings off of the cumulative number of installs and come with a pretty decent match less what Dan just described.

But our goal -- so, that being said, we really need to have installs this quarter in the second quarter well above -- more in the 3500 to 4000 range to keep up with that track so that is something you should pay attention, see if we can do that.

But we do have the people in place to do it; it is really about the paperwork and moving it forward.

Ryan Merkel, William Blair.

Thanks.

Very nice quarter, guys.

Thanks, Ryan.

So, let me start with the growth rate to customers with vending which moderated to 34% this quarter, although still a healthy number.

How should we think about that moderation and then what should we expect going forward?

I think the first thing to think about it is more of those customers are in their second and third year.

Right.

Because that's cumulative customers.

If we were to separate it out and say growth in customers that had vending for 12 months or less it would be a much higher number.

So, that number will probably continue to moderate at some level, but without having experience in this, because this is a new initiative for us it is really hard to say how it will play out.

But we knew, and I think I stated in other conference calls, that we were at 50%.

We're not going to maintain that number as the tail gets longer.

Right, that makes sense.

Okay.

And then second on the vending install number which was incredibly strong, is this a level that we can extrapolate for the next few quarters or was there something unique this quarter that drove such a strong result.

On the install rate?

Yes.

The install rate should go up.

The install rate should --

I'm sorry --the signings rate.

I'm sorry.

The signing rate?

Yes.

Well, we did put some incentives in place with our managers and district managers and I think we explained that in the past.

But those incentives are still in place and are still going strong.

I don't know if we'll keep it this level, but we should be well above previous levels, meaning somewhere in between the 2500 and 4500 if I had to guess.

But there is a lot of energy out there and the customers that I had the opportunity to speak with, it was all positive.

And so we are doing a lot of things well.

So, our goal for the year starting out was 10,000 machines, 2500 a quarter.

By right now I feel very confident that we're going to exceed that probably pretty handily.

(Operator Instructions) Hamzah Mazari, Credit Suisse.

A question on vending, again.

Could you maybe talk about, as vending becomes a bigger part of your mix, what kind of margin dilution should one expect in the short-term?

And then also longer-term, as you get up to speed on the learning curve, how should one think about the impact on margins longer term, both gross and operating margins?

Thank you.

On the gross margin, we really aren't seeing a deterioration from vending.

Our vending business does run at a lower margin, but it is because it is running through larger customers.

If you match the vending customers up -- well, actually when I do is I look at the customers pre-vending and post-vending and the margin really doesn't change.

And so, there is no change in the margin.

If all of the vending, if we get a very high growth that is going to large customers then we have to work on that but that is actually a positive problem.

As far as operating expense, the vending is going to be more efficient business to serve.

It is easier -- there is just a lot less work in supplying the product through the vending machine.

We have better visibility to need.

A simple thing is for years, we've been out doing bin stock to customers where we drive out we look at their supplies, we write down what they need or scan it with a handheld scanner, we go back to the store, spending thousands of hours every week and month doing that.

With the vending machine the Internet or the machine is doing that for us sending it back over.

All that time disappears and we get better information.

And that's just an example of how it works.

So the more we get out there, the less labor it will take, the higher service level we were provide for our customers.

So, vending from an operating profit standpoint is a very positive from a gross margin; it is neutral based on the same customer, same size.

Okay, and just a follow-up question.

On the gross margin coming in lower than expectations, do you guys have a rough breakdown as to what the contributors were?

How much was vendor incentive?

How much was transactional or organizational, in terms of negative contribution?

Yes, the drag was in the transactional side.

On a sequential basis, our gross margin from a vendor incentive standpoint was up about 10 basis points.

A little bit of improvement on our freight side, but that was offset somewhat because of fuel.

I would've expected a little bit better improvement on the transportation side, absent the fuels situation.

But our issue on a year-over-year basis that we continue to struggle with is just the day-to-day transactional side.

It is pricing attitude.

Well, it is pricing attitude and probably the biggest part is not keeping up with inflation.

And there hasn't been a lot of inflation, but when you have a small amount of inflation, and you don't keep up with the pricing.

It's funny to say, but it almost is easier when there's a lot of inflation because everybody jumps and goes.

When it creeps in a nickel at a time -- if you look at the margin it's not like were off 3 points, it's more like creep.

And that's what we've identified as the biggest problem is where we are taking 1% and 2% price increases and not passing those along here and there.

But we've addressed it, as I said, and everyone is completely aware of what we need to do, we just have to get it done.

Sam Darkatsh, Raymond James.

I wanted to hit on the occupancy cost, which was a very pleasant surprise, particularly based on the amount of machines that you are looking at on the vending side.

Can you get a sense of what the utility savings were in the quarter and how sustainable that leverage on the occupancy side might be over the next few quarters?

First off, if you look at it from the quarter, a meaningful impact, because we are in the midst of heating season, and so from Q4 to Q1, there was about a $1 million increase in occupancy.

It should have been more than like $2.5 million.

If I look at it from the standpoint of vending, that number has increased meaningfully, but it is still a smaller component of overall occupancy.

And in the final piece, as it relates to locations, our growth in occupancy related to locations is half the rate of growth from store openings.

We continue to find ways to improve our leverage there, from both a percentage of sales standpoint and just an absolute dollar standpoint and that piece is sustainable as you go through the year.

Some of the benefit that we had -- we're not heating in April and March so the fact that natural gas prices are lower becomes much less meaningful because we use some propane in our forklifts, but that is a relatively small dollar.

And, Dan, if I could just follow up on the gross margin question from the last question.

You mentioned the pricing attitude, Dan.

Was pricing off on a year-on-year basis or was pricing up but not nearly to the extent that your own costs were rising?

Just a second, our pricing is up but not as much as our own cost.

And the pricing is not up a lot and our own costs are not up a lot.

And like I said, that is the difficult part is it is not coming in in big chunks.

It just kind of slides in, its 1% let it go, well that adds up.

So our pricing is up, it just didn't cover the costs.

Is there a particular either line of products or end market where the pricing discipline needs to be firmed up a little bit more?

No, there really isn't.

It is somewhat across the boards and we've spent basically the last two weeks analyzing it, or the last month, actually.

Really have a good handle on where it is and I had an opportunity, as I said, to speak with our regional vice presidents.

They're really the ones in the field who handle it and our international account leads.

So I've been with most of them in the last week and everyone's very clear on what we need to do and how important it is.

And you have to understand we have one big thing going for us and that is pay programs.

Gross profit is a big part of how we get paid all of us, and most of the people were disappointed.

And even though we had a good quarter, many of us, our bonuses were down, many of our regionals, their bonuses were down.

And district managers.

And district managers.

So, there were a bunch of people going, man, I worked very hard, I grew my business 20% and the Company paid me less.

They're not mad at the Company; they're kicking themselves in the butt, the same as Dan and I are.

Most people don't understand what a motivator that is, but it really works in our system.

And I made a point this week of asking everyone how happy they were with their bonus and there were many positives in that conversation.

So, were pointing that out and I think we will see some results.

Okay and so there's absolutely no relation between the need for more discipline and the amount of machines that are getting signed up?

Meaning that you are not looking to give discounts to incentivize customers to take on the extra machine?

You mean the vending side?

Yes.

The vending business and its impact on our overall numbers and what it means for gross margin at this stage of the game, is negligible.

This has absolutely nothing to do with vending signings.

This is our business outside of vending and we're not keeping up with where we need to be at in managing our sale price and our cost.

And that is where we're getting the squeeze.

Vending is absolutely no part of this.

And the vending is neutral on our margin -- the customers' margin today that have deployed vending, if you take the entire list and add it up, there's been no change in those customers margin.

There's been great growth, as we showed 34%, but the margin haven't change in that group of customers over that period.

And keep in mind, the vending business, the customer is representing 18% of our sales and it is about 20% of those sales that are actually going through the vending machine.

3% to 4%.

Yes, 3.5% and that doesn't move the needle on the other 96%, 97%.

Understood.

Thank you much.

You bet.

Robert Barry, UBS.

Just a couple of things.

One is, I wanted to follow up on your commentary on the sales trends and, I hear you, Dan, on potential for some redistribution of the non-res activity within the quarter.

But I think if you look at October versus the growth rate through the first three months, it looks like you are still a little softer this year than you have been over the past few years despite the resurgence in March.

So, I'm just wondering if you can comment on the end markets?

I mean you did mention that the ISM is a little bit lower than last year, but just in general do you think things are a little bit softer in the underlying end markets?

I think if you looked at an October, and hopefully the facts don't refute what I'm saying, it's a little bit from the hip.

But I think if you look at the October to March time frame and look at sequential patterns, I think you see in all of the years in question, this year, last year, the year before, that a general softness that was there through February and then you saw a big pick-up in March.

I don't know that I agree with the comment that from October of last year to March, it is weaker.

Maybe the facts, if you actually laid it out in front of you, maybe it is nominally weaker, but I guess in my mind that doesn't really stand out too dramatically.

Yes, I think it is nominally, fair enough.

I was just wondering if you were actually seeing anything in the end markets.

I don't think so.

And then I just wanted to follow-up on this market size number that you put in the release of $160 billion.

I've actually been getting a fair number is of questions about it recently, maybe you have, as well.

I'm just curious, what your confidence is around that number, where it comes from, how you derive it?

These numbers have gotten tossed around among the distributors for a little while.

I think in the past they have been more like $140 billion to $150 billion.

Just any comments on that I'd be curious to hear.

Thank you.

That is a number that we've used in a somewhat generic fashion for the better part of a decade.

And in fact, if you went back 8, 10 years ago and you looked at discussions or presentations of Fastenal and some of its peers, we were using the low number for sizing the market with our $160 billion number.

A lot of our competitors used numbers that were more in the $250 billion to $300 billion, maybe even a little bit higher than that.

And I think generally speaking when you see presentations today or hear discussions, the market is typically sized to that.

With that said, there is a piece of that market that we don't believe is readily addressable to us today.

And I think the piece that we think is readily addressable, that we are highly confident goes through distribution and represents products that we have a very good knowledge of --

And we can make margin on them.

And we can make margin on them, that number is probably closer to $110 billion to $120 billion.

Because there is some business, as Will mentioned, there is some business we're not interested in because the marketplace doesn't pay for a level of service or even a level of distribution and that is business that probably should go direct or be sold by somebody other than Fastenal.

And I've used the $140 billion to $160 billion for years.

But to be honest with you, considering we are at roughly $3 billion, there is so much in front of us, we don't spend a tremendous amount of time looking at even thinking about that because the next $10 billion we find is there and there is so much headroom in our business and I keep referring back to the show.

When you go and you have the opportunity to see the customers and listen to them, foreseeably, in our lifetimes, there's a lot ahead of us.

I think that is true if you sat down and looked at some of our more established regions and look at the rate at which they grow.

Our Winona region, which is Minnesota, Wisconsin, Dakotas, Iowa, Northern Illinois, that grows very attractively year-over-year mid- to upper teens or better depending on the quarter.

So you look at that and say, I have business that has been established now for 40-plus years and continues to grow at that kind of rate.

I think it is evident also when you look at the stats we put out on our 5-plus-year-old stores and quarterly on our 10-plus-year-old stores.

The fact that we have 5-year-old stores that grow at mid-teens, 5-year plus stores growing at mid-teens tells me there's a ton of market out there.

Thank you very no more questions at this time I'd like to turn the call over to management for any closing remarks.

Again, we would like to thanks everybody for participating in today's call.

I hope this combined with the release is informative of how our business is progressing and we are very optimistic as we look forward into 2012.

Have a good day, everybody.

Thank you.

Ladies and gentlemen thank you for your participation in today's conference.

This concludes the program.

You may now disconnect and have a wonderful day.