快扣 (FAST) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Fastenal Company third quarter 2012 earnings results.

At this time all participants are in a listen only (technical difficulty) We will conduct a question-and-answer session.

Instructions will follow at that time.

(Operator Instructions).

As a reminder, this conference is being recorded.

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

Please begin.

Welcome to the Fastenal Company 2012 third-quarter earnings conference call.

Present for today's call are Will Oberton, our Chief Executive Officer; Dan Florness, our Chief Financial Officer; and Lee Hein, our President.

The call will last for up to 45 minutes.

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

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

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

This call is being audio simulcast on the Internet via the Fastenal investor relations home page, investor.fastenal.com.

A replay of the webcast will be available on the website until December 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 materially from these forward-looking statements are contained in the Company's periodic filings with the Securities and Exchange Commission and we encourage you to review those carefully.

Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance that the matter contained in such statements will occur.

Forward-looking statements are made as of today's date only and we undertake no duty to update the information provided on this call.

I would now like to turn the call over to Will Oberton.

Go ahead Mr. Oberton.

Good morning.

Thank you, Ellen, and good morning everybody and thank you for joining our call.

I am going to spend a few minutes on some brief comments on my view of the quarter and then I am going to turn it over to Dan.

Overall I felt that we did a very good job in the quarter considering a little bit of economic headwind.

Sales were slow but we did see an uptick in September so we are very optimistic about that.

Another thing on a positive note is on a sequential basis from June to September, we are really on track with what our historical numbers are so we also see that as a positive.

We had a very weak April, May timeframe where we lost a lot of ground for the year but since then, we have really been tracking very consistent.

So there is a little life underneath all of this.

We have seen very slow growth in both Asia and Europe.

That has also been holding us back.

If you compare it to last year in 2011, we have actually were getting about a 200 basis point bump in our sales because of our foreign activity and this year it is about equal to the US business.

So we are just not getting any tailwind from our Asia and European businesses.

Mexico remains very strong which is a very positive.

They have just done great over the last three or four years and we continue to invest -- I believe we have opened seven stores in the last year in Mexico and they continue to perform at a very high level.

A little bit on some of the vertical markets.

Construction actually bounced back a little bit in September but if you look at the number, August was like the low point and so September is more on a normal number or a more traditional number almost 10% growth on the construction.

In manufacturing, we just haven't seen much change.

I think it went -- moved about 10 basis points over the three-month period up 10, down 10.

So manufacturing has been very consistent which we actually look at as a positive because it had been moving down prior to that.

So we are holding our own in manufacturing and hopefully things will pick up as time goes on here.

On the margin, I'm a little disappointed in the margin.

We have been working very hard on improving our margin.

We didn't lose any ground.

We also didn't make up much ground in the quarter.

One thing to note on that though is that steel remains soft.

If you follow the steel markets at all, steel continues to decline a little bit.

If you look at -- we look at the Asian steel markets because a lot of our fasteners come out of Asia and a lot of their prices are down 10% to 20% from a year ago and so that continues to put pressure on our margin but I think the team is doing a good job of holding the price as up as they can but it is more difficult to make gains in a deflationary market.

And with fasteners making up close to 50% of our business, that makes a big difference in our margin opportunities.

We will continue to work on it and believe we can -- we will show some improvement as we go forward.

Some of the other projects or initiatives we are working on, we continue to work hard on metal working.

Our goal going into the year was to grow that business.

The productline, metalworking productline at at least 10 points faster than the overall Fastenal growth.

We have been able to maintain that -- actually exceed that goal and we continue to make nice wins still not a huge business for us but it is a nice sized business and it is growing meaningfully faster than the overall business.

So we are optimistic.

And our margins have maintained at a nice level.

We are not giving up a lot of price to get that sales -- or we are not getting the sales on price so that is very positive for us so we will continue to invest heavily in the metalworking business.

On the government side, another one of our new initiatives, our goal is the same in government, grow the business at least 10% faster than Fastenal.

We are also achieving those goals.

That business, tremendous upside and we will continue to invest and we continue to make nice wins there.

That is going to be -- it is almost door -- it is like street fighting.

It is door to door business.

You have to go to a lot of small entities, county shops and small hospitals and city shops, very good dependable business but it is hard to get.

So it is not one big swing gets it all so we are working very hard on the government business and continue to develop our people and train them on how to go after that business because it is a little different than our traditional industrial and construction business.

Vending had a very strong quarter.

We had a very strong quarter in vending.

We signed over 5300 machines.

We installed just under 4000 machines.

We have made nice progress in both areas.

Some of the positives that -- things that I see as positives in there is we have had broader participation at the store level.

We are getting more stores to buy into the program.

We still have a ways to go there.

The stores that have bought in early, the early adopters are signing far more machines than the rest but it is broadening out and we have also made some very nice customer wins that we picked up over the last three to four months.

So we are optimistic about what is going on there.

We believe it will continue to grow in the future and as a Company, we will continue to invest in the vending program as we will in our metalworking and government programs.

On the pathway to profit again, a little disappointed there.

We only picked up 50 basis points year over year.

Our goal was 100 basis points but we really didn't have the sales growth to make it happen.

You need probably more like a 15% to 16% sales growth to pick up 100 basis points without squeezing the business too hard on other things.

On a positive note though if you look at a two-year run, we are up 190 basis points.

We are still staying pretty close to the goal over a longer period and that is really what we want to do.

We know we are going to have some stronger years and some weaker years so as a project, we are doing nice -- or the team is doing a great job I believe and we believe we can stay on that track going forward.

Expense control, done a nice job considering we didn't have the great sales growth that -- as good a sales growth as we were expecting but I think the team is doing a nice job looking at the little stuff and that is how we have been able to maintain the earnings growth that we have.

Strong cash flow -- Dan and his team do a great job with that controlling the inventory growth and creating very positive cash flow for the Company.

So overall I believe we had a good quarter.

I think there is a lot of work to do, a lot of things we can do better.

We are very focused on improving our business and growing into the future.

And with that I am going to turn it over to Dan because Dan will provide more color on the quarter.

Thanks, Will, and thanks everybody for joining on today's conference call.

A couple of things to make note as we flip through the various pages of the press release.

On page one, inserted a paragraph into this quarter that is a bit atypical for us.

But you know the calendar had some impacts on the quarters so I wanted to share a few thoughts on that.

In the third quarter, we actually had 63 days versus 64 days a year ago and in some businesses that might not make much of a difference but for us when you are selling a very tangible product, the number of business days really does matter.

Our headline number is we grew our sales at 10.5% but if you really peer under the hood a little bit, look at our daily growth, that is over 12%.

And I think that is the number that is really relevant because that is the number that carries the trend into the future.

And so I added a little comment -- a blurb on that.

Looking at that 10%, very pleased and to (inaudible) touch on what Will just mentioned, very pleased the fact that we were able to obtain leverage in an environment where our topline dollars are only growing at 10% and we had a little bit of headwind from the gross profit side as well.

One item just to make note of when I look at the Q4, we will have -- it's a 63 to 63 day quarter so there is nothing really going on from that standpoint.

There is a little bit of movement around within the months of the quarter.

October will have 23 days this year versus 21 a year ago so it will give us a nice headline number.

Daily will probably suffer a little bit because of that just because there is a certain piece of our business that is more centered on the month and there is a piece of our business that is more centered on the day.

So just making everybody aware that there is two additional days.

Those two days we give back in December.

So if I look at trade-offs in life, October is a big month for us and if I can get two extra days in October and give them back in December, I will take that deal anytime.

Will touched on the sequential patterns a little bit that we look at on page three of the release.

You know, if I look at the last couple of years, 2010 and 2011, you know we were beating the benchmark pattern that we laid out 50%, 60%, 70% of the time and when we got out to September, we were 490 basis points ahead of trend line.

So 5 points ahead of the trend line year to date looking at January to September.

This year you know we had a setback in February some weather issues going on.

We quickly got it back in March but then May came along and May really changed the year for us and created more a conservative tone within the organization for the balance of the year.

And at the end of June, we were about 330 basis points behind year-to-date history and we are basically at that same point.

We are about 330 basis points behind now at September.

So since June, the business has been kind of treading water as far as how we compare to history but nice momentum and there was a nice pickup, as Will mentioned, that we saw in September and that bodes well as we go into October and into 2013 the more important way of looking at it.

You know in that context of the April, May, June timeframe when we did see the slowdown, it was really in the fastener area.

The non-fastener area held up much better but that is also the area that has helped by all the growth drivers, the vending, the government business, the metalworking, all those things we are doing really demonstrated that we can work through a period of a declining economy and maintain very attractive topline growth rates.

One thing you know in September here, ISM did pop up.

Historically when we have looked at ISM we have always felt ISM led us by about three months.

So if ISM drops in June, we would expect to see a drop in September.

What we have been seeing in really the last year, year and a half is that we tend to coincide with ISM.

I am not quite sure what caused the change but you know when we dropped off in May, the ISM dropped off in June.

I will be interested to see if the ISM over 51 in September is a blip or if it has some legs.

At this juncture the jury is still out for us and we are still maintaining a conservative tone as we go into the tail end of the year and into the first part of 2013.

As Will mentioned on the growth drivers, talk about on page six, all I can say on the FAST Solutions is really nice growth, great signings.

I attribute that to great focus on it at the field level, our stores, our districts, our regionals are really running with this.

Russ Rubie and his team does a great job and very pleased with that.

To me I guess the piece that jumped out the most is the fact that you know obviously this is ramping up quickly but we have a fair number of machines that have been out there for 12, 18, 24 months.

That is not an inconsequential number and the fact that that entire group of customers that have vending overlapping numbers is still growing faster than 30%, I think is a staggering figure and demonstrates the power of what vending can mean for our business.

And it is really about customer engagement.

Vending is just the way we measure it.

It is about we are engaged with that group of customers and we are growing because we are providing great service and a great value to them.

In that same section of growth drivers, did touch on a bit on 2013.

We set out some expectations for store openings for next year, indicated a range of 50 to 100 which is about 2% to 4%.

And I think our focus really is continuing the growth drivers we have in 2011 and 2012, they are demonstrating great results.

Reinvigorate the fasteners.

We have some things we are working on to really drive our OEM fastener growth.

And in July, we mentioned the elevation of Lee Hein to President and I think we announced that right after our call last quarter so I want to congratulate Lee on that promotion.

But I think the final thing we touched on in that paragraph was talking about fixing our underperforming stores.

And when I think of people and their strengths that they bring to the table one of the strengths that I think of when I think of Lee, he is great at assessing people and talent and he is great at raising the bar.

And if you are driving down the road in your car and the brake is stuck on one of your tires, it is going to slow you down and we have a subset of stores in any given month that just aren't growing, that aren't performing and we need to raise the bar and get that brake off because it damages the rest of the engine.

And I am brutally excited about that looking into 2013.

Profit drivers for the business on page seven.

You know, we continue to be pleased with the progress of our pathway to profit.

We took a step back a little bit in some of the smaller groups.

I think there is really two things that are driving that.

One working on and the other is probably a good problem.

One is the gross margin that Will touched on.

We are down in gross margin as a percent year over year.

That creates drag in all those groups of stores.

The other thing is with the vending we are rolling out in the smaller stores, the expense of that vending does put a little drag on their pretax but I think that is a good problem from the standpoint it really is driving our growth.

But if you look at the stores that do more than $150,000 a month where there is no vending impact, I mean negative vending impact because the dollars of expense isn't big enough, for that group is impressive and we saw nice profit growth on a year-over-year basis.

The other thing I think to think about and I touched on this in last quarter's call as well, if you look at since we started the pathway to profit back in 2007, we have increased the size of Fastenal by about 65%.

We improved our gross margin from 51% to 51.6% and our profits have doubled.

And that is just talking the power of growth, leverage it with improving gross profit and managing our fixed operating expenses and leveraging quite attractively.

If you look -- looking at our expenses in the organization, we have always talked about our biggest operating expense is the people side of the equation.

And if I look at what we have done since 2007, we have added around 3800 people to our organization since the first quarter of 2007.

87% of those adds are enrolls that directly contact -- that interact with customers every day.

6% are involved in our distribution centers, 6% are involved in our manufacturing.

So if I add those three up, 99% of our headcount growth since 2007 is in those three areas and that is how you leverage overhead in an organization.

I am very pleased with the fact that -- we had 21.9 -- I am just going to round up and say 22, it just feels better.

But again, you know those are two highly profitable quarters for us despite the fact that we didn't have great sales growth in the quarter.

We continued to make progress on our exclusive brands.

We are essentially at 10% of sales today.

Vending really was helping move that number.

And then finally on touching on some working capital, Will mentioned continued improvement in our working capital.

I do want to mention that Scott Camp and his team really did a nice job I think year to date on managing the distribution side of the inventory.

We have lost a little traction on the accounts receivable side.

Part of that was a short September.

You take X number of days to collect cash and there is enough of August business that is coming in here the first week of October.

That is more of a calendar issue.

But when I look at cash flow, you know year to date we have taken 90% of our earnings and turned it into operating cash.

We've spent about 27% of earnings on CapEx.

A big piece of that relates to the success we are seeing in vending and we have thrown off 63% of our earnings in free cash full year to date.

And a great number and because of that, we did announce last night an increase to our dividend and are paying out a $0.21 dividend in the fourth quarter.

With that, I will turn it over to what questions might come up.

(Operator Instructions).

Hamzah Mazari, Credit Suisse.

Good morning.

Thank you.

The first question is just on store growth.

You know you talked about 2% to 4% growth next year.

You know, how should investors think about that number?

Is that more of a normalized growth rate for you guys on stores or do you plan on increasing store growth if you get more comfortable on the economy?

Just curious to see how we should think about store growth given where Fastenal is right now.

I'm going to be perfectly honest.

I don't know that we know.

And I will say that in a couple of ways.

You know we still don't know yet from our non-North American business what that means for store openings into the future.

We just don't know.

If I center the answer on North America, what we know about the market is it is big, it is $140 billion, it is $150 billion, it is $160 billion a year depending on whose math you're looking at.

And we have somewhere between 2% and 3% market share.

And you know historically a lot of our eggs were in the store opening basket.

And with that rate of profit, we really took a step away from that and said there is a whole bunch of ways for us to go after this market share and we have this network that is out there that is -- that has unbelievable capabilities and let's balance our total growth drivers across more channels so we put tools in the hand not just of an area where we are more sparse but areas where we are more dense.

I mean when I look at the growth we continue to see in the upper Midwest in a business that we have been in for 40 plus years and we are doing it with a combination of store openings, vending, government the whole gamut as far as growth drivers, we think 2% to 4% is a good number for 2013.

2014 and 2015, we will see when we get there.

A long way of really not answering your question but saying the opportunity is so big that we don't want to paint ourselves into the corner by saying it has to go from this one thing.

It comes from a variety.

But when I think of for example the government business you know and I don't know in our products how big the government is but if you read the headlines, government is 20% of our economy.

So if we have 2500 locations -- so I am using that so I can do the math in my head -- and we add a 20% potential to that, that is like opening 500 stores.

So is that a better route to go down in the short term or to go with store openings?

I think it is a combination of the two but I will take that government business.

That is very helpful.

I appreciated it.

Just one last follow-up question.

On vending, could you maybe talk about how your vending offering is different from some of your larger competitors?

Specifically you know is your machine different?

What are you stocking in there relative to what others are stocking?

Do you own the inventory?

Does the customer own the inventory?

I know there is a bit of difference between your offering and some of your competition.

Maybe if you could touch on that.

Thank you.

This is Will.

I think a lot of it is quite similar.

Our machines are Internet-based appliances which we think is an advantage because they are more dependable.

Some of the other companies offer a machine that has a PC built into it.

Same system that we use to offer four or five years ago and we find ours are far more dependable.

Because it is a PC-based appliance, it is also a lower cost system and so we are able to provide them a somewhat lower cost.

The inventory in some customers, it that is consigned inventory and other customers, the customers choose to own it but the majority is consigned.

Some of our competition does consigned inventory and some of them have the customers own it.

I think one of our biggest advantages compared to the big public companies that we all know of is our local branch network because this is a physical business.

If you think about the person who is supplying your soda machines or pop machines in the office, those people aren't driving from three or four hours away in many cases.

Our local branch adds a service element that is going to be very hard to duplicate for some of our competitors.

I know some of our competitors, their strategy is to ship it in to the factory and then have the factory workers put the product away.

But I would guess if your person providing the vending machines at your office said that they will just ship the product to the dock and you guys can put it away in the morning, probably you would find a new -- or you may find a new supplier.

So we have that local advantage that really gives us some leverage and we have this distribution network to move the product more efficiently.

But machine to machine, product to product, it is not that dissimilar.

(Operator Instructions).

David Manthey, Robert W. Baird.

Hi guys, good morning.

First off, Dan, back in the third quarter of last year you said that you could take your leverage point down to maybe 12% or 13% growth with energy and you said lower if you hit the wall.

And it seems like you have taken the leverage point down to that level or lower.

And I am just wondering about the strength you saw here in September relative to an uncertain economy.

Are you happy with where the set point is right now that you will maintain that unless things change one way or the other into 2013?

That is the first question.

And then I will just sneak the second one in the here too.

In terms of vending placement, the number of vending machines by my math is up over 300% in the past year and revenues to customers with vending machines looks like it is up a little bit less than 100%.

And I am trying to understand that dynamic.

Does that mean you are now getting into smaller customers?

Are you placing more of the FAST 3000 machines which are less yield per customer or what is the implication from that math?

Okay, first off a couple of different questions there.

First on the breakpoint, you know my comment a year ago, 12% to 13%, I am glad to say I was wrong.

I think part of it is maybe -- I'm Midwestern and I'm an accountant so that makes me probably too conservative and not willing to put my neck out and say we can do it to at 10% because I didn't think we could.

So that is I think just good execution especially in the face of the gross profit dynamic going on which made it more challenging.

On the vending machines, I am not sure if I am following your math on the 100% piece.

And so I think I will kind of restate it back the way we have it and I will think out loud a second and then I will give you a third question to follow-up on my answer.

But the way I think about it is the customers that are coming into that group when we introduce vending, that overall business is growing at 30% and that includes the weight if you will of the customers that have anniversaried, the customers that had vending a year ago and two years ago because we are looking at that combined group.

I think if you are talking about vending being up over 100% because you are looking at the new machines and the dollars going through it and you are taking the math of saying okay, 24% of your sales are with customers with vending and that number is X% bigger than it was a year ago, you are comparing apples and oranges.

Because we have customers that we had a year ago that didn't have vending that have vending today so when we talk about the percentage of our sales that is vending, that includes customers who have been buying from us for years who are just now looking at it saying how big is that pool growing and how big was that customer base a year ago?

Which I think is the best way to look at it because it is really how much is it impacting your business not what is the dollar growth going through a machine because that is really not a meaningful number.

I am not sure if I answered your question or I didn't but the other thing I guess I would look at and say is if I look at our dollars per machine and I try to understand that dynamic, is it improving or getting worse?

It is at or a little bit better than it was a year ago.

And so from that standpoint, I don't think there is any dilution going on because of the different models of machines.

But you know there is some impact when we report our machine count, we are reporting just our absolute count.

Here's how many machines we have out there.

And in that mix there is the traditional FAST 5000.

There is the locker systems, there is some hydration machines, I think that is what we call it, and there is some cutting tool machines so there is a variety of machines and they have different potentials as far as throughput.

And the way we measure it is we look at lockers and we say we think they have about a half a potential.

So when we are looking at dollars per machine we look at that as a half.

But I don't know if I just thought out loud and did a brain dump and didn't answer the question and maybe Will has a better answer.

The way I look at it, Dave, is I look at the incremental growth off this group of customers.

This group of customers represented almost 60% if you take 25 -- roughly 25% of your business grew 20 points faster than the overall company.

In other words, that represents the majority of our incremental growth and we weigh that against the expense of the vending program.

But then from the vending program we can also look at it a different way and say we are putting expense of all these machines into our occupancy because we really think it is just off-site storage and our occupancy is not outgrowing our revenue because Dan's group is doing such a great job.

So we are really bolting this into our old P&L working model and so it is very accretive business when you look at it that way.

It is a great growth driver.

But we can talk more and try and clear up -- I am a little confused too with the question.

That's great.

I appreciate the color on that.

Just to follow-up on that first question though, Dan, in terms of how you feel about it as you are looking at the business model for next year, I am just trying to get a read -- I know you don't have a tremendous amount of visibility but there is a lot of crosscurrents here in terms of the data that we are seeing out there in the marketplace, some of the economic data and then relative to what you are saying for your June through September.

I'm just trying to get a relative read on your feeling as you look to 2013.

Are you feeling pretty good or are you still fairly cautious about this industrial environment just as a Company?

We are cautious.

You know, we are investing aggressively.

We are putting vending machines out there.

We are adding sales potential into our organization every day but we are cautious when we are looking at how we manage our expenses.

And one thing that we didn't mention on the call is that we have introduced a lot of new technologies and efficiencies into our business that have helped us lower that break even down to somewhere below 10% I guess if you look at the numbers.

Those are things that will continue to benefit us for years and it is throughout our organization, electronic billing and accounting, the automation in our warehouses, and we have introduced two or three major things to the stores from point-of-sale simplifying the pricing, simplifying the processing of orders with a goal of being the most efficient distributor in the industry.

These are things that have a long tail on them and will continue to benefit.

So where that break even is at any given time will depend on our (inaudible) and if we are very bullish, we will invest heavier and that will slide.

If we are very conservative which we are not right now, we are cautiously conservative, we will pull that down and be able to lower that number.

We have better levers on that than we have ever had because we are not adding the cost of the fixed overhead of the stores.

That was a big thing that you couldn't do much about once you had it.

Thanks, Dave.

Sam Darkatsh, Raymond James.

How are you?

A couple of questions on vending again.

So specifically looking at your vending customers, what is the growth that you are seeing from the SKUs they are buying that don't come from the machines?

I am trying to figure out parse out the actual impacts on the machines themselves on those customers versus what they are doing outside of the machines?

Well, I guess -- I am going to answer it by talking about -- if I look at the subset of the business that goes through the vending machine, that number has been -- you know if we have a $10,000 customer, $2200, $2300 of that, so about 22% of that is actually physically going through the machine.

But the products that are going through the machines, Sam, could be products that -- there is 40 slots in the machine.

10 of those slots could be items that we have been selling to that customer for years and is just now we are selling it using the vending machine as the vehicle and the other 30 slots or 20 slots or 10 slots are now new products.

But the discussion we have with the customer is really one of economics.

We are bringing this machine that we believe will help your business and what we need is a couple thousand dollars of incremental business with you.

And that is usually a worst-case scenario.

So let's use a scenario where the customer is spending $3000 a month of business that now -- 100% of it is going to go through the vending machine.

And I know based on the value of that vending machine brings, that is $3000 spend that we had with that -- that customer had with us is probably going to go down to $1800 or $2000 because when it goes through a vending machine, there is more accountability to the products.

And so our discussion with that customer is we need in total to take your business from $10,000 to $12,000.

Or $3000.

You said $3000 (multiple speakers)

$3000 is going through the machine.

But we are doing $10,000 with that customer.

$2000 incremental.

I need $2000 of incremental and the discussion might be the customers says well you know what, I spend $3000 a month in welding supplies and they turn over their welding supplies to us.

We are not wed to the machine dynamic; we are wed to the growth of the business.

Lee?

Sam, the other thing that happens just from a branch standpoint again back to that local branch is because our people are there daily or every other day, we are capturing sales because we are there.

We are having customers go -- seeing the employee walk in in a blue shirt with our blue machine going that is our supplier -- hey, while you are here, could you get me whatever.

We are seeing growth because of that also back to the local store.

Okay.

Let me ask a second question then.

You have talked in the past about the average size of a customer that uses a vending solution.

What is that average size now?

How many more customers do you have of that size that have not yet signed up with vending solutions and how many customers of that size do you intend to add on an annual basis?

When we started vending and we looked at the opportunity and I think this is the best way to answer it -- you know, we looked at it and said we have 230,000, 240,000 active customers a month and we think about 10% of that number, 25,000 to 30,000 based on our initial definition of the vending, the FAST 5000, could have a vending machine.

And we looked at it and said -- if we could have two machines per customer in that environment, here is an opportunity here for us to put out 50,000 machines.

That was what we thought about it three years ago.

And so if I think of the -- I don't have the exact number in front of me but we have what -- 17,000 machines out there now --?

17 installed.

And the last data I looked at I think the relationship is about 2 or 2.2 machines per customer.

So there is 8000 customers right now that have vending -- rough numbers and Lee might have a better number.

And so there is a big universe of customers out there that we have today that we put vending into even based on our definition of three years ago what the FAST 5000 is.

We have added a whole fleet of machines now and we have broadened the audience of customers that could have vending.

We have decreased the size that we need to run through the machine and decreased the size of the customer.

So I don't think there is a market limitation for us.

Unless you want to start talking about 2020.

Well, anecdotally, Sam, when you stalk talk to store managers who have not bought into this, they will tell you that they see three or four customers in their market that may be a potential.

And then you visit stores that have done very well, stores that have 20 or 30 machines and we have several of those now and you ask them what their market potential is with the lowest numbers I hear are 50 and most of the people say -- oh, I get well over 100 in my store.

And so once the store managers start to see this, the numbers become so much larger, I am almost shaking my head going wow.

But these are the guys in the field, these are the guys that understand it.

And so it is really about opening the eyes and numbers will continue to grow as Dan said as we get different machines for smaller customers and larger customers.

It is simply a better way to deliver a product.

Ryan Merkel, William Blair.

Thanks, first I want to start with September which was a very good month and you mentioned you saw an uptick.

Can you just speak to how the month played out and if there were any surprises from your viewpoint by end market or geography?

There really weren't.

One thing I noticed about September, Ryan, is the consistency throughout the United States.

If you looked at the growth region by region, it was probably the narrowest group that --band that you have seen in a long time.

Nobody had a real bad month and there is really no one that had a great month which consistency is good for us.

We did see a nice uptick though in our international business.

Part of that was driven by currency but overall even the unit growth was up internationally.

So it was consistent.

It was for the most part consistent through the month.

We had a little bit of a stronger finish but we do our daily analysis and we bring the sales in and we ended up with about 200 basis points ahead of where we had estimated even before halfway through the month.

Some early days into the month, we were estimating in that high 12%s and that is where -- we ended up just a little bit above, 12.9%.

So very consistent pattern, consistent across the United States and steady as the month went.

So that was all a positive.

That sounds actually very positive.

Okay and then second question I want to ask about vending but I will ask it a different way.

If I just look at the number of vending installations and of course signings as well, it seems to me that the impact from vending should start to accelerate starting as early as the fourth quarter.

Is that the right way to think about it?

Is that how you are thinking about it?

I am not sure why it would -- well.

In terms of impact.

The impact is going to continue to grow because the number of machines is growing so fast and so it adds in layers of potential.

I think the other thing and we don't know how to measure this -- is there is a lot of built-up -- there is a lot of energy going into this project today but it is really delayed because it takes us about 90 days to install a machine after we sign it.

And it really takes based on Dan's analysis, another 60 to 90 days to get everything flowing because what happens in most cases is the customers we sign up have a lot of inventory whether we sold it to them or the other guys did, they have a stock that we have to burn through.

And many times we will actually put that in our machines and burn the inventory through whether it is ours or theirs.

So the reality is if I sign a machine today, it is probably March before I see much gain.

So we have a lot of energy in selling that has a delayed positive effect which is actually a great thing because it will come through.

The other part -- you have that.

The other is with all that energy, we are probably not working as hard on some other things we should because we only have so many hours in the day.

So it is where you put your time.

As Dan mentioned, fasteners, you know they are probably suffering because of some of this.

Lee has a comment.

What I would add also, Ryan, is it is really you have got to focus in on the participation.

What is going to accelerate vending or the vending sales is more stores participating.

Every time you look at Fastenal whether it is government, any of our industry specialists, you always have to hold that against how many stores are participating in this growth driver today.

And that is really where we come into drive that but once the stores latch onto vending, we get the majority of stores participating, that is what will accelerate that.

Thank you.

This ends the Q&A portion of today's conference.

I would like to turn the call over to management for any closing remarks.

Once again as we mentioned at the start of the call, we would like to thank everybody for participating in this quarter's call and we look forward to discussions in the future.

Have a good day, everybody.

Thanks.

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

This concludes the program.

You may now disconnect.

Have a wonderful day.