快扣 (FAST) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fastenal Company first-quarter 2014 earnings results.

(Operator Instructions)

Please note, today's conference is being recorded.

I would now like to hand the conference over to [Jan de Gale].

Ma'am, please go ahead.

Thank you.

Welcome to the Fastenal Company 2014 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 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 question 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 June 1, 2014, 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.

Thank you, Jan.

I would also like to let you know that Lee Hein, our President, is also with us this morning.

I would like to start off by thanking everybody for joining us on the call today, and I'm happy to report that we had a good first quarter of 2014.

Our sales growth of 8.7% for the quarter was moving in the right direction sequentially.

We had a very strong March at 11.6%, so we're very encouraged by that and believe we're moving in the right direction with adding more selling energy in the stores.

Very sequential improvement -- excuse me -- very good sequential improvement overall in the business, but what we're really excited or especially excited about is the improvement in our older stores.

If you look at the March number of almost 10%, that's very strong.

And historically, this has been a very positive indicator for both future growth and profitability, so that's one number that gave us great encouragement.

On the earnings side, the story really is year-over-year margin.

It's very difficult, if not impossible, to grow our earnings relative to sales, when our sales are in the single digit, and our margin was down almost 100 basis points.

With that being said, our margin is moving in the right direction and we're very focused on improving that.

So directionally, we feel good about the margin.

It's just at a lower point than it was last year, and it made the earnings growth very difficult.

Staying on the earnings, from an expense control, everyone did a very good job.

I'm really proud of the Fastenal team.

The extreme weather that we had caused expenses to go up in more areas than you can imagine.

Simple things like snow plowing, you know, the fuel, all of those things, heating expenses, but overall, it's very challenging with the hard weather.

But the team held tough, and we did a nice job in expense control in difficult times, and that's just, again, very proud of the team.

Switching to the vending area, although our signings were down, the most important number and the one we're very focused on, growth of the vending customers and growth of the number of customers using it and growth with that group of customers both moved up, and so we're very excited about the program.

So overall, I feel good about the current state of our -- and our future prospects for vending.

I have spent a lot of time in this past quarter visiting customers, and in most cases, they are larger customers that have installed vending systems, and in every case, the customers have been very excited about the systems.

They have talked about the savings, and in most cases, they are actually in the process of adding more machines to the customers I saw, so very positive.

We're going to continue to move forward with the vending program and feel that it holds a great future for us.

Moving forward, talking about pathway to profit, here at Fastenal, we have an old saying, and the saying is that sometimes you have to take a step back to get two steps ahead.

We've been saying that for about 30 years in our business, and I think that really frames up our pathway to profit.

We did take a step back in the first quarter because we added a lot of selling energy in the store and we moved -- we went backwards slightly.

But, we are very focused on the 23% pre-tax growth and the overall concept of pathway to profit.

Larger stores, average stores becoming larger, and the profitability improving per store.

So, we haven't lost any focus on that, although we took a step back with the energy we put in, we're still very excited about the future prospects of the profitability of the business by doing -- by having larger stores.

Looking at the -- one of our very important initiatives, the headcount, we're on track.

We're up about just over 15%.

We're going to stay on that track, continue to add labor at 15%, but understand it doesn't translate into 15% more labor dollars.

We're adding very heavily on the part-time side, and the goal there is to bring more part-time labor to do the backroom tasks, answering the phone, loading the trucks, stocking the shelves, making the deliveries, which will free up time for our managers and our sales people to be out aggressively calling on our customers and growing our business.

The other thing that it does by focusing on the part-time help, it allows us to bring in a lot of strong people for the future.

So, not only does it allow us to manage our expenses very well, it allows us to build for the future.

So, two very positive things, and we're very confident we're making the right moves in that area.

So overall -- my comments are short today, but overall, I feel very good about the quarter.

Not so much about the results, but more about the direction that we are going.

We're moving things in the right direction.

We feel very good about that.

And, I believe one of the reasons that we're doing -- the direction is going as well as it is, is that Lee and his teams, back in the fourth quarter, spent a lot of time talking about our goals and really putting time in to make sure that our goals are realistic -- our sales goals for our stores are realistic for 2014.

Then, they spent a lot of time messaging to the stores, communicating with the stores, talking about goal, and having a very simple message: hit your goal.

Some stores needed to grow 30% to hit their goal because of the situation they are in, and some stores may not grow at all to hit their goal because it's a difficult comp, something like that.

And, it's working.

If you look at January, we were at 98.7% of goal; February, we're at 98.7% of goal.

We think those goals were affected by weather.

But, we came back strong in March and we hit 102.4% of goal, which miraculously got us to 100% for the quarter.

But, I think there's more to it than that, I think the people are really buying in.

They knew they were a little bit behind.

They picked it up hard in March, and they came through for the team because they understood what they needed to do and it added up.

Now, I don't know if we'll ever do that again, the exact 100%, but we're still focused on that and we're going continue to pound that drum all year because it really resonates well with the field.

They understand what they need to do.

If we are able to achieve our goal -- and I'm not giving guidance, I'm just telling you the way we're thinking.

If we are able to achieve our goal in the second quarter, we would -- our goal, or our sales would come in just over 13%.

We believe that's achievable.

It's too early in the quarter to say it is, but we feel good about it and we're working very hard to achieve that goal.

And, I think the people in the field are motivated by that simple message of going out and doing it every day.

With that, I'm going to turn it over to Dan, and then we'll take some questions.

Thank you very much.

Thanks, Will.

And, good morning, everybody.

At Fastenal, we've never been known for brevity in our earnings releases.

We try to explain the business as thoroughly as we can for the outside world.

Plus, we find it useful for our folks internally.

They get a chance to understand better and learn more about their business and where it's going.

This quarter, I think we could have had a release that was about a half page long.

I think the number that matters is that first line on that first page of 8.7% top-line growth.

And, when you look on, as Will touched on, the pages where we dissect the stores of varying ages, the fact that our oldest group of stores is close to 10% growth is a tremendous feat.

And what that really does for us, it allows us, over time, to continue to leverage the business through the pathway to profit because we're driving up the average store size, over time, and our largest, most profitable stores are continuing to grow.

Sequentially, very strong February to March.

January and February were both heavily impacted by the weather, as Will touched on, but a very, very solid step up to get us back to where the business inherently is, as opposed to where it was getting pounded down to because of the weather.

One item that I note that's positive, and there's a lot of questions as far as how reliable the ISM has been as a predictor of our business over the last several years.

Historically, it's been a very good predictor; the last several years, not quite so well.

But we are seeing, as we go into 2014, a continuing improvement in that number, which I believe, ultimately, is only good for our business.

End marketwise, last year, our manufacturing customer base, which represents about half of our business, grew just over 6%, 6.3% to be exact.

The first quarter, as we touched on in the release, it grew at 9%.

In March, it grew at 11.5%.

Construction, which has been weak for -- really, it's been a weak piece of our business for a number of years, and we're not the only one in that boat.

Post-2009, a lot of construction activity that had occurred for the prior decade really dried up and it hasn't come back.

We grew at about 2.5% in 2013.

We grew at 2.9% the first quarter.

In March, and I'm sure there's some things going on with weather in these numbers, but in March, we grew 7.5%, so again, very solid number.

Our heavy equipment, which we've touched on in the past, was very, very challenging for us as we went through 2013.

It has stabilized, and we're seeing some nominal improvement in that business.

Vending, a little noise in the release this quarter because we're trying to really better define how we measure our vending units and the equivalencies, really for the analyst community and some of the work they do.

Page 2 of the vending is, I think, the page that matters.

40 -- close to 40% of our business today is with customers where vending is part of our offering.

In that arena, it's close -- it's about 30% of the business, so about 12% of our business, right now, is actually going through a vending machine.

But, it's about the relationship.

And, that 40% of our business is growing at close to 20% right now.

Our goal, over time, is how do we take the 40% to 45%, how do we take the 45% to 50%, how do we continue to raise that?

Because, it's a very tangible measurement of engagement with our customer.

It's not about the number of machines.

It's not about all this other stuff.

It's about engagement with our customers and driving that growth and the stickiness of that business.

Will touched on some aspects of the gross margin.

As we said on our January call, we expect it to be back into our range.

The improvements really came from the fact of some of the supplier incentive programs reset.

And, we did a nice job of freight in the quarter.

Not just the utilization piece that comes with greater activity, but we did a better job on every transaction, number of will calls we're doing at our supplier locations, the mode that our stores are using for moving their product.

Because they pick the mode -- is it small parcel, is it going on our truck, is it going with a third party?

We did a nice job of improving that and those things are shining through in the margin.

Expense-wise, we break out a few pieces.

Payroll, labor expenses increased, primarily related to headcount, as a lot of folks within the Organization -- when you're in an organization that values incentive compensation, you get a piece of prosperity.

You also feel a piece of when the economy is more challenging, and a lot of the district and regional leadership within Fastenal, as well as the national leadership, are feeling that pain as we went through 2013 and the start of 2014.

But, we're investing in the business because we believe it's the right thing to do.

Final item on the cash flow, first quarter is traditionally a solid cash-flow quarter for us.

We benefit -- it's the one time of the year where we don't have Uncle Sam putting his hand out and taking a big toll on us, and so we are able to have a better cash flow in the first quarter.

With the added growth in the business, especially leaning towards the latter third of the quarter, AR grew a little bit faster than we prefer to see.

A couple things that are challenging in the numbers, one is the earlier piece I talked about, the amount of growth that's coming from those customers where we have great engagement, by and large, that's larger customer business.

Larger customers have more ability to negotiate terms than our day-to-day business that comes into the store.

A good chunk of the day to day is actually business that's almost cash.

It's either coming in a credit card payment or a fairly quick payment, so there's not a lot of days there.

So, if your growth is disproportionate to that population of your business, you're going to have a little challenging aspect on AR.

With that said, we can always do better, and that's what we're working to do, both on the AR side and continuing to challenge the inventory.

Over time, our inventory naturally leverages as our average store size grows.

We just want to get a better piece of that.

With that, I will turn it over -- Lee, do you have any comments?

Okay.

I will turn it over to Q&A.

(Operator Instructions)

Our first question comes from the line of Adam Uhlman from Cleveland Research.

Hi, guys.

Good morning.

Good morning, Adam.

I guess, first of all, to follow up on the gross margin comments that you were making, Dan -- it seems like the transportation utilization problems from weather were probably a big drag in the quarter.

It doesn't seem to have come through on the gross margin.

Should we expect that to pick up more in the second quarter?

Well, definitely there was drag in the first two months.

But one thing you have to keep in perspective, part of our issue in the first two months was -- in the case of January, we had our largest distribution center shut down for a number of days.

State of Indiana, the interstate system was shut down for I believe 1.5 days, 2 days, and so our trucks weren't even running.

Because they weren't running, product couldn't get through and sales couldn't occur.

But when they are not running, we're also not incurring expenses, operating expenses.

Obviously, we still had the payroll to the people, but not the direct operating.

So, I wouldn't look at that in the vein you are.

I think we saw the leverage that we would expect to see because we're moving -- basically every time the semi goes out -- the simplest way I think about it, it has more boxes on it.

It has more revenue going through it, and we're better leveraging that fixed cost.

Okay, got you.

And then, on the SG&A side, the transfer costs were a big driver of the 9% overall cost growth.

Should we be thinking of that growth rate as pulling back?

You're talking about the transportation, you said?

Yes.

Yes.

I believe that will improve.

I know -- if you think about, when it's 10-below zero, and we had a lot of that in the Northern states of the country this year, there's a lot -- we have roughly 5,500, 6,000 pickups scattered across 2,700 locations.

Lot of times where a pickup stays running, a lot of times where -- things -- when it's cold, all of our vehicles you see our miles per gallons drop off because more of the energy is going towards heating and getting cold oil to move than it is about locomotion.

And so we'll see some improvements just because of the severity of the weather not being in the numbers, and we saw that in March.

Great, and then what was your guess at the impact to --

That was three, Adam --

Adam, I'm going to get you back in queue.

All right.

Thank you.

Our next question comes from the line of Ryan Merkel from William Blair.

Hi, guys, nice quarter.

Thanks, Ryan.

Thanks, Ryan.

So, I'm going to be picky though and ask about earnings leverage because now that we've caught up on sales hires and you're in the process of optimizing vending, can we expect incremental margins to rise back in that mid-20%s range if you continue the top-line growth at 13% to 15%?

Or, do we need stronger, faster growth and a little inflation to get there?

If we're getting the sales growth -- right now, the challenge in the first quarter, and we all knew this coming in the first quarter, is the challenge now that we've been doing a lot of investing, we also have a pretty ugly gross margin comp to grow over in first quarter.

We were down roughly 115 basis points.

As we go through 2014, that picture changes.

It's still tough in the second quarter and getting great incremental margin in the second quarter is challenging.

But, with the added sales number, I believe we can see attractive incremental margin as we go into the second quarter.

Which, to me, means I believe we get into the -- get back to the 20%s.

And then, it's really in the second half of the year, it's more akin to what we would expect, where that number is mid- to upper-20%s, with -- and depending on the strength of the increase, the year-over-year basis gain in the gross margin, we would like that ultimately to be in the 28% to 33% neighborhood.

But, definitely believe, as we go through the year, that will move up nicely.

And, I believe it will improve in the second quarter.

Perfect, okay.

And the second question is, I just want your read on if the industrial economy is truly picking up.

You mentioned easier compares were part of the sales acceleration.

And then, of course, we have the Easter shift and we have weather.

But, if you put those factors aside, is the answer, you're getting a little help from light and medium manufacturing, but heavy is still tough, especially given the fastener number this quarter, March was better, but in the quarter, the fastener number was still weak, is that fair?

Yes.

I mean, if you think of our book of business and we think of ourself as a growth machine.

We add selling energy into our stores to go out and sell additional items to existing customers and find new customers every day.

But we have a tremendous book of business that's established right now, close to 30% of our business is OEM fasteners.

A rising tide is incredibly powerful in what it can do for us.

Thank you.

Our next question comes from the line of David Manthey from Robert W Baird.

Hello, guys.

Good morning.

Hi, Dave.

First of all, Will, you mentioned in your monologue about your headcount goals for the year of adding 15% people, not necessarily dollars, of course.

But I'm wondering, as T-hub continues to ramp and you continue to get efficiencies in productivity on the vending side, are you planning on pulling back on the FTEs at the store level, or are you just continuing to reallocate those folks?

Yes, David, this is Lee.

No, we -- I just put a video out to our folks talking about the fact that we're going to continue to add.

And, we're going to be wise about it and look at the stores and the different markets.

But, it does something to the sales force when they have confidence that we're not going to add, then pull back, add, then pull back.

They like the fact that we're going to continue to pour into the store.

And my whole deal with this, when I talk to our people, it's why we're adding people is to maintain a high level of service and to have someone out seeking customers every day.

That does something to our people, and it puts us in a position to take market share, so we're going to continue.

What we're really saying, Dave, is that, if we can afford it, continue to increase our incremental margin, as Dan said, up into the upper-20%s, maybe low-30%s, we'll take the rest of the earnings and put it into sales drivers.

And if our stores become more efficient, we would expect higher growth rates than we historically have gotten because there's more energy our selling and less energy packaging orders.

Right, okay.

Thank you for that.

And, sort of as a follow on here, as you're thinking about 2014 and even beyond that, I'm just interested -- because on Wall Street, we tend to get a little myopic here in terms of quarterly and monthly data and things --

Really?

I was hoping you could give us a little bit of a longer-term view.

What do you think in terms of 3 to 5 years, 5 to 7 years?

How do you view the future of Fastenal in terms of just growth and profitability?

I understand pathway to profit and so forth, but I mean, are there still some good days ahead of you here?

Dave, we think the days ahead of us are as good as, or better than, the ones behind us.

When you look at the overall market and you look at our share of the market being -- who knows exactly what it is, but it's no more than 3%, even 4% if you really go crazy on it and say it's only $80 billion or so.

So, we're a very small player in a large market.

We know that many of our stores can be three or four, five times bigger than they are based on their current size, so there's a tremendous amount of opportunity.

We have some of the -- we have the best service in the industry, we believe.

We have some of the best systems with our vending, with our distribution, with our FASTCO Trading Company.

We have the ability to buy well, move it efficiently, and deliver it on time, almost every time.

So, we're very focused on the future.

Can we grow the business at 20% every year, year over year?

I mean, the future will tell us that time -- time will tell us, but we're going to invest to that level as long as we can afford to.

We know that the profitability will go up.

Even if the gross margin goes down some, if you look at our bigger stores, their average gross margin is lower, but their operating margins are much higher.

So we're not super focused on the gross margin -- we're focused on it, don't get me wrong, but that's not the real measure.

The measure is way further down on the sheet -- the operating margins and the return on capital.

So, we believe the Company will continue to grow well above inflation or GDP.

We believe the business will continue to grow above most of our competitors, if not all of the large competitors hopefully, and we believe that the profitability will continue to improve year over year.

And, as I said earlier, sometimes you take a step back to get two steps ahead, and sometimes that is caused because we make some bad decisions, like pulling back on labor too much as we did in the past.

But overall, the future, we believe, is very, very good.

A couple things that are going in the direction of us and our large competitors -- more and more of the industry is getting bought up by bigger companies, the Danahers and all those companies, the GEs of the world.

And, what they want to do is they want to buy from fewer suppliers.

At the same time, there are fewer big brands.

The Stanleys are buying the DeWalts, and so on, and they want to sell to big distributors because it's easier and more profitable.

So, the larger distributors, not just Fastenal, we all have an advantage in that situation, and we think that we can leverage that advantage.

Thank you.

Our next question --

Does that help?

Our next question comes from the line of Hamzah Mazari from Credit Suisse.

Good morning.

Thank you.

Maybe if you could --

Hello, Hamzah.

Good morning.

Maybe if you could comment on how we should think about pricing in 2014?

I realize inflation is low; demand may be picking up.

A competitor of yours put through a moderate mid-year price increase.

I realize you don't overlap 100% with them, but maybe give us a sense of how we should think about pricing?

I think pricing, generally speaking, is going to be pretty quiet this year.

There's always some movements we'll see on the steel side of the business, on the stainless steel side of the business.

But I think, generally speaking, it'll be relatively quiet.

So much -- if you think of some of the things that are growing our business today, so much of it is about we have a better offering, a better means of delivery.

We talk constantly about the vending portion of it, but it's really on the MRO side, it's so much about, I need this, and I'm buying it in nominal amounts.

And then, maybe a longer-term question, I know it's not in your DNA to do M&A, but as you look out longer term, does that ever change for you guys?

And, how do you think about sort of diversifying to becoming more of an MRO business, relative to being tied to the production assembly line?

As far as diversifying -- the second half of your question, we're comfortable with being tied to the assembly line.

We like the MRO business, don't get me wrong, but there's a tremendous amount of opportunity, so we're happy playing in both of those markets.

As far as M&A, going forward, it's not that we don't want to do it.

In the past, we have never had to do it.

So, it's really about what the greatest opportunity is.

If the right opportunity came along, or if we found a company that would allow us to go into a new market, we're open to that.

So, it's really about understanding where we want to go and understanding what is the fastest and the most accretive way to get there.

Thank you.

Our next question comes from the line of Sam Darkatsh from Raymond James.

Good morning, Will, Dan, Lee.

How are you?

Good morning, Sam.

A couple of quick questions here -- actually, piggybacking on Hamzah's last question there, you called out specific deflation in fasteners themselves.

Is that competitive pressures?

Is that commodity based?

How long lasting do you think that might be?

And, would it get to the point where you need to really start focusing on inventory turns and protecting gross margin?

Or, we're not at that levels yet?

Sorry, I was talking more -- I was talking generically more about the steel has, over time -- steel and stainless steel has, over time, some deflation and inflationary periods.

Right now, everything is pretty quiet.

Okay.

What percentage of your total machines installed now are FAST 5000 machines?

I know with the changing in the definitions, it's a little bit more challenging for us to get at that number.

I believe it's around 47%.

It's just under 50%, I know that, Sam.

But, I don't have the exact number right in front of me, I'm sorry.

Okay.

If I could sneak one quick one in there, when will store person sales productivity begin to stabilize in your view?

Well, as we go -- right now, we're in that mode of adding around 15%, 16% FTE in an environment where our top line is growing in the 8% to 9%.

As Will touched on, our goal is to get us into -- start moving us into the teens, low-teens, potentially --

No guidance --

-- as we get into the year.

And so, we're investing at a 15% clip, with belief that we will move above that number as we go into later in the year, so third and fourth quarter.

But again, I have to make clear, if you look at our labor cost, it didn't go up even close to 15%.

We're adding in part-time hourly labor, and it's not -- to correct an earlier question, it's not 15% heads, it's 15% more hours --

FTE, yes.

FTE, and so we're adding at a lower cost.

We're managing it very well, and so I'm actually very pleased with what the team's been able to do to get the labor in there without hurting expenses.

Thank you.

Our next question comes from the line of Holden Lewis from BB&T.

Great, thank you very much.

Had a question for you, it looks like the fastener growth was relatively consistent with Q4, which was -- they are all a little bit better than sort of the previous quarters.

But I mean, of the acceleration, it looks like it's coming more from the non-fastener mix.

I guess what I'm curious about is, given the people that you're putting in place, which is aimed at sort of freeing up sales to go out and sell, I guess I would have thought that fastener growth would have been one indication that the initiatives that you have in place are beginning to gain traction and bite.

And, I guess I'm just wondering the degree to which the fastener performance is a bit disappointing, and what does that say about the state of the initiatives, if you will?

One thing you have to keep in perspective, Holden, is -- my way of thinking of our fasteners, about two-thirds of our fasteners are more production centered.

And, additional selling activity, in a three or a six-month period, doesn't necessarily change that gob of business because you just can't influence enough.

It's too long cycle.

You can't influence it enough in the short term.

The MRO piece of our business, on the other hand, is like the non-fasteners in that it's MRO and selling activity can improve that.

That business did improve in the first quarter.

I don't have the stats in front of me for that subset of the business.

But, the MRO side of our fastener business did improve, which, to me, lines up perfectly with the added selling energy in the store.

Okay, got you.

Then, on the vending machines, as you noted, the growth of the customers that use them has been going up.

I was curious, are you having more success in getting sort of the $2,000 per month, or whatever it was, from customers that are putting that in place?

I know, in the past, you've sort of talked about maybe you weren't meeting that aspiration.

Is part of the growth that you're seeing or the improvement in that metric just you doing a better job farming the incremental revenue that you've been wanting to get?

I think it's a little bit of each, but keep in mind that the $2,000 number that we have out there is a commitment on total business with that customer.

We're doing quite nicely in that regard.

The second piece of it -- we also look at it every day from the standpoint of -- this customer, their business went from $10,000 to $12,500, so we went up $2,500.

They have completely met their commitment to us of increasing their business.

But, we might look at the vending machine and we say, but the vending machine is only doing $1,000 or $1,100 or $1,300 or $800, and we challenge ourselves, internally, to understand -- that machine, we believe, can do more revenue.

And, when we have a machine out there doing $800, are we providing the best service to our customer?

Because, if there's a bunch of coils in that machine that aren't turning, the machine brings tremendous usage, both point-of-use access availability, so it's closer to where the employee is working, and it lowers consumption.

But, if we have a bunch of coils in the machine that aren't turning because we don't have the right product in there, we're not providing the greatest value to our customer, and I would love to be in a position where we add $400 to that machine because we're providing more value.

By the way, our sales just went to $2,900 of growth rather than $2,500.

But, as far as getting the growth, we're getting the growth from the customer.

And, your question, yes, we are getting more, and that's why our growth just keeps moving up over the last three quarters through those customers.

Thank you.

Our next question comes from the line of Robert Barry from Susquehanna.

Hello, guys.

Thank you.

Good morning.

Good morning, Robert.

I wanted to just ask about the 13% growth number, the low-teens growth rate that it sounds like you're targeting for 2Q or later into the year, what are the assumptions behind help from the end markets in that?

Or, is that really just about kind of firm-specific initiatives?

It's company-specific.

What I'm saying is that we work -- Lee's team worked very hard developing the goals, trying to understand the sequential patterns, and if we stick with those, we're going to end up just over 13%.

It uses a lot of looking at our historical sequential patterns, and actually, being just above those, as we go forward, or exceeding those -- not a big above -- not well above, excuse me.

That's really what it's looking at.

That aside, our assumption in the economy is that it will get ever slightly better as we go through the year.

We think it's going to improve a little bit.

The anecdotal stuff, and as I've said, I've been out to see a lot of customers over the last three months, and generally speaking, there's some positive feeling with the customers about things going on later in the year.

So, that's making us feel a little better about the business, and how we're going to end, or go throughout the year -- stuttering, I apologize (laughter).

It's okay.

And then, just maybe tying that into the outlook for the incrementals, mentioning it going back into the mid- to upper-20%s or even the low-30%s, how much of that is in your control versus how much is about getting help from the end markets?

If you are doing the low-teens, which sounds like it's mostly in your control, can we still, under that assumption, expect to see that improvement in the incrementals as the year progresses, based on things that you're doing at Fastenal?

Yes.

And, I think there's things in life that are, we and you -- the market needs to help, or we need to do this.

It's there.

Again, the really challenging part, as we look at 2014 in general, is the fact that 2013 is kind of like two distinctly different years, from the standpoint of what our fastener business was doing and what our margin was doing.

So, as those comp changes, as we go through the year, it just makes it easier.

I'm feeling -- I like what I see when I look at 2014 for Fastenal's opportunities.

Thank you.

Our next question comes from the line of Brent Rakers from Wunderlich.

Good morning.

Just two pretty --

Good morning, Brent.

Good morning.

Two quick questions.

The first one, I think your insurance costs grew about 20% to 25% last year.

First quarter, they were flat.

Why don't you give us a sense for how that plays out over the course of the year?

Then, second question, what's your best estimate of the drag in the March month from -- or the benefit, rather, in the March month from Easter?

Thanks.

Lee, you want to touch on the March?

Yes, on the March, when you look at it, some of it, Brent, is -- we have to be honest, was pent up, I think, energy from January and February.

Some of it's just the timing, and some of it was just we had good weather.

But, you've got to look at it, and when we see our stores, and our large stores and what happened, we also got an indication some time in February with five good days, that we knew something was starting to move in the business in a positive way.

And, we really saw it come to fruition in March, and that's really what played out.

It was a good month, stripping out weather, stripping out pent up January and February, it was a good month for our people, and like Will said, great direction for the rest of the year.

I think one other part that gave us some confidence in February is that when we looked at our February results, the areas of the Company that hadn't been hit -- south of the Mason-Dixon, basically, because the weather on the north hit us all the way from Seattle to Boston.

It covered the country.

But, the south was pretty clean.

And with only one exception, every region in the southern part of the United States hit their goal, and across the south, Fastenal exceeded their goal.

So, we had confidence that our selling energy was working, and then March just brought -- proved that out when the weather cleared up, the regions in the north hit goal, so they came back.

So, it was very clear on a map to see what was going on, and that let us look -- as far as Easter itself, we gain a couple million dollars by Good Friday being out of there.

It always changes, depending on where it falls in the month.

It's a really difficult thing to measure exactly.

If Easter falls early, it's easy, so it's trying to figure that out.

Your other question about insurance, if you look at our insurance numbers, and I assume you're pulling numbers out of the K, there's really two drivers of that, two components.

One is health insurance, and that's the majority of our dollars.

I don't have it in front of me, but I would suspect it's 75% to 80% of our dollars, and the rest is general insurance.

If you look at 2013, the commentary on the delta from 2012 to 2013 is more of a statement about 2012 than it is about 2013, as far as what it means going into 2014.

Obviously, we saw some -- our nation is seeing some, let's just say, turmoil, in the health insurance side of the arena.

And, we have seen sizable growth in there.

Being a large employer, there's a lot of tax components that were added to our expense pool, added to our employees' costs over the last several years, and 2013 got a full dose of that.

I think the delta from 2013 to 2014 will be a little bit more muted, partly because it's maybe a little bit quieter, not a lot quieter, but a little bit, and partly because of the manner in which we're adding headcount right now, primarily through the part-time arena.

As it relates to the other side of the insurance, the general, the only thing -- the biggest component for us on that over time is the workers' comp and the fact that we have 6,000 vehicles on the road.

They are backing in to a lot of loading docks by a bunch of 20- to 30-year olds.

So, we get a lot of minor fender benders, and if we do a good job managing that over time, we can manage that expense quite well.

The workers' comp, actually, some of our distribution automation over the last several years is actually improving that trend.

Thank you.

We have time for one more question.

Our final question comes from the line of Kwame Webb from Morningstar.

Good morning, gentlemen.

Thanks so much for taking my call today.

Good morning.

I just wanted to retouch on the topic of vending.

I know you guys kind of took the pedal off the metal there just because you felt like you weren't getting the assortment right.

Where are you guys on sort of the time line for figuring that out, making sure that you're getting the economics you want, as well as making sure the customer is getting the benefit they need?

Do you feel like you've really cracked the code by now?

I don't know if I would say we have cracked the code, but we have made tremendous improvement.

We understand the mix.

Our throughput through the machines continues to grow, and we believe we're going to see improved signings.

But, back to the 2012 numbers, it will roughly take us a long time, if ever, that we get back to those types of signings.

When we talk about it internally, we say if we had 15,000 quality signings a year, that would give us tremendous growth through our business and we would take share at a rate that no one else is doing.

So right now, without just having a specific goal, we're pretty comfortable where we were in the first quarter with our signings, because with a little improvement, we'll get to the 15,000 quality signings, and then we'll grow from there.

And, we'll be able to manage it.

It will not overwhelm the stores.

They will be able to manage that and still go out and grow their other business, their construction, their MRO and all the other things they are doing.

And, the message that Lee is doing a great job putting out to the team is, it's about profitable growth.

But to maintain that profitable growth, you probably need to add some new customers, you need to add some vending, and you need to do some other -- use some other initiatives that we have.

If the managers understand that and focus on that, I think we'll continue to hit goal and grow our business profitably.

Vending will be a pretty big component of that.

And, we just continue to get better -- our packaging, our costs.

I was looking at some product lines that are predominantly vending product lines in the reports, quarterly reports, and there's just tremendous growth in so many of those.

A lot of them are personal safety things, like gloves, dust masks, things like that, that fit so well into that system.

Thank you.

We have run out of time for questions.

I would like to turn the conference back to Fastenal for any concluding comments.

Similar to prior quarters, again, we thank the folks attending this call, our employees, our shareholders and the analyst community for your continued interest in Fastenal.

Our annual meeting is coming up here in 1.5 weeks.

We invite those of you that are able to attend to attend.

And, in case you might have missed it, last night, we announced our second-quarter dividend of $0.25.

That will be payable during the quarter.

With that, everybody have a good day and a good weekend.

Thank you.

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

This does conclude the program, and you may now log off and disconnect.

Everyone, have a good day.