快扣 (FAST) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fastenal Company Q3 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Ms. Ellen Trester.

Ma'am, please begin.

Welcome to the Fastenal Company 2014 third-quarter earnings conference call.

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

Also present for today's call is 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, 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 those forward-looking statements are contained in the Company's periodic filings with the Securities and Exchange Commission, and we encourage you to review those carefully.

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

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

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

Go ahead, Mr. Oberton.

Thank you, Ellen.

Thank you, everybody, for joining us on the call this morning.

Talk about the third quarter of 2014, overall, we feel that we had a good quarter.

Starting out with sales, July was a little bit weak.

We had a very good August and actually September was a good number.

We had a very slow start after the holiday, but once we got through the first four days, we had a very good run rate, very much on pattern of what we would expect off the historical numbers.

On the margin, I also believe we did a good job on the margin.

There are a lot of gives and takes in the margin right now.

We have customer mix, larger customers are growing faster.

We have some product mix issues.

But the fastener growth continues to rebound and that's very positive.

We also saw nice growth in our exclusive brands, which run at a much higher margin.

Going forward, we have a lot of opportunity to improve the margin on our vending product through "T" hub and other things we're doing to source that product, lower our cost to package and lower our cost to serve the customers.

I think the most important thing to think about on margin, though, is a piece that Dan put in, talking about the margin in larger stores and the inherent profitability of those larger stores.

As he put in there, the stores with the revenue north of $100,000 the two groups, one from $100,000 to $150,000 and then $150,000 and above, have about a 90 basis-point lower margin than the Company average.

Bigger stores, bigger customers, that's really the story.

But the most important part there is their operating profit is 350 basis points above the Company.

So we are not as concerned about the absolute gross margin.

We're concerned very much about the pretax and return on investment.

We continue to make that point and that's why I'm pounding it here today.

From an expense standpoint, we did a good job.

We didn't do a great job on that, because our -- well, put it this way, we did a nice job, considering the labor we added in the store.

We would have expected a little more leverage, but we continued to add labor in the stores.

Going forward, we're in a very good position with store labor.

We will continue to add labor in the stores at a rate of about 10% more hours, which translates into about 5% or 6% higher labor cost, plus commissions and things like that.

So we're in a very good position labor-wise and I believe our expense growth going forward will look much better.

One area in particular that we did a nice job, kind of a shout-out to our team, is the transportation.

It's been a tough area right now.

Excuse me, transportation's been tough.

Trucks are hard to find.

Rates are going up.

But our team just did a great job in both the second and the third quarter.

I'm very proud of what they've been able to do.

Vending, very steady progress.

We're happy with what's going on in vending.

Our signings are basically have been steady all year.

The best numbers are the numbers that give me the most -- I'm the happiest about, sorry, are really the sales going through the customers that have vending.

That growth, or the -- I'm stumbling, excuse me.

The customers with vending grew at 21.9%, and that represents 37.8% of our business.

So very good progress, growing as a percentage of our business.

And vending, in general, the overall business concept has a long pathway.

We continue to see other ways we can use the technology.

We continue to lower our cost of the product and lower our cost to serve the customer, very competitive.

We believe it's a very long-term business for us.

On the inventory, working capital, inventory grew much slower than sales and we made nice progress there.

The supply chain group is very focused on improving the service levels, while at the same time reducing our days on hand.

I spent a lot of time talking with that group recently.

We believe we have a lot of opportunity over the next 4 to even 8 to 12 quarters, to continue to improve our service to our customers.

And at the same time, reducing the working capital need of inventory, using new tools -- new tools they're buying, and just getting better at understanding how to use the inventory.

Overall, for the quarter I feel good, very good, about where we are.

We have good sequential growth going into 2015.

We watch that very close.

Our margin seems to be more stable than it was earlier in the year.

Labor in the stores is at a good level, so we've added the labor.

Our margin is stable.

We have good sequential growth.

If the economy stays steady, we are in a very good position to see the benefits of pathway to profit in 2015.

Before I turn it over to Dan, I apologize for stumbling.

I was looking at the stock going down at the same time and I couldn't speak clearly.

But, no, with that I'll turn it over to Dan.

He'll cover some more things and then we'll come back and answer questions.

Thank you very much.

Thank you, Will.

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

Reiterate the commentary.

We added some commentary in the quarterly release.

I think much more explicit than maybe we've been in the past and maybe that's remiss on my part.

The page references I'm going to use are on my copy and if the version you printed on the web is slightly different, I apologize for that.

On page 1, top of page 2, we talked about gross margin and relative profitability, as Will touched on a few minutes ago.

And that takes me right to page 10, which is our discussion on profit drivers of our business, and really the pathway to profit.

Some things that I think are worth pointing out on that table.

One is, and we've continued to make this point, in both of these sections, our profits and ability to leverage profits long term is about the top-line growth and growing our average store size.

We've said that for a number of years as it relates to pathway to profit.

We're trying to accentuate a few of the components, the puts and takes in the math, both on the P&L as well as the working capital side because I think they're both important to talk about, long-term profit growth, relative profitability and relative returns.

We think we have ample [planning] effects for all.

Some things that I think probably jump out to you is the relative profitability decline in the different groups.

And it really is stemming from four components, when I look at it.

One, in comparison to both 2012 and 2013, our gross margin in those periods were 51.6% in 2012, third quarter, I believe.

Last year was 51.7%.

We're at 50.8%.

So we've given up about 90 basis points of gross margin.

That's one component when I look at that table.

Another component is, as we talked about last year in the July and October calls, we felt we were under-investing in people, especially at the store level.

So there was a little bit of under-expense in those two periods when I look at those relative groups of stores.

I believe we've corrected that, and we have the appropriate staffing in our stores today to grow our business.

Growing our business drives our average store size up.

Because when you look at these tables, yes, we gave up some relative profitability in the groups.

But look at the percentage of the stores that are now in the fourth and fifth group, the 100 to 150 and the 150 plus.

The relative in the 100 to 150 has gone from 15%, 16% one and two years ago to 21%.

The relative percentage of stores in the fifth group, the over 150, is now at 17%.

Last year it was at 13% and change.

Two years ago it was at 11% and change.

That's what's driving our overall profitability.

Even giving up 90 basis points and adding people at a faster clip than we've done in each of the last two years when I look at the third-quarter time frame.

And I think those are important distinctions to make.

The other distinction that I think is important that's often overlooked, I believe, by many people, sometimes myself, until you take a step back and you think about it.

Our relative expenses, if you look at our P&L over a number of years, is a gross margin in the low 50%s and operating expense 29%, 30% kind of neighborhood and the operating profit in the low 20%s.

I think those are important things to sit back and think about.

Because when I think about a lot of companies I look at in the industry, and I'm not just talking about public companies, I'm talking about private companies too.

In the industry when I think about profitability within industrial distribution, I think about a number in the low double digits.

I think of a P&L that probably is gross margin in the lower half of the 40%s.

I think of operating expenses around 30%, maybe 29%, maybe about our number.

And an operating profit in the low double digits.

Some of the better-leveraged players in the industry start moving that up into the teens.

I think an important thing to ask yourself is, Fastenal has an average store size of [$]107,000 which means that some time in our history, 20, 30 years ago, we figured out how to make money in a store doing $50,000 a month.

There aren't too many players in the industry who have done that.

If you look at the average store size of most private and public players in the industry, their average store size is a multiple of ours, 8, 9, 10 times larger average store.

But the operating expenses really don't change appreciably.

In fact, in many cases when I look at them, they're at or slightly higher than ours, which always makes me scratch my head a little bit, of why the industry is so different.

Maybe it's just a case of we developed a frugal nature 30 years ago.

And that frugal nature continues to shine through in our business and gives us just a structural delta to everybody else.

I'm not sure.

I think it's something for people to think about.

Because it positions us long-term with that structural advantage to keep going after the market and to keep going after the market in a profitable way and with great returns.

And speaking of going after the market and top-line growth, some thoughts that always pop in my mind, is it really gets down to a handful of things.

Our top-line growth is about the existing market.

It's big.

The relative health of our existing market share, and that's had a tough couple of years for us.

We talked a lot about what we saw in our fastener business, what was going on with our large customers over the last several of years.

The fact that that was stabilizing, improving slightly.

I think you see that in nice growth numbers, or good growth numbers, in our fastener business.

We grew about 10% this quarter and that's a big business.

We're pretty excited about the improvements we've seen there.

And then the growth in the available selling store energy, the fact that we've right-sized, we've corrected the headcount in our store.

We're positioned really well going in 2015.

Our trends year-to-date, if you look at our daily gains in overall business, in fastener business, in non-fastener business, are quite strong as we approach 2015.

Some other things that jumped out for me when I'm going through the release, and again, I'm using my page references.

On top of page 4 looks at our five-year stores and what's happening to the growth in our five-year stores.

We've had five months now of 10%-plus growth.

Look at the last three -- look at the three years on that table.

That never happened.

I think we had five months in 2012 with 10%-plus growth but they weren't consecutive.

I don't believe we had any last year.

There's some powerful things going on because we've added the selling energy into our store and our large account business has stabilized.

Our heavy equipment manufacturers have stabilized, and our inherent growth is shining through.

Page 6, and I touched on this already, but our end markets and our product.

We're seeing improving trends there, both when you look at absolute year-over-year numbers, but more importantly, when you look at year-to-date numbers.

Where were we in January?

Where were we in September?

How are we trending?

As we've said in the past, September and October tells us where we're going to start the new year.

On page 12, you see the numbers, and that's our headcount numbers.

You see the numbers settling down now as we get into the third quarter, because we're anniversarying where we started to add people post-Labor Day last year.

Gross margin, we've touched on that, I think, pretty explicitly, both in the early part of the document, as well on page 13.

Page 14, our SG&A.

Probably the only thing that stands out for me there is, okay, our labor counts -- our labor expense is up because of the headcount we added.

And because there's been improvements in our profitability bonuses, in our profit sharing contributions because of where we're performing, relative to -- that's more about the last several quarters, so much than the anniversarying.

One thing that jumps out, our selling transportation is too high.

As we're adding people, we're adding, I believe, some expenses there faster than we should.

Those are some things we're working on to correct right now.

Kind of rounding out the release, our operating cash flow is okay.

Operating cash is about 2 points lower than where I'd care it to be.

It's rare that you won't get that comment out of me on a quarter, even if we were 2 points higher.

And we bought back some stock in the third quarter.

Year-to-date, we bought some in the first quarter we had previously disclosed.

We bought some in the third quarter.

And we increased our line of credit during the quarter to have some cash ready and available to buy back those shares, and potentially some more.

One item I'd like to throw out there that I want to point out, our international business.

We were particularly pleased with that business.

And by international, our US and Canadian business are very homogenous businesses from the standpoint of our store footprint, the infrastructure in those countries and the amount of time we've been in those countries.

So when I talk about international, I'm excluding the Canadian piece.

I'm just looking at south of the border, Europe, Asia business.

Very pleased with performance in that business.

We grew our earnings more than 50% in that business, third quarter to third quarter.

Partly a recovery of some struggling a year ago, but partly just some darn good performance.

And a good compliment to Steve Rucinski and his team in those businesses.

With that, I'm going to turn it back over for some Q&A.

As we've asked in previous quarters, please limit yourself to one question with maybe a potential follow-up.

And we'll go from there.

Thank you.

Thank you.

(Operator Instructions)

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

Your line is open.

Please go ahead.

Thanks.

Good morning, everyone.

Good morning, Ryan.

Good morning, Ryan.

So I guess the big question here is how can we have confidence that gross margin stays near 51% if the plan is for larger stores across your network, which larger stores have larger customers, and the largest customers have lower gross margins?

Dan, I'll give it to Dan.

First off, as we cited, the stores that are north of that have a gross margin that is slightly lower.

I think, Ryan, it really gets back to what's our operating profit going to be.

I think if everybody who looks at the Fastenal business, and looks at owning our stock, and looks at owning our stock today, and having that stock three years from now and five years from now.

If you believe we can grow the business, and we look out to a larger business some years into the future.

Let's just say for discussion's sake that the margin drops 40, 50 basis points, but the operating margin is at 23% or 24%.

Because right now -- the one thing that I probably didn't touch on, because sometimes I've learned to shut up when I should shut up, is 23.7% for $100,000 to $150,000, I'd be lying if I didn't say I was really disappointed in that number.

I don't think that number should be below 24%.

I think it should be more like 24.5%.

But would you own a Fastenal organization, that larger organization, in the future?

Because I believe it's going to grow.

And I believe our -- and if it grows, our average store size has to increase.

The question you should ask yourself, would you own that Company that looks a lot like that?

Even that disappointing number that we have in my mind today.

Would you own that business versus some other stock?

I would.

Ryan, I think in -- I know history doesn't always predict the future, but if you -- we're focused on big stores, margin going down.

But over the years, we've focused on the Company gets bigger, the margin goes down.

Fastener mix drops, margin goes down.

There's a long list of things I could address there.

But our margin has been around 51% as the center point for 25 years.

And so a lot of it -- Bob Kierlin always stated this, the number one thing that determines our margin is our branch pay programs, or our incentive programs, not just at the branch, but at all the levels.

And that continues to come true.

If you pay people to hit a goal, high percentage of the time they will hit a goal.

It's far more about that than it is about product mix, customer mix or store size.

Okay.

And then my follow-up or second question, do you have an updated pathway to profit average monthly store size to hit that 23% EBIT margin target?

Is there an update there?

Clearly -- well, clearly it looks like it's higher than $110,000 a month.

I removed that paragraph.

Yes, I noticed.

There was discussion on whether I should or shouldn't.

I looked at it and I said -- you know what?

We've had that paragraph in there for years and I think the table removes the need for the paragraph.

And so I just finally decided to get it out of there.

Partly because I think there was always so much questions about 23%, 23%.

23% has never been a target.

23% is a point in time reference.

I just cited a Company in the future that has a 24%.

But right now if you look at the table, that $100,000 to $150,000 is at 23.7%.

And so I mean you could look at the -- I'll throw out some components.

Right now, the 2,647 stores that are in that table, as you see on the next page, represent about 87%, 88% of our sales.

If I look at the first five groups in that table, the ones where we explicitly call out the percentages, that subset represents about 80% of our sales.

And the other -- the deltas in the strategic counts and overseas stores.

So I look at a number that's with the gross margin being lower than it was a year ago, it's not $110,000 because we're at $107,000 right now for average store size.

But we're also not happy with where those numbers came out this quarter, Ryan.

I don't think it's that far off, off the $110,000, somewhere in that range, $110,000 to $125,000.

But it's really about point in time and growing the average store size.

Okay.

Thanks, guys.

You bet.

Thank you.

And our next question comes from the line of Robert Barry with Susquehanna.

Your line is open.

Please go ahead.

Hey, guys.

Good morning.

Good morning, Robert.

So I did just want to follow up on that and clarify.

I understand that some of the targets could be a little bit soft at times.

But it does sound like versus last quarter your outlook for the profitability of your business has gone down.

It sounds like both on the gross margin side and on the EBT margin side.

I don't read that.

Is that a false interpretation?

Yes.

Yes.

Our optimism about the ultimate profits of the organization and our ability to grow profits has never been stronger.

I guess I'm --.

We expanded the language around gross margin.

If you went back to the transcripts from the second quarter call in July, I was very much expecting a call that would center on top line growth, top line growth, top line growth.

How do you get that top line growth?

Primarily because a year ago we were in that July time frame, our growth was pretty anemic.

Our growth was more in line with the industry.

And we had started to expand our growth.

We felt there was great momentum to continue to expand our growth.

I was frankly a little disappointed that the entire call was about 15 basis points, 20 basis points of gross margin, and not about our ability to grow the business.

And when I look at that table, that pathway to profit table, it's so compelling about where we could move the profit of the business to if we're growing and we grow our average store size.

And the discussion was getting lost in a few fixation points.

I think the fixation should be how do we move deeper into that table?

And what are we doing to grow our top line?

And how does that happen?

The market's big.

What's the health of our existing market share?

And what are we doing to grow the business?

And I think that's where the headcount, the energy in the store, really comes into play.

Those are the three most important things.

Back to your question.

You misinterpreted our report.

We are very, very confident in our ability to be highly profitable.

Just to clarify, I'd agree with you about maybe there was too much focus on the gross margin.

But at the end of the day I think we need to measure the growth as well as the cost to engender that growth.

And as we move further down the income statement, I'm more concerned about what sounds like backing off the ability to get to the 23% EBT at the $110,000 than I am about the softer gross margin target.

Because it does sound like there's some offset on the SG&A.

Let me jump in here.

If you think about to 2007, I don't know if you followed us then.

When we came out with pathway to profit, our 23% goal was at $125,000 a month.

Halfway between the $100,000 and $150,000.

It was $125,000.

In the interim, when we got very tight with our expenses during the very tight recession of 2008 and 2009, we lowered our base cost and we brought that down to $110,000.

Now we're back to where we were at 2007, somewhere in the middle there.

And actually at $125,000 I think it'll point to 23.7%.

Yes.

The difference between $110,000 and $125,000 and 22% and 23.7% to us is going to move around.

It's an inexact thing.

But we believe we're going to go right by that number and be highly profitable.

And so we're not trying to back off the number.

We're trying to not give so much information that our calls are completely dominated by, as Dan said, 5 or 10 or 15 basis points in different categories.

Okay.

So the message you want to leave with investors is that over a period of time, big picture, the targets are roughly as they have been?

Absolutely.

In terms of your ability to raise profitability as to where size grows.

It's easy math.

If we don't open many stores, we grow our top line just, say, 15%, our average store size goes from here to here.

You can look at the chart, put your finger down and get a good idea of what the leverage is.

And the average store in that $100,000 to $150,000 category right now is $123,000.

That's the average store size if you actually run the math.

And we believe that group should be in the low 24% pretax, not 23.7%.

That's where our head is.

We need to move to the next question.

Okay, thank you.

Thank you.

And our next question comes from the line of Flavio Campos with Credit Suisse.

Your line is open.

Please go ahead.

Good morning.

Thank you for taking my call, my questions.

Good morning.

Just focusing on the selling personnel, FTE count.

It was flat in September and pretty much flat as well on the quarter.

Actually, a little bit down.

Was just wondering if that was a seasonal thing because of the summer months?

How do we go back?

How do we go up to that 10% growth that you mentioned in the call?

There is always some flattening that occurs in the August, September time frame.

Really, August to the first half of September time frame.

One of the means in which we recruit is we strive to have a subset of our employee base be full-time students, either in a four year state college or a two year technical school, technical college.

Because we find that if we have some part-timers working for us that fit that type of demographic, it's a great short-term workforce.

But probably more importantly, it's a great long-term recruiting force.

And so we recruit from that.

There's certain times of the year you get some churn in that group or just some stalling in that group.

When they're going back to school in August, you see a little bit of a pause until they get their schedule worked out in early September.

You see a little drop-off in some hours typically.

When we report numbers we're reporting FTEs.

Perfect.

That's helpful.

And just turning to margins for just one quick second.

On Q4, generally we see a little bit of a drop seasonally.

Just wondering if you're going to see that this year?

If you're expecting that this year as well?

Or if this 50.8%, that's your expectation for Q4 as well.

We don't give guidance on the fourth quarter.

Dan, anything?

Yes.

The only thing is the softness that we do sometimes seasonally get is related to -- we have an extensive trucking network.

And that trucking network loses a little bit of leverage in the November, December time frame.

It could be amplified in a year like 2012 or 2013, or 2008, if there's something that's compounding that softness.

But it's a little bit of noise and right now our trends on volume are good.

Perfect.

That's helpful.

I'm going to jump back in queue.

Thank you for taking my questions.

You're welcome.

Thank you.

And our next question comes from the line of David Manthey with Robert W. Baird.

Sir, please go ahead.

Hi, guys.

Good morning.

Good morning, Dave.

First off, I realize that stores don't drive growth at Fastenal, it's the people.

But you closed 37 locations.

I'm just trying to get a read on that number.

And did those closures, do you think, have any impact on September?

And then to back it up and forget about the stores for a second, could you discuss your hiring plans as you look to 2015?

Will, I think you mentioned 5% to 6% increase in labor cost.

Is that a next-year thought as well?

I'll take that part and then I'll hand it to Lee for the store closings.

Our thought is 10% more hours, a minimum of 10% more hours, assuming our sales growth stays in the range it is, the mid teens.

If we do that, it will cost us about 6 percentage points higher labor, and that is the plan for 2015.

What will move that up or down is if we grow faster, we'll add to it, if we grow slower, that's kind of the -- roughly add hours about 5% lower than our sales growth.

And then the other 5% come through productivity.

I'll give it to Lee on the stores.

Hey, David.

On the store consolidation piece, it's really you got to get your arms on the fact they're small stores.

We're highly aggressive as we open stores.

So yes, did we put some stores in markets that were fairly close?

We really feel we're going to retain a good portion of the business.

We have homes for our people.

The markets are great.

It was just a great strategic move for us.

But it's really about a consolidation.

And we are still committed to the markets in almost every case.

And even more so when you really think about going forward, the energy we're going to put into some of these stores where we move the business.

And it's just discipline at work at Fastenal and it's what we do.

And the store closing would not have impacted September anymore than it would have impacted August, July, June or May because these things were in the works.

I think we cited in the second quarter release, and I apologize if I'm slightly off, but out of the 40-some stores we had identified, I think there were 8 that were more than 10 miles from another store.

When I looked at all the data, we assumed less than 10% of the sales from all the stores we were closing was at some risk of being lost.

Got it, okay.

And then just final question.

You touched on "T" hub.

It's been over a year since you started rolling that out.

I'm just wondering if you can talk to us about are we seeing the benefits today?

What kind of tail is on this initiative?

I don't have the stats.

I've stayed very close to it, Dave, but I don't have the stats as far as how many parts we're shipping.

I don't know if you do, Dan.

I don't, but I have a (multiple speakers)

As I said in the second quarter call, it has not ramped up as quickly as we thought it would.

But it continues to grow.

We have a long tail on it.

Probably the two biggest areas that we'll pick up benefit is gross margin, because the product in "T" hub we're buying at very, very good prices.

And the other is inventory turns, because if we're buying it centrally, the stores do not have to buy as much.

If the store's out buying the product on their own, they might buy two or three month's supply to get the pricing.

The big advantages right now as we see it, are gross margin and inventory turns.

There's also efficiency, but that is probably not as big a savings.

We're still very optimistic on moving that project forward.

Just a couple of thoughts on it.

End of July, we had all of our stores that are going to be serviced by "T" hub, their point of sale system was converted over such that they could turn parts on and off from being serviced out of "T" hub.

That ramp-up really occurred in the June, July time frame.

The steps that occur before and after that is aligning the parts that are being vended in the machines and optimizing the turning parts so that you have an efficient redistribution plan.

I always use the analogy if we have a soda machine in the warehouse and 9 out of 10 people want Mountain Dew, and Mountain Dew is one of the six options, they're going to fill the Mountain Dew slot every day as opposed to maybe you need five out of the six be Mountain Dew.

Or Diet Coke or whatever the case might be.

One tangible thing that I can point to that comes with "T" hub, Will touched on the gross margin, is we measure different pieces of our business.

One thing that did change is the percent of our sales going through vending that are Fastenal brands, went up by 1 percentage point from Q2 to Q3.

And so we are seeing some tangible things there.

And for the suppliers of branded products that are in our "T" hub facility, I would expect to see their business.

And we have seen their business grow commensurate because there is more of that activity going on.

Got it.

Great.

Thanks a lot, guys.

Thank you.

And our next question comes from the line of Adam Uhlman with Cleveland Research.

Your line is open.

Please go ahead.

Hi, guys.

Good morning.

Hey, Adam.

Just to start with the fastener sales, you touched on it a little bit here.

We saw good acceleration in that.

Could you talk about the visibility that you have into growing that chunk of the business?

What are you hearing from customers and their production schedules versus new business that you've brought into the fold?

Combined with that, heavy manufacturing, there's a good deal of worry from investors from the impact from farm equipment demand and oil and gas.

So maybe you could help us understand your exposure to that as well.

It's hard for us to break down exactly where the fastener growth is coming from.

The biggest part of it is machinery manufacturers.

We've also had a very strong push with small customers.

It's really about incentive programs at the stores, different programs for bin stocks and just raising the awareness of fasteners.

The other stuff is more fun to sell.

Branded products, there's just more to it.

So I think it's about putting the energy in and continuing to work hard on just talking about the fasteners.

As far as the exposure, yes, I've been reading that too.

Some of the large farm equipment manufacturers are slowing down.

I guess fortunately, we don't have a lot of that business right now.

We'd like to have it, but the timing's probably good that we don't.

Our exposure really trends more with the overall manufacturing than any specific area of manufacturing, whether it be ag.

We're light in ag on a big scale, the Deeres and the CH, Case & Hollins.

We're light in automotive.

So there's less exposure in those areas.

But it's broad manufacturing base.

I think it's the same exposure we see in all manufacturing.

Does that help?

It's a little bit difficult.

Yes, that's helpful.

Thank you.

And then just somewhat related to that, if you think about your longer-term growth drivers, could you talk about what you're seeing?

Metal working, government, e-commerce, overall the growth rates and maybe how big they are now?

The government continues to grow well, represents about 4% of our business.

Metal working has slowed a little bit, still outgrowing the Company, but slowed some.

That's about just under 10% of our business, so it's about a $300 million business.

We're working hard on that.

Trying to think of other -- we talked about the vending earlier.

Fasteners, you know those numbers.

Safety is one that continues to do well, it's a great product through vending.

We continue to see very good growth in the safety product line.

Some of them -- trying to think ones that aren't doing as well.

I guess it -- fasteners, I guess, still doing well but it's still not keeping up with the Company, so the other ones are outgrowing it.

One tidbit I'll throw in, though, on trends is year-to-date.

The last couple of years, if I look at what our business was doing, in 2012 and 2013, if I looked at January to September, we were up about 12% on average, 12.5% in 2012 and 11.5% in 2013.

We're up about 18% this year.

Fasteners aren't far behind that 18%.

They're up about 17%.

Last two years they were up 8% and 6% respectively.

Our non-fasteners are up about 19% to get our average of 18%.

They were up about 16% the last two years.

Our vending business continues to help support our non-fasteners.

More hours in the store support our non fasteners.

The marketplace, as well as more energy in the stores, is getting our fasteners going.

Thank you.

Thanks, Adam.

I think we're at 9:44.

Sorry, Michelle.

That's okay.

I think we're at 9:44.

And so we're going to wrap up the call.

We're very conscious of the fact that the folks on this call, we're in earnings season so you have busy schedules, and we like to hold to our 45 minutes.

Again, thank you for participating in the call this morning.

And one shout-out I'll give is my son's soccer team Winona High School, won their second game last night in the state tournament.

So we're in the sectional tournament.

I wish them good luck on Saturday.

Thank you.

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

This does conclude the program and you may all disconnect.

Everyone have a great day.