快扣 (FAST) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fastenal Company first-quarter 2015 earnings results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Jan Degallier.

Ma'am, you may begin.

Thank you.

Welcome to the Fastenal Company 2015 first-quarter earnings conference call.

This call will be hosted by Lee Hein, our President and Chief Executive Officer, and Dan Florness, our Chief Financial Officer.

The call will last for up to 45 minutes.

The call will start with a general overview of our quarterly results and operations by Lee 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 June 1, 2015, 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 Mr. Lee Hein.

Thanks, Jan.

Good morning, and welcome to our Q1 2015 call.

The quarter was -- when you look at it, it's really two stories; one of things we can control, and things we cannot control.

Obviously, the things outside of our control -- the currency, weather, oil and gas, and the port situation in California.

But the things we can control, I think, when I look at the Fastenal team, I think it was a solid quarter.

With that being said, I will always say this -- that when we see single-digit revenue growth, we're not satisfied, nor are we happy.

But with 8.8% growth, we did some things, and I think hats off to the Fastenal team when you look at some different areas.

When I look at the fact that we stabilized our gross margins, and I know there's been questions there, but I look at the fact that we were able to do some things there.

And a lot of that is truly execution when you really look at what our people are doing at the point of transaction.

The second thing is we challenged our Fastenal team to really live within our means.

What I mean by that -- that's an old school BK philosophy that if we don't need it, don't buy it.

And you saw that play out in the first quarter when you look at meal, travel and entertainment.

We made a conscious decision to spend our money on labor in the stores.

We said no to things that may sound nice, and may actually help us long term in some regards, but today we made a decision to invest in our stores, to fuel our growth, to drive profits, and that's what you saw play out on the expense side, even when you take out the tailwind on the fuel.

The other thing -- some other highlights -- we grew our earnings 14%.

That's a nice leverage when you consider we're at 8.8% on the daily average growth.

More importantly and more impressive, I think, is the team was able to put up 32.2% incremental margin growth; again, a number that I think most companies would just -- would be thrilled with.

When you look at the added energy in the store, I want to -- this is where we really got to get down to what's truly happening -- boots on the ground.

From the end of Q3 2014, up until the end of Q1 2015, we've added 1,000 people into our stores.

Now, most of those heads came in the last half of Q1.

January -- folks, I got to tell you, January, coupled with the weather, the fact that the kids aren't back to school -- it's a rough month for recruiting.

In the second half of February, and in the month of March, that's when you started to see the team really start to bring people into the stores.

And we'll continue that going forward.

We're committed to energy in the stores.

We're committed also to looking at a few of our stores.

When I look -- I talk about that -- our large stores, our stores with a high number of customer, or we would just say a lot of traffic -- we're looking at adding products into some of those stores to also build invoice, build customer satisfaction, all the things that we try to do every day.

The other thing, and lastly, I think a shout out really to Nick's team on the inventory side, coming in at $867 million with inventory at $869 million a year ago really is, again, a testament to the Fastenal team and what we can do when we put our minds to it.

With that, I'll turn it over to Dan.

Thanks, Lee, and good morning, everybody.

And for those of you that were wondering, he's referring to Nick Lundquist and the team on the supply chain, and did a really nice job of managing the inventory in a tough environment.

I'm going to -- typical to prior quarters, I'm going to reiterate a few of the points made, and then touch on a few additional.

I have the opportunity to talk to a lot of folks in the Wall Street community over the course of the month, and one confusion there's been, and what we talked about in the January call, I just want to reiterate here.

And that is: Lee touched on it, and we really are focused on adding energy into the store to free up the time of our salespeople to get out and sell more.

And as Lee mentioned, in the last 12 months we've added more than 1,000 people -- 1,067 to be exact -- and we intend to keep adding people to the store level.

And internally the way we've described it to our folks is: We have just under 300 district managers in the Organization, and we'd like to be in a position for each of those district managers to, on a net basis, add an employee into their business each month.

And most of that hiring's going to be part time.

We continue to want to beef up our ranks on the part time.

It's really a means for us to recruit long term, because we go in to two- and four-year -- two-year technical colleges, four-year state colleges -- we recruit people with a year or two years left of school, with the hopes that when they graduate, they can come work for us full time, and we can really hit the ground running.

And we have the dollars to put a lot of training into them during their entire cycle with Fastenal.

So, if we added 300 people a month and, say, did it for hopefully 9 months, 10 months of the year, maybe 9 months, but you'd be adding about 15% to your FTE base in the Business.

So, you add 3,000 people, they work about a little less than 20 hours a week, you start with a group of 10,000 FTE, you add 1,500 on to that, it's 15%.

I don't know that when the dust settles at the end of the year, if we'll hit that 15% number, or if it will be closer to 12% or 13%.

The economy's going to dictate a little bit how hard we push on that, but that's our intention, to invest heavily into time in the store, and free up our salespeople who are, quite frankly, the best in the industry -- free up their time to get out and sell.

As Lee touched on, quite a few of those came in the last, really, two months.

In the first quarter here, we added about 614 people into our store locations.

Little bit in the release, starting on page 5, talk about the environment -- tough environment out there.

Our sales growth softened as we got deeper into the quarter.

Weather hit us hard in the January and February time frame.

Oil and gas, and some of our customers that are involved with export markets, the currencies are -- the strong US dollar is not helping export.

So, our Business did weaken as we went through the quarter.

You really see it showing up in the industrial -- the production side of our Business.

And as we talked about in the release, the best way to think about that is on the fastener side.

Our fasteners grew about 6% for the quarter.

They were growing 10% and 11% in the third and fourth quarter of last year.

That business really slowed down.

We didn't lose any customers, but those customers are producing fewer widgets and, therefore, they need fewer fasteners.

The non-fastener business still maintained double-digit growth.

It did weaken.

It will move directionally with the other business.

But that is a much -- that's a more resilient piece of business for us.

And part of it really stems to the fact that it's heavily influenced by our vending initiative of the last five years.

Starting on page 10, we talk about the earnings; and probably the things that jump out for me when I look at it personally is I, frankly, think it's a pretty impressive report.

And I'm the first one to let our folks know when we've had a weak quarter.

I'm also the first one to let them know when we've had a strong quarter.

I think, from an execution standpoint, we put out a nice report because we executed well.

We added, in the last 12 months, over 1,000 people into our stores.

We managed our labor expenses well.

We managed our non-labor expenses even better.

We were helped, obviously, by the fuel and gas prices in our Business, but that was a known item for everybody.

But even outside of that, we did a wonderful job managing our Business.

Finally, cash flow: Cash flow was very strong.

Partly, as Lee touched on, we did a nice job with our inventory, but a strong performance looking at all aspects of the cash flow statement.

Some things that might be worth pointing out: Late yesterday, we announced our second-quarter dividend of $0.28 a share.

That is consistent with our dividend in the first quarter.

Late March, we announced that our Board had increased our repurchase authorization for buying back stock to 4 million shares.

Just to give you a brief history on that, in January they established a 2-million share authorization.

From mid-February until the latter part of March, we spent and bought back 2 million shares.

We spent roughly $82 million.

We bought back stock at just under $41 a share.

This depleted that authority.

Therefore, we asked our Board, and they agreed, to establish a 4-million authorization to use going forward.

We have been in the process of increasing our credit facility, so we're in a position to exercise that if the market sees fit, and we'll see how that plays out.

I think the report is pretty straightforward this quarter.

There's not a lot of noise to it.

Obviously, the top-line weakening is probably the most noteworthy thing.

Again, everybody had seen January and February numbers, so there's no surprises there.

I have one item I'll throw out as a reminder, and then we'll switch over to question and answer.

That reminder is just a reminder to folks: Our annual meeting is next Tuesday at 10:00 AM.

With that, we'll turn it over to Q&A.

Thank you.

(Operator Instructions)

Our first question comes from Robert Barry with Susquehanna.

Your line is open.

Hello, guys.

Good morning.

Good morning, Robert.

Good morning.

I wanted to start by asking about gross margin because you mentioned that you had stabilized it in the quarter and that's a positive.

But it sounds like the language in the release sharpened a little bit this quarter and now seems to call for ongoing decline as average store size grows and since you're not adding stores, it sounds like essentially saying growing gross margin decline as the business grows.

Can you clarify what the expectation is for the gross margin going forward?

Yes.

I'll take that one.

You know, and I don't recall if it was the January call or the October call, but in that previous call, one of the things that I don't know that people always appreciate, we've talked about our pathway to profit table for years and in that pathway to profit as our stores mature, they become more profitable because we dramatically leveraged the fixed cost structure of our business.

The flip side of that coin is, if we're visiting a $50,000 store, you don't have very many $20,000 and $30,000 a month customers in that store.

I'd be surprised if you even have one.

You visit a $150,000 store, and you could have several.

You could have three customers doing $20,000, $30,000 a month, and those customers -- first off, they have more ability to negotiate pricing.

But more importantly than that, we have the ability to go after that business in a different way because that market's a little different.

And so you go after that business because you have more predictability of what your need is and you can be a little sharper with your pencil because you know that those revenue dollars, and more importantly, those gross profit dollars while there's some added expense of serving them, you're still in the same building.

You're still the same semi delivering product.

So when we move from a $100,000 store, if you look at all of our stores over $100,000, our average store in that group is about $165,000 a month.

Our gross margin in that group, and this -- I'm just reiterating what we talked about earlier.

Our gross margin in that group is about 90 to 100 basis points lower than the rest of our stores.

However, our operating expenses drop off around 450 basis points.

So that $165,000 store has profit relative to sales dollar; it's 350 basis points higher, but there's some tradeoffs.

You're giving up a little bit of gross margin, you're picking up at operating leverage.

We like that tradeoff.

As we move -- once we popped above $100,000 a month in sales, as we move further away from $100,000 a month, I would expect our gross margin to decline, and I'll take that tradeoff of $1 here for $4.50 over there.

So it sounds like the outlook for gross margin is essentially a secular decline but you expect to more than make up for it at the operating margin level through SG&A leverage.

Yes, 3 to 1, 3.5 to 1.

And I noticed you took the table out of the release this quarter that shows how the margins are progressing in the various store buckets.

I don't know if that will be in the Q. But maybe you can just share some thoughts on what has been happening with the margin in the largest bucket because it looked like it had been declining.

Well, the operating margin improved, and you see that shine through.

If you look at our stores that do over $100,000 a month, that's about half our revenue.

And so our overall profits were up 100 basis points from last year.

That group was a big piece of that equation.

I removed it for a couple reasons.

I think one thing, when we started the pathway to profit back in 2007, we dramatically expanded some of the information we disclose, really because it was a big change for Fastenal.

Five years ago when we introduced the industrial vending, we expanded a bunch of our disclosures because again, that was a big change for Fastenal.

And one thing we like to be in a position to do always with our shareholders is be able to think out loud, openly and honestly with you about what we're doing.

I kind of got -- I started to signal last year that I was going to pull back some of the disclosures, not because we want to disclose less but we want to make sure that all the stuff we disclose doesn't create noise and take away from the message.

And it's really because you want to focus on here are the major things and here are the minor things, and so what we're trying to pare it back a little bit so we have a little bit more concise of a report.

And I'm also a firm believer after seven, eight years of showing pathway to profit, for the people that believe it, you don't need to see it every quarter.

For people that don't believe it, after eight years I don't know if I'm going to convince anybody.

Okay.

All right, Dan.

Thank you.

You bet, Rob.

Thank you.

Our next question comes from Flavio Campos with Credit Suisse.

Your line is now open.

Hi, there.

Thank you for taking my questions.

Just focusing on gross margin, just very quickly on Q1, it looks like fuel helped you about 10 bps, a little bit of a reduction to that $8.8 million this quarter.

And you guys talked a little bit about seasonality as well.

If you could just help us bridge that, and if you can also talk a little bit about the fact that on fastener business you've had a lot of cost deflation on the supplier side and now we are seeing a little bit of that price pressure on your customer side as you called out on the release.

And if that mismatch in timing has also helped gross margin right now or if you're actually passing through a lot of the savings.

No, the gross margin really hasn't been helped by any timing.

Where we do have contracts that are tied to a CRU or some other type of index, it usually mirrors the turn of our inventory.

So really, when I look at the gross margin and I tried to touch on that in the release, the improvement in gross margin, there's always a seasonal lift that occurs and the real impact is we have a fixed cost with our trucking network.

That truck is going -- our [up river] from Winona is Redwing, Minnesota.

There's a truck that stops there every morning.

Whether that truck is carrying 10 packages or 20 packages, the cost of the truck is the same.

And so from October to November and December, our volumes will drop off meaningfully because of the seasonality of the business, and so that fixed cost of that truck weighs a little heavily, more heavily on the sales.

When our sales snap up in the first quarter, that truck still costs us the same.

I'm ignoring fuel here for a second.

That truck still costs us the same but we're delivering 10% more boxes.

So that lift is always there and that drag is always there in the fourth quarter.

I think what's more important about our gross margin is we did more than that.

We got the lift that's there.

It was added a little bit, as you mentioned, because our fuel costs came in less than, say, a year ago.

Less than even fourth quarter, although that delta is smaller.

But more importantly, we did a better job pricing our product and sourcing our product.

A lot of our sourcing is done at the store level, which is fairly unique for industrial distributors in general because we're very entrepreneurial in our nature.

And it's really looking at everybody square in the eye and challenging everybody, you know what, we need to stop this and stabilize.

And we did a little bit better than that.

Perfect.

Perfect.

That's very helpful color.

Thank you for that.

If I could just have a quick follow-up.

On the non-resi side of the business, that slowed down a lot in March and that seems to be a little less levered to the headwinds of oil and gas and exports.

I'm not sure if that's accurate but if you just could comment on a little bit on the health of that end market.

Yes, that business did slow down for us.

One item just to keep in mind, a chunk of our non-res construction is directly tied to energy.

It's infrastructure.

Because of where we operate and the infrastructure that's being built to support both the production as well as downstream to refining and the transmission in between, we're involved in those three stages of oil and gas.

So oil and gas does have an impact on our non-res, but that business was a bit weaker.

Part of that was weather centered but it did soften a little bit.

I think there's a lot of tentativeness in the marketplace right now.

Perfect.

That's helpful.

Thank you for taking my questions.

You're welcome.

Thank you.

Our next question comes from Ryan Merkel with William Blair.

Your line is open.

Hello, guys.

Good morning.

Good morning.

So first question, when I look at your March growth rate and I look at the ISM index, it looks like demand is slowing sort of beyond oil and gas and beyond exports.

Are you seeing this as well?

And what do you think is driving this?

Well, I think -- yes, we are, but I think what you really have is those two you mentioned, exports and oil and gas, that casts one heck of a shadow.

It's not just the folks that are directly involved in that business.

If you're in the same geographic area and the manufacturing pace, the manufacturing heartbeat of that area is weaker, everything else kind of takes a step down.

If you're working at industrial business and you're kind of worried about what's going on in your business, people aren't as quick to do other things, to buy a car, to buy things, to make a renovation to their home.

People just say you know what, let's wait and hold because I don't need to replace this television set today.

Stuff like that, you just become a little bit more conservative becomes everybody's a little nervous.

You know, Ryan, I jump in.

The other thing on the oil and gas, last call we talked about it being 10% to 12% from a geography standpoint.

But even when you start to consider the steel mill that's making the frac pipe, we didn't even -- that's not even part of our discussion last quarter.

There is a ripple effect that I think, as Dan said, that is greater than I think most people really understand.

Okay.

And asking that a different way, do you have the growth rate in the quarter for the energy states and the non-energy states?

Was there a big difference there?

You know, I don't have that right in front of me, Ryan.

Okay.

But if I was looking at the energy in general, in the case of March, most probably about a 3% impact.

Okay.

And then incremental margins were very strong as you pointed out.

I'm just wondering if growth sort of stays at 6%, 7% range and then you're going to ramp the FTEs a bit it sounds like.

What's the reasonable incremental margin range in your mind as we look at 2Q, 3Q, 4Q?

One thing to keep in mind, once you know -- second quarter and third quarter last year, our gross margin was at 50.8%.

Fourth quarter, it took a little dip down, and wow we're back at 50.8%.

So we could be in a position to invest well and if the noise of gross margin is silent, it's really about our operating expenses.

And I see no reason why -- I don't know if we'll stay north of 30% but I feel very good about staying north of 25%.

Thank you.

Our next question comes from Luke Junk with Robert W. Baird.

Your line is now open.

Building off your last comment there on the gross margin line, Dan, just kind of weigh out in terms of the outlook for the rest of the year, things that you can't control and some of the things, say you've been working on the pricing side, versus maybe some of the headwinds we might face this year, especially in the fastener product line.

Just how those dynamics interact, and maybe better understanding as we're seeing the drop in steel prices right now and a piece of your business that you're probably turning less than two times per year, how you'd expect from lower steel prices to work its way into the P&L as we go forward here.

Well, the lower steel prices, any time you have deflation it creates a challenging environment, and we've been in a situation of having deflation now for a few years.

And so it makes it challenging as we go through the year.

At the end of the day, though, I really look at it in a little longer-term perspective than just that.

Because I try to understand what are the long-term drivers of our gross margin.

That's really the things that you focus on.

And the long-term drivers of our gross margin is really gets down to business and product mix.

So customer mix, how much of our business is coming through stores of different sizes that we touched on earlier in the call.

How much is coming with customers of different sizes.

One thing that we've done a nice job in recent years, and by recent years I'm saying the last 15, but we've done a nice job of leveraging this infrastructure that is Fastenal, this store base that is Fastenal and growing our large account, our national account business quite aggressively.

That continues to outgrow the rest of the business.

Not because we're losing opportunities in the smaller customer base, it's because we're underrepresented in large customer base.

So we continue to grow a little bit faster there.

To me, long term, the growth in that large customer base as well as the residual impact to our product mix, that ultimately drives our gross margin.

And as we see, as our revenue base grows and our gross margin does decline a bit, we do a very nice job of our business model of leveraging that cost and doing a nice job with the pretax, which really at the end of the day is of all the numbers in the P&L, really the only one that matters is the one at the bottom of the page.

Everything else above that is just discussion points.

But it's still healthy to appreciate the points and understand how that differs from business, but ultimately it gets down to what's our customer mix and what's our product mix within those customers.

And then just a follow-up.

Lee, you'd mentioned that the port situation was something that did impact you during the quarter.

Just curious at a high level what impact it may have had on your supply chain on product pricing, do you need to source any product domestically that you typically import, et cetera.

We kind of tried to get a message to our folks that we thought this thing would get rectified and to really try to take care of our customers, but really we took I think a fairly tough stance that we're not going to go out and find something or secure parts domestically and eat the difference.

So we did a nice job there.

To put a number on it, I couldn't do that.

But it caused I think for maybe a few months, a month, a little bit of problems here and there but nothing to the degree that it really moved the needle for us on the margin side.

One thing that helps us in situations like this is the fact that we have -- we have inventory that turns roughly two times a year.

We have more resiliency than our peers really do when it comes to this matter because with 2,600-2,700 store locations and 14 distribution centers, we have a lot of inventory stored around the country.

Thank you.

Our next question comes from Charles Redding with BB&T Capital Markets.

Your line is now open.

Hi, gentlemen.

Thanks for taking my question.

I wonder if we could just drill down a little more on Canada.

I realize your exposure is certainly more heavily weighted toward the eastern markets.

Have you seen the weakness there responded to direct oil and gas exposure?

Are you seeing that really bleed over into some of the more ancillary markets?

For Western Canada, obviously our business there has been impacted pretty dramatically and, yes, it bleeds over into everything in that geographic area.

As you noted in your question, when we originally entered Canada we entered from essentially Southern Ontario and grew through Ontario and then from there expanded east and west.

So the core of our business is really in the province of Ontario.

That business there has held up reasonably well if I'm looking at Canadian dollar, Canadian dollar.

Obviously, the Canadian currency is very much tied to the fact that their economy is tied to extractive industries, and the weakness in oil and gas, the weakness in energy in general has not helped their currency.

In a local currency basis, we're growing reasonably well.

But when you compare it to USD, and that's what we report in, the picture isn't quite so good but the underlying business is sound.

Okay.

Thanks.

Then on heavy manufacturing and ag, I know your exposure there is relatively limited as well but if you could just provide a little more color on heavy manufacturing right now, kind of churns, where you're seeing that and how you're seeing that shaping up over the next quarter or two.

That piece it pretty weak right now.

A chunk of our heavy manufacturing is tied to -- easiest way to describe it, big wheeled pieces of equipment and those and that's mining equipment.

That's agricultural equipment.

It might be military equipment.

We have a good focus there because those end markets really value what we can bring to their table from the standpoint of fastener expertise and fastener availability as well as everything else that goes with it.

All those areas are pretty weak right now.

You folks know as well as we do what's going on in some of those end markets as far as what some of those large customers are experiencing right now.

It's not a pretty picture.

And so that's impacting our fastener business because it's impacting our heavy manufacturing.

Thank you for the time.

Thank you.

Thank you.

Our next question comes from Robert McCarthy with Stifel.

Your line is now open.

Good morning, guys.

Congratulations on a good quarter in a tough operating environment.

Thank you.

Thank you.

I guess one -- this question's been asked prior, but could you just walk through do you think there was any kind of benefit from kind of the rollover in steel just from a contract perspective?

And as contracts get reset, how you're thinking about kind of more of a normalized gross margin in the back hoof half of the year.

It's a bit of a leading question, so you can argue at the premise of it.

That's fine, but I just wanted to ask it.

I'll answer it this way, deflation and steel never helps our reported margin.

It's the steel based products that are the slowest turning for us.

If there is some deflation in non-steel products that we sell, so the non-fasteners, that inventory turns a little faster.

There you can realize some impact.

But for us, what we are always endeavoring to do is manage the noise of timing.

In other words, manage where you're getting price concessions, where you're not.

Really, the only time you ever really can get an impact is if you go back to I think it was the 2008 timeframe, there was a lot of inflation going on in steel, and we actually saw some short-term gross margin improvement because of it.

That was a little unusual because it was so extreme.

But generally speaking, the lift -- the improvement we had in gross margin is if there's any impact from steel pricing in there, it's negligible.

Not even sure if it's measurable.

Really, you don't think it's material?

No.

Okay.

Then the second question is, and I know you're reluctant to pull out your crystal ball but I'll ask you.

Looking at the compares in the back half of the year and some of your comments were on non-residential construction in terms of the fact that oil and gas, the penumbra or the emanation from oil and gas and the weakness is going to affect more markets than we would like and we would think.

How do you think about the -- if you saw a commercial construction recovery of some stripe in the back half of this year in the compares, are the prospects there that you could still see kind of mid- to high-single-digit organic growth in terms of sales, given the acceleration in non-res?

We believe so.

Okay.

The business really weakened in this three month period.

We don't know where we are in the weakening cycle.

We don't know if it's 90% behind us or 50% behind us.

We just don't know.

Or where oil's going.

What we do know is that I think we've demonstrated an incredible resiliency to managing through it, and I think the selling energy we've added into our stores gives us a great means to defend anything the market's going to deliver to us.

But our focus has always been on -- and Lee touched on it really well at the beginning, and being a farm kid, I appreciate that perspective really well.

You worry about the things you can affect.

I don't worry about the weather when I'm growing up on the farm because I can't affect it.

I worry about how I react to it.

Same thing here.

I don't worry about the economy but we do focus on energy and how we can react to it.

I know that's not a real satisfying answer to your question.

It's but largely because we don't frankly know what the economy's going to deliver in the next 9 to 12 months.

One more question, I'm sorry.

But I mean is there any data points that you've seen in terms of your order book, your sales, that has been particularly troubling or that you're really monitoring closely versus just a normal slowdown versus a pronounced cyclical rollover?

Is there any evidence on one side or the other?

No, there's not.

There's not.

Okay.

Thanks for your time.

Thank you.

Our next question comes from Kwame Webb with Morningstar.

Your line is now open.

Good morning, gentlemen.

Thanks for taking my call today.

Good morning.

So there's been a lot of talk about adding support people to the stores.

Maybe if you could just kind of bring us up-to-date on what you've done in terms of headcount additions for the national sales initiative, just in terms of adding extra bodies, adding extra IT resources, just to help us understand a little bit better why that business seems to be growing a lot faster than it historically was.

You know, I think it's a case of all the things that we've done.

It's a culmination.

It's not about what we did in the last 3 months or 6 months or 12 months.

It's a culmination.

Our store footprint puts us in a position -- picture yourself, you have -- last week, we had our annual customer show down in Nashville, Tennessee.

I had the opportunity over the course of three days to talk to probably more customers than I've ever talked to in a three-day period, which was a wonderful event because what it demonstrated to me is how much opportunity there is out there.

And I think that's what really drives for us long term is maybe sometimes the realization of how big the opportunity really is and what that means for our ability to grow our business.

And so the fact that we positioned ourself with a great store network, staffed with great people, a distribution and support infrastructure behind the scenes to support their day-to-day activities.

Last five years we've built basically a $0.5 billion a year business selling products through vending machines and all those things support a multi-location customer who wants to have product available for their employees but doesn't want to have waste.

That's where vending comes in.

Who wants to have a supplier base that can support them not in 1 location or 5 locations but all 20 locations.

They want consistency.

Yes.

And so that's a really important thing and I think we just over the years have gotten better and better at realizing what we bring to the table.

And probably at least I can speak for myself, realizing just how massive the opportunity is out there.

And that's why I'm a firm believer, that business is growing faster because we're under-represented there, not because the small account business isn't growing.

It's because we're under-represented in one and we're really poised to sell into that and demonstrate what we can do and take advantage of growth there.

And I want to say about a year ago I had a conversation with you guys in terms of just making sure all the incentives were there.

I believe there was some commentary saying that you were comfortable paying double commissions both at the store level and at the national accounts level just to make sure that people weren't competing against each other for business.

Is that still true?

We believe it's harder to grow than it is to maintain.

We pay a higher commission on growth.

Just like we pay a higher bonus to our non-sales personnel on profit growth than on profit.

The status quo is easier than change, and we reward for change.

Your question I believe though is are we stacking commissions both at the -- so, I'm a national account rep.

Yes.

Yes, we pay both.

But it's much like the national account folks are the hunter but our stores do the work day-to-day to support the accounts.

We pay both and that's factored into our decision and it's a great move.

We're all lined up at the Company.

If the Company wins, our employees, our leadership team wins, our support folks win.

We don't, we move on.

And our shareholders win.

Yes.

And just before I hop off, when we talk about these big national account wins, who exactly is this business coming from?

Is it still mom and pops or is it more sort of national, top 15, top 20 type industrial distributors?

It's coming from everywhere.

There's a lot of very, very good local and regional distributors out there.

And they have probably 70% of the market.

And so just the odds would say they should be getting impacted 70% of the time, and so it's both.

But it's a mix.

All right.

Thank you.

You bet.

Thank you.

Our next question comes from Brent Rakers with Thompson Research Group.

Your line is you now open.

Yes, good morning.

I wanted to follow up on the implications, I guess the cost implications of some of the employee additions you're talking about.

Dan, if you hit the targets by the time the fourth quarter comes around, do you have a sense for what the impact would be on overall compensation?

Are we talking about an $8 million to $10 million a quarter type of number?

If you -- the real driver is looking at that, you know, those 300 people we're adding every month.

The way to think about it is we're adding 300 people.

They're working -- let's just say for discussion sake, 20 hours a week and depending on what the geography is, our average hourly rate is probably around $11.

So that's probably the best way to think about the math, Brent, is kind of those three pieces and that's kind of the layering effect we'd have on each month going forward as far as the expense.

Then I guess Dan or Lee, the related question is how do you look at the payback from that?

You're adding -- you're talking about adding basically about 15% FTEs.

How productive does that make the other store sellers to get that revenue growth and gross profit dollar to offset or even to get a decent return on those part-time additions?

It doesn't take a lot of business to get payback on that type of expense, When you spread it across a $100,000-some dollar store.

What it does provide is the employee base that we have in that store, and I'm really talking about the salespeople that we have in that store, the seasoned salespeople.

That's A, not an inexpensive population but more importantly, it's a very productive population but if they're coming in every day to help receive in the truck or to make deliveries, it just -- it removes from their day, from their window the pure amount of time to get out and sell and, again, as I touched on in the earlier question about opportunity, opportunity is staggering.

I still visit a lot of stores, and I'm always amazed by just when I ask people in the store what are some of the customers or where are some of the opportunities in this market, the opportunities are staggering.

And we want to be able to unleash that because this cost at the end of the day on a store-by-store basis because if you look at it, we have around 2,600-2,700 stores.

So we're talking about really adding one person per store over the course of 12 months.

It doesn't take a lot of revenue dollars and gross profit dollars to pay for that and get a pretty attractive return because all your other expenses in the store are fixed.

And Brent, I would just jump in.

When you add a part-timer, now I'm going back to my days in the store, when you add a part-timer into a store where you have a general manager and OSP and a team that understands the value they bring to the market and they can actually present that more often, the return on that part-timer is hard to measure.

But Dan's really touching on a lot of things.

We have opportunity within current customers.

We saw that last week in Nashville.

But we need to be out in the market daily, taking market share and that's what this part-time employee brings, not only, but it's the other side of the coin is the part-timer gets to understand our Company and our culture to make a decision long term for them.

It's a win-win for both the employee coming in and for our teams in the store.

Thank you.

This concludes our question-and-answer session.

I would now like to turn the call back to Lee Hein for closing remarks.

We just want to again thank you.

We appreciate your support.

We don't take it for granted.

And we look forward to talking to you next quarter.

Thank you.

Thanks, everybody.

Have a good day.

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

This does conclude today's program.

You may all disconnect.

Everyone have a great day.