快扣 (FAST) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Fastenal Company Q3 2015 earnings results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ellen Trester of Investor Relations.

Ma'am, you may begin.

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

This call will be hosted by Will Oberton, 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 Will and Dan, with the remainder of the time being opened 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 homepage, investor.fastenal.com.

A replay of the webcast will be available on the website until December 1, 2015, at Midnight Central Time.

As a reminder, today's conference call may include statements regarding the Company's future plans and prospects.

These statements are based on our current expectations, and we undertake no duty to update them.

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

Factors that could cause actual results to differ from anticipated results are contained in the Company's latest earnings release, and periodic filings with the Securities and Exchange Commission, and we encourage you to review those carefully.

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

Thank you, Ellen, and thanks, everybody, for joining the call today.

I'd first like to start out telling you how happy the Board -- Fastenal Board -- and myself are to announce Dan as our new CEO.

We're very excited Dan -- still considered a new guy because he won't be 20 years until next year with the Company -- but we think he's going to do -- we really believe he's going to do a great job.

He has a great team around him that both Dan and I have helped develop over the last 30 years or so.

And we think Fastenal has a great future under Dan's leadership.

Thanks, Dan.

Then I'm going to switch to the quarter.

As you know, it's been a difficult quarter for Fastenal -- talk a little bit about our sales.

September slowed down slightly, and really it's a story of industrial fasteners and the slowness within, or the slowdown within that part of our Business.

In the first quarter, we grew our fastener business 5.5% -- not great, but market -- taking share.

Then by the third quarter, it had dropped to a negative 4.4%, driven by not only volume but also some deflation in the markets, weak steel prices.

We do not believe we're losing share.

Actually, we believe we're still taking some share; not at the rate we would like to take or expect, but still taking share.

On a more positive note, our non-fastener business grew at 5.9%, taking share, growing that business.

That's driven by a great effort by our sales team, and continued success with our vending program.

On the margin side of the Business, I believe the team did a very nice job, considering the balance of things, with margin plus and negative.

Product mix goes against us when the fasteners are not growing.

Customer mix goes against us when our large customers are outgrowing our small customers due to our success with the national accounts program, and then the deflation and weak steel prices.

The positive on the margin that helps support it to where it is, as we -- transportation costs are lower than they would have been a year ago, with lower fuel pricing.

So, there are some puts and takes.

And overall, I think the team has done a very good job of managing the margin.

As Bob Kierlin always reminds me, the margin is more about our pay programs, and our incentives in our pay programs than it is about mix.

Hard-working, smart people have a way to make those -- the margin work for themselves by delivering additional service to our customers, bringing value to the field.

I also feel the team did a nice job on expense control.

We are able to add -- I believe it was almost 1,300 people.

I get so many numbers in my head at this point of the month, I lose it.

But I know close to 1,300 people in the year, and still manage our expenses to have earnings leverage, which -- we've never been able to do that in the past.

That's really a testament, not so much to Dan and I and the senior people, but the people in the trenches that are working every day to run their businesses profitably and create opportunities for themselves.

The last thing, and my comments are going to be very short today, the attitude at Fastenal, the mindset that we're in right now is a mindset of we need to create our own luck.

We are not economists.

We don't know what the economy will do over the next two to three quarters, but we aren't real optimistic that it's going to bounce back quickly, so we need to create our own luck as an Organization.

That's what we want to talk to the investing public about on November 5 -- all the things that we're doing.

We're having an Investor Day on November 5, for those of you that don't know that -- all of the things that we're doing to help separate ourselves, and take more market share in 2016 than we would otherwise be able to do without being very focused.

We're going to talk about our increased investment in our stores.

We're going to talk about the increased investment in our vending program; how we're refocusing that program, and believe it will give us well above average growth through 2016 and beyond.

We're going to talk about our Onsite program.

Dan mentioned that, I believe for the first time, in our quarterly release -- it came out this morning -- about our Onsite program; what we're doing with that, and why we're so bullish on that as a business, is why that brings value to our customers.

And we're going to talk about our web program, our eBusiness.

We know we have fallen behind some of our large competitors in that, and we're working very hard to make efforts to come back on that, and present our customers with a very, very good solution for them to buy products electronically.

There's a common theme to the four things that I just mentioned: our stores, our vending, our Onsite, and our web.

All four of those bring value to our customers.

They bring product closer, so the customer has to do less work to run their business, so they can spend more time running their business than they have to spend buying parts that are necessary to make the place run.

So, with that, I'm going to turn it over to Dan, and he will cover more information on the quarter.

Thank you.

Thanks, Will, and thanks for the message at the start of the call as well.

Good morning, everybody, and thanks for your interest in Fastenal.

I'm going to work to keep this focused on the quarter.

As Will mentioned, we plan on having an Investor Day on Thursday, November 5 at our Indianapolis facility.

We'll be talking a lot about 2016 and beyond, and I think one of the things that will stand out in that day is always looking at the facts at hand in a business.

In what ways are we great, and what ways do we have the best opportunity to leverage that greatness?

The thing that always stands out for me when I think of Fastenal, and that was true 20 years ago when I joined the Organization, and it's true today.

That is: We put a lot of energy into recruiting, identifying talent, and nurturing talent, and unleashing that talent; letting people make decisions in their business to impact their future.

Knowing that, the second thing that we're great at is, early on we figured out how to make money in a footprint with a lot of small locations.

We figured out -- when I look at a lot of industrial distributors -- a lot of great companies, regional companies, national companies -- one thing that stands out is it's really difficult to make money in a store doing $50,000 or $60,000 or $70,000 a month.

But if you can figure that out, as you move beyond that, you can put people close to the customer, you have the ability to provide a different type of service than anybody else.

We thrive in a marketplace that wants to get better, that wants to be helped by some of the tools, some of the things we bring to the table.

That's really what's driven our ability to excel, is, if you put great people close to the customer, and you have a business model with a structurally low operating cost, you can compensate people fairly for what they're doing.

And you build a great machine over time, and you build a great Organization over time.

That's really what we've done, and we want to talk about that in early November.

But getting back to the quarter, I have tried to incorporate, over the last few quarters, into our press release -- obviously, the usual items that we talk about and disclose, but really some quick bullets on what are some negatives and positives in the quarter?

And I always want to get the negatives out of the way, so we can then talk about the positives because I think the one list outshines the other.

But the reality of it is, in 2015, we, our customers, have been hit hard by the slowdown in the oil and gas sector, and hit hard by the strength of the US dollar and the ability of our customers to compete effectively across the globe.

And 89% of our sales are in the US, so anything that's negative to the US market is negative to us in the short term, as far as managing through it.

The other item, and you saw it in our September number, we have seen stabilization in a lot of parts of our Business in recent months.

The Texas market for us did take a little bit of a step down in September.

And the other item I noted is our Canadian business.

And this is all in local currency, so I want everybody to be mindful of that.

I've heard a lot about the negatives in the Canadian market and the weakness in the Canadian market.

We continue to -- I put it in my negatives because we're only growing at 6%, and because we were growing at 10% in the second quarter.

But I continue to look at that and say -- it's a negative in that, that business has slowed, but it's really a positive in what we're able to accomplish up there in a very tough environment.

It demonstrates the types of things that we can do.

Jeff Watts and his team are doing a wonderful job with that business of continuing to manage through and prosper.

If I looked at individual regions around the country, there's a lot of similar stories to our Business.

It's just that you have some geographic areas that are getting hit really hard, and those areas are big areas for us.

But the positive is we're executing well in a lot of places.

That shines out in some of the positives I mentioned.

We entered the year saying we weren't sure what the oil and gas was going to mean for us in 2015, but we're going to invest in people at the store level.

We're going to invest to keep growing our Business long term because the opportunities for us are immense.

Year to date, we've added 1,234 people into our stores.

In the last 12 months, we've added just over 1,300, and we've continued to invest in the energy of the Business and I think that's meaningful.

I did introduce our 2016 estimate for store openings.

Right now, we're citing a range of 60 to 75 stores; so, 2% to 3%.

I'm happy to talk about that.

The last few years, most of the discussion has been about looking at some of our locations, rationalizing some of our locations.

And we'll always do that, but also talking about what we're doing to grow the Business.

Because, again, when you have the ability to break a profit at a reasonable level in the store, and you see opportunities to take market share in a lot of different ways, get close to your customer, this is one of those pieces.

The other thing that is positive is, when I look at our national accounts business -- and I've had the opportunity to work with the folks in our national accounts team quite extensively over the last year or so.

Some things that I've learned over the last year is the opportunity is immense, and we're seeing that shine through in our signings.

We might have existing customers that their business has been weakened, and we have their business, but their business is down 10%, 20%, 30%.

We can't change that in the short term.

What we can change is -- are we doing everything we can to get all of the wallet share we can at that facility with that customer?

Are we doing things to help their business?

Because where we help our customers, they help us back with more business.

Are we doing those things, and are we out meeting new customers every day?

When I look at the pace of signings, we are on pace to easily exceed our last three years of individual signings with new customers.

I feel very good about where we are, even year to date, and the fact that we're almost at the 2014 number right now as far as signings, and we'll easily exceed it through the end of the year.

So, we're very excited about what's going on in our national accounts business.

The Onsite -- as Will mentioned, it's the first time I've ever mentioned it in an earnings release.

When I look at our Onsite business, and I take a little bit more expansive view of it.

When I think of that business, I include in that what we call Onsite today, as well as what we call strategic account stores.

When I combine that business, it's really about dedicated locations, either physically inside the customer's facility, or really nearby -- dedicated locations that are about this one customer, and getting closer and closer to that customer; helping them in their business, becoming more knowledgeable of their business.

That business over the last 15 years has grown to be almost 15% of our -- just over 15% of our sales today.

So, it's about a third of our national account business, and it's a great win-win relationship.

We can get on site, lean up some of our operations, and really take a much wider view of things we can do for the customer.

I think that bodes well for us into the future, and we'll be talking on that, as I mentioned, in our meeting in early November.

As Will mentioned, our gross profit improved in the quarter.

We're doing a lot of things to make good, wise decisions every day at the store level, at the district level, on how we price our product.

Clearly, the fastener piece is tough because there's some deflation going on in that market right now.

It's creating top-line issues for us; it's creating some gross margin issues for us.

Despite that, we continue to manage through it, and eked out a nominal improvement in our gross profit.

Finally, and this is about our district managers and about our regional leaders that are managing the Business really well in a tough environment.

We've asked them to go out and add people; and to that they've added 1,300 people into the Business.

We've asked them to open some locations, to keep building for the future in an environment where our existing book of business is going through a very weak period.

Despite all those things, we had incremental margin of almost 50% in the quarter.

I'm proud of them for what they accomplish because that's about them, and because we're asking them to do a lot of things.

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

Thank you.

(Operator Instructions)

Our first question comes from Adam Uhlman of Cleveland Research.

Your line is open.

Hi, guys.

Good morning.

Hey, Adam.

Good morning, Adam.

Congrats, Dan, on the CEO position.

Thank you.

The one area that I'd like to start with -- you talked about it a bit in the release and in the prepared remarks about the national account wins.

I'm wondering if there's any way to quantify the opportunity that's popped up with a lot of these wins already on track, ahead of last year.

Is that the revenue opportunity or just the sheer numbers of them, and so, could you help us with that?

I guess the biggest way to think about it is national accounts, when we started that business 20 years ago, was low-single digits as a percent of our Business.

Today, it's about 46% of our Business.

When I think of national accounts, and I add to that other large customer pieces that we don't classify as national account, but large regional accounts, a lot of our government business -- when you start adding all those pieces together, you're probably talking 56%, 57% of our Business.

I don't know if everybody knows all the facts of life, but I've always been a firm believer -- 80%/20% works in a lot of things.

I really believe the large account business, the national account business can be a 70%, 75%, maybe 80% piece of our Business if you broaden the definition a little bit, of our Business long term.

The real question is: How do we keep growing that business?

Given that -- we have a structural advantage in the marketplace.

We have people close by a lot of these locations.

A lot of these locations are not in the major metros; they are in various locations through the states, through the provinces of Canada, around the planet.

And so, the fact that we can get close to a lot of them, and grow it long term, I think is tremendous because I do believe that's going to be a driver of our growth long term.

Vending and Onsite are merely another tool to that -- growing that business.

Okay.

I'm just wondering because the revenues were only up 1% in the quarter.

If nothing changes next year, should we expect to get another -- (multiple speakers)

The revenues are up [1%] because our top [line] dropped.

If you look at where we've done a great job in the last three or four years, it's heavy industry; and that heavy industry has dropped tremendously.

Dan mentioned oil and the strong dollar.

The other big one is agriculture for us, and mining, things like that.

So, the gap between us signing a lot more accounts and our national account performance -- it's two different things right now.

We're taking share for the future.

The economy picks up, we will be rewarded for that, is what we believe.

Okay, thanks.

Does that make sense?

Thank you.

Our next question comes from Robert Barry of Susquehanna.

Your line is open.

Hey, guys, good morning.

Good morning, Robert.

Dan, congratulations.

Thank you.

It sounds like, even though the top line is decelerating, that the messaging on investment is that it's going to remain strong, maybe even accelerate with more store openings, eCommerce investment, et cetera.

So, curious how we should be thinking about the SG&A line over the next 12 to 18 months?

What we've -- over the last couple of quarters, we've spent a lot of time looking at where we can make a maximum investment and still maintain at least not negative leverage, some positive leverage like we did in this quarter.

We've done a nice job of that.

So, we're going to invest in -- we are going to talk about investing in some inventory for our stores.

But we're going to take that inventory out of our -- we're going to redeploy the inventory from distribution to the front line, and we have a very good plan for that.

We talk about vending.

We've added -- greatly increased our sales force.

We've found other areas to offset those expenses, and we've found ways to pay for those people.

So, what we've had to do is we've had to become very focused.

One of the reasons we have to do that is for the investing public.

But the bigger reason is for our employees who get paid off the performance of the Business.

So, we're very focused on creating our own luck.

But at the same time, we're not going to give away the bank, and destroy the quarter.

So, looking forward, tight expense control, continue to add people at a certain level, and hopefully separate ourselves with additional growth.

One thing you have to always keep in perspective, and we've touched on this a lot over the last seven, eight years, is that what we've always coined the pathway to profit, and that is -- anything that we can do that drives our average store to get a little bit bigger has incredible profit gains built into it.

So, you can invest some dollars to do that.

The only thing that's on our list that doesn't drive that, in the ultimate sense, is opening 60 or 75 stores.

We know what that costs, and that's a pretty modest cost.

So, it's really all the rest of the things are about things we can do to drive the top line, because the negatives that we've had in our Business are already embedded in our Business.

The negatives that have occurred in 2015, the customer that's down 10% or 15% or 20% or 30%, that's already inherent in our Business.

So, the things that we can do to drive market share gains faster, whether that's national account signings or driving our vending, driving our Onsite as a complement to the national account signings, all those are wins that are highly profitable wins, and allow us the luxury of investing.

Guys, that all makes sense, and I think the focus on the top line seems reasonable, but it does also sound like you're willing to live with, at least in the near term, what could be very low incrementals, given what's happening on the top line, and yet this commitment to pushing on the investment.

Is that fair?

How are you thinking about the incrementals?

I think that's fair.

Although 50% incremental is great, when you only have a couple percentage points of earnings growth, it doesn't add up in real dollars.

Our pathway, and I believe what our true long-term shareholders want, is they want us to grow, and we're going to work very hard in that growth, but be very smart about it.

We are not going to be trying a bunch of crazy things that we don't -- new things -- because we don't have a lot of luxury to do that right now.

That's, as we laid -- both Dan and I laid them out -- we're going to invest in things that are very tried and true with a great team that knows how to execute, and we're going to have to say no a lot to good ideas that don't make the top of the list.

In doing that, we believe we can be on that balance point, a little bit of incremental earnings growth, but that's not our major focus.

Our major focus is getting some growth back, and doing it wisely.

That's why -- using the things we know very well, and keeping our costs low on every investment we make.

We're good at that.

Great, thank you, guys.

Thanks, Rob.

Thank you.

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

Your line is open.

Thank you.

Good morning, everybody, and congratulations, Dan.

Good morning, Dave.

Thanks.

First off, on the deflation, both of you in your monologues mentioned it, and I'm wondering if you could tell us what the top-line impact on revenues of fasteners and non-fasteners were in the current quarter relative to pricing?

The deflation is really about the fastener side of the Business, and it's about 40% of our Business.

We're seeing about 2 points of deflation right now in the Business.

Okay.

Then, as it relates to your FIFO inventory methodology, as we look ahead to 2016, are there any implications there, or generally what are your expectations for pricing and margins in 2016?

Sure.

Our inventory turns about twice a year.

That's our overall inventory.

Our fasteners turns slower than that, and so the deflation has been a [full] this year.

It's hurt our top line.

It's hurt our gross margin.

But we really haven't seen much of the benefits through our cost of goods, because that inventory is what's coming on our shelves.

And if you think about the pace of our Business, if our Business is growing faster than we expect, that inventory is turning a little faster.

And if we're growing a little bit slower, that inventory stretches out a little bit.

But that bodes well for us going into 2016, that that will be a friend to our Business.

Okay.

So, you expect pricing out the door to remain relatively benign then, and you're benefiting from the lower-cost inventory?

The pricing out the door is going to depend on what the market is doing in the next 12 months, Dave, more than anything.

Is the market stable?

Is the market improving?

Is the market weakening?

If the market is stable or improving, I think we can do a pretty good job holding on to that.

And most of it will be about the new business we're adding, and is there a mix difference going on, than anything else.

All right.

Just to be clear, the 2% you mentioned, that's revenues to Fastenal on fasteners, in terms of pricing?

Yes.

Okay, very good.

One clarification here: When Will was talking, I think he cut out a little bit.

Will, you were saying something about creating your own luck, and then I believe you said you're not optimistic things will bounce back quickly?

Is that what you said, or did I catch that wrong?

No, I'm saying that we're not planning -- I'm not -- personally I'm not real optimistic when I look at everything going on in the world, and that's the way the thinking is that let's create our own luck.

If I'm wrong, I'll be the happiest guy in the room.

But right now, when you look at election year, you look at the turmoil in the Middle East, China, and many other parts of the world, weak economy in Europe, there's nothing that points -- doesn't look like oil is going to come back and corn is probably low for a long time.

There aren't a lot of strong economic indicators that are going to push us up.

But we're in a huge market.

We're in a market that, in the US alone is, who knows, $100 billion to $150 billion; it's at least $100 billion, we know that.

So, we have to go out and take share.

And our problem today isn't that we aren't taking share.

Our problem today is that our base business, as Dan said earlier, has shrunk.

Our good existing customers are buying less from us.

So, to grow at 2%, we have to take share at a much faster rate.

If the economy just stabilizes, and that base of business just stays flat, we're going to stack business on top and we're going to separate ourselves from our competitors in the market.

And that's what we're planning on.

If it were to bounce back, and we were to do that at the same time, then you'll see growth like we had -- I believe you'll see growth like we had in 2010, where we are getting the benefit of our existing customers growing at a rapid pace and new business piling on top of that.

So, those are the two scenarios.

My crystal ball tells me it's probably the one where we take share and add it on top of a more stable base.

Got it.

Thanks a lot, guys.

Thank you.

Our next question comes from Robert McCarthy of Stifel Nicolaus.

Your line is open.

Good morning, everyone.

Congratulations, Dan.

Thank you.

A few questions here: In terms of -- we spoke in the past that the expectation is that perhaps you would have seen growth in September given what you saw in the recent pronouncements in monthly sales releases, but it's obviously inflected negatively.

Could you expand upon what your expectations are, given the tougher compares from the fourth quarter into 1Q, given the stack of what you're seeing?

What should we expect qualitatively for growth in the fourth quarter?

We've never been good at forecasting the future, so we've tended to stay away from it.

What we always try to do is talk about what we're doing to invest, and how we're going to manage through it.

We were disappointed by the September number as well, with 10 days left in the month, and it was looking to be slightly negative, as we saw.

So, it wasn't a case of strong finish, weak finish, that kind of thing; it was pretty steady throughout the month.

It was more pronounced in certain geographic areas, like I talked about, because, like I say, I look around the country and I see a lot of positive things, but saw some things that did worsen.

So --

Business is slow.

Business is slow.

I don't think it's going to -- I don't see anything externally that's going to cause it to pick up in the next three months.

And so, Will's point of we need to make our own luck -- we need to look at our Business, we need to look at things we're really good at, things that -- where we have great relationships with customers, and set our priorities accordingly, and drive our own growth, make our own luck.

Yes.

And then just as a follow-up to that, I'd take your comments to imply that the fourth quarter, given what we see in terms of the stack of compares, would be negative in terms of the top line.

How do you think about the gross margin, given the supplier, or lack of supplier incentives, and the seasonal nature?

Should we be thinking about a sequential downtick there qualitatively?

Probably, right?

How do you think about the fourth quarter in terms of the factors that are going to drive gross margin there?

I think we'll manage through it just fine.

We know our team on the supply side, managing our transportation areas, they are ready to manage through that piece.

They know what we're expecting, as well.

When I think of the mix of our business, and what are the things that are positive and negative to our fourth quarter and our 2016, I believe we can manage the gross margin through it just fine.

And so, I'm optimistically looking at 2016 and the fourth-quarter 2015, that we'll manage through it in true Fastenal style, and to be just fine with our gross margin.

One last question, if you'll indulge me: In terms of the 60 to 65 of store adds, could you talk just qualitatively how we should think about CapEx and OpEx there?

What are the learnings from basically driving growth at your existing stores now that -- are you looking at different geographies or different footprints or different configurations for your stores, so that you'll get a better return on the store growth, because probably you're optimizing for the right region?

First off on the CapEx side, our CapEx, whether you are looking at 2015 or 2016 and beyond, is there is never much CapEx that goes into new stores.

If you think about a new store, the CapEx going into it, it's really centered on computer system, some shelving, and a pickup, and the rest of it's working capital, primarily inventory obviously.

So, the investment going into a new store -- we dialed that in years ago.

We're really, really efficient about that.

Our CapEx going into next year is really about -- what are we doing on the front of vending?

What are we doing as far as our distribution centers?

And what are we doing as far as our vehicle fleet, because those are really where the dollars are driven, not if we open 75 stores or if we open 25 stores.

We'll get further color on that at the November analyst day, in terms of how you're thinking about the CapEx, but clearly, given the level of investment, you would expect an uptick there?

No, no, I can give a preliminary number on our CapEx for next year.

Yes?

This year, we're going to be in that mid-$150 millions neighborhood, between $155 million and $158 million, and that's very much in line with what we talked about earlier in the year.

I would expect next year our CapEx will drop meaningfully and it?ll be in that $130 million neighborhood, maybe $125 million (multiple speakers).

What's the driver of that, given the level of investing in vending and DCs, et cetera?

The real driver of that is, if you think about our Business over the last few years, we had two big drivers of CapEx.

One was -- we came out a number of years ago and said, you know what?

We've automated two of our distribution centers.

We really like what we've seen, and we're going to do that into the future, and we're going to do it aggressively.

So, we went from having two distribution centers, fully automated; today, about 84% of our PICs are done through automated DCs.

And so, now what happens is, in an Akron, Ohio, for example, where we have a highly automated distribution center, the dollars that go into there today are more about how much is that business growing?

What do we need in distribution capacity to support that growth?

But we're not automating the facility; we're expanding the facility.

That's a completely different proposition.

So, our CapEx, when I think of distribution, will drop meaningfully from where it was in each of the last three years.

The second one is vending.

When we started vending back a number of years ago, we really didn't know how fast this thing would grow.

If you recall, in 2012, we started the year saying, geez, if we could sign X number, 10,000 machines for the year, we would consider that a home run.

And we hit that number, I believe it was around July 6.

The one thing that we wanted to do is we wanted to have our powder dry to support that business.

So, not only did we invest capital in the machines we were deploying, we invested capital in the machines to be deployed, because we didn't want to outshoot our ability to produce machines.

So, we have an inventory of machines that we've been working through, and so that puts us in a luxury of now managing our vending equipment to the needs of the Business, as opposed to staying well out ahead of it because we have a better idea of our pace.

Well, I'll see you in Indianapolis.

Very good.

Great.

Thank you.

Look forward to it.

Thank you.

Our next question comes from Ryan Merkel of William Blair.

Your line is open.

Thanks.

Good morning, everyone.

We've covered a lot of ground here, but I just want to go back to the incremental margins just for a second.

Just assuming, next year, sales are up only 2%, 3%, let's say, what would incremental margins look like, you think, given that you're going to ramp some of the investment spend a bit more?

Incremental margins would probably move a lot closer to our operating profit.

Okay.

We wouldn't be in the -- let's face it, right now we're in an unusual place of incremental margins being north of 35%.

In our history, you look at a lot of our -- over the last decade, a 25% to low-30%s was a much normal range.

And I think in an environment, if you're investing for the future, to hope for being on that upper end of the range probably isn't realistic, and you move down closer to our operating margin.

But the piece you have to keep in the back of your mind is we have a natural lift to our business profit as we add dollars to our individual stores.

So, if we're adding -- in your example, Ryan, if we're adding 2% to 3% top-line growth, and we're opening 2% to 3% stores, we're treading water there.

But we don't have some of the mix issues going on that we've had going on over the last few years, if we're only doing 2% or 3%.

We're going to be very focused on beating that sales number.

Absolutely.

That's the way we win, and that's the way all -- everyone dependent on us, our shareholders and our employees, win.

If the economy just stabilizes, our customer base stabilizes, we have a very good chance of making that happen, we believe.

Absolutely fair.

I hope it's better than 2%, 3%, too.

I just wanted to calibrate everybody on what the incremental margin would look like under that more dire outlook.

Then just lastly, Fastenal growing 0% here in September in a non-recessionary environment is pretty surprising for a lot of us.

But if we just step back and we think about quantifying some of the headwinds, and I don't want to put words in your mouth, but it seems to me oil and gas customers are probably down, what, 30% this year, might be a 3% headwind to sales?

And then what about exports?

I've got to think that's an even bigger impact, but you tell me, and we've also got FX as a 1-point headwind.

A couple things: First off, the premise of the question, I would argue that anybody selling into the industrial market is not selling into a non-recessionary environment.

(multiple speakers) I agree with you there.

The industrial environment is in a recession.

I don't care what anybody says, because nobody knows that market better than we do with the number -- we touch 250,000 active customers a month.

Cat, Deere, Emerson, Terex, name the list, they are all down 8% to 10%.

Right.

If I look at our top -- last quarter, I cited some stats of our top-25 customers.

I'll take a broader brush, and I'll look at our top 100.

Right now, in the third quarter, 44 of our top-100 customers are negative.

We have not lost any business with that group; they are negative in their spend.

In some cases, they are negative because their business is very negative and they're somewhat negative with us; in some cases, their business is treading water and they've decided to tighten their belt.

Look at our CapEx next year.

There is going to be suppliers to our capital spend that will have a tighter year in 2016 than they have in 2015 because we're not automating for two, three, four distribution centers in the next 12 months.

Of that 44 that were negative, 32 of them were negative more than 10%.

Of that 44 that's negative, 17 of them were negative more than 25%.

That's a sign of a recessionary environment, because despite all of that, we continue to add customers at a faster pace than we've done in recent years, which is about momentum into the future.

We continue to grow our national account business, which is about momentum.

But we have existing customers that are struggling through a pretty weak environment in their own business.

Right.

You read my research.

You know I agree with you in the recession for the heavy manufacturing.

I just meant the traditional GDP for the US is negative two quarters in a row.

Really, the focus of my question was -- if I think about the headwinds this year, oil and gas 3%, exports maybe 4% to 5%, FX 1 point -- were those things to turn around, you could be back to a 10%-plus top-line grower.

Yes.

So, I was just trying to quantify --

Even if they just level out.

Even if they just (multiple speakers)

Just level out.

Right.

Okay, well, great, thanks.

Thank you.

Thank you.

Our next question comes from Sam Darkatsh with Raymond James.

Your line is open.

Good morning, and again, Dan, kudos on a very well-deserved promotion.

I want to make sure that's reiterated.

Thanks, Sam.

Two, three questions, just housekeeping of nature: First off, can you give us, Dan, what the machine equivalents were, the vending machine equivalents, both signed during the quarter as well as the installed base?

I'm going to -- I don't have that number, but I'm going to throw out one stat that's impressive.

The volume through the machine, sales dollars through the machine, grew 16.6% in the quarter, just in a very difficult environment.

I think I said this to Ryan Merkel, and I saw him recently that that's about a $600-million business for us, growing in high-double digit -- almost 17% -- probably the fastest growing industrial business out there of that size.

So, we're seeing very, very good growth.

And that's the reason that, as a team, we decided to double down on that growth.

Now, I think Dan has his numbers here; he's paging through.

Yes, I have the number of units in service.

I don't have a copy of the 10-Q in front of me.

We will be filing that on Friday, and all of the details are in there.

But our equivalent number of units in service at the end of the quarter is 40,067, and the actual device count is 53,547.

And, Sam, we're -- internally, we are more focused on the growth through the machine than any other metric because that's what it's all about.

That's what creates the commission and the profit.

Thank you for that.

And a couple more quick questions, if I could.

If I'm understanding it, Dan, the store openings of 60 to 75 next year is a gross number.

I'm guessing you may still have some closings that are anticipated.

Do you have a sense of what the net store count -- the change in the net store count might be next year?

This is a little bit of a stab in the dark.

I would suspect, if we closed 20 stores, that wouldn't surprise me.

I don't have a firm number on that, but that wouldn't surprise me.

So, a number -- the number I've had in my head is we'll probably add 50 net next year.

And then the last question: You had a little bit -- you repurchased, I believe, about 600,000 shares in the quarter, which was a little bit below the pace first half of the year.

Was that timing?

Was there something strategic to that?

Where do you anticipate the level or the pace of repos over the near to intermediate term?

Yes, we hit it really hard in the second quarter, as we talked about on the July call.

We pulled the pace back a little bit.

Part of it, we're in discussions right now to up our line nominally to have dollars in place for that and some other pieces that are going on with our business in the next 9 to 12 months.

But we'll probably continue at that pace, maybe a little bit higher, in the next few quarters.

A lot of it is going to depend on where the market values the stock, too.

At the third-quarter pace, you're referring to?

Yes.

Okay.

Thank you, gentlemen.

I appreciate it.

Much obliged.

Thanks, Sam.

Thank you.

This concludes our Q&A session.

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

Again -- this is Dan speaking -- we will reiterate, thank you for participating on our call today.

Thank you for your continued support of Fastenal.

And our investor day in early November -- in addition to hosting an investor day, we will be broadcasting that on the web for people to listen to remotely.

Thank you, and have a good day.

Thank you.

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.