快扣 (FAST) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fastenal Company third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

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

Ma'am, you may begin.

Welcome to the Fastenal Company 2016 third-quarter earnings conference call.

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

The call will last for up to 45 minutes, and we'll start with a general overview of our quarterly results and operations, with the remainder of the time being opened for questions and answers.

Today's conference call is a proprietary Fastenal presentation and it 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, 2016 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 factors carefully.

I would now like to turn the call over to Mr. Dan Florness.

Good morning, everybody, and thank you for joining in on our earnings call this morning.

And I also want to welcome Holden, to not only the earnings call, but to our organization as well.

Holden's been here now for I believe, 5 1/2 weeks, so he's a seasoned veteran of the Fastenal organization.

When we started 2016, had a handful of expectations for the year.

And I thought I'd run through those expectations, and talk a little bit how the year's played out of relative to those expectations.

First expectation for the year, we're going to open some stores.

We hadn't opened much stores in recent years.

We're going to open a few more stores, not a lot, but a few more, because that is part of our long-term growth, and it's about always exploring ways to grow in different markets.

The second thing we were going to do is we were going to reinvigorate our store network.

We talked about the CSP 16 at our Investor Day last November.

Essentially, we injected about $75 million of inventory in our store network to be a better supplier, a more efficient supplier, and a better same-day supplier.

And we're pretty good already, but let's get better.

Third item, let's reinvigorate our vending.

We've created a wonderful vending business in the last five years, but in the last two years, we've lost some steam.

In 2014 and 2015, we were signing about 4,000 a quarter.

So we were -- had run rates of about 16,000 a year, and really saw there's a lot more potential there, and our capabilities are strong, and this naturally works with our store and Onsite network.

Let's go after this more aggressively.

The fourth, speaking of our Onsite network, let's transition to an Onsite mentality for growth.

History says we'll sign about 5 to10 a year.

In 2015, we had started the transition, and we signed about 80.

Could we sign 200 in 2016?

Five, our comps going to ease in Q3 (multiple speakers -- technical difficulty) Sorry about that, folks.

I'm not sure where that came from.

Our comps were going to ease a bit in Q3, would allow for mid single-digit growth in sales, and gives us a little more flexibility on what we could afford to spend, as we approached the year.

Let's focus on our growth drivers in 2016.

Let's demonstrate to ourselves and others that we can grow in this environment.

And let our regional vice presidents, our district manager group, our hub manager group, our support leads run their business.

It's an incredibly talented group.

They run an incredibly impressive business.

Let them run it, let's focus on our growth drivers.

And points 7, 8, 9 and 10, serve your customer, serve them every day, improve their business and ours, and be creative, we will grow.

What are some of the realities of the year?

We are opening some stores.

We opened about 30 -- we'll have opened between 35 and 40 stores for the year.

I think that's a good number for us in 2016.

One item that changed on our stores is in May of 2016, the Department of Labor published some new rules regarding exempt employees.

This rule, while it doesn't impact our Company in totality, because it essentially raised the threshold of what qualifies as an exempt employee from a -- there's rules for duties that qualify you, and there's also a rule for pay.

And those rules were increased dramatically in 2016.

Because of that change, it does impact our smaller stores.

Because in our smaller stores we don't always compensate above that $48,000 level, because we have folks that are building a business, and we're a sales-minded organization.

But the opportunity is huge.

But as you all know from the years of us publishing our pathway to profit data, stores under $75,000 a month are not profitable -- are marginally profitable, and this damages that.

And we decided to close some stores.

We moved fairly aggressively on it.

We closed 65 stores in Q3.

We have another 32 stores queued up to close in Q4, and we're also evaluating another group we're going to look at in 2017.

But because of the close to 100 stores that we identified for closure, we did book up a reserve in the third quarter for those closures primarily related to the occupancy.

But we moved fairly quickly on it.

These closures should have a minimum impact on our revenue, similar to closures in the past, because the stores have another -- these locations have another store in reasonably close proximity.

And as you know from previous conversations, the vast majority of our revenue is business to business, most of it going out our back door, and we're delivering to the customer sites.

So if we're serving a market with five stores versus four stores, or three stores versus four stores, doesn't necessarily change our ability to grow or ability to maintain the business we have.

And typically, we maintain 90%-plus of the business when we close a store.

But it did change a bit of our thought process, as we've gone through the year, just because of the changing landscape, the reality we live in.

CSP 16, we moved aggressively on that early in the year.

Our store conversion is largely behind us.

We believe this broadens our ability to -- as I mentioned earlier be a better same day supplier, appeal to a broader range of customers.

We believe ultimately this will help us, as we go into 2017 with our construction customers.

But we believe it makes us a more efficient business.

On vending, our run rate has improved.

We've been signing 4,700 to 4,800 per quarter, instead of the closer to 4,000 we were doing in the last two years.

Right now, our run rate, if you just take that number and annualize it, it's about 19,000 run rate versus the 16,000 the last couple years.

This is okay.

It's not great.

We added 200 and some people earlier in the year to ramp this number up.

That ramp has been moving a little bit slower than I would have liked.

I'd like the quarterly number to start with a five versus a four.

But we've improved it nicely.

And I also have to acknowledge the fact that, as you all know from previous calls, we signed a rather sizable vending leasing program earlier in the first half of the year, and we've deployed in the last four months roughly 11,000 vending machines into that program.

And that's created a little bit of distraction to our program.

But I'd still like a number that starts with a five, but we've made nice progress.

Regarding the transition to Onsite, I'm frankly impressed with our team.

We still have work to do, but I'm impressed with the fact that we signed 133 year-to-date.

That put us on pace to do roughly 180.

Our record year last year was 80.

I believe we're creating momentum for our business into the future.

Because the closer we get to the customer, whether that be with our store network, our vending platform, or our Onsite, history has demonstrated we take market share when we do that, because we have a servant's heart within our organization.

Our covenant with our customer, we will help you be a better business by being a great supplier, a great partner to you, and the Onsite strategy only makes that better.

And I'm very pleased with the transition we're making, and that I expect us to continue making as we enter 2017.

Point five, the comps are easing in the third quarter, and that will help us.

Unfortunately, we're still stuck in that band of [1%] to [3%].

If you look at it from Q2 to Q3, our sales are treading water, but there's two stories going on in there.

Our fastener business continues to be weak.

That business has been weak since the spring of 2015, and our fastener revenue dropped about $10 million from Q2 to Q3.

Under the hood, our fastener margin improved nominally from Q2 to Q3.

Under the hood, our non-fastener margin improved nominally from Q2 to Q3.

We didn't execute that -- we haven't been executing that well in my opinion in 2016 in general on our freight.

Our propensity to charge freight has weakened in the last six, seven quarters.

Lower fuel prices is part of the reason, discipline is the other, perhaps the marketplaces makes it a little more challenging to charge freight.

But there's still ample examples where we can charge it, and we're not, and we need to be better at executing on that front.

But the product margins under the hood, again, we had mix going against us, because the fastener business was down about $10 million.

We continue to see us inching along in improving the relative gross margin on the components.

If sales are up 5%, 6% as we were expecting, the fact that our expenses are up a little above [5%] would be okay, wouldn't be great but it would be okay.

Unfortunately, that's not the fact pattern, and we're pulling some levers on expenses.

One of those levers that we're pulling is to help offset some of the [DOL] impacts as we go into 2017, to offset some of the investment impacts we made in 2016.

The regulatory environment, well, you all watch the news.

I'm not sharing a secret here.

It's not a great environment to do business in.

But that's the world we live in, and that's the world we need to contend with, and there's a lot of uncertainty.

But the certainty I do know, is that we have a great organization, a great group of people out there managing our business.

And we're going to continue to focus on our growth drivers, and we're going to continue to let our regional vice presidents, our district managers, our hub managers, our support leads run their respective groups.

But we'll need to be mindful of the environment we're in.

It's a different earnings call for me this quarter, and as the last couple quarters have been, in that I don't have a bunch of spreadsheets sitting in front of me, ready to answer any and every question, just talking about the business.

And I'm upbeat about our business, as I look forward.

There's a lot of good things, from a momentum standpoint, but it was a tough quarter.

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

Great.

Thank you, Dan.

I'll cover the numbers, and try to give a little bit of color into what we saw that generated them.

In terms of the revenues, total and daily sales in the third quarter were both up 1.8%.

That's the third straight quarter where we've seen daily sales growth between that 1.5% and 2% range.

We did like that the quarter finished in September with a daily sales rate up 2.8%.

But as you all know, the comparison did get quite a bit easier, and that's a pattern that's going to continue into the fourth quarter.

Qualitatively, it's not clear to us that the tone changed much in the third quarter.

We saw that the sales of fasteners into heavy manufacturing, construction end markets were relatively weak as we've seen before.

The same could be said of our largest customers.

Our top 100 was flat to maybe down sightly during the period.

But again, these are the same dynamics that have persisted throughout 2016.

If there was any incremental change, it may have been that the US business grew a little less quickly, while Canada and Mexico actually strengthened.

But at the end of the day, it all blended into what we thought was a fairly consistent quarterly sales performance.

This sluggishness does mask the progress we're making on our growth drivers.

Dan alluded to some of this, but we did sign over 4,700 vending machines in the third quarter.

Our total installed base rose by more than 2,000 units.

We now have 60,000 -- more than 60,000 in the field.

That's a figure that does not include the machines that are related to our lease locker program which is being rolled out as we expected it to be.

We also signed 41 Onsites in the third quarter.

We're up to about 133 year-to-date.

The SKUs related to our CSP 16 initiative are growing faster than the Company as a whole.

And we'll provide some additional insights into the CSP 16 and Onsite initiatives after the fourth quarter.

But again, overall, we think that those initiatives are proceeding nicely.

In terms of gross profit, our gross margin was 49.3% in the third quarter.

That's down 120 basis points annually, and that's down 20 basis points versus last quarter.

We've discussed the gross margin ramifications related to the relative growth of our non-fastener large customer mix in the short and intermediate term.

And that dynamic was significant in the annual decline we saw this quarter.

In particular, fasteners as you saw as a percentage of sales, that's down 180 basis points year-over-year to 36.1%.

That does have an impact on our gross margin overall.

That was also a factor in our modest sequential decline.

But that said, we're a bit disappointed that the gross margin slipped in the third quarter.

We looked at the gross margin of the fastener and non-fastener categories.

They remained stable.

We did good work there.

We don't believe that we saw any meaningful pressure within the product categories themselves.

We did see higher freight costs this quarter.

That relates to both the weak demand, also perhaps our own diligence around inventory levels during the quarter.

But regardless, the freight was a significant contributor to the downward drift we saw in the sequential gross margin, Q2 to Q3 of 2016.

In terms of operating expenses, our operating margin was 20% in the quarter.

That's down 210 basis points annually, and down 60 basis points sequentially.

On a year-over-year basis, our total headcount at the end of the third quarter was down 115 people.

That decline was greater in our part-time labor.

As a result, the full-time equivalent headcount was actually still up 1.4% in the quarter.

And that reflects both the Fasteners, Inc.

acquisition as well as the additions we made to vending and Onsites.

Sequentially, total headcount at the end of the third quarter was down 460 people.

The full-time equivalent was down 4.8%.

And that just relates to what's become prudent headcount management, given the sluggish demand environment, and our efforts to prune some of our stores.

We did see an increase in healthcare expenses in this quarter.

However, overall, the employee-related expense as a percentage of sales, we thought were stable year-over-year, and frankly improved slightly sequentially.

Occupancy, expenses there were up, both on an annual and sequential basis.

This relates to three things.

First and most significantly, is the continued growth in our vending equipment.

Revenues through our vending machines were still up almost 10% in the third quarter.

That's well above our corporate growth, so we feel good about these investments.

Secondly, we continue to invest in our distribution infrastructure, primarily related to automation initiatives we've had under way.

We think that that will contribute to long-term productivity.

And then third, in the third quarter, the expense was also lifted due to the closing of those 65 stores.

For those reasons in the short-term, and given the current environment, occupancy expenses are certainly playing a material role in pushing down our near-term margin.

Cash flow generation, we generated $133 million in operating cash in the third quarter.

That's down about 5% versus last year, really related just to lower income this period.

But it does represent 105% of this quarter's net income which is actually slightly better than last year.

We did have a free cash deficit of about $27 million.

That includes our having paid our dividend.

But we also saw capital spending rise, and that's simply a function of the lease locker program with Walmart, and sort of the costs related to that.

We didn't buy back any shares in the period, and we did add about $15 million in debt to finance the free cash shortfall.

Lastly, on balance sheet, our total debt at the end of the third quarter is now about $445 million.

That is up $130 million from the end of third quarter last year.

On a net cash basis, our total debt now is 13.5% of total capital, up marginally from 10.2% in the same period a year ago.

That rise is modest.

It relates to the modest free cash generation we've had from lower earnings, the higher inventories we put out there due to CSP 16, some stock repurchase, and of course, the payment of our dividend.

We do view the balance sheet as being conservatively capitalized, and we have ample liquidity to continue to invest in the business, and pay our dividend.

In terms of working capital, this will be my last comment, we were comfortable with how the numbers shook out.

The receivables came in at about 49.7 days.

That is comparable to where it was year-ago.

Inventories came in at [$159.6 million].

That's well ahead of where we were a year ago, but that was expected.

It does reflect our infusing the CSP 16 products into the field, the acquisition of Fasteners, Inc.

which will anniversary in November, and the increase in Onsite locations.

But the annual increase in dollar inventories was 9.5%.

That was -- that did achieve our goal of keeping growth below 10%.

So overall, we're comfortable with where the condition of our balance sheet is, given the effect of the significant growth investments that have impacted it.

That's all I have.

And with that, we'll turn it over to questions.

(Operator Instructions)

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

Your line is open.

Thanks, good morning, guys.

Good morning, Ryan.

So first, can you talk a little bit more about September?

Which to me, it looked like sales stabilized at a low level.

But how did the month start and finish?

And I know you said that not much has changed with the end markets, but are you seeing any signs that the industrial economy is bottoming?

I can't say that we are, Ryan.

I can tell you that with two weeks left in the month, and looking at where I thought the month was going to finish and how it played out, there were no surprises in the last 10 days, which says as much about our large account performance as it does our small account performance, just the dynamics of timing during the month.

But I can't say that we saw any kind of inflection.

Holden, I don't know if you have any comment to add to that?

Yes, and what I'll say about that Ryan is, when we look at sort of our customers by category or end market grouping, we didn't see a lot of changes.

In September, we might be lapping some of the issues around the energy side, but that would be one month in hand with that, and we'll see how that plays out through fourth quarter.

But there may have been some indication on that in some of those customers.

We probably saw a little bit of incremental weakness in the heavy duty truck customers that we might have.

But beyond those two items there -- not a lot more to add in terms of end markets.

Regionally, we indicated the US was a little bit weaker than the international.

Some of that might simply reflect changes in currencies, more than anything else.

But there wasn't a whole lot of change beyond those fairly minor sort of differences in the quarter or in the month.

Okay.

Fair enough.

You need to see a little bit more evidence, before you're willing to call a bottom, I understand.

Then moving to incremental margins.

I think in the last call, Dan, you said that the new level was 20% to 25%, just given the Onsite business that's ramping.

But what level of sales growth do you need in 2017 to get there?

Well, if you look at our expense growth right now, we're running -- and I'm assuming in this discussion that gross margins, the drain that we've seen in the last five, six quarters moderates, our fasteners as a percentage of our business moderate to a certain degree.

And there's a better shine-through of the revenue growth, or maybe I could just answer to the context of gross profit [dollar] growth we need.

Right now, our operating expenses are up about 5% year-over-year.

Some of that because of the investments we've made.

We need to structurally lower that, probably closer to 3.5% to 4%, so that at 3.5% to 4% revenue growth, we can let that shine through.

Obviously, one thing that's inherent in our numbers right now is of the accordions that are within the -- if you think of the cost structure of Fastenal, our incentive comp is at an incredibly low point right now.

So we'd be very mindful of the structural expenses we're adding, as we look into 2017 and 2018, because we know there will be some expansion in that cost pool as we go into 2017 and 2018.

And that's frankly, a good thing.

That was also a component -- I'm not going to paint the picture of the DOL rule changes were the only reason we closed some stores.

They were a reason we moved pretty quickly.

But we do need to be mindful of some structural costs that we can remove from the business, especially in an environment where Onsite's a bigger part of our growth driver going forward.

So next year, you need mid single-digit top line, maybe a little bit better to see some meaningful earnings leverage, is that fair?

Yes, yes.

Yes, I think it's also fair, Ryan to suggest that coming into this year, we sort of took it for granted that we'd grow mid single-digits and planned to invest around that.

I'm not sure that we're making such -- that we're making any such assumption about the go forward market, given that we haven't seen any meaningful improvement in the markets.

And so, we're not necessarily going to assume that we're going to make those same investments for that same level of growth.

We may be prudent, if we don't begin to see the revenue growth rates begin to tick up.

Right.

Makes sense.

Okay, thanks.

I'll pass it on.

Thank you.

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

Your line is open.

Thanks.

Good morning, guys.

Good morning, Dave.

Could you remind me of the math on vending?

You ask that customers have an incremental spend of about $2,000 a month, I believe it is.

Is that a net goal after the reduction in usage of the products that are in the vending machine?

Yes, it is.

And it does not need to be vending revenue.

And again, that's based on the machine itself, and different machines have different requirements.

The FAST 5000 which is roughly I think 40% of our fleet that's that $2,000 number.

But for lockers which have a lower cost basis than the FAST 5000, the number might be $1,200 or might be $1,000.

That's why we have disclosed historically, we talked about both our absolute device count, but then our weighted average count.

Because the weighted average is more akin to the $2,000 number.

Okay.

Got it.

And if I recall, your realized incremental revenues was something less than that $2,000.

Is that still the case?

No, our realized historically, if you look at that as far as growth with those customers, that was realized, again, not all of it through the machines.

Our average machine runs closer to $1,100, $1,200, versus that $2,000.

But we do achieve growth outside of the machine.

And that's why you see our vending direct -- our business with the vending machine continues to grow.

And our non-fastener business which, about 25% of our non-fastener business goes through a vending machine, and that's why that business continues to grow mid single-digits in an environment where the peers in that business are contracting.

Okay.

So what you're saying is that per weighted average machine, you are achieving $2,000 of total net growth, again yet realizing that's not just through the machine, that's all-in for the customer; correct?

Correct.

Okay.

All right.

Thank you for that.

And then, how much higher were your occupancy costs due to the closures in the current quarter?

And then, you mentioned a reserve for future closures that you took in the third quarter.

I think you said it wasn't that meaningful, but could you just give us an idea of what that was?

I believe it was just over -- just under $1.1 million that we booked during the quarter.

And again, what that is, once we make the -- and this is the -- this is the Dan throwing the CFO hat on for a second.

Sorry, some habits are hard to kill.

What you accrue when you are closing locations, is you look at future expenses you'll incur, that do not have a future benefit.

And so, in the third quarter store closures, there's some real estate that we need to contend with.

And in the fourth quarter locations, there's some real estate costs we'll need to contend with.

And those we accrue up, based on assumptions of similar closures in the past.

But it's about $1.1 million.

All right.

And then, a final question on pricing.

You've been seeing some pressure on the fastener side recently.

Has that alleviated at all?

Can you talk fasteners, non-fasteners, and then your outlook for 2017 on pricing?

I don't know if we have an outlook, a generic outlook for fasteners and non-fasteners.

My earlier comments were from Q2 to Q3, our gross margin on fasteners ticked up nominally.

I look at that, and say that probably should have occurred structurally, just because some of the weakness usually occurs that we're seeing most acutely is in the OEM fasteners.

And so, mix should be helping fasteners a little bit.

So I'd look at that, and Holden characterized it as treading water.

Our non-fasteners, we improved a little better than 20 basis points from Q2 to Q3.

Okay, but from a pricing point, Dan?

From a pricing standpoint, not much going on there, Dave.

That's the non-fasteners is much about us doing a better job of managing the mix.

Okay.

To the extent, Dave, that in prior quarters there was any confidence from our people that there was a little bit of pricing pressure that they were seeing on fasteners, I would say that the confidence is not as high that they're seeing that pressure at this point.

So it was never huge on fasteners to begin with.

And whether we're anniversarying it or what have you, it doesn't seem to be a big factor in what we saw this quarter.

And again, I think that's reflected in part by the fact we had relatively stable margins on our -- when you look at the category specifically.

All right.

Thanks, guys.

Thank you.

Our next question comes from the line of Hamzah Mazari with Macquarie.

Your line is open.

Good morning.

Thanks for taking my question.

Just a question on the --?

Good morning.

Good morning.

A question on the Onsite business, maybe Dan if you could frame for us how should we think about the ramp period associated with a new Onsite store, either in revenue per month or however you want to describe that?

Just trying to get a sense of how the Onsite business ramps over time and gains critical mass?

And I realize it will vary depending on the customer, but just any sense of that would be helpful.

What we talked about a year ago -- I'll answer it in two components.

What we talked about a year ago was, and what Chris talked about as he studied a lot of our existing Onsites, is that you could take a $20,000 or $30,000 a month relationship, and grow it to $120,000 or $130,000, $150,000 relationship in 12 to 24 months.

We still believe that to be true.

We ramped so many, the 80 and then the ones we've signed this year, many of which were turning on at different times last year and different times this year.

In our earlier commentary, we talked about in January giving a little bit more insight in what we've seen from this first group of 80, now that we'll have a calendar year under our belt, and then what we're seeing in the new group coming in that have turned on, as we've gone through the quarters.

I'd just as soon hold the answer to that, for that point in time as we'll have more succinct data to share with you.

What I can tell you is our assumptions initially, we have not seen evidence that causes us to think that assumption should be different going forward.

Got it.

And then, just a follow-up question.

On the gross margin, anything you can quantify around freight, and also the CSP 16 start-up costs?

Just trying to get a sense of the margin degradation regarding those two items?

It's (inaudible) like margins coming in, your expectation was probably flat to up slightly, given some of the inventory you pulled of out last quarter.

Is that fair?

Yes, yes, that's a fair characterization of what we talked about in July.

If you look at the CSP, from a gross margin perspective, the stuff we were seeing earlier wasn't about CSP 16 so much.

That was about, we were introducing some new tools into our business, inventory by location and some other aspects like that, and we [aggressively] moving on some inventory from a clearance standpoint.

The CSP 16, those, the margins on those products are nicely above the Company average.

That has as much to do about the mix of who that business is going to, as it is about the actual products.

Because in the CSP 16, there's a fairly strong mixture of tool categories, et cetera, that don't necessarily have a higher gross margin, but the mix of customers is beneficial in that business.

So that CSP 16 has a positive influence over all the gross margin, albeit relatively small impact on the relative dollars.

And Hamzah, in terms of the impact on freight, I mean, our gross margin declined 20 basis points sequentially from Q2 to Q3.

I think it's fair to suggest that freight was a significant piece of that 20 basis points, if not all of it.

Great.

Very helpful.

Thank you, guys.

Thank you.

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

Your line is open.

Hi, guys.

Good morning.

Good morning.

Just sticking with that freight theme for a second here, we've talked about fuel and execution behind that.

I'm wondering if you're seeing any changes in how the market approaches freight, because obviously, a lot of consumer markets, consumers expect free shipping?

And so, maybe you could talk about how much of your revenue base you already have free freight with certain customers?

And then, maybe talk a little bit more about the pushback or the execution issues that you're seeing there?

Well, two things going on here, Adam.

One is, if you think of our growth drivers both short-term and multi-year, our growth drivers are, lend themselves towards things that really don't have a freight component to them.

Vending, there really isn't a freight component to vending.

So that business, that growth, that $600 million-plus business a year is freight-free, because it's part of the offering we have.

If you think of CSP 16, by placing it in the store, those products don't really lend themselves to having freight charged on them, whereas perhaps in the past there would have been some freight on some of that revenue, again that's a relatively small impact.

One of the selling impacts or selling philosophies of the Onsite is that, by moving Onsite to their facility there's certain costs we can strip out.

One of them is, some of your working capital costs, because we can stock that inventory because we're a more efficient supply chain.

Some of that is, because we're more orderly in what we're ordering and our visibility to when we see the -- we learn about transactions before they become quotes and purchase orders.

And so, we can be more efficient in how we manage our freight costs.

So those are structural changes over time that aren't necessarily detrimental in the true sense of the word.

I think one of the things that can happen when you're going through this environment of some of the structural changes don't necessarily have a freight component to them, is that you can convince yourself that maybe the other pieces don't have as great a propensity to have freight on them as they did in the past.

Maybe that -- a piece of that is the tone of the leaders of the organization, and I look at myself when I say that.

Maybe I'm not pushing it hard enough.

But it's a case of sometimes you can convince yourself on why you can't do some stuff, and you need to convince yourself on why you can, why you should.

And I think that's probably the bigger culprit in this equation than the marketplace.

Because the marketplace doesn't change that abruptly to explain some of the degradation we had.

Okay.

Thank you.

And then, if we could just switch gears back to the revenue growth trends, the non-res construction, sales have been weaker some time.

And I think Holden, you mentioned that we're starting to cycle against some of the oil and gas headwinds that we had last year.

And maybe could we dig into that a little bit more deeply, what have you been seeing by region?

Any pick-up in oil-related customer growth recently?

Thank you.

It would probably be premature to get particularly excited about what we're seeing.

As I said, in September, it looked like maybe a couple of our national accounts within that energy piece began to see some of their annual rates of change become less severely negative.

But they're still negative.

And we'll see how the next couple of months, couple and next quarter plays out on that space.

But I think that the real emphasis that we would make -- and I guess, this is -- came about the question of bottoming, we're not seeing things get a lot better.

If those customers get better, it's because the comps are getting easier.

Maybe we'll be pleasantly surprised, and demand will actually improve from here going forward.

But it's a little bit early to make any such declaration in any of those markets.

I'll throw one comment in.

I had the opportunity early last week to reach out to our regional leader in the Gulf Coast.

Steve and his team have gone through a pretty ugly period in the last year, year and-a-half.

And that business grew in September, and it was fun making that call, and congratulating him.

Because I know from a first-hand basis, some of the discussions I personally had with him, as well as other individuals in that business unit.

They've had a really ugly period, and I was really happy for them, to see their business grow in the month of September.

That's good to hear.

Thank you.

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

Your line is open.

Good morning, Dan.

Good morning, Holden, how are you?

Good.

Good morning, Sam.

Fine, thank you.

Good morning.

A couple questions here.

First off, related to -- back to vending, the spread between the growth in vending customers and non-vending customers is obviously pretty tight right now.

I'm trying to think about what factors might occur that would create that spread to re-widen in vending's favor, especially with your thoughts, Dan, that you think the fastener business ultimately for you stabilizes from here?

Yes, we had quite a few vending machines that have been running negative, and vending relationships that have been running negative.

And I asked our team to take a look at this group of vending machines, and it's a sizable group of vending machines.

So it's a population you could look at, and you could actually glean some knowledge from it.

We took a good hard look at it, and what we saw -- because one visibility we have into our customer business that we've never had before, is insight into how many unique people are using the device.

If there's 100 employees that are in this customer's facility, you know that, because those 100 people are in the database of people that can use the vending platform.

And it also what -- of those 100 people can get these products versus those products.

If I'm in the welding area, I have access to the welding tips.

But if I'm not in the welding area, I don't have access to those six buttons if you will -- or those six products.

And one thing that jumped out for us, where we had vending machines that were negative, and again it was a sizable number, is the number of employees in the database right now, versus a year ago had dropped.

And that group, the number of employees had dropped about 10%.

And I don't recall offhand, how many customer locations this included.

But that tells me we have a bunch of customers -- and our fastener business was negative at those customers.

We have a bunch of customers who have downsized some operations, maybe they have fewer shifts, maybe they have fewer people per shift.

But they had downsized, in this group about 10% actual headcount, and we were seeing in those machines, revenue down in the teens.

So that's a case of there was some serious belt tightening going on.

But there was just a drop in consumption, because there's a drop in the workload at that business.

And that's -- the economics are such, that if there's fewer employees from a year ago, they need fewer safety glasses and gloves and the consumables that go with having people.

Interesting.

A couple more quick questions, if I could.

What would prompt a resumption of the share repo activity?

Is it just a matter of once you no longer require the capital for the Walmart initiative, or is it something else?

I don't know if we know the answer to that right now, Sam.

One of the -- personally, one of the advantages of bringing in somebody like Holden into the organization, is the perspective of Fastenal has historically been, we're boringly conservative Midwesterners.

And we tend to look at the business probably not as financially astute as we should, and that's probably a reflection of the old CFO.

I like the fact that we have a voice at the table that is going to challenge us to think about our business differently, the fact that -- think about our working capital, think about our capital structure.

Just think about the business in general a little bit differently, doesn't mean we're going to change suddenly on our appetite for doing different things, because we've changed our appetite on that over the last two years.

But we've been -- as you see from the numbers, we've been pretty quiet on the buyback.

And I don't know that that will change in the next few months.

When the decision was originally made, part of it was simply the capital structure had been so under -- so overly conservative, if you will.

At this point, with 13% debt to cap is certainly not a lot.

There is plenty of room to go higher should we choose to do so, but at the same time, we do in fact have debt at this point.

So the same urgency to address our capital structure isn't quite where it might have been originally.

And so, there may be reasons to buy back stock in the near to intermediate term, but there's no urgency to do so.

And then the last question if --?

I'm going to -- Sam, I'm going to have to -- we're going to have to take that one offline.

I see we're at 45 minutes past the hour, and we've always religiously held to the 45 minute conference call.

I realize it's the start of earnings season.

Everybody has a lot of demands on their time.

I want to close the call by thanking everybody for your interest in the Fastenal organization, and learning a little bit about our quarter, and about our growth drivers.

I'm as excited about the opportunities for our business as I was a year ago, as I was five years ago, and really feel we've begun -- taken two nice steps, 2015 and 2016, into transitioning to an Onsite mentality for growth.

And I'm excited about what that means for our future.

Thank you, everybody, and have a good day.

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 wonderful day.