Fastenal Company (FAST) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fastenal Company First Quarter 2012 Earnings Results Call. [Operator Instructions] As a reminder, this conference call is being recorded. Now I'll turn the conference over to Ellen Trester of Investor Relations. Please begin.

Welcome to the Fastenal Company 2012 First Quarter Earnings Conference Call. This call will be hosted by Will Oberton, our Chief Executive Officer; and Dan Florness, our Chief Financial Officer. The call will last for up to 45 minutes. The call will start with a general overview of our quarterly results and operations by Will and Dan, with the remainder of the time being open for questions and answers. Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission or distribution of today's call is permitted without Fastenal's consent. This call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage, investor.fastenal.com. A replay of the webcast will be available on the website until June 1, 2012, 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 material from those anticipated. Information on factors that could cause actual results to differ material from these forward-looking statements are contained in the company's periodic filings with the Securities and Exchange Commission, and we encourage you to review those carefully. Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance that the matter contained in such statements will occur. Forward-looking statements are made as of today's date only, and we undertake no duty to update the information provided on this call. I would now like to turn the call over to Will Oberton. Go ahead, Mr. Oberton.

Good morning, everybody, and thanks for joining us on our first quarter conference call. Starting out, I'd like to say that I believe it was a -- or I feel it was a good quarter. Our sales growth was right on plan. Looking at our internal sales goals. In January, we're at 100.6% of goal; February, 98.8% of goal; and March, 101.3% of goal. So for the quarter, we're at 100.3% of goal. I'm not sure if it's good sales growth or good forecasting. But whatever, we're right on target this far into the year. I also take a look at the 2-year growth numbers because as we look at the sequential numbers, trying to understand what the patterns are, but sometimes it's easier to look at the 2-year. And if you look at the 2-year growth numbers that we put in the report and combine 2010 and 2011, there was 40.1% growth in January, 41.5% in February and 42.1% in March. So we continue to march forward and also show a very consistent growth. The other reason I feel pretty good about the sales growth is if you look at the purchasing index that was also in the release, last year through the first 3 months, the average for the country, the U.S. market is at 59.8%, a very high rating. This year, still a good reading but it's down to 53.3%, so it's really 6.5 points lower. And we had similar -- our growth was off a little bit but very similar. So I think the initiatives we're putting in place are working well. This week, I had the opportunity to visit -- this week, we're holding our customer show down in Indianapolis, where we bring in about 4,000 to 5,000 customers and 200 suppliers, and we let our customers visit our suppliers and the product. But anyway, that gave me the opportunity to visit with dozens of companies, both suppliers and our customers, also to speak with many of our managers. And the mood is very upbeat. So I was optimistic about that. Many of our customers believe they're going to have a good year, continue to have a good year. And many of the suppliers are hearing that not only from the Fastenal people, but also from other customers. So it was a very upbeat show and gave us a good feel for the next couple months. In the report, there was, I believe -- moving on, there's only one negative in our report this quarter, one major negative, and that was the margin. Spend a lot of time looking at the margin, trying to analyze what we're doing and what we need to do. And after spending a time analyzing it and discussing it with most of our sales leaders down in Indianapolis this week, the conclusion I came to, and I hate to say this, but my conclusion is that we've basically taken our eye off the ball a little bit working on other things. But after the discussions I had with the regionals, with our sales leader and our National Accounts sales leaders, I'm very confident that we know what we need to do, and we will see improvement in the second quarter. So we're going to work very hard on that. We're not off a long ways. We're still on our range of between 51% and 53%. But as the competitive people that we are, we'd rather be in the high end of the range rather than the low end. So we're going to work very hard to move that up over the next 2 to 3 quarters and get into the upper end of our margin range. On the expense control side, I have to say the Fastenal team, the Blue Team, did a great job. Our expenses grew about 6 percentage points below sales, exactly what we needed to do. Labor grew a little faster than the other expenses, but that's -- some of that is planned. We did a lot of things, changing some pay programs, trying to make sure that we're taking care of our people, and it's working very well. So not a lot to say on expense control. Dan will probably touch more on that, but I'm really proud of what we were able to do on expense control. One other area that you may have noticed we had a little drop-off was the store profitability that we show on Page 7, where some of the store groups had lower profitability per size than they had in the previous year. And that's all explained in one word: margin. As we look at that, because margin was a little lower, the profitability per store size was a little lower. So if we can correct the margin or as we correct the margin problem, we'll also correct that problem. But overall, our pretax profit at 21%, I'm proud of the number. We only picked up 90 basis points from last year with our goal as 100, so we missed it by 1/10, but I'm very confident we'll get that back. And the most positive thing on that chart on Page 7 is the number of stores that moved up a category. So we continue to do what we have laid out in 'pathway to profit', grow -- move the average store size up, the profitability goes up and the system continues to work. One area on the report that I'm also very happy about was the inventory control. We had stated in the fourth quarter call that we thought we could improve our turns. Through the quarter, we only added -- or we added less than $2 million in inventory. And so we've done a nice job both quarter to -- or sequentially through the quarter, but also year-over-year, a very nice job on inventory growth or controlling our inventory growth, deploying our assets in better ways. Talking -- switching gears a little bit, talking about the initiatives that we have, our sales initiatives. All of the initiatives -- I'm happy to report that all of our initiatives are going well. Our Government project that we started 2 years ago is ahead of plan from a standpoint of sales growth. We are fully staffed or, I mean, very few openings. We have the people in place that we need. We have the coverage in the states. Our WSCA contract, which is our big state contract, is going very well. It's at or ahead of plan, and some states are doing better than others. But overall, it's doing very well. And we feel very good about the knowledge that we're gaining through the people in the field. 5 years ago, we probably had 2 or 3 people in the company that had a real good knowledge of how to do this. Now we have a team of about 40. And I think we're just going to continue to gain traction on the Government business, mainly in the state areas where we're looking at other pieces of Government business as well. Our Web sales continue to grow. That's been an initiative since really the end of 2010. We did well in 2011, but we continue to see traction in 2012. Buying off the Web is good for our customers. It's good for our stores also because it's more efficient; that continues to do well. Metalworking. We're very happy with the results in metalworking. And at the show this week, I had the opportunity to visit with several of our large suppliers that just came on. And on a very positive note, they're happy with the results because that's one of the keys to making this work. We have to be able to sell -- grow fast enough to make the suppliers happy with the results, and that's going well. Our sales people that we've been hiring and training in the field are doing a nice job. We have about 52 people that are sales specialists just in metalworking. Our plan is to add another 10 as the year goes on or as we can find the right people to do that. But also the opportunity to speak with many customers who are looking at us for metalworking. And it appears or the theme was now there's another national player, there's another company I can look at to provide my metalworking supplies. And so we've had some very nice opportunities. It fits in well with our vending program, and so we're very optimistic about that for the future. It's a large market and there's good, tough competition in it, but we think we can continue to take share. And the main reason is because of the relationships we've developed with these customers over the years. We're not taking it out to new customers per se. It's really developed relationships that are looking for a possible alternative. And our biggest initiative that we talked about is vending. And as you saw in the results, we had a great quarter. As I've been stating for the last 4 quarters, our goal would be to hit 2,500 machines for the quarter. We exceeded that by more than 2,000 at 4,500 machines. We installed more than 2,300 machines. And so we're moving along nicely. I am more convinced than ever that it's a long-term change in industrial distribution. Again, I keep talking about the show, but I just got back last night. I had the opportunity to speak with probably 20 to 30 customers that have deployed vending, and not one of them is disappointed with the results. They're all talking about the savings. There's really 2 themes that come up from the customers. One is inventory control and how much time it saves them to not have to distribute the product, and the other is the consumption -- or the savings. But I think the biggest theme really is about the inventory control more than the savings. And it's just, it's there when we need it, and it's just out of sight, out of mind in a positive way. So we're working very hard on that and believe we'll continue to see good results going forward. So overall, looking at the quarter, looking at the information, I'll put it down as a good quarter. If we had improved the margin, I would say it was a great quarter because everything else looks good. So we have some things to work on. We're focused on that. And hopefully, we'll see improvement this quarter. With that, I'm going to turn it over to Dan, and he'll give you some more detailed color on other things in the quarter. Thank you.

Thanks, Will, and good morning, everybody. And thanks again for listening in on our call today. So one thing I wanted to touch on, most of you have probably noticed, changed the format of the earnings release a bit this quarter. I felt there was pieces of it that were getting a bit stale, removed out the explicit discussion of 'pathway to profit' and more integrated it just into the general layout of the earnings release. I know reading through a document written by an accountant can be painful. Hopefully, this makes it a little less painful this quarter. One item on Page 3 that I thought was worthwhile to point out, and that's looking at the sequential trends of the business. And Will talked a bit about the year-over-year information. But one thing I think is worthwhile to note and added actually 3 years' worth of data rather than the typical 2 years' worth of data that we cover is a similar trend that we've seen the last several years, and that trend played out again this year in the first quarter, is actually from my perspective a little bit of softness in the January, February timeframe followed by a huge leap forward from February to March. We saw it in 2010, we saw it in 2011 and we saw it again here in 2012. And hopefully, that sets us up for continued nice performance as we go into the future, but it's an interesting dynamic to our business. The March timeframe in each of the last 3 years, we've more than doubled the sequential norm of February to March gains in daily average. And I think it's worthwhile to note, especially when you look at the month of March because one thing that is noteworthy in our numbers as well is our construction numbers. And construction is roughly 20% of our business. Our construction numbers were actually a little bit weak in March. And my perception looking at the data is really that with the very mild winter, there was some work that moved into January and February that normally would have been in February and March. And I think it softened February a little bit, I think it softened March a little bit. And I have some first-hand knowledge of this, only from the standpoint my wife and I had some work done on our home here last year. And I told the contractor, which -- this is always a dangerous thing to tell a contractor. I told the contractor, "I'm in no particular rush. So when you get a chance to fit it in, come back and finish the work." Because there were some stuff on our outside garage. Well, in early March, I got a call from my contractor, and he says, "Dan, I'm running a little low on work. I've got some time to finish that project up." I didn't think he'd get to it until late summer. So that tells me there's probably some truth to the fact some work got pushed up into the early part of the quarter and made the latter half a little bit softer. As Will mentioned, ISM index, I think, continues to hold up well for us. It came in at 53.4% in March. When I look at the growth drivers that I talked about on Page 5, as Will mentioned, all of our areas are operating above plan. And when I look at the FAST Solutions in particular, we touched on it in our February sales release that we had exceeded our 2,500 number. As you see, we exceeded it soundly. But the other thing that jumped out for me was, it was the case of it was solid in all 3 months of the quarter. It wasn't a case of January was big because of a weaker December. It was solid in January, February and March and building. So very nice performance when I look at the vending for the quarter. The profit drivers on Pages 6 and 7. I don't recall us ever having a first quarter with 21% pretax, so it's a nice milestone mark for the organization. As Will touched on earlier, we did lose some of the, what I refer to as amplification effect on 'pathway to profit' with weaker gross margin, but it was – and so our relative profitability per group fell up a little bit from last year. It's still nicely above where it was in 2010. But our $150,000 store group did hold up and actually improved nicely. I believe they improved by about 90 basis points year-over-year, so continued to see some nice performance. The other thing I think is worthwhile to note, when we started the 'pathway to profit' back in 2007, if you'd have told me that at some time in the future with an average store size of just over 86,000 that we'd be at 21% pretax, I would have given you a pretty skeptical look because I wouldn't have thought it was possible. And I think we've done a nice job with lowering our operating expenses during that timeframe and moving the mix but having nice profits with an average store size, which is still relatively small in the scheme of 'pathway to profit'. As Will touched on a few minutes ago, our only wart in this release from my perspective is our gross margin. We just aren't executing really well, very well in this regard, and -- but we've always said gross margin is all attitude, and we just need to develop some attitude. And I believe we have opportunity. With that said, there are some positives when I look at components. Our exclusive brands, our private label, if you will, brands that we talked about in the past, a year ago that was at about 8.5% of our sales. Today, that is at 9.3%, so we continue to inch forward on that. Not moving as fast as we'd like, but still moving forward and improving the mix. Operating and administrative expenses on Page 11. I'll just cut to the chase and say I think we did a -- we managed that well as we went into the first quarter, and I think we're poised well to go into second and third with a good position on operating expenses, get some lift in gross margin and we'll have some nice numbers. The final item I'll point out is relating to working capital and cash flow on Page 13. Nice numbers. We did a nice job with both accounts receivable and inventory growth year-over-year. The challenging thing we've had the last several years on all fronts is the expansion of our large account business, the expansion of our international business, which is challenging with working capital because, especially on the international, we don't have the same distribution support that we have domestically or in North America, in general. And finally, from a cash flow perspective, operating cash flow was 132% of earnings. About 40% of that comes from the fact we don't have any tax payments. So a 90%-plus number in the first quarter is extremely unusual because of the growth we need in accounts receivable because of the sequential increase in sales. So I think a great number from the standpoint of cash flow. We spent about 27% of earnings for CapEx, right in line with what we'd expected, so free cash flow of over 100% in the first quarter versus 68% a year ago. With that, I will turn it over to the Q&A. [Operator Instructions] Thank you.

[Operator Instructions] Our first question is from David Manthey of Robert W. Baird. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: First off, are you currently taking orders for that half-sized vending unit? And if you could tell us what your vending installation capacity is today, I think initially it was about 3,000 units?

The answer to the first question is, yes, it's the Fast 3000, if anyone wants one. It's actually about 2/3 the size. And we're taking orders, it's going actually very well so far. And our capacity for installs is actually very scalable. I would say it's probably about 1,000 a month right now. But with the centers we put in, it's really just a matter of adding more people. And that's not been an issue because there's a lot of pretty basic workaround that we have good leaders in all the center. We can probably double that very quickly. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then quickly, I was wondering, just so we can get an understanding of these growth drivers and sort of the scale of them, could you give us what percentage of revenues approximately today are attributable to Government, cutting tools, international and Internet?

I can do some -- I have 3 out of 4 of those in my head and give you a good number. The metalworking, I'm not going to go in the order that you're in, is roughly 8% of our revenue today. The Internet business is at about -- also about the same. But understand the Internet business isn't different business, it's the same -- well, sometimes. It's a different channel for receiving business. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: For receiving the order. Got it.

Receiving the order, so many of the same customers. So I guess, that's always a clarification point, but about 8% of our orders. And that does not include our EDI, which if we added all the other electronic interchange on top of that, it would almost double. We look at it a little different than our competitors. So the one I don't have on the top of my head is Government because that's moving rapidly. I believe it's about 4%.

I was going to say, between 3.5% and 4%.

4%. And what was the last one, Dave? I missed the fourth one. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: International sales?

International sales, yes, is running just over -- about 10.5% to 12%, 11% depending on the month. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: And the vast majority of that Canada, anything – any number outside of North America?

Outside of North America -- well, outside of Canada, because Mexico we kind of look at as more truly international business, about 3% to 3.5% of our revenue comes outside of U.S. and Canada.

Actually in the quarter, it was almost 4%.

Almost 4%.

Our next question is from Adam Uhlman of Cleveland Research.

Just a follow-up on the vending question and the capacity to install the units. I guess, we're looking at the total cumulative contracts signed for just over 17,000 machines, and you've only installed like 9,800. And so there's always been somewhat of a lag. But I guess this is somewhat of a bigger lag than we've see in the past. And I'm just wondering, one, when should we start to see a catch-up of the contract signings? When will that get closer to the installs? And then secondly, the revenue that you're asking customers to step up with the extra couple thousand bucks a month, is that coming through as you had expected it? Or what have been the trends there?

I'll take the second question. I'll give Dan the first because he has better -- yes, the revenue is coming through. The trends have been that it's been running just above -- most of our machines is a FAST 5000. Our requirement on that is $2,000 a month. We've been running just above that number for the last 1.5 years. I was hoping it would be a little higher than that, it's in the 2,000 to 2,200, depending on any month that you look at.

The other part about the cumulative. It's probably worthwhile to point out, and we mentioned this last May at our investor conference, but I think it's worthwhile to point out. The data we disclosed -- keep in mind when we started disclosing this data, this is a new animal for us. And with a lot of information that we disclose, we have a very time-tested intuitive feel about how things will play out. When we look at that first number, the contracts signed during the period, and we look at 2 years ago, we're at 257. And that grew a year ago, we were at 1,400. Now we're at about 4,500. That is the raw number. That is the gross number of contracts signed. And there is always things that happen downstream that cause some of those not to be installed. It might be a case of the -- it gets delayed because the customer changes their mind or maybe the person that signed for it wasn't sure what they wanted and they pull back and maybe -- and it expires, and we don't actually install it. Over time, when I look at that first statistic, about 90% of those signings turn into a vending machine. And about 10% that contract signing expires, it might be subsequently signed as a new contract or maybe we get inertia going again 4 months later or 6 months later. But what we're trying to do on that first number is we're trying to just give you, "Here's a raw number of the contracts we signed that quarter." So when you add up all those raw numbers and compare that to what's actually installed, you're kind of comparing apples and oranges.

And to your question of when we will catch up, we'd like to say it should be a 60-day backlog. It's probably going to take 90 to 100 days on the average. And so if we continue to ramp up our signings, there's always going to be -- you can basically take the last 90 to 100 days of signings off of the cumulative number of installs and come with a pretty decent match, less than what Dan just described. But our goal -- so that being said, we really need to have installs this quarter and the second quarter well above 3,000, more in the 3,500 to 4,000 range to keep up with that track. So that's something you should pay attention, see if we can do that. But we do have the people in place to do it. It's really about the paperwork and moving it forward.

Our next question is from Ryan Merkel of William Blair. Ryan Merkel - William Blair & Company L.L.C., Research Division: So let me start with the growth rate to customers with vending, which moderated to 34% this quarter, although still a healthy number. How should we think about that moderation? And then what should we expect going forward?

Well, I think the first thing to think about it is more of those customers are in their second and third year because that's cumulative customers. If we were to separate it out and say growth in customers that had vending for 12 months or less, it would be a much higher number. So that number will probably continue to moderate at some level. But without having experience in this, because this is a new initiative for us, it's really hard to say how it will play out. But we knew, and I think I've stated in other conference calls, that we were at 50%, we're not going to maintain that number as the tail gets longer. Ryan Merkel - William Blair & Company L.L.C., Research Division: All right, that makes sense. Okay. And then second on the vending install number, which was incredibly strong, is this a level that we can extrapolate for the next few quarters? Or was there something unique this quarter that drove such a strong result?

On the install rate? Ryan Merkel - William Blair & Company L.L.C., Research Division: Yes.

The install rate should go up. The install rate should... Ryan Merkel - William Blair & Company L.L.C., Research Division: Oh, I'm sorry, the signings rate, Will. Sorry.

The signing rate? Ryan Merkel - William Blair & Company L.L.C., Research Division: Yes.

Well, we did put some incentives in place with our managers and our district managers. I think we explained that in the past. But those incentives are still in place, and they're still going strong. I don't know if we'll keep at this level, but we should be well above previous levels, meaning somewhere in between the 25% and the 45%, I guess, if I had to guess. But there's a lot of energy out there, and the customers that I had the opportunity to speak with, it was all positive. And so we're doing a lot of things well. So our goal for the year starting out was 10,000 machines, 2,500 a quarter. But right now, I feel very confident that we're going to exceed that probably pretty handily.

[Operator Instructions] Next question is from Hamzah Mazari of Credit Suisse. Hamzah Mazari - Crédit Suisse AG, Research Division: A question on vending again. Could you maybe talk about, as vending becomes a bigger part of your mix, what kind of margin dilution should one expect in the short term? And then also longer term, as you get up to speed on the learning curve, how should one think about the impact on margins longer term, both gross and operating margin?

Yes, on the gross margin, we really aren't seeing a deterioration from vending. Our vending business does run at a lower margin, but it's because it's running through larger customers. If you match the vending customers up -- well, actually what I do is I look at the customers' pre-vending and post-vending, and the margin really doesn't change. And so there's no change in the margin. If all of the vending -- we get a very high growth that's going to large customers, then we have to work on that. But that's actually a positive problem. As far as operating expense, the vending is going to be a more efficient business to serve. It's easier to -- there's just a lot less work in supplying the product through the vending machines.

Gives better visibility to need.

Well, the simple thing is for years, we've been out doing bin stocks at customers, where we drive out, we look at their supplies and we write down what they need or scan it with a handheld scanner. We go back to the store, spending thousands of hours every week and month doing that. With the vending machine, the Internet or -- the machine is doing that for us, sending it back over. All that time disappears, and we get better information. And that's just an example of how it works. So the more we get out there, the less labor it will take, the higher service level we will provide for our customers. So vending, from an operating profit standpoint, is a very positive. From a gross margin, it's neutral based on the same customer, same size. Hamzah Mazari - Crédit Suisse AG, Research Division: Okay. And just a follow-up question. On the gross margin coming in lower than expectations, do you guys have a rough breakdown as to what the contributors were? How much was vendor incentive? How much was transactional or organizational in terms of negative contribution?

The drag was in the transactional side. On a sequential basis, our gross margin from a vendor incentive standpoint was up about 10 basis points. A little bit of improvement on our freight side, but that was offset somewhat because of fuel. I would have expected a little bit better improvement on the transportation side, absent the fuel situation. But our issue on a year-over-year basis that we continue to struggle with is just the day-to-day transactional side. It's pricing attitude.

Well, it's pricing attitude, and probably the biggest part is not keeping up with inflation. And there hasn't been a lot of inflation. But when you have a small amount of inflation, you don't keep up with the pricing. And it's funny to say, but it almost is easier when there's a lot of inflation because everybody jumps and goes. When it creeps in, a nickel at a time, and if you look at the margin, it's not like we're off 3 points, it's more like creep. And that's what we've identified as the biggest problem is we're taking 1% and 2% price increases and not passing those along here and there. But we've addressed it as I said and everyone is completely aware of what we need to do. We just have to get it done.

Your next question is from Sam Darkatsh of Raymond James. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Wanted to hit on the occupancy cost, which was a very pleasant surprise, particularly based on the amount of machines that you're looking at on the vending side. Can you give a sense of what the utility savings were in the quarter and how sustainable that leverage on the occupancy side might be over the next few quarters?

First off, if you look at it from the quarter, a meaningful impact because we are in the midst of heating season. And so from Q4 to Q1, there was about $1 million increase in occupancy. It should have been more like $2.5 million. If I look at it from the standpoint of vending, that number has increased meaningfully. But it's still a smaller component of overall occupancy. And then the final piece, as it relates to locations, we are -- our growth in occupancy related to locations is half the rate of growth from store openings. So we continue to find ways to improve our leverage there from both a percentage of sales standpoint and just an absolute dollar standpoint. And that piece is sustainable as we go through the year. Some of the benefit that we had -- we're not heating in April and March. So the fact that natural gas prices are lower becomes much less meaningful because we use some propane in our forklifts, but that's a relatively small dollar. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: And then if I could just follow up on the gross margin question from the last questioner, you mentioned the pricing attitude, Dan. Was pricing off on a year-on-year basis? Or was pricing up but not nearly to the extent that your own costs were rising?

It was the second. Our pricing is up but not as much as our own cost. And if pricing isn't up a lot and our costs aren't up a lot, like I said, that's the difficult part is it's not coming in, in big chunks. It kind of just slides in. That's 1%, let it go. Well, that adds up. So pricing is up, just didn't cover the costs. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Is there a particular either line of products or end market where the pricing discipline needs to be firmed up a little bit more?

No, there really isn't. It's somewhat across the boards. And we've done a lot of -- we've spent basically the last 2 weeks analyzing it or last month actually. We really have a good handle on where it is. And I had an opportunity, as I said, to speak with our regional vice presidents. They're really the ones in the field who handle it and our National Account leads. So I've been with both of them the last week. And everyone's very clear on what we need to do and how important it is. And you have to understand we have one big thing going for us, and that's pay programs. Margin is a big part, our gross profit is a big part of how we get paid, all of us. And most of the people were disciplined, no matter -- even though we had a good quarter, many of us, our bonuses were down; many of our regionals, their bonuses there down.

And district managers.

And district managers. And so there are a bunch of people going, "Man, I worked very hard. I grew my business 20% and the company paid me less." They're not mad at the company. They're kicking themselves in the butt, the same as Dan and I are. And so that's a -- most people don't understand of what a motivator that is, but it really works in our system. And I made a point this week of asking everyone how happy they were with their bonus, and there weren't many positives in that conversation. So we're pointing that out, and I think we'll see some results. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: And so there's absolutely no relation between the need for more discipline and the amount of machines that are getting signed up, meaning that you're not looking to give discounts to incentivize customers to take on the extra machine?

You mean the vending side? Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Yes.

The vending business and its impact on our overall numbers and what it means to our gross margin at this stage of the game is negligible. This has absolutely nothing to do with vending signings. This is our business outside of vending. And we're not keeping up with where we need to be at in managing our sale price and our cost. And that's where we're getting the squeeze. Vending is absolutely no part of this.

And the vending is neutral on our margin. The customers' margin today that have deployed vending, if you take the entire list and add it up, there's been no change in those customers' margin. There's been great growth, as we showed, 34%. But the margin hasn't changed in that group of customers over that period.

And keep in mind the vending business, it's 18% -- the customer is representing 18% of our sales and it's about 20% of those sales that are actually going through the vending machine.

3% to 4%.

Yes, it's 3.5%. And that doesn't move the needle on the other 96%, 97%.

And your next question is from Robert Barry of UBS.

Just a couple things. One is I wanted to follow up on your commentary on the sales trends. And I hear you, Dan, on potential for some redistribution of the nonres activity within the quarter. But I think if you look at October versus the growth rate through the first 3 months, it looks like you're still a little softer this year than you have been over the past few years despite the resurgence in March. So I'm just wondering if you can comment on the end markets. I mean, you did mention that the ISM is a little bit lower than last year. But just in general, I mean do you think things are a little softer in the underlying end markets?

I think if you looked at the -- kind of an October -- and hopefully, the facts don't refute what I'm saying here, I'm – this is a little bit from the hip. But I think if you look at the October to March timeframe and look at sequential patterns, I think you see in all the years in question, this year, last year, year before, that a general softness that was there through February and then you saw a big pickup in March. So I guess, I don't know that I agree with the comment that from October of last year to March it's weaker. Now maybe the facts, if you actually laid it out in front of you, maybe it is nominally weaker. But I guess, in my mind, that doesn't really stand out too dramatically.

Right. Yes, I think it is nominally. Fair enough. I was just wondering if you were actually seeing anything in the end markets.

I don't think so.

And then I just wanted to follow up on this market size number that you put in the release of $160 billion. I've actually been getting a fair number of questions about it recently, maybe you have as well. I'm just curious what your confidence is around that number, kind of where it comes from, how you derive it. These numbers have gotten tossed around among the distributors for a little while, I think in the past, they've been more like $140 billion to $150 billion. So just any comments on that, I'd be curious to hear.

No, I mean, that's a number that we've used in a somewhat generic fashion for the better part of the decade. And in fact, if you went back 8, 10 years ago and you looked at discussions or presentations of Fastenal and some of its peers, we were usually the low number for sizing the market with our $160 billion number. A lot of our competitors used numbers that were more in the $250 billion to $300 billion neighborhood, maybe even a little bit higher than that. And I think generally speaking, when you see presentations today or heard discussions, the market is typically sized to that. Now with that said, there's a piece of that market that we don't believe is readily addressable to us today. And I think the piece that we think is readily addressable that we're highly confident goes through distribution and represents products that we have a very good knowledge of…

And we can make margin on them.

And we can make margin on them, that number's probably closer to $110 billion, $120 billion because there's some business that -- as Will mentioned, there's some business we're not interested in because the marketplace doesn't pay for a level of service or even a level of distribution. And that's business that probably should go direct or be sold by somebody other than Fastenal.

And I've used the $140 billion to $160 billion number for years. But to be honest with you, considering we're at roughly $3 billion, there's so much in front of us. We don't spend a tremendous amount of time looking at even thinking about that because the next $10 billion we find is there. And there's so much headroom in our business. And I keep referring back to the show, but when you go and you have the opportunity to see the customers and listen to them, foreseeably in our lifetime, there's a lot ahead of us.

And I think that's true if you sat down and looked at some of our more established regions and look at the rate at which they grow. Our Winona region, which is Minnesota, Wisconsin, Dakotas, Iowa, Northern Illinois, that grows very attractively year-over-year mid- to upper-teens or better, depending on the quarter. So when you look at that and say, a business that's been established now for 40-plus years and continues to grow at that kind of rate. And I think it's evident also when you look at the stats we put out on our 5-plus-year-old stores and quarterly on our 10-plus-year-old stores. The fact that we have 5-year-old stores that grow at mid-teens, 5-year-plus stores growing at mid-teens tells me there's a ton of market out there.

There are no more questions. At this time, I'd like to turn the call over to management for any closing remarks.

Again, we'd like to thank everybody for participating in today's call. Hope this, combined with the release, is informative of how our business is progressing. And we're very optimistic as we look forward into 2012. Have a good day, everybody.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect, and have a wonderful day.