Fastenal Company (FAST) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fastenal Company Q1 2013 Earnings Results. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Ellen Trester. Please begin.

Welcome to the Fastenal Company 2013 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 in 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, 2013, 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.

Thank you, Ellen, and thank you for joining us today. I'd also like to mention that we -- Lee Hein is joining us, our President; figure with the quarter that we just reported, we need some help on Q&A. Now actually, we had an okay quarter, considering the economic conditions. We did many things well with the areas that we're struggling in. And the first one would be sales growth. It was a struggle for us in the first quarter and continued to slow down as the quarter went on, reporting 6.5% on a daily rate for the quarter. And so it was a slow quarter from a sales growth standpoint. We do have some bright spots in that our metalworking product continued to grow at just above -- or 10% above our overall number, so we had some pretty good growth there. And that is an area that we've worked hard on, we're pushing very, very hard on. Our government business grew just at about 15%, 14% to 15%. So that was another nice number, something we've been focused on for the last 3 or 4 years. Our vending signings were up 25% from the first quarter of last year, a little lower than we were hoping for, but still a good number considering the slowness in our business. And on a very positive note, the customers that have deployed our vending systems continued to grow at a very nice rate at 24%. So we saw very good growth out of that customer group. We just need to expand that customer group is our view, so we feel very committed to expanding the industrial vending operation and opportunity. On the margin, we showed very nice improvement on the margin. Most of that improvement was driven by our new price guidance system is what we've termed it internally. It's a price system that the stores are using, using historical pricing data to give them better direction as to where to price the product. At this point or at the end of the first quarter, we have that about somewhere between 60% and 70% deployed, so we have about 1/3 of the opportunity ahead of us, and we'll continue to work on that in the second quarter. So we still have some upside on the margin, we believe. But again, very nice progress. Pricing, in general, we've seen very little change. We've not seen a lot of inflation on our product. As Dan had stated in the release, the fasteners are probably a little down [indiscernible] product has moved up. But at the end, it's very steady pricing. And right now, out into the future, steel is rising, but we're not sure if those prices are going to stick. So there's some uncertainty in our pricing environment. One area that I'm proud of is our expense control. The team did a very nice job of controlling the expenses. In particular, our distribution team, the people that run our warehouses and our transportation area, they actually supported the business and reduced their expenses year-over-year. So I want to kind of give an attaboy to that group of hard-working employees because they've really done a nice job. And part of this is driven by the investments that we've made in new technology and better information systems for running our transportation team. They've really been paying off. Pathway to profit, which we always talk about. We increased our pretax profit by 70 basis points. We were 30 basis points short of our goal, but -- our stated goal of 100 basis points. But really, the long story there is we need better sales growth to hit the 100 basis point improvement. I am proud of the fact that we did report 20.7, which is the highest number we've ever reported in a first quarter for the company and in a very good result in a difficult sales growth environment. Cash management, and I know Dan is going to talk on this, but I think Dan's team did a very good job of managing the cash, reducing the inventory by $15 million and producing a very high number for incremental revenue. So I think -- or incremental profit, excuse me. Good job there. One area that I think is a little misleading is, and I'd like to explain, is our hiring. If you've read the release, our hiring has been very slow, and we've heard very -- several comments about how to grow your sales if you don't hire salespeople. We believe we're still in a good position for growing sales with the energy we have. And the reason we believe that, there are 2 reasons. One is we continue to add in our outside sales support or the outside salespeople, non-store salespeople. And those are -- we've seen very good results. And I think metalworking and government are a good example of that, also vending. But at the store level, we've introduced several different areas for efficiencies to actually free up time from doing non-sales activities to sales activities, and they're in things like point-of-sale systems. We've enhanced our point-of-sale system. We're doing more packaging for the stores, our vending systems are more efficient. So although our headcount has not risen in the stores, we feel very comfortable that we have good selling energy in the stores. And then if we continue to work hard, we will be able to execute in the future. With that, I'll turn it over to Dan to cover his area and then we'll take the questions. Thank you very much.

Thanks, Will, and good morning, everybody. And again, as I've mentioned in prior quarters, thank you for your interest and focus on Fastenal and participating in the call. The -- Will touched on it in his sort of comments, so we're going to be repeating a couple of things. But when I look at the quarter, I have 5 things come to mind. First 3 are the same: sales, sales and sales; third and fourth, talk about gross margin and the leverage we did obtain. When I look at our business, the state of the economy is an important factor, I think, for our shareholders to consider. Quite frankly, within Fastenal, we don't give too much thought about the state of the economy. We give thought about what we can do to execute tomorrow, next week, next month, and therefore -- and there on. A couple of mathematical things, just to make note of, and we've touched on this in the Q4 call. It was a bit of a different calendar this year. We had a 63-day quarter versus 64. We'll have a more normal quarter here in Q2. So it gave us some additional challenges, 6.5% daily growth, but 5% more dollars to work with. I made it a bit more challenging. But when we -- the other thing that's worth noting is on Pages 4 and 5 of the release, the fastener side of our business, particularly the OEM fasteners, continue to plague the business, and that's, I think, more of a state of the economy. But the non-fasteners are still void by our sales drivers, particularly vending, but also feeling some pain from the economy that we're dealing with. When we get into Q2, particularly the May-June time frame, we'll see some easing comparisons. But again, our internal focus is on about what are we doing sequentially to improve our business and to grow our business and not spend too much time talking about the economy and the situation. Also, we did notice that when we went from last quarter into January, foreign currency was adding about 2/10 of a percent to our growth. That slipped when you get out to March to negative 2/10. So we lost almost 0.5 point of growth just because of what's going on with the flipping of currencies. Again, it is what it is but something to not lose sight of. On Page 5, the last several years, we've included the ISM data in our release. Historically, we felt it was a great relationship between what ISM was doing and what our business did. To be perfectly blunt, I think in the last 12 months, the relevance of the ISM index to our business has become cloudy at best, and I don't know if we'll strip it out in future releases because it's not -- it doesn't tell me anything about our business anymore. When we look at the growth drivers behind our business, and this is on Page 7 and 8 of the release, a couple of things that stand out for me, and as Will mentioned, that we improved our vending signings, maybe not quite as much improvement as we were hoping for coming into the quarter. One thing I'll share that's not explicit in the release. As we exit the quarter, looking at the March data, we're on about a 6,200 per quarter run rate. So we ended the quarter -- I think we ended the quarter with nice uptick leading us into Q2 and still feel good about our ability to hit that run rate we talked about during 2013. I think the other thing that's worth noting, it's in the third category of information on our vending, is that, as you see, we continue to diversify the fleet, if you will, of vending machines of -- the FAST 5000 is still our flagship, but I think the group has done a nice job of developing other platforms for us to supplement as we're introducing vending and solutions quite into our customers' business. Just touching on store openings. We'd still -- we reiterated our intention for the year of opening 65 to 80 stores, which is 2.5% to 3% growth, would anticipate will probably be at the lower end of the range given what we did in the first quarter, but we still only intend to be in that range for 2013. Will mentioned that we hit 21.7% pretax in first quarter, a 70 basis point improvement from first quarter a year ago and a nice improvement from where we were in the fourth quarter. I applaud the team; this takes discipline. And the biggest part that caused us to expand our operating margin was what you saw in the gross margin. And I'll just give a more recent history of our gross margin. If you look where we were in Q3, we were down 20 basis points sequentially as we were going through the quarter. So we were in a down sequence mode. In Q4, our sequential gross margin was 40 basis points as we went through the quarter from October to December, so it put us in a nice position coming into the first quarter of this year. As you see, our gross margin in the fourth -- and the first quarter was up 70 basis points from fourth quarter, 110 basis points from third quarter. And I think we are in a nice position to keep eking out some gross margin gains as we move into the second and third quarters because there are still pieces of the system, the price cut system that Will mentioned that haven't been -- or are being implemented as we speak. So there's still some runway ahead of us. And the other piece, private label products. We broke into double-digit territory of 10.3% in the fourth quarter, inched it up slightly in the first quarter, the 10.6% of sales. We have a lot of runway left there, and we need to move that a little faster. The operating expenses, coming out of 30.7% of sales is respectable. It slipped a little bit from where we were last year in the first quarter of 30.3%. However, I think that's more of a function of the math and the fact that we get back through the first 3 subjects that we talked about, sales, sales, sales. That would have solved that 30.7% number more than anything and 1 extra day. So those 2 things would have really changed how we did on expense management. As Will mentioned on the cash flow, I guess I would change his commentary a little bit. I'm pleased with my team, don't get me wrong. But when I look at the working capital improvement, it was very much inventory-centered in the first quarter. I think Gary, Ken and Steve and their respective teams came through from the store perspective. When I look -- I think Scott, Anne and the entire sourcing team did a great job lowering our DC inventory. Basically, we worked through the bubble of fourth quarter and put ourselves in a nice position going into the rest of the year. It gives us some latitude to put investments into our new distribution center in Indianapolis, supporting the vending initiative, et cetera. It gives us some dollars to work with and still have an attractive cash flow for the year. Speaking of that, in the first quarter, our operating cash came in at 147% of earnings. Q1 is always strong because there's minimal tax payments. And for us, given our profitability, that's a big deal. But it was better than I expected, and it put our free cash flow in at about 97%, again, better than I expected. Because of that, I'm pleased to say we were able to announce this morning a $0.20 dividend that's going out in the second quarter. That's a doubling of what we paid out in the first quarter, and I believe it's about 18% increase over the second quarter of last year. So I'm pleased to be able to deliver that message today, that we're going to be increasing our dividend payout. And I think that puts us in a good position for the balance of the year. A couple of takeaway messages that I see in the quarter before we turn over to questions. One is pathway to profit continues to prove itself in our business. The ability to get leverage at 4.5% growth is a pretty amazing thing. Gross profit was a big piece of that. But the fact that we had leverage, nonetheless, is a pretty powerful statement, something that I won't even jokingly talk about just a couple of years ago, about our ability to do it. Weak sales patterns. Tough environment out there, especially in production fasteners. And we had a great event last week in Indianapolis. We had -- I don't have the final number on customers, Will probably has it, 4,000 [indiscernible] in our events in Indianapolis last week. It also gave us the opportunity to spend some time with our district managers, our regional leadership. And I'm convinced by something more and more every day, and that is you surround yourself with the best people and then expect the best back. That's a definition. That's a recipe for success in our organization. With that, I'll turn it over to any questions there might be.

[Operator Instructions] The first question comes from Ryan Merkel with William Blair. Ryan Merkel - William Blair & Company L.L.C., Research Division: So I want to start with March. It looks like the seasonal lift was a little less than usual. I'm just wondering how much of that was macro? And then how much do you estimate that Good Friday hurt, if at all?

Ryan, we look at Good Friday as probably -- it's more than 0.5 day. So if you said 60%, we would have lost about $5 million, which would be 2 percentage points. I hadn't looked at it that way, but I mean, that's what the math would be. It was a slow finish, Good Friday was, but it's also a slow month. Ryan Merkel - William Blair & Company L.L.C., Research Division: Okay. And then on gross margin, I guess a two-part question. Where do you think margins can go once the other 1/3 of stores have the price guidance system? And then secondly, do you think that better price discipline has impacted sales at all?

To answer the first part, all of the stores have the price guidance system. We just haven't deployed it to all customer groups. So just might be clear on that. And where the margin can go, we're not sure. We're not going to speculate on the margin. We believe there's still upside improvement. And the question or the second question, do we think it's affecting sales? No, we really -- and Lee's here, too. I can let him jump in, but I have heard no anecdotal, any stories about losing business because of price guidance. Could there be some? Of course. But that's not what we're hearing back.

Yes. I would definitely add, Ryan, that it would only be true if the system was so rigid that we would then offer the flexibility of our folks to look at an order and take it if it makes sense to our business. And that is, again, a culture, a piece of the culture within our company that we've always been flexible to the point to be wise and take orders when it makes sense.

Our next question comes from Derek Jose of Longbow Research.

I was wondering how vending customers, given that you guys are signing so many more contracts this year than last year, how the customer is changing in terms of size and market? And given that there's a higher percent of non-FAST 5000 machines, how many of the new contracts are going to current customers who already have it versus new customers?

All right, to answer your last question first, I don't know the percentage of current customers versus new customers. And I've stated this many times that most of the customers that sign up for vending are current customers at some level. It might be a customer doing 500 and they go to 10,000. So we're not -- we don't keep good track of that, we sign the customers. But as far as the mix of new machines, that's more about producing new equipment than anything else. Our locker systems -- in the past, 2 years ago or 1 year ago, when we signed a locker, you had to have a FAST 5000 to drive that machine electronically. The new locker systems that we have have their own control unit on it so I can put it just lockers or I can put in as a combination of the FAST 5000. So a big part of the reason we're signing more of the other machines, the new machines, is because they're standalone machines and they never used to be. It was always the FAST 5000 with the lockers. Now some -- many times, it's just the lockers for larger items where they have a different need. Does that answer your question?

Okay. Well, in terms of just the targeting, in other words, who you're targeting now in terms of...

That has not changed one bit. The stores determine the targets. We're targeting every customer that we believe can use the system. And there are just thousands and thousands -- I mean, it's endless, the opportunities. But it starts with our current customers within our current market base within each store. And so there is -- it's not a targeting, it's the stores are going out knocking on doors and deploying the technology.

Okay. And then just lastly, in terms of the project activity, one of the things we saw in the fourth quarter is that a lot of projects either got canceled or delayed. Having that one now into April, what are you seeing in terms of some of these projects that were delayed or the larger projects that could have been put in place a year ago? Are you seeing -- what kind of changes are you seeing in terms of demand from those areas?

I think you were referring to the slowdown we saw in construction activity, just wanted to clarify.

Yes.

I guess I can't say that we've seen a rebound in that. But you also have to remember that a lot of that business is very seasonal in nature, and you wouldn't really see the rebound in the January, February and even March time frame because we did have a more severe winter this year than last winter. In fact, you saw it in our February numbers. If I think of the middle -- Midwest, the middle Midwest, so the Nebraska, Iowa, down to Oklahoma, Arkansas area, that zone there, we were pounded with snow in February. We're probably impacted, I'm going to say, $1.5 million in sales in that time frame because of snow. And so if you just think of that in general and where most of our sales dollars are, they tend to be heavily influenced by the northern climate in North America. And so I guess I didn't hear any commentary from the folks I talked to last week that construction had picked up per se from the level of activity in projects. And Will, maybe you can add on -- add to that?

No, I haven't either. But if -- it's not just the late spring, it's the fact that last year we had a very early spring. And I was talking to one of our district managers in the northern region. And in March, he said his business was down 15% over last year, lost business because the construction hadn't started up. And last year, it rolled in 6 weeks early. So March, there's an impact. And if you look at the weather this week, major winter storm coming all the way from Colorado. I mean, we have stores shut down all over the place in Nebraska today. Minnesota is going to be shut down this afternoon. We're supposed to get 14 inches of snow in Minneapolis. So it's just a different weather pattern, and construction is greatly affected by that. But it should all work out over time.

Our next question comes from Hamzah Mazari with Credit Suisse. Hamzah Mazari - Crédit Suisse AG, Research Division: You guys commented that March was a slow finish. Just curious to see what you're seeing in early April, and maybe talk about what you're hearing from your customers? And has there been a change in tone relative to February because you guys expected February to be a decent month?

What I -- The comment I made on March being a slow finish was all about Good Friday. It was not -- the month was pretty consistent throughout, ending the month on Good Friday slows down the finish. We were not going to -- we don't comment on the current month. We never have done that. Maybe Lee could talk about the customers? Lee and Dan both were with many customers last week.

Yes. In 3 days, I had the chance to spend with customers, large customers, current customers. And there is just a general feeling of caution in the market. There's no question about it. When you talk to our suppliers, when you talk to our current customers -- now, I am talking about customers we've had relationships for years, and some of our National Accounts, there is just a general feeling and there is a concern with the state of the economy. And you could feel it during the show for 3 days. Hamzah Mazari - Crédit Suisse AG, Research Division: That's helpful. I appreciate it. And just a follow-up question on the vending business, could you maybe talk about how that business is tracking in terms of sales volume per machine? Are there any low-margin machines out there that you need to get rid of or maybe improved or maybe send -- and maybe be more aggressive on the sales side? Maybe just talk about the margin profile on the vending business.

When I look at the margin profile, that really doesn't come up when I'm looking at machines. But what really, I think, comes up if you look at the machines is you're looking at them and saying -- over the last several years, we've deployed now 25,000 machines. And when you do anything quickly and you're running along -- if I'm running along carrying a bucket of water, I'm spilling water as I go along. Are there machines out there that are underperforming right now? Absolutely. I'd rather have 25,000 machines out there and have a couple of thousand underperforming than have 15,000 machines out there and we're hitting home runs on every one. We have a team in place, and we've expanded that team in recent months, over the last 6 months, to really go back and look at some of the underperforming machines that have been deployed. Typically what you find out, there's a small percentage of machines that are in situations that don't make sense. But that's the exception, not the norm. The real issue is, do we have the right products in the machines? Do we have a sense of urgency about, "Is this machine bringing value to our customer?" We have machines out there doing $500 a month, doing $600 a month. Our challenge is, we're not giving a service to our customer with that $500 or $600 a month machine. And we sure as heck aren't giving a return to our sales on the deployment of that machine. So it's our job to constantly be looking at those and improve that, because improving that would give us a nice surge in growth right there. But there are a few thousand machines out there that are less than satisfactory. But I would expect that at this juncture in the process.

Our next question comes from David Manthey of Robert W. Baird. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: First off, based on normal sort of sequential patterns, it would appear that you should be in the teens growth region by the time you reach the second half of this year. And I'm just wondering, have you thought about a plan B if that doesn't materialize? Or do you just keep driving these initiatives and keep moving forward unless things get really ugly, if we slide into recession or something? Could you just give us your thoughts on what happens if things don't materialize like you think they will in the back half?

Well, we do keep pushing on the initiatives, to answer that part of your question. We have to look hard at our expenses. There aren't a lot of areas to squeeze because we haven't had a lot of labor, but we'll take a very hard look at everything that we can pull back on. We will look -- basically, tighten up the business everywhere that we can. But we're not going to give up on the big picture because even if we did get into a recession, we found that that's a good time to invest and a good time to take market share. We would do that as inexpensively or as frugally as possible. So as far as our overall plan, we'll continue to push metalworking, government vending, our fastener initiative that we're working on as hard as we can. We won't add -- if anything, our headcounts would probably drop in that scenario. As you know, our pay program or our comp [indiscernible] table, so we would save some money there. And we would continue to drive the business forward. That's in the last 2 or 3 slowdowns, that's what we've done and it's rewarded us in the future. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Right. Okay, Will. And then second, an update on a couple of product initiatives here. I know in the annual report you talked about expanding your store-based inventory, focusing on safety and fasteners. I'm wondering if you could just explain a little bit about what that initiative is about. And then you mentioned the OEM fastener initiative. Can you just give us a quick update on where that stands and what your goals are there?

Yes. In the store inventory, we're always trying different things, and safety is one that's been growing very rapidly, a lot of it being driven by vending because it really fits. On the fastener side, we don't see expand -- well, I guess what we commented on in the fasteners is we're going to add a new selection of fasteners that's really just small bags to service the customer faster. It's one of the efficiency things we've talked about. So a customer can come in and buy a $2 or $3 package, which we didn't have in the past. But our OEM initiative is back in August of last year. We've put a person in, he's the gentleman who ran Europe for us, came back from Europe, and he has launched a very aggressive plan to go out and sell a more consistent sales plan to large OEM fastener accounts. It's a list of about 3,000 customers. We estimate the opportunity with these customers between $2.5 billion and $3 billion annually. And it's going forward very well. It's really about making a consistent effort to call on these customers every quarter, every quarter, and then continue to monitor that. At some level -- and I already say this, but at some level, I think we have dropped the ball a little bit on fasteners because we've been so focused on some of these other things. And so this is an effort to bring that back quickly. We're very, very good at distributing fasteners.

[Operator Instructions] Our next question comes from Sam Darkatsh with Raymond James. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: A couple of questions. First off, again, back to the vending topic. I noticed, I think you still have the 30,000 count for a goal for the year in terms of signage. That implies, I guess, a second half quarterly run rate of like 10,000 a quarter. Is that -- that's realistic in your view? And then I want to ask about the 5000 machines versus the other machines.

Actually, as we mentioned in January call, and I did tweak the language a little bit in our press release. Our message to our folks internally was, coming into 2012, here is a goal for us to go after, and we crushed that goal. And like any entrepreneurial sales-centered organization, we upped the ante in the next go-around, and we challenged ourselves internally. Can we hit 30,000? And to me, that's not -- when I think of that number, that tells me that we're after a very aggressive goal. In there, we talk about a 30,000 run rate. And what I mean by that is we expect -- I don't want to soften our position, but we expect to hit 7,500 in a quarter. I don't know if we hit that in the second quarter. I don't know if we hit that in the third and fourth. I don't honest -- right now, I don't believe we'll hit 30,000 machines for the year. I do believe we have the potential to hit a 30,000 run rate during the year. Now that might mean we hit 7,500 a quarter in the third and fourth quarter. Right now, we -- I mentioned we exited the quarter with about a 6,200 run rate per quarter. So you take that out, you have a 24,000 annual run rate, if you take that times 4. But I believe we have the ability and the marketplace capable to accept this of hitting 7,500 during this year. Don't know if it will be second quarter, don't know if it will be third quarter. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Of that 7,500 run rate, once you hit it, how should we look at the lockers versus the FAST 5000 machines as a ratio of the 2 within that projection?

Sam, I wouldn't give too much thought to it. One thing to keep in mind, when we report the numbers, so if I look at the table that's in the release right now and we talk about the 25,000 machines we have right now or if I look at the 21,000 we had at year end, we actually had about 25,000 machines operating at year end. But on the 3-door lockers and I believe the 12-door lockers, we count those as a half. So we take the 8,000 lockers, crunched that down to 4,000 and we report to you 21,000. And the reason we're doing that, we don't expect the same revenue throughput in a locker, a small locker than we would in a FAST 5000. So we want to normalize the number to our targets. And so we don't give too much thought to, "Hey, are we rolling out 2 lockers here or 1 FAST 5000 here?" It's about, "Are we deploying equipment and is that deployed equipment producing revenue and giving us a return?" And we keep it that simple.

And Sam, I just want to jump in. To just clear the air on vending, every sales call, you need -- we go into it to determine the proper solutions. So think pick and shovel. I mean, we could have 2 completely different solutions for a customer, and we have no idea where that's going to go. So we don't have any goal, lofty goals of 5,000s and 10,000s on lockers. We go to the customer, the customer has a problem, we bring a solution, think pick and shovel, and that's all the vending kind of goes where it goes based on the call. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: So said in another way, there's really not a material difference in volume through the machines from the numbers you give us for a FAST 5000 machine versus a locker because of the adjustments you make, Dan? Is that a fair statement?

Correct. Correct. Yes. And the real variability from machine-to-machine centers on the product that's in the machine and the number of employees. For example, if it's a machine with expensive cutting tools in it, you're going to see greater revenue. If it is more of things like gloves, there you need a headcount to generate the dollars. But it's really predicated on how many employees are in that facility and what are the products that are being invented. And have we, Fastenal, brought a great value to our customer by putting the right products in the machine so that -- so we're bringing the best solution to them?

And I think a more important measure is what percentage of our customers have deployed the technology and how is that customer subset doing versus machine-by-machine. It's a much better macro measurement.

Our next question comes from Holden Lewis of BB&T. Holden Lewis - BB&T Capital Markets, Research Division: One is -- a couple of things, first, on the vending, you talk about getting from the current level, it was I think 5,300 or what have you, up to 7,500 at some point a quarter. Why are you confident in that? I mean, is the main gating factor right now that you don't have enough people to get there, so like you hire to get there? I mean either demand has increased, and it seems like demand is pretty torrid as it is, or you need more people. I'm just sort of curious why you think you can scale up to such a volume so confidently.

If I go back to the end of 2011 and I look at the number of machines that we have deployed, and I look at what's -- how many stores are actually driving the number, at the end of 2011, about 2/3 of our stores actually had a vending machine deployed. And that number had gone from 27% of our -- 30% of our stores to about 2/3 of our stores, so 1/3 to 2/3 over that -- the previous 12 months. And what really launched us last year is the fact that we had more -- we introduced an incentive. Obviously, that had an impact. But we had more stores with hands-on knowledge about vending at the end of the year that we did a start. At the end -- if I look at it right now, 92% of our stores have at least one vending machine deployed. So the percent of our population that -- there's 2 types of knowledge. One type of knowledge is, hey, you get how the -- my knowledge on vending is I get how the vending machine works. But I can't sit down with somebody and actually talk to them about a customer that has vending of mine where I'm filling the vending machine and I can talk directly about how this improves the business and why it works. 92% of our people today have hands-on knowledge of vending versus 2/3 a year ago and 1/3 the year before that. To me, that's the biggest comfort zone is that, as I get months under my belt with vending, I can sell it better.

And Holden, I think it's even -- one thing, the way I look at it, is when the stores really seem to take off is when they have, say, 7 to 10 machines. If you're to talk, and I do this almost every week with managers, if you were to talk to a manager that has more than 10 machines and you ask them what their market potential is, they'll give you a number. Almost every time, they'll give you a number north of 7,500, as high as 200. If you talk to a manager that has 1 or 2 machines deployed, they'll give you a number of 10 or 20 in a very similar market. Until you've done it, they don't see the potential. And once they see that, they take off. And that's why I'm bullish on our opportunity to improve as we have 92% that haven't signed, but we only have about 40% to 50% of our stores that have meaningful numbers that are really knee-deep into it. And those are the people -- as that rolls over, I think we're going to continue to see acceleration. Because even though our sales only grew daily 6.5%, we still signed 25% more machines off of a very big number in the first quarter of 2012. It wasn't a soft number we were going against. Holden Lewis - BB&T Capital Markets, Research Division: Okay. And then just flipping over to the gross margin for a second, obviously, forecast in the short term. But I'm sort of curious, you're sort of approaching the 52.5%, 53%, kind of the upper half of your long-term goal. And when I think about how you're getting there and I think about pricing, the DC automation and all those sort of things, I mean, you're doing it in spite of maybe fastener mix working against you. Should we be looking -- those all seem like reasonably sticky sources of gross margin improvement. Should we be thinking in terms of your long-term range of 51% to 53%, now maybe being 52% to 54%? I mean, does it look like a permanent step-up in profit capabilities for you? And if not, what's the risk to that scenario?

I guess I don't -- we're not ready to move out of that range right now. We'll see a few more quarters if we're ready to move out of that range. As we said in previous calls, we get pretty itchy when we're in the bottom half of that range, so we feel a lot better about it today. If you think about our initiatives, though, there's still some headwinds in our initiatives and tailwinds. There are some of both. If I lay them on pros and cons, a pro would be exclusive brands. There's an opportunity -- said in another way, private label. There's an opportunity for us to expand gross margin through private label. On the negative side of the ledger, vending right now is a little bit of a drag on gross margin.

And it's not vendings that drag, it's being sold to larger customers -- to larger customer segments that drag, sorry.

Yes. Yes, to clarify. Because the vending sales -- a customer with vending sales, their margin isn't negatively impacted by vending. It's no different than National Accounts as a percentage of our business has grown from 5% to 40% over the last 15 years. That's been a drag on gross margins. So that piece. The OEM fastener initiative has the potential to be a drag. Even though it's fasteners, it's high-volume fasteners going in -- a limited number of SKUs going into large customers, so you have a potential for a drag there. So we're not ready to move out of the 51% to 53%, but we are comfortable we're going to be in the upper half of that zone, and we have potential to improve in the future. And I think the odds of us being willing to move out of that range a few quarters from now is a lot better than it would have been if we were having this discussion a year ago.

Our next question comes from Brent Rakers with Wunderlich Securities.

Really just, I guess, 2 questions on 2 of the components within SG&A. I think, first, if you could maybe talk through the increase and the growth rate and the occupancy cost, I think the last couple of quarters, I want to say mid- to high-single digits and now we're at that 13%, 14% level. I think that's the first question. And the second question is, I was hoping -- you talked a lot about some of the puts and takes within the payroll side. If you could maybe give a little bit more color on the performance bonuses versus the sales commissions and kind of how those are moving in opposite directions and maybe the magnitude of each.

First off on the occupancy side. The real drivers of our increase wasn't 2 subcategories with occupancy. Vending was the biggest driver. When you look at the amount of vending we've added over the last 12 months, it's a staggering number. So it's moved that number north. So when you look at it on a year-over-year basis, it added to the operating expenses. The second one is, probably the biggest variable within our store side, in an environment where we're adding 3% more stores, we can manage through that from just the rent expense, if you will, because we continue to do a nice job in negotiating and improving our rent picture. But last year, you had a very, very insignificant winter, if that's the right way to say it. If you look at our -- if you go back to our first quarter report of the year ago, we were feeling really good about what we've done on the energy side because you had a mild winter, seeing much less heating cost. You had rates coming down, so you had a double-dip, and we had a very attractive occupancy number a year ago. This winter, we had a cold winter. We had a long winter, and so we spent significantly more dollars heating our locations than we did last year. Those 2 things are really the story when I think of occupancy. When I look at -- remaining components of SG&A, if you look at what happened in our business -- and I don't know if you're thinking of SG&A from a sequential standpoint, Brent, if we look at it year-over-year.

More year-over-year, Dan.

Yes. If I look at it year-over-year, the real drivers of increase -- our FTE is down or our FTE doesn't tell the full story of what's going on with our payroll because in the fall, we reduced some headcount on the part-time side. And so the FTE delta, if you will, from where we would have been versus where we are, isn't our most expensive group of employees. So that's one item. The other is, you had 105 basis points or thereabouts to your gross margin. You pay out more commissions. So our commission rate is higher to date, and it meaningfully outgrew our sales growth. I consider that a high-class problem. The other thing that's an important component is in our profit sharing program, we have a couple of distinct pieces to profit sharing. One is, when our profit gets above 16%, we share a piece of that with our employees. When our profit gets above 20%, we share another layer of profit-sharing. So if I look at our profit-sharing number in first quarter to first quarter, it's up. I don't have the number in front of me, but 23%, 24%. And so while we're doing a nice job managing the headcount, some of our incentive pay, as it relates to our national leadership, our regional leadership and our district leadership, is negatively impacted because our earnings growth isn't where we want it to be, so just the way our mechanic programs work. But on other pieces, a lot of it is about, not sales growth, it's about gross profit dollar growth. And that drives -- and pretax earnings. Those are the 2 things that really drive a lot of our payout. So we have nice expansion in gross profit margin. We have expansion in our pretax margin. That drives some SG&A expense. And again, we consider that a high-class problem. It doesn't link right with the FTE numbers, but it is a driver of our expense.

And Dan, I guess my just one follow-up to that. I think in the past, maybe you've given a percentage in terms of how to think about a gross margin increase, how much of that will translate into additional payroll? Do you kind of have a thought process there?

If you add it all up, it's going to be roughly 30% if we increase gross margin by say $1 million incrementally, we'll pay out about $300,000 of that when you layer all the programs done. We pay a premium for gross margin because it's hard to do. It's hard to produce. That's hard work.

Okay, great. And then, I'm sorry, just last question on the occupancy cost. So there's been no change in your kind of per-vending unit cost numbers flowing through the occupancy?

No.

Not at all.

I'd like to hand the call back over to Will and Dan for closing comments.

Again, as we suggested at the start of the call, thank you for your continued interest in Fastenal. For those of you that have had the opportunity to read through our earnings release, I apologize for the fact that it's 19 pages long. Back in college, I was a Cliffs Notes guy, so I didn't like long documents. But hopefully you find the document useful and it gives a good level of understanding to our business as you're looking at your investment in Fastenal and, hopefully, your expanded investment in Fastenal. Thank you, and have a good day.

Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.