Jan Degallier - IR Lee Hein - President and CEO Dan Florness - Chief Financial Officer

Robert Barry - Susquehanna Financial Group Flavio Campos - Credit Suisse Ryan Merkel - William Blair Luke Junk - Robert W Baird Charles Redding - BB&T Capital Markets Robert McCarthy - Stifel Kwame Webb - Morningstar Brent Rakers - Thomson Research Group

Good day, ladies and gentlemen. And welcome to the Fastenal Company First Quarter 2015 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Ms. Ms. Jan Degallier, ma'am, you may begin.

Thank you. Welcome to the Fastenal Company 2015 first quarter earnings conference call. This call will be hosted by Lee Hein, our President and Chief Executive Officer; and Dan Florness, our Chief Financial Officer. The call will last for up to 45 minutes. The call will start with a general overview of our quarterly results and operations by Lee and Dan, with the remainder of the time being open for questions-and-answers. Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission or distribution of today's call is permitted without Fastenal's consent. This call is being audio simulcast on the Internet via the Fastenal Investor Relations' homepage, investor.fastenal.com. A replay of the webcast will be available on the website until June 1, 2015, at midnight, Central Time. As a reminder, today's conference call includes statements regarding the company's anticipated financial and operating results, as well as other forward-looking statements based on current expectations as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming, or similar indications of future expectations. It is important to note that the company's actual results may differ materially from those anticipated. Information on factors that could cause actual results to differ materially from these forward-looking statements is contained in the company's periodic filings with the Securities and Exchange Commission, and we encourage you to review those carefully. Investors are cautioned not to place undue reliance on such forward-looking statements, as there is no assurance that the matter contained in such statements will occur. Forward-looking statements are made as of today's date only and we undertake no duty to update the information provided on this call. I would now like to turn the call over to Mr. Lee Hein.

Thanks, Jan. Good morning and welcome to our Q1 2015 call. The quarter was when you look at it's really two stories. One of things we can control and things we cannot control. Obviously the things outside our control are the currency, weather, oil and gas and the port situation in California. But the things we can control, I think when I look at the Fastenal team I think it was a solid quarter. But that being said I will always say this that when we see single digit revenue growth, we are not satisfied nor are we happy. But with 8.8% growth we did some things and I think hats off to the Fastenal team when you look at some different areas. When I look at the fact that we stabilized our gross margins and I know there has been questions there but I look at the fact that we were able to do some things there. And a lot of that is truly execution when you really look at what our people are doing at the point of transaction. The second thing is we challenged our Fastenal team to really live within our means. And what I mean by that, that's an old school BK philosophy that if we don't need it, don't buy it. And you saw that play out in the first quarter when you look at meal, travel and entertainment. We made a conscious decision to spend our money on labor and the stores. We said no to things that may sound nice and may actually help us long term in some regards but today we made a decision to invest in our store to fuel our growth to drive profits and that's what you saw play out on the expense side even when you take out the tailwind on the fuel. The other thing, some other highlights, we grew our earnings 14%, that's a nice leverage when you consider we are at 8.8% on daily average growth. More importantly and more impressive I think is the team was able to put up 32.2% incremental margin growth. Again a number that I think most companies would just -- would be thrilled with. When you look at the added energy in the store, I want to -- this is where we really got to get down to what's truly happenings boots on the ground. From the end of Q3, 2014 up until the end of Q1, 2015, we've added 1,000 people into our stores. Now most of those heads came in the last half of Q1. January, folks I got to tell you, January coupled with the weather, the fact that the kids aren't back to school. It's a rough month for recruiting. But in the second half of February and in the month of March, that's when you started to see the team really start to bring people into the stores. And we will continue that. Going forward, we are committed to energy in the stores. We are committed also to looking at a few of our stores. When I look I talk about that our large stores, our stores with the high number of customer, we would just say a lot of traffic. We are looking at adding products into some of those stores to also build invoice, build customer satisfaction all the things that we try to do everyday. The other thing and lastly I think a shout out really to Nick's team on the inventory side coming at 867 with inventory at 869 a year ago really is again a testament to the Fastenal team and what we can do when we put our minds to it. With that I will turn it over to Dan.

Thanks, Lee. And good morning, everybody. And for those of you that are wondering he is referring to Nick Lundquist and the team on the supply chain and a really nice job of managing the inventory in a tough environment. I'm going to -- typical to prior quarters I’m going to reiterate few of the points made and then touch on a few additional. I have the opportunity to talk to a lot of folks in the Wall Street community over the course of the month. And one confusion there has been and what we talked about in the January call, I just want to reiterate here. And that is Lee touched on it and we really are focused on adding energy into the store to free up the time of our sales people to get out and sell more. And as Lee mentioned in the last 12 months, we've added more than 1,000 people 1,067 to be exact. And we intend to keep adding people to the store level and internally the way we've described to our folks is we have just under 300 district managers in the organization. And we would like to be in a position for each of those district managers to on a net basis add an employee into their business each month. And most of that hiring is going to be part time, we continue to want beef up our ranks on the part time. It's really a means for us to recruit long term because we go into two and four year -- two year technical colleges, four year state colleges, we recruit people with a year or two years left to school with the hopes that when they graduate, they can come work for us full time and we can really hit the ground running. And we have the dollars to put a lot of training into them during their entire cycle with Fastenal. So if we added 300 people a month and say did it for a hopefully nine months or 10 months of the year, maybe nine months, but you would be adding about 15% to your FTE base in the business. So you add 3,000 people, they work about little less than 20 hours a week. You start with a group of 10,000 FTE, you add 1,500 on to that it is 15%. I don't know when the dust settles at the end of the year if we’ll hit that 15% number or if it will be closer to 12% to 13%. The economy is going to dictate a little bit how hard we push on that. But that's our intention to invest heavily into time in the store and free up our sales people who are quite frankly the best in the industry. Free up their time to get out and sell. And as Lee touched on, quite a few of those came in the last really two months. In the first quarter here we added about 614 people into our store locations. Little bit in the release starting on Page 5, talk about the environment; tough environment out there. Our sales growth softened as we got deeper into the quarter. Weather hit us hard in the January, February timeframe. Oil and gas and some of our customers that are involved with export markets, the currencies – the US - strong US dollar is not helping export. So our business did weaken as we went through the quarter. You really see it showing up in the industrial, the production side of our business and as we talked about in the release, the best way to think about that is on the fastener side. Our fasteners grew about 6% for the quarter. They were growing 10% and 11% in the third and fourth quarter of last year. So that business really slowed down. We didn't lose any customers but those customers are producing fewer widgets and therefore they need fewer fasteners. The non-fastener business still maintains double digit growth. It did weaken, it will move directionally with the other business. But that is a much -- it's a more resilient piece of business for us. And part of it really stems to the fact that it's heavily influenced by our vending initiative of the last five years. Starting on Page 10, we talk about the earnings and probably the things that jump out for me when I look at it personally are, and frankly I think it is pretty impressive report. And I am the first one to let our folks know when we had a weak quarter. I am also the first one let them know we had a strong quarter. And I think from an execution standpoint we put out a nice report because we actually hit it well. I mean we added in the last 12 months over a 1,000 people into our stores. We managed our labor expenses well. We managed our non labor expenses even better. We were helped obviously by the fuel and gas prices in our business but that was known item for everybody. But even outside of that we did a wonderful job managing our business. Finally, cash flow. Cash flow was very strong. Partly as Lee touched on, we did nice job with our inventory but a strong performance looking at all aspects of the cash flow statements, some things that might be worth pointing out. Late yesterday we announced our second quarter dividend, the $0.28 a share. That is consistent with our dividend in the first quarter. Late March we announced that our Board had increased repurchase authorization for buying back stock to 4 million shares. Just to give you a brief history on that. In January, they established a 2 million share authorization. From mid February till the latter part of the March, we spent and bought back 2 million shares. We spent roughly $82 million. We bought back stock at -- just under $41 a share. This depleted that authority, therefore we asked our Board and they agreed to establish a 4 million authorization to use going forward. We have been in the process of increasing our credit facility. So we are in a position to exercise that if the market sees fit. And we will see how that plays out. I think the report is pretty straight forward this quarter. So not let noise to it. Obviously, the top line weakening is probably the most noteworthy thing again everywhere it seem generating February numbers. So no surprises there. And I have one item I'll throw out as a reminder and then we will switch over to question and answer. And that reminder is just you remind you focus our annual meeting is next Tuesday at 10 AM. With that we will turn it over to Q&A.

[Operator Instructions] Our first question comes from Robert Barry with Susquehanna. Your line is open.

Hi, guys, good morning. I did I wanted to start by asking about gross margin because you mentioned that you had stabilized it in the quarter and it's positive. But it sounds like the language in the release sharpened a little bit this quarter and now seems to call for ongoing decline as average store size grows and since you are not adding stores it sounds like essentially same gross margin decline as the business grows. So can you clarify what the expectation is for the gross margin going forward?

Yes. I will take that one. I don't recall if it was the January call or the October call. But in that previous call -- one of the things that I don't know the people always appreciate, we've talked about our pathway to profit table for years. And in that pathway to profit, as our stores mature they become more profitable because we dramatically leverage the fixed cost structure of our business. The flip side of that coin is you know if you are visiting $50,000 store, you don't have very many $20,000 and $30,000 a month customers in that store. I would be surprised if you have one. You visit a $150,000 store and you could have several. You could have three customers doing $20,000 and $30,000 a month. And those customers first off they have more ability to negotiate pricing. But more importantly than that we have the ability to go after that business in a different way because that market is little different. And so you go after that business because you have more predictability of what your need is and you can be a little sharper with your pencil. Because you know that those revenue dollars and more importantly those gross profit dollars while there are some added expenses of serving them, you are still in the same building. You are still the same semi delivering product. And so when we move from $100,000 store, if you look at all of our stores over $100,000, our average store in that group is about $165,000 a month. Our gross margin in that group and I am just reiterating what we talked about earlier, our gross margin in that group is about 90 to 100 basis points lower than the rest of our stores. However, our operating expenses drop off around 450 basis points. So that $165,000 store has profit relative to the sales dollar that’s 350 basis points higher but there is some trade off, you have given up little bit a gross margin, you are picking up at operating leverage. We like that trade off and so as we move -- once we popped above $100,000 a month in sales, as we move further away from $100,000 a month, I would expect our gross margin to decline. And I'll take that trade off of $1 here for $4.5 over there.

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

Yes. 3.5:1

And I noticed you took the table out of the release this quarter that shows how the margins are progressing in the various store buckets. I don't know if that will be in the Q but maybe you can just share some thoughts on what has been happening with the margin in the largest bucket because it look like it had been declining.

Well, the operating margin improved and you see that shine through, if you look at our stores that do over $100,000 a month, that's about half of our revenue. And so our overall profits were up 100 basis points from last year. That group was a big piece of that equation. I removed it for a couple of reasons. I think one thing when we started the pathway to profit back in 2007, we dramatically expanded some of the information we disclosed really because it was a big change for Fastenal. Five years ago when we introduced the industrial vending, we expanded a bunch of our disclosures because again that was a big change for Fastenal. And one thing we like to be in a position to do always with our shareholders is to be able to think out loud openly and honestly feel what we are doing. I kind of got -- I started to signal last year that I was going to pull back some of the disclosures. Not because we want to disclose less but we want to make sure that all the stuff we disclose doesn't create noise and take away from the message. And it's really -- because you want to focus on here the major things and here the minor things. And so we are trying to pare it back a little bit so we have little bit more concise report. And I am firm believer after 7-8 years of showing pathway to profit for the people that believe it you don't need to see it every quarter. For the people that don't believe it after eight years, I don't know how to convince anybody.

Thank you. Our next question comes from Flavio Campos with Credit Suisse. Your line is now open.

Hi, there. Thank you for taking my questions. Just focusing on gross margin just very quickly on Q1. It looks like fuel helped you about a 10 bps right little bit of reduction to that $8.8 million this quarter. And you guys talked a little bit about seasonality as well. So if you can just help us bridge that and if you can also talk a little bit about the fact that on the fastener business you had a lot of cost deflation on the supplier side and now we are seeing a little bit of that price pressure on your customer side as you called out on the release. And if that mismatch in timing has also helped gross margin right now or if you are actually passing through a lot of the savings?

Yes, no, the gross margin really hasn't been helping any timing. Where we do have contracts that are tied to a CRU or some other type of index, it usually mirrors the turn of our inventory. So really when I look at the gross margin and I try to touch on that in the release, the improvement in gross margin, there is always a seasonal lift that occurs. And the real impact is we have a fixed cost with our trucking network. That truck is going, –[inaudible] from Winona is Redwing, Minnesota. There is a truck that stops there every morning. Whether that truck is carrying 10 packages or 20 packages, cost of the truck is the same. And from October to November, December, our volumes will drop off meaningfully because of the seasonality of the business. And so that fixed cost of that truck weighs little heavily -- more heavily on the sales. When our sales snap up in the first quarter that truck still cost us the same, I am ignoring fuel here for a second, that truck still cost us the same but we are delivering 10% more boxes. And so that lift is always there and drag is always there in the fourth quarter. I think what's more important about our gross margin is we did more than that. We got the lift that's there. It was [inaudible] a little bit as you mentioned because our fuel cost came in less than say a year ago, less than even fourth quarter although that delta is smaller. But more importantly we did a better job pricing our product and sourcing our product. A lot of our sourcing is done at the store level which is fairly unique for industrial distributors in general because we are very entrepreneurial in our nature. And it's really you know looking at everybody square in the eye and challenging everybody, what we need to stop this and stabilize. And we did a little bit better than that.

Perfect, that's very helpful color. Thank you for that. And if I can just have a quick follow up on the non-res side of the business, that slowdown a lot in March end, that seems a little less levered to the headwinds of oil and gas and exports, I am not sure if that's accurate but if you just could comment on a little bit on the health of that end market.

Yes. That business did slowdown for us. One item just keeps in mind, a chunk of our non-res construction is directly tied to energy. Its infrastructure because where we operate and the infrastructure is being built to support the production as well as downstream refining and the transmission in between. We are involved in those three stages of oil and gas. So oil and gas does have an impact on our non-res. But that business was little weaker, part of that was weather standard, but it did soft a little bit. I think there is a lot of tentativeness in the marketplace right now.

Thank you. Our next question comes from Ryan Merkel with William Blair. Your line is open.

Hey, guys, good morning. So first question, when I look at your March growth rate and I look at the IFM index, it looks like demand is slowing sort of beyond oil and gas and beyond exports. Are you seeing this is well and what do you think is driving this?

Well, I think, yes, we are but I think what you really have is those two you mentioned export and oil and gas. That casts one heck of a shadow; it is not just the folks that are directly involved in that business. If you are in the same geographic area and the manufacturing pace, the manufacturing heartbeat of that area is weaker, everything else is kind of takes a step down. If you are working at industrial business and you are kind of worried about what's going on your business, people aren't as quick to other things to buy a car, to buy a thing to make a renovation to their home. People just say let's wait and hold because I don't need to replace this television set today. Stuffs like that, you just become a little bit more conservative because everybody is little nervous.

Ryan, I jump in and the other thing on the oil and gas, last call we talked about it being 10% to 12% from a geographic standpoint. But even when you start to consider the steel mill that's making the frac pipe, we didn't even -- that's not in part of our discussion last quarter but there is a ripple effect that I think as Dan said that is greater than I think most people really understand.

Okay. And asking at a different way. Do you have the growth rate in the quarter for the energy state, the non energy state; was there a big difference there?

I don't have that right in front of me, Ryan. But if I was looking at the energy in general, in case of March, that's probably about 3% impact.

Okay. And then incremental margins were very strong as you pointed out. But I am just wondering if growth store stays at 6% -7% ranges and then you are going to ramp the FTEs, if it sounds like, what's the reasonable incremental margin range in your mind if you look at 2Q, 3Q, 4Q?

Well, one thing to keep in mind, once second quarter and third quarter last year our gross margin was at 50.8, fourth quarter it took little dip down now we are back at 50.8, we could be in a position to invest well and if the noise of gross margin is silent, it's really about our operating expenses. And I see no reason why -- yes, I don't know if it will stay north of 30 but I feel very good about staying north to 25.

Thank you. Our next question comes from Luke Junk with Robert W Baird. Your line now is open.

Yes, just building off your last comment there on the gross margin line, Dan, Just kind of way out in terms of the outlook for the rest of the year, things that you can't control and some of the things say you have been working on a pricing side. First is maybe some of the headwinds we might face this year especially in the fastener product line, just how this -- in your act and maybe better understanding as we are seeing the drop in steel prices right now and piece of your business that you are probably turning less than two times per year just how would you expect some lower steel prices to work its way into the P&L as we go forward here.

Well, that the lower steel prices, any time you have deflation it creates a challenging environment and we have been in a situation having deflation now for a few years. And so it makes challenging as we go through the year. At the end of the day though I really looked at it in a little longer term perspective than just that. As I try to understand what are the long-term drivers of our gross margin. Because that's really the things that you are focus on. And the long-term drivers of our gross margin are really gets down to business and product mix. So customer mix, how much of our business is coming through stores of different sizes that we touched on earlier in the call. How much is coming with customer of different sizes. One thing that we've done a nice job in recent years and by recent years I am saying the last 15, but we've done nice job of leveraging this infrastructure that is Fastenal, the store base as Fastenal and growing our larger counter national comp business quite aggressively. That continues to outgrow the rest of the business. Not because that we are losing opportunities in the smaller customer base, is because we are under represented in large customer base. So we continue to grow little bit faster there. To me long term the growth in that large customer base as well as the residual impact to our product mix that ultimately drives our gross margin. And as we see as our revenue base grows and our gross margin does decline a bit, we do a very nice job of our business model leveraging that cost. And do a nice job with a pretax which really at the end of the day is the of all the numbers in the P&L, really don't they want matters is the one at the bottom of the page. Everything else above that is just discussion point. But it's still healthy to appreciate the point and understand how that differs from business but ultimately it gets down to what our customer mix and what's our product mixes within those customers.

And then just follow up. Lee you mentioned that the port situation was something that did impacted during the quarter. Just curious at a high level what impact it may have had on your supply chain, on product pricing, need to source any product domestically you typically import et cetera.

We kind of try to get a message to our folks that we thought this thing would get rectified and to really try to take care of our customers but really we took I think fairly tough stands and we are not going to go out and find something or secure parts domestically and eat the difference. So we did a nice job there to put a number on I can do that. But it cause I think for maybe a few months or month, a little bit of problems here and there but nothing to the degree that it really move the needle for us on the margin side.

One thing that helps us in situations like this is the fact that we have -- with inventories turns roughly two times a year. So we have more resiliency than our peers really do when it comes to this matter because we have 2,600 -2,700 store locations and 14 distribution centers. We have a lot of inventory stored around the country.

Thank you. Our next question comes from Charles Redding with BB&T Capital Markets. Your line is now open.

Hi, gentlemen. Thanks for taking my question. I wondered if you could just drill on a little more on Canada. I realized your exposure certainly more heavily weighted towards the eastern markets. Have you seen a weakness there advantage to direct oil and gas exposure? Are you seeing that really bleed over into and some of the more ancillary markets?

For a Western Canada, obviously our business there has been impacted pretty dramatically. And yes it bleeds over into everything in that geographic area as you noted in your question. When we originally entered Canada, we entered from essentially Southern Ontario and grew through Ontario and then from there expanding East and West. So the core of our business is really in the province of Ontario. That business there is held up reasonably well. If I am looking at in Canadian dollar. Obviously, the Canadian currency is very much tied to the fact that their economy is tied to extractive industries. And the weakness in oil and gas, weakness in energy in general is not helped their currency. So we are in a local currency basis we are growing reasonably well. But when compared to the USD, that's what we report in, picture isn't quite so good but the -- underline, and business is sound.

Okay, thanks. And then on heavy manufacturing and Ag, I know your exposure there is relatively limited as well. But if you could just color, provide a little more color on heavy manufacturing right now and trends, where you are seeing now you are seeing that shaping up over the next quarter or two?

That piece is pretty weak right now. A chunk of our heavy manufacturing is tied to -- easy way to describe it big wheel pieces of equipment and those and that's mining equipment type, agricultural equipment, it might be military equipment. We have a good focus there because those end markets really value what we can bring to their table from the standpoint of fastener expertise and fastener availability as well and everything else that goes with it. Although that is a pretty weak right now. You folks know as well as we do what's going on in some of those end markets as far as with some of those large customers are experiencing right now. It's not a pretty picture. And so that's impacting our fastener business because it is impacting our heavy manufacturing.

Thank you. Our next question comes from Robert McCarthy with Stifel. Your line is open.

Good morning, guys. Congratulations on a good quarter in a tough operating environment. Yes, I guess one -- this question has been asked prior but could you just walk through, do you think there was any kind of benefits from kind of the rollover and steel just from a contract perspective and those contracts get reset, how are you thinking about kind of more of normalized gross margin at the back half of the year, it is a bit of leading question so you can argue with the partners, so that's fine but I just wanted to ask it.

Yes. I'll answer this way. Deflation in steel never helps our reported margin. If the steel based products that-- are the slowest turning for us. If there is some deflation in non-steel product that we sell so the non fasteners that inventory turns little faster. There you can realize some impact. For us what we are always endeavoring to do is manage the noise of timing. In other words manage where you are giving price concession, where you are not. And really the only time you ever really can get an impact as if you go back to I think it was 2008 timeframe, there was a lot of inflation going on in steel. And we actually saw some short-term gross margin improvement because of it. That was a little unusual because it was so extreme. But generally speaking we-- the lift-- the improvement we had in gross margin is, if there is any impact from steel pricing in there it's negligible, -- not it is measurable.

Really -- immaterial

No.

Okay. Then the second question is I mean and I know you are reluctant to pull out your crystal ball the last year, I mean just looking at the comparison in the back half of the year and some of your comments about non-residence construction in terms of the fact that oil and gas, I mean its number the emanation from oil and gas that we -- is going to affect more markets than we would like and we would think. How do you think about the -- if you saw a commercial construction recovery or some strike in the back half of this year and the comparison, are the prospects there that you could still see kind of mid to the high single digit organic growth in terms of sales given the acceleration in non-res.

We believe so. That the business really weakened in this three months period. We don't know where we are in the weakening cycle. We don't know if it is 90% behind us or 50% behind us. We don't know.

Where oils going in

Yes. What we do know is that, I think we've demonstrated an incredible resiliency to managing through it. And I think the selling energy we've added into our stores gives us a great means to defend, anything that markets going to deliver to us. But our folks have always been on and Lee touched on really well at the beginning. And being the farm kid I appreciate that perspective really well. You worry about the things you can affect. I don't worry about the weather when I am grown up on the farm because I can't affect it. I worry about how I react to it. Same thing here. I don't worry about the economy. But we do focus our energy and how we can react to it. And I know that's not a real satisfying answer to your question. It is but largely because we don't frankly know what the economies going to deliver in the next 9 to 12 months.

Has a one more question, I am sorry. But I mean is there any data point you are seeing in terms of your order book, your sales that has been particularly troubling or that you are really monitoring closely versus just a normal slowdown versus pronounced cyclical rollover. Is there any evidence on side or the other?

No. There is not.

Thank you. Our next question comes from Kwame Webb from Morningstar. Your line is now open.

Good morning, gentlemen. Thanks for taking my call today. So there has been a lot of talk about adding support people to the stores. Maybe you can just kind of bring us up to date on what you have done in terms of headcount additions for the national sales initiative? Just in terms of adding extra bodies, adding extra IT resources, just to help we understand a little bit better why that business seems to be growing a lot faster than historically was.

I think it is a case of all the things that we've done, it is a combination. It is not about what we did in the last three months or six months or twelve months. It is a combination. Our store footprint puts us in a position. Picture yourself you have -- last week we had our annual customer show down in Nashville, Tennessee. I had the opportunity over the course of three days to talk to probably more customers than I had ever talked to in a three day period which was a wonderful event because what it demonstrated to me is how much opportunity there is out there. And I think that's what really drives for us long term is maybe sometimes the realization of how big the opportunity really is. And what that means for our ability to grow our business. And so the fact that we positioned ourselves with a great store network, staff with great people, a distribution and support infrastructure behind the scene to support day to day activities. Last five years we've built the basically $0.5 billion a year business, selling products through vending machines. And all those things support a multi location customer who wants to have product available for their employees but doesn't want to have voice, that's where vending comes in, who wants to have a supplier base that can support him not in one location or five location but all 20 locations.

Yes. They want consistency.

Yes. And so that's a really important thing. And I think we just over the years have gotten better at realizing what we bring to the table. And probably, at least I can speak for myself, realizing just how massive the opportunity is out there. And that's why I am a firm believer that business is growing faster because we are under represented there. Not because the small comp business isn't growing, is because we are under represented in one and we are really poised to sell into that and demonstrate what we can do. And take advantage of growth there.

And I want to say about a year ago I had a conversation with you guys in terms of just making sure all the incentives were there. I believe there were some commentary saying that you are comfortable paying double commissions both at the store level end and at the national accounts level, just to make sure that people want to compete against each other for business, is that still true?

We believe it is harder to grow than it is to maintain. We pay a higher commission on growth. Just like we pay a higher bonus to our non sales personnel on profit growth than on profit. Because status quo is easier than change. And we reward for change.

Your question I believe are we stacking commissions both at the -- on a national account rep percent, yeah, we pay both but is much like the national account folks are the hunter but our stores do the work, day to day to support the accounts. We pay both and that's factored into our decision and it is great move. We are lined up but that's a company. If the company wins, our employees, our leadership wins, our support folks win. We don't, we move on.

And our shareholders with

Yes

And just before I hop, when we talk about this big national account wins, who exactly is this business coming from? Is it still mom and pop or is it more sort of national top 15, top 20 type industrial distributors?

It is coming from -- it is come from everywhere. There are a lot of very, very good local and regional distributors out there. And they have probably 70% of the market. And so just to add let say they should be getting impacted 70% of the time. And so it's both but it is a mix.

Thank you. Our next question comes from Brent Rakers with Thomson Research Group. Your line is n now open.

Yes, good morning. I want to follow up on the implications. I guess the cost application of some of the employee additions you are talking about, if -- Dan, if you hit the targets by the time the fourth quarter comes around, do you have a sense for what the impact would be on overall compensation? Are we talking about an $8 million to $10 million a quarter type of number?

The real driver is looking at that those 300 people we are adding every month. And the way to think about it is we are adding 300 people. They are working let just say for discussion sake 20 hours a week. And depending on what the geography is our average hourly rate is $5 or $11, so that probably the best way to think about the math, Brent is kind of those three pieces and that's kind of the layering effect we have on each month going forward as far as the expense.

Then I guess Dan or Lee, the related question is how you look at the -- that the payback from that. I mean you are adding -- you are talking about adding basically about 15% FTEs, how productive does that make the other store sellers to get that revenue growth and gross profit dollar to offset or even to get a decent return on the those part time additions?

It doesn't take a lot of business to get pay back on that type of expense especially when you are spread it across 100 and some thousand dollar store, but what it does provide is the employee based that we have in that store, I am really talking about the sales people that we have in that store, the season sales people, that's A, it is an inexpensive population but more importantly it is a very productive population but if they are come in everyday to help receive in the truck or to make deliveries, it's just -- it removes from their day, from their window, that the pure amount of time they get out and sell and again as I touched on in the earlier question about opportunity. Opportunity is staggering. I still visit a lot of stores and I am always amazed by just when I asked people in the store what are some of the customers, or what are some of the opportunities in this market, the opportunity is staggering and we want to be able to unleash that because this cost at the end of the day on a store by store basis, because if you look at it we have around 2,600 and 2,700 stores. We are talking about really adding one person per store over the course of 12 months. Doesn't take a lot of revenue dollars, gross profit dollars to pay for that and get a pretty attractive return because all your other expenses in the store are fixed.

And Brent, I would just jump in, when you add a part-timer and now I am going back to my days in the store, when you add a part timer into a store, or you have a general manager and OSP and a team that understands the value they bring to the market then they can actually present that more often, the return on that part timer is hard to measure. The Dan is really touching on a lot of things. We have opportunity within current customers. We saw that last week in Nashville. But we need to be out in the market daily, taking market share and that's what this part time employee brings not only but it is the other side of the coin is the part timer gets to understand our company and our culture to make a decision long term for them. It is a win-win for both the employee coming in and for our teams in the store.

Thank you. That concludes our question and answer session. I would now like to turn the call back to Lee Hein for closing remarks.

We just want to again thank you. We appreciate your support. We don't take it for granted. And we look forward to talking to you next quarter. Thank you.

Thanks, everybody. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.