Greetings, and welcome to Fastenal Q2 26 Earnings Results Conference Call. At this time, participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.
As a reminder, this conference is being recorded. it is now my pleasure to turn the call over to Dray Schreiber. Please go ahead, Dray.
Welcome to the Fastenal Company 26 Second Quarter Earnings Conference Call. This call will be hosted by Daniel L. Florness, our Chief Executive Officer Jeffery Watts, our President and Chief Sales Officer and Max H. Tunnicliff, our Chief Financial Officer. The call will last for up to 1 hour and we will start with general overview of our quarterly results and operations with the remainder of the time being open for questions and answers.
Tommy's conference call is a proprietary 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 09/01/2026, at midnight Central Time. As a reminder, today's conference call may include statements regarding company's future plans and prospects.
These statements are based on our current expectations and we undertake no duty to update them. It is important to note that company's actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission we encourage you to review those factors carefully.
I would now like to turn the call over to Mr. Watts.
Thank you. Good morning, everyone. Welcome to Fastenal's second quarter 26 earnings call.
I am Jeffery Watts, Fastenal's President and Chief Sales Officer, and I appreciate you joining us all today. I turn to the results, I would like to take a moment and on something that I think matters to everyone on the line and that is that today we will be Daniel Florence's final earnings call as our CEO. Dan joined Fastenal, joined the Blue team back in June 2 thousand. he is been the steady voice explaining our business to this community for the past 3 decades.
First, our chief financial officer and then as our president and CEO. Through multiple cycles, multiple recessions, pandemic, trade shift, stock splits, through all of it, Daniel's always had the same candor, the same humility, and the same unwavering respect for our people and for our shareholders. So to Dan, on behalf of every employee at Fastenal and every shareholder on the line, thank you for the leadership thank you for the discipline, thank you for handing us a business that is stronger today than it is ever been.
Now with that said, today is not a farewell speech. it is an earnings call, and the best way to know how to honor Dan's last call is to walk you through a business that is executing. So moving to our results. Q2 was a very strong high quality quarter for the company.
Solid double-digit daily sales growth, operating margin expansion return on invested capital at a decade plus high, and strong cash generation deployed with the discipline that defines this company. Our strategy is working and it is showing in the numbers. So turning to slide 3, Now on the top line, daily sales grew 14.7% in the quarter extending the path we built in Q1.
The market conditions improved at a pace similar to last quarter, but what is important to point out is that our outperformance continues to be driven by share gains and not by the market backdrop. And that share gain is showing right up across all 3 of the pillars you see on the slide. First, increasing sales effectiveness.
Share gains driven by our key account strategy and by continued new contract wins. Second, enhancing our services expanding our FMI device base and our digital footprint, improving the customer experience, driving retention, and creating operating efficiencies in the process. And then third, expanding our addressable market.
Growth driven by new customer site wins and deeper penetration across every 1 of our end market segments. Now on pricing, and we realized approximately 2.9% in the quarter or about 4.5% on a stack basis versus roughly 3.5% in Q1. Now the sequential step down, it is not a change in posture, it is simply lapping the onset of pricing actions we took in Q2 of last year.
Our pricing actions to mitigate cost and tariff inflation continue, our pricing discipline continues right alongside them. I know Max is going to touch a little deeper on this later in the deck. So now 1 number I want you to focus on this quarter, and it is it is the customer site that on the right side of the slide.
And our contract count in Q2 was up over 7% year-over-year and the number of customer sites spending $50 thousand or more per month grew 16.5% over last year with revenues growing over 26%. Now that is the shape of durable, high quality revenue. Larger customers deeper contracts and higher productivity per site. it is exactly what our key account strategy is designed to produce and it is the foundation of the momentum we are using to carry into the second half of this year.
And that momentum is being reinforced and scaled by our technology platform. So moving to slide 4, which, is our technology update. And this is where the enhancing our services pillar comes to life in the numbers.
And starting with digital footprint, Digital footprint DSR grew 16.2% in Q2, outpacing total company DSR now represents 61.6% of total sales. Up 60 basis-points from last year. Now our estimate for 2026 is 63% to 64%, modestly below our original target of 66%.
And I want to be clear though on what this reflects. We are not slowing down on digital adoption. We are still driving customers to digital at a very strong pace. it is really the denominator is simply moving faster because our non digital sales are growing right alongside digital as we take share and add larger and larger customer sites.
To me, I guess that is a healthy problem to have. Inside that though, e-business DSR grew 12.6% steady and disciplined digital engagement that continues to broaden our reach with both new and existing customers. Now turning to FMI, the engine of our services strategy.
FMI technology signings were up 8.3% at 109 weighted devices signed per day in Q2 just under 7 thousand total for the quarter versus 101 per day or just under 6.5 thousand total in the same time period last year. FMI now, sales now represent 44.6% of total sales. Up roughly 60 basis-points from a year ago.
When I think about this, every 1 of these technology metrics is really a leading indicator. Devices installed today are deposits into next quarter sales, and to next year's retention and into the operational rigor and efficiency that show up in our margin structure. Fastenal has never had more contract customers or large customer sites devices in the field or more digital engagement than we do today.
This is what durable scalable growth looks like and why we are so confident in our pathway forward. And with that, I will turn it over to Max.
Thank you, Jeffery, and good morning, everyone. As in the past, I will review 3 areas with you this morning. The business trends we saw in the quarter the key drivers of margin performance, and how those results translate into cash flow and capital allocation.
Overall, the quarter showed continued progress against our strategy. Improving demand trends, solid execution across the business, and strong cash generation. Even with continued uncertainty in the broader economy.
I will start on the business trends and market drivers slide. During the second quarter, the industrial environment remained stable and modestly positive. Consistent with the trend we saw in the first quarter.
U.S. PMI averaged slightly above 53 for the quarter, up from 52 last quarter. Industrial production was slightly positive year over year in April and May. This lines up with the gradual improvement that started late last year.
Our daily sales growth improved to 14.7% for the quarter up from 12.4% in the first quarter. Reflecting continued market outperformance. Growth was supported by new customer wins, increased share of wallet with existing customers, pricing, and improved industrial production.
Importantly, the improvement was not concentrated in any 1 area. It showed up across customer types and markets. Customer sentiment remained favorable throughout the quarter, While trade and tariffs uncertainty stayed in the picture, its impact this quarter showed up through cost planning and pricing discussions rather than demand.
As a result, activity levels remained healthy and our teams continue to see strong customer engagement. From an end market perspective, this slide shows the breadth of that improvement. Manufacturing activity remained solid, led by heavy manufacturing.
Where our faster expansion and key account momentum continued to pay off. Heavy manufacturing represented 44% of total sales, average daily sales growth in that segment was 18%. Continuing the upward trend that began last year.
Construction grew approximately 17% for the second quarter in a row representing a meaningful improvement from weaker trends we saw in prior periods. Within construction, electrical, utility, infrastructure and data center related activity were among the strongest areas of demand during the quarter. Non manufacturing end markets also contributed, with gains across transportation, warehousing, and other industrial services as demand improved across customer types.
Across materials, both direct and indirect categories grew in the mid-teens, with direct materials slightly outpacing indirect. That mix reinforces that growth was tied to customer product production activity and supported by higher fastener penetration. Improved product availability and pricing actions.
The common thread across the strongest areas was larger customer engagement and project related activity. Which continues to support our key account strategy. That said, conditions were not perfectly uniform across all markets, While manufacturing and construction remained healthy, certain other end markets particularly those tied to discretionary consumer spending, continue to lag.
Overall, demand conditions were stable to modestly positive, while cost inflation remained less predictable. In that environment, our diverse customer base key account focus, and strategic initiatives helped us convert market stability into stronger growth and continued share gains. Turning now to margin performance and drivers.
The key margin story this quarter is that we maintained operating margin including a 5 basis-point improvement despite inflation driven pressures. Strong sales growth SG and A leverage, and disciplined cost control more than offset net price cost headwinds. At the gross margin line, we contracted approximately 75 basis-points year over year.
With pricecost representing roughly 40 basis-points headwind. On pricecost, we improved approximately 10 basis-points from the first quarter, Our pricing actions helped offset the ongoing impacts of tariffs and other inflation. We remain focused on pricing discipline and will continue managing toward price cost neutrality over time.
Beyond pricecost, we also experienced smaller gross margin headwinds from customer mix transportation costs and customer rebates during the quarter. Customer mix impacts are important to emphasize. As we discussed previously, our customer mix continues to shift toward larger customers by design.
This is part of our strategy. While these customers typically carry lower gross margins, they generate attractive incremental profit dollars and we remain accretive to operating margin. The higher volumes associated with these relationships drive fixed cost leverage improve asset utilization, and create operating efficiencies across our network.
As a result, although the mix shift can moderate gross margin percentage, It supports our broader objective of growing absolute profitability and expanding operating margins over time. At the operating margin line, SG and A improved to 23.5% of sales, compared to 24.4% in the same quarter last year, reflecting disciplined cost control and operating leverage. That leverage more than offset the gross margin headwinds, and drove margin consistency year over year.
Even with continued investment in tech analytics, and sales support. In addition to strong sales growth and cost management, return on invested capital increased 180 basis-points on a trailing 12-month basis. Reflecting strong sales growth good cost control and disciplined capital allocation.
In total, our P&L performance shows that we can invest for growth, while staying focused on profitability even as our mix strategically shifts. Toward larger and more complex accounts. Turning to the cash flow and capital allocation slide.
Operating cash flow was $266 million representing approximately 70% of net income. While the second quarter conversion rate was lower than last year, year to date cash generation remains strong as inventory efficiency helped offset the working capital needs associated with growth. Our second quarter conversion rate was driven specifically by higher accounts receivable.
Primarily driven by our strong June sales improvement of 20% year-over-year. Year-over-year. Additionally, we continued to run inventory more efficiently.
Finding ways to optimize inventory levels while keeping availability high for our customers. The increase in accounts payable outpaced inventory this quarter, largely a function of payment timing. Net capital spending this quarter was approximately $60 million with investments focusing on strengthening our hub for distribution center and automation capacity.
Advancing our IT infrastructure, and investing in Fastenal managed inventory hardware capabilities. For full-year 2026, we continue to expect net capital expenditures of approximately $320 million as we invest in hub capacity. FMI devices automation and technology.
These investments are made to drive efficiency, scalability and customer value. Based on current consensus revenue estimates, for full-year 2026, our expected CapEx range represents approximately 3.5% of sales. Reflecting our continued focus on investing to grow the business.
To put this into context, our average capital spend relative to sales over the past 5 years was approximately 2.5 percentage points, compared to roughly 4 in the preceding 10-year period. Meaning that we go through periods of different investment run rates. 2026 is a year in which we will invest a little bit toward the higher end of that investment range. We returned $350 million to shareholders during the quarter mostly through dividends alongside modest share repurchases.
Together, these returns represented approximately 80% of net income. Reflecting our confidence in cash generation and our commitment to returning value to shareholders. Our capital allocation approach remains unchanged.
We prioritize investing in the business where we see strong returns. Returning excess cash to shareholders, and maintaining a conservatively capitalized balance sheet. I will summarize as I close my section.
Second quarter showed strong top line execution, continued share gains and disciplined cost management. And importantly, operating margin was consistent year over year as SG and A leverage and cost discipline offset gross margin pressures. That performance together with ROIC expansion and strong capital allocation, demonstrates the durability of our business model.
Thank you to everyone, and I will turn it over to Daniel.
Daniel L. Florness
President & CEO
Thanks Max and good morning everybody. My page is page 8 on the flipbook, so I will touch on a few points. Those look through that.
From a market outlook perspective, the broader market conditions continued to improve similar to in the first quarter. We have now had 6 months of 50-plus PMI. That combined with some key leadership changes we made back in 2023 and 2024 that are really key to what you are seeing shine through.
So the inherent growth of Fastenal is shining through because of the market not giving us headwinds. But what you are really seeing is Jeffery stepped into the chief sales officer role. I believe it was 2023, and I hope he does not change take his head and say no to him. it is a different year.
But he made some other he made some changes in personnel at that time and you are really seeing the outcome of those changes. And incredibly powerful as we have moved into 2026. There is an ongoing focus on price neutrality And it is no speaker to anybody listening to this call.
That if I was being 100% candid, and you would know that I am always 100% candid, I would have felt a hell of a lot better about the quarter if our incremental margin would have been 24%. Coming into the quarter, we had a gross margin trend that was challenging. And 1 of the things I told Jeffery, the hardest when you have a trend that you are-- that is your friend, you love that trend.
You cherish that trend. You convince everybody to do the things necessary to keep that trend going and you do not sit there and enjoy what is happening right now. You focus on where the hell you are going.
And making that trend better. And if and if the trend gets disturbed by the economy, that is life. If the trend gets disturbed because you took your eye off the ball, that is us.
And so really focused on cherishing a good trend and changing a bad trend. Coming into the quarter, we had a bad trend with gross margin. That ultimately prevented us from being at that 24% incremental margin that I thought was achievable.
With that said, the group changed the trend. And our gross margin sequentially improved despite the fact that there is more gross margin headwinds during the quarter than there was before, we just are fighting and clawing our way back. And that is how you saw the quarter play out.
From a financial discipline perspective, we touched on ROIC and when I think about ROIC, 20 years ago, our ROIC was in the mid-20s. Actually, you go back far enough and Daniel, I am going take you back far enough for a second. We went public in the late '80s, our ROIC was in the low-30s.
What changed as we went through the 90s and into the 2000s is we were selling more than just fasteners. We need to stock more product. We started importing directly into stock a lot more product.
And our ROIC went down into the mid-20s and it was still there a decade ago and I am really pleased to say over the last decade between some really strong discipline on the part of the team, Holden Lewis, our prior CFO, did a wonderful job of really showing us what we could do from an ROIC standpoint. But the group made it happen. And today, we are in the low-30s.
So incredible financial discipline. there is 1 item that I do not know that everybody appreciates how good the performance is. But if I if you read our proxy, you will quickly see how we get paid. And what you read in the proxy about we get piece of pretax growth.
Is true very deep into the organization. So in the second quarter of 25, our operating earnings grew 40% and I calculated this morning, so if I am wrong by a million or 2, I apologize. How good my mental skills are with my phone calculator.
But I think we grew $49.2 million in operating income. In the second quarter of 26, we grew $65.7 million. that is a 33% increase. In our pretax dollar growth.
Forget percentages for a second, just the $1.00 growth. In the first quarter of this year, our operating earnings grew $45.3 million. In the second quarter, again, grew $65.7 million. that is a 45% increase in the dollar growth all get a piece of that action.
You know what, there is a lot of folks in Fastenal that had a nice second quarter bonus. They had what they thought was a pretty darn good first quarter bonus and we just crushed that number because the bonuses in the second quarter I did my math right, are probably about 45% higher than they were in the first quarter. When I look at all that and I look at our SG&A and how we managed SG&A, the number that just impresses the heck out of me.
Is our headcount growth. And how we are managing. And that is because we are not squeezing it to death.
We are investing for where we are going. Just like we always have. We are just getting progressively better.
And some of that is the team is better today than they were 2 and 5 and 10 years ago. Some of that is some of the AI tools. We are implementing large account business faster today than we would have 1, 2, and 3 years ago.
We can do quotes faster. We are just really good. And so I am really impressed with the SG and A leverage because I know how much bonuses grew.
Q1 to Q2 and Q2 to Q2. that is really hard to get that kind of leverage on SG&A. My kudos to the group. Strong cash generation. Our capital allocation continues to be very focused.
On growth technology and a thoughtful look at shareholder returns as measured in ROIC. To that end, want to thank Max Earlier in the year, I said to Max, our stock price is approaching $50 a share. We have been maintaining a 2% yield for quite some time.
It would really be nice to do a $0.25 dividend per share as an interim dividend. He started out a little bit less than that because he wanted to dedicate some dollars to buying back some shares. And consistently do that to cover things like dilution.
I took another swing at the pitch in the here in recent weeks ago and I said, raising it to $0.26 would get us to $1.00 for the year. Would not mind considering that. I appreciate it.
Maybe 2x is the charm, but the thought process there is simply this. A $1.00 dividend for the year will allow us whatever the Street does, it allows us to have a decent return dividend yield. So that is the thinking behind that.
Do not read anything more into it than that. And when you think about the $1.00 this year, think about where that perhaps goes in the future. But that is a different group that we are making that decision.
From an organizational priorities, from a capital allocation, we talked about it, but continued investment in tools, technology and analytics to support and scale growth And you know, a lot of companies are talking about AI. We do not talk a lot about it. Just do a bunch of things behind the scenes.
To have better tools to support our people, and ultimately our customers and how we deliver a business. But we are being very thoughtful from a financial fiscal discipline. In what we are spending in AI relative to what kind of return is it generating for us and what kind of productivity is it giving us?
Because we spent about 400 -- if you add up all of our labor costs, in is going give me a dirty look sharing this number. But if you add up all of our labor costs in the second quarter, base, bonus, social taxes, health insurance, our school of business, you add all that up, we spent about $400 million. We spent about $1.6 billion a year in people cost.
The question we will ultimately need to ask ourselves is, how much are you willing to spend for that group to be 5% to 10% more productive? And that is how we will gauge what we do or do not do in the future. At least I believe that is how the group will do it.
From a strategic progress standpoint, I am not going list out all the things other than to say, wow, I think the team is executing at an incredible level. And I am really proud of the group. Finally, and it is not on the bullet list, but I will add it.
I think you have come to know that I probably tell stories that are too long. And but I am also pretty transparent. In how we share the business And I thought I would share some internal messaging I had for the group this morning both in our video that goes to 25 thousand employees as well as our conversation with our regionals and folks I have been talking to and when I think about the pieces, we always talk about year to date sales versus goal.
What quarter 2 of 2026 and June sales details tell me? 1 thing that really stands out when I look at the June set of percentages is everything whether it is geographic, or it is end market or it is customer use everything is double-digit. We have not been in that situation for quite some time. And the only thing on that page that is not double-digit is non contract customer sales growth of that group.
And that is not our priority of going to market. However, we love that customer group too and we want to grow that group. And I am pleased to say that the growth in that group is double what it was 12 months ago.
Because we are building a better mousetrap. We are building a better machine to serve the market. A better machine to serve the market grows whether you are putting people energy behind it or not.
To drive it. And you are seeing that come into fruition. The other things talked about on it and this is I am a milestone person.
And I always highlight milestones and we in the second quarter, we have 4 districts now. That are due averaging more than $8 million a month. that is 4 districts that are either north of $100 million a year or they are on the or they are on the verge of being there. They are close.
That was zero a decade ago. Heck, that was 0 5 years ago. there is 59 district managers. So 25% of our district managers, in the second quarter, were doing more than $4 million a month. that is a $50 million a year business.
For folks that have owned Fastenal a long time, you remember $100 million Fastenal or a $50 million Fastenal. We have 25% of our districts are that big now. And that is an incredibly talented group of people.
And you know, at the end of the day, it was really nice for the group to for my final month as CEO to grow north of 20%. So to the sales team, thank you for that. And if you take that $844 million because we are over $833 million our run rate on a 30 day basis is a $10 billion company.
Final touch. With that, I am going to stop talking at you and what questions you have.
Thank you. We will now be conducting a question-and-answer session. Our first question today is coming from David Manthey from Baird.
Your line is now live.
Thank you. Good morning, everyone. Morning.
Daniel, what do you say? It was a absolutely stellar run. Congratulations, and thanks for everything.
We also appreciate it. Thank you. So I guess that means that Jeffery and Max get the tough questions here.
Sales growth, obviously, terrific at 15%. And I think the team has recently been signaling kind of 25%-plus incrementals at this level of growth. And I know that Daniel went through a couple of the items that affected that.
But I am wondering if you can crystallize that for us and talk about the puts and takes that sort of drove that contribution margin this quarter? And more importantly, as you are looking out to the second half, which of those do you think persist and which of those may alleviate as we get to the back half of the year and lead to stronger contribution margins?
Sure, David. This is Max. I will take that 1, to start.
So if we think back to the first quarter of this year, where we were disappointed in our net price cost position of 50 basis-points. it is important to keep that component into context with the rest of my comments. And the reason I say that is because as we move forward, as we said in our prepared remarks and as Daniel reiterated, we did eat into that 50 by 10 basis-points. And so we are focused there at the same time growing at significantly fast levels.
So balancing and optimizing both of those, we feel was a success mark on the quarter for us. With that being said, it does not mean that we dismiss the 50 and now negative 40 basis-points. But that negative 40 basis-points that we still sit with today if you think about that from an incremental perspective, is going to be 3 or 4 percentage points on the incremental.
So you get to the mid-20s when that net negative goes away, number 1. And then number 2, we did, as Daniel iterated, paid some bonuses on that growth. And that is a contributing factor as well.
Those are the way you think about those is we continue to grow like we want to we are always going to have some bonus pay. So that 1, you could dismiss out of the incremental walk. But that gross margin our position is to maintain price cost neutrality.
And so the second part of your question was, when do you get there? At this moment, we are going to keep chipping away fighting as fast as we can. But the trajectory is it is not something that we are expecting to be completely closed in the second half.
We are going to continue to look at a lot of things we are doing from a growth perspective and we are going to continue to chip away at that net negative price cost position. And as we move through the year and chip that away, incrementals will naturally improve. Back to where you know, like we say, if we are growing this fast, should be mid-single digits.
We are not backing off of that. That statement, I guess, we would say. I do not want to say commitment.
Maybe that is a little too strong. But that we believe this business is set to drive the mid-20s we are growing this fast. And so we will get back to that over time.
Got it. Thank you. And then Jeffery, I dislike the question, what will you do differently because I do not think that is really applicable here at Fastenal anyway.
But when I think about the past couple of CEO eras, I mean, Overton era of store growth and the Florness era, I know, FMI and national accounts, etcetera. When you think about the range of tools that Fastenal has today, what are the strategic growth engines that you plan on leaning on to start the Jeffery Watts era?
it is a good question. First, I would say that this is this is not a transition we are sticking with the strategy. The strategy that we have dealt with the last 2 years the 3 strategic pillars, they are going to be unchanged, increasing sales effectiveness, enhancing our service, and expanding markets.
But I think what changes is every day it seems like, the AI portion and the tools that we are developing are helping us increase speed. I think 1 thing that is important as you saw it in June kind of shocked us a little bit in our revenue as far as our sequentials go. And really digging in, there were some 1-off orders that we were able to get that we would not normally have gotten just from new business signing some 1-off type orders.
But a lot of the business that we are turning on, we are turning it on faster now because of tools that we have built. I think that it is part of our strategic planning, but it is happening a lot faster than I thought it would. And like I said, June was a little bit of a surprise to us.
Think the sequentials are still in place, but moving forward in the direction, I do not see a lot of change with what fast who Fastenal is as a whole. Blue team first to centralized decision making. And L accountability, promoting from within. that is all cultures and built over the last 30, 40, 50 years. that is not gonna change.
What I do think is we are going to look at harder and faster is the speed in which we go out and attain new business, grab new contracts and expand our markets globally.
Daniel L. Florness
President & CEO
David. I will throw in 1 little tidbit there. If you characterized an era as the Florness era.
That was actually Jeffery had an incredibly big voice as did Casey, as did Bill When I think from what we are doing from a revenue from a sales growth standpoint. And you might characterize the last decade with a different name than Florness. You might say it a blue team effort.
I think that Blue Team effort continues.
Got it. Yeah. Always a blue team effort.
So thanks everyone. Best of luck.
Thank you. Thank you.
Next question is coming from Ryan Merkel from William Blair. Your line is now live.
Hey, everyone. Good morning. And Dan, I want to echo David's comments.
I cannot believe this is your last call. it is been a great run, my friend, and I wish you all the best. Well, Ryan, is not 121 calls enough. Yeah.
Yeah. 20 years, Daniel, we have been doing this. I cannot believe it. it is been a great run. Appreciate all your help.
So I want to start on price cost. You made progress, but more to go. When do you think you will get to neutral?
I know that is kind of a hard question. And then also comment on gross margins in the third quarter, should we be thinking flat sequentially from the second quarter?
Yes, Ryan, I will take that. Question to start at least. The chipping away at the negative $40 million will continue.
It has to for our business to business But as I said, we need to continue to grow. At our ROIC level, growth is first and foremost. But at I want to reiterate, it is healthy growth. it is operating margin accretive growth.
So it is all those healthy things that you would expect us to push on as we have in the past decades. But this chipping away is an important term because we might come into Q4 and be there, but it is not something that we are we are predicting. Give us some time.
We are going to make some progress, but it will be small. On this net price cost position. Importantly, there continues to be cost increases in the marketplace.
And everyone knows that it is the headline. And so keeping up with the new inflow of cost and chipping away at the old is a lot of effort. As I said, we are we are pleased with our 10 basis-points of chipping away.
And so we will continue to do that. Our commitment is to continue to offset cost to the best extent possible while growing this business very, very fast. As we think about gross margin profile, because at the end of the day, those questions just model into gross margin and so your point you are spot on with the gross margin question as well.
At this moment, we do not forecast or sorry. Should not say forecast, we do not provide guidance on gross margin unless there is some big up or down movement we do not want to surprise you. At this moment, we do not see a big up or down movement so the gross margin profile should be fairly consistent with historical trends.
And as you probably know, and I will just remind the audience, because of our I should say primarily because of our focus on growing large strategic accounts, for all the reasons that probably make sense, efficiencies and leverage and those types of things. Those accounts carries less gross margin as a percentage than our weighted average. This is nothing different than has happened in past 10 to 20 years.
And so we will continue if you look at that 10 year pattern, you see about a 60 basis-point contraction in gross margin albeit maintaining to improving operating margin, which is our focus area. And so that 60 basis-points improvement as you know from your modeling, it is roughly 15 basis-points of sequential decline every quarter. And so if you look back between Q2 and Q3, you get roughly that.
You get between 10 and 20 bps drop just on a normal year when Fastenal is performing well and when Fastenal is maintaining or growing operating margins. So our commitment to ourselves and our shareholders is grow fast and continue maintain and grow operating margins. And so that is what we see for as we move through the rest of this year.
Got it. Okay. No. that is all fair.
Appreciate that. Just a follow-up maybe to David's questions on incremental margins. Should we be calibrating to maybe low 20s incremental margins for 2026 at this point?
And if you make faster progress on the price cost, then maybe you get in the mid-20s?
Daniel L. Florness
President & CEO
You know, Q2 is this is a hope, but we see in 21.5 on our P&L with this much growth is not I would just say we hope that is our low point, but it is hard to predict with the cost inflation coming through.
I think that is a safe bet. I think it is safe to do it that way. But as we chip away, we should be able to expand.
I mean, we have a low point and we would be heading toward the normal run rate business of mid-20s. it is just it is tough to predict whether that is Q3 the end of Q3, if that is Q4, but in that ballpark, expect improvement as we move. Throughout But, yeah, it is not going to-- I would not necessarily expect a Q3 jump all the way up to the mid twenties.
Okay. it is your model. Very fair. So yep.
Alright. Thank you. I will pass it on.
Thank you.
Next question is coming from Tommy Moll from Stephens.
Your line is now live. Good morning and thank you for taking my questions. Good morning, Tommy.
First question on SG&A. Point taken, you paid some pretty healthy bonuses and commissions this quarter given the strong top line performance. At the same time, I would think you might still expect to see some leverage just thinking about those items as a percentage of sales rather than deleverage. And so could you help us unpack some of the items that delevered this quarter?
I would not think that at this rate of sales growth, we should expect those to continue to delever, but any context would help. Thank you.
Keep in mind, 90 basis-points. Oh, yeah. Yeah.
Yeah. Point taken. I Yeah.
We did not work deleverage. Yeah.
Sorry.
Go ahead.
Yeah. I was more specifically talking about the items you referenced. That did delever this quarter.
I think it was fuel, transportation, travel, bonuses, commissions, are a number of things mentioned on the call and in your materials that did delever. that is specifically what I was curious about. Yeah. Sure.
So and I will speak a little bit about it, but we started just on fuel as you can imagine, it is extremely volatile. If you would have asked me 2 weeks ago what I thought the future would hold, I would give you a different answer. Of course, First of all, the fuel component in our SG&A, it we do not talk about the amount, but it sits in that remaining 30% -- Daniel, we have historically in the past referenced 70% of our SG&A are people related costs.
So you do have a component of fuel in there that we started to see in Q1 as the conflict escalated we experienced about a month of that headwind, and now we have 3 months of that headwind. And that is 1 of those areas where even from the question of incrementals, I mean, if those fuel costs and associated oil related costs dive, more toward the second half of this year. We are going to start to see even some improvement incrementals there.
But fuel is 1 of those that we are actually given the amount of volatility we are managing very well on a fuel side. it is still a headwind. And then we mentioned the bonus, and the bonus is just a pure we grew profit dollars extremely fast. And we like the fact that it is a headwind is a good thing for us, but it is in it is part of our business modeling as well.
So aside from that, there is not anything else that would be delevered in our SG&A is very small.
And we keep a keen, a very keen eye. I think you know us well, Tommy. We are we are frugal operators.
And we do not see we do not intend to change that frugality approach in our business because it does well for our business.
Daniel L. Florness
President & CEO
You know, for instance, I will give you talking to Barry McGraith. Barry runs our distribution center here in Winona. A few days ago.
I said to Barry, I know when I look out my window how many trucks I see, but how many routes do we have that go out of Winona on a given day? And says, depending on the date, anywhere from 25 to 30, depending on what day of the week it is. And not so many trucks.
And so we have Winona routes, there is probably about 470 routes when you start looking at all the different places the trucks go and we drive about 95 thousand miles a week just in this 1 serviced area in the Midwest out of Winona, Minnesota. And so the reality of it is, a semi tractor gets sub-7 miles per gallon. You are gonna spend if the price is up 10%, 20%, or 30%, you pick the number, We are going to spend that much more. that is the bad news.
The good news is that burden falls a lot heavier on competitors that we have in this space. And quite frankly, it falls pretty high on our customers. And so we become a better value proposition because even though our costs have gone up, our costs are at a discount to any other option that is out there.
Because so much of our industry ships small parcel. And so it actually, chaotic times like this, we have to manage through the SG&A of it and most of that diesel that I am talking about is actually in gross margin, not in SG&A. Whereas our small fleets in SG&A. But it positions us to be more successful and bring a better value proposition to the customer. And I was in a customer meeting yesterday really productive meeting, and it is a typical national account meeting when I am talking to a large customer of ours and find out that our business could be 2x or 3x larger.
As we turn on more opportunities. We had a lot of discussion about how we go to market, how our network works, how our trucking network works. And it is a really compelling advantage when you are having that discussion.
Thank you both. As a follow-up, Jeffery, I wanted to circle back to a comment you made regarding your priorities ahead here. 1 item you mentioned specifically was expanding markets globally. You have obviously got a lot of experience ex-U.S. with the fethanol business.
Yep. And linking that to the comment you made today, I am just curious for whatever thoughts you can share there. On the future of outside of North America? that is right.
Yes. I mean, I was just actually, I was just in an Italian business last month. I mean, right now, I would say we are just in the beginning stages of exponential growth.
We have such a talented team I think the focus we need to look at as a company is speeding up the transition of certain tools that we need. We were lucky with Canada and Mexico. Kind of got to piggyback on the supply chain of The United States business unit when we first got going.
We look at international, 1 thing when we talk about M and A or acquisitions in the future, trying to take that timeframe from we could build it in 10 years We could buy it and have that supply chain built in 2 to 3. Maybe, is really a focus for us moving forward. We have such a huge opportunity when we look at the tools on a global scale I always use the example of, given a manufacturing facility in Chicago, you have 1 in Romania, Italy, China.
We have the same tools, the same, solutions in all of the countries that we are in today, all in the same platform. You know, in our industry today that does not exist. it is just us today. Our customers want it and they want it fast and we just need to be able to keep up with the demand, and I think that is where we are at right now.
We are trying to keep up with the demand from our customer base internationally. it is a good problem to have. Thank you, Jeffery.
I will turn it back.
Thank you.
Next question is coming from Chris Schneider from Morgan Stanley. Your line is now live.
Thank you. I wanted to ask about just the strategy and approach to pricing. Has there been any change there And maybe do you guys think at this point in time or even maybe going forward, it is better to prioritize volumes over price cost Because it just seems that, you know, you guys would be able to drive higher price if you need it, you know, demand is improving.
I think the cost of the inflation out there, I think it is very clear to everybody. You mentioned advantages on the cost to deliver. So is it a matter of like hard to get it or you just think that, no, it is better to prioritize volumes?
Thank you.
Daniel L. Florness
President & CEO
You know, I have 5 things I was going to close with on this call. I think I will use them in answering your question. And these are if Jeffery asked my opinion on something, these are the 5 things that always guide me.
The first 1 is, love the people that are part of this team. And this is your chosen family. And that means you challenge the heck-- I will not say the hell out of-- the heck out of everybody to grow their skill set.
The second 1 is love growth. And I and this is an accountant saying this to a sales guy. But love growth because it is every problem can be addressed in a simpler way if you are growing.
The third 1 is incrementals matter. And it should frustrate the heck out of you if you are not getting incrementals, especially when you are growing double-digits. The fourth 1 is be really special.
Figure out how to be special to your customers. And then finally, getting back to your chosen family. Go Blue.
But Christopher, my point of running through all that is we love growth, but right behind it is incrementals. So, you have got to find a balance in that every day. Because that balance gives you discipline throughout your organization.
That you are not sacrificing 1 for the other. Does that mean if a district manager had a customer call up right now and they had $100 thousand sale at 20% or 25%? Would they take that?
And your basically pushing paper. They take that sale? I know I would.
And even if that meant that hurt my incremental margin a little bit in my district. And absolutely hurt my gross margin in my district. Because you take those opportunities to serve your market and your market came to you because you are special.
But long term, we have incredible discipline because we want to support a great business that will have great growth prospects in ROIC deep into the future. And as we grow, especially the international piece that, from a standpoint of outside North America, We would be really disciplined in North America of what we are doing. But it is going to take some financial capital to support that business in the years to come.
Just like 20 years ago, it took financial capital to support the coastlines in The United States. I remember when California was losing money, and we were supporting it, because we saw what the future was. We were losing money in the Southeast.
Up in Canada. Because we saw what the future was. And you need discipline to do that wherever you go.
Thank you. I really appreciate all that perspective. If I could follow-up on it with another margin question on SG&A. Is there any way to think about or maybe separate the drivers in Q2 year on year SG&A expansion, from the variable comp reset in general or sorry, variable comp in general inflation, which should remain in the model.
Versus fuel and freight, which could potentially ease depending on, you know, some of the Middle East resolution. I am just trying to get a sense for how we could see that line item shift as the year goes on. Thank you.
Yeah. Chris, we do not historically break down into that level of detail. I do not want us to think that these are massive impacts on SG&A. They are sizable.
But if you if you think about combined, if you take bonuses and transportation headwinds. On the incrementals. it is a couple of points. So it is not nothing for sure. it is a couple of points.
But I will not break it out further than that because these things are moving parts and the bonus, although it is primarily heavily weighted on pretax, the bonuses a bit more complicated when you look across our business because you know, of course, some individuals and teams are a little bit more balanced between top line and pretax and some are ROIC. So there is not a real precise way to model it. But I will just give you that for context.
You are looking at if you did not have the incremental bonus or the higher bonus as a percent year over year of growth And if you did not have the inflation, you would be looking at a couple points of incrementals.
Thank you. I appreciate that.
Thank you.
Our next question today is coming from Chris Tinker from D. A. Davidson. Your line is now live.
Hey guys. And Dan speaking of congratulations. I mean 30 years, it is really, really impressive.
I just I would echo the congratulations of everyone else here. So thank you very much for everything. I guess the biggest question I have got walking away from the call today if the FTE growth has been I mean, really, really impressively constrained.
I guess, has the formula really changed here? What kind of headcount growth do we need sort of long term? Is this an aberration?
Is this kind of the new normal? Maybe just any kind of comments on what sort of energy is required to keep driving double-digit growth here?
Daniel L. Florness
President & CEO
Jeffery and I are still trying to figure out who is taking what questions on this call. And what I will say is, do not know if I would use the word constrained because I do not know that we constrained it. Our district leaders add people because they need to support business that is turning on today and in the future.
Our distribution personnel do the same thing And throughout the organization, that is true. What you are seeing is this is the natural number that is falling out. Based on executing in 42 business units across the planet.
And I am surprised at the number. Because I figured if you can get 10% productivity gains, that is pretty good. And so I would have seen it closer to 4 or 5 at the field level.
Just based on that logic. Now keep in mind, that does not translate into 4% or 5% more cost because the entry level coming in they are coming in a different coming in for what they are building for the future. So it is you know, 4% or 5% there would be a different number.
The other thing that is happening is and it is been going on for a couple of years. But we are reloading the portion of our of our field population especially that is part time. And we do that not for a lower cost labor We do that to build a pipeline of talent for the future And 1 of the reasons, we can add at a slower pace right now is because if 20% of your headcount is part time and you need to add some folks, you are adding a lot of external folks and you are spending a lot more to make those ads and they are not as productive right away.
Actually need to add people faster. And you need to add full FTE FTEs 1 faster. If you have folks that are working for you when they are a full time student, they are working part time, When they come on board and if that is closer to 30% of your workforce versus closer to 20, when they are coming on board, they are still a lot more productive.
So we talk about some stuff on AI here and some of the tools we are coming up with. Are really stunning as far as productivity on some of the quoting aspects. Of what we are able to do today versus even a year ago.
But a lot of it is as we have reloaded our part-time ranks, we have a more productive group out of the chute when they come full time. And you are seeing that. So I do not know if you if we can grow 15% and be in low single digits.
Forever. I think we can do it for a little while. Yeah.
I appreciate the color there, Daniel.
it is it really is impressive leverage. So thanks for kind of the breakdown. I guess just my follow-up really simply, any change in kind of expectations for pricing into the back half of the year?
Should we assume it is still kind of low singles, maybe even as high as mid single? Just any color on pricing would be great.
I think Chris, what you suggested is in the realm I would say, of what we would expect. So you can also look back at stacked pricing and you can see that we added roughly a percentage point stack coming across Q1 and Q2. So yes, we are going to keep pushing.
A lot of this is and we said this before, we are customer centric. And so we do not we do not especially with our strategic accounts, we do not just push the button and ramp pricing through. So it is also a little bit harder to predict and commit to where we might land.
But we are going to look at this strategically through the continued conversations as we move forward. But anyway, your estimates are not too far off from where we probably would land.
Daniel L. Florness
President & CEO
So there were 2 things that Jeffery accented on the call this morning with the regional leadership. We traditionally, Max has a call. Our CFO has a call with all of our regional and VP group Just kind of explain what the you know, a little bit about the earnings release and what is some of the things we are going talk about.
And, Jeffery, you know, closed with a couple things, and he pushed hard on what are you doing with your EB percentage. And EB is exclusive brands. And it is really where we have some of our branded partners that have gotten maybe too aggressive at just that button and just jamming a price increase in.
You know, you push too hard and you give somebody a reason to look at something else. And so, continue to look at the exclusive brands as a percentage of our mix We are better at that today than we were 5 and 10 years ago, and we will be better 5 and 10 years into the future. And the other 1 was continuing to drive FMI because FMI we continue to drive that, especially in the production world, is driving a lot of our labor efficiencies to the last question.
With that, I see we are at a minute to the hour. For joining the Fastenal earnings call today. And thanks for allowing me to share the story over the years.
And I am excited to see where Jeffery and the team take this business in the future. Thanks, everybody.
Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day.
We thank you for your participation today.
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