Prepared remarks
Greetings, and welcome to Fastenal Q2 2026 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 Drew Schreiber. Please go ahead, Drew.
Welcome to the Fastenal Company 2026 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 one hour and we will start with a general overview of our quarterly results and operations with the remainder of the time being open for questions and answers. This 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 the company's future plans and prospects.
These statements are based on our current expectations and we undertake no duty to update them. It is important to note that the company's actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission; 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 2026 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 on something that I think matters to everyone on the line, and that is that today will be Daniel Florness's final earnings call as our CEO. Dan joined the Blue Team back in June many years ago. He has been the steady voice explaining our business to this community for the past three decades—first as our chief financial officer and then as our president and CEO. Through multiple cycles, multiple recessions, a pandemic, trade shifts, 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 has ever been.
Now with that said, today is not a farewell speech. It is an earnings call, and the best way 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. 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. That share gain is showing up across all three 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 each of our end-market segments. Now on pricing, we realized approximately 2.9% in the quarter or about 4.5% on a stacked basis versus roughly 3.5% in Q1. The sequential step down 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 one number I want you to focus on this quarter is the customer site metric on the right side of the slide. 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%. 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 carrying into the second half of this year. That momentum is being reinforced and scaled by our technology platform. So moving to slide 4, which is our technology update. This is where the enhancing our services pillar comes to life in the numbers. Starting with the digital footprint, digital footprint DSR grew 16.2% in Q2, outpacing total company DSR, and now represents 61.6% of total sales—up 60 basis points from last year.
Our estimate for 2026 is 63% to 64%, modestly below our original target of 66%. I want to be clear 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 just that the denominator is 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, 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 7,000 total for the quarter versus 101 per day, or just under 6,500 total, in the same period last year. FMI sales now represent 44.6% of total sales, up roughly 60 basis points from a year ago.
When I think about this, every one of these technology metrics is really a leading indicator. Devices installed today are deposits into next quarter sales and 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, more 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 three 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 one area; it showed up across customer types and markets. Customer sentiment remained favorable throughout the quarter. While trade and tariff 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, the 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; 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 five-basis-point improvement, despite inflation-driven pressures. Strong sales growth, SG&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 price-cost representing roughly a 40-basis-point headwind. On price-cost, 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 price-cost, 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&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. 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 and distribution center 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 five years was approximately 2.5 percentage points, compared to roughly 4% in the preceding ten-year period—meaning that we go through periods of different investment run rates.
2026 is a year in which we will invest a 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. The second quarter showed strong top-line execution, continued share gains, and disciplined cost management. Importantly, operating margin was consistent year over year as SG&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.
Thanks Max, and good morning everybody. I will touch on a few points. From a market outlook perspective, the broader market conditions continued to improve similar to the first quarter. We have now had six months of 50-plus PMI. That combined with some key leadership changes we made back in 2023 and 2024 are really key to what you are seeing shine through. The inherent growth of Fastenal is shining through because the market is not giving us headwinds. But what you are really seeing is Jeffery stepped into the Chief Sales Officer role in 2023, and he made some personnel changes at that time and we are really seeing the outcome of those changes. It's been incredibly powerful as we have moved into 2026. There is an ongoing focus on price neutrality. If I am being 100% candid, and you know I am always 100% candid, I would have felt 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. One of the hardest things when you have a trend that is your friend is that 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 you are going and on making that trend better. 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 on us. 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. Our gross margin sequentially improved despite the fact that there were more gross-margin headwinds during the quarter than before—we 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. Twenty years ago our ROIC was in the mid-20s. If you go back far enough, we went public in the late '80s and 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 needed to stock more product, and we started importing directly into stock a lot more product and our ROIC went down into the mid-20s. Over the last decade, through strong discipline on the part of the team—Holden Lewis, our prior CFO, did a wonderful job of showing us what we could do from an ROIC standpoint—the group made it happen. Today we are in the low-30s. So incredible financial discipline. One item I do not know that everybody appreciates is how good the performance is. If you read our proxy, you will quickly see how we get paid, and what you read about pretax growth is true very deep in the organization.
In the second quarter of 2025, our operating earnings grew 40% and I calculated this morning that if I am wrong by a million or two I apologize, but I think we grew $49.2 million in operating income. In the second quarter of 2026, we grew $65.7 million—that is a 33% increase. In our pretax dollar growth, forget percentages for a second, 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. A lot of folks at Fastenal 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, if my math is 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 impresses the heck out of me is our headcount growth and how we are managing it.
We are not squeezing it to death; we are investing for where we are going, just like we always have, and we are getting progressively better. Some of that is the team being better today than they were two, five, and ten years ago; some of that is the AI tools we are implementing that allow us to implement large-account business faster than we would have one to three years ago. We can do quotes faster; we are just really good. I am really impressed with the SG&A leverage because I know how much bonuses grew Q1 to Q2 and Q2 to Q2. 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. Earlier in the year I suggested to Max that with our stock price approaching $50, maintaining a two-percent yield for quite some time, it would be nice to do a $0.25 interim dividend per share.
He started a bit lower because he wanted to dedicate some dollars to buying back shares and consistently doing that to cover dilution. I took another swing and said raising it to $0.26 would get us to $1.00 for the year. The thought process there is simply this: a $1.00 dividend for the year will allow us, whatever the Street does, to have a decent return dividend yield. Do not read anything more into it than that. When you think about the $1.00 this year, think about where that perhaps goes in the future—that is a different group that makes that decision. From an organizational perspective, continued investment in tools, technology, and analytics to support and scale growth remains a priority. A lot of companies are talking about AI; we do not talk a lot about it publicly but we are doing a lot behind the scenes to have better tools to support our people and ultimately our customers, and we are being thoughtful about financial discipline relative to the return we expect from those AI investments.
To give context, if you add up all of our labor costs in the second quarter—base, bonus, social taxes, health insurance, our school of business—you get about $400 million. That is about $1.6 billion a year in people costs. The question we will ultimately need to ask is how much are you willing to spend for that group to be 5% to 10% more productive? That is how we will gauge the future investments in AI. From a strategic progress standpoint, the team is executing at an incredible level and I am really proud. Finally, I will share some internal messaging I had for the group this morning. We always talk about year-to-date sales versus goal. What Q2 and June details tell me is that everything—geography, end market, customer use—everything is double-digit. We haven't been in that situation for quite some time. The only area not double-digit is non-contract customer sales growth; that is not our priority but we love those customers and want to grow that group too.
That growth is double what it was 12 months ago because we are building a better machine to serve the market. We have milestones: in the second quarter we have four districts now averaging more than $8 million a month—that's four districts that are either north of $100 million a year or on the verge of it. That was zero a decade ago. There are 59 district managers; 25% of our district managers in the second quarter were doing more than $4 million a month, a $50 million-a-year business. For folks who have owned Fastenal a long time, you remember $100 million or $50 million Fastenal. We have 25% of our districts that big now, and that is an incredibly talented group. At the end of the day, it was really nice for my final month as CEO to grow north of 20%. To the sales team, thank you for that. On a 30-day basis our run rate is a $10 billion company. With that, I am going to stop talking and open it up for questions.
Questions and answers
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. Daniel, I would say it was an absolutely stellar run—congratulations and thanks for everything. We also appreciate it. So I guess that means that Jeffery and Max get the tough questions here. Sales growth was obviously terrific at 15%, and I think the team has recently been signaling kind of 25%-plus incrementals at this level of growth. 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 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. I will take that one to start. If we think back to the first quarter of this year, we were disappointed in our net price-cost position by 50 basis points. It is important to keep that component in context with the rest of my comments. As we move forward, as we said in our prepared remarks and as Daniel reiterated, we did chip into that 50 by about 10 basis points. We are focused there while growing at significantly fast levels, so balancing and optimizing both of those felt like a success for the quarter. That said, it does not mean we dismiss the remaining negative 40 basis points. Think about that from an incremental perspective: that headwind is going to be three or four percentage points on the incremental. So you get to the mid-20s when that net negative goes away, number one. Number two, we did pay some bonuses on that growth and that is a contributing factor as well. Those bonuses you could consider outside the incremental walk.
But our gross-margin position is to maintain price-cost neutrality. The second part of your question was when do you get there? At this moment, we are going to keep chipping away and fighting as fast as we can. The trajectory is that it is not something we expect to be completely closed in the second half—we will continue to chip away at that net negative price-cost position. As we move through the year and chip that away, incrementals will naturally improve. We believe this business is set to drive mid-20s incrementals if we are growing this fast, and 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—the Overton era of store growth and the Florness era with FMI and national accounts—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, this is not a transition where we are changing the strategy. The strategy we have used over the last several years—the three strategic pillars—increasing sales effectiveness, enhancing our services, and expanding markets will be unchanged. What I think changes is the pace. Every day it seems the AI portion and the tools we are developing help us increase speed. One thing that stood out in June—our revenue sequentials kind of shocked us a little bit—and digging in there were some one-off orders we were able to get that we would not normally have gotten just from a new business signing, some one-off-type orders. But a lot of the business we are turning on, we are turning on faster now because of tools we have built. That is happening a lot faster than I thought it would. June was a little bit of a surprise to us. I still see the same direction; I do not see a lot of change in what Fastenal is as a whole: Blue Team first, decentralized decision making with accountability, promoting from within—culture built over decades—that will not change. What I think will change is we will go harder and faster at acquiring new business, winning contracts, and expanding our markets globally.
David, one little tidbit: if you characterized an era as the Florness era, a lot of those shifts were actually driven by many leaders including Jeffery, Casey, and Bill. The last decade's progress has been a Blue Team effort, and that Blue Team effort continues.
Got it. Always a Blue Team effort. Thanks everyone. Best of luck.
Next question is coming from Ryan Merkel from William Blair. Your line is now live.
Hey everyone. Good morning. Dan, I want to echo David's comments. I cannot believe this is your last call; it has been a great run and I wish you all the best. I want to start on price-cost. You made progress, but more remains to be done. When do you think you will get to neutral? I know that is a hard question. 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. The chipping away at the negative 40 basis points will continue; it has to for our business-to-business model. We need to continue to grow—growth is first and foremost for us at our ROIC level—but we want healthy growth that is operating-margin accretive. Chipping away is important because we might come into Q4 and be there, but it is not something we are predicting precisely. Give us some time; we are going to make small progress on the net price-cost position. Importantly, there continues to be cost increases in the marketplace, so keeping up with new inflows of cost while chipping away at the old is a lot of effort. We were pleased with our 10 basis points of progress and will continue. Regarding gross margin profile, we do not provide guidance on gross margin unless there is a significant 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.
As you probably know, because of our focus on growing large strategic accounts, those accounts typically carry less gross margin as a percentage than our weighted average. That is nothing new; you can see about a 60-basis-point contraction in gross margin in long-term patterns while maintaining or improving operating margin. If you look at the typical quarterly pattern, you would see roughly a 10 to 20 basis-point drop between Q2 and Q3 on a normal year when Fastenal is performing well and maintaining or growing operating margins. Our commitment is to grow fast and continue to maintain and grow operating margins, and that is what we see as we move through the rest of this year.
Got it. Just a follow-up: 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, maybe you get into the mid-20s?
Q2 is likely a low point; seeing 21.5% on our P&L with this much growth is not ideal. We hope it is our low point, but it is hard to predict exactly with ongoing cost inflation.
I think that is a safe framing. We should be able to expand incrementals as we chip away toward the normal run-rate business of mid-20s. It is tough to predict whether that happens in Q3 or Q4, but expect improvement as we move through the year. I would not expect a Q3 jump all the way to the mid-twenties, but the trajectory should be toward improvement.
Okay, fair. Thank you. I will pass it on.
Next question is coming from Tommy Moll from Stephens. Your line is now live.
Good morning and thank you for taking my questions. 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 deleveraging. Could you help us unpack some of the items that delevered this quarter? I would not think that at this rate of sales growth those would continue to delever, but any context would help. Thank you.
Keep in mind, 90 basis points—point taken. We did experience some deleverage. Specifically, fuel, transportation, travel, bonuses, and commissions were among the items that delevered this quarter. Fuel is extremely volatile. If you had asked me two weeks ago what I thought the future would hold, I might give you a different answer. The fuel component in SG&A is volatile; it sits in that remaining portion beyond the roughly 70% of SG&A that are people-related costs. We started to see headwinds in Q1 as the conflict escalated and we experienced about a month of that headwind, and now we have three months of that headwind. Given the amount of volatility, we are managing fuel very well, but it is still a headwind. The bonus is a pure result of growing profit dollars extremely fast; while it is a headwind, it is a positive sign of performance. Aside from those items, there is not much else that meaningfully delevered SG&A. We remain frugal operators and we intend to maintain that frugality because it does well for our business.
To add some context, I spoke with Barry McGrath, who runs our distribution center in Winona. We run a lot of routes—depending on the day, 25 to 30 trucks out of Winona—and across our network there are a lot of routes. A semi tractor gets sub-seven miles per gallon; if diesel is up 10, 20, or 30 percent, that cost increase is real. The bad news is our costs go up. The good news is that burden falls heavier on competitors that ship small parcels and on our customers, so we become a better value proposition because our costs are at a discount to other options. Much of that diesel impact is in gross margin, not SG&A, whereas small-fleet costs are in SG&A. In chaotic times like this we must manage through SG&A, but this also positions us to be more successful and provide a more compelling value proposition to customers. I was in a customer meeting yesterday and the customer indicated our business could be two to three times larger as we turn on more opportunities, which was a very productive conversation.
Thank you both. As a follow-up, Jeffery, you mentioned expanding markets globally. You have experience outside the U.S. and I am curious about your thoughts on the future outside North America.
Yes. I was in an Italian business last month. Right now, we are in the beginning stages of exponential growth internationally. We have a talented team and the focus needs to be on speeding up deployment of the tools we need. With Canada and Mexico, we piggybacked on U.S. supply chain. Internationally, one thing we will consider is M&A to accelerate the supply chain and network build rather than building it over ten years—buying it can compress that to two or three years. We have a huge opportunity to provide consistent tools and solutions across manufacturing facilities in different countries—our customers want that and want it fast. We need to keep up with demand; it is a good problem to have.
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 strategy and approach to pricing. Has there been any change there? And given improving demand, do you think it is better to prioritize volumes over price-cost because you could drive higher price later if needed? You mentioned advantages on the cost to deliver, so is it hard to get price increases or do you prefer volume? Thank you.
I have five guiding principles I often share. First, love the people on the team—they are your chosen family, and you should challenge them to grow their skill sets. Second, love growth—every problem is easier if you are growing. Third, incrementals matter—it should frustrate you if you are not getting incrementals, especially when growing double-digits. Fourth, be really special—figure out how to be special to your customers. And finally, go Blue. We love growth, but right behind it is incrementals; you have to find the balance every day. That balance gives discipline across the organization so you are not sacrificing one for the other. If a district manager has a customer call offering $100 thousand in sales, even at a lower margin, many would take that sale because you serve the market and customers come to you because you are special. But long term we are disciplined because we want a sustainable business with strong ROIC. When it comes to international expansion or other investments, we will be disciplined. We have historically supported markets that lost money early because we saw the future opportunity—California, the Southeast, Canada—and it takes discipline in capital allocation to do that.
Thank you. I appreciate the perspective. If I could follow up on SG&A: is there a way to separate the drivers in Q2 year-on-year SG&A expansion—variable comp versus inflation versus fuel and freight which may ease? Just trying to get a sense for how that line might shift as the year goes on. Thank you.
We don't historically break down SG&A drivers to that level of granularity. These are moving parts and while the impacts are sizable, they are not massive. If you combine bonuses and transportation headwinds, on incrementals that is a couple of points—so it is not nothing, but it is also not an order of magnitude. Bonuses are primarily weighted to pretax results and vary across the business, so there isn't a precise way to model it at a granular level. But for context, if you did not have the incremental bonus or the higher bonus as a percent year over year and if you did not have the inflation, you would be looking at a couple points of incremental improvement.
Thank you. I appreciate that.
Our next question today is coming from Chris Tinker from D.A. Davidson. Your line is now live.
Hey guys. Dan, congratulations—30 years is really impressive. Thank you for everything. My biggest question walking away: FTE growth has been impressively constrained. Has the formula changed here? What kind of headcount growth do you need long term? Is this an aberration or the new normal? Any comments on what energy is required to keep driving double-digit growth?
Jeffery and I were deciding who would take which questions. I would not use the word 'constrained'—district leaders add people because they need to support business that is turning on today and in the future; distribution personnel do the same. What you are seeing is the natural result of executing in our business units. I was surprised by the level of productivity because if you can get 10% productivity gains that is pretty good; I would have expected 4% to 5% at the field level. That 4% or 5% does not translate into 4% or 5% more cost because new hires come in at different levels. Another factor is we are reloading our part-time population to build a pipeline of talent. When part-time workers become full-time, they tend to be more productive out of the gate compared to external hires. AI tools and other productivity improvements are also contributing to faster ramp and more productivity. I do not know if we can grow 15% and stay in low single-digit headcount increases forever, but we can do it for a while based on these levers.
It is really impressive leverage; thanks for the breakdown. As a follow-up, any change in expectations for pricing into the back half of the year? Should we assume low single-digit or maybe as high as mid-single-digit pricing?
What you suggested is in the realm of what we would expect. If you look at stacked pricing, we added roughly a percentage point across Q1 and Q2. We will keep pushing, but we are customer-centric, especially with our strategic accounts; we do not just push a price button. That makes it a bit harder to predict and commit to where we land, but your estimates are not too far off from where we would likely land.
Jeffery emphasized two things to the regional leadership: continuing to watch exclusive brands as a percentage of our mix—some branded partners have pushed price increases too aggressively and you can give customers a reason to look elsewhere—and continuing to drive FMI, because FMI in production is driving labor efficiencies. With that, we are at one minute to the hour. Thanks for joining the Fastenal earnings call today, and thanks for allowing me to share the story over the years. 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.