Q3 2025 Fastenal Co Earnings Call
Speaker #1: Good Good morning.
Speaker #2: You're the worst.
Speaker #3: Greetings, and welcome to the Festival 2025 Q3 earnings results conference call. At this time, our participants are in listen-only mode. A question-and-answer session will follow the formal presentation, and you may enter the question queue at any time by pressing *1 on your telephone keypad.
Speaker #3: We ask that you please ask one question and one follow-up, and return to the queue. If anyone requires operator assistance, please press *0 on your telephone keypad.
Speaker #3: As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Dre Schreiber, Director of Investor Relations. Please go ahead, Dre.
Speaker #4: Welcome to the Fastenal Company's 2025 third quarter earnings conference call. This call will be hosted by Dan Florness, our Chief Executive Officer; Jeff Watts, our President and Chief Sales Officer; and Sheryl Lisowski, our Interim Chief Financial Officer, Chief Accounting Officer, and Treasurer.
Speaker #4: The call will last for up to one hour and will start with a general overview of our quarterly results and operations, with the remainder of the time being open for questions and answers.
Speaker #4: Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission, or distribution of today's call is permitted without Fastenal's consent.
Speaker #4: This call is being audio-simulcast on the internet via the Fastenal Investor Relations homepage, investors.fastenal.com. A replay of the webcast will be available on the website until December 1, 2025, at midnight Central Time.
Speaker #4: 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.
Speaker #4: 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, in periodic filings with the Securities and Exchange Commission, and we encourage you to review those factors carefully.
Speaker #4: I would now like to turn the call over to Mr. Jeffery Watts.
Speaker #5: Thank you. Good morning, everyone, and thank you for joining us today. You know, to start, Q3 was a strong quarter, and more importantly, it was a consistent one.
Speaker #5: And we delivered double-digit growth. We expanded margins and continued to gain share in a flat market. And, you know, that's not easy to do; it speaks to the strength of our strategy and the execution of our teams.
Speaker #5: But before jumping into it, I'd like to extend a big thank you to our entire Blue Team for their hard work this quarter. You know, when I travel to branches and onsite in D.C., I'm always struck by the pride and energy in our people. I’m happy to say that the Fastenal culture of service legacy Bob Kirtland left us is alive and well.
Speaker #5: So, to every employee, thank you for your focus and commitment. The work you do every day in front of our customers and behind the scenes.
Speaker #5: It's what's really driving this performance. Also, to all of our employees up in Canada, I just wanted to wish them a Happy Thanksgiving, and I hope you're getting to spend some quality time with your friends and family.
Speaker #5: Now, let's get started and turn to slide number three. In the third quarter, we delivered net sales of $2.13 billion, which is an 11.7% increase over Q3 of last year.
Speaker #5: This is our second consecutive quarter above the $2 billion mark, which, you know, demonstrates the effectiveness of our plan and Fastenal's growing partnership with our customers.
Speaker #5: It's also worth mentioning that the growth this quarter came with the same number of selling days, so it's a clean comparison. Overall, again, it's a strong result.
Speaker #5: Now, let's discuss the cadence of the growth through the quarter. You know, one thing we pride ourselves on at Fastenal is solid execution, quarter in and quarter out, and Q3 is a good example of this.
Speaker #5: Despite a couple of timing quirks, we pretty much met or beat our typical seasonal patterns each month. In July, we saw daily sales growth of 12.8%, with a sequential dip from June of about 2.7%.
Speaker #5: And that's actually better than our historical benchmark, which typically sees about a 3.5% drop from June. So, July came in stronger than expected. Now, one nuance here is the timing of July.
Speaker #5: Of the July 4th holiday, it landed on a Friday this year, which is important, as it pulled some of the activity into that first week of July.
Speaker #5: If we were to fall on a Wednesday or Thursday, kind of like it did last year, we wouldn't see that same activity. Our vending data confirmed this.
Speaker #5: We saw about an 8% increase in vending activity that week, compared to when the holiday falls midweek. It didn't materially impact the quarter, but it did shift some intermonth cadence.
Speaker #5: When you add in what we saw in August and September, you know, our Q3 daily sales growth actually came in a bit stronger than our benchmark would have predicted.
Speaker #5: That was around 11.2, which is an encouraging sign. And looking at the year-to-date picture, our daily sales from January through September are up 15.9% compared to a historical benchmark of about 9.5%.
Speaker #5: You know, that's a big delta. But even when we consider the weather-related issues stated in January and the price cost through September, we're still showing double-digit sequential growth well ahead of our historic pattern.
Speaker #5: I think the big takeaway is our underlying growth remains strong and steady. You know, we have a phrase we use internally: "Plan the work and work the plan."
Speaker #5: And the team did exactly that in Q3, and it shows in the results. When we're looking at where the growth came from, the broader market wasn't much help.
Speaker #5: You know, the industrial economy remained sluggish, essentially flat. I think the PMI averaged about 48.6 for the quarter, which indicates contraction. However, I would characterize our growth as mostly self-help and market share gains, rather than any particular macro lift.
Speaker #5: Pricing did contribute, contributing roughly 2.5% to growth, somewhere in that 240 to 270 basis points, a bit lighter than we anticipated earlier in the year.
Speaker #5: But I think Sheryl's going to dive into this a little bit more detail later in the presentation. I would just add, though, that our team has done an excellent job communicating with customers on pricing.
Speaker #5: And, you know, the one thing I hear consistently from customers is the appreciation of Fastenal's transparency and partnership in managing these cost changes. You know, we're not just passing on increases.
Speaker #5: We're working side by side with our customers to find solutions, alternatives, and efficiencies. That kind of response builds trust, and it's a big reason we're continuing to gain share.
Speaker #5: Aside from price, the rest of our growth, roughly 8 to 9 points, came from volume and share gains. We saw meaningful wins with key accounts, a steady stream of new contract signings, and deeper penetration in existing accounts.
Speaker #5: Our national accounts and onsite signings over the past year are now ramping up in revenue, and it showed this quarter. In fact, our national account sales were up double digits in Q3, slightly higher than the company, reflecting those new contracts really coming into fruition.
Speaker #5: When we turn to slide four, you know, in terms of our customer category results from our strategy, we continue to see success with large accounts.
Speaker #5: Our aim has been to deepen relationships with big customers, and in Q3 it showed. The number of active customer sites spending over $10,000 per month with us grew over 8.1%.
Speaker #5: And those spending over $50,000 per month, what we call onsite-like locations, the number of those sites grew by 15.4%. Those are significant gains in penetration.
Speaker #5: And, in fact, some long-standing customers are now utilizing us in more plans for more product categories than ever before. I was just down in Texas for some regional VP meetings, and I had a regional tell me a story.
Speaker #5: You know, one of the major manufacturers in his area, there's been a Fastenal customer for 20 years, just expanded Fastenal's program from two sites with him to five sites, essentially making us their primary supplier nationally.
Speaker #5: And that didn't just happen by accident. It was our team proving themselves and offering new solutions and new product lines—a great example of earning more with existing customers by enhancing our services.
Speaker #5: I also wanted to highlight the growth we're seeing in what we call non-traditional markets, and that speaks to expanding our total market. You know, in the quarter, for example, our business with healthcare, education, and government customers grew nicely, as did our sales to warehousing and logistics companies.
Speaker #5: You know, they were up significantly. These segments are outside of heavy manufacturing, and they help diversify our base. We've also signed several new onsite contracts with universities and school districts this year.
Speaker #5: You know, it's an area we target after the pandemic. Those are now kicking in and contributing to growth and the resilience in our mix.
Speaker #5: You know, as Dan noted earlier in the year, institutions and warehouses, they might not boom like manufacturing, but they don't bust as hard either.
Speaker #5: So bringing them into the fold makes us a stronger company long-term. The bottom line is our strategy is delivering. We set out to align the organization behind those three pillars: increasing sales effectiveness, enhancing our services, and market expansion.
Speaker #5: And in Q3, we can see tangible results: faster growth in our core product, fasteners; more spend from big customers; and entry into new pockets of business.
Speaker #5: Moving on to slide five, you know, when I look at slide five, a few takeaways for me on this slide. The first is we continue to speak about alignment in our strategy, but most of that has been around just our sales departments.
Speaker #5: I think it's very important to point out that this is a company-wide strategy. Our fastener expansion initiative is a good example of this.
Speaker #5: This was a company-wide effort, not just a product push, but a coordinated strategy across sales, supply chains, and operations. You know, we improved availability in our DCs, we aligned our teams around some key SKUs, and, most importantly, we made it easier for our customers to get what they needed.
Speaker #5: And the result, you know, fastener sales grew over 15% in September, outpacing overall company growth. It resulted in a meaningful lift in not just sales, but the gross margin as well.
Speaker #5: This is what company alignment looks like, and it's driving results. The second thing from this slide, you know, for me, Q3 was a quarter of profitable growth.
Speaker #5: We achieved double-digit top-line growth in the soft market and converted it to even faster bottom-line growth. That resulted in 12.6% growth in revenue, with EPS up 12.3%.
Speaker #5: Our margins expanded and costs were well managed, resulting in a 20.7% operating margin. That's really the scenario we aim for. The only cost of this success was really higher performance pay, and our team definitely earned that.
Speaker #5: I'm definitely not going to get in the way of that. You know, this combination of growth, profitability, and returns is exactly what we set out to deliver.
Speaker #5: It speaks to the strength of our strategy, and more importantly, to the execution of the Blue Team. It also gives us confidence as we head into the end of the year, knowing that we're growing the right way—profitably and sustainably.
Speaker #5: While creating value for our customers, our employees, and our shareholders. Now, moving on to Slide 6, which highlights our digital engines. You know, this is an area where we've been investing for years, and in Q3 we saw continued momentum.
Speaker #5: We averaged about 110 FMI signings per day, slightly below last year's pace, but still an extremely strong level of activity. That's over 7,000 weighted Fast Bid and Fast Spend devices signed in the quarter.
Speaker #5: You know, bringing our total installed base to just under 134,000 devices globally, up 8.7% year over year. The sales through FMI technology represented 45.3% of our total sales in the quarter.
Speaker #5: This was 43% a year ago, and when you look at the daily sales through FMI, they grew just shy of 18% year over year, well above the company average.
Speaker #5: And the clear sign that, you know, this program, it's not just expanding; it's accelerating. On the e-business side, we saw 8% growth in daily sales. This includes both e-procurement and e-commerce activity.
Speaker #5: All those numbers are now where we want them. We believe the relaunch of FASTENAL.com will help improve this growth as we move into 2026. When you combine FMI and e-business, our digital footprint accounted for 61.3% of total sales in the quarter, reflecting our long-term strategy to drive growth through technology, automation, and customer integration.
Speaker #5: And further, you know, it really furthers our motto of growth through customer service. So, before I hand it off to Sheryl, maybe a quick summary.
Speaker #5: You know, we're winning with large customers. We're deepening customer relationships with technology and onsite, and we're aligning around the right priorities. We did it by investing in the right things.
Speaker #5: You know, our customers, technology, and the development of our people. I'm very proud of the teams and how they've embraced and executed the strategy over the last year.
Speaker #5: And I believe we're really starting to fire on all cylinders. We're aligned, we're adaptive, and we're customer-driven. With that, I'll pass it over to Sheryl.
Speaker #6: Thanks, Jeffery. Good morning, everyone. Now I'll turn to slide seven. Sales in the third quarter of 2025 were up 11.7%. That's our strongest quarterly daily sales rate since the first quarter of 2023.
Speaker #6: Despite sluggish end market demand and caution related to trade policy and tariffs, margin pressures government shutdowns, and the potential for longer than normal holiday shutdowns in the fourth quarter, due to the Christmas holiday falling in the middle of the week, regional and other sales leadership expectations are generally favorable for continued strong growth, growth due to share gains.
Speaker #6: In the absence of much external help, the improvement in our sales reflects two other variables. First, even as the market has stabilized, our comparisons have gotten easier.
Speaker #6: Particularly in the cyclical parts of our business. This factor helped produce our third quarter of growth for fasteners since the first quarter of '23, and acceleration in manufacturing and markets.
Speaker #6: Second, contributions from our strong contract signings since early 2024 continue to build. We continue to experience a healthy pace and mix of signings in the third quarter of 2025, and our total national, regional, and government contracts grew in the high single digits.
Speaker #6: The quarterly sales growth rate is a fair representation of our performance, and we did see acceleration through the period. It was another solid self-help-driven result in a soft market.
Speaker #6: The pricing outlook warrants some discussion. Year to date, significant tariffs have been applied to products from China, as well as steel, including steel-derived products like fasteners on a global basis.
Speaker #6: We continue our long-term trend of diversifying our supply chain where possible to align with the size and timing of our suppliers' pricing actions. Additionally, we added some inventory to our own balance sheet.
Speaker #6: That said, supply chains have gotten more expensive, and a part of our response over time has been incremental pricing. We have been proactively engaging with our customers for several months.
Speaker #6: We measured price on the sale of identical parts to the same customers in both periods. This represents approximately 50% of our business, and we refer to this as like-for-like pricing.
Speaker #6: During the third quarter, we implemented one pricing action in the month of August, which addressed the reciprocal tariffs that were finalized in July of 2025.
Speaker #6: Our previously stated goal was for price to contribute 3% to 5% by the end of the third quarter of 2025. The phased approach to this rollout resulted in 240 to 270 basis points of additional impact in the third quarter, with momentum building as we ended the quarter.
Speaker #6: Additional pricing actions will be necessary in the fourth quarter of 2025, with the potential to increase the impact of pricing on like-for-like parts to be in a range of three and a half to five and a half percent, depending on where the tariff litigation ultimately settles and the pace and execution of our actions.
Speaker #6: Our revised goal for pricing on like-for-like parts in the fourth quarter of 2025 reflects a reduction from our previously stated goal of 5% to 8%.
Speaker #6: The other 50% of parts sold to customers exist in the current period but do not exist in the prior period, making it hard to measure the price impact on that group.
Speaker #6: That said, it must be acknowledged that had we sold that part to that customer in the prior period, it would have likely been sold for less due to inflation.
Speaker #6: Therefore, in periods of inflation, there is an inherent price component that flows into share contribution. It is likely pricing is contributing to share contribution in a range of 1% to 2%.
Speaker #6: We are encouraged by the easier comparisons, the improved sentiment, and particularly our internal momentum. That said, we have limited visibility in share our customers' uncertainty over how current trade policy may impact demand in the fourth quarter of 2025.
Speaker #6: However, Fastenal has historically been able to win market share during periods of disruption on the strength of our nimble sales, our frugal and adaptive culture, and the weight of the technologies and global supply chain resources we can apply to finding solutions to customers' challenges.
Speaker #6: That is our expectation in the current environment. Now turning to slide eight. Operating margin in the third quarter of 2025 was 20.7%. This is up 40 basis points year over year.
Speaker #6: Gross margin in the third quarter of 2025 was 45.3%, up 40 basis points from the year-ago period. The improvement was primarily driven by our fastener expansion project, other supplier-focused initiatives, and improvements in customer and supplier incentives.
Speaker #6: These benefits were partly offset by continued customer mix solutions and higher organizational overhead costs. Price costs had a neutral impact on our gross profit percentage in the third quarter of 2025.
Speaker #6: We anticipate our gross profit percentage for 2025 will be relatively flat compared to 2024. This will be dependent upon our effectiveness in managing price costs, and the degree of macro improvement will also influence this scenario.
Speaker #6: SG&A was 24.6% of sales in the third quarter of 2025, which was consistent with the year-goal period. Employee-related expenses increased faster than the rate of growth in sales, largely due to the reset of bonus and commission programs as a result of improved financial performance.
Speaker #6: This increase was partially offset by leverage achieved in all other SG&A costs. We continue to invest in key areas of our business to support growth while managing other costs more tightly to reflect the sluggish business conditions.
Speaker #6: Putting it all together, we reported third quarter 2025 EPS of $0.29 per share, up from $0.26 per share in the third quarter of 2024.
Speaker #6: Reminder, we executed a two-for-one stock split in May of 2025. The prior year EPS has been adjusted for this change. Now, turning to slide nine, we generated $386.9 million in operating cash in the third quarter of 2025.
Speaker #6: Or 115.3% in net income. Despite our investment in inventory, cash generation was above traditional third-quarter levels. The five-year average from 2020 to 2024 was 104.2%.
Speaker #6: We remain comfortable with the cash generation of our model and continue to carry a conservatively capitalized balance sheet, with quarter-end debt being 4.8% of total capital.
Speaker #6: Accounts receivable were up 12.2%, reflecting sales growth, relatively faster growth to larger customers that tend to carry longer terms, and an uptick in quarter-end deferred payments from our customers.
Speaker #6: Inventories were up 10.5%, which was an improvement from the preceding quarter. We have increased inventory as part of our effort to improve product availability in our selling locations and enhance picking efficiency in our hubs.
Speaker #6: We have added stock to support customer growth, and we accelerated some inventory schedules for future delivery into current periods ahead of tariffs. Inventory growth may remain elevated in the fourth quarter of 2025 as we continue to navigate tariffs and more inflation builds in.
Speaker #6: Accounts payable were up 14.3%, primarily reflecting the increase in inventories. Net capital spending in the third quarter of 2025 was $54.7 million, down slightly from $55.8 million in the third quarter of 2024.
Speaker #6: This increase is consistent with our expectations for the full year, where we anticipate capital spending in a range of $235 million to $255 million, which is up from $214 million in 2024.
Speaker #6: This increase is from higher FMI device spending, distribution center outlays to reflect spending on our Utah and Atlanta hubs, and automated picking additions across our hub network; higher IT spend, which includes projects aimed at developing additional digital capabilities; and higher spend on vehicles.
Speaker #6: The increased spend was partially offset by an increase in proceeds from sales of vehicles and properties. With that, I will turn it over to Dan.
Speaker #7: Thanks, Sheryl. And good morning, everybody. You know, I was sitting here thinking, as Jeff and Sheryl were talking, what's kind of nice for me right now is we put up a great quarter. A few quarters ago, Jeff and Sheryl would have been really nervous about what they just did.
Speaker #7: I think they did a wonderful job talking about the quarter, discussing where we're going, and providing insight to our shareholders on the call, as well as to our employees.
Speaker #7: I think as I was reading through some stuff last night, a few things dawned on me. One was it was 10 years ago today that we put out the third quarter of 2015.
Speaker #7: And you know, the PMI was plus 50. We'd gone through a year where we'd seen diminishing success. And the afternoon before, I'd been named President and CEO.
Speaker #7: And the first message I had to deliver was: tough quarter. Our sales went negative in September, and as it turned out, they were negative for the balance of the year.
Speaker #7: And we needed to kind of regroup and figure out where we're going. Not the chaos of today, and there were some simple themes that began to emerge.
Speaker #7: When we settled down, you know, it's a great organization, great capabilities, great people. However, we lost our way a little bit. Some other things that emerged over time were the idea of thinking big about where you're going.
Speaker #7: Taking steps towards the future, being willing to change and never clinging to the past because it's comfortable and safe. Figure out where you're going and get there.
Speaker #7: It eventually chimed into some mantras: find great people, ask them to join, give them a reason to stay. And we just, Jeff just introduced a new one.
Speaker #7: I liked his phrase: "Plan the work, work the plan." I don't know if that's a Canadian thing or a hockey thing.
Speaker #1: Hockey thing.
Speaker #7: I don't think it is there with growth and customer service, but it's pretty darn good. And I love it. I would like to say thank you to the Blue Team.
Speaker #7: For the quarter we just put up, frankly, the last two quarters we just put up, it was nice having a couple quarters above $2 billion, where we're enjoying growth again.
Speaker #7: But I would like to give special mention to several people. To Bill Dratzkowski, thanks for thinking about the organization first and stepping into the role of leading our national accounts, our contract sellers team, two and a half years ago.
Speaker #7: A big part of the turnaround is the work of your team in collaboration with the network they serve. To Casey Miller, thanks for taking a big load on your shoulders when Bill stepped out of his role.
Speaker #7: I'm glad we were able to add some resources here in the last three to four months to assist the effort. But thanks for everything you've done.
Speaker #7: To Tony Borsma, thank you for the improvements we've seen in our supply chain over the last year and a half. It has helped us tremendously in navigating the tariffs of 2025.
Speaker #7: Because it gave us a little bit of a cushion to make mistakes, or as we did here in the third quarter, to delay a pricing action.
Speaker #7: Because of some uncertainty going on with, okay, what are the courts going to do? What's going to happen next? Heck, even over the weekend, there was some noise about what's going on.
Speaker #7: But the work of our supply chain team gave us a little wiggle room in which to navigate. And then finally, to Jeffery Watts, he stepped into a role, and the first thing he did was get our sales team pursuing a common goal.
Speaker #7: Challenge us to maybe stop being stupid some of the time on the things we were doing, and remember we all serve our customers and we serve each other; nobody serves us.
Speaker #7: It's never about us; it's never about I. It's about the customers and the market we serve. I did like the other quote Jeff had in his prepared remarks.
Speaker #7: Drive growth through technology. You know, a decade ago, on that call, we couldn't have made that statement because we didn't have the technology to present.
Speaker #7: We didn't have a technology team to present. And my compliments to John Soderberg on your efforts over the last decade to get us to where we are today.
Speaker #7: And the resources we have to assist our sales team. Page 10 of the CEO message on the third quarter talks about an item that we mentioned actually on page two of our earnings release.
Speaker #7: If you look at page two of the earnings release, we've historically talked about three categories of products: fasteners, safety, and other. Within fasteners, we further break it down to OEM fasteners and MRO fasteners.
Speaker #7: We started doing that some years ago, and we did it by guesstimating the mix. We didn't have great reporting to tell us, but we did know that if it's a manufacturing transaction, we aren't charging sales tax.
Speaker #7: It's an OEM fastener, and so in there, you'd see about 19.8% of our sales are an OEM fastener. That's really predicated on looking at the U.S. business and estimating it.
Speaker #7: On page 10 of the flip book, what you see is, our folks, we have better reporting systems now. We can look at things differently, and we can look at it globally rather than kind of faking it because we're looking at non-tax sales.
Speaker #7: That 19.8 is actually 20.9. And that's looking at it globally. In places like Mexico, spring the average up. And as we've gone through the year, one of the things we've talked about is our Americas Business outside the U.S., particularly our business in Mexico.
Speaker #7: They're having a tough year. That business is more heavily skewed towards OEM business, especially OEM fasteners, than the rest of the company. And when you have a sub-50 ISM, it beats them up.
Speaker #7: But we have great people down there doing great things, and I know we're building for the future. That future will shine through. What we learned in this process of really going through is that we wanted to understand the non-fastener business.
Speaker #7: Because we had no visibility of that in the past. If you'd asked me six months ago, what percentage of our business do you think is OEM?
Speaker #7: I would have said it's probably about 30%. And the difference between the 20 and the 30 would be about half of it would be metalworking.
Speaker #7: And abrasives. And half of it would be everything else. As you can see from the information here, I was woefully understated in my number.
Speaker #7: And so, as we move towards the year-end, and in each of the steps between now and then, an ask I have of the analyst community: when you're having conversations with Sheryl and Kevin about our monthly sales, about the follow-up to this call, challenge us on what you want to see from this information.
Speaker #7: It's our intent to replace that table on page two, or to supplement that table on page two. I'm not sure which at this point.
Speaker #7: With a thought process of our business of, here's our direct business, i.e., OEM. Here's our indirect business, i.e., MRO. And give better visibility to what we're doing and where our success is taking us.
Speaker #7: As we move forward. Speaking of moving forward, I would like to switch over to the questions. I've used up my 10 minutes, and I would ask that, as mentioned, please limit your questions to one with a follow-up.
Speaker #7: Thank you.
Speaker #1: Thank you. And I'll be conducting a question-and-answer session. If you'd like to be placed into question two, please press *1 at this time.
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Speaker #1: And as another reminder, please ask one question, one follow-up, then return to the queue. Our first question is coming from David Manthey from Baird.
Speaker #1: Your line is now live.
Speaker #7: All right. Thank you. Good morning, everyone. My question is on pricing out of the gate here. So the gross margin looked good, assuming there's no issue with you passing on price.
Speaker #7: But with the pricing being below expectations, I was wondering if you could just talk about the mechanics there—the how's and why's that are panning out slower than you originally thought.
Speaker #7: You know.
Speaker #8: Dave, good morning. As I mentioned, when we were stepping into the quarter, we thought our cadence would be a little different than it played out.
Speaker #8: And you know, every time we have a conversation like this, we're answering based on what we know at that point in time. And as you know, it's a pretty fluid environment.
Speaker #8: We ended up delaying it about 30 days, our third quarter step. In doing that, two things happened. Obviously, the benefit or the impact on the quarter is muted.
Speaker #8: And however, by delaying it 30 days, I think we had better discussions with our customers. We had better options for them to have. I believe when you're pushing things too fast, you kind of negotiate differently.
Speaker #8: You have discussions that are different, and there's probably some territory you'd cede. In that discussion, 30 days later, when you have a little more insight and can have a more thoughtful conversation, you're probably more effective at your pricing. But more importantly, you're more effective at providing counter options to avoid part of the price.
Speaker #8: Through substitution. And it did slow down our cadence in Q3. As we step into Q4, as Sheryl mentioned, we've lowered that number a little bit.
Speaker #8: Part of it, when we gave that number for Q4 in the July timeframe, part of it is, you know, you're doing the straight-line look.
Speaker #8: And you don't really know what it is. The only difference between now and then is we know what we know now, and that is it's going to be a little bit lower than we thought.
Speaker #8: Which, frankly, is a good thing. Because it tells me we've probably put in more substitutions in place. And, you know, I cautioned in July about we might get a little bit of margin squeeze in the third quarter.
Speaker #8: Part of the reason for putting that message in the call is I thought it could happen, and I wanted everyone to know, the Fastenal employees, to hear it.
Speaker #8: I'm going to make the same comment again. We can expect a little margin squeeze in the fourth quarter because costs are continuing to rise.
Speaker #8: And we've had some wiggle room because of what we talked about on the expansion of fastener products. That we stock an inventory; that gave us some margin on some other products.
Speaker #8: Unrelated to the price, but we could get a little squeeze in the fourth quarter. We're going to work to avoid it, like ever. But we think the numbers are a little bit lower; most of that is because we have better information now than we did three months ago.
Speaker #8: Got it. Thanks, Dan. So, when you're saying the numbers are coming in a little bit lower, you're talking about the fourth quarter down from the 5% to 8% you thought previously.
Speaker #8: But is there a change in how you're thinking about peak pricing ultimately? Or does that $5 to $8 just get pushed into 2026 at some point?
Speaker #8: You know.
Speaker #7: I don't know if we know that answer at this point, Dave. You know there are going to be things that happen. We're going to do pricing actions every quarter.
Speaker #7: If the situation dictates it, you know the optimist in me would say that things are calming. We had an economist come in and talk to our board the other night.
Speaker #7: And she was running through some of that stuff and talking about what their expectation is coming into 2026. And you know how it is, you ask 10 economists a question, you're going to get 12 opinions.
Speaker #7: But I think there is a feel, and I think there's a political will that gets some of this stuff calmed down. Obviously, over the weekend, there was some noise going in different directions.
Speaker #7: We'll see how that plays out as we move into November. You know, the optimist in me would say maybe the point we get to by as we exit the year is the point we've gotten to.
Speaker #7: And now the real challenge is the fatigue on pricing. That doesn't mean there won't be some price changes after the first of the year.
Speaker #7: Because I believe there will be, and there might be some that didn't agree to a price change three months ago or six months ago.
Speaker #7: That we have to go back and have that discussion again. Hopefully, the end result is we're better at pivoting sources of supply and the product served.
Speaker #7: Because I believe we're better at that than our peers. Because we have direct conversations with our customers. And we have great line of sight to the supply chain.
Speaker #1: Thank you. Next question, today's coming from Ryan Merkel from William Blair. Your line is now live.
Speaker #9: Hey, everyone. Thanks for the question. I wanted to start with the bonus reset. Can you just explain why the bonus reset was so much larger in Q3 versus Q2?
Speaker #8: So there's a few aspects to that. One is the part of its bonus reset, you know, in early August, when we had our after we'd gotten the July numbers. We had a bit of a discussion with our leadership team that said, hey, SG&A is getting ahead.
Speaker #8: Of where we need to be. And there are a number of things that kick in. In fact, this morning, we always have a call at 7:00 a.m. with our leadership team.
Speaker #8: And Sheryl runs through some analysis she provides for our board and shares it with our leaders. In that discussion, I was doing some ad hoc calculating.
Speaker #8: And for the Fastenal leadership listing, I was wrong on my ad hoc because I was doing it on the fly. Matt Ransomberg reminded me afterwards that, hey, Dan, we split our stock.
Speaker #8: So, your math was off by a factor of two. If you think about it on a district manager by district manager basis, we spent about $8,000 a month too much.
Speaker #8: And because that would have gotten us closer to $0.30 if you do the reverse engineering on the math. Our district managers have been under incredible pressure for the last two years to manage expenses.
Speaker #8: They probably had some pay increases they needed to do, and there are probably some pay increases that were occurring as we were going through—I’m talking about base pay.
Speaker #8: That we're going through the year, and we probably underestimated that a little bit as we went through the second quarter. We were realizing more success.
Speaker #8: There were also some changes that we talked about regarding some pay programs we were making. Most of those programs center on the field and focus on the line at which you're measuring for pay purposes.
Speaker #8: Are you measuring at the sales line, the gross margin line, the operating margin line? What we internally refer to as the ROA, which is our internal P&L and asset document.
Speaker #8: It was a little bit more of an impact from some of those changes because we were discovering success than maybe we estimated. But the final mechanical piece is we have a lot of programs that are linked to the performance of P&L growth.
Speaker #8: And we pay out a meaningful piece. And you know how our proxy works. We all get a piece of the earnings growth. We had a few more months of success because we had better participation across the network.
Speaker #8: So, we had a few more district managers than we initially anticipated, and programs are kicking in. We underestimated the number a little bit.
Speaker #8: If there's nothing in there that I'm going to lose sleep over, other than cautioning everybody in August to slow that down because it doesn't do anything for Q3.
Speaker #8: It really doesn't do much for Q4. It really matters for Q1 of '26 because it's a big ship, and it requires a little more time to do some steering.
Speaker #8: On that rudder. But part of it was there were some base pay changes going on. We probably underestimated a little bit the impact of some of the new programs.
Speaker #8: And then the rest is we're finding success and we're paying. And we think that's a great thing.
Speaker #9: Okay. Yeah, that makes sense. And then the follow-up is SG&A in the fourth quarter. Is it going to be similar? 11% year-over-year growth that we saw in Q3?
And if that's a fair characterization,
And everything goes. Alright, should this be a creative to ROIC? And what's a reasonable time frame for that to unfold?
Well I'll talk about the share gain on it and really if you think of it. This way we've got a little tighter on our inventory models and what it did was it made it very difficult in the field for the branches to get standard inventory they werent efficient at it and we started to lose some share. So we brought back the standard inventory that.
We're missing we've actually increased it and it's just made it a lot more efficient for our branches and our customers to get that inventory, let Dan answer the second part.
On the ROIC is actually that the.
Phase one and most of the phase III is accretive to ROIC.
And.
Because what we what happened to Jeff's point, having the inventory on the shelf.
I just meant that if.
It's easier for our folks to to perform is easier for us to folks to give a quick answer to a customer of yes, I get it in as opposed to doing a sourcing exercise and then calling the customer back because a lot of things can happen during that sourcing exercise like maybe talking to three of the other suppliers because they need stuff.
And if I can just answer the question it puts them to bed. So there is there is there.
Capture of market share you get the other thing that happens is when you buy it in an orderly fashion you always purchase it better.
And so we're getting a nice return on when I look at the inventory dollars we added.
The return on that is much better than ROIC as a company.
The reason I say accretive and not ridiculously accretive is.
There's always a trade off on efficiency, so we've given Tony and his team.
The.
The ask of saying.
Keep looking at this kind of stuff.
Bob Cardon always taught us.
Not about the P&L, it's not about the pre tax as a percentage of sales and all that really matters don't get me wrong.
It's about the returns that's what that's what our long term, that's what our shareholders will reward us for is to.
The returns on the investments on the decisions, we're making and if we're adding inventory and it's enhancing our returns we will continue to add inventory, even if we add a few days to our inventory.
If we can get a return on that.
That's a better use of excess cash then EBIT than a dividend a dividend is just throwing in the towel because you have more cash than you can then you can deploy in a useful fashion and what we've always believed in is that companies that have too much cash and they look for places to deploy it usually destroy shareholder value there.
Don't create it so we would rather dividend everything out unless we have no need for it.
And count on future cash flow to fund the ideas that we have.
Thank you next question is coming from Nigel Coe from Wolfe Research. Your line is now live.
Kevin I don't remember hearing now.
John.
Hello.
Let me recall Nigel one second please.
Yes.
Your line is now live.
Hello can you hear me yes. Please proceed.
Okay great.
Good morning, guys, sorry about that I'm not sure what happened there.
Can you maybe just expand on the price fatigue comments I mean, I don't think its particularly surprising but I'm just wondering is this.
Is this really just the uncertainty around tariffs and as you mentioned the litigation around that so is that sort of a pickup in competition here and youre seeing some some of your competitors are not pushing through price perhaps.
Our competitors are pushing through price.
The marketplace is pushing through price.
We actually prefer not to push through price.
We prefer to push through growth.
We prefer to have conversations about technology, we can employ to your to your point of views that lowers your consumption expanding.
Expanding the universe of what we're selling.
The price conversation is only about.
Costs are going up and your supply chain and pricing power customer realizes that.
And so we've always been reticent on the flip side, we have great line of sight to our needs and we have open candid discussions with our customers about what's happening in their supply chain and that price is part of it.
The biggest I think complexity to the conversation is things like.
What's the court system going to say about it.
Whats the pivot and the political wind of Av.
Chaos or has it settled down it isn't so much what the prices reset too.
Are the prices done resetting.
So customers can make decisions about what they want to do because.
Because they know the economics of what they wanted to do.
And in the meantime, what happens is you get kind of a pause.
And.
Yeah.
And I think that shines through in our comments the economist to us and Jeff was alluding to.
Is that customers are doing what they need to do but they aren't necessarily doing more than they need to do.
Because they arent building for the future because they're not sure what their cost structure is going to be in if they want to do that thing.
But.
But the price fatigue, as we all get tired of talking about that because we'd rather talk about growth.
Yes, okay. Thanks, that's really helpful. And then just a quick one maybe for Sheryl just maybe can you just put some boundaries around four key gross margins, Dan you mentioned potential flow squeeze.
In the fourth quarter. So I'm just wondering if there's any any sort of more high profile comments around that.
Yes, so in the fourth quarter, we are expecting that we'll see.
A drop in our gross margin, which is consistent with quarter four performance historically.
But we are still targeting that we will be flat on our gross profit percentage for 2025, when compared to 2024, and that's really driven by the.
The fastener expansion.
Project promoting our gross margin.
If somebody had asked me in January with all the chaos going on.
What's a win in.
In 2026, I would've said getting our growth to double digit as we move through the year.
And if we can maintain our gross margin a flat gross margin in this environment.
It's a huge win.
Yeah and.
And part of that was I didn't appreciate how chaotic the year would be on tariffs.
If any of us really did.
Secondly.
Sure.
I knew mathematically how much the faster expansion could help us, but going mathematically how much it's going to help and realizing that.
In actual activity aren't always the same two things.
Thank you. Our next question today is coming from Stephen Volkmann from Jefferies. Your line is now live.
Great. Good morning, everybody, Dan maybe can we go to your slide 10, and I am curious how are you use. This data is this percentage something that youre trying to manage to to either grow it faster or not I guess to the overall business and I am curious if theres any.
I'm, assuming the margins are higher in this area, but any commentary there would be great.
Actually the margins in direct materials are lower but your cost structure is lower because it's planned activity.
Here's how I use it and I'm going to think out loud and Steven. Thank you for that question by the way, but I'm going to think out loud so.
If you are writing these down use a pencil instead of a pin.
<unk> as the information becomes more available to you and frankly to us.
Some of these things might be conceptually that on but the paper off by a little bit.
So.
When I think of the PMI going sub 50 in November of 2022.
And in.
And our business falling off as we got into the second quarter of 2023, there's obviously a cause and effect there.
On the PMI and industrial production subset of information that we've historically talked about them internally.
When I look at that.
The.
Even we didn't really understand how much of this was production shutting down.
Versus.
We're just not executing or we need to get our head out of somewhere and get executed.
And what this gives us insight if we appreciate that 40% of our business or 38, eight excuse me, but almost 40% of our business is direct material production related the story that subset of information tells.
I suspect, we'll have a strong correlation to industrial production and two.
The PMI in general.
I also believe that close to.
We talk about 45 million, 3% of our sales go through <unk> I suspect on that piece of our business, probably 50% of that business goes through fmri. We don't know the answer to that right now, but that's what I I suspect it will be when the dust settles.
And then the other 60% our indirect it's really MRO spend.
Really.
A good compare comparison benchmark to some of our peers that are more MRO centered businesses. It's a good.
Parison those things, we're doing to broaden our breadth of customer base, because that's less impacted by the PMI less impacted but less so.
It.
As far as industrial production as well because.
8% of that business is going into it.
Supplying ecommerce distribution.
8% of that business is going into the government and.
Sector, we're supplying their needs and it really has nothing to do with PMI.
And we believe about of that 60%. That's indirect we believe about 40% of that is going through <unk>. So if you meld those two together and do your math, it's about 45.
Is the mix now time will tell if Dan is full of it on that and the numbers come in a little differently, we will learn that in the weeks and months to come and as we learned that in November with our monthly release, we will put out some insight on it if we learn some new things in December we'll put in November we'll put it out with our December release and then.
Talk about it a bit more in January and a bit more in our annual report because our goal is to provide you with better information for understanding our business, where we're discovering our success, where we're struggling and are the factors of struggle internal execution.
Execution or external.
And we're going to focus on growing our business long term always but we think it provides better insight than purely hey, here's fasteners and here's everything else.
Great. Okay. Thanks, that's helpful and maybe from a long term tube Super short term anything in October to call out relative to how we should think about top line for the fourth quarter.
Whenever I use October on the 13th month I'm always wrong.
I'll defer that to our November are released in early November.
Thank you next question today is coming from Chris <unk> from Morgan Stanley. Your line is now live.
Thank you I wanted to follow up on the conversation about price is the software is there any impact here from the producers or may be just pushing less on you guys than you thought previously.
And then or when we kind of see the Q4 step down is it just that the company is comfortable being under water for maybe a short period of time on price cost.
And does that tell us that it's getting more competitive in the market. Thank you.
We're never we're never comfortable being underwater on price cost.
Sometimes that happens we're never uncomfortable if we're growing double digits, we don't like our gross margin to be below 25, but I'm not going to lose any sleep over this quarter, where we're closer to where we're essentially 24.
I don't think the.
Here's what I'd like to think but this is really just given an opinion that in.
$3 of a cup of coffee or a quick trip in Winona.
But.
I believe.
Our our duty to our customers is the pushback on supply base.
Now in the case of things like tariffs. That's a mechanical thing now we can push back on our supply base and get price concessions or cost concessions, but potentially.
Or we can move business to other geographies and avoid some of the tariffs, but there's trade offs you might be paying more to save tariff and that more might be in the cost of product.
We have diverted product going directly into Canada. So it doesn't come through the U S and get the toll coming through the U S. But it's more expensive for us to break shipments down and divert it to the west coast of Canada, and bringing it in that way.
But that might be 8% more expensive, but if tariffs are X are multiples of that you choose to do that because it makes the most sense.
I'd like to think that producers also realize that if you use tariffs as a means to we're very very surgical with our tariffs some companies arent still surgical there just like hey, we're just going to raise prices X to everybody.
AD when somebody does that a supplier of ours does that well.
You can set your pricing, where you want to set it.
The marketplace is going to decide where it wants to source its product.
And if youre not being surgical.
We're in a punchy interface and want to take that product sourcing somewhere else.
And I'd like to thank some of those activities and being on that being literal that comment I'd like to think some.
Some of those activities causes pause of our supplier base.
To the old adage pigs get fed hogs get slaughtered don't be a hog figure out what you need.
Surgically byproduct based on cost components, but don't don't do a broad brush on this and perhaps we're seeing some of that but we will never be comfortable.
With price cost being anything but neutral.
Thank you Dan really appreciate the thoughtful answer.
Maybe just following up you mentioned earlier about making investments in inventory and are providing a great return.
Do you think customers did anything similar in the first half of the year, you know theres very well flagged telegraphed price increases coming do you think there was any pulling forward of inventory at the customer level just to get ahead of that thank you.
Can't speak to supply chains that don't come through fats at all because I'm sure there's customers that bought some components.
Because they knew what their needs are and they bought some assuming they can get them in.
And they can get produced and get them in before the toll started charging but but I.
I don't believe they did any of that activity through us.
Because we're a real time.
Hi chain partner for them, that's the value we bring.
And.
What we do broadcast to our customers as things were doing so we can tell them hey, here's how many weeks of supply we have of your part and here's where the cost increase is going to kick in.
And the price increase to use so I don't think our customers did.
In the in the products we sell.
I can't speak to products outside of that.
But with that I see we are two minutes to the hour. So that will be our last question. Thanks for thanks to the Blue team for everything you did.
I would share with the group sorry, if I've been a little bit on available the last couple of weeks.
My 95 year old mother passed away a couple of weeks ago and she lived a wonderful life.
Hum.
<unk> takes its toll on all human beings and.
I'm really glad that my four children, particularly our daughter Anna was 20 years old.
<unk> had a grandmother to live long enough that she was part of her life and she knew her as a human being.
Thanks, everybody have a good day.
Thank you that does conclude today's teleconference. Webcast. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.