Q1 2026 Fastenal Co Earnings Call
Speaker #1: Greetings and welcome to the Fastenal 2026 Q1 Earnings Results Conference Call. At this time, all participants are in a listen-only mode.
Speaker #1: A question and answer session will follow the formal presentation . If anyone should require operator assistance during the conference , please press Star Zero on your telephone keypad .
Speaker #1: Please note this conference is being recorded. I will now turn the conference over to our host, Dray Schreiber. Dray, thank you.
Speaker #1: You may begin
Speaker #2: Welcome to the FASTENAL CO 2026 First Quarter Earnings conference call . This call will be hosted by Daniel Florness , our Chief Executive Officer , Jeff , what's our President and Chief Sales Officer and Max Tunnicliffe , our chief Financial officer .
Speaker #2: This 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 #2: Today's conference call is a proprietary , Fastenal presentation is being recorded by Fastenal . No recording . Reproduction . Transmission , or distribution of today's call is permitted without FASTENAL CO consent .
Speaker #2: This call is being audio simulcast on the internet via the Fastenal Investor Relations home page . Investor FASTENAL CO . A replay of the webcast will be available on the website until June 1st , 2026 at midnight Central Time .
Speaker #2: 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 #2: 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, and we encourage you to review those factors carefully.
Speaker #2: I would now like to turn the call over to Mr. Jeffery Watts.
Speaker #3: Good morning , everyone . Welcome to FASTENAL CO first quarter 2026 earnings call . I'm Jeff Watts , president , chief sales Officer and before diving into the results , I want to take a moment to thank our entire FASTENAL CO team across the world for their exceptional work driving the strong performance .
Speaker #3: You're going to hear about today . I also want to highlight a real success that that just happened . It was our recent customer expo where we host over 3000 customers from around the globe , and the turnout and the engagement , it was just outstanding .
Speaker #3: We showcased our latest solutions, FMI technology, and digital tools, but what really made it successful was the quality of conversations and the strategic partnerships that were being formed and were being strengthened. Events like these really demonstrate why we keep gaining market share.
Speaker #3: We help customers improve their efficiency and we help them improve their productivity , all becoming a trusted partner Overall , like I said , it was just a great event and one of our best ones yet .
Speaker #3: So moving into the quarter . Slide three . Q1 was a very strong quarter and a great start to the year . We delivered 12.4% daily sales growth .
Speaker #3: Our third consecutive quarter of double digit growth What's important is where this came from . The industrial economy remains somewhat challenging , with US manufacturing PMI averaging around 52.6 , which is an improvement but still moderate overall .
Speaker #3: We really didn't see much of a tailwind. We gained share through focused execution. Largely, we won new business with key accounts.
Speaker #3: We expanded customer site presence, and we strengthened our value-added services and solutions. This performance was really powered by our three strategic drivers.
Speaker #3: The first being increasing sales effectiveness. And we're winning with key accounts and new contracts. We added a healthy number of new national account contracts in the quarter, keeping us on track for a goal of roughly 250 new signings this year.
Speaker #3: Our total contract count grew by almost 8% year over year to just over 3,600 contracts, and about 75% of our Q1 sales came from these customers, which today we're deeply embedded with.
Speaker #3: When we look at our customer sites spending $50K plus per month, they increased 16.3% year over year to just over 2,900 sites, at 21% revenue growth.
Speaker #3: These sites now account for just over half our total sales Our approach to enhancing our services is aligned with our strategic commitment to addressing the specific needs of our larger customers , rather than just focusing on a one size fits all approach .
Speaker #3: By focusing more on our ten K to 50 K plus sites , it enables us to have greater direct integration within their facilities .
Speaker #3: Deeper insights to deliver better solutions to fit their needs . This targeted focus really allows us to implement and develop deliver more tailored solutions to all of our customers , regardless of their size , kind of think of it like a trickle down effect .
Speaker #3: Smaller customers may not need all of our solutions, but will be able to take advantage of the pieces where and when they need them.
Speaker #3: The impact of this approach can really be seen in our average monthly sales per our 50K-plus sites. Not only are we adding new sites, but we're selling more at each of them, as we've increased the average monthly sales by $5,700 per site per month now.
Speaker #3: Lastly , expanding our markets as our international sales teams have become increasingly more aligned , their growth continues to accelerate . Now in March , the international business , primarily Europe and Asia grew almost 24% .
Speaker #3: And even though today they're a smaller piece of the pie, this performance is exactly what we want to see as we continue to invest in our global expansion.
Speaker #3: And after speaking with just so many customers last week from different parts of the world, one thing is very clear: our solutions, our local presence, and our supply chains are definitely in high demand.
Speaker #3: And it's really why our growth internationally is so important to our future. So, tying this all together financially, our daily sales increased 12.4% to $34.9 million per day for the quarter.
Speaker #3: And our operating margin improved to 20.3%, up 20 basis points from last year. And that improvement was primarily the result of strong leverage.
Speaker #3: The SG and a expenses , which I believe reflects our disciplined approach to managing costs , even as we continue to invest in our strategic growth drivers .
Speaker #3: Now, moving on to slide four. The first quarter, our digital initiatives continue to gain momentum with our digital footprint. Daily sales are up 13.6%, outpacing overall company growth.
Speaker #3: As a result, digital channels represented 61.5% of the quarter's sales, and we remain on track to reach our digital mix goals by the end of the year.
Speaker #3: We also accelerated the deployment of our FMI or Fastenal managed inventory technology in the quarter . We signed close to 7000 new FMI device agreements , about 110 per day , and 8% increase over last year .
Speaker #3: You know, this helped expand our active device base by nearly 6% and drove almost 45% of our Q1 sales through FMI, which is up 150 basis points over last year.
Speaker #3: In short , more customers are using our on site devices and solutions to manage inventory , which makes FASTENAL CO a stickier and more efficient supply chain partner Meanwhile , our e-business grew daily sales nicely up almost 7% over last year Electronic transactions account for close to 30% of our total sales , and we do anticipate digital adoption continue to continue to rise as more and more customers integrate the procurement systems with FASTENAL CO .
Speaker #3: Our investments in technology are delivering measurable results by expanding our digital footprint through FMI and e-commerce. We're winning new business, and we're driving profitable growth. I think our priorities here are very clear.
Speaker #3: We continue to invest in tools, technology, and analytics to drive operational excellence and deepen our customer relationships. The strength of our first quarter reflects our strategic focus.
Speaker #3: We're winning with large strategic , strategic customers , embedding ourselves deeper through technology and service and doing it financial discipline that drives both top line growth and bottom line leverage With that , I'll turn the call over to Max , who will walk you through the financials in more detail .
Speaker #3: Thanks .
Speaker #4: Thank you .
Speaker #3: Jeff .
Speaker #4: And good morning, everyone. Overall, the quarter showed continuous progress against our strategy. We saw improving demand, solid execution across the business, and strong cash generation, even as the broader macro environment remains uneven.
Speaker #4: And in some areas, uncertainty. I'll start on the business trends and market drivers. Slide, slide five. During the first quarter, the industrial environment showed signs of stabilizing in the US.
Speaker #4: PMI averaged about or above 52 for the quarter , and industrial production was slightly positive year over year in January and February . This lines up with the gradual improvement we began to see late last year As Jeff mentioned , our daily sales growth trends on a quarterly basis improved to 12.4% for the quarter from just over 11 in the fourth quarter of last year , and we continue to outperform the market This growth was driven by a combination of new customer wins , increased share of wallet with existing customers , and pricing Importantly , the market was not concentrated in any single customer type or end market .
Speaker #4: Customer sentiment remained generally favorable throughout the quarter. While trade and tariff uncertainty continues to be part of the backdrop, most customers are viewing this uncertainty primarily as a cost and planning issue, rather than a demand issue.
Speaker #4: As a result, activity levels remained healthy, and we continue to see solid engagement across our customer base. From an end market perspective,
Speaker #4: Growth was broad based manufacturing activity remains solid , particularly in heavy manufacturing , which continues to benefit from our faster expansion and momentum in key accounts Heavy manufacturing represented 44% of total sales and average daily sales growth in that segment was near the mid-teens , consistent with what we saw in the fourth quarter of last year Construction saw 17% growth , marking a strong turnaround from previous quarters .
Speaker #4: This increase was widespread, with both large national contractors and regional firms benefiting, and activity rising across key metro areas, especially in markets with infrastructure and commercial development.
Speaker #4: We also saw jumps from other non-manufacturing end markets , including transportation , warehousing , data centers and other industrial services . As demand improved across a range of customer types across materials , both direct and indirect categories grew in the low to mid teens Direct materials slightly outpaced indirect , supported by higher fastener penetration .
Speaker #4: Improved product availability and pricing actions . Categories like hydraulics , pneumatics , welding , and abrasives , and material handling also outperformed the company average , reflecting improving underlying activity levels Overall , while the macro environment remains unpredictable , our diverse customer base focus on key accounts and ongoing strategic initiatives allowed us to capture growth opportunities and continue to strengthen our market position Okay , turning now to slide six .
Speaker #4: Margin performance and drivers. We were approximately 40 basis points below our own Q1 gross margin target, as pricing actions did not keep up with cost increases.
Speaker #4: As the quarter played out. As a reminder, we said in our previous earnings call that roughly 50 basis points of margin pressure within Q4 was timing-related and should be added back into our run rate.
Speaker #4: And that played out as we had expected. You may recall that these items related to timing of inventory-related working capital and supplier rebates. What impacted us this quarter?
Speaker #4: Q1 was pricing versus cost tariff related costs moved through the PNL faster than our pricing , leaving us , as I said , approximately 40 basis points short of our own target and 50 basis points year over year on pricing .
Speaker #4: We realized approximately 3.5% year over year , and that compares to 3.3% in the fourth quarter , not enough to offset inflation While our pricing execution progressed during the quarter , we did not move quickly enough .
Speaker #4: Related mostly because of tariffs in some other items . As you can imagine , tariff uncertainty added additional challenges . In many cases , customer conversations and pricing actions took longer than usual as customers worked through their own planning assumptions and others .
Speaker #4: These conversations were delayed as customers and suppliers await further direction on tariff changes and potential refunds Importantly , we remain focused on maintaining pricing discipline over time and we focus on continuing to manage toward price cost neutrality We also experienced smaller headwinds from fuel and transportation costs and customer rebates during the quarter .
Speaker #4: Customer Rick's customer mix remained a structural headwind to gross margin as growth skewed toward larger customers that typically carry lower margins on the gross side However , these accounts are positive to operating margin due to strong fixed cost leverage , higher volumes , and improved operating efficiency .
Speaker #4: We continue to be comfortable with this trade-off given the long-term value of these relationships, and we continue to see the net positive impacts on our P&L fastener expansion.
Speaker #4: Benefits continue to provide a partial offset to gross margin pressure, as expected. These benefits will anniversary early in the second quarter.
Speaker #4: While we continue to pursue additional sourcing , pricing and product opportunities , productive opportunities across the business As a reminder , our faster expansion project did a number of things .
Speaker #4: It helped us capture higher margin business and it drove cost savings initiatives at the operating margin line Performance improved year over year and a declined from 24.3% of sales to from , sorry , two 24.3% of sales , compared to 25% in the same quarter last year , reflecting continued cost , discipline and leverage Importantly , we more than offset the reload of incentive compensation as well as our ongoing investments in tech analytics and sales support .
Speaker #4: In addition to our strong sales growth and cost management . We increased our return on invested capital by 180 basis points on a trailing 12 month basis , which shows our continued approach to capital allocation and maximizing asset productivity in total , our panel performance shows that we can invest for growth while maintaining a sharp focus on profits , even as our mix evolves and we pursue larger , more complex accounts Turning to the cash flow and capital allocation slide Operating cash flow was approximately $378 million , representing 111% of net income .
Speaker #4: Cash generation remains strong even as we added working capital to support growth. Accounts receivable reflects our expanding customer base and growth with existing customers.
Speaker #4: Our inventory levels show increasing efficiencies as we continue to find opportunities to optimize inventory while maintaining high availability to meet our customers' needs in accounts payable.
Speaker #4: Increased more than inventory , primarily as a result of some timing items associated with both inventory and non inventory payments Net capital spending for the first quarter was approximately 58 million , with investments focused on strengthening our hub and automation capacity Fastenal managed inventory , hardware capabilities and advancing our IT infrastructure for full year 2026 .
Speaker #4: We continue to expect net net CapEx of approximately $320 million as we invest in hub capacity . FMI devices , automation , and technology .
Speaker #4: These investments are designed to drive efficiency, stability, and customer value. To provide context, our average capital spending relative to sales over the last five years was about 2.5%.
Speaker #4: Compared to roughly 4% in the preceding ten-year period, meaning that we go through periods of different investment run rates. As we mentioned last quarter, 2026 is a year in which we will invest at the higher end of our historical range.
Speaker #4: If you compare our 26 estimate to the consensus revenue estimate for full year 26 , our capital expenditure range approximates 3.5% of net sales , reflecting our continued focus on investing to grow our business We returned 296 million to shareholders during the quarter through dividends and a small amount of share repurchases , which offset dilution These totaled 87% of net income , reflecting our confidence in cash generation and our commitment to returning value to shareholders Our capital allocation approach remains unchanged .
Speaker #4: We prioritize investing in the business where we see strong returns, while returning excess cash to shareholders and maintaining a conservatively capitalized balance sheet.
Speaker #4: In closing , I'll just summarize my slides before turning it to Dan . The first quarter reflected steady execution across the business . We delivered strong sales growth , disciplined cost management , and solid cash generation operating margin , expanded year on year despite higher bonuses and continued investments , demonstrating strong leverage within our PNL .
Speaker #4: This reflects our ability to effectively manage costs while supporting growth, and we continue to improve our return metrics, which we believe reflect the strength and durability of our business model.
Speaker #4: That wraps up my section. Thank you, and I'll turn it over to Dan.
Speaker #3: Thanks .
Speaker #4: Max , and good morning , everybody , and welcome to our earnings call . So I'm on page eight of the of the flip book .
Speaker #4: And from a market outlook standpoint . First off , as we , as we talked about in January , we've seen some improvements in what the market is willing to , to give us versus create obstacles for us Although there are only now starting to be realized .
Speaker #4: If you , after being at FASTENAL CO for 30 years , blue was always my favorite color . It's become even more so in the last 30 years .
Speaker #4: And despite the fact I'm from Wisconsin . Red is not high on my list of favorite colors If you look at the Purchasing Managers Index , we have an internal grid that that we've shared in the past at our annual meeting where we look at it and any , any month where the ISM is below 50 .
Speaker #4: We color that month red. And if you look at the last decade or so, you don't see much red on it until the last three years.
Speaker #4: And it was it was it was pretty constant . And in fact , it was every month constant . And we've had three months now where we're above 50 that generally gives us confidence that what we're what we're going to be seeing three and four months out .
Speaker #4: And so from that standpoint , our outlook is positive The other thing for me personally , that stands out when I look at this quarter is , you know , in the over the last six or so years , we really changed the focus of FASTENAL CO and kept diving into being a supply chain partner to support businesses and , and really , ever since we started the vending initiative about 18 years ago , and we slowed down our openings , we've been really in that mode .
Speaker #4: We just didn't always say it out loud , but one of one of the , the things that struggled as we were changing our , our , our format of how we go to market was our , our non-res construction business really suffered .
Speaker #4: If I , if I think of it coming out of Covid , it was growing in the mid single digits in that 23 to 24 time frame .
Speaker #4: It was actually negative mid-single digits through 2025 . It grew about 4% . We exited the year growing almost ten . And in the first quarter , that business is growing 17% .
Speaker #4: Now . That's only 8% of our revenues . I don't I don't want to overstate it , but it tells me a great supply chain partner is relevant to every industry that's out there .
Speaker #4: And that we could we are that partner and we can get traction in any end market . And all we have to do is understand that our end market and frankly , that end market has to understand why FASTENAL CO can be special for their business .
Speaker #4: But really exciting to see the the second bullet in the , in the market outlook , talk about talks about ongoing focus on price neutrality and managing tariff impacts .
Speaker #4: You know, one of the things we touched on in January is a wave of cost. We saw it coming in late last year and early part of this year.
Speaker #4: And in some ways , it relates to tariffs . But I'm not sure if it does . And it was our branded suppliers and branded suppliers have a unique market power in that if a customer wants brand X , that supplier can can , can , can push pretty hard and say , hey , here's , here's where the cost is .
Speaker #4: And we will share that with the end customer to really allow them to make the decision. Do you want brand X at this price?
Speaker #4: Do you want brand y at maybe a different price ? And the branded suppliers have been very aggressively in the last six seven months , raising costs and and some of it I'm sure is related to tariffs , either doing some catch up , some of it's maybe related to true inflation .
Speaker #4: You know , there are some commodities right now if you're if you're trying to source nitrile gloves good luck . Because the cost of that has gone through the roof in the last 60 days as a result of what's going on in the Middle East .
Speaker #4: But what we're really aggressively doing in the marketplace is arming our customers and our teams with information to make trade offs . We're arming them with , here's examples of brand X has raised their price of the cost of their product by six , seven , 8% .
Speaker #4: Maybe it's well defined , maybe it's a kind of a generic spread across everything type cost increase . Our job . And one of the conversations we had with our team earlier this morning is , I really challenge them from the standpoint of what I've seen from this group In the decade that I've been in this role .
Speaker #4: When this group needs to rise to the occasion and have communications, sometimes discussions that are, that are, that are challenging, that's what we're good at because that's being bluntly honest with your business partners.
Speaker #4: So we're having some of those conversations right now and , and those conversations were really challenged in the first quarter , partly challenged because of uncertainty around what the Supreme Court was going to rule as it relates to tariff , partly challenged by , frankly , fatigue of the last 12 months of the pricing actions that have been happening as supply chains have become more costly and and the real challenge to the group is we need to have those tough discussions every day .
Speaker #4: Sometimes it's about price, sometimes it's about changing product. Sometimes it's about changing from brand X to brand Y and getting through this with our customer.
Speaker #4: Moving on to the second item , financial discipline . This organization never ceases to impress me on their ability to perform . Really impressed with the the strong cash generation in the first quarter , Max touched on that our capital allocation will always be focused on growth of the business infrastructure to support that growth technology to support the efficiency of our teams and information available for our customers and ultimately , strong shareholder returns to that extent , our ROIC came in at 31% on a trailing 12 month basis A nice improvement over where it was a year ago and a nice improvement in where it's been for the last decade .
Speaker #4: From an organizational priorities standpoint, I touched on this a second ago, but we'll continue to invest in supporting the future of our business and our customer, with an eye towards technology investments that enhance our ability to be more efficient.
Speaker #4: You saw that play out in our SG&A this quarter, despite the fact this is our final quarter of reloading bonuses, because we reward the heavily driven based on earnings growth.
Speaker #4: And that ramped up dramatically in Q2 of last year. So we've now anniversaried that going into Q2 of this year, but it's also about being more efficient. That puts us in a position to do special things for our customers without wearing out our teams, and being able to reward those teams appropriately.
Speaker #4: And then strategic progress , as Jeff mentioned , our key account strategy is performing really well . New contract wins are strong . We continue to expand our FM technology deeper and deeper into our customer supply chains and we find success in a wide range of industries and one thing that shouldn't be lost on anybody looking at that table on page three of our earnings release , where we look at customer sites and sales segmentation , we have really strong growth with our customer groups .
Speaker #4: But interestingly enough , even though manufacturing is 75% of our revenue from a percentage standpoint , we're actually seeing stronger growth in the non-manufacturing from the pure number of customers doing 50 K plus , because while the company might have grown at 16% .
Speaker #4: Our Non-manufacturing customers grew at 25% . We're discovering success across a wide range of industries , a wide range of geographies . With that , we'll turn it over to Q a
Speaker #1: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad.
Speaker #1: A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker #1: We kindly ask that you please limit yourself to one question and one follow-up question. Our first question is from the line of David Manthey with Baird.
Speaker #1: Please proceed with your questions.
Speaker #5: Thank you . Good morning everyone . First question . When you say pricing actions will continue at a slower pace , the two questions on that one , does that imply sequential gains of this sort of 20 basis points or less sequentially quarter to quarter from here ?
Speaker #5: Or should we expect that to accelerate ? And then number two , if the first quarter of 25 , we're kind of using as a baseline , I think you talked about 5 to 8% ultimately , is that still the case ?
Speaker #5: And when would you expect to achieve price-cost neutrality?
Speaker #4: Dave , this is Max . I'll take I'll take the first part . And so because we continue to drive price actions , this doesn't stop .
Speaker #4: And we were behind where we wanted to be in Q1 . Those those actions will continue . And so although we're not guiding toward a Q2 , we would , we would do everything in our power to not see the same sequential move from Q1 to Q2 .
Speaker #4: So you can start at that as a starting point . But , you know , it's , it's our , it's in our ability to change that trajectory .
Speaker #4: And so I think that would come with just our statements from , from our prepared remarks that we , as Dan said , we've got a team that knows how to knows how to overcome some challenges .
Speaker #4: And then, if you could repeat the—could you repeat the second part of your question, please?
Speaker #5: Yeah. I was wondering about the baseline. I know there have been changes in the tariff landscape, but you originally were saying sort of 5% to 8% would be the peak level of pricing that you would see.
Speaker #5: And I'm also wondering , is number one , is that still the case ? Number two , when would you expect to achieve price cost neutrality if it's that 5 to 8 or if it's something less today ?
Speaker #4: Yeah , we don't have a reason to believe that , that , that , that estimate changes . I think it's , you know , it gets replaced essentially by one .
Speaker #4: 22 . So we don't in the timing , we feel like around mid-year ish , we're going to start to see some of that plateau .
Speaker #4: And so we're well , we feel like we got a good estimate on that part . We just have work to do to make up for some of the , the traction that we lost through Q1 .
Speaker #4: Again , a timing item . What we can't tell you is when when we recover that , but we're going after it . Okay .
Speaker #4: Dave , you might notice a little trepidation on our part to , to answer , you know , we probably over answered in January a little bit .
Speaker #4: And , and under estimated what it would be like to push a string through Q1 and , and it's been a slug or slug .
Speaker #4: Excuse me . Maybe a slug too , but , but the 5 to 8 was that's a cumulative number . That's not a quarter over quarter .
Speaker #4: So as we're anniversary , we go into Q2 that will eat some into that . So what we report on a year over year might not be that 5 to 8 , but it's a cumulative piece .
Speaker #4: I but the real challenge we have with our folks is we need to have strong conversations with our customers . We have customers that , that have business that turned on at different points in time .
Speaker #4: So it might be some new business that turned on and the facts have changed. It's always guiding that customer to what is happening with their supply chain and how we can address that.
Speaker #4: And sometimes it's substitution, sometimes it's price changes, but it's being candid with your customer.
Speaker #5: Got it . Okay . And then also , as it relates to the improvement you're seeing in the past , Fastenal has tried to ramp head count in anticipation or concurrent with an improving macro backdrop .
Speaker #5: I'm just wondering, should we expect a similar ramp if the backdrop continues to gain strength for you this time, or is there something different this time around?
Speaker #4: You know, I'll throw out a piece and then Jeff and Max correct me on what I messed up on, but I think we've really developed some nice efficiencies.
Speaker #4: We've gotten really focused on on identifying role specificity within our network . And , and I think our teams really have good capacity built in .
Speaker #4: One of the things we've done in the last several years come out of Covid . One part of our employee ranks that really were hollowed out was the part time ranks , because when schools go remote , you it's hard to find that .
Speaker #4: And it really dropped off. We've reloaded that portion, and what that is always about is our local district leaders having conversations to understand who in their team is ready to step up and take that next opportunity on business.
Speaker #4: That's turning on because everybody's looking out and saying, what business is turning on, because that's where the biggest need for headcount is.
Speaker #4: It isn’t always on that customer. That business is up 5% or 10% because we’ve taken on some new products. We’re really, really efficient at turning that kind of business on locally.
Speaker #4: And I don't know, Jeff, if you want to add anything to that.
Speaker #3: I would just say that the technology and solutions we're adding, and also our customer mix, we're making them more efficient. We're also making ourselves more efficient.
Speaker #3: So going back in the past , if you looked at our ramp up in revenue and then our ramp up in headcount , I don't think that same number correlates today as it did back then , especially with all the technology we have and efficiencies that we're adding in .
Speaker #3: I think that's part of the reason our SG&A leverage is so good.
Speaker #5: And we know thanks
Speaker #6: Just as a follow up to that , Dave , we as you can imagine , we know where we need to add . And so we feel pretty comfortable because there's a lot of pluses and minuses , meaning we have a lot of reasons , efficiency gains , and then we know where we want to plug to drive some further growth .
Speaker #6: So what you're seeing in the P&L and Q1 from leverage should be an expectation. We should be able to continue in that general trajectory.
Speaker #7: All right
Speaker #1: Thank you. Thank you. Our next question is from the line of Ryan Merkel with William Blair. Please proceed with your questions.
Speaker #8: Hey , everyone . Thanks for the question . I want to start off on the topic of pricing and being slower to pass that on to customers My question is , what are you doing to fix this issue ?
Speaker #8: Because this is the second time in the past year that we're dealing with this. Yeah. Thanks.
Speaker #4: Yep . Well , the first off , I'm , I'm pleased to say it's only the second time because in our goal has never been to be great at adjusting prices .
Speaker #4: Our goal is to be really great at informing our customer what's happening in their supply chain . And so with the chaos of the , you know , the last 12 months or more , maybe that's a win .
Speaker #4: The , you know , the biggest thing is , is really fine tuning some of the things we're doing . And quantifying it .
Speaker #4: I was on a conversation this morning, and Kevin Fitzgerald is the individual in the organization who leads our analytics team. And he was going through with our regional leaders some very specific outcomes that are needed from pricing actions.
Speaker #4: We're doing . So it's really dividing and conquering a little bit of saying , here's , here's where you have some flexibility . And frankly , here's where we don't .
Speaker #4: And , and I think it's like anything when you get pushed against the wall a little bit , you push back . I don't know , Jeff or Max .
Speaker #4: You want to add anything to that?
Speaker #6: I think it's good
Speaker #8: Okay . Thanks for that . And look , I appreciate it . Its difficult . It's a unique environment for pricing . And then I had a follow up to Dave's question .
Speaker #8: I guess—are you seeing suppliers continuing to push pricing? Do you expect higher inflation because of oil?
Speaker #4: Yes
Speaker #8: Okay. That's a really—are you seeing that price increases, or are you expect—
Speaker #4: Well , you know , I mentioned it in my commentary about nitrile gloves . I mean , that's not the biggest product line we sell , but it's a meaningful product line that we sell that price is going crazy because it's all petroleum based .
Speaker #4: So it really depends on what energy or petroleum content there is in a product that directly moves it. But there, you're seeing percentages that make some of these tariff percentages.
Speaker #4: We talked about in recent years look small . But again , it's a very small . I don't want to overstate a smaller category , but it's it's just an example
Speaker #6: And as you can imagine , it's just so volatile on a typical year , sitting here in a Q1 , we at least internally know that we've had , you know , 99% of the supplier increases if they're coming come through , but it's just this is just unusual times .
Speaker #4: I think our biggest challenge , Ryan , in a time like this . And I'm thinking of our supply chain teams more so than our discussions .
Speaker #4: Necessarily with our customer, but our supply chain teams of knowing where you push back and how aggressively you push back from the standpoint of, you can look at—we understand the cost components of products.
Speaker #4: We source for our customers, and we can share that understanding with our customers. And where there's a, there's a commodity that's going up and it's, and it's linked to tariffs or it's linked to energy prices, we can assess really quickly if that's real or if it's BS.
Speaker #4: And that determines how much you push back . So part of it is the art of how much you push back . And then once you , once you find the pieces that , that are truly legitimate of acknowledging that , that portion of the supply chain has become more expensive and conveying that to your customer , because we're not delivering a unique message to our customer because they're seeing in a lot of commodities or a lot of items that are sourcing outside of the Fastenal universe to
Speaker #8: Okay . All right , guys , very helpful . Pass it on . Good luck . Good luck .
Speaker #9: Thank you .
Speaker #1: Thank you. Our next questions are from the line of Stephen Volkmann with Jefferies. Please proceed with your questions.
Speaker #10: Great . Good morning guys . Thanks . I'm not going to ask about tariffs and pricing . But let's maybe shift to the growth side of the equation .
Speaker #10: It sounds like , Max , from your commentary around end markets , that growth is sort of broadening out . I don't want to put too many words in your mouth , but but are you expecting sort of growth to continue to accelerate ?
Speaker #10: We do have a little bit tougher comp in the second quarter. Just how should we think about the growth side going forward?
Speaker #3: Well , I'll take that , Max , you see you looking over my way . I think it's hard to tell right now with everything going on .
Speaker #3: I haven't checked the news this morning, but we're still cautiously, cautiously optimistic about the growth continuing. And we're seeing that across the board.
Speaker #3: We haven't seen any pullback . In fact , you know , if you look at our we don't like to give guidance . But if you look at our our April numbers that that markets continued to expand our markets .
Speaker #3: So, overall, it's hard to say what the rest of the year is going to look like. But right now, we're, like I said, cautiously optimistic.
Speaker #4: I'll add one piece on there, and it's a data point we put in our monthly sales release, and that is the percentage of our locations that are growing.
Speaker #4: There's always something , somewhere
Speaker #11: We
Speaker #4: Where a customer is down or a group of customers are down . I know I was watching our regional leaders pull together videos for our board each quarter , and we'll have 2 or 3 and , and one of them , I was watching this weekend this individual is leading a mature part of our business in the central United States .
Speaker #4: And he was talking about what's happening in his overall business , but he was also talking about two customers , his two largest customers who were down 20% .
Speaker #4: And so there's always specific reasons with customers . But when I look at the percentage of our locations growing , that's been stuck in the mid 60s , and that's a good place .
Speaker #4: That's been that's been in the mid 60s consistently now since last fall . And whereas , you know , a year ago or more , that was probably down in the low 60s or upper 50s .
Speaker #4: And so the closer that is to 70, life just gets a lot easier because you're seeing broad-based support from a geographic standpoint, which typically translates into support from an end market standpoint as well.
Speaker #6: And Stephen , let me just add one more quick point . If you break down , essentially our DSR , as you know , in , you know , run rates and you're an analyst , you'll you'll know that we're coming up on some headwinds from a pricing perspective , when we comp the prior year .
Speaker #6: So we are very confident in our shared gain opportunities because we believe we have a great business in that space . So our internally , we expect share gains to , to continue as they are to increase .
Speaker #6: But at the same time , when you model out , you got to everyone's thinking about pricing as well . We started pricing in Q2 of last year .
Speaker #6: And so we're going to start to encounter a little bit of a comp item on the top line in that regard.
Speaker #6: Of course, it doesn't impact operating profit because our pricing mechanics were there to offset cost increases. So just keep that in mind.
Speaker #4: The one thing I always counseled over the years is, focus on the sequential patterns of the business. Jeff talked about the fact that we're having really strong customer acquisition patterns.
Speaker #4: And despite the fact that we're adding customers at a rapid clip, that historically would pull down our dollars per customer a little bit, because the newer customers aren't as mature as the existing customers.
Speaker #4: That's not what's happening. So we're adding customers at a very, very rapid pace, but we're also adding wallet share at the same time.
Speaker #4: And our in our ultimate number is expanding . And Jeff touched on that in his commentary earlier that that makes me more bullish on what the future looks like because the economy is going to give or take what it gives or take what we take from others .
Speaker #4: And from the standpoint of market share gains, those are just pure wins.
Speaker #10: Great . That's great color . I appreciate that . And then , Dan , you mentioned slug or slug when you have these customer conversations , I'm curious though , are there competitors out there that are kind of not raising prices as they should , or is anyone doing anything competitively that's kind of holding this back ?
Speaker #4: You know , we're all we're all swimming in the same in the same water . And , that and that water is , you know , has a current to it .
Speaker #4: And that water is , has become more expensive . I that's a really lousy analogy . Sorry about that . But , but we're all impacted by the same economics .
Speaker #4: Are there examples where a competitor might get really aggressive with a customer circumstance? That's all. That's always true. And there's some of that.
Speaker #4: I think by and large , our industry is a rational industry . And , and , and the only time you see weird things , I've recently traveling in Indiana and there was a long term competitor that it wasn't that they were doing anything irrational , it was their businesses really struggling .
Speaker #4: And , and you see some , some signs of that of when , when organizations get squeezed too much , you see some competitors that either disappear or they have to downsize their operations .
Speaker #4: And we're seeing , we , I saw some of that . And again , one data point is on a recent trip down to Indiana , but but I don't think there's anything irrational going on .
Speaker #4: But that doesn't mean we don't have circumstances where somebody's trying to elbow out somebody else in a customer situation, but that's the exception, not the rule.
Speaker #10: Thank you guys
Speaker #1: Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question.
Speaker #12: Thanks . Good morning . Just wanted to . Yeah , I just wanted to . Just to kind of turn attention to the tariffs .
Speaker #12: How do we think about all the changes to , you know , iPad . Section 122 . The changes to the section 232 tariffs .
Speaker #12: Just how does that shake out for Fastenal Co?
Speaker #6: And we just if we think first of IPO , which is making the most noise . We've said in the past that that's a smaller , much smaller portion of the total tariff landscape for us .
Speaker #6: And so those, because they're largely replaced by 122 anyway, we don't see much activity within our P&L to speak to on that one.
Speaker #6: And even , you know , even the refund noise , once again , it's a it's a very small amount of our total business and our total tariffs .
Speaker #6: So from where , from our vantage point , it's , it's not in simply because it creates so much noise and it creates , as we said , the slog of pricing a part of that slog is driven by the uncertainties and tariffs .
Speaker #6: But I hope that gives you the context.
Speaker #4: The point , Max just made about the the impact , you know , it's it's the headline impact . You know , when the Supreme Court ruling came out , if you're a casual observer or if you're not really dialed in to tariffs , you can also look at it and say , I'm sure there's conversations that have occurred where I thought the tariffs were ruled illegal .
Speaker #4: And so it becomes an education endeavor. And then it becomes a negotiation discussion, as opposed to just a negotiation discussion. So, it's the headline impact.
Speaker #4: It just slows things down.
Speaker #6: And Nigel , just one more point . Just because you asked also , I did not comment on . 232 232 does not impact us .
Speaker #4: So, there was no change.
Speaker #6: No change . Sorry . Any discussion about changing ? It does not impact us . 232 is been with us for a while .
Speaker #6: Abroad . Yep .
Speaker #12: That's helpful . So no change . 232 that's that's kind of what I was asking about really . And then just , I mean , the price cost , it seems obviously , you know , the pricing conversation we've had that already , but obviously the inventory , the unit cost of inventory , the inflation embedded inventory coming through the PNL is certainly a factor as well .
Speaker #12: So I'm just wondering , are we now at a point where , you know , the , the headwind from the inventory conversion is now behind us .
Speaker #6: We're getting close . That's a bit what I was referring to when I was talking about the plateau of the costs . So yeah , we've got a little bit left in there , but we're around mid-year .
Speaker #6: We'll have pushed all that through, essentially.
Speaker #12: Okay. Thank you very much, guys.
Speaker #9: You're welcome
Speaker #1: Thank you. Our next question comes from the line of Tommy Moll with Stephens. Please proceed with your questions.
Speaker #13: Good morning, and thanks for taking my questions.
Speaker #6: Good morning. Good morning.
Speaker #9: Tony .
Speaker #13: So contract signings have gone pretty well. Pricing discussions are behind plan. My question is whether these two are linked. Is it the case that as you're bringing on new contract business, the pricing discussions don't proceed as fast as they might otherwise?
Speaker #3: No , I don't think so . I think it's more The current contract customers . And when we go to raise pricing , a lot of the contracts we have today have set terms in place .
Speaker #3: So we can't change pricing for 30 days or 60 days . And when the new when the Supreme Court came out with their ruling , a lot of those conversations almost got put on hold from our customers , really pushed back hard .
Speaker #3: But I don't think in a lot of the newer business that's really the case. I mean, we're pricing in a lot of that already.
Speaker #3: When we get the business, it's more the current contracts we have in place.
Speaker #13: Got it . That's helpful . Thank you . Jeff . And then follow up question on capital allocation . I wanted to ask about the repurchases , the dollar amount was pretty modest this quarter , but it has been some time since you've deployed capital .
Speaker #13: There . And I would like any kind of update you can provide on on a philosophy that may be emerging here or what was behind the decision making process to , to deploy those dollars .
Speaker #13: Thank you. Yeah, yeah.
Speaker #6: First of all , I do second , your point . It's it's small , but we just felt as a management team that we wanted to start to offset dilution .
Speaker #6: And so that is what we've done. We've done. And we'll see—that would be our approach going forward for a bit here.
Speaker #6: We can change our mind overnight . But that's what you're seeing . It's just just a simple mathematical offset of dilution . And we'll we'll as we always say , we'll remain opportunistic , meaning when the time comes , we'll , we'll do something else .
Speaker #13: Sure. Thank you for the insight. I'll turn it back.
Speaker #1: Thank you. Our next question comes from the line of Chris Snyder with Morgan Stanley. Please proceed with your questions.
Speaker #14: Thank you . You know , FASTENAL CO quickly , I guess on the fastener side , you know , the company turns the inventory very slowly , and that is always provided a lot of visibility into the future cogs .
Speaker #14: And it felt like you guys were always able to use that visibility or lag to very appropriately balance price-cost through prior inflation.
Speaker #14: Up cycles , whether it was , 22 , 23 or even last year , it seems like that is more difficult now to kind of match that price cost for the company .
Speaker #14: So I guess , is there a reason why , you know , you're talking earlier ? I think to Nigel about , you know , maybe a little bit more education that's needed this time around just because tariffs keep moving .
Speaker #14: Is that why , you know , it's more difficult to kind of execute and realize the price because it's you know , obviously been kind of falling short of expectations for for almost a year now .
Speaker #14: Thank you .
Speaker #4: So first off , we recently changed some of our reporting . And in that we talked more about our direct materials side of the business and our indirect material side of the business and really challenged our analytics team to follow suit and do that on how we think about gross margin and , and parse out maybe the faster business a little differently parcel to the product lines differently .
Speaker #4: What I can tell you is the struggles we have right now are not in Our margin is doing just fine . There . Where we're where some of the struggles are , is you start looking at some of the areas of the business that maybe have a little bit more of a branded presence , because fasteners don't really have a branded presence .
Speaker #4: There's , there's some , don't get me wrong , but that's not where the dollars are . Our safety margin is challenged . And because some of the branded presents are cutting tool margin is challenged because some of the branded presents .
Speaker #4: So the things that you've known from us historically is true , our fastener business , we have great insight because we have time , time on our side , and we can have those types of conversations with the customer , and we can really talk about this OEM fastener we have four months of inventory , and here's what the here's what the price is going to do at the end of that .
Speaker #4: Four months . So you can really have a different discussion because our customers know we're about managing price costs . We're not about inventory profits in the short term , because that's the relationship we have with our customer where we're getting squeezes on some of those branded products where our timeline to , to , to understanding the cost change and how fast it occurs in our , in our Fifo inventory is much different than what it is in our faster inventory .
Speaker #4: And that’s where we’re getting squeezed.
Speaker #14: Thank you . That's really , really helpful . Appreciate all that color . If I could just ask one on Q2 , it sounds like price costs will start getting better .
Speaker #14: You know, maybe into the back half of the year if I'm understanding the commentary. Right. But just Q2, does it get worse before it gets better?
Speaker #14: I would imagine some of the headwinds that came through on on the fuel side will be bigger in Q2 just because , you know , in Q1 , maybe only a month or so was impacted .
Speaker #14: So is there a little bit more pressure that's coming before we kind of get into the recovery? Or do you think Q1 is really kind of the trough of that price/cost?
Speaker #14: Thank you .
Speaker #4: So I'm going to answer this one only because I want Jeff and Max to take a step back. So, as you know, we're in a leadership transition here.
Speaker #4: And Max is relatively new in his role. And so I'm going to answer this based on 30 years of experience. Q2 is challenging.
Speaker #4: Q1 was challenging . Our message to our teams is here's what's happening . Here's what we need to do . I believe this team will react , but Q2 will be challenging and I personally feel good when I look out to Q3 and Q4 , because I know how long it takes to do certain things .
Speaker #4: There's price discussions . We've had going on since December that that there are price changes that we've made and some some went into effect 1st of March , some are 1st of April .
Speaker #4: There's some in 1st of May , 1st of June . And again , Jeff touched on it . It's about the contractual obligations .
Speaker #4: Sometimes it's just about negotiating, and finally agreeing on a price. It might be from the customer's perspective, where they have some ability on pricing and what they can do on their end from the standpoint of their marketplace.
Speaker #4: But Q1, we knew was that in January, that's the only place in my gut I didn't feel good, was Q1.
Speaker #4: And then once we once we have some certainty on , on the Supreme Court ruling , at least it allowed you to understand a piece we still don't understand some other some other aspects .
Speaker #4: And , and what other type of challenges there will be to tariffs coming down the down the road . But Q2 is challenging .
Speaker #4: And I believe the team can pull it off. And I—
Speaker #14: I think I really appreciate all of it.
Speaker #4: That's not a mathematical answer. That's just an honest answer.
Speaker #14: No , I appreciate it
Speaker #1: Thank you. Our next question comes from the line of Patrick Baumann with JP Morgan. Please proceed with your questions.
Speaker #15: Oh , thank you . Fit me on here . So I just wanted to touch on incremental margin expectations for for this year .
Speaker #15: Now , I think last quarter in response to a question Dan suggested that high 20s on incremental margins would be possible this year has has enough changed to , to alter your thinking there ?
Speaker #15: I mean , I think you're still lack the incentive comp headwinds in second quarter , which should be a nice tailwind for , for for the business from a leverage perspective , I guess I'm just wondering if the price timing dynamics have had enough of an impact to change your thinking on incremental margin expectations for this year
Speaker #6: No . Patrick , we don't believe we don't believe that is the case . There's enough efficiencies . We would say structural down in the s a space plus , as Dan said , there are actions that we're taking to mitigate the gross margin headwind that will be in a in an incremental space that we that we had expected in the past So just , just a short answer to say we confirm our previous statement .
Speaker #15: Okay .
Speaker #6: Now
Speaker #15: I just had one follow up on the tariffs . So on section 232 , so it sounds like FASTENAL CO is already charging for the full customs value based on your statements , did you observe any non-compliance in the industry that would that would have any impact on market dynamics in fasteners going forward ?
Speaker #15: Regarding the competition and how they were approaching, you know, charging for tariffs on imports.
Speaker #6: I know the answer is no on that. Nothing came to our attention.
Speaker #15: Okay. Thanks a lot, guys. Best of luck.
Speaker #9: Yeah . Welcome , Patrick
Speaker #4: I see we're at four four minutes to the hour . So if you have any follow up questions , I know Max is available through the balance of the day .
Speaker #4: Thank you again for joining our call today. And thanks for your support on the blue team. Have a good day, everybody.
Speaker #1: Thank you , ladies and gentlemen . This does conclude today's teleconference . We appreciate your participation . You may disconnect your lines at this time .
