快扣 (FAST) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fastenal Company 2018 Second Quarter Earnings Conference Call.

(Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Ms. Ellen Stolts of Investor Relations.

Ma'am, you may begin.

Welcome to the Fastenal Company 2018 Second Quarter Earnings Conference Call.

This call will be hosted by Dan Florness, our President and Chief Executive Officer; and Holden Lewis, our Chief Financial Officer.

The call will last for up to 1 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.

Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal.

No recording, reproduction, transmission or distribution of today's call is permitted without Fastenal's consent.

This call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage, investor.fastenal.com.

A replay of the webcast will be available on the website until September 1, 2018 at midnight Central Time.

As a reminder, today's conference call may include statements regarding the company's future plans and prospects.

These statements are based on our current expectations and we undertake no duty to update them.

It is important to note that the company's actual results may differ materially from those anticipated.

Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission and we encourage you to review those factors carefully.

I would now like to turn the call over to Mr. Dan Florness.

Thank you, Ellen, and good morning, everybody, and thank you for participating in today's call.

I realize at this stage of the economic cycle, our industry is a bit out of favor.

But however, I believe we have a good story to tell and I believe our moat is expanding in the marketplace.

Let's start off by going to Holden's flip book.

If I look at some of the highlights he called out, I'll start with -- I'm on the right page.

I'll start with our nonresidential construction business is accelerating.

In June, we hit 17%.

In all honesty, I don't understand the strength behind it.

I know the things we've done to build momentum there.

I was very pleased with the progress we saw in the second quarter.

Our manufacturing demand is stable at very healthy levels.

Roll that together, we grew our sales 13.1% in the second quarter.

That's our fifth straight quarter of double-digit growth.

So when I think about it, I think there's 2 things that are noteworthy there.

One is we are growing on some good growth numbers, and I think that's a pretty strong statement.

The second thing is a year ago in late March 2017, we acquired a great organization in Michigan called Mansco.

We anniversaried that acquisition on March 31.

So our growth in the second quarter was 100% organic and we put up, I think, a great number.

If I look at -- on the operating income side, our operating income grew 13.3% which is a beautiful thing.

The -- our reported EPS was $0.74.

However, there was a discrete tax item in there.

So really pleased with the earnings growth we saw in the quarter and our ability to manage our expenses.

Holden will touch on some of this a little bit deeper later.

Onsite vending signings are on pace to achieve our 2018 targets.

As mentioned, we had significant operating leverage in the first -- in the second quarter, including employee-related expenses.

And our gross margin was stable on a sequential basis, which I think was an important thing to note.

And the real key to the stability from Q1 to Q2 from my perspective is we did a little bit better job using our own trucks.

We have always talked about the fact that we have a great trucking network we built over the last 35 years.

We have a structural advantage in the marketplace.

And frankly, the marketplace is becoming increasingly more expensive.

And so our ability to divert some of our shipments off of third-party carriers on to our own network serve us well in any economy.

It served us really well in the second quarter.

In the context of normal seasonality, our operating cash flow improved in the second quarter.

We repurchased some stock.

And as we announced last night, we increased our third quarter dividend from the $0.37 we have been doing in the first 2 quarters to $0.40.

Flipping to the Page 4 of Holden's book.

We signed 81 Onsites in the second quarter.

That's a 19% increase over the second quarter of 2017.

And we finished the quarter with 761 active sites.

That's a 57% increase over last year.

Our 2018 goal for Onsite signings remains somewhere between 360 and 385.

Total in-market locations were 3,051 at the end of the quarter, up over 2,937 a year ago.

What you're seeing before your eyes is a morphing of the Fastenal distribution model.

We are consolidating some locations throughout the marketplace, probably a little bit more in the major metros where we have a wide smattering.

And some of those locations are morphing into Onsites and so we continue to expand our in-market presence.

We signed 5,537 vending devices in the second quarter, a 13.5% increase over the second quarter of '17.

Our installed base grew 14.3%.

And the sales through our vending devices grew in excess of 20%.

Our 2018 goal is to sign 21,000 to 23,000 and we feel good about that goal at this point.

National Accounts daily sales grew 19% in the second quarter.

In June, we broke 20%.

I have to say that tasted pretty good and I was proud of the team and everything they're doing to grow their business.

Outside the U.S., our sales continued to well outpace the company and we're seeing great results within the U.S. and throughout the rest of the world.

Before I turn over to Holden, I just wanted to share some commentary and [call list] in the category of trying to be ever more transparent in what we do and what we're seeing in the marketplace.

And at 7:00 this morning, Holden had this typical call with our leadership group, our Regional Vice Presidents, our VPs that lead up support areas as well as our officers.

He discussed through the earnings release to give them more insight into what's going -- what we saw in the business.

And he gives me a few minutes at the end to throw in a few thoughts and I just thought to share with you some of the thoughts that were covered on that call.

The first one talked about with the group is we really decided that hitting goal matters.

We have hit goal -- January, we missed goal.

Weather messes up a little bit, so we came in just shy of goal.

Since February, we've hit goal every month.

And we have a big goal number in June I was pleased to say we hit it.

And in total for the first and second quarters, we hit goal.

Hitting goal consistently gives you confidence to invest in where you're going.

From a gross margin perspective, we maintained our gross margin.

And the mantra of, hey, just use your -- use our trucks played out really well.

We have a great, as I mentioned earlier, a great trucking network and we're tapping into it a little bit more.

We've been having a lot of discussions about expenses.

And this is one where, if I'm looking at myself in the mirror, I have to say either we're not communicating really well or you're not listening.

I think it's probably more we need to step it up on how we communicate so I'm taking that piece on from the standpoint, after the first quarter when we grew our labor expense about 14%, I got a lot of phone calls from shareholders and the sell-side community really wondering what the heck is going on that you're growing your expenses so fast and you're not able to leverage.

What we've been talking about the last 2 years is the investments we're making in growth drivers.

We made dramatic investments in our ability to sign vending devices.

We made tremendous investments in our ability to implement and improve our Onsite network.

We made sizable investments over a year ago in our ability to grow our e-commerce locally.

And the other piece is understanding the fundamentals of how we compensate.

Historically, a sizable piece of conversation within Fastenal has been incentive-based.

If you read our proxy, you can see that if we grow our -- if we don't grow our earnings, our leadership better enjoy living on base pay because that's the key driver of incentive comp.

In the first quarter of 2018, we added $21 million in pretax to our business.

That was double the $11 million we had added the year before when we compare '17 to '16.

That causes our incentive comp to grow quite dramatically.

And if I look at the 14% labor growth in the first quarter, 6 points of it comes just from expanding incentive comp.

One point of it comes from our Mansco acquisition and the other 7 comes from adding people in the organization.

If I look at the transition from Q1 to Q2, you saw our operating -- our labor expense growth drop 400 basis points from 14% to 10%.

What really changed there?

We put a little bit of a pause on hiring.

We had gotten ahead of ourselves, but that wasn't the real change.

The real change was we anniversaried Mansco.

And our incentive comp, while at a high level, is not disproportionately higher than second quarter of 2017 because in the second quarter of 2017, we added about $27 million in pretax.

In the second quarter of '18, we added $31 million.

The delta there isn't as great.

So our team, through authorization, are enjoying enhanced incentives, but they were second quarter last year so the comp is different.

I apologize we haven't -- that I haven't communicated that better, but we saw a nice change in our ability to leverage.

Frankly, I didn't think it was going to happen until the third quarter and the team did a nice job of deciding to move it up 3 months.

If I look at the MSAs -- and I've started to talk about that more.

I've talked about that in the President's letter.

I've talked about that in our -- at our annual meeting and in previous discussions.

We're really learning a lot by really taking a good look at those 100 large MSAs, communities over 0.5 million.

What is our plan in those markets?

Something that's jumped out for me, and this isn't an exclusive thing to the MSAs, but it expands out when I look at it from things we're doing.

And so yesterday at our board meeting, our -- the individual that leads the e-commerce drive -- within Fastenal, that's a relatively small business because there's so many things we do that don't lend themselves to e-commerce.

We do Onsites.

We do our local branch network.

In many cases, we're fulfilling things for our customers that they don't even have to order and so e-commerce really isn't part of the Fastenal model.

But one thing that's really -- was interesting to see is that as -- we've been quietly building momentum in our ability to go-to-market in a bunch of different ways.

And if I look at true local e-commerce transactions where we're taking advantage of our last mile advantages, that's about a $100 million business that's growing 30% a year.

I think that speaks well.

And forget the fact that's e-commerce.

It speaks well to the capabilities of the Fastenal organization to fulfill and to serve customers' needs.

And the interesting thing is we're seeing really nice growth within our Onsites as well.

It's about ease of doing business.

If I -- I'm also -- and bear with me a second.

I like milestones.

Sometimes, they're fun to point out.

And this is probably a ridiculous one, but bear with me.

If I go back to 1987, the year we went public, we had about 50 locations back then.

We had 300-and-some employees.

For the year, we did just under $20.3 million.

I believe it was $20,294,000 or something like that.

In the month of June, on a daily basis, we broke $20.3 million.

So in June of 2018, we did more revenue every day than we did 31 years ago, that company that went public.

That's a pretty neat milestone and I'm proud of what our team has done in that 30-some years to accomplish that.

Said another way, we're 254x bigger than we were 31 years ago, that's kind of fun.

I also thank our regionals and our VPs and RVPs for a great quarter.

I think they really demonstrated the power of the Blue Team and what we can accomplish in the marketplace and some of our structural advantages.

I'm blessed from the standpoint I have a wife that's not afraid to challenge me on most things in life, personal and business.

And there were days she was asking me some questions about the quarter and I told her I can't tell you because it's not public yet.

But all kidding aside, she was asking about what we're seeing from the tariffs.

She said, "You think your strength you're seeing is coming from the tariffs in the marketplace?" And I answered really quickly and with confidence.

I said, "Absolutely not." I said, "What our business is about is we're a supply chain partner and most of our customers are able to operate in a very lean environment because of what we do."

And I don't believe there's any impact from the LIFT other than if there's any impact to any of our customers in their activity that would create -- but there is no inventory build in the cycle from what I'm seeing, which caused me to immediately go to Holden and say, "Hey, Holden, this is what I told my wife.

Am I accurate?" And he canvassed our RVP group and he got a resounding no, we're not seeing that all.

So I thought I'd address that in the context of the time.

Second question she had, which was actually just as good as the first, was how does Fastenal react in an environment like this?

And I looked at her and I said, well, I gave her the proverbial I'm a farm kid and I learned at a young age you don't react to the weather.

You plan for it because you can't change it.

And this is just like the weather.

It seems to change on a daily basis.

What I can tell you is Fastenal's biggest strength is our field network, our branch and Onsite network.

We, unlike any other regional, national or global distributor, we source a tremendous amount of product locally.

And so we don't have a small centralized group that has to be really agile, although they are.

We have 15,000 people working in our branch and Onsite network that are agile every day.

So our ability, it's not easy to manage through it, but our ability to manage through it is stronger than anybody else in the marketplace.

And I would -- going into a period like this, the confidence I have comes from the team we have on the ground and that makes it pretty exciting.

When I was finishing up with the RVPs this morning, I didn't say this to them because I don't want to get weird on the call, but I thought back to a movie -- Gene Hackman is one of my favorite actors of all time.

And I thought back to a movie he made back in the early '80s called Hoosiers.

And at the end of the movie, he cites a line, as the scene is going dark, to his team that, I love you, guys.

22 years ago, I joined the Fastenal organization.

And I didn't join because of the growth of the organization.

I didn't join because of the opportunities of the marketplace.

And I didn't even join because of the great people.

All 3 of those were true.

I joined because I saw in Fastenal an organization that treats people differently than other organizations I'd seen in my prior experience.

And I want to be part of that, in an organization where you're inclusive and you treat others well and you invite others to join.

And the only requirement to join us, a willingness to learn and change, a willingness to help each other succeed and a willingness to be challenged by others and to be willing to challenge others to think big.

When you have all that, you have a home at Fastenal.

Come join us, we can do great things together.

And I think you see it come through in a quarter like this and in what we're doing and the evolution over the last few years.

I'll close with 2 thoughts and I'll turn it over to Holden.

My mom is having a double mastectomy at 11:00 this morning.

I wish her well on that.

I'm going to go visit her after the call, and Godspeed on her recovery.

60 days ago, my wife had the same surgery.

And I'm proud to say that today, she looks and feels better than she ever has.

So I'm thankful for organizations like (inaudible).

Our medical in this nation could do great things.

With that, I'll shut up and turn it over to Holden.

Thank you.

Thank you.

Good morning.

Why don't we go over to Slide 5?

As covered, the total and daily sales were up 13.1% in the second quarter.

That's consistent with the growth that we logged in the first quarter of 2018.

We estimate that pricing contributed between 50 and 100 basis points in the period, which is also in line with last quarter, although we should say that this quarter did have to grow over what were modest price increases from last year's Q2 and that did mask what was some incremental progress on price in the period.

The quarter finished on a healthy note with June's daily sales growing up 13.5%.

This represents a 13th straight month of organic daily sales growth ranging between 11.5% and 14.5% and that's despite the stiffening comparisons you've seen over the period.

In addition to contribution from our growth drivers as Dan discussed, this growth is supported by what remains healthy macro conditions.

The PMI averaged 58.7 in the second quarter and industrial production continued to expand at a low to mid-single-digit rate.

Nonresidential construction continued to accelerate for us, leading our mix this quarter with growth of 15.5%.

This includes growth of 17.4% in June.

Manufacturing end markets remained stable at high levels growing 13.3% with sustained strength in most sub-verticals.

And from a product standpoint, non-fasteners were up 14.8% and fasteners were up 11.1%.

Both were in line with the first quarter levels, though it's worth noting that fasteners in June grew 13.5%, which is the fastest rate we've seen this cycle.

From a customer standpoint, National Accounts were up 19.1% with 80 of our top 100 accounts growing.

And in June, our National Accounts grew 20.4%.

Growth in non-National Accounts continues to run in the mid to high single digits with roughly 66% of our branches growing in the second quarter.

In terms of market tone, sentiment in the field remains constructive, especially as it relates to the nonemployment -- I'm sorry, nonresidential construction market.

And the good demand of the past few quarters appears to be carrying into the second quarter of 2018.

Now over to Slide 6. Our gross margin was 48.7% in the first quarter of 2018, down 110 basis points versus the second quarter -- versus -- I'm sorry, our gross margin was 48.7% in the second quarter of 2018, down 110 basis points versus the second quarter of 2017.

While mix is always a factor given where we're seeing our strongest growth, it was a relatively minor factor this quarter.

There were 2 larger impacts.

In the second quarter of 2017, we had a modest price increase ahead of anticipated higher product costs, so the large decline in the current period reflects the degree to which of those costs have caught up.

Higher freight expenses were also a meaningful drag on the year-over-year basis.

Sequentially, on the other hand, our gross margin was flat.

There were no big movers in either direction, but seasonality was offset by a little extra leverage due to the strong growth, a slightly lower mix drag and steps to counter increasing cost of freight and imports.

Price-cost was slightly negative in the quarter and there is further work to do here.

We do believe we'll make further progress in coming quarters.

Our operating margin was 21.2% in the second quarter of 2018, flat on a year-over-year basis.

Stronger seasonal volumes and the lapping of certain cost resets generated 110 basis points of cost leverage at an incremental margin of 21.5%.

Looking at the pieces, we achieved 80 basis points of leverage over general corporate expenses and occupancy-related costs.

The latter was up 3% with growth in vending being partly offset by flattish facility expenses.

Employee-related costs were up 10% and that generated 50 basis points of leverage.

We were restrained in our headcount additions this quarter with total and FTE headcount being up just 3.4% and 4.7%, respectively.

This was aided further by inclusion of Mansco expenses in both periods and the moderation of the growth in incentive comp now that we have entered our second year of stronger growth.

Putting it all together, the second quarter of 2018 EPS were $0.74.

Though excluding a onetime tax item, this would have been $0.70 or up 36% from the second quarter of 2017.

In the absence of tax reform and the lower rate that it provides to us, EPS would have been $0.59 and growth would have been 13.8%.

We continue to anticipate a tax rate of 24.5% to 25% absent refinements in the application of or discrete events arising from recent tax reform.

Turning to Slide 7. We generated $152 million in operating cash in the second quarter of 2018 or 72% of our net income.

Second quarter is a usually lower cash-generating period due to our having 2 tax payments.

Still, we were pleased that the conversion rate in the current quarter was above the 57% average conversion of the past 5 years, which reflects the lower tax rates.

Based on our expectations for continued favorable cash flow, we have increased our quarterly dividend from $0.37, which we established in the first quarter of 2018, to $0.40 for the third quarter.

Net capital spending in the second quarter of '18 was $25 million, bringing our year-to-date outlays to $53.8 million, consistent with the first 2 quarters of 2017.

However, this reflects mostly timing and we would expect higher capital spending in the second half of 2018 for expansions and upgrades of hubs and for property purchases.

We've also identified a need to increase our spend for vending equipment given the strength that we're seeing in that growth driver and, as such, we are increasing our full year 2018 net capital spending projection to $158 million from our previous $149 million.

We increased funds paid out in dividends by 15% to $106 million and repurchased $40 million in stock in the period.

We finished the quarter with debt at 16% of total capital below last year and at levels that provide ample liquidity to invest in our business and pay our dividend, which we've actually increased for the third quarter.

The picture for working capital was improved versus the first quarter.

Inventories were up 11.4% in the second quarter of '18.

Inventory on hand fell 5.5 days, which we view favorably in light of inflationary pressures and plans for additional inventory investments in the field throughout 2018.

Receivables grew 19.6% in the second quarter of '18, expanding days by a little more than 3.5.

This continue to be affected by growth in our National Accounts and international businesses as well as customers pushing payments past quarter-end.

Fortunately, the intensity of this latter factor has moderated and we have not seen any meaningful change in [hard-to-reflect] balances.

That's all that we have for our formal presentation.

And with that, operator, we'll take questions.

(Operator Instructions) And our first question will come from the line of Ryan Cieslak with Northcoast Research.

The first question I had is looking at the June sales growth rate, particularly with fasteners, a big acceleration there from maybe what you guys were trending in May.

Dan or Holden, maybe if you could peel back the onion a little bit and think about what's ultimately driving that, is it -- do you say it's a combination of both the market accelerating there, but also maybe some share gains?

Just trying to get a better understanding on what's driving the acceleration in fastener growth there.

Yes.

I'm not sure that I have a tremendous amount of granularity there for you.

I would say that if I look at June, our fastener growth in most of our categories actually stepped up pretty nicely, right?

And that's true of our OEM fasteners, which, no doubt, the Onsite growth is playing a role on that as is the general economic strength that we've seen, but construction fasteners were up quite a bit in June relative to even May as well or March or April.

MRO was up as well.

So I would say that it's fairly broad, but we've definitely seen the same sort of acceleration that we've seen in the construction business broadly.

We've seen that in the construction fasteners, too.

And so I would look at it and I would say that we're seeing stability relative to prior quarters in many categories.

And in the construction piece, which is accelerating broadly, also we're seeing that from the fastener component of the construction, too.

So that's probably what I would say about those pieces.

Okay.

Great.

And then for my second question, really nice to see the operating leverage here in the quarter and the incremental margins within that range you've talked about.

It feels like as you're getting the back half of the year, you continue to lap some of the headwinds you saw last year from an expense standpoint.

And if I hear you right, you said price-cost dynamics, maybe there's some additional opportunity there.

How do we think about incremental margins then into the back of the year?

Is there anything that we should be keeping in mind from a negative standpoint or an offset that comes in that maybe keeps you at the low end of that range versus potentially getting into the higher end of that range?

Yes.

So what I would say is the components that drove it in the second quarter, I think those are intact in the third quarter.

And when we're talking about the occupancy leverage, the general corporate leverage, the OSHA continue to be leverageable pieces of our overall mix.

From an employee expense piece, yes, you're right.

The -- we've lapped those resets and that will certainly be true in Q3.

So that -- those pieces that led to this leverage this quarter, those are still very much intact as we go forward.

You combine that with double-digit revenue growth, assuming that, that's what we achieved in the third quarter.

And I think that, that is a formula to continue to make progress on the incremental margins, particularly because I would not expect the gross margin comp to be anywhere near as difficult, right?

So I mean, we did 21.5 against that gross margin.

It's fairly satisfying.

And I think that where you're going with this, is should we do better?

We should be.

I think that the math would tell you that we should do better in Q3 than we did in Q2 from an incremental margin standpoint.

The one piece that I will contribute to that is the strong work that was done by everybody at Fastenal to deliver that leverage in the quarter, that does also afford us the opportunity to keep investing in growth.

And so the -- there is the potential that we may choose to take some of that growth and reinvest it in the business to sustain the type of growth rates that we're having.

But yes, I would concur, Ryan.

I think the pieces that drove this incremental margin are still intact as you go to Q3.

We shouldn't have the same difficulty with the gross margin comp.

And if we continue to grow quickly, I think that the prospects for doing better on incremental margin in the back half are still pretty strong.

Our next question will come from Scott Graham with BMO Capital Markets.

Three questions for you all.

Number one, Holden, I'd harken back to the comments you made about a year ago that you kind of have to deal with 20 to 30 basis points of gross margin headwind from mix.

Is that still a number that you would go with?

And maybe talk a little bit about how you will backfill in the second half on that a little bit more.

Secondly...

Scott, let me take that in order.

And also, we're going to take 2, so think about the second question carefully before you give it.

Sure, no problem.

As it relates to your first question, yes, the mix elements are changing.

Again, with National Accounts growing as quickly as they are within the mix and with the Onsites growing as quickly as they are within the mix, they continue to contribute more to our growth overall each quarter.

I think this quarter, the Onsites were good for 4% of our -- contributed to 4% growth in our business.

And a year ago, that was 3.2%.

Those are mix issues that we're -- we're happy to take those on, but it does push the margin down.

And I still believe the 20% to 30% mix drag per year is the right number to think about.

I haven't changed off those terms.

Good.

Secondly, you've got some really good operating leverage at the operating expense line.

Could you talk about the sustainability of that and how you're looking at that in the second half toward some of the incremental margin comments you made?

Yes, I mean, not a lot to add versus what I just contributed.

Again, the pieces that drove it this quarter, I think those pieces are intact as you go into Q3 and Q4 in terms of lapping some of these expenses.

But what we won't have is we won't have the difficult gross margin comp.

And so you blend all that together, and there certainly is a path to doing better incremental margins in the third quarter and fourth quarter than what we did this quarter.

The only caution I threw out there was we're afforded the opportunity to invest in our business because of the leverage that we achieved this quarter, and we might reroute some of that into sustaining the type of growth that we've enjoyed.

And so I don't have a lot to add to that.

I guess what I'm trying to get at, Holden, simply is you have this gross margin headwind.

It's not going to go away.

Does that kind of get the entire company, particularly at the regional level, much more focused on their operating expenses to generate the leverage to offset that gross margin issue?

This is Dan.

I'll just chime in quick.

If you go back in time, a decade ago, we realized that we were talking about the pathway to profit.

And in that discussion, we talked about the inherent profitability of the Fastenal business and how that gets enhanced over time and how when you look -- when I look at our most mature regions that frankly have a higher percentage of Onsite, and in many cases, National Accounts business than the company average, they're also our lowest operating expense businesses and typically our highest operating margin businesses.

And it comes from -- part of the expense management comes from doing -- it's hard work.

If you do it every day, you don't let things slip through your fingertips.

You understand what's best-in-class across the organization.

But part of it comes from the fact the inherent leverage that comes in the Fastenal model.

When the average branch is doing 120 versus 100, you pick up hundreds of points of operating margin.

When it goes from 120 to 150, you pick up expense leverage and the -- and only partial offset to that can come from, in fact, your gross margin.

Typically, a branch doing 100 will lose 100 basis points of gross margin on its journey to 150 a month.

But it will also shed 450 basis points of operating expense, and your net win is a 350-point win.

And so it's really not allowing being a little bit lazy or a little bit lax on expense management today to let any of that slip through your fingertips.

That economic model is what affords us to do what we're doing with Onsite.

And at the Analyst Day, if you recall, right, we showed a couple of lines.

One was the gross margin declining over the past 30 years as we've invested in these growth drivers, and the other one is the SG&A as a percentage of revenues declining over 30 years as we leverage.

And I would just point you to the SG&A percentage in the first half of this year has never been lower in the history of our company, and that's how the model is supposed to work.

As Dan said, this leverage came through perhaps a quarter sooner than what we might have expected, but the model is working as we would have expected it to.

Our next question comes from David Manthey with Baird.

First off, looking at that number of top 100 National Account customers experiencing growth, I guess, it was 80 this quarter.

And Dan, in the earlier part of this decade, I think you were talking about 75 out of 100 was kind of normal.

What is the historical low and high in that figure?

I'm going off the hip here, Dave, so bear with me on that.

I believe, when I go back to 2015, I think we had a quarter where we got down on the 40s.

And as you know, that was not helpful to our business.

The -- what I don't know here is obviously we have a solid economy.

We also have some growth drivers at our fingertips that either weren't there or weren't contributing as high a level when I go back to 2015.

The Onsite, as Holden mentioned, has changed the game.

And 75% of our Onsites are with National Account customers, I believe that's the stat.

It's in the 70s.

And so we're seeing -- so it's what's the cause, what's the effect, or chicken and egg, or whatever analogy you want to use.

The economy has given lift, but our growth drivers are getting a lift.

The fact that our vending is operating at a really high level, that benefits all customers, including National Accounts.

So -- but 80 is a really strong number.

And when I go back to prior periods, we were able to grow our fasteners especially at this kind of rate.

You needed to be in the 70s.

Okay, maybe I'll follow-up on that.

But the second question for Holden, in -- where you're saying it picked up, I guess, $5 million to $10 million year-over-year due to price and you're saying this -- the price-cost equation isn't quite there yet, so I assume you're not fully recapturing your COGS increases.

But am I right to assume that you're capturing enough of it that you're picking up incremental gross profit dollars, Holden?

You're not actually going -- you're not getting lower gross profit dollars because you're upside down on that price-cost equation, are you?

No, we're not, we're not.

We're slightly underwater just with regards to our price-cost standpoint.

But as we said in the first quarter, we got a little incremental pricing in the first quarter from efforts that we put into place in the fourth.

We actually got incremental pricing in the second quarter over the first.

That was masked a little bit because in the second quarter, we were growing over last year's modest price increases where we were in the first quarter.

But we made some incremental progress on pricing.

There were certainly some incremental moves on the inflation side as well.

But yes, we're not backwards in that regard.

Our next question comes from Hamzah Mazari with Macquarie Capital.

The first question is just around tariffs.

You mentioned sort of they're not leading to strength.

Does that mean that you didn't see any prebuy related to tariffs?

And then maybe if you could just update us what your sort of direct and indirect exposure is to China sourcing.

Sure.

With regards to prebuying, I actually canvassed the RVPs this morning to get a sense of what they're seeing in the field.

And it came back fairly uniformly that we really aren't seeing anything or at least nothing is being discussed with us about prebuying product ahead of time.

Now to be fair, I'm not sure that gloves and goggles are necessarily the type of product that people load up on ahead of demand, right?

So we may not be that kind of product to that kind of company.

But we don't believe that, that is impacting our revenue growth rates in any meaningful way.

As it relates to the 232s and 301, 232 at this point is just beating inflation, generally speaking, with regards to that one.

As it relates to 301, and I think there's a couple of threads here, one is the first $50 billion that has been talked about.

There is not a huge impact on us from that.

Now that we've had a chance to kind of see how our products are being affected, I will probably stick with about $10 million of COGS perhaps being affected by that, although it's in places we haven't necessarily expected, sort of indirect shipments on things like ball bearings and welding consumables and things like that.

But it's a pretty small number, I don't think particularly meaningful.

And so if it stops there, I'm not overly concerned about the direct impact to tariffs.

I think the question you're really getting at is what happens with the other $200 billion, should they go into effect?

And honestly, at this point, we're not sure.

I mean, it's hard to sort of speculate on that.

I think you can make a case that somewhere in the neighborhood of 10% of our COGS may come from China directly and indirectly.

But I'm only guessing at the indirect piece.

Again, that's more art than science, figuring that one out.

It also -- I don't assume that everything that we get from China will be tariffed.

That would pull the number down, the impact down.

And of course, we would expect to be able to shift product perhaps from China to Taiwan or Vietnam or other sources.

I think one of the great values of having a significant local sourcing operation on the ground in that region is that we know where there's alternative source of product that we can [shift] as quickly as anybody else.

And so its conjecture as to what the impact will be, if any.

You would expect that it could have an impact.

But we have mechanisms and such to manage that.

Great.

And then just secondly, any color on just improvement in nonresi?

For you, it was pretty dramatic.

I know you have oil and gas in nonresi.

Do you attribute it to that?

And then is the margin mix on nonresi better than manufacturing?

Any color there.

The -- I think that the oil and gas and things around that are certainly helpful.

The other thing I would point out is relevant to manufacturing, right, we talked about how our growth has been up between organically 11.5% and 14.5% for 14 months -- 13 months.

That is not necessarily true of nonresidential, right?

I mean, for most of that period, our manufacturing was really driving that.

If you look at the quarter a year ago in non-res, we're up about 5.5%, 6%, right?

And so to some extent, I think what you're seeing is an acceleration off of some easier comps.

But I do think that also we're benefiting from having injected energy over the last 2 or 3 years into the effort.

If you remember, we really started talking about the tone around non-res starting to get better in March of last year.

And I think that, that tone transformed into actual facts on the ground in November, December of 2017.

And it's just continued to run from that point, and right now, it's running against relatively easy comps.

And so that's about the color that I have for that.

And from a margin standpoint, we always think about -- from a gross margin standpoint, construction fasteners fall somewhere in between the OEM fastener on the low end and the MRO fastener at the high end.

Our next question comes from Ryan Merkel with William Blair.

So just to follow up on price-cost, and it was slightly negative, so I don't want to make a big deal here.

But can you just articulate for our us why is price-cost negative?

What are the key issues there?

Well, I mean, the key issue is that inflation continues to run very quickly.

We -- I just said we've got some incremental pricing, but the quick math is we had feedstock or product cost that were -- was going up somewhat faster.

And so, yes, that's the environment.

I don't know what more to add to it.

I mean, it is inflationary for products and that inflation has not stopped.

I'll add just one thought to that, and I touched on this in April.

I think we really started the hard press about 4 to 5 months later than we should have.

We did some things last summer, Holden touched on that, where we were raising some prices.

Actually in second quarter last year, we got some nice lift in our gross margins.

We were actually ahead of it a little bit.

But November, December time, we really should have been putting on the hard press.

We have our meeting in December every year with our leadership we should add the hard press on, and I didn't really turn it on until April.

And that's completely on me.

And so we're a little bit behind.

And to give you a sense, right, so in Q1, we're sort of reacting to things.

I think in Q2, we actually put a lot of discipline in the field just in terms of the messaging.

And that messaging flowed down to the RVPs and into the field, and that was a part of that.

And then in Q3, we had some additional tools that are going into the field to hopefully make this pricing process easier.

And so that's why we struggle like everyone else does with what is ramping inflation.

But we believe that we continue to make incremental improvement each quarter, and I think that's going to continue into Q3.

Got it, yes.

I'm just clarifying that it's transitory and it's not anything that's structurally different than the past.

It was more just being late on passage of the pricing.

It's good to hear.

Yes.

And my second question -- okay.

And then my second question, the non-National Accounts, I think you said it was up mid-single digits.

And I don't think that has accelerated much, correct me if I'm wrong, over the past couple of quarters.

But my real question is, is that a market growth rate?

Are the smaller customers or non-National Account customers just not growing as well?

Or is it just not a focus for you and that's why the growth rate just isn't anywhere near the National Account growth rate?

Yes, I think there's a couple of things going on.

Our growth drivers, when it relates to Onsite, really benefits the National Accounts and a piece of the non-National.

If I think of the strength we're seeing internationally, that's much more akin to our National Accounts.

Heck, our National Accounts are doing a great job.

If I think of our local business, one thing that is impacting that.

And Holden, refresh me on the number.

I believe our branch count is down about 6% Q2 to Q2.

When we consolidate a branch in a market, historically, we've talked about 65% to 70% of our business is our top 10 customers in that branch.

That's real -- frankly, you can retain that business without a great plan because that's a group of customers you're just -- you're naturally engaging with.

And you do enough business that you -- everybody matters to each other from the standpoint of they know Fastenal is an important part of their team.

And we're typically delivering the product to the backdoor.

So the fact we're coming from a branch 2 miles away or 7 miles away doesn't really matter.

If you think of the other 1/3 of our business, so the other 35%, 5% of that is retail business.

And a piece of that retail business, you can tell, you have a high risk of losing.

Now in a $50,000 branch that you consolidate, there's $3,000 that's there and you're going to lose a piece of it.

The other 30% of the 35%, you need to have a really good plan in place to make sure you don't lose touch with that customer because that's a customer doing $300, $500, $700 a month with you, and your relative importance to them might be different.

And so there, we have to have a really good plan.

And so some of the delta you're seeing, I don't think it's because it's industry growth, which it happens to be.

I think it's a case of 6% of our branches disappeared, and so there is some impact from that.

Now does that account for why it's single-digit versus double-digit?

I honestly don't know.

But that comes into play.

And Ryan, I might contribute as well.

So I mean, we are growing in those -- in the non-National Account business faster than industrial production, which I think is meaningful.

In addition to what Dan talks about in terms of the branch closures, the Onsite growth, most of our Onsites are within National Accounts, but some portion of our Onsites are not within National Accounts.

And remember, we do shift revenue from a branch into an Onsite.

And so for those Onsites we sign up, maybe some of those had been serviced out of a store that wasn't a National Account business, and there might be a little bit of an impact there as well.

So there are a few pieces that are sort of working against that number being better than what it is today.

But it is outperforming industrial production, and we think the field is doing a nice job.

And it's helped perform in the organic growth of the industry.

Our next question comes from Adam Uhlman with Cleveland Research.

I was wondering if we could circle back -- I wanted to circle back on the investment drivers.

I guess, as we think about the back half of the year, you're -- we touched on it maybe a little bit, but the headcount growth has been relatively low.

And it would seem as if there might be some need to add additional heads into the back half of the year to support the growth that you're seeing.

And I'm just trying to understand how you guys are conceptualizing that investment spend in the headcount.

Could it be only a couple of points of extra growth?

Or is there something where we should be expecting a bigger ramp?

My message -- the message we've had to the team is where you're signing Onsites where you have business growth, add people.

And -- but we've been investing at a pretty healthy clip.

And as I mentioned by the first quarter, in all honesty, we've probably got a little bit ahead of ourself, and so we just put a pause on.

We didn't stop hiring, we put a pause on.

And -- but if you actually drift into the weeds a little bit, you'd see that from a pure headcount standpoint, there was more drop in the part-time than there was in the full time.

So the loss of hours and energy wasn't as great.

The other thing is as we migrate to a bigger -- an ever-bigger piece of our business being Onsite, we become more efficient.

If I think about some time ago, and I forget the exact time, it was a little over a year ago, we took over the hosting of our vending network.

What that afforded us to do is to interconnect the vending information much more directly into our point-of-sale system, so the lift, the workload for servicing vending, while it's still sizable, and we're doing things every day to make it a little bit more efficient.

It's much more efficient today than it would have been 12 months ago because the interconnectedness within our point-of-sale system and our trajectory system that runs the vending platform is much more seamless today.

But we will continue to add headcount to support our growth and -- but we're working against comps that are really different.

And that really is what speaks to Holden's confidence in our ability to achieve leverage.

Okay, got you.

And then secondarily, thanks for the disclosure on the e-commerce business.

That's a lot of incremental revenue off of a small base.

I was just wondering if you could touch on anything new or different that you're doing there relative to what you've talked about in the past and how big do you think it could get for you within your current business model.

Yes.

At this point, on the last part of your question, I'd be just posing a wild guess.

And my wild guess would be, frankly, no better than anybody else's wild guess.

If you -- but to the part of what we're doing different, for 3 years, our e-commerce was negative.

Nominal, and it was a relatively small business because it wasn't an emphasis point.

Our team, we started investing in resources into our team early part of 2017.

And we added an RESS, and I hope I have the acronym right.

Help me out, Holden, e-commerce sales specialists -- regional e-commerce sales specialists.

There you go.

Okay.

And it's a small team.

But really, what they're about is engaging with our branch network, our Onsite network, to go out and drive that.

Our IT team is operating at a higher level today than I've ever seen in my 22 years.

What the team has put in place -- we've always had great talent, but we weren't always able to muster up the resources to do great things.

And right now, we're doing some great things in the system they've put in place that we rolled out, what we call FAST 360°, a year ago.

And that's really a visibility tool for our customers to see what's on their plant floor, whether it's in a vending machine or in a bin stock location.

So many times, historically, customers don't know always what's in their facility because a lot of what we sell is coined MRO.

So when it's bought, it's expense.

So there's no visibility where stuff is.

Even on the OEM side, most ERP systems don't give you the level of visibility to know where stuff is.

Our FAST 360° does that for our customers, and we've rolled that out a year ago, and that's growing nicely in our business.

And it works out really well in our Onsites as well.

The team is really leveraging that start and our same-day capabilities at our branch network that really tap into -- we can do today what many companies aspire to do, and we've connected some of the dots electronically to do it.

But I don't want to get ahead of myself.

It's still a relatively small number, but we're tapping into making it easier to buy it from us.

Today, 90% of our sales go through an omnichannel, goes through -- we only -- we have 10% of our sales where the customer buys through one channel.

And that's typically our retail business and our -- what we call Tier 1 customers.

So relatively small customers that interact with us only at the branch level.

But when you start layering in where you source at the branch through an Onsite, through vending, through a bin stock, internationally, e-commerce and put all those together, that's 90% of our revenue.

So we're doing things today and we have been naturally for years what other companies aspire to do.

And you're just seeing it shine through because we have a group that has a really good plan and are executing to it.

But it's still a relatively small part of the business, and I haven't the foggiest idea where it will go to.

With that, I see we're at just a few minutes before the hour.

I hope I'm not cutting anybody off who had a question.

But thanks again for your interest this morning.

And I do sincerely believe we have a great story to tell.

The Blue Team is blessed with great people.

And I believe we do something special for our customers, and they recognize it and it affords us the ability to grow.

Have a great day, everybody.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program.

You may all disconnect.

Everyone, have a great day.