Fastenal Company Q2 2026 Earnings Call | Onsite Enterprise Infrastructure Scaling Supports

Greetings and welcome to the Fastenal all Q2 2026 earnings results conference call. At this time, all participants are in listen-only mode. A question and answer session will follow a formal presentation. You may be placed in the question queue at any time by pressing star one on your telephone keypad and we ask you please ask one question and one follow-up then return to the queue. As a reminder, this conference is being recorded. If anyone should require operator assistance, please press star zero. It's now my pleasure to turn the call over to Dre Shriber. Please go ahead, Dre.

Welcome to the Fastenal Company 2026 second quarter earnings conference call. This call will be hosted by Dan Florness, our chief executive officer, Jeff Watts, our president and chief sales officer, and Max Hunliffe, our chief financial officer. The call will last for up to 1 hour and we'll 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 FAL 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 1st, 2026 at midnight central time. As a reminder, today's conference call may include statements regarding the company's future plans and prospects. These statements are based on our current expectations, and we undertake no duty to update them. It is important to note that the company's actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission and we encourage you to review those factors carefully. I would now like to turn the call over to Mr. Jeff Watts.

Thank you. Good morning everyone. Welcome to Fastenal's second quarter 2026 earnings call. I'm Jeff Watts, Fastenal's president and chief sales officer, and I appreciate you joining us all today. Before I turn to the results, I would like to take a moment and on something that I think matters to everyone on the line and that is that today will be Dan Florness's final earnings call as our CEO. Dan joined Fastenal, joined the blue team back in June of 1996 and he's been the steady voice explaining our business to this community for the past three decades, first as our chief financial officer and then as our president and CEO. Through multiple cycles, multiple recessions, a pandemic, trade shift, stock splits, through all of it, Dan's always had the same candor, the same humility, and the same unwavering respect for our people and for our shareholders. So to Dan, on behalf of every employee at Fastenal and every shareholder on the line, thank you for the leadership. Thank you for the discipline, and thank you for handing us a business as strong today as it's ever been.

Now, with that said, today isn't a farewell speech. It's an earnings call. And the best way I know how to honor Dan's last call is to walk you through a business that's executing. So, moving to our results. You know, Q2 was a very strong, high quality quarter for the company. Solid double-digit daily sales growth, operating margin expansion, return on invested capital at a decade plus high, and strong cash generation deployed with the discipline that defines this company. Our strategy is working and it's showing in the numbers. So turning to slide three. Now on the top line, daily sales grew 14.7% in the quarter, extending the pathway we built in Q1. So market conditions improved at a pace similar to last quarter. But what's important to point out is that our outperformance continues to be driven by share gains and not by the market backdrop. And that share gain is showing right up across all three of the pillars you see on the slide. First, increasing sales effectiveness, share gains driven by our key account strategy and by continued new contract wins. Second, enhancing our services, expanding our FMI device space and our digital footprint, improving the customer experience, driving retention and creating operating efficiencies in the process. And then third, expanding our addressable market growth driven by new customer site wins and deeper penetration across every one of our end market segments. Now on pricing and we realized approximately 2.9% in a quarter or about 4 and a half% on a stack basis versus roughly 3 and 12% in Q1. Now the sequential step down is not a change in posture. It's simply lapping the onset of pricing actions we took in Q2 of last year. Our pricing actions to mitigate cost and tariff inflation continue and our pricing discipline continues right alongside them. I know Max is going to touch a little deeper on this later in the deck. So now, one number I want you to focus on this quarter, and it's the customer site data on the right side of the slide. And our contract count in Q2 is up over 7% year-over-year, and the number of customer sites spending $50,000 or more per month grew at 16.5% over last year with revenues growing over 26%. Now, that's the shape of durable, high-quality revenue, larger customers, deeper contracts, and higher productivity per site. It's exactly what our key account strategy is designed to produce and it's the foundational momentum we're using to carry into the second half of this year and that momentum is being reinforced and scaled by our technology platform.

So moving to slide four which is our technology update and this is where the enhancing our services pillar comes to life in the numbers. Now starting with digital footprint, digital footprint DSR grew 16.2% in Q2, outpacing total company DSR, and now represents 51.6% of total sales, up 60 basis points from last year. And our estimate for 26 is 63 to 64% modestly below our original target of 66. And I want to be clear though on what this reflects. We're not slowing down on digital adoption. We're still driving customers to digital at a very strong pace. It's really the denominator is simply moving faster because our non-digital sales are growing right alongside digital as we take share and add larger and larger customer sites. And to me, I guess that's a healthy problem to have. Inside that though, e-business DSR grew 12.6%, steady and disciplined digital engagement that continues to broaden our reach with both new and existing customers. Now turning to FMI, the engine of our services strategy. You know, FMI technology signings were up 8.3% at 109 weighted devices signed per day in Q2, just under 7,000 total for the quarter versus 101 per day or just under 6,500 in total, same time period last year. FMI now sales now represents 44.6% of total sales, up roughly 60 basis points from a year ago. When I think about this, every one of these technology metrics, it's really a leading indicator. Devices installed today are deposits into next quarter's sales, into next year's retention, and into the operational rigor and efficiency that show up in our margin structure. Now, Fastenal has never had more contract customers, more large customer sites, more devices in the field, or more digital engagement than we do today. This is what durable, scalable growth looks like and why we're so confident in our pathway forward. With that, I'll turn it over to Max.

Thank you, Jeff, and good morning everyone. As in the past, I'll review three areas with you this morning. The business trends we saw in the quarter, the key drivers of margin performance, and how those results translate into cash flow and capital allocation. Overall, the quarter showed continued progress against our strategy, improving demand trends, solid execution across the business, and strong cash generation, even with continued uncertainty in the broader economy. I'll start on the business trends and market drivers slide. During the second quarter, the industrial environment remained stable and modestly positive, consistent with the trend we saw in the first quarter. US PMI averaged slightly above 53 for the quarter, up from 52 last quarter, and industrial production was slightly positive year-over-year in April and May. This lines up with the gradual improvement that started late last year. Our daily sales growth improved to 14.7 for the quarter, up from 12.4 in the first quarter, reflecting continued market outperformance. Growth was supported by new customer wins, increased share of wallet with existing customers, pricing and improved industrial production. Importantly, the improvement was not concentrated in any one area. It showed up across customer types and markets. Customer sentiment remained favorable throughout the quarter. While trade and tariffs uncertainty stayed in the picture, its impact this quarter showed up through cost planning and pricing discussions rather than demand. As a result, activity levels remain healthy and our teams continue to see strong customer engagement. From an end market perspective, this slide shows the breadth of that improvement. Manufacturing activity remained solid, led by heavy manufacturing where our faster expansion and key account momentum continued to pay off. Heavy manufacturing represented 44% of total sales and average daily sales growth in that segment was 18, continuing the upward trend that began last year. Construction grew approximately 17% for the second quarter in a row, representing a meaningful improvement from weaker trends we saw in prior periods. Within construction, electrical, utility, infrastructure, and data center related activity were among the strongest areas of demand during the quarter. Non-manufacturing end markets also contributed with gains across transportation, warehousing, and other industrial services as demand improved across customer types. Across materials, both direct and indirect categories grew in the mid-teens with direct materials slightly outpacing indirect. That mix reinforces that growth was tied to customer production activity and supported by higher Fastenal penetration, improved product availability, and pricing actions. The common thread across the strongest areas was larger customer engagement and project related activity which continues to support our key account strategy. That said, conditions were not perfectly uniform across all markets. While manufacturing and construction remained healthy, certain other end markets, particularly those tied to discretionary consumer spending, continued to lag. Overall, demand conditions were stable to modestly positive while cost inflation remained less predictable. In that environment, our diverse customer base, key account focus, and strategic initiatives helped us convert market stability into stronger growth and continued share gains.

Turning to margin performance and drivers, the key margin story this quarter is that we maintained operating margin, including a five basis point improvement despite inflation-driven pressures. Strong sales growth, SG&A leverage, and disciplined cost control more than offset net price cost headwinds. At the gross margin line, we contracted approximately 75 basis points year-over-year with price cost representing roughly 40 basis points headwind. On price cost, we improved approximately 10 basis points from the first quarter. Our pricing actions helped offset the ongoing impacts of tariffs and other inflation. We remain focused on pricing discipline and will continue managing toward price cost neutrality over time. Beyond price cost, we also experienced smaller gross margin headwinds from customer mix, transportation costs, and customer rebates during the quarter. Customer mix impacts are important to emphasize. As we discussed previously, our customer mix continues to shift to our larger customers by design as this is part of our strategy. While these customers typically carry lower gross margins, they generate attractive incremental profit dollars and we remain accretive to operating margin. The higher volumes associated with these relationships drive fixed cost leverage, improve asset utilization and create operating efficiencies across our network. As a result, although the mix shift can moderate gross margin percentage, it supports our broader objective of growing absolute profitability and expanding operating margins over time. At the operating margin line, SG&A improved to 23.5% of sales compared to 24.4 in the same quarter last year, reflecting discipline, cost control, and operating leverage. That leverage more than offset the gross margin headwinds and drove margin consistency year-over-year even with continued investment in tech, analytics, and sales support. In addition to strong sales growth and cost management, return on invested capital increased 180 basis points on a trailing 12-month basis, reflecting strong sales growth, good cost control, and disciplined capital allocation. In total, our P&L performance shows that we can invest for growth while staying focused on profitability even as our mix strategically shifts to larger and more complex accounts.

Turning to the cash flow and capital allocation slide, operating cash flow was 266 million, representing approximately 70% of net income. While the second quarter conversion rate was lower than last year, year-to-date cash generation remained strong as inventory efficiency helped offset the working capital needs associated with growth. Our second quarter conversion rate was driven specifically by higher accounts receivable, primarily driven by our strong June sales improvement of 20% year-over-year. Additionally, we continued to run inventory more efficiently, finding ways to optimize inventory levels while keeping availability high for our customers. The increase in accounts payable outpaced inventory this quarter, largely a function of payment timing. Net capital spending this quarter was approximately 60 million with investments focusing on strengthening our hub distribution center and automation capacity, advancing our IT infrastructure and investing in Fastenal Managed Inventory hardware capabilities. For full year 26, we continue to expect net capital expenditures of approximately 320 million as we invest in hub capacity, FMI devices, automation and technology. These investments are made to drive efficiency, scalability, and customer value. Based on current consensus revenue estimates for full year 26, our expected capex range represents approximately 3 and a half% of sales, reflecting our continued focus on investing to grow the business. To put this in context, our average capital spend relative to sales over the past 5 years was approximately 2 and a half percentage points compared to roughly 4 in the preceding 10-year period, meaning that we go through periods of different investment run rates. 26 is a year in which we will invest a little bit toward the higher end of that investment range. We returned 305 million to shareholders during the quarter, mostly through dividends alongside modest share repurchases. Together, these returns represented approximately 80% of net income, reflecting our confidence in cash generation and our commitment to returning value to shareholders. Our capital allocation approach remains unchanged. We prioritize investing in the business where we see strong returns, returning excess cash to shareholders, and maintaining a conservatively capitalized balance sheet. I'll summarize as I close my section. The second quarter showed strong topline execution, continued share gains, and disciplined cost management. Importantly, operating margin was consistent year-over-year as SG&A leverage and cost discipline offset gross margin pressures. That performance together with ROIC expansion and strong capital allocation demonstrates the durability of our business model. Thank you everyone and I'll turn it over to Dan.

Thank you. We will now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. And as a reminder, we ask you please ask one question and one follow-up. Once again, that star one to be placed in the question queue and a confirmation tone will indicate your line is in the question queue. Our first question today is submitted from David Manty from Bear. Your line is now live.

Thank you. Good morning everyone. Morning. Dan, what do you say? But it was an absolutely stellar run. Congratulations and thanks for everything. You all appreciate it.

So I guess that means that Jeff and Max get the tough questions here. Sales growth obviously terrific at 15%. And I the team has recently been signaling kind of 25% plus incrementals.

At this level of growth. And I know that Dan went through a couple of the items that affected that, but I'm wondering if you can crystallize that for us and talk about the puts and takes that sort of drove that contribution margin this quarter and more importantly as you're looking out to the second half. Which of those do you think persist and which of those may alleviate as we get to the back half of the year and lead to stronger contribution margins?

Sure, Dave. This is Max. I'll take that one. To start, if we think back to the first quarter of this year where we were disappointed in our net price cost position of 50 basis points, it's important to keep that component into context with the rest of my comments. The reason I say that is because as we moved forward, as we said in our prepared remarks and as Dan reiterated, we did eat into that 50 by 10 basis points, so we're focused there. At the same time, growing at significantly fast levels. Balancing and optimizing both of those we feel was a success mark on the quarter for us. With that being said, it doesn't mean that we dismiss the 50 and now -40 basis points, but that -40 basis points that we still sit with today, if you think about that from an incremental perspective, is going to be three or four percentage points on the incremental. So you get to the mid-20s when that net negative goes away, number one. And then number two, we did as Dan iterated, paid some bonuses on that growth and that also is a contributing factor. Now, the way you think about those is if we continue to grow like we want to, we're always going to have some bonus pay, so that one you could just miss out of the incremental walk. But that gross margin, our position is to maintain price cost neutrality. The second part of your question was when do you get there? At this moment, we're going to keep chipping away, fighting as fast as we can, but the trajectory is it's not something that we're expecting to be completely closed in the second half. We're going to continue to look at a lot of things we're doing from a growth perspective and continue to chip away at that negative price cost position. As we move through the year and chip that away, our incrementals will naturally improve back to where, like we say, if we're growing this fast, we should be mid-single digits. We are not backing off of that statement. I don't want to say commitment, maybe that's a little too strong, but we believe this business is set to drive the mid-20s when we're growing this fast, and we'll get back to that over time.

Got it. Thank you. And then Jeff, I dislike the question, well, what will you do differently? Because I don't think that's really applicable here at Fastenal anyway. But when I think about the past couple of CEO eras, I mean the Oberton era of store growth and the Florness era, I don't know, FMI and national accounts, etc. When you think about the range of tools that Fastenal has today, what are the strategic growth engines that you plan on leaning on to start the Jeff Watts era?

It's a good question. First, I'd say that this isn't a transition. We're sticking with the strategy that we've dealt with for the last two years. The three strategic pillars are going to be unchanged: increasing sales effectiveness, enhancing our services, expanding markets. But I think what changes is every day it seems like the AI portion and the tools that we're developing are helping us increase speed. I think one thing that's important to us, you saw it in June. June kind of shocked us a little bit, our revenue as far as our sequentials go and really digging in. There were some one-off orders that we were able to get that we wouldn't normally have gotten from new business signing some one-off type orders. But a lot of the business that we're turning on, we're turning it on faster now because of the tools that we've built. I think that is part of our strategic planning, but it's happening a lot faster than I thought it would. Like I said, June was a little bit of a surprise to us. I think the sequentials are still in place, but moving forward in the direction, I don't see a lot of change with what Fastenal is as a whole. Blue team first, decentralized decision-making, P&L accountability, promoting from within. It's all culture built over the last 30, 40, 50 years. That's not going to change. What I do think is we're going to look at harder and faster is the speed in which we go out and attain new business, grab new contracts, and expand our markets globally.

Got it. Yeah. Always a blue team effort. So, thanks everyone. Best of luck.

Thank you. Thank you. Next question is coming from Ryan Merkel from William Blair. Is my last.

Hey everyone. Good morning. And Dan, I want to echo Dave's comments. I can't believe this is your last call. It's been a great run, my friend, and I wish you all the best.

Yeah. Yeah. 20 years, Dan, we've been doing this. I can't believe it. But it's been a great run. Appreciate all your help. So, I want to start on price cost. You made progress but more to go. When do you think you'll get to neutral? I know that's a hard question. And then also comment on gross margins in the third quarter. Should we be thinking flat sequentially from the second quarter?

Got it. Okay. No, that's all fair. I appreciate that. Just to follow up maybe to Dave's questions on incremental margins, should we be calibrating to maybe low 20s incremental margins for 2026 at this point? And if you make faster progress on the price cost, maybe you get in the mid-20s. I know Q2 - this is hope - but we're seeing 21.5% on our P&L with this much growth. I would just say we hope that's our low point, but it's hard to predict with the cost inflation coming through. I think that's a safe bet. I think it's safe to do it that way. But as we chip away, we should be able to expand. We have a low point and we'd be heading toward the normal run rate business of mid-20s. It's tough to predict whether that's the end of Q3, Q4, but in that ballpark. Expect improvement as we move throughout. But it's not gonna be a Q3 jump all the way up to the mid-20s.

All right. Thank you. I'll pass it on.

Thank you. Next question is coming from Tommy Moll from Stephens. You're live.

Good morning and thank you for taking my questions.

First question on SG&A. Point taken. You paid some pretty healthy bonuses and commissions this quarter given the strong topline performance. At the same time, I would think you might still expect to see some leverage just thinking about those items as a percentage of sales rather than deleverage. So could you help us unpack some of the items that deleveraged this quarter? I wouldn't think that at this rate of sales growth we should expect those to continue to deleverage, but any context would help. Thank you.

Well, keep in mind SG&A did leverage about 90 basis points.

Oh yeah. Yeah. Point taken. I...

Yeah, sorry. Go ahead.

Yeah, I was more specifically talking about the items you referenced that did deleverage this quarter. I think it was fuel, transportation, travel, bonuses, commissions. There were a number of things mentioned on the call and in your materials that did deleverage. That's specifically what I was curious about.

Yeah, sure. I'll speak a little bit about that. We started just on fuel. As you can imagine, it's extremely volatile. If you would have asked me two weeks ago what I thought the future would hold, I would give you a different answer. First of all, the fuel component in our SG&A - we don't talk about the amount, but it sits in that remaining 30%. Dan, we've historically referenced 70% of our SG&A as people-related costs, so you do have a component of fuel in there that we started to see in Q1 as the conflict escalated. We experienced about a month of that headwind, and now we have three months of that headwind. That's one of those areas where even from the question of incrementals, if those fuel costs and associated oil-related costs dive more toward the second half of this year, we're going to start to see some improvement in incrementals there. But fuel is one of those that we're managing very well given the amount of volatility. It's still a headwind. Then we mentioned the bonus. The bonus is pure - we grew profit dollars extremely fast, and we like the fact that that's a headwind because it's a good thing for us, but it's part of our business modeling as well. Aside from that, there's not anything else that would be deleveraging in our SG&A. It's very small and we keep a very keen eye on it. I think you know us well, Tommy. We are frugal operators and we don't intend to change that frugality approach because it does well for our business.

Thank you both. As a follow-up, Jeff, I wanted to circle back to a comment you made regarding your priorities ahead here. One item you mentioned specifically was expanding markets globally. You've obviously got a lot of experience ex-US with the Fastenal business, and linking that to the comment you made today, I'm just curious for whatever thoughts you can share there on the future outside of North America.

That's right.

Yeah. I was just in an Italian business last month. Right now, I'd say we're just in the beginning stages of exponential growth, and we have such a talented team. I think the focus we need to look at as a company is speeding up the transition of certain tools that we need. We were lucky with Canada and Mexico - we kind of got to piggyback on the supply chain of the United States business unit when we first got going. When we look at international, one thing when we talk about M&A or acquisitions in the future, trying to take that timeframe from we could build it in 10 years to we could buy it and have that supply chain built in two to three, four maybe, is really a focus for us moving forward. We have such a huge opportunity when we look at the tools on a global scale. I always use the example of if you have a manufacturing facility in Chicago, you have one in Romania, Italy, China, we have the same tools, the same solutions in all of the countries that we're in today, all in the same platform. In our industry today, that doesn't exist. It's just us today. Our customers want it, they want it fast, and we just need to be able to keep up with the demand. I think that's where we're at right now - we're trying to keep up with the demand from our customer base internationally. It's a good problem to have.

Well, thank you, Jeff. I'll turn it back.

Thank you. Next question is coming from Christopher Schneider from Morgan Stanley. Your line is now live.

Thank you. I wanted to ask about the strategy and approach to pricing. Has there been any change there? And maybe do you guys think at this point in time or even going forward it's better to prioritize volumes over price cost? Because it just seems that you guys would be able to drive higher price if you need it. Demand is improving. I think the cost inflation out there is very clear to everybody. You mentioned advantages on the cost to deliver. So is it a matter of hard to get it or you just think that no, it's better to prioritize volumes? Thank you.

Thank you. I really appreciate all that perspective. If I could follow up with another margin question on SG&A, is there any way to think about or maybe separate the drivers in Q2 year-on-year SG&A expansion from the variable comp reset in general - sorry, variable comp and general inflation, which should remain in the model, versus fuel and freight, which could potentially ease depending on some of the Middle East resolution? I'm trying to get a sense for how we could see that line item shift as the year goes on. Thank you.

Yeah, Christopher, we don't historically break down into that level of detail. I don't want you to think that these are massive impacts on SG&A. They're sizable, but if you think about combined, if you take bonuses and transportation headwinds on the incrementals, it's a couple points. So it's not nothing for sure. It's a couple points. But I won't break it out further than that because these things are moving parts. The bonus, although it is primarily heavily weighted on pre-tax, is a bit more complicated when you look across our business because some individuals and teams are a little more balanced between topline and pre-tax, and some are ROIC. So there's not a real precise way to model it, but I just give you that for context. You're looking at if you didn't have the incremental bonus or the higher bonus as a percent year-over-year of growth, and if you didn't have the inflation, you'd be looking at a couple points of incrementals.

Thank you. Our next question today is coming from Chris Tanker from DA Davidson. Now live.

Hey guys, and Dan, speaking of milestones, congratulations. I mean, 30 years, it's really impressive. I would echo the congratulations of everyone else here. So thank you very much for everything. I guess the biggest question I've got walking away from the call today, if the FTE growth has been really impressively constrained? Has the formula really changed here? What kind of headcount growth do we need long term? Is this an aberration? Is this kind of the new normal? Maybe just any comments on what sort of energy is required to keep driving double-digit growth here.

Yeah, I appreciate the color there, Dan. It's really impressive leverage. So thanks for the breakdown. I guess just my follow-up really simply, any change in expectations for pricing into the back half of the year? Should we assume it's still kind of low singles, maybe even as high as mid singles? Just any color on pricing would be great.

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.