Hey, ladies and gentlemen. Welcome to the Fastenal Company Second Quarter 2016 Earnings Results Conference Call. As a reminder, this conference is being recorded. I would now like to hand this meeting over to Ellen Trester, investor relations. Please go ahead.
Welcome to the Fastenal Company 2016 Second Quarter Earnings Conference Call. This call will be hosted by Dan Florness, our President and Chief Executive Officer, and Sheryl A. Lisowski, our interim Chief Financial Officer, Controller, and Chief Accounting Officer. The call will last for up to 45 minutes 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 1st, 2016, 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. We undertake no duty to update them. It is important to note that the company's actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission. We encourage you to review those factors carefully. I would now like to turn the call over to Mr. Dan Florness.
Good morning, everybody. Thank you for joining our earnings call for the Second Quarter of 2016. I've been in my role here at Fastenal as CEO and President for I'm in my seventh month. Started it in January. Unofficially stepped into the role last October. I'm a firm believer. I have some CEOs that came before me at Fastenal that did an excellent job of doing two things, providing vision to our shareholders and to the employees of Fastenal, and providing perspective periodically on what we are doing for course correction as you go through a period of time. In the case of vision, I like to believe the vision that we laid out last November in our Investor Day and the envision that we believe, I believe, is the correct one for Fastenal, is being presented in a meaningful fashion. I think we're seeing traction on that.
From the vantage point of the second item, perspective. Perspective is looking at the business, in my mind, as you go through the quarter. Again, pointing things out. As you go through the quarter, you go through the year, you go through the month, pointing things out and seeing cause and effect from the standpoint of a reaction and improvement on certain things, or you accelerate on certain things that aren't moving fast enough. In that regard, I would have to say I let the Fastenal organization and our shareholders down in the second quarter because there were some missteps we made. Let's look at vision first. One thing that I think is critical to our success as we go forth in this year and into the years to follow, is the momentum we're building as an organization.
One of the hallmarks of the organization that I've known for, oh, just over 20 years. In June, I hit 20 years with Fastenal, a milestone I'm particularly proud of, is the fact that we are an organization that builds momentum. Whether that momentum is coming from the opening of stores, the adding of people, the signing of and installing of vending machines, we are an organization that creates momentum for ourselves, that allows us to separate in the marketplace our ability to grow long term. We operate in a large market, we have a large opportunity, it's upon us to build the momentum to go out and take that opportunity. We didn't have great momentum coming into the year, you see that shining through in some of our numbers this quarter, I'll get into a few more specifics in a second.
On the building of momentum front, in the first six months of this year, we signed 92 Onsites, 48 in the first quarter, 44 in the second quarter. Our stated goal is to sign 200 for the year. Personally, I want to have no quarter that doesn't start with at least a four, it'd be great to have a quarter or two that starts with a five. So far, I believe in the first two quarters of the year, we've made a tremendous transition in our ability to sign Onsites. Onsites, for those of you not familiar with it, is really about us setting up a store inside the customer's facility and having an even more intimate relationship than we've had in the past. We have currently 333, I believe that's the number, Onsites that are operating.
Of the 92, we've turned on, I believe, close to 50 Onsites. We're making very good progress on changing the organization to start building that momentum that we'll need as we go into 2017, 2018, and beyond. In regards to vending, in the first two quarters of this year, we signed 9,516 devices, we signed more in the second quarter than the first quarter. Earlier in the year, we added roughly 230 people into our business to support vending to drive our signings with vendings. I'll touch on a few stats in a second of why that's important, I'm proud to say that we're gaining some momentum there. Part of the process with this new group of people was to go out and optimize our existing devices. In many cases, that optimization involved adding products into the machines to improve the throughput of the machine.
In some cases, it was changing the configuration of the machines to improve the efficiency of replenishing the machine. An optimization isn't all revenue-based, it might be a service-based aspect. We've optimized approximately 75% of our machines in the first six months of the year. That's the good news. The second set of good news is we continue to see good statistics out of those group of stores. The bad news is it also required the removal of a certain number of machines. We removed 7,200 machines in the first six months of this year as we went through our optimization process. Many of those machines that we removed are great decisions, because we went from 10 machines to nine.
We went from four machines to three, because we really rationalized the equipment we needed to support that customer, and that's a great decision because it allows us to get a better return on that asset that's deployed. Unfortunately, some of the machines we removed were examples where we had a machine in an environment where either the business had changed or the business never truly justified the vending machine, and we went from one to zero or two to zero. I believe we have a much better vending business today than we had six months ago, and we continue to see great traction in our signings. Every day we're doing a better job vetting new signings than we did the day before. We're becoming a much better vending company. If I look at the second quarter, we grew our business just under 2%.
Our vending customers grew just under 3%. Those customers, like many of our customers, especially in particular industries heavily hit by either weaker energy prices or weaker activity in the industrial marketplace. Our fastener business with vending customers was down 5% in the second quarter. That group of customers that grew 3%, their fastener business with us was down 5%. I think that's an indicator of what's going on in their economic circumstance. The non-fastener business with that same group of customers grew about 6%. If I take it one step further, the dollars going through the vending machine grew about 11. What we're seeing is a group of customers, about 45% of our revenue is with customers that have vending. Our revenue with that group of customers is growing at about twice the rate of our overall business as a company.
That group of customers is as hurt by the economy as any other group, and you're seeing that shine through in the fastener business. Our non-fastener business continues to grow very well, and our business through the vending machine is growing double digit. We believe vending is an example of engagement with our customer, just like Onsites is an example of engagement with our customer. We believe we're building momentum that will serve us well in the years to follow. The third piece of momentum I believe we're building is our CSP 16. I believe we're at about 1,900 stores converted. Our CSP 16 is largely in place with the revenue drivers of our business. What I mean by that is there are some stores that have yet to convert. They might be smaller stores or stores that are in the process of moving.
Our revenue base is largely complete as it relates to CSP 16, that positions us to be a better same-day supplier to our customers, be a more efficient supplier to our customers, broaden our appeal on the range of customers that can buy from us. I believe that will serve us well in the months and years to follow. Finally, we have very good momentum on our national account signings. We highlighted that in the points raised, I believe it was on the second page of the press release. That's being helped by Onsite signings. Onsite signings are being helped by that. They serve each other well because 75% of our Onsites are with national account customers. That's the vision and I believe the momentum we're building as we go through 2016.
The perspective part and the part where, as I mentioned earlier, I think frankly I could have done better is from the standpoint of providing perspective to the team at Fastenal. Our top 10 customers in the first quarter, our top 10 customers represent 8%-10% of revenue, depending on the month to quarter you're looking at. That group was growing at about 14% in the first quarter, largely buoyed by a few customers that were new to that group. The key to that group every year is, what is the new blood you're bringing into it, and what are you doing with your existing group of customers that were in there in the past? In the district level, we refer to that as our top 25. At the region level, we refer to that as our top 300 customers.
It's really what's happening with your big customers, what new customers are you bringing into that group. The growth with that group, which was double digit in the first quarter and was double digit in April, went to 0% in the month of May and went to -6% in the month of June. In the second quarter, that group of customers grew at about 8%. If I look at the top 100 customers in our business, again, they represent about 25% of our revenue. The top 10 I just talked about would be a subset, clearly. In the first quarter, that group of customers grew about 4.5%. In the month of April, that group of customers grew 6.5%. In the month of May, that group of customers contracted about 2%. In the month of June, that group of customers contracted about 2.5%.
For the quarter, that group of customers, which grew almost 5%, 4.5% in the first quarter grew 0.7% in the second quarter. When I look at that group of customers, I see that sudden falloff as an example, not of the momentum we're building, but of slowdowns with momentum we've built in the past, with customers we've added in the past, where we have a large market presence, and that business fell off later in the quarter. The perspective part that we failed on is we didn't react fast enough, locally and company-wide, to that falling revenue in the months of May and June. As it relates to gross margin, you'll notice a couple of things omitted from our press release this quarter. One is a stated range. That stated range was not removed because I felt it was accurate.
It was removed because it was becoming too much noise to our conversation. I believe you own Fastenal because Fastenal is an organization that builds momentum and carries that momentum forward, and is good enough at executing the business that we're able to capture that momentum in very attractive profit growth over time and very attractive returns. Our focus internally is 90% on building the momentum. In the case of gross margin, our gross margin dropped about 30 basis points during the quarter from the first quarter. About 25 basis points of that drop was tied to some of the activities around a very rapid CSP16 rollout, and really more than that, a number of efficiencies we introduced into our store network.
Inventory by location, they come under a bunch of names, we're introducing, and we wanted to do it very rapidly, maybe a little bit too rapidly. We wanted to do it very rapidly to move forward. During that process, there were some components of our inventory we decided to sell off at a lower price. There were some components of our inventory that we decided to remove from our business. There's about 10 basis points of that drop that I believe are behind us. There's about 15 to 20 basis points of that drop that I believe will remain for several quarters. I was willing to move quickly on that as we entered the second quarter because I felt there were other things we were doing that we could fund that, if you will, by other gross profit initiatives.
Those didn't materialize, unfortunately, the gross margin that you see as a result. Related to operating expenses, there's really probably two things that are noteworthy in our operating expenses, and Sheryl's going to touch on a handful, go a little more depth on these and a few more. The two things that jump out for me, our fuel costs were up about $2.5 million from Q1 to Q2. That's a fact of the price of gasoline at the pump and diesel fuel at the pump. Where we didn't execute real well is we didn't react quickly to adjusting some of our store routes, our local routes. More importantly, we didn't react very quickly to our propensity to charge freight, and therefore, we largely bore that expense without sharing any of that expense.
The second one, this is a mechanical thing, it's something that I talked about with many of you over the last year on earnings calls, that is, historically, we have a very good flex in our operating expenses as it relates to incentive comp and what it means in the short term for our ability to absorb some worsening environments and a little bit of the incremental margin we give back in strong periods. That is, as we had gone through 2015, our incentive comp was compressing dramatically. If you take a look through our proxy, you could see that from the standpoint of the impact on the executive compensation. It contracted dramatically. The district and regional and store leadership component of that is at a compressed level.
The ability to flex there is limited in the current environment, and you saw that shine through, unfortunately, in the current quarter. Finally, two things I'll touch on, and it really relates to the momentum items I was discussing earlier, and that is, and we highlighted it, we installed during the quarter approximately 3,000 locker lease devices under our locker lease program that we initiated earlier in the year with Walmart. The total rollout of that will be approximately 15,000 devices and will roll out as we go through the balance of this year and I believe a little bit into early next year. We think it's an excellent program for us long term, and we entered into it. The second one is at our Investor Day last year, we unveiled our outdoor locker. As of today, we have approximately 30 outdoor store lockers in place.
We expect to have about 50 by September. While it's not very meaningful from a revenue perspective, and it won't be very meaningful from a revenue perspective when I look at 2016 or 2017, it's a step we're taking and one more means to be a much better supplier to our customers. With that, I'll turn it over to Sheryl.
I will start by providing an overview of our operating and administrative expenses. Regarding employee-related expenses, we added approximately 800 people to the Fastenal organization in the last 12 months. Approximately 37% of these people were added to a store or some other type of selling location. During the first half of 2016, our payroll-related expenses increased due to the addition of personnel related to the acquisition of Fasteners, Inc., which occurred in November of 2015, and the addition of vending specialists, information technology development resources, and distribution personnel. We also experienced an increase in our healthcare costs. These increases were partially offset by contraction in our performance bonuses and commissions, and in our profit-sharing contribution, primarily due to lower sales growth and due to lower operating income, both on a dollar basis and a relative basis.
The increase in the second quarter of 2016 when compared to the second quarter of 2015, was driven by the same factors as the six-month period. Regarding occupancy expenses, the increase in the first half of 2016 when compared to the first half of 2015, was driven by an increase in industrial vending equipment and also an increase in investment in our distribution infrastructure over the last several years, primarily related to automation. The largest impact related to the industrial vending equipment. The increase in the second quarter of 2016 when compared to the second quarter of 2015, was driven by the same factors as the six-month period. Selling transportation costs, including operating and administrative expenses, increased in the first half of 2016 when compared to the first half of 2015.
This was driven by an increase in the number of vehicles for sales personnel and the timing of leased vehicle sales, which was partially offset by a decrease in fuel cost. The increase in the second quarter of 2016 when compared to the second quarter of 2015, was driven by the same factors as the six-month period. During the second quarter of 2016, we did not repurchase any stock. However, in the first quarter of 2016, we purchased 1.6 million shares of our common stock at an average price of $37.15 per share. We spent approximately $396 million buying back stock since June 30, 2014, and repurchased approximately 3.3% of our shares outstanding from the start of this timeframe.
Regarding net capital expenditures, in the first half of 2016, our net capital expenditures expressed in dollars and as a percentage of net earnings were $86 million, or 33.3% of net earnings. We expect our net capital expenditures to be approximately $200 million in 2016, we plan to fund a portion of our planned capital expenditures with the proceeds of a private placement of debt. We expect to close on this funding in late July 2016. Regarding operational working capital, on a year-over-year basis, our inventory grew by $108 million, this growth was driven by the following factors: CSP 16 was approximately 50% of the increase. Our international inventory growth was approximately 9% of the increase. The acquisition of Fasteners, Inc. related to 8% of the increase. Onsites and large customer impacts were approximately 14% of the increase.
From a cash flow perspective, our operating cash flow as a percentage of net earnings contracted slightly in the first half of 2016 when compared to the first half of 2015, due to our current initiative to add additional products into store inventory under our CSP 16 format. This was partially offset by a reduction in net cash used to fund accounts receivable. Our first quarter typically has stronger cash flow characteristics due to the timing of tax payments, this benefit reverses itself in the second, third, and fourth quarters as income tax payments go out in April, June, September, and December. Our free cash flow year-to-date for 2016 is 63% of earnings, which compares to year-to-date 2015 at 66% of earnings. Last night, we announced a Q3 dividend of $0.30 per share.
As a takeaway, I'd like to share with the group that we have a strong cash flow, we're optimistic about our cash flow potential throughout the year. With that, I turn it over for questions from the group.
Ladies and gentlemen, to ask a question, please press star then one on your touch-tone telephone. If your question has been answered and you wish to remove yourself from the queue, you may press the pound key. In the interest of time, we are asking you to limit yourself to one question and one follow-up question only. Our first question comes from Robert Barry with Susquehanna. Your line is open.
Hey, guys. Good morning.
Good morning.
Good morning.
Dan, I wondered if you could just provide a little bit more color on June sales, what verticals slowed, especially in light of the ISM, which seems to be showing improving conditions. I wonder if you'd attribute any of the pressure to things that might be considered temporary, like these extended shutdowns you mentioned.
In the construction front, we saw a slowdown in our energy customers and in both May and June, a piece of that is we're seeing projects that were still going on from a year ago that just are not being replaced. I would not look at that as a temporary one. On the temporary front, we saw quite a few customers that were shut down. I think our largest impact was actually an Onsite we have, where the customer was shut down for three weeks of the month in doing maintenance. The week of Memorial Day in early June, we saw shutdowns. We saw some shutdowns here over the week of July 4th. I believe those, while they're temporary, will impact third quarter as well because of the July 4th, and I would suspect there'll be some over Labor Day as well
Yeah. I know it's probably hard to quantify, but any rough estimate of the extent to which these temporary items weighed on June or the quarter?
Well, in the case of June-
I guess.
Yeah. In the case of June, I could comfortably say a percentage point of revenue. Going beyond that, I wouldn't be as comfortable.
Yep. You also mentioned pricing as an impact from deflation. Can you dimension that? Given steel prices have started to rise, how should we think about that potentially becoming a benefit?
We were seeing probably more propensity for fastener prices to rise two and three months ago. While there still are examples of that, some of the propensity has lessened. For that one, I'm less certain. I think that's probably more about we need some traction in the economy to make some of that become a little stickier.
Yeah. The steel price rises aren't yet a potential tailwind, just not enough for long enough, or?
They're not as pronounced. Like I say, we were seeing more of that two and three months ago. While there still are a lot of discussions both on the fasteners and the non-fasteners, I would say it's probably less noise from it now than there was two or three months ago.
Got you. Thank you.
Yep.
Our next question comes from Christopher Dankert with Longbow Research. Your line is open.
Hi. Morning, guys.
Morning.
Last call, you've been talking about being able to hold gross margin flat or roughly flat, kind of through the rest of the year. Just kind of given what we've seen pricing wise and demand wise, I guess, could you kind of give us some sort of size of what you do expect for the full year now as far as, is it 49.5%, a better benchmark now?
Mike, I don't know that my credibility is real good on that right now, given some of the statements made in the past. What I touched on is we saw about a 25, 30 basis point drop, largely because of a few, what I'd consider, internal shorter term things that we decided that we were moving quickly on and decided to do, to be honest with you. I felt we had enough momentum of other things in place to mask that in the short term. My comments here are short term centered and short term being 2016, because longer term, our Onsite business, which runs in the mid-30s, as we gain traction in there, will become a more meaningful piece. If you're looking out a longer term, three to five years, I would expect some compression in our gross margin solely because of mix of business.
Okay. That's helpful. Thank you. Then I guess, I don't believe I missed it, but is there any way to quantify the exact sales impact from CSP or some of the on-siting stuff? I know you've given us some decent progress numbers as far as how those have rolled out, but is there any kind of revenue impact you can give us?
I plan on doing a little bit more of that in the Q3 call, only because the last of our CSP conversions were occurring in that early June timeframe. We really don't have enough time under our belt because there was a lot of activity going on in the first and second quarter, and a lot of it in the second quarter. In the case of the Onsite, we wanted to get a little deeper into the year and then do some discussions on the 80 we signed last year, what we're seeing, what we're learning from it. The 92 we've signed in the first six months of this year, what are we seeing. For the time being, I'll hold off on that.
All right. Thanks, Dan.
Yep.
Our next question comes from David Manthey with Robert W. Baird. Your line is open.
Thank you. Hey, Dan. Good morning.
Morning.
When you think about the growth of the company today and the buildup of sort of a secular growth rate, market growth, share gain, vending Onsites, price, et cetera, how do you think about the growth of Fastenal as it stands today?
Give me your timeframe, Dave, so I can.
Yeah, I'm talking.
You're looking at kind of a multi-year thing?
Definitely. I'm talking 3 to 5 years, kind of secular from here over the next several years.
Yeah. We talked in the November Investor Day about the number of Onsite potential, the number of vending potential, and our existing store potential outside of those two, because only a third of our national account business today goes through an Onsite. Two-thirds of it's outside the Onsite. There's a whole bunch of pieces to growth, and I'm not even including in that the impact of international, which is now getting to be a meaningful piece of our business, and a piece of our business that grew nicely, both from a revenue and a profit perspective in the current quarter. If I look at it, let's say over a multi-year period, we can sign 200, 300 Onsites a year. If they truly turn into a $1 million to $1.5 million revenue growers as we move forward, a piece of our business would migrate there.
More importantly, that would provide us, I believe, 5 points of growth when we're looking at this three and four and five years out, right there, on top of what vending would do. Part of the vending I'm double counting, because some of the vending would be to that group of customers. What our store base would do I really believe from just doing the math and assuming we have the horsepower, because I know the market's there, the horsepower to pull it off, which I believe we have or can add, that it's a business that over a multi-year perspective, could grow in the low double digits.
We need our store piece to execute well in that environment. We need our vending piece to execute well in that environment. I believe that's achievable. If I'm wrong on the store piece and how much we can add there, it would translate that from a lower double digits to an upper single digit.
I think in either scenario, it's very attractive and profitable growth.
Right. Earlier when you were talking about the growth in Onsites and the traction you're getting there and the fact that's coming through at a slightly lower margin, I guess in terms of the contribution margin, I think you used to talk about 25%-30% was a targeted range. When I look over the past five years in periods where you've grown 5% or greater, it's been about 25%. Should we assume that maybe 20%-25% is a better range given the importance of Onsites in that growth algorithm?
It plays into it, yes. That might not be a bad way to think about it. The one perspective that the pathway to profit that's underlying in our business within our store network is still there. So that store network will continue to see that tick up over time. If we go from Onsites and customer sites, that group we talked about being mid-teens, around 15% of our business, and that effectively doubles over a six to eight-year horizon. It would take a little bit out of our incremental margin, yes.
Yeah. Okay. All right. Thanks very much, Dan.
Yep.
Our next question comes from Scott Graham with BMO Capital Markets. Your line is open.
Hi. Good morning, Dan.
Good morning.
Just wondering in the, really the two questions are, in the current environment where sales are tough to come by and shareholder value tough as a result, is there any thought behind accelerating share repurchases in the second half of the year? My second question relates more to the vending program with respect to the fastener side. I was hoping you can give us a little bit more color on, I think what you said was a minus five in that area for the company.
Yeah. Well, it was a -5% with the customers that have vending, and that's really a function of what their underlying activity is. The reason I called that out is really want to talk about the market share gains we're seeing in that group in that there's a world of difference between what our fasteners and our non-fasteners are doing, and I look at those as two distinctly different businesses. It's really demonstrating the growth potential of the latter. I'm not sure if I addressed your fastener side question, because fasteners and vending really don't go hand in hand. The reason I was talking about it is it's a subset of our business with that group of customers that has vending, and I think it's a pretty good proxy to their underlying activity.
Right. No, I did understand how you were framing that for us. I was just kind of wondering why at a -5% you would consider that a market share gain.
No, I'm talking about the -5% is what I would consider the market with that group of customers as it relates to fasteners. The market share gain would be the fact that group of customers is growing at close to 3%, and their non-fastener business is growing at close to 6%, 5.9% to be exact. That's clearly a market share gain because that is not a rising tide in that customer.
I got you.
we're taking market from other people.
All right. Got you. Okay. On the share repurchases, is there now a stock a little weak today, kind of been below 45 more than it's been above recently. Is that an opportunity?
Yep. Yes, it is. We have, I believe, $1.3 million under our current authorization. I have not had discussions with my board about going deeper than that. However, what I've found in the past is it's a board willing to discuss it. So I don't want to commit the board to anything deeper than that, but it's a case of, we had a debt-free balance sheet two and a half, three years ago. The debt we have on the balance sheet has solely been from buying back of shares, and are in an environment where we continue to pay dividend at a very similar rate that we paid in the past. So we've demonstrated a willingness in the past. I believe the willingness would exist there in the future. I'll couch it with one caveat. We are boringly Midwestern conservative.
It took us some discussions to take on the first layer of debt that we did, but we also looked at it from the standpoint, from a financial decision, I don't want to say it was a no-brainer, but it was an easy decision. I think I would have a board that would be open to the conversation, but I've not had that conversation beyond the $1.3 authorization we have right now.
Okay. If you don't mind my squeezing one last question in here, is there any update that you can provide us with on the store openings and closings for the rest of the year?
I would say the pace that you've seen in 2015 and 2016 as it relates to store closings, that remains. One of the things that I believe is important to our business today is that every day you rationalize your business with a view towards five to 10 years from now. It's a healthy exercise every day. Are there markets where I believe we'll have more stores five years from now than we have today? Absolutely. There are markets where I believe in an environment where you're adding Onsites, where you're adding vending, that our business might morph in certain markets. I'm not ready to commit to what that means, but it means that from an absolute number standpoint, but from a philosophical perspective, we are always looking at what is the best business model, what is the best structure to our channel to grow our business long term.
Thanks very much.
You bet.
Our next question comes from Ryan Merkel with William Blair. Your line is open.
Hey, Dan. Just want to go back to June. You mentioned construction was a bit slower and that might continue, but the fastener number was pretty weak. I'm just curious, can you flesh that out a little bit? What drove that weakness? Is that temporary? Then just comment, you had a pretty weak May and June. Is the industrial economy still stabilizing in your mind, or are things maybe potentially getting a bit worse here?
I think they potentially got a little bit worse. Sometimes that's a hard one to gauge, Ryan, because a lot of our internal information as it relates to some of the plant shutdowns, is more anecdotal of talking to our regional VPs around the country and kind of getting from them a feel for what we're seeing or what the impact is. Very much a weakening. In the case of the construction question you raised, the point I was making there is the fact that we saw it particularly weak with energy customers, and I don't know if the oil price is such that there's going to be a rush back to any kind of new construction there, new activity there. I think it's going to be idle for a period of time. In the case of fasteners, again, that was very much related.
That was amplified by the fact that we had some large customers that were shut down, and it really hit the radar. What you really see when that shutdown occurs, it hits the OEM fastener because they're shutting down their production. They're still doing some maintenance, so you might not see it in the non-fastener, but you see it in the fastener number.
It's strange, I guess, to hear about shutdowns in June, and then there's going to be yet more shutdowns in July. Is this just a unique situation?
It's different customers. In the June was a spillover of Memorial Day week.
Got you. Okay.
Yeah. It's different customers.
Right. Okay. Then I guess just on the July commentary, you already mentioned that you saw some weakness and shutdowns around the fourth. Can you just help us, I guess, qualitatively, I know you don't like to talk about the current month, but is it going to show up in the July numbers? Do we need to consider it for modeling purposes? I guess, should we think about normal sequential as possibly missing that again in July?
The June had some big impacts, so from a sequential perspective, I'm not willing to concede that normal sequential won't be there. I honestly don't know, Ryan.
Right.
I'm not necessarily willing to concede it because some of the shutdowns which were extended in June, they're back in full force now. That will give us some lift from June to July. I don't even want to speculate on the July fourth week.
Okay. Fair enough. I guess just lastly, with Onsites, do you have enough examples now that you can be pretty confident the stores can replace the lost sales to Onsites?
We don't have enough time yet.
Okay.
We believe it to be true. That history is on a relatively small sampling. It's enough that we think. If you think about what's really happening is we're taking an existing relationship, and we're stepping deeper into their business, and we have proven history that says we can grow fastener with that customer. Let's say the part about the remaining stores. You have a $100,000 store that we pull a $30,000 customer out of it, and it becomes a $70,000 store. I believe based on history, a $70,000 store can grow fastener than a $100,000 store, and I believe with the market presence they already have, they will have the ability to snap back quickly. Let's just say we're completely wrong, and that 70,000 residual store can't grow any fastener.
I think what we're doing with that $30,000 customer is the right decision regardless of the aftermath. That other $70,000 of business won't be harmed by carving that customer out. It can only be helped.
Right. Okay, great. Thank you.
Our next question comes from Adam Uhlman with Cleveland Research. Your line is open.
Hi. Good morning.
Hi, Adam.
Morning.
I guess the first question is a clarification for Sheryl. You had gone through some of the cost drivers for the quarter between employee occupancy and transport. I guess, could you tell us what the year-over-year expense increase was for each of those categories just for the second quarter, please?
Yes, I will. Year-over-year net employee costs were up about $7 million. Occupancy year-over-year was up about $6 million. Transportation expenses year-over-year were up about $1.2 million.
Okay. Thank you. Then, back to the gross margin question from earlier. Historically, the second half has been a bit weaker than what we've seen in the second quarter, and you guys have provided some good detail on the inventory writedown headwinds that you had in the second quarter. I guess beyond that, are there any other items that we should keep in mind as to perhaps a tailwind or additional headwinds to gross margin just for the back half of the year?
Well, I guess the primary tailwind would be the piece of the activity we had in the second quarter that I believe is largely behind us, which is about 10 basis points. Short of that, it's about what we do from an execution standpoint and what happens to our fastener business.
Okay. Got you. Thanks very much.
You bet. With that, I see we're at 46 minutes past the hour. Again, want to thank everybody for taking time this morning to listen to the Fastenal earnings call and the vision and perspective portion that I think is important. We will do better. Thank you.
Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect, and everyone have a great day.