Day, ladies
and gentlemen, and welcome to the Fastenal Company First Quarter 2016 Earnings Results Conference Call. As a reminder, this conference is being recorded. I would now like to hand the meeting over to Ellen Trester, Investor Relations. Please go ahead.
Welcome to the Fastenal Company 2016 First Quarter Earnings Conference Call. This call will be hosted by Dan Flournes, our President and Chief Executive Officer and Cheryl Lisowski, our Interim Chief Financial Officer, Controller and Chief Accounting Officer. The call will last for up to 45 minutes, 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 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 June 1, 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, 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 Flourna.
Thank you, Ellen, and good morning, everybody, and thank you for joining in on the Q1 2016 Fastenal Company earnings call. Press release went out first thing this morning. Hopefully, you all saw as well. We put out a press release yesterday evening announcing our dividend our 2nd quarter dividend. In the quarter, we grew our sales about 3.5%.
We had the benefit of additional business day during the quarter. So on a daily basis, we grew about 2%. Our earnings per share grew just over 2%, primarily driven by the fact we had bought a considerable amount of our stock in the last 15 months because our actual earnings were down slightly from a year ago. A bit of a noisy quarter in that the calendar had some stuff going on. We the daily number which is what we typically report, can be influenced positively or negatively by the change from year over year and the number of business days in a calendar month.
So in January, it was a 20 day month versus 21. February, we had an additional day, so it was a 21 versus a 20. And in March, we had an additional day, so it was a 23 versus a 22. And March also had Easter, which had been in April in each of the last 2 years. I throw these in to the equation because they can influence the number.
So if you look at our numbers as reported, in January, we grew at 3.3 daily average. February grew at 2.6 and March, we dropped to 0.0. So we basically had no growth in final month of the quarter. If I factor in the change in days, I think of the months as being January, we grew between 2.5 and 3. February, we probably grew closer to 3.
In March, we probably grew just under 1. If I add Easter into the equation, that March number probably is closer to a 2. And so I'll start the call by saying very pleased with the fact in January February we started out with a nice improvement after really struggling through the Q4. And struggling through the Q4 and the latter 9 months of 2015 is more of a statement of what our customers were enduring as their business weakened, particularly those involved in the oil and gas industry and those involved in export. But when I look at March, we're a little disappointed in the month.
The month weakened as we got through it. Easter is part of it. The calendar is part of it, but the month did weaken a little bit. And, so it was a soft finish to the quarter. If I there's really no other noise in the numbers because the acquisition we did last fall added about 0.8 percent to our number and FX removed about 0.8 percent.
So other than the calendar, it wasn't a lot of noise. Speaking of FX, really talking about our foreign business in general. One of the items that we touched on in the call centered on Canada. Canada has an economy that's very much influenced by commodities, particularly energy commodities, but commodities in general. That business for a lot of distributors had been struggling throughout 2015, ours included.
In the Q4, our business in Canada grew using local currency, so removing the FX impact and local days, our business grew about 4%. I'm pleased to say that business improved in the Q1 and grew about 7%. I think that is probably a good teller of some underlying strength that we're seeing in that business and our execution. From a P and L perspective, and this is a lot of the comments that I've shared with our folks internally, sometimes you need to take a step back and look at what you've been investing in and what it's translated into to help understand the puts and takes of your P and L. From 10,000 feet, the best way I can think about the P and L is this.
We added about $33,000,000 in additional revenue from the Q1 of last year to the Q1 of this year. As you see in our published statements and you saw this in our Q4 and you saw it quite frankly throughout 2015, With the growth drivers we have in place, particularly the large account emphasis within our growth drivers, The larger our customer gets, typically the lower the gross margin because in many cases, you're supplying a concentrated offering into a business. It's a more competitive landscape because it's a more efficient landscape to operate. And so our gross margin in that business is typically lower, but again, it's more efficient. So our operating expenses are lower as well.
So as we've seen great success in that business, we've seen some trade off in gross margin. Also as we went through 2015, our fastener business was particularly hit by the slowdown in the economy. And so we had some product mix as well as customer mix impacts to our margin. And with the weaker environment, a very competitive landscape. So we did lose gross margin on a year over year basis.
Our gross margin was largely in line with 4th quarter. And that $33,000,000 in additional revenue translated into about $7,000,000 of additional gross profit, because of the contraction in gross margin. We talked a lot in 2014, latter part of 2014 2015 about adding people to our store based network. As we got later into the year, we also talked about slowing down the growth and we've continued that discussion of slowing down the growth of people. We think we're to a point where our stores are well staffed and now we need the business to catch up and frankly get ahead of our headcount growth a bit.
But in the last 12 months, excuse me, we've added about $12,000,000 in additional payroll expense because of all the people we've added, because a lot a high percentage of our compensation is incentive based. If I look at incentive compensation at the district, regional, national, local level as well as profit sharing type contributions, those are down on a year over year basis. And so about $7,000,000 of the $12,000,000 was funded by our collective group of employees and our payroll expenses are up about $5,000,000 in total against $7,000,000 additional gross profit. We also have been heavily investing in vending, heavily investing in on-site, heavily investing in growth drivers and our operating expenses outside of payroll are about $5,000,000 dollars So total expenses are up about $10,000,000 year over year and our earnings down about 3. We took on some debt in the last year, year and a half to fund the buyback of stock options excuse me, stock.
So our interest expense is up about $1,000,000 So our earnings are down just under $4,000,000 a year ago. When I look at the investments we made in people and the investments we made in growth service to our business, I believe they're great investments for our business short term and long term. However, we don't have the gross profit dollars in the short term to pay for it and that's why we're holding tight on headcount as we go into the year. And also you'll notice that we softened a bit our store opening expectations for the year. Then the last year, we cited a range of 60 to 75.
We pulled that down to a range of 40 to 60, while still a meaningful number of stores reopened. We really felt, given the top all the growth drivers we had in place, it was a wise decision to slow that down a little bit. Last November, we had an Investor Day. In that Investor Day, we really talked about 4 primary things. They centered on vending, our industrial vending deployment, talked about on-site where we set up a store inside the four walls of our customer.
We talked about e commerce, investments we're making to make it easier for our customers to interact with us. And we talked about what we call CSP 2016 and that was expanding the merchandising that we have locally in our store to improve our ability to fulfill on a same day basis, to improve the spectrum of customers we would appeal to, frankly to improve our business. When I look at our progress on those, I'm extremely pleased with what we've done not only in the Q4, but what we've done in the Q1. From a vending perspective, we really talked about the team we were adding. So we added about 230 people to drive the optimization of our vending, to drive the signing of our vending and to drive the efficiency of vending.
When I look at where we are at the end of March, about 60% of our machines have now been optimized. When we talked about it last November at the Investor Day, we were at about 11%. So we've made great progress on that. And really what it translates into is a better utilization of our vending platform within our customer business, but also a better value proposition for our customer because we know product that goes through a vending machine lowers the consumption, lowers the waste and lowers the expense for our customer and we think that's a winning combination in our business. About 80% of our store locations use the vending tab.
And what that is and we talked about this on our Investor Day, that is a better integration of the vending within our own point of sale platform. It helps our store personnel be more efficient with the replenishment. It helps streamline the supply chain and we've made great progress on that. And that's going to serve us well as we go into 2016 and beyond. As important to those two pieces, our pace of signings improved.
In the Q1 of 2015 and the Q4 of 2015, we signed roughly 4,000 vending devices. In the Q1, that number improved. We signed about 4,700. So I think we're off to a great start and that's an important growth driver to our business. In the case of On-site, last year we signed about 82 Onsites.
Our historical run rate or pace of annual signing was about 9. So we took a big leap forward in 2015. In fall of 2015 at our Investor Day, we talked about a goal. We said our goal is 200 signings of On-site in 2016. In the Q1, we signed 48.
Frankly, it's a number that was better than I was expecting. I was very hopeful coming into the year, we'd have a number that would start with a 4, because I knew that was a big step up from the run rate we had in the latter half of twenty fifteen. Our team came through and worked with their customers and signed 48. Those will turn on as we go through the year, but I'm very optimistic about our on-site program as we go through the balance of the year. E commerce, as I mentioned, is more about the ease of our customer ability to interact with us.
There'll be more updates on that in future meetings. That's more of a when I think of a late 2016, 2017 2018 type of item. And then finally, CSP 2016, we made a hard push late in the year. We've continued that hard push. We currently have just under 1,000 locations converted to the CSP 16 format.
And I believe when we get to the end of the second quarter, that number will be closer to a 1700 or 1800 number that are substantially converted, which position us well not only for the efficiency of our business, but our ability to appeal to a broader range of customers and fulfill their needs as we go into the summer. With that, I'm going to turn it over to Cheryl to talk a little bit more in detail about the quarter.
Good morning. I'm going to provide an update on our cash flow. Our operating cash flow for the quarter was 128 percent of net earnings compared to 141 percent of net earnings during the first quarter of 2015. The operating cash flow is slightly lower in the Q1 of 2016 due to our current initiative to add additional products into our store inventory under our CSP 16 format. The Q1 operating cash flow is also benefited by minimal tax payments occurring in the Q1, that will reverse itself in the second, third and fourth quarter of the year.
Our operational working capital year over year inventory growth was approximately $97,000,000 The main drivers of the increase in the inventory were driven by the CSP-sixteen initiative, which was approximately 35% of the increase. International inventory growth and the acquisition of Fasteners Inc. Contributed approximately another 25% of the increase. And then the last main driver was the on-site and large customer impacts, which were approximately an increase of 10%. We also disclosed in our earnings release that we had previously indicated our net capital expenditures would be approximately $128,000,000 in 2016.
We now believe given the new vending locker lease agreement and a strong start to vending signings in the Q1 that we will have total net capital expenditures of approximately $197,000,000 to $200,000,000 in 2016. We do plan to fund this increase as well as some of our previously planned capital expenditures with the proceeds of a proposed private placement of debt. During the Q1 of 2016, we purchased approximately 1,600,000 shares of our common stock at an average price of 37.15 dollars per share for a total of approximately $59,000,000 And during the last seven quarters, we have purchased 8,700,000 shares of our stock or approximately $396,000,000 worth of stock, which represents about 3.3% of our outstanding shares from the start of this timeframe. As Dan mentioned earlier, last night we announced a dividend of $0.30 per share. This will be our 2nd quarter dividend for the year.
So we have strong cash flow and we're optimistic about our cash flow potential throughout the year. And with that, I will open it up to questions from the group.
Thank And our first question comes from David Manthey with Robert W. Baird. Your line is open.
Hi, good morning.
Good morning, Dave. Good morning.
First of all, in terms of the new Onsites that you turned on last year, can you estimate how additive to growth these the on sites that were operating in the Q1 of 2016 were?
Probably the way I think about it, Dave, the numbers start getting a little bit double counting when you look at the vending and you look at the on-site. The best way to look at it is when I think of the districts that are signing on sites. Districts that added Onsites last year are growing double digit right now. The districts that did not are growing low single digit. We really look at the on-site business as being when we go on an on-site, what Chris had talked about last fall in our Investor Day was we really believe that when we exit a 12 month period after rolling out the On-site and we have On-site that turned down throughout the year, so that's where the numbers start getting a little muddy.
But we really believe based on our data that when we exit the 12 month period, we'll add close to $80,000 to $120,000 of additional monthly revenue on a per on-site basis.
Okay. And then second on pricing and gross margin, you mentioned the fastener pricing being lower, if you could quantify that. And then if you saw anything across the other 60% plus of your product lines. And as it relates to gross margin, I know there's some timing issues with the FIFO inventory and so forth. But typically, Q1 gross margin is the highest of the year and then it declines from there or is lower through the rest of the year.
Is that your expectation for this year? Or are there other factors in 2016?
Our expectations given where our growth is coming from is that 50% is probably a good target number for us to have. There is when I look at the components of our gross margin, couple of things that were going on in the Q4 and in the Q1, it was in a declining mode when we were at as we were going through the Q4, quite frankly declining mode throughout 2015. We really saw, the stabilization start to occur in the February, March timeframe the standpoint of what was going on with gross margin. So, I really believe when I look out to the balance of the year, 50 is probably a better target. When I look out long term, it's really going to be a function more of how successful we are with the on-site program, because that will materially change longer term our customer mix, but it's very attractive in the ability to grow the business long term and the operating leverage long term.
And on the pricing, Dan, the Sorry.
Yes, what we were seeing through most of last year is deflation somewhere in that 1.5% to 2% neighborhood. We're still operating in that zone. The as far as the cost coming through, we're starting to see some lower costs now. Our overall inventory turns about twice a year. The faster piece of our inventory turns slower than that.
The non faster piece turns faster than that. And so some of the lower costs we're seeing we're starting to see come through our cost of goods now. As it relates to the non fastener product, I would say that area is pretty quiet. Any changes we have in pricing there would be solely related to customer mix and not to what's going on in the underlying product.
Got it. Thanks, Dan.
You bet, Dave.
Thank you. Our next question comes from Robert McCarthy with Stifel. Your line is open.
Good morning, Dan. How are you doing today?
Good. Good morning, Rob.
So I guess in terms of April, I mean, I think you did take some pains to kind of talk about the noise of the quarter in terms of not only the days and the Easter shift, but how should we think without commenting on April in terms of the demand trends because you haven't just disclosed it yet. Just how do we think about the impact of the normalization for Easter? Do we think about a point benefit for April? Or how do we think about it in terms
of the days and the Easter shift? That's how I think about it. When I if you walk through the math, I walked through on the March. So, hey, here's the ugly part of Easter move in. I think it took a point, maybe a 0.2 out of March.
You should see the flip side of that going in April.
Okay. And remind us of what the days is in April year over year in terms of the difference?
In the Q2, Sherry, correct me if I'm wrong. In April, we're at 21 versus 22 a year ago.
That's correct.
May, we're 21 versus 20 a year ago. In June, it's a push at 22.
Got it. Okay. And then I guess, as a follow-up in terms of what you're seeing in terms of industrial vending growth, Are you still kind of committed kind of to that kind of 16,000 in deployments for the full year? And I think you saw in your you highlighted interesting statistic in association with your vending, which was basically your daily sales to customers to industrial vending grew about 3.6% in the Q1 of 2016. And then daily sales of non fastener products to customers with vending grew 7 0.4%, but daily sales of fasteners to customers with vending contracted 5.5%.
So I guess the question is obviously a lot of your business to go to where you're venting is not fasteners, but why do you account for that kind of contraction? And I'm referring to, I think, the final paragraph on the second page of the press release.
Yes. When I think of vending, you're dead on with your comment or your question and comment about vending is really about our non fastener business. Vending really isn't used for dispensing of fasteners. Now there are some extensions of vending that over time, how our bin stocks work, things like that will include will incorporate potentially some of the vending type technology for replenishment cycle. But vending is about non fasteners.
And so we've done a great job deploying vending to our existing customers over the last 5 years. And the faster piece is about their economic activity and our ability to take market share. And I think the story when I look at the faster piece is about the economic activity. The non faster piece is about the activity and our ability to grow and deploy vending. So we can have a customer whose business in the faster piece is down because we have a great market penetration already and their business is just off.
But we can grow the non fastener piece because of vending because we're deploying a better supply chain to our customer. Because when I think about our covenant, our deal with our customer and what our customer truly needs, put yourself in the shoes of the purchasing manager, the plant manager. They live in a world where there's constant demands on them for improvement. They're working with fewer resources every day. So what they need from their supplier isn't just, great fulfillment.
I think that's a starting point. They need a better supply chain partner And in the case of vending, in the case of bin stock, in the case of our on-site model, we're a better supply chain partner. And we highlight this point because it demonstrates that even in a weak economy, we can grow our business because we're a better supply chain partner for our customer.
Thanks for your time.
Yes.
Thank you. Our next question comes from Adam Yulman with Cleveland Research. Your line is open.
Hi, good morning. Thank you.
Good morning, Adam. Good morning.
I guess if we could just step back and talk about the cash flow outlook for the year, it seems like we have growing demands on cash from the CS and P2 or 16 rollout as additional stores are added and the vending growth is going to unfold for the year. Can you help me understand better, I guess, how much debt do you expect to take on to fund these growth investments? And at what point do you start to pull back on other CapEx projects?
Well, I'll answer the last part and then Cheryl can answer the numbers part. But as far as pulling back on other projects, I don't really the biggest thing that we the only thing that we've pulled back on consciously is, we slowed down a bit the pace store openings. But other than that, I don't really see us pulling back on the initiatives that we have in place. As we talked about in 2015, a lot of the big, big initiatives we had from a CapEx standpoint are in our rearview mirror. I'm talking about automation of our distribution centers and the initial build of growing a vending of creating and growing a vending business.
So I don't see a lot of other pullback, but Sheryl, you can touch on the exact numbers.
Sure. So we're still as we're projecting our cash flow for the year, we feel very confident that, operating cash flow will continue to exceed historical percentages of net earnings. Our total CapEx, it will be a little bit higher than the historical percentage of net earnings due to the increase in our vending spend for the year. And our free cash flow will continue to fall within the historical percentage of net earnings throughout the year. So we feel very confident that we have adequate cash flow to continue to support our initiatives throughout the year.
Okay. Thanks. And then Cheryl, could I just follow-up on the bad debt expense for the quarter? Could you talk through what you guys are seeing there and expectations going forward?
Yes. We continue to see our bad debt
expense trend to historical norms. We are not seeing a significant increase in bankruptcies or anything that causes us great alarm or concern. Pretty quiet, I guess, quarter from that perspective. And so, really no surprises from our end.
Okay.
Thank you. And our next question comes from Ryan Cieslak with KeyBanc Capital Markets. Your line is open.
Hi, good morning. Good morning. Dan, sorry if I missed this, but do you have a sort of initial view of how April is trending for you right now? I know it's early, only 2 weeks in, maybe excluding the benefit you might get from how Easter fell in the extra day or so in the quarter. Is it gotten any better from what I think I heard you right, you said the quarter ended off soft.
I just would be curious to know just the sequential trends so far into April.
Yes. Whenever I touch on the current month, I'm always wrong and the question is how much. So I don't know that with basically a week into the month that we've had some chance to look at the data, I don't think it's meaningful enough to even talk intelligently about it. So I'm going to defer that until early May when we report it.
Okay, fair enough. And then I think last quarter you talked about discretionary spending being down and a headwind and in the release today you mentioned a slight improvement. I would be curious maybe just some more color around that how the discretionary spending looked in the Q1 relative to maybe a normal relative to maybe a normal Q1 or your expectations coming out of the Q4? And how much of a drag on gross margins was that this relative to the Q4?
Sure. The commentary on that both in the Q4 and the Q1 is as much art as it is science. The team that analyzes all of our sales data, slices and dices at about 18 waves to Sunday. And one of the things that jumped out for them was they looked at frequency of items and stuff that are that's purchased in a less frequent basis, how that was performing in the Q4 and we did see a drop off in that. We saw some of that come back as we got into February, didn't see much of it in January.
And but I'd say it's still tepid. I think there's a lot of organizations out there. Similar to the comments I started the conversation with about what we're doing with headcount, what we're doing with expenses in general, we're doing with store openings. A lot of organization out there have their belts really tightened down and I think you're seeing that coming into the New Year holding pretty firm.
And is there a way of saying
To quantify it, this is a from the hip number, but I don't know, 10 basis points. Okay. That's helpful. But that's kind of that's more of a guess.
Got you. No, that's helpful. And then just really quick, if I may, I'd just be curious to know, at the Investor Day, you talked about maybe a greater appetite for M and A this year and maybe just sort of an update on what you're seeing there with regard to maybe some M and
2014, we started to take probably a more serious look rather than stumbling upon stuff periodically. Let's take a little more serious look at it. We looked at a bunch of companies last year. One of them that we met early in the year in April to be exact, we ended up acquiring later in the year. There is a few companies we're in discussions with right now and we're constantly looking both on the distribution side as well as some of the support service side that might be a manufacturing entity or some other type of support service for our stores.
Only time will tell how that plays out. I think the biggest thing is that we're open to it and we're actively looking rather than just seeing what jumps up and hits us, but nothing in the works.
Okay. Thanks for the time.
You bet.
Thank you. Our next question comes from Ryan Merkel. Your line is open for William Blair.
Hey guys, good morning.
Good morning, Ryan. Good morning.
So back to March, Dan, is there anything that stood out to drive the softer finish either by customer or geography?
Geography, only been that stood out there is that we did continue to see weakening deeper than we probably would have expected or maybe better way to say hoped for when we were looking at it back in the latter part of 2015. But the oil and gas areas did continue to weaken when I look at it on a sequential basis. And time will tell if some of the recent pricing influences that positive in the upcoming months, but it continued to weaken. The but setting that aside, the month finished very poorly. With 5 days, 6 days, 7 days, 8 days left in the month, I felt we'd be closer to 2% and the month really deteriorated late.
And that's probably a function that's probably described some things that we saw in the patterns of our larger account base, because they tend to be somewhat loaded a little bit towards the back end of the month. But frankly, a weak finish.
Okay. And I mean, should this frame our thinking at all as we think about April? Or would you just have us adjust March for Easter and then just use sort of normal sequentials? Is that sort of the best way to think about April at this point?
That's all I'm thinking about it. Okay.
And then on the macro, in the press release, you said you're seeing some improvement, but an economy that is still very weak. Where are you seeing the improvements? And then when you talk to customers, are they optimistic that we found a bottom for industrial demand? Or is that still a little optimistic at this point?
On the latter part, I don't know. One thing that I will have the benefit of this week is our customer show. And so we'll have a little over 5,000 customers, over a 3 day period in meeting with suppliers, meeting with our employees, meeting with our on-site folks, all of our teams, our vending folks, etcetera. So I'll get more of a chance to get a pulse on that this week. This afternoon I'm leaving for that show myself.
But when I think of what are some of the positives, In the Q4 and that was probably as bleak appeared as you could see and I was not hesitant to share my thoughts on it during the Q4. But our fasteners as an example were down about 6% in the 4th quarter. In the Q1, they're down around 2%. Our non fasteners were struggling in the Q4 and I don't have the exact stat in front of me, I'm sorry, but they improved to mid single digits, upper single digits in the Q1. And so we saw generally speaking an improvement in our business.
And that's, I think, what we're really talking about. I think what we see is the business in January, February and I can't quite say that for March, but January, February felt more like where we were in October. And I think if I look at the last 5 or 6 months, I really think the outliers was the extreme weakness we saw in November December. And I think that was a function of companies just shutting down around the holidays more extensively than normal. March, only April May will start to answer for us what really happened in March.
Right. Very good. Okay. Thank you.
Thanks, Brian.
Thank you. Our next question comes from Robert Barry with Susquehanna. Your line is open.
Hey guys, good morning.
Good morning, Robert. Good morning.
I wanted to circle back to the gross margin. So the pace of decline last year 40, 50 basis points a quarter, now we're looking at down 100. Just curious what drove that kind of step change in the pace of decline?
You mean down 10 on a sequential when you talk about paying?
On a year over year basis.
Yes. Right. Like we've been
tracking down 40, 50 and now we're down 100.
Yes. There's a number of things. 1, our growth is coming from large account and that's that deepened as we went through the year. The it's primarily coming from if I think of our sales number in the weakness, when you we've done a nice job signing new customers both on sites and traditional national account customers that aren't on-site. When you're doing a nice job taking market share, you're turning on a lot of new business.
And that a lot of times, you're turning on a lot of new business, you do get some short term mix issues going on in that you a new large customer isn't at average margins for that group on day 1 because it takes you time 6, 9 12 months to work through some of the hiccups in the system of finding the best source of supply, finding the best part match for this item when you're turning new business. And typically, you have your existing business that is supporting that because that existing business, you've done a better job of improving your supply chain already. If you think of what's really hurting us right now is from a revenue and revenue growth perspective, We're doing a wonderful job signing new national accounts. We're doing a wonderful job signing on sites. We're doing a wonderful job signing vending and growing those pieces of business.
So we're taking market share at a very good clip. What's causing us to struggle is our existing book of business, our existing customers are struggling in a weak environment. And so the more mature component of our business is going backwards. And that more mature piece has a because if I've had a customer excuse me for 2 or 3 years, I've already in many cases established a lot of the best parts, a lot of the best source of supply to serve that customer's needs. And that's in my mix and that mix is weakened right now.
So that's a piece of it. The other piece of it is on an execution standpoint, we slipped a little bit as we went through 2015. We slipped a little bit on the freight, how good we are on our freight expense versus our freight that we charge the customer. Part of that, I think it became more difficult for our stores to be operates effectively given that fuel prices were lower. Fuel prices is an important part of our distribution costs, but it's not the only component.
But it might make it harder for you to charge freight on this item or that. And the fact that it's a weak environment, it's a competitive marketplace. I feel we're at a point where our gross margins are stable from a sequential standpoint, but that still has a painful process on a year over year basis. There's no question about that.
Yes. Actually, I did want to just follow-up and clarify that. So it's your expectation that you can hold the gross margin stable here now at about 50 percent as we look in the next few quarters?
Yes.
And I guess my question would be, what's changing as we move forward because the pace of decline seems to be accelerating as you say, Onsites gaining on sites gaining traction, national accounts gaining traction, the product and customer mix issues have been there, they'll probably continue to be there. So what's going to kind of diminish the pace of decline in the gross margin? What are
the offsets? Well, the biggest one is well, I think the biggest one is the offset we've had in the last 12 months, you've had dramatic weakening of our existing customer base and that's hurt our gross margin because that's business where we have a very, very established efficient source of supply. And so that's put a quite a pinch on that. I believe the pace of that deterioration is slowing. And I think that shines through in what you're seeing, what's happening in our faster business, in our non faster business from a growth perspective.
So I think that's the wildcard.
Yes. Just to clarify, Dan, at this point, because I think there's some confusion out there. What product lines at this point are accretive to the gross margin? Is it just the maintenance fasteners? Or is it all fasteners or how would you describe that?
I'd say it's probably it probably leans towards the maintenance as well as the construction fasteners in many cases. Yes. I think you
said the maintenance was 40% of the business. How much of the business of the fastener business is the construction piece?
That's a relatively small piece. Yes.
Okay. I don't
have the exact stat in front of me, but relatively small, single digits.
Got you. Fair enough.
Thank you, Dan. Thank you. With that, I see we're at 944. Hopefully, there wasn't anybody else in queue that didn't get to ask a question. I'll finish the call the same way I started the call.
Thank you for taking time this morning to listen to our Q1 earnings call. I hope you find our earnings release today as well as our 10 Q, which I believe we'll go out later in the week, to be informative of helping to understand the Fastenal story. I also invite anybody that's interested to either make a trip to Winona next Tuesday for our annual meeting or listen to it in our webcast. Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.