Ladies and gentlemen, and welcome to the Fastenal Company 2015 Second Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question I'd now like to turn the conference over to your host for today, Ms. Ellen Treaster. Ma'am, you may begin.
Thank you. Welcome to the Fastenal Company 20 15 Second Quarter Earnings Conference Call. This call will be hosted by Lee Hine, our President and Chief Executive Officer and Dan Flores, our Chief Financial Officer. The call will last for up to 45 minutes. The call will start with a general overview of our quarterly results and operations by Lee and Dan with the remainder of the time being open for questions and answers.
Today's call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission or distribution of today's call is permitted without Fastenal's consent. This call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage investor. Fastenal.com. A replay of the webcast will be available on the website until September 1, 2015 at midnight Central Time.
As a reminder, today's conference call includes statements regarding the company's anticipated financial and operating results as well as other forward looking statements based on current expectations as defined by the Private Securities Litigation Reform Act of 1995. Forward looking statements may often be identified with words such as we expect, we anticipate, upcoming or similar indications of future expectations. It is important to note that the company's actual results may differ materially from those anticipated. Information on factors that could cause actual results to differ materially from these forward looking statements are contained in the company's periodic filings with the Securities and Exchange Commission and we encourage you to review those carefully. Investors are cautioned not to place undue reliance on such forward looking statements as there is no assurance that the matter contained in such statements will occur.
Forward looking statements are made as of today's date only and we undertake no duty to update the information provided on this call. I would now like to turn the call over to Mr. Lee Hine.
Thanks, Ellen. Good morning. Today, I'd like to begin the call to answer the question on what is our opinion of the economy. And when I say that it's a tough economy and a tough environment, I'm really centering it around 5 areas for us. It's non res, it's oil and gas, ag, manufacturing and of course the currency.
And so tough environment, but when I look at it, given this quarter, I think it's a solid quarter of execution given the revenue number. We were able to leverage our growth of 5 percent into 8.9 percent pre tax growth. We were able to raise our pre tax percentage to 22.6% and incremental to 40%. Now, when we talk about execution, the word that comes to mind for me, I think many of our folks within Fastenal is discipline. To execute you must be disciplined.
And so we put a call out to our folks to the blue team we call them and we asked them to scrutinize every expense and to reduce where possible. The reason we did this and we tell our folks over and over why are we doing what we do. And we make it very clear in this point, we look to reduce expenses so we could add energy into the stores. And to that point, year over year, we're up about 1129 people. 910 folks we've added in the stores.
That's a 9.4% increase. And what's nice and what I want to point out here is a few quarters back, our ads were almost identical whether it was non selling or selling. Today that 9.4% year over year, it is 4.9% on the non selling. We're starting to again show discipline and balance in what we're trying to do in our growth initiative of offering or getting more energy into our stores again to offer a high level of service, immediate service when needed to stay in line on these large key customers and to serve our customers on a local level. And so the other point that I look at for the quarter that's a highlight is we were able to sign 5,144 machines compared to 3,962 in the previous quarter.
And today, it's our pleasure to point out that we have hit a milestone of 50,000 installs and we've done this all in just over 5 years. So all in all, solid quarter, but we will continue to pour energy into our growth drivers. Dan? Thanks, Lee, and good morning, everybody. Thank you
for joining on the Fastenal call today. We changed up the look of our press release with this quarter. Hopefully you'll find it useful. We tried to really boil it down and summarize it a little bit better than I think we've done in the past. Our Q which will go out on Friday still has a little bit more of the meat that you've grown accustomed to in the past.
But we felt the best way to communicate is to get to the points fast. And if you want a little more detail, we can cover some stuff on the call and cover some stuff in the general queue. The cash flow for the quarter, I'll touch on a few things and then I'll kind of work back through the press release a little bit. Operating cash year to date 97.5 percent of our earnings. We feel good about that number.
Typically, we think a good number for Fastenal is in that low 90s, 90%, 95% neighborhood. So we feel good about what we're doing. Doing a nice job. Obviously, the accounts receivable growth is really centers on what's going on with our sales growth. But I think we're doing a nice job managing the growth of inventory.
There's a lot of places we found where we can free up some inventory dollars. There's a lot of places where quite frankly we want to invest some additional inventory dollars. But I think all in all in total, we're doing a nice job managing it in the 1st 6 months of the year and I'm confident in our ability to continue managing that in the future. If I look at our CapEx, no surprises there. We talked at the in our annual report about what we expected our CapEx for the year to The number was moderating from what it's been the last few years.
A lot of our big distribution projects are behind us with automation in a bunch of our DCs over the last 3 years. Our vending, we spent a lot of money for about 3 years building up our vending capacity both from the standpoint of the teams and our equipment. Now we're in more of a steady state mode. And so that number has come down a little bit to better match what we're actually installing as opposed to building up a base of machines. And so feel good about our CapEx in the 1st 6 months of this year.
Free cash, which is operating minus our net CapEx about $177,000,000 so about 66 percent of earnings. Again, I believe a very good number for Fastenal. We in the 1st 6 months of this year paid out about $165,000,000 in dividends, so about 61% of earnings. So most of our free cash went to funding dividends thus far this year. As you all know, we bought back some stock in the latter half of twenty fourteen and we've been busy buying back some stock in the 1st four and a half months of 2015.
We think it's a good wise decision for our shareholders. So year to date, we've bought back about $250,000,000 worth of stock and we borrowed about $240,000,000 to fund it. And that's a quick snapshot of our cash flow. We think it's good decisions for our shareholders short term and long term. In the first page of the press release, continuing on to the second page of the press release, I touched on 4 bullets about the business that I wanted to accent and I'm going to touch on it again here.
The first one I think Lee did a great job talking about the people side of the business. We're putting people into the stores. We're trying to really allow the efficiency of the organization between the automation we put in, some of the technology we put in, everybody working smarter every day to minimize what we're adding outside the store to minimize the expense growth there. And I think we did a nice job of adding people into the right spots in the 1st 6 months. Item 2 touches on, we've been hit hard this year by a number of factors.
In here, I talk about oil and gas. I don't think there's any surprise by that. Our customers have been hit hard by the strength of the U. S. Dollar.
Most of our business is in the U. S. And anything that impairs the manufacturing output of this country impacts us and the strong dollar has done some of that. We also sell a fair amount into Canada and that business is all denominated in the Canadian currency. So that's created some headwinds for us.
I cite in bullet 2 that we see some signs of stabilization in the oil and gas. And I want to share a little bit more insight what I mean by that. As you know from our press releases and our filings over the years, we put a lot of emphasis. We try to really understand the trends of our business, what's going on to improve our business, what's going on to hurt
our business.
And if I look at the Texas and Louisiana geography within our business and I look at that business and look at their sequential patterns, so not the company numbers, but just those two states and look at those sequential patterns and what's actually happening in our business, the story is really different in 3 distinct time periods this year. In the January February time period, I look at history and I look at actual results, there's about a 9 or 10 percentage point delta between what history says should happen and what's actually happening. So from January to February, if history says we should be up 2% sequentially, We're 9 or 10 points off that and we're down 7 or 8 points. Someone explained that what I'm talking about. In the March, April May timeframe that 9 or 10 point delta, the deficiency in our sequential pattern contracted to about 4.
In June, it contracted to 2 and change. Now, does it mean I mean, our year over year numbers are pretty weak right now. But sequentially, the trends are starting to move closer to normal. And that makes me feel better about what it means for Q3 and Q4 and going into next year as far as the health of that underlying business. So I just wanted to touch on that.
Point number 3, gross profit is hit by large accounts. It's no secret that our growth has been driven by the success we've enjoyed in leveraging this network we've built into growing a large account business. Because for so many years, most of our growth centered on local customers, local business, as we were rolling out our store network. As we've been as we've developed that store network in the last 15, 20 years, we've very aggressively gone after large account business. We've had great success there.
That business does not operate at company wide gross margins. But the beauty of going after that business is, we can afford to go after that business even with a lower gross profit because it leverages the network we already have in place. And so those gross profit dollars shine right through quite well to the bottom line. In fact, this quarter, the if you look at it for every dollar in sales, we picked up about $0.41 in gross profit. $0.40 of that $0.41 actually shut, made its way down to our pre tax line, because our operating expenses were essentially flat.
Now that's in spite of the fact that we were adding people at a very fast clip in the last as we cite in the release in the last 12 months, we've added almost 1400 people into the organization, an increase of 7.7%. We funded that by not spending dollars everywhere else. And that's the exciting part about what we were able to accomplish in the last 12 months in my opinion. And again, the 4th point just touches on what I just said, the strong incremental margins. I'm sure there's been periods in our history where we've had incremental margins of 40%.
I'd have to go back to Bob Kerlin and see back in the 70s quarter by quarter if he has that information still. I can't recall a time in my 20 year 19 years here at Fastenal that we've done it. And so I'm really, really impressed with that. Some thoughts on revenue growth. And in the past, I've touched on this in passing in the calls.
Sometimes I don't want to get too deep into the numbers into the weeds because I'll lose everybody on the call. But I think it's helpful to understand our business. And in the press release I touched on, we're really 2 distributors in 1, We're this fastener distributor that has built up a book of business over the last 50 years and we're an MRO distributor that's really built up that business in the last 20 years. We really started to expand our product lines beyond fasteners in the early to mid-1990s and have grown that non fasteners business now to be 60% of our sales. And that 40% fasteners and 60% non fasteners are really different businesses, different end markets going through a common channel.
And so if I look at that air business, a lot of production business in there. The beauty of that business is incredibly sticky. It's really invasive and complicated and painful to switch a fastener supplier, because that's a very tight relationship, because I'm supplying you the stuff you need in what you're producing. And the quality, the source of supply, all those things we bring to the table are critical and it's very, very disruptive to change your supplier. That's the good news of that business.
The bad news of that business, it's linked directly to production. If our customers' production is down 10% that business is down 10%. If our customer's production is down 30%, that business is down 30%. The good news is if it's up 20% our business grows by 20%. And that's really what we've been seeing in the last few months.
If I look at our top 25 customers and I took a good hard look at that group of business, 11 of those 25 customers were negative in June. 7 of those 11 were negative double digit and 5 of those 11 were negative in excess of 25%. That's the negative of being directly linked to their business. The positive is when I look at those relationships, these are solid relationships. I visited with most of those customers in the last 6 months.
We have a great relationship. We're continuing to strengthen because most of those customers, we are growing our business with them. There's only one on that list that I think of where we're not growing our business and it's actually going backwards a little bit. The other 24, we're growing our relationship, but their business is struggling in this economy. That's a function of the end market economy.
If I take that a step further and go beyond the 25, that group of customers represents a little bit over 20% of our sales. That group of customers has gone from 7% growth 4 months ago to 2% growth in June. It's still growing, but it's struggling because there's so many in that group that are negative. The good news is, if I look at all of our other large account customers, all of our national accounts outside of our top 100 that business is growing and growing well. In March that business grew at 11.3.
In April, it grew at 13.5. In May, it grew at 14.5. And in June, it grew at 14.2. Percent. That's about Fastenal taking market share.
That's not about Fastenal being impacted by the economy. We're out taking market share fast as fast as we've ever done. I look at our signings in the 1st 6 months of this year. They're ahead of our signings in the 1st 6 months of last year. So I feel very good about the underlying business as far as our ability to take market share.
But we're struggling with some headwinds right now. With that, I've used up a little bit more time than I planned on. I'll be quiet and we'll take some questions.
Comes from the line of Sam Darkatsh of Raymond James. Your line is open. Please go ahead.
Hi. This is Josh Wilson filling in for Sam. Thanks for taking my questions. Congratulations on the operating expense control. Could you talk a little bit about what your expectations would be going forward under a range of growth assumptions?
What would it look like if it's what would it be in kind of a low single digit environment, mid single and that sort of thing?
That question gets pretty involved because there's so many dynamics that kick into play. For example, at the start of the year, we talked about a goal that we had expressed to our people in December of adding 3,000 people into our stores. Now that was anticipating a top line growth a world away from what we're actually seeing. And so what you've seen is that number in the first 6 months is just over 900 people into our stores. And I would suspect that when the dust settles end of this year, we won't double that number because November December we typically pull back, but you're probably going to see a 16%, 17% kind of 100% increase.
But the dynamic that comes into play is, if we saw our business picking up for some reason, we'd ramp that number up. In a single digit environment, we will endeavor to keep our operating expenses growing in a fashion that you saw in the second quarter. It will be a little challenging. The one thing that helps us is last year we had a little bit stronger growth and so some of our incentive comp was a little bit higher. And that's providing one of the puts and takes to keep helping us keep our operating expenses low.
But if all of a sudden our sales growth was to take off, you'd see us adding people a little bit faster, you'd see our incentive expense expand quite quickly. And you'd see your operating expense growth move from that low single digit into the middle single digit. To me, I always think about it in context of what do I think about our incremental margin. And I feel very good about our ability to I was surprised quite frankly by the fact that we hit 40%. I thought a number in the 30s would be pretty good.
And I think a number of around that 30% neighborhood is a pretty good target for us to strive for in the next few quarters.
Thanks for that color. And I didn't see unless I missed it in the press release an update on your guidance for store count openings for 2015. Could you give us an update on that?
No change in our guidance.
Thanks. Good luck with the next quarter.
Thank you.
Thank you. Our next question comes from the line of David Manthey of Robert W. Baird. Your line is open. Please go ahead.
Hi, guys. Good morning. Good morning, Dan. Looking at gross margin, I don't want to dwell too much on this, but with all the ongoing mix shifts and this rebate situation, is there any reason to believe that 3rd quarter gross margin or 4th quarter for that matter should be any material difference from what we saw here in the Q2 all else being equal?
I would expect pretty quiet on the gross margin front in the 3rd and 4th. There's really the drop in rebates, indicated, I see that as a transitory issue. I mean, if our growth gets stronger, that number improves as well.
Yes. Okay. And then on SG and A, it's rare to see a downtick from the Q1 to the Q2. So clearly, you were doing what you said you're doing here and keeping a lid on costs. But assuming a slow growth environment going forward, should we just see normal expenses flex up with volume into the 3rd quarter and sort of the $5,000,000 to $10,000,000 uptick in SG and A that we normally see from the 2nd quarter into the 3rd 4th quarters?
Or again, is there anything that sort of hit the Q2 that was unusual that will unwind in the 3rd that we shouldn't expect to see?
Probably the most noteworthy thing that hits from 1st to second is we get out of the heating season. And even though energy prices are better than they have been in the past, it still costs money to heat. And that steps out You see that benefit from 1st to 2nd. 2nd to 3rd, I don't see anything that would cause me to think last year's sequential pattern would be anything outside the norm.
Okay. All right. And then just final question kind of philosophical here. You mentioned your CapEx requirements relative to your earnings power lower in the future. And now that you're paying dividends and buying back stock, can you tell us going forward, will both of those be a part of your capital allocation plan?
And do you favor 1 versus the other longer term?
Well, first off on the CapEx, if you looked at that number over an extended period of years, say 10 years or so, what you'd see is our CapEx kind of hovered in a 25% to 30% of earnings zone typically. And that number as we'd indicated about 3, 4 years ago, that number moved up dramatically when we were doing 2 big things at once. We were automating our distribution centers. We were rapidly building up an inventory of machines to deploy. So we never had to be in a situation where a customer wanted a machine and we didn't have one to deploy.
And so I think we had a high watermark of CapEx at 44% of earnings. And we really saw this year going down closer to that 30% number and probably being in that kind of zone going forward. So that gives us flexibility from the standpoint of free cash. Free cash, I think our bias still leads towards the dividend. We have a lot of shareholders that I believe have grown accustomed to that.
We have attracted some shareholders because of that aspect of our business, a growth organization over time that pays out a meaningful yield on the stock. Quite frankly, the marketplace has pushed us to buy back some stock by how you price the stock. If our stock had a price that was materially higher than it is today, we wouldn't be having this discussion, I don't think. And so I think the question on allocation in the future is really going to center on where is our valuation? And I don't mean from an absolute perspective.
I mean where is our valuation from a relative perspective? Where's our valuation relative to our peers? And the tighter that number is, we're probably more inclined to buy back a little stock.
Got it. All right. Thanks a lot, Dan.
You bet.
Thank you. Our next question comes from the line of Flavio Campos of Credit Suisse. Your line is open. Please go ahead.
Good morning. Thank you for taking my question. I just wanted a little bit more color on the SG and A line. We didn't get the fuel disclosure this time around. So if you could talk a little bit about what the impact of fuel was there?
And also how much of that of those savings were coming from the fuel itself and from discretionary expense? And how much of that tied to the fact that you had net 13 store closures this quarter?
Yes. The 13 store closures really doesn't affect the numbers that because you don't have any you don't have all that labor that's tethered to the store. But in the short term that expense is pretty nominal on its impact. I'm looking at the copy of the Q here. And our employee related expenses were up about 1% in the second quarter.
Our occupancy related expenses were up about 3.5% and most of that centers on vending. And then our selling transportation expenses, similar to what we saw in the Q1, it's down around 20%, 21%. And if I look at our fuel component of that, in the Q1, we spent just under $9,000,000 in fuel. That's total fuel. That's in cost of goods.
About half of that's in cost of goods for diesel going into semis. About half of that's in operating expenses, the gas that goes into our pickups at the store. And that number was just over $9,000,000 in the second quarter. So similar savings what we saw last year, about $3,000,000 it saved
us.
Perfect. Perfect. That's very helpful color. Thank you for that. And on the vending side, we saw that the growth of customers with vending to drop to single digits for the first time in the time series.
How much of that is that replay of the national accounts that you were talking about on the call that the top 100 slower and the lower and the smaller national accounts are growing faster. And is there a strategy to increase penetration of vending on those faster growing Vending accounts on the national accounts on the tail?
Absolutely. I mean, first off, your first half of your question was the linkage. It's a direct linkage. Those customers that we have a lot of OEM relationships with, I was just at a plant last week in Redmond, Washington that we are on-site with a lot of OEM business. And I saw a lot of blue vending machines.
I was walking around those two facilities I was in. So they're very tightly related. The but the weakness we're seeing in our top 100 customers heavily, heavily weights on what you're seeing on the vending. Because vending quite frankly, if you think about the vending machine, our goal with the FAST 5,000 is when we place it, our goal is to get $2,000 in monthly revenue. And so vending by its nature tends to lend itself to a larger customer rather than a smaller customer.
Because a $500 a month customer, if we're getting the lion's share of their business, they're probably well, they're not a target for of any machine where you're targeting $2,000 because they just won't have that spend.
Perfect. And but are you do you have a strategy to target those that end of those smaller customers as well? Or they're just not as attractive for Vantage Solutions as the top 100?
We are targeting every customer that has the business potential to justify it, whether that customer is a national account or a local account in Eau Claire, Wisconsin. We are targeting we're bringing that value to customers that the vending machine is valuable to. So that customer has the spend to make economic sense for their business to have vending. We're bringing it to them. We don't care what group
they're in. Yes. And Flavio, we don't care whether it's gloves, office supplies, beverage, water. We look at the customer and we go in, we do a process mapping and we try to tailor our deployment by size of machine, number of machines to really give them the benefit of vending. We have a smaller 3,000.
We have a 5,000. We have lockers. And so we really try to come to the customer with some type of solution that fits their business needs.
Perfect. Perfect. Very helpful. Thank you for taking my questions.
You bet.
Thank you. Our next question comes from line of Adam Alden of Cleveland Research. Your line is open. Please go ahead.
Hi, guys. Good morning.
Good morning, Adam.
I guess the first point of clarification, it seems that pricing is still a headwind to revenue growth. I was wondering if you could detail how much that was a drag on your year over year sales growth? And then secondly, it sounds like you have a good amount of traction with the smaller accounts coming through. And I might have missed it, but what was your active account growth for the quarter?
I don't have that number handy right off the cuff. That number is probably mid single digits I guess.
Yes, 3 to 4.
And that number is so much of our growth is coming from there's 2 components to our growth. There's active account growth and there's dollars per active. So much of our growth has been centered on dollars per active in this environment, because all of our growth drivers with the exception of the people we've been adding now in the last 12 months. But the growth drivers of the last 3 or 4 years have really centered on means to add dollars per active, because it's very, very profitable growth for us.
Got you. Thanks for that. Yes. And on the pricing question?
Yes. Go ahead. I mean go ahead.
What was the drag on revenue growth this quarter from Q2?
Well, the exchange rate drag from a pricing standpoint was about 1%. If you look at our year over year number, most of the drag comes from mix and not from pricing, I'd say probably 0.25% drag 0.25% drag 0.25% of our drop in the gross profit was more about pricing.
Got you. Thank you. You bet.
Thank you. Our next question comes from the line of Ryan Merkel of William Blair. Your line is open. Please go ahead.
Thanks. I wanted to start with a bit more color on June. I know there was an extra day in the month and also it ended mid week, but you still missed the sequential pattern by a decent amount. So I'm just wondering how the month play out? And then are there any other signs of life outside of the energy delta coming in a bit?
June was disappointing. There's no question. And even at the 1% on the extra day, it was not where we wanted it. And when you look at you talk about outside of the oil and gas, some bright spots for us, I look at some things that are happening and taking place within the business in Florida, in California, in some of our Midwest regions, we're starting to see Canada when you really factor in the native currency is actually performing well. And so this oil and gas thing as we've talked before Ryan, it's just got such a ripple effect through the economy and through the business that it's just weighting us down.
But if you look at non res that's we think and when we look at our information, we believe that's heavily tied to oil and gas. So that's a factor. We look at ag and heavy manufacturing all headwinds right now for us.
And I guess maybe the follow-up is lacking anything else. Should we just sort of assume normal sequential patterns for sort of the rest of the year just because there's really no obvious catalyst that you're seeing in your business? Is that a fair statement?
That's a fair statement. That's the assumption I'm going on to.
Okay. The second question and Dan you sort of hit on this, but I want to ask it again. I thought that the higher EBIT margin year over year with lower gross margins was a big positive. But it's hard to tell how much of that is one time cost cutting versus pathway to profit really starting to shine through. And pathway to profit really wasn't shining through last year, for example, because gross margins were sort of coming down so much and offsetting it.
So my question is, should investors view your results this quarter as a positive long term signal that you can raise EBIT margins even if gross margin moderates due to mix? I believe so.
We've touched on that and really talked about the mix and what it does to gross profit. But the inherent cost structure that we have and the ability to leverage that cost structure. One of the things I shared with our Board yesterday is, if you look at our business, we have the 80% of our business that's going through either a U. S. Or Canadian store and 20% of our business that's either going through what we call an on-site situation or a strategic account store where we have a very close tight relationship with a large customer or our non U.
S. And Canadian store business. If I set those aside and look at the 80% of the store business, when we set up the pathway to profit back in 2007, most of our business was going through that piece that store piece. And we said as this piece continues to mature, we could take the operating margins from the 18.3 percent we are at to north of 23 percent. This quarter, if I look at strictly the store subset, so that chunk of business that represents about 80% of our sales, we were at north of 23%.
So we actually hit our pathway to profit target in that subset of stores. And we've always said that's a point in time number. So that group of stores is about 106,000 a month in business. So I think it's very, very bullish for our long term ability to drive the profit machine that is fast enough.
Perfect. That's what I was looking for. Thanks.
Thanks, Ryan.
Thank you. Our next question comes from the line of Robert Barry of Susquehanna. Your line is Please go ahead.
Hey, guys. Good morning. Hi, Robert. I wanted to just actually again follow-up on the SG and A. I mean, I understand you're in a low growth environment and so it makes sense to really double down and try and dial back the costs.
But Dan, you did mention you haven't seen this kind of performance in the 19 years you've been at Fastenal. So I'm curious beyond the next couple of quarters, were changes made in the way you're running the business that are permanent and sustainable? Can you maybe share a little more color on that?
Well, I mean the leverage that we described in Pathway to Profit that's structural. That's a case of our occupancy as a a smaller and smaller portion of our labor pool. Those kinds of things are structural. The things that aren't structural that are part of the tug of war of life, if you will, is one of the challenges Lee put out to the team and I think the team responded tremendously too is, hey folks, we're investing in adding all these people. We can't spend money doing other things.
We've always been frugal with travel and sometimes we joke about some of the things we do when we travel because that's who we are. We doubled down on that. Now how permanent that component is, is a function of the tug of war of life. If we were growing faster, Lee's message might not have resonated quite as deeply with our district managers, our national accounts folks, our regionals, because they might be traveling a little bit more, because they're visiting more customers, they're visiting more people, they're doing more things. And sometimes you dial that back, maybe you don't need to have that meeting.
Maybe you have that meeting as a conference call rather than a face to face. Maybe you do these things in the short term, but those in the scheme of our expense pool are relatively small, but they're very symbolic. And the fact that we managed our travel, our non store operating expenses as well as we did, I think was enhanced by the call to action that Lee put out there 3, 6 12 months ago. And but we demonstrated we can do it when we need to do it, because when you're growing your top line 5%, you've got to do things like that that maybe you wouldn't have to do if you were growing at 12% or 14%.
Right. Fair enough. Yes Rob I'd just add one thing though and you have to link this together that when you put a call out to the troops and you get them into the why and I said that at the opening, they were asking and they want to grow. Their commission plans are set up that way. So they want to grow.
They want to take market share. They want to serve at a high level. So when you put out there that we want to add energy into your store, but I need a little help over here that's what we're talking about. They saw the reason they responded like Dan said the team just did a tremendous job.
Yes. Could I also just follow-up on the vending? Some of the disclosure absent this quarter was also the signings and installs a machine equivalent basis. Is that something that you could provide?
That will be in our Q. Let me see if I have that page handy here. Let's see. On a machine equivalent basis, okay, the signings number be $3,931 versus the $2,916 we did in the Q1. The installed at the end of the period would be $37,714 versus $35,997 at the end of Q1.
And I think the rest of the stuff was in our release.
Yes. So even on an equivalent basis that's pretty good acceleration year over year. Anything in particular driving the acceleration in the signings?
We have a group of store employees, district managers and national account members that are key to driving that number. Because one thing that we know about our business and we keep reiterating with our team, The vending machine is a sign of engagement with your customer. If you're truly engaged with your customer, you should be able to put vending machines out there and makes the business stickier.
And it's just good
I I think the other thing too Rob is again I worked in the store and when you and again it's a world of competition and we like that and we love it. And so when a competitor comes in and they see our blue machines in there, our folks are starting to understand that how tough it is for the competition to get us out. And it's a learning curve with 2,600 stores, 2,700 stores, but more and more stores are adopting, more and more stores are seeing the benefit, more customers. And for me personally, I'm in a store and I have a customer with vending and I show you and take you to that customer and you see it in action, that is how we continue to see more engagement and more adoption in the field.
Right. I think you had actually purposely dialed down the pace a little bit a year or so ago in an effort to improve the efficiency and the profitability. I mean, do you think given you've made progress there you're dialing up the aggression a little bit?
Well, I think it's what we said earlier, I think this is actually linked to what's going on with our national accounts. Everybody is engaged with vending, whether it's the local store, district managers, regionals and national accounts. But as our national accounts are providing the growth, they're also providing a lot of what we're seeing on our vending right now. Great. Thank you.
Yes, sir.
And it's 942 Central. It looks like we have time for one quick question, if there's any left.
Our final question will come from the line of Robert McCarthy of Stifel. Your line is open. Please go ahead.
Hey, guys. Thanks for fitting me in. Yeah. Yes, sure. Now in terms of I mean, I don't know if I missed this earlier, but did you talk about what you thought incremental margins could be in the back half of the year?
Did you talk about kind of the 20s range or the 30s range? I forget.
Our goal is always to be as close to 30 as we can. And I was frankly surprised by it pleasantly surprised by the fact we were able to hit 40 percent despite the fact that June came a little bit weaker than we thought it was going to be. And but I noted that on the last call. We get antsy when that number is below 25%. Because if that number isn't at least better than our operating profit, What's causing us to lose that?
Now if we're losing that because we're consciously making an investment in something that's one thing. But our anxiousness rises if we're not meaningfully beating that number.
Could you talk about the effect of kind of the rollover to steel prices? Have you seen any impact in terms of pricing and gross margin? How would you quantify
it? We've seen the impact in our revenue. We've seen the impact on gross profit. We're at it's difficult to quantify it because sometimes there's source supply because you're bringing a better cost value to them. It's not just in steel, it can be in non steel products as well.
But there's no doubt about it. Steel is creating headwind for us and it's creating some challenges. It also creates some opportunities. Earlier on when asked about our gross margin change, I indicated about half the drop from Q1 to Q2 centered on our supplier incentives and probably about a quarter of the drop related to the impacts of pricing.
Of pricing, okay. And then in terms of the back half of the year, I mean, obviously, you can look at the sequential patterns and the but also the compares are a little tougher. I mean, I guess, do you still see the prospect for positive organic growth for the back half of the year given what we've seen in terms of June?
Yes.
Okay. Well, I will leave it there. Thank you very much.
Thank you. It is 945. We'd like to thank everybody again for your listening on the call and your interest in Fastenal and we'll talk to everybody soon.
Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the