Day, ladies and gentlemen, and welcome to Fasenal Company Second Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session with instructions following at that time. As a reminder, this conference call is being recorded. Now I'll turn the conference over to Ellen Truster with Investor Relations.
Please begin.
Welcome to the Fastenal Company 2012 Second Quarter Earnings Conference Call. This call will be hosted by Will Overton, our Chief Executive Officer and Dan Fornes, 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 Will and Dan with the remainder of the time being open for questions and answers. Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal.
No recording, reproduction, transmission or distribution of today's call is permitted without Fastenal's consent. This call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage, investor. Fastenal.com. A replay of the webcast will be available on the website until September 1, 2012 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 Will Overson. Go ahead Mr. Overson.
Thank you, Ellen and thanks everybody for joining us today. I'm very happy with the quarter that we reported this morning. I'm going to make my comments pretty brief. Dan does a very good job in his press release and so I'm going to go through it pretty quickly and basically just give you the color as I see it. Manufacturing is slow.
That's clear. But on a very positive note, I've been out talking to a lot of our regional people and district people and we have not seen a lot of abrupt change. It's more of a step down and we haven't seen a lot of panic from our customers. So we think although it's much slower than it was, it doesn't appear to be a lot of panic going on. So that gives us some optimism for the next couple of months.
Construction has also slowed, but we're actually having a difficult time with the comparisons or understanding the comparisons because of the very warm winter now the hot summer, it's hard to see where the business would have normalized. But overall, it appears to be somewhat weaker than it was, but there's still a lot of business and a lot of opportunity out there. On the margin, my comment there is I think we've made nice progress. I'm happy with what the team has done. We believe there are still several opportunities or many opportunities to show additional improvement in margin and we're going to continue to work very, very hard on the margin as we go forward.
One of the areas that I guess I'm the happiest with is our expense management. The second quarter this quarter was the first time that we've ever reported SBNA below 30%, which we're proud of. And it's really I believe it's really just a result of focus and hard work by the team. A lot of people working on it, a lot of people understand the expenses and just really doing a nice job and I want to give the people on our team a kudos for that because they're working very hard. Initiatives, our sales initiatives, we continue to see very nice progress on those.
Metal working continues to show progress. We continue to pace run at a nice pace. But we have a long ways to go. We're learning a lot about it. Our learning curve is very steep right now.
I've been meeting with several groups of managers and talking about this initiative and finding out what we need to improve upon in areas that we can move faster with. Government is also very similar. We're making nice progress with our government initiative and there's a tremendous opportunity going forward. Both of those areas we're pretty much fully staffed as we see it today with our sales teams and those sales teams continue to improve their knowledge level. So we think that we have a we should continue to see incremental improvement quarter over quarter to quarter as we go forward.
So that's some built in upside for us. Vending, all I can say is I feel we made great progress. Our team Russ Ruby and his team that runs the vending program, they're working hard and they've had the opportunity to talk to several of our larger customers that have deployed our vending solutions and the positive the feedback has all been very positive. So the customers are seeing the savings. The customers like the control on their inventory.
The software is working well for them to show them what they're using and how they're using these products. So there's a very positive customer feedback. In our processes, internal processes for how we receive the orders from the customers, how we set the machines up, all the different things that we've developed continue to improve and we still have a lot of opportunity there to improve these processes. And every time we do that, we lower our costs and we improve the customer service at the same time. So we have a tremendous amount of focus on the entire process of the vending business from the start to finish and think that that will just continue to get better as we go forward.
Stepping back and thinking of the overview of our business and the puts and the takes, thinking about the economy. The economy as we see it is I guess we'd say it's not great, but it's okay. So we should continue to we should be able to perform at a reasonable level in the current economic situation. I think our we're doing a nice job as I mentioned with expense control, which creates cash flow. So we're in a very positive position there.
Feel good about that. Our sales drivers initiatives that we continue to talk about are getting stronger, which is very good. You saw that with the vending numbers that we reported. We're actually accelerating in those areas. Some of the areas that we don't talk as much about are internal things.
One that I'm very optimistic about is we've our IT group has developed some new software programs to use in our stores. In
all of
them there's actually 2 or 3 large ones that we're either rolling out or testing at this time. Our systems that are set up to make store life far easier and automate different processes like receiving product, how we process orders and several other areas. 3 weeks ago, I had the opportunity to go out and visit 11 stores in Eastern Wisconsin, larger stores some of them are mature area and talk to managers about how these were working. And in every case they were talking about this one saves me an hour a day or this one saves me 2 hours a week. And so we only have these initiatives rolled out to a handful of stores or a smaller percentage of our stores.
As we do that, it has a tremendous upside to save labor in the store and usually the way that works is that labor will now be used for sales activity. So I'm very optimistic about what this the potential this has for our company over the next 2 to 6, 7 quarters, very optimistic. Our warehouse and transportation group continues to work on automating their systems. We're within about 4 weeks of starting up our new automated warehouse here at the Winona facility and that should not only shorten up our cycle times to produce the orders, but also lower our expense. And we have several other projects that we're working on for warehouse automation.
The transportation group, the people who run all of our entire fleet or direct our entire fleet are a ways into a project trying to understand the use of compressed natural gas CNG to run our trucks off. And we've actually had some very good feedback. It's a small experiment with our branch vehicles and now they have some semis coming in, some large vehicles coming in and it has some real potential if it works out for the future. As an example of the semis that we're working on, we would save on the average between $15,000 $2,000 per month in operating expense on those trucks after paying a higher price for the vehicle and the tanks. So it has some potential going forward to lower our expense.
And as you know transportation has always been a very big part of our business. So overall, very positive about the future things that we have going on and we'll just have to work through this slower economic time and go from there. With that, I'll turn it over to Dan and I thank you again for joining us today. Thank you, Will and good morning everybody and thank you for joining us as well on our call. I'm going to touch on a handful of things in the press release just to highlight a few things that we were noteworthy.
Let's start with the sequential trends on Page 3. If you look at the 3 years we have displayed there, it really has a story of 3 different years. If I look at 2010, from January to October, we were soundly beating the historical pattern about 60% to 70% of the time. February was what I'd call a setback month. And at June, our cumulative number was in line with history.
We were beating it most of the time. We had a big setback month, but we were trending with history. 2011 was a little bit different story. From January, October, we actually were beating sound like beating the pattern a little bit less about 50% or 60% of the time, but we didn't have any big setback months. And at the midpoint of the year, we were about 3 70 basis points ahead of what history says we should be building.
And so coming into the year, we estimate we'd grow around 2019 based on history. We ended up growing closer to 2022 based on just having better momentum, better trends throughout the year and no big setback month. When I look at 2012, March was a in the January to June time trend that we have history on, March was a huge feat. And April June were essentially in line with our historical patterns. February May were our setback months and because of those 2 months we're sitting there about 3 30 basis points behind our history.
So those are just some of the things I guess to note when we look at the sequential patterns of our business. When I look at the second half of the year, there's some positive and negatives. Positive, I think we have some nice built up momentum with our vending machines that have been signed and are going to be installed, the ones that have been installed in the last 6 months, which are significant. And the headwind is the uncertainty about the economy and some of the things going on with our currency rates.
One of
the things we did see change quite abruptly in the spring and I mentioned it on page 4 of the release is on our production fastener side or on our fasteners in general. In the Q1 that business was growing about 15.5%. In the Q2 it dropped to just over to several digits in April dropped down to about 6% in May and rebounded a bit to about 9 faster areas, areas where most of our growth drivers are centered on, We're seeing still very strong results still into in the close to 20 neighborhood. The ISM Index touched on that in the release as well, dropped just below 50 here in June. I believe that's the first reading below 50 since August of 2,009, which was a quite long stretch.
Growth drivers as Will mentioned, we continue to make nice progress on those. One thing that I think is really noteworthy when you look at the vending stats is while we were seeing softening trends as we went through the Q2. Our vending numbers, the growth of our vending customers actually improved from Q1 where we grew at 33.9 with that subset of customers to Q2 where we grew at 34.3, percent, which from a directional standpoint, I think that's a huge accomplishment, because these are larger customers where a lot of these vending machines are going and we're really demonstrating our ability to take market share at a faster pace in that subset of customers. Profit drivers on page 8, a few things that I thought were noteworthy. We're often guilty a bit of beating ourselves up internally and externally a bit when some things aren't working as we think they could.
A good example of that is our margin in the Q1. We do this because we believe we fix stuff today. We don't just analyze and talk about it or said another way rationalize it. However, if I take a longer term look at our business and look at Q1 of 2007, so the quarter last quarter before we started the pathway to profit in the Q2 of 2012, our average store has gone from 72,000 a month to 89,000 per month. Our gross margin has increased from 51 percent to 51.6 percent and our operating costs have improved through our pathway to profit and through our initiatives to improve our relative performance in each category.
Or it's in a much simpler way, we've increased the size of Fastenal by about 65% and we've doubled our profits. These are great long term improvements and we are all about long term improvement. The other thing that I think is worthwhile to note, we probably are a little anal with some of our statistics we put in our release. One of them is a table that shows our headcount numbers and our store numbers etcetera as we tried to demonstrate and to communicate what we're seeing on the pathway to profit. If you look at the FTE headcount growth in that table on Page 10, you would notice that since the Q1 of 2007, we've added about 3,700 FT feet feet
feet feet feet feet feet feet feet feet feet
feet feet feet feet feet feet feet feet feet feet feet feet
feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet
feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet Es to the business are individuals that have direct contact with our customers either in the store or a non store selling role. We added another 2 35 people or about 6% into our distribution centers to support that 65% increase in sales. We added another 2 29 or about another 6% into our manufacturing centers and about 40% of this came from our Holocome acquisition back in 2,009. And because of the efficiencies we've gained in our business in the support areas, we've added 27 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet
feet feet feet feet feet Es
or less than 1% of our headcount growth since the Q1 of 2007 have been enrolled. It doesn't directly relate to selling, moving product or manufacturing product that we sell. And I think that's a strong tribute to the individuals internally as well as the wisdom and the possibilities of our path to the profit. And speaking of Holochrome, I thought I'd mention quickly that I had the opportunity here several months ago to go out and one of our regional VPs, Russ Sarat, out of Ohio was having a district managers meet there to get a view of the facility as well as have the district meeting. And I went out to speak to the group.
One comment I'd make is that we moved into a new manufacturing facility about several years ago. It was my first chance to see it. Very impressive facility, very impressive people I met that work in that facility and my compliments to Tim and his team out there. Also as noted in the table, we hit 22.2% operating margins. I don't know if that's I think that's our best quarter we've ever had from an operating margin percent perspective.
If I'm sure if I'm wrong, somebody will call me later today and inform me, but very impressive. And we had about an 80 basis point improvement from 2011, not the 100 basis that we strive for, but I think very strong given that we moved our operating expenses below 30%. And that's the first as well I believe as Will mentioned earlier in the call. The gross margin on page 10 as I mentioned, we kind of beat ourselves up on that a little bit. And that was our wart in the Q1.
We aren't done yet, but I'm pleased with the progress we've seen in the Q2. I'm also pleased in general when I look at the 22% pretax, the improvement in gross margin, the improvement in our business that we've experienced not only in the last year, but in the last 5% to personally be associated with an organization of this caliber. As mentioned in prior quarters, our exclusive brands continue to inch upward. Today, they're about 9.5% of our sales. A good piece of that is being driven by our vending solution.
Operating and administrative expenses, we talk about the great thing we did with expense control. I think the story is often understated, because under the surface in those expenses, there are some things that are growing quite dramatically, but I see them as high quality items of growth. 401 profit sharing contribution, we share a piece of our profits with our employees that participate either in our retirement programs throughout the company. Our profit sharing contribution in the quarter grew 74% from the number a year ago. In fact, if you look at our profit sharing contribution for the Q2, we're about 70% of our annual number just 2 years ago in 2010.
Also in our occupancy, our vending machine costs more than doubled from a year ago because of the success we've seen with vending. Those are 2 items that are outgrowing the company, high quality items, I would might add. Finally, on the working capital side, all I can say is we had a nice improvement and I credit that to our team in the field. They're doing a nice job of managing their working capital needs both compensable and inventory, which produced a very strong cash flow again as we go through the 1st 6 months of the year. Our expectation when we started Pathway to Profit was operational working capital excuse me operational cash flow at 89% of earnings.
I believe that range has really moved to 85% to 95%. Year to date, we're at about 90%. Net CapEx, we've really set our target number of that is about 25% of earnings. Year to date, we're at about 23%, which puts our free cash flow at about 66%, 67% of earnings, not only a strong number given our range of estimating about 60% to 65%, but a very strong number when you consider the first half of the year is where we need the most working capital growth because of the seasonality in our business. I think that bodes well for our cash flow capabilities in the second half of the year.
With that, I would turn it over to questions. As we've said asked in the past, please limit yourself to one question, so we can get through the entire group of folks that get queued up. Thank you.
Thank you, ladies and gentlemen. First question is from Ryan Merkel of William Blair. Your line is open.
Thanks. Good morning, guys. Good morning, Ryan. Just want to start off with June. Maybe you could provide a little bit more color.
How did the month end? Does that tell you anything about activity levels? And then maybe talk about the strengths and weaknesses either by end market or by geography? June actually was a came in about what we thought it was. In the middle of the month, we had a little uptick and thought we might get closer to the 15%, 16%.
But overall, it was a very predictable month, up from May and kind of average growth as you saw in the sequential number. As far as the geography, there wasn't a lot of change. In May, we had more slowing up the Eastern seaboard. Most of those areas came back in June. It seems like it's just a step down across the country.
Even in the areas that we're doing so well earlier in the year. The oil patch from Texas, Louisiana, Oklahoma, their growth stepped down about equal to the rest of the company. The Midwest where we've been strong also far a little bit. So we can't give you much help there. Industry wise, Dan puts in his number, manufacturing and construction or so overall, it just seems like and I think I commented on this, the entire thing just stepped down a little bit, a little energy like you we let off the throttle for the economy.
Even our international business is much slower than it was a year ago. Mexico that has remained very strong for us, their growth was slightly lower than it had been in previous months, still well above the company, more than double the company. So it's hard to really pinpoint any one area that's slowed more than another. Yes, I would agree. Okay.
And then just for my follow-up on SG and A, I was also quite impressed with the controls in the quarter. I'm wondering is 9% OpEx growth sustainable if you continue to grow in the mid teens? Maybe just talk about the puts and takes there? I mean, if you look at the nature of the items, the quality of our operating expenses, if you think about that, we have other seasonal things that help it or hurt it. On the Q1, one of the questions I had going into the Q2 was, Q1 was helped in a meaningful fashion from the standpoint we had no winter and natural gas prices had dropped.
So we had some things in there that weren't necessarily sustainable on a sequential basis. When I look at our operating expenses in general today, there's nothing in there that is unusual in nature. So I think our ability to continue managing that at an extremely low level like we did in this quarter is fairly sustainable. And some of the things I mentioned about the software some of that will be coming through and that helps the large stores more than anyone else by quite a margin. And if you look at our report that is the group of stores that raised their profit had the most impressive increase in their profitability because we're making those stores more efficient.
So we do have some upside there.
Thank you. Our next question is from Holden Lewis of BB and T Capital Markets. Your line is open.
Great. Thank you very much. I'm just sort of curious now that we've had kind of it stepped down a bit in growth rates, your goal has been to expand your operating margin about 100 basis points a year going forward. Can you talk about whether or not the current level of growth is still consistent with 100 basis points of operating margin growth? And then maybe also sort of recognize that that achievement is a series of things you're doing internally.
Can you talk about maybe some of the projects that are dropping off, whether it's successful or not successful and then those that are coming on? You alluded to sort of the software, the transportation initiative. I'm just sort of curious about kind of how we're progressing through initiatives that's upcoming and going. Okay. Well, the first thing and I'll let Will touch on some of the initiative piece.
But just from a mechanical, you think of the math of our P and L. We still and this problem improves as we move forward. But I mean if you look at it, our gross margin was down 60 basis points roughly from a year ago. And in the Q1, it was down 80 basis points from a year ago. So as we work in I don't want I'm not going to make predictions on what our gross margin is going to do or not.
But as if you think of the mechanics that was happening in 2011, our gross margin was stepping down during the year. So our comps changed dramatically as we stepped through this year. And all of a sudden all that headwind from gross margin dissipates as we get into the second half of the year. So that puts us in a position if we're doing a good job with operating expenses to do a great job on raising our operating margin. But Will maybe you want to touch on a few of the initiatives?
Well, I think on the initiatives you mentioned transportation. We continue to see improvement in our transportation. The first half of the year was a little tougher because fuel prices started out high. But we are making money on our transportation and we'll be at least based on halfway through the year or halfway through the year we've already made more money on our freight program than we did the entire year of 2011, so well ahead there. The software things that I talked about are branch based initiatives where it's just it's operational efficiencies and how we receive the product, pick the product, ship the product.
So in the larger stores with higher volume, we are saving labor. I was in our largest facility who's on the trip to Wisconsin and the manager there has had this system for about 3 to 4 months now. He said, well, I could not operate the business today without that. I suppose he'd figure it out, but that's his feeling, which is very positive. So there are a lot of things we're working on the vending where to streamline that process.
It was it wouldn't have been a real big deal when we've had 500 or 1,000 machines. But now that we have 13,000 machines installed, we're going to by the end of the year, we could be close to 20 or probably should be close to 20. Those types of things really work and give us some efficiencies. We are as an organization, we are very focused on making a more efficient business, a leaner business. So in the higher economy, we can use that to grow our sales faster and be leaner.
In a slow economy, we can use it defensively to lower our costs and be a better competitor and more profitable. Okay. Thank you.
Thank you. Our next question is from Sam Rakesh of Raymond James. Your line is open.
Good morning. This is Josh Bill in for Sam. Congrats on the quarter.
Thanks. Thanks. First, a
bit of a modeling question. Do you think there was or can you give us a sense of any negative impact on July from the timing of the July 4th holiday being in the middle of the week? I've chatted with a handful of our regional vice presidents situated around North America just to see what kind of impact. If you think of last year, July 4 was on a Monday. The month started on a Friday, July 4 on a Monday.
That's about as a perfect alignment as you can get. This year, we have a few things going on. I believe we have an extra day in July this year. And the July 4 week falls the July 4th falls dead in the middle, so you have a couple of orphan days. What I was hearing from a lot of the folks is, you had businesses that shut down the 1st 2 days of the week and some businesses shut down the last 2 days of the week.
I personally believe it takes a day to 1.5 days of the month. But time will tell how that plays out. It's just 3 months maybe Will has a different opinion. He might think of all of it.
No. It could have
been any worse and we'll just have to play it out. But on a positive note it's early in the quarter. Yes. And so we have plenty of time to make up if we lose some ground. Thanks.
And then just looking at the spread between your vending growth rate and the company wide growth rate seems to imply a fair amount of moderation in the nonvending customers. Is this entirely driven by moderation in the end markets? And do you think it implied rates somewhere around 10% or 11% accurately reflects those markets? Well, I guess I'll answer it this way and if you need to follow-up, I'll give you a follow-up on that. But I think it says more I think it understates the strength of lending in general, because if you notice one of the things we touched on was the slowdown in our fasteners.
Our fasteners really aren't helped by our vending. Vending is really about the non fastener side of the business. So I think a faster business is doing what the faster would do right now because of what's happening in the economy. And the growth we're seeing is because of our ability to keep taking market share, but the economy has fallen back in my opinion on the fastener side. So I think it's more about that piece of the business.
Clearly, our stores with fasteners grow faster than our with vending grow faster than the stores without it. In fact, I believe you look at our stores that Wilma you want to touch on. If you look at the stores that have deployed 10 machines or more, those stores are growing at almost double the rate of their peer group. So there really is something. Now there's more to it than just bending and maybe the better managers people are embracing different ideas, but there is a direct correlation.
And also to answer is 10%, 11% the right number. If the ISM is flat to down, it says that there's no growth no underlying growth. So everything that we're getting is taking share. And taking share at that rate of our size is probably still pretty good performance. What it really tells us is that we need initiatives to cover a broader base of our business and that's what we're focusing on saying, okay, vending is working well, government is working well, metal working is working well.
We just need more of those and figure out what are the best ones to continue our above average growth as an organization.
Thank you. Our next question is from David Manthey of Robert W. Baird. Your line is open.
Hi, guys. Good morning. Hi, David. Hi, David. Similar question.
I mean, I'm just looking at the same data here and trying to figure out, is there anything to the thought that your customers that don't have vending for whatever reason are not getting the TLC they need and just not growing as fast? And then Dan to your comment on the fasteners, I guess the non fastener type products you're selling through vending seem to be doing better than your OEM or industrial production type products. Is there anything related to that? Is it customer mix or is that market? I'm just trying to get underneath the growth rate here.
But again, when we look at the overall deceleration that you saw here, it seems a little bit more severe than your comps or than what we're hearing out in the field. I'm just trying to understand what you think is kind of behind that step down in growth rate that you saw here relative to the world? Look, what I'm hearing talking to our people and I've been out to see a handful of customers is people are slowing down production at some level. If you look at the backlogs, the backlogs flattened out a lot of them in the April, March to May timeframe. And what manufacturers typically do when their backlog quits building is they pull back on production so they can stretch that out because you don't want to burn through your backlog and then have nothing to do.
And I really believe that's happening in a lot of the industrial areas in the fasteners or production product. So it cuts back just a little bit. It doesn't take a lot because understand that we're still growing that business. But if they're not growing or their production is slower than last year, you have to pick up a lot of additional business to make up for that. And it really is centered around that fast production fastener business.
I think it's slower than others maybe are seeing because we're more involved in that production. Okay. And then the follow-up, is there any trend in the type of customer that you're seeing that's adopting vending? Is it primarily a manufacturing sort of production type of customer? Or is it the opposite of that is spending more appropriate for other types of service businesses or those that aren't so manufacturing focused?
My guess is the former, but if you could if there's any trend that you've got. It's actually broad based. We're seeing tremendous success in government accounts, a lot of big maintenance accounts whether like food processing things like that. Manufacturing is very strong. Energy being power plants, producers of energy.
It is so broad based. We just haven't seen an area that isn't working well when we present it right. The biggest hurdle that we have to overcome we're doing well with it is finding the right person to sell to because in most cases going to our everyday buyer that we call on isn't the right contact within the facility. And once we get to the right contact, it goes very well. But it's a very broad customer base.
A lot of warehousing also. We've had some great success in big distribution operations, pick back and ship operations for their necessary step. Got it. All right. Well, thank you.
Thank you. Our next question is from Robert Barry of UBS. Your line is open.
Hey, guys. Good morning. Hi, Rob. I think last quarter when you signed almost 5,000 vending machines, you thought that might be a little bit hard to sustain, but it looks like you even exceeded it a little bit. I was just wondering what was what had changed there and whether the right pace going forward can now actually be more in this $4,000 to $5,000 range than the $2,500 that you were originally targeting?
And then also if you could comment on the mix of machines. I know that originally it was really focused on the PAS 5,000, but you had the 3,000 and the cutting tool machines
too. What are you seeing in terms of
the other types of machines that you had introduced later?
As far as the beginning of your question, what has changed? Nothing has really changed. We just we had seen such rapid acceleration that we didn't want to we were hoping it would hold. We thought it would hold, but we didn't want to commit to that. As far as going forward, our goal for the year is 10,000 machines.
We're comfortable we're going to exceed that, but we're not going to ratchet up the number externally because it's still it's a tremendous amount of work, but we're optimistic that we can keep a fast pace. As far as the types of machines, the FAST 5,000 is still the workhorse. It's we're signing more of those than all the other ones combined. The second machine that we're seeing tremendous success with is the lockers. We've put out a new locker system that's actually standalone, which means it doesn't need to be driven off the range of a Fast 5000 or the controller on a Fast 5000.
And we cannot keep up with that machine. In fact, we would have installed several 100 more machines in the quarter if we would have had the machines to do it. The success was greater than we had estimated, but we're getting caught up. We believe we'll be caught up this quarter and moving forward. The cutting tool machines are moving slower than we had hoped.
We are signing lots of them, but not the numbers we had hoped. And the past 3,000 is moving out, but also slower than I would have estimated. But that really whether that's a 3000 or 5000 it really doesn't matter to us. And part of the reason I think that's moving slower is we're still very focused on the larger customers and it's a machine that's designed for smaller customers with smaller usage. But as a group, we're not real concerned which machine sign.
We just want to get our footprint out there. We want to plan our flag in that account. And then for the most part what we're seeing is the customers that have it are aware a lot of our growth is coming from that are deploying more equipment in other plants. And so that's a very positive result that we're seeing. The reason I asked about the mix is
in part because I think that you require a different amount of incremental net revenue come to Fastenal based on the machine, right? I mean
how much do the lockers require?
Is that also 2,000 a month
in that inventory? There's different configurations, but for the most part it's about 1500. There's several different configurations, but it's about 75% if I were trying to model it, if you were trying to model it. Got you. Okay.
Thank you.
Thank you. Our next question is from Adam Uhlman of Cleveland Research. Your line is open.
Hi. Good morning, Dan. Hi, Adam. Hi, Adam. Just a point of reference, Dan, you did hit a new record in the EBIT margin this quarter.
So congrats on that. Thanks. Thank you. You're going to correct me. And just to follow-up on the vending question.
It looks like it added maybe on a net basis 4 percentage points of growth with all of the machines that were contracted here in the first half of the year. How are you thinking about that contribution to sales growth in the back half of the year? We think we should at least be able to maintain that level possibly expand it. But one thing that we have to caution on is whenever you put a tremendous amount of energy into one area, there is going to be some good. So it's not all incremental.
We put a lot of energy into this and I think maybe Dave mentioned is something else giving. We don't think we're not servicing the other customers. We may not be selling as hard to those other customers because we're selling so hard to the vending customers. But as far as the contribution, we believe that we will increase our installs in the Q3 over the Q2. We won't talk about signings, but our installs should be up.
And if that happens then we should continue to drive the new revenue through those machines because it continues to prove that that works and we see that at a very high percentage of the time. But we have a lot of built in sales growth. Right. And then secondly just on the gross margin. So there were a couple of headwinds relative to the Q1 with the faster mix was lower as a percent of revenues than we had in the Q1 and the vending mix was higher.
It's just still got a little bit of gross margin expansion. I was wondering if you could just maybe elaborate a little bit more on why that played out and how you're thinking about at least the near term direction of the gross margin rate? It's really focus. We spent a lot of time focusing on it, looking at areas that maybe we weren't making as much money and some cases you walk away, some cases you raise the prices. But overall we and we were pretty clear on that in the Q1.
We felt we've been a little sloppy and maybe not as focused as we need to be. But you're right there were some headwinds. But vending overall isn't a headwind unless it's being sold to larger customers. We don't see a step down in the margin in vending just because it's vending. We see a step down in margin because it's being vended to large customers that are typically lower margin customers.
We want to make that clear because there seems to be a notion out there that if it goes through a vending machine it's at a lower gross margin. The same product to the same customer doesn't really matter how we deliver it. It's about the customer. It's about the customer and the product delivering to that customer. And overall from an operating margin standpoint as we develop our processes for vending, although the gross margins may be lower to those customers, our operating margin should continue to improve because it's a far more efficient process.
So we're looking at this as long term a big tailwind not a big headwind. It's a more efficient process, which is additive. But at the end of the day that added sales increases the average size of our store, which increases our level of profits because of store mix. This adds to that. Yes.
So there's a double win in that situation.
Thank you. Our next question is from Brent Rabis of Wonderland Securities. Your line is open.
Good morning. Just two questions. First, you've talked a lot about SG and A. Again, I congratulate you as well on performance there. But could you talk about what your thought process in the slower growth environment is towards hiring the second half of the year?
As I mentioned in the release, our tone is cautious. What we if you think about where we're really adding heads, it's really in the sales part of the organization. And what we strive to do is if you think of the mechanics of the pathway to profit, as long as our labor growth on the store side of the business is running at 70% of the gross margin running at 70% or better of the gross profit dollar growth, We leave our regionals alone to let them manage their business. And but we really strive to have that and that's really a function of that's where the number should be just based on the fact that our average store size is growing and it's leveraging. And so for the areas of the business that are seeing good growth, whether it be because they're introducing vending or growing their government business or growing their metalworking or growing their fastener business, They will be adding people commensurate with that growth to service the need.
And areas where we're not, we'll be managing very tightly. And on the support side, we'll be managing it very tightly. Yes. Because we believe we can. Great.
And then just my I guess my follow on question. Last year you guys seemed to really have some breakthroughs in Europe and China and Latin America with some new locations. Just wondering if you can give us a better flavor on both how the existing stores are doing internationally year to date and then maybe how much of these 53 locations opened up this year are non North American locations. Dan is looking for the number on what percentage are non North American. I can cover the first part of your question.
We have seen a slowing in our international business. Some of it is that is FX. But also we didn't do as good a job of signing new large accounts. Most of our international business is driven by large account signings and we didn't have quite as many successes in the 4th and the first quarter which slowed affected our 2nd quarter growth. We do have a lot of good things going on.
We've just sent a couple of nice large customers will be coming on later this quarter early Q4 which will give us a boost. And so we're expecting the growth rates to come back. But it's always going to be more up and down than the rest of our business because it's driven by a handful of large customers where those stores are. As far as new areas, we're just getting going in Brazil. It's taken us longer than we expected.
It's a bureaucratic nightmare with the taxes and the things we have to do, but we're very optimistic about that area. And so overall, we still believe international is going to do well for us. On a very positive note with international is the profitability was up nicely in the Q2. So although we didn't have quite as good a growth, the profit continued to grow at a very nice level even without the growth dollars that they were expecting. I checked my hand.
14 of our 53 locations were international. That includes North America International, so Canada, that's about so 26% of our openings year to date are international. So it's just over 2 times percent of our business because it's about 11%, 12% of our business is international. Great. That's very helpful.
Thanks a lot guys. We're at 946. I apologize to the group that we've gone a minute long. But just to wrap up by saying again thank you for participating in the call. We are pleased with the quarter.
We have some concerns about the sales patterns, but that just means you manage the business in a different fashion. But I'm very pleased with the improvements we saw on the gross margin and the operating expense side. 2 sidebar notes, I always try to add at the end of the call just to make to put an account and I like to be fun. When I read the headlines, I have to say, I'm a glass half full guy. When you read the headline on our quarterly release that the headline says Fast Home Missing Sales, that's a little frustrating, but that's just me venting.
And secondly, for those of you in the Public Works Department, I noticed yesterday on The Wall Street Journal, my hometown of Elkville, Wisconsin made The Wall Street Journal because of their annual skewscurred festival They are the Cheesecake Capital with Swanson. If you ever need any stop by elsewhere. Thank you much. Have a good day. Thanks.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful