Operator:

Good morning, and welcome to the Fastenal Second Quarter 2024 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Taylor Ranta of Fastenal Company. Thank you. You may begin.

Daniel Florness:

Thank you, and good morning, everybody, and welcome to the second quarter 2024 earnings call. Before I start on the quarter, I just wanted to share a couple of things. First off, I wanted to share a story about an onsite of ours in Sweeny, Texas, and I was speaking with Steve Diekman, our Regional Vice President based out of Houston, and for those of you that -- I suspect most people on the call are aware that Houston periodically gets hurricanes and they had a hurricane. And on -- typically what happens when there's a hurricane and this might be Steve Diekman in Houston, it might be Bob Hopper down in Florida, oftentimes, they'll get a call from me or from Casey to see -- and this is before, to see how everything is going, and we often remind them of, we got their back, and what that means is, when you're in the chaos of the moment, you're forced to make decisions on-the-fly and there's a lot of things going on and somebody with 20:20 hindsight a week later might pick apart decision you make at three in the morning to solve a problem. My comment to Steve and Bob is always, we've got your back, make great decisions to take care of our customers and to protect your employees. So -- and the second thing, and this happened a few years ago, read an article about a retirement community in Florida during the hurricane, they were without power and without resources for a few days, and when you read something like that, you're kind of like, how the hell does that happen in today's world, and so one thing I often will throw in there and say, hey, make sure your branches are paying attention to facilities around their area. It might be a hospital, it might be a retirement home, whatever it is, call them up and see if they're okay till they need something. I don't care if they're a customer of ours or not, be there to help because that's what we are. We're a supply chain when people need stuff. So we have an onsite in Sweeny, Texas with Phillips 66, with their refining facility. Refining facilities can be demanding customers. If you think about what they do, it's a facility where really bad things can happen if they're not on their A-game, and so they need something. They don't need it tomorrow, they don't need it next week, they need it. And so Wade, our -- one of our employees at the onsite, he comes into work on Sunday evening, he doesn't normally come into work on Sunday evening. He came to be there all night long because if they need something, he's there to supply that need. So the hurricane hit on Monday about 2 o'clock in the morning. I think it lasted about 6 hours in that area. A good chunk of Houston is without power right now, but our customers in that area get served by Fastenal. If you go to our branches, you'd find out -- a lot of our branches right now have no power. Their point-of-sale system and their lights are being run by generators, which means when there's a 106 degree heat index, it gets a little warm in there. So in the afternoon, they hop in their pickups and they go call on their top 15 customers, they'll call their other customers, is there anything we need. Most other businesses are hunkered down, maybe not being there in the same way. We're out there for a pragmatic reason. The only way you're going to get AC at one in the afternoon, in a 106 degree heat index, is be in your truck. But go see your customer, let them know we're there to serve them. Great thing about Fastenal and thank you to Wade for doing the night shift on Monday morning. The second thing, I wanted to touch on is, I want to congratulate our technology team. Last fall, we did a lot -- we're starting some projects around AI or as I prefer to refer to it internally, FI. It's not artificial intelligence, it's Fastenal Intelligence because the source data is our data and it's a really robust system that we decided to go out and build. And our goal was to roll it out in the second quarter for our folks to start using it. It rolled out on June 28. It's out there. Our folks are using it and I had the ability to test it some in early June. What amazed me, it's scary good, what this technology can do, and the way it's set up is we have a general information and it's our chatbot blue that we created about five years ago. The old system had 130,000, 140,000 Q&A payers, and based on a probability match, you got what you got. Now you actually get a well-thought-out answer and it tells you the source of your information and you can look internally at Fastenal-only data, so it's Fastenal Intelligence. And if you want to go deeper, you can go externally if you want, but you know the source and you know how it is. The source of information is the quality of the information and sometimes you get what you get when you're on the world web. But it's great information on general supply-chain questions. We have embedded Bob Kierlin's book, The Power of Fastenal People. So there's great leadership insight. It's like you're asking Bob a question. It's published right now in 30 plus languages and the next piece we're working on that's going to deploy here in third quarter is an AI-assisted sourcing tool. And conceptually, what we're after is an employee to be able to look -- hop on this tool and identify what is this item the customer is asking for. What else is it? So I can help rationalize clear product substitutions depending on if you need it right now, maybe this isn't available for three days, but we have three things that could substitute for it, what do you need? And then understanding the supply chain, this is readily available, this is difficult to get and so you can have that discussion with your customer and then understand the market for that. What's the price in the market? What should you expect to pay for it? Because maybe it's something we haven't sold before. But it really is a tool that's being built, going to roll it out in the third quarter. We're excited about it and we'll see how that goes from there. But Fastenal Intelligence, not artificial intelligence. Third, take a look at the flip book, talk a little bit about the quarter. A tough quarter. Our net sales grew about 2%. Our underlying market remains challenging. EPS was down -- was $0.51, down about 2%. The item I shared with the Board yesterday. The team within Fastenal looks in a mirror and says, what are we being paid to do? Are we being paid to defend margin when we're growing 2% or are we being paid to figure out how to not grow 2%? The bias goes towards the latter, but we put emphasis on the former as well. And so I think we found the appropriate balance. Does that mean we did everything perfectly? No, there's always room for improvement, but I think we're appropriately balancing where we're going and how to not grow 2% with defending the margin at 2%. As you see in the table on the next slide, I'll get to that in a few minutes, but we continue in that sub-50 ISM, the Purchasing Managers Index, and that's 19 of the last 20 months, we saw a blip in March that proved to be a head fake. It's an uncommonly long duration that weighs on U.S. industrial production and consequently affects our daily sales rates because 75% of our revenue is industrial. Our efforts to accelerate our customer acquisition remain encouraging. A year, year and a half ago had some pretty frank discussions on this call about some missteps that we saw occurring in 2021 and 2022 where our focus on a common goal became blurred. I think there was a little bit too much of what I'm doing and not what we're doing, and when everyone individually is successful, but we're not successful, something is wrong with alignment. So I aligned all the sales organization under Jeff Watts at the time. Jeff is a proven strong leader of the organization. I have to say, Jeff has done a wonderful job in the last 12 to 18 months of pulling this thing together, but it wasn't just Jeff. It's Jeff and his team. It's Casey Miller stepping up in the U.S. It's Miguel and Tony stepping up International. It's Bill Drazkowski stepping up and everybody else that supports them, including me, stepping up their game to support the sales team as we align on a common goal. And I think you're seeing that in the second straight quarter of strong onsite and FMI signings and low-double-digit growth in national contract counts. As I mentioned earlier, we believe we have the right balance for managing our costs and we continue to maintain this balance, but I have reemphasized with our leadership team and as well as Holden and everybody else, this isn't a two person endeavor, this is a 23,000 person endeavor. We need to be really tight with spending in the current environment. The one thing that helps us in the latter half of all three -- '23, excuse me, in the first half of '24, is we have some wiggle room because of declining incentive comp, that wiggle room keeps getting thinner and thinner and so we need to be more dialed-in. Again, in all frankness, we felt in the first quarter as we were exiting that the second quarter was going to play a little differently. We realized as we went through April, that was not to be the case, then in early May, we tightened it down a bit and we've tightened down some more here in July. As you would expect from a distribution business, we continue to generate a very healthy operating cash flow and we have an incredibly flexible and strong balance sheet. The Page 4 is probably a weird chart. I asked Holden, hey, can we just put the table in? Because I have this nice table of ISM data going back, he's got it going back 50, 60 years or whatever the heck it is, but I haven't going back a decade. I said, we show it in because I think it's really good for our investor and our employees to appreciate the environment that we're in, and so we had all these numbers in there and then Holden came to me a couple of days ago and said, we actually can't publish that because that's a subscribed service. I said, well, can you just put in blanks and put a red square wherever the sub-50 is, so you can at least say magnitude, and he's like, yeah, we can do that. So what you see here is a lot of nothing, except for the fact you can see the duration of sub-50 ISM over the last decade plus 12 years. And you can see that since November of 2022, except for March of this year, we've been sub-50, so we had 16 consecutive months and now 19 out of 20 months. And if you look at that little table in the bottom-left, there's eight periods that Holden highlighted with extended sub-50 PMI readings. The third one, July of '81 to June of '83, was the longest period. I remember that, I was in college, just got out of -- just getting out of high school. You do not realize when you're in college how bad the economy is other than -- because you can -- I can find a part-time job, and fortunately, school was a little cheaper back in the early 80s than it is today. But I remember it being pretty tough for my parents and the family farm. The second one is August 2000 to January 2002, about 18 months there and that was the dot-com meltdown. And from a duration standpoint, the third one is right now and that was the 16 months that -- so it's 19 months, 18 months, and then 16 months duration before we had a blip. But you can see all these periods would have impacted Fastenal negatively, every one of these eight that we cite, and some were severe, some were long in duration, early 80s was both. I'll let the listener conclude on what you think that should mean to an industrial distributor. Internally, we say, okay, nobody jump out the window, let's focus on what we're doing to add business. Let's focus on what we're doing to grow the business, and for that customer that's business down, support the hell out of them. Page 5, 107 signings in the second quarter and active sites finished at 1,934, so we're approaching that 2,000 active onsites, 12% above where we were a year ago, and we grew low-single digits. A lot of our older onsites are negative right now. If you have the bulk of a customer's business and their business is down, 10%, 20% 30%, 40%, our revenue will follow suit. If it's OEM Fasteners, it follows suit in magnitude. If it's MRO, it follows suit directionally. FMI Technology. When I stepped into this role in 2015, I remember saying to the group, in 2014, we signed 49 devices a day and we frankly pulled way too many out. There's two things we need to do. We have to stop pulling out 20% plus of our installed base and we have to grow that 49 a day to 100 a day and we need the infrastructure to do it, and we slowly built it and slowly built it. 7,188 devices in the first -- in the second quarter, that's 112 per day. Our installed base is now 119,000 weighted devices, an 11% increase from last year, so we're taking market share. We're planting flags and we're making the business more resilient and efficient. An interesting thing happens, a lot of customers love the technology because they believe in their facility, it steps up their internal game, because when they see the OEM Fasteners in this Kanban bin that has RFID chips and it's not messy, it's not chaotic, it's well-managed, maybe you should do that throughout the production line. Maybe you should do that in a bunch of other places and it challenges everybody in the facility to step up their game and that includes Fastenal. So, in the -- about 42% of our sales are now going through an FMI Technology. And earlier, I mentioned the impact of the economy. I'll share a few statistics that we get. One thing with FMI, you get a lot of statistics on what's going through all these things. So in our FASTStock, and that's where we're going out with an Android device that we're scanning bins and we're managing it with a combination of technology and labor. In January of 2024, we did 16,387 orders per day through scanning technology. Our average order was $224. I already shared that from February to March, it dropped from $200 -- it was $225 in February, it dropped to $216 in March. About 60% of that was volume, while 40% of that was priced. Since then, it's been $216, $214, $217. So our dollars per order is down about $7 from $224. I didn't calculate the percentage here, so I apologize for that. But our orders per day have grown to 17,640 because we're deploying, we're deploying, we're deploying. So we have 1,253 more orders per day, a 7.5% increase. Interestingly enough, when I look at our customer acquisition, we have -- a number we've always tracked and it's our core accounts. It's -- it may be a more meaningful statistic when we were branch based and opening branches, but last year, our core accounts with some of the chaos and things we were doing and some execution missteps and some intentional steps, our cores per day from January to June were down about 4%. This year, they're up about 7%. Part of that is us working through some indigestion. Part of that is Jeff and our sales team getting traction and part of it is just overall execution by everybody supporting them. But bottom line is, it's $217 every time we scan a bin and not $224, but we're scanning 7.5% more bins. If I look at vending, and I look at vending, I'm not looking at FASTBin because it's not mature enough to really look at the data because it moves around too much because we're deploying so fast. But we have a lot of vending machines out there. In January, now this is not an order number, this is a monthly number. In January, we did $1,578 per -- weighted device per day. And recall when we started vending years ago and I'm old enough and I've been around here long enough to remember those days, we talked about $2,000 when we talked about it with the analyst community, we talked about where can we get that too. We started in the less than $1,000 category. We got it up into that $1,000 to $1,100 and we were stuck there for the longest time. And I have to say our teams and our vend -- our FMI teams that support them led by Jeff Hicks, have done a wonderful job of challenging and optimizing those machines over time that now we're doing close to $1,600, but we didn't do close to $1,600 in June, we did $1,454 per device. So about $124 less, about almost 8% less revenue per device, that's the economy. Because the -- we've added more devices -- as I mentioned, our FMI technology is up about over 11% from a year ago, but the customer needs fewer things. One advantage to Fastenal in the marketplace is by having our type of supply chain, not only are we a great supplier and supply chain partner to our customers, we can help them dial their expenses down faster when their business slows down and it just doesn't pile up because everything is on autopilot, and I believe that makes us a better partner. E-business rose about 25%. The E-procurement side is really the driver of that. Our E-Commerce side is okay. It's not great, but some of the things we're doing with AI is intended to improve that over time on the unplanned spend side. Finally, on digital footprint, 59.4%, that's taking all of our E-Commerce, all of our FMI, eliminating the double counting and saying what percent of our business is going through one of those two? It was 59.4% in the second quarter, actually in June, it hit 60%. We had expected that maybe we'd get to about 66% this year. We now think it's about 63% and that's not because we're not acquiring customers, it's because customers are spending less and it shows up in our numbers. With that, I'll setup and turn it over to Holden.

Daniel Florness:

Thanks, Holden. And earlier this morning, as you all know, we put out our earnings release, and just before market opened, we put out a second release. Normally, we would have put that release out after the market closed, but it's a Friday and we didn't want to -- I'm not a politician, I don't bury news into the weekend, I aspire to be a leader and we put news out, good and bad, and this is good news. I mentioned earlier about the transition that we had with Jeff Watts stepping into the Chief Sales Officer role. One thing I've learned from Jeff being in that role, first off, the sales leaders have stepped up their game to support Jeff in that expanded role, but of equal importance, maybe more important, everybody else has embraced Jeff, and Jeff has embraced him back from the standpoint of he's not a salesperson trying to figure out his way outside of sales, he's a business leader who has always had a great relationship with our finance team, with our HR team, with technology, with supply chain. But what he did is he took a big step in the last year, a year and a half, and said, I want to embrace more and I want to learn more, and he humbled himself to listen and learn. And he challenged some things back, as a result, we're a better organization. And I'll give you an example. Tony Broersma and his team will oversee the -- our supply chain and distribution. A number of years ago, and we're always doing this, we did a very significant reclass, and what that is, is you're deciding what the stock and distribution, and we remove some stuff, and when Tony stepped into that role, we all challenged them, but Jeff continued to challenge them, but we all challenge them about think about supply chain, not as what we stock in distribution, a distribution center. Think about supply chain as how we get product to the customer and where we stage it because we'll be a better organization. I don't care if our inventory goes up or down in distribution. Holden cares about our total investment, so do our shareholders, but we really care about how to best serve our customer. And Tony went to work on it and again, was challenged by a lot of people, so we're doing actually a do-over reclass and we're adding about 18,000 SKUs into distribution in the next six months or so. Between now and year end, we will probably add around $17 million of inventory to our balance sheet. Once in place, some of that will start to burn through, we think that will drop by about a third by March. And we think ultimately 18 months from now, the net impact is zero because we're restaging, we're moving stuff around and we're normalizing the quantity on hand. We believe the annual improvement to cost of goods is more than the initial investment in inventory. So that $17 million, we think is worth about $20 million because when you buy it that way, you're not hurried, you're not scrambling, you buy it more effectively because you can decide where you're sourcing it as opposed to an emergency spend. From a branch perspective, not only will they have these 18,000 SKUs available, their workload will actually go down, we cut about three million POS a year at the branch and onsite level. 300,000 of those POs relate to this product. So we'll cut our PO workload by about 10% at the branch and onsite level and enhance our gross margin and our service to our customer at the same time. We think that's a winner. When I think about what Jeff's doing, a couple of years ago, I really sat down with the Board and said, I'm turning 60, November of 2023, you really have to be -- you have to get to know our entire team better. I challenged them to -- we scheduled some field trips. We've been doing field trips the last several years. I challenged them to come to our Employee Expo in December, our Customer Show in April and meet our leaders. And I really asked them to get to know Jeff Watts better. And we announced this morning that Jeff has been elevated to President of Fastenal. I'm excited for Jeff. I'm more excited for Fastenal because my motivation is simply this. I should say our motivation is simply this. It's a means to grow faster and I believe Jeff will help that happen. I also -- I sat down with John Soderberg. I talked earlier about some of the things John has done and his team have done as it relates to Fastenal Intelligence, not artificial intelligence. And I sat down with John and I said, John, Jeff and I are going to drive you crazy, and I apologize for that. We're going to punch you from both sides and we believe we can move even faster, and so I'm excited for everything. But Jeff, congratulations. John, will try not to drive you too crazy. And to everybody else supporting Jeff and the organization, thank you. With that, we'll turn it over to questions.

Tommy Moll:

Good morning, and thank you for taking my questions.

Tommy Moll:

I wanted to start with a follow-up on the pricing commentary you provided. The deflation in Fasteners has been ongoing for some time and is well-known, but the news today I believe, is in the safety category. So I was just curious if you could give us any context for what you've seen there. And then when you referenced taking steps to be a little more disciplined in the coming quarter, if you could give any insight on that? Thank you.

Tommy Moll:

Thank you, Holden. As a follow-up, I wanted to ask about the nexus between some of the warehousing customers where you've been ramping and the gross margin trends. It sounds like the impact from the warehousing ramps was as planned in Q2 and should ease into Q3, but any other context or any way you can quantify that would be helpful. And then, if you set that against your typical gross margin trends, Q2 to Q3 and maybe even into Q4, how does that net out in terms of what you might forecast for this year versus the typical just given some of these new dynamics?

Tommy Moll:

Yeah. And maybe just to tie it all together, if you think about -- and this is consolidated results I'm talking to here, your typical progression for gross margins from Q2 to Q3, how would you characterize that typical progression? And is there anything this year where there's a noteworthy good guy or a bad guy?

Tommy Moll:

Got it. Thank you, Holden. I'll turn it back.

Stephen Volkman:

Hi. Good morning, guys. Maybe since we're on the P&L, I'll just -- I'll stick with it and go to the next level here. Holden, I think you said, maybe you both said several times, there's a real focus on SG&A control, and I know that some of the unusual SG&A expenses from the second quarter probably go -- trail-off. So I'm curious how you're thinking about sort of leverage on SG&A holding in the second half?

Stephen Volkman:

Okay. Fair enough. And since you sort of teed me up on this, in terms of thinking about the revenue trend going forward, should we read anything into kind of the better cadence of the quarter, i.e., May better than April, June better than May, do you think there's any kind of an inflection happening or is it more just that your ability to outgrow is kind of starting to gain some traction or is it just kind of the numbers are still small and we shouldn't read too much into it?

Daniel Florness:

If you're looking -- if the question is about green shoots, I don't have a lot of green shoots for you on the macro side. Where I do think we're accelerating though is on the self-help side, right, with the contract signings and the onsite signings and the FMI signings, the reality is, you sign an onsite today, it's not generating revenue tomorrow. There's a period of time it takes for those sorts of things to start to hit our results. In the first half of 2024, we were feeling the impact of relatively low signings in 2023. I think in the back half of '24, you're going to begin to feel the benefits of the stronger signings in the first half of 2024, whether that be FMI, whether that be onsites, whether that be contracts. And so I think we're very encouraged about what we're doing to acquire customers. But I don't have a lot of green shoots at the macro level.

Daniel Florness:

Sure.

Nigel Coe:

Thanks. Good morning, everyone.

Nigel Coe:

I just want to go back to the -- yeah, good morning. I wanted to go back to the price deflation on the safety and other products. I mean, obviously, you addressed the question from Tommy, but is this a function of a more competitive environment? So you've seeing a bit more pressure from competitors maybe because they've got more products or excess inventories, or is this more elective from your RBPs (ph) to try and gain share? I mean, obviously, you've been very successful in contract signings, onsite, et cetera, so I'm just wondering if this is a bit more offensive or defensive.

Holden Lewis:

Now to the degree that part of the question is, is Fastenal consciously willing to accept lower margins in order to win business? I would tell you the answer is no. There's individual decisions being made in the field based on conversations that are being had and judgments that make sense to that individual and that situation at that time. So there's not a -- we aren't winning business because we said, don't sweat the margin. We think the margin and return on our business is very important. But there is nonetheless a challenging marketplace and different individuals react differently to that marketplace and I just think that you're getting to use someone else's word, a nexus between both the market and the conversations with customers.

Holden Lewis:

That's production. Dan said it, I think in this preamble, right? When you have one customer, the fate of your business hinges on what the experience of that one customer is, and as a business, we're 75% manufacturing. Within our onsite world, I bet you it's substantially above that level. And so if there's a manufacturing environment that's challenging, the onsites are going to feel it to a greater degree. The onsites are going to be more heavily oriented towards production, that's why you're seeing our OEM Fasteners grow in the mix along with onsites growing in our sales mix. And so -- I think you have a combination of the impact of macro on that particular customer category, combined with the fact that, again, it does take a little while for the signing success that we're having today to translate into revenues tomorrow. So I think you're bearing disproportionate burden of the macro in the first half of this year. It doesn't appear the second half of the macro is going to be a lot better, but I do think that some of the signings that we've enjoyed in the first half are going to begin to grow in that environment, and that's how I'd probably characterize it. On the mature onsite, I'll just throw in one little nugget, and that is, our East and Western United States business units have been separate business units since 2007, and a year ago, we pulled them together back into one, and Casey Miller oversees that $6 billion business in the U.S. Casey was a Regional Vice President in the Kentucky, Tennessee area. He's originally from Kentucky, lives in Nashville now. And he -- Casey's business and by extension, Eastern U.S., which he led for the last eight years, is great at customer acquisition, great at it. One observation he made as he's got into the Western business unit because the Western business unit wasn't as great at customer acquisition, but they were great at maturing and farming those relationships. And so the one benefit of combining the U.S. into one business unit, I think that East and Western halves of our business can really learn a lot from each other and I think that's a positive and win for our customers, our employees, and our shareholders.

Daniel Florness:

Thank you.

David Manthey:

Thanks. Good morning, guys.

David Manthey:

Yeah. And congratulations to Jeff on the new title. Just one question this morning. I'd like to zoom out and maybe ask you about some secular factors here. Could you refresh us on how you think about outgrowth versus industrial production and your contribution margin expectations? Here, I'm thinking not about the next year but long term over the cycle. Thanks.

David Manthey:

Appreciate it, Holden. Thanks for the update.

Operator:

Thank you. Our next question is coming from the line of Ryan Merkel with William Blair. Please proceed with your questions.

Holden Lewis:

Yeah. I will say that in terms of regional feedback, I probably got a few more comments about extended shutdowns, layoffs, things like that, it doesn't feel to me that the overall level of activity has changed. It does feel to me like our customers have decided to some extent throw in the towel on the near term and make some adjustments to their cost structures in light of what has been a fairly lengthy downturn. So like I said, I don't feel like the floor has fallen any further, but I feel like customers are saying this could last longer than we expect and making cost adjustments to react to it. That's how I'd probably characterize it. In terms of the crystal ball, I don't know. I don't have a good answer for you, I'm afraid. As you know, we don't have a lot of forward visibility, you know that, and I'm going to choose not to express an opinion about the election. Dan certainly can feel free to.

Ryan Merkel:

Yeah. I get that. I was just sort of hearing that from some of the feedback and was just curious, RVPs were hearing that -- it usually happens [indiscernible] in front of the election, I think is history.

Daniel Florness:

I meant the election part, I won't touch the 10-foot pole. It's -- I suspect there aren't too many customers out there or players in the market that are expecting anything to rev up for, and so I think it'll be fairly subdued.

Daniel Florness:

I can't even predict that somebody is going to win the election.

Holden Lewis:

You bet, Ryan. Thanks, Ryan.

Operator:

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

Operator:

Hello, and welcome to the Fastenal 2024 Q1 Earnings Results Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Taylor Ranta of the Fastenal Company. Please go ahead, Taylor.

Dan Florness:

Thank you, Taylor, and good morning, everybody, and thank you for joining us for our first quarter call. And I'm going to go right to the flip book, page 3. And my comments on page 3 can be summarized with five statements. First one is, a tough quarter. Second one is, tricky calendar. Third one is, highlighting the customer expo. Third [sic] [Fourth] is strong performance on our growth drivers. And then the final is financially strong and that strength is continuing to build as we've seen in recent years. Going back to the tough quarter. So we grew about 2%. Coming into the quarter, we anticipated a number that was probably in that 4% neighborhood. And the tricky calendar was really a function of January and February are seasonally weaker months for us. Then March starts to pick up as we move into the spring. So having two days shifted out of March and into January and February, respectively, wasn't helpful, but that was a known event coming into the quarter. And having the quarter end on Good Friday being in March versus in April is negative. But that's probably more of a function of trying to rationalize and figure out things on the quarter. The truth of the matter is the core issue remains sluggish demand. A positive we saw is after 16 consecutive months of sub-50 Purchasing Managers Index, we broke above 50 in the month of March. And the other day, I chatted with Holden and I said, how long have they been checking the PMI statistics and he said, yeah, since early 1970s. So, we did a look and there's been two periods that have had longer duration of 16 months. The one would have been in the early 1980s, I believe it was a 19-month duration. The other was in the dotcom meltdown year of the early 2000 that was about a 17 or 18-month duration. Now in full disclosures, they were a little bit longer. They were actually more severe as far as where it went into -- how far into the 40s that it went or even into the upper 30s. There were a few other periods, obviously, the 2008, 2009 period, much shorter in duration, but pretty steep, but we feel positive about the 15 March, and time will tell if it's a head fake or if it's real, but that speaks to what we think might be happening as we move into the second half of the year. The customer expo, which we'll host next week on the 17th and 18th in Nashville, Tennessee. I'm upbeat about that from the standpoint. One aspect that's challenged us in recent years with customer acquisition has been the fact that starting about 20 years ago, we started doing an employee event or we bring employees in, engage with our suppliers, and it was a great opportunity to hold in the month of December, some planning discussions for the next calendar year, but also have a trade show where employees get to interact directly with suppliers and learn about their products, learn about their supply chain. And also over time, learn more and more about some of the FMI devices that are coming out, which started up in the kind of the 2007, 2008 time frame when we started vending. What we learned a number of years into it that a lot of employees want to bring their customers to this. They thought to be a great means to expose our customer to their supply chain. And we started doing that probably five, six years later, and we've been doing that for many years. In 2020 and 2021 because of COVID, we had to shut down the event. And we felt the impact of that over time, and it shows up in things like on-site signings. It shows up in how we're engaging with that customer. What I'm pleased to say is, after restarting the event in 2022 and continuing it in 2023 and 2024, in 2024, we were surprised by the overbooked status of the show, and we've had to dramatically expand it. And Holden will touch on some of that in his comments about what that means for the second quarter as far as expenses. But we'll have 50% more people attending this year than did last year, and we'll have double the number of people attending this year than we did last year. I believe that speaks well to our ability to capture market share with that subset of customers. And that's been challenging us for the last several years because we just couldn't engage in the same way. So, it's an expense issue for the second quarter. It's a really high-class expense issue for the second quarter. On the next page, I'll touch on growth drivers. So flipping to Page 4. On-site, we had 102 signings during the quarter. So the number of active sites we had operating at the end of the quarter was up about 12% from what it was in the first quarter of last year. And our sales going through that channel grew low single-digits, which tells me that that's where we're seeing the demand issue play out in our numbers is because that number should be closer to what we're seeing in unit growth. The FMI Technology, we signed 105 devices a day, and I believe we've only had one quarter that we've ever done over 100. And if you think back to a few years ago, what we really challenged our team to do back in that 2017, 2018 time frame, we geared up our infrastructure to support 100 signings a day. And we challenge everybody to engage with our customer and to get there. And by 2022, we were doing about 83 a day. In 2023, we had grown that to about 90 a day. And those numbers are based on the average of the first three quarters of the year. So, last year, we did 92, 106, 95, average of about 98. Officially, we've always said that we want to get that over 100. Internally, what we've challenged our team to do is to get that number up into the 120s. And so, we feel really good about Onsite and FMI Technology as far as the progress we're making to take market share. In a similar comparison that I did with the unit growth of Onsite. So FMI, we have 10.5% more devices today than we did a year ago, but you can see some falloff in the revenue per device. And in safety, for example, we grew about 8%. And when I look at our revenue per device, it's down 1% to 2% from a year ago. It's been pretty flat as we've gone through the year so far. And again, that's a demand, but ultimately, it's a market share. It's a land grab. And so, we will take market share by deploying more devices. And then we have to live with what the actual consumption is in those customers, whether it's robust or less than robust. It's a sign of permanent market share, and I'm pleased with the progress we're seeing there, and how it shines through in things like our safety because about half of our vending sales involve safety products. E-commerce continues to get nice traction. And our digital footprint continues to expand. We're approaching 60% of sales. And our anticipation is sometime this year that number will hit the mid-60s, 66 is our target. And ultimately, we believe that ends up being 85% of sales. So on the second page, I feel really good about the progress, but I'll finish where I started. It was a tough quarter, and we feel good about where we're going. With that, I'll turn it over to Holden.

Operator:

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Tommy Moll from Stephens.

Dan Florness:

Good morning.

Dan Florness:

I think we -- one of the changes we made, and this was -- if I go back 15 years, we made a decision to split our business into three distinct entities, essentially, the Eastern US, the Western US, and international. And in our national accounts team, we split into three pieces to as we align with those three business units. We did that for about seven years. And around 2014, we saw that national accounts being three distinct entities, it was a little chaotic. And so we rolled that back into one umbrella. When we're going through 2022, we're putting up really good numbers and the economy is rebounding. But when I look at things like what was going on with our Onsite signings, what was going on with our contract acquisition numbers, they were softening and it's not about a person or a thing. It's about sometimes are we aligned to pursue a common goal, or are we too fixated on our individual goals? It seemed like we had so many groups talking about how well they were doing. But somehow if every group is doing well and the organization is slipping, something's wrong with how we're looking at it. And so in the spring of 2023, we realigned everything under one sales leader and realigned the US back into one business unit. And there's disruption when there's change, and it takes time to gain traction. But I think a manifestation of that is the Onsite signings and one month isn't a trend, but they improved. The fact that we're scrambling in the last 45 days, the last 30 days, and I say, we – there's a team that's coordinating our trade show. So it's been extremely busy lining up additional hotel rooms, additional space for an event that's much larger than we anticipated two months ago. That's a function of an engaged sales team and a customer that's engaged with us of understanding how we can help their business. So that's what the 102 means to me and of equal importance, the record sign-up relative to post-COVID world on folks attending our show and learning about how we can help. And I know personally, the visits I've been on, there's some really good traction going on out there, and I feel good about it. We just have to work through the fact that we were taking market share from the standpoint of contract signings at an unacceptably low rate for a period of time. And the time between changing your sales focus, getting traction and that turns into revenue, doesn't happen in a quarter.

Tommy Moll:

Thank you, both. As a follow-up, I wanted to ask about a new disclosure you introduced today, just breaking out your OEM versus MRO fastener business with some new granularity there. I was just curious what was the decision-making process to do that? And is there a takeaway you want us to make sure to have today? I mean one that comes to mind is just the relative size of those two businesses where OEM is nearly 2x the MRO in terms of revenue contribution. But if there's something you want to make sure we take away, please flag it for us.

Holden Lewis :

Now as I usually say, we're not playing a three-dimensional chess here with data. We gather the information, we figure we'd provide some information. Now I will tell you that both OEM and MRO tend to move with industrial production directionally the same way. But I think there's certainly.

Holden Lewis :

As far as fasteners are concerned. Now I think there's some information that could be in there, right? I mean when you think about Onsites. Onsites are probably more oriented towards OEM fasteners than MRO fasteners. And so there's some information in there about how Onsites are going. It gives you a little bit more granularity and the cyclicality because again, OEM fasteners tend to be -- while the directionality may be the same, the order of magnitude may be different. So it gives you a little bit of color into that as well. So as Dan indicated, we gathered the data anyway. We saw no reason why we shouldn't share it. Question is about to come up on the call, and so you can have it.

Operator:

Thank you. Your next question is coming from Chris Snyder from UBS. Your line is now live.

Dan Florness:

Yes. I guess, I would maybe phrase that differently in one regard. We've been investing to grow throughout the cycle. But we had some offsets and we talked about this in the January call, and that was we were closing locations for a decade, and that gave us a little nugget of an offset. As we went through 2023, one nugget of an offset was the fact that in 2022, our earnings grew quite dramatically. And in our incentive comp, which is linked to earnings growth, a big piece of it grew quite dramatically. That softened as we went through 2023 and quite frankly more normalized. And but as we get deeper into that, moving away from the 2022 time frame, some of that benefit isn't there. So I don't know that it's a function of -- and I'm looking at it from a growth standpoint and expense, not an absolute. I think it's probably more of a function. Our investments to grow are shining through a little bit more now than maybe they were in the last six to eight quarters

Chris Snyder:

Appreciate that. It makes a lot of sense. For the follow-up, a question that we continue to get from investors is around the impact of potential tariffs based on the outcome of the November election. So, just would be interested in your guys' perspective and what that could mean for the business? Thank you.

Holden Lewis:

Probably the only thing I would add to that is, our execution wasn't as crisp as we might have liked during the first period where there was tariffs. Remember, there's also some ancillary inflation on top of the tariff that was occurring at that time. And we struggled a little bit to sort of capture it all in the moment. I would say that since that, and frankly, because of that period, we made significant investments in the technology that we utilize to understand the environment and communicate internally and externally with sort of the structure of our business and how we kind of manage our pricing and costing processes. And I think that you've seen the effectiveness of those changes through this last few years where there's been very significant inflation and our ability to keep up with it fairly effectively and on time. And so again, I don't know what the future holds on that, but to the extent that there's anything that moves up the cost of product, we think we're better served to execute effectively than we were five years ago during the last period of time.

Stephen Volkmann:

Thank you. Holden, you mentioned in your gross margin comments that you mentioned transportation resources and a little bit of price degradation, I guess. I'm just curious, have you changed your view of the cadence of gross margin as we move into the next three quarters?

Stephen Volkmann:

Great. Thank you for that. And then switching back to the customer expo, is that the kind of event where you actually sign up various things like actual revenue comes out of it or is it more of a sort of a customer relationship type building exercise?

Holden Lewis:

Make no mistake, Stephen, if we have to talk to you about what the impact of the cost is going to be in the second quarter, we do expect a return on it. It may not all happen at the show, but it's expected to happen shortly thereafter.

Operator:

Thanks. Your next question is coming from Jacob Levinson from Melius Research. Your line is now live.

Holden Lewis:

Good morning.

Holden Lewis:

Yes. If those categories are too broad for you, take that up with the federal government. I'm just going by SIC codes. I don't know what the outliers are. At this point, and honestly, I think it kind of is reflective in the end market chart that we have in the press release. At this stage, pretty much every end market is converging on itself. We're well over a year here of sluggish demand in a market that I think has affected most markets. And so when I talk to the regional leadership and they provide their feedback, there's different times when certain markets are called out because they're either stronger or weaker or what have you. At this point, I'm not getting a lot of end market callouts, which suggests to me that people are kind of feeling a general softness across the board. So, I don't have a lot of market-by-market color to add. I'm not sure there is much.

Holden Lewis:

I don't know that I've heard about a lot of appetite. Now a couple of things, I think, that you should recognize. One is I think a lot of people look at the US steel indexes, I would tell you that we're more associated with foreign steel indexes and those have not been particularly volatile, frankly. I think the US ones are behaving in a different fashion than the Taiwanese or Chinese ones. And so we're not necessarily seeing the steel inflation that people keep asking me about. Two, bear in mind that by the time fastener is made and shipped and sold to the mark up through the channel, et cetera, the actual value of the raw material in the final product is probably one-third or slightly less of the total value. So I mean, I know we're selling a slug of steel, but there's a lot of value add wrapped on top of the initial raw material. And so honestly, as long as I've been here, and Dan might be able to speak to prior periods. But as long as I've been here, steel hasn't really been a catalyst to raising or lowering prices. Transportation has been more meaningful. So I don't think that I'm hearing anything. And Dan and I have spoken to different people, different group, and might have a different perspective. I don't think I'm hearing anything that says, we're seeing rampant inflation in raw materials that we need to start thinking about raising prices.

Jacob Levinson :

I appreciate the color. Thank you. I’ll pass it on.

Operator:

Thank you. Your next question is coming from Patrick Baumann from JPMorgan. Your line is now live.

Dan Florness :

Good morning.

Dan Florness:

If there was a camera in the room, sometimes you might chuckle at the reactions you get from Dan [ph] and Holden looking a [indiscernible] during a question because I kind of gave Holden look, that's in there. And I say it that way, because back in about 2014 -- 2013, we really came to a conclusion we had too many locations for the market. And we felt a better way to grow into the future was through the Onsite strategy. And we tempered the desire to close the locations too fast. And these weren't large locations. We tempered it from the standpoint of the biggest limiting factor for Fastenal historically, hasn't been opportunity, i.e., size of the market. It hasn't been financial ability to pull it off. It's been talent acquisition and talent development. That's why we have a very thoughtful process of how we recruit, and we have our own corporate university to develop talent, because that's what we bring to the market, talent, and that talent is armed by a great supply chain system behind them to help them be really, really effective. And so we tempered the closures really to -- because we felt that talent could slide over into the other -- into branches that are growing, but also into this new Onsite growth element because we had the talent to move. And if we had closed a bunch of locations, we'd have lost that talent. What we also tried to do is, we try to be very thoughtful about what it meant from the perspective of moving that. If we have a community with two or three Fastenal locations, in a perfect world, we would like to keep that business in the other branches. Now, if the business goes to an Onsite that's because there was a larger opportunity in the first place and it moved into an Onsite. I don't know that closing branches led to Onsite or growth of Onsites. I'm not sure with a customer there. And sometimes we close branches because it was a remote market. And the only reason we were there was because of two customers. And we went Onsite with those two customers, and we closed that branch. That did happen. But usually what happened is those two customers were doing 30,000 a month with us each and now they're doing 130,000 a month with us each and that was the appeal of the strategy. But there were trade-offs in that. For the annual meeting this year, I do plan on sharing some insight on some of the trade-offs we've made as an organization, as we've closed locations, because this is a piece that doesn't always get talked about. But if I go back and when I have district manager conversations, I get a whole bunch of stats from our statistics folks [indiscernible]. And I get it district by district. But if I look at it at a company level, in 2007, cash customers, so that's somebody that comes into a branch, it is a purely retail customer. In 2007, our total sales with that customer, it was 4% of our revenue. It was $76 million. Five years later, that $76 million had grown to $78 million. And the reason it didn't grow very much, we weren't opening very many locations because we pulled our location growth way down in 2007 and that customer was kind of stagnant. Interestingly enough, that $78 million, five years later had grown to $111 million that was 2017. Two years after that in 2019, the year before COVID started, that had dropped to $106 million, so it dropped 5% in that two-year period. During COVID, that business was pummeled because we closed all our front locations and the marketplace decided to order -- to buy more through e-commerce than to buy retail. And I think we all know that in our own personal life that $106 million went to $75 million, it's now 1% of our sales. We made the strategic decision to keep the doors closed. And when I say closed, they're open, but we made the decision to deemphasize going after that and redeploy those resources on other things. Just like restaurants in today's world have made the decision, they're not open on Monday, Tuesday, Wednesday anymore because they can't afford, they can't find the staffing and they can't afford it. So that $75 million that we did in 2021 was $45 million in 2023. That was a trade-off. That didn't go to another brands because if you're coming in and shopping at Fastenal like it's a hardware store, and we don't have a location, three the locations in town and the two that are left are 10 minutes instead of five minutes away, you lose some of that business. Customers under $500. This is where they have an account number with us. That was $336 million back in 2007. 10 years later, that was $395 million. Last year, that was $153 million. Now some of that is our customers that we lost. Some of that is customers that now are doing $1,000 with us or $2,000 with us or $3,000 with us because we moved them out of that bucket. But those are trade-offs of business makes. We think it's the right trade-off because it set us up to be really special because if you think of all the growth drivers we've introduced in the last 15 years when we deemphasized back in 2007 opening locations, vending doesn't grow a retail customer. Vending doesn't even grow a $400 a month customer, but it might turn out $500 into a $5,000. It might turn a $10,000 into $20,000 because between FMI and Onsite you're unlocking more business with that customer. And I would probably on more of a tangent there than you anticipated with that question. But I think that's a critical piece to understand of the strategy of Fastenal for the last 10 to 15 years and how it's played out.

Patrick Baumann:

That makes sense. I appreciate the extra color there. I just have a very quick follow-up on the Onsite signings. How did things progress through the quarter? And I'm asking only because last quarter, you said maybe some slipped out of the fourth quarter for whatever reason and could have been pushed into this year. So wondering if there was any evidence of that.

Patrick Baumann:

Okay. Thank you very much.

Operator:

And your next question is coming from Ryan Merkel from William Blair. Your line is now live.

Dan Florness:

The – I mentioned earlier that we split the US into two business units 15 years ago. If we were to share numbers by business unit, you would find out that there's two different stories going on in the business right now. in the Eastern US, and there's no -- it's not a coincidence why Casey Miller stepped into running into the US and why eight years ago, I think it was eight years ago, in the fall of 2095, maybe nine years ago, or 8.5 years, I asked Casey to step out of leading our, what we referred to as, the SEC, our Southeast Central region, which is basically Kentucky and Tennessee. And I asked him to run the entire Eastern US Casey's done a wonderful job. It doesn't mean we agree on everything and we don't, but has once in a while, that's good and healthy. But we asked Casey, Jeff, why don't you ask Casey to run the US business and put the best people in the best roles for us to find success of the organization. Our Western business unit was negative this quarter. Our Eastern business unit was positive this quarter. Our Onsite signings aren't equally split between the Eastern US and the Western US. And that's been true for a number of years. And change is hard from the standpoint. It can get entrenched into a successful business. I remember a number of years ago, and I'll pick on a particular market, and that was Des Moines, Iowa. Great market for us, great people. We have become more obsessed with how profitable we are and our returns in that market than we were about the joy of growth. And we stirred up that pot, and we made a change five years ago and said, "No, we're about growth and expanding the people we partner with as much as we are about making a great return for our shareholders because ultimately, the best answer for our shareholders and our employees is grow the business, grow the opportunity, grow the returns. And I'm pleased to say that we've done that. In fact, I'm tipping my hand on a couple of things I'm going to talk about in the annual meeting. One is some of the trade-offs we've made and some is looking at some discrete markets we're in and what those trade-offs have meant to a mature business who decided, you know what, I'm going to get dressed today a little differently than I have for the last 20 years, I'm going to go out and engage in the marketplace in a fundamentally different way and the people we've been promoting into leadership roles, whether it be branch managers, district managers or Regional Vice Presidents as well as people like Casey Miller. We want people that have more joy in growing the business than in just harvesting the business. And Holden needs to keep us balanced because he just touched his heart when I said that. We want to do both, but it's a growth issue. And sometimes you have to change how you go to market.

Operator:

Thank you. As a reminder our next question is coming from Nigel Coe from Wolfe Research. Your line is now live.

Unidentified Analyst:

Hey, guys. This is actually Will Frank [ph] on for Nigel. Thanks for fitting me in. I guess, first on price/cost, pricing flat in the quarter. I guess do you think that you can say price/cost positive if pricing remains flat. And then maybe just if you could let us know how pricing was in the quarter ex fasteners. That would be really helpful.

Unidentified Analyst:

Must have got it.

Dan Florness:

Thank you again for joining us on the call today. We'll be having our annual meeting here in a couple of weeks. It's on a Thursday. I believe it's the 25th, but it's a Thursday, and I don't have calendar in front of me. And I'd like to share a trip I did last week, got the opportunity to go out and visit our folks at Holo-Krome out in Connecticut. And Holo-Krome is as an organization we acquired back in 2009, it was in the process of being shut down and that production moving offshore, and we did want to see the loss of a domestic manufacturer of their quality and their status in the United States, so we've acquired it. I was pleased to have the opportunity to go out there and celebrate tenure. There were five individuals, and this is a business with 100-and-some employees. But there were five individuals out there who celebrated 40-plus years with Fastenal. We went up to celebrate that. All told, there were 20-plus people in that organization with more than 25 years of experience, a combination of, obviously, Holo-Krome and Holo-Krome being a partner to joining the Fastenal organization back in 2009, great trip, great people. We keep finding people like that, we'll be successful in this market for years to come. Thanks, everybody. Have a great day.

Operator:

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

Operator:

Hello, and welcome to the Fastenal 2023 Annual and Q4 Earnings Results Conference Call [Operator Instructions]. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Taylor Ranta of the Fastenal Company. Please go ahead, Taylor.

Dan Florness:

Thank you, Taylor, and good morning, everybody. And welcome to the Q4 Fastenal earnings call. I'm going to go right to the foot book, and on Page 3, we have a handful of slides here. So 2023 has seen two struggles in our organization. One, since November of 2022, so for 14 consecutive months, we've seen a sub-50 PMI that when you operate very heavily in the industrial space, that's a big deal for you. And there's many benefits to have Holden as part of our organization. One is his career before joining Fastenal, he has access to -- he's forgotten things about stuff that I don't even know. And so I asked him. I said, hey, how often does a period like this happen? And he said, well, back to 1970, it's happened 6 times that it's been sub-50 for an extended period of time, most recent being the Great Recession in the '08-'09 timeframe. But it's a pretty tough period, nice. Okay. And so it's been pretty tough and you could look at that. But the second item, the second struggle is we've executed better. And in 2022 -- and we put up good numbers, inflation helped some, the rebounding economy from COVID helped some. The fact that we're pretty good at supply chain and we were able to find stuff and keep people supplied helped, because if you can't get it anywhere else, you come and get it from us. But there was some stuff under the hood that we weren't executing as well as we'd like to see. And we made some leadership changes earlier in the year. And I think we're poised really well as we go into 2024, but those are a couple of things that challenged the year. Despite all that, in the fourth quarter, we grew our daily sales 3.7%. The team did a really nice job managing expenses. We had a few things that -- sometimes you have a few things that go your way. Sometimes, you have a few things that go against you. On par, things were generally favorable and we grew our EPS 8.5% to $0.46. If I think of our growth initiatives, kind of uneven. We've continued to see nice development in our installed base of Onsite locations, maybe not as fast as we'd like. FMI devices, we did a really nice job. And we continued to increase our Digital Footprint that we've talked about in recent years. Operating cash flow was a record at over $1.4 billion of operating cash that we generated, and it was a 52% increase than what we did in 2022. Now on the surface, that's a little bit misleading because 2022, and I'll touch on that in a second, consumed a lot of working capital because we were ensuring a reliable supply chain for our customers. That brings us to the final bullet on the page and we paid out a fifth dividend, paid out $0.38 per share here in December. That's the fourth time that we've done a supplemental dividend like that since going public back in the late 1980s. The first time was in December of 2008. The world was in free fall. We had cash available. We looked at that cash as being, this is owned by our shareholders, we don't know what needs they have for liquidity. We do know we won't need this in 2009 if the economy is doing what it does, because our business is countercyclical and we knew we'd throw off a lot of cash. And so we paid out a sizable dividend in December of 2008. December of 2012, there was a lot of uncertainty in the United States. The federal government was having a fight amongst itself about what tax rates should be on dividends. We didn't know if tax rates were going to go up in 2013 and figured we're sitting on a bunch of cash, let's pay out to our shareholders and we don't need it. We'd generate a lot of cash in the future. We'll pay it out and let the folks in Washington, D.C. figure things out. It's nice to know that in today's Washington, D.C., things are much more calmer. Sorry for the sarcasm, I'm Midwestern. December of 2020, the world was in COVID. We had more cash than we needed and we paid out a supplemental dividend. This one is different than the other three. We invested a tremendous amount of cash into inventory in 2021 and 2022, an incredible amount because supply change became erratic. You can't count -- it was not a reliable time frame of getting containers through ports and getting products. And we're not a sorry company, we don't say to our customers, sorry, couldn't get it. We're a supply chain company. And if we feel that it's going to take an extra 40 or 45 days to get a container, we'll add 50 days of inventory, six days of inventory. So we consumed a tremendous amount of cash. Fortunately, things have become more stable and we harvested that cash in 2023, and we'll generate ample cash as we move into '24 and beyond. We didn't need it, we sent it to our shareholders. We feel we have a really conservative balance sheet, and we have plenty of gunpowder for anything that we need to do as we move into 2024. Flipping to Page 4. 58 signings in the fourth quarter of '23. Not a particularly impressive number. Perhaps the environment came a little bit tougher late in the year for signing Onsites, it's not the strongest of year for many of our customers. Perhaps we had some district managers that are looking at their expectations for 2024 and maybe some Onsite signings split into 2024. We're up 12.3%, we finished the year with 1,822 locations. Our older Onsites had a pretty tough year. That speaks more, I believe, to the PMI index than anything else. But we still anticipate 375 to 400 signings next year. We think we're poised to do that. We think the energy is behind it and we think the team is really focused on it, and that speaks back to some of our execution issues I mentioned on the prior page. FMI technology. We had a good year with FMI. We did a nice job of signing. If I look at just below the bullet where we say we signed 24,126 MEUs, you divide that by 253 days, that's 95 per day over the span of the year. One thing we've talked about a number of years ago was building our infrastructure to support signing 100 devices a day. And that was a long way away from what we were doing at the time, but that was kind of the number we had in our head. And I'm pleased to say that the team has essentially gotten there, and it came in at 95 per day for the year. Our intention for next year is to sign 26,000 to 28,000. It's a big number, I believe the team is up to it. E-commerce continues to grow well. A lot of that -- obviously, we're not growing at 28%. So a lot of that is customers are changing how they engage with us and we're not unique to that. And so I believe e-commerce as a potential of our business is about 25% of sales now. If I go back not too many years ago, it was 5% of sales. So it continues to grow. And then finally, our Digital Footprint. That's where we engage electronically with our customer. It might be we deploy FMI. So a vending device, a bin with technology embedded, a mobility scanned bin, whatever it might be but we engage with our customer and then we added the e-commerce on top of that, removed the double coning. And in January of 2020 that was 36% of sales. A year later, it was 38%. A year later, it was 46%. A year later, it was 53%. And now we ended this year at 58%, 59% type of neighborhood. Flipping to Page 5. This is the last time you're going to see this chart. We started it a number of years ago. Back in -- so we have about 3,419 in-market locations. It's up 3.5% from where we were a year ago. Back in 2015, about 9% of our in-market locations were what we call an Onsite. Now an Onsite might be we're physically inside the customer's facility, we are operating in a facility down the street from the customer that's dedicated to that customer. We might be operating a facility that's in the back of a branch because the customer doesn't have enough room for us to put everything in there, and we only put some stuff in there and we backfill our -- our backroom is the back of the branch. But it's where we engage in a discrete business with the customer and it ramps up our ability to grow. As we really look at this as being not just something that had happened once or twice back in the '90s. And the first one was, frankly, we couldn't find a building to rent in town and the customer said, I have some room, and we moved in. So it was more borne out of necessity. But as we realized this was really a business model that could help us grow, it prompted us to revisit our branch network. And so we peaked out in 2013. At that point in time, we estimated we were within a 30 minute drive of 95% of the manufacturing base in the United States with our 2,600 or so stores or branches, and that included our US and Canadian network. But we looked at it and said, if we pulled that back a bit because some of the business that would be in a branch is going to be an Onsite over time, what would it look like? And we settled on a number of about 1,450. At 1,450 locations that 95% access to the manufacturing base drops to about 93.5%. And we know if there's customers that are outside that 30 minute window and they're Onsite customers, the fact that our branch is 4 to 5 minutes away doesn't matter. So we saw this as the right density. And I'll use some -- I'm always -- one beauty about being an organic grower of the year is all of our systems are in one system. You have access to a tremendous amount of information. And I did look at our oldest four states in the company. And if I go back to 2007, in Minnesota, Iowa, Wisconsin and Illinois, we did just under $400 million in revenues, about 19% of our sales. We had 236 branch locations in those four states. We had 20 Onsite. In the next decade, that business -- those four states, we grew -- our CAGR was about 5.7% a year. And as you can appreciate, it's a nicely profitable business, it's above the company average, a few hundred basis points. And about 18% of our revenue was Onsite. Since 2013, we closed a bunch of locations, but we opened a bunch of Onsite. In fact, we've gone from 200 -- we peaked out at 263 branches. Currently, we have 191, so we're down about 30% from our peak. Our Onsite count says over -- it’s 221, so we have more Onsites than we have branches. In the last -- since 2017, that area has a CAGR of not 5.7%, it has a CAGR of 8.2%. So we took an old, mature, profitable part of the Fastenal business and grew it faster. Today, it's about a $1.1 billion business. It's about 15% of our sales and about 46% of our sales run through an Onsite. Sorry for taking us down memory lane there, but I thought I'd give a little insight on why we're excited about the rationalization of the branch network and the Onsite and the potential to expand our ability to grow. With that, I'll turn it over to Holden.

Dan Florness:

Before we start Q&A, there's a few items I thought I'd share from a conversation we had this morning with our senior leadership from throughout the company. And part of it was sharing with them a little bit of a recap of our Board meetings over the last couple of days and some thoughts on the quarter and some thoughts on 2024, and I just thought I'd share. First, some thoughts on the P&L. And Holden touched on some of these but I thought I'd present it maybe in the way we talked about it with our own team internally. First one was when I think of 2023 and then going into 2024, so this is the last year that we'll have some branch closings. Branch closings do two things for us. They do free up a little bit of occupancy. What we've found over time is typically when we're consolidating two locations into one, some of that occupancy savings is spent on maybe a larger location for the two locations because the business doesn't fit, or as we've seen in the last -- during the COVID period, a lot of buildings that we operated in became really attractive buildings for a lot of local distribution points for a lot of e-commerce. So there is some competition for the space and competition doesn't make it cheaper. But with that said, we've benefited from some occupancy savings there. Those benefits are going to be behind us and we need to be thoughtful about that as we enter in 2024. There's a flip side of that coin. Consolidating two locations in one is a heck of a lot of work, and it's a big distraction to the business, to our customers. And that distraction of our own selling energy, our own local energy is now behind us. And the challenge to put in front of everybody is make sure that's translated into selling activity to grow the darn business. The second, we had the benefit in 2023 of some lower bonus payouts, benefit to the P&L, not a benefit to the recipients. But 2022 was a really good year for us and a lot of our folks are incented off of simple growth in earnings. And we grew earnings tremendously in 2022 with that falling off as we went into 2023, that contracted the bonuses. We don't anticipate having that benefit in 2024 because we don't anticipate the P&L doing what it did in 2023. And that means we need to be really dialed in on everything else we do so that can re-expand. The final piece, Holden touched on it, some vending depreciation, we had a runoff and then benefited the fourth quarter. The beauty of that is it will also benefit the first quarter and the second quarter and the third quarter until we anniversary that. So that will give us some benefit in 2024. The next one was a challenge to everybody on that call, whether you're in sales or not is our focus has to be on everything we're doing. It's helping our branch and Onsite locations hit their goal. In fact, I had to laugh after -- certainly after the call, and I suspect I need to thank John Soderberg for this. But out on the printer, there's a sign, help our brands and Onsite hit their sales goals in 2024. Thanks for that, John. But that's where our head is at. We didn't feel good about 2023, and the best way to feel better about it, [Indiscernible] grow a little faster. My compliments to our team that worked on ESG. A few years ago, we were probably a little bit slower to it, primarily because our operating style, frugality is naturally conserving. And as we stepped into the ESG world, what we really learned is we needed to do a better job telling our story. And I've been pleased to say that while we've maybe formalized up some of our public facing policies and things like that, most of the efforts we put into it is understanding what we do. It's a lot of work quantifying some things that we do but really telling a better story. And here in January, I'm pleased to say, for those of you familiar with EcoVadis, that's a rating agency per se for ESG. We had a bronze in the past. Here in January, we were upgraded. We now hold a silver in EcoVadis. I'm not aware of any other North American distribution businesses that have silvers. Perhaps there are some. I'm not aware of any. So my compliments to the team for doing a great job telling our story. Finally, earlier this week, I had an opportunity to tour our shop, and I say an opportunity. I've done it before. Tim Borkowski has led a big piece of our manufacturing for 29 years. Retired this week. And Tim is famous for giving you a 20-minute tour but taking 60 minutes to do it because he loves what he does. He loves to explain it, he loves to describe it, must be an engineering background thing. But I had a really nice visit with him with a handful of us that touring it. And one challenge I put out to our regional leadership today is I said, during COVID, we wore them out with virtual tours and that's kind of gone radio silent in the last two years. And I said to the group, I said, when customers see our capabilities, it sells itself. We have 1,822 Onsites. We plan to sign close to 400 in the next 12 months. Well, I would think there's -- if just the Onsite each did a tour over the 253, 254 days of the year, that's seven a day. Let's wear them out. Because right now, our own internal manufacturing capabilities represents between 9% and 10% of our fastener sales. We're really quite good at it. And so when customers see that, that makes us special in their eyes. With that, I'm going to shut up and open it up to Q&A.

Michael Hoffman:

So one of the things about looking at data inventories less orders would suggest PMI should be over 50. So when you look at your end markets, can you see pockets where this is starting to validate that thesis?

Michael Hoffman:

And then you all have consistently talked about sort of price of zero to 2%, market share is 5% or better. We've had a little bit of metals inflation at the end of the year. Do we trend to the higher end of that zero to 2%, and then what is your confidence about 5% or better in market share?

Dan Florness:

One thing that was an interesting update we had this week, our Head of Transportation, we've done a lot of work over the last several years to improve our own ability to track product. So if I'm in a branch, I can pull up a screen now. And if I'm looking for some product, I can look at it and say, oh, the truck that's bringing that is in the middle of Nebraska and it's going to be here in 30 minutes. It could be here in 3 hours or it might be on a container. And we've gotten to the point now where we're tracking it where we're seeing it at the container level. So he pulled up the screen the other day and the number of dots you saw on the map that went around the southern tip of Africa were meaningful. And I didn't see any dots that went through the Suez Canal on the product we were moving. And that just was a snapshot at that point in time in the information.

Operator:

Our next question today is coming from David Manthey from Baird.

Holden Lewis:

Yes, I think you may have caught me with a question that's more granular than I studied, to be honest. What I can tell you is we've seen an uptick in recent weeks, a meaningful uptick in the cost of a container. How that looks route by route, I don't know.

Holden Lewis:

And I think -- this is probably some speculation, but I would say that the disruption moving from China to the West Coast ports is less than things moving the other direction. But if the existing capacity is going to be consumed on trips for a longer period of time, that's going to stress the entire global network, which is going to impact ultimately our cost as well and that's what we've begun to see. Again, it's very early. We don't know how this plays out but it's something we're watching.

Dan Florness:

I'm not aware of any but it wouldn't surprise me. And -- because if you look at where the outgrowth is coming from, it's coming from fewer and fewer. So it wouldn't surprise me, but I'm not aware of any, David.

Operator:

Your next question is coming from Chris Dankert from Loop Capital Markets.

Holden Lewis:

It's relevant. And I think what you're seeing is we've talked about how our signings this year were not at the level that we expected them to be. And I think that at the beginning part of the year, you were benefiting from the signings rolling through earlier that were greater than the year prior to that, which is being affected by the pandemic, right? And so as you get the benefit of those, but then you have -- you layer in another year where your signings are slower, you're going to naturally have that effect roll through. So I think in many respects, it feels to me like it has a lot more to do just with the signings cadence, which, again, I think we've suggested we love the fact that our Onsite continues to grow in the mix. We love that the installed base continues to grow but the signings pace has not been what we expected it to be, and I think what you're seeing is a byproduct to that.

Holden Lewis:

I might also say, the answer to office comments, talking about how the year was marked by two things. One was difficult markets, the other was execution. I think I described the part of it that was the execution. The other thing to think about is if you look at where industrial production has weakened, it's really weakened in sort of the machinery and fabricated metals parts of the industrial production spectrum. And those are areas that are relevant to us as a company but they're particularly relevant in that Onsite world. And what we saw in the fourth quarter, to give you a sense, is all year, we've had a fairly significant gap between OEM fastener growth and MRO fastener contraction, which is a reflection of the Onsites coming on. In the fourth quarter, that gap narrowed appreciably. And I think what you're also seeing is simply the relative weakness in the machinery and fab metals is having a disproportionate impact on areas that disproportionately impact the Onsites. And so I think, again, it's a combination of market and our own execution.

Holden Lewis:

I think I try to predict what mix will be every year, it's a fairly thankless effort to be quite honest. But I think I've used like 50 to 70 basis points in the past. I think it will be less than that, and I think it will be less than that for a few reasons. One, we talked about fewer branch closures. If we have fewer branch closures, I think the rate of attrition in our smaller customer set will also slow. So you won't have the same order of magnitude impact from that. We have had slower Onsite signings. And again, that ripple effect, I think at least in the earlier part of the year, that's going to put less pressure on the channel mix impact. I would also point out that over the balance of this year, you've had a dramatic difference in growth between fasteners and non-fasteners, and maybe there's a little element of both comparison and market here. But I would wager that next year that gap is not going to be as wide, and that would relieve some pressure off of the product mix element as well. And so I still think mix will be negative, it's just the nature of our growth drivers. But I don't think it will be as negative as sort of the normal 50 to 70 that I've talked about in the past, I think it could be narrower than that.

Ken Newman:

Just wanted to touch on the color on some of the warehousing demand that you saw this quarter. Just curious what really drove that increase, is that really new customer acquisition, is it gaining market share with existing customers? And I know it's small for you now, but just where do you think that could go in terms of mix longer term?

Holden Lewis:

I would point out maybe a couple of things. One, prior to the pandemic that warehousing sector was less than 1% of our sales. And so oftentimes you get asked, like what -- can you show that you actually have improved your business coming out of the pandemic? This is an example of a market where we retained business coming out of the pandemic that we gained because of what we were able to do there. And so again, we think it's -- we love having that customer set involved. The other thing I think I would point out, I think I sort of indicated that market was up 60% in December. Christmas doesn't come every month, presents today doesn't have the same commercial value. I just wouldn't expect that kind of order of magnitude from that customer set as we go forward into 2024 that we experienced over the most recent holiday period.

Holden Lewis:

I'm not getting into the business of predicting January, February, and March DSRs. Here's what I would tell you. Onsites could have an impact. Does it have an impact in January specifically? I really don't know, right? I've always said that there's a lot of value, a lot of value and sort of understanding how those trends work. But there's a lot of error variable anytime that you're talking about 20 days of activity and you're trying to apply a lot of meaning to it. Onsites, over a multi-month period of time, yes, I think that they may grow a little bit less quickly in the absence of a market improvement because of some of the signings. But I'll tell you, we're also seeing a little bit of an uptick in the sales activity in non-Onsite national accounts, and I think that could also pick up. So there's just a lot of moving pieces that makes it difficult for me to say with any sort of definitiveness that you should expect us to beat or miss those DSR benchmarks.

Operator:

Next question is coming from Nigel Coe from Wolfe Research.

Dan Florness:

When I think of Onsites, Onsite and e-com don't even come into play. I could see -- because really what the Onsite is about is we're stepping into their shoes and we're operating inside their facility on something that they were probably doing themselves before, and didn't really have the expertise or the tools or the visibility into the supply chain that we have to help operate it more effectively, more efficiently. And then we arm that Onsite with all the tools we have in place, whether it be vending machines or technology embedded bins or areas where we're scanning, it's just a much more efficient way to operate. And that's about logistics as much as it is ordering, because quite frankly, when there on Onsite, anything that's gone through FMI and FMI is a high percentage of Onsite, anything going through FMI, the customers hasn't been really ordering it. And so e-commerce really isn't the thing there. E-commerce is probably a bigger thing with smaller customers, because oftentimes, smaller customers buy, and sometimes the way you and I do. I buy a lot of stuff online. The other part it can play into is -- and we saw this really in 2020, a market change in activity in that when all of a sudden, people started working more remotely, you're ordering more things electronically than maybe you were before, because we're delivering product in one of the facilities, they might catch us and order some stuff, they might phone us. And people tend to phone less when they're at home, they tend to do more things on the computer. At least that's what we're seeing.

Dan Florness:

But a high percentage of that e-commerce you're talking about is EDI…

Nigel Coe:

And then just on the points about -- so are you seeing pockets competition on Onsite? Again, one of your biggest public competitors does talk about their implant offerings. And just thinking about, Dan, you were very honest about the out growth in '23 below your expectations. Do you think that in '24, you'd be back to that sort of 5 points plus of that growth versus the market?

Holden Lewis:

And maybe the only other thing I would add, this is largely anecdotal. Again, I sort of asked the regionals how things are going every month. And they sort of just freewheeling give me answers. And oftentimes, there's comments about our competitors there, sometimes it's favorable to us, sometimes it's not favorable to us. What I can tell you is I haven't noticed any difference in the cadence of that conversation over the course of this year. So I mean, if part of the question is, are you seeing things intensify, I haven't gotten that from the feedback from the field.

Ryan Merkel:

So I have two questions and I'll just ask them upfront. The leadership changes, Dan, what changes did you make and why are you confident that that will accelerate the share gains? And then second question. Can you clarify the tweak to the business model where are the front doors open now on all of the branches? And I think the question I'm getting asked is, could that help sales in '24 or is it not that impactful?

Holden Lewis:

And I think a couple of pieces of perspective I might add. I mean, Dan touched on it. When we started this process, we had a lot of different experiments in the field going on, right? Some people closed, other people didn't close. Some people flipped counters, et cetera. Some people stuck with the traditional, the older CSP model. And I think we wanted to come up with a more consistent model. And so having had the opportunity to evaluate all the different things we were doing, we wanted to sort of consolidate under sort of one approach. We have a lot of customers in a lot of places that share a company and we want to make sure that we weren't creating conflict in that regard. So that was part of what went into that. As it relates to the impact on growth, bear in mind that if you're talking about accounts that are smaller accounts, which tends to be what that walk-in is, because when we're talking about our larger customers, we're typically going to their locations. It represents mid-single digits of our total revenue. So do you get some incremental revenue from that? In all likelihood, we will. I wouldn't overstate the overall impact to growth. It could contribute something at the margin but I wouldn't overstate the potential of that.

Holden Lewis:

Exactly.

Operator:

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

Operator:

Hello, and welcome to the Fastenal 2023 Q3 Earnings Results Conference Call and Webcast. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Taylor Ranta of the Fastenal Company. Please go ahead, Taylor.

Dan Florness:

Thank you, Taylor. Good morning, everybody, and thank you for joining our third quarter call. I'll start on the -- reference the flip book on Page 3. Conditions remained challenging in the third quarter of '23, reflected in a daily sales growth rate of 4%. Still, regardless of the year, we celebrate milestones when they occur. I remember just over 10 years ago when we hit $10 billion (ph) in daily sales for the first time, we recognized that on this call, as well as internally to celebrate that milestone. Some years later, we hit $20 million. Here in the month of September, we broke $30 million in sales per day for the first time in our history, and my congratulations to the Fastenal organization for hitting that milestone. Our sales growth in the quarter translated into EPS growth -- EPS of $0.52, 4.1% growth over the same period last year. Our results reflect the unique profile -- product profile of our business. Fasteners still constitute about a third of our sales, and within that subcategory, about 63% is in OEM-oriented fastener, and that business can be very cyclical because of the production needs of each of the customers we're serving. If you look at the rest of the business, it tends to be much more MRO-oriented. Our fastener daily sales, as you've seen in our monthly sales release, have decelerated at a faster rate than our non-fastener business as we've gone through the calendar year. The third-quarter operating margin hit was 21%, which matched last year despite the one less selling day. And so, earlier I spoke about the $30 million we do in a day. The quarter had one less day. Many of our -- some of our expenses are tethered to the day, most are not. And so, pleased that the team was able to match the operating margin of 21% from last year. But I believe that understates the reality of the performance. If you looked at it on a same-day basis, we believe we would have increased the operating margin, because we'd have had roughly $10 million more, about a third of that $30 million in operating income, because that -- a good chunk of that flows through because of the change in the nature of the expense. The Blue Team, if I think about the last several years, we had a unique opportunity to serve the marketplace because of our pristine balance sheet. When COVID hit the globe back in 2020, we were able to step forward and secure and -- and purchase and fund with cash a meaningful increase in inventory, primarily centered on safety supplies, because our customers and society, in general, needed something to get through that period, and we were proud to be part of the solution. We were able to do that because of our balance sheet. As the global economy reemerged from the pandemic, we saw first-hand, and you saw it in daily news clippings, about congestion that was going on in supply chains around the planet. Again, as supply chains became more rocky and you couldn't rely on how many days it would take to get product, there's a solution to that. Its stock more product. And we beefed up our balance sheet and our cash flow suffered as a result, but I believe our standing with our customers and in the marketplace never performed better, because the market could rely on the covenant that Fastenal provided to them in being a great supply chain partner. As we moved deeper into 2022 and now into 2023, we've been able to unwind a piece of that. And as a result, our year -- on a year-to-date basis, we have converted 121% of our net earnings into operating cash flow. That's our highest performance in a decade that's averaged just shy of 100% -- about 95%. If I look at it from the standpoint of relative to a year ago, in the quarter, our operating cash grew about 51%. Year-to-date, our operating cash has grown 69%. Again, part of that's a reflection of the investments we made to serve our marketplace and our ability to unwind that in the current environment and translate that into cash flow for the organization to serve our shareholders and to serve the business as we move into the future. Our Onsite and FMI installed bases and our digital footprint continue to expand. And earlier this year, we did some restructuring and we announced the elevation of Jeff Watts to Chief Sales Officer in the organization. We did some restructuring of the sales side of our organization, because we wanted to double down on the challenge we'd put in place in front of everybody going back to the 2015 time frame. And that was really stepping into what we saw as an untapped opportunity to grow our business faster, and that was to expand our Onsite presence. It was earlier this year that, for the first time, the number of Onsites in the organization outnumbered the number of branches in the organization, and that delta continues to expand. And we believe that each of our district managers has the potential in their market to land two Onsites per year, and it's our job and part of the purpose of the restructuring of the sales team was to really just decide, hey, we believe it, but we haven't done it. Let's do this thing. We expanded not too many years ago, we were signing 80 Onsites a year and we laid out the plan to get to 400 a year. We expect, as you see on the next page, we'll do about 350 this year. But we haven't hit that number, and we've been kind of stuck. Now, COVID threw some challenges our way. It's never an easy time to move into -- move in with somebody when they're trying to isolate from the rest of the world, and that challenged our ability to grow coming out of COVID. But looking at the opportunity that's out there, I believe we can do that. We need to turn that belief into a reality. Flipping to Page 4. Speaking of Onsites, we did sign 93 in the quarter. So, our active sites are 1,778, 13.5% greater than they were at the end of third quarter of 2022. And our daily sales in those Onsites, excluding transferred business when you open an Onsite, is in the low-double digit rates. So, we're seeing good growth there. We're just not signing enough. And as I said, we still anticipate signing roughly 350 this year. FMI technology, there we set lofty goals as well. We said, can we do 100 a day? Not 100 a quarter, but 100 a day of our weighted device count. Now, we did 5,969 during the quarter, 95 per day versus 81 a year ago. The team's performing really well here. We're not at the 100. The 100 is the goal, and we will push and push and push till we get there. But I'm really proud of what the team is doing, and you see that shine through. When you look at our sales by product line in -- in our monthly and quarterly releases, one thing you do see is, our safety business, grew almost 10% in the month of September and a lot of that could be attributed to the success we're seeing in FMI. And it's our anticipation we'll sign between 23,000 and 25,000 MEUs this year, and that's a combination of FASTBin and FASTVend. eCommerce, we can -- it's still, in the scheme of things, a relatively small piece of our business. It's just under 25%, but it's up from single digits not too many years ago. And it currently grows -- it grew about 41% during the quarter. And that's really a case of the marketplace saying to us, we'd prefer to purchase from you this way, and our team in the field and our team in technology building an ever better mousetrap to serve into that market. As I've shared on prior calls, we still have a ways to go on this piece of our business, because a chunk of eCommerce is that unplanned spend, and our goal is to keep making that easier for our team to do in the field. Finally, if you roll up FMI and eCommerce, we talk about our digital footprint. How much of our revenue is touching some digital aspect of engagement? We were at 57% in the quarter versus 49.5% a year ago. Our challenge to the team is targeting 60% sometime before we exit this year. And our long-term expectation, is still at that 85% we've talked about in the past that we believe will be part of our digital footprint as we move into the future. In addition to our earnings release, there's several 8-Ks that have gone out around the earnings time, and I thought I'd share just some insight on the three. The first one, and I believe it went out yesterday evening after market close, we announced as we do typically on a quarterly basis, a dividend, we bounced to $0.35 dividend, which is consistent with the dividend we paid in each of the first three quarters of the year. We also announced a few leadership changes. One is, is a press release we put out, one of the individuals that's been very influential in our ability to beef up our inventory during COVID and wrap it back down and overseeing the distribution and transportation teams as well is Tony Broersma. Tony has been with the organization of roughly 20 years, and he's demonstrated through a career and we identified that we lay out his career in the press release, the different roles he's had, but he's demonstrated excellence. And yesterday, I asked the Board of Directors to elevate him to Executive Vice President over operations. So essentially elevating his role in that his responsibility will be largely unchanged from what we had previously, but it's recognizing his performance and what we see in the future of Tony within the organization. Second filing one out. It's a required filing related to one of our officers who has decided to move on to a new chapter in his career. And it's Terry Owen, our Chief Operations Officer. I have known Terry for many years. He's been with the organization. I believe all told, he's been with the organization about 28 years. The official documents say it's 24.5 because he was in the earlier years, part of time with the organization, but then came full time and had a break in service there. But Terry has demonstrated a career of exemplary service to the organization. We've had some conversations in recent months about some aspirations he had in the -- he's looking at the number of years he has left in his career and what he wants to do as he moves into his next chapter life. He discovered an opportunity we thought was quite compelling that would serve his desire for the future as well as his family. Terry had relocated to the East Coast of the U.S. several years ago for family reasons. And all I can say that Terry is your good friend. I wish you best of luck in your next endeavor. And thank you for the team that you developed, Tony being one of them, but thank you for the team you developed. The organization has always prided itself on our ability to build leaders and promote from within. And every time we see a person decide to take a new chapter in life, whether that's after retirement or going into a family business or whatever the case might be. We always see another layer of talent right behind that person ready to step in and discover their future and their opportunity. With that, I'll turn it over to Holden.

Operator:

[Operator Instructions] Our first question is coming from Nigel Coe from Wolfe Research.

Dan Florness:

Good morning.

Holden Lewis:

I think, Nigel, there's a little bit of that, that's flowing through, but we've definitely seen lower costs related specifically to our fastener line. And I think that's largely what you're seeing. So yeah, when we think about what caused a lot of the inflation in our business, there was an element of it that was raw material, but there was a fairly significant element that was related to transportation. And so yeah, I think you're just seeing some of that gradual impact play through. But I want to also give a lot of credit to the organization, particularly sort of the field and the national accounts teams and the folks that manage pricing. I mean, I believe five years ago that we wouldn't as effectively have been able to align our pricing and cost in the way we have. The variance that we've had against what's going on in the market has been fairly tame. If you remember, this quarter last year, we were talking about 20 basis point deficit and we felt that, that was going to -- we felt at the time that we hadn't quite caught up with where costing went with fasteners. I think our guidance at the time was we kind of expect that costing to catch up. It has caught up and probably came in a little bit. But I think over coming quarters, you're going to see the benefit that we saw this quarter, which largely recaptures the deficit we saw a year ago. I think you're going to see that begin to moderate. So it wasn't what we expected either. As you know, we target neutral, we continue to target neutral. But I don't think that it's a -- I don't think it's a sustained trend either. I think as we go through the next couple of quarters, it's going to trend back to neutral.

Holden Lewis:

The majority of it was not elective. We had a -- there's a piece of property in there. The signing of which just got pushed out from fourth quarter to first quarter, that's just a calendar timing issue. We did have some automation projects where it's just a matter of when the product is going to come in. We always do it would be later in the year and it's just going to sort of cross the calendar line. So the majority of it relates to projects that we remain committed and excited about and will fall into the 2024 and it was more a function of timing. Now I will say that earlier in the year, we did say, look, take a look at your budgets, it's not a great year in terms of demand and tighten some stuff up. So I think there's some elements in there of what you're talking about, and that's just about enforcing discipline across the organization. But I think the larger portion of it relates to projects that will be coming back into the business in 2024.

Holden Lewis:

Thank you.

Christopher Snyder:

Thank you. I wanted to follow up on some of the price cost commentary. I understand that price cost was positive from a year-on-year perspective. But I think you said the deficit was largely caught up, from which would kind of maybe imply that you're still a bit price cost negative at the moment. So when we think about that trajectory back to neutral, is that like incremental price cost positive to get there or is that incremental price cost give back to get there? Thank you.

Christopher Snyder:

Thank you. I appreciate that. And then maybe could you just talk a little bit about pricing on the non-fastener side? I think I understand that the fastener is seeing some price pressure, whether it's the metal or the freight. But can you talk about the non-fastener side of the business? Thank you.

Christopher Snyder:

Thank you.

David Manthey:

Dan, Holden, good morning.

David Manthey:

First question, could you talk about the feedback and early returns after you reopened the front doors of your stores last month?

Holden Lewis:

And just probably the one piece of perspective I might add, Dave is, for a long time or for several years, we had a lot of different models occurring within the branch, right? There were some branches that did, in fact, close their doors. There were some branches that had very specific low call average. There are some branches that stayed open. There are branches that flipped their counters -- branches that didn't. And I think what you're really seeing and picking up on is after several years of experimentation, which is really what Fastenal does. It came time to say, let's settle on and align around kind of an agreed approach to it. And so what you picked up is essentially us having looked at the various experimentations that were run throughout the organization for a number of years and say, "hey, here's the path forward that we're going to take.

Holden Lewis:

Yeah.

Jacob Levinson:

Good morning, Dan, Holden.

Jacob Levinson:

I know you guys saw into lots and lots of different end markets. And maybe it's not always easy to tell exactly where the product is going at the end of the day. But maybe you can just walk us through what you're hearing from the field in terms of some of the positive and negative outliers on a vertical basis?

Dan Florness:

The only thing I'll add to it in my ask of everybody hearing this, don't read too much into it because it's a relatively small piece of our business. But when I'm going through the numbers, the individual that poses the stuff together, I often wear him out a little bit with questions and just to understand it myself. And the other end markets, which is about 11% of our business, it's a bunch of stuff in there since the term other and it peaked up. And in one of the components of that is our business and our government business has been gaining strength as we've gone through the year, but it didn't gain strength sequentially in September. And sometimes that's just a function of comp. But generally speaking, it's been gaining because we've been really successful in Onsite and government locations that we have in the business. And so I asked him, I said, I know government didn't tick up. Why did that tick up? And a big chunk of that other is transportation. And it's not automotive transportation that's not in there. It's transportation that we sell into and that saw a real uptick. I'm not sure what that means. So maybe I created more questions with that answer than an answer with that answer. But that was the one thing that jumped out at me. I was -- I'm still scratching my head on it, but at least I know that's what drove the other end markets to grow 12.5%.

Dan Florness:

Yeah. I think there's a few things in there. One is, when we came through the tariff period, that was brutal from the standpoint of our pricing tools being so decentralized, communicating what was changing almost on a week-by-week basis was incredibly difficult. And there was one quarter I sat down with our IT -- John Soderberg, our leader of IT, and I said, John, I'm going to ask you something that I never -- that I told you I'd never ask you to do. We're going to shut down all IT development for whatever time it takes, and we're going to focus 100% of our energy on a better pricing tool for our organization to use because this is a disaster we're going through right now, and we can't handle these fluctuations because our system isn't built for that. And we shut down IT, and we focused on building what we call our price review tool. And then we had other folks in the organization that took that our district managers. We have a key person here in Winona, Kevin Fitzgerald, who took that and created a great tool and our ability to price and pricing isn't is much about not being too high as it is about not being too low because sometimes if your price isn't precise and you're too high, you might actually hurt your margin because you don't sell enough of that or if you were 3 points lower, you would sell more of it, and it help your margin. So on the gross margin side, we've gotten better at our ability to price. And in the recent years, our transportation team has gotten really agile and manage the expense side. So that's on the gross margin piece. And there's a bunch of other things, but I don't want to give you a 15-minute answer. On the operating expense side, we focused a lot of energy on people development, on leadership development. Earlier when I was talking about the transition with Terry, one of the things that always makes me feel good about transition within Fastenal is the incredible bench of talent we have that exists throughout the organization. It's from a promote within culture. Because of all that investment, our leadership team, whether it be in a support area, at the district level, at the regional level, our leadership team has never been better. And one thing I'll credit, especially to Casey Miller, who leads our U.S. business and Jeff Watts, who leads our global business. They both have done an incredible job over the last five, six years of challenging their leaders to be better at managing the expense side. Because in a decentralized organization, there's nothing more difficult than that. You have to be out ahead of stuff. And they've just done a wonderful job on that. And then the other piece, not displayed anybody, our distribution team and their ability to manage expenses through the cycle is second to none. So as I look at the information I see and I click my ails and I'm like, I can't believe how good this team is. And I think we're just better at it. And that's not about one person. That's about an organization that's gotten better over time.

Dan Florness:

Thanks.

Patrick Baumann:

All right. Good morning. Thanks for taking my questions. Maybe one for Holden first. Just wanted to follow up on the near-term gross margin expectations. It sounds like the price cost will be favorable year-over-year in the fourth quarter. And then, you also have an easy comp, I think you had called out like weaker product margins last year. Maybe that's the non-fastener business. I guess just given that and your third quarter performance, are you thinking the gross margin in the fourth quarter is going to be up year-over-year? And then can it also be up maybe from the third quarter as well?

Dan Florness:

And the delevering of our trucking network.

Patrick Baumann:

Great. Helpful color. I really appreciate that. And then, I got one more in terms of the branch size now. It looks like it's close to that target you laid out in the fourth quarter, around the fourth quarter conference call, I think you said 1,450 for U.S. plus Canada. So maybe if you could update us on [Technical Difficulty] is that for now? And then a couple of things in context of that, like how should we think about that sales momentum in the non-res and reseller accounts, which I think has been hurt by some of this consolidation and then also the occupancy expense account where I think you've been benefiting from some of that in terms of costs coming out of the business? Thanks for any color on that. I appreciate it.

Dan Florness:

Yeah. I'll try to unpack that in reverse order. And if I missed something, help me out. But first off, branch count 1,450 is our target number. That's not a -- we're at this number and an edict comes out that says thou shalt not close or thou shalt not open. That number could -- perhaps we should talk in ranges instead of exact points because 1,450 was what our internal team identified as a target number, looking at demographics, and I believe it, I don't have the stat in front of me, so if I'm wrong, I apologize, I would have been in the flipbook from the first -- from January. But I believe at 1,450, we were within 30 minutes of 93% of the U.S. manufacturing base and so it's a theoretical number. Could I see it go down to 1,400, yes. Could I see it go to 1,500, yes. The closure piece will become ever quieter. And as we move into 2024, I know just yesterday, I was chatting with Casey and Jeff about some of that and what they're seeing because there's still a few closures on the horizon. Part of it is reminding folks that the openings are okay, too. And so I think we'll be in that 1,400, 1,500 range. So don't read anything into it moving up or down 20.

Dan Florness:

If I look at occupancy in the third quarter, we actually didn't leverage it. And part of the reason for that is within occupancy, we have two components. We have our branch and Onsite network. We have, obviously, our distribution centers. But we also have our FMI, our vending and FASTBin. And the reason we classify that as occupancy. When we started vending 15-plus years ago, looked at it and said, a vending machine is basically a shelf. We've taken a shelf out of the branch. We've wrapped it in a metal box, and we put that shelf in the customer's facility, but it's a shelf. And we really challenged our district leaders to think about that as occupancy on our internal P&L. We classify it as occupancy because if a branch grows from 100 to 150 and for simple purposes, let's just say that, that 50,000 of growth is all vending. I shouldn't need a bigger building. And my occupancy grows because I have the depreciation and expense associated with my vending platform. And it was a way of more holistic about it. Our FMI numbers, as you know, we're signing 95 devices a day. Our FMI grew 6%. And our expenses within occupancy, and that was about 55%. So our occupancy grew just under 4%. And about 55% of that related to vending. But even though we closed some branches and closed some locations, our rent has not gotten cheaper in the last 12 months, and we will continue to be challenged with that. One of the things we've talked about on prior calls is the thing we call Lyft. And Lyft is about efficiency of where we're picking the product to replenish FMI vending today with FMI more broadly. But it also -- if I have a 50 vending machines out of -- that are serviced out of a branch, and I don't need to stock all of that inventory in the local branch because I'm picking it in an automated distribution center in a highly efficient way. Now that distribution center isn't free, but I also don't need to expand the footprint of my branch because I freed up 40 feet of shelving that was dedicated to FAST vending in the past. But it's given us some challenges on the fact that occupancy has grown. And as you can imagine, the further you get from the middle of the country, the more expensive the space gets and when you get into some of our businesses in Europe, it's more expensive than it is in Winona, Minnesota. But I feel good about our ability over time to continue to manage that and lever it, as I said with our FMI, that business is growing quite handsomely, and we grew our expense to 6%, so we levered that nicely.

Holden Lewis:

Thanks.

Operator:

Thank you. Next question is coming from Tommy Moll from Stephens. Your line is now live.

Holden Lewis:

Yeah. So what we're seeing in the quarter is you continue to have MRO fasteners down and we actually had OEM fasteners that were still rising. The perspective you need to have though is, we continue to see our OEM fasteners grow as a proportion of the mix because they tend to benefit from the growth in our Onsite. So today, a lot of our growth is coming through Onsites, and therefore, a lot of those new signings, those new implementations also bring in OEM fasteners. And so in the past, we've talked about OEM, and I think people have been surprised that OEM hasn't gotten negative given sort of the behavior. But if you go back to like mid last year, OEM fasteners were growing mid-20s. If you come to current period, it's growing low-single digits. And so you've seen significant moderation in OEM fasteners as the production environment has softened over the past 12 months, but it's still growing because of the success we continue to have signing and implementing Onsites.

Dan Florness:

Yeah. If you think about what we do, in a perfect world, where we're supplying OEM fasteners. The customer isn't ordering it per se. We're supplying it when they need it. And that shouldn't change depending on the cycle because the question is, if you peer downstream from the manufacturing activity to our customer or their supply chain to the end market. How much inventory is there because if – there shouldn’t be a different stage of where you're ordering OEM fasteners. The pull-through is what the pull-through is. Now some of the changes from what Holden talked about a year ago, there was elements of inflation in there. But there was also elements of folks had such an unstable supply chain for everything else. Fortunately, they were partnered with Fastenal, and their supply chain for fasteners was great. And I'm having a little fun with you there, but they might have had other stuff or their end markets, possession is [indiscernible] so they just ordered it because they were worried about getting it. And so I think you do have cases of downstream from our manufacturer customers. There's some stuff that piled up, but I think that's worked through. I think the poll right now is to poll. I was talking with our leader in Continental Europe the other day, and his business has ticked up, and I was just asked them some components about it. And he was talking about some of these transportation customers that picked up. He said their business is pulling through what they're selling, but they're being very, very cautious about not getting ahead of anything. So I think there, it's just true demand coming through.

Tommy Moll:

That's all very helpful. Thank you, both.

Ryan Merkel:

Hey, guys. Thanks for fitting me in. I had a couple of questions on gross margin. So usually gross margins kind of flat sequentially into 3Q, and obviously, it was up 40 bps. Can you just unpack what the drivers are there, just because that was the surprise factor.

Ryan Merkel:

And when you say price cost, you're talking on product, you're talking on freight because it sounds like freight was the thing that you mentioned first driving the gross margin.

Dan Florness:

Because we consider that our landed cost to the shelf as opposed to when we're moving it around North America or moving around in our business.

Ryan Merkel:

Got it. Okay. That's helpful. And then sequentially, you think maybe gross margin could come down a little bit more than seasonality. Is that because price-cost is going to decline and the reason there you're going to lower fastener prices to match the lower product costs or is it also this idea that maybe charging for freight is getting a little bit harder.

Ryan Merkel:

All right. Thank you.

Holden Lewis:

Thank you everyone.

Operator:

Good morning and welcome to Fastenal 2023 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would now like to hand the call over to Taylor Ranta of Fastenal Company. Thank you. You may begin.

Dan Florness:

Good morning, everybody and thank you for our second quarter earnings call. Before I start on Fastenal matters, I'd like to share a message. When I joined Fastenal back in 1996, one of the things that was unique in my joining is that I stepped into the role of Chief Financial Officer, Bob Kierlin offered me the opportunity. And so, I joined in an unconventional way in that I didn't start in a branch or in a distribution center and work my way up through the organization. And sometimes when you join an organization that promotes from within, you're not sure -- kind of reception you'll get when you join. One of the first people I met was Colleen Quad [ph], it was Bob Kierlin sister. She had retired in a retirement. She worked for Fastenal a few years in sales support. One of the nicest ladies I ever met and we lost Colleen [ph] earlier this year. And to her children and grandchildren, you have my condolences and as well as to Bob on the loss of your sister. What a wonderful lady and we were all blessed to know her. We started back in 67. So our 5 founders aren't in their 20s anymore. And Van McConnon -- Henry McConnon [ph], he goes by Van, he was our first employee. In fact, I think that's how he earned his stake in Fastenal, did well with that stake and I'm proud of them. He lost his wife Wilma earlier in the year and the same message. Van was -- could not have been more of a welcoming person to me when I joined the organization and here is my condolences in the loss of his wife to spring. With that, I'll move on onto the Fastenal quarter. Second quarter '23 is a challenging quarter. Last fall, when we -- or last December, when we had our leadership meetings and our planning discussions for 2023, the ISM had weakened. We knew that 2023 was going to have some slugging aspects to it. We warned -- we cautioned our team. Second quarter and third quarter will be tough quarters to get through and prepare yourself, prepare your teams from the standpoint that we're going to have to manage our expenses really well. We'll have to keep all of our heads skewed on the right way because there's been -- it's been an interesting number of years between tariffs and COVID and congested supply chains and inflation and all this stuff, there's noise, noise, noise. We're going to experience something we have experienced for a number of years and that's a slowing economy and prepare for what that means and get the muscle memory back. But it was a challenging quarter. Our earnings came in at $0.52, rising about 4.5%. Softer manufacturing activity led our data sales growth to decelerate. We grew 5.9% in the second quarter. We did not leverage. That's an important element of our business. Our sales grew 5.9% but as we're cycling through some mix changes and Holden, touch on a little more detail. Our gross profit dollars grew about 3.6% and our operating expenses grew 4.1% and I'm not real good with math but I know that's not a good combination if you want to leverage your earnings. And one of the elements is, we didn't anticipate it softening quite as much as it did and that 4.1% needed to be a little bit lower. We didn't adjust our variable costs quite quickly enough. As we've seen in prior time frames when the economy is weakening and it affects our ability to grow, the high amount of working capital on our balance sheet really can influence our ability to generate cash and given my old role as CFO, second quarter is a painful quarter for us typically because we have 2 tax payments. And when you're a profitable organization, you operate a lot of business in the United States, you pay a lot of good tax. And so second quarter hits us really hard. And normally, we -- for every dollar in earnings, we generate $0.60 to $0.70 in operating cash flow. I don't recall us ever having a second quarter where we generated more cash -- operating cash flow than earnings perhaps Holden will cite an example where we did. But -- and maybe it was 2009. But that's a strong cash flow as we've ever seen for this time of year. And it also -- and a chunk of it is from not just what's happening in the economy and the working capital needed to fund receivables and to fund inventory for growth. In the last several years as supply chains were really getting congested, the message that I made very clear to our supply chain folks and our teams, we have a covenant with our customer and that is worded supply chain partner, we will not let our customers down in their supply chain. If that means we need an extra 15 and extra 30, an extra 45 days of inventory, don't get ahead of yourself but we need to have inventory to support the business, period. And when the ports on the West Coast of North America were getting congested, the economy is turning back on, everything was getting congested, we beefed up our inventory. We started -- we were harvesting that. We were doing it in the first quarter. We're doing it this quarter. I think the team has done a wonderful job. It means we have capacity now to look at our balance sheet and say, where does it make sense to make strategic investments in inventory. I'm not saying there's stuff on the table right now but that discussion can be had, whereas a year ago and 2 years ago, we couldn't really even think about it because we were focusing all of our energy on something else. In the second quarter, we made some leadership changes. First off, Jeff Watts, who's led our international -- who joined Fastenal back in 1996, so he's been here for 27 years and started in our Canadian organization when we were -- when we had just a handful of locations in Ontario. He's led our international sales efforts since 2015 and he will oversee all of our sales efforts across the planet. And obviously, we know each other really well. The team in the U.S. -- international knows them really well because he's led that team for quite a few years. But the U.S. team is no stranger to a 27-year employees. So we know each other well but I believe we'll have greater coordination on our efforts. And Jeff has a very entrepreneurial approach to how he leads a business and I welcome him and look forward to the success he's going to see. Terry Owen, who's been in EVP Operations role, we formalized this role and that he's our Chief Operating Officer. And this bullet was added kind of late in the process. I found out yesterday as a team that I should mention this since we had announced it this quarter. And there's an error in our release. I thought I'd let you know and it's probably not material in the true aspects of life. But it is Terry has been here 28 years and I know he joined in June of 1999. And if I do the math, I think it's 24. So sorry, we didn't catch that error in our process. But in conclusion, cyclical factors aside, the last several years, we've taken a lot of steps to improve both our labor and our inventory productivity. And I believe this forms an excellent foundation for our ability to generate long-term share gains in the marketplace. Switching to the next page. Onsites, I'll state the obvious. 86 Onsite is a disappointing number. Our aspiration internally has been to drive that to 100 per quarter, 400 per year. That's been our stated aspect mentioned internally. Prior to COVID, we hit 362 and that was a ramp-up from 80 in 2015 to 176 to 270 to 336 to 362 per year. When COVID came along, it really impaired our ability to sign Onsites because the last thing you want when you're worried about people being around you is inviting a bunch of folks of Blueshirt to come in and operate inside your four walls. And so we saw that drop dramatically. We recovered to about -- we did 356 signings last year. We broke 102 out of four quarters. Perhaps some of the leadership changes we made in the last 60 days created some distraction, perhaps we're not as focused as we should be. But that number needs to be 400 a year or more. And right now, we've adjusted our number. We think we'll probably come in similar to last year, somewhere in the 350s. And with that said, the fact that our Onsites are up, we have 15% more Onsites than a year ago. That's a great number. We're just not building the pipeline the way we need to. FMI Technology, that's a different story. So, our goal in Onsite is 100 a quarter. Let's get there and then figure out how we take it to 110, 120 but let's get to 100 first. Same with FMI technology, it's not 100 a quarter, it's 100 a day. And I'm pleased to say in the fourth quarter -- excuse me, the second quarter, we did 106 per day. And that's market share gains. That's us going out and planting new flags in new locations to improve the supply chain for our customer, illuminate the supply chain for our customer and us being a great supply chain partner. That's a huge positive. I believe it tells me the marketplace is conceding the space to us. Maybe I'm wrong on that but I believe it is because we are so far out ahead of the marketplace. Year-to-date, I told the Board yesterday we're with the 106 this quarter -- we had our Board meeting yesterday, with 106 this quarter, we're at 100 year-to-date. I misspoke, we're actually at 99, but I'm really pleased with what the group is doing there. And the 39.8% of our sales went through our FMI platform in the second quarter. News flash, it was 40% in June. So we hit the number -- we hit 40%. Now we need to get to 45% and 50% but continue to see really nice progress there. E-commerce continues to grow handsomely for us and grew about 45% in the quarter. For us, this has been a different journey than other things because a lot of e-commerce is unplanned spend. If you think about our FMI Technology, that's all about planned spend. That's stuff you're using daily, weekly, every month in your business and it makes sense to stage it accordingly. E-commerce, a lot of that is stuff that you're hopping on to order. So it's unplanned. Historically, not a strong suit for us. And I'm pleased to say it's growing to be a bigger piece of our business. It's, as I mentioned, 45%. The EDI portion of it is up 37% and that's typically larger customers. The web portion of it can be large or small and that's up almost 70%. And to give you a magnitude of how that's changed and again, we're not great at this piece of the business, but we can be. But with that said, in 2015, when I stepped into this role, the web portion of it was less than 2% of sales and we were at $3.8 billion, $3.9 billion of the company back then. So about $75 million going through web sales back in 2015. In 2023, in the second quarter, it was 6.5% of sales. So right now, we're on a 12-month run rate of about $7.5 billion. So that's a business that's approaching $500 million and we're not that good at it, but we can be. And so it's 6.5x bigger than it was a handful of years ago. And obviously, it's been accelerated by the events of the last few years, COVID is a perfect example. What really accelerated as people do -- some people are working remotely. Some people are ordering a lot more stuff electronically. We're seeing that in our numbers and we're getting better at it every day. And when you push the FMI technology and the e-commerce together and you think about our digital footprint, that was 55.3% of sales in the second quarter of '23, was 47.9% a year ago. We thought we could get to 65% this year. We've tweaked it to 60%. I don't know if I completely agree with our language there about FASTStock conversions. I think it's really -- part of it is the case of we're doing more and more every day. But some of the activity, because a lot of the FASTStock, for example, is going into fastener installs. It's going into OEM production areas, it's going in the MRO production and we're doing more transactions every day. However, the transactions are a little bit smaller because industrial production is slowing down in our business. And so we might be doing more orders. There are just fewer of them. And I'll cite you a few statistics. In January of 2022, our FASTStock, we did 234,000 scans of orders through our tool which is 11,100 every day. So our employees are going out with an Android device and scanning 11,100 planograms every day and generating about a $250 order. Actually, it's closer to 260. And then in January of this year, that 11,100 had grown to 14,700 and between January and June, that 14,700 scans per day is now 16,300. That's a combination of market share gains and conversion of -- instead of going out with a yellow note pad, we're going out with an Android device in scanning bins. And so that's a huge win in our system from efficiency. It's a huge win from a standpoint of ability to take market share. But looking at the numbers, our average order size was $258 in calendar 2022. And in January, that number had dropped to $246. So it was down about 4.7%. And I think there's enough transactions going on there that, that's probably more a tone of the economy than anything else because when you're doing 300,000 a month, it's not a mixed thing. Between January and June, the $246 order dropped about $222, so it's down $24 which is 9.6%. That's primarily activity that's declining in the industrial marketplace. And there might be an element between January and June of a little bit of deflation because there's some fasteners in there, but it's mostly about activity. Just thought I'd share those start to get in the weeds. And I will share one last thing before I turn it over to Holden. And that is, again, this FASTStock tool, this Android device that we have out there. In October of -- excuse me, in the summer and fall of 2019, we did a beta version out in the Southern California of that device and work through some bugs, work through some bugs and started rolling it out to regions late in the year with a planned 2-year rollout. COVID-hit and we accelerated that rollout and we rolled it out across the company by June of 2020. So, we rolled -- we had a 2-year rollout in 6 months. And today, that's about 12% of our revenue. The -- in October of this year, we plan to roll out what we call our order pad which will be on the same device. It will be an internal-facing device and use it in beta for -- in the October time frame. If all goes well, our goal would be to roll it out in Q4. And essentially, it's a tool for our personnel when they're out visiting a customer, not only can I take a recurring order, I could easily take a customer asking for something or I can do a search on it and I can respond to the customer right in front of them. That's a capability we've never had and we plan to have -- we expect to have that by the end of this year for 2024. A second piece, that's an internal facing app. We've also developed an external-facing app called FASTScan, it's with beta customers right now. Our goal is in August to have that out in the Apple store and the Google Play for customers. If they choose to download that and that would be a bin stock app for customers. It's primarily smaller customers or customers that might be a few hours from a facility in Montana or in Western Canada, where they can do some bin stock scans themselves, transmit the orders so when we visit, we aren't surprised by a stock out and it makes for a better supply chain for that customer base. That will be, again, coming out in August. And depending on what we -- the success we find with our order pad, our goal would be next summer to roll that out in the customer-facing app as well. Again, we're not great at the web portion of our business. It's a $0.5 billion business within Fastenal now but we can be and we're building tools to do that because we think that's a better reaction to some of the buying habits that's going on in the marketplace. With that, I'll turn it over to Holden.

Operator:

[Operator Instructions] Our first questions come from the line of David Manthey with Baird.

Holden Lewis:

Sure. The clarification is we continue to expect moderation in the overall contribution from price in the back half, really just a continuation of what we've been seeing over the past few quarters. Does that help?

Holden Lewis:

Okay. Then -- yes, if you -- the CFC continues to experience very strong growth. I believe in the second quarter, if you think about the books of business that our CFC or hunter program has, the growth in those books in the current quarter relative to what those books did the prior year, it's actually up north of 50%. So, we continue to see good success in particular with the CFC program. And I don't have specific numbers on the target 5 for you, Dave. CFCs to some extent, have their own target. So I think you can get a sense of how that growth is occurring. But the -- yes. I don't have specific on target 5. The CFCs continue to grow well in excess of our business. And I think the CFCs are a manifestation of the same key account approach that the target 5s are feed into as well.

Michael Hoffman:

Dan and Holden, the trend data that you share so generously, can you -- again, I get that you have limited forward visibility but do you think you're hitting bottom?

Michael Hoffman:

Okay. And then on the digital transformation, one of the things that I think I understand correctly, as you tend to gain a greater percentage of wallet of the individual customer over the life cycle of that penetration, how do you -- how would you characterize where you are in that journey and how that's influencing some of the share gain.

Holden Lewis:

And I might add as well that I think that those 2 actually interconnect in the sense that to the extent that it helps to reduce our overall cost of operations than it does, that actually allows us more flexibility in bidding processes and I think makes us more competitive in the marketplace and contributes to our ability to win and gain market share as well. So it really plays -- it plays really strongly in both our ability to leverage as well as our ability to grow.

Operator:

Our next questions come from the line of Chris Dankert with Loop Capital Markets.

Holden Lewis:

Yes. Well, I mentioned the IT and the FMI spend because those are investments in our business that we're making that are wise investments to make. And I don't necessarily anticipate where we're making investments in those areas that we're going to pull meaningfully back in those areas. The areas we were talking about more had to do with expenses that we had for travel, both sales and non-sales and related type expenses. When we think about how we're using our part timers and the fact that hours among our part timers are up, 12% in June in a marketplace where revenues are up less than 5%, there's just a number of things that we talked about that are variable that we weren't really treating those expense lines as though we're in an environment that's growing at 5%. And the message is we need to get there. Now what was the impact of that? If I think about the -- if I think about the travel, meals, supplies, et cetera, that's about a 10 basis point impact on our business in terms of overall profit impact. If I think about the increase in base pay that comes from higher absolute headcount that comes from higher part-time hours, those sorts of things. That would have been about a 450 basis point impact to margin. Now that was offset by the fact that incentive compensation was down because last year was such a strong year relative to this year. But those are areas that as an organization, we need to tighten up a lot of our behavior and patterns to reflect more of the environment that we're in. And again, I expect that we'll make progress on that in the third quarter.

Operator:

Our next questions come from the line of Ryan Merkel with William Blair.

Holden Lewis:

I think in the first quarter, we sort of talked about normal seasonality would apply but at a bit more of a muted rate and I think that's still appropriate. I mean, second quarter was down about 20 basis points from first quarter. I typically think of it being down 30. 3Q is fairly typically flat with 2Q and I think that's a reasonable ballpark. And 4Q is usually down about 30 basis points from 3Q. And again, maybe to be a little bit more modest than that. I mean I think about the mix question is still an open one, right? Because the reality is, in a weak cycle, your fasteners weaken more and that winds up sort of having a bigger impact on gross margin and mix than you would normally expect. And you saw that this quarter just as you've seen in the past. And so to some extent, Ryan, part of the question is, well, what's going to continue to happen with the cycle and the gap between fasteners, non-fasteners? And such a cyclical question, I can't answer. But if I think about the transportation piece of it. I think that's going to continue to have a sustained beneficial impact for a number of quarters. If I think about sort of the timing elements that the gap stuff that I talked about, I don't think that that impact is as great in Q3 and Q4 is what we saw in Q2. I think we'll still be price mix neutral just as we were this quarter, right? So when I put all that in together, I think the seasonality is reasonable but I would mute it against history for the next couple of quarters. That's my expectation. And like I said, the wildcard really in my mind is what happens in the cyclical element of seasonality related to fasteners.

Holden Lewis:

It will depend how aggressive we are. The part of the operating margin is going to be a reflection of the gross margin. So again, I will perhaps comp out a little bit in your question about SG&A and a part of the answer to your question is going to rest in what happens to the cyclical element of mix, right? Step that aside and just focus on the SG&A, I think that the -- we need to reduce the cost in our SG&A relative to Q2 by $2 million, $3 million. And we need to do that through tighter control of headcount, through tighter control of those expenses. And I feel comfortable that we'll be able to do that. I think the organization is already sort of responding to the messages and responding to the natural signal of their growth slowing down. So I do believe that we will have better leverage opportunities in the back half. Again, with the wildcard being what happens to the underlying demand environment and what impact does that have on fastener-related mix?

Josh Pokrzywinski:

Also, kudos to the operator for nailing the authentic pronunciation there. We don't get [indiscernible].

Josh Pokrzywinski:

Yes, that was old country right there. I like that. The -- just maybe a higher level question for both of you. Obviously, we've seen a huge wave of inflation supply chain tightness. Now going back the other direction at least with this inflation, I guess what would you identify Dan, as the biggest change you saw as a function of that? And the biggest things that are changing now as those reverse. Could be customer-facing, could be kind of margin profiles with the business, deliberately a broad question but just thinking of how [it is going to be priced]?

Holden Lewis:

And specific on pricing, if you recall during the period of tariffs, we didn't do a great job sort of offsetting all the tariffs and inflation that occurred during that period of time. And the organization kind of buckled down and developed since then, what we call the pricing review tool, PRT and I think what you've seen over the last few years in a period first of fairly significant inflation and now a period of perhaps modest deflation is I think you've seen that tool and our organization's ability to utilize it, result in a much better outcome. We -- there's the occasional blitz here and there. We didn't quite get all the inflation on fasteners. So that's come back. In fourth quarter, I think we got a little bit behind on a certain area. But for the most part, we've been able to be price cost neutral for the entirety of this period of inflation and deflation. And I think it really is reflective of the organization's ability to deploy technology solutions to problems that we run into every day. The other thing that I would say is, from an inventory standpoint, we talked about how inventories dropped a lot because of the -- we're unwinding or sort of harvesting some of the investments. But we peaked from a days on hand standpoint between 185 and 190 days. We're currently sitting between 135 and 140. That's not just because of buying inventory and then harvesting it related to pandemic. That relates to a lot of things the organization did in terms of how it views branch inventory strategically in terms of what's in our hub versus where should inventory be, improving the velocity. And I think the fact that we're able to improve the overall performance of our assets, even in an environment where we're getting a tremendous amount of pressure because of the needs of the pandemic when it started and as it was fading really reflects the organization's ability to do more than one thing at once. And I think the organization can be proud of itself how it's managed a lot of the things that have come up over the course of the past 4 or 5 years.

Dan Florness:

Yes, I don't think the competitive landscape has changed, if you look at it from a product perspective. And I think one element that's there, too, is while the -- there's more than one element of inflation and there's more than one aspect of cost. There's inflation that we saw in product costs. There's inflation that we saw in transportation, container costs, things like that. Product cost dynamics are different than the container and transportation element. The third element which is really relevant for our customers and for their supply chain is the cost of labor. There is no deflation in labor. I'll guarantee you that. There continues to be inflation in labor. We do have more success in recruiting. We -- but we are not unique. All businesses are seeing inflation in that arena until this day. And part of -- the nice thing about the total cost of ownership approach we take with our customer is we're really able to understand all those cost components and have intelligent conversations with the customers that they're not a motion conversation, the fact and tactic conversations which allows both us and our customers together to make better choices on puts and takes. But there are inflation elements still in the business. There are some deflation elements in the business. Container is coming across the ocean is cheaper today than it was 1.5 years ago or a year ago.

Dan Florness:

And Josh, in the interest of full disclosure, I probably would have gotten your last name incorrect.

Tommy Moll:

Can you give us an update on fastener product margins? And I know that associated with those, there's potential for some renegotiation just on pricing that has given some of the volatility around steel and shipping. Any update you could give there would be helpful as well.

Tommy Moll:

Indeed. I also wanted to talk about supply chain and in the prepared materials this morning, you talked to the reduced inventory is aided by a shorter product ordering cycle for Fastenal. I'm curious, though, with the better supply chain, do you see some of the same for customers? And is there any impact on your daily sales trends from that?

Operator:

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

Operator:

Greetings. Welcome to the Fastenal 2023 First Quarter Earnings Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. At this time, I’ll turn the conference over to Taylor Ranta of Fastenal Company. Taylor, you may now begin.

Dan Florness:

Thank you, Taylor and good morning everybody and welcome to the first quarter Fastenal earnings conference call. This call is a little different for Holden and I today because we are at the site of our customer expo that just finished up yesterday and really pleased with the event, a lot of great customer engagement. One thing nice about the event this year is some of the natural things that were occurring, obviously, 2 and 3 years ago we didn’t have an event because of COVID. Last year, we had an event, but we had to limit the attendance and also because of international travel, we had to limit the attendance. This year, we didn’t have those restrictions, so we had a great event. And there were four areas of focus to the theme of the event this year. One was continuing to accelerate our customers’ digital transformation to give them better visibility to what is happening inside their four walls, inside their facilities. The second one was really securing their supply chain. The world has seen a lot of change and a lot of impacts to supply chains over the last several years and really allowing our customers the opportunity to think about their supply chains continually in a more strategic way as we move forward. The third was powering productivity, a lot of this is digital transformation, understanding the elements of your supply chain, it’s also about bringing productivity to your – whether it’s your production floor or some element of your operation, we provide the tools to do that. And then the fourth piece was understanding our customers’ goals and sharing with them ways that we can serve their goals when it comes to their journey in ESG. And I think those four points resonated well throughout the event. Now moving on to the quarter. So first quarter, we had earnings per share of $0.52, an increase of 10.5% over last year. The team had really strong expense management during the quarter and pleased with the incremental margin we were able to produce despite the fact as you saw in our monthly numbers, the March daily sales came in a bit softer. We are in now our fifth month of ISM below 50 and it had ticked down in March. And we are seeing that in our business, particularly in the fastener side, the OEM piece of the business. And – but despite that, really impressed with our team’s ability to manage through it. As is – as we have talked about in prior years, we have done a really nice job of managing pieces of our business if we compare to pre-COVID and post-COVID. And I am sorry for that beeping in the background. My laptop is here and – but if you look at operating cost, as a percentage of sales, in the first quarter of 2019, operating costs were 27.8% of sales. In the first quarter of 2023, they were 24.6%. And it’s really about all the changes we have made to the organization, a) our average branch is larger today the ones back in 2019. More of our business is coming from onsite. We have done a nice job of digitizing our business to bring efficiencies to it and you see that shining through. The other piece is as we understand better our engagement with our customer and their needs and as supply chains have improved globally, we have also been able to not only lower our days on hand of inventory from what we were seeing 1 year ago as we, and 6 months ago, as we deepened our inventory, but where our business was pre-pandemic. So we have taken about 3 weeks’ worth of inventory out of the network over that entire timeframe and really impressed with our team’s ability to do that. Finally, if you manage your business well, manage your expenses well, managing your working capital well, it’s a distribution business, you see that show up in your cash flow. So our operating cash flow was $389 million, which was 132% of earnings and was 70% higher than a year ago and so about $160 million of additional operating cash that we generated in the quarter. Our CapEx, net CapEx, is very similar in both periods. So a very strong free cash flow, which puts us in a position to invest in the business or return to our shareholders. And we continued that pattern and we will be able to pay out a nice dividend in the first quarter. And then last night, we just announced the second quarter dividend and – of about $200 million a quarter, we are paying out right now in dividends. Moving to Page 4 of the flip book. So Onsite, we signed 89 in the quarter. Active sites finished at 1,674, so about a 16% increase from first quarter last year. If you ignore the transferred sales that come from the branch when you open an Onsite, our Onsite business grew about 20% Q1 to Q1, so strong performance. We remain steadfast in our intention to sign 375 to 400 Onsites this year. Number was a little bit weaker in the first quarter, and most of that we saw in March. And – but when I think of the engagement going on at the event here the last several days, I feel good about where we are going to be in the next 6 months. If I look at FMI technology, an incredibly strong performance by the team this quarter. We have talked in the past about this idea of we build infrastructure to support 100 signings per day. And during COVID, our numbers dropped from the upper 70s, low 80s neighborhood as we built up towards that ability to sign 100 a day, we dropped down in the 60s. And it’s slowly – start our way back. Last year, in the first quarter, we signed 83 a day. This year, in the first quarter, we signed 92 per day. In the month of March, we signed 99 per day. So, really strong performance by the team and you can see that continuing to expand in our platform. Our FMI for the quarter was 39.4%. In the month of March, we broke 40 for the first time ever. And really pleased and we feel good about our goal of signing between 23,000 and 25,000 for the year. As we have seen in prior quarters, we continue to see really strong growth in e-commerce, recall that last fall that broke 20% of revenue for the first time. I believe this quarter we are at about 22%. And then finally, if you roll all those pieces together, our digital footprint came in at 54% of sales versus 47% a year ago. And in the month of March, excuse me, we hit 55%. And our goal is to drive that to 65% later in the year. Time will tell if we are able to accomplish that with a long-term goal of – we believe that number is about 85% of our business is going through some type of digital footprint. With that, I will turn it over to Holden.

Operator:

Thank you. [Operator Instructions] And our first question comes from the line of Chris Dankert with Loop Capital Markets. Please proceed with your questions.

Dan Florness:

Good morning.

Dan Florness:

We have talked about labor management with the RVPs really coming into this year. And the premise was when you look at where the PMI is, when you look at the trend in industrial production, we needed to be looking forward and really have a plan to be cautious about hiring. Now in January and February, I will tell you that demand grew pretty healthy and I think that we added people sort of related to that. In March, obviously, we called out the demand softened a little bit. I would also point out that our hiring adds softened a little bit in March as well. We have always talked about how we can react fairly quickly to changes that we are seeing. And so the message to the field has been, you have to be prepared to adjust for a down shift in demand. And again, that’s not a message we just conveyed. We entered the year having that same conversation. And I think that they have been really responding by adding resources where they need to add it by adding the right resources. We continue to see the mix of part-timers growing in the overall piece of our business, right, where we have added full-timers, a significant portion of those are made in India, right. So I think that the organization is focused on the right metrics to understand what they need to be doing from a labor standpoint. I think they are executing on that. And I was encouraged that as demand slowed down in March, so did the sort of the hiring adds. So I think we are doing the right things.

Holden Lewis:

By CSP growth, what are you referring to?

Holden Lewis:

So remember that our traditional branches are – they support not only the local business is what you are referring to, but they do support the national accounts business as well. But yes, I think you’re referring to the non-national accounts sector on our release. So thank you for that clarification. The – when you think about what’s happening in sort of the construction, the reseller, traditionally, there has been a lot of smaller customers there, right? I mean what confused me is when you talked about CSP, right, CSP was our old stocking model that we began to unwind a few years ago. That CSP was intended to draw in that smaller local construction customer, provide them a high degree of service in the local market and things of that nature. And our priorities in the branch have shifted a little bit, trying to move that customer online and creating a sort of time to focus on some of those larger customers in the market. And I can’t say that I’m surprised by what we’re seeing. I think that the relative weakness you see in construction relative to manufacturing, which, again, is part of what we’re trying to achieve, I think that, that is really that’s really related to the difference you’re seeing in the national accounts versus the non-national accounts growth as well. So I think those things are all related. Does that get to your question?

Dan Florness:

Thank you.

Steve Volkmann:

Great. Thanks, guys. Can I just pull on that thread slightly one more time, Holden. How long do you think that transition takes in the construction-type business where you sort of move away from some of these smaller customers? I assume that’s a process that lasts a year or two, I don’t know. How long do you think that goes on?

Dan Florness:

Also, if you think of the chart we’ve shared in January of each of the last several years, we talk about branch consolidations we’re near the end of that process. So if you think about – if you think just about our customer segments, so the customer where we’re highly engaged from a Digital Footprint perspective, we are their supply chain partner. Those customers rarely, if ever, come into one of our facilities. They probably don’t know we’re located. And so if you’re in a market and you consolidate a few locations, you are actually moving further away from this other segment of customer. And so if you look at where we get to that ultimate branch count, we’re probably a year away of being at that point. And that ties right into Holden’s comment as well.

Steve Volkmann:

Right. Got it. Yes. Apologies for the semantics, I was struggling for something better unsuccessfully. But can I switch slightly. When you talk about some of the deceleration that you’re seeing, it’s kind of an interesting dynamic. Do you have visibility? Do you think your customers are destocking because the supply chains are now better and so that might be part of what we’re seeing? Or do you think it’s actual sort of end market slowdown? And the other overlay that’s interesting is that you would think that production rates would actually kind of go up at your customers as supply chains normalize rather than down. So I’m just curious if you have any visibility into any of that, and then I’ll pass it on.

Dan Florness:

The other piece I’ll – from an insight perspective, if you think about our business from a product line and product use perspective, if I go back to January, so OEM fasteners is 20%, 22% of our revenue, kind of low 20s. That business was growing around 13.5% in January. In March, it grew 7%. So that is production dropping off. If I contrast that with safety, for example, our safety business grew stronger in March than it did in January. Now I honestly haven’t given that [Indiscernible] the last few days. I don’t know if there was a comp issue because some of the safety was being pushed around a little bit because of some COVID activity. But that’s a case of that business has been – it fell off a little bit in February. That, I know, was a comp issue with last year. But I don’t believe January and March had a comp issue. I think that ties a bit into the strength we’re seeing in our pending deployment. If I look at remaining products, that did also fall off a little bit, and there’ll be some production in those as well, particularly in the metalworking.

Dan Florness:

Thanks, Steve.

Dan Florness:

Dave, if you’re talking, unmute.

Ken Newman:

Hey, good morning, guys.

Ken Newman:

Holden, I’m curious if you could just talk a little bit more on the fastener sales trends in March. Obviously, a bigger sequential slowdown here and the comp for April looks pretty similar. I guess, two minor questions here. One, I guess, should we assume that the fastener volumes were negative in the month? And two, how do we think about the net margin impact of that part of the portfolio since I think it’s typically accretive to mix, but you also called out lower shipping container costs?

Dan Florness:

By line, it was slightly negative.

Dan Florness:

When the falloff is in the OEM fastener component of the fasteners, the mix impact is different than if it’s in the MRO piece. Could be the OEM fasteners do not have a higher gross margin than our overall company gross margin. The MRO fasteners do.

Dan Florness:

We are acutely aware of steel pricing and shipping costs. And that’s our covenant with our customer. We’re going to find the best quality, best price, best reliability supply chain for their business. There are always robust conversations going on. But we also operate in a very dynamic marketplace. So we’ve been seeing fastener prices stabilize for a number of months now. We’re seeing that come through in our cost of goods. And that also helps our gross margin in the short-term because we’re seeing – we were getting squeezed a little bit 6 and 9 months ago. A little bit of that squeezing is lessening right now, and you’re seeing that in through in our numbers as well.

Ken Newman:

Understood. Thanks for the time.

Operator:

Thank you. Our next questions come from the line of David Manthey with Baird. Please proceed with your questions.

Dan Florness:

Hey, David.

Holden Lewis:

As we sit here today, I would say no. We’re not. Again, we – that we might need to adjust pricing is not a surprise. We know where that would have to happen to actual. Again, we have pretty good visibility in our costing. And so we really do try to align those two things. And so as you know, we really didn’t have a point through the period of inflation where our pricing was ahead of our costing, and that was deliberate. As you got towards the flip side of that cycle, we actually got a little bit behind from a price/cost standpoint just because as much pricing as we put through to respond to the marketplace, it just wasn’t quite enough given how dramatic the sort of the cost side was. And all we are seeing – so as we talked about two quarters ago, we started talking about two quarters ago, we wound up having negative price cost on the fastener side. And we anticipate at the time that costing would catch up to our pricing, and that’s largely where we got to this quarter. But going forward, the idea is to – and this is a conversation we’ve been very explicitly having with customers. There will be cases where we have to reduce the price based on the variables you talked about, but we should be able to largely track that with our costing.

David Manthey:

Thanks, guys. My dog and I appreciate the answer.

Operator:

Our next question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your questions.

Dan Florness:

I think sometimes you can be guilty of over time of – you focus on – there is enough energy in the room to focus on a handful of things. And sometimes things fall off that focus. I would say if anything, we were probably a little bit guilty of that in recent years on the freight side of the equation. And part of that, I’ll attribute it to me from the standpoint of what are the things you talk about, what are the things you push focus on. And when things get really chaotic, sometimes you have to pivot and say, hey, folks, we need to put some energy into this because this is a problem that we need to fix. And so it’s more of a case of I’d say we’re probably reverting to some of the freight pricing habits that we had 3 and 4 years ago that were maybe a little bit waning in the last several years. And COVID and all the other distractions of life came into play. The other element to it is while we lost some focus on our ability to charge for freight, we have really good at using our own trucks from moving freight. So we have those two dynamics going on. We’re probably back to where we should be on what we’re charging out and we’ve improved on how much goes through our own network, and that’s a nice one-two punch.

Nigel Coe:

Yes. No, that’s great. Thanks, guys. And then just a quick one, we talked about the March sales now at some length. But you called out weather impact in February. You didn’t call out anything in March, but some companies are blaming weather in March. So I’m just wondering were there any weather impacts that could maybe explain some of the weakness you saw towards the back end of the month?

Nigel Coe:

Okay. That’s great. Thanks, guys.

Nigel Coe:

Okay. That’s great. Thank you.

Pat Baumann:

Hi. Good morning. Thanks for taking my questions.

Pat Baumann:

Hi. How are you doing? Just a quick one on pricing first, I think there was a wide range on expectations, at least as I understood it for your pricing coming into this year. Maybe you were thinking it could be down 1 point or 2 points or up 1 point or 2 points, depending on how things played out. I guess I am just curious, after the first quarter, and your actions in February and what you just said on kind of fasteners with regard to the input cost on that, what your expectations are now for this year on pricing? And then as a corollary to that, just thinking about your February pricing actions in the non-fastener, non-safety portion of sales, do you think that had anything to do with kind of the volume slowdown you saw there for the month of March?

Holden Lewis:

Yes. I would agree with that. The – plus frankly, those price increases went in sort of late in the quarter. And so I am not sure that you would have seen responses like – that you are alluding to in such a tight window. But that said, we are not really expecting that that’s going to be adverse to those lines from a gross standpoint. The – yes, so we just – we didn’t see that. I wouldn’t expect to see that. As it relates to the overall pricing, remember, the wide range I have given is because ultimately, we don’t have a great deal of visibility as it relates to how much pricing are we going to have to give away to customers because of contracts and things of that nature, right. And so my comment, I think, was if demand softens and there is a lot of pressure to sort of adjust price based on contracts, etcetera, then maybe our pricing is down a percentage point. If that doesn’t occur because it hasn’t to this point, maybe it’s up a percentage point. And that was – that’s sort of the wild card from a pricing standpoint that sort of exists out there. Again, unrelated to price/cost, which regardless, we think will be neutral, but that’s why there is a wider range. And I think that that’s still the case. And we talked a little bit in an earlier question about, I suspect is yet 2Q and 3Q we will be adjusting some pricing. I will say, however, that I have spoken to some people before about how I think pricing comes into that zero to 2% range probably in the lower half of it if nothing changes. But we have made some changes to our pricing in that other products area. And so what I would tell you is if we never had to adjust fastener pricing, I suspect that our pricing this year will be in the upper half of that zero to 2% range. But now the wildcard becomes what do we have to do with fastener pricing, if we give a bunch of that back in 2Q and 3Q, then that upper half of the range comes down. And that’s the – we just don’t know the order of magnitude of impacted that yet. I hope that wasn’t confusing.

Holden Lewis:

Yes. So again, price/cost, most of the variables that were impacting gross margin didn’t surprise us, right. The degree that mix is impacting – again, when you think about how the quarter progressed, that didn’t surprise. If I think about the price/cost elements of it, that’s playing out largely as we expected when we talked about it last quarter. Really, the only variable that was a surprise was that freight piece. We simply executed very well. And again, I do believe that most of the variables that benefited freight, I believe that those variables are going to be in place in 2Q and 3Q. So, freight may have increased my expectations around gross margin for the full year, but that’s really the one variable that played out differently than I expected it to from last year – from last quarter’s conversations.

Holden Lewis:

Do we have two?

Holden Lewis:

Thank you.

Jacob Levinson:

Hi. Good morning everyone.

Jacob Levinson:

I just – I realize it’s still very early days here, but I am just curious if you have heard anything coming out of the field in terms of the impact of credit stresses on either customers or some of your smaller competitors?

Jacob Levinson:

Okay. That makes sense. And then just quickly the second one, I can see that you are still planning on spending that $200 million-ish capital spending this year despite the fact that the growth has come down a little bit. I mean is that partly just a function of the fact that you haven’t been able to get some things done over the last few years with all the volatility around COVID, or is it really just a function of the fact that, obviously, 10% growth in the quarter is not exactly a recession?

Jacob Levinson:

That makes sense. Thank you.

Operator:

Our next questions come from the line of Tommy Moll with Stephens. Please proceed with your questions.

Dan Florness:

Good morning Tommy.

Holden Lewis:

Yes. I don’t know that I am necessarily going to walk you back. I think it’s important to understand the source, right. I mean the reason why we were able to leverage the way we did was because we are just not growing as quickly this year as we grew last year. And so again, I wanted to emphasize that I think we had a healthy payout of incentive pay of the businesses. In this quarter, it wasn’t as healthy as last year. And that’s not a surprise. But if I think about how the rest of the year plays out, we still have some pretty large numbers that we are going to lap in the second quarter and the third quarter as well. And so I do expect that we will have healthy incentive payouts in the second quarter and third quarter. We will see how the market plays out, but based on sort of how we grew in the most recent quarter, but I do believe that they will be lower than what we experienced last year. And so I think that we are going to have, for most of the year, that element of lower incentive pay year-over-year that helps us in leveraging the sort of the payroll-related expense.

Tommy Moll:

Thank you. I appreciate the insight and wanted to shift for my second question to a higher level strategic question. The framing you provided on the structural improvements in terms of leverage and asset intensity versus the pre-pandemic base was very helpful. And so there is clearly some progress on both of those initiatives. If you think about 2023, what are some of the key focus areas, the work that’s still ahead of you for this year? Are there any that you would draw our attention to that you are really focused on driving through the organization at this point? Thank you.

Holden Lewis:

And probably, the only thing I will add to that is, I mean if you talk to our sales EVPs. A lot of the things that you are seeing happened, it’s us taking advantage of things we have already installed, right. Taking advantage of the changes to sort of the branches, taking advantage of the digital footprint, taking advantage of lift, new role, specialization, all those things. We put those in place, but we haven’t necessarily maximized the benefit to our business yet. And I think that our sales EVPs believe that we will be more efficient 2 years, 3 years from now than we are today, that there is still plenty of room to run on that. I would say as well, from an inventory standpoint, we are doing a lot of things to improve velocity in our system and things of that nature. But we still have a lot of import inventory that we can work off. When we think about how far in the future we had to think about our purchasing behavior during the pandemic when constraints were there, we probably doubled our window for ordering. Right now, if we went from four months to eight months or probably back down to seven months, there is still more room to go to get closer to where we were pre-pandemic. I don’t know that we will get all the way there. Our fulfillment rates are higher. But there is still a lot more room to go. And so again, we have become – our comments about where we are as a business was intended to say we have arrived. It was to make the point that we have progressed down the road nicely, but that road still has room to run.

Dan Florness:

Thanks. I think we have time for one more question. If there is one left. I see it’s four minutes to the hour, and we look finished properly. Just one more question, we will take it, otherwise we will wrap up.

Chris Snyder:

Thank you. I guess maybe for the one question. Specifically, we are looking for more color on the back half March softness. It sounds like the month ended softer than it started. Any end markets or product lines that saw a negative rate of change throughout the month? Because the ones you guys kind of called out was retail customers, international construction kind of stuff that’s been weak for the last three quarters. So, did those just get weaker, or did you see anything else kind of weaken as the month went on? Thank you.

Operator:

This will conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.

Operator:

Greetings, and welcome to the Fastenal 2022 Annual and Fourth Quarter Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Taylor Ranta of Fastenal Company. Thank you. You may begin.

Dan Florness:

Thank you, and good morning, everybody, and welcome to our fourth quarter earnings call, and Happy New Year. If you -- some highlights on the quarter. I'm on Page 3 of the flip -- of the flipbook. So, our daily sales grew 10.7% in the quarter, eased a bit from what we've seen in recent quarters, primarily because of tougher comparisons to what we were seeing in the fourth quarter last year, but also some moderating demand. I'm pleased to say that our fourth quarter operating margin remained stable at 19.6% and our ability to generate cash. So, we're looking at our cash conversion, it returned to historic levels. And that's really a sign of moderation and the level of inflation that we're seeing in the marketplace. But also, a more stable supply chain and the ability to not need -- that for a double negative, not need to expand our stocking levels to ensure a reliable supply line for our customers. So, it gives us some flexibility as we go into 2023. We're very pleased to see that. 2022 was a year of milestones and they all centered on $1 billion. So, in October, our e-commerce revenues surpassed $1 billion for the first time ever. Our -- and that's on an annual looking at annual milestone. Our international sales exceeded $1 billion. We hit that milestone in the month of November. And as noted in the release this morning, our company-wide net earnings topped $1 billion for the first time ever and that was for calendar 2022. When I look at that chart on the upper left, it's hard to decide where do you start explaining all the noise you have really over the last three years, as we went through COVID, as we emerged from COVID, as we went through supply chain disruptions and inflationary period. So, I chose to not and just compare to 2019 from the standpoint of what was our cumulative sales growth in each of the quarters of this year, because I think it tells a more stable story and talks about the things that we've built. So, in the first quarter of 2022, we were 28.1% larger than we were in the first quarter of 2019. This expanded to 30% in the second quarter, expanded to about 31% in the third quarter and in the fourth quarter, we're about 35% larger than we were in the fourth quarter of 2019. Now you shouldn't conclude from that, that, geez, that expanded 7 points from Q1 to Q4. Because in all -- in full disclosure, 2019 was weakening a bit as we went through the year. I would see this as ignoring COVID, ignoring supply chain, ignoring inflation, we're 30% bigger than we were three years ago, and I think that's a testament to the business model and to the team executing the model and the marketplace, recognizing Fastenal for what it is, a great supply chain partner to their business. If -- and I'm pleased to say, I think we're exiting the pandemic stronger than we entered. The -- we experienced margin pressure in the fourth quarter, and Holden will touch on that in more detail later in the call. Fasteners were challenging, but we understood what's going on there, and we knew what was coming. The safety, I would say the same thing, it's challenging like anything is challenging, but we knew what to expect there. And I think on these first two buckets of Fasteners and safety, we understood it, and we managed through it quite well. The remaining clients, a lot of those products, aren't as prevalent in the recurring pattern, the planned spend component of our business, whether it be through the vending portion of FMI or the BIN or the FASTStock portion of FMI. And so, it takes different tools and different means to manage that. And we had some challenges there. And again, Holden will touch on a little bit more later in the call. When I look at the final piece and the reason we were able to maintain a stable operating margin, we've done a really nice job with headcount. We did add a few more people in the fourth quarter than I would have liked to have seen. I suspect some of it is after a period of being really difficult hiring and as it eased throughout the year, there are some spots that we needed to fill, that were filled. But when I look at it in totality for the year, we've really done a nice job. And I'll touch on it a few more -- a little bit more in a few minutes, but we've done a nice job in the last three years as well. Flipping to Page 4 of the flipbook, the Onsite, we had 62 signings in the fourth quarter and finished with 1,623 active sites, so up about 15% from a year ago. If you ignore the sales at transfer over when we opened an Onsite, where it's an existing customer, we grew our Onsite-based revenue in the high teens and reiterate our goal for 2023, our intention is to sign 375 to 400 Onsites next year. And I'm pleased to see, for us, we often talk about participation inside the organization. Just over 80% of our district managers signed an Onsite back in 2019, and when society closed up and folks weren't as excited about us moving in to stay with them during the day, our -- that participation dropped dramatically as our Onsites dropped in both 2020 and 2021. I'm pleased to say, in 2022, 80% of our district managers signed at least one Onsite. Now would I prefer to see that go to 85% or 90%? Sure, I would. But 80% is a nice threshold to get above again because we have done it once before, and that was in 2019. So, my congratulations to the team. FMI Technology

Dan Florness :

Before we start Q&A, my adder to the Holden's comment on the ESG report, I encourage to focus on this call to read it. Don't wait for the movie. It's a -- I think it's a well-written story in the context of how Fastenal tell its story about how our business and our team have addressed this topic really throughout our history, but communicated in a way that is conscious of the formatting in the structure that society has grown more accustomed to. The other piece that I wanted to highlight is another announcement went out last night, which was, we announced that our international team has surpassed $1 billion in revenue for the first time during 2022. My congratulations to everybody listening to this call as part of our international team that spans the Americas, Europe and Asia. And to our team in China, where -- your society has opened a bunch more in recent months, recent weeks, I would like to wish you a Happy Chinese New Year. I believe it's the year of the rabbit. And I hope you since I -- sincerely hope you have a nice opportunity to visit with family as the societies opened up a little bit more. With that, we open the Q&A.

Ryan Merkel:

So, Holden, as you might imagine, I'm getting a few questions on gross margin this morning, obviously, a few moving parts. Should we think about, for '23 a typical 30 basis points to 50 basis points of pressure from mix? Or could it be a little bit greater, just given this price cost dynamic, lower rebates, any other pressures?

Ryan Merkel:

Right. Got it. Okay. And then next, moving to incremental margins, your kind of exit 4Q at about 20%. Is this a level you think you can achieve in '23 on mid-single-digit sales growth? It sounds like FTEs will be down. You'll have the incentive comp that's down. Anything you can add there would be helpful.

Operator:

Our next questions come from the line of David Manthey with Baird.

Holden Lewis :

Maybe moving backwards and to your first question. I do think that we will have additional closures this year as we move towards that target. And I think beyond this year, you'll begin to see those closures begin to moderate, right? And so I think part of your question is how long does this -- the sort of this closure process go? And I think we have another year of it before it becomes a little bit less part of the story. But one of the things that we've done in closing the branches is, on top of that, we've sort of shifted the priorities of the branches, which ultimately make those branches more scalable in the future than I think they have been in the past. And so as we grow as a business, I expect that we will -- even if we're not closing branches, I think that as our average branch size grows, we're going to get good leverage out of that. To your point of, are there some expenses that were in there regarding closing? Sure. There's branches that we may have closed where the lease wasn't up and there's a buyout. We haven't scrutinized that spend meaningfully. It's been within the overall results for the last 5 or 6 years that we've been doing this. But there'd probably be some of that, that would also taper out of the model as we move from a branch closing mode to sort of a branch sustaining and leveraging mode 12 to 18 months from now. So, there'll be something in there. But again, I don't -- it's not a massive number. If we were prone to breaking things out, which we're not, I don't know that necessarily would have been that big a number to begin with. So, I wouldn't make too much out of that. As it relates to the underlying leverage -- yes, go ahead, Dan.

Holden Lewis :

Yes. But I would say looking over the course of the cycle, Dave, I don't think our variability has changed. I think what we've done is we've reduced the level that our SG&A as a percentage of sales over time can decline to without impairing our levels of service, our ability to grow, et cetera. So I think we've reduced our floor of operating expenses to sales. I don't think the variability of our cost structure has changed much.

Unidentified Analyst:

This is actually Gustavo for Josh -- earlier on the gross margin front and mix headwinds heading into '23. I think just looking a little bit more near term, can you sort of quantify the margin impact from price cost, maybe the improving supply chains? And then how does that sort of trend from here from what you saw in the fourth quarter?

Unidentified Analyst:

Got it. That’s helpful. And then I guess just sticking with fasteners. And obviously, it’s been a margin headwind here in the fourth quarter as well. I guess with steel deflation coming into the fold now, how should we be thinking about P&L impact from fasteners deflation over the next couple of quarters? And maybe any historical context on what you’ve seen previously would be helpful?

Dan Florness:

Or the cost of transportation.

Dan Florness:

From a historical perspective, and I’ll use an extreme time frame because, quite frankly, over the years, there hasn’t been a lot of significant inflation or deflationary periods. In the late 2000, so 2008, 2009 timeframe, you saw a period of pretty heightened inflation followed by not only deflation, but the economy getting pounded pretty hard in that late ‘08 and ‘09 timeframe. So, what you saw is if you think of our business in 2 components, large production-type environments and then maybe some of the smaller customer base departments, you – the one is driven more by conversations with customers about pricing. And there, we tend to do a pretty good job over time of maxing it and some you get a little bit ahead of it depending on the turn of that product. But our fasteners turn a lot slower than our – turns slower than our overall inventory. So generally speaking, on the way up, you get a little bit of margin profit in there. And you’ve see an expanding gross profit margin. You saw that back in ‘08, and that’s over that turn of inventory. In ‘09, it was amplified obviously because the economy was weak, but you saw the inverse of that, and we’ve got squeezed pretty hard. But again, it was for a turn. So it’s about understanding what’s happening in the turn versus what’s happening in the long term. What’s changed in today’s environment is that piece that is the more the production center element is a larger component than it would have been back in 2008. And so that piece where the marketplace is raising prices affects a smaller piece of our inventory, and it’s more of these direct conversations. And so – and I think we have better tools to manage through it and have a more sophisticated conversation with our customer on the way up and on the way down. But you know it is it’s easier to slow things down on the way up because your customers arguing that direction, then it is to slow things down on the way down because your customer actually has a different incentive there. So you have those challenges. It will be challenging in the cycle of this turn of inventory, but I believe our team and our tools, we have a means a disciplined way of managing through it.

Tommy Moll:

Wanted to start off with some of the end market -- end market commentary you offered, particularly around what appears to be continued strength in manufacturing tied to industrial capital goods. At the same time, I think, Holden, your word characterizing the outlook for this year on manufacturing was cloudy, obviously, PMI is sub-50 now. Have you seen any softening there? Or would you characterize that end market is just as strong as it was, say, a quarter ago?

Dan Florness:

So I have the opportunity throughout the year with 240 district managers. And throughout the year, I'm having conversations with 4, 5 or 6 DMs every week. And our conversation with each one going through learning a little bit more about them, learning about their business, where they think their business is going and just hearing about what they're saying. And we were stuff on our chart sleeps. If you feel like -- if you're nervous, that anxiety manifests itself and how you think about stuff. I think a couple of things are going on. And again, put that in the category, this is from talking to a lot of people and this isn't from studying a lot of numbers. I think what's helping manufacturing is a really healthy backlog that existed through much of 2022. So let's just say you're a manufacturer and your backlog is 100 units and whatever that revenue is because, say, it's 100 units. And because of supply chain constraints, because of just demand in the marketplace from the last several years, maybe some deferred maintenance, whatever it might be, that backlog goes from 100 to 150. And then we get into the latter third of 2022. And let's say that backlog goes from 150 to 120. It's still a really good backlog. And the question is, is the PMI reflecting the 120? Or is it reflecting the concern, the angst that comes with, well, the backlog went from 150 to 120? And is the PMI giving us a head fake or is the PMI really telling us what's going to happen? We honestly don't know. But to Holden's point, the activity we're seeing feels okay. But we are -- we, like everybody else, are a bit nervous about where things are going. The last 3 months and for the next 6 months, I'll be pushing our leadership pretty hard on what we're doing as far as adding headcount and being really thoughtful about it. I feel good about -- set aside the economy for a second, I feel good about the fact that we have 350-plus new Onsites that will be given us juice as we go into 2023, and we didn't have that kind of number coming into 2022 or 2021. And so there's some positives there. But as far as the underlying economy, we're not really sure if the PMI is right or wrong, but we're playing it, assuming it's right.

Holden Lewis :

We'll have to put our heads together and decide if a two-part or second question is actually three questions. We'll get back to you, Tommy, on that. The -- so the -- the other products, I think, was the second question that you asked. And the -- there's not a lot more, I think, that we can add to kind of why we think it occurred. We just think that those products tend to be less planned. They tend to be a little less centralized in sort of the supply chain. And when markets change and shift, and we've seen some, right? I mean you go back six, nine, 12 months ago and the availability of products in the marketplace was fairly sketchy. It's gotten much better. Inflation conditions have changed. Demand may be softening a little bit sort of under the surface. I don't know. But in the end, I think that the weakness that we're seeing has a lot more to do with things that we've done. And the good news in that is having identified that, there's things that we can do to sort of mitigate those effects. And those are things that we intend to do over the next quarter or such, right? And so, we have a lot of belief, and this is another element of gross margin for next year. It comes down to your confidence in us and our ability to execute sort of the measures we need to mitigate that effect. Now what was your question about bridging from Q4 into next year, it probably does mean that if you look at traditional seasonality around gross margin, it's probably a little weaker in the first part of the year and a little stronger in the second part of the year as we get our arms around the things we need to do to sort of mitigate the issue around the other products. So hopefully, that gives you a little bit of color you can use.

Jake Levinson:

On a totally different topic. I feel like that international $1 billion revenue level seems to have snuck up on us and it's certainly been one of the fastest-growing parts of your business. I'm curious, what your longer-term aspirations are there? Because as far as I can understand it, it grew kind of organically out of the domestic business that you built in North America. But clearly, it's getting to a pretty sizable level. So, is there a path to further expansion beyond that traditional legacy model, if you will?

Operator:

Our next questions come from the line of Chris Snyder with UBS.

Holden Lewis :

Functionally, I think it's less about a function of time and more a function of scale. And that being said, it really -- well, on an individual on-site basis, you're going to get a certain degree of variability, right? I don't believe that a $600,000 a year on-site is necessarily margin accretive. But if that $600,000, we believe can lend itself to $1.8 million to $2 million a year, then it's certainly worth being in that setting and that environment and that relationship for the potential upside. And that's part of the point of the exercise. But if it's a function of volume, what I've always said is prior to Onsite becoming an initiative, and we just looked at 215 on sites that have been there, somewhere between 1992 and 2014, they were mature not as a function of time, but a function of scale. On average, those Onsite were doing between $1.8 million and $2 million a year in revenue. And that is when you achieved a margin north of 20% on that group. And what I can tell you is during the period of COVID when our signing slowed down, you had a certain maturation of existing on sites that became a faster percentage of the whole than we would have expected to see in the absence of COVID. And one of the by-products of that was we actually saw a pretty good increase in the overall operating margin of our Onsite business. And I believe that, that increase was to the tune of a percentage point a year between 2020 and 2021 and '21 and '22. Now we signed a lot of Onsite last year. We're targeting signing a lot of Onsites this year. Assuming we're successful with that, and we believe we will be, then you'll sort of see the inverse of what happened during COVID, where you're going to see those newer units kind of stepping up a bit in the mix again. And that might make further progress in 2023 on margin at the Onsite level, a little bit more difficult to achieve. You might see a little bit of a step back, but you're not going to step back to where we were pre-pandemic. We've seen the mix of mature units go up. And I think we'll continue to see that. And our expectation is that right now, your average unit is probably between $1.6 million and $1.7 million. If that steps back a little bit in 2023 because of all the new implementations that we're doing and the greater signings, that's fine. But we do expect that, that average size is going to continue to trend towards that 1.8 to 2 and that those margins will trend towards 20% plus. That's the expectation.

Operator:

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

Operator:

Greetings, and welcome to the Fastenal 2022 Third Quarter Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Taylor Ranta of Fastenal Company. Thank you. You may begin.

Dan Florness:

Good morning, everybody, and thank you for joining us for our third quarter earnings call. The -- we had a good quarter. We -- when I look at the performance of the team, I am proud to be a member of the Blue Team. The 16% daily sales growth that we experienced in the quarter, we were able to translate that into 19% operating profit growth, and ultimately, we were also able to translate it into strong operating cash flow growth. We grew our cash flow 54% from the third quarter of 2021 to third quarter of 2022. And in the expansion of our ability to generate operating cash relative to our level of earnings, we haven’t been able to lay claim to that for over year and a half, as I believe you have to go back to prior to 2021 where you can see that. And it was really great execution throughout the organization and the fact that supply chains have become a bit more stable and that doesn’t mean they have become easier. It just means they have become more stable, and you can rely on what you are seeing in your level of safety stock, doesn’t be quite as deep. As far as customer demand, that was stable throughout the quarter. Now September’s 2.7% sequential growth versus August does lag the way we look at the historic pattern and history would say we should be up 3.4%. The real driver of that is if you look at the storms that hit the Southeastern United States, Hurricane Ian late in the quarter and essentially pushed some business out of September and into October. The storms likely reduced our sequential DSR by about 0.5% and so you can do the math on what it would be if that’s added back in, but we see it as stable demand. And in the next bullet, touch on the fact that we are preparing for a softer 2023. So I thought I’d share some thoughts on, what does that mean? Now first off, I remember back in the fall of 2015, I believe it was a Tuesday morning, don’t quote me on it. But the day before, we would our Board meeting, and I learned after that Board meeting that I’d been selected as the next President and CEO of Fastenal and it was a pretty tough environment for not just the organization but for industrial entities in general. And the next day I -- during the Q&A section, I was probably a little more animated than I typically am and I commented on what I thought was the state of the economy. And the next day, my wife informed me that I was on the front page of the Wall Street Journal, but that was my mouth. So we are not in that kind of environment. We are not in something where I am going to proclaim something. But we are preparing for a softer 2023 and a lot of that centers on two things. One is something that has nothing to do with 2023. If you would been on the call I had an hour - two hours ago with our leadership around the planet, I talk -- I gave them the typical October talk and that is we are a seasonal business. And if you look at history, history says between September and December, our daily sales typically drop off 12%, 13%. And I am going back to the time before COVID and even before some of the tariff period. I am going back to the 2017 and 2016 and 2018 numbers. And just looking at sequential patterns, that should not be a surprise to anybody listening to this that a business that operates in Northern North America, a big chunk of revenue of Northern North America, after you get past Canadian Thanksgiving and get to the U.S. Thanksgiving, get to Christmas, the business slows down. We are preparing ourselves for that. When we are talking about 2023, it’s really about a lot of the numbers we are seeing, and again, they are not numbers that are unique to Ireland. I am looking at industrial production and Holden will touch on some of that here later. But looking at industrial production with some of the forecasters are predicting. But the most important feedback that we focus on is what are our regional and district leaders hearing from their customers as far as their confidence going into 2023? And I will be honest with the group. That confidence isn’t strong. It’s not, hey, the sky is falling, but the confidence is very, very cautious and we are preparing for that type of environment. And that means that you are very thoughtful about where you invest. You are very thoughtful about not getting ahead of yourself. Now we have signed a lot of Onsites this year and that gives us resiliency going to next year and I will touch on that in a second. But what it means is, you staff for the things you know, but you don’t get ahead of yourself on staffing for the things you don’t know. And that’s the mindset we have going in 2023, whereas a year ago and two years ago, we were staffing for both and it’s just a bit of caution in the year. Last week, I was traveling in Europe, my first trip outside North America since before the pandemic. It’s -- there’s something about -- even being -- even this human being is a social creature and there’s a certain energy you get and a certain rapport you can get and a level of communication intimacy you can get by meeting people in person and it was a wonderful trip. I spent some time with our folks at what we call EHUB, which is our distribution facility up in the Netherlands and most of our European leadership were there for that discussion. And then I traveled down to Northern Italy, primarily Lombardi area of Northern Italy and met with our team there. And what stands out is the last time I visited this group was in 2000 -- fall 2017. How the group has grown, just interesting [ph] your numbers, but grown in talent and business acumen was really impressive. And despite all the stuff that’s going on in Europe over the last three years, actually the globe, but then more specifically Europe in the last 12 months, that business is 80% bigger than what it was in 2019 and that’s telling the story in U.S. dollars. If I left it in local currency, it would be closer to $90. And I think back when I was there, which was two years earlier, we haven’t tripled in size, but we’re pretty close to it. And so it’s really a powerful story about the marketplace around the planet has identified in Fastenal what is special about Fastenal over the years and I am glad to say that we are replicating that with our team in Europe. The -- one thing that is a positive, despite what it looks like in the numbers, it’s a positive and that is the pre-pandemic margin profile of the business has reemerged. And back in 2016 and 2017 and 2018 when we were really telling the story of how we thought our growth was going to change in the future and those will be much more Onsite-driven, it changes the profile of your gross margin, but it also changes the profile of your operating expenses. And we felt, over time, that was a great trade-off, because ultimately, it’s about the level of profit and return you can generate and this is a faster way to grow and a better way to develop your talent and be special in the marketplace. We thought it was. But it was explaining how those dynamics would work. Mix driven lower gross margin did occur in the quarter. Strong expense leverage also occurred very much in line with the story we were telling five years ago. And I am pleased to say that after a period of time where our operating margin was kind of stuck within 20 basis points or 30 basis points of 20% for a number of years. Year-to-date, we have been able to break out of that and move it up to 21% or actually slightly better. So very pleased with that. And then finally, I touched on it earlier, really impressed. I am the former CFO, so looking at our cash flow statement for the last couple of years, it was tough for Holden. It was tough for Dan, too. And I am really pleased to say, when I look at the cash flow statement, that for the first time in quite a few quarters, six, seven quarters, I can look at the year-over-year numbers and say it’s improving, our cash flow is improving. And I believe it has staying power, because I look at the things we are doing to create it, the environment that’s allowing us to create it and the tools we are deploying to maintain it and elevate it even more, we have never been in a better position to improve our ability to generate cash. Flipping to page four of book, Onsite signings, softened a little bit during the quarter, 86. So total On -- active Onsites is 1,567, up about 15% from a year ago. Our goal for the year of 375 to 400 remains intact. Given where we are and it’s in the early part of October, we expect to be in the lower end of that range. FMI Technology, we signed 5,187 weighted devices. That’s about 81 per day. A year ago, we signed 75. I’d be lying to you if I didn’t say I’d like that number to be closer to 100 and at least starting with a nine, but we are getting good execution. What really stands out is the -- what’s happening with that business from the standpoint of the revenue per device, how it’s expanding nicely from what we have seen. The FASTBin element of it, we are putting up really impressive numbers. One of the things I shared with our Board yesterday is, if you look at that discrete number of signings per day, a couple of years ago, one of those signings was a FASTBin. Today, it’s 15 and so it’s rapidly expanding throughout the organization and really impressed with the way our teams in the field have embraced the technology and the way our customers like the technology, too. You look at eCommerce, daily sales through, oh, excuse me, and our goal for the year of 2,100 unit to 2,300 unit equivalents for FASTVend and FASTBin signings remain intact. Finally, daily sales for eCommerce rose 50%. And eCommerce is an interesting one because for years, I think back to when I stepped into this role, eCommerce was about 5.5% of our sales and it has been stuck there. It was stuck in purgatory. And because it wasn’t how we went to market, we are a service organization, we are not a catalog centered organization or an eComm company, we are service, we are a supply chain partner and part of it was we had to admit to ourselves that’s what we are, and that’s a beautiful thing. And then how do we play to those strengths? And so we have really I believe found a way to make this part of our business. In the quarter, we hit $5 million a day going through eCommerce and it wasn’t too many years ago that we were starting out in that journey, so really impressed with the team. Then finally, our Digital Footprint. We have talked about that. It’s really about widening the moat, illuminating supply chain for our customer and making supply chain more efficient for both ourselves and our customer. I am pleased to say that we have grown that to 49.5% of sales in the third quarter versus 43.7% a year ago and we have talked about our plan, our goal, to hit 52% of our sales running through the Digital Footprint sometime in 2022. That’s still our goal. In fact, in the month of September we came in at 49.9%. So if you would, excuse me a second, I will just round it up and say 50% of our business is now the Digital Footprint and we see that continue to grow as we move forward. The other piece and this is touching back and I didn’t touch on it with the eCommerce a second ago is, not just to have our numbers improved, but one thing we always look at internally is our level of participation, in other words, how much is everybody doing, not just a few leaders in the organization. So if I go back to 2018, 17% of our branches had more than 10% of their sales in eCommerce. Two years later in 2020, that number had grown to 25% of our branches had more than 10% of their sales in eCommerce. I am pleased to say in the third quarter of 2022, 52% of our branch and Onsite locations, excuse me, of our branch locations, had over 10% of their revenue in eCommerce. So this 18% that we hit in the third quarter isn’t coming from a few. It’s coming from a lot of activity throughout the organization, which means it’s becoming part of our DNA and that’s how we found success in vending a decade ago, how we found success in Onsite over the last five years, six years and what we are seeing in eCommerce today. With that, I will turn it over to Holden.

Dan Florness:

Mask write-down.

Operator:

Thank you. [Operator Instructions] Our first questions come from the line of David Manthey with Baird. Please proceed with your questions.

Dan Florness:

Good morning, Dave. Fine.

Dan Florness:

Thanks, Dave.

Holden Lewis:

So as you know, through most of this cycle, we have been fairly flat from a price/cost standpoint and that reflected our ability to kind of match the cadence of our price increases with how we are seeing costs come through. As you pointed out, we have a long supply chain and we are at the point now where, on one hand, pricing levels are stable, but we are still seeing some product come through that was bought months ago that was at a higher cost in the marketplace that’s impacting us and that’s where the 30 basis point drag from price/cost sort of evolved to in Q4. But what we are also seeing is that and you look at the same indices we do, right? I mean we are starting to see that material costs, things like steel, have come off from prior peaks. And what we are therefore seeing is as product is now getting on boats in Asia and it won’t be here for months and months, right, it won’t flow through our supply chain, it takes time. You are starting to see that the inflation in that product has begun to come off. In fact, if I think about September, September and August cost levels of product that we are purchasing was fairly flat. It’s the first time that’s been true in a long time. We have been seeing sequential increases as things have flowed through. This is the first time that we have seen that number flatten out. And so I think that what that tells you is that, we were a little bit shy of all of the cost in our pricing actions, we had that impact us in Q3. As that less inflated or non-inflated product begins to work through several quarters from now, with price levels being where they are, that should all stabilize. So we had a 30 basis point drag in Q3. I think in Q4, perhaps, in Q1, there will still be some of that, but I don’t expect it to get worse. I think it will be basically at or better than that level. And then by the time you get into the middle part of next year, we are going to see some of that product that looks like it’s moderating in terms of cost coming back into our system.

Holden Lewis:

Sure.

Jake Levinson:

Good morning, everyone.

Jake Levinson:

Hi. Just on the non-res construction side, I know you -- it seems like sales have slowed a little bit there and you made some cautious comments in the release. Just curious and I am sure there’s storm impacts in September there, but just curious what you are hearing from the field in terms of trends in that market, if there are any particular regions or verticals that seem better…

Jake Levinson:

… of course.

Dan Florness:

The other one would be the fact that and this isn’t unique to this quarter or this year. But over a number of years, we have reduced the physical number of locations and that has a place too.

Dan Florness:

But that doesn’t have a lot of relevancy to what we are seeing right now in the patterns.

Jake Levinson:

Okay. That’s helpful. I think that’s it from me today. Good luck, guys.

Holden Lewis:

Thanks.

Chris Dankert:

Hey. Good morning, guys. Thanks for taking the question.

Chris Dankert:

Holden, we have talked about this in the past, I guess, given the very high sales growth and kind of the necessary preoccupation with finding and sourcing alternative products and re-pricing. As some of that starts to moderate, does that mean we can refocus more on Onsites and can kind of help drive some of these kind of more organic growth initiatives. And was that part of the productivity improvement and the SG&A leverage we saw in the quarter here, I guess?

Dan Florness:

Yeah. I don’t think that you can underestimate the amount of energy that has been diverted over the last 15 months towards conversations with customers about raising prices, as opposed to conversations about increasing what we can do for them, right? And how we can solve an additional or incremental levels of challenges that our customers may have. As all of that normalizes, I think, that our conversations will shift from playing defense to playing offense to an even greater degree than it has been, and I think that that’s useful and I think that is going to help on the productivity side. And if we weren’t doing the things that we were doing to prioritize the Digital Footprint, to rethink kind of the structure of our Physical Footprint and how we prioritize our time, I think, that we would have been much more challenged than we turned out to be.

Dan Florness:

Sure.

Tommy Moll:

Good morning and thanks for taking my questions.

Holden Lewis:

Good morning.

Holden Lewis:

Yeah. I think that the elements of manufacturing that faces capital spending or commodity markets being stronger than manufacturers that are touching consumer markets. That dynamic has persisted to some degree for the last two quarters and it existed in September as well. So that still is a thing, that hasn’t changed. But I think that the feedback that we are getting from the RVPs, and again, it’s not universal. There are some RVPs that said, no, things are really still good, right? So I am taking sort of a holistic consensual view from some 20-plus individuals and not all of them are seeing weakening markets. But I am seeing a few more comments from a few more people and it’s not about specific markets. It’s just about the mindset and the outlook of the customers, generally speaking, has gone from, look, I am just trying to get this massive backlog work through to, yeah, my backlog is pretty good, but I am a little bit concerned about the orders, right? And so I can’t relate it to specific markets. I am -- it’s been true in the consumer side. The fact that it’s picking up, I assume means that there’s been some change in the customer sentiment on some level and that’s probably a little bit more broad than simply the consumer side of things. But again, I want to emphasize, and again, we don’t have a lot of visibility. It’s not universal. I mean, we are not facing a sales force and a customer set that has seen a major inflection. It’s just the tone of some of the conversations have taken on a little bit more of a cautious tone.

Dan Florness:

To the extent your business is in the Americas or in Europe, access is completely there. To the extent your business is in Asia, particularly China, part of Asia, it’s very, very restricted. Fortunately, for us, 99% of our revenue is in the areas that access is really good. As far as history has shown when you are really busy, sometimes decision processes slowed down a little bit, because you just don’t have the time to change from a strategy standpoint. You don’t have time to change that and that can hurt the Onsites. A little bit weaker environment probably helps our ability, because we are bringing, at the end of the day, our Onsite model is about a more efficient model for supply chain and there’s a noted cost advantage from the standpoint of, when we are in there, we have the tools to provide the supply chain in a way the customer can’t. So, I think, generally speaking, an average or a slower environment is probably a little bit helpful.

Tommy Moll:

Very helpful. I appreciate the time and I will turn it back.

Holden Lewis:

Thank you.

Chris Snyder:

Thank you. So I understand the commentary that fast -- the fastener price/cost drag will narrow over the next few quarters as lower unit costs flow through the P&L. But I guess my question is, how should we think about fastener price into our revenue forecast for next year, is the expectation that price will hold or that price will go down but maybe not to the same level as the cost deflation you are expecting?

Chris Snyder:

Right.

Chris Snyder:

No. I really appreciate all that color. And then, Holden, to prior commentary you made about, I think you said, unit costs are the price, I guess, you guys are paying from the producers flattened out in August and September, really for the first time since the pandemic. I guess my question is, is that -- are fasteners down and everything else is still kind of inching higher or is it kind of really across the Board cost of finding out. I will ask you again, it just feels like fasteners are a bit different of a cost…

Chris Snyder:

… kind of trajectory?

Dan Florness:

Part of it, Chris, stems from what was the ultimate cause of the inflation. If you think of the product, and I will speak to fasteners, but the logic could be true to anything. There’s a cost of the underlying steel. There’s a cost of the energy to convert that underlying steel to the finished product. As you know, that cost of that energy has only gone up and that’s not coming down. The next piece is the cost of the human capital, the human resources, to be involved in that endeavor of converting it, of transporting it, of running it through distribution. That has appreciated as well and that’s not coming down. Once a cost element there increases, it has incredible sticking power. The third one is the physical cost of moving it. That cost has moderated. I mean it had gone ridiculously high. It has moderated and but I don’t see that coming back. And so if you look at those four pieces, there’s really one of the four that you can see some -- that you can -- just looking at it mechanically and see, yeah, there’s opportunity for that in the future, but the cost of the energy, the cost of the people and the cost to move it.

Dan Florness:

Those are what they are and they really don’t deflate per se.

Operator:

Thank you. Our next questions come from the line of Ken Newman with KeyBanc Capital Markets. Please proceed with your questions.

Dan Florness:

Good morning.

Holden Lewis:

Yeah. And I guess the frank answer is I don’t know the answer to that question. We haven’t broken down price/cost elements by end market. I just don’t have a good answer for you.

Holden Lewis:

I mean fasteners are made of the same steel, whether you are selling it into a construction application or manufacturing applications, same underlying raw material, right?

Holden Lewis:

But whether or not the pricing behavior in those two markets are the same or different, I just don’t have a good answer for you on that.

Dan Florness:

Well, if you think about it, historically, we could look at our established business and our business that was coming from new branch openings. I am going back 15 years, 20 years when I make this comment. So you had this constant wave of pushing. But we still sell into a cyclical end market and so where you have a meaningful presence in a market, you get headwind and it’s how much of that headwind is offset by the things you are doing. And Onsite is a cousin to branch openings from the standpoint of -- I feel better about 2023, the fact that we have signed a whole bunch of Onsites in the first month -- nine months of this year, because the customer activity at our existing branches, at our existing Onsites is going to be impacted by the economic cycle. That’s just the reality. We have a customer that’s spending $10,000 with us and it goes to $11,000, it goes to $11,000, if it goes to $9,000, it goes to $9,000. So it’s how many new customers, how many expanded relationships are you adding? And I take a lot of comfort in the fact that we have a lot of pent-up growth, market share gains in our hopper right now, because of all those Onsites we have signed and because of the vending and the FMI devices that we have signed. It gives you incredible ability to take market share. When we are looking at it internally, we always look at it from the standpoint, okay, here’s our growth. How much is the market giving to us and how much are we taking? And the number you are focused on is how much are you taking and what are you doing to take? And then the number that’s how much is being given, that’s what you use to pull levers to manage your business, because those are things that impact you. The other is things you impact. I hope that’s helpful.

Holden Lewis:

And I might, if you think about our value prop, it hasn’t changed that much, right? It’s always been about getting really well-trained people close to the customer and empowering them to make great decisions to solve customer issues and that has been the proposition. That remains the proposition. The only thing that’s changed is the tools we have at our disposal to achieve that have gotten better and more sophisticated in advance. But the value proposition, I don’t think has changed. But one thing that does excite me is, as you do go Onsite, as you do put in those bins, not only is there a greater ability to add value through data that I think becomes even more important when people are looking for how to become more efficient themselves, but it also ensures that we always have a reason to be there. That Onsite might be down 20% because of the market, but we are still there every day and we are looking for other opportunities to expand our ability to gain more business. When we are primarily branch-driven, we would have to gain entrance to it. And there might be people that are say, we don’t have time right now. We are managing this. And now we are there every day, filling those bins that are part of the Digital Footprint and the vending machines and even Onsite and I think that that’s going to that’s going to make our ability to gain market share resilient regardless of cycle.

Ken Newman:

Very helpful color. Appreciate it.

Operator:

Thank you. Our next questions come from the line of Nigel Coe with Wolfe Research. Please proceed with your questions.

Dan Florness:

Thanks.

Holden Lewis:

I don’t think so. But, again, I mean, given some of the things that I described being perhaps a little bit later in the cycle in terms of where we hit our sweet spot in construction, some of the changes I made. I am just not sure we are a great proxy for the overall non-res market trends, right? But when I query the RVPs, nothing particularly special has come out of the discussion around non-res for us.

Dan Florness:

So, Nigel, as far as the -- we are always in the phase of managing down costs. We are always in the phase of looking at everything and rationalizing everything every day and that just keeps us agile and fresh. What it means is sometimes it’s reminding everybody we have been through -- you think of the last four year, five years. You had -- we were impacted very directly by all the tariffs a few years ago. We along with everybody else on the planet was impacted by COVID. We along with everybody else on the planet were impacted by supply chains being just gnarled up. The only benefit we had was we are better at unsnarling that than anybody else. And part of that, we were willing to do just with hard work. Some of that we were willing to do because we just know a lot of manufacturers, a lot of potential suppliers. And part of it we were willing to do because we were willing to use our balance sheet. You think back to the spring of 2020, I remember some of the POs we were cutting for mass. I sleep really well at night. There were a few nights from I am kind of like, oh, my God. And as we went forward, if it’s taking an extra 30 days or 60 days to get product in, all of a sudden, we are adding $250 million of inventory, because that’s just mathematically what it takes, because at the end of the day, we have a covenant with our customer. We are their supply chain partner. They will get it from us, and they trust us to do that. Now we have been in the process for some months of looking at that and saying, okay, we now can rely on supply chains in a way we couldn’t six months, nine months, 12 months ago, so we can start dialing that safety stock down." What you are seeing in cash flow this quarter is just the outcome of that. And so we aren’t squeezing the balance sheet and squeezing inventory because of what we are thinking for 2023. We are removing layers of safety stock that we had added over the last few years, and we are slowly removing -- you close a bunch of locations and you change your inventory layout. We had a lot of inventory that was positioned around the company, because we had a front room that we slowly are working our way out of and those two things is what gives me confidence on our ability to generate cash flow. The idea of preparing for 2023 is reminding everybody, you know what. This isn’t the time we are giving raises. This isn’t the time we are adding things that are discretionary. This is the time where we are saying to our field personnel. We have close to 300 Onsites we have signed. We need to staff those. We have locations that are growing we need to staff those. Our head count became disproportionately out of kilter during the last three years, because our recruiting model, a big chunk of the way we recruit is we go into two-year technical colleges and four-year state colleges and we say to young people, come join us, work 15 hours, 20 hours a week. Let’s get to know each other. So that when they graduate, they might decide they that industrial distribution is right for them and we might decide they are right for us and that’s how we add people. We still haven’t corrected that mix. And so we are going to be adding people in the field, but it’s going to be disproportionate to part time and focus to staff our Onsite. And part of, when you are looking at a year like 2023 could be based on the tone out there, you just remind people to what we are about.

Dan Florness:

Yeah. We are…

Dan Florness:

We are about two minutes to the hour. So I will just share a couple of closing thoughts. One is, Holden talked briefly here about the fourth quarter, but also about some of the expense components that are fixed or that are variable. We are in a position where a lot more of our expenses are variable than we have ever been in for the last 50-plus years of our existence. And that couldn’t be more true than what we see today. If you take a step back -- read our proxy, and you will see how people in Fastenal are paid. There’s a lot of incentive comp at the branch level, at the support level, at the distribution level throughout the organization. A piece of that’s related to sales and gross profit growth, a piece of that’s related to expense management, a piece of that is related to earnings growth. It’s no secret that for the year, we will have pretty good earnings growth. And if you think a chunk -- a big chunk of folks are paid off that earnings growth, I think, and I will put it shout out to Dave Manthey, he coined this phrase, I think, 15 years, 18 years ago about the shock absorbers in the Fastenal expense model. Those shock absorbers -- they are fully flexed right now, and what that means is, unfortunately, as an employee, it means you will probably get some contraction in pay, and I am an employee, so that could be unfortunate, the fortune is you had a pretty good 2022. But it puts us in a position to invest to grow the business in the future without cutting any muscle. You -- there are some things that just naturally contract if earnings growth contracts. So it puts us in a great position to do the thing that we have proven for decades we can do quite well and that’s to take market share.

Dan Florness:

Thank you.

Operator:

Hello, and welcome to the Fastenal Second Quarter 2022 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Taylor Ranta of Fastenal Company. Please go ahead, Taylor.

Dan Florness :

Thank you, and good morning, everybody, and thank you for joining us for today's earnings call. Who you choose to surround yourself in life gives you freedom to do a lot of things and to find success with others. And one thing I found on this call is Holden has done such a fine job with sharing with the investment community, particularly the sell-side analyst community, the trends he is seeing in the business that it affords me the opportunity to be a bit more philosophical and talk to our shareholders, but also talk to the employees of Fastenal on this call. I suspect for most people listening to this call, the reason you're looking at our earnings release today and looking at participating in this call is you want to see what breadcrumbs might come out of it as far as where the economy is going. Spoiler alert, we've often said that our visibility to the future is about 8 hours. And most of it comes from what we're hearing from our customer, the anecdotes that come through, what we're seeing in some of the trends in the business. So we get an indicator, and we try to share those as we see them. But we don't have a backlog in a traditional sense. We are a just-in-time supply chain partner to our customers. And things [shine] (ph) through as they occur. So here are some things that have occurred in our business. First off, our travel has expanded. If I look at our travel in the year-to-date and 2022 and ignore for a second 2020 and 2021, our travel is about 12% below where it was in 2019. In the second quarter, our travel is about 18% higher than it was in 2019, and that's measured in dollars. And as you know, for those of you who have bought an airplane ticket recently or done any kind of travel, things have not gotten cheaper. So I suspect that means we're probably still down from 2019, but the expense is up because of the inflation inherent in travel today. But what that means is the most societies have entered into the endemic stage of COVID-19, not all. And what that means, we're finding a new normal, and I'm pleased to say travel is resuming. And that's one of the ways we engage with our customer. Our Fastenal culture is one of -- we trust each other. We work every day to build our own talent pool, and we promote from within. An integral part of that is the idea of human interaction and our ability to teach and learn from each other every day, and it's, frankly, more efficient when you can have in-person conversations. But we have adapted. if you went into a Fastenal branch today versus 2019, you'd see a different branch. You see many locations where we've changed what the front room looks like. You've seen many locations where we either have reduced dollars or we don't have an open front door anymore because we've really morphed into more and more of a supply chain partner and more product that's going out the back door than ever before in markets where we have a larger construction presence or we have a meaningful walk-in business and the local team sees that as their means to serve the market, they might be open. But in many markets, we've changed that format. And it allows us to find success in an era when it's more difficult to hire and because it's a more efficient labor model in our business. I'm also -- the folks that aren't in a branch or on site. Obviously, folks that work in a distribution center or manufacturing division or drive a truck never had the opportunity to work remote. But since the first half of 2021, we've been largely in the office, working in a different fashion than we did 3 years ago, but finding success together. We were able to better engage with our customer. Some of the stuff we're going to talk about on site, et cetera, are a reflection of that. But in April, we held our first in-person customer expo since 2019, and it was a great event. We had great engagement with the customers that were there. We did have to limit some geographies just from the hassle of travel and some of the COVID restrictions. But we found really good successful event that we held back in April. Hiring remains challenging. However, our trends and applications received have improved. In fact, if I use 2019 as the benchmark, in 2020, post-COVID starting, our applications coming in were down close to 40%. In 2021, our applications using 2019 as a benchmark, were down about 36%. In the first 5 months of this year, they're down about 18% from what we saw in 2019. And I'm pleased to say, in the last 3 months, applications coming in every month are about 10% below where they were in 2019. I consider that a huge win and a sign that people are more comfortable and ready to get back to work and to build their career and to build their future. And that's just an element of that in our business. We have effectively managed marketplace disruption. It's made supply chains more expensive than pre-pandemic and elongated. And you're seeing that in -- if you look at our balance sheet, look at our cash flow. First 6 months of this year between a combination of inflation and the fact that it takes longer for products to physically move, we have a deeper supply of inventory, and that supply of inventory is more expensive, and you're seeing that in our balance sheet. And again, you're seeing that in our cash flow as that inventory is building and turning. We're pleased with the fact that we have the balance sheet to withstand that and we can make that covenant with our customer that we are your supply chain partner and we will serve your needs. We did that before COVID, we did that during COVID we're doing that today in whatever stage of COVID you do care to call this. Finally, this is our earnings release. And for the quarter, we grew our sales 18% and our pretax profit grew just under 21%. Demand is generally healthy. But there were some signs of softening in May and June, and we'll delve into that as we go through this call. Onsites. We signed 102 Onsites in the second quarter. We did -- we signed 106 in the first quarter. The last time we signed 100 plus in a quarter, it was back in 2019. I believe it was the first quarter. This is the first time we've ever signed 100 plus in 2 consecutive quarters. And I think there's a number of things going on there. Again, the marketplace sees value in our Onsite model. In an era where it's more difficult to hire and more difficult to manage supply chain, I believe our Onsite model is even a better option for our customer in the marketplace. And I think that's shining through in our signings. Obviously, the fact that we had a customer event in April, while it didn't help the first quarter number, I think it was an element in the second quarter number. And we remain committed to strong signings for second -- for all of 2022. And we see this as a means to take market share faster and a hedge on whatever the economy might do in the months and years to come. FMI Technology continued to have industry-leading signing levels, albeit not maybe at the level we'd like. Our internal goal is always to get that number to 100 per day. And during the quarter, we were at 86, an improvement from what we saw in the first quarter, but not where we'd like it to be. And our aspirations here are very high and that shines through on our expectations. We did, given where we are year-to-date, adjust our expectations for the year. Previously, we had indicated 23,000 to 25,000 signings. We think that number is more in the neighborhood of 21,000 to 23,000, and that's a machine equivalent unit basis. E-commerce continues to grow nicely. It rose 53% in the second quarter of 2022. And our large customer-oriented EDI was up 53%, whereas our web sales were up. And when you combine those 2, e-commerce is about 17.1% of sales in the second quarter. Finally, our digital footprint. We've talked about that in prior calls. It's our ability to manage supply chain more efficiently and illuminate that supply chain for our customers. That increased and was 47.9% of sales in the second quarter, 48% in the month of June. With that, I'll turn it over to Holden.

Operator:

[Operator Instructions] Our first question today is coming from Josh Pokrzywinski from Morgan Stanley.

Holden Lewis :

What I would say is we've been dealing with inflation now for the better part of the year. And we've been managing that through a number of means, but one of those means has been price actions on our own end. And as we've reported each quarter, we've really been able to align the pacing of our price increases with the pacing of our cost increases. And frankly, I don't expect that to change. Our material costs today are fairly stable at a high level with where they've been. And so in the second quarter, we didn't take any additional broad actions. There were certainly some actions around freight. There were certainly actions where we had suppliers put increases into us and things like that. But I view those as being more tactical. We certainly took actions as contract windows opened up. But again, that's part of how we manage the price/cost dynamic is understanding where our costs are coming from and when we'll have opportunities to make adjustments. And I give an enormous amount of credit to the folks who manage our pricing and costing strategies and frankly, the folks in the field that have to execute them because I think they've done a really, really good job of that. When I look forward right now, it feels like it's going to be more of the same. To the extent that we see suppliers putting cost increases into us, first, we'll push back on them. We have a good sense of what's going on with raw materials as well. And depending on how that goes, we might have to push some SKU-specific price increases through. But unless there's some meaningful change in the overall cost environment from where we spent most of the past quarter, I don't anticipate any aggressive actions to have to be taken. Again, we'll see how the environment plays out. I'm just going by what we see today. But I also expect that we'll continue to manage to a neutral price cost. And so I'm not seeing much change in that area. But one change you will see is as we run into Q3, we're going to run against tougher comps. And so I do expect that the percentage growth related to price increases will moderate from where we were in Q2. But again, that doesn't reflect the change in the overall price level. That would be my expectation.

Dan Florness:

I think part of what we did, obviously, the COVID period pushed everybody to abruptly change what they are doing and I think that the strength you see in our e-commerce sales growing north of 50% is a testament to the marketplace -- I don't know if the marketplace is reacting to what we're doing or we're reacting to what the marketplace is doing. I think it's more of the latter. And -- but buying habits have changed. And you see it in your personal life. What you do today is different than what it would have been 5 years ago. And so as we've moved -- as more and more of our growth comes from the fact we're engaging deeper with customers and they're seeing the ability for us to help them in more ways than maybe they would have 5 and 10 years ago, it changed the footprint we needed. And sometimes when you change your footprint, if all of a sudden you have 5 locations in a market and you go to 3, you will lose some business because you're not close proximity. But most of that is morphing to a different channel. And that was going to happen regardless of our changing footprint. And we think we're doing a nice job keeping a lot of that business as, again, if you look at our increase in web sales because a lot of that business would go to the web sales that's growing at 50%.

Dan Florness :

And with our local customers.

Operator:

Your next question is coming from David Manthey from Baird.

Dan Florness :

Sure. You have a good memory, Dave. And last -- yesterday, we had our Board meeting and I was reflecting on just that element with the Board because we're talking about what could happen in different scenarios, what we're seeing? And if you recall in 2009 -- so in 2008, there was a fair amount of inflation. And nothing like we're seeing today, but there was inflation going on. And when demand fell back, that flip from inflation to deflation. And all of a sudden, what is 6 months' worth of product, if your demand drops off enough, that might turn into 7 or 8 or 9 months' worth of product. And you saw the squeeze that occurred. You also saw a mix shift in your business depending on who's being impacted by it. And then the deleveraging, obviously, of the trucking network -- because if we're driving a truck from Winona, Minnesota to Minneapolis to deliver to branches, and that truck has 10% -- is running full or it's running at 80%, the cost of the truck and the cost of the driver and the cost of the fuel going in, that is what the market is that day and you deleverage that network. Same thing with our distribution. If -- what's different today, the element of deleverage in the trucking network, that's the same. Nothing's changed there. The -- our mix is different. You're right, fastener, 50% of our mix. The -- a fair amount of that is product that most of the fasteners in this country are not produced in this country. And so whether it's us or supply chain partners in North America, most of that's coming from Asia. And if there is deflation going on, there's a squeeze that goes down there that occurs in your turn of inventory. Once you get through that turn of inventory, that issue goes away. Again, the question is how much supply do you have. Those dynamics are in play. The non-fastener piece, a chunk of that, we source domestically, a chunk of that we import. I suspect a chunk of what we buy domestically is imported by somebody else. There will be some of those dynamics going on too. Deflationary environment is not a friend to gross profit in the short term. It wasn't in 2009. It wasn't in the early '90s. It wasn't in the late '90s. And it won't be if something that would happen in today's world.

Nigel Coe :

I think I'm going to revisit some of the questions beforehand. Maybe I think what Josh was trying to drive at was the fastener pricing with steel prices coming down. Obviously, steel prices are sub-$1,000 right now. I understand you've got contractual pricing arrangements with some customers on that. So maybe just if you could just address that and how that works and maybe just go from there.

Nigel Coe :

Right. Now I mean talking about deflation with the CPI numbers that just came out, it seems a bit academic. But no, it's a wrong discussion. Just on -- just staying on inflation, I think you called out half of the inventory increase is inflation, half is units. So it looks like we've got about 12% inflation in inventory here. Pricing is 6.6, 6.9. Does that mean you need to push more price in the back half of the year to maintain price cost neutrality on products?

Dan Florness :

There's a premise to the question that I think being missed from the standpoint of the basis for the question. And that is when we have $100 of products sitting on the shelf, let's just say that's our ending inventory. And we're selling product next month, the month after that, we're not exclusively selling product out of our inventory. We're selling product that we're buying that month and selling that month. We're selling product a disproportionate piece of our inventory that's sitting on the shelf is a product that has -- that we've decided over time because of the length of the supply chain and the nature of the supply chain, we're going to stack that ourselves. So if we have a supplier -- a domestic supplier who we're lockstep with, we have a great supply chain relationship capabilities. We don't have 6 months of their product on our shelves. We have 3 weeks. We have 6 weeks. We have 8 weeks of their product and ourselves, depending on what the need is to physically move it in an efficient fashion because your supply chain is different. If that product is coming from halfway around the planet, and in the last 1.5 years, that trip from source to use is less than predictable, that's where our inventory has deepened. So when Holden talks about what percentage of our inventory increase related to inflation and relates to deepening of the quantity, that's disproportionate to inventory that we're sourcing outside the United States, outside of North America. And so that 12% doesn't naturally translate to -- well, that means your inflation and your sale price in the next 6 months has to be up 12% because that's not apples-on-apples. I hope that makes sense, Nigel.

Ryan Merkel:

So I wanted to follow up on Dave's question and just clarify. So relative to 2009, it sounds like the mix is a little bit different, obviously, of your business. But I think you're saying you're going to be just as cyclical and decrementals could still be in the mid-20s if we have weak sales and deflation. Is that a fair statement?

Ryan Merkel :

It does.

Dan Florness :

Before everybody on the call walks over -- and this is to everybody. For everybody walks on the call, walks over to the closest window and decides to leave. When I talk to our regional leaders, when I talk to our national comp sales leaders and I get the tone of what they are seeing from their customers, I don't think there's a customer they talk to that doesn't have as strong a backlog as they've ever had in their business. Now backlogs are funny. Backlogs can evaporate in an environment. But there's a lot of -- if you think about what you see, we were down -- our transportation folks were at the rail yards in Chicago recently, really trying to -- we're always trying to figure out ways to streamline our supply chain. And the amount of containers of product that retailers have sitting there that they're paying for storage is massive. And so there's a lot of those kinds of things we're hearing about. But when I talk to our manufacturing customer base and our construction customer base, folks, the proverbial canary in the coal mine, and I'll use a term from one of our directors yesterday, is projects don't get canceled, but they get delayed when things get softer. But there's a lot of pent-up demand because a lot of manufacturers have stuff that's sitting there ready to be finished, but they're waiting for components. One of the components they're not waiting for -- is the OEM fasteners. One of the components they're not waiting for is the stuff that fast to supply them. So when that widget can be assembled or can the assembly can be finished, we're there to serve that need. And so we're in a different spot than a lot of suppliers going into that. But Holden's point is dead on. I still remember from -- I believe from October to January, our business dropped off about 18%. And then we dropped off 5 percentage points a month of actual business level. So we were down -- we weren’t 60 Holden, we were down about 33. But -- and then it started to shallow in the spring. But his point is dead on that, that's a complete different scenario than what we're talking about from the standpoint of the demand need and the backlog in the marketplace downstream from us.

Holden Lewis :

Well, again, I believe that if we had bought a widget in both periods, it would be inflated this year compared to where it was last year. I think that goes out saying. But I mean that's why if you look at fastener inflation, throw out the 60% where there's no offsetting sales year-over-year to a similar customer. But faster inflation exceeds 25%. It has over the past couple of quarters because of what's happened with the price of steel cost of transporting internationally, et cetera. If I look at non-fasteners, it's been close to 10%, right? So I mean that's the level of inflation that we've been seeing in the marketplace. Hopefully, that gives some color. I'm not sure what else you're referring to.

Holden Lewis :

As I said, for every widget that we sell this quarter for which there's no comparable sale to the prior quarter, I'm pretty certain that we probably got more for it this quarter than we would have a year ago had we sold it. I think that there's -- if we didn't sell it last period, I also think we probably gained some share or gain some products something like that. I don't think we sold lose sight of that fact. But yes, without a doubt, most of the stuff we're buying this year probably we're getting more for it than we would have a year ago.

Holden Lewis :

And I would point out, and again, ultimately, price/cost gets reflected in some way, shape or form in your gross margin. And again, our gross margin has been fairly stable. So I don't believe that there's a bunch of inflation out there that we're not seeing and we're not accounting for. Because if that were the case, it would be reflected in our gross margin. I think the actions that we've taken are capturing the order of magnitude of increase that we've seen.

Hamzah Mazari :

My first question was just around the Onsite business. You mentioned, clearly, it's a good solution for some of the supply chain issues you're seeing. Do you view there to be structurally higher demand for Onsite in kind of a post-COVID world post-pandemic relative to your kind of expectations pre-pandemic? And kind of has the time line in terms of implementing a new Onsite the ramp changed at all with some of the labor availability issues? I know you mentioned you had pretty good hiring in Q2.

Holden Lewis :

Bit of color I might add to that, probably over the last 3 to 5 months, which kind of coincides with where I think ourselves and our customer base begin to sort of adapt to the current setting. But over the last 3 to 5 months, a lot of the feedback that's come back from the Regional Vice Presidents in their commentary to me that they give me each month, each quarter, there's been many of them that have said that the lessons that were learned from the period you just came out of was that -- our customers are not supply chain managers, and they're looking for someone to bring that expertise into them. And so to Dan's point about structural, I think that this laid bare how difficult managing your supply chain can be. On top of that, supply chains have just gotten more expensive in the current environment. And I think that our customers are looking for more assistance in that, and I think they're conveying that to the to the field sales force based on the commentary that I'm getting back. So just some anecdotal support for that.

Dan Florness :

Yes. I mean what I'll tell you is I haven't received any concrete commentary from people saying, "Oh, all these plants are coming back." Yes. So I've never seen any anecdotes to support the idea that onshoring is or isn't happening. But I'll tell you that in my view, I think that that's sort of a long cycle thing that we're going to look back 10 years from now and say it happened or it didn't happen. I don't know how you identify that in a given quarter or frankly, even a given year that, that trend is in place. But I've not received any specific feedback from the field suggesting that that's driving our business.

Tommy Moll :

I was hoping you could elaborate a little bit on the softening demand trends that you called out. And I'm thinking about it in a couple of ways. First, just if you can walk us through the quarter. And Holden, you referenced the exit rate and what that might imply for the remainder of the year? And then the second way I'm thinking about it is you made a comment, I believe it was Holden, around the weakness or softening. We can say largely centering around consumer/construction end markets. So any end market commentary would be helpful as well.

Tommy Moll :

That's helpful. As a follow-up, I wanted to shift to hiring. Dan, it sounds like the conditions remain challenging, but I believe you said the trends on applications have improved. I just wondering if that might be driven by softening and hiring elsewhere? And you may not have a ton of visibility on that, but I'd be curious if you had any thoughts. And to the extent we do enter a period a recession period, can you just refresh us on the philosophy on how you manage hiring and leverage and/or deleverage on employee-related expenses in that kind of environment?

Operator:

Our next question is coming from Chris Snyder from UBS.

Dan Florness :

Yes. It's not unusual for activations to occur somewhere between 3 months and 6 months is probably sort of the gap in which that traditionally occurs. There absolutely is a period of time where those signings have to bleed in. Do we believe that labor has played some role in the slowness? Yes, yes, we do. Hopefully, that's beginning to resolve itself to some degree. I will note we had a lot of implementations in the second quarter. Even so, we had a lot of signings so we grew the backlog again. And we do, in fact, have a record backlog of implementations to do. And so we feel pretty good about the degree to which the number of signings that we have, the backlog that we have in place, the degree to which that's either a bit of a hedge against any sort of downturn that plays out or an accelerant if one doesn't play over the back half of this year and into next year, we feel really good about that.

Dan Florness :

Yes. Well, the $1 million you're talking about has been -- a lot of times we use the example of a $30,000 a month customer. We think we can add $80,000 to $100,000 of incremental business and grow that to $110,000, $120,000, $130,000, $140,000 relationship, and that 80,000 increment is at least $1 million layer on top. To the point when you get it when you're turning it on, I think we're getting better at turning on Onsites every day. So that enhances our ability to drive that quicker. But it's still going to be dependent on the circumstances. And so I think the layering event of numbers that we've historically shared, I think that's still as good a proxy as anything above what to expect.

Holden Lewis :

Thanks, everyone.

Operator:

Hello, and welcome to the Fastenal First Quarter 2022 Earnings Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Ellen Stolts, Investor Relations. Please go ahead.

Dan Florness:

Thank you, Ellen, and good morning, everybody, and thank you for joining our Q1 earnings call. Before I start, I thought I'd just share a few tidbits from a conversation I had this morning with our regional business unit leaders, our regional vice presidents and our VPs of the business. And I started that by sharing last evening or late yesterday afternoon, my wife and daughter returned from a week long band trip to Florida, marching band. And as with most high school trips, it involved a 26, well, if you're coming from Winona that is, it involved a 26-hour bus ride down last Wednesday and a 26-hour bus ride back. And I saw a bunch of haggard kids and a handful of haggard adults to get off the bus yesterday about 4:00. And when we got home that evening, I was watching the video, I don't like to watch myself on video, but it's a necessary evil to make sure you present as good a message you can and present it in a style that isn't too painful to watch. And my wife commented on it, and I think she probably was commenting partly, in fact, she was kind of tired from the bus ride. She thought it was a pretty under-inspiring video. And she had no problem telling me that. And she said, for the last two years, you come home, you talk about things that people are doing at Fastenal, things you see from the leaders and everybody within the organization and how impressed you are. And in your video, you just had a great quarter and your video doesn't speak to that at all. It sounds like you're in the middle of COVID, it's kind of disappointing. And after brushing my pride off, I got in this morning and I led our regional -- our leadership now, just how damn proud I am of the quarter they just put out. But more important than that of what they've done in the last two years and all the hard work as we transition from tariffs to COVID and worrying about our own human safety and the safety of others to the surge in demand for products, that pivoted into a supply chain globally that completely fell apart and how did we manage through that to support our customers and their needs, and more recently, managing through the chaos that is inflation. Frankly, the first bullet on the flip book says that has the statement good execution, there's a typo there. That should say great execution. I think the Fastenal Blue Team did an unbelievable job in the last two years, and I think that extended into this quarter, and I'm really proud to be associated with them. Even yesterday in our Audit Committee call, we were picking on Holden a little bit, but he's been kind of crabby lately. And it's kind of refreshing you have a really good quarter and your CFO was kind of crabby and he was talking about our cash flow. And he wasn't pleased with it, and I said to him, I said, Holden, take a look at the last six years, and look at our growth and look at what our operating cash flow to earnings was in our strongest year, I think it was at 93%. I think that was first quarter of 2018 might have been '17, and it costs money to grow a distribution business, and that money is spent in working capital. And that gets amplified when you have heavy inflation like we're seeing right now. So I'm glad you're irritated and irritable. I can't imagine being right now when you come home from work. But thanks to what you're doing, but don't be too hard on everybody. So flipping to the book here. The net sales grew 20.3% in the first quarter. Our pretax profit grew 28%. There was some amplifying effects. Last year's weather in the Texas and Oklahoma area in February hurt our sales hurt the economy, quite frankly. And then we had a mass write-down. And -- but adjusting for those, this is our strongest top and bottom line growth that we've experienced in a decade. It's really been since we were recovering from the '08, '09 in the 2011, 2012 time frame that we saw the growth that we're seeing right now, so really pleased with the performance. And in the last two years, so since the pandemic started, we've put in a lot of energy to deploy technologies and strategies to just improve our efficiency. And that served us really well because the environment has restrained our ability to add labor, add energy into the organization, but it hasn't hurt our ability to grow sales and also to continue the branch consolidation process that we started six, seven, eight years ago, so very strong performance there. The supply chains in markets remain tight. However, conditions have stabilized. We're getting more products on the shelf to support the needs, which makes the business less chaotic. And we are seeing an uptick in applications coming in. And I'm hearing it mostly anecdotally from our regional leaders, but they're seeing more and more people willing to come back and do the workforce and apply for jobs. Part of that is probably a function of our number one recruiting area is four-year state colleges and two-year tech colleges as they have come back in full force, that group of people are looking for opportunities for their future. Our international business reached a milestone. In the month of March, we broke -- we exceeded $100 million in sales for the first time. And next week marks two steps towards normalcy in our world. One is our customer expo, our selling event is returning to an in-person format after two years of not occurring in person. And that will be Tuesday, Wednesday next week. And then next Saturday, we'll hold our annual meeting in person after two years of the sanitized video or on air version, which is, frankly, less than satisfying in a community like this where we get a good local turnout at the event. Flipping to Page 4 of the book to comparison to the 2020 to 2022 period, and this will be the last quarter that we put this table in because, obviously, as we exit this quarter and enter the new quarter, our two-year comparison falls square into the COVID period, so it becomes less than meaningful. But we thought we'd continue it as we've done the last three quarters. I think the only thing that should jump out on here is at least jumps out for me is the fact that our operating and administrative expenses have dropped from 26.7% of sales two years ago to 25.5% of sales today, as we've worked to make the organization more efficient. And I am really probably we were able to accomplish this during the distraction of the last two years. One item that's probably a little bit misleading in here, it shows our gross profit is actually flat in that two-year period. It's actually down slightly. January and February of 2020 were a bit higher. And as we entered the COVID period in March of 2020, we started selling bulk quantities of masks and things like that at a lower margin and it actually pulled our margin down to 46.6%, just trying to express full disclosure there. Flipping to Page 5. When people get more confident of where we are today and there's less chaos in the world, and you're more comfortable engaging with others, we always felt that our growth drivers would see an uptick and we had to just get through this COVID period. Well, our Onsite saw that uptick. We signed 106 in the quarter, finishing with 1,440. So, we're up 12% from the number of active sites we had a year ago. And we continue to do the healthy business thing, and that is, just like we've done with our branches over the last decade, you challenge every business unit is that Onsite performing to what you need it to be for both our customer and for us. Sometimes, we run into situations where we take a customer that was doing $25,000 or $30,000 a month of sales in a branch and we double that, and maybe we even triple that. But we get to the point where we kind of get stuck at a number, let's say it's $70,000, $80,000 a month. We always have to evaluate what is the best solution there for the customer and for our ability to serve that business. And sometimes it's pulling it back into the brand. Sometimes it's the case, the customer runs out of space for us. Sometimes, and we've seen this in the last six months, particularly, we have some customers that are consolidating some of their operations, and we've had a few on-sites that have closed but we pick it up somewhere else or consolidates was an on-site we have somewhere else. And -- but we think it's a great business, and we're really pleased at what we saw in the first quarter with signings, and we're excited about that customer event next week and what it means to keep this thing going. FMI Technology, it's about bringing better visualization and service ability to the point of use. It started with bending a decade plus ago, and we've expanded with a bunch of other technologies. A year ago, we were signing 74-a day. This quarter, we signed 83 a day. We ended the quarter stronger than we started the quarter. And for Onsite and for FMI, our plans -- our goals the year remain unchanged. So, the FMI Technology now represents 35.5% of sales. A year ago, it was 28.7%; and two years ago, it was 26.4%. We're going to keep driving that. E-commerce, 55.6% growth in the first quarter of '22. And like our international group, our e-commerce team also hit a milestone. In March, we exceeded $100 million in revenue for the first time. It's not too many years ago, I think it was 2011, when we pointed out the fact that international was now 10% of the Company but still a relatively small piece. And e-commerce was something we dabbled in, but it really wasn't a thing. Times have changed in the last decade and now both of them are $100 million month businesses. Finally, if you roll up our FMI Technology in our e-commerce, we talk about our digital footprint. We hit 47% of sales in the quarter, 39.1% a year ago, 34.9% two years ago. Our goal is to hit 55% of sales at some point later in the year. And we still believe that long term, that has the potential to be 85% of sales, and we're gearing our supply chain and have been gearing our supply chains to support that kind of business in the future. With that, I'll turn it over to Holden.

Operator:

Thank you. Now, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Chris Snyder from UBS. You line is now live.

Holden Lewis:

We continue to assume that we're going to be price cost neutral over the course of the year. If your question is, what is the level of pricing we expected? Bear in mind, that, to some degree, as we move into Q2, but particularly as we get into Q3 and Q4, we're going to begin to comp against much higher pricing from a year-over-year standpoint. And so I think my expectation is that we will still be north of 5% on price in the second quarter, but that you'll begin to see that pricing contribution drop fairly sharply in the Q3 and Q4 period, as our own pricing actions remain fairly stable and runs into last year's tougher comparisons.

Dan Florness:

When we sign an Onsite, we will have discussions about targets for that facility. And based on the customers' information about their spend, our information about their spend and sometimes you can do some napkin calculations based on how many employees are there, what types of activities, OEM faster demand, et cetera. There isn't a hard and fast rule that says, hey, you need to be at this number. But it's really about -- it's a partnership. And that partnership says, let's work together to grow the footprint. What I often see when I visit Onsite is that I find a very motivated customer to add wallet share to Fastenal because what does an Onsite represent to them? It represents Fastenal putting personnel and inventory into their business to support their business, which frees up their need to add personnel, frees up their need to add working capital. So it's a great program for our customer and it's a way for them to have resources. Resources that we normally would have had working in a branch now are bringing product right to the point of use or doing different things in actively managing and it frees up resources for them. That's ultimately what gives us our footprint. It isn't a contractual obligation that says you must do this or else, same thing with our vending program and our onset program. What we say to the customers, this is what it's about, and we're not going to hold you to a contract. But if you demonstrate that you don't -- six months into it that you really aren't brought into it, we reserve the right to take our ball and go home. And that's what drives the wallet share ultimately of the business.

Dan Florness:

I'll add to that. We have relatively low market share. We're always growing. It's just that sometimes it doesn't shine through in the numbers because there's a lot of headwinds.

David Manthey:

First off, could you discuss your expectations for FTE growth needed to fuel revenue growth this year? And then, Dan, maybe long-term expectations for labor requirements versus historical trends, especially in light of these automation tools that you've deployed and you will continue to deploy across the Company, and that's both customer-facing and internal type technologies.

Holden Lewis:

And one nuance about that, Dave, is we tend to look at it less about the FTE and more about what the total labor dollars that we commit. And when we talk about being more productive with labor, we tend to think about are we driving more gross profit dollars for every dollar of labor that we produce in our business. And that's how we tend to think about it. And to Dan's point, I'm not sure that we have an exact percentage that we would communicate here managed very well by the field. But I think that as an organization, we understand that the growth in our labor dollars on our pathway from where we are today, that $10 billion company and beyond has to come with labor dollars growing at a slower rate than gross profit dollars. And as an organization, I think, pretty uniform in that objective.

Holden Lewis:

That is the expectation. And here's how I think the setup plays for the rest of the year. If I think about incentive pay, for instance, in the first quarter, it was up about 60% versus the prior year. Again, that's a great thing to be able to talk about because it reflects the performance of the business. I just don't believe that you're going to see that rate of growth as you move into the second quarter, third quarter and fourth quarter, partly because of the comps from the prior year, where we really begin to ramp in terms of our performance in the back half of last year coming out of the pandemic. And so I wouldn't be surprised if the rate of growth in incentive pay you get those comps is half in Q2 what it was in Q1, for instance. And I think you have very similar dynamics with health care costs and general insurance costs where the drag that they contributed in Q1, I don't think you're going to see anywhere near that same order of magnitude of drag as you get into Q2, Q3, Q4. Travel and supplies, something which really sort of came down as the pandemic settled in, that was up 50% in the first quarter. I think that's going to be up less than 20% in the second quarter. It could be flat in the back half. So I think a lot of the lack of leverage that you saw in the first quarter reflects on some levels, the comparison versus the prior year. And as we go into the balance of this year and second quarter, third quarter, our volumes should be higher just seasonally, I don't think you're going to have the same degree of cost drag in a lot of areas that we experienced in the first quarter. So my expectation is that for the balance of the year, we're going to leverage SG&A. Occupancy, I think, will continue to leverage based on what we're doing on sort of the branch strategies and things of that nature. So yes, my expectation is we leverage SG&A in the balance of the year.

Holden Lewis:

The impact of that write-off actually is an important perspective to have.

Michael McGinn:

So I guess higher level, if you watch the news, a recession is imminent and it doesn't seem to be a case with almost 90% of your top 100 national accounts growing. I guess, of those top accounts, how many are growth constrained that maybe shape your outlook for sales given the tougher comps as we approach the back half of the year? And maybe any update on what you think your market share take rate is in an environment where fasteners are the fastest-growing category and it's been a while since we've seen that for you on a sustained basis.

Michael McGinn:

Yes, components where you're not necessarily playing right now and they're trying to deliver a longer cycle backlog-driven product but can't get it out the door for reasons that are beyond your control.

Michael McGinn:

That's correct.

Michael McGinn:

Got it. It does, yes. So I wanted to go back to kind of gross margin. I see the strong results here, and you mentioned price cost neutral. It just feels like during -- when you're comparing that to pre-COVID levels, you should have seen some sort of national account mix erosion given your model, but that's it seems like something more is going right here for you guys. And I just wonder I think flat or slightly down was the prior framework and understanding everyone's a little gun shy to guide that line item, but I guess what's your outlook now on the gross margin side of the equation?

Michael McGinn:

It did. I appreciate the time. Thank you.

Operator:

Our next question today is coming from Tommy Moll from Stephens. Your line is now live.

Dan Florness:

Okay. So we talk a bit about the digital footprint. And so within that digital footprint, we have -- if I went back two years ago, when COVID has started, we probably had around 5%, 6% of our sales where we used -- it's an MC device, but it was gut and stand bins. But we didn't really use that to be more efficient upstream in how we pick the product, how we supported that. Today, that roughly 6% has expanded to about 12% of sales in the March month, that's gone through and I'll call FAST stock. That's our mobile technology on a platform that we have written that interfaces directly with our point-of-sale system and of equal importance with our distribution center network. And so not only are we gathering using technology twice as much of our sales, but we're using that upstream. Where in the past, that half that doubling would have been -- we've been writing on yellow notepad and getting orders and pulling it in. And then those orders transmit earlier in the day. So when they transmit earlier in the day, our distribution center can start picking that product to support them at 10:00 in the morning when they scan the bin, not at 4:00 in the afternoon, they get back to the branch and they doc their MC device and transmit all that. And it allows us to think differently about how we operate, same thing with our FASTBin and FASTVend platform. FASTBin is a relatively new thing, and that's where we put in an environment where you have OEM fasteners and there's a Kanban system. Somebody has to go out and get the bins, somebody asked the bought and figure out what we need for replenishment. What we do today is where we've implemented the Bin technology. When that Bin is empty, the person that emptied it puts the Bin up above the shelf, and there's an RFID chip in it, and there's an RFID reader that's saying, hey, Bin #242 is empty, it's hungry, it needs to be fed. And that transmits right through our point-of-sale system to our distribution center. And that's where LIFT becomes important in the future because we'll support more and more of that, especially with standard product in a highly efficient distribution model, but even if it's done locally, where it's because it's more special for that OEM need, we're gathering the information, the need electronically when it occurs you have fewer surprises, but you also remove the cost of that data collection. And then that information for your customer much more readily and you become a better supply chain partner. And so that as a percentage, when I start adding that up, just the FMI component has grown dramatically from two years ago, and that -- there's no data collection effort going on.

Tommy Moll:

That's helpful. As a follow-up, I was looking through my notes from last quarter, and I think the framework that you laid out for the full year this year was gross margin may be down as much as 50 basis points for the full year versus full year last year, but incremental margins in the 20% to 25% range. You've come out of the gate pretty strong here in the first quarter, so really just to boil it all down. Is it fair to assume that both of those ranges that you talked about a quarter ago based on what you know now could be positively biased?

Operator:

Next question today is coming from Chris Dankert from Loop Capital. Your line is now live.

Holden Lewis:

Yes. And actually, if I could just add one more thing to my prior question, I won't count it against you. I want to make sure that when I think about gross margin being flattish or in that ballpark for the year, make sure you're including the write-down from last year because I'm comparing against that number, including that number, just so we're all on the same page. To your question about fastener margin, yes, we haven't necessarily broken it out by product line in that fashion. What I would tell you is the inflation that exists in fasteners is, is probably twice or more that of what we're seeing in the non-fastener lines. And even though we might be a touch below neutral on the fastener line from a price cost standpoint, in order to achieve that, it's fair to assume that the pricing component would be greater for fasteners than it is for the non-fastener piece. And so, I think there's probably a bit more balance between product and price as it relates to the fastener side of the ledger.

Dan Florness:

I don't know if we know the answer to that on the competitive shift, Chris. The reality of it is we've performed well in the last two years because we figured out how to find product and we figured out how to get product. And sometimes that meant spending money that was painful for us. We're a pretty frugal organization. Sometimes that meant spending money to move stuff that was kind of expensive in our way of thinking and heck, even today, the cost of taking a container across the ocean is ridiculous. But that doesn't change that it is what it is. But I think the memories sometimes are short, painful memories often aren't. And a lot of businesses that went through a really ugly period and they found a friend in Fastenal, I think they remember that because again, that's a painful memory. Holden has talked about on prior calls, the number of customers that didn't buy from us before COVID that discovered who Fastenal was because of a pain point they had during COVID. And a lot of that is government and health care centered organizations, but a lot of other businesses, too. But that's a $50 million a quarter business for us now. So it's a $200 million business within Fastenal that didn't exist two years ago. And I don't think supply chain becoming a little bit less chaotic hurts that business. I think that's a customer segment and that it has realized what a lot of our traditional realized for years that Fastenal does a pretty nice job supporting their supply chain needs.

Operator:

Our next question is coming from Jake Levinson from Melius. Your line is now live.

Holden Lewis:

Not really. When 92% of your top 100 are growing, there's not many that's not. Even areas, I would say, like oil and gas and areas that have been a little bit sluggish, they're not necessarily where everything else is, but they're doing better. But I think the marketplace is pretty uniformly strong, Jake. It's hard for me to define many areas of significant weakness. And I'm not -- again, we don't have a lot of visibility into the future, but the field still remains pretty optimistic about how things are playing out.

Operator:

Our next question today is coming from Ken Newman from KeyBanc Capital Markets. Your line is now live.

Holden Lewis:

Our goal has always been to achieve a 20% to 25% and to expand our margin a little bit from where we are, and that remains our goal. I'll let you model it, however you model it based on what you've heard so far. I think we've given you enough to play with. But we feel good about how the business is performing today. And we'll see how the macro environment plays out the rest of the year, but we feel pretty good about how things are playing out.

Dan Florness:

Well, I do -- first off, so on the call this morning, one thing I didn't touch on, I did touch on the fact that our leaders in our -- both our sourcing operation and our sales operations in China, they're based in Shanghai, and obviously, they're experiencing a pretty ugly lockdown right now. And I first let them know that we are here to support and really impressed with what you're doing locally. Our team has become -- especially the sourcing side of it, but both sides have become quite agile of operating in a remote fashion. Fortunately, there was enough warning that they were able to set up that ability to do that again. And I feel better about it the fact that we have more inventory on the shelf right now because there will be disruptions from this. There's no question. We're not immune to that nor is anybody else, but sometimes the old adage is possession is nine-tenths of the law. The fact that we have inventory on the shelf or inbound that's at a pretty high level, even though Holden doesn't like the cash flow impact of that, he does like the fact that they're to support our business. And -- but we have a sizable presence in Shanghai, and we're worried about our team.