Greetings, and welcome to the Fastenal Company’s 2021 First Quarter Earnings Results Conference. 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 is now my pleasure to introduce your host Ms. Ellen Stolts of Fastenal. Thank you. Please go ahead.

Welcome to the Fastenal Company 2021 first quarter earnings conference call. This call will be hosted by Dan Florness, our President and Chief Executive Officer; and Holden Lewis, our Chief Financial Officer. The call will last for up to one hour and will start with a general overview of our quarterly results and operations, with the remainder of the time being open for questions and answers. Today’s conference call is the proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission or distribution of today’s call is permitted without Fastenal’s consent. This call is being audio-simulcast on the Internet via the Fastenal Investor Relations’ homepage, investor.fastenal.com. A replay of the webcast will be available on the website until June 1, 2021 at midnight Central Time. As a reminder, today’s conference call may include statements regarding the company’s future plans and prospects. These statements are based on our current expectations and we undertake no duty to update them. It is important to note that the company’s actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company’s latest earnings release and periodic filings with the Securities and Exchange Commission, and we encourage you to review those factors carefully. I would now like to turn the call over to Mr. Dan Florness.

Thank you, Ellen, and good morning, everyone. I appreciate you joining us for our Q1 earnings call. With our Annual Meeting coming up next Saturday, I’ll skip the storytelling this morning and get right into the quarter's results. Our diluted earnings per share were $0.37 for the quarter, reflecting a 3.7% increase. Net sales also rose by 3.7%, with a daily increase of 5.3%. This quarter had its challenges, including significant storms in February, which impacted our numbers. A more notable factor was losing one calendar day, going from 64 to 63 days. While it might not seem significant, we generate approximately $23 million per day, and that lost day affected our financials. Most of our expenses, like rent and payroll, are consistent across the month, so we incurred those costs despite the missing day. It’s estimated that $0.30 to $0.40 of that lost dollar could have impacted our bottom line, costing us around $7 million to $9 million this quarter. As we approach Q4, we’ll face a similar anomaly in 2021 with two lost business days—one in Q1 and one in Q4. I mention this to highlight the importance of understanding these timings. I am really impressed with how our team is managing expenses and driving growth in this environment. This quarter, we also wrote down about $8 million in 3-ply masks. Historically, 3-ply masks haven’t been a major part of Fastenal’s product line, making up about 2% of our sales over the past 12 months. This reflects the pandemic's unique circumstances. Last spring, we invested in a significant amount of mask inventory to support our customers and society during that time. If given the chance, I would make the same decision again. Our team handled this well, showing our customers that we are a reliable supply chain partner capable of tackling these challenges. Earlier today, I enjoyed reading reports from analysts, especially one that pointed out our lack of adjusted financials. We are not an acquisitive company and we focus on our role as a distributor. The inventory write-down is a strong indicator of our confidence in the market’s future for masks. We believe the economy is improving, which is evident in our daily sales growth. In the first quarter, our sales grew approximately 4%, but jumped to 14% in March. However, that increase is somewhat inflated due to comparisons, so looking at sequential growth is more telling. For example, our fastener sales grew 7.1% sequentially from January to March. If we look at the years before the pandemic, our average growth from 2015 to 2019 was 4.9%. This strength in the economy supports our decision regarding the masks, and we’re seeing positive sequential patterns, particularly in heavy manufacturing markets. We also noted increasing supply chain pressures, which should not be surprising. The recent incident in the Suez Canal highlighted some of these constraints faced in ports globally, leading to inflationary pressures. While the impact on Q1 was minor, we expect it to grow in Q2 and Q3. Throughout 2020 and continuing into 2021, our local and regional leadership teams have excelled in managing working capital, leading to solid cash flow performance. Moving to page four, we've seen improvement in Onsite signings, reaching our highest number since the pandemic began with 68 new Onsites this quarter. We now have 1,285 active sites, a 9% increase from last year. Daily sales in the Onsite business grew in the mid-to-high single digits. One area that still requires attention is the older Onsites, which remain sluggish due to their customer base, but we are noticing positive momentum. Although Holden observed some slowing in signings due to the current environment, it doesn’t diminish our long-term confidence in this segment. Regarding FMI, we’ve expanded beyond traditional vending since acquiring Apex Technologies last year. We’re excited about this broader business model, but it necessitates strong customer engagement and facility access. Surprisingly, despite pandemic restrictions, customers have welcomed us into their facilities to restock and renew their services. In terms of e-commerce, daily sales saw a significant rise of 35% this quarter, with EDI sales up nearly 38% and web sales increasing by 29%.

Great. Thank you, Dan. Starting on Slide 5 of the flipbook, total and daily sales were up 3.7% and 5.3%, respectively, in the first quarter of 2021. The severe storms that affected the U.S. in February reduced growth in the quarter by 50 basis points to 100 basis points. Demand improved for our traditional manufacturing and construction customers. For instance, manufacturing is up 5.6% in the first quarter, but accelerated to up 10.8% in March. Construction was down 7.5% in the first quarter, but improved to flat in March. Fasteners are a great bellwether of activity, and as Dan noted, the rate of change between January and March of 2021 well exceeded the typical pattern. We saw similar patterns in vended safety products and total and heavy manufacturing industries. So, yes, comparisons began to ease in March, but even so, it’s clear that underlying demand growth is improving at an accelerating pace as well. Now the counterbalance to gains in our traditional business is moderating demand for COVID-related products. Daily sales of safety products were up 14.7% in the first quarter of 2021, but that slowed to up 3.2% in March. We have seen daily sales of non-vended respirators and gloves, which were heavily pandemic-oriented ease over the past few months. Daily sales to government customers were up 37.3% in the first quarter of 2021, but that slowed to up 14.5% in March. This pattern will become more pronounced in the second quarter of 2021, given the absence of surge sales that we had in the second quarter last year. Our long-term goal, however, is to retain customers that engaged with us for the first time during the pandemic. Along those lines, 26% of the customers who bought PPE from us for the first time in the second quarter last year continued to buy from us in the first quarter, contributing more than $60 million in sales. The primary area that is still being restrained by COVID-related accommodations, are growth driver signings, as Dan discussed earlier. We do not believe market receptivity to our growth drivers has changed. As access to facilities and key decision makers continues to improve as it did in the first quarter, we believe signing activity will as well. When we look at the second quarter of 2021, we see quarterly growth that is flat to slightly down. As you know, we do not traditionally provide forward guidance. However, given the convergence of accelerating demand in our traditional markets, share gains in safety and the absence of $350 million to $360 million in surge sales, we just felt some perspective on an unusual comparison would be useful. Now over to Slide 6. Gross margin was 45.4% in the first quarter of 2021, down 120 basis points versus the first quarter of 2020. Roughly half of this decline related to the mask write-down addressed earlier. The remainder is split between customer mix and lower product margins in fasteners and safety. For fasteners, lower margin OEMs growing faster than other categories, which is likely to continue. However, pressure related to a couple of large customer implementations and from spot buys to manage the tight supply chains should ease in the second and third quarters of 2021. In safety, PPE sales to government remain meaningful and carry lower margins. While the margin on this business may remain lower, likely improvement in the non-government mix in upcoming quarters relative to the first quarter should benefit the overall product margin. The decline in gross margin was matched by 120 basis points of SG&A leverage, producing an operating margin in the first quarter of 2021 of 19.8%, flat with the prior year. Excluding the write-down, it would have leveraged nicely in the first quarter of 2021. This leverage continues to be a function of good control of headcount, branch reductions, lower selling-related transportation expenses and reduction of discretionary spend such as travel and supplies. Our incremental margin was 18%, but excluding the write-down would have been roughly 33%. The organization managed costs effectively in the first quarter of 2021 and we believe that will continue. However, remember that in the second quarter of 2021, the comparisons will get tougher as we anniversary the first period to have been affected by the pandemic and the related cost savings measures. At the same time, demand is improving, which will likely bring incremental investment to the business. As a result, relative to the adjusted incremental margin of 33%, we would expect incremental margins to moderate in future quarters. Putting it all together, we reported first quarter 2021 EPS of $0.37, up 3.7% from $0.35 in the first quarter of 2020. Now turning to Slide 7. Operating cash flow of $275 million in the first quarter of 2021 was 131% of net income. Year-over-year accounts receivable was up 2.1%, while inventories were down 3%. Sequentially, our working capital expanded more slowly than is historically typical. This is due in part to improving receivables quality, lower branch count and initiatives to improve the flow of our internal logistics, reduce slow-moving product and make local inventory more efficient. We believe these represent improvements in our working capital that will be sustained. However, less welcome was tightening global supply chains, which contributed to our hubs having about $15 million less in inventory on hand than we had intended. Net capital spending in the first quarter of 2021 was $30 million, down from $47 million in the first quarter of 2020. This was largely from lower vending spend, which was a product of lower signings over the past 12 months and better device costs stemming from the Apex asset acquisition. Our 2021 net capital spending range is unchanged between $170 million to $200 million. We returned cash to shareholders in the quarter in the form of $161 million in dividends. And from a liquidity standpoint, we finished the first quarter of 2021 with net debt at 2.2% of total capital, down from 9.5% in the year-ago period and 5.1% versus the fourth quarter of 2020. Essentially, all of our revolver remains available for use. Now before moving into Q&A, I wanted to address a couple of subjects of current interest. First, we are experiencing significant material cost inflation, particularly for steel, fuel and transportation costs. This did not have a material impact on the first quarter of 2021. Price contributed 60 basis points to 90 basis points to growth and the impact of price cost on margin was immaterial. However, we are instituting broad and material pricing actions in the second quarter of 2021 that will likely lift pricing contributions over the course of the year. Customers never like higher prices, of course, but they are busy in seeing increases throughout the supply chain. Further, the tools and processes we have developed, including data for our customers has never been more effective. The environment today is receptive. Second, we are also impacted by tightening global and domestic supply chains. On the sales side, certain of our customers are not operating as fully as they could be due to shortage of components. On the cost and service side, moving product has become increasingly costly and lead times have lengthened, causing product shortages in our hubs. These shortages have been overcome with spot buys made in the field that have allowed us to sustain service but at lower margins. We believe this dynamic could persist through 2021, though perhaps not quite as intensely in the second half as we are experiencing currently. That is all for our formal presentation. So with that, operator, we will take questions.

We have one other comment. Before we switch over to Q&A. In the last several quarters, I have shared with you our employee COVID numbers and I neglected to mention that earlier and I just wanted to run through these with you. So since the start of COVID-19, we have had 1,685 cases within the Fastenal Blue Team family. With just over 20,000 employees, that’s roughly 8.5% of our employees contracted COVID. I consider that a low number when you look at the fact that unlike many organizations, our employees didn’t have the luxury of being able to work out of a room in their basement or home office. Our employees go to work every day and work in a manufacturing facility, a distribution center, work in a branch or Onsite location or drive a truck, and so they are actively engaged with customers in their environment. If I look at the peak, our peak period was November of 2020. We had 430 cases or roughly 86 per week. To give you a contrast, in March of 2021, we had 102 cases or 26 per week, a drop of 70%. We think that is a sign of what’s happening in the underlying marketplace and makes us bullish as we look out into 2021. We will switch over to Q&A now, please.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. Our first question today comes from Jake Levinson of Melius Research. Please go ahead.

Good morning, everyone.

Good morning.

Good morning.

I know you mentioned pricing briefly during the quarter, but could you provide a broader overview of the pricing environment? Additionally, could you clarify your expectations for the next few quarters or the year?

I believe we're in an environment where transportation costs are rising, along with increases in steel and fuel, which ultimately affects plastics. Generally, we're experiencing inflation, and I don't think that surprises anyone. It shouldn't surprise anyone that we'll respond in various ways, which will include adjusting our pricing. In the second quarter, we will need to implement some price increases to help manage this situation. When I mentioned the impact of 60 to 90 basis points from pricing in the first quarter, I anticipate that will be higher in the latter half of the year. However, I don't expect it to go beyond our typical range of 0% to 2%. Our aims remain unchanged: to offset the impact on our margins and maintain our standing in the marketplace. To achieve this, we'll need to take appropriate actions given the current market conditions. The positive news is that our customers are quite active. They are experiencing similar pressures from various sources, which prompts ongoing discussions. In this inflationary climate, customers within these supply chains often explore other options for better pricing. Nonetheless, we aren't observing anything atypical in the inflationary landscape compared to past experiences, and we are confident in our ability to navigate through it.

That’s helpful color. Thanks. And maybe just as a follow-up and I know, obviously, there’s some pretty well-publicized supply chain challenges out there. But has it changed how you guys are thinking about working capital, or are you carrying extra buffer inventory or anything like that to kind of manage through the speed bumps, if you will?

We were probably $15 million, maybe a bit more, underperforming in the hubs compared to our expectations for the quarter. This is because we couldn't move products into our hubs quickly enough as demand increased. Regarding buffer inventory, I wouldn't say we're carrying a lot of it, and I’m not sure there’s much in the channel either. What’s impressive about our field is that we empower individuals in our business units to make independent decisions. This is not the first time they’ve had to source products where we haven’t been able to provide them from the hub in certain cases. Feedback from the RVPs indicated that any supply chain disruptions at the customer level are not due to us failing to provide product. We are successfully sourcing product locally and keeping up, although it requires more effort and time. That’s one of our organization's strengths. The supply chain issues we're facing are not unique to Fastenal, but we are well-structured to manage and navigate them. We saw this in Q1, and it bodes well for future market share gains. There is a bit of a margin impact because sourcing outside our supply chain tends to be less profitable than sourcing within it, which you may have noticed in the fastener line. However, as we work to normalize the supply chain throughout the year, you should see that effect diminish.

I want to make a point about how we operate in challenging environments. Many of you know I have a financial background, and being part of an organization that maintains significant inventory is a costly yet resilient approach. This was evident in 2020 and has been clear in previous years when supply chain disruptions occurred. Our inventory levels allow us greater agility. Recently, our supply chain team has adjusted their approach; instead of only looking 90 to 110 days ahead for reorder points, we are planning much further out, looking to August and September. We are proactively reaching out to ensure we can secure product amidst the disruptions. Our ability to maintain a strong cash position allows us to be responsive and swift in our orders, which positions us well compared to our competitors. I've noticed that in such environments, this gives Fastenal an advantage in capturing market share, especially against more local competitors rather than national ones.

That’s helpful. Thank you, guys. I will pass it on.

Thank you.

Thank you. Our next question is coming from Chris Snyder of UBS. Please go ahead.

Thank you. I guess starting with the $8 million PPE inventory write-down. Does this clear the decks, so to speak, or is there a risk of additional write-downs in Q2, and then, could you maybe just help frame how you think about the gross margin trajectory as you move past that?

No. It doesn’t clear the decks. The fact is, it’s still a good product and it’s still moving. The only difference in the market is that the value of it relative to when we purchased it is lower today than it was and that’s just about market dynamics. So a full write-off of that wouldn’t have been appropriate or frankly necessary. So that’s probably how I’d characterize that.

The only thing I would add is that the 3-ply mask was a unique item for us. There aren’t similar products available, and we specifically sourced that type of supply. As a result, we have adjusted the pricing to make it more competitive in the marketplace. Our local teams are driven to increase their business and do so profitably; if we carry expensive inventory, it could take a long time to sell, and we want that inventory to turnover.

So I think your question was, in part, is there a risk of another write-down? I mean, the product that’s on the shelf is good product for the next 15 months and the expectation is that we will be able to sell what’s remaining on our shelves over the course of that 15-month period.

Thank you for that. Following up on the comments regarding supply chain disruption, looking back at the Q2 2020 situation, Fastenal seemed to gain significant market share as customers relied on their largest suppliers. Are you observing a similar trend in the current market with the ongoing port delays and other issues?

Well, we think that that potential is there. I would say the supply chain issues, pricing issues, those are more sort of run-of-the-mill issues within distribution historically, whereas what occurred last year was generally unique and intense, right? So, I mean, on an order of magnitude, do I think that you are going to see $350 million to $360 million of sales that you wouldn’t have otherwise in this current environment? No, nothing of that sort. But going back to what Dan and I talked about a moment ago, the ability of our people in the field to be able to go out and find product independently to fill in gaps that we may have as our traditional supply chain is perhaps a little tight. I think that that is an advantage to our business. It was an advantage last year, as Dan talked about. I mean, a lot of the customers that we source and things like that, there was a local element to that. I think it will be an advantage this year just because right now what our customers are concerned about as demand goes up is having a product available and the flexibility in our business model. I think that’s going to provide us an advantage when making sure that service levels remain high and availability remains high, that I think it’s going to give us market share. But I wouldn’t expect anything so intense as what you saw last year at this time.

I appreciate that.

Thank you.

Thank you. Our next question is coming from David Manthey of Robert W. Baird. Please go ahead.

Hi. Good morning, guys.

Hi, Dave.

Good morning.

First off, pre-pandemic in 2019, I believe safety was about 17% to 18% of your mix. I am just wondering how you view where that mix percentage might bottom out. Would it be reasonable to expect 18% to 19% in the second half and then continue the gradual increase from there? Or do the changes from pandemic products, the cyclical recovery, and personal protection on the shop floor suggest that the safety mix might bottom closer to 20%?

I believe it’s unlikely to see the safety mix drop below 20%. There are groups of customers who are now safety customers and expanded safety customers. As we move through the rest of 2021, I expect that many of the habits formed will continue. About 93% to 94% of our employees cannot work remotely, while around 6% can because they have supporting roles. We strongly encouraged many of those employees to work from home a year ago to ensure a safer environment for those on-site. As employees return, we are implementing measures such as partitions and sanitizing equipment that we didn’t need in the past year when the rooms were empty. This will certainly create ongoing demand. However, I would be surprised if the mix fell below 20%, and if it does, it would be because other areas are growing faster than expected.

And maybe to put some numbers to that for you as well, Dave. In the first quarter, we generated a little over $60 million in revenues from customers that had not purchased PPE from us prior to the second quarter of last year and that amounts to a little over 1% of our sales. And I think that amounts to market share gains. And so when you think about where we were before and you think about those types of customers now being a part of our mix and contributing more than 1% to our share, I think that, that’s still right.

Okay. Thank you for that. And second, could you discuss the general economics of bin stock compared to vending Onsite in terms of gross and operating margins, return on capital?

The cost of the device is significantly different. I will focus on RFID since it's currently the largest component. We will evaluate the relevance of IR beams within MRO bins later. Essentially, you can compare it to a Kanban system. Currently, someone has to go out and monitor empty bins or collect them. In an RFID setup, when a bin is empty, it operates like a shelf with an open box above it where the bin is placed and an RFID tag reads it. This notifies our branch and supply chain team that we need to replenish the bin. The main advantage is increased labor efficiency, and it also gives customers greater visibility into the supply chain, enabling them to operate leaner and reduce inventory. I believe that the reduction in inventory for our customers will cover the capital costs for the devices since the primary change is the technology enablement. The bins themselves remain the same; they have just been fitted with RFID tags. Therefore, the capital investment is quite modest, aside from the communication technology, and the economics are more favorable than vending. The key factor is the enhanced labor efficiency in serving the business.

Perfect. Thank you.

Thanks.

Thank you. Our next question is coming from Ryan Merkel of William Blair. Please go ahead.

Hey, thanks. Good morning, everyone.

Hi, Ryan.

So, I guess, first question for Holden. Can you just update us on how to think about gross margins this year, just given the new headwinds on fasteners that you discussed? I think prior, Holden, you thought gross margins could be up slightly year-over-year in 2021; is that still the case or do we need to rethink that?

No, I don’t think there’s any need to rethink it. Again, we are taking actions to try to mitigate some of the pressures that we are seeing. I believe the guidance is probably a strong word, but the suggestion I made after the last quarterly discussion was that I expect gross margin to be slightly up this year, probably by about 50 basis points or less. On the other hand, SG&A leverage will face difficult comparisons from last year, and I would expect there to be marginal leverage on SG&A considering those comparisons. Ultimately, this translates into an incremental margin for the year in the 20% to 25% range. I think that reflects what we discussed in the last quarter's call, and honestly, I don’t think anything about that has changed.

Okay. That’s helpful. So it sounds like the increased headwinds on margins that you talked about because of the fill-in and the spot buy, that doesn’t sound like that’s meaningful.

Well, we are not talking about significant changes here. The impact is relatively small at this point. We believe that over the course of the year, we will improve the supply chain, and we will also take pricing actions to address some of those pressures. Therefore, I don’t see these as major issues.

Okay.

This assumes that we execute...

Very helpful.

Thanks.

Thanks, Ryan.

Thank you. Our next question is coming from Adam Uhlman of Cleveland Research. Please go ahead.

Hi, guys. Good morning.

Hi, Adam.

Hey. I was wondering if we could go back to the discussion about the Onsite signings. Could you maybe expand on what you are seeing in the negotiations that led you to reduce the full year signings outlook? I guess, I wouldn’t have thought that the first half would have had big expectations for signings, maybe more of like a second-half recovery, and then February, it was probably impacted by weather. I am just wondering what exactly you are hearing from your field guys there?

Sure. Last quarter, we discussed a potential range of $375 million to $400 million, indicating our belief in the market's capacity to support that range. However, we noted that business conditions would need to improve significantly for us to reach those figures. While I do think conditions have gotten better, they haven't returned to pre-pandemic levels yet. In Q1, we reported $68 million, and to be on track for closer to $400 million, given that figure, seems ambitious, especially since the environment hasn’t fully normalized. This is still an area impacted by COVID-related adjustments. We indicated last quarter that the $400 million scenario was high potential, and it's prudent to set realistic expectations. We also mentioned our outlook for FMI devices this quarter, believing the market can support 23,000 to 25,000 devices. However, we need to see activity levels improve beyond what we experienced in Q1 to achieve that goal. Currently, we might be pacing a bit low. It's essential to emphasize that this situation isn't about the acceptance of our tools in the market; we believe we can reach those targets. Yet, the environment is still in the process of normalizing, and as a result, we might come in slightly lower, although the overall trend is positive.

Yeah. I am going to comment on…

Okay.

When I was reading through Holden's flipbook, I noticed he mentioned the 300 to 350 range. Sometimes I express my disagreements with him, and other times I find myself in agreement. In this case, I'm not entirely sure I agree with him. He might be correct, but I'm uncertain. Looking at the first quarter, 29 out of our 68 signings occurred in March, indicating an uptick as the quarter progressed. This pattern isn't unusual, as January tends to be tentative, and February was impacted by the storm. I believe the risk regarding signings this year stems from customers being extremely busy, making it hard for them to focus on this right now. This is why we might struggle to reach the 100 signings per quarter pace. Otherwise, I would have asked Holden to remove that sentence from both the earnings release and the flipbook. I think the model is solid, and the market is open to it; we could accelerate our progress. However, there is the concern that people may be too preoccupied to make it happen. I’m not fully aligned with Holden on this, but if I had to bet, he’s probably more accurate. My message to our internal team is that there’s no reason we shouldn’t achieve 100 signings per quarter in the second half of the year. The question remains whether we can reach that goal in the second quarter, and I would be happy to be proven wrong.

Okay. Gotcha. Thanks. That’s very helpful. And then, secondly, back to the inventory discussion, I understand it’s been difficult to get inventories into the DCs. I guess, how much do you think inventories need to increase this year to support the growth that you expect, realizing that you have some other internal initiatives going on?

Well, I know in Q1, obviously, we talked about the hubs being down $15 million-plus versus what we would have expected. And we need more product to make its way across. And as it does, I would expect the hub inventories to rise. I am not sure that we have necessarily put a number to that and I think a lot of it’s going to depend on the degree to which demand continues to run the way that it is. So - but I do believe that we are light on inventory in the hubs. As inflation continues to run through, I think that will put some upward pressure on values of inventory as well. So I am not sure I have a good answer for you in terms of what the ultimate number is. But that’s part of the answer to addressing what we are seeing in the supply chain and improving our service levels. But right now, we are a little bit low on inventory, we are a little bit low on fulfillment levels and we need to correct that. And in Q1, it would have required $15 million more and I think that builds a little bit as you get into Q2 and the supply chain pressures build. Now that will be offset to some degree with the work that we are doing internally to take out slow and no moving inventory. In terms of reducing the branch count, which the field continues to take some of the branches out, that makes sense to them. Those sort - I think, when we talk a little bit about the customer fulfillment center, which is a form of branch, which has much more customized and tailored inventory, those are all initiatives that I think are very sustainable. We will continue to mitigate the effects of the supply chain over the course of the year. But right now, our inventory would be better off in having a little bit more in it than it does and that’s going to motivate our work on improving the supply chain.

Just the one thing I had is…

Okay. Thank you.

It's important to keep things in perspective; the $15 million that Holden mentioned represents roughly a day's worth of inventory. While it's a significant figure, we appreciate the transparency in disclosing it. Overall, we are fortunate to have a robust supply chain and strong resilience regarding our inventory intake. The main consideration is always the pricing, but again, it amounts to just a day's worth of inventory.

Thank you. Our next question is coming from Josh Pokrzywinski of Morgan Stanley. Please go ahead.

Hey, good morning, guys.

Hi, Josh.

Good morning.

Just to revisit Ryan's earlier question, I want to clarify some of the gross margin factors we discussed last quarter. Holden, considering the dynamics you mentioned, which appear to be more pronounced in the second quarter, particularly regarding mix and price/cost, and the possibility of certain ongoing purchases, should we expect this to be more relevant in the second half of the year rather than what was previously anticipated? I realize this is a detailed inquiry, but I'm trying to understand if there has been a change in the timing of those expectations, rather than the overall annual figure.

No, I don’t think so. I am still trying to think through the question a little bit. We all know that we have a relatively easy comparison on gross margin in the second quarter. I haven’t really tried to think about it in terms of year-over-year rate of change. If you take the first quarter gross margin and adjust for the write-down, which is our intention, that will be focused on the first quarter of 2021 and be done. Adjust for that, and you are looking at a first quarter margin of about 45.9%. If I move over to the second quarter, normally, the second quarter would see a slight decline sequentially from the first quarter. I think that could come in somewhere around flat, and part of the reason is the mix that you mentioned. Interestingly enough, the fastener/non-fastener mix is normalizing faster than the Onsite/non-Onsite mixes right now. This actually moderated the impact of mix in the first quarter, and we will see how that plays out in the second quarter. But it’s possible that could also be a little moderate, and I think that contributes to the outlook. Assuming we are effective on pricing, that can contribute as well. When I think about the second quarter gross margins, it becomes quite complex to think about it year-over-year when we can consider sequential patterns and build from there. Instead of thinking about it in terms of the normal 20-basis-point decline for the second quarter, I believe it could actually remain a bit more flat. That would clearly indicate a meaningful increase year-over-year, but that’s primarily a comparison issue. Does that help?

Got it. That’s helpful perspective. Yes. That helps a lot. And then, I guess, sort of related to the supply chain tightness that Dan had talked about. Understanding there was a pretty big step-up in activity sequentially into March, presumably that that continues just as things reopen on the fastener side. I know growth isn’t really homogenous, it can come anywhere. But are there limits to being able to grow here in the short term, so you talked about kind of flattish to maybe down a little bit in 2Q? But if everything went your way, is there really capacity to grow a lot faster, I mean, I guess, I am thinking back to some of the weather interruptions in 2Q and those customers not being able to make up days immediately. Is that something that’s sort of governed on the upside here, at least in the short-term until some of the supply chain stuff works out?

When I consider growth limitations, I focus on demand rather than supply. In February, several issues arose, one of which was power outages impacting our plants. Our distribution center in Dallas was inactive for five days due to a lack of electricity. Numerous facilities faced similar challenges, especially in colder regions where freezing temperatures caused significant issues. Good plants were unable to operate due to power shortages, resulting in frozen pipes and extensive repairs needed across many sites. The core problem involved insufficient power and environmental damage, rather than a lack of resources. Our primary constraint is demand and our capacity to attract more customers who want to partner with us as a supply chain solution.

Yeah.

Got it. Appreciate it. Thanks, guys.

Sure.

Thank you. Our next question is coming from Kevin Marek of Deutsche Bank. Please go ahead.

Hi. Good morning.

Good morning.

I think a lot has been said already, but just going back to the point made about market share gains. I know you called out, I think it was like 26% of accounts that were first-time PPE buyers have reordered at this point. Is there anything you would add about gains made outside of PPE and maybe how share gains in core areas have shaped up over this pandemic period?

Unfortunately, there’s no industry resource that clearly tracks distributor performance. We received some interesting insights regarding safety, the pandemic, and new customers, but the rate of new customer acquisition isn't generally as pronounced as what was observed during that time. Therefore, it's tough to provide a definitive answer. What I can say is that we continue to grow as a business. Looking at industrial production and similar metrics, it seems growth is not evident. Surveys up until February indicated that distribution remained negative, and industrial production was slightly down. However, we have been growing. I typically assess our market share gains through these metrics. Historically, we have outpaced our industry and industrial production, and I believe that trend continued through Q1. The data is available for you to analyze, and we will keep advancing.

Got it. No, that makes sense. Maybe just as a quick follow-up kind of following up on a prior question, I am wondering if you could talk about the trends through the quarter maybe by market, just thinking about manufacturing versus construction within March. It looks like results maybe, manufacturing seeing more acceleration versus construction or improvement, maybe just directly kind of comp-related. Is there any color you can provide to delineate kind of trends between the two?

Well, if you look at the construction business, it’s been encouraging to hear RVPs mentioning improvements recently, and it's nice to see the numbers start to reflect that. In January, construction was down 9%, in February down 14.5%, and in March it remained flat. This indicates a significant improvement. It’s true that the comparisons have become easier, which also applies to manufacturing, where we saw movement from up 5% to up 1% to up 11%. Comparisons will certainly influence the results. However, RVPs have indicated for several months that the overall sentiment in the construction market is improving, even if there has been a slight delay in reflecting that in the data. It appears that both the construction and manufacturing markets are showing signs of improvement compared to previous months.

Got it. Thanks very much.

Sure.

So it is five minutes to the hour and I guess we will wrap up to Q&A. And I just want to thank everybody for listening in today and thanks for your support of the Fastenal Blue Team. Take care now.

Thanks.

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