Greetings, and welcome to the Fastenal Company's 2021 Second 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Taylor Ranta of the Fastenal Company. Thank you. Please go ahead.

Welcome to the Fastenal Company 2021 second 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 September 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.

Thanks, Taylor, and good morning everybody, and thank you for joining our second quarter earnings call. Similar to the last five quarters, I'm going to start with a few stats on our COVID experience. So, to date, we've had 1,950 cases of COVID-19 among our employee base, so about 9.5% of our employees have contracted the virus over the last five quarters. Looking at it from a pattern standpoint, and as we discussed in previous quarters, our worst quarter was the fourth quarter of 2020, November of 2020 was our worst month, but in the fourth quarter, we averaged about 60 cases per week. In the first quarter of 2021, that dropped to 44. In the second quarter, that dropped to 20 cases per week. And I'm pleased to say in the month of June, we averaged eight cases per week, about 30 cases throughout the company. So, very good patterns, not unlike what we're seeing generally speaking in society, especially in the countries in which the bulk of our employees are located. One of the things that should jump out to a reader of our earnings release or in some of the commentary, one of the struggles that we're seeing that is not unique to Fastenal, I suspect most companies will cite this, is difficulty in hiring, the addition of people, as we're reemerging from the shutdown economy of 2020 and the first part of 2021. And there are three distinct subsets that drive it, at least in our case. As you all know, historically, we're a promote from within culture, and we believe in starting early in a person's career in that promote-from-within culture, and we hire a lot of part-time employees, and a very high percentage of those employees are full-time students. And we think of it as in most cases, in a perfect world, you're not hiring a part-time employee; you're hiring a future full-time employee. We provide a tremendous amount of flexibility to folks early in their career. We focus very acutely on four-year state colleges and two-year technical colleges. And so, in a period where schools are closed and people are studying remotely, a big chunk of our recruiting base has vaporized from the areas that we traditionally approach. And that has created some challenges for us. I'm pleased to say those challenges have lessened over time, but they're still pretty acute. A fair number of our part-time employees, especially in our distribution centers, represent a second job; I heard an example the other day of individuals that had pulled back their hours with us, because they hold a second job, because they have a child in college. It's a great way to earn extra money. We're incredibly flexible with employees and on scheduling. But their employer has gone to mandatory overtime, and so they just don't have the hours to work for us. So, that's creating some challenges. The third, and this is more across when I think of generally speaking our branch and Onsite network, we're seeing some geographic biases in the numbers as far as country-by-country and state-by-state in the United States, depending on how open or closed the society is, what impediments there are to hiring from the standpoint of public policy. We're seeing some patterns there. We're seeing no meaningful pattern from a racial perspective of hiring. The progress we've made over the last decade continues to be evident throughout the business. Where we have seen a stark weakness, and I talked about this at our April Annual Meeting, is on the gender side. We've seen the application side of the business during 2020, and this has continued in 2021. Our female applications are down about a third from what we've seen in recent years. And we've seen worse than historical patterns in terms of turnover in an environment where society is shut down, and a lot of schools and daycares closed; we've seen a dramatic impact. And that's largely affected the female portion of our employee base and our potential employee base, and we're making efforts to improve that, but they're difficult. But with that, I'll switch over to the Flipbook. Sales and manufacturing construction customers grew 21.5% in the second quarter. There was, as expected, a fall-off in the pandemic-related sales; frankly a good thing, which resulted in overall flat sales performance from a year-over-year basis. I believe we continue to manage costs really well. I'm so impressed with the team throughout Fastenal and our ability to manage expenses well. We did have some resets, and Holden talked to that in the earnings release. Branch and Onsite, our incentive compensation, there's a reset going on there because a year ago, a lot of customers were idled or shut down. A lot of our surge business was direct container shipments, not container shipments; excuse me, direct pallet and truckload shipments. And so, it was a different cost structure. I'm pleased to say our brands and Onsite business is coming back in a resounding fashion. And we're paying people for that. We're also seeing an incredible reset in the healthcare; I believe healthcare expenses were up about 25% this quarter, and that's really a function of we're self-insured when it comes to healthcare. People weren't using it a year ago; they're using it now. We're seeing a reset there. Where we're seeing some partial resets are things like travel. Our airfare was about tenfold from the second quarter of 2020. The second quarter of 2021 now before you read anything into that, that's meaningful. We're still 82% below where we were in 2019. We don't know ultimately where that number settles on. The number I've challenged our team with is, with some of the technology tools we have, and some cultural changes as far as working from a distance and communicating from a distance, I do believe that a 30% to 40% reduction is an achievable number and time will tell us that, if I'm correct, or if I'm full of it. But I believe it's something that will be achievable right now we're about 80% down. Price actions to date have largely matched cost increases. There's a ton of inflation going on. There's inflation because of disruption in shipping, i.e., the cost of moving the container; and this is pretty public information so I don’t need to cite figures. But it's gotten really expensive to move a container across the ocean. And it takes a longer time than it did 12 and 18 and 24 months ago because of all the congestion at the ports. There's massive inflation going on. We've been largely able to move with that. The higher gross margin we experience is really about product mix. The fact that the organization is moving more products means there's more stuff going through our manufacturing; there's a utilization of the corporate overhead organizational efforts going on. And within the safety product category, there's a meaningful shift in customer mix. When you're shipping truckloads of product versus pieces of product, the gross margin profile is different, and we're seeing that playing through in the numbers. The final point talks, and I see the team put it in here a few times, about our digital footprint. If you think about the digital footprint we're talking about, about 42% of our sales are part of what we call our digital footprint; it starts with FMI. In FMI, there's a device component and there's a mobility component. The device component is our vending machines that we've talked about for the last decade. It also includes, growing in importance over the last 12 to 15 months, our digitally enhanced, technology-enhanced bins where the bins inform us when they're running low, just like the vending machine tells us when it's empty. About 21% or so, 22% of our business is going through one of those devices. Another about 10% is going through what we call Fast Dock. That's where the mobility that we've deployed, and we're out there scanning bins; and that's really about a productivity play in the short term. But I believe an ability to grow faster in the long-term. On Page 7 of the earnings release, Holden has a great table in there that lays out the FMI pieces, the devices, and the Fast Dock. The third piece is looking at ECOM, and that's growing quite dramatically. And I'll touch on more of that in a second. About 10% of that is outside the FMI world. So, you add those three pieces together; about 42% of our sales is now digitally connected; and the vast majority of that is where it's FMI and the importance of FMI; the goal should be an easy way to order. The goal should be if it's recurring business, why are you ordering it? And why don't you have a partner that supplies it when you need it? And that's what we endeavor to be: a great supply chain partner for our customer. Flipping to page four of the book, pleased to say our Onsite signings ticked up again in the second quarter of '21. We had 87 signings; that's our best quarter since COVID started. And of equal importance, it's about participation. How many of our district business units are signing an Onsite? We had 30% of our district business units sign an Onsite. We haven't been north of 30% since the first quarter of 2020. So not only are the numbers strong, it's broadly dispersed across our business. We ended the quarter with 1,323 active sites, just over a 9% increase from the second quarter last year, and our daily sales in the Onsite business grew just over 25%. So very, very strong performance there, and it's improving. That builds upon our ability to engage with our customer and grow the business long-term. FMI, I touched on that; excuse me, on the last slide; I did touch on it yesterday with the board - that's a different matter. There are 5,843 devices, that's a weighted number signed in the second quarter; that's 91 per day, similar to Onsite's nice, improving strong performance. Our ending installed base was up just over 9% from June of last year. If you look at it, I'm going to flip to some points on that table on Page 4 of the earnings release. Sales through the devices are up 40.4%. Sales through Fast Stock are up 148%, and you combine the two together, FMI grew 61.4% really excited about the momentum we have there. E-commerce saw a 53% increase; large customer-oriented EDI was up 51%. That's about the economy; that's about the strengthening of our existing customer base, and we're seeing it play out right there. When I look at web sales being up 61%, that's about habits changing; that's about how our customers are engaging with us. So two dynamics are going on, both very positive, from the standpoint of how our customers are engaging with us, and how is our underlying customer doing as far as business. I'm going to skip the digital footprint, since I covered that pretty thoroughly already. Flipping to page five, this is a new table, I believe Holden plans to have it in here in this quarter, I suspect next quarter, maybe fourth quarter, but it's really doing a quick snapshot of understanding if we ignore the noise of COVID-19 for a second, and just say, 'What did our business do in the second quarter of 2019? What did it do in the second quarter of 2021?' Some things to stand out: our margin is down about 40 basis points in that period; and that's about the shift that we've talked about in prior quarters of our business to more of an Onsite focus, a higher proportion of our business being Onsite, which is due to larger customers, larger transactions, and better expense leverage. You see that expense leverage play out in the operating administrative expenses being down 140 basis points in that same time period. Our operating income was up 100 basis points. Pleased to say we had great incremental margin, about 31% in that timeframe. We generated good cash. With that, I'll turn it over to Holden.

Great. Thanks, Dan. So, turning to slide six, as indicated, our sales were basically flat in the second quarter of 2021. I think everybody understands the dynamic supply here; about $350 million to $360 million in surge business from last year did not repeat. And that was offset by a significant rebound in demand from our traditional manufacturing construction customers, and to a lesser degree, new sales to customers that had never bought from Fastenal prior to the pandemic. Our Fastenal products grew 28.4%, and that represents the strength of our underlying business conditions. If we were to adjust out the impact of surge sales, we believe that safety and other products would have grown at a level that's comparable to our Fastenal growth. Manufacturing, and particularly heavy manufacturing, is exhibiting broad strength. In the case of both manufacturing and non-residential construction, sequential quarterly growth in the period exceeded historical norms. Combined with access to customers that is approaching pre-pandemic levels, as evidenced by our improved Onsite and FMI signings in the second quarter of 2021, our outlook remains positive. It's also worth highlighting that while government sales were down 63% in the second quarter of 2021, they were up 37% versus the second quarter of 2019. We had similar dynamics play out with certain large customers; we continue to believe that we gained market share during the pandemic. Now to slide seven, operating margin in the second quarter of 2021 was 21.1%, up 20 basis points. Gross margin was 46.5% in the second quarter of 2021, up 200 basis points versus the second quarter of 2020. Our safety product margin improved in combination of mix, as lower margin COVID-affected PPE mix retreated to pre-pandemic levels and recovery in pricing as the market normalized. We leveraged overhead costs on an improvement in volumes and favorable rebates, which is a combination of lower rebates to certain customers that were heavy surge buyers in 2020, and our own purchasing of key products improving versus 2020. Product mix, specifically growth of fasteners versus non-fasteners, was also a significant contributor to the growth and was a significant factor in gross margin outperforming our expectations for the period. Our pricing actions largely matched inflation we are seeing in the marketplace; price costs did not meaningfully affect gross margin in the second quarter of 2021. The increase in gross margin was partly offset by operating expenses growing faster than sales. In the second quarter of 2020, in response to the onset of the pandemic, we took certain proactive steps to reduce costs; certain costs naturally declined as a result of the weak business and a large portion of our surge sales went direct as opposed to through our branches, which is a very low labor intensity source of revenue. In response to improving conditions in the second quarter of 2021, these situations reversed. Our headcount remains under control, but as we appropriately tick up as demand recovers at our branches. Further, incentive compensation was up almost 20% and healthcare costs are up 25%. Travel expenses are growing strongly off very easy comparisons as the economy fully opens, and fuel costs are rising sharply. As we indicated last quarter, de-leveraging operating expenses in the second quarter of 2021 is a function of the anniversary in the first periods of pandemic-related cost savings measures combined with a strongly recovering marketplace. Setting aside these optics; however, we believe the organization continues to manage costs well. If you put it all together, we reported second quarter 2021 earnings per share of $0.42, which is flat versus $0.42 in the second quarter of 2020. Now turning to slide eight, operating cash flow was $172 million in the second quarter of 2021. This is down 32% annually and was 71.5% of net income. Now, recall that in the second quarter of 2020, pandemic-related legislation allowed us to defer tax payments into the third quarter of 2020; that deferral was not available to us in the second quarter of 2021, and we made those two payments as we historically have. The better way to think about cash generation is by considering that in the five years from 2015 to 2019, our second quarter cash conversion averaged 63.5%. Against this, we were pleased with our cash generation in the second quarter. Year-over-year accounts receivable was up 3.1%. Those sales were flattish; the shift away from PPE surge buyers last year and toward traditional buyers this year blended our days outstanding. Inventory was down 5.3%, and there are a lot of moving pieces here. Part of this is due to the difficulty in getting sufficient imported products, although our hub inventory deficit has not widened meaningfully versus where it was in the first quarter of 2021, as we are finding domestic sources as a product. However, the decrease also reflects deliberate efforts to clean out slow-moving hub and branch inventory, branch closures, and the shifts that are stocking focus in the field. We believe these represent improvements in our working capital that will be sustained. Net capital spending in the second quarter of 2021 was $32 million, down from $38 million in the first quarter of 2020. This was largely from lower FMI hardware spend, which was a product of lower signings over the past 12 months and greater refurbishment of FMI equipment. Our 2021 net capital spending range is unchanged at $170 million to $200 million, and we're tracking in the lower half of this range at this time. We returned cash to shareholders in the quarter in the form of $161 million in dividends. And from a liquidity standpoint, we finished the second quarter with net debt at 2.5% of total capital, down from 6.4% in the year ago period at 5.1% versus the fourth quarter of 2020; essentially all of our revolver remains available for use. Now before moving to Q&A, I wanted to update a few subjects of current interest. First, we continue to experience significant cost inflation, particularly for steel, fuel, and transportation. In the second quarter of 2021, price contributed 80 to 110 basis points to growth. This largely tracked our increase in costs, and the impact of price costs on margin was immaterial. Cost pressures remain high, however, which will require us to institute further material price actions in the period. The marketplace is still receptive to price actions, and the tools and processes we have developed have been effective; even so, given the rate of inflation, maintaining price cost parity will be a bigger challenge in the third quarter of 2020. Global supply chains remain tight. We have managed this well domestically, which has allowed our customer service levels to remain high as a result of spot buys, which tend to carry a lower margin, and inventory in certain areas to build to meet projected future needs. Internationally, there continues to be a shortage of capacity, which has made moving products, particularly fasteners, increasingly costly and sustained long lead times. We believe this dynamic could persist at its current level of intensity through 2021. Dan commented earlier on the labor shortages in most of our business; we have largely managed this to this point, however, we are beginning to see those pressures reflected in our labor costs, and the increase in Onsite signings and implementations could introduce some additional strains there. However, recognize a few things. First, this is partly a byproduct of strong demand and happens to some degree with every cycle. Strong growth will allow leverage of other costs that will help us to mitigate these pressures. Second, much of what we're doing with our digital footprint, and the change in our branch model will address many of these matters. Third, none of these pressures are unique to Fastenal, but we believe that our culture and our structure is uniquely geared to navigate them. We have seen no moderation in these pressures over the past three months, but we continue to believe that we'll gain share through them. That is all for our formal presentation. So, with that, Operator, we'll take questions.

Thank you. Ladies and gentlemen, the floor is now open for questions. Our first question is coming from David Manthey of Baird. Please go ahead.

Thank you. Good morning, guys.

Good morning, David.

Dan, in the past, you've noted that at $10 billion in revenues, you should have about 46% gross margin and 20% plus operating margin, which is exactly how the business looks today at $6 billion in revenues. Is there any change to that formula based on how you see the complexion of the business playing out over the next $4 billion?

You know I won't be surprised. As far as the residual number, which is ultimately the number that matters, that 20% plus, I see no change there; maybe a bias for increasing it, but time will tell on that one. I wouldn't be surprised, given what we saw in the last year, and some of the things we're doing as we get deeper and deeper with some of the larger customers, and looking at different types of businesses and options there, I wouldn't be surprised to see the 46; us drop below the 46. In those discussions, I oftentimes cited that 46, 24, 22 was a number that we aspired to. I think ultimately when you have a branch network where the average branch is north of 200,000 a month versus 130,000 to 150,000 like it is today in an Onsite network, that's a bigger percentage of the business. I feel comfortable saying that any gross margin that the mix pulls us below that 46 threshold also pulls us below the 24 threshold. And so, that plus 20 thought process of when we're a $10 billion organization, I feel as good about that today as anytime in the last five years.

The focus internally, Dave, is that everyone who is involved in selling make sure that on every individual relationship, every individual transaction that they get the value that they deserve based on the value that we bring to the relationship. As long as we do that, whatever the mix does, because of our growth, the mix does, but as Dan indicated, there’s been no change in our expectation that we're going to be at 20% to 22% operating margin business and a 25% plus return on capital business. There’s no change in that.

Yes, sounds good. And second, how does the branch configuration relate to the Lift program? Maybe I misunderstand here; are CFCs the new lifts? And do you expect to see some benefits in 2022 as you free up that selling energy that was formerly consumed by filling vending machines at the store level?

Yes. Some things to keep in mind there: the Lift is still cutting a relatively small piece of our vending revenue, which is a piece of our overall revenue. I think right now we're at about 8%. I think that's where we ended the quarter; about 8% of our vending revenue is being touched by Lift. If vending is a little over 20% of our revenue, you can see it's a relatively small piece it's touching. So, I don't want to overbuild what Lift is in the short-term. We're really excited about it in the longer term. And so, that's one element. So, the CFC, the fulfillment center-type branch, we have two branch types. And I'm generally speaking talking about our U.S. business in this commentary. When we go outside the U.S., there's some nuance to it, but I won’t muddy the conversation with that. In the U.S., in the Metro areas, about 70% of our branches now are fulfillment centers. And all that means is we might have limited hours that the front door is open, and part of this sprang out of COVID. We found that that wasn't horribly disruptive to our customer because every customer has a cellphone, every customer has Internet access. So, saying to our customer, 'Hey, call us when you come in,' or 'Order electronically, we'll have it ready for you. The doors can be locked, when you get here, but we'll let you in,' because most of our business is recurring customers and business-to-business relationships. That's just the way the branch operates. The front showroom has been contracted down because that's redundant; contracted. There's a small footprint you walk into if the front door is open, you pick it up at a locker if the front door is closed, or you're calling we let you in. That's just how a branch operates. Separate from that, so that branch setup, and then the other 30% of the Metro areas would be the traditional service branch that you've visited over the years. The only thing that changes when you get out to the Metros, the mix is a little bit different; it's about 60:40. But separate from the brand facility is this Lift. Now the Lift might be adjacent to a distribution center; it might be completely independent of a distribution center. And that's just a very focused distribution center that's picking, not a pallet of product for branch delivery; it's picking a total product for a customer vending machine delivery. It's removing that labor that's relatively inefficient at the branch and putting it into a Lift, where it's much more efficient; we can bring some automation to it, we bring scale to it. In time, that will become a bigger and bigger piece of our vending business. The real question is, can we do some of those same things for our Fast Stock? Because those are highly repetitive transactions; you can bring scale to those transactions for the branch network and be more efficient. Does that help?

It does. Thanks for the color, Dan.

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

Hey, guys. Thanks for taking the question.

Good morning.

Right, so I guess, first off, Holden, you mentioned bigger inflation in the second half of '21 and then potentially some price costs issues; just given that the market is receptive to price, why is there worry on price-cost timing?

Well, I would say it has as much to do with simply the rate of increases as anything else. You didn't see an uplift in price in Q1, and then it's kind of stayed there, right? You've continued to see those increases build and much as we saw during the period of tariffs and inflation, when you see a rapid rate of ascent that continues on for a period of time, it can be difficult to maintain the pace, particularly when you have a business where over half of it is national accounts and contract business. So, now much like in the prior period, do we think that you catch up to this? Absolutely. I've always said that I feel like if you achieve price-cost parity anytime within a quarter ahead to two quarters behind, that's kind of what the business supports. I still believe that's true. But there's always timing involved when cost is trending. And that's the situation we have today. We've gone to the marketplace for different purposes a couple of times, done at least one large increase earlier in the second quarter. That was received fairly well; but based on what cost is doing, we'll have to go to the market with some additional ones. To this point, we continue to hear from the field that customers are still so busy and receiving from so many areas that it's not been a huge bone of contention. But there are timing issues around costs and around contracts that we navigate every cycle and we'll navigate this one too.

Just a couple of added tidbits I'll throw in there. One element, Ryan, is frankly fatigue that sets in from the standpoint of I'm going back one more time. And that's an element that doesn't mean you don't get it. But that makes it challenging in the short term. The other piece is the vast majority of what we're seeing, we don't view as transitionary. But there is a transitionary component, and that is with the congestion at the ports. We're doing fill-in buys, and we estimate right now that the magnitude of fill-in buys that we do this year will be about five times what we see in a typical year. There's always issues that come up; there's a spike in demand, and we need to do a fill-in buy; there's an issue with production from a manufacturer or shipment that requires a fill-in buy. But the magnitude is so much bigger right now. And a piece of that is transitionary, and that is with the congestion at the ports, and we might not capture.

Yes, okay, makes sense and not different than I expected actually. And then I just want to clarify the decision to remove counter labor at some of the branches; having taken a lot of questions on this. So what are you giving up? What are you getting? And would you call this a tweak to the strategy? Or is this a major change?

Part of it is, I don't know if we know the answer to that. Keep in mind that the incredible majority of our business is B2B, and what we saw during COVID is a lot of habits changed. In your personal life, I suspect there's things you do today and how you procure items for your personal life that are different from what they were a year and a half ago. Well, that's true with our customer base, too. It’s true at both the B2B and then a piece of it is, I don't know if I'd call it B2C, but maybe it's B2B where it's a local business that just buys, doesn't even have an account. We really encourage that customer we can be a better partner for you, and we can provide you a higher level of service by ordering electronically, and we'll have it ready for you. Part of the reason we aren't necessarily removing some counter labor is that part of it doesn't exist. Our business, our branch based business is up 20 some percent, our FTE at the branch is up less than 1%. And that isn't my choice; that's what's available. Part of it is off to COVID; part of it's legacy, because we don't have some of the staffing we want. We do believe this is our model for the future, and we believe it's a better model.

What I'd probably add, Ryan, is if you think about the amount of revenue that's being impacted here. I mean the cash business, just what is paid to us in actual dollars and cents credit card is about 2% of our revenue. I mean, it's not a huge number. If I think about those accounts that are $250 a month or less, that's 4% of our revenue, but it represents more than 80% of our active accounts. What we're essentially trying to time to think through is how much labor are we putting into 80% of our accounts that represent 4% of our revenues? When we think about the development of e-commerce, and you see in this quarter, our e-commerce, our web sales, e-commerce is up north of 60%. That wasn't entirely because of our conversations with the smaller customers about how we can service that model, but a part of it was certainly because of that. So we don't view it as walking away from a lot of revenues; we view it as aligning the best way to service different groups of customers within our branch in a way that frees up time for our people to sell. So let's take the question earlier; we created a Lift program to free up time for our people to sell to customers that are really going to move the needle. The things that we're doing in the branch is really intended to be very much the same thing. And what I'll tell you is I'm not sure this model is a whole lot different from what we did 15 years ago. So it's a bit of an evolution towards that, if you will. So, you asked what we're giving up. This just seems like a refinement in the model to focus on key accounts that can really move the needle and free up a lot of time for talented salespeople to go after those accounts. We think that makes us grow faster over time.

Yes, makes sense. All right, thanks. I'll pass it on.

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

Hi, good morning guys.

Good morning.

Good morning.

Just to follow up on that last question in terms of the freed-up time to sell to customers. Dan, how do you think about the priorities there? Is it Onsite or national accounts and more mid-sized customers? Maybe all of the above? What is that kind of new ideal customer that the sales force is freed up to go pursue? And is there some sort of seasoning period as they get to meet what I would imagine are our newer customers, or are they productive right away?

The priority is very simple: have a plan. And that plan involves knowing who your larger opportunities are in the marketplace and making sure you're engaging with those customers, knowing who really understands the potential of your existing customers in the market and engaging with that customer and then having a plan for everybody else. That means when something is ordered electronically and it's a smaller customer, serve the heck out of that customer, meet that customer where it works for both parties, and that means if something is ordered, if it's in the branch, it's ready for them in a short window of time for them to come in and pick it up. If it's something that's not in the brand, and some distribution center, we get it in the next morning. It's in a locker at 7 o'clock in the morning, or it's ready for the customer to pick up in the branch at 7 o'clock in the morning. So, you're very mindful of what is your plan because the bulk of the dollar opportunity is coming from the larger opportunities in the market. That's just math, but you want a nice mix to your business because it helps to be a great partner to a wide range of customers. We can be a special business because we can fulfill transactions faster than our industry because of our local stocking and our captive distribution network. We have a better cost structure to our industry. We have a better fulfillment cycle to our industry, and it's incredibly reliable. We have that local team that can react to the unexpected. That froze up for so many companies in the second quarter of 2020.

And I think what you do with that time is it frees you up to spend more time in front of those key accounts where those large volume opportunities are, and what comes out of that is going to be determined by that conversation. Do we think it's more Onsite? Probably, because we think Onsites bring tremendous value. Is it more FMI? Probably, because we think that brings a tremendous amount of value. But ultimately, remember, Josh, our model is set up, so that we don't have one solution for a customer. We don't have one solution for each of the customer's plants. We have a different solution that's tailored to each plant for each customer. When we're out having a conversation about how we can do that, when we have more time to have that conversation, we suspect more Onsites will come out of it; we suspect more digital footprint is going to come out of it. Ultimately, it's about the conversation with the customer that gains us share as a supply chain partner.

Got it. That's helpful color around. And then just a follow up on Onsites. I know that, I saw that in the release the closings, I guess in conversions together kind of remain elevated here. Is that just a function of folks kind of reassessing post-COVID now that they're back out in the world? Do you think that's more of a temporary phenomenon or is this just kind of the run rate they're on for a while?

Well, since the level of how does it seem to have changed during COVID or after COVID, I guess I'd say that it's been a little sticky. If you've talked to the folks in Onsite, I think they would say the 27 and the quarters have been elevated. If we were at a pace of 80, I don't think that would surprise anybody. A pace of a hundred is probably a little bit more than you might have expected. Why that is, I'm not sure. Each quarter, we again, we go through why we're seeing closings and what we take out of that is the large majority of those closings continue to either be a plant being shut and the volume going elsewhere, or going to a different geography or simply a decision on the part of somebody at Fastenal to say this isn't actually working out as an Onsite. We think we can service this just as well, if not better at a branch, and we're going to take it back there and do it that way. That continues to be the vast majority of the closures that we see as opposed to those fewer cases where it's we lost the business, which does happen, but it's the minority of those closures. In the case of the first, there is not much we can do about plants moving, right. In the case of the second, we're making a business decision, and I can't tell you it's a bad decision. In the case of the third, that happens every now and again; you lose a piece of business, but for the most part, what we're not seeing is our competitive moat around Onsite decreasing, and that's why we're seeing closings. We just haven't seen any indication of that. That mix hasn't changed, and that answer hasn't changed; we're as excited about Onsite as we've been in the last decade.

Yes. Great, appreciate the color, guys.

Thanks.

Thank you. Our next question is coming from Nigel Coe of Wolfe Research. Please go ahead.

Thanks. Good morning, gents.

Hey, good morning.

So, Dan, I think you mentioned last quarter that the outlook for pricing, some of it in the normal range, I think you said 2% at the upper ends. Is that going to be enough to offset the inflation that you're referring to in the back half of the year? Do you need to go above that? Is that normal 2% range?

Okay. Yes. You mentioned 3Q, Holden, and sometimes you do give some color on gross margin mix. I'm just...given the moving pieces on inflation pricing, and also the pandemic mix is coming down as well. How do we think about that sequential build instead backup for the year on gross margins?

Yes, I think we'll always debate what we consider to be unusual circumstances that we should guide for. This time, I’m approaching it differently. When considering the dynamics surrounding gross margin, we've seen a rise in overseas transportation costs over the past couple of months, which affects our cost of goods. The cost of fuel, while not a major expense, is still increasing. Regarding the fill-in buys that Dan mentioned earlier, those will likely remain at a fairly high level. When it comes to price costs being unpredictable, I don't anticipate our third quarter results will match the second quarter's $46.5 million; there are market forces that will counter that. I expect the second quarter to reach $46.5 million, but the third might decline. There are challenges ahead, and we need to acknowledge those. We have plans and systems in place for pricing and are committed to maintaining our position on price costs. While there is a chance we could be effective, we need to be mindful of the pressures increasing.

Okay. Thanks a lot.

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

Thank you. I wanted to follow up on the earlier conversation on the Onsite closures. Like as you guys were saying, we've seen this 100ish run rate really starting in '19 and carrying through today, and 100 as per year, I mean. With that the turn has gone higher to high single-digits from pre-2018; it was really in the low single digits. I guess my question is, as you're scaling it, is it incrementally more challenging to find Onsite candidates that you have high conviction aren't going to move and are going to be suitable from a volume standpoint?

Simple answer, no, it's not more challenging. There are plenty of opportunities available. The difficulty lies in the past 15 to 17 months in trying to engage with customers who prefer to distance themselves from others. It's akin to bringing in a roommate to an apartment when you don't want to be around people. However, that's beginning to change. If we look at vending, which we've been doing for almost 13 years, in the latter part of 2011 and into 2012, we were removing about 25% to 28% of the devices we installed because some were just ineffective, and we were still figuring things out as we were creating the industry. That removal rate decreased to 22%, then 18%, and today, we remove about 12% of our devices each year. We believe we can reduce that to 10% with our Lift strategy. The real question now is what the natural number is for Onsite. After five years of a focused effort, with more than a year of that during COVID, we still don't have a clear answer. We know that about half of the Onsites we close are due to the customer relocating or shutting down the facility. The other half involves taking some back as we lose visitors. There are various dynamics at play; in some cases, we grow from 30% to 60% and then get stuck at 60%, prompting us to return to the branch for greater efficiency. I dislike Onsite closures, but I recognize they are part of the business. The key issue is whether we can surpass our industry growth as an organization; can we gain market share more effectively and productively, and can we achieve that with Onsite and FMI devices, along with everything we are doing? I love the business.

Yes. And I think the reason we look at it every quarter, why those closings happen is just so that we understand why. When you think about that, typically I think people think about a closure as a loss of revenue; in the large majority of cases, a closure of an Onsite is not a closure, it's not a loss of revenue. In fact, to the extent that there was some progress at the Onsite at the original inception, we might be bringing more to the branch than less than initially. When you think about the closure rate, think about cutting it in half, because a bunch of the business we're still maintaining. As Dan indicated, there’s some historical precedent here with vending. We ran hard and fast to get into the marketplace. We learned a lot. We cleaned up some things that maybe we did when we were early on in the initiative, and then we were smarter and more efficient coming out of it. I think we're really following a similar pattern here.

Appreciate all of that. And I guess for following up and trying to tie the Onsite conversation into your prepared remarks around hiring, I guess from the customer standpoint, whether it's social distancing in the factory or them having trouble bringing in new employees, has that impacted maybe your revenue per Onsite year-to-date? And as that all begins to come back, should we expect the revenues at Onsites to outpace growth across the remainder of the business in the coming quarters?

Yes, I'm not quite sure how to answer your question from the standpoint of if the social distancing in the plan means their production is down 20%, and we're supplying OEM parts, OEM fasteners, it would impact us 20% in that plant. If it's MRO, it would impact us directly. But when it comes to vending, the FMI devices for the vending machine; over half the revenue there is PPE. That's directly related to how many human beings are in that plant and for how many hours of the day. If there’s a smaller number of human beings but they're spread out over multiple shifts, so the same amount of hours are being worked, I wouldn't expect safety to be impacted. It might be higher, because people are much more conscious about safety today than about wearing a mask, or wearing gloves, or doing anything. People were better about washing their hands today than they were a year-and-a-half-ago. To that extent, you might have fewer people and more consumption, because everyone's saying, do this, do this, do this; and you’re more conscious do it.

Appreciate that.

I actually thought you were going a different place with the question. I thought you were going to the idea that if it's really difficult to hire, does that help your ability to sign Onsites, because it's difficult for your customer to hire? I would say it sure doesn't hurt, but it's difficult for us to hire for that too. It's just that it's a more efficient model. So the customer doesn't need to hire three people, and maybe we need to hire one. So it becomes an enhancer, but I don't know how you quantify that.

Interesting color. Thank you for that.

All right.

Thank you. Our next question is coming from Hamzah Mazari of Jefferies. Please go ahead.

Hey, guys, good morning. It's Ryan Gunning, actually filling in for Hamzah.

Hi, good morning.

Good morning. Could you talk about market share gains and how much you're kind of outperforming in terms of growth versus your end markets?

Yes, you need to account for the pandemic and the surge in sales, which I have done. When comparing our growth, Fasteners increased by 28%. If you exclude the pandemic impact, the growth would have been similar across the business. In comparison to industrial production during the quarter or any industry surveys available, it's clear that we outperformed both of those metrics. We are optimistic about our ability to continue gaining market share.

Got it. That's helpful. And then, could you talk about how you're thinking about freight going forward than just where maybe you are in terms of optimizing your fleet from a route perspective and other last-mile delivery factors?

Yes. I tell you what, I'm going to ask Holden to take that one offline, because we're right against the hour, and we’re pretty strict. We try to hold this to an hour because we realize we're in earnings season and the analyst community isn't on the call to jump on or stop the review. So, we'll take that one offline. But thank you to everybody for participating in the call today and to the Fastenal team on the call. Thanks for what you did in the second quarter. Good luck on third.

Thank you.

Ladies and gentlemen, thank you for your participation and interest in Fastenal. This concludes today's event. You may disconnect your lines at this time and have a wonderful day.