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. 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.

Welcome to the Fastenal Company 2022 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 we'll 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 a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission or distribution of today's call is permitted without Fastenal's consent. This call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage. A replay of the webcast will be available on the website until June 1, 2022, 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, 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. I started that by sharing last evening, my wife and daughter returned from a week-long band trip to Florida, marching band. As with most high school trips, it involved a 26-hour bus ride down last Wednesday and a 26-hour bus ride back. I saw a bunch of haggard kids and a handful of haggard adults get off the bus yesterday about 4:00. 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. My wife commented on it; she was kind of tired from the bus ride, but she thought it was a pretty under-inspiring video. She had no problem telling me that. 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. Your video doesn't really speak to that. It sounds like you're in the middle of COVID; it's kind of disappointing. After brushing my pride off, I got in this morning and led our leadership just how proud I am of the quarter they just put out. More importantly, of what they've done in the last two years and all the hard work as we transitioned from tariffs to COVID and concerning our human safety and the safety of others, to the surge in demand for products, into a global supply chain that completely fell apart. I think the Fastenal Blue Team did an unbelievable job in the last two years, and this 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. He's been kind of crabby lately, and it's kind of refreshing to have a really good quarter with a crabby CFO. He was talking about our cash flow and wasn’t pleased with it. I said to him, 'Holden, look at the last six years and look at our growth, and what our operating cash flow to earnings was in our strongest year'; it was at 93%. It costs money to grow a distribution business, and that money is spent on working capital. 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 for what you're doing, and don't be too hard on everybody. The net sales grew by 20.3% in the first quarter. Our pretax profit grew by 28%. There were some amplifying effects last year, specifically the weather in Texas and Oklahoma in February that hurt our sales. This is our strongest top and bottom line growth that we've experienced in a decade. The supply chains in markets remain tight; however, conditions have stabilized. We're getting more products on the shelf to support needs, which makes the business less chaotic. We are seeing an uptick in applications coming in, mostly anecdotally. Our international business reached a milestone; in March, we broke $100 million in sales for the first time. Our customer expo is returning to an in-person format after two years, which is exciting. Looking at our operating and administrative expenses, they have dropped from 26.7% of sales two years ago to 25.5% of sales today. This is significant and a testament to our growth and efficiency initiatives. I think it's important to note that our gross profit is flat from that two-year period; it's actually down slightly, and that has to do with bulk quantities of lower-margin products during the pandemic. But we feel optimistic about our gross margins moving forward. I think our greatest challenges have always been about finding ways to improve our efficiency and our operations, and I think we've done that.

Great. Thanks, Dan. So I'll be starting on Slide 6. Total sales increased 20.3% in the first quarter of 2022. If you adjust for the extra selling day in the period, sales increased by 18.4%. Both periods were impacted by adverse weather. Pricing contributed 580 to 610 basis points to growth in the first quarter of 2022, reflecting actions taken over the last nine months to offset inflation. Input costs have mostly stabilized at high levels with a few notable exceptions. Higher nickel prices will flow through to stainless steel fasteners, while higher oil prices will affect the cost of fuel for our captive vehicle fleet and the cost of overseas shipping services. We're effectively managing our environment and have seen an uptick in signings, reflecting a more predictable business environment. Operating margin in the first quarter of 2022 was 21%, up from 19.8% in the first quarter of 2021, resulting in a solid increment margin of 27.1%. Gross margin was 46.6% in the first quarter of 2022, up 120 basis points versus the first quarter of 2021. We're encouraged by the growth in our employee base, although we still need to address the challenge of maintaining FTE growth alongside our sales. We anticipate improved conversion rates as supply chain constraints ease over the year. We returned cash to shareholders in the quarter in the form of $178 million in dividends, and we finished the quarter with debt at 10.4% of total capital, down from 12.7% in the year-ago period.

Congratulations on the strong quarter. My question is on price cost going forward. The Company noted that I think the price costs are high but stable and they're seeing inflation on a select few product lines where it seems like there's opportunity for incremental pricing. So I guess my question is: Should we assume relatively unchanged price cost over the rest of '22 relative to Q1 levels?

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 expect, keep in mind that as we move into Q2, but particularly getting into Q3 and Q4, we're going to begin to compare against much higher pricing from a year-over-year standpoint. While we are still expecting over 5% in price in the second quarter, I think you'll begin to see that pricing contribution drop sharply in Q3 and Q4 as our own pricing actions stabilize.

I appreciate that. And then as a follow-up, I wanted to ask around the Onsite model in a potential macro slowdown. I know the Company has spoken to Onsite revenue targets per location. Is there any volume commitment that accompanies these Onsite agreements that could potentially give the Company a naturally higher wallet share of customer spend as their activity declines?

When we sign an Onsite, we have discussions about targets for that facility based on the customers' information about their spend and what we expect. There isn’t a hard and fast rule, but it is about partnership and growing the footprint together. We can gain market share in either growing or contracting environments. That’s what drives the wallet share ultimately for our business.

I don’t believe the Onsite model diminishes our cyclicality. It's a great platform to gain market share whether in a growth or contraction period, but we still maintain a cyclical profile.

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 across the Company?

I hesitate to throw out a percentage regarding FTE growth. We're still operating with fewer employees than we would like. Even if I point out some positives, we didn’t implement as many Onsites as I would have hoped for in the first quarter, partly due to staffing. All the growth we need requires better than low single-digit percentage growth in labor to keep pace with our sales growth. We will see how that plays out moving into the second and third quarters.

We tend to look at it less from the FTE and more from the perspective of total labor dollars committed; we want labor efficiency to improve over time.

Yes, thanks, Holden. And maybe we could drill down on that a little bit because in the first quarter, OpEx growth and revenue growth were pretty identical at 20%, and you did have this 6% price. Should we expect better leverage on your OpEx in future quarters?

That is the expectation. The dynamics you saw in the first quarter won't continue in the same way; I expect we will leverage SG&A going forward this year. We should see improved levers on costs. Occupancy should continue to leverage due to our strategic branch strategies.

If you watch the news, a recession is imminent, but it doesn't seem to be the case with almost 90% of your top 100 national accounts growing. Of those top accounts, how many are growth constrained that may shape your outlook for sales as we approach the back half of the year?

In general, our customers are navigating the supply chain challenges better than six months ago. While there are still some disruptions, our customers are more successful in managing those issues than the case six months ago.

We have performed well in the last two years because we found ways to source and deliver product amid challenges. Our market share has potentially increased due to the customer relations built through the chaos of the past two years.

Can you give any context on the technologies and strategies around efficiency, particularly in light of automation, and where you are in that deployment?

We’ve expanded our digital footprint significantly over the past two years. With the implementation of technology, we've improved our efficiency in operations and sales processes. Our mobile technology integrates directly with our distribution, allowing for better support in real-time. Innovations in vendor relationships are also improving productivity. Our future efforts will continue to focus on efficiency and improving our service to customers.

In terms of freight revenue, we saw strong improvements in Q1, which allowed us to narrow losses in some areas and we expect those improvements to continue through the year.

We have a sizable presence in Shanghai, where our sourcing operations are currently affected by lockdowns. However, we have adequate inventory levels which should provide some insulation from immediate impacts.

Overall, despite the challenges we are seeing in supply chain logistics, we have successfully navigated significant disruptions, positioning ourselves to continue supporting our business growth.

I’d like to emphasize that we made conscious decisions in the past that allowed us to stock up on product to support customer needs, leading to the growth of new business segments that didn’t even exist prior. If faced with the same situation again, I would make the same decision.

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.