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

Welcome to the Fastenal Company 2022 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. This call will last for up to 1 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, investor.fastenal.com. A replay of the webcast will be available on the website until September 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, good morning everyone, and thank you for joining us for today's earnings call. The people you choose to surround yourself with can greatly influence your freedom to achieve success working alongside others. I’ve noticed that Holden has done an exceptional job communicating with our investors, especially the sell-side analysts, about the trends we’re noticing in the business. This allows me to take a more philosophical approach when addressing our shareholders and the employees of Fastenal. I imagine many of you tuning in today are here to find insights regarding the direction of the economy. I should note that our ability to predict the future is quite limited—usually around eight hours—which is largely based on feedback from our customers and current trends in the market. We attempt to share those indicators as they arise, but we don’t have a traditional backlog since we operate as a just-in-time supply chain partner. This means we see trends as they unfold. In terms of our business dynamics, we have noticed that our travel activity has grown. Comparing our travel in 2022 to 2019, we see it approximately 12% lower year-to-date, but in the second quarter, it’s risen about 18% compared to 2019, measured in dollars. For those traveling recently, it’s evident that costs have increased, suggesting we are still below 2019 levels despite higher travel expenses due to inflation. This indicates that most areas have entered a new phase of COVID-19, signaling a transition to a new normal, and I’m happy to report that travel is returning. Our Fastenal culture is built on trust. We prioritize building our talent internally and fostering human interaction which allows for effective teaching and learning daily—this proves to be more efficient with in-person dialogue. However, we've adapted our branch formats significantly since 2019, with many locations being restructured. We’ve seen a shift toward serving our customers more remotely, allowing us to thrive even while hiring remains challenging. Notably, those in distribution centers or manufacturing have not had the opportunity for remote work, but we have adapted to a new normal since 2021, continuing to work effectively together. We recently held our first in-person customer expo since 2019, which was a success, although we faced some restrictions due to travel challenges. Hiring remains challenging, yet we’ve seen a modest improvement in job applications. In 2019, our application numbers dipped significantly due to COVID-19, but this year we’ve seen our monthly applications nearing 10% below 2019 figures, which signals a return of confidence among job seekers. We have navigated marketplace disruptions that have led to more costly and longer supply chains, affecting our balance sheet and cash flow. Inventory levels have risen due to inflation and delays in shipping, which is visible in our financials. Despite these challenges, we are maintaining our responsibilities as your supply chain partner. In our recent earnings release, we achieved an 18% growth in sales and nearly 21% growth in pre-tax profit. Although demand remains strong, we've noticed some signs of softening in May and June, which we will explore further in our discussion. In the second quarter, we signed 102 Onsite agreements, slightly down from 106 in the prior quarter, but it marks a positive trend with consecutive quarters above 100 signings, a feat last accomplished in 2019. This trend reflects the marketplace's appreciation for our Onsite model amidst current hiring challenges. I believe our customer event in April positively influenced our second-quarter performance, and we are focused on achieving strong signings throughout the year to capture market share while managing economic fluctuations. Our FMI Technology division is maintaining strong signing levels, though still aiming for our internal goal of averaging 100 signings per day. In the last quarter, we averaged 86 signings, which shows improvement but is still below our expectations. E-commerce has seen robust growth, with a 53% increase in sales during the second quarter, and when combined with our large customer-oriented EDI, e-commerce accounted for about 17.1% of our total sales. We've also focused on enhancing our digital footprint to manage supply chains more effectively, which reached nearly 48% of our sales in June. Now, I’ll hand it over to Holden.

Thank you, Dan. All right. Starting on Slide 5. Our total and daily sales increased 18% in the second quarter of '22. A stronger dollar reduced growth by 60 basis points, and currency-adjusted growth was consistent from the first to the second quarter. In contrast to the first quarter, however, we did experience a softening intra-quarter trend in the second. That softening was not particularly deep, and if the level of economic activity that we experienced exiting the second quarter were sustained, we feel good about the rest of the year. I might characterize it through this prism: the percentage of our branches that experienced growth, which was 72% in May and June, is not as good as 76% in March and April, but on its own, it's quite good. Nor was the softening that we experienced particularly broad. We experienced it largely in areas that directly impact consumers as well as construction, while our core capital goods and commodity-related markets remain strong with healthy backlogs. As we've said before, we experienced demand in real time, and we lack much visibility regarding how demand will trend through the second half of 2022. Pricing contributed 660 to 690 basis points to growth in the second quarter of 2022, reflecting carryover from broad pricing actions taken over the last 12 months, the timing of opening contractual windows, and tactical SKU-based actions based on supplier movements. Most costs remain elevated but are not worsening. As a result, while we expect price levels to be stable in the third quarter of 2022, we anticipate the contribution to growth to moderate as we begin to grow over the start of more aggressive pricing actions from the third quarter of last year. The supply chain picture remains unchanged from the first quarter. Challenges with availability persist, but we and our customers are managing them more effectively. Labor market tensions seem to have eased, as reflected in our strong full-time employee additions in the second quarter of 2022. Disruptions persist, but the chaos surrounding them has receded, resulting in a more predictable business environment. Now to Slide 6. Our operating margin in the second quarter of 2022 was 21.6%, up from 21.1% in the second quarter of 2021. Our incremental margin was 24.2%. A couple of trends influenced this period. First, we saw a moderation in the growth of certain expenses, such as incentive pay, profit sharing, and health care costs, which are subject to early-cycle resets. As expected, this produced improved operating expense leverage. It also contributed to a further gradual migration towards a pre-pandemic margin profile with a mix-related gross of 2022 flat versus the second quarter of 2021. Product margin was slightly down with wider negative impacts from product and customer mix, as a slightly lower fastener margin countered higher non-fastener product margins. This was offset by stronger organizational leverage and sustained strength in volumes absorbed overhead. This absorption slightly exceeded my expectations during this period. The impact of freight on margin was neutral, with higher fuel and shipping costs being offset by good leverage related to a 37.5% increase in freight sales. Pricing actions continued to match higher costs, yielding a neutral price-cost dynamic in the quarter. We achieved greater operating leverage in the second quarter of 2022, with an operating expense to sales ratio improved by 40 basis points, reaching 25%. We also achieved 60 basis points of leverage over occupancy related to a 10% reduction in our traditional branch count and the effect of what has, to this point, been a relatively slow expansion of our vending install base. Similarly, we achieved modest leverage over total employee expenses. FTE growth continues to lag sales growth, while health care expenses were lower, offsetting increases in employee incentive payouts and profit-sharing expense growth. Other operating expenses reflected increases in selling-related transportation costs, including fuel, and further increases in spending on travel and supplies. Putting it all together, we reported earnings per share for the second quarter of 2022 of $0.50, up 19.7% from $0.42 in the second quarter of 2021. Now turning to Slide 7. We generated $151 million in operating cash in the second quarter of 2022, which is roughly 53% of net income for the period. Traditionally, second quarter conversion rates are low due to the timing of tax payments. As in the first quarter, the current quarter's conversion remained below historical norms due to the impact of strong sales growth, supply chain constraints, and high inflation on our investment in working capital. We view the lower conversion rate as reflecting our commitment to supporting our customers. Year-over-year, accounts receivable was up 21.5%. This reflects strong customer demand and an increase in the mix of larger key account customers, which typically have longer payment terms than our smaller customers. Inventories were up 25.4%, with inflation accounting for half of the total increase, a proportion that continues to moderate as the flow of physical products into our hubs continues, supporting strong product availability and fulfillment rates. The twin disruptions of inflation and supply chain have created an additional level of challenges. Despite that, our 161 days on hand in the second quarter of 2022 is more than 10 days below the days on hand in the second quarter of 2019, prior to the pandemic, reflecting increasing and sustainable efficiencies in how we manage our inventories. Net capital spending was $43 million in the second quarter of 2022, up 37.8%. Year-to-date, net capital spending was $76 million, up 24.4%, primarily due to increased investment in FMI equipment and hub automation and upgrades. We continue to anticipate 2022 net capital spending in the range of $180 million to $200 million. However, the combination of slower FMI signings and ongoing supply chain challenges for transportation and IT equipment suggests a downward bias to our net capital spending budget. We returned cash to shareholders in the quarter through $178 million in dividends and a $49 million share buyback. While our opportunistic approach to share buyback remains unchanged, our Board approved an 8 million share increase to our authorization, leaving us with 10.2 million shares authorized for repurchase. From a liquidity standpoint, we completed the second quarter of 2022 with debt at 13.7% of total capital, up from 12.3% in the year-ago period and up from 11.4% compared to the fourth quarter of 2021. With that, operator, we'll turn it over to Q&A.

Our first question today is coming from Josh Pokrzywinski from Morgan Stanley.

Good detail on the release on price and you guys have been quite helpful throughout this inflationary environment. It seems like there was less coming in 2Q. And then I think prospectively, maybe steel starts to flow through the business. How should we think about that, particularly on the fastener piece regarding not only what the sensitivity on what you guys could see on pricing is, but is there any margin impact as that flows through and you guys recognize lower prices or customers start to tighten their belts?

What I would say is we've been dealing with inflation now for the better part of the year. And we’ve been managing that through a number of means, but one of those means has been price actions on our end. As we've reported each quarter, we've been able to align the pacing of our price increases with the pacing of our cost increases. I don't expect that to change. Our material costs today are fairly stable at a high level, where they have been. In the second quarter, we did not take any additional broad actions. There were certainly some actions around freight, as well as some increases from suppliers. However, I consider those to be more tactical. We certainly took actions when contract windows opened up. But again, that's part of how we manage the price/cost dynamic: understanding where our costs originate and when we’ll have opportunities to adjust. I attribute a significant amount of credit to the team that manages our pricing and costing strategies, as well as to those in the field who execute them, as I believe they've done a remarkable job in this regard. Looking forward, it appears that the status quo will remain. If we see suppliers passing cost increases onto us, our first approach will be to push back. We have good visibility regarding raw materials. Depending on the outcome, we may need to implement some SKU-specific price increases. Nevertheless, unless there's a significant change in the overall cost environment based on our observations from the past quarter, I don't foresee any aggressive pricing actions needing to be taken. We'll just have to wait and see how the environment develops. But I anticipate that we'll continue to manage to a neutral price-cost dynamic. Additionally, I expect that as we approach Q3, we will encounter tougher comparisons. Therefore, I do expect the percentage growth due to price increases to moderate compared to Q2, although that doesn't indicate a change in overall price levels. That's my expectation.

Got it. That's helpful. And as a follow-up, you guys have been pursuing branch conversions for a while now. Any observations about how that has influenced the traditional retail or branch-facing model? I know the purpose was to drive more customers toward e-commerce, potentially sacrificing some traditional customers. But how would you evaluate how that transition has gone? Additionally, any insights into attrition rates or similar metrics you could share?

I think part of what we did was definitely altered by COVID, which pushed everyone to adapt to new ways of operating. The strength you're noting in our e-commerce sales—growing by over 50%—is a testament to the marketplace. I’m not certain if the marketplace is responding to what we're doing or if we're adapting to the marketplace, but I suspect it's more the latter. Customer purchasing habits have evolved significantly, and you witness that in your daily life. What you do now is different than what it would have been five years ago. As we've shifted and created deeper engagements with customers, they are seeing how we can assist them in ways that might not have been apparent 5 or 10 years ago. This has reshaped the physical footprint we require. Changing from 5 locations in a market to 3 will result in some lost business due to proximity. However, much of that business is transitioning to different channels. This was inevitable, regardless of our modified footprint. We believe we are managing to retain a significant portion of it as reflected in our increase in web sales because many of those transactions have shifted online, contributing to the 50% growth in that segment.

Yes. I would add to that perspective. Despite the alterations we've made, our growth has remained robust, which includes strong performance on the e-commerce side.

Indeed, we've also continued to engage effectively with our local customers.

Exactly. We're still in the early stages of comprehending how everything is falling into place. This is a process that has unfolded over the past few years, and there's a period required to adapt and gain familiarity in a different environment. However, I strongly believe that early feedback from the field, including anecdotal data and initial data trends, is encouraging.

Your next question is coming from David Manthey from Baird.

Hey, Dan, Holden, good morning. Back in 2009, your gross margin dropped about 300 basis points, albeit every cycle differs. Could you discuss what's different about the business today, aside from the fastener mix, which I believe was about 50% back then? Are there other changes that would limit a similar impact on your P&L?

Sure. You have a good memory, Dave. Yesterday, we had our Board meeting, and I reflected on that exact issue with the Board as we discussed potential scenarios and our observations. If you recall, back in 2009, there was a degree of inflation. While nothing like what we’re experiencing today, it did exist. When demand fell, we flipped from inflation to deflation. Suddenly, products that typically would last six months could extend to seven, eight, or even nine months given a demand drop-off. We witnessed significant pressure as a result. You also saw a change in the mix in the business depending on which sectors were affected. Then there was the deleveraging within the trucking network; the costs involved in transporting product from Winona, Minnesota, to Minneapolis begin to influence our margin. The same applies to our distribution. The element of deleverage in the trucking network has persisted. You're right to note that the mix has shifted today. Fasteners constitute 50% of our sales, whereas now they represent just one-third of our business. While that still remains impacted, it’s less acute. Keep in mind a fair amount of our fasteners, like most, are sourced overseas. In a deflationary environment, that pressure shifts downward and is temporary but could lead to excess stock. So we have enough supply to manage those dynamics. In contrast, the non-fastener products are partly domestically sourced, which would help us mitigate some of those pressures, considering many of our domestic suppliers have been long-term partners. A deflationary environment isn't friendly to gross profits in the short term, as has been demonstrated in the past.

Our next question is coming from Nigel Coe from Wolfe Research.

I think I want to revisit some prior questions. Perhaps what Josh was trying to drive at was regarding fastener pricing as steel prices decline. Obviously, steel prices are currently sub-$1,000. I understand you have contractual pricing arrangements with some customers. Could you address that and elaborate?

Yes, I would challenge the assumption a little bit that steel pricing is down. It depends on which index you're referencing. We source most of our steel products from Asia. So what's relevant to us is what's happening in Taiwan or China. From the last statistics available, those prices still appear relatively high. Now regarding deflation and inflation, we approach our customers with price increases to defend our margins when raw material costs escalate. Conversely, when raw material prices drop, customers feel inclined to negotiate lower prices with us, which causes some contractual obligations. As a result, negative pricing could happen. We witnessed this back in 2015 and '16. It’s important to note that we've historically not seen negative pricing on our non-fastener mix. For fasteners, consider this: no more than one-third of a fastener's value comes from the raw material itself; the remainder consists of value-added manufacturing, transportation, etc. Thus, the inflation and deflation dynamics work similarly, but you need to put them in perspective. If we were to analyze it quantitatively, we likely saw deflation in pricing of just 1 to 2% across the board back in 2015-2016. That illustrates the magnitude of impact we’re discussing. However, I want to emphasize that is not the environment we are currently witnessing.

Understood. Regardless, the most recent CPI figures seem a bit abstract regarding deflation. Shifting to inflation, you mentioned that half of the inventory increase is inflationary, while the other half is unit-based. This suggests we have around 12% inflation in inventory. Pricing ranged from 6.6 to 6.9. Does this imply you need to impose further price increases in the second half of the year to maintain price-cost neutrality?

Here’s the challenge: how you gauge relative pricing matters. When discussing prices running through our revenues, we consider recurring sales, comprising roughly 40% of our overall business. This implies about 50% of our transactions include product sales that we hadn't carried in the prior period. Most importantly, if we sold the same product this year as last, we likely would have sold it at a lower price. As for the recurring sales we referenced, our fastener prices trail a bit behind, while everything else is mostly aligned. Therefore, I don't think we lag; generally, we're on track with the inflation we're experiencing, and the gap between pricing and inventory reflects the difference in recurring sales levels.

The premise of your query has some nuances. For example, if we have $100 of product in our inventory, we won't exclusively sell out of that stock next month or the month after; we'll be selling products that are new and thereby purchased that month. A significant portion of the inventory sitting on the shelf consists of products we've strategically chosen to hold due to the unpredictability of supply chains. The factors regarding how much of our inventory increase consists of inflation versus deeper inventory draw depend primarily on our sourcing outside North America. When Holden talks about inflation's role in the inventory increase—and that 12% doesn't automatically imply that inflation or sale price must be increased by 12% over the next 6 months—it's important to realize there's no direct correlation. I hope my explanation clarifies that.

Your next question is coming from Ryan Merkel from William Blair.

I wanted to follow up on Dave's question and clarify. Relative to 2009, I think you're suggesting that the mix is somewhat different now, of course, but are you acknowledging just as cyclical business dynamics might remain, indicating decrementals could still be in the mid-20s if we encounter sluggish sales and deflation?

The points Holden made previously were much more eloquently stated than I might put it. The mix certainly intensified back in 2009 when fasteners made up half of our business. Fasteners have different pricing dynamics compared to non-fasteners. The fact that it's now one-third of our business diminishes that impact somewhat. However, in a deflationary environment, that one-third still plays a role. It's crucial to note that in 2009, demand fell by 60% almost instantaneously. Adjusting your cost structure is much more challenging under those circumstances. I don't believe, unless you expect conditions resembling 2009, that those figures are equitable parallels to a potential slowdown similar to 2019. I would recommend reassessing the benchmarks you're utilizing.

Additionally, in 2009, demand dropped radically and quickly, which made reacting to cost adjustments exceptionally difficult. Historically, our only year where revenue fell was in 2009, and the decremental margin was around 40%. The abnormal nature of that year makes it hard to propose that it serves as a reference point for typical slowdowns. I have no idea how conditions will evolve, but many of the inquiries stem from that perspective. Our decremental margin has typically remained stable outside of extreme downturns.

Before everyone on the call rushes to the nearest window, I must remind you that when I consult with our regional leaders, I discover that their manufacturing and construction customers report robust backlogs. Backlogs can shift, but many manufacturers currently have substantial inventories due to logistical obstacles. I hear consistent feedback that projects may take longer to complete but are not canceled. Many manufacturers are experiencing pressure concerning components but not fasteners. These factors indicate that we occupy a different space than many suppliers entering this cycle. Although the overall demand environment remains uncertain, we are well-positioned to serve our customers' needs.

Understood. That sheds light on things. My second question concerns inflation to deflation; I suspect it's better suited for Holden. You indicated that price inflation reflects around 40% of sales. What is the risk that inflation in the remaining 60%—which is hard to measure—has supported sales and margins to a greater extent than we recognize?

As I said, for every product we sold this quarter that wasn't present in the previous quarter, I’m quite confident we likely received more for it than if we had sold it last year. It’s worth highlighting that most of what we administered this year is likely at a higher price than a year ago. Nonetheless, I don't believe we should overlook that there were instances in which customers willingly shifted their purchasing habits. For instance, we might have raised the price of Product A by 10% and Product B by 10%. However, the 10% increase might only be slightly above what you paid for Product A previously. What we're witnessing is indicative of consumers reacting to both price and inventory adjustments. Although we're observing this inflation, some of it may not be reflected through straightforward growth, particularly with customers shifting to exclusive brands. Consequently, not all inflation is captured in pure growth metrics.

One critical element contributing to our price growth is that numerous customers have demonstrated willingness to change preferences. Our exclusive brands, along with suppliers, have grown at a rate surpassing our overall growth. Thus, not every instance of inflation comes through as a straightforward increment in sales because the shifting of product choices influences how we measure price hikes. For example, if you go shopping and identify two brands increasing prices by 10%, you might spend the same amount compared to last year since you switched to a different brand.

Moreover, I would emphasize that ultimately, price and cost reflect in some manner within our gross margin. If there were widespread unaccounted inflation, it would be manifesting as declines in our gross margin. Thus, our gross margin has remained stable in the current landscape, indicating that our adjustments are in line with the levels of increase we’ve observed.

Your next question is coming from Hamzah Mazari from Jefferies.

My first question was about the Onsite business. You mentioned that it represents a solid solution amidst the supply chain challenges you're seeing. Do you view there to be an increase in structural demand for Onsite in a post-COVID world when compared to your pre-pandemic expectations? Additionally, has the timeline for implementing new Onsite agreements changed due to the labor availability challenges? I know you indicated you had strong hiring in Q2.

Yes, 'structural' is a term that can have various implications. I believe we are witnessing a structural change in demand, driven partly by COVID—certainly labor availability plays a role. Rather, awareness has been crucial too. In the past, saying 'vending' within industrial distribution was unusual; it hadn’t established presence. Many viewed it as a one-off novelty. Yet, our awareness of these solutions has fundamentally shifted. A significant aspect of this shift completed during our customer expo, where attendees could observe firsthand the Onsite model, discuss it with peers, and understand how it benefits their operations significantly. As this awareness grows, it fortifies our position. I firmly believe there is greater structural demand for Onsite solutions, signified by our signings increasing to 100 versus the 80 or 85 pre-pandemic. This is further compounded by the current difficulty in hiring. Acquiring skilled individuals in customer roles can be challenging. Our staff retention strategy has continually aimed at adding capable individuals, impacting our prospect of scaling. The pace of implementation can naturally correlate with our staffing capabilities and our customers’ adaptability. Your question correctly suggests that the COVID pandemic has resulted in a more supportive environment for Onsite solutions, as customers recognize they require those services.

I want to emphasize that many of our Regional Vice Presidents have communicated that the pandemic starkly highlighted how complex supply chain management can be. Our customers are increasingly seeking our expertise. We perceive heightened demand for our service and a necessity for expertise in managing this dynamic landscape. Evolving perceptions from the customers have enabled us to gather momentum.

That’s very informative. My follow-up question is, regarding reshoring manufacturing capacity back to the U.S., do you have any customer feedback suggesting whether that's occurring or is it merely anecdotal? Are you starting to notice any data indicating that this process is unfolding?

I've not received specific commentary suggesting that manufacturing is reshoring at this moment. It’s important to note, I'm far from certain how to identify that trend on a quarterly or even yearly basis, though it’s conceivable we might look back a decade later and observe the pattern clearly. However, I haven't received explicit feedback indicating that this would play a significant role in driving our business.

Your next question is coming from Tommy Moll from Stephens.

I hope you can provide insights regarding the softening demand trends you mentioned. Specifically, could you share how the quarter unfolded? Holden, you made note of the exit rate. What does that indicate for the remainder of the year? Additionally, you remarked about the weakness primarily being in consumer and construction end markets. Any observations about specific sectors would be helpful.

Addressing the last point first, providing specificity around end markets can be tricky. The feedback I share comes primarily from regional vice presidents who note seeing some softening mainly in sectors directly influenced by consumers, such as automotive and recreational vehicles. Conversely, our core capital goods and commodity-related markets, like agriculture and energy, remain solid, reporting strong backlogs. It’s challenging to offer specific insights by SIC code, but it remains evident that consumer-targeted sectors are where we experience difficulty. The softening we experienced during the quarter is not widespread and not significant. Regarding your first question about how the quarter progressed, we didn't conclude June as strongly as we began it. This differs from the March data, where we finished stronger than we started. Two out of three months in the quarter, including June, did not achieve the sequential norm you would expect to see. That said, if the exit rate we experienced in June sustained, it projects a growth rate that we are optimistic about for the rest of the year.

That’s very insightful. My follow-up question pertains to hiring. While you suggested hiring conditions remain challenging, you noted improved trends in applications. Do you believe this improvement stems from a slowdown in hiring practices elsewhere? You may not have a full view, but any insight would be appreciated. In case we enter into a recession, could you remind us how you manage hiring and costs related to employees during such periods?

Certainly, I suspect changes in hiring have affected our applications. However, the enhancements we're experiencing primarily stem from our recruitment efforts within higher education institutions. In prior years, students faced challenges transitioning from remote learning back to campus. As educational institutions returned to traditional classroom settings in 2021 and 2022, those students became increasingly motivated to seek employment opportunities. It appears that, with the right initiatives, we could find suitable candidates. - This may not apply universally; hiring difficulties persist across industries today. Additionally, I suspect the ramifications of strong demand for workforce availability may not directly translate to what you experience when dining out or visiting service-oriented businesses. Many operations are utilizing staff on rotation and may find it difficult to sustain regular open hours, thus impacting access. But in summary, our enhanced application trends stemmed less from hiring constriction elsewhere and more from an increased willingness among individuals to work.

Your next question is coming from Chris Snyder from UBS.

I wanted clarity on the Onsite business and the lag between signing and activation. The first half of the year saw 208 signings, yet only 138 activations. Could you elaborate on the typical lag? Has it been impacted by the tight labor market in 2022? Furthermore, what are the expectations for activations in the second half?

It's typical for activation to take between 3 to 6 months following signing. The labor market has contributed to this delay. We had a substantial number of implementations in Q2, aiding our backlog. We currently hold a record backlog of implementations to be carried out. Thus, the signings we’ve secured this year alongside our existing backlog provide us with confidence, whether some market uncertainties arise or remain stable. We feel reassured that our position is favorable.

Thank you for that insight. Following up on the potential benefits, you've outlined the $1 million target for Onsite revenue. Could you detail the ramp-up process and any typical metrics we can use to quantify this sale?

The $1 million you refer to is often based on an example of a $30,000 monthly customer—we believe we can build an additional $80,000 to $100,000 in incremental business, leading to annual revenue growth of $1 million. We’re significantly improving our capability to execute Onsite agreements. Nonetheless, it's essential to remember that actual outcomes will depend on varying circumstances. Therefore, our previous estimate serves as a solid benchmark for possibilities, but the specifics will always vary. I see we have come to 10:00 AM Central Time, so I probably shouldn't have taken that last question. We are running out of time. Chris, if you have follow-ups, don't hesitate to reach out to me or Holden. Everyone else, thank you for participating today. Wishing you all a successful Q3 and a fruitful rest of the year.

Thanks, everyone.

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