Greetings and welcome to the Fastenal Q1 2025 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. You may be placed into the question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Dre Schreiber of Fastenal. Please go ahead, Dre.

Welcome to the Fastenal Company 2025 First quarter earnings conference call. This call will be hosted by Dan Florness, our Chief Executive Officer, Jeff Watts, our President and Chief Sales Officer, and Holden Lewis, our Chief Financial Officer. The call will last for up to one hour. 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 this webcast will be available on the website until June 1, 2025, 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 these 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.

Good morning, everybody, and thank you for joining us for our Q1 earnings call. As you can see from the flip book on page three, Bob Kierlin, our founder, passed away on February 10th. He was 85 years of age. I thought I'd open with a few thoughts on Bob, if you'd indulge me. Bob was born in June of 1939 in Winona, Minnesota. It's a town of about 25,000 people in Southeastern Minnesota, on the banks of the western banks of the Mississippi River. His first memory as a child was a World War II victory parade going across the interstate bridge coming into Winona. In his obituary, it said Bob's compass was a true north with a belief in people, free minds, and free markets. He indiscriminately respected others, seeing the best in everyone, without desiring reciprocation himself. I had the good fortune. I knew Bob for just over thirty years. I met him in the second quarter of 1994. And I had a number of cross-country road trips. Bob preferred to travel by van and visit fast food locations. I remember my first trip with him. We left on a Sunday morning at about seven o'clock. We drove to Denver, visited some locations, met some investors. We drove to Salt Lake City, we drove to Vegas, we drove to LA, San Francisco, Rock Springs, Wyoming, and made our way back to Winona on Friday evening. In that, I learned how well-read Bob was. And one thing I observed over the years is there was not a day when Bob Kierlin did not read The Wall Street Journal from cover to cover. I thought it appropriate based on my travels with him that in his obituary, it said Bob's sense of humor was kindled from old Mad magazines and Bob and Ray comedy shows, which I might be older than most of the folks at Fastenal. I'm not sure what that is. Steve Martin and Bob Newhart. I do know the latter two, and I do know the Mad magazine reference. About sixty years ago, Bob convinced four friends to invest in a vending company selling nuts and bolts. The idea didn't work. But after calling on customers, understanding what they needed as far as helping in their supply chain needs with fasteners, he went with plan B. And that's the organization you know today and that the investing public first became aware of in 1987 when we went public. So forty years after our start in around 2007, 2008 time frame, we revisited Bob's vending idea. Today, about 25% of our revenue goes through a vending machine. And we've added a lot of other technologies to that since. If you look at our broadly defined FMI or Fastenal managed inventory, which is really point-of-use technologies that we've deployed, over 43% of our revenue today goes through some type of technology platform. There have been a number of articles written on Bob over the years and recently. I remember the first one after a trip I'd done with Bob. He was regarded as frugal, the cheapest CEO in America. The fact that he shares hotel rooms with other Fastenal employees when he travels. On all my trips with Bob, I shared a hotel room. And he wore used suits. And they painted somewhat of a character about Bob. I think in many ways, they missed the point. So what our flip book includes is an excerpt from a book Bob wrote in the late 1990s titled "The Power of Fastenal People." He talked about philosophy on leadership within your organization. He had ten rules about leadership he had coined over the years. I'm sharing that with our folks on the call today, whether that be shareholders, analysts, employees of Fastenal, others, in hopes that more of society can capture some of the ideas that Bob shared with us. I was very blessed to have met Bob, as I said, thirty years ago. Like many others at Fastenal, he changed the course of my life. For me, the ones that stand out particularly when I think of Bob is the first rule about challenge rather than control. Treating everyone as your equal, see the unique humanness in all persons, let people learn. We've tweaked that a little bit to challenge people to learn and ask them to consider changing when they learn something new. And then finally, remember how little you know. We have a lot of tenure within Fastenal. A lot of people choose to start their career young with Fastenal and spend their career here. Whether you've been here five years or thirty years, you always have things to learn. Bob carried that mantra through his entire life and will be sorely missed. I was personally blessed in that a couple of weeks before he passed away, I had a nice visit with Bob. We served on the board of another organization together. We had a nice conversation afterward, and he is sorely missed in the organization and in the community at large. Thanks, Bob. Looking to page four, some thoughts on the quarter. From a quarterly perspective, our sales grew about 3.5%. We had one less day, so our daily growth grew about 5%. The marketplace we operate in is still sluggish. I deem what's happening in our growth as mostly self-help. Things that we're doing from an execution standpoint, and there's an element of comps in there too. But it's mostly self-help. I make that comment when I look at the sequential patterns of our business. Because that's about how we're executing, new customer relationships we're creating, and expansion of existing customer relationships that we're creating. We're executing at a very high level. When I think of the changes we made two, two and a half years ago within the organization, as we came through COVID, we had drifted apart a little bit. We weren't as focused on a common goal as we should have been. As travel resumed, we saw signs of that, and we made leadership changes in our sales side of the organization. Everybody has been in their roles now a couple of years, and you're really seeing a gel. It's shining through in our numbers. The quarter's a little odd to look at if you think about it from a monthly perspective. But don't be misled by that either. January was a bit understated because of weather. March is a bit overstated because of the timing of Easter. I don't know if Holden will agree to my number here, but I estimate about 2-2.5% of the growth in March is a bit about Good Friday being in April. But regardless of that, even if you adjust for the weather in January and you adjust for the Easter timing in March, the sequential pattern is quite strong. It's strong in all of our geographies, which is really good to see. Again, I deem that to be about what Fastenal's doing engaging with the marketplace rather than what the marketplace is asking us to help with because of their business patterns because it's still sluggish. As is typical of April, we held our customer expo. A few of us actually traveled back yesterday. The expo finished on Wednesday evening and flew back on Thursday morning. We had similar what we witnessed in 2024, record attendance by customers at the event. Last year surprised us a bit because coming out of COVID, the first two years in 2022 and 2023 that we had the show, it was a very subdued event because a lot of organizations either weren't traveling yet or they were doing limited traveling. It was so difficult to travel internationally that we weren't getting international folks. So folks weren't coming from Canada or up from Mexico for the event. This year, I can tell you firsthand that we had a record number of attendees from our business unit in Mexico because I had the opportunity to speak to a large group that was gathered, and it was exciting to see the types of questions they were asking about and the way they were approaching the relationship. The other thing, and I'll probably touch on this a couple of times through my commentary, it was a unique week because in talking to various groups, the one thing there wasn't a lot of discussion on was tariffs. That's not to say it didn't come up. But the way we address the conversation in every group I talked to, there were a few sessions we had where it was a Q&A, and Bill Dyer has Dresskowski was the moderator. He led off with a question on tariffs, and he pointed it at me each time. What I really impressed upon our customers is the way a supply chain partner approaches any kind of chaos. I shared some stories about the lead-up to COVID, the vetting of suppliers that we did for safety products before the world got weird, and how that put us in a position to be a better supply chain partner. The tactical decisions we made to go out and buy inventory, to get ahead of the onslaught of everybody else because of the strength of our balance sheet and our financial resources. A lot of that attributed to things we do, but really the foundation that Bob Kierlin laid many years ago in priorities in an organization and what you do with cash. But what I can tell you is we shared with them the tactics we're taking right now. In some cases, fattening our balance sheet a little bit, it doesn't solve any issue other than it gives you time to have options. We talked about products we're bringing directly into Canada and Mexico that we would have brought to the United States before because some of the new tariffs are not eligible for duty drawback. While it might be more expensive to bring it directly into that market, from a logistics perspective, it's a lot less expensive than a tariff that gets layered on top of maybe a tariff going into Canada or Mexico as well. We're being very thoughtful about that because about 15% of our revenue is in Canada or Mexico. From the standpoint of the U.S. and all markets, we talked a lot about how we've changed our sourcing patterns in the last five years. On diversifying where we're sourcing from, to provide a better supply chain, but we also talked about the fact that when we diversify our sourcing practices, we don't just play whack-a-mole and try to avoid a problem. We try to improve the supply chain in every step we take. We try to be relevant to the new manufacturing partners we join with, regardless of where they're located. In that, we're a top one, two, three, four, five customer with that manufacturer. Because if you're a significant customer to a manufacturer, and they get tied on capacity, or they need to expand their capacity, they're gonna help their largest partners first. They're prioritizing their efforts. The fact that they know we have financial resources to match with dollars what our commitments are, we often get in line ahead of everybody else. That serves our customers in the marketplace really well. We've added a bunch of customer site information to our disclosures this quarter. Three years' worth of history. We had a recent investor day where we talked about it. We touched on it in our January earnings call to really give better visibility to some of the strategies we have deployed and are deploying to broaden the size of our market opportunity. When I think of stepping into this role a decade ago, one of the points I've made to our board was coming from my old role, I had the advantage of I'd studied the numbers of Fastenal for years. I'd had a lot of conversations with our regional leaders over the years. So I understood maybe better how they thought about things. Where they discovered success, there were a few people for me that stood out that had been very successful in their business. When I think of our business in Minnesota and Wisconsin, I took a lot of stuff out of that playbook. When I think about our regional leaders, the two Millers, Randy who led our business down in Indianapolis and Casey who led our business down what we referred to as the Southeast Central at the time, which was Kentucky and Tennessee. Our team in Mexico, our team in international more broadly. Jeff Watts at the time had a lot of discussions to really understand their tactics for growing. Because they had consistently discovered success maybe sometimes when others hadn't. Bob Hopper is another one on that list where I'd touch with and he covered our Florida market. Incredible success. You learn and you ask people, how are you doing it? What I shared with the board is our most successful regions have a great key account program. If you put me in this role, I'm gonna drive the business towards where they're discovering success. Because I think it broadens the market for Fastenal, but we have to lower our cost structure to go after that kind of business. I'm pleased to say we've done that. You see the success that shines through in some of those customer site information statistics. Finally, on page four, we increased our dividend from $0.43 to $0.44 and it's a dumb reason. I'll give you a little historical perspective. In 2003, our sales, total sales, we needed 10.5% growth to break a billion that year. We came in at 9.9. We reported $995 million in sales. That was cool. But a billion plus would have been neater. But we can't change our sales. We can influence that by activities, but we can't change it. At least not legally. In 2018, our operating income came, we needed 13.4% growth to break a billion dollars that year. We only got 13.3. We came in at $999.2 million of operating income. We can't change that one either. Holden did get a dirty look from me, but we can't change that one. But we can change our dividend. So in the first quarter, we paid out $246 million and I looked at Holden. I said, we bumped that up a penny. If our board goes along with it and we continue this dividend through the year, we'll break a billion in dividend for the first time. Some reason sorry about that, flipping to page five. FMI, we continue to execute at a high level there. Given the comment I just made about dividend, I'd feel a lot better if we had 130,000 devices, not 129,996, but I'm gonna round it and say we have 130,000 devices deployed in 25 countries. Our device count grew 12.5%. When you look at our safety sales growth of almost 10% March, that's about execution and FMI and our vending more generally, but FMI more broadly. Going down the page, digital footprint. 61% of total sales versus 59% and 54% one and two years ago. Our goal remains in October, 66% to 68% of sales going through the digital footprint. And that's what we're working towards. And then, again, the customer site data, success in our 10k plus sites. And what that means is you this is a customer. It's a building. It's a campus. Where we provide more than $10,000 a month in product and services. A subset of that is what we call on-site like customer sites, and that's where we do more than $50,000 a month with that customer. That group grew 7%. So that's about executing and engaging with customers at a high level. There's one category that you'll see that doesn't shine so strongly, and that's our under 5k, and it's really our under 2k. A subset of that. And if you're on our e-commerce team right now or if you're in IT, if you're in supply chain, you're getting a lot of pressure and dirty looks from Dan right now because we need to get better at the e-commerce side. We solved the problem with that group not by adding resources and sales teams to go after $500 and $800 a month customers. We want those customers. That marketplace has chosen to buy more in the online channels, and that accelerated during COVID. We're not great at that piece of the business. We're great at a lot of things. That's not on the list, but we can be. And the reason that matters is when you look at through some of the customer site data, I believe a great e-commerce platform enhances our ability to be successful in all groups, because I believe there's probably a 20% lift. And this is just this is the belief. This is not based on any data. I believe there can be a 20% lift in every category if we have a great e-commerce strategy. Because there's random MRO spend we don't necessarily get even when we have a great relationship with that customer. Because some department in that organization might find it easier to order somewhere else. We need to get better at that. I'll shut up now and flip it over to Holden.

Alright. Thanks, Dan, and good morning, everyone. Before digging into the results for what will be my final call, I did want to mention a few things. First to Dan, who nearly nine years ago, based on the response of many of the people on this call, took a chance on a relatively unorthodox hire. It's been an unbelievable experience working with a great leader and I sure have enjoyed being your partner in this. To the entire Blue team, I know I got this opportunity in part because of my outsider's perspective, but at the same time, you all have challenged me to earn your trust and respect, and you deserve that. I've tried to do that for nine years, but it wouldn't have been possible if not for your passion for learning, teaching, and collaboration that's the foundation of our culture. So I've surely enjoyed being your CFO, and I couldn't ask for 24,000 better friends. And to our investors, you probably don't realize how often I've actually used your observations, perspectives, and questions in my own work here. And for that, I thank you. I hope I've been able to provide a deep and differentiated view into our business. I could go on, but if I do, I suspect the music will start why don't I just jump into slide six? Sales in the first quarter of 2025 were up 3.4% with daily sales up 5%. That's our strongest daily sales rate since the second quarter of 2023. Feedback from regional leadership continues to reflect sluggish end market demand despite generally favorable outlooks. Customer tone did seem to shift from the steady improvement we've seen since the election to plateauing as trade policy created some caution. Notwithstanding this uncertainty, we did not discern any meaningful pre-buying ahead of tariffs. In the absence of much external help, the improvement in our DSR reflects two other variables. First, even as the market has stabilized, our comparisons have gotten easier, particularly in the cyclical parts of our business. This factor helped produce our first quarter of growth for fasteners since the first quarter of 2023, an acceleration in manufacturing end markets. Second, contributions from our strong contract signings over the past two years. We continue to experience a healthy pace and mix of signings in the first quarter of 2025, and our count of national, regional, and government contracts has grown at a double-digit rate for twelve consecutive months. Now the monthly cadence during the quarter warrants some discussion. I feel like Dan covered much of that. So I agree with his numbers about the impact of Good Friday having fallen in March of last year. What I will say is the quarterly daily sales rate growth is a fair representation of our performance and we did see accelerations through the period. It was a solid self-help driven result in a soft market. But even so, as you interpret our results, please take stock of the discrete factors that affected each period. The pricing outlook also warrants some discussion. Year to date, significant tariffs have been applied to products from China as well as steel, including derivative products like fasteners on a global basis. We continue our long-term trend of diversifying our supply chain where possible, questioning the size and timing of our suppliers' pricing actions, and we have added some inventory to our own balance sheet. That said, supply chains have gotten more expensive, and a part of our response over time will be incremental pricing. We have been proactively engaging with our customers for several months and in April, we took our first actions, which we believe will contribute 3% to 4% of price in the second quarter of 2025 with the potential for that to double in the second half of 2025. Depending on the pace and execution of our actions. We have taken no actions on the deferred portions of their cyclical tariff but may need to should those ultimately go into force. We are encouraged by the easier comparisons, the improved sentiment, and particularly our internal momentum. That said, we have limited visibility and share our customers' uncertainty over how current trade policy may impact demand over the course of 2025. However, Fastenal has historically been able to win market share during periods of disruption on the strength of our nimble sales force, our frugal and adaptive culture, and the weight of the technologies and global supply chain resources we can apply to find solutions to customer challenges. It is our expectation in the current environment. Now to slide seven. Operating margin in the first quarter of 2025 was 20.1%, down 50 basis points year to year. We had one less selling day in the period versus the first quarter of 2024 which is worth roughly $31.5 million in sales. Had the first quarters of 2024 and 2025 had the same number of selling days, we would likely have leveraged SG&A our operating margin would have been down a more measured 10 to 20 basis points. Gross margin in the first quarter of 2025 was 45.1% down 40 bps from the year-ago period. Product and customer mix was the usual contributor. We also saw higher costs from third-party freight providers which both coming against relatively flat freight revenue. Price cost was neutral in the period. We anticipate easier gross margin comparisons in the latter half of the year, so our effectiveness managing price cost and the degree of macro improvement will influence this scenario. SG&A was 25% of sales in the first quarter of 2025 up from 24.9% in the year-ago period. As described above, we believe we would have leveraged in the period had the current and year-ago quarters had the same number of selling days. All major cost categories either leveraged or deleveraged very modestly with none standing out. We continue to manage cost effectively. Total SG&A expenses were up 3.6% year to year consistent with what has been a stable 2% to 4% rate of increase over the last nine quarters. We continue to invest in key areas of our business to support growth while managing other costs more tightly to reflect the sluggish business conditions. Putting it all together, we reported first quarter 2025 EPS of $0.52 flat with the first quarter of 2024. Now turning to slide eight. We generated $262 million in operating cash in the first quarter of 2025 or 88% of net income. This is a lower conversion rate than we might typically achieve in a first quarter, reflecting our current investment working capital. Otherwise, we remain comfortable with the cash generation of our model and continue to carry a conservatively capitalized balance sheet with quarter-end debt being 5.1% of total capital. Accounts receivable were up 5.4% reflecting sales growth, relatively faster growth to larger customers that tend to carry longer terms, and an uptick in quarter-end deferred payments from our customers. Inventories were up 11.9% not different than the preceding quarter. We have increased inventory as part of our effort to improve product availability in our in-market locations and improve picking efficiencies in our hubs. We have added stock to support customer growth, including mix expected incremental growth in the warehousing space, and we accelerated some inventory scheduled for future delivery in the current periods ahead of potential tariffs. Inventory growth may remain elevated in 2025 as we continue to navigate tariffs and as more inflation builds in inventory. Accounts payable were up 23.9% reflecting the increase in inventories and the timing of payments. Net capital spending in the first quarter of 2025 was $53.8 million, up from $48.3 million in the first quarter of 2024. This increase is consistent with our expectations for the full year. We anticipate capital spending in a range of $265 million to $285 million up from $214 million in 2024. This increase is from higher FMI device spending in anticipation of higher signings, higher IT spend, which includes projects aimed at developing additional digital capabilities, and distribution center outlays to reflect spending on our Utah and Atlanta hubs and automated picking additions across our hub network. With that operator, we'll turn it over to begin the Q&A.

Our first question is coming from David Manthey from Baird. Your line is now live.

Thank you. Good morning everyone and Holden, thanks for everything, and best of luck.

Thank you. Good morning. Good morning, Dave.

Morning. So your customers may not be talking about tariffs, but that's all we talk about here on Wall Street, so I'll start there. If you could just, Dan, maybe talk about the 145%. I don't know how realistic that is, but if that type of tariff is actually implemented even for a short period of time, are your customer contracts set to absorb the timing and magnitude of that kind of increase? And just any other thoughts you have around if that should transpire.

Yeah. So you're talking about specifically the China non-steel tariff. Because for us, because the China steel is with all the recent noise, is a total of 70%. But 45 of that is new. But going to your question, do our contracts have this capability to adjust pricing? Yes. The question you have to look at is what optionality do you have as far as alternative sourcing? Because if we move steel-based product out of China, there's the 25% section 232 that's on steel and metal products, essentially. But it changes quite dramatically because you don't have the other duties that have been put in place both back in 2018 and earlier this year. So it becomes an optionality. And so most of our discussions with customers are frankly on optionality and things we're doing. But our contracts do allow for that. You have to then ask yourself what demand gets destroyed. But keep in mind, for most of our customers, every dollar they spend with us, they're probably spending ten dollars somewhere else. Whether that be products if it's in an OEM setting product, they're directly sourcing. So you have to look at it and say what business has become not economical. When you have that type of steel-based tariffs. From a non-steel where the actual total duty is 170%, of which 145 is new with all the pieces that have been added in. Again, same pattern. But there are in many cases, some optionality. Again, for how you can direct the spend. Depending on the willingness of the customer and the availability of alternatives. The other wildcard and the piece that we have no control over is a lot of products that we source are branded products that are coming from suppliers in-country. That are having products manufactured with their name on it somewhere else on the planet. And the question is, what their ability is to change sourcing. And to manage through it. But, Dave, getting back to your question, we do have the ability to raise prices. And probably the only other thing that I would probably add to that is the ability includes not only the contract terms, but frankly, I think at the customer expo, a lot of the discussion was about visibility. Clarity, certainty, and the fact that we have direct sourcing capabilities gives us a degree of knowledge about what's happening, sort of, in the source markets that's a lot of our competitors, frankly, might be buying from master distributors may not have the same visibility. The pricing review tool that we developed in 2018 in response to that round of tariffs provides a tremendous amount of granularity to our customers. And so you're starting off and your opening conversation is very detailed about the whys and the whats and the wheres. You never say this is an easy conversation and the order of magnitude is somewhat something we haven't navigated before. But we start off in a much stronger position because of the capabilities we've created to communicate effectively. But, Dave, you know where a lot of the conversations went with customers was actually to tactics that we're taking because we're very transparent with our customer of things we're doing and have done because we've been modifying our sourcing teams quite dramatically. Like, if you go back to 2019, the year before COVID hit and, you know, right after the tariffs, if I look at other sourcing we have in Asia, for example, our teams outside of China are ten times larger today sourcing teams. Now that's working off a pretty small base. Than they were in 2019. Because we wanted to move the way you move faster is you get closer to the manufacturer. But a lot of discussions with customers I know we're taking this question in a lot of tangents in our answer, but hopefully, it's answered maybe some other questions that might be out there. Is sharing those tactics with our customers. Because in some cases, they're searching for answers too. Because they have to solve the other nine dollars to spend for every dollar they have with Fastenal. Where they're sourcing directly, and in some cases, we might help them find some manufacturing capability. That's what a supply chain partner does. And I believe we're poised to be more successful in this type of environment just like we were during COVID and the reemergence of the global economy after COVID. Because we sourced in so many places. And we know our customers on a first-name basis locally. And a lot of that sourcing is done locally too.

And perhaps the last piece of that, I would say, talking to Bill Draskowski who heads up national accounts, you know, he said that where the dialogue went at the show, was much more about show me the math so I can understand what's happening, and then don't shut me down. And that seemed to be the mindset of our partners and customers at the show. Around this.

That's very helpful. Usually, the analyst asks four questions. This time, I asked one and got four answers. So I'll pass it on. Thanks a lot, guys.

Thanks, Dave.

Thanks.

Thank you. Next question is coming from Stephen Volkmann from Jefferies. Your line is now live.

Great. Good morning, everybody. I'll I guess I'll ask the next one here. How do you I mean, the magnitude of these increases is pretty unprecedented. Do you try to sort of smooth this out for your customers, or does it just become very no. I hope we're still here. Yeah.

Kevin, can you hear us?

You are. Yes, please proceed. The question

The question cut off there. That's why I was wondering. As Holden mentioned, we do so much direct sourcing because of our scale of operation. It gives us much more visibility to communicate with our customer and inventory so it allows you to step into things in a different way because we don't want our goal here isn't to profit on the inventory on the shelf. Our goal profit because of tariffs. Inventory on the shelf. Let me rephrase that. Our goal is with that natural hedge how can we use that to our customer's advantage as we manage through this? And it gives us time for some optionality on certain products in some cases. When the tariff situation is changing daily, in fact, this was every week starting February 10th, Kevin Fitzgerald and our team that provide communication to the field and guidance to the field. We've been putting out an updated video. In fact, there was just a new one that came up this morning. Because it's been a moving target. Even during the course of our conversations, numbers were moving around because the week started and ended in two different places. There's no way to cushion a 145% tariff. There's no math that you can make that work. The question is what optionality you have because a non-steel product if we source it out of Taiwan, the map changes from a 145% new tariff to ten. Or if we source it in other places in Asia or other places around the world, then the number goes to ten. But it might be 30% more expensive. Or more. Depending on their ability to produce it and to produce it in a chaotic environment where there's a lot of change going on. But there is no silver bullet that will cause something where you have a tariff that was declared on Wednesday or Thursday. That's 145%. That's just math. We do try to align the timing of the costing hitting our cogs in terms of thinking about how we're going to affect pricing. So when you talk about smoothing it, we try to align with where the market is. The one thing I would point out though, I think everyone's aware that we have turns about two and a half times. As it relates to this matter, once something actually hits the US shores, our turns are obviously much faster with all of our products. Right? In the case of tariffs, when those go in, it's really only a couple of a few months before the costing is beginning to catch up with the P&L. That's why when you think about the cadence of tariff conversations are really heavy in February and March, and we took our first steps in April even though we have a very long supply chain with two and a half turns, that was because tariffs begin to hit much faster than generalized inflation.

Thank you, guys. I'll pass it on as well.

Thank you. Next question is coming from Ryan Cook from Wolfe Research. Your line is now live.

Good morning and thank you for taking my questions.

Morning.

Maybe we could spend some time on SG&A. I know you called out some elevated freight expense again within that other category that was up double digits. We just quantify that impact in this quarter and share how we should think about things trending for the rest of the year? I guess just more broadly, it does sound like you expect to be leveraging SG&A in the remaining quarters. Given you would have been there without the loss of a selling day in one Q. So just making sure, is that the correct way to be interpreting your outlook?

Yeah. On the freight, the nature of freight was different this quarter than it was last quarter. Last quarter, we had some expedited shipments that we paid for. So that's in cost of goods. Right? If you're talking freight and SG&A, you're talking more vehicles, small vehicles. Got it. Sorry. I was anticipating a different question. Yeah. On the SG&A, so we are cycling through our fleet of pickups. That pace has accelerated in the last call it six, twelve months. That's because one of the sort of afterglows of the pandemic was it took a while for the vehicle supply chain to catch up, and we had several years where we were probably not cycling as quickly as we normally would during which those things were inflating. That is continuing to move through. I think as you get into the second and fourth quarter in particular, the comps do start getting somewhat easier. I do think you have that working in your favor on the SG&A. But to your broader point, I've always argued that when we grow at a mid-single-digit rate, we spill defend the margin. I think this quarter, if we hadn't lost the day compared to last quarter or the year-ago quarter, we would've grown it at 5%. That's where our DSR was at. At that level, we were pretty close to sustaining our operating margin and would have leveraged SG&A. I think the answer to the question is it depends on what you think demand is gonna do. If you think that we're gonna grow, continue to grow at a mid or better than mid-single-digit rate, then I would expect that we should be able to leverage SG&A at that level, particularly with the way that we're managing our cost today. But volume always has a say in that. The only thing I'll add to that is and I think it was Dave Manthey that coined this a number of years ago. We talked about the shock absorbers in our system and that is we use a meaningful amount of incentive compensation. In our structure. One of the messages I had for our leadership earlier this morning was, as we're moving into the second quarter here, we did a nice job of managing expenses. Our sales growth has picked up. We expect that to continue as we move into the second, third quarter. There will be some reloading of bonus numbers because you could read our proxy and you can see it was pretty ugly for a few of us. That's not unique to the folks that are in proxy. That's throughout the organization. Folks saw a meaningful cut in their incentive comp, in 2023 and 2024. There will be some reloading of that. But that's predicated on the fact that our gross profit dollars and our pretax dollars are growing and driving that.

That makes sense?

Why we always talk about an incremental margin being that 20%, 25% range because you do have that shock absorber effect, that works on both works when volume is expanding as well as when it's slower.

Great. Thanks, Dan and Holden. That's all very clear. I guess if we could just spend a quick moment on the customer sites, and thank you for the additional disclosures you've given there. I guess, maybe just how do you think about the disaggregation between manufacturing versus the non-manufacturing locations?

Should we think of the pruning opportunity as maybe more substantial on the non-manufacturing side? Given those look to be a little bit heavier mix of the slow spend customers or anything you'd share on just how you think about the two differences there and maybe if there's any significant margin differentials to think about. Well, I'm not sure there's a difference between manufacturing and non-manufacturing as much as there's a difference between the services that are utilized. The reality is what we sell are supply chain solutions using a high-touch model and a lot of technology. We need customers that have the scale to take advantage of that and are willing to sort of pay for the savings and advantages that we can bring to them. Whether that's a customer in manufacturing or non-manufacturing, to some degree is somewhat agnostic to us. When you look at the bucket information and you look at what's happened to the total customer sites in that less than 5k group, the reason that's acting the way it's acting is, in part, because we closed branches. That process is obviously stabilized, but part of the reason we've lost customers is because we closed branches. The other part is because a customer that does $500 a month with us doesn't use a lot of the tools that we can bring to bear for customer supply chains. Whereas a customer that spends 10k or more a month with us, they typically are using multiple of our solutions. When we think about manufacturing and non-manufacturing, I don't think there's as much of a distinction there as much as there's a distinction between the size and the opportunity that exists with the customer in either of those spaces.

One thing I'll add to that is on the non-manufacturing, the manufacturing, obviously, is a more cyclical customer base to a certain degree. The non-manufacturing includes some customer segments that we've seen enjoyed success with that aren't manufacturers, and they're businesses that are involved in warehousing and distribution. Typically supporting e-commerce models. They might be organizations that are involved in data centers. They might be organizations I've talked previously about some of the success we've enjoyed with on-sites going through the COVID period. For example, I mentioned Bob Hopper earlier. I go down and visit Bob once a year. He usually doesn't let me come to Florida in winter. I have to come in the summer. But hotels are cheaper. But when I come down to visit, invariably, I'm going to a K-12 school district where we have an on-site. Or I'm going to a boat manufacturer, one of the two. There's roughly 600 four-year state colleges, two-year technical colleges, K-12 school districts with more than 20,000 students in the United States alone. If you take that number to 10,000 plus students, that 600 goes to over 1,300. Prior to COVID, we had fewer than five on-sites. With higher ed or K-12. Coming out of COVID, it'd grown to 25. Of that 600 number, I don't know this for a fact, but we're probably sitting there with 5% of them right now. Those would be in that bucket, and that's where we found success because that group of customers found we were special during COVID. Because we can get them stuff other people couldn't get. It opened up their eyes to the potential of some of the FMI devices, the resources we can bring to their supply chain. I'm pleased to say in the last few years, we've had on-site customers that are in the final four of the basketball tournament. We're rooting them up. We have one this year as well.

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

Good morning and thank you for taking my questions.

Hey, good morning.

I wanted to follow up on a comment. I think this was from you, Holden. Just on the pricing actions that were taken in April, you quantified maybe three to four points year-over-year uplift in the second quarter that could potentially double in the second half if I heard that correctly. Is the driver there just the staggered dates of implementation for these increases, and is that just tied to the pricing and costing alignment you referenced earlier, or is there something else going on here?

Stagger timing as well as just the timing it takes to sort of implement and have conversations. Our model starts with discussions with customers. It's not just sort of flipping a switch on a website. Those conversations can take their own bearing paces, particularly when 70% of your business is in the contract realm.

Can touch on a few things. That's heavily centered on fastener product because that 25% tariff that came in on steel-based products once it was clarified, it was derivative products as well, which includes threaded fasteners because of the high steel content there. Little sarcasm. Sorry. But part of that is having conversations with our customers. Understanding what inventory we have. To support them and some of the timings that can come into play. That creates some staggering effect. Particularly on the OEM side of fasteners, and that's about two-thirds of our fastener sales.

Thank you both. I wanted to follow up with a question on gross margin. Holden, I believe it was last quarter. You said that there was a shot for flat in 2025, maybe slight decline. Any update on that outlook? It sounds like maybe not. Just given some of the price cost commentary on how you think you can defend margin percentage there, but I just wanted to ask if there was anything else you wanted to offer.

No.

Don't you take that one? What's that? Care if I take that one? Be my guest. Because I look forward to hearing what you have to say. This is a philosophical thing. Historically, we've defended gross profit percentage. In fact, I had a conversation with a few of our directors yesterday on just this fact. If you look back to the 2018 time frame, we largely defended our gross margin percentage. It was a little chaotic because we didn't have the tools we have today. The degradation that you did see in gross profit over time was the earlier mentioned hard frontal attack on growing our 50k plus customers, and it was a mixed shift. That was going on both in customer mix and product mix. Those were competing with gross profit percentage. But we largely defended the percentage and but we'd be very thoughtful about what it means for our customer. Our bigger challenge to our customer right now is what optionality we can create in their business. Because defending gross profit percentage in an arena where you're talking 125, 140 I mean, whatever hell number you throw out. There, you're really working with your customer. To manage their supply chain. You're doing right by everybody, that includes employees, customers, suppliers, because we're pushing back on suppliers pretty darn hard too. And our shareholders. You're finding what the right mix is you're also trying to figure out is this a forever thing? Or is this something that's gonna be announced on Wednesday and canceled on Friday? What steps are you gonna take? You're not gonna stick your head in the sand. And pretend it's not happening. Because that's naive that's foolish. You're not gonna jump out the window either. You're gonna find some place in between and make great supply chain decisions for your customers. Our goal has always been to manage gross profit percentage. Through scenarios. Our real goal long term is to grow relationships and find discover more customers that find the Fastenal supply chain model to be special, and then with existing customers once established to grow our footprint with them, and be special for more things. That's an incredibly trusting relationship. We're gonna do right by all four constituencies I talked about. All four are gonna get pushed. As we go through this. Suppliers, customers, shareholders, and employees. I think with that kind of mix, I think our shareholders do really well investing in Fastenal over time. Because we have our head in the right place. We keep our eye on despite this quarter and beefing up our inventory, to do a number of things, strategically. We keep our eye pretty well on our cash flow operation too. I see we're at five minutes on the hour. We can take one more if it's a quick question, but in case we run out of time, I do want to reciprocate and say to Holden, for the last nine years. You brought a very unique insight to the Fastenal organization. I always used to get home and my wife would ask me, hey. How were the questions today? Or some of the pop questions. I'd always share a handful of names with some folks that would add some really really good questions. Holden is always on that list. He will be missed if that's not But if there's one more question, we'll take it.

Our final question today is coming from Chris Snyder from Morgan Stanley. Your line is now live.

Thank you. I appreciate you squeezing me in here. I just wanted to maybe ask you, Dan, about fastener supply chains. They're very heavily tied to Asia. When we look at other industrial categories, we did see more of a shift to Mexico over the last five years. That hasn't really happened in fasteners. Just, are there contract manufacturers in Mexico that could take on some of this production? If not, any views as to why? Because when we think about a fastener the majority of the COGS are transportation and metal. So I would think that producing domestically even in the US couldn't make sense for that category. Just wondering if you had any thoughts on that and then what that could mean for Fastenal if supply chain is getting shorter.

I don't have a great answer for you other than there are sources of product in North America. We source product out of Canada. But there are sources of fastener product in North America. We took a really hard look ourselves over a multiyear period of taking some of our working capital and redirecting that into fixed capital and saying, could we take some of the dollars we have on the balance sheet because we have a long supply chain? And build our own capability? We did a lot and, you know, the US has some things North America has some really key things going for it long term. The most critical one that I can think of is there's no place on the planet industrial place on the planet, that has a more reliable long-term source of stable cost energy. Than North America. Whether we choose to use it or not, that's a different question. But there is nobody with the capability industrialized area that has that capability. It does create a unique advantage. The problem was there's such scale in Asia. With faster production, with steel production, and by extension faster production. Such scale that's been created because automotive took faster manufacturing to Japan and South Korea post World War II. In the fifties and sixties. Long before we even existed. There's such scale over there. Part of the issue you have in North America and this comment includes Mexico. There isn't the same scale that's been developed as far as competitive factors. Obviously, this changes the map. The real question is, does the marketplace do the producers of fasteners believe the investment is justified but because you hear on all the talking show, like, CNBC in the morning about certainty and all this kind of junk. There is no certainty in the world. Never has been. But if it's government-mandated, that's a really weird thing for certainty because if the economics work because there's a 50% tariff, or a 25% tariff or a 75% tariff, and that tariff can go away in a day as easy as it can be created in today. Are you gonna make that investment in Mexico for scale manufacturing? You may or may not. My guess is you probably won't unless you have comfort that you can put half a billion dollars into a plant. That 25% piece will be there for the next fifteen years. Twenty years. You're not gonna do it if you think it could disappear in two. That's the challenge, but we have not found scale manufacturing capabilities to satisfy our needs. In North America.

Thank you.

We've reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments.

I already slipped in my comment on Holden and as always, thank you for participating in our call today. In future quarters, between Jeff, Cheryl, and Dan, we'll try to step into the void that Holden will create. So be patient with us. Thank you.

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