Greetings and welcome to the Fastenal Q2 2025 Earnings Conference Call and Webcast. At this time, 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 Dre Schreiber. Please go ahead, Dre. Welcome to the Fastenal Company 2025 second 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 Cheryl Lisowski, our Interim Chief Financial Officer, Chief Accounting Officer, and Treasurer. The call will last for up to one hour and will start with a general overview of our quarterly results and operations with the remainder of the time being open for question 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 09/01/2025 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 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. We encourage you to review those factors carefully. I would now like to turn the call over to Mr. Jeff Watts.

Thank you, and good morning, everyone. Thanks for joining us today. My name is Jeff Watts, President and CSO. While I have been on calls for decades, and more recently sat on the call the last few quarters, this is my first time addressing you and I'm excited to kick off our second quarter update today. I'd like to begin by extending my congratulations to the Fastenal team on delivering a very strong quarter, exceeding the quarterly result of over $2 billion of revenue for the first time in our company's history. Now that's a significant achievement, and I'd like to express my appreciation to everyone across the organization for their contributions. Now, jumping into it, sales in the second quarter increased by 8.6%, marking our highest daily growth since early 2023. When I think about the growth this quarter, market conditions haven't really helped us and remain sluggish. We did get some lift from price of about 140 to 170 basis points, which Cheryl will address in more detail later in the deck. But what I'm really proud of is the team's push and momentum in market share gains and contract signings. That momentum is built on the belief and execution of our strategic plan, the one we shared at our Investor Day presentation back in March. The activities and actions we've taken better align our field and corporate teams focused on something our late founder, Bob Kierlin, taught us: the importance of a common goal. Bob emphasized that when everyone in the company is focused on a shared purpose, it drives unity and prevents division among groups and departments, ultimately driving results. We're seeing that reflected in our contract signings. Since implementing changes at the beginning of 2023, our contract growth has increased from 4% in the 2022-2023 timeframe to 11.2% last year, and that momentum has continued as we move into 2025. In Q2, we saw 84 contract signings, well ahead of the last two quarters and outperforming our expectations considering the current market conditions. Contract customer sales for the quarter increased 11% and now represent 73.2% of our revenues, up from 71.2% in the previous year. Moving on to customer performance, revenue from sites generating 10,000 or more per month increased 11.6% in the quarter, accompanied by a nearly 7% rise in the number of such sites. Growth in our on-site-like sites or those generating $50,000 or more per month grew by 12.4%, showing revenue growth of 14.5%. Monthly sales per customer site increased in all customer categories, with total sales per site increasing by 17.7% to $6,790 per month. We did see a decline in the number of accounts under 5,000, which contributed to the average revenue increase per site in this category. However, almost all these declines were in the accounts under 500 customers with the bulk coming from the customer due less than $100 per month. This decline was expected as we continue to focus on our larger sites, and we also plan to relaunch fastenal.com later in 2025 to address the spot buy needs of all our customers, including those in smaller categories. Our goal has always been to grow in all categories. Notably, our non-manufacturing sites in the 50,000-plus category have seen their revenue increase 30% year over year and the site count has increased over 18%. This is a result of our realignment in our sales teams to work more closely with regions and the regional vice presidents from government teams to safety teams. We're driving more business together in areas we may have missed in the past, especially in the non-manufacturing sector. Overall, for the quarter, a very nice job from the team, not only on the sales side but continuing to show progress on implementing our strategy across the organization. So again, thank you to the team, and I'll now pass it over to Dan.

Thanks, Jeff, and good morning, everybody. When I think back three years ago in the summer of 2022, we were having a good year. However, as we reemerged from COVID, there were a lot of supply chain constraints and a chaotic environment with inflation. We were posting strong numbers, but frankly, it didn't feel like a good year. I've known Jeff for nearly thirty years, and we were having discussions about what we were seeing. What didn't feel good was that the organization lacked alignment, and there was a loss of humility over the prior several years. We made some changes late in 2022 that continued into 2023. I asked Jeff to step out of his existing role and into the Chief Sales Officer role. True to his nature, he took that and, along with a strong team, made changes that have paid off significantly as we move through 2025. As I mentioned earlier, we named Jeff Watts President and reshuffled the deck a bit, and I'm pleased to see the outcomes of that. Late last year, during our annual leadership meeting, I shared with a few folks that yes, Jeff would open the earnings call in July; it would make it a lot easier for him if we could put up a strong quarter. The team rose to the occasion and produced excellent results. My only comments to Jeff and Cheryl going into this call were to ensure they slow down when they talk, enjoy it, and tell our story. On page four, Jeff shared some stats. We hold regular calls throughout the year with district leadership, and in those calls, we share instructions ahead of time on what helps and hinders them in support. One noticeable trend is that the closer we get to the action, the shorter the timeframe. As we look at customer performance statistics monthly, we discuss quarterly statistics in our quarterly calls because they are more relevant. What I'm pleased about this quarter is our numbers remained consistent as we move into 2025 because the business has stabilized. Last year, the PMI dropped and stayed below fifty most of the time, but our execution has dramatically changed, and I feel the organization is really aligned. On page five, Jeff touched on the daily sales rate growth rate. For the quarter, we reached $0.29 EPS, which is up 12.7% from a year ago. One under-the-hood story I'm pleased to share relates to our stocking and distribution of fasteners. After assessing our supply chain, we began ramping up our investments, and it's proven fruitful. We've leveraged our SG&A, resulting in a 21% operating margin for the quarter. The only SG&A component we didn’t leverage was bonus and commission, and everyone's been affected by performance issues in the past two years with getting pay cuts. I'm happy to say our bonus pools expanded nicely this quarter and allowed us to celebrate our team's hard work. Our incremental margin for the quarter came in at 30%. Lastly, the FMI technology has softened slightly compared to last year. The year before, we had many conversions of existing customers with the FMI technology, and while there's some softness, we still ended the quarter with over 132,000 devices installed—a nearly 11% increase since June. E-business grew 13.5%, and for the first time ever, we broke 30% of sales. I'm optimistic about our future growth. With that, I’ll turn it over to Cheryl.

Thanks, Dan, and good morning, everyone. Turning to Slide eight, sales in the second quarter of 2025 were up 8.6%, our strongest daily sales rate since the first quarter of 2023. As Jeff mentioned, it's also our first quarter above $2 billion in sales. Feedback from regional leadership continues to reflect sluggish end-market demand despite generally favorable outlooks. Trade policy continues to create some caution; notwithstanding this uncertainty, we did not detect any meaningful pre-buying ahead of tariffs. The improvement in our sales reflects two factors. First, even as the market has stabilized, our comparisons have gotten easier, particularly in the cyclical parts of our business. This led to a second quarter of growth in fasteners since early 2023 and an acceleration in manufacturing end markets. Second, contributions from strong contract signings over the past six quarters continue to build. We have maintained a healthy pace and mix of signings, and our total national, regional, and government contracts have grown at a double-digit rate for fifteen consecutive months. The quarterly sales growth rate is a fair representation of our performance; we saw acceleration through the period. The pricing outlook also warrants discussion. Year-to-date, significant tariffs have been applied to products from China as well as steel, including steel-derived products. We continue our long-term trend to diversify our supply chain, and we added some inventory to our balance sheet. Supply chains have gotten more expensive, and part of our response will be incremental pricing. We have proactively engaged with our customers for months. During the second quarter, we implemented three pricing actions, which we expect to contribute 3% to 4% of price by the end of Q2 2025. The phased approach led to impacts of 140 to 170 basis points in Q2, with momentum building as we ended the quarter. Additional pricing actions will likely be necessary in the second half of 2025, with the possibility to double the impact of pricing, depending on the deferred tariffs and the pace of our actions. We are encouraged by the easier comparisons, improved sentiments, and our internal momentum. However, we have limited visibility and share our customers' uncertainty regarding how current trade policies may affect demand in 2025. Nevertheless, Fastenal has historically been able to gain market share during disruptions due to our nimble sales, adaptive culture, and technological resources. Based on these factors, we expect to maintain our position. Moving to Slide nine, our operating margin in Q2 2025 was 21%, up 80 basis points year-over-year. Gross margin in Q2 2025 was 45.3%, reflecting a 20 basis points increase from the prior year, driven by improvements in price-cost management, margin enhancement from fastener sales, and supplier-focused initiatives. These improvements were partially offset by customer and product mix dilution and higher import duty fees. Our gross margin for 2025 is predicted to remain relatively flat compared to 2024. SG&A was 24.4% of sales in Q2 2025, down from 24.9% year-over-year. Employee-related expenses grew faster than sales, due to restructured bonus programs from improved performance, but this increase was offset by effective management of other SG&A costs. In summary, we reported Q2 2025 EPS of $0.29, up from $0.25 in the same quarter of 2024. Reminder: we executed a two-for-one stock split in May of 2025, and the prior year's EPS has been adjusted. Now turning to Slide 10, we generated $279 million in operating cash in Q2 2025, reflecting 84.4% of net income. Our investment in inventory keeps cash generation above traditional second-quarter levels. The five-year average from 2020 to 2024 is 83.7%, indicating our cash generation model is strong. Our capital spending expectations range from $250 million to $270 million up from $214 million in 2024. This reflects investments in FMI devices, IT projects to enhance capabilities, and expenditures for distribution center upgrades. With that, operator, we'll turn it over to begin the Q&A.

Thank you. We'll now be conducting a question and answer session. Our first question today is coming from David Manthey from Baird. Your line is now live.

Good morning, everyone. My first question, I'm hoping to better understand contribution margins with the 10,000-plus per month customers over time. Could you discuss the evolution of profitability as those relationships mature and grow?

Dave, if you think about the on-site business that we've talked about in the past, it serves as a good proxy for the contribution margins from our 50,000-plus customers. If you take that down a step to the 10,000-plus, it aligns more closely with historical company margins. The gross margin can challenge the company number a bit, but the SG&A leverage is much better. Over the last decade, as we've rationalized our branch network, we have leaned down our operating expenses while still maintaining service levels for our on-site and large customers, who combined make up almost 80% of sales. It therefore reflects underlying organizational strength. Hope that answers your question.

Yes. Thank you. It does. And then second, when you discuss the inventory investment, you say you expect that to pay off in the back half. Does that imply that you're expecting a higher mix of fasteners, or could you clarify that statement?

I would interpret that a bit differently. It's already paying off in the first half. The revenue and gross profit from it are attractive, but freeing up time makes a measure of the benefit more difficult to quantify. Jeff mentioned this when he covered customer categories. If we can give our teams more time to engage with customers, we can find better ways to support them. So the returns from the inventory are evident right now. Looking to the second half of the year and into 2025, our added inventory will lead to rationalization that will free up inventory at distribution points. This improves returns.

Hey, everyone. Congrats on the quarter.

Thanks, Ryan.

Let me follow up on Dave's question. Should we expect sort of flattish gross margins year over year in the second half? Can you unpack why deeper inventory of fasteners is helping your margins?

Yes. As I mentioned in my commentary, we are expecting our margins for 2025 to remain essentially flat with 2024.

Regarding the fastener expansion, the primary benefit isn’t solely in better pricing, though that is true in about 80% of cases. It’s because we are incorporating more MRO fastener business into the mix. We already know our costs, which allows us to quickly convey a price to our customer. This fact coupled with the heavy labor involved in spot buys leads to better gross margins overall.

Yes, I think when I look through it and examine our pipeline today, there's no reason for me to say that we won't be in that category of double-digit growth moving forward for the rest of the year. Everything seems strong across all our categories, especially in our pipeline of contracts.

No.

Good morning and thank you for taking my questions.

Good morning.

Dan, I believe it was in your prepared remarks you mentioned some enhancements for the fastenal.com channels that are coming and that in part those are an attempt to improve capture of the spot buy purchases. Could you give us more insight on this opportunity?

Yes. In my opinion, there's a big opportunity to recapture the market for smaller purchases. A lot of our efforts have been invested in large accounts over the years, leaving our e-commerce side underdeveloped. However, we are steadily improving—30% of our revenue now comes from e-commerce, which indicates progress. Our focus is to optimize our e-commerce strategy while ensuring it's optimized for both larger accounts and smaller purchases. Enhancements in our checkout process, search functionality, and AI integration are critical.

Yes. We're looking at increasing the number of customer solution consultants because they've been immensely successful for our teams at the district level.

Some of that specialization can lead to deep dives into processes within districts that have shown success over time. That said, I don’t anticipate seeing major shifts or changes in roles at this time.

Thank you. I wanted to ask about price. On the last conference call, you all mentioned three to four points of price. It was closer to 1.5%. Was this based on how you were defining that number?

In April, we were dealing with many uncertainties, so we shared our insights based on what we knew at the time. The context changed, and we ended up exiting the quarter closer to that three range. Moving forward, we believe that our pricing strategy will remain effective.

Yes, to Dan's point, we did exit the quarter closer to the three range. We expect that pricing will continue to rise, potentially reaching 5% to 8% by the end of the year, but many unknowns remain.

At the moment, these discussions have shifted more to pricing than concerns about shutting our operations down. We've been facing fatigue from all sides concerning the unpredictability of the market.

I see we're at about four minutes to the hour. If we could have a question that we can answer in a minute or two, I'd appreciate it.

Yes. This will be a quick one. The gross margin expectation for the year—how does price cost look in relation to that? Are there any unusual drivers we should consider beyond this year?

The price-cost balance may prove challenging in the latter half of the year, but we aim to remain aligned with overall expectations as we move forward. No, we're good. We'd like to conclude the call, but I want to highlight that we've made leadership changes over the past two years. We are committed to investing in depth and have promoted from within the organization. It strengthens our decision-making and enhances probabilities for success as we move forward. Thank you all, and have a good day.

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.