Greetings, and welcome to the Fast and All Q2 2026 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. You may be placed into question queue at any time by pressing star 1 on your telephone keypad, and we ask you to please ask one question and one follow-up, then return to the queue. As a reminder, this conference is being recorded. If anyone should require operator assistance, please press star 0. It's now my pleasure to turn the call over to Dre Schreiber. Please go ahead, Dre.

Welcome to the Fastenal Company 2026 Second Quarter Earnings Conference Call. This call will be hosted by Dan Flournis, our Chief Executive Officer, Jeff Watts, our President and Chief Sales Officer, and Max Tunnicliffe, our Chief Financial Officer. The call will last for up to one hour, and we'll start with a general overview of our quarterly results and operations, with the remainder of the time being open for questions and answers. Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission, or distribution of today's call is permitted without Fastenal's consent. This call is being audio simulcast on the internet via the Fastenal Investor Relations homepage, investor.fastenal.com. A replay of the webcast will be available on the website until September 1, 2026 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. Jeff Watts.

Thank you. Good morning, everyone. Welcome to Fastenal's second quarter 2026 earnings call. I'm Jeff Watts, Fastenal's President and Chief Sales Officer, and I appreciate you joining us all today. Before I turn to the results, I would like to take a moment on something that I think matters to everyone on the line, and that is that today will be Dan Florence's final earnings call as our CEO. Dan joined Fastenal, joined the Blue Team, back in June of 1996, and he's been the steady voice explaining our business to this community for the past three decades. First as our Chief Financial Officer, and then as our President and CEO. Through multiple cycles, multiple recessions, a pandemic, trade shift, stock splits, through all of it, Dan's always had the same candor, the same humility, and the same unwavering respect for our people and for our shareholders. So to Dan, on behalf of every employee at Fastenal and every shareholder on the line, thank you for the leadership, thank you for the discipline, and thank you for handing us a business that's stronger today than it's ever been. Now, with that said, today isn't a farewell speech. It's an earnings call, and the best way to know how to honor Dan's last call is to walk you through a business that's executing. So moving to our results. Q2 is a very strong, high-quality quarter for the company. Solid double-digit daily sales growth, operating margin expansion, return on invested capital at a decade-plus high, and strong cash generation deployed with the discipline that defines this company. Our strategy is working, and it's showing in the numbers. So turning to slide three, on the top line, daily sales grew 14.7% in the quarter, extending the pathway we built in Q1. Now, market conditions improved at a pace similar to last quarter, but what's important to point out is that our outperformance continues to be driven by share gains and not by the market backdrop. And that share gain is showing right up across all three of the pillars you see on the slide. First, increasing sales effectiveness. Share gains driven by our key account strategy and by continued new contract wins. Second, enhancing our services, expanding our FMI device space and our digital footprint, improving the customer experience, driving retention, and creating operating efficiencies in the process. And then third, expanding our addressable market. Growth driven by new customer site wins and deeper penetration across every one of our end market segments. Now, on pricing, we realized approximately 2.9% in the quarter, or about 4.5% on a stacked basis, versus roughly 3.5% in Q1. Now, the sequential step down, it's not a change in posture. It's simply lapping the onset of pricing actions we took in Q2 of last year. Our pricing actions to mitigate cost and tariff inflation continue, and our pricing discipline continues right alongside them. I know Max is going to touch a little deeper on this later in the deck. So now one number I want you to focus on this quarter, and it's the customer site data on the right side of the slide. And our contract count in Q2 is up over 7% year over year, and the number of customer sites spending $50,000 or more per month grew at 16.5% over last year, with revenues growing over 26%. Now, that's the shape of durable, high-quality revenue, larger customers, deeper contracts, and higher productivity per site. It's exactly what our key account strategy is designed to produce, and it's the foundation of the momentum we're using to carry into the second half of this year. And that momentum is being reinforced and scaled by our technology platform. So moving to slide four, which is our technology update, and this is where the enhancing our services pillar comes to life in the numbers. Starting with Digital Footprint, Digital Footprint DSR grew 16.2% in Q2, outpacing total company DSR, and now represents 61.6% of total sales, up 60 base points from last year. Our estimate for 26 is 63% to 64%, modestly below our original target of 66%, and I want to be clear, though, on what this reflects. We're not slowing down on digital adoption. We're still driving customers to digital at a very strong pace. It's really the denominator is simply moving faster because our non-digital sales are growing right alongside digital as we take share and add larger and larger customer sites. And to me, I guess that's a healthy problem to have. Inside that, though, e-business DSR grew 12.6%, steady and disciplined digital engagement that continues to broaden our reach with both new and existing customers. Now, turning to FMI, the engine of our services strategy. You know, FMI technology signings were up 8.3 percent at 109 weighted devices signed per day in Q2, just under 7,000 total for the quarter, versus 101 per day or just under 6,500 in total same time period last year. FMI sales now represents 44.6 percent of total sales, up roughly 60 basis points from a year ago. When I think about this, every one of these technology metrics, it's really a leading indicator. Devices installed today are deposits into next quarter's sales, into next year's retention, and into the operational rigor and efficiency that show up in our margin structure. Now, Fastenal has never had more contract customers, more large customer sites, more devices in the field, or more digital engagement than we do today. This is what durable, scalable growth looks like and why we're so confident in our pathway And with that, I'll turn it over to Max.

Thank you, Jeff. And good morning, everyone. As in the past, I'll review three areas with you this morning. The business trends we saw in the quarter, the key drivers of margin performance, and how those results translate into cash flow and capital allocation. Overall, the quarter showed continued progress against our strategy, improving demand trends, solid execution across the business, and strong cash generation, even with continued uncertainty in the broader economy. I'll start on the business trends and market drivers slide. During the second quarter, the industrial environment remained stable and modestly positive, consistent with the trend we saw in the first quarter. US PMI averaged slightly above 53 for the quarter, up from 52 last quarter, and industrial production was slightly positive year-over-year in April and May. This lines up with the gradual improvement that started late last year. Our daily sales growth improved to 14.7 for the quarter, up from 12.4 in the first quarter, reflecting continued market outperformance. Growth was supported by new customer wins, increased share of wallet with existing customers, pricing, and improved industrial production. Importantly, the improvement was not concentrated in any one area. It showed up across customer types and markets. Customer sentiment remained favorable throughout the quarter. While trading tariff uncertainty stayed in the picture, its impact this quarter showed up through cost planning and pricing discussions rather than demand. As a result, activity levels remained healthy and our teams continue to see strong customer engagement. From an end market perspective, this slide shows the breadth of that improvement. Manufacturing activity remained solid, led by heavy manufacturing, where our faster expansion and key account momentum continued to pay off. Heavy manufacturing represented 44% of total sales, and average daily sales growth in that segment was 18, continuing the upward trend that began last year. Construction grew approximately 17% for the second quarter in a row, representing a meaningful improvement from weaker trends we saw in prior periods. Within construction, electrical, utility, infrastructure, and data center-related activity were among the strongest areas of demand during the quarter. Non-manufacturing in markets also contributed, with gains across transportation, warehousing, and other industrial services as demand improved across customer types. Across materials, both direct and indirect categories grew in the mid-teens, with direct materials slightly outpacing indirect. That mix reinforces that growth was tied to customer production activity and supported by higher fastener penetration, improved product availability, and pricing actions. The common thread across the strongest areas was larger customer engagement and project-related activity, which continues to support our key account strategy. That said, conditions were not perfectly uniform across all markets. While manufacturing and construction remained healthy, certain other end markets, particularly those tied to discretionary consumer spending, continued to lag. Overall, demand conditions were stable to modestly positive, while cost inflation remained less predictable. In that environment, our diverse customer base, key account focus, and strategic initiatives helped us convert market stability into stronger growth and continued share gains. Turning now to margin performance and drivers. The key margin story this quarter is that we maintain operating margin, including a five-basis point improvement, despite inflation-driven pressures. Strong sales growth, SG&A leverage, and disciplined cost control more than offset net price cost headwinds. At the gross margin line, we contracted approximately 75 basis points year over year, with price cost representing roughly 40 basis points headwind. On price cost, we improved approximately 10 basis points from the first quarter. Our pricing actions helped offset the ongoing impacts of tariffs and other inflation. We remain focused on pricing discipline and will continue managing toward price cost neutrality over time. Beyond price cost, we also experienced smaller gross margin headwinds from customer mix, transportation costs, and customer rebates during the quarter. Customer mix impacts are important to emphasize. As we've discussed previously, our customer mix continues to shift toward larger customers by design, as this is part of our strategy. While these customers typically carry lower gross margins, they generate attractive incremental profit dollars and we remain accretive to operating margin. The higher volumes associated with these relationships drive fixed-cost leverage, improve asset utilization, and create operating efficiencies across our network. As a result, although the mixed shift can moderate gross margin percentage, it supports our broader objective of growing absolute profitability and expanding operating margins over time. At the operating margin line, SG&A improved to 23.5% of sales compared to 24.4 in the same quarter last year, reflecting disciplined cost control and operating leverage. That leverage was more than offset the gross margin headwinds and drove margin consistency year over year, even with continued investment in tech, analytics, and sales support. In addition to strong sales growth and cost management, return on invested capital increased 180 basis points on a trailing 12-month basis, reflecting strong sales growth, good cost control, and disciplined capital allocation. In total, our P&L performance shows that we can invest for growth while staying focused on profitability, even as our mix strategically shifts toward larger and more complex accounts. Turning to the cash flow and capital allocation slide, operating cash flow was $266 million, representing approximately 70% of net income. While the second quarter conversion rate was lower than last year, year-to-date cash generation remained strong as inventory efficiency helped offset the working capital needs associated with growth. Our second quarter conversion rate was driven specifically by higher accounts receivable, primarily driven by our strong June sales improvement of 20% year-over-year. Additionally, we continued to run inventory more efficiently, finding ways to optimize inventory levels while keeping availability high for our customers. The increase in accounts payable outpaced inventory this quarter, largely a function of payment timing. Net capital spending this quarter was approximately $60 million, with investments focusing on strengthening our hub or distribution center and automation capacity, advancing our IT infrastructure, and investing in fastball-managed inventory hardware capabilities. For full year 26, we continue to expect net capital expenditures of approximately $320 million as we invest in hub capacity, FMI devices, automation, and technology. These investments are made to drive efficiency, scalability, and customer value. Based on current consensus revenue estimates, for full year 26, our expected capex range represents approximately 3.5% of sales, reflecting our continued focus on investing to grow the business. To put this in the context, our average capital spend relative to sales over the past five years was approximately two and a half percentage points compared to roughly four in the preceding 10-year period, meaning that we go through periods of different investment run rates. 26 is a year in which we will invest a little bit toward the higher end of that investment range. We returned $305 million to shareholders during the quarter, mostly through dividends alongside modest share repurchases. Together, these returns represented approximately 80% of net income, reflecting our confidence in cash generation and our commitment to returning value to shareholders. Our capital allocation approach remains unchanged. We prioritize investing in the business where we see strong returns, returning excess cash to shareholders, and maintaining a conservatively capitalized balance sheet. I'll summarize as I close my section. The second quarter shows strong top line execution, continued share gains, and disciplined cost management. Importantly, operating margin was consistent year over year as SG&A leverage and cost discipline offset gross margin pressures. That performance, together with ROIC expansion and strong capital allocation, demonstrates the durability of our business model. Thank you to everyone, and I'll turn it over to Dan.

Thanks, Max, and good morning, everybody. My page is page 8 on the flipbook, so I'll touch on a few points as we go through that. From a market outlook perspective, the broader market conditions continue to improve, similar to in the first quarter. We've now had six months of 50-plus PMI. Okay. That, combined with some key leadership changes that we made back in 2023 and 2024, are really key to what you're seeing shine through. So the inherent growth of Fastenal is shining through because of the market not giving us headwinds. But what you're really seeing is Jeff stepped into the chief sales officer role, I believe it was 2023, and I hope he doesn't shake his head and say, no, Daniel, it's a different year. But he made some changes in personnel at that time, and you're really seeing the outcome of those changes and incredibly powerful as we've moved into 2026. There's an ongoing focus on price neutrality. And, you know, it's no secret to anybody listening to this call that if I was being 100% candid, and you know that I'm always 100% candid, I would have felt a hell of a lot better about the quarter if our incremental margin would have been 24%. Coming into the quarter, we had a gross margin trend that was challenging. And one of the things I told Jeff, the hardest – when you have a trend that's your friend, you love that trend. You cherish that trend. You convince everybody to do the things necessary to keep that trend going, and you don't sit there and enjoy what's happening right now. You focus on where the hell you're going and making that trend better. And if the trend gets disturbed by the economy, that's life. If the trend gets disturbed because you took your eye off the ball, that's us. and so really focused on cherishing a good trend and changing a bad trend. Coming into the quarter, we had a bad trend with gross margin. That ultimately prevented us from being at that 24% increment margin that I thought was achievable. With that said, the group changed the trend, and our gross margin sequentially improved despite the fact that there's more gross margin headwinds during the quarter than there was before. We just are fighting and cloning our way back, and that's how you saw the quarter play out. From a financial discipline perspective, you know, we touched on ROIC, and, you know, when I think about ROIC, 20 years ago, our ROIC was in the mid-20s. Actually, if you go back far enough, and I'm going to take you back far enough for a second, When we went public in the late 80s, our ROIC was in the low 30s. What changed as we went through the 90s and into the 2000s is we were selling more than just fasters. We needed to stock more product. We started importing directly. We had to stock a lot more product. And our ROIC went down into the mid-20s. And it was still there a decade ago. And I'm really pleased to say over the last decade, between some really strong discipline on the part of the team, Holden Lewis, our prior CFO, did a wonderful job of really showing us what we could do from an ROIC standpoint. But the group made it happen. And today we're in the low 30s. So incredible financial discipline. You know, there's one item that I don't know that everybody appreciates how good the performance is. But if you read our proxy, you'll quickly see how we get paid. And what you read in the proxy about we get a piece of pre-tax growth is true very deep into the organization. So in the second quarter of 2025, our operating earnings grew 40, and I calculated these this morning. So if I'm wrong by a million or two, I apologize. It's how good my skills are with my phone calculator. But I think we grew $49.2 million in operating income. In the second quarter of 2026, we grew 65.7. That's a 33% increase in our pre-tax dollar growth. Forget percentages for a second, just the dollar growth. In the first quarter of this year, our operating earnings grew $45.3 million. In the second quarter, again, we grew 65.7. That's a 45% increase in the dollar growth. We all get a piece of that action. You know what? There's a lot of folks in Fastenal that had a nice second quarter bonus. They had what they thought was a pretty darn good first quarter bonus, And we just crushed that number because the bonuses in the second quarter, I did my math right, are probably about 45% higher than they were in the first quarter. When I look at all that and I look at our SG&A and how we managed SG&A, the number that just impresses the heck out of me is our headcount growth and how we're managing. And that's because we're not squeezing it to death. We're investing for where we're going, just like we always have. We're just getting progressively better. And some of that is the team is better today than they were two and five and ten years ago. Some of that is some of the AI tools. We're implementing large account business faster today than we would have one, two, and three years ago because we can do quotes faster. We're just really good. And so I'm really impressed with the SG&A leverage because I know how much bonuses grew, Q1 to Q2 and Q2 to Q2. That's really hard to get that kind of leverage on SG&A. My kudos to the group. Strong cash generation, our capital allocation continues to be very focused on growth, technology, and a thoughtful look at shareholder returns as measured in ROIC. To that end, I want to thank Max. Earlier in the year, I said to Max, you know, our stock price is approaching $50 a share. um we've been maintaining a two percent yield for quite some time it'd really be nice to do a penny a dollar a share and in dividend um he started out a little bit less than that because he wanted to have dedicate some dollars to uh to buy back some shares and and consistently do that to cover things like dilution um i i took another swing at at the pitch in the here in a few weeks ago and i said you know raising it to 26 would get us to a dollar for the year you wouldn't mind considering that. I appreciate it. Maybe two times is the charm, but the thought process there is simply this. A dollar dividend for the year will allow us, whatever the street does, it allows us to have a decent return, a dividend yield. So that's the thinking behind that. Don't read anything and anything more into it than that. And when you think about the dollar this year, Think about where that perhaps goes in the future, but that's a different group that will be making that decision. From an organizational priorities, you know, from a capital allocation, we talked about it, but continued investment in tools, technology, and analytics to support and scale growth. And, you know, a lot of companies are talking about AI. We don't talk a lot about it. We just do a bunch of things behind the scenes to have better tools to support our people and ultimately our customers. and how we deliver a business but we're being very thoughtful from a financial fiscal discipline and and what we're spending in ai relative to what kind of return is it generating for us and what kind of productivity is it giving us because we spent about 400 if you add up all of our our labor costs in the and max is going to give me a dirty look for sharing this number but if you add up all of our labor costs in the second quarter base bonus social taxes uh health insurance at our school of business you had all that up we spent about 400 million dollars so we spent about 1.6 billion a year and people cost and the question we'll ultimately need to ask ourselves is how much are you willing to spend for that group to be five percent ten percent more productive and and that's how we'll gauge what we do or don't do in the future at least I believe that's how the group will do it from a strategic progress standpoint I'm not gonna list out all the things other than to say wow, I think the team is executing at an incredible level, and I'm really proud of the group. Finally, and it's not on the bullet list, but I'll add, I think you've come to know that I probably tell stories that are too long, but I'm also pretty transparent in how we share the business, and I thought I'd share some internal messaging head for the group this morning, both in our video that goes to 25,000 employees as well as our conversation with our regionals and folks I've been talking to, and when I think about the pieces, you know, we always talk about year-to-date sales versus goal. What quarter two, 2026, and June sales details tell me. One thing that really stands out when I look at the June set of percentages is everything, whether it's geographic or it's end market or it's customer use, everything is double-digit. We haven't been in that situation for quite some time. And the only thing on that page that isn't double-digit is our non-contract customer sales growth of that group. And that isn't our priority of going to market. However, we love that customer group, too, and we want to grow that customer group. And I'm pleased to say that the growth in that group is double what it was 12 months ago because we're building a better mousetrap. We're building a better machine to serve the market. A better machine to serve the market grows whether you're putting people energy behind it or not to drive it. And you're seeing that come into fruition. The other things talked about on it, and, you know, this is – I'm a milestone person, and I always highlight milestones. And in the second quarter, we have four districts now that are averaging more than $8 million a month. That's four districts that are either north of $100 million a year or they're on the verge of being there. They're close. That was zero a decade ago. Heck, that was zero five years ago. There's 59 district managers. So 25% of our district managers in the second quarter were doing more than $4 million a month. That's a $50 million a year business. You know, for folks that have owned Fastenal a long time, you remember a $100 million Fastenal or a $50 million Fastenal. We have 25% of our districts are that big now. And that's an incredibly talented group of people. And, you know, with the end of the day, it was really nice of the group for my final month as CEO to grow north of 20%. So to the sales team, thank you for that. And if you take that $844 million, because we're over $833 million, our run rate on a 30-day basis is a $10 billion company. Nice touch. With that, I'm going to stop talking at you and see what questions you have. Thank you.

Thank you. And I'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 in your telephone keypad. And as a reminder, we ask you, please ask one question and one follow-up. Once again, that's star one to be placed in the question queue, and a confirmation tone will indicate your line is in the question queue. Our first question today is coming from David Matthews from Baird. Your line is now live.

Thank you. Good morning, everyone. Good morning. Dan, what do you say? It was an absolutely stellar run. Congratulations and thanks for everything. We always appreciate it. So I guess that means that Jeff and Max get the tough questions here. Sales growth, obviously terrific at 15%. And the team has recently been signaling kind of 25% plus incrementals at this level of growth. And I know that Dan went through a couple of the items that affected that. But I'm wondering if you can crystallize that for us and talk about the puts and takes that sort of drove that contribution margin this quarter. And more importantly, as you're looking out to the second half, which of those do you think persist, and which of those may alleviate as we get to the back half of the year and lead to stronger contribution margins?

Sure, Dave. This is Max. I'll take that one to start. So if we think back to the first quarter of this year, where we were disappointed in our net price cost position of 50 basis points, it's important to keep that component into context with the rest of my comments. And the reason I say that is because as we move forward, as we said in our prepared remarks and as Dan reiterated, we did eat into that 50 by 10 basis points. And so we're focused there at the same time growing at significantly fast levels. So balancing and optimizing both of those we feel was a success mark on the quarter for us. With that being said, it doesn't mean that we dismiss the 50 and now negative 40 basis points. But that negative 40 basis points that we still sit with today, if you think about that from an incremental perspective, is going to be three or four percentage points on the incremental. So you get to the mid-20s when that net negative goes away, number one. And then number two, we did, as Dan iterated, paid some bonuses on that growth. And that is a contributing factor. Now, the way you think about those is if we continue to grow like we want to, we're always going to have some bonus pay. So that one you could dismiss out of the incremental walk. But that gross margin, our position is to maintain price-cost neutrality. And so the second part of your question was, when do you get there? At this moment, we're going to keep chipping away, fighting as fast as we can. but the trajectory is, it's not something that we're expecting to be completely closed in the second half. We're going to continue to look at a lot of things we're doing from a growth perspective, and we're going to continue to chip away at that net negative price cost position. And as we move through the year and chip that away, our incrementals will naturally improve back to where, you know, like we say, if we're growing this fast, we should be mid-single digits. We are not backing off of that statement, I guess you'd say. I don't want to say commitment. Maybe that's a little too strong. But that we believe this business is set to drive the mid-20s when we're growing this fast. And so we'll get back to that over time.

Thank you. And then, Jeff, I dislike the question, what will you do differently? Because I don't think that that's really applicable here at Fastenal anyway. But when I think about the past couple of CEO eras, I mean, the Oberton era of store growth and the Florida era, I don't know, FMI and national accounts, et cetera, when you think about the range of tools that Fastenal has today, what are the strategic growth engines that you plan on leaning on to start the Jeff Watts era?

That's a good question. First, I'd say that, you know, this isn't a transition. And we're sticking with the strategy and the strategy that we've dealt with the last two years. The three strategic pillars, they're going to be unchanged, increasing sales effectiveness, enhancing our service, expanding markets. But I think what changes is every day it seems like the AI portion and the tools that we're developing are helping us increase speed. And I think one thing that's important is you saw it in June. June kind of shocked us a little bit in our revenue as far as our sequentials go and really digging in. And there was some one-off orders that we were able to get that we wouldn't normally have gotten just from new business signing some one-off type orders. But a lot of the business that we're turning on, we're turning it on faster now because of the tools that we've built. And I think that it's part of our strategic planning, but it's happening a lot faster than I thought it would. And like I said, June was a little bit of a surprise to us. I think the sequentials are still in place, but moving forward in the direction, I don't see a lot of change with what Fastenal, who Fastenal is as a whole. You know, blue team first, decentralized decision-making, P&L accountability, promoting from within. That's all cultures have been built over the last 30, 40, 50 years. That's not going to change. What I do think is we're going to look at harder and faster is the speed in which we go out and attain new business, grab new contracts, and expand our markets globally.

Hey, Dave, I'll throw in one little tidbit there. You characterized an era as the Flornis era. That was actually – Jeff had an incredibly big voice, as did Casey, as did Bill, when I think of what we were doing from a revenue, from a sales growth standpoint. And you might characterize the last decade with a different name than Flornis. You might say it was a blue team effort, and I think that blue team effort continues.

Yeah, always a blue team effort. So thanks, everyone. Best of luck. Thank you.

Thank you. Next question is coming from Ryan Merkle from William Blair. Your line is now live.

Hey, everyone. Good morning. And, Dan, I want to echo Dave's comments. I can't believe this is your last call. It's been a great run, my friend, and I wish you all the best. Well, Ryan, isn't 121 calls enough? Yeah, 20 years, Dan, we've been doing this. I can't believe it. But it's been a great run. Appreciate all your help. So I want to start on price cost. You made progress, but more to go. When do you think you'll get to neutral? I know that's kind of a hard question. And then also comment on gross margins in the third quarter. Should we be thinking flat sequentially from the second quarter?

Yeah, Ryan, I'll take that question to start at least. the chipping away at the net negative 40 will will continue it it has to for our business but as i said we need to continue to grow uh at our roic level growth is is first and foremost but i want to reiterate it's healthy growth it's uh it's operating margin accretive growth so it's all those healthy things that you would expect us to push on as we have the past decades. But this chipping away is an important term because we might come into Q4 and be there, but it's not something that we are predicting. So give us some time. We're going to make some progress, but it'll be small on this net price cost position. Importantly, there continues to be cost increases in the marketplace. And everyone knows that. It's the headline. And so keeping up with the new inflow of cost and chipping away at the old is a lot of effort. As I said, we're pleased with our 10 bips of chipping away. And so we'll continue to do that. Our commitment is to continue to offset cost to the best extent possible while growing this business very, very fast. As we think about gross margin profile, because at the end of the day, those questions just model into gross margin. And so your point, you're spot on with the gross margin question as well. At this moment, we don't forecast or sorry, I shouldn't say forecast. We do not provide guidance on gross margin unless there's some big up or down movement. We don't want to surprise you. At this moment, we don't see a big up or down movement. So the gross margin profile should be fairly consistent with historical trends. And as you probably know, and I'll just remind the audience, because of our, I should say primarily because of our focus on growing large strategic accounts, for all the reasons that probably make sense, efficiencies and leverage and those types of things, those accounts carry less gross margin as a percentage than our weighted average. This is nothing different than has happened the past 10 to 20 years. And so we will continue. If you look at that 10-year pattern, you see about a 60 basis point contraction in gross margin, albeit maintaining to improving operating margin, which is our focus area. And so that 60 basis points improvement, as you know from your modeling, And it's roughly 15 bits of sequential decline every quarter. And so if you look back between Q2 and Q3, you get roughly that. You get between 10 and 20 bits dropped just on a normal year when Fastenal is performing well and when Fastenal is maintaining or growing operating margins. So our commitment to ourselves and our shareholders is grow fast and continue to maintain and grow operating margins. And so that's what we see as we move through the rest of this year.

Got it. Okay. No, that's all fair. I appreciate that. Just to follow up, maybe to Dave's questions on incremental margins, should we be calibrating to maybe low 20s incremental margins for 2026 at this point? And if you make faster progress on the price cost, then maybe you get in the mid 20s?

I, you know, Q2 is, this is hope, but we seeing 21 and a half on our P&L with this much growth is not, you know, I would just say we hope that's our low point, but it's hard to predict with the cost inflation coming through. I think that's a safe bet. I think it's safe to do it that way. But as we chip away, we should be able to expand. I mean, we have a low point and we'd be heading toward the normal run rate business of mid 20s it's just it's tough to predict whether that's q the end of q3 if that's q4 but in that ballpark expect expect improvement as we move throughout uh but yeah it's not gonna i i wouldn't necessarily expect a a q3 jump all the way up to the mid 20s okay it's your model very fair yeah all right thank you i'll pass it on thank you Next question is coming from Tommy Moll from Stephen's.

Your line is now live.

Good morning, and thank you for taking my questions. Good morning, Don. First question on SG&A, point taken, you paid some pretty healthy bonuses and commissions this quarter given the strong top-line performance. At the same time, I would think you might still expect to see some leverage just thinking about those items as a percentage of sales rather than deleverage. And so could you help us unpack some of the items that delevered this quarter? I wouldn't think that at this rate of sales growth, we should expect those to continue to delever, but any context would help.

Keep in mind, SD&A did lever about 90 basis points.

Oh, yeah, yeah, yeah, point taken. Yeah, we didn't see deleverage. Yeah, sorry, go ahead. Yeah, I was more specifically talking about the items you referenced that did delever this quarter. I think it was fuel, transportation, travel, bonuses, commissions. There were a number of things mentioned on the call and in your materials that did delever. That's specifically what I was curious about.

Yeah, sure. So, and I'll speak a little bit about, but we started just on fuel. As you can imagine, it's extremely volatile. Well, if you would have asked me two weeks ago what I thought the future would hold, I would give you a different answer, of course. First of all, the fuel component in our SG&A, we don't talk about the amount, but it sits in that remaining 30%. Dan, we've historically in the past referenced 70% of our SG&A are people-related costs. So you do have a component of fuel in there that we started to see in Q1 as the conflict escalated. We experienced about a month of that headwind, and now we have three months of that headwind. And that's one of those areas where, even from the question of incrementals, I mean, if those fuel costs and associated oil-related costs dive more toward the second half of this year, we're going to start to see even some improvement incrementals there. But fuel is one of those that we're actually, given the amount of volatility, we're managing very well on a fuel side. It's still a headwind. And then we mentioned the bonus, and the bonus is just a pure, we grew profit dollars extremely fast, and we like the fact that that's a headwind is a good thing for us, but it's in, you know, it's part of our business modeling as well. So aside from that, there's not anything else that would be delevered in our SG&A is very small, and we keep a keen, a very keen eye. I think you know us well, Tommy, we're, we are a few frugal operators and we don't see, we don't intend to change that frugality approach in our business because it does well for our business.

You know, for instance, I'll give you, I was talking to Barry McGrath. Barry runs our distribution center here in Winona a few days ago. And I said to Barry, I know when I look out my window, how many trucks I see, but how many routes do we have that go out of Winona on a given day? And he said, depending on the date, anywhere from 25 to 30, depending on what day of the week it is. And that's how many trucks. And so we have Winona routes. There's probably about 470 routes when you start looking at all the different places the trucks go. And we drive about 95,000 miles a week just in this one serviced area in the Midwest out of Winona, Minnesota. and uh and and so the reality of it is is you know a semi-tractor gets a little over seven miles to the gallon um you're going to spend if the price is up 10 percent 20 percent 30 percent you pick the number uh we're going to spend that much more that's that's the bad news the good news is that burden falls a lot heavier on competitors we have in this space and quite frankly um it fell pretty high on our customers. And so we become a better value proposition because even though our costs have gone up, our costs are at a discount to any other option that's out there because so much of our industry ships small parcels. And so it actually, you know, chaotic times like this, we have, we have to manage through the SG&A of it. And most of that diesel that I'm talking about is actually in gross margin, not in SG&A, whereas our small fleets in SG&A. But it positions us to be more successful and bring a better value proposition to the customer. And I was in a customer meeting yesterday, a really productive meeting. And it's a typical national meeting where I'm talking to a large customer of ours and find out that our business could be two or three times larger as we turn on more opportunities. But we had a lot of discussion about how we go to market, how our network works, how our trucking network works. And it's a really compelling advantage when you're having that discussion.

Thank you both. As a follow-up, Jeff, I wanted to circle back to a comment you made regarding your priorities ahead here. One item you mentioned specifically was expanding markets globally. You've obviously got a lot of experience ex-US with the Fasinal business. And linking that to the comment you made today, I'm just curious for whatever thoughts you can share there. On the future outside of North America?

That's right. Yeah, I mean, I was just – actually, I was just in an Italian business last month. I mean, right now I'd say we're just in the beginning stages of exponential growth, and we have such a talented team. I think the focus we need to look at as a company is speeding up the transition of certain tools that we need. We were lucky with Canada and Mexico. We kind of got to piggyback on the supply chain of the United States business unit when we first got going. We look at international. One thing, when we talk about M&A or acquisitions in the future, trying to take that time frame from we can build it in 10 years, we can buy it and have that supply chain built in two to three, four maybe, is really a focus for us moving forward. We have such a huge opportunity when we look at the tools on a global scale. I always use the example of if you have a manufacturing facility in Chicago, you have one in Romania, Italy, China, we have the same tools, the same solutions in all of the countries that we're in today, all on the same platform. In our industry today, that doesn't exist. It's just us today. Our customers want it. They want it fast, and we just need to be able to keep up with the demand, and I think that's where we're at right now.

We're trying to keep up with the demand from our customer base internationally. it's a good problem to have thank you jeff i'll turn it back thank you next question is coming from christopher schneider from morgan stanley your line is now live thank you um you know i wanted to ask about just the strategy and approach to pricing um you know has there been any change there um and maybe do you guys think at this point in time or even maybe going forward um it's better to prioritize volumes over price cost, because it just seems that, you know, you guys would be able to drive higher price if you need it. You know, demand is improving. I think the cost of the inflation out there, I think it's very clear to everybody. You mentioned advantages on the cost to deliver. So, you know, is it a matter of, like, hard to get it, or you just think that, no, it's better to prioritize volumes. Thank you.

You know, I have five things I was going to close with on this call. I think I'll use them in answering this question. And these are, if Jeff asks my opinion on something, these are the five things that always guide me. The first one is love the people that are part of this team. And it's your chosen family. And that means you challenge the heck I won't say the hell out of the heck out of everybody to to grow their skill set the second one is love growth and you know and this is an accountant saying this to a sales guy but but love growth because it's every Every problem can be addressed in a simpler way if you're growing. The third one is incrementals matter and it should frustrate the heck out of you if you're not getting incrementals, especially when you grow in double digits. The fourth one is be really special. Figure out how to be special to your customers. And then finally, getting back to your chosen family, go blue. But, Christopher, my point of running through all that is we love growth, but right behind it is incrementals. So you've got to find the balance in that every day because that balance gives you discipline throughout your organization that you're not sacrificing one for the other. Does that mean if a district manager had a customer call up right now and they had a $100,000 sale at 20% or 25%, would they take that? And you're basically pushing paper, would they take that sale? I know I would. And even if that meant that hurt my incremental margin a little bit in my district and absolutely hurt my gross margin in my district, because you take those opportunities to serve your market, and your market came to you because you're special. But long-term, we have incredible discipline because we want to support a great business that will have great growth prospects in ROIC deep into the future. And as we grow, especially the international piece from the standpoint of outside North America, we'd be really disciplined in North America with what we're doing. Because it's going to take some financial capital to support that business in the years to come. Just like 20 years ago, it took financial capital to support the coastlines of the United States. I remember when California was losing money, and we were supporting it because we saw what the future was. When we were losing money in the southeast, up in Canada, because we saw what the future was. And you need discipline to do that wherever you go. Thank you. I really appreciate all that perspective.

If I could follow up with another margin question on SG&A. You know, is there any way to think about or maybe separate the drivers in Q2 year-on-year SG&A expansion from, you know, the variable comp reset in general – or sorry, variable comp and general inflation, which should remain in the model, versus fuel and freight, which could potentially ease depending on, you know, some of the Middle East resolution? I'm just trying to get a sense for how we could see that line item shift as the year goes on.

Yeah, Christopher, we don't historically break down into that level of detail. I don't want us to think that these are massive impacts on SG&A. They're sizable. but if you think about combined, if you take bonuses and transportation headwinds on the incrementals, it's a couple points. So it's not nothing for sure. It's a couple points. But I won't break out further than that because these things are moving parts and the bonus, although it's primarily heavily weighted on pre-tax, the bonus is a bit more complicated when you look across our business because, you know, of course, some individuals and teams are a little bit more balanced between top line and pre-tax, and some are ROIC. So there's not a real precise way to model it. But I just give you that for context. You're looking at if you didn't have the incremental bonus or the higher bonus as a percent year over year of growth, and if you didn't have the inflation, you'd be looking at a couple points of incrementals. Thank you. I appreciate that.

Our next question today is coming from Chris Tanker from PA Davidson. Your line is now live.

Hey, guys. And Dan, speaking of milestones, congratulations. I mean, 30 years, it's really, really impressive. I would echo the congratulations of everyone else here. So thank you very much for everything. um i guess the biggest question i've got walking away from the call today is the fte growth has been i mean really really impressively constrained i guess has the formula really changed here what kind of headcount growth do we need sort of long term is this an aberration is this kind of the normal maybe just any kind of comments on what sort of energy is required to keep driving double to get growth here?

You know, I'm going to go first. Jeff and I are still trying to figure out who's taking what questions on this call. And what I'll say is I don't know if I'd use the word constrained because I don't know that we constrained it. Our district leaders add people because they need to support business that's turning on today and in the future. our distribution personnel do the same thing and throughout the organization that that's true yeah what you're seeing is this is the natural number that's falling out based on executing in 240 business units across the planet and uh i'm i'm i'm surprised at the number because i i i figure if you can get 10 productivity gains that's pretty good And so I would have seen it, you know, closer to four or five at the field level, just based on that logic. Now, keep in mind, that doesn't translate into four or 5% more cost because the entry level coming in, they're coming in a different – they're coming in for what they're building for the future. So it's, you know, four or 5% there would be a different number. The other thing that's happening is, and this has been going on for a couple years, but we're reloading the portion of our field population, especially, that is part-time. And we do that not for a lower-cost labor. We do that to build a pipeline of talent for the future. And one of the reasons we can add at a slower pace right now is because, you know, if 20% of your headcount is part-time and you need to add some folks, you're adding a lot of external folks, and you're spending a lot more to make those ads, and they're not as productive right away. So you actually need to add people faster, and you need to add full FTEs one faster. If you have folks that are working for you when they're a full-time student and they're working part-time, when they come on board, and if that's closer to 30% of your workforce versus closer to 20, when they're coming on board, they're just a lot more productive. So, you know, we talk about some stuff on AI here, and some of the tools we're coming up with are really stunning as far as productivity on some of the quoting aspects of what we're able to do today versus even a year ago. But a lot of it is, as we reloaded our part-time ranks, we have a more productive group out of the chute when they come full-time. And you're seeing that. So I don't know if we can grow a 15% and be in low single digits forever. But I think we can do it for a little while.

Yeah, I appreciate the color there, Dan. And it really is impressive leverage. So thanks for the breakdown. I guess just my follow-up really simply, Any change in kind of expectations for pricing into the back half of the year? Should we assume it's still kind of low singles, maybe even as high as mid-singles? Just any color on pricing would be great.

I think, Chris, what you suggested is in the realm, I would say, of what we would expect. So you can also look back at stacked pricing, and you can see that we added roughly a percentage point stacked coming across Q1 and Q2. So, yeah, we're going to keep pushing. A lot of this is, and we said this before, we're customer-centric. And so we don't, especially with our strategic accounts, we don't just push the button and ram pricing through. So it's also a little bit harder to predict and commit to where we might land. But we're going to look at this strategically through the continued conversations as we move forward. But anyway, your estimates are not too far off from where we probably would land.

So there were two things that Jeff accented on the call this morning with the regional leadership. Traditionally, Max has a call, our CFO has a call with all of our regional and VP group to just kind of explain a little bit about the earnings release and some of the things we're going to talk about. And Jeff, you know, closed with a couple things, and he pushed hard on what are you doing with your EB percentage, and EB is exclusive brands, and it's really where we have some of our branded partners that have gotten maybe too aggressive at just pushing that button and jamming a price increase in. You know, you push too hard and you give somebody a reason to look at something else. And so continue to look at the exclusive brands as a percentage of our mix. We're better at that today than we were five and ten years ago, and we'll be better five and ten years into the future. And the other one was continuing to drive FMI. Because FMI, as we continue to drive that, especially in the production world, is driving a lot of our labor efficiencies to, you know, the last question. With that, I see we're at two minutes to the hour. We're a minute to the hour. Thanks for joining the Fastenal Earnings call today. And thanks for allowing me to share the story over the years. And I'm excited to see where Jeff and the team take this business in the future. Thanks, everybody.

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