Fastenal Company

Greetings, and welcome to the Fasten All Q2 2025 Earnings Conference Call and Webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. We ask that you please ask one question and one follow-up, then return to the queue. 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 Flournus, our Chief Executive Officer, Jeff Watts, our President and Chief Sales Officer, and Cheryl Lasowski, our Interim Chief Financial Officer, Chief Accounting Officer, and Treasurer. 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 Relation homepage, investor.fastenal.com. A replay of the webcast will be available on the website until September 1st, 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 Security 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 and good morning, everyone. Thanks for joining us today. My name is Jeff Watts, President of CSO, and while I've listened to this call 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 Fasol team on delivering just a very strong quarter and exceeding the quarterly result of over $2 billion in revenue for the first time in our company's history. Now, it'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. And when I think about the growth this quarter, market conditions, they 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 be addressing in more detail later in the deck. But what I'm really proud of the team for is their push and momentum in market share gains and contract signings. That momentum has really built up the belief in the execution of our strategic plan, the one that we shared at our Investor Day presentation back in March. The activities and actions that we've taken better align our field and corporate teams focused on something that our late founder, Bob Kerlin, taught us, the importance of a common goal. Bob always emphasized that when everyone in a company is focused on a shared purpose, it drives unity and prevents division among groups and departments. It also drives results, and that's what we're focused on, with an emphasis on stronger, more embedded customer relationships, which reflect our strategic intent to be more than just a distributor. We're a supply chain partner, embedded at the point of use, delivering measurable value to our customers. I think this shows in our contract signings. Since implementing these changes back in the beginning of 2023, our contract growth has increased from 4% in the 22-23 timeframe to 11.2% last year and that momentum has continued as we move into 2025. In Q2, we saw 84 contracts signings well ahead of the last two quarters and honestly outperforming our expectations considering the current market conditions. Contract customer sales for the quarter increased 11% and now represents 73.2% of our revenues up from 71.2 in the previous year. And moving on to slide four and looking at our customer site performance. Starting with revenue from sites generating $10,000 or more per month, these increased 11.6% in the quarter, accompanied by a nearly 7% rise in the number of such sites. This change is primarily influenced by the growth in our onsite-like sites, or those generating $50,000 or more per month, which grew by 12.4% and showed revenue growth of 14.5%. Monthly sales per customer site increase in all customer categories, with the total sales per site increasing by 17.7%. to $6,790 per month. We did see a decline in the number of accounts that are under 5K, which did contribute to the average increase in revenue per site in this category. But when digging further, almost all these declines were in the under 500 customers, with the bulk actually coming from the customers that do less than $100 per month. Now this decline was expected as we continue to drive our focus on our larger sites, but we also looked to relaunch Fastenal.com later in 25, and this is being done to really help address a spot by needs of all of our customers, including the ones in the smaller categories. Our goal has always been the same. Our goal is to grow in all of our categories. One number that does stand out to me in our growth is the non-manufacturing sites in the 50K plus category. Now, this group's revenue has increased 30% year over year, and the site count has increased over 18%. Now, this is, we believe, as a result of our realignment of our sales teams to work more closely with the regions and the RVPs, from the government teams to the safety teams We're driving more business together in areas we may have missed in the past, especially in the non-manufacturing sector. And again, some encouraging numbers. When you look at the slide and the results on slide four, we use these to gauge our quarterly performance, but in the field, we go down to the month. And what's exciting is when we look at our trends on a more granular basis. As we move throughout the quarter, growth has continued to increase in all categories, 5,000 and above, most notably our site counts, which were all double-digit growth in June. Some very exciting numbers there. Overall for the Gorder, a very nice job from the team, not only on the sales side, but also on how we're continuing to show progress on implementing our strategy across the organization. So again, to the team, thank you very much, and I'll now pass it over to Dan. Thanks, Jeff, and good morning, everybody.

You know, when I think back three years ago, in the summer of 2022, we were having a good year. And, uh, but, uh, as, as we had reemerged from COVID, some things were going on. There was a lot of supply chain constraints, a lot of chaotic environment, a bit of inflation. We were putting up really strong numbers, but in all frankness, it wasn't a year that felt good. And, uh, and I've known Jeff for, uh, for 30 years or close to 30 years. And we were having a lot of discussions about what we're seeing. I was having a lot of discussions with other leaders in the organization. And what didn't feel good was it didn't feel like the organization was aligned. And even worse than that, it felt like we had lost some humility in the organization over the prior several years. And maybe it was masked a little bit because of COVID. Maybe the fact that we weren't keeping each other in check, because in life, we all need life partners, whether it's business partners or, in my case, my wife, who tells you when you're full of it once in a while and keeps us all humble. But it felt like we had lost some of it. And so we started making some changes late in 2022, and that continued as we moved into 2023. I asked Jeff to step out of his existing role and step into the Chief Sales Officer role. challenged him on some ways to think about the sales side of the organization. True to his nature, he took that and with a really strong team, asked some folks to step in some different roles. And I'm really pleased to say that the changes they made felt good at the time and they feel even better now as we're going through 2025. So last fall, as I mentioned earlier, we named Jeff Watts president. And reshuffled the deck a little bit more. And again, really, really pleased to see the outcome of those changes. Late last year in our annual leadership meeting, I shared with a few folks, yeah, Jeff's going to open the earnings call in July. So it'd make it a lot easier for him if we could put up a strong quarter. Because it makes the call just a lot easier. It makes the Q&A a lot easier. And so true to form, the team rose to the occasion and put up an excellent quarter, and I'm proud of the entire organization. My only comments to Jeff and also to Cheryl coming into this call were make sure you slow down when you talk, enjoy it, and just tell our story. On page four, Jeff shared some stats on that page. We have regular calls throughout the year with our district leaderships, district leadership, as well as our regional leadership. But in those district calls, we lead into it or give them some instruction ahead of time to talk about how the organization helps you, what helps you the most that we do, what hinders you the most in what we do in supporting you and, quite frankly, slowing you down. It's a great way to challenge both directions in the firm, inside and out. And we provide these types of statistics that you see on page four. One thing that you'd see if you were inside the four walls of the organization is that the closer we get to the action, the shorter the timeframe. So if you're having a conversation with the district manager, we look at this, and Jeff mentioned it, we look at these customer site performance statistics on a monthly basis. In our quarterly calls, we talk about it on a quarterly basis because we think it's more relevant to the discussion. And as we did in our March Investor Day and what I expect we'll do in our annual filings is we'll talk about it on an annual basis to really talk about what it means. But regardless of the timeframe you're looking at, it's about what are the trends in the business and what are driving the trends and how much of that is coming from the tide is rising and we're rising faster or not as fast or the tide is stagnant or dropping but we're performing. What I'm really pleased about this quarter is our numbers didn't change as we moved through 2025 because the tide is rising. I will say it has stabilized in our business. Last year, the last two years, quite frankly, in the fall of 2022, the PMI really dropped and it's been sub 50 pretty much ever since, after the couple months. But what's changed is it's stabilized, but our execution has dramatically changed, and I feel like the organization is really aligned. And I believe it shines through on page four of our flipbook. Going to page five, Jeff already touched on the daily sales rate, growth rate. For the quarter, we came in at 29 cents. EPS rose 12.7% from a year ago. One of the... An under the hood story within the quarter is a change we made in mid 2024 to undo a decision that had been in the works for a few years. And that related to our stocking and distribution of fasteners where it's really wide. You know, probably the person I've learned from the most, I mean, learned a ton from Bob Curlin learned a ton from the Fastenal organization. One of the persons I've learned the most from over my career at Fastenal is Nick Lundquist. And when Nick led supply chain and distribution, he always had a comment. He felt their job was to keep the trucks full. And what that meant is support the branch and onsite network in any way you can to give them hours in the day. And we pulled away from that after Nick had stepped out of that role for a few years and we weren't stocking as deep as we should have been. And our supply chain team really dug into it and studied the branch and onsite activity. And we began ramping up our investments where we get a nice return. And we did that in the tail end of 2024, coming into 2025. And this morning on our call with our regional leaders, I really challenged that group. to understand what that's done to your business, not just in revenue or margin, but in effort as you look at how many POs have dropped. And it gives hours in the day to our folks in the field and a huge, huge win. Moving down to P&L, I'm pleased to say we leveraged our SG&A. And as a consequence, put up 21% operating margin for the quarter. The, uh, the only component of SG&A that we did in lever was bonus and commission. And I think it's Dave Manci a number of years ago used the phrase shock absorbers in our system. And, you know, on the way down, what, what helps us preserve our P and L and frankly preserve our ability to invest in the business and our customers going forward is the fact that everybody in the organization takes it on the chin. when our performance suffers. So in 23 and 24, there were a lot of people in Fastenal that took pretty extreme pay cuts. And I'm pleased to say in the quarter, one of the things that ate away at some of our leverage was the fact that our bonus pools expanded nicely and were able to celebrate and reward the team for what they've been doing the last two years. If I think about that operating margin, I'm really pleased to say our incremental margin for the quarter came in exactly at 30%, again, a strong showing. And as you saw end of last week, we announced a dividend payable in third quarter of 22 cents. We remain confident in our ability to generate cash flow to support the business and to support the dividend that we expanded in 2025. Going to page six, the FMI technology, A little softer that we're seeing. And if I look at it, you know, in 2025, the contrast of 2024 is in 2024, we were hitting hard with converting a lot of existing customers with the FMI technology related to RFID. We have a Kanban system, we're implementing that. That was extremely successful in 2024. And it reflected both new customer signings, but also, again, the conversion of existing customers. That softened a little bit as we looked at this quarter. Even our vending softened a little bit. Part of that is a function of how many we converted last year. Our holy grail has always been to keep that number above 100 a day. And in the quarter, we were at 101. There's a lot of conversations going on around that little thing called tariffs. And there's a finite amount of energy in the room. And sometimes something's got to give. And I think what gave this quarter is all those discussions meant there were fewer discussions about expanding the FMI footprint. And our challenge to our team is we have to keep moving that forward. Despite all that, we ended the quarter with just over 132,000 devices installed at the equivalent weighted devices, 132,000 installed across the planet. And that's almost an 11% increase in what we had at the end of June last year. So that puts our FMI at 44.1% of sales. And we believe ultimately that number can get to about 65% where there's enough repetition with a customer that's large enough where you can install that investment. And so two years ago, that number was in the 30s. So continue to see that expand nicely. Because of the number being down slightly, we see the signings for the year coming in somewhere between 25,000 and 26,000 MEUs. Again, a great number, a number we would have killed for not too many years ago, and so successful. But we want to get that number up a little bit higher, not just above 100, but a little bit deeper into the 100s. E-business grew 13.5%. I'm pleased to say for the first time ever, we broke 30% of sales as we exited the quarter, well, for the quarter. So excellent performance there. And I believe we have a lot of runway on that piece as we continue to improve our e-commerce capabilities. And finally, if you take those two and combine them, 61% of our sales fell under our digital footprint. That number was in the mid-50s two years ago, and our goal is to exit the year somewhere between 63% and 64%. Page 7 is a new one for the group. Frankly, it's a new one for us six months ago. And Kevin Fitzgerald was involved in our pricing efforts back in 2018 when some of the initial tariffs were going on. And at the time, we shut down our IT group for three months and built a system to track this and be in a position where we convey insightful information to our customer about what we're seeing and, more importantly, what to expect and what that might mean to give them time and options to pivot on their own supply chain. And so when the tariff... Activity started ramping up. I said to Kevin, can you start producing a video for the field to convey order to the chaos? And try to simplify it as much as you can. And what you're seeing here is, in essence, a rolled up version of the slide deck that Kevin uses in those videos. And I think he's produced 13 or 14 to date. It seems like about every other Friday there's a new video coming out. Maybe it's more frequently than that. But what we do here is try to simplify it for the field, but also for the folks in supply chain. So when you start looking at that fourth column where it says, is it eligible for duty drawback? That's a really important distinction because we bring product into North America for North America. And if all of a sudden there's a 25 or a 10 or a 15 or whatever percent tariff being applied on product and you bring it into the US and then you subsequently move it into Canada or Mexico, you've created an inefficient supply chain for your customer, even if it is the most efficient way to move the product. So as we move through 2025, we've been redirecting more and more product to come directly into Canada. the economics justify it and this is primarily on the faster side and the same thing in the mexico the downside is it is a more expensive supply chain because you do spend when you're breaking down shipments and you're sending them into multiple ports it is more expensive to go into the west coast of canada with a with a with a import for just canada than it would be to bring it into the u.s but it's a but it's less than 25 45 or 50%. And so you make that decision, but you convey that to your customer. What we're doing, because our covenant is to manage your supply chain. So hopefully this brings some clarity to what we approach with tariffs and how we convey it. Our goal isn't to be the best organization at adjusting pricing. Our goal is to be the best organization at managing supply chain for our customer and being agile to benefit them and their ultimate customers downstream on the most efficient supply chain to get them what they need when they need it. 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%. That's our strongest daily sales rate since the first quarter of 2023. And as Jeff mentioned, it's also our first quarter above $2 billion in sales. Feedback from the 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. In the absence of much external help, the improvement in our sales 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 second quarter of growth for Fastener since the first quarter of 2023 and acceleration in manufacturing and markets. Second, contributions from our strong contract signings over the past six quarters continues to build. We continue to experience a healthy pace and mix of signings in the second quarter of 2025, and our total national, regional, and government contracts has grown at a double-digit rate for 15 consecutive months. The quarterly sales growth rate is a fair representation of our performance, and we did see acceleration through the period. It was a solid, self-help-driven result in a soft market. The pricing outlook also warrants some discussion. Year-to-date, significant tariffs have been applied to products from China, as well as steel, including steel-derived products like fasteners on a global basis. We continue our long-term trend on diversifying our supply chain where possible to the size and timing of our suppliers' pricing actions, and we 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. During the second quarter, we implemented three separate pricing actions which aimed to contribute 3% to 4% of price by the end of the second quarter of 2025. The phased approach to this rollout resulted in 140 to 170 basis points of additional impact in the second quarter with momentum building as we ended the quarter. Additional pricing actions will be necessary in the second half of 2025 with the potential to double the impact of pricing. depending upon where the deferred tariffs ultimately settle and the pace and execution of our actions. 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, our frugal and adaptive culture, and the weight of the technologies and global supply chain resources we can apply to finding solutions to customer challenges. This is our expectation in the current environment. Moving on to slide nine. Operating margin in the second quarter of 2025 was 21%, up 80 basis points year over year. Growth margin in the second quarter of 2025 was 45.3, up 20 basis points from the year-ago period. The improvement was driven by price cost being slightly favorable, margin on fastener sales improving due to the fastener expansion project, and improvements related to other supplier-focused initiatives. These improvements were partially offset by customer and product mix dilution, higher import duty fees, and higher fleet and third-party transportation costs. Customer and supplier incentives were also a slight drag. We anticipate our gross margin for 2025 will be relatively flat with 2024. This will be dependent upon our effectiveness in managing price costs, and the degree of macro improvement will also influence this scenario. SG&A was 24.4% of sales in the second quarter of 2025, down from 24.9% from the year-ago period. Employee-related expenses increased faster than the rate of growth in sales, largely due to the reset of bonus and commission programs due to improved financial performance. This increase was partially offset by leverage achieved in all other SG&A costs. 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 29 cents up from 25 cents in the second quarter of 2024. Reminder, we executed a two-for-one stock split in May of 2025. The prior year EPS has been adjusted for this change. Now turning to slide 10, we generated $279 million in operating cash in the second quarter of 2025, or 84.4% of net income. Despite our investment in inventory, cash generation was above traditional second quarter levels. The five-year average from 2020 to 2024 was 83.7%. We remain comfortable with the cash generation of our model and continue to carry a conservatively capitalized balance sheet with quarter-end debt being 5.7% of total capital. Accounts receivable were up 9.9%, reflecting sales growth, relatively faster growth to larger customers that tend to carry longer terms, and an uptake in quarter-end deferred payments from our customers. Inventories were up 14.7%, similar to the preceding quarter. We have increased inventory as part of our effort to improve product availability in our selling locations and improve picking efficiencies in our hubs. We have added stock to support customer growth and we accelerated some inventory schedules for future delivery into 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. Accounts payable were up 9.1% reflecting the increase in inventories. Net capital spending in the second quarter of 2025 was $64.3 million, up from $52.6 million in the second quarter of 2024. This increase is consistent with our expectations for the full year where we anticipate capital spending in a range of $250 million to $270 million, up from $214 million in 2024. This increases from higher FMI device spending, higher IT spending, 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.

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into the question queue, please press star 1 on your telephone keypad. As a reminder, we ask you to please ask one question, one follow-up, then return to the queue. Our first question today is coming from David Manthe from Behringer Line. Is that live?

Thank you. Yeah, 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 onsite business that we've talked about in the past, that's really a good proxy for the contribution margins from the 50k plus. If you take that down a step and you go to the 10k plus, it aligns actually a lot closer with the historical company. Because what's different there is The gross margin can challenge the company number a little bit. Not too much, but a little bit. But the SG&A leverage is much better. Because one of the things that you've seen over the last five, six years, actually over the last decade, as we rationalized our branch network and morphed a lot of businesses, both to onsite and also to large customers served out of a branch, because we're indifferent to how it gets served. We wanted the local team to make the best decision. But what you saw was an incredible leaning down of our operating expenses. And the biggest two drivers of that were people-centered and occupancy-centered, were the two biggest drivers that were variable. So contribution margin actually for A lot of the 10K plus customers, it looks a lot like the company. And intuitively, the best way to prove that out is, you know, that 10K plus group is almost 80% of sales. So it really shines through a lot of the underlying organization. Hope that answers your question.

Yeah, yeah, thank you. That 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 not? Maybe you could just help clarify that statement.

I would read that a little bit differently, and if we weren't crisp with our press release, that's on me. It's been paying off in the first half. It's been very attractive from the standpoint. The revenue and the gross profit dollars in and of itself is really attractive. The nice piece that's harder to measure is what does that freed up time mean as far as what our teams can do? I think a lot of it shines through, and Jeff touched on that when he looked at that page of the customer categories and the success we're seeing. It's If I have more hours in the day, more hours in the week to engage with my customer, there's always more ways we can help. It's just sometimes you don't have time to get to that third thing or fourth thing. And freeing up that cutting appeal has really helped. So it's been providing an attractive return right out of the chute. What happens as we move into the latter half of this year and into 2025 is There is some rationalization we can do because by putting, by deepening that inventory in our distribution network. One challenge we always put in front of our supply chain team is because they're aligned with our distribution centers, historically they could sometimes get caught in that trap of they would look at our hub inventory, our hub supply chain, and feel really good on what our fulfillment is out of distribution and how many days of inventory we have on hand. But a great supply chain leader looks at it from the standpoint, what do we have in inventory all the way from our supplier to the customer and all the stopping points in between? And so if we take $10 million out of inventory and it means we end up with $10 million in the branch network or $15 million in the branch network and we're cutting a lot of POs, that's not a smart decision. And so as we go through the second half of 2025 and into 2026, some of that inventory we've added, we're slowly raking that out of distribution. And so we believe the returns will improve. But on that piece, so when we talk about the latter half of 2025 and into 2026, we're more referring to that, but we're getting the return on that inventory right now.

That's great. Thanks a lot, Dan.

Thanks, Dave. Thank you. Next question is coming from Ryan Merkle from Williams. Your line is now live.

Hey, everyone. Congrats on the quarter.

Thanks, Ryan.

Let me follow up on Dave's question. So should we expect sort of flattish gross margins year over year in the second half? And can you just unpack why deeper inventory of fasteners is helping your margins? Are you getting better margins on fasteners, or do you expect the mix of fasteners to get better? And that's what helps the margins.

I'll take the last part of that, but then I'll ask Cheryl to answer the first part of that.

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

If you think of that faster expansion, The bigger part of it isn't the fact that we're buying it better, although we probably are in 80% of the cases. And the reason I say that 80% are qualified at all is the fact that we went really deep in our analysis and we looked at some small levels of sales from a dollar standpoint and from the number of branches actually selling it in a 12 month period perspective. So we went really deep and wide, excuse me, we went really wide. What it does do though is there's a lot more MRO faster business in that mix because the stuff that we're buying on a regular basis, whether we're sourcing that through our distribution and supply chain group or locally at the branch or onsite, that's a known spend and Our stocking level on planned spend didn't change so much. It was on unplanned spend. And so that actually has two benefits to it when you have it on the shelf. One is you know your cost quickly. You can convey a sell price to your customer quickly. And so part of the win is a little extra revenue of that type of product. And that product in and of itself carries a better gross margin profile because it's a spot buy versus a plan buy. And the reason that needs a little bit better gross margin profile is it's a lot of work. And so it takes a lot of labor. Now, if we can put a little bit of that product on the shelf and leverage the labor up a little bit and get a little bit more of those sales, the mix helps us run. Okay. That makes sense.

And then my second question is just on sales outlook. The contract signings were really impressive. I guess my question is, Dan or even Jeff, what's your confidence level in achieving double digit sales growth in the second half of 25? Because it seems like the pipeline is there. And then Cheryl talked about more pricing.

Yeah, I think when I look through it and I look at our pipeline today, there's no reason for me to say that we won't be in that category of double digit moving forward for the rest of the year. Everything is becoming very strong across every category we have, especially in our pipeline of contracts. So confident with that level at this point.

All right. Thanks. Pass it on.

Thank you. As a reminder, that's star one to be placed into question queue. Our next question is coming from Stephen Volkner from Jeffrey, your line is now live.

Hello?

Stephen, perhaps your phone is on mute. Our next question is coming from Tommy Moulton. Stephen, your line is now live.

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 by purchases. Maybe just give us a little more insight there, and if there's any way to quantify how big an opportunity you think that is to capture more of those spot buy needs from existing customers, that'd be helpful too.

Thank you. Yeah. In my answer to this question, this is Dan's opinion, and my opinion and $3 will buy you a cup of coffee. But here's what I believe based on conversations with a lot of customers over the years and with a lot of Fasto employees over the years. When we talk internally about the e-commerce piece, we look at the customer site categories And a lot of it, and one thing you'll notice is, and this has been true if you look at our data that we shared in March, for a decade as we were closing, consolidating locations, excuse me, and rationalizing our network, that customer, that smallest customer, you saw a dramatic fall off in that customer. And that customer was disproportionately tied to non-res construction. But you saw a lot of fall off in that customer group. And at the same time, the things that we had been investing in for years, our national accounts team, and as time progressed, our government sales team, our regional sales team, our initially vending but FMI initiatives, what we were really doing is creating great resources to grow our large account business. And And it was a really successful strategy. And within strategy, you have priorities. And priorities mean trade-offs. And you look at what you can invest in today and what you invest in over time. And one of the things that had to be invested in over time was the e-commerce side. Because frankly, we were bad at it. And today, we're not great at it. But 30% of our revenue was e-commerce. in the second quarter, so it doesn't mean we're not successful at it. I just would say we get those numbers because we're really, really good with key accounts. But in every key account I visit, if I walk through the receiving area, I'll see boxes that don't say Fastenal on them. And that tells me there's elements of their supply chain needs, spot buys. that we're not providing. Now, it might be products that we don't sell. It might be products we sell every day, but the buyer in the engineering department doesn't know us the way the buyer in the production area knows us. And we're all creatures of habit. And so they go and hop online and they buy it. And some of that became even more pronounced during COVID because when they looked at sending people home, It wasn't the person on the production line that was going home. It was the person that was in more of an office setting role to get them out of the building, to make it safer for everybody else. And when I look at our existing customers, I believe with our 10K plus customers, for every dollar they spend with us, there's 20 cents they don't. I could be full of it on that answer. but I know it's not 0%. And so I believe there's a huge win there for Fastenal in the years to come. In the categories of customers that have been dropping off, the under 5,000, the under 1,000, the under 500, the $100 customer, what would be great if we had an e-commerce solution where that customer could hop on and easily order from us and we'd pick up business there. And I believe when we go into 2026, when we go into 2027, that the drop-off we've seen in the less than $5,000 customer, which is really coming from the under 500 and under 100 other customer groups, stabilizes. And I believe it has the potential to grow, not because we're throwing labor at it, but because we have this great supply chain going across North America and more people can tap into it because it's now available in the way they want to buy. And some of that is, and we've rolled out enhancements to our checkout process, to our search functionality, incorporating some AI aspects in our search functionality to make it work better. And also having a really crisp strategy on what is it we offer in our e-commerce window that might be a subset of what we offer to a customer where we're onsite, where you can take more Herculean steps for a customer that spends $50,000 a month with you than a customer that buys from you twice a year because you understand their needs better and you can communicate expectations better. But long answer there. I hope that actually answered your question. But I believe the potential is meaningful with our existing 5 and 10K plus customers. And I believe it can expand our under 5K customers.

Thank you, Dan. I appreciate the insight. Jeff, I had a follow-up question for you. Your vision on running the sales organization is increasingly clear and backed up by some quantitative evidence. I mean, the contract count is a beautiful chart of blue bars up and to the right. And so my question is, now that you've inflicted a pretty good amount of pain on others in the marketplace, How are you seeing others try to defend their share? Or when do you expect to see that? I mean, this Fastenal market share story has been gathering momentum. You know, maybe this is round one. I would expect that at some point you'll see a round two and there will be a collective response. What do you see in there?

Yeah, I mean, I look at it a couple different ways. The first way I look at it is... This may sound a little odd, but especially when times are tough, we have to go through tariffs or, you know, the 2009 timeframe. You know, we obviously do a lot better than because customers need some security. They look at Fastenal right now today as, hey, you know, they have a very good supply chain. They have great solutions for us. And, I mean, part of the reason our pipeline is so strong right now, I believe, is because of the uncertainty with the tariffs and customers are looking for some safety and security. I don't see... One thing about us is we have such a large footprint globally that it's hard sometimes to compete with us on a global scale. So if you have a site in Chicago, you have a site in Italy, you have a site in Shanghai, we're going to be able to offer you the exact same services in Chicago or Shanghai or any of our sites. That's tough to compete with these days, especially when we're talking about a supply chain on a global scale. Right now, we're seeing nothing but positives in our pipeline when it comes to that. I don't know if you want to add anything to that, Dan. Nope. Thank you, Jeff.

I'll turn it back.

Thank you. Next question is coming from Chris Denkert from Loop Capital Market. Your line is now live.

Hey, good morning. I guess I would just echo the congratulations on a really nice quarter here. And maybe this one is also for Jeff to start off. I mean, Quick update, perhaps, on the success of the Customer Solution Consultant Program. That team's still near 170. How are they doing versus your plan? Maybe just a quick update there would be great.

Yeah, I mean, we're still looking at increasing those numbers, but the reason is that team has been extremely successful for the districts, for the regions as a whole. They're really out there trying to build the contract success and maybe not the large global sites, but the more regional sites. If you look through a lot of our customer site analysis, a lot of the success we're seeing in the 10K plus categories come from the CSC program. So we're still looking to expand that. Obviously, it's not just in the United States. It's in every country we're in now. But I think we're getting close to our number. The nice thing is I have a lot of districts now looking for to add multiple CSCs to their area. Once they can afford it, they want more and more, and there's a reason for it. It's been a very successful program for us so far.

Got it. And I guess maybe just as a follow-up, are there additional opportunities around role specialization? I know we spent a lot of time diving deep there at the analyst day. I mean, is it really more about maintenance tweaks at this point, or there's still some fairly large-scale shifts in blue team roles that are available here?

I don't think there's a lot of large shifts still to do. I think maybe some maintenance, like you said. Certain areas of the country, certain areas of the globe still has some work to do on getting that more clear in certain areas. But for the most part, I don't see any major shifts coming with role clarification. You, Dan?

I would say there's always things you discover because in a decentralized organization, you we have a great aligned plan, but you still have great district and regional leaders. You have great contract customer leaders, our national accounts team as an example, our government sales team as an example, that try nuances to it because of discussions with customers. And all of a sudden you see some success occurring in one of our regional business units or with a group of customers, you start asking questions. And so that Some of that will lead to refining as we go forward, but right now I can't think of anything offhand that jumps out. It's been really successful.

Thank you. Next question today is coming from Chris Snyder from Morgan Stanley. Your line is now live.

Thank you. I wanted to ask about price. On the last conference call, you guys talked to three to four points of price here in Q2. It came in closer to 1.5%. Is that just a different, a definition in that, you know, when you guys were saying three to four, that was the exit number, not the quarterly average. And then I guess, what should we expect on price cadence here into the back half of the year? Thank you.

I'm going to answer the first half of that and I'll give between Kevin, the chair who's in the room or Cheryl's in the room, maybe it's an opportunity to chime in on the second part. You know, when we had our call in April, The only thing that was certain at that point in time was this is chaotic as hell. And you weren't really sure what was going to happen. From day to day, you have a tariff. You hear about something going to a crazy level tariff. When you start talking 150% tariff on something, you just kind of look at yourself and don't know even how to respond to it. But there was the pause that kicked in. There was different starts and stops, starts and stops. And so when we answer a question, we look at it based on what we know today, here's what we think. As I mentioned earlier, our goal isn't to be the greatest pricing company in the world. Our goal is to be the best supply chain organization in the world. and to give great visibility to our customers so they have the ability to make decisions when their supply chain becomes more expensive or more chaotic. And so we frankly didn't know, but here's what we thought. As it played out, some of those pauses kicked in and it changed the timing of things we are doing. And as it turned out, it was more of that's how we exited the quarter. Not how we, you know, we thought we'd be there by May 1, not exit the quarter at that level. Even when we look out to the second half of the year, we have thoughts on steps we're taking, things that we've communicated. And some of those are still up in the air based on what happens. You know, you see it in the news every day. A headline says we're doing this with this trading partner or that with another trading partner. And it changes, and what we really try to do is understand what are we seeing in our costs, and how do you communicate that to the customer? And our goal here is to defend our margin, not to enhance it. Our margin improved in the quarter because of the faster initiative. That's what really drove it. And that had nothing to do with tariffs. And so it turned out we exited the quarter that way, but Kevin, I don't know if you want to chime in or Cheryl?

Yeah, no. To Dan's point, we did. We exited the quarter closer to that three range as we guided, you know, on the Q1 call for Q2. We'll continue to see that ramp up, though. As we sit here in Q3, we'll continue to probably see in that three to five range. And then kind of to Dan's point, you know, there's a lot of things changing. all the time. I do think we can get into that five to eight range by the end of the year, but some of it's just going to be dependent on what happens on August 1st, what happens with Section 232 tariffs. So a lot's still unknown, but we're still moving forward with what we do know, and those ranges seem to be accurate.

I'll close with a thought on that, and that is I believe our team is really good at communicating with our customer. Our customer trusts the information we provide because we're very transparent. One feedback I've received from our customers when I travel, and I travel quite a bit. A month ago, I was down in Illinois. We had a 40-year employee that Bill Draskowski and I went down to celebrate with that individual, and we visited some customers. There was a few customers that I visited where their head of operations not only greeted us, but sat in on a discussion and caught me afterwards and was very complimentary of our team from the standpoint of not only what they communicated on our supply chain into their business, but the insight we're able to give them on their other supply chains, whether it's direct or through other companies that come into their business, because we work to really simplify the information. And long story short, I think that means we can be effective at communicating and that translates into results because we're not raising prices. Our prices reflect the cost of the supply chain coming into our customer.

Thank you, Dan. I really appreciate all that color and transparency. If I could just follow up with a quick one. I think three months ago you kind of said the conversation with customers was really about don't shut us down, less about maybe price. Is that still the nature of the conversations today? Thank you.

I think today it's more about price. I think there's some fatigue going on. And that fatigue is not just with customers. That fatigue is with our folks. That fatigue is with our suppliers, our folks that work with customs. So I think it's more price than it is shutdown the line today.

Thank you. I appreciate that.

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

Sure, our next question is coming from Patrick from JP Morgan. Your line is now live.

Yeah, this will be a quick one. The gross margin expectation for the year, how does price cost look in that, you know, relative to the way you're thinking about it? And are there any unusual drivers besides that we should think about as we think about modeling the gross margin, you know, beyond this year? Thank you.

I think the price cost becomes challenging in the second half of the year. We're a little bit ahead of it. Our goal would be to stay with it. And I don't know if that means we were, you know, we're 10 or 15 basis points ahead of it or five or 10 basis points behind of it. I guess time will tell, but that gets more challenging as we get deeper into it and we have more and more of that higher cost inventory coming through. Very good.

Turn it back over for any further closing comments, or would you like to take another question, sir?

No, I think we're good. We'd like to finish on the hour. And I would just throw out we've made several leadership changes during the quarter. Essentially, the last two years have been about investing in depth. We moved Jeff into the role he's in over the last couple years. We backfilled on the international side with deep bench talent that we have. We're blessed in that we're promoted from within organization, and we have deep talent in the organization. It doesn't make decisions easier, but it makes the probability of decisions stronger for success. And during the quarter, Casey Miller and Bill Draskowski, who had taken a lot on their shoulders, over the last two years after Jeff asked them to. We modified their structure within their team, elevated two individuals within Casey Miller's group to split the U.S. into two business units again. And I'm pleased to say that the two individuals that stepped in, Kevin Davis and Bob Hopper, have 26 years of experience on average Kevin's at 24 and Bob's at 28. Bill Dretzkowski elevated two individuals on the team. And essentially the elevation was really about their team and giving them the opportunity to step into more roles and to give Bill and Casey some breathing room because they were really stretched thin. And that's Scott Bailey and Bill Rickenbacker. And those guys are both 30 plus years. So incredible talent that's getting elevated, and I'm excited what that means for those business units and the teams under them to spread their wings a bit. With that, thank you, and everybody have a good balance of the 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.