Hello and welcome to the Fastenal Q1 2022 Earnings Results Conference Call and Webcast. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Ellen Stolts, Investor Relations. Please go ahead. Welcome to the Fastenal Company 2022 Q1 Earnings Conference Call. This call will be hosted by Dan Florness, our President and Chief Executive Officer, and Holden Lewis, our Chief Financial Officer. The call will last for up to one hour and will start with a general overview of our quarterly results and operations with the remainder of the time being open for 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 June 1, 2022 at midnight Central Time. As a reminder, today's conference call may include statements regarding the company's future plans and prospects. These statements are based on our current expectations, and we undertake no duty to update them. It is important to note that the company's actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission and we encourage you to review those factors carefully. I would now like to turn the call over to Mr. Dan Florness. Thank you, Ellen and good morning, everybody, and thank you for joining our Q1 earnings call. Before I start, I thought I'd just share a few tidbits from a conversation I had this morning with our regional business unit leaders, our regional vice presidents and our VPs of the business. I started that by sharing last evening or late yesterday afternoon, my wife and daughter returned from a week-long band trip to Florida, marching band. As with most high school trips, it involved a 26 hour bus ride down last Wednesday, well, if you're coming from Winona, that is, and a 26 hour bus ride back. I saw a bunch of haggard kids and a handful of haggard adults get off the bus yesterday about 4' o clock. When we got home that evening, I was watching the video. I don't like to watch myself on video, but it's a necessary evil to make sure you present as good a message as you can and present it in a style that isn't too painful to watch and m y wife commented on it, and I think she probably was commenting partly in the fact she was kinda tired from the bus ride. She thought it was a pretty uninspiring video and she had no problem telling me that and s he said, "You know, for the last 2 years, you come home, you talk about things that people are doing at Fastenal, things you see from the leaders and everybody within the organization and how impressed you are. And, your video, you just had a great quarter and your video doesn't speak to that at all. It sounds like you're in the middle of COVID and kind of disappointing." And after you know, brushing my pride off, I got in this morning and I let our leadership know just how damn proud I am of the quarter they just put up. But more important than that, of what they've done in the last 2 years and all the hard work as we transition from tariffs to COVID and worrying about our own human safety and the safety of others to the surge in demand for products. That pivoted into a supply chain globally that completely fell apart and how did we manage through that to support our customers and their needs. More recently, managing through the chaos that is inflation. Frankly, the first bullet on the flip book says that has the statement good execution and t here's a typo there. That should say great execution. I think the Fastenal blue team did an unbelievable job in the last 2 years, and I think that extended into this quarter and I'm really proud to be associated with them. I even, you know, yesterday in our audit committee call, we were picking on Holden a little bit because he's been kind of crabby lately. You know, it's kind of refreshing when you have a really good quarter and your CFO is kind of crabby, and he was talking about our cash flow and h e wasn't pleased with it. I said to him, I said, "Holden, take a look at the last 6 years and look at our growth and look what our operating cash flow to earnings was in our strongest year." It was at 93%. I think that was Q1 of 2018, might have been 2017 and it t costs money to grow a distribution business, and that money is spent in working capital. That gets amplified when you have heavy inflation like we're seeing right now. I'm glad you're irritated and irritable. I can't imagine being Elise right now when you come home from work but t hanks for what you're doing, but don't be too hard on everybody. So, flipping to the book here. The net sales grew 20.3% in the Q1. Our pre-tax profit grew 28%. There was some amplifying effects of last year's weather in the Texas and Oklahoma area in February hurt our sales, hurt the economy, quite frankly. Then we had a mask write-down and, b ut adjusting for those, this is our strongest top and bottom line growth that we've experienced in a decade. You know, it's really been since we were recovering from the 08, 09 in the 2011, 2012 time frame that we saw the growth that we're seeing right now so r eally pleased with the performance. In the last 2 years, so since the pandemic started, we've put in a lot of energy to deploy technologies and strategies to just improve our efficiency and t hat served us really well because the environment has restrained our ability to add labor, add energy into the organization but i t hasn't hurt our ability to grow sales and also to continue the branch consolidation process that we started 6, 7, 8 years ago. So very strong performance there. The supply chains and labor markets remain tight. However, conditions have stabilized. We're getting more product on the shelf to support the needs, which makes the business less chaotic and w e are seeing an uptick in applications coming in. I'm hearing it mostly anecdotally from our regional leaders, but they're seeing more and more people willing to come back into the workforce and apply for jobs. Part of that is probably a function of our number one recruiting area is 4 year state colleges and 2 year technical colleges. As they've come back in full force, that group of people are looking for opportunities for their future. Our international business reached a milestone. In the month of March, we exceeded $100 million in sales for the first time and n ext week marks 2 steps towards normalcy in our world. One is our customer expo, our selling event, is returning to an in-person format after 2 years of not occurring in person and t hat'll be Tuesday and Wednesday of next week. Next Saturday, we'll hold our annual meeting in person after 2 years of the sanitized video or, you know, on-air version, which is frankly less than satisfying in a community like this where we get a good local turnout at the events. Flipping to page 4 of the book, it's a comparison of the 2020 to 2022 periods. This will be the last quarter that we put this table in because obviously, as we exit this quarter and enter the new quarter, our 2 year comparison falls square into the COVID period, so it becomes less than meaningful but w e thought we'd continue it as we've done the last 3 quarters. I think the only thing that should jump out on here is at least for me, jumps out for me, is the fact that our operating and administrative expenses have dropped from 26.7% of sales 2 years ago to 25.5% of sales today, as we've worked to make the organization more efficient and I'm really proud we were able to accomplish this during the distraction of the last 2 years. One item that's probably a little bit misleading in here, it shows our gross profit is actually flat in that 2 year period, i t's actually down slightly. January and February of 2020 were a bit higher and a s we entered the COVID period in March of 2020, we started selling bulk quantities of masks and things like that at a lower margin. It actually pulled our margin down to 46.6%, j ust trying to express a little full disclosure there. Flipping to page 5. When people get more confident about where we are today and there's less chaos in the world, and you're more comfortable engaging with others, we always felt that our growth drivers would see an uptick and we had to just get through this COVID period. Well, our Onsite saw that uptick. We signed 106 in the quarter, finishing with 1,440. So we're up 12% from the number of active sites we had a year ago and w e continue to do the healthy business thing and that is just like we've done with our branches over the last decade. You challenge every business unit, is that Onsite performing to what you need it to be for both our customer and for us? You know, sometimes we run into situations where we take a customer that was doing $25,000 or 30,000 a month in sales in a branch, and we double that, and maybe we even triple that. But we get to the point where we kinda get stuck at a number. Let's say it's $70,000-80,000 a month. We always have to evaluate what is the best solution there for the customer and for our ability to serve that business but s ometimes it's pulling it back into the branch. Sometimes it's the case the customer runs out of space for us. Sometimes we've seen this in the last 6 months particularly. We have some customers that are consolidating some of their operations and we've had a few Onsites that have closed, but we pick it up somewhere else or it consolidates with an Onsite we have somewhere else. We think it's a great business, and we're really pleased at what we saw in the Q1 with signings, and we're excited about that customer event next week and what it means to keep this thing going. FMI technology, it's about bringing better visualization and serviceability to the point of use. It started with vending a decade plus ago, and we've expanded with a bunch of other technologies. A year ago, we were signing 74 a day. This quarter, we signed 83 a day, and we ended the quarter stronger than we started the quarter. For Onsite and for FMI, our plans and our goals for the year remain unchanged. FMI technology now represents 35.5% of sales. A year ago, it was 28.7% and 2 years ago, it was 26.4%, w e're gonna keep driving that. E-commerce, 55.6% growth in the Q1 of 22 and l ike our international group, our e-commerce team also hit a milestone. In March, we exceeded $100 million in revenue for the first time. You know, it's not too many years ago, I think it was 2011 when we pointed out the fact that international now 10% of the company. Still a relatively small piece and e-commerce was something we dabbled in, but really wasn't a thing. Times have changed in the last decade and now both of them are $100 million a month businesses. Finally, if you roll up our FMI technology and our e-commerce, we talk about our digital footprint. We hit 47% of sales in the quarter, 39.1% a year ago, 34.9% 2 years ago. Our goal is to hit 55% of sales at some point later in the year. We still believe that long term, that has the potential to be 85% of sales and w e're gearing our supply chain and have been gearing our supply chain to support that kind of business in the future. With that, I'll turn it over to Holden. Great. Thanks, Dan. I'll be starting on slide 6. Total sales increased 20.3% in the Q1 of 2022. If you adjust for the extra selling day in the period, sales increased by 18.4%. Both periods were impacted by adverse weather and the net effect contributed 50-100 basis points to the growth in the period. I'm not gonna recite all the numbers that are on this page because we basically experienced consistent growth across all major product categories, our large and our small customers in most end markets. The main exception to this broad-based strength were government customers, which fell 6.2% year-over-year but I would point out that they were up nearly 50% from pre-pandemic levels and I think that really reflects sustained share gains across that customer set. As always, our business does not carry a lot of forward visibility, but our field sales force continues to maintain a very positive outlook about their markets. Pricing contributed 580-610 basis points to growth in the Q1 of 2022, reflecting actions taken over the last nine months to offset inflation. Input costs have mostly stabilized at high levels with a few notable exceptions. For instance, higher nickel prices will flow through to stainless steel fasteners, while higher oil prices will affect the cost of fuel for our captive vehicle fleet and the cost of overseas shipping services. As described on this page, these are relatively smaller pieces of our business, which we believe we can adjust through targeted pricing on stainless steel fasteners and surcharges for transportation-related increases. Price contributions should remain high in the Q2 of 2022 before running into tougher comparisons in the second half of 2022. The last thing I'll say about the marketplace is it is still grappling with supply chain and labor constraints, as well as high prices for inputs and products. What is changing is we and our customers are more effectively managing this environment. This is reflected in higher growth driver signings and improving internal supply chain and relatively strong FTE additions in February and March so w hile these disruptions persist, the chaos surrounding them has receded, resulting in a more predictable business environment. Now to slide seven. Operating margin in the Q1 2022 was 21%, up from 19.8% in the Q1 of 2021 and good for an incremental margin of 27.1%. While the absence of last year's write-down of masks favorably impacted the year-over-year compare, even adjusting for this, our incremental margin was a solid 24.4%. Gross margin was 46.6% in the Q1 of 2022, up 120 basis points versus the Q1 of 2021. Half of this increase relates to the absence of last year's mask write-down. The next largest contributor was safety product margin, which increased significantly even excluding the effect of the write-down. In the year earlier period, we were still supplying COVID-related supplies to key customers under supply commitments that we had entered into at the start of the pandemic, which had lower margins. Those commitments have since expired and COVID-related product margins have returned to pre-pandemic levels. A smaller contributor was a narrower loss on freight service to our branches as strong daily sales growth and freight sales of 37% provided improved cost leverage. Our price cost remained largely neutral to gross margin in the quarter. Product and customer mix was a roughly 10 basis points negative impact to gross margin, with drag produced by strong Onsite and national account sales having a slightly greater impact than the positive effect of favorable fastener mix. Our operating leverage was modest in the Q1 of 2022, with an operating expense to sales ratio being 10 basis points better at 25.5%. We achieved 60 basis points of leverage over occupancy expenses related to a 10% reduction in our traditional branch count and the effect of what has been, to this point, relatively slow expansion of our vending installed base. We also achieved good leverage over employee base pay. While we are encouraged by the February and March growth in our FTE employee base, the tight labor market continues to produce FTE growth that is lagging sales. These areas were mostly offset by strong employee incentive payouts, higher profit sharing expenses, higher healthcare costs, higher travel expenses, and to a lesser degree, rising fuel costs. If you put it all together, we reported Q1 2022 EPS of $0.47, up 27.8% from $0.37 in the Q1 of 2021. Now turning to slide eight. We generated $230 million in operating cash in the Q1 of 2022, which is roughly 85% of our net income in the period. Traditionally, Q1 conversion rates exceed net income. However, the combination of robust customer demand, supply chain constraints, and high inflation put a premium on product availability and investment in working capital. As a result, we view the lower conversion rate as reflecting our commitment to supporting our customers. As supply chain constraints and inflation rates ease, we expect to see improved conversion rates as we go through the year. Year-over-year, accounts receivable was up 25.9%. This reflects strong customer demand and an increase in the mix of traditional manufacturing construction customers, which tend to have longer terms versus the prior year period, i nventories were up 22.6%. Inflation accounted for roughly 2/3 of the total increase. That's significant, but it is a decline from the Q4 of 2021, when inflation accounted for roughly 80% of the rise in inventory and that is the result of an accelerating flow of physical products into our hubs, which is improving product availability and fulfillment rates. Net capital spending in the Q1 of 2022 was $33 million, up from $30 million in the Q1 of 2021, with increased spending for FMI equipment, hub automation and upgrades and IT equipment. Quarterly capital spending levels should pick up through the balance of the year as vehicle availability improves and hub projects advance. As a result, we continue to anticipate 2022 net capital spending in a range of $180 million-200 million, which is unchanged from the prior quarter. We returned cash to shareholders in the quarter in the form of $178 million in dividends and f rom a liquidity standpoint, we finished the Q1 of 2022 with debt at 10.4% of total capital, down from 12.7% in the year ago period and 11.4% versus the Q4 of 2021. Our revolver remains available for use. With that, operator, we'll turn it over for Q&A. Thank you. We'll now be conducting a question-and-answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. Once again, that's star one to be placed into question queue. If you'd like to remove yourself from the queue, please press star two. One moment, please, while we poll for questions. Our first question is coming from Chris Snyder from UBS. Your line is now live. Thank you. Congratulations on the strong quarter. My question is on price cost going forward. The company noted that I think the current mark costs are high but stable and they're seeing inflation on a select few product lines where it seems like there's opportunity for incremental pricing. I guess my question is, s hould we assume, you know, relatively unchanged price cost over the rest of 2022 relative to Q1 levels? We continue to assume that we're going to be price cost neutral over the course of the year. If your question is, what is the level of pricing we're expecting? Bear in mind that to some degree, as we move into Q2, but particularly as we get into Q3 and Q4, we're gonna begin to comp against much higher pricing from a year-over-year standpoint. I think my expectation is that we will still be north of 5% on price in the second quarter, but that you'll begin to see that pricing contribution drop fairly sharply in the Q3 and Q4 period as our own pricing actions remain fairly stable and runs into last year's tougher comparisons. Appreciate that. Thank you, and then f or the follow-up, I wanted to ask about the Onsite model into a potential macro slowdown. I know the company has spoken to Onsite revenue targets per location. I was just wondering, is there any sort of volume commitments that accompany these Onsite agreements that can maybe give the company a naturally higher wallet share of customer spend as their activity declines? You know, when we sign an Onsite, we will have discussions about targets for that facility. Based on the customer's information about their spend, our information about their spend and sometimes you can do some napkin calculations based on how many employees are there, what types of activities, OEM fastener demand, et cetera. There isn't a hard and fast rule that says, "Hey, you need to be at this number." But it's really about, i t's a partnership. That partnership says, you know, let's work together to grow the footprint. What I often see when I visit Onsites is that I find a very motivated customer to add wallet share to Fastenal because what does an Onsite represent to them? It represents Fastenal putting personnel and inventory into their business to support their business, which frees up their need to add personnel, frees up their need to add working capital so i t's a great program for our customer and it's a way for them to have resources. Resources that we normally would have had working in a branch now are bringing product right to the point of use or doing different things and actively managing and it frees up resources for them. That's ultimately what gets us our footprint. It isn't a contractual obligation that says, you know, you must do this or else, y ou know, our Onsite. Same thing with our vending program and our Onsite program. What we say to the customer is, "This is what it's about, and we're not gonna hold you to a contract. If you demonstrate that, you know, six months into it, that you really aren't bought into it, we reserve the right to take our ball and go home and t hat's what drives the wallet share ultimately in the business. Chris, I don't believe the Onsite model necessarily diminishes our cyclicality. I mean, we do have tamped down cyclicality versus any industrials with our MRO exposure and that sort of thing, but I don't think the Onsite does anything in that regard but t he Onsite is a great platform, as Dan indicated, to gain market share, whether we're in a period where we're growing or a period where the marketplace is contracting. We can gain market share in either environment, but we'll still maintain a cyclical profile. We'll add to that. We have relatively low market share. We're always growing. It's just that sometimes it doesn't shine through in the numbers because there's a lot of headwinds. Thank you for all that color. I appreciate it. Sure. Thank you. Next question is coming from David Manthey from Baird. Your line is now live. Yeah, thanks. Good morning, guys. First off, could you discuss your expectations for FTE growth needed to fuel revenue growth this year? Dan, maybe longer term expectations for labor requirements versus historical trends, especially in light of these automation tools that you've deployed and you will continue to deploy across the company and that's both customer facing and internal type technologies. I hesitate to throw out a percentage only from the standpoint of while we've seen a tick up in applications, we still are operating, quite frankly, with fewer employees than we'd like to see. You know, even if you look at, you know, if I was gonna tease through the quarter and point out some positives, some negatives, one negative that would jump out is we didn't implement as many of the Onsites as I'd like to have seen in the Q1 and I know part of that hold back, sometimes it's just the transition process, but sometimes it's a case of, do we have the staffing? Because when we have the individual ready to step into that new Onsite, but do we have an individual back in the branch ready to step into their spot in the branch? That will, you know, we add, you know, let's say we sign and add 100 Onsites a quarter, that pulls employees with it. I said I wasn't gonna say percentages, w e need to have better than low single digit percentage growth in that environment when our sales are growing, you know, double digit and beyond. We'll see how that plays out as we move into the second and Q3. Yeah. One nuance about that, Dave, is, you know, we tend to look at it less about the FTE and more about what the total labor dollars that we commit and w hen we talk about being more productive with labor, we tend to think about, are we driving more gross profit dollars for every dollar of labor that we produce in our business. That's how we tend to think about it. To Dan's point, I'm not sure that we have an exact percentage that we would communicate here, i t's managed very well by the field. But I think that as an organization, we understand that the growth in our labor dollars on our pathway from where we are today, that 10 billion dollar company and beyond, has to come with labor dollars growing at a slower rate than gross profit dollars and a s an organization, I think pretty uniform in that objective. Mm-hmm. Yeah. Thanks, Holden. Maybe we could drill down on that a little bit because in the Q1, I know it's just one quarter, but OpEx growth and revenue growth were pretty identical at 20% and y ou did have this 6% price. So SG&A growth kinda outpaced your unit volume growth by quite a bit. Question is, should we assume that based on what you just said, that despite the fact that in a generalized inflationary environment, your cost stack is going to be elevated as we go forward here, you should see better leverage on your OpEx in future quarters? That is the expectation and, y ou know, here's how I think the setup plays for the rest of the year. If I think about incentive pay, for instance, in the Q1, it was up about 60% versus the prior year. Again, that's a great thing to be able to talk about, 'cause it reflects the performance of the business. I just don't believe that you're gonna see that rate of growth as you move into the Q2, Q3, and Q4, partly because of the comps from the prior year, where we really begin to ramp in terms of our performance in the back half of last year coming out of the pandemic. I wouldn't be surprised if the rate of growth in incentive pay as you hit those comps is half in Q2 what it was in Q1, for instance. I think you have very similar dynamics with healthcare costs and general insurance costs, where, you know, the drag that they contributed in Q1, I don't think you're gonna see anywhere near that same order of magnitude of drag as you get into Q2, Q3, Q4. You know, travel and supplies, something which really sort of came down as the pandemic settled in, you know, that was up 50% in the Q1. I think that's gonna be up less, you know, less than 20% in the Q2, c ould be flat in the back half. I think a lot of the lack of leverage that you saw in the Q1 reflects on some levels the comparison versus the prior year and as we go into the balance of this year, in Q2, Q3, our volumes should be higher just seasonally, I don't think you're gonna have the same degree of cost drag in a lot of areas that we experienced in the Q1. My expectation is that for the balance of the year, we're going to leverage SG&A. Occupancy, I think, will continue to leverage, based on what we're doing on, you know, sort of the branch strategies, you know, and things of that nature. Yeah, my expectation is we leverage SG&A the balance of the year. Hey, Dave, I'll just throw a little tidbit in. In prior conversations, you've talked about the shock absorbers in our operating expenses. If you think of what happened a year ago, because I talked about some of the amplifying effects earlier that the weather change and then the inventory write down a year ago. Because there were 2 things going on in Q1 of 2021 that didn't occur in for Q1 of 2022. In the Q1 of 2021, 55% of our branches were growing. By the Q2, that had expanded to 70%, and it's kinda hung at that 70-ish number in the second, third and Q4. In the Q1, 75% of our branches and onsites were growing. That has a massive impact on the incentive comp paid locally to our branch and Onsite employees, because we believe it's harder to grow than it is to maintain and there's a premium for growth so t hat was part of that 60% expansion and incentive comp that we saw from a year ago. The other thing that happens is we have a big chunk of people that are paid off of incentive comp, off earnings growth. Earnings, the rate of just the raw earnings and earnings growth. That $8 million write down a year ago hammered those programs but a year later, it amplifies those programs. When I look at the 60% increase over Q1 last year in the incentive comp, it's amplified by those 2 hammering events. In fact, from Q1 to Q2, our incentive comp increased 32%. That changes the comp picture dramatically and t hat was 130 basis points of operating expense decrement Q1- Q1. Probably got way into the weeds there, but thought I'd share a little insight on that. Yeah, the impact of that write-off actually is an important perspective to have. Yeah. Very helpful, guys. Thanks very much. Thanks, Dave. Thank you. Next question is coming from Michael McGinn from Wells Fargo. Your line is now live. Hey, good morning. Thanks for the time. Good morning. Morning. I guess higher level, if you watch the news, a recession is imminent and it doesn't seem to be the case with almost 90% of your top 100 national accounts growing. I guess of those top accounts, how many are growth constrained that maybe shape your outlook for sales, given the tougher comps as we approach the back half of the year? Maybe any update on what you think your market share take rate is in an environment where fasteners are the fastest growing category, and it's been a while since we've seen that for you on a sustained basis. What do you mean by growth constrained, going back to question one, what do you mean by growth constrained in our largest customers? Yeah. Components where you're not necessarily playing right now and they're trying to deliver longer cycle backlog-driven product, but can't get it out the door for you know, reasons that are beyond your control. Other supply chain disruption other than what we're supplying? That's correct. Okay. Got it. You know, I'll just fall back on some of the commentary from our regional vice presidents and I'll say that in general, they believe that getting products is still a challenge, but easier than it was 6 months ago a nd that's not just for our products, that's for other products within the supply chain. In general, I think that our customers are figuring out how to navigate that some. You know, relative to 6 months ago, do I think that production rates have gotten better and the ability to navigate some of this disruption has improved? It feels that way to us, just again, based on some of that commentary so I 'm not gonna tell you that there aren't, you know, issues around chips and things like that that you hear about. I think that for the most part, our customers are more successfully navigating those issues than was the case 6 months ago. Perhaps that, you know, what you're concerned about in the marketplace probably is not as dramatic today as it was. That's all anecdotal, by the way. Got it. Does that answer the question? It does, yes. I wanted to go back to kinda gross margin, y ou know, I see the strong results here, and you mentioned price cost neutral. It just feels like during when you're comparing that to pre-COVID levels, you should have seen some sort of national account mix erosion given your model. That's, you know, it seems like something more is going right here for you guys. I just wanted to, I think flat or slightly down was the prior framework and understanding, y ou know, everyone's a little gun shy to guide that line item. I guess what's your outlook now on the gross margin side of this side of the equation? Well, a couple of things to think about. One, you know, the 46.6% in the Q1 of 2020 and the 46.6% in the Q1 of 2020 was a little bit misleading. As Dan alluded to, if you look at only January and February, because in March, the back half of March, we already started to see a lot of low margin, you know, product getting shipped to deal with the pandemic. If you look just at January and February of 2020 versus 2022, the gross margin in January, February of 2020 was 47.1%, and in January, February of 2022, it was 46.5%. Right? That decline you would have expected to see if you take out a month that was beginning to get affected by the pandemic, you would have seen it. Okay, that's one element. The other thing I think you have to be a little bit careful of is there is more that drives our gross margin than just price cost and product customer mix, right? I think about things like mix within mix. When we talk about product and customer mix, we're really looking at large categories against one another but w ithin safety, there may be a mix within mix element where you know we're improving our margin on the COVID product specifically. That doesn't necessarily get captured in the you know the customer product mix between categories. There's also things like you know we've done a great job with exclusive brands over the course of the pandemic. If I look at the mix of exclusive brands and Onsite, 2 years ago, it was 10%, this quarter it was 12%. Exclusive brands through vending, 2 years ago, it was 21.5%, this quarter it's 24.5%. You know, that's something which can actually mitigate the product and cost impact, to some degree, you know, that has happened y ou know, EBs are great because it's lower cost to our customers, and it's a higher margin to us. Then I would also point out that you're looking over a two-year period. All through last year, we talked about organizational leverage, which wasn't a big factor in Q1, but it was a bigger factor last year, and that's related to the cycle, y ou know, there's more than just those 2 pieces that affects our gross margin trend, certainly over a multi-year period of time. Does that add some color to that? It did. I appreciate the time. Thank you. Yeah, sure. A couple of structural changes and Holden alluded to the EB component. Again, that's expanded nicely in our vending. Our vending offering, that subset of business has expanded nicely, that the exclusive brand component in the last 2 years, as well as our preferred partner component in the last 2 years. Some of that we believe is gonna continue to get amplified by things like our LIFT initiative, where we are picking and supporting the product needs for our vending platform out of a handful of facilities and o ur push to our branch to turn that on is you need to have a more standardized offering in the vending machine to make it work in that type of a supply chain. The second one is, you know, we talk about the consolidation of branch locations and what it does for occupancy. What we never talk about is the consolidation of locations and what it does for our trucking network. You know, if it's 2 years ago and there's a bunch of trucks that are leaving at 8, 9, 10 o'clock at night, going out and delivering to branches throughout the night and we're going to 1,800 locations and 2 years later we're going to 1,600 locations, but those 1,600 locations are doing more revenue than the 1,800 did 2 years ago, that's a more efficient network. All those things come into play, and they keep, you know. The mix punches us in the gut, and it affects our gross margin downward, and we have to keep clawing back up these little incremental gains, and we find them in places like that. Thank you. Next question today is coming from Tommy Moll from Stephens. Your line is now live. Good morning and thanks for taking my questions. Morning. Morning. Dan, I wanted to start by going back to your introductory slide. You mentioned some technologies and strategies all around efficiency, talked about restraining labor adds without hurting sales, supporting gross margin, branch consolidation, et cetera. Can you give any more context on what some of those efficiency-driven measures have been and what inning we're in terms of the deployment there? Okay. You know, we talk a bit about the digital footprint. Within that digital footprint, if I went back two years ago, you know, when COVID had started, we probably had around, I don't know, 5%-6% of our sales where we used. It's an MC device, but it was to go out and scan bins. But we didn't really use that to be more efficient upstream in how we picked the product, how we supported that. Today, that roughly 6% has expanded to about 12% of sales in the March month. That's gone through what we now call FASTStock. That's our mobile technology on a platform that we have written that interfaces directly with our point-of-sale system and of equal importance, with our distribution center network. Not only are we gathering using technology twice as much of our sales, but we're using that upstream, where in the past, that half, that doubling would've been written on yellow notepads and getting orders and pulling it in. Those orders transmit earlier in the day. When they transmit earlier in the day, our distribution center can start picking that product to support them at 10:00 A.M. when they scan the bin, not at 4:00 P.M. when they get back to the branch and they dock their MC device and transmit all that. It allows us to think differently about how we operate. Same thing with our FASTBin and FASTVend platform. FASTBin is a relatively new thing, and that's where we put, you know, in an environment where you have OEM fasteners and there's a Kanban system. Somebody has to go out and get the bins. Somebody has to go out and figure out what we need for replenishment. What we do today is where we've implemented the bin technology. When that bin is empty, the person that emptied it puts the bin up above the shelf and there's an RFID chip in it, and there's an RFID reader that's saying, "Hey, bin number 242 is empty, it's hungry, it needs to be fed." That transmits right through our point-of-sale system to our distribution center. That's where LIFT becomes important in the future, because we'll support more and more of that, especially if it's standard product in a highly efficient distribution model but e ven if it's done locally, where it's more special for that OEM need, we're gathering the information, the need electronically when it occurs. You have fewer surprises, but you also remove the cost of that data collection. Then you can surface that information for your customer much more readily, and you become a better supply chain partner. And so, y ou know, that is a percentage w hen I start adding that up, just the FMI component has grown dramatically from 2 years ago and that there's no data collection effort going on. Yeah, I would probably add to that. I mean, if you see the growth in our web, for instance, right? I mean, you're having better than 50% growth out of EDI within that. That creates certain efficiencies for us when you're seeing that much growth there. The web component is also growing north of 50%, and that's allowing us to address certain types of customers in a much more efficient way for us. I think the growth that you're seeing there also introduces some of that. Some of the strategic things that we're doing, right? The LIFT is still a relatively small component, but we're getting aggressive with it and we're growing it faster and we'll continue to do so. That's gonna bring efficiencies into the field in terms of how they supply the vending and frankly, the FMI as well over time, right? That's gonna bring efficiencies to how we use our time. I would say how, you know, the things we've talked about with regards to our branches also is trying to bring efficiencies and focus to how we prioritize there. It's really a combination of the technologies Dan talked about and some of the strategies, all of which are really aimed at what we talked about earlier, which is making sure that our labor productivity goes up over time. Thank you both. That's helpful. As a follow-up, I was looking through my notes from last quarter and I think the framework that you laid out for the full year this year was gross margin may be down as much as 50 basis points for the full year versus full year last year, but incremental margins in the 20%-25% range. You've come out of the gate pretty strong here in the Q1. Really just to boil it all down, is it fair to assume that both of those ranges that you talked about a quarter ago based on what you know now could be positively biased? Now, if memory serves, I think the 50 basis points might have related specifically to mix as opposed to the overall gross margin. I think the expectation was that gross margin would sort of lean down over the course of the year. I would tend to agree with you that, you know, the Q1 was a good start to the year on gross margin. Would it surprise me if that improves the overall annual picture a little bit and pushes us closer to something that's flat for the year? Yeah, that wouldn't surprise me. You know, I wanna give some credit because one of the reasons I think that we came out stronger this quarter really does relate to the job the field is doing on freight revenue. Freight revenue in the Q1 is up 37% and it was at a dollar level that we haven't seen before. That really allowed us to narrow the losses that I otherwise expected to see. I mean, I expected the losses related to our branch freight to be about $3.5 million higher than they turned out to be. I think that relates to real efforts on the part of the field and strategies that we've put in place to try to improve that freight profile. I expect it to sort of carry through for the rest of the year so th at's probably the piece that provided more upside relative to my expectations in the Q1 and t he good news is I think that that's gonna sort of carry through for the rest of the year as well. Appreciate it. I'll turn it back. Thank you. Next question today is coming from Chris Dankert from Loop Capital. Your line is now live. Hey, morning. Thanks for taking the questions, guys. Yeah, morning. I guess, you know, first off, you know, I know this question is gonna be very difficult to parse, so I appreciate that upfront. I guess looking at the fastener growth, I mean, it's pretty staggering. Is there any way to parse on a relative basis, you know, how much pricing versus restocking versus core demand is contributing there? I'm not looking for an exact number, but just can you give us a flavor for how those kind of three pieces might be contributing? Actually, if I could just add one more thing to my prior question, I won't count it against you. You know, I wanna make sure that when I think about gross margin being flattish or in that ballpark for the year, make sure you're including the write-down from last year because I'm comparing against that number, just so we're all on the same basis. To your question about fasteners margin, yeah, we haven't necessarily broken it out by product line in that fashion. What I would tell you is the inflation that exists in fasteners is probably twice or more that of what we're seeing in the non-fasteners lines. And, you know, even though we might be a touch below neutral on the fastener line, from a price cost standpoint, in order to achieve that, it's fair to assume that the pricing component would be greater for fasteners than it is for the non-fastener piece and so I think there's probably a bit more balance between product and price, as it relates to the fastener side of the ledger. Got it. That's really helpful. Thanks so much for that. I guess kind of bigger picture zooming out a bit, you know, as kind of supply chain starts to normalize slowly here, how do we think about how some of these competitive dynamics shift, which certainly you've been taking share by just having inventory availability? What changes on that front? Then I guess, how do we think about your inventory levels versus customer inventory levels? Or just any kind of big picture, how do we think about Fastenal in the context of a normalizing supply chain here. You know, I don't know if we know the answer to that on the competitive shift, Chris. You know, the reality of it is, we've performed well in the last 2 years because we figured out how to find product and we figured out how to get product. Sometimes that meant spending money that was painful for us. We're a pretty frugal organization, and sometimes that meant spending money to move stuff that was kinda expensive in our way of thinking and h eck, even today, I mean, the cost of taking a container across the ocean is ridiculous. That doesn't change that it is what it is. I think the memories are sometimes short, p ainful memories often aren't. A lot of businesses that went through a really ugly period and they found a friend in Fastenal. I think they remember that because again, that's a painful memory, y ou know, Holden has talked about on prior calls, the number of customers that didn't buy from us before COVID, that discovered who Fastenal was because of a pain point they had during COVID. A lot of that is government and healthcare-centered organizations, but it's a lot of other businesses too but t hat's a $50 million a quarter business for us now. It's a $200 million business within Fastenal that didn't exist 2 years ago. I don't think supply chain becoming a little bit less chaotic hurts that business. I think that's a customer segment and that it has realized what a lot of our traditional industrial construction customers have realized for years. That Fastenal does a pretty nice job supporting their supply chain needs. The other thing I might add to that is we've also talked in prior quarters about how we tend to get sort of obsessive about, you know, growth drivers Onsite. If those aren't going well, what's that mean for market share, et cetera? What we've commented before is, you know, we meet the customer where they're at. For the last couple of years, our Onsite signings have been relatively low, but we've been able to gain share through other means because customers are asking us for different things. You know, I think we should all be encouraged by the fact that as the environment does perhaps become a little a little less chaotic and therefore a little easier for everyone to navigate and maybe that changes the dynamics a little bit. By the same token, we just signed a record number of Onsites. If one element begins to normalize, I think that we're gonna have coming up from behind those Onsite growing in the mix at a faster rate, driving market share from our more traditional growth drivers at the same time so, yo u know, one might normalize a bit, but I think the other one comes up. That's really excellent color. Thank you both. Again, congrats on the quarter here. Thank you. Thanks. Thank you. Our next question is coming from Jake Levinson from Melius Research. Your line is now live. Morning, everyone. Good morning. Morning. Morning. It certainly sounds like most of your end markets are firing on all cylinders here, but any particular positive or negative surprises you guys saw in the quarter as you look across the different verticals? Or just curious what you're hearing from the field. Not really. When 92% of your top 100 are growing, there's not many that's not. You know, even areas, I would say, like oil and gas and areas that have been a little bit sluggish, they're not necessarily where everything else is, but they're doing better. But I think the marketplace is pretty uniformly strong, Jake. It's hard for me to find many areas of significant weakness. I'm not, again, we don't have a lot of visibility into the future, but you know, the field still remains pretty optimistic about how things are playing out. You know, the only thing I'd add to that is Europe is a relatively small piece of our business. The last few years, that business has been on fire. I mean, growing 40%, 50%, 55%. Right now, that business is growing in single digits because we have customers that are either impacted because of what's going on in Ukraine or they're impacted by, you know, it might be supply chain disruption, but it's probably linked to what's going on in Ukraine. So that's impacted our business there. Just each week, I have about a half dozen conversations with district leaders within Fastenal where they talk about their business. In the last week, I had a couple conversations with folks down in the Carolinas. One of them had a customer that supplies a product that goes into packaging for medical products, where one of their larger customers is in Russia and that business is in a standstill right now and, y ou know, that's really small anecdotes in the scheme of the business. Your comment about generally a robust environment is spot on. That's great color. I appreciate it. That's all for me today. I'll pass it on. Thank you. Thanks. Thank you. Our next question today is coming from Ken Newman from KeyBanc Capital Markets. Your line is now live. Hey, good morning, guys. Thanks for taking the question. Good morning. I just wanted to clarify the operating leverage comments you made earlier in the call and sorry if I missed it, but, I mean, just given your comments on potentially flat gross margins inclusive of the mask write-down for the year. I think, Holden, you were talking about expectations for better SG&A leverage through the remainder of the year. Should I just take all of that to mean that you expect incrementals could stay in this mid-20% range or higher for the remainder of the year? You know, our goal has always been to achieve a 20%-25% and to expand our margin a little bit from where we are and that remains our goal. I'll let you model it however you model it based on what you've heard so far. I think we've given you enough to play with but, y ou know, we feel good about how the business is performing today. We'll see how the macro environment plays out the rest of the year, but we feel pretty good about how things are playing out. Understood and f or my follow-up, you know, obviously, I think, COVID is unfortunately a normal part of the operating environment now. You know, I'm curious if you could just talk through any of the impacts that you may or may not be seeing from the recent lockdowns in China. Particularly, I'm just curious about, you know, your ability to secure inventory or your outlook on the margin progression for the rest of the year as it relates to your suppliers within Asia. You know, first off, on the call this morning, one thing I didn't touch on. I did touch on the fact that our leaders in both our sourcing operation and our sales operation in China, they're based in Shanghai and obviously they're experiencing a pretty ugly lockdown right now. I first let them know that, you know, we are here to support and really impressed with what you're doing locally. Our team has become, especially the, you know, the sourcing side of it, but both sides have become quite agile of operating in a remote fashion. Fortunately, there was enough warning that they were able to set up that ability to do that again. I feel better about it, the fact that we have more inventory on the shelf right now, 'cause there will be disruptions from this. There's no question. We're, you know, we're not immune to that and nor is anybody else. Sometimes the old adage, possession is 9/10 of the law. The fact that we have inventory on the shelf or inbound that's at a pretty high level, even though Holden doesn't like the cash flow impact of that, he does like the fact that they're there to support our business. Yeah, and, b ut, you know, we have a sizable presence in Shanghai and we're worried about our team. Yeah. When we talked about the supply chain being fairly predictable at this point, there are components to that, w hat I will say is you are seeing the time it takes to get product from a port in China through to our hubs has actually begun to shorten. However, the time that it takes to sort of put in a PO with a manufacturer overseas and then get it to the port, that actually has begun to lengthen. I suspect that's a little bit of what you're seeing, the impact of COVID over there. There's a little bit of a difference there. As Dan indicated, I think the fact that we've been purchasing and floating over so much product over the past 6-9 months and that's now really beginning to hit the hubs nicely, that's gonna provide us a fairly decent runway of insulation from some of that. Got it. That's helpful. Thanks. Thank you. I see we're coming up on the hour and so I'll close with a philosophical thought for you. That is, so a year ago, Holden, it was about $8 million that we wrote off on inventory? Yep. Close. We wrote off $8 million of inventory and our leader of the supply chain team as well as quite a few members of the supply chain team were at pains when we wrote that off. They were quite apologetic about it. I looked at them and I said, "No, here's what we did. We made a conscious decision to stock up on product to support our customer needs and our new customers' needs. Even factoring that $8 million write-off in, if I had to do all over, I'd do it in a second. I believe it will build a better business for us in the future. If we'd never had gotten that business in the prior year and let's just say we had an $8 million write-off a year ago, but that $8 million write-off would have translated into $200 million business within Fastenal that now exists because we were willing to do that didn't exist before. We're not an acquisitive organization, but I would have spent $8 million in a second for $200 million of annual business within Fastenal. Thanks for your time today, everybody. Thank you. 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.