Hello, and welcome to the Fastenal second quarter 2022 earnings results conference call. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Taylor Ranta of Fastenal Company. Please go ahead, Taylor. Welcome to the Fastenal Company 2022 second quarter earnings conference call. This call will be hosted by Dan Florness, our President and Chief Executive Officer, and Holden Lewis, our Chief Financial Officer. This 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 September 1st, 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 and good morning, everybody, and thank you for joining us for today's earnings call. You know, life, who you choose to surround yourself in life, gives you freedom to do a lot of things and to find success with others. You know, one thing I found on this call is, Holden does such a fine job with sharing with the investment community, particularly the sell side analyst community, the trends he's seeing in the business that it affords me the opportunity to be a bit more philosophical and talk to our shareholders, but also talk to the employees of Fastenal on this call. I suspect for most people listening to this call, the reason you're looking at our earnings release today and looking at and participating in this call is you wanna see what breadcrumbs might come out of it as far as where the economy is going. A spoiler alert, we've often said that our visibility to the future is about eight hours, and most of it comes from what we're hearing from our customer, the anecdotes that come through, what we're seeing in some of the trends in the business. We get an indicator, and we try to share those as we see them. We don't have a backlog in the traditional sense. We are a just-in-time supply chain partner to our customers and things shine through as they occur. Here are some things that have occurred in our business. First off, our travel has expanded. If I look at our travel in the year to date in 2022 and ignore for a second 2020 and 2021, our travel is about 12% below where it was in 2019. In the second quarter, our travel is about 18% higher than it was in 2019, and that's measuring dollars. As you know, for those of you that have bought an airplane ticket recently or done any kind of travel, things have not gotten cheaper. I suspect that means we're probably still down from 2019, but the expense is up because of the inflation inherent in travel today. What that means is, most societies have entered into the endemic stage of COVID-19, not all. What that means, we're finding our new normal and I'm pleased to say travel is resuming. That's one of the ways we engage with our customer. Our Fastenal culture is one of we trust each other. We work every day to build our own talent pool and we promote from within. An integral part of that is the idea of human interaction and our ability to teach and learn from each other every day. It's frankly more efficient when you can have in-person conversations. We have adapted. If you went into a Fastenal branch today versus 2019, you'd see a different branch. You'd see many locations where we've changed what the front room looks like. You'd see many locations where we either have reduced hours or we don't have an open front door anymore because we've really morphed into more and more of a supply chain partner, and more product is going out the back door than ever before. In markets where we have a larger construction presence, or we have a meaningful walk-in business and the local team sees that as their means to serve the market, they might be open. In many markets, we've changed that format, and it allows us to find success in an era when it's more difficult to hire and cause it's a more efficient labor model in our business. I'm also, you know, the folks that aren't in a branch are on-site. Obviously, folks that work at a distribution center or manufacturing division or drive a truck never had the opportunity to work remote. Since the first half of 2021, we've been largely in the office, working in a different fashion than we did three years ago, but finding success together. We're able to better engage with our customer on some of the stuff we're gonna talk about on-sites, et cetera, a reflection of that. In April, we held our first in-person customer expo since 2019, and it was a great event. We had great engagement with the customers that were there. We did have to limit some geographies just from the hassle of travel and some of the COVID restrictions. We found really good successful event that we held back in April. Hiring remains challenging. However, our trends and applications received have improved. In fact, if I use 2019 as the benchmark, in 2020, post-COVID starting, our applications coming in were down close to 40%. In 2021, our applications, using 2019 as a benchmark, were down about 36%. In the first five months of this year, they're down about 18% from what we saw in 2019. I'm pleased to say, in the last three months, applications coming in every month are about 10% below where they were in 2019. I consider that a huge win and a sign that people are more comfortable and ready to get back to work and to build their career and to build their future. That's just an element of that in our business. We've effectively managed marketplace disruption. It's made the supply chains more expensive than pre-pandemic and elongated. You're seeing that if you look at our balance sheet, look at our cash flow. First six months of this year between a combination of inflation and the fact that it takes longer for product to physically move, we have a deeper supply of inventory, and that supply of inventory is more expensive, and you're seeing that in our balance sheet. And again, you're seeing that in our cash flow as that inventory is building and turning. We're pleased with the fact that we have the balance sheet to withstand that, and we can make that covenant with our customer that we are your supply chain partner, and we will serve your needs. We did that during before COVID, we did that during COVID, and we're doing that today in whatever stage of COVID you care to call this. Finally, this is our earnings release. For the quarter, we grew our sales 18%, and our pretax profit grew just under 21%. Demand is generally healthy, but there were some signs of softening in May and June, and we'll delve into that as we go through this call. On-sites. We signed 102 on-sites in second quarter. We signed 106 in the first quarter. The last time we signed 100+ in a quarter was back in 2019, I believe it was the first quarter. This is the first time we've ever signed 100+ in two consecutive quarters. I think there's a number of things going on there. Again, the marketplace sees value in our on-site model. In an era where it's more difficult to hire and more difficult to manage supply chain, I believe our on-site model is even a better option for our customer in the marketplace, and I think that's shining through in our signings. Obviously, the fact that we had a customer event in April, while it didn't help the first quarter number, I think it was an element in the second quarter number. We remain committed to strong signings for all of 2022. We see this as a means to take market share faster and a hedge on whatever the economy might do in the months and years to come. FMI technology continued to have industry-leading signing levels, albeit not maybe at the level we'd like. Our internal goal is always to get that number to 100 per day. During the quarter, we were at 86. An improvement from what we saw in the first quarter, but not where we'd like it to be, and our aspirations here are very high, and that shines through in our expectations. We did, given where we are year to date, adjust our expectations for the year. Previously, we had indicated 23,000-25,000 signings. We think that number is more in the neighborhood of 21,000-23,000, and that's a machine equivalent unit basis. E-commerce continues to grow nicely. It rose 53% in the second quarter of 2022. Our large customer-oriented EDI was up 53%, whereas our web sales were up 51%. You combine those two, e-commerce is about 17.1% of sales in the second quarter. Finally, our digital footprint, w e've talked about that in prior calls. It's our ability to manage supply chain more efficiently and illuminate that supply chain for our customers. That increased and was 47.9% of sales in the second quarter, 48% in the month of June. With that, I'll turn it over to Holden. Thank you, Dan. All right, starting on slide five. Our total and daily sales increased 18% in the second quarter of 2022. A stronger dollar reduced growth by 60 basis points, and currency-adjusted growth was consistent from the first to the second quarter. In contrast to the first quarter, however, we did experience a softening inter-quarter trend in the second. That softening was not particularly deep, and if the level of economic activity that we experienced exiting the second quarter were sustained, we'd feel good about the rest of the year. I might characterize it through this prism, the percentage of our branches that are growing. 72% in May and June is not as good as 76% in March and April, but on its own, it's pretty good. Nor was the softening that we experienced particularly broad. We experienced it largely in areas that directly touch consumers as well as construction, while our core capital goods and commodity-related markets remained strong with healthy backlogs. We've said before, we experience demand in real time, and we lack much visibility into how demand will trend through the second half of 2022. Pricing contributed 660-690 basis points to growth in the second quarter of 2022, reflecting carryover of broad pricing actions taken over the last twelve months, the timing of opening of contractual windows and tactical SKU-based actions based on supplier actions. Most costs remain elevated but not worsening. As a result, while we expect price levels to be stable in the third quarter of 2022, we expect the contribution to growth to moderate as we begin to grow over the start of more aggressive pricing actions from the third quarter of last year. The supply chain picture is unchanged from the first quarter. Challenges with availability persist, but we and our customers are managing them more effectively. Labor market tension seems to have eased some, as reflected in our strong FTE additions in the second quarter of 2022. Disruptions persist, but the chaos surrounding them has receded, resulting in a more predictable business environment. Now to slide six. Operating margin in the second quarter of 2022 was 21.6%, up from 21.1% in the second quarter of 2021. Our incremental margin was 24.2%. A couple trends are at play in the period. First, we saw moderation in the growth of certain expenses such as incentive pay, profit sharing, and healthcare costs that are subject to early cycle resets. As expected, this produced improved operating expense leverage. It also contributed to the second trend, which is a further gradual migration toward a pre-pandemic margin profile with mix-related gross margin pressure more than offset by stronger operating leverage. Gross margin was 46.5% in the second quarter of 2022, flat versus the second quarter of 2021. Product margin was modestly down with a wider negative impact from product and customer mix at a slightly lower fastener margin, more than offsetting higher non-fastener product margin. This was offset by stronger organizational leverage as sustained strength and volumes absorbed overhead. This absorption slightly exceeded my expectations in the period. The impact of freight on margin was neutral, with higher fuel and shipping costs being offset by good leverage related to a 37.5% increase in freight sales. Pricing actions continued to match higher costs, yielding a neutral price cost dynamic in the quarter. We achieved greater operating leverage in the second quarter of 2022, with an operating expense to sales ratio being 40 basis points improved to 25%. We achieved 60 basis points of leverage over occupancy 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 modest leverage over total employee expenses. FTE growth continues to lag sales growth, and healthcare expenses were lower, which more than offset an increase in employee incentive payouts and profit-sharing expense growth. Other operating expenses reflected increases in selling-related transportation costs, including fuel, and further increases in spending on travel and supplies. Putting it all together, we reported second quarter 2022 earnings per share of $0.50, up 19.7% from $0.42 in the second quarter of 2021. Now turning to slide seven. We generated $151 million in operating cash in the second quarter of 2022, which is roughly 53% of net income in the period. Traditionally, second quarter conversion rates are low due to the timing of tax payments. As in the first quarter, the current quarter's conversion was below historical norms due to the impact of strong sales growth, supply chain constraints, and high inflation on our investment in working capital. We view the lower conversion rate as reflecting our commitment to supporting our customers. Year-over-year, accounts receivable is up 21.5%. This reflects strong customer demand and an increase in the mix of larger key account customers, which tend to have longer terms than our smaller customers. Inventories were up 25.4%. Inflation accounted for half of the total increase, a proportion that continues to moderate as the flow of physical products into our hubs continues, supporting strong product availability and fulfillment rates. The twin disruptions of inflation and supply chain have created an additional level of inventory value. Despite that, our 161 days on hand in the second quarter of 2022 is more than 10 days below the days on hand in the second quarter of 2019, prior to the pandemic, which reflects increasing and sustainable efficiencies in how we manage our inventories. Net capital spending was $43 million in the second quarter of 2022, up 37.8%. Year to date, net capital spending was $76 million, up 24.4%, due most significantly to increased spending for FMI equipment and hub automation and upgrades. We continue to anticipate 2022 net capital spending in a range of $180 million-$200 million. However, the combination of slower FMI signings and continued supply chain challenges for transportation or IT equipment suggests there is a downward bias to our net capital spending budget. We returned cash to shareholders in the quarter in the form of $178 million in dividends and $49 million in share buyback. While our opportunistic approach to share buyback is unchanged, our board did approve an 8 million shares increase to our authorization, leaving us with 10.2 million shares authorized for repurchase. From a liquidity standpoint, we finished the second quarter of 2022 with debt at 13.7% of total capital, up from 12.3% in the year ago period, at 11.4% versus the fourth quarter of 2021. With that, operator, we'll turn it over to Q&A. Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment please while we poll for questions. Our first question today is coming from Josh Pokrzywinski from Morgan Stanley. Your line is now live. Hi, good morning, guys. Morning. Morning. A lot of good detail in the release on price. You guys have, you know, kind of helped us throughout kind of this inflationary environment. Seems like there was less coming in 2Q. Then, you know, I think prospectively, maybe, you know, steel starts to flow through the business. How should we think about that, particularly on the fastener piece, in terms of not only, you know, maybe what, you know, the sensitivity on what you guys could see on pricing is, but is there any margin impact, you know, as that kind of flows through and you guys recognize lower prices or maybe customers, you know, kind of sharpen their pencil a little bit? You know, what I would say is we've been dealing with inflation now for the better part of a year, and we've been managing that through a number of means. One of those means has been price actions on our own end. As we've reported each quarter, we've really been able to align the pacing of our price increases with the pacing of our cost increases. And frankly, I don't expect that to change. Our material costs today are fairly stable at a high level with where they've been. In the second quarter, we didn't take any additional broad actions. There were certainly some actions around freight. There were certainly actions where we had suppliers, you know, put increases into us and things like that, but I view those as being more tactical. We certainly took actions as contract windows opened up, but again, that's part of how we manage the price cost dynamic, is understanding where our costs are coming from and when we'll have opportunities to make adjustments. I, you know, I give an enormous amount of credit to the folks who manage our pricing and costing strategies, and frankly, the folks in the field that have to execute them, cause I think they've done a really, really good job of that. When I look forward right now, it feels like it's going to be more of the same. You know, to the extent that we see suppliers putting cost increases into us first, we'll push back on them. We have a good sense of what's going on with raw materials as well. You know, depending on how that goes, we might have to push some you know, SKU specific price increases through. You know, unless there's some meaningful change in the overall cost environment from where we spent most of the past quarter, I don't anticipate any aggressive actions to have to be taken. Again, we'll see how the environment plays out. I'm just going by what we see today. I also expect that we'll continue to manage to a neutral price cost. I'm not seeing much change in that area. The one change you will see is as we run into Q3, we're gonna run against tougher comps. I do expect that the percentage growth related to price increases will moderate from where we were in Q2. Again, that doesn't reflect a change in the overall price level. That would be my expectation. Got it. That's helpful. Just as a follow-up, you know, you guys have been at the branch conversion here for a bit now. Any observation for how that's impacted, you know, kind of the traditional, you know, retail or branch facing model? I know that the objective there was to kind of push more of those customers to e-commerce, you know, maybe be willing to lose some of them, but, you know, how would you know, sort of rate how that's gone and, you know, any observations or attrition rates or stuff like that you could share? Yeah. I think, you know, part of what we did, obviously the COVID period pushed everybody to abruptly change what they're doing. I think that the strength you see in our e-commerce sales growing north of 50% is testament to the marketplace. I don't know if the marketplace is reacting to what we're doing or we're reacting to what the marketplace is doing. I think it's more the latter. Buying habits have changed, and you see it in your personal life. What you do today is different, what it would have been five years ago. As more and more of our growth comes from the fact we're engaging deeper with customers and they're seeing the ability for us to help them in more ways than maybe they would have five and 10 years ago, it changed the footprint we needed. Sometimes when you change your footprint, if all of a sudden you have five locations in a market and you go to three, you will lose some business because you're not close proximity. Most of that is morphing to a different channel. That was gonna happen regardless of our change in footprint, and we think we're doing a nice job keeping a lot of that business as, again, if you look at our increase in web sales, cause a lot of that business would go to the web sales that's growing at 50%. Perfect. Yeah. I mean, I would build on that, you know, pointing to the same thing. I mean, despite the changes that have been made, our growth has been very good, and that includes on the e-commerce side. And with our local customers. With our local customers. That's one of the things I was gonna say. It's really early to really understand in a concrete fashion where the numbers are all falling, cause obviously this is something that's come up in the last couple of years. There's a period of time to execute, get comfortable in a certain environment, et cetera. I do believe that at least very early on, I think the growth that we're getting out of our branches relative to the marketplace is a little bit better in this cycle than what we saw last cycle. I think that attributes to a lot of the changes that we're making. This is a this is a wealth of data that we're gonna have to continue to collect and evaluate. Everything coming out of the field anecdotally and really early indications on the data, I think are all encouraging. Got it. Appreciate it. Thanks, guys. Thanks. Thank you. Next question is coming from David Manthey from Baird. Your line is now live. Hey, Dan, Holden. Good morning. Dave, good morning. Back in 2009, I know every cycle is different, but through that year, your gross margin dropped about 300 basis points. At the time, you talked about FIFO and lower rebates and competitive pricing. Can you just discuss what's different today about the business other than the fastener mix, which I think was about 50% back then, and anything else that's changed that would limit that kind of of an impact on your P&L? Sure. You have a good memory, Dave, and you know, just yesterday we had our board meeting, and I was reflecting on just that element with the board because we were talking about you know, what could happen in different scenarios, what we're seeing. If you recall, in 2009. In 2008, there was a fair amount of inflation and nothing like we're seeing today, but there was inflation going on. When demand fell back, that flipped from inflation to deflation. You know, all of a sudden, what is six months worth of product, if your demand drops off enough, that might turn into seven or eight or nine months worth of product. You saw the squeeze that occurred. You also saw a mix shift in your business depending on who's being impacted by it. The deleveraging, obviously, of the trucking network, because if we're driving a truck from Winona, Minnesota, to Minneapolis to deliver to branches, and that truck has 10%, you know, is running full or it's running at 80%, the cost of the truck and the cost of the driver and the cost of the fuel going in, that is what the market is that day, and you deleverage that network. Same thing with our distribution. What's different today, the element of deleveraging the trucking network, that's the same. Nothing's changed there. You know, our mix is different. You're right, fasteners for 50% of our mix. A fair amount of that is product that most of the fasteners in this country are not produced in this country. Whether it's us or supply chain partners in North America, most of that's coming from Asia. If there is deflation going on, that there's a squeeze that goes on there that occurs in your turn of inventory. Once you get through that turn of inventory, that issue goes away. Again, the question is how much supply do you have? Those dynamics are in play. You know, the non-fastener piece, a chunk of that we source domestically, a chunk of that we import. I suspect chunk of what we buy domestically is imported by somebody else. There would be some of those dynamics going on, too. Deflationary environment is not a friend to gross profit in the short term. It wasn't in 2009. It wasn't, you know, in the early 1990s. It wasn't in the late 1990s, and it won't be if something like that would happen in today's world. Thanks, Dan. Appreciate the color. Thank you. Our next question is coming from Nigel Coe from Wolfe Research. Your line is now live. Thanks. Good morning, everyone. Good morning. I think I'm gonna revisit some of the questions beforehand. Maybe I think what Josh was trying to drive at was the fastener pricing with steel prices coming down. Obviously steel prices are sub $1,000 right now. I understand you've got contractual pricing arrangements with some customers on that. Just maybe if you could just address that and you know how that works and maybe just go from there. Thanks. Yeah. I mean, first thing, I would challenge the assumption a little bit about steel pricing being down. Depends which index you're looking at. I mean, we source most of our steel product over in Asia, and so what's relevant to us is sort of what's going on in Taiwan, what's going on in China, at least on the last statistics that were fed to us. Those prices are still relatively elevated. Consider first the region. Look, I think deflation works the exact same way as inflation, right? When the cost of the raw material goes up, we approach our customers with an increase to defend, to sort of defend our margin. When it goes down, our customers approach us with a decrease, and there's a whole bunch of them that have those contractual windows that allow them to do that. As a result, is it possible that you could have, you know, negative pricing in your business? Sure. I think we saw that in 2015 and 2016. Now consider the pieces, right? I don't believe that we've historically seen negative pricing in our non-fastener mix. You know, and on the fastener side, consider that no more than 1/3 of the value of a fastener is the actual raw material itself. The rest of it is the value add in the manufacturing, the transportation costs, et cetera, right? When you start slicing and dicing, at the end of the day, in 2015, 2016, you know, we probably saw deflation in price of 1% or 2% across the business, right? You know, please consider the order of magnitude of impact that we're talking about. You know, I think that the dynamics work the same way, but in reverse if the pricing environment should change. Again, I wanna emphasize that's not the environment that we're seeing today. Feel free to speculate anyone on this call that that's going to happen, but that's not the environment we're seeing today. Right. Now, I mean, talking about deflation with the CPI numbers just come out seems a bit academic, but no, it's a relevant discussion. Just staying on inflation, I think you called out half of the inventory increase is inflation, half is unit. So it looks like we've got about 12% inflation, you know, in inventory here. Pricing is 6.6%, 6.9%. Does that mean you need to push more price in the back half of the year to maintain price cost neutrality on products? Well, you know, I think part of the challenge is how you measure the relative pricing. Remember that when we're talking about pricing, running through our revenues, you know, we're looking at recurring sales, which is about 40% subset of our total business, right? Now, what that means is about 60% of our business is the sale of a product that we didn't sell in the previous period, right? Now, the truth is, if we were to have sold the same part last year that we sold this year, we probably would have sold it for less than we did this year, right? I believe that, you know, there's a recurring component of inventory is much higher than the recurring component of sales by the nature of our business. I think that's the difference that you're seeing between the two. You know, again, when I look at where we are, if I take out all that non-recurring, I look just at recurring, the dynamic is we're a little bit behind on fasteners and, you know, we're sort of in line on everything else. No, I don't believe that we're behind, Nigel. I think that we're largely on pace with the level of inflation that we're seeing. The gap you're talking about is reflecting sort of the different recurring sales levels that you see in sales versus inventory. There's a premise to the question that I think is being missed from the standpoint of the basis for the question. That is when we have $100 of product sitting on the shelf, let's just say that's our ending inventory, and we're selling product next month, the month after that. We're not exclusively selling product out of our inventory. We're selling product that we're buying that month and selling that month. We're selling product. A disproportionate piece of our inventory that's sitting on the shelf is product that we've decided over time because of the length of the supply chain and the nature of the supply chain, we're gonna stock that ourself. If we have a supplier, a domestic supplier who we are lockstep with, we have a great supply chain relationship with, they know the demand, we know their capabilities. We don't have six months of their product on our shelf. We have three weeks, we have six weeks, we have eight weeks of their product on our shelf, depending on what the need is to physically move it in an efficient fashion because your supply chain is different. If that product is coming from halfway around the planet, in the last year and a half, that trip across from source to use is less than predictable. That's where our inventory deepens. When Holden talks about what percentage of our inventory increased related to inflation and relates to deepening of the quantity, that's disproportionate to inventory that we're sourcing outside the United States, outside of North America. That 12% doesn't naturally translate to, well, that means your inflation and your sell price in the next six months have to be up 12% because that's not apples and apples. I hope that makes sense what I just Okay. Yeah, it does, it does make sense. Thanks, Dan. Appreciate the color. Thanks. Thank you. Our next question is coming from Ryan Merkel from William Blair. Your line is now live. Hey, guys. Good morning. Good morning. Good morning. I wanted to follow up on Dave's question and just clarify. Relative to 2009, it sounds like the mix is a little bit different, obviously, of your business, but I think you're saying you're gonna be just as cyclical and decrementals could still be in the mid-20% if we have weak sales and deflation. Is that a fair statement? Well, the point Holden made, in a much more artful fashion than I tried to make when I initially answered it, was the mix was more acute in 2009 cause half our sales were fasteners, and fasteners have different pricing dynamics than non-fasteners. The fact that it's a third of our business today would diminish it. It wouldn't remove it on that third, but it would diminish it because it's a third of our business rather than half our business. Does that make sense? It does. The other thing that I would remember or that I would point out is in 2009, demand was down 60% in a blink. It's really hard to adjust your cost structure when demand is down 60% in a blink. I would maybe things change, and maybe we have 2009 coming. I have no idea cause we have no visibility, but that seems to be where a lot of questions are coming from. You know, our decremental. One reason why 2009 is so exceptional is because that's actually the only year in our history that revenue was down. Our decremental is 40% because you can't adjust your cost structure that quickly. I don't believe, unless you believe there's a replay of 2009 coming, I don't believe that 2009 is the right proxy for, let's say, a 2019 style slowdown. I would just give some consideration to the benchmark you're using. This is to everybody. Before everybody who's on the call walks over to the closest window and decides to leap. When I talk to our regional leaders, when I talk to our national account sales leaders, and I get the tone of what they're seeing from their customers, I don't think there's a customer they talk to that doesn't have as strong a backlog as they've ever had in their business. Now, backlogs are funny. Backlogs can evaporate in an environment. If you think about what you see, our transportation folks were down at the rail yards in Chicago recently. We're always trying to figure out ways to streamline our supply chain. The amount of containers of product that retailers have sitting there that they're paying for storage is massive. You know, there's a lot of those kinds of things we're hearing about. When I talk to our manufacturing customer base and our construction customer base, to the construction folks, the proverbial canary in the coal mine, to use a term from one of our directors yesterday is, projects don't get canceled, but they get delayed when things get softer. There's a lot of pent-up demand because a lot of manufacturers have stuff that's sitting there ready to be finished, but they're waiting for components. One of the components they're not waiting for is their OEM fasteners. One of the components they're not waiting for is the stuff that Fastenal is there to supply them. When that widget can be assembled or the assembly can be finished, we're there to serve that need. We're in a different spot than a lot of suppliers going into that. Holden's point is dead on. I still remember. I believe from October to January, our business dropped off about 18%, and then we dropped off 5 percentage points a month, our actual business level. We were down, we weren't down 60%, Holden, we were down about 33%. It started to shallow in the spring. His point is dead on that that's a completely different scenario than what we're talking about from the standpoint of the demand need and the backlog in the marketplace downstream from us. Got it. That's helpful. My second question, and the premise to this question is the worry about inflation to deflation, and probably better for Holden. I think, Holden, that price inflation that you report reflects about 40% of sales. I think that's what you've said. The question is: What is the risk that inflation in the other 60% that's hard to measure has been more helpful to sales and gross margins than we appreciate? Well, again, I believe that if we had bought a widget in both periods, it would be inflated this year compared to where it was last year. I think that goes without saying. I mean, that's why, you know, if you look at fastener inflation, throw out the 60% where there's no offsetting sale year-over-year to a similar customer. Fastener inflation exceeds 25%. It has over the past couple of quarters because of what's happened with the price of steel, cost of transporting internationally, et cetera. If I look at non-fasteners, it's been closer to 10%, right? I mean, that's the level of inflation that we've been seeing in the marketplace. Hopefully, that gives some color. I'm not sure what else you're referring to. Yeah, no, it's helpful. I just, if it's hard to measure roughly 60% of sales on inflation, I was just worried that potentially inflation is helping more than we can appreciate since we can't really see it. As I said, for every widget that we sell this quarter for which there's no comparable sale to prior quarter, I'm pretty certain we probably got more for it this quarter than we would have, you know, a year ago had we sold it. Right. Right. You know, now I think that there's. If we didn't sell it last year, I also think we probably gained some share or gained some product, something like that. I don't think we should lose sight of that fact. Yeah, without a doubt, you know, most of the stuff we're buying this year, probably, you know, we're getting more for it than we would have a year ago. The piece you're not factoring into this is there's numerous examples of where the customer was willing to shift what they were buying. For example, we have our own exclusive brands. There is examples where, hey, widget A has gone up 10%. Widget B has gone up 10%, too. However, that 10% increase is less, is only a point and a half above what you were spending on widget A in the past. You know, sometimes these measurements are funny at not measuring things like that to shift because our exclusive brands as a percentage of business, our preferred suppliers as a percentage of business has grown faster than our overall business. Not all of that inflation shines through in the terms of pure growth, because when substitution comes into play, what you're selling is more expensive than it would have been a year ago, but it's only nominally more expensive than what the alternative was because you, it's kind of like going to the grocery store and you're buying a different brand than you were buying a year ago. Both brands might be up 5% or 10%, but you might be spending the same as you were spending a year ago because you're buying a different brand. Got it. You know, a-and I would- Again, ultimately, you know, price cost gets reflected in some way, shape, or form in your gross margin. Again, our gross margin's been fairly stable. I don't believe that there's a bunch of inflation out there that we're not seeing and we're not accounting for. Cause if that were the case, it would be reflected in our gross margin. I think the actions that we've taken are capturing the order of magnitude of increase that we've seen. Good point. Okay. Thanks. Thanks, Ryan. Thank you. Thank you. Our next question is coming from Hamzah Mazari, from Jefferies. Your line is now live. Hi. Good morning. My first question- Good morning. Good morning. My first question was just around the on-site business. You know, you mentioned clearly it's a good solution for some of the supply chain issues you're seeing. Do you view there to be structurally higher demand for on-sites in kind of a post-COVID world, post-pandemic, relative to your kind of expectations pre-pandemic? Has the timeline in terms of, you know, implementing a new on-site or the ramp changed at all, with some of the labor availability issues? I know you mentioned you had pretty good hiring in Q2. Yeah. You know, structural is a funny word. I believe there is a structural change in demand. COVID, I mean, COVID in the hiring environment is part of it. I think awareness is part of it too. You know, if you go back 15 years ago, there wasn't a structural demand for vending in industrial world, in industrial distribution. It didn't exist. It was a one-off novelty that had been around for 20 years, but it really didn't have a presence. Even internally, when we first started talking about it, a lot of reaction was, We wanna put what in a snack machine? It's a better means to distribute that type of product. We've expanded that footprint now into our FASTBin offering, our FASTStock offering. What's changed is our awareness of the solution, but as of equal importance, the customer's awareness of the solution. The one thing that is nice about an event like our customer show is customers get to come to that event, and they see firsthand examples. They talk to other customers that are doing it. All of a sudden, the awareness changed of what the on-site is about, you know, Fastenal model, c ause there's other on-site models out there, implant models out there, but they learn about what it is in the Fastenal supply chain, armed with all of our FMI technology, of why it's a great solution. I believe structurally, there's a better environment for it, and that's why we're signing 100 versus 80 or 85 or 90 if I go back even pre-pandemic. That's enhanced by the fact that, you know, maybe some folks look at that as, geez, it's really difficult to hire, especially for an expertise that isn't inherent in my business. We make widgets. We don't source product. It's an expertise and a hiring element. Don't lose sight of the fact that it's work for us to add those people, too. Sometimes the limiting factor to how fast it ramps up is our ability to staff it with a talented team and our customers' ability to make change in their business and willingness to make change. The premise of your question is, structurally, is there a better environment today than there would've been in the past? Yes. Part of that's COVID, part of that's a hiring environment, but I think the most important element is awareness. That gives it sustainability past the next six-12 months. That gives it sustainability for years into the future because it's a thing. A bit of color I might add to that. Probably over the last three to five months, which kind of coincides with where I think ourselves and our customer base began to sort of adapt to the current setting. Over the last three to five months, a lot of the feedback that's come back from the regional vice presidents in their commentary to me, that they give me each month, each quarter, there's been many of them that have said that the lessons that were learned from the period we just came out of was that our customers are not supply chain managers, and they're looking for someone to bring that expertise into them. To Dan's point about structural, I think that this laid bare how difficult managing your supply chain can be. On top of that, supply chains have just gotten more expensive in the current environment. I think that our customers are looking for more assistance in that, and I think they're conveying that to the field sales force based on the commentary that I'm getting back. There's some anecdotal support for that. Got it. Very helpful. My follow-up question, I'll turn it over, is just an I think maybe it was asked a few quarters ago, but anything you're hearing from your customers on reshoring manufacturing capacity back to the U.S. domestically, is it more anecdotal, or are you sort of seeing any data points suggesting that that's beginning or happened or happening? Thank you. Yeah. I mean, what I'll tell you is I haven't received any, you know, concrete commentary from people saying, Oh, you know, all these plants are coming back. You know, I've not received any anecdotes to support the idea that onshoring is or isn't happening. I'll tell you that in my view, I think that that's sort of a long cycle thing that we're gonna look back 10 years from now and say it happened or it didn't happen. I don't know how you identify that in a given quarter. You know, or frankly, even a given year that that trend is in place. I've not received any specific feedback from the field suggesting that that's driving our business. Got it. Thank you. Sure. Thank you. Next question is coming from Tommy Moll from Stephens. Your line is now live. Morning, and thanks for taking my questions. Morning. Morning. I was hoping you could elaborate a little bit on the softening demand trends that you called out, and I'm thinking about it in a couple of ways. First, just if you can walk us through the quarter and Holden, you referenced the exit rate, and what that might imply for the remainder of the year. Then the second way I'm thinking about it is, you made a comment, I believe it was Holden, around the weakness or softening, we can say largely centering around consumer construction end markets. Any end market commentary would be helpful as well. Yeah, taking the last first. You know, getting down to specific end markets can be a challenge. The message that I'm conveying is, again, based on the feedback from the RVPs, where they talk about seeing some softening. It winds up being things like automotive, recreational vehicles, right? Things like that tend to have a more direct connection to the consumer. When we start talking about things around commodities like oil and gas, or things around capital goods like agriculture, the feedback is still pretty positive there. No real sense that there's been any slowing in demand and no sense that that backlogs are, you know, anything other than strong. That's kind of the split. It's difficult for me to give a lot of color from an. In terms of an SIC code sort of perspective. Just in terms of the anecdotes coming from the field, that seems to be the direction that they're pushing us, where you touch the consumer directly, it's a challenge, where you don't, it's still strong. That's why I said, you know, the softening we saw during the period, it's not broad and it's not deep, but it was a bit of a change. You know, to the first question, or maybe part A of the first question, you know, we didn't finish June as strong as we started it. That's different from what we experienced in March. We finished March stronger than we started it. Two out of the three months of the quarter, including June, we did not achieve the sequential norm that you would normally expect to see, right? I mean, those are sort of the elements that we're talking about. Now, when I talk about if the exit rate were to be sustained, we feel pretty good about it. You know, you can run the math yourself, right? I mean, I'm simply taking where we finished in June, and I'm running the sequentials out the rest of the year, and it tells me that we would grow, if nothing else changed based on where we exited June. We can feel pretty good about that rate of growth. But that's how I tend to think about it. That's helpful. Thank you. As a follow-up, I wanted to shift to hiring. Dan, it sounds like the conditions remain challenging, but I believe you said the trends on applications have improved. I just wonder if that might be driven by softening and hiring elsewhere. You may not have a ton of visibility on that, but I'd be curious if you had any thoughts. To the extent we do enter a period, a recession period, can you just refresh us on the philosophy on how you manage hiring and leverage or and/or deleverage on employee related expenses in that kind of an environment? Yeah. What's really changed in our hiring, and it's more about our hiring in the field than it would be in our hiring in distribution or our hiring in some of the support areas or in transportation. Our model for hiring is we have relationships that we've nurtured over the years with four-year state colleges, two-year technical colleges that are in the proximity of our network. If I'm in northern Wisconsin, for example, we're recruiting from University of Wisconsin-Eau Claire, University of Wisconsin-Stout, which is in Menomonie, Wisconsin. We're going to UW-River Falls. We're going to the, I believe it's Western Technical College. We have relationships there. Well, if you think of what happened in 2020, all these kids went home and moved in with mom and dad and were doing college and tech school remotely. If, you know, unless it was a trade that they were learning that required hands-on, but they were doing it remotely. The 2020 to 2021 school year was, well, we're remote some of the time and we're in some of the time, and it was a chaotic environment, and some people just said, Oh, the heck with it. I'm gonna stay remote cause I can. The current school year that ended, that started last fall in 2021 and through 2022, it was pretty much everybody was in class. I think what really changed in 2022 for us that moved the numbers is all of a sudden, this young person who's going to college somewhere, going to a tech college somewhere, they're now six months into, Hey, I'm at college. They haven't kicked me out and sent me home to my parents. I need a job. We're finding those people, and they're applying for jobs we're posting. I think that's what's really moved the needle, cause we haven't seen the needle move as well in our distribution centers. I wish we would. We haven't seen it move as well in our transportation. I wish it would. But same thing with manufacturing, but I think that's what's driving it more than people not hiring, y ou know, hiring somewhere else has changed. I think the availability of talent has improved. Or the willingness of talent to work has improved more so than the opportunities have dropped off. Cause there's still a lot. You know, it's a rare business that you go to today that has enough people. Typically, when I go out to eat, I call the restaurant first because I wanna know if they're open. Because in this environment, there's a lot of times businesses shut down on different days of the week because it just doesn't. If they only have 300 hours of work or 1,000 hours of work this week, they're gonna put it in the point that it's most useful for the employee and for the employer and their market. I think that's what's driving it more than anything. Thank you. That's helpful. I appreciate it, and I'll turn it back. Thank you. Our next question is coming from Chris Snyder from UBS. Your line is now live. Oh, thank you. My first question is on on-site and specifically the lag between signings and activations. The first half of the year, you guys signed 208 but only activated 138. Can you maybe talk about the typical lag? You know, has that been impacted by tight labor market, you know, so far in 2022? Any expectations for, you know, activations into the back half? Yeah. It's not unusual for activations to occur somewhere between you know, three months and six months, is probably sort of the gap in which that traditionally occurs. There absolutely is a period of time where those signings have to bleed in. Do we believe that labor has played some role in the slowness? Yeah. We do. Hopefully, that's beginning to resolve itself to some degree. I will note we had a lot of implementations in the second quarter. Even so, we had a lot of signings, so we grew the backlog again. We do in fact have a record backlog of implementations to do. you know, we feel pretty good about the degree to which the number of signings that we have, the backlog that we have in place, the degree to which that's either a bit of a hedge against any sort of downturn that plays out or an accelerant if one doesn't play over the back half of this year and into next year, we feel really good about that. Appreciate that. I guess just kind of following up on that, you know, potential tailwind, whether it's into a slowing macro or not a slowing macro tailwind either way. I mean, you guys have spoken in the past about a $1 million target for on-site revenue. Is there any color you could provide on, you know, the ramp? You know, how long it could take to get to something like that? You know, maybe any color on what an on-site typically kind of comes out at? Just kind of how we could think about that or try to quantify that challenge. Yeah. Well, the $1 million you're talking about has been. A lot of times we use the example of a $30,000 a month customer. We think we can add $80,000-$100,000 of an incremental business and grow that to, you know, a $110,000, $120,000, $130,000, $140,000 relationship. That $80,000 increment is at least a $1 million layer on top. You know, to the point when you get it, when you're turning it on, I think we're getting better at turning on on-sites every day. That enhances our ability to drive that quicker. It's still gonna be dependent on the circumstance. I think the layering of numbers that we've historically shared. I think that's still as good a proxy as anything about what to expect. I see we're at 10:00 AM Central Time. I probably shouldn't have taken that last question. We're running out of time. Chris, if you have a follow-up, feel free to give me or Holden a call. For everybody else, thank you again for participating in the call today, and I hope you have a successful Q3 and the rest of the year. Thanks, everyone. 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.