Greetings, and welcome to the Fastenal 2022 annual and fourth quarter earnings results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Taylor Ranta of Fastenal Company. Thank you. You may begin. Welcome to the Fastenal Company 2022 annual and fourth 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. The call will last for up to one hour, and we'll start with a general overview of our annual and 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 March 1, 2023 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. We undertake no duty to update them. It is important to note that the company's actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission. We encourage you to review those factors carefully. I would now like to turn the call over to Mr. Dan Florness. Thank you, and good morning, everybody, and welcome to our fourth quarter earnings call, and Happy New Year. If you some highlights on the quarter, I'm on page 3 of Holden's flipbook. Our daily sales grew 10.7% in the quarter. Eased a bit from what we've seen in recent quarters, primarily 'cause of tougher comparisons to what we were seeing in the fourth quarter last year, but also some moderating demand. I'm pleased to say that our fourth quarter operating margin remained stable at 19.6%, and our ability to generate cash. We're looking at our cash conversion, it returned to historic levels. That's really a sign of moderation in the level of inflation that we're seeing in the marketplace. Also, a more stable supply chain and the ability to not need... How's that for a double negative? Not need to expand our stocking levels to ensure a reliable supply line for our customers. It gives us some flexibility as we go into 2023. We're very pleased to see that. 2022 was a year of milestones, and they all centered on $1 billion. In October, our e-commerce revenues surpassed $1 billion for the first time ever. Our, and that's on annual, looking at annual milestone. Our international sales exceeded $1 billion. We hit that milestone in the month of November. As noted in the release this morning, our company-wide net earnings topped $1 billion for the first time ever, and that was for calendar 2022. You know, when I look at that chart on the upper left, it's hard to decide where do you start explaining all the noise you have really over the last three years as we went through COVID, as we emerged from COVID, as we went through supply chain disruptions and an inflationary period. I chose to not, and just compare to 2019 from the standpoint of what was our cumulative sales growth in each of the quarters of this year, because I think it tells a more stable story and talks about the things that we've built. In the first quarter of 2022, we were 28.1% larger than we were in the first quarter of 2019. This expanded to 30% in the second quarter, expanded to about 31% in the third quarter. In the fourth quarter, we're about 35% larger than we were in the fourth quarter of 2019. You shouldn't conclude from that geez, that expanded, you know, 7 points from Q1 to Q4, 'cause in all in full disclosure, 2019 was weakening a bit as we went through the year. I would see this as ignoring COVID, ignoring supply chain, ignoring inflation. We're 30% bigger than we were 3 years ago, and I think that's a testament to the business model and to the team executing the model, and the marketplace recognizing Fastenal for what it is, a great supply chain partner to their business. And I'm pleased to say I think we're exiting the pandemic stronger than we entered. The we experienced margin pressure in the fourth quarter. Holden will touch on that in more detail later in the call. Fasteners were challenging, we understood what was going on there and we knew what was coming. The safety, I would say the same thing. It's challenging, like anything is challenging, but we knew what to expect there. I think on the, these first two buckets of fasteners and safety, we understood it, and we managed through it quite well. The remaining product lines, a lot of those products aren't as prevalent in the recurring pattern, the plan spend component of our business, whether it be through the vending portion of FMI or the bin or the FASTStock portion of FMI. It takes different tools and different means to manage that. We had some challenges there. Again, Holden will touch on a little bit more later in the call. When I look at the final piece and the reason we were able to maintain a stable operating margin. We've done a really nice job with headcount. We did add a few more people in the fourth quarter than I would have liked to have seen. I suspect some of it is after a period of being really difficult hiring and as it eased throughout the year, there's some spots that we needed to fill that were filled. When I look at it in totality for the year, we've really done a nice job, and I'll touch on it a little bit more in a few minutes, but we've done a nice job in the last three years as well. Flipping over to page four of the flip book. The Onsites, we had 62 signings in the fourth quarter and finished with 1,623 active sites, so up about 15% from a year ago. If you ignore the sales that transfer over when we open an Onsite where it's an existing customer, we grew our Onsite base and the revenue in the high teens. Reiterate our goal for 2023. Our intention is to sign 375-400 Onsites next year. I'm pleased to see, for us, we often talk about participation inside the organization. Just over 80% of our District Managers signed an Onsite back in 2019, and when society closed up and folks weren't as excited about us moving in to stay with them during the day, that participation dropped dramatically as our Onsites dropped in both 2020 and 2021. I'm pleased to say in 2022, 80% of our District Managers signed at least one Onsite. Would I prefer to see that go to 85 or 90? Sure, I would. 80% is a nice threshold to get above again, 'cause we'd only done it once before, and that was in 2019. My congratulations to the team. FMI technology, we signed 4,730 weighted devices in the fourth quarter. That's 76 per day. A year ago, we were signing 64 per day. The activity through our FMI technology platform represented almost 39% of sales in the fourth quarter. That was 35% a year ago and 27% two years ago. For 2023, our goal is to sign between 23,000 and 25,000 MEU devices, whether it be FAST Bin or FAST Vend. E-commerce, the next piece of our what we call our digital footprint. Daily sales rose 48% in the fourth quarter. Again, incredible traction in that area. We've really seen that traction move in the last three years, partly a function of COVID, and I think a lot of people are seeing those kinds of patterns. Also, we've gotten better as an organization at our ability to execute on e-commerce, and that shines through the numbers as well. EDI and punchout catalogs and really large customer-oriented e-commerce was up 45%, and our web sales was up almost 60%. Looking at our digital footprint, so that's looking at FMI plus the piece of e-commerce that doesn't come from FMI, was 52.6% of sales in the fourth quarter, and that was 46.5% a year ago. Our goal is 65% of net sales going through our digital footprint next year. In the interest of full disclosure, that's an aggressive goal, but it's our goal nonetheless. If I flip into page five, we put this table in the release last January as well, and it's really intended to show over time what's really happening to our network. That is, as FMI becomes a bigger piece of our business, as our mix of customers changes, as e-commerce becomes a bigger piece, you rationalize your footprint 'cause your need for a footprint change. You can see in 2013, we peaked out, and I'm gonna start at the bottom of this set of bullets and work my way up. In 2013, looking at our data, we had a 30-minute access to about 95% of the U.S. manufacturing base. This is just looking at the U.S. branch network 'cause the Canada follows a similar trend as far as what you've seen in the number of branches, whereas the rest of the planet are continuing to open locations because we're quite young there. Looking at the 1,450, which we think is the ultimate number we get to for branch count, in the U.S. and Canada. The U.S. piece of that where we have really good data, we think that 95 drops to about 93.5, which we think is incredible coverage and puts us in a great position to be a great local supply chain partner and still have a really efficient network. You're seeing that in our OpEx over the last few years. If you look at our headcount numbers, I touched on it earlier, and I thought I'd share a different view rather than the year-over-year view you have in page 5 of the earnings release. That is, again, a 3-year view of what's happening. Our in-market locations from an absolute basis since 2019, our headcount's down about 567 people in the branch and Onsite network, which is about a 4% drop. Again, things like FMI and rationalizing locations have really allowed us to leverage that. However, our sales headcount is up because every headcount we've reduced has moved into some type of sales role supporting the branch and Onsite network. I'm pleased to say we were able to realign our resources in that timeframe and really be a better growth-driving organization for the long term that aligns with our strategy of a branch and Onsite network. The other thing that should stand out is a year ago, we had 377 more branches relative to Onsites. We had 1,416 Onsites. We had 1,793, so it was a 377 delta between the two. At the end of 2022, that delta has contracted to 60. We have 1,623 Onsites. We have 1,683 branches. You know, I don't know what quarter that flipped, but it won't be too much, too far into our future that we'll actually have more Onsites than branches, which has been very much a plan thing within our business over time. Again, the FMI digital footprint helped us leverage our headcount and our rationalization of branches. The other piece that's an important and growing component, we've talked about our LIFT initiative, and we ended the year with just over 17,000 of our vending machines being resupplied out of our LIFT facility, which really allows us to operate more efficiently, ultimately allows us to rationalize some working capital, and our sales team can focus on selling more than managing some of the back office items in a branch. The final thing, if you look at our headcount over the three-year period, is we've been able to really rationalize our support labor. We have added folks into distribution because of LIFT. However, in the If I look at DC and manufacturing, we're up 98 people in the last three years. Again, that team's done an incredible job of managing our headcount. If I look at our support areas in general, 51% of our headcount increase in the last three years has been folks going into IT. That's how we're able to do things like FMI, how we're able to do things like LIFT and build the technology to support it. 35% has gone into either a growth driver or into our international team or supporting our sales team. Fourteen percent has gone into all other categories combined in the last three years. I think that's an organization that dramatically improved itself in the last three years as we prepared for the future. One last item. When you see our release in February, I usually don't get ahead of myself on what's gonna be in a future release. One thing to note is, in 2022, our team in India added approximately 50 interns, and we ended up hiring 54 of them because of a number of those interns told their friends about Fastenal, and they joined the Blue Team, and they added to our IT group. We saw such great success with that. It's a very efficient way to add folks. Here in early January, we added 96 or 98, one of the two. You're gonna see the number grow by about 100 in the month of January in our support infrastructure. Don't conclude from that Fastenal is not managing its headcount. Conclude from that Fastenal is investing in resources to support its technology side. With that, I'll turn it over to Holden. Great. Thanks, Dan. Starting on slide six. Total and daily sales increased 10.7% in the fourth quarter of 2022, which included an up 8% reading in December and represented further deceleration from prior quarters. We attribute this deceleration to slower industrial production, which shouldn't surprise anyone that tracks the Purchasing Managers' Index, and more difficult growth and pricing comparisons. Even so, significant elements of our business continue to perform well. For instance, manufacturing, which was roughly 73% of our sales in the fourth quarter of 2022, grew 16% and slightly exceeded normal quarterly sequentials. In addition, our largest customers, as reflected by our national accounts program, and which approximated 59% of our sales in the fourth quarter of 2022, grew 15%. We believe continued healthy performance in these areas reflect our investments in Onsite and changes to our branch structure and sales roles. Feedback from our regional leadership on the outlook entering 2023 remained constructive and largely unchanged from the third quarter of 2022. There are a few areas where we have seen incremental weakness, however. For instance, a handful of our large retailer customers tightened their belts regarding facilities and labor, and our non-North American sales softened on a strong dollar in geopolitical events. We've made significant investments and seen enormous growth in these areas over the last few years, and the current weakness, in our view, relates to market-specific factors. Construction revenues were also softer, which reflects the conscious decision we have made to position our branches to focus on larger key accounts, which is contributing to better labor leverage. These three areas, large retailers, non-North American markets, and construction, together represent more than 15% of sales and went from double-digit growth as recently as the first quarter of 2022 to declining in each case by the fourth quarter of 2022. As always, we have limited visibility as it relates to future demand. We do believe that our sales initiatives continue to gain momentum and expect good outgrowth in 2023. To slide 7. Operating margin in the fourth quarter of 2022 was 19.6%, flat from the prior year. We continue to manage operating expenses effectively, producing 120 basis points of SG&A leverage in the fourth quarter of 2022. Occupancy costs are being restrained from strategic branch closures, while initiatives such as digital footprint LIFT and the changes we've made to our branch strategies are contributing to improved labor leverage, which accelerated in 2022. As Dan indicated in his opening remarks, we were a bit more aggressive with headcount adds than might be prudent given the cloudy manufacturing outlook heading into 2023. We think that can adjust quickly, and it is likely annual FTE growth peaked in December or will peak in January before decelerating through the first half of 2023. Although the ultimate level of growth in the marketplace will have its say, we do believe that we can continue to leverage operating expenses in future periods. SG&A leverage was offset by a matching 120 basis points decline in gross margin, which was greater than anticipated. Certain factors were familiar. The drag related to product and customer mix widened as non-fastener growth began outpacing fastener growth, which was expected. The price cost drag widened slightly, which is a little more than expected, reflecting some improvement on the fastener side, but incremental challenges in other products offsetting this. In fact, we experienced broader product margin pressure in our non-fastener and non-safety products. These categories tend to have a less centralized supply chain, and the spend tends to be more unplanned, which, when combined with slower demand and a better-stocked marketplace, resulted in broader discounting. We believe this relates more to our actions than the state of the market and have plans to address it in the first quarter of 2023. On the positive side of the margin ledger, we continue to have healthy freight revenues and narrower losses related to maintaining our captive fleet. We had a higher tax rate reflecting the absence of certain favorable reserve adjustments that benefited the fourth quarter of 2021 and higher nondeductible payroll and state income tax expenses in the fourth quarter of 2022. Our fully diluted share count was also down 0.8% from share buybacks over the last 2 quarters. Putting it all together, we reported fourth quarter 2022 EPS of $0.43, up 7.1% from $0.40 in the fourth quarter of 2021. Turning to slide 8. We generated $302 million in operating cash in the fourth quarter of 2022, or approximately 123% of net income in the period. This reflects a typical fourth quarter conversion rate in contrast with the preceding 5 quarters, where our conversion rates lagged. This is due to comparisons, as in the second half of 2021, we began to finance significantly more working capital to navigate supply chain constraints and inflation. We do not expect to have to make a similar incremental investment in 2023, which should produce better cash flow. Year over year, accounts receivable was up 12.6% on higher customer demand and an increase in the mix of larger key account customers, which tend to have longer terms. Inventories rose 12.1%. The supply chain has largely normalized. Inflation is moderating, and our fulfillment rates are at healthy levels, which is causing our inventory growth to align more closely with growth than was true earlier in the year. Our days on hand was 161.5, more than four days better than the fourth quarter of 2021 and more than 13 days below the fourth quarter of 2019, despite the challenges of the last 18 months. We continue to identify sustainable efficiencies in how we manage our inventories. Net capital spending in 2022 was $162.4 million, a bit below the $170 million-$190 million anticipated at the end of the third quarter, mostly related to project and equipment deferrals. Those deferrals, combined with higher spending on hub investments, fleet equipment, and IT equipment, resulted in an anticipated net capital spending range for 2023 of $210 million-$230 million. We finished the fourth quarter of 2022 with debt at 14.9% of total capital, up from 11.4% in the fourth quarter of 2021 and unchanged at 14.9% in the third quarter of 2022. We had strong cash generation in the fourth quarter of 2022, we were also again more aggressive in returning cash to shareholders in the form of $177 million in dividends and $93 million in share buyback. Last night, we announced an increase in our quarterly dividend from $0.31 in the first quarter of 2021, I'm sorry, of 2022 to $0.35 in the first quarter of 2023. Before moving to questions, one quick note. This week, we released our inaugural ESG report, which is accessible through the ESG link found at the bottom of fastenal.com. This report highlights the strong alignment of Fastenal's culture and mission with the environmental and human capital objectives of our stakeholders. I wanna congratulate and thank the community of Blue Team members that worked to pull this outstanding piece together. With that, operator, we'll turn it over to Q&A. Before we start Q&A, my adder to Holden's comment on the ESG report. I encourage the folks on this call to read it. Don't wait for the movie. It's I think it's a well-written story in the context of how Fastenal tells its story, about how our business and our team have addressed this topic really throughout our history, but communicated in a way that is conscious of the formatting and the structure that society has grown more accustomed to. The other piece that I wanted to highlight is another announcement went out last night, which was we announced that our international team has surpassed $1 billion in revenue for the first time during 2022. My congratulations to everybody listening to this call as part of our international team that spans the Americas, Europe, and Asia. To our team in China, where your society has opened much more in recent months, recent weeks. I would like to wish you a happy Chinese New Year. I believe it's the year of the rabbit. I hope you sincerely have a nice opportunity to visit with family as society has opened up a little bit more. With that, we open to Q&A. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for your question. Our first question has come from the line of Ryan Merkel with William Blair. Please proceed with your questions. Hey, guys. Good morning. Thanks for taking the call. Hi. Morning. Holden, as you might imagine, I'm getting a few questions on gross margin this morning. Obviously, a few moving parts. Should we think about for 2023 a typical 30-50 basis points of pressure from mix or, you know, could it be a little bit greater just given this price cost dynamic, lower rebates, any other pressures? Yeah. Well, you know, from a, from a mix standpoint, you know, 30%-50% is probably a low number now versus where it was in the past, primarily because our strategies have changed, right? I mean, we have shifted towards really prioritizing, you know, key and larger accounts. Now that might be a larger regional account at a branch level, might be national accounts, but I mean, we've shifted our strategy to prioritize those, as you know. So I think that you've probably seen a bit of a widening in the expected mix impact from gross margin. Again, there's nothing that's surprising about that. I would again point you to the improved labor leverage that we've been seeing the last few years as being the flip side of those decisions, right? So that's deliberate. You know, so I, you know, I wouldn't be surprised if the type of leverage that we're looking at from a mix standpoint is more in the 50-70 basis points range. Again, as I said, I think that's expected, and I think that it's offset by the labor leverage that we get from the change in strategy. I think that where products or where mix is concerned, you have to balance, you know, both what's happening at the gross margin with the offsetting impact on operating margin. Right. Got it. Okay. Next, moving to incremental margins, you're gonna exit 4Q at about 20%. Is this a level you think you can achieve in 2023 on mid-single-digit sales growth? You know, it sounds like FTEs will be down. You'll have the incentive comp that's down. Anything you can add there would be helpful. Yeah. I think that you're hitting on important elements from an OpEx standpoint, and we do continue to expect good leverage there, right? I think we've seen on the labor side, wage inflation has moderated a bit. You're right, incentive pay. Look, I'd love to be paying greater levels of incentive pay, but if the market slows down, that wouldn't happen, so you wouldn't see that kind of growth there. I think we'll continue to control headcount and the mix will shift as well, where a lot of the headcount that we add will be, you know, part-time as we rebuild those ranks or, you know, so the mix will shift that way. I think that there's still good opportunity to leverage labor in 2023. I think the same for occupancy. End of day, the question, though, is what's gonna happen on gross margin. If we can limit the decline in gross margin to our mix, I expect that we'll be able to grow our operating margin, you know, year over year, which would get you more than that 20% incrementals and would get you, I think, solid into the 2025. I think the question, and I'm sure there'll be additional questions coming up, but I don't wanna just leave this hanging out there. Ultimately is how do you think we execute some of the pressure that we've seen in the other product side and any level of deflation that may occur down the road, if it occurs? You know, I think those are variables that are harder to sort of judge. I think get down to whether or not you believe that we're gonna execute effectively on some of the things that we cited that pressured the gross margin this quarter. Obviously, we believe that we're gonna execute effectively, that we're gonna find, you know, find ways to kind of, you know, offset some of the pressures that we saw in 4Q. When we do that, I think that in a mid single-digit growth environment, that we can defend or improve the margin. I think there's probably more variables or questions on the gross margin going into 2023 than, you know, than we have answers to right now. Thanks. Pass it on. Yep. Thank you. Our next question has come from the line of David Manthey with Baird. Please proceed with your questions. Thank you. Good morning, Dan Florness. Good morning, David. I have 1 2-part question on OpEx. The first part is related to labor. The initiatives that you put in place have clearly driven better labor efficiency overall. I'm wondering, in general, is the Fastenal cost structure more or less variable today than it had been in the past because of some of those structural changes? The second question is related to branch rationalization. By the chart you show here, where you're extending it out to 2025, it appears that you're materially complete with that transition. I'm just wondering, are there any costs related to that transition that you've eaten over the past many years that will go away in 2023? What I'm referring to is any sort of rationalization costs that a less conservative company might have flagged as non-recurring or restructuring. Maybe moving backwards and then to your first question. You know, I do think that we will have additional closures this year as we move towards that target. I think beyond this year, you'll begin to see those closures begin to moderate, right? You know, I think part of your question is, you know, how long does this sort of this closure process go? I think we have another year of it before it becomes a little bit, you know, less part of the story. One of the things that we've done in closing the branches is on top of that, we've sort of shifted the priorities of the branches, which ultimately make those branches more scalable in the future than I think they have been in the past. As we grow as a business, I expect that we will even if we're not closing branches, I think that as our average branch size grows, we're gonna get good leverage out of that. To your point of are there some expenses that were in there regarding closing? Sure. There's branches that we may have closed where the lease wasn't up and there's a buyout. You know, we haven't scrutinized that spend meaningful, meaningfully. It's been within the overall results for the last 5 or 6 years that we've been doing this. There'd probably be some, you know, some of that would, that would also taper out of the model as we as we move from a branch closing mode to sort of a branch sustaining and leveraging mode, you know, 12 to 18 months from now. There'd be something in there. Again, It's not a massive number. If we were prone to breaking things out, which we're not, I don't know that it necessarily would've been that big a number to begin with. I wouldn't make too much out of that. As it relates to the underlying leverage, you know, Yeah, go ahead, Dan. Yeah. You know, so you talked about more variable, less variable. That answer will change over time, Dave. If I think of 2022, you know, a big chunk of our compensation programs, whether that be to our district leadership, the leadership in a lot of support areas, our regional leadership, our executive leadership. If you look at all those groups, a big driver of pay is growth in pre-tax. If you think about that from the context of, you know, you look at it from the last. The 5 years prior to 2022, we're growing our pre-tax X. In 2022, we grew our pre-tax X times 2. There was a very sizable increase in incentive comp that was paid out in 2022 versus the prior years. That actually ate into quite a bit of our efficiencies during the year. If you look at it just from a P&L perspective and a labor efficiency, 'cause that's a meaningful payout. Depending on what you conclude our earnings growth will be in 2023, I suspect it will be a smaller number than 2022. That will cause, in the 2023 timeframe, variable to actually be higher than it had been in the last few years because of that swing. If I look at things that we have done historically in the model, if you're opening branches every year, you're adding a fixed layer of expenses every year. If you're adding people into those branches, you're not getting a lot of revenue and gross profit dollars for those adds. There's a fixed layer that you're adding. That really isn't part of our model anymore. Because when we're adding labor into new units, it's going into an Onsite, and we're going into the Onsite because we have an understanding with the customer of what's gonna ramp up, and that ramps up a lot faster than historical the branch network would. From that standpoint, in 2023, more variable. As we move out over time, it's gonna depend on what the economy is doing and is it pulling us up or pushing us back as far as our ability to grow our earnings. But I think you also have our ability to manage headcount in a much different way today than we could have. You know, if you're adding 100 branches, you need 200 people to go into those branches on day one. That element has changed, and so it gives us the ability to manage the P&L in a fundamentally different way. The other piece is, while this doesn't tie right to your variability question, as we're growing things like LIFT, it allows us to create efficiency, the leverage that Holden talks about. That's gonna keep building over time 'cause we're at about 17% of our devices today are supported through LIFT. That was about 5,000 a year ago. That's gonna continue to grow and over time. That just allows us to either remove a layer of expense as well as a layer of assets or invest in selling energy faster, or a combination of the two. I hope that answers your question and. It's about the year you're asking it to. In 2023, there's a little bit more variability. Yeah. I would say, you know, looking over the course of a cycle, Dave, I don't think our variability has changed. I think what we've done is we've reduced the level that our SG&A as a percentage of sales over time can decline to without impairing our levels of service, our ability to grow, et cetera. I think we've reduced our floor of operating expenses to sales. I don't think the variability of our cost structure has changed much. Perfect. Thanks much, guys. Yep. Thank you. Our next questions come from the line of Josh Pokrzywinski with Morgan Stanley. Please proceed with your questions. Hey, good morning, guys. This is actually Gustavo Gonzalez on for Josh. Good morning. Thanks for earlier on the gross margin front and mix headwinds heading into 2023. I think just looking a little bit more near term, can you sort of quantify the margin impact from price cost, maybe the improving supply chains? How does that sort of trend from here from what you saw in the fourth quarter? You know, so price cost, the, I think last quarter we talked about it being about a 30 basis point impact. This quarter that was probably more like 40 basis points, so it widened a little bit more than I expected. I will say, though, one of the reasons we expected that it would be flat to better this quarter is 'cause we expected the dynamic around fasteners to improve. We in fact saw that happen. The, the drag for a price cost standpoint on the fastener side was narrower than what we saw last quarter. You know, where we saw the more than offset was when I alluded earlier to sort of the other product side. I think we saw a greater impact on the other products, that sort of moved that number from where I would have expected it to be to about a 40 basis point drag. Got it. That's helpful. Then I guess just sticking with fasteners, and obviously it's been a margin headwind here in the fourth quarter as well. I guess with steel deflation coming into the fold now, how should we be thinking about PNL impacts from, you know, fastener deflation over the next couple of quarters? Maybe any historical context on what you've seen previously would be helpful. I'm gonna take historical context first. I mean, thinking about the current, as you know, I don't have the same historical context that Dan does. You know, this is one of those variables on gross margin next year where it comes down, Gustav, to your belief in our ability to execute, right? I mean, we do expect that at some point in 2023, there will be requests to adjust fastener pricing down based on the cost of steel. You know, now you have to- The cost of transport. The cost of transportation. Now, certain costs are still higher, you know, labor, things of that nature, right? We have to balance that. In the end, it's the same question during a period of inflation is, you know, can we time the reductions in the price of our product with the lower cost coming through our P&L? You know, as we have had conversations with customers, that's been the message that we've conveyed, is we understand when our cost is gonna come through, and these conversations will sort of occur in lockstep with that. To the degree that we execute that effectively, we would target neutral from a gross margin standpoint in terms of price cost. It comes down to your belief in our ability to execute it effectively. I think that with the new tools that we've put in place the last few years, I think our ability to manage that process has improved significantly, and I think you saw that during a period of a fairly aggressive inflation. you know, so we feel good about that prospect. you know, our goal would be to really time the cost and the price, effectively so that price cost is neutral in 2023. It comes down to your belief in our ability to execute that effectively. From a historical perspective, I'll use an extreme timeframe because quite frankly, over the years, there hasn't been a lot of significant inflation or deflationary periods. In the late 2000s, 2008, 2009 timeframe, you saw a period of pretty heightened inflation, followed by not only deflation, but the economy getting pounded pretty hard in that late '08 and '09 timeframe. What you saw is, if you think of our business in two components, you know, large production type environments and then maybe some of the smaller customer-based departments. The one is driven more by conversations with customers about pricing. There, you know, we tend to do a pretty good job over time of matching it. Some you get a little bit ahead of it, depending on the turn of that product, but our fasteners turn a lot slower than our or turn slower than our overall inventory. Generally speaking, on the way up, you get a little bit of margin profit in there, and you'll see an expanding gross profit margin. You saw that back in 2008, that's over that turn of inventory. In 2009, it was amplified obviously because the economy was weak, you saw the inverse of that, and we got squeezed pretty hard. Again, it was for a turn. It's about understanding what's happening in the turn versus what's happening in the long term. What's changed in today's environment is that piece that is the more the production-centered element is a larger component than it would have been back in 2008. That piece where the marketplace is raising prices affects a smaller piece of our inventory, and it's more of these direct conversations. I think we have better tools to manage through it and have a more sophisticated conversation with our customer on the way up and on the way down. You know how it is. It's, it's easier to slow things down on the way up because 'cause your customer is arguing that direction, than it is to slow things down on the way down 'cause your customer actually has a different incentive there. You have those challenges. It will be challenging in this cycle of this turn of inventory, but I believe our team and our tools, we have a means, a disciplined way of managing through it. Got it. Super helpful. Thank you, guys. Thanks. Thank you. Our next question comes from the line of Tommy Moll with Stephens. Please proceed with your questions. Good morning, and thanks for taking my questions. Hey, Tommy. Good morning. Wanted to start off with some of the end market commentary you offered, particularly around what appears to be continued strength in manufacturing tied to industrial capital goods. At the same time, I think, Holden, your word characterizing the outlook for this year on manufacturing was cloudy. Obviously, PMI is sub 50 now. Have you seen any softening there, or would you characterize that end market as just as strong as it was, say, a quarter ago? Still feels pretty strong. you know, and again, I tend to try to rely on the Regional Vice Presidents and kind of their feedback to me. Honestly, the feedback over the last 2 or 3 quarters really hasn't changed that much. We clearly downshifted from 1st quarter to 2nd quarter. you know, but since then, it's kind of been the same kind of feedback from the RVPs. They, they still feel good about what we're doing. They feel constructive about the cycle. Their customers are constructive, but nervous. you know, and an RVP might cite something that's worrisome, but on the other hand, another one might sort of change their tune quarter-to-quarter. That's why I look at it net-net. The overall tone and tenor of what the RVPs are describing to us about the marketplace, frankly, it hasn't changed a whole lot as it relates to that manufacturing. The dynamics are fairly similar. Look, we look at the same stuff that you do, and I've always had a tremendous amount of respect for the PMI and its ability to sort of, you know, point directionally to what industrial production is doing. I think if you look at industrial production, that's still growing, but that growth is moderated. We still feel pretty good about, you know, what we're doing with focusing on this customer set and really being able to spend more time and grab wallet share at a faster clip. I think a lot of things that we're doing is making us feel pretty good about a market that, yeah, as you pointed out, there's a lot of signals that are suggesting it should be softer than it feels to us right now. I have the opportunity throughout the year with 240 District Managers, and throughout the year, I'm having conversations with four, five or six DMs every week. An hour conversation with each one, going through, learning a little bit more about them, learning about their business, where they think their business is going, and just hearing about what they're saying. You know, we wear stuff on our shirt sleeves. If you feel like If you're nervous, That anxiety manifests itself in how you think about stuff. I think a couple of things are going on, again, put that in the category, this is from talking to a lot of people, this isn't from studying a lot of numbers. You know, I think what's helping manufacturing is a really healthy backlog that existed through much of 2022. Let's just say you're a manufacturer and your backlog is 100 units, and whatever that revenue is, but just say it's 100 units. Because of supply chain constraints, because of just demand in the marketplace from the last several years, maybe some deferred maintenance, whatever it might be, that backlog goes from 100 to 150. Then we get into the latter third of 2022, and let's say that backlog goes from 150 to 120. It's still a really good backlog. The question is the PMI reflecting the 120, or is it reflecting the concern, the angst that comes with, well, the backlog went from 150 to 120. Is the PMI giving us a head fake or is the PMI really telling us what's gonna happen? We honestly don't know. To Holden's point, the activity we're seeing feels okay. We are, we, like everybody else, are a bit nervous about where things are going, the last 3 months and for the next 6 months. I'll be pushing our leadership pretty hard on what we're doing as far as adding headcount and being really thoughtful about it. I feel good about, you know, set aside the economy for a second. I feel good about the fact that we have 350+ new Onsites that will be giving us juice as we go into 2023, and we didn't have that kind of number coming into 2022 or 2021. There's some positives there. As far as the underlying economy, we're not really sure if the PMI is right or wrong, but we're playing it, assuming it's right. Very helpful. Thank you both. As a follow-up, I wanted to pivot to pricing dynamics and gross margin. I guess this is a two-parter. Holden, on gross margin, is there anything quantitative or qualitative you'd offer just to bridge us from 4Q to 1Q? Then more broadly, I forget which one of you referenced the broader discounting in the non-fastener, non-safety, SKUs. Is this an early sign of a trend that may bleed over into some of your more core product categories? Any context you could offer on that discounting dynamic would be helpful as well. Thank you. We'll have to put our heads together and decide if a 2-parter second question is actually 3 questions. We'll get back to you, Tommy, on that. The, it... You know, the other product, I think, was the second question that you asked. The, and there's not a lot more, I think, that we can add to kinda why we think it occurred. We just think that, you know, those products tend to be less planned. They tend to be a little less, you know, centralized in sort of the supply chain. When markets change and shift, and we've seen some, right? I mean, you go back 6, 9, 12 months ago, and the availability of products in the marketplace was fairly sketchy. It's gotten much better. You know, inflation conditions have changed. Demand may be softening a little bit, sort of under the surface. I don't know. In the end, I think that the, you know, the weakness that we're seeing has a lot more to do with things that we've done. The good news in that is, having identified that, there's things that we can do to sort of mitigate those effects. Those are things that we intend to do, you know, over the, you know, over the next quarter, or such, right? So we have a lot of belief, and this is another element of gross margin for next year. It comes down to your confidence in us and our ability to execute sort of the measures we need to mitigate that effect. Now, your question about bridging from Q4 into next year, it probably does mean that if you look at traditional seasonality around gross margin, it's probably a little weaker in the first part of the year and a little stronger in the second part of the year as we get our arms around the things we need to do to sort of mitigate the issue around the other products. Hopefully that gives you a little bit of color you can use. That's helpful. Thank you. I'll turn it back. Thanks. Thank you. Our next question has come from the line of Jake Levinson with Melius Research. Please proceed with your questions. Good morning, everybody. Morning. Morning. On a totally different topic, I feel like that international billion-dollar revenue level seems to have snuck up on us, and it's certainly been one of the fastest-growing parts of your business. I'm curious what your longer-term aspirations are there because as far as I can understand it grew kind of organically out of the domestic business that you built in North America. Clearly it's getting to a pretty sizable level. Is there a path to further expansion beyond that traditional legacy model, if you will? Yeah. First off, yes, it's that growth has been all organic, as has most 99.5% of our growth as a company in general over the last 50-plus years. The, you know, the milestone, I think is made ever more impressive by the fact that you look at our international business outside of North America, I mean, talk about a year to get your teeth kicked in. You have, you know, the chaos that's going on in Europe between the hostilities in Eastern Europe and Ukraine and the energy situation and all the uncertainty and stuff that's been shut down in Europe because of its high energy consumption, et cetera, and moved to other places. You have Asia, where the bigger part of our business is in China. These are both relatively small pieces to Fastenal, but to international, they become more important. That milestone is ever more important. You know, in China, they've been, you know, enduring lockdowns for an extended period of time, and it makes it really difficult to conduct business. I think it's really impressed what they've done. Throughout this timeframe, you know, I touched on it in my headcount numbers, we've continued to invest in the team. I had the opportunity after after not being over there for a number of years, obviously because of COVID, I was over traveling in Europe in the fall, in the September-October timeframe. Spent time with our team in Northern Europe. I spent time with our team up in the Netherlands. I'm really impressed with what I'm seeing from the growth perspective. Not top-line growth, but from the underlying customer acquisition perspective and the team I met with. What's exciting about that business is you're seeing examples of customers we're signing and Onsites we're signing or branches that we're creating relationships with that aren't strictly an extension of North America. There are businesses we're signing up contracts with that know nothing about our business in the US or our business in Canada or our business in Mexico, and they were introduced to Fastenal and our team because of our contact on the ground, whether it be in Europe, whether it be in China or down in Southeast Asia. That's the exciting part because it tells me the team there is creating a market presence for themselves, and they're being recognized in the supplier community, which makes life a lot easier. When your supplier community is in North America and you're operating in Europe, that's a challenge. The other piece is if you think about the economy, and I'm not telling you anything you don't know, there's more business outside North America than there is in North America, and we're very conscious of that long term. Depending on what your time horizon is, if your time horizon is the next 5 or 10 years, most of the growth element of the business is gonna come in North America from a pure magnitude perspective. You go beyond that, what's exciting is I think we've found tremendous success moving beyond the traditional geography that your business operates in, and the model works. We go in these new markets, we find great people, we ask them to join. We create an environment where I think they wanna be. I think the comment earlier about our experience with interns in India is indicative of what we're able to do. I think people like this style of decentralized organization where we respect people for their opinions, and we challenge everybody to be vocal about what you think can make us better. That's how we get better as an organization. I couldn't be more pleased. In fact, at our April annual meeting, I've asked Jeff Watts, who leads our international business to speak to the group this year. He was gonna do it a couple years ago and then couldn't make it 'cause COVID hit in the spring of 2020. We had virtual annual meetings for the next couple years, so it wasn't quite the same. We just kept it to the facts, so to speak. Last year, we had the opportunity to let Terry Olin talk about the distribution and investments we're making on the sales side of the organization. This year, Jeff's gonna cover international. It's a wonderful business for us because we're finding a whole bunch of folks that are getting exposed to the Blue Team and our supply chain capabilities. That's great color. Well, good luck, guys. I'll pass it on. Thank you. Thank you. Thank you. Our next question has come from the line of Christopher Snyder with UBS. Please proceed with your questions. Thank you. I wanted to talk about the ability to drive operating leverage as Onsite activations ramp. I understand that a fully mature Onsite can be accretive to operating margin, despite being materially lower on the gross margin side. I guess my question is, how long do you think it takes, or how long should we expect it to take for an Onsite to reach that level of maturity? How should we think about that dynamic into 2023 as Onsite activations are ramping? You know, functionally, I think it's less about a function of time and more a function of scale. That being said, it really will on an individual Onsite basis, you're gonna get a certain degree of variability, right? I don't believe that a $600,000 a year Onsite is necessarily margin accretive. If that $600,000, we believe, can lend itself to $1.8 million-$2 million a year, then it's certainly worth being in that setting, in that environment, in that relationship, for the potential upside. That's part of the point of the exercise. If it's a function of volume, what I've always said is prior to Onsite becoming an initiative, and we just looked at 215 Onsites that have been there somewhere between 1992 and 2014, they were mature, not as a function of time, but a function of scale. On average, those Onsites were doing between $1.8 million and $2 million a year in revenue, and that is when you achieved a margin north of 20% on that group. You know, what I can tell you is during the period of COVID, when our signing slowed down, you had a certain maturation of existing Onsites that became a faster percentage of the whole than we would've expected to see in the absence of COVID. One of the byproducts of that was we actually saw a pretty good increase in the overall operating margin of our Onsite business. I believe that that increase was to the tune of a percentage point a year between 2020 and 2021 and 2021 and 2022. We signed a lot of Onsites last year. We're targeting signing a lot of Onsites this year. Assuming we're successful with that, and we believe we will be, you know, you'll sort of see the inverse of what happened during COVID, where you're gonna see those newer units kinda stepping up a bit in the mix again. That might make further progress in 2023 on margin, you know, at the Onsite level, a little bit more difficult to achieve. It might see a little bit of a step back, but you're not gonna step back to where we were pre-pandemic. We've seen the mix of mature units go up, and I think we'll continue to see that. Our expectation is that right now your average unit is probably between, you know, 1.6 and 1.7. If that steps back a little bit in 2023 because of all the new implementations that we're doing and the greater signings, that's fine. We do expect that that average size is gonna continue to trend towards that 1.8 to 2, and those margins will trend towards 20%+. That's the expectation. We've talked about over time. I'm just gonna add to Holden, sorry. We've talked about over time how we expect the operating margin of our business to continue expanding. There's really two dynamics going on there. One is we can absorb a greater mix, even if they're below company average operating margin. We can accept the greater mix because the branch network isn't stagnant. The branch network is continuing to grow because we're adding revenue every day, and we've pulled some units out over time, as we talked about. So if I look at our oldest regions that have the highest concentration of Onsites, their average branch isn't doing $150,000, $140,000 a month. It's doing $210,000, $220,000. Our operating margins are higher in those areas, even though our Onsite revenue might be 50% of revenue. It's really a case of the network matures. Even if the mix is beating you down, your branch network is actually becoming more profitable. The other thing is elements of inside our business, and I see we're almost at ten o'clock, so I'm gonna cut it off with this when I'm done. Apologize for that. The elements of our business are becoming stronger. I'll use vending as an example. five years ago, I sat down with the fellow that leads our vending business, and if you looked at vending as a discrete business within Fastenal, it had operating margins between 13%-14%. It doesn't take a lot of math to figure out, hey, you keep growing your vending business, that's not friendly to your operating margin. My comment to Jeff at the time was, "Jeff, here are the pieces we need to work on over time. Increase revenue per machine, increase the mix of our exclusive brands, increase the mix of our preferred providing brands, lower the cost of our devices. All these things need to occur over time." I'm pleased to say, when I look at vending as a discrete P&L, we just looked at it last week, it broke 20% for the first time. Onsite never had the benefit of organizational investments in it to make it better. Didn't have FMI, it didn't have a point-of-sale system that was built for Onsite. It had a point-of-sale system that was built for a branch network. We're investing in those tools today. That helps the efficiency of the Onsite network too. It helps defend the math, but the branch network is getting better, and we have demonstrated proof that that occurs already. With that, it is on the hour. Thank you for your interest in Fastenal. Have a great 2023. Thank you, everyone. Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.