Greetings. Welcome to the Fastenal 2023 First Quarter Earnings Results Conference Call. At this time, all participants will be in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that this conference is being recorded. At this time, I'll turn the conference over to Taylor Ranta of Fastenal Company. Taylor, you may now begin. Well, welcome to the Fastenal Company 2023 First 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 will start with a general overview of our quarterly results and operations, with the remainder of the time being open for questions and answers. Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission, or distribution of today's call is permitted without Fastenal's consent. This call is being audio simulcast on the Internet via the Fastenal investor relations homepage, investor.fastenal.com. A replay of the webcast will be available on the website until June 1st, 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, Taylor, and good morning, everybody, and welcome to the First Quarter Fastenal Earnings Conference Call. This call is a little different for Holden and I today because we're at the site of our customer expo that just finished up yesterday. Really pleased with the event. A lot of great customer engagement. One thing nice about the event this year is some of the natural things that were occurring, obviously two and three years ago, we didn't have an event because of COVID. Last year we had an event, but we had to limit the attendance and also because of international travel, we had to limit the attendance. This year we didn't have those restrictions, so we had a great event. There were four areas of focus to the theme of the event this year. One was continuing to accelerate our customers' digital transformation to give them better visibility to what is happening inside their four walls, inside their facilities. The second one was really securing their supply chain. The world has seen a lot of change and a lot of impacts to supply chains over the last several years, and really allowing our customers the opportunity to think about their supply chains continually in a more strategic way as we move forward. The third was powering productivity. A lot of this digital transformation, understanding the elements of your supply chain. It's also about bringing productivity to whether it's your production floor or some element of your operation. We provide the tools to do that. The fourth piece was understanding our customers' goals and sharing with them ways that we can serve their goals when it comes to their journey in ESG. I think those four points resonated well throughout the event. Now moving on to the quarter. First quarter, we had earnings per share of $0.52, an increase of 10.5% over last year. The team had really strong expense management during the quarter and pleased with the incremental margin we were able to produce. Despite the fact that as you saw in our, in our monthly numbers, the March daily sales came in a bit softer. You know, we're in now our fifth month of ISM below 50, and it had ticked down in March. We're seeing that in our business, particularly in the Fastener side, the OEM piece of the business. Despite that, really impressed with our team's ability to manage through it. As we've talked about in prior years, we've done a really nice job of managing pieces of our business if we compare to pre-COVID and post-COVID. I'm sorry for that beeping in the background. My laptop's here. If you look at operating costs as a percentage of sales, in the first quarter of 2019, operating costs were 27.8% of sales. In the first quarter of 2023, they were 24.6%. It's really about all the changes we've made to the organization. Our average branch is larger today than it was back in 2019. More of our business is coming from onsite. We've done a nice job of digitizing our business to bring efficiencies to it, and you see that shining through. The other piece is as we understand better our engagement with our customer and their needs, and as supply chains have improved globally, we've also been able to not only lower our days on hand of inventory from what we were seeing one year ago and six months ago, as we deepened our inventory, but where our business was pre-pandemic. We've taken about three weeks worth of inventory out of the network over that entire timeframe, and really impressed with our team's ability to do that. Finally, you know, if you manage your business well, manage your expenses well. Managing your working capital well is a distribution business. You see that show up in your cash flow. Our operating cash flow was $389 million, which was 132% of earnings and was 70% higher than a year ago. About $160 million of additional operating cash that we generated in the quarter. Our CapEx, net CapEx is very similar in both periods. A very strong free cash flow, which puts us in a position to invest in the business or return to our shareholders. We continued that pattern, and was able to pay out a nice dividend in the first quarter. Last night, we just announced the second quarter dividend of about $200 million a quarter we're paying out right now in dividends. Moving to page four of the flip book. On sites, we signed 89 in the quarter. Active sites finished at 1,674, so about a 16% increase from first quarter last year. If you ignore the transferred sales that come from the branch when we open an on-site, our on-site business grew about 20% Q1 to Q1, so strong performance. We remain steadfast in our intention to sign 375-400 on-sites this year. Number was a little bit weaker in the first quarter, and most of that we saw in March. But when I think of the engagement going on at the events here the last several days, I feel good about where we're gonna be in the next six months. If I look at FMI technology, an incredibly strong performance by the team this quarter. We've talked in the past about this idea of we built infrastructure to support a 100 signings per day. During COVID, our numbers dropped from the upper 70s, low 80s neighborhood as we built up towards that ability to sign a 100 a day. We dropped down in the 60s, and it slowly found our way back. Last year in the first quarter, we signed 83 a day. This year in the first quarter, we signed 92 per day. In the month of March, we signed 99 per day. Really strong performance by the team. You can see that continuing to expand in our platform. Our FMI for the quarter was 39.4%. In the month of March, we broke 40 for the first time ever. Really pleased, and we feel good about our goal of signing between 23,000 and 25,000 for the year. As we've seen in prior quarters, we continue to see really strong growth in e-commerce. Recall that last fall, that broke 20% of revenue for the first time. I believe, this quarter, we're at about 22%. Finally, if you roll all those pieces together, our digital footprint came in at 54% of sales versus 47% a year ago. In the month of March, excuse me, we hit 55%. Our goal is to drive that to 65% later in the year. Time will tell if we're able to accomplish that. With a long-term goal of we believe that number is about 85% of our business is going through some type of digital footprint. With that, I'll turn it over to Holden. Great. Thank you, Dan. Before diving into the details of the quarter on slide five, I wanted to build a little bit on Dan's earlier comments in his prepared remarks to offer a little bit of perspective on the overall state of our business. You recall simultaneous with the onset of the pandemic in 2020, Fastenal accelerated its technology deployment and shifted the structure and priorities of our sales effort. Those actions are adversely affecting short-term sales, though we continue to grow our on-site and FMI bases as well as our digital footprint penetration. We continue to achieve historical levels of market outgrowth. This also adds an incremental annual mix-related gross margin pressure. However, those changes need to be weighed against the benefits to the rest of our business. Relative to the pre-pandemic business, we have begun to generate meaningful labor productivity and reduce the cost footprint of our facilities. As a result, the incremental margin from the first quarter of 2019 to the first quarter of 2023 of 24% is appreciably greater than what we saw from the first quarter of 2015 to the first quarter of 2019 of 16.2%, and we've improved our capacity for leverage over time. At the same time, from the first quarter of 2019 to the first quarter of 2023, our inventory days have declined from 175 to 154 days despite inflation and supply chain disruption, and our receivables days have fallen from 56 to 55 days despite growth in our national accounts mix. The Blue Team has sharpened our differentiation in the marketplace while sustainably improving the leverage ability of our cost structure and lowering our asset intensity. We're a stronger, more productive business today than we were prior to the pandemic, and that is very clear in these first quarter of 2023 results. Let's jump into those. Daily sales increased 9.1% in the first quarter of 2023. February storms had a modest 20 basis point -40 basis point negative impact, while currency was a 70 basis point drag. There are several other items affecting sales. First, pricing continues to moderate. It contributed 290 basis points-320 basis points to growth in the period, down approximately 290 basis points from the first quarter of 2022, and down approximately 60 basis points from the fourth quarter of 2022. This trend is not a surprise and will likely continue through 2023. Second, we continue to see weakness in several major retailer customers, our international business, and our construction and reseller businesses. These dynamics are unchanged since the third quarter of 2022. Our retailer customers have tightened their belts with respect to facilities and labor, which also affected our non-North American business, along with a strong dollar in geopolitical events. Softer construction reflects the conscious decision we made to position our branches to focus on larger key accounts, which is contributing to better labor leverage. Third, manufacturing and large accounts continue to perform strongly, reflecting investments in on-site and changes to our branch structure and sales roles. Even so, we did see a downshift in broader market activity in March, as represented by slower DSR growth of 6.8%, including just 2.3% daily growth in fasteners. One month does not make a trend. It's too early to have a good read on April, we don't have a lot of forward visibility. We do continue to anticipate that we will outgrow our marketplace, which frankly isn't growing right now. The quarter did finish on a softer note. To slide six. Operating margin in the first quarter of 2023 was 20.2%, up from 20% in the prior year. The incremental margin, incremental operating margin was 22.7%. Gross margin was 45.7%, down 80 basis points from the prior year. This decline is entirely due to product and customer mix as we experienced widening sales growth outperformance of non-fasteners over fasteners and on-sites over non on-sites. Price cost was still negative year-over-year, but narrowed meaningfully versus the fourth quarter. The remaining gap is largely in our other products category, where pricing actions in the first quarter of 2023 only went into place in February, while in fasteners, lower costing eliminated the negative price cost we experienced in the second half of 2022. GAAP expenses were higher with inbound shipments declining as we adjusted our stocking to reflect a smoother supply chain. On the other side of the ledger, contribution to margin from freight was better than anticipated. We saw annual and sequential declines in both container costs and containers purchased on the import side, and record freight revenues allowed for good leverage of our captive fleet expenses. These dynamics are likely to persist for the next couple of quarters. On the operating expense side, we generated 20 basis points of leverage from occupancy costs as branch closings over the past 12 months produced a slightly lower facility expense. We generated 80 basis points of leverage from payroll expenses. Total incentive pay for the company in the first quarter of 2023 was the second highest on record for a first quarter. However, with pre-tax growth in the first quarter of 2023 being roughly one-third of the pre-tax growth in the first quarter of 2022, total incentive pay for the company was down high single digits. Other operating expenses benefited from lower bad debt costs, lower selling-related transportation costs, and higher profits from asset sales, which was largely offset by higher costs for IT, general insurance, and sales-related travel. Putting it all together, we reported first quarter 2023 EPS of $0.52, up over 10% from $0.47 in the first quarter of 2022. Turning to slide seven. We generated $389 million in operating cash in the first quarter of 2023, or approximately 132% of net income in the period. I'll provide a bit more color in a moment, but this improvement in our conversion rate reflects working capital swinging from a significant use of cash in the first quarter of 2022 to a source of cash in the first quarter of 2023. This strong cash flow allowed us to reduce debt in the period, putting net debt at 10.9% in the first quarter of 2023, up slightly from 10.4% in the first quarter of 2022, down from 14.9% in the fourth quarter of 2022. Year-over-year, accounts receivable was up 7.3% on higher customer demand and an increase in the mix of larger key account customers, which tend to have longer terms, this is partly offset by an improvement in receivables quality. Inventories rose 3.2%. Inflation was not a material contributor to inflation growth in the period. Further, as indicated earlier, normalization of global supply chains is allowing us to unwind a layer of inventory that we intentionally built up in late 2021 and early 2022 to manage what had been significant product bottlenecks. We believe the process of rightsizing inventory will continue through 2023, with additional releases of cash as the year progresses. Net capital spending in the first quarter of 2023 was approximately $31 million. Our range for net capital spending in 2023 remains $210 million-$230 million, and our first quarter spending being behind that pace reflects timing of expenditures. Over the course of 2023, we expect higher spending on hub investments, fleet equipment, and IT equipment. With that, operator, we'll turn it over to you for questions and answers. Thank you. We'll now be conducting the question and answer session. If you'd like to ask a question today, please press star one from your telephone keypad and 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 who are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Thank you. Our first question comes from the line of Chris Dankert with Loop Capital Markets. Please proceed with your questions. Hey, morning, guys. Thanks for taking the question. Morning. I guess first off, think about your conversations with RVPs right now. How do they feel about, you know, adding FTEs or kind of management there? Just how are we thinking about labor management today and growth kind of going forward? You know, we've talked about labor management with the RVPs really coming into this year. You know, the premise was when you look at where the PMI is, when you look at the trend in industrial production, we need to be looking forward and really have a plan to be cautious about hiring. Now, in January and February, I'll tell you that demand grew pretty healthy. And I think that we added people, sort of related to that. In March, obviously, we called out that demand softened a little bit. I would also point out that our hiring ads softened a little bit in March as well. We've always talked about how we can react fairly quickly, to changes that we're seeing. You know, the message to the field has been, you have to be prepared to adjust for a downshift in demand. Again, that's not a message we just conveyed. We entered the year having that same conversation. You know, I think that they have been really responding, you know, by adding resources where they need to add it. By adding the right resources. We continue to see the mix of part-timers growing in the overall piece of our business, right? Where we've added full-timers, a significant portion of those were made in India, right? I think that the organization is focused on the right metrics to understand what they need to be doing from a labor standpoint. I think they're executing on that. I was encouraged that as demand slowed down in March, so did the hiring ads. I think we're doing the right things. No, that's great color. Thank you so much on that. Then again, just thinking about the CSP growth seems to be, you know, lagging a bit more relative to the rest of the business here. Does that change any of the calculus around, you know, the pace of closures there or kind of how you're positioning the business from a channel approach perspective? By CSP growth, what are you referring to? Just the non-national accounts piece of the business, obviously undergrowing national accounts and onsite. I guess, my assumption is most of that is the more traditional branches, correct? Remember that our traditional branches are, they support not only the local businesses that you're referring to, but they do support the national accounts business as well. You know, yeah, I think you're referring to that non-national accounts sector on our release. Thank you for that clarification. You know, when you think about what's happening in sort of the construction and the reseller, traditionally, there's been a lot of smaller customers there, right? I mean, what confused me is when you talked about CSP, right? CSP was our old stocking model that we began to unwind a few years ago. That CSP was intended to draw in, you know, that smaller local construction customer, provide them a high degree of service in the local market and things of that nature. Our priorities in the branches have shifted a little bit, trying to move that customer online and, you know, creating a, you know, sort of time to focus on some of those larger customers in the market. You know, I can't say that I'm surprised by what we're seeing. I think that the relative weakness you see in construction relative to manufacturing, which is again, is part of what we're trying to achieve. I think that that's really related to the difference you're seeing in the national accounts versus the non-national accounts growth as well. I think those things are all related. Does that get to your question? Got it. That does. That makes a ton of sense. Thanks so much for the detail there. I'll leave it there and best of luck on the quarter, guys. Thank you. Our next question is from the line of Steve Volkmann with Jefferies. Please proceed with your questions. Great. Thanks, guys. Can I just pull on that thread slightly one more time, Holden? How long do you think that transition takes in the construction type business where you sort of, you know, move away from some of these smaller customers? I assume that's a process that lasts a year or two. I don't know. How long do you think that goes on? I don't love the phrase move away from those type of customers. The truth is, we're trying to service them through a different model. Setting aside the semantic. You know, I suspect, just looking at how that cadence has played out in the preceding, call it 15 months, I suspect it will probably have some softness in that area. That transition period will probably last the bulk of this year. I think as we get into Q4 and into next year, I think you begin to sort of lap those comps. I think we're probably in a position where it doesn't represent, you know, the drag on our business that it does today. I think you're right to look at it as a transition because I think that's what it is. Once we lap that transition, I think the growth that you're seeing today in those manufacturing customers and those large customers, that's gonna really begin to shine as we sort of work through that transition over the next two or three quarters. Also, if you think of the chart we've shared in January of each of the last several years, we talk about, you know, branch consolidations. We're near the end of that process. If you think about, If you think just about our customer segments. The customer where we're highly engaged from a digital footprint perspective, we are their supply chain partner. Those customers rarely, if ever, come into one of our facilities. They, they probably don't even know we're located. If you're in a market and you consolidate a few locations, you are actually moving further away from this other segment of customer. If you look at, you know, where we get to then at that ultimate branch count, we're probably a year away of being at that point. That ties right into Holden's comment as well. Yeah. Looping that back to Chris's comment earlier, pardon the pun, you know, I failed to mention that. I mean, that's another reason why those smaller customers have been relatively weaker as well, because a lot of times when you go through that branch consolidation, Dan indicated, that's the customer that no longer is visiting that location that would have otherwise been there. That's an element of that as well. Got it. Yes, apologies for the semantics. I was struggling for something better unsuccessfully. Can I switch slightly? When you talk about some of the deceleration that you're seeing, it's kind of an interesting dynamic. Do you have visibility? Do you think your customers are destocking because the supply chains are now better? That might be part of what we're seeing? Do you think it's actual sort of end market slowdown? The other overlay that's interesting is that you would think that production rates would actually kind of go up at your customers as supply chains normalize rather than down. I'm just curious if you have any visibility into any of that, and then I'll pass it on. Yeah. The feedback from the regionals was really touched on both things that you brought up, Steve. One is they did talk about how as supply chains normalize, you're seeing suppliers of product begin to shave back their production simply because their customers can now. They may have tried to hold extra product, and now they can sort of, you know, sort of back that up a little bit. There's an element of adjusting to the supply chain. I also did get a number of comments from regionals that they're also seeing our customers just tighten their wallets a bit, both in terms of capital spending as well as operating expenses. I think there's a little bit of both of those things, those dynamics playing out. Yeah. The other piece I'll, from an insight perspective, if you, if you think about our business from a product line and product use perspective, if I go back to January, OEM fasteners is 20%-22% of our revenue, kind of low 20s. That business was growing around 13.5% in January. In March, it grew 7%. That is production dropping off. If I contrast that with safety, for example, our safety business grew stronger in March than it did in January. I honestly haven't given that I've been down at the show the last few days. I don't know if it was a comp issue because some of the safety was being pushed around a little bit because of some COVID activity. That's a case of that business has been, it fell off a little bit in February. That I know was a comp issue with last year. I don't believe January, March had a comp issue. I think that ties a bit into the strength we're seeing in our, in our pending deployment. I look at remaining products, that did also fall off a little bit, and there'd be some production in those as well, but particularly in the metalworking. Got it. That's great color. Thank you, guys. Thanks, Steve. Our next question is coming on the line of David Manthey with Baird. Please proceed with your questions. Dave, if you're talking, you're on mute. Ready? Hey, moving on. Our next question is from the line of Ken Newman of KeyBanc Capital Markets. Please proceed with your questions. Hey, good morning, guys. Hey, Ken. Morning. Hey. Holden, I'm curious if you could just talk a little bit more on the fastener sales trends in March. You know, obviously a bigger sequential slowdown here, and the comp for April looks pretty similar. I guess two minor questions here. One, I guess, should we assume that the fastener volumes were negative in the months? Two, how do we think about the net margin impact of that part of the portfolio since, you know, I think it's typically accretive to mix, but you also called out lower shipping container costs. Yeah. With regards to sort of the volume side versus the price side. I'm trying to think. Yeah. It. Bottom line, it was slightly negative. It would be. I think that that's an element. Again, it's our most cyclical line. Dan referenced sort of the commentary about the OEM fasteners in particular. You know, I mean, today, OEM fasteners represent about 62% of our fastener business. When you get a slowdown of some sort in a period, it's gonna affect the volumes of the fastener side of the business. Now you're right, it tends to be a higher margin line. To the degree that fasteners grow slowly, slower than the rest, that does have an adverse mix impact. I think that's always been the case, cycle to cycle. It's something we talk a lot about sort of mix impact. You know, when the, when the falloff is in the OEM faster component of the fasteners, the mix impact is different than if it's in the MRO piece. 'Cause the OEM fasteners do not have a higher gross margin than our overall company gross margin. The MRO fasteners do. That's helpful color. Got it. Then I guess for my follow-up here, you know, I'm curious if you last quarter, you talked maybe the need to renegotiate pricing with some of your big vendors because of steel prices as well as transportation costs. You talked a little bit about transportation easing a bit. I think the prices have also kinda stayed in here in recent months. I'm curious if you have any update on the color for, you know, price cost negotiations on higher steel material? We are acutely aware of steel pricing and shipping costs. You know, that's our, that's our covenant with our customer. We're going to find the best quality, best price, best reliability supply chain for their business. There are always robust conversations going on. You know, we also operate in a very dynamic marketplace. We've been seeing, you know, fastener prices stabilize for a number of months now. We're seeing that come through in our cost of goods, and that also helps our gross margin in the short term because we were getting squeezed a little bit six to nine months ago. A little bit of that squeezing is lessening right now, and you're seeing that shine through in our numbers as well. I think those conversations, I think we've always talked about how our objective was to talk to those customers about the timing of our costing. We understood, as Dan said, we have a covenant to sort of adjust as appropriate. I think our customers have been great working with us to understand when our product is gonna be coming through at a lower cost, et cetera. We've always kind of felt that as you get to that second quarter, there'd probably be more activity around that, and adjustments to be made. I still think that that's probably the case, that those are sort of second quarter, third quarter type activities. Again, what you should be getting a sense of is we're trying to time any decline that we may have to have in pricing to our customers with the declines that we see in costing. I certainly understand the concern. Again, we've done a good job sort of matching price and cost. I think that the team has done a great job this side of the cycle as well. The objective is to be price-cost neutral. Understood. Thanks for the time. Thanks. Thank you. Our next question comes from the line of David Manthey with Baird. Please proceed with your questions. Thank you. good morning, Dan, Holden. Hey, Dave. Yeah, in relation to that, to the prior answer, that's exactly what I wanted to have you discuss, just the general pricing methodology of how you're trying to match your customer pricing relative to the actual COGS in your supply chain versus front running, any price increase or, I guess, lagging a price decline. You, and you addressed it to a large extent, but I just wanna be clear on that. Your container prices are down, steel prices are up a little bit, and you're saying that fastener prices are mostly stable today. You're not anticipating any major changes as we look at 2023 as we sit here today? As we sit here today, I would say no, we're not. Again, that we might need to adjust pricing is not a surprise. We know where that would have to happen. It's contractual. Again, we have pretty good visibility on our costing, and so we really do try to align those two things. As you know, we really didn't have a point through the period of inflation where our pricing was ahead of our costing, and that was deliberate. As you got towards the flip side of that cycle, we actually got a little bit behind from a price cost standpoint, just because as much pricing as we put through to respond to the marketplace, it just wasn't quite enough given how dramatic the sort of the cost side was. As we talked about two quarters ago, or started talking about two quarters ago, we wound up having negative price costs on the fastener side, and we anticipated the time that costing would catch up to our pricing, and that's largely where we got to this quarter. But going forward, you know, the idea is to, and this is the conversation we've been very explicitly having with customers, you know, there will be cases where we have to reduce the price based on the variables you talked about. But we should be able to largely track that with our costing. If you break our business into three components, Dave, to Holden's point, on the fastener side, I think we've done a really nice job managing through it. Part of the lumpiness to it was some of the changes were pretty extreme. If I look at safety, we have great visibility to demand. You know, over half of that business is going through a vending device, so you really understand that business, and we've been able to manage through that quite well. We did adjust some pricing here in the, as Holden touched on, during the quarter on our remaining product lines, 'cause there we probably weren't, we were putting so much attention on the half of our business that's fasteners and safety, and we were probably not as focused on the other half of the business as we should have been. We did some corrections there. We did raise some prices on the non-fastener, non-safety piece during the quarter. Thanks, guys. My dog and I appreciate the answer. Thanks, Dave. Our next question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your questions. Thanks. Good morning, everyone. I know the freight is quite a small portion of your revenues. You called out the growth of, you know, 14% or so. Obviously very good margin. Just wondering, given where LTL, you know, tonnage is trending right now, what did you do to kind of get that kind of growth rate? It sounds like you're expecting this to continue going forward. Just wondering, you know, what's driving that kind of growth? You know, I think, sometimes you can be guilty of, over time, of, you focus on, you know. There's enough energy in the room to focus on a handful of things, and sometimes things fall off that focus. I would say if anything, we were probably a little bit guilty of that in recent years on the freight side equation. Part of that I'll attribute it to me from the standpoint of what are the things you talk about? What are the things you push folks on? You know, when things get really chaotic, sometimes you have to pivot and say, "Hey, folks, we need to put some energy into this 'cause this is a we problem that we need to fix." It's more of a case of, I'd say we're probably reverting to some of the freight pricing habits that we had three and four years ago that were maybe a little bit waning in the last several years. You know, COVID and all the other distractions of life came into play. The other element to it is, while we lost some focus on our ability to charge for freight, we have really good at using our own trucks for moving freight. So we have those two dynamics going on. We're probably back to where we should be on what we're charging out, and we've improved on how much goes through our own network, and that's a nice one-two punch. I think there's, I mean, there's a number of things factoring in today, some of which are long-term sustainable and some of which are sort of in the here and now. You know, we've alluded a couple times to an increase in planned spend. As more planned spend becomes a bigger portion of our business, it becomes easier for us to plan our own logistics, right? We have seen our third-party freight go down in part because of that trend. I think that's gonna continue. We did or at least are in the process of executing some route consolidation and some rescheduling of routes, which I think will bring some efficiencies into the business. Not just the ongoing continuous improvement of the business that I think will be sustainable. What you're referring to, though, is important because as our revenues have gone up as the endemic focus there, you know, the cost structure of our semis fleet is fairly stable. As revenues go up, we've actually, you know, leveraged that fairly well. The other piece in this quarter that occurred, though, is, one, container costs are down a lot. You know, that was a benefit. I think down something like 75%, you know, year-over-year. That was a benefit. I would also point out that our container flow is down a lot this quarter because of the things we're doing to sort of unwind some inventory. Our container flow in the first quarter was also down 50%. I think those latter two issues, they're not necessarily long-term issues. That's adjusting to sort of things that appeared in the last couple of years. I do think that they'll last for the next couple of quarters. Things like the planned spend, lower third-party rate, freight, route consolidation, those sorts of things, I think those are gonna continue to improve the business. The big variable will be demand, right? Because our freight revenues aren't different than our other revenues. If activity levels begin to drop, then freight revenue dollars may come in, and then that stable cost base could work against you. I think demand is an open question there. From an execution standpoint, there's some great things going on with freight in the organization. Yeah. No, that's great. Thanks, thanks, guys. Then just a quick one. You know, we talked about the March sales now at some length, but you called out weather impacts in February. You didn't call out anything in March, but some companies are blaming weather, you know, in March. I'm just wondering what, you know, were there any, you know, weather impacts that could maybe explain some of the weakness you saw towards back end of the month? No. We've tried to raise our threshold of pain that we bother to mention. Can I find you an RVP that thinks there was some weather in January? Sure. Can I find you someone that thinks there was some in March? Yes. It doesn't rise to a threshold that's worth discussing. That wasn't true in February. Okay, that's great. Thanks, guys. Nigel, for what it's worth, as Holden was answering that first question, I did take a quick look. Our freight as a percentage of sales that we charged out in the first quarter of 2022 was identical to what it was in the first quarter of 2019. In the last two years, it had dropped off about 30 basis points. Okay, that's great. Thank you. Our next question comes from the line of Pat Baumann with JP Morgan. Please just queue with your questions. Oh, hi. Good morning. Thanks for taking my questions. Hey, Pat. Hi. How you doing, Holden? Just a quick one on pricing first. I think there was a wide range on expectations, at least as I understood it, for your pricing coming into this year. Maybe you were thinking it could be down a point or two or up a point or two, depending on how things played out. I guess I'm just curious after the first quarter, and your actions in February and what you just said on kind of fasteners with regard to, you know, the input, you know, costing on that, what your expectations are now for this year on pricing. As a corollary to that, just thinking about your February pricing actions in the non-fastener, non-safety portion of sales, do you think that had anything to do with kind of the volume slowdown you saw there for the month of March? I'll touch on the that last part of your question, then I'll let Holden handle the meat of it. On that last part, if you think about what happened and what we're just, you know, running through on those OEM fastener numbers, the drop off from January to February was linked to production business. Our OEM fasteners, you know, dropped in half as far as the from, you know, 13.5%- 7% growth. There was no pricing action there. If you look at the remaining product lines, the drop off, actually, it occurred 30 days after. I mean, it was really about the production aspect of our business, not so much the other parts of our business. Yeah, I would agree with that. Frankly, those price increases went in, you know, sort of late in the quarter, and so I'm not sure that you would've seen a response like that you're alluding to in such a tight window. That said, y ou know, we're not really expecting that that's going to be adverse to those lines from a growth standpoint. Yeah. I, we just didn't see that. I wouldn't expect to see that. As it relates to overall pricing, remember the wide range I've given is because ultimately we, you know, we don't have a great field of visibility as it relates to how much pricing are we gonna have to give away to customers because of contracts and things of that nature, right? My comment, I think, was, you know, if demand softens and there's a lot of pressure to sort of adjust price based on contracts, et cetera, then maybe our pricing is down a percentage point. If that doesn't occur, 'cause it hadn't to this point, maybe it's up a percentage point. You know, that's sort of the wild card from a pricing standpoint that sort of exists out there. Again, unrelated to price cost, which regardless we think will be neutral, but that's why there's a wider range. And I think that that's still the case. We talked a little bit in an earlier question about, you know, I suspect as you get into 2Q and 3Q, we'll be adjusting some pricing. I will say, however, that, you know, I've spoken to some people before about how I think pricing comes into that 0%-2% range, probably in the lower half of it if nothing changes. We have made some changes to our pricing in that other products area. What I would tell you is if we never had to adjust fastener pricing, I suspect that our pricing this year would be in the upper half of that 0%-2% range. Now the wild card becomes what do we have to do with fastener pricing? If we give a bunch of that back in 2Q and 3Q, then that upper half of the range comes down. That's, that's the variable. We just don't know the order of magnitude of impact of that yet. I hope that wasn't confusing. No, no. That's, that's helpful color. Maybe my follow-up would be around gross margin then for this year. I think you were expecting maybe 50 basis points- 100 basis points of contraction when we talked in January. Sounds like maybe pricing could be tracking a bit better, price cost may be neutral. I don't know. The freight commentary was also. It sounded, you know, better. Wondering if you're thinking any differently about that, you know, framework now. Yeah, price cost. You know, most of the variables that were impacting gross margin didn't surprise us, right? The degree that mix is impacting, again, when you think about how the quarter progressed, that didn't surprise. If I think about the price cost elements of it, that's playing out largely as we expected when we talked about it last quarter. Really, the only variable that was a surprise was that freight piece. We simply executed fairly well. Again, I do believe that most of the variables that benefited freight, I believe that those variables are going to be in place in 2Q and 3Q. You know, freight may have increased my expectations around gross margin for the full year. You know, that's really the one variable that played out differently than I expected it to from last quarter's conversations. Okay. That's, that's helpful. Squeeze one more in, I will. I think. Did we have two? Yeah. No, that's great. Thanks for the time. Appreciate it. Thank you. Our next question comes from the line of Jacob Levinson with Melius Research. Please just give your questions. Hi. Good morning, everyone. Morning. I realize it's still, very early days here, but just curious if you've heard anything coming out of the field in terms of the impact of credit stresses on either customers or some of your smaller competitors? No. We actually reduced. You know, our bad debt expense was actually a benefit to our margin this quarter. We're just not seeing a significant, w e're not seeing anything in our business regarding that. Okay. Yeah, no, that makes sense. Then just quickly, a second one. I can see that you're still planning on spending that, you know, $200 million-ish, on capital spending this year, despite the fact that the growth has come down a little bit. I mean, is that partly just a function of the fact that you haven't been able to get some things done over the last few years with all the volatility around COVID, or is it really just a function of the fact that obviously 10% growth in the quarter is not exactly a recession? Well, it's a, that's a piece. The other thing is we're always adding infrastructure for what we need long term. If you think about what's going on right now, we're expanding our distribution facility in Denton, Texas, on the outskirts of Dallas-Fort Worth area. We are building a distribution facility in the Salt Lake market. We're adding capacity because we've outgrown the capacity we have. If you think about our FMI, that's quite strong right now, and that's a, that's a capital item that we're adding. The last piece would be, if I think of where we've probably struggled the most in recent years to add, would be on the vehicle side because stuff just wasn't available. We couldn't get our Dodge Ram pickups in the way we wanted to. We couldn't get our semis the way we wanted to. That is loosening up now. Some of the CapEx is going into the transportation side. Recently, I was visiting one of our on-site locations, and I'm pleased to say that I received a picture here a week and a half ago of a bunch of Fastenal trailers being produced that are coming down the production line. Those kinds of things we're able to get better today than we could have six and 12 months ago. That makes sense. Thank you, guys. I'll pass it on. Thanks. Our next question has come from the line of Tommy Moll with Stephens. Please proceed with your questions. Morning, thanks for taking my questions. Good morning, Tommy. I wanted to start off on OpEx. If I'm doing my math right in the first quarter, employee-related expenses grew at less than half the rate of sales, which is great to see. I suspect you may walk us back from assuming that recurs here in the second quarter or the rest of the year. To the extent you could frame what you would anticipate for the second quarter, that would be helpful. And just any qualitative commentary for the year would be as well. Thank you. Yeah. I don't know that I'm necessarily gonna walk you back. I mean, the reason why we were able to leverage the way we did was because we're just not growing as quickly this year as we grew last year. Again, I wanted to emphasize that I think we had a healthy payout of incentive pay as a business in this quarter. It wasn't as healthy as last year, and that's not a surprise. If I think about how the rest of the year plays out, we still have some pretty large numbers that we're gonna lap in the second quarter and the third quarter as well. I do expect that we'll have healthy incentive payouts in the second quarter and third quarter. We'll see how the market plays out, based on sort of how we grew in the most recent quarter. I do believe that they will be lower than what we experienced last year. I think that we're gonna have, for most of the year, that element of lower incentive pay year-over-year that helps us in leveraging the sort of the payroll-related expense. A good chunk of our incentive comp. We cover this in pretty good detail, I believe, in our proxy. A good chunk of our incentive comp is tied directly to pre-tax earnings growth. If you think what was going on last year, Q1, Q2, and Q3 had a meaningful expansion of that incentive growth. Q2 was the highest of the three, I believe it was what? A $500,000 higher in Q2 versus Q1, just nominally higher, and then drops off in Q4. You know, depending on what's happening with our earnings growth, relative to what was happening in the same quarter of the prior year, that gives us a bit of, a bit of a buffer here in the first quarter and presumably in the second and third, unless the economy surprises us and it turns more positive, and that'd be a great problem to have. Yep. Thank you. I appreciate the insight. wanted to shift for my second question to a higher level strategic question. The framing you provided on the structural improvements in terms of leverage and asset intensity versus the pre-pandemic base was very helpful. There's clearly some progress on both of those initiatives. If you think about 2023, what are some of the key focus areas, the work that's still ahead of you for this year? Are there any that you would draw our attention to that you're really focused on driving through the organization at this point? Thank you. Well, you know, if you think of the, you know, the growth drivers come to mind first. That's not what your question is. For me, growth drivers come to mind first of the structural changes we're making as far as customer acquisition, both in the standpoint of physically what channel it's going through, brand versus onsite, and then what tool are we using within the respective channel, FMI, et cetera, to serve at a really high level and a very efficient level to our customer. If I think about things that impact our cash flow, you know, we often talk about our covenant with our customer includes a number of things. One, finding great quality of product, great availability of product, reliability of product, and great price. One of those elements, the availability, we had to take a tremendous amount of working capital inventory onto our balance sheet over the last six to 18 months as things were chaotic. Well, you can actually go back several years because we took on a lot of safety products back in 2020, but that piece had been worked through. When I think of this year, I envision a very, very strong cash flow year, as we saw in the first quarter, because we can take not days, but weeks out of our inventory and on hand. We're managing our accounts receivable relationships at a really strong level. Basically, we have a better CFO today than we did 10 years ago. You know, things like that help. You put those things together. We've talked internally about what we call our Drive to 35. What that is, if you looked at our internal financial statements, and these would shine through externally, two of the three would. We look at our accounts receivable business unit by business unit. We look at fully loaded inventory, that's local inventory as well as allocation of distribution inventory. We look at our local vehicles. We look at those three assets and we say, you know, an optimal place for us in a $175,000 a month branch, a $200,000 a month branch is about 35%. That number is 35% of the annual sales. We haven't been able to drive towards that in the last few years because of COVID, because of inflation, because of supply chain disruption. We're gonna continue moving in, down towards that path. I don't know if Holden believes we can get to 35%. He's probably a 37% guy, but I believe we can get to 35%. If international allows us, you know, makes Holden more right or me more right, and if we're growing really well, I'm cool with either number. It puts us in a position to really rationalize the inventory, 'cause conceptually, when you're pulling inventory through a supply chain network and you have great visibility, 65% of our revenue is in this FMI footprint. We have great visibility of need. You can manage that. Setting aside the disruptions like you saw last year with, "Hey, it's taking an extra 30 days to get it through across the ocean through the ports, and you need to allow for that." Setting that kind of stuff aside, it's an inherently more efficient model. It both from a working capital standpoint and from a human capital standpoint. You've seen that shine through in both our cash flow this quarter. You're seeing it shine through in our operating expenses, particularly the questions here, you know, about components of our of our people cost. Probably the only thing I'll add to that is, I mean, if you talk to our sales EVPs, you know, a lot of the things that you're seeing happen, it's us taking advantage of things we've already installed, right? Taking advantage of the changes to sort of the branches, taking advantage of the digital footprint, taking advantage of LIFT, new role specialization, all those things. We put those in place, but we haven't necessarily maximized the benefit to our business yet. I think that our sales EVPs believe that we'll be more efficient two, three years from now than we are today, that there's still plenty of room to run on that. I would say as well from the inventory standpoint, again, we're doing a lot of things to improve velocity in our system and things of that nature. You know, we, we still have a lot of import inventory that we can work off. When we think about how far in the future we had to think about our, our purchasing behavior during the pandemic when constraints were there, you know, we probably doubled our, our window for ordering. Right now, if we went from four months to eight months, we're probably back down to seven months. There's still more room to go to get closer to where we were pre-pandemic. I don't know that we'll get all the way there. Our fulfillment rates are higher. But there's still a lot more room to go. You know, again, we've become, you know, our comments about where we are as a business wasn't intended to say we've arrived. It was to make the point that, you know, we've progressed down a road nicely, but that road still has room to run. Great. We'll look forward to watching the progress. I'll turn it back. Thanks. I think we have time for one more question if there's one left. I see it's 4 minutes to the hour. We'd like to finish promptly. If there's one more question, we'll take it, otherwise we'll wrap up. Sure. Sure. The next question's come from the line of Chris Snyder with UBS. Thank you. You know, I guess maybe for the one question. You know, specifically, we're looking for more color on the back half March softness. It sounded like the month ended softer than it started. Just any, you know, end markets or product lines that saw a negative rate of change throughout the month? 'Cause the ones you guys kinda called out was retail customers, international, construction, you know, kind of stuff that's been weak for the last three quarters. Did those just get weaker, or did you see anything else kind of weaken as the month went on? Thank you. You know, we don't have great visibility into specific end markets for the most part. What I would tell you is. Within the month. Yeah, within a month. Certainly within manufacturing, it can be a little bit tricky within that particular bucket. The what I'll tell you is outside of our Texoma region, which was still fairly positive on overall demand. That's Texas and Louisiana. Yeah, sorry. For the non-Fastenal folks. Yeah. Very oil and gas oriented. Still a really good outlook there. I think that market's doing well. Frankly, the vast majority of our other regions all had some variation of things softened in March. You know, that just tells me it was pretty broad through the manufacturing space, not specific to any one market or what have you. I add a little piece, and this isn't spin. This is, this is an observation. So I had a lot of discussions with global operations entities, customers of ours or potential customers of ours over the last two days. And, you know, there was tremendous interest at the event. You know, quite a few people that said, "You know, part of the reason we're here is we want to learn what you're doing from a technology standpoint to help our business." And, you know, one of the advantages when there's a breather, when there's a when there's less noise and less things you're worrying about, all of a sudden, the things you haven't done for the last 12 or 24 or 36 months because the world kept repeating itself of trying to end. I think that's positive for our ability to take market share. Even if, even if the business itself, you know, the customer, you know, if we talk about our top 100 customers, if you, if you dial that in a little bit and you start looking at our top 10, that's what really hurt us, is our top 10 customers, were contracting from where they were six months ago. That's economic. Our top, if you look at customers 10 through 50, they were growing. If you look at customers 50 through 100, they were growing nicely 'cause we're picking up market share. That makes me more enthused because long term, our success is from taking market share every day. The economy's gonna do in the, in the short term what the economy's gonna do. We have a healthy business. We generate more cash flow in a year like this. We'd rather be deploying the cash flow into the business. In a year like this, maybe we return a little more to shareholders. It's a case of focusing on the long-term opportunity of business, and I'm excited as ever. With that, it's on the hour. Thanks for your interest in Fastenal today. Everybody have a good, a great April. Thanks, everyone. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.