Greetings and welcome to the Fastenal 2020 Second 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce to your host, Ms. Ellen Stolts. Thank you, ma'am. You may now begin.

Welcome to the Fastenal Company 2020 second quarter earnings conference call. This call will be hosted by Dan Florness, our President and Chief Executive Officer; and Holden Lewis, our Chief Financial Quarter. 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 open for questions-and-answers. Today’s conference call is the 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' home page, investor.fastenal.com. A replay of the webcast will be available on the website until September 1st, 2020, at midnight Central Time As a reminder, today’s conference call may include statements regarding the company’s future plans and prospects. These statements are based on our current expectations and we undertake no duty to update them. It is important to note that the company’s actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company’s latest earnings release and periodic filings with the Securities and Exchange Commission and we encourage you to review those factors carefully. I would now like to turn the call over to Mr. Dan Florness.

Thanks Ellen and good morning, everybody and thank you for taking time this morning to listen in on the Fastenal earnings call. Before I start, I'd like to mention two milestones in Fastenal this week, and I want to do that – just got written -- and in case I would be negligent and miss it. Dave Donahue today celebrates 40 years with Fastenal. Dave, I want to say thank you and congratulations. Not far behind Dave is Lee Hein, who will celebrate 35 years with Fastenal tomorrow. Hey, Rodney if you're listening, I would mention you as well, but you're only at 20 years and so in 10 years, I'll mention you on the call. Surround yourself with great people, people better than yourself. Be willing to learn to change and be comfortable with trusting others and you will find success. And I'm pleased and I'm really proud of the Fastenal team for what we accomplished this quarter. First off, the team was successful in sourcing hard-to-find safety products and bringing this product to our existing customers, but of equal importance -- maybe greater importance to new customers; customers -- we don't traditionally do much business with, and I'm thinking of hospitals and first responders when I talk about that group. The team was also successful in lowering our cost structure. It's really a combination of our model simply working the way it works. One item that assisted us this quarter is we've enjoyed great growth over the years. We are a promote from within organization. That means you're finding new talent every day in the organization. And the best way to do that -- at least the best way that we found is you have constant relationships with four-year state colleges, two-year technical schools, and you find folks…

Right. Thanks, Dan. I'll start on slide 7. Second quarter 2020 sales were up 10.3%. It was a quarter that was marked by two really distinct trends, both evolving from the social and business efforts to manage the COVID-19 pandemic. The first trend was the weakening of the economy due to stay-at-home measures and steps taken by companies to protect their workforce. This caused customers to operate at greatly reduced utilization and even shut down through parts of the quarter, something, which particularly impacted our Onsites. Conditions did improve as the quarter progressed. A pattern exemplified by our fastener daily sales, which declined 22.5% in April, 15.3% in May and 11.4% in June. That same pattern was evident in the vending data that Dan discussed, as well as our distribution center picks. We believe demand in our traditional business is still 10% to 15% below first quarter levels. And we have seen some flattening in those trends in the last few weeks. The second trend was a surge in demand for certain products that were critical to governments, healthcare providers, and certain businesses in handling the pandemic. We estimate the surge sales of PPE, sanitizer, and other products contributed $350 million to $360 million or roughly 25 percentage points of growth in the quarter. These volumes, which drove 116% growth in our safety products and 260% growth in our government and healthcare business, more than offset weak underlying conditions in our traditional business. We've mostly sold through our pipeline of surge orders at this time. The near-term outlook remains difficult to project. The reopening of industry is occurring in fits and starts as customers reconstitute their workforces and their supply chains and the trends in our internal metrics and a June PMI of 52.6 are encouraging. Further, while we do…

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Josh Pokrzywinski of Morgan Stanley. Please go ahead.

Hey Thanks. I hope everybody is doing well?

Hi, Josh. Good morning.

Holden, just first question, from a comment you made flattening in the past few weeks. I guess, depending on whether I will get the charts that are kind of indexed to pass points in time or just thinking about year-over-year, can you just help me unpack what that means? Is that business getting better in the last few weeks relative to how the quarter ended or are you trying to say that you've seen some tapering? It wasn't entirely clear. I apologize for maybe being a little slow on the uptake there.

Well, I think if you look at Page 4, which is the product expenses through vending, what you'll see is it bottomed in April that really recovered nicely through May, but over the last call it three, four weeks, you've really seen a flattening in the number of vending dispenses that we've seen relative to prior weeks. And I think that's really what I'm referring to. We've seen something similar in hub picks. And so, I think what that kind of tells us is, in the last few weeks, you have that steady increase that we've been seeing week upon week there for a month and a half, two months, really it has kind of flattened out in the last couple of weeks. Now to what degree is that because of the timing of the 4th of July holiday? To what degree is that a function of an increased infections and maybe people reacting in certain parts of the country to that? We don't know that at this point, but I think that what I was referring to in the dialogue was really, what you see on that chart on slide 4.

Got it. I guess if I had to look at it like a fastener-only version of that, so stripping out some of the safety elements, do you think it would look the same or would it have more of a steady increase, kind of more representative of the day-to-day business as it were?

I think it would probably look the same, worth noting that we don't vend fasterners. So, this certainly wouldn't reflect it but…

Right, more safety it represents.

Yeah. But, if I think about the trend in hub picks, which is much broader than just vending, right? And they show a very similar pattern. I think that's what you're seeing. But like I said, the cause of it is difficult to know. This chart really -- this flattening really occurs around a significant holiday, and timing of the week can matter and that sort of thing. So, it's really difficult to know what that means in terms of the remainder of July and the remainder of the third quarter, but it's there to sort of look at and we'll see how that plays out in coming weeks.

Got it. That’s helpful. I’ll jump back in queue. I'm sure there's a lot of people who want to ask questions.

Sure. Thanks, Josh.

Thank you. Our next question is coming from David Manthey of Baird. Please go ahead.

Hey. Good morning, guys.

Hey, Dave. Good morning.

First off, I think that 2021 was supposed to be the year that Onsites would be gaining ground on operating margin as you're adding fewer to the bucket, and as the existing Onsites were improving profitability. Should we -- as we think about going through the downturn here, should we think about just moving that to the right a year? Do you still anticipate maybe 2022 where we would start to see Onsites as a group improving in terms of profitability actually helping the overall margin?

I'll throw out a thought on it and I'll let Holden correct me if I go awry. You are correct with your comment about 2021 and our thinking is the same. I think that there's a couple of competing things going on. One will be, if our existing Onsites are at a depressed level and that depressed level stays in place, that wreaks havoc to what you're talking about. If that -- if we work our way out of that depressed level on the existing Onsites, all of a sudden their operating margin improves because their volumes improve and we're absorbing our cost. If you think of the impact of new Onsites coming in, actually that would help us in 2021. Unfortunately, it help us because we'd have fewer drain from the new Onsites. We won't have the revenue growth. But in the first year, the Onsites actually hurt operating margin, and so your comment about mix change is really a function of, as we get now four years into this accelerated Onsite signings and it becomes a more balanced mix. A lower number in one year would actually help that in the short-term. I don't want that help. We want the signings. But mathematically – so, I don't know that it pushes it out and Holden might have a better insight because he's closer to the numbers than I am.

Yeah. I think it's for better or for the worse what has occurred, nothing has changed in terms of our overall view of how this plays out. But what has occurred is, we've injected a couple more variables in that we didn't necessarily anticipate injecting in. I think Dan really spoke about those. The variables that was causing us to think about the timing originally, the one that comes to mind for me is, one reason the margin would get better is because the average size per Onsite gets better, and we were going to see those lines begin to cross in 2020, and therefore, lead to some better improvement in 2021. I still think that's the key metric, Dave. And so, depending on how all these variables play out over the next six to 12 months, I think the key metric is the average size per Onsite bottoming out and beginning to rise in a sustainable fashion. And is it possible that that point can get pushed out a bit by all these moving pieces that are playing out? Yeah, I think that's possible. I think those are cyclical factors as opposed to secular ones, right. I think the overall dynamic is still very much in place, very much in force. And unfortunately, we've had some other variables that get injected into it. But I still believe that once the average size per Onsite begins to move up, that's where you're going to start to see the leverage and incremental margins in that business move up. If that slides a couple of quarters because of some of the things that's happening, it's possible, but I don't think it's changed in any way the overall secular picture around Onsites and improving profitability and returns.

Got it. Okay. And it's been a while to have asked this question and the mix may have changed over time. But when you look at Fastenal’s business today, particularly in the manufacturing verticals compared to industrial production, what verticals do you see the company right now as being slightly overweight versus slightly underweight? Can you just give us an idea of maybe the top one or two there?

Not sure how to answer that question. The -- we're still a heavy manufacturing company of course. And heavy machinery is a big portion of that. Now, I think that's a natural byproduct of the, kind of, products that we serve, our history, the markets that we typically address, et cetera. So, I'm not sure that we're overweight. But I will tell you, we'd like to move our construction mix up. We'd like to move our government and education mix up. And I think that, that's occurred over time, we'd like to see it happen faster. And so, if I think going forward, will manufacturing be slightly smaller in the mix than it is today relative to some of these governments and health care and educational opportunities in construction? Probably. That's just us moving into additional markets and additional opportunities and making progress in those. So that's probably how I would characterize it. Dan, I don't know if you have a different perspective.

If you think about our manufacturing business, about half of our manufacturing business to Holden's point is heavy manufacturing. And a big chunk of that, probably two-thirds of that would be heavy equipment manufacturing within that heavy manufacturing subcategory. And you picked up, I saw -- I read the piece you put out earlier this morning, Dave, we picked up on the fact that manufacturing did weaken a little bit in June. And that's where the weakening in June. It had gained some strength in May. It was down 24% in April. It was down 10% and then down 14% now in June. I don't know how much comps from last year played into that, because I just don't have visibility to that in front of me. But that's a piece. About 40% of our manufacturing business is broadly in what Holden describes on my teaching here is media manufacturing; I'll let him define what that means. That was just marginally negative in June. The remaining, which is about 10% of our manufacturing, which probably has a lot of food in it as well, that's actually growing double digits in April, May and June, where it was only growing 9% back in March.

Okay. Great.

But your operating in Oklahoma -- yes, if you're operating in Oklahoma, Texas, or Louisiana, that's a pretty tough manufacturing environment right now because there's -- we do fair amount of business in oil and gas.

Yes. Okay. All right. Thanks a lot, Dan.

Thanks.

Thank you. Our next question is coming from Hamzah Mazari of Jefferies. Please go ahead.

Good morning. Thank you. My question was just on the -- on your captive trucking network. I think you mentioned using third-party transport. Any thoughts as to how you're thinking about freight? And just longer term, what kind of competitive advantage your trucking network has? Historically, you know, you've talked about optimizing that. Just curious where that stands?

So, I don't think our thought process on freight using our own captive network has changed at all during this. What we did do is we pulled -- our lowest day of the week for shipments is Tuesday. So, our shipment that goes out -- our truck routes go out Monday night, we've effectively canceled those in April. And branches that were getting five trucks, now getting four trucks. And we really challenged out those branches to work with your customer to understand your inventory stocking. So, we didn’t -- not -- so we didn’t canceled Tuesday trucks and then we trade in a bunch of stuff because we needed the product. We did a really nice job with that. Now, the savings there is in some labor. It's in fuel, obviously. The trucks, unfortunately, all we could do on that day is park them. And so as they go off lease, we can reduce some of those as we go through the year. We used a fair amount for third-party because our trucking network is really this agile trucking system that lives and breathes within the Fastenal supply chain. And these surge orders, we weren't selling you know, a box or a pellet product, we were selling truckloads or container loads. And so that's what really prompted the need to use probably more third-party than we had typically because it was just a different type of movement. Whereas our trucking network, I think of it as an LTL network. It does small parts of those LTL, and it's very agile nimble. But if you want to move a truckload from point A to point B, it might be more cost effective to move it in one of our trucks and just drive it there, we'll move it on third-party, who's got -- who has an open lane.

The combination of underutilizing some of our fleet as well as if you look at how much product we move not on our fleet, but on third-party, it was probably six percentage to seven percentage points higher in this quarter than it has been in recent quarters. And again, that carries an incremental cost to it as well. But it's a reflection of some of the product that we did move, but those are some of the inefficiencies that get created in the network in an environment like this.

Got it. Thank you. And just a follow-up question, I'll turn it over. Just what are you looking for in terms of -- visibility before you start adding cost back into the system, specifically, headcount? I know you mentioned you're cautiously optimistic today, but any thoughts as to what you're looking at internally there before you add costs back? Thank you.

Every Wednesday, I get an update on those vending stats you looked at, and I'm watching those vending stats because here's a $1 billion business that touches on a daily basis. And I mean, seven days a week in -- across 25 countries, across a big piece of our customer base. I think it was on the latest employment numbers that came out, and they were talking about how they were adjusting and the methods. We learned more about the methods for doing unemployment reporting at the federal level. And I felt like geez, don't they just get a RVPs board and then they can improve the accuracy. Here, we have something that looks at our business every day, every week. It's incredibly accurate. When I see those trends moves, we'll be more comfortable to take steps.

Got. Thank you.

Yeah. And I think to add to that, you will see some expenses come back. I mean, we had movement, travel, food, things of that nature, among our sales and non-sales force, that was down 60% -- just about 60% in the second quarter. Do I expect that to be down 60% in the third quarter? Probably not. Will it be down significantly? In all likelihood, it will. If you talk to the RVPs on how they're viewing labor, at this point, they're still looking to be very tight with what they add back. And as they add, if those opportunities present themselves, they're more likely to begin by adding hours because I think there is plenty of capacity in our part-time workforce today to add hours before we have to add more heads or more bodies. So the -- we're still going to operate, I think, well below sort of the Q1 level of expenses, and I think the market justifies that. But would you expect to see some increase as the market today looks really different than what we thought it might look like three months ago? Sure. But we're certain going to be fairly tight. And that's controlled by the field.

Got it. Thank you.

Sure.

Thank you. Our next question is coming from Ryan Merkel of William Blair. Please go ahead.

Hi, guys. Maybe I'll ask a few safety questions. So I think first off, any color on why safety sales in June only tapered slightly? I think Holden, you were expecting maybe a bigger falloff. And I think one of your peers who reported mentioned that, hey, customers already bought. So they saw safety fall off pretty meaningfully in June?

Yeah. I'll say the surge business was still pretty healthy in June. And I think that really gets to it. So, in both May and June, I would say the surge orders outperformed what I might have expected going into the months. And that's a positive thing. Not only for us as an organization, but for what we can do for customers and for the marketplace in general. So I think that, that's great. But yeah, I would say the surge orders just simply were better than I might have expected going into the month. Now, I will caution, I think I did suggest that at the time of the May sales release that we would see some more in June, they would taper off. They didn't taper off as much as we thought, but I did indicate that, I didn't think that surge orders would be meaningful as you roll into the third quarter. I still believe that. I think that we've largely sort of taken care of the pipeline of the initial surge. The question at this point is whether or not there's going to be a second pipeline filling events, right? And you are seeing a lot of COVID infections moving up. We have a lot of new customers that we absolutely expect to turn, get away from being sort of a one-time supplier search product and turning them into long-term regular customers. But at the same time, the marketplace right now is much better supplied with these products than it was three months ago, when the surge pipeline built-up. So, I believe that in the third quarter, I think safety will grow up, despite the market still being a little bit underwater. And I think that some of what you're seeing in the market will be helpful. But I think you're looking at growth that's more like 10% to 15%, not 116%. And that's how I'd characterize the environment today.

The only thing I'd add to it is there's still a lot of noise going on. Every day, you see something new going on in a particular geographic area. I think we've done a nice job. Our government team particularly has done a really nice job of helping the public to be aware of we are a reliable source of supply. And more stuff came out of the board work in June than I would have expected. And just last week, I was talking to one of our Regional Vice President and he was talking about an Onsite we just signed and it was completely related to somebody that wasn't a business partner of ours before, but they were sourcing product for and they learned about what we do and how we go to market, and we signed an Onsite with them. And so, I think part of what's helping us right now is word-of-mouth in the end market. We're still getting calls. Yesterday, I was sitting in the Board meeting and we see the text from one of our EVP of Sales and there’s some stuff come out of the word work again. Now please don't read into that, Florness just said, it's going to take off again in Q3, but there's still stuff that comes out of the word work. And I think part of it is the marketplace, a non-traditional marketplace for us is seeing us as a very valuable supply chain partner because one of the things that has come out of this is – and you see news – unfortunate new stories about it. There's a lot of garbage in the marketplace as far as product. We were founded by a mechanical engineer. We started with fasteners. There's nothing that requires better QC than fasteners because it's holding stuff together. When we source something, we're in the plant, we're testing the product in a way that maybe isn't existing in all sources of supply and so people trust us. And that's really important in this environment.

Another way to think of the change perhaps is, if I look at where the safety mix is through the first seven days of the business, so let's bear in mind, there's only seven days. But safety is about 24% of revenues through the first seven days of July. Compare that to the second quarter, it was 34% of revenues. And so, you've clearly seen that July is not going to be where June was in those numbers, unless something changes as it relates to the current COVID infections and that's something that we have yet to be seen. But I think it's just as meaningful to suggest or to point out that at this time last year, safety was 17%, 18%, 19%, right? And so, that's kind of the dynamic that you're seeing. And that's why we suggest that you're not going to see surge volumes in the third quarter in July, like you've seen -- like you saw in the second quarter, but we'll see how the market evolves.

Okay. Yeah, helpful color. I'm having a pretty tough time forecasting 3Q, I think like everyone else, but that's helpful. So you started to answer Dan, my second question a little bit there. But just stepping back, high level, in a post-COVID world, does your value prop to the customer increase in your view? And then related any change in the way that you go-to-market? Or is access to facilities not going to change that much in your view?

I think the value prop has expanded, particularly for folks outside our historical customer base.

Right.

I mean they didn't know us as well. And we've been serving the manufacturing and construction sectors for years. We're still kind of a new player in some of the other spaces. So, I think our value proposition, the awareness to it has improved. I think one of the outcomes of this, I think, we've proven to ourselves that we can do some things that maybe we didn't even realize we could do. Because while we have a substantial safety business, I don't want to make light of it, half of our safety business was because of our vending business. And so we've grown great resources in that industry, in that marketplace. But I don't think we even realized how strong they were. And this gave us a chance to flex that muscle a little bit and demonstrate it. And so, what it means going forward that, one, I'm really not sure of. We had to cancel our customer show in April as you're aware. And that's a big event for us, because people get a chance to get exposed a little deeper into the organization than you meet with suppliers. You learn about what we do, how we go to market. It's a very transparent event from the standpoint of gaining comfort. Because a supplier when they really turn the business over to us, that's a huge trust thing, and they learn that this is a group of folks that I can rely on. And not having that, that's a tough one. But we have, going into the fall, a bunch of virtual events that we're developing and we'll be one. But we have, going into the fall, a bunch of virtual events that we're developing and we'll be doing, and they're -- we really, I think, have a good plan there. We're going to figure out a way to promote vending to promote Onsites, to promote the Fastenal business model in the marketplace. And I think maybe we'll figure out a way to do it better, but time will tell.

Perfect. Thank you.

Thanks Ryan,

Thanks.

Thank you. [Operator Instructions] Our next question is coming from Nigel Coe of Wolfe Research. Please go ahead.

Good morning, guys. Maybe I'll pick up from, I think, Ryan just touched on a topic that I was going to dig into as well. In the traditional retail world, we've seen a pretty marked shift between physical versus e-commerce. And it doesn't feel like you've seen that. I'm just wondering in the post-COVID world, do you expect e-commerce to accelerate the expense of physical store sales, not necessarily Onsite, just your physical stores?

If you think about how we've kind of presented the story and I talked about this about at the Annual Meeting and is we really -- when you boil down business, it's going into our end market, and we're a B2B model. When you look at that business, the bulk of the dollars are planned spend, a smaller piece of the dollars are transactional spend. And what we've really built with our -- starting with fasteners, especially the OEM fasteners and the MRO as it relates to bin stocks. And now gotten much deeper with our vending is we're really a great supplier for planned spend. And because we have the infrastructure for planned spend, we're really good at transactional, too. So one of the reasons, our e-commerce numbers are different than our peers is most of the products our customers buy from us, they don't order. It's there when they need it. It might be a vending machine, it might be in a bin, it might be on production floor. We know their needs. And so, it's kind of like that ad that you used to always see of the person reaching in and grabbing that once used and there's a hand reaching through from -- or the sand or orcher whatever you call where oranges are grown. And -- but the point is, if you're really good at supply chain partnership, you aren't ordering product, and that changes are dynamic. Now, we see on that piece of business that is transactional, be a great partner, and that's where we think things like our vending come into play. So one thing we really haven't talked about is during the last few months, we've rolled out about 400 vending machines to the front of branch locations. So, when a customer calls up to order something or better yet orders it online, we put in the locker because the vending is the natural social distance tools. Bin stocks is a natural social distance tool. So, we think we're actually poised to be more successful at creating a reliable supply chain and yet instilling social distance because it's inherently more efficient. And so I think it serves us well and improves -- to Ryan's last question, the value proposition because, especially, since we did the transaction with Apex back in March, we now can do things with vending that we couldn’t have done three and four and five months ago, and now we own the technology. So, we can take it anywhere that our -- the marketplace wants us to take it.

I would probably add, I mean, our fundamental value proposition is one of total cost of ownership savings. And as Dan alluded to, what we try to do for a customer is remove them from the process of doing something which is non-core to them, which is sourcing product. And the e-commerce path has a lot of value in the channel, but it still is going to heavily involve the customer in the process of procuring product. And as long as customers continue to see value in the case of an onsite and our assuming the inventory and our assuming the crib duties or in vending, seeing value in the data that comes out of that, the availability on the -- at the point-of-use on the plant, that's -- those just aren't things that can be replicated in an e-commerce environment. So, in our view to see a major change like you're suggesting, would have to see a major change in what customers value, which is to say they're willing to accept more expense in their sourcing operations than they have to if they use -- they use our approach to the marketplace. And we just don't think that's going to happen.

That's nice. Great color. Thanks for that guys. And then I want to understand what you mean by the safety is much better supplied in the market, specifically within some of the non-traditional customer base. And is that because the traditional distributors into those verticals have kind of caught up and they've got inventory? Or do the customers have a lot of inventory themselves? I mean, what do you actually mean by that comment?

It's probably some combination of all of it. I think three months ago, when this crisis hit, remember China was actually down and coming back up. And so you weren't fully producing product at the kind of scale that you needed to deal with the issue of COVID as it hit Europe and the U.S. And so I think, three months ago, you had supply restrictions. I think those supply restrictions have largely cleaned up. I think three months ago, the supply chain was in shock and it took a while for the supply chain to figure out where to go to get product. I think that the supply chain has figured that out. And I do suspect that there are customers out there that over-purchased product because of the uncertainty of the situation, and it's probably in the chain.

I think the last piece is probably as important element of all of them. I mean how many people in this call went out bought six months' worth of toilet paper in March? I mean it was ridiculous what you'd see going out in carts at establishments as it relates to just basic household supplies. And when you have that kind of a surge in demand, I mean, one thing that we did and I think it's resonated well with our customer base, especially including our new customer base, is we put in place a very commonsensical allocation process. And we've really have tried to share and shed the light of day of that process with our customers. And I think that even changes the ordering pattern of the customers because all of a sudden, they get what we're doing. They understand it. And now they're buying to demand. They’re not buying out of panic. And that’s what – I keep harping on this point, and I'm sorry if I'm beating at the death. That's what a supply chain partner does. If you shed light to, here's how the system works, and here's how and why we can support your needs. And we can be reliable. And that's probably changing part of the two, because there's less panic buying going on today. I mean, we brought very early on, this organization was able to bring organization to chaos. And I think today the market has less chaos, and it's fairly well supplied with key products like 3-Plys and things of that nature. And by the way, in that particular line, that's also having an impact on sort of the pricing in the marketplace as well.

Very clear. Thanks, guys.

Thank you. Our next question is coming from Chris Dankert of Longbow Research. Please go ahead.

Hi. Holden, do we have time for one more or do you want to wrap it up?

Yeah. We have. Go ahead. Yeah.

I hold an answer, because I talked too long.

Thanks, guys. Thanks for squeezing me in here. I guess, just kind of circling back here. How many of these non-traditional customers have indicated there is the opportunity for a larger relationship? Is some of this just, hey, let's support the governments and hospitals and health care workers in this time in need. And that's going to be just a short-term sugar rush? Or can some of these relationships extend into 2021 and beyond and kind of grow from there?

I think our safety teams have talked about probably fully a quarter of the relationships that we created or entered into and sort of a one-time surge capacity can be forged into longer-term relationships. Now when I say a quarter, look, some of those relationships were always going to be transactional, right? Either because they were using us because their conditional supplier wasn't available, they go back to that relationship or what have you. But, there is an expectation out of the safety teams that fully a quarter of those relationships from the second quarter could be extended into long-term relationships as opposed to short-term transactional ones. And obviously, those are going to be the ones that are the largest opportunities from our perspective, so.

One thing I'll add to that -- sorry, I said, I shut up is I think awareness, is part of the game for a lot of these customers, they probably weren't – they didn't think of us as a supply chain partner in their space, and their industry. They thought of us, oh! those guys have some nuts and bolts. Or they're more of a manufacturing and industrial and construction supplier. They don't really sell what we source. So I think awareness is an important element here. I believe also, what you run into with a lot of those marketplaces, they buy through consortiums. And if you're not necessarily a player in that space, you're not on their radar. And I wouldn't be surprised. And this is forward-looking now. So I should have in turn here to qualify everything I'm going to say. I wouldn't be surprised to see some customers say, hey, to their consortium, we want Fastenal in this group, so that we can source from them and it's easier, because we went through too many hurdles to buy from them in March or April. And we need to make this easier. I think you'll see some of that. And I think it has some staying power. But I think it's all about becoming aware to what we can bring to their table. Because at the end of the day, it's not about what Fastenal does. It's about the value we can bring to the customer. And awareness is a key part. Yeah.

Got it. Yeah, I'm glad to hear that there's certainly some real tangible opportunity there. And then Holden, you touched on this, I'd like to circle back real quick I guess now, Fastenal deals in a fairly high amount of branch specific stock in most quarters. But obviously, we're seeing a lot more kind of in response with pandemic. Now that these supplier relationships are established, I guess, how does that impact mix going forward? Is it reasonable to think that getting these rebate relationships in place can kind of help offset some of that gross margin pressure in the back half of the year?

Well, I'm not sure that there's – rebates, they are typically negotiated on a periodic data. I'm not sure that, that's going to have any impact on the back half of the year. Starting a little bit with the sort of the – where you're going with the question. But yes, if you could let me know exactly what you're looking for.

I was just thinking -- no, if you're dealing with just new suppliers that you have no history with, obviously, you're going to get a tougher cost basis than if you're establishing these relationships and you start to work out better pricing. That was the thrust of my question.

Got it. Right. Okay, on the supply side, my apologies. So, one of the reasons – our safety margin in the second quarter was probably 250 to 350 basis points lower than it needs to be and frankly lower than it was in Q1 and last year. And that is significantly because of some of the things that you're talking about. Now going forward, we've certainly introduced ourselves to new suppliers and they to us and we'll no doubt that those suppliers. And if there are suppliers that are worth carrying forward going forward, then I'm sure we'll do that. And we'll do that in a more traditional relationship. Maybe there'll be rebates in there or maybe there'll be a different agreement on pricing. As two parties begin to trust each other, I think that it becomes easier to optimize that relationship, and that can happen. But worst-case scenario; again, as the marketplace normalizes, we will go back to our normal dynamics with our normal suppliers, with our normal means of transporting product about. And I would expect that we will get that 250 to 350 basis points back. Now will that happen in 3Q? Probably not, because as I talked about, we do have some product in inventory that – where some of the price cost dynamics are a little bit challenging. And I think we have to work through that over the course of the year. And again, there's probably going to be some additional COVID-type business that happens based on the infection rates. And so, I think we get the 250 to 350 back in the third quarter, probably not. But I think we'll make substantial progress. And I think we'll normalize things as the year progresses in that particular product line.

Got it. Thank you for the color guys. Take care. Go ahead.

I was just going to say, it's two minutes to the hour. Again, thank you for everybody for participating in the call today. My thanks to the Blue team at Fastenal for what you did in the last three, four months of setting your personal fears aside at times and pursuing the goal of -- we have a strong conservative balance sheet. We can make use of it in this environment to create a fast us, to create speed and resilient supply chain. And everybody needs to purpose and a reason to get for morning. I think we found a great purpose for the last four months. And thank you.

Thank you.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and have a wonderful day.