Greetings. Welcome to the Fastenal 2023 First Quarter Earnings Results Conference Call. [Operator Instructions] 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.

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 1 hour and will start with a general overview of early results and operations, with the remainder of the time being open for questions and answers. Today’s conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission or distribution of today’s call is permitted without Fastenal’s consent. This call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage, investor.fastenal.com. A replay of the webcast will be available on the website until June 1, 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 and we undertake no duty to update them. It is important to note that the company’s actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company’s latest earnings release and periodic filings with the Securities and Exchange Commission and we encourage you to review those factors carefully. I would now like to turn the call over to Mr. Dan Florness.

Thank you, 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 are at the site of our customer expo that just finished up yesterday and 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, 2 and 3 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. And 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 is digital transformation, understanding the elements of your supply chain, it’s also about bringing productivity to your – whether it’s your production floor or some element of your operation, we provide the tools to do that. And then 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. And I think those four points resonated well throughout…

Great. Thank you, Dan. Before diving into the details of the quarter on Slide 5, 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. If 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 Onsite and FMI basis as well as our digital footprint penetration and 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 of the rest of our business. Relative to the pre-pandemic business, we have begun to generate meaningful labor productivity and reduced 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 ‘15 to the first quarter of ‘19 of 16.2%, and we have improved our capacity for leverage over time. At the same time, from the first quarter of ‘19 to the first quarter of ‘23, 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 leverageability of our cost structure and lowering our asset intensity. We are a stronger, more productive business today than we were prior to the pandemic and that is very clear in these first…

Thank you. [Operator Instructions] And our first question comes from the line of Chris Dankert with Loop Capital Markets. Please proceed with your questions.

Hey, good morning guys. Thanks for taking the question.

Good morning.

I guess, first off, thinking about your conversations with RVPs right now, how do they feel about adding FTEs or kind of management there? Just how are we thinking about labor management today and growth kind of going forward?

We have talked about labor management with the RVPs really coming into this year. And the premise was when you look at where the PMI is, when you look at the trend in industrial production, we needed to be looking forward and really have a plan to be cautious about hiring. Now in January and February, I will 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 the demand softened a little bit. I would also point out that our hiring adds softened a little bit in March as well. We have always talked about how we can react fairly quickly to changes that we are seeing. And so the message to the field has been, you have to be prepared to adjust for a down shift in demand. And again, that’s not a message we just conveyed. We entered the year having that same conversation. And I think that they have been really responding 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 have added full-timers, a significant portion of those are made in India, right. So 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 are executing on that. And I was encouraged that as demand slowed down in March, so did the sort of the hiring adds. So I think we are doing the right things.

That’s great color. Thank you so much on that. And then again, just thinking about the CSP growth seems to be lagging a bit more relative to the rest of the business here. Does that change any of the calculus around the pace of closures there or kind of how you are 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 under growing national accounts and Onsite, I guess my assumption is most of that is the more traditional branches, correct?

So remember that our traditional branches are – they support not only the local business is what you are referring to, but they do support the national accounts business as well. But yes, I think you’re referring to the non-national accounts sector on our release. So thank you for that clarification. The – when you think about what’s happening in sort of the construction, the reseller, traditionally, there has 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 that smaller local construction customer, provide them a high degree of service in the local market and things of that nature. And our priorities in the branch have shifted a little bit, trying to move that customer online and creating a sort of time to focus on some of those larger customers in the market. And 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, again, is part of what we’re trying to achieve, I think that, that is really that’s really related to the difference you’re seeing in the national accounts versus the non-national accounts growth as well. So I think those things are all related. Does that get to your question?

That does. That makes ton of sense there. 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 question.

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 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, but setting aside the semantic. I suspect just looking at how that cadence has played out in the preceding, call it, 15 months, I suspect that we 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. And I think we’re probably in a position where it doesn’t represent the drag on our business than it does today. So I think you are right to look at it as a transition because I think that’s what it is. And once we lap that transition, I think the growth that you’re seeing today in those manufacturing customers and those large customers, that’s going to 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 branch consolidations we’re near the end of that process. So if you think about – if you think just about our customer segments, so 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 probably don’t know we’re located. And so if you’re in a market and you consolidate a few locations, you are actually moving further away from this other segment of customer. And so if you look at where we get to that ultimate branch count, we’re probably a year away of being at that point. And that ties right into Holden’s comment as well.

Yes. And so looping that back to Chris’ comment earlier, pardon the pun, 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 to that branch consolidation, Dan indicated, that’s the customer that no longer is visiting that location that would have otherwise been there. So that’s an element of that as well.

Right. Got it. Yes. Apologies for the semantics, I was struggling for something better unsuccessfully. But 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 and so that might be part of what we’re seeing? Or do you think it’s actual sort of end market slowdown? And 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. So I’m just curious if you have any visibility into any of that, and then I’ll pass it on.

Yes. So 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 sort of back that up a little bit. So there is an element of adjusting to the supply chain. But I also did get a number of comments from regionals that they are also seeing our customers just tightened their wallets a bit, both in terms of capital spending as well as operating expenses. And so I think there is a little bit of both of those things, those dynamics playing out.

The other piece I’ll – from an insight perspective, if you think about our business from a product line and product use perspective, if I go back to January, so 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%. So 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. Now I honestly haven’t given that [Indiscernible] the last few days. I don’t know if there was a comp issue because some of the safety was being pushed around a little bit because of some COVID activity. But 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. But I don’t believe January and March had a comp issue. I think that ties a bit into the strength we’re seeing in our pending deployment. If I look at remaining products, that did also fall off a little bit, and there’ll be some production in those as well, particularly in the metalworking.

Got it. That’s great color. Thank you, guys.

Thanks, Steve.

Our next question comes from the line of David Manthey with Baird. Please proceed with your questions.

Dave, if you’re talking, unmute.

And 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. Good morning.

Holden, I’m curious if you could just talk a little bit more on the fastener sales trends in March. 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 month? And two, how do we think about the net margin impact of that part of the portfolio since I think it’s typically accretive to mix, but you also called out lower shipping container costs?

Yes. With regards to sort of the volume side versus the price side, the – I’m trying to think.

By line, it was slightly negative.

It would be. It would be. So I think that that’s an element. And again, it’s our most cyclical line. Dan referenced sort of the commentary about the OEM fasteners in particular. I mean today, OEM fasteners represent about 62% of our fastener business. And so when you get a slowdown of some sort in a period, it’s going to affect the volumes in the fastener side of the business. Now you’re right, it tends to be a higher margin line. And so to the degree that fasteners grow 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, about sort of mix impact.

When the falloff is in the OEM fastener component of the fasteners, the mix impact is different than if it’s in the MRO piece. Could be 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. And then I guess for my follow-up here, I’m curious if you – I mean, 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’ve obviously – you talked a little bit about transportation easing a bit, but I think the prices have also kind of stayed in here in recent months. I’m curious if you have any update on the color for price/cost negotiations on higher steel material?

We are acutely aware of steel pricing and shipping costs. And 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. But we also operate in a very dynamic marketplace. So we’ve been seeing 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’re seeing – we were getting squeezed a little bit 6 and 9 months ago. A little bit of that squeezing is lessening right now, and you’re seeing that in through in our numbers as well.

And I think those conversations – I think we’ve always talked about how our objective was to talk to those customers that have the timing of our costing and we understood, as Dan said, we have a covenant to sort of adjust as appropriate. And I think our customers have been great working with us to understand when our products to be coming through at a lower cost, etcetera. And so we’ve always felt that as you get to that second quarter. There’ll 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. But 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. And so I certainly understand the concern. But again, we – I think we’ve done a good job sort of matching price and cost. I think that the team has done a great job on this side of the cycle as well. And the objective is to be price/cost neutral.

Understood. Thanks for the time.

Thanks.

Thank you. Our next questions come from the line of David Manthey with Baird. Please proceed with your questions.

Thank you. Good morning, Dan, Holden.

Hey, David.

Yes. 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. And you addressed it to a large extent, but I just want to be clear on that. Your container prices are down, steel prices are up a little bit and you are saying that fastener prices are mostly stable today. So 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, we – that we might need to adjust pricing is not a surprise. We know where that would have to happen to actual. Again, we have pretty good visibility in our costing. And so we really do try to align those two things. And so 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. And all we are seeing – so as we talked about two quarters ago, we started talking about two quarters ago, we wound up having negative price cost on the fastener side. And we anticipate at the time that costing would catch up to our pricing, and that’s largely where we got to this quarter. But going forward, the idea is to – and this is a conversation we’ve been very explicitly having with customers. 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, it was some of the changes were pretty extreme. If I look at safety, we have great visibility to demand. 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 because 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 and we did some corrections there. So 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, David.

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 small portion of revenues, but you called out the growth of 14% or so, obviously, very good margin. So just wondering, given where LTL tonnage is trending right now, how – what did you do to kind of get that kind of growth rate? And it sounds like you can just to continue going forward. So just wondering what’s driving that kind of growth?

I think sometimes you can be guilty of over time of – you focus on – there is 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 of the equation. And 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 focus on. And when things get really chaotic, sometimes you have to pivot and say, hey, folks, we need to put some energy into this because this is a problem that we need to fix. And so it’s more of a case of I’d say we’re probably reverting to some of the freight pricing habits that we had 3 and 4 years ago that were maybe a little bit waning in the last several years. And 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 from 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.

And I think there is – I mean there is 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. But we’ve alluded a couple of times to an increase in plant spend. As more plant spend becomes a bigger portion of our business, it becomes easier for us to plan our own logistics, right? And so we have seen our third-party freight go down, in part because of that trend. I think that’s going to 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, it’s not just the ongoing continuous improvement of the business that I think will be sustainable. What you are referring to though is important, because as our revenues have gone up and as we focus there, the cost structure of our semis fleet is fairly stable and so as revenues go up, we actually leveraged that fairly well. The other piece in this quarter that occurred though is, one, container costs are down a lot. And that was a benefit. I think down something like 75% year-over-year. So 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. And so our container flow in the first quarter was also down 50%. Now I think those latter two issues, they are 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. But things like the plant spend, lower third-party, freight route consolidation, those sorts of things, I think those are going to 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. And so I execution standpoint, there is some great things going on with freight in the organization.

Yes. No, that’s great. Thanks, guys. And then just a quick one, we talked about the March sales now at some length. But you called out weather impact in February. You didn’t call out anything in March, but some companies are blaming weather in March. So I’m just wondering were there any weather impacts that could maybe explain some of the weakness you saw towards the back end of the month?

No. We’ve tried to raise our threshold of pain that we bought at a mentioned. Can I find you an RVP that think there was some weather in January? Sure. Can I find just 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 2 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 JPMorgan. Please proceed with your questions.

Hi. Good morning. Thanks for taking my questions.

Hi Pat.

Hi. How are you doing? 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 1 point or 2 points or up 1 point or 2 points, depending on how things played out. I guess I am just curious, after the first quarter, and your actions in February and what you just said on kind of fasteners with regard to the input cost on that, what your expectations are now for this year on pricing? And then 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 will touch on the last part of your question, then I will let Holden handle the meat of it. But on that last part, if you think about what happened and what we are just running through on those OEM fastener numbers, the drop-off from January to February was linked to production business. Our OEM fasteners dropped in half as far as the – relative – from 13.5% to 7% growth. And so that – there was no pricing action there. And if you look at the remaining product lines, the drop-off actually occurred 30 days after. So, I mean, it was really about the production aspect of our business, not so much the other parts of our business.

Yes. I would agree with that. The – plus frankly, those price increases went in sort of late in the quarter. And so I am not sure that you would have seen responses like – that you are alluding to in such a tight window. But that said, we are not really expecting that that’s going to be adverse to those lines from a gross standpoint. The – yes, so we just – we didn’t see that. I wouldn’t expect to see that. As it relates to the overall pricing, remember, the wide range I have given is because ultimately, we don’t have a great deal of visibility as it relates to how much pricing are we going to have to give away to customers because of contracts and things of that nature, right. And so my comment, I think, was if demand softens and there is a lot of pressure to sort of adjust price based on contracts, etcetera, then maybe our pricing is down a percentage point. If that doesn’t occur because it hasn’t to this point, maybe it’s up a percentage point. And that was – 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 is a wider range. And I think that that’s still the case. And we talked a little bit in an earlier question about, I suspect is yet 2Q and 3Q we will be adjusting some pricing. I will say, however, that I have spoken to some people before about how I think pricing comes into that zero to 2% range probably in the lower half of it if nothing changes. But we have made some changes to our pricing in that other products area. And so what I would tell you is if we never had to adjust fastener pricing, I suspect that our pricing this year will be in the upper half of that zero to 2% range. But now the wildcard 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. And that’s the – we just don’t know the order of magnitude of impacted that yet. I hope that wasn’t confusing.

No, 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 to 100 basis points of contraction when we talked in January. It sounds like maybe pricing could be tracking a bit better. Price/cost may be neutral, I don’t know. And the freight commentary was also – sounded better. So, wondering if you are thinking any differently about that framework now.

Yes. So again, price/cost, 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 very well. And 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. So, freight may have increased my expectations around gross margin for the full year, but that’s really the one variable that played out differently than I expected it to from last year – from last quarter’s conversations.

Okay. That’s helpful. I will squeeze in one more in, I will.

Do we have two?

Yes. 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 proceed with your questions.

Hi. Good morning everyone.

Good morning.

I just – I realize it’s still very early days here, but I am just curious if you have 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 – our bad debt expense was actually a benefit to our margin this quarter. We were just not seeing a significant – we are not seeing anything in our business regarding that.

Okay. That makes sense. And then just quickly the second one, I can see that you are still planning on spending that $200 million-ish 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, hey, that’s the piece. The other thing is we are always adding infrastructure for what we need long-term. So, if you think about what’s going on right now, we are expanding our distribution facility in Denton, Texas and on the other side of the Fort Worth area. We are building a distribution facility in the Salt Lake market. And so we are adding capacity because we have all grown the capacity we have. If you think about our FMI, that’s quite strong right now, and that’s the capital item that we are adding. And then the last piece would be, if I think of where we have probably struggled the most in recent years to add would be on the vehicles side because stuff just wasn’t available. You couldn’t get – 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 and so some of the CapEx is going into the transportation side. Recently, I was visiting one of our onsite locations. And I am pleased to say that I received a picture here, 1.5 weeks ago, a bunch of Fastenal trailers being produced that are coming down the production line. And so those kinds of things, we are able to get better today than we could have 6 months and 12 months ago.

That makes sense. Thank you.

Thanks.

Our next questions come from the line of Tommy Moll with Stephens. Please proceed with your questions.

Good morning and thanks for taking my questions.

Good morning Tommy.

I wanted to start off on OpEx. If I am 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. So, to the extent you can 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.

Yes. I don’t know that I am necessarily going to walk you back. I think it’s important to understand the source, right. I mean the reason why we were able to leverage the way we did was because we are just not growing as quickly this year as we grew last year. And so again, I wanted to emphasize that I think we had a healthy payout of incentive pay of the businesses. In this quarter, it wasn’t as healthy as last year. And that’s not a surprise. But if I think about how the rest of the year plays out, we still have some pretty large numbers that we are going to lap in the second quarter and the third quarter as well. And so I do expect that we will have healthy incentive payouts in the second quarter and third quarter. We will see how the market plays out, but based on sort of how we grew in the most recent quarter, but I do believe that they will be lower than what we experienced last year. And so I think that we are going to 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. And we cover this in pretty good detail, I believe in our proxy. But a good chunk of our incentive comp is tied directly to pre-tax earnings growth. So, if you think what was going on last year, Q1, Q2 and Q3 have meaningful expansion of that incentive growth. Actually, Q2 was the highest of the three, but I believe it was about $0.5 million higher in Q2 versus Q1. So, just nominally higher and then drops off in Q4. So, 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 buffer here in the first quarter and presumably in the second quarter and third quarter, unless the economy surprises us and it turns more positive, and that would be a great problem to have.

Thank you. I appreciate the insight and 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. And so there is 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 are really focused on driving through the organization at this point? Thank you.

Well, if you think of the growth drivers come to mind first. That’s not what your question is. But for me, growth drivers come to mind first of the structural changes we are making as far as customer acquisition both in the standpoint of physically what channel is going through brands versus onsite. And then what tool are we using within the respective channel, FMI, etcetera, to serve at a really high level in a very efficient level, our customer. If I think about things that impact our cash flow, we often talk about our covenant with our customer includes a number of things. One, finding great quality of products, great availability of products, reliability of products 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 6 months to 18 months. And as things were chaotic could be late and actually go back several years because we took on a lot of safety products back in 2020, but that piece had been worked through. So, 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 on hand. We are managing our accounts receivable relationships at a really strong level. It’s basically a better CFO today than we did 10 years ago. And things like that help. But you put those things together, we have talked internally about what we call our Drive to 35. And what that is, if you look at our internal financial statements, and these would sign through externally, two of the three would, we look at our accounts receivable business unit-by-business unit. We look…

And probably, the only thing I will add to that is, I mean if you talk to our sales EVPs. A lot of the things that you are seeing happened, it’s us taking advantage of things we have 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. And I think that our sales EVPs believe that we will be more efficient 2 years, 3 years from now than we are today, that there is still plenty of room to run on that. I would say as well, from an inventory standpoint, we are doing a lot of things to improve velocity in our system and things of that nature. But 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 purchasing behavior during the pandemic when constraints were there, we probably doubled our window for ordering. Right now, if we went from four months to eight months or probably back down to seven months, there is still more room to go to get closer to where we were pre-pandemic. I don’t know that we will get all the way there. Our fulfillment rates are higher. But there is still a lot more room to go. And so again, we have become – our comments about where we are as a business was intended to say we have arrived. It was to make the point that we have progressed down the road nicely, but that road still has room to run.

Great. We will look forward to watching the progress. I will turn it back.

Thanks. I think we have time for one more question. If there is one left. I see it’s four minutes to the hour, and we look finished properly. Just one more question, we will take it, otherwise we will wrap up.

Sure. The next questions come from the line of Chris Snyder with UBS.

Thank you. I guess maybe for the one question. Specifically, we are looking for more color on the back half March softness. It sounds like the month ended softer than it started. Any end markets or product lines that saw a negative rate of change throughout the month? Because the ones you guys kind of called out was retail customers, international construction kind of stuff that’s been weak for the last three quarters. So, did those just get weaker, or did you see anything else kind of weaken as the month went on? Thank you.

We don’t have great visibility into specific end markets for the most part. What I would tell you is within the month – within a month. And certainly, within manufacturing, it can be a little bit tricky within that particular bucket. But the – what I will tell you is outside of our Texana [ph] region, which was still fairly positive on overall demand, that’s Texas and Louisiana. Very oil and gas oriented, still a really good outlook there. And so I think that market is doing well. Frankly, the vast majority of our other regions all had some variation of things softened in March. And just tell you it was pretty broad through the manufacturing space, not specific to any one market or what have you. I will add a little piece. And this isn’t stand. 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 few days. And there were tremendous intersecting events. It was quite a few people that said, part of the reason we are here is we want to learn what you are doing from a technology standpoint to help our business. And one of the advantages when there is a breather, when there is less noise and less things you are worrying about, all of a sudden, the things you haven’t done for the last 12 months or 24 months or 36 months because the world kept repeating itself of trying to end the – I think that’s positive for our ability to take market share. And even if the business itself, the customer – if you look at our – and we talk about our top 100 customers, 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 we are – and contracting from where they were six months ago. And that’s economic. But 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 because we are picking up market share. And that makes me more enthused. Because long-term, our success is from taking market share every day. The economy is going to do in the short-term what the economy is going to do. We have a healthy business. We generate more cash flow in a year like this. We would rather be deploying the cash flow into the business. But in the year like this, maybe we will return at more to shareholders. But it’s the case of focusing on the long-term opportunity of the business, and I am as excited as ever. With that, it’s on the hour. Thanks for your interest in Fastenal today. Everybody, have a great April. Thanks everyone.

This will conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.