Greetings, and welcome to the Fastenal Company’s 2021 First Quarter Earnings Results Conference. 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 your host Ms. Ellen Stolts of Fastenal. Thank you. Please go ahead.

Welcome to the Fastenal Company 2021 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 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 being 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’ homepage, investor.fastenal.com. A replay of the webcast will be available on the website until June 1, 2021 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, Ellen, and good morning, everybody, and thank you for joining us for our Q1 earnings call. I will take you to -- we have our Annual Meeting a week from Saturday and because of that and too much -- most people’s great satisfaction, I will not tell a story this morning and we will get right into the quarter. If I go to page three of the flipbook, but rest assured, if you participate in our Annual Meeting next weekend, I will tell a story or two. If I go to page three of our flipbook, so our earnings -- diluted earnings per share were $0.37 in the quarter, an increase of 3.7%. Net sales were up 3.7% as well, on a daily basis, they were up 5.3%. Some things stand out for me when I think of this quarter, obviously, we had the storms in February and a massive storm, much more than we have seen in years past, but winter is like that. It has storms and it impacts our numbers. Probably the most meaningful impact though and larger than the storms was the fact that we had one less calendar day, 63 versus 64, I believe. And that might not seem like a big deal in the scheme of life, but we do about $23 million a day and that day we missed. Most of our expenses center on the month, whether it’s rent or payroll or things like that, they center on a period of time. And so most of our expenses are still here despite the fact that we have one less day. So if I assume $0.30 to $0.40 of that $1 lost in that day, would flow to the bottom line. That’s about a $7 million to $9 million impact to the quarter and so can have a very meaningful impact. I point that out only because Q4 has a similar anomaly. 2021 is a weird year. We lose two business days, one in the first quarter and one in the fourth, and I point that out just to make sure we are aware of that. But very impressed with what our team is doing to manage expenses and to grow the business in this environment. Additional item in the quarter, we wrote down about $8 million worth of 3-ply masks. Now 3-ply masks is not historically a product line or a product we sell much within Fastenal. As Holden mentioned in the release, from April of 2020 to March of 2021, we sold roughly $110 million worth of 3-ply masks. So it was about 2% of our sales over the last 12 months. That’s a sign of the pandemic. And what we did as a supply chain partner in the marketplace is we went out last spring and locked up supply. We were willing to spend dollars to buy a sizable amount of inventory. We knew it was a risky venture going into it. But we felt it was the right thing to do for our customers, for our employees, and quite frankly, being in a strong position, we felt would also serve society quite well. And if I had a do over, I’d do it again. I think it was a great decision. Our team did a great job. But I think it also demonstrated to our customers and to potential customers what we are about as a supply chain partner and we are willing to do things like that in this type of environment. So not only did we have the operational capability to handle it, we have the financial capability to do it and we have the sense of prioritization to also do it. It requires all three and so I am really impressed with the team. I have to say earlier this morning, I chuckled out reading through, I think, Adam Uhlman and Dave Manthey sent out reports earlier this morning. And I really had a kick out of Dave Manthey’s. I believe it was bullet number three, where he commented, while FAST does not report adjusted anything, core gross margin, he went on to explain the impact of the $8 million. You are absolutely correct. We do not report adjusted anything. We are not an acquisitive company. We are not a manufacturer that’s leveraging and talking about EBITDA. We are a distributor. And I don’t think distributors in our position should be doing that and I am really proud of what we have done and with how it positions us going forward. I also think the write-down of inventory. It’s still great inventory. The write-down of inventory is one of the most -- is one of the bullish -- most bullish comments we could make as an organization, internally and externally because we believe the market is going to change for masks in the months to come. Because we believe the economy is healing and that’s showing up, as you see in our next bullet, when we talk about FAST in our daily growth. So we grew about 4% in the first quarter, but it was 14% in March. Now before you get too excited about that number, that is a bit of a comp issue as well. So I think sequential has a lot more to tell the story. Just like we saw a decade ago in 2009, sequential was what it’s about. January to March, our sequential fasteners grew -- sequentially our fasteners grew 7.1%. If I go back to -- ignore 2020 and go back to the years before that, 2015, 2019, on average, we grew 4.9%. That’s a sign of the strength in the economy and that’s what led us to write-down the masks, because we see the market changing, and we saw very good sequential patterns in our manufacturing, particularly in our heavy manufacturing end markets. We also mentioned in the release that we are seeing increasing supply chain pressure. I don’t think that should come as a surprise to anybody. I suspect everybody regardless of where you live on the planet, saw that ship in the Suez Canal sitting cockeyed for about five days, six days -- I think almost five days. That’s merely a very visual thing that we are seeing in ports around North America. We are seeing in ports around the world and there’s a lot of constraint. And constraint and rising activity create one thing and that is inflationary pressures and we are seeing that. Pretty nominal impact to the first quarter, we do anticipate seeing a larger impact as we move into Q2 and Q3. As we saw in much of 2020 and it’s continued in 2021, the team, whether that be our local team, our district and regional leadership, our finance teams, did a wonderful job managing working capital and as a result, very, very strong cash flow performance. Flipping on to page four, while we are not back to pre-pandemic signings, we saw improvement in the signings of Onsites and we signed 68 in the quarter. Again, that’s our highest number since pandemic began. We ended the quarter with 1,285 active sites, an increase of 9% over last year. The daily sales in that Onsites business grew mid-to-high single digits. And the only problematic area, if you will, in the quarter is, A, the level of signings, which is improving. But also the older Onsites are still sluggish and that’s really a reflection of that underlying customer base, but the momentum is improving as we went through the quarter. Holden did soften a bit, the signings and that’s more of a function of the current environment we operate in, has nothing to say about the long-term opportunity we see in this piece of our business. We are very excited about the Onsite business. FMI, and hopefully, you have gotten -- you have adjusted to some of the new reporting that Holden has, I will let him dig into that in a little more detail. I think he did a nice job explaining it in the release. I think he did a nice job explaining it in our annual report. With the acquisition of the Apex Technologies a year ago. And with additional pieces that our team has built, FMI has moved beyond being strictly vending to a much wider swath of business. We are really excited about that. Like Onsite, FMI requires strong engagement with the customer. It also requires going into customer’s facilities. One thing that surprised me probably more in the last 12 months of anything is the willingness of customers to continue signing Onsites, the continue signing -- vending even at a lower level in an environment where you wanted to kind of lock up your facility and keep it safe for your employees. We have been -- during this entire timeframe, we have been welcomed in the customers’ facilities to replenish bins, to replenish line stocking, to replenish vending and we are seeing that open up more and more each and every day. Flipping to e-commerce, e-commerce daily sales rose 35% in the quarter. Our large customer-oriented EDI was up almost 38% and our web sales were up 29%. With that, I will switch it over to Holden.

Great. Thank you, Dan. Starting on Slide 5 of the flipbook, total and daily sales were up 3.7% and 5.3%, respectively, in the first quarter of 2021. The severe storms that affected the U.S. in February reduced growth in the quarter by 50 basis points to 100 basis points. Demand improved for our traditional manufacturing and construction customers. For instance, manufacturing is up 5.6% in the first quarter, but accelerated to up 10.8% in March. Construction was down 7.5% in the first quarter, but improved to flat in March. Fasteners are a great bellwether of activity, and as Dan noted, the rate of change between January and March of 2021 well exceeded the typical pattern. We saw similar patterns in vended safety products and total and heavy manufacturing industries. So, yes, comparisons began to ease in March, but even so, it’s clear that underlying demand growth is improving at an accelerating pace as well. Now the counterbalance to gains in our traditional business is moderating demand for COVID-related products. Daily sales of safety products were up 14.7% in the first quarter of 2021, but that slowed up 3.2% in March. We have seen daily sales of non-vended respirators and gloves, which were heavily pandemic-oriented ease over the past few months. Daily sales to government customers were up 37.3% in the first quarter of 2021, but that slowed up 14.5% in March. This pattern will become more pronounced in the second quarter of 2021, given the absence of surge sales that we had in the second quarter last year. Our long-term goal, however, is to retain customers that engaged with us for the first time during the pandemic. Along those lines, 26% of the customers who bought PPE from us for the first time in the second quarter last year continued to buy from us in the first quarter, contributing more than $60 million in sales. The primary area that is still being restrained by COVID-related accommodations, are growth driver signings, as Dan discussed earlier. We do not believe market receptivity to our growth drivers has changed. As access to facilities and key decision makers continues to improve as it did in the first quarter, we believe signings activity will as well. When we look at the second quarter of 2021, we see quarterly growth that is flat to slightly down. As you know, we do not traditionally provide forward guidance. However, given the convergence of accelerating demand in our traditional markets, share gains and safety and the absence of $350 million to $360 million in surge sales, we just felt some perspective on an unusual comparison would be useful. Now over to Slide 6. Gross margin was 45.4% in the first quarter of 2021, down 120 basis points versus the first quarter of 2020. Roughly half of this decline related to the mask write-down addressed earlier. The remainder is split between customer mix and lower product margins in fasteners and safety. For fasteners, lower margin OEMs growing faster than other categories, which is likely to continue. However, pressure related to a couple of large customer implementations and from spot buys to manage the tight supply chains should ease in the second and third quarters of 2021. In safety, PPE sales to government remain meaningful and carry lower margins. While the margin on this business may remain lower, likely improvement in the non-government mix in upcoming quarters relative to the first quarter should benefit the overall product margin. The decline in gross margin was matched by 120 basis points of SG&A leverage, producing an operating margin in the first quarter of 2021 of 19.8%, flat with the prior year. Excluding the write-down, it would have leveraged nicely in the first quarter of 2021. This leverage continues to be a function of good control of headcount, branch reductions, lower selling-related transportation expenses and reduction of discretionary spend such as travel and supplies. Our incremental margin was 18%, but excluding the write-down would have been roughly 33%. The organization managed costs effectively in the first quarter of 2021 and we believe that will continue. However, remember that in the second quarter of 2021, the comparisons will get tougher as we anniversary the first period to have been affected by the pandemic and the related cost savings measures. At the same time, demand is improving, which will likely bring incremental investment to business. As a result, relative to the adjusted incremental margin of 33%, we would expect incremental margins to moderate in future quarters. Putting it all together, we reported first quarter 2021 EPS of $0.37, up 3.7% from $0.35 in the first quarter of 2020. Now turning to Slide 7. Operating cash flow of $275 million in the first quarter of 2021 was 131% of net income. Year-over-year accounts receivable was up 2.1%, while inventories were down 3%. Sequentially, our working capital expanded more slowly than is historically typical. This is due in part to improving receivables quality, lower branch count and initiatives to improve the flow of our internal logistics, reduce slow moving product and make local inventory more efficient. We believe these represent improvements in our working capital that will be sustained. However, less welcome was tightening global supply chains, which contributed to our hubs having about $15 million less in inventory on hand than we had intended. Net capital spending in the first quarter of 2021 was $30 million, down from $47 million in the first quarter of 2020. This was largely from lower vending spend, which was a product of lower signings over the past 12 months and better device costs stemming from the app -- from the Apex asset acquisition. Our 2021 net capital spending range is unchanged between $170 million to $200 million. We returned cash to shareholders in the quarter in the form of $161 million in dividends. And from a liquidity standpoint, we finished the first quarter of 2021 with net debt at 2.2% of total capital, down from 9.5% in the year ago period and 5.1% versus the fourth quarter of 2020. Essentially all of our revolver remains available for use. Now before moving into Q&A, I wanted to address a couple of subjects of current interest. First, we are experiencing significant material cost inflation, particularly for steel, fuel and transportation costs. This did not have a material impact on the first quarter of 2021. Price contributed 60 basis points to 90 basis points to growth and the impact of price cost on margin was immaterial. However, we are instituting broad and material pricing actions in the second quarter of 2021 that will likely lift pricing contribution over the course of the year. Customers never like higher prices of course, but they are busy in seeing increases throughout the supply chain. Further, the tools and processes we have developed, including data for our customers has never been more effective. The environment today is receptive. Second, we are also impacted by tightening global and domestic supply chains. On the sales side, certain of our customers are not operating as fully as they could be due to shortage of components. On the cost and service side, moving product has become increasingly costly and lead times have lengthened, causing product shortages in our hubs. These shortages have been overcome with spot buys made in the field that have allowed us to sustain service but at lower margins. We believe this dynamic could persist through 2021, though perhaps not quite as intensely in the second half as we are experiencing currently. That is all for our formal presentation. So with that, operator, we will take questions.

We have one other comment. Before we switch over to Q&A. In the last several quarters, I have shared with you our employee COVID numbers and I neglected to mention that earlier and I just wanted to run through these with you. So since the start of COVID-19, we have had 1,685 cases within the Fastenal Blue Team family. With just over 20,000 employees, that’s roughly 8.5% of our employees contracted COVID. I consider that a low number when you look at the fact that unlike many organizations, our employees didn’t have the luxury of being able to work out of a room in their basement or home office. Our employees go to work every day and work in a manufacturing facility, a distribution center, work in a branch or Onsite location or drive a truck, and so they are actively engaged with customers in their environment. If I look at the peak, our peak period was November of 2020. We had 430 cases or roughly 86 per week. To give you a contrast, in March of 2021, we had 102 cases or 26 per week, a drop of 70%. We think that is a sign of what’s happening in the underlying marketplace and makes us bullish as we look out into 2021. We will switch over to Q&A now, please.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Jake Levinson of Melius Research. Please go ahead.

Good morning, everyone.

Good morning.

Good morning.

Just wanted to -- I know, Holden, you touched on pricing a little bit in the quarter, but maybe you can just give us a sense of what the pricing environment looks like more broadly? And if you can put a finer point on what you are expecting for either the next couple of quarters or the year?

Yeah. I mean, I think, the way we described it was simply an environment where you are seeing an increase in costs around transportation. You are seeing it in steel. You are seeing it in fuel and that ultimately goes through plastics. So, I think, in general, we are seeing an inflationary environment and I suspect that that doesn’t surprise anybody. It also shouldn’t surprise anybody, I believe, that we are going to react to that a number of ways, but a part of that is going to involve pricing behavior. And so in the second quarter, we are going to have to institute some price increases as a means of mitigating things. So when I talked about the 60 basis points to 90 basis points of impact from price in the first quarter, I do expect that to be higher as we get into the second half of this year. Now will it be outside of our normal sort of 0% to 2% range? No. I don’t think it will be. I don’t think it’s anything of that order of magnitude and I think that our objectives remain the same. And that is to neutralize the impact on our margin and essentially stay even within the marketplace and I think those are our goals. But in order to do that, obviously, we will have to take actions, given where the market is today. I guess the good news, maybe let us call it the news is that right now our customers are really busy. Our customers are seeing these types of actions from a lot of different quarters and so there’s always a conversation. This is an environment where inevitably customers for -- within these supply chains start wondering if there’s other places that they could get a better piece price and that’s the kind of thing that happens in the marketplace and during periods of inflation. But we are not seeing anything unusual or different in the marketplace in terms of an inflationary environment than I think we have experienced in the past, and we expect to be able to manage through it.

That’s helpful color. Thanks. And maybe just as a follow-up and I know, obviously, there’s some pretty well-publicized supply chain challenges out there. But has it changed how you guys are thinking about working capital, or is there -- are you carrying extra buffer inventory or anything like that to kind of manage through the speed bumps, if you will?

You know what, here’s I’d say about that. If we could -- we were probably $15 million, maybe a little bit more light in the hubs versus what we would have expected to be going into the quarter. And the reason for that is because we simply couldn’t move product from where it was into our hubs as quickly as demand began to accelerate. And so to the question of, are we carrying a bunch of buffer inventory? No, I wouldn’t say that we are carrying a bunch of buffer inventory. I am not sure there’s a lot of buffer inventory in the channel. But what I think is impressive about what our field does is, culturally, we have always empowered individuals in our business units to make very independent decisions. And this is not the first time that they have been called upon to go out and source product where we haven’t been able to provide it out of the hub in certain cases. And when I sort of send out the survey to the RVPs, one of the comments that came through loud and clear is, whatever supply chain disruptions are happening at the customer level, it’s not because we aren’t getting them product. We are managing to source product locally in the field and we are continuing to keep up with things. But it does involve a lot more effort and time sourcing that product. But I think that’s one of the strengths of the organization. And so supply chain is not unique to Fastenal in terms of the tightness that’s out there, but I think we are uniquely structured to manage it and navigate it. I think we saw that in Q1 and I think that’s good for a -- in terms of market share gains over time. It does have a little bit of a margin impact, right? I mean, sourcing outside our supply chain isn’t quite as profitable as sourcing within it and you saw some of that in the fastener line. But as we normalize the supply chain as you go through the year, to the extent we can, I think, you will see that effect moderate.

I will just add a comment and that is when I think of environments like this historically, I -- as many of you know, I have a financial background. So being at an organization that has months of inventory on hand because of our network and how we operate while it’s an expensive way to operate, it’s also an incredibly resilient way to operate. I think that shined through in 2020. I think that has shined through in the years past when there’s a little bit of chaos going on in the supply chain. It allows us to be a little bit more agile because we do have some inventory on the shelf. What we are really seeing in changes is and I mentioned it to our own employees on an internal video. Historically, our supply chain team might be pinging branches with reorder points that are 90 days out, 100 days out, 110 days out. What our supply chain teams are doing, we are going out even further. We are going out into August and September and we are pinging folks and saying, hey, we might want to order this now. We might want to do some things now, get it in motion now because there are some disruptions. We want to be in queue for product. One thing that has historically helped us for being in queue for product, we are an organization that is known in the industry for being incredibly responsive to paying its bills. We have a strong cash position. We can move faster than anybody else as a result and that positions us well. And history has told, being in environments like this. I believe it tips to scale towards Fastenal a bit on its ability to take market share, because we will have inventory, we will have opportunities and abilities to move in the marketplace that some of our competitors won’t. And I am primarily talking about a lot of the more local competitors as opposed to some of the national players.

That’s helpful. Thank you, guys. I will pass it on.

Thank you.

Thank you. Our next question is coming from Chris Snyder of UBS. Please go ahead.

Thank you. I guess starting with the $8 million PPE inventory write-down. Does this clear the decks, so to speak, or is there a risk of additional write-downs in Q2, and then, could you maybe just help frame how you think about the gross margin trajectory as you move past that?

No. It doesn’t clear the decks. The fact is, it’s still a good product and it’s still moving. The only difference in the market is that the value of it relative to when we purchased it is lower today than it was and that’s just about market dynamics. So a full write-off of that wouldn’t have been appropriate or frankly necessary. So that’s probably how I’d characterize that.

Only thing I would have to add is, masks were -- the 3-ply mask was a unique item for us. There aren’t other products that are like that and where we went out and bought that kind of supply. And so from that standpoint, we have priced this now where it can more easily sell in the marketplace. Our local teams are motivated to grow their business and grow it profitably if we have expensive inventory itself and that could spend a lot of time trying to sell it and we want that inventory to turn.

So I think your question was, in part, is there a risk of another write-down? I mean, the product that’s on the shelf is good product for the next 15 months and the expectation is that, we will be able to sell what’s remaining on our shelves over the course of that 15-month period.

Appreciate that. And then, I guess, following up on the comments on supply chain disruption. If you look back to the Q2 2020 supply chain disruption, Fastenal seemingly took pretty material share with customers leaning on their -- the biggest suppliers. Are you seeing a similar dynamic in the current market with the port delays and whatnot?

Well, we think that that potential is there. I would say the supply chain issues, pricing issues, those are more sort of run of the mill issues within distribution historically, whereas what occurred last year was generally unique and intense, right? So, I mean, on an order of magnitude, do I think that you are going to see $350 million to $360 million of sales that you wouldn’t have otherwise in this current environment? No, nothing of that sort. But going back to what, Dan and I talked about a moment ago, the ability of our people in the field to be able to go out and find product independently to fill in gaps that we may have as our traditional supply chain is perhaps a little tight. I think that, that is an advantage to our business. It was an advantage last year, as Dan talked about. I mean, a lot of the customers that we source and things like that, there was a local element to that. I think it will be an advantage this year just because right now what our customers are concerned about as demand goes up is having a product available and the flexibility in our business and in our model. I think that’s going to provide us an advantage when making sure that service levels remain high and availability remains high, that I think it’s going to give us market share. But I wouldn’t expect anything so intense as what you saw last year at this time.

I appreciate that.

Thank you.

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

Hi. Good morning, guys.

Hi, Dave.

Good morning.

First off, I -- pre-pandemic in, say, 2019, I believe safety was running about 17%, 18% of your mix. I am just wondering how you are thinking about where that mix percentage bottoms out, would it be reasonable to expect 18%, 19% in the second half and then resuming the secular incremental uptick from there? Or does the glide path from pandemic products and the cyclical recovery and the sort of shop floor personal protection stuff cause the safety mix to bottom closer to 20% or so?

Yeah. This is a guess, Dave, and I would be surprised to see it drop below 20%. And because there’s a group of customers that are now safety customers, there’s a group of customers that are expanded safety customers. And I have to believe as, even in the balance of 2021, I think, there’s going to be a lot thing, a lot of habits that formed that will continue as we go through the year and I will speak to firsthand knowledge of what some things we are doing. So roughly, 93%, 94% of our employees can’t work remotely, I mentioned that earlier. Around 6% of our employees can work remotely, because they are in supporting roles. And we did ask -- strongly asked a lot of those folks to go home a year ago, because we wanted to create a safer environment for everybody else, the people that had to be here. We have folks that are coming back and we are doing a lot of things as far as putting up partitions and different things that we didn’t do over the last 12 months, because it wasn’t necessary because the rooms were empty. But we are putting up Plexiglas barriers and we are putting in a lot of sanitizing stuff, because people are returning to work. That’s going to create a core demand. But I’d be surprised to see a drop below 20%, and if it does, it’s because everything else grew faster than I am expecting.

And maybe to put some numbers to that for you as well, Dave. The -- in the first quarter, we generated a little over $60 million in revenues from customers that had not purchased PPE from us prior to the second quarter of last year and that amounts to a little over 1% of our sales. And I think that amounts to market share gains. And so when you think about where we were before and you think about those types of customers now being a part of our mix and contributing more than 1% to our -- to share, I think, that Dan’s right. We have always sort of thought 2021, 22% is probably where this settles out and I think that, that’s still right.

Okay. Thank you for that. And second, could you discuss the general economics of bin stock compared to vending Onsite in terms of gross and operating margins, return on capital?

Well, the capital -- the cost of the device is much different. It’s -- what essentially – I mean, and I will talk to the RFID, because that’s our -- that’s the biggest piece of it, at least it is currently. We will see if the IR beams within MRO bins, how big that becomes relative to it. But what it really is, is think of a Kanban system. And in that Kanban system, right now what you have is somebody has to physically go out and observe empty bins or gather the empty bins. What really changes in an RFID environment is, when that bin is empty, there’s a -- think of it as a set of shelves and up above, there’s this open box and you put the bin up there and there’s an RFID tag that reads it and it tells our branch. It actually tells our supply chain team, we need to replenish this bin. And so, the biggest thing is the labor efficiency, but it also allows us to illuminate much more of the supply chain for the customer, so they can really see it and can operate a little bit leaner and we can reduce the inventory. I believe the inventory lean-up for our customer will fund the capital it takes for the actual devices because the only thing that’s really changing is the technology enablement. The bins are the bins, they were there before. You have an RFID tag on them. So the capital piece is relatively modest, except for the actual communication talking, but the economics are better than bedding. And the real reason is, it becomes much more labor efficient to serve that business in the marketplace.

Perfect. Thank you.

Thanks.

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

Hey, thanks. Good morning, everyone.

Hi, Ryan.

So, I guess, first question for Holden. Can you just update us on how to think about gross margins this year, just given the new headwinds on fasteners that you discussed? I think prior, Holden, you thought gross margins could be up slightly year-over-year in 2021, is that still the case or do we need to rethink that?

No, I don’t think there’s any need to rethink it. Again, we are taking actions to try to mitigate some of the pressures that we are seeing. I think the guidance that -- guidance is probably a strong word. But I think the suggestion that I made coming out of Q -- coming out of the last quarterly discussion was that, yeah, I expect gross margin to be up a little bit this quarter -- this year and - but we are probably talking about 50 basis points or less. The flip side of that is SG&A leverage will come up against the difficult comps of last year. And I would expect there to be marginal leverage on SG&A when you think about the comps and things of that nature. And then ultimately, what that translates into is an incremental margin for the year that’s kind of in the 20% to 25% range. And I think that was kind of what we discussed last quarter’s call, and honestly, I don’t think anything about that has changed.

Okay. That’s helpful. So it sounds like the increased headwinds on margins that you talked about because of the fill-in and the spot buy, that doesn’t sound like that’s meaningful.

Well, I mean, fill-in buys -- no, it’s not meaning -- we are not talking about tens and tens of basis points here. It’s relatively small at this point. And again, we do believe that over the course of the year, we will smooth out the supply chain a bit, and of course, we will be taking pricing actions to mitigate some of those pressures as well, right? So, no, I don’t think that those are major matters.

Okay.

This assumes that we execute…

Very helpful.

…this assumes we execute the strategy as well, right?

Right. Okay. That’s helpful. I will pass it on. Thanks.

Thanks.

Thanks, Ryan.

Thank you. Our next question is coming from Adam Uhlman of Cleveland Research. Please go ahead.

Hi, guys. Good morning.

Hi, Adam.

Hey. I was wondering if we could go back to the discussion about the Onsite signings. Could you maybe expand on what you are seeing in the negotiations that led you to reduce the full year signings outlook? I guess, I wouldn’t have thought that the first half would have had big expectations for signings, maybe more of like a second half recovery, and then February, it was probably impacted by weather. I am just wondering what exactly you are hearing from your field guys there?

Sure. So, if you recall, last quarter what we said is, we talked about a $375 million to $400 million, because we wanted to convey to people that we believe that’s what the market can support and we continue to believe that’s what the market can support. But we also said at the time that business conditions would have to meaningfully improve in order for us to achieve that. And whereas I do believe that business conditions have improved, they haven’t normalized to where they were pre pandemic at this point, and the fact is in Q1, we landed $68 million. And so to be on the type of pace that we would have to do to do closer to 400, given that we have booked 68 in quarter one, it just seems like a stretch. When the conditions haven’t fully normalized from where we were before, right? That’s the one area that I believe is still being affected by COVID-related accommodations. So, given that, I think that it was worth -- I mean, I think, we sort of, I think, gave indication that this seemed like a high potential scenario when we talked last quarter and it just seemed like a prudent thing to do. Now note, we have kind of said the same thing about FMI this quarter, right? We believe that the market can support 23,000 to 25,000 weighted FMI devices. But we are going to need to see the activity levels continue to improve even from where it was Q1 to get there. Right now we are probably pacing a little bit low. But I think the important thing to just reiterate is, I don’t think this has anything to do with the receptivity of the tools that we are providing in the marketplace. I don’t believe that there’s any belief on the part of our organization that we can’t achieve those levels. But the environment is still normalizing. It’s not there yet, and as a result, we may come in a little bit shorter, but the trend line is up.

Yeah. I am going to comment on…

Okay.

…and Holden can be mad at me for this, Adam. When I was reading through Holden’s flipbook, I saw that he had put in that sentence about the 300 to 350 range. There are certain times I go into Holden and I tell him my discrete with them and certain times I tell them I agree with them. So this is one where I don’t know that I agree with him. He’s probably right. But I don’t know if I agree with him. And that is, I think, if you look at first quarter, I believe 29 of our 68 signings were in the month of March. So it did tick up as we went through the quarter. Now that’s not an unusual pattern because January is usually tentative and February was weaker because of the storm, as you mentioned. I think the risk of signings this year is more about customers really being busy and they just can’t think about it right now. They just can’t do it right now. And I think that’s the risk of it not getting to that 100 per quarter pace. And that’s the only reason I didn’t ask Holden to remove that sentence from both the earnings release and the flipbook. Otherwise, I’d ask him to remove it because I think the model is great, I think the market is receptive to it and I think we could ramp up faster. But there is that one risk that people are too busy to let it happen because change always takes energy and where do you want to prioritize your energy. But I am not completely in agreement with Holden on this one. But he’s -- if I were a betting person, he’s probably more right. But my message to our team internally is there’s no reason why in the second half of the year, we shouldn’t be at 100 a quarter. And the question is, can we get there in the month of - or in the second quarter and I will happily be wrong.

Okay. Gotcha. Thanks. That’s very helpful. And then, secondly, back to the inventory discussion, I understand it’s been difficult to get inventories into the DCs. I guess, how much do you think inventories need to increase this year to support the growth that you expect, realizing that you have some other internal initiatives going on?

Well, I know in Q1, obviously, we talked about the hubs being down $15 million-plus versus what we would have expected. And we need more product to make its way across. And as it does, I would expect the hub inventories to rise. I am not sure that we have necessarily put a number to that and I think a lot of it’s going to depend on the degree to which demand continues to run the way that it is. So - but I do believe that we are light on inventory in the hubs. As inflation continues to run through, I think, that will put some upward pressure on values of inventory as well. So I am not sure I have a good answer for you in terms of what the ultimate number is. But that’s part of the answer to addressing what we are seeing in the supply chain and improving our service levels. But right now, we are a little bit low on inventory, we are a little bit low on fulfillment levels and we need to correct that. And in Q1, it would have required $15 million more and I think that builds a little bit as you get into Q2 and the supply chain pressures build. Now that will be offset to some degree with the work that we are doing internally to take out slow and no moving inventory. In terms of reducing the branch count, which the field continues to take some of the branches out, that makes sense to them. Those sort - I think, when we talk a little bit about the customer fulfillment center, which is a form of branch, which has much more customized and tailored inventory, those are all initiatives that I think are very sustainable. We will continue to mitigate the effects of supply chain over the course of the year. But right now, our inventory would be better off in having a little bit more in it than it does and that’s going to motivate our work on improving the supply chain.

Just the one thing I had is…

Okay. Thank you.

…is just keep things in context, the $15 million that Holden cites, that’s about a day’s worth of inventory. So it’s a number. You’ve helped -- disclosing it was helpful. But in the context of things, we are blessed with an incredible supply chain and incredible resiliency as far as where the intake point is for inventory. The question is always the price point, but it’s a day’s worth of inventory.

Thank you. Our next question is coming from Josh Pokrzywinski of Morgan Stanley. Please go ahead.

Hey, good morning, guys.

Hi, Josh.

Good morning.

Just back to -- good morning. Just back to, I think, Ryan’s earlier question, just to level set us on some of those gross margin considerations that you laid out last quarter. Holden, just with some of the dynamics that you talked about, which seem more acute in 2Q, particularly on like mix, price/cost, maybe some of those still in buys still having to persist for a while. Should we think of that as maybe fair for the year, but a bit more of a second half dynamic than what you were considering before? I know that’s putting a pretty fine point on it, but just trying to sense like if there was some shift in the timing underneath that expectation, if not the total year number?

No, I don’t think so. I am still trying to think through the question a little bit. I mean, we all know that we have a relatively easy comp on gross margin in 2Q. And so I haven’t really tried to think about it in terms of year-over-year rate of change. I think if you take the first quarter gross margin, you adjust for the write-down, which is our intention is that, that will be focused on 1Q 2021 and be done. Adjust for that, you are looking at a first quarter margin about 45.9%. If I move over to 2Q, normally, second quarter would see a little bit of a decline sequentially from Q1. I think that, that could come in somewhere around flattish and part of the reason is the mix that you are talking about. Interestingly enough, right now, the fastener/non-fastener mix is normalizing faster than the Onsite/non-Onsite mixes. And so that actually moderated the impact of mix in Q1 and we will see how that plays out in Q2. But it’s possible that could be a little bit moderate as well and I think that contributes to that. And of course, assuming we are effective on pricing that can contribute as well. So when I think about the second quarter gross margins, I think, it gets really messy to think about it year-over-year when we can kind of think about sequential patterns and try to run off of that. And I guess, I think -- when I think about Q2, instead of thinking about it in terms of the normal 20-basis-point decline, I think, that that could actually run a little bit more flattish and that would obviously be a meaningful increase year-over-year, but that’s just a comp issue. That help?

Got it. That’s helpful perspective. Yes. That helps a lot. And then, I guess, sort of related to the supply chain tightness that Dan had talked about. Understanding there was a pretty big step-up in activity sequentially into March, presumably that that continues just as things reopen on the fastener side. I know growth isn’t really homogenous, it can come anywhere. But are there limits to being able to grow here in the short-term, so you talked about kind of flattish to maybe down a little bit in 2Q? But if everything went your way, is there really capacity to grow a lot faster, I mean, I guess, I am thinking back to some of the weather interruptions in 2Q and those customers not being able to make up days immediately. Is that something that’s sort of governed on the upside here, at least in the short-term until some of the supply chain stuff works out?

When I think of limit to growth, I think of demand, I do not think of supply. When you talked about in February, there was a number of things that caused problems. One was you had plants down there with no power for -- our distribution center in Dallas was shut down for five days because we didn’t have electricity. And so you had a lot of examples where -- I grew up in the North, I grew up in Wisconsin, so I realize that when temperatures get into the single digits, things freeze and you saw a lot of that. You had good plants that where there was no electricity and they weren’t operating and you had pipes freezing. You had hundreds and thousands of feet of pipes being replaced in a lot of facilities because they froze and they broke. And so the issue was one of the no power and then damage from the environment or no natural gas and essentially no energy to operate. That’s a different scenario than what we are describing here. Our limiting factor is demand and our ability to find more customers every day that want to use us as a supply chain partner.

Yeah.

Got it.

And on some level as well…

Appreciate it.

Yeah. I mean, on some level as well, I mean, there are industries out there. I think the RVPs that are affected by auto talk about some lines shutting down because of availability of chips and things like that. So you might be referring to that as well. But you would know as well as we do what industries are having issues because of products that aren’t related to our products. Our objective is to make sure that when a customer needs something that we can supply that we can get that, we’ve been effective doing that. We can’t control the chip supply chain or how that might flow through.

Got it. Appreciate it. Thanks, guys.

Sure.

Thank you. Our next question is coming from Kevin Marek of Deutsche Bank. Please go ahead.

Hi. Good morning.

Good morning.

I think a lot has been said already, but just going back to the point made about market share gains, I know you called out, I think, it was like 26% of accounts that were first-time PPE buyers have reordered at this point. Is there anything you would add about gains made outside of PPE and maybe how share gains in core areas have shaped up over this pandemic period?

Yeah, I mean, there’s -- unfortunately, there’s no industry resource that tallies up how all the distributors do and gives anything definitive on that. So, I think, that we had an interesting picture provided to us around safety and the pandemic and new customers and things like that. But new customer acquisition is not usually so dramatic as what you saw during that period of time. So I think it’s really difficult to say. What I would say is we continue to grow as a business. And I think if you look at industrial production and things of that nature, I don’t think that you are seeing that grow. There are some surveys that are done out there. And certainly through February, those surveys were still pointing to distribution being negative. Industrial production was still slightly negative. We were growing. So, I think, those are the ways that I usually look at it to judge or understand the degree to which we are gaining market share. Historically, we have outgrown our industry. Historically, we have outgrown industrial production. I think that that continued through Q1. I think the numbers are out there for you to evaluate and I think we will continue to do that.

Got it. No, that makes sense. Maybe just as a quick follow-up kind of following up on a prior question, I am wondering if you could talk about the trends through the quarter maybe by market, just thinking about manufacturing versus construction within March. It looks like results maybe, manufacturing seeing more acceleration versus construction or improvement, maybe just directly kind of comp-related. Is there any color you can provide to delineate kind of trends between the two?

Well, I don’t know, I mean, if you look at the construction business, and interestingly, this has been one that in recent months, the RVPs have been talking about it getting better and better, and the numbers really didn’t move and so it’s nice to see them begin to move. But I mean, if you look at construction, in January, construction was down 9% and February was down 14.5% and in March, it was flat. And so that marks fairly significant improvement. Now, you are right, the comps got easier. But I mean, that’s true within manufacturing, which caused it to go from up 5% to up 1% to up 11%, right? So the comps are going to play a role. But the RVPs have been reporting for the last several months that the construction -- the tone of the construction market was getting better and there has been a bit of a lag to that. But it feels to me like both of those end markets are improving versus where they have been.

Got it. Thanks very much.

Sure.

So it is five minutes to the hour and I guess we will wrap up to Q&A. And I just want to thank everybody for listening in today and thanks for your support of the Fastenal Blue Team. Take care now.

Thanks.

Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines or log off the webcast at this time and have a wonderful day.