Fastenal (FAST) Q1 2026 Earnings Call Transcript

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DATE

Monday, April 13, 2026 at 10 a.m. ET

CALL PARTICIPANTS

• President & Chief Sales Officer — Jeffery Watts
• Chief Financial Officer — Max Poneglyph
• Chief Executive Officer — Dan Florness

TAKEAWAYS

• Daily Sales Growth -- 12.4% daily sales growth, marking the third consecutive quarter of double-digit expansion, with daily sales reaching $34.9 million.
• Contract Growth -- Total contract count increased nearly 8% to just over 3,600 contracts, with approximately 75% of total sales from contract customers.
• Large Customer Sites -- Customer sites spending over $50,000 per month rose 16.3% to just over 2,900; average monthly sales per site increased by $5,700, and these large sites now represent slightly more than 50% of total sales with 21% revenue growth.
• International Sales Expansion -- International sales, primarily in Europe and Asia, grew nearly 24% in March, contributing to increased global momentum.
• Digital Sales Mix -- Digital footprint daily sales increased 13.6%, with digital channels accounting for 61.5% of total sales.
• FMI Technology Adoption -- Signed nearly 7,000 new Fastenal Managed Inventory (FMI) device agreements, an 8% annual increase, expanding the active device base by nearly 6% and driving almost 45% of quarterly sales through FMI.
• E-Business Penetration -- E-business daily sales advanced almost 7%, with electronic transactions now representing close to 30% of total sales.
• Operating Margin -- Operating margin improved to 20.3%, up 20 basis points from a year ago.
• SG&A Leverage -- SG&A declined to 24.3% of sales from 25% the previous year, reflecting improved expense management.
• Cash Flow -- Operating cash flow reached approximately $378 million, amounting to 111% of net income, with continued inventory efficiency gains.
• Capital Expenditures -- Net capital spending totaled about $58 million, with full-year CapEx expected at $320 million to support hub automation, FMI hardware, and IT infrastructure.
• Shareholder Returns -- Returned $296 million to shareholders via dividends and a small quantity of share repurchases, totaling 87% of net income.
• Return on Invested Capital (ROIC) -- ROIC increased by 180 basis points on a trailing twelve-month basis, reaching 31%.
• End Market Diversification -- Heavy manufacturing accounted for 44% of sales with mid-teens sales growth, and construction revenues increased 17%, while non-manufacturing end markets demonstrated improved demand.
• Gross Margin Pressure -- Gross margin was approximately 40 basis points below the company’s Q1 target and 50 basis points below last year, due to tariff-related cost increases outpacing pricing actions.

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RISKS

• Gross margin was "approximately 40 basis points below [the] own Q1 gross margin target, as pricing actions did not keep up with cost increases as the quarter played out," resulting in 50 basis points of margin compression year over year.
• Tariff-related costs moved through the P&L faster than pricing, resulting in being approximately 40 basis points short of the target, with ongoing uncertainty causing delayed customer pricing discussions and less pricing flexibility.
• Branded suppliers are being armed with examples of where a brand has raised the cost of their product by 6%, 7%, 8%. Maybe it is well defined, maybe it is a generic spread-across-everything type cost increase. Volatility in commodity-linked products, like nitrile gloves, has further pressured cost structures and complicated margin management.
• Q2 is expected to remain "challenging," with CEO Florness stating, “Q2 is challenging. Q1 was challenging. The message to teams is: here is what is happening, here is what we need to do. I believe this team will react, but Q2 will be challenging.”

SUMMARY

Fastenal (NASDAQ:FAST) highlighted disciplined execution, robust contract growth, and expanding digital adoption as primary contributors to top-line and operating margin improvement. Management underscored strong international momentum, significant penetration of FMI and e-business channels, and measurable SG&A leverage driving improved return on invested capital. Despite broad-based end market demand, persistent gross margin headwinds emerged from tariff-driven cost increases, pricing execution lags, and aggressive branded supplier actions, leading to an explicit caution for continued margin pressure in the coming quarter.

• Strategic investment in automation and IT remains elevated as the company targets $320 million in capital expenditures, with a run rate at the higher end of its long-term historical range to support scalability and efficiency gains.
• Share gain opportunities were emphasized, with non-manufacturing customers spending over $50,000 per month growing 25% and management citing increased success across a widening industry and geographic base.
• The capital allocation approach remains unchanged, with a focus on investing in the business where strong returns are identified, while returning excess cash to shareholders and maintaining a conservatively capitalized balance sheet.
• Implementation of pricing actions to recover margin losses is underway, though management declined to provide specific Q2 guidance, emphasizing the cumulative nature of planned 5% to 8% price increases and continued challenges around tariffs and supplier cost inflation.
• Digital strategy progress is reflected in 61.5% of sales through digital channels and nearly 45% of sales routed through FMI, with management reiterating intent to reach year-end digital adoption goals.

INDUSTRY GLOSSARY

• FMI (Fastenal Managed Inventory): A suite of supply chain solutions and automated inventory management devices marketed by Fastenal Company to integrate directly into customer operations for improved supply visibility, control, and efficiency.
• DSR (Daily Sales Run Rate): Average daily sales computed to normalize for differing numbers of business days in reporting periods, used to track momentum and growth trends.

Full Conference Call Transcript

Jeffery Watts: Good morning, everyone. Welcome to Fastenal Company's First Quarter 2026 Earnings Call. I am Jeffery Watts, President and Chief Sales Officer, and before diving into the results, I want to take a moment to thank our entire Fastenal Blue Team across the world for their exceptional work driving the strong performance you are going to hear about today. I also want to highlight a real success that just happened. It was our recent customer expo where we hosted over 3 thousand customers from around the globe, and the turnout and the engagement were just outstanding.

We showcased our latest solutions, FMI technology, and digital tools, but what really made it successful was the quality of conversations and the strategic partnerships that were being formed and strengthened. Events like these really demonstrate why we keep gaining market share. We help customers improve their efficiency and productivity, all while becoming a trusted partner. Overall, it was a great event and one of our best ones yet. Moving into the quarter, slide three. Q1 was a very strong quarter and a great start to the year. We delivered 12.4% daily sales growth, our third consecutive quarter of double-digit growth. Now, what is important is where this came from. The industrial economy remains somewhat challenging, with U.S.

Manufacturing PMI averaging around 52.6%, which is an improvement, but still moderate overall. We really did not see much of a tailwind. We gained share through focused execution. Largely, we won new business with key accounts, we expanded customer site presence, and we strengthened our value-added services and solutions. This performance was really powered by our three strategic drivers. The first is increasing sales effectiveness, and we are winning with key accounts and new contracts. We added a healthy number of new national account contracts in the quarter, keeping us on track for a goal of roughly 250 new signings this year.

Our total contract count grew by almost 8% year over year to just over 3.6 thousand contracts, and about 75% of our Q1 sales came from these customers, with whom we are deeply embedded today. When we look at our customer sites spending $50 thousand-plus per month, they increased 16.3% year over year to just over 2.9 thousand sites. At 21% revenue growth, these sites now account for just over half our total sales. Our approach to enhancing our services is aligned with our strategic commitment to addressing the specific needs of our larger customers rather than focusing on a one-size-fits-all approach.

By focusing more on our $10 thousands to $50 thousands-plus sites, it enables us to have greater direct integration within their facilities and deeper insights to deliver better solutions to fit their needs. This targeted focus really allows us to implement and deliver more tailored solutions to all of our customers regardless of their size. Think of it like a trickle-down effect. Smaller customers may not need all of our solutions, but they will be able to take advantage of the pieces where and when they need them. The impact of this approach can really be seen in our average monthly sales per our $50 thousand-plus sites.

Not only are we adding new sites, but we are selling more to them as we increased the average monthly sales by $5.7 thousand per site per month. Lastly, expanding our markets. Our international sales teams have become increasingly more aligned, and their growth continues to accelerate. In March, the international business, primarily Europe and Asia, grew almost 24%, and even though today they are a smaller piece of the pie, performance is exactly what we want to see as we continue to invest in our global expansion. After speaking with so many customers last week from different parts of the world, one thing is very clear.

Our solutions, our local presence, and our supply chains are definitely in high demand, and it is really why our growth internationally is so important to our future. Tying this all together financially, our daily sales increased 12.4% to $34.9 million per day for the quarter, and our operating margin improved to 20.3%, up 20 basis points from last year. Improvement was primarily the result of strong leverage of SG&A expenses, which I believe reflects our disciplined approach to managing costs even as we continue to invest in our strategic growth drivers. Now moving on to slide four.

In the first quarter, our digital initiatives continued to gain momentum with our digital footprint daily sales up 13.6%, outpacing overall company growth. As a result, digital channels represented 61.5% of the quarter’s sales, and we remain on track to reach our digital mix goals by the end of the year. We also accelerated the deployment of our FMI, or Fastenal Managed Inventory, technology. In the quarter, we signed close to 7 thousand new FMI device agreements, about 110 per day, an 8% increase over last year. This helped expand our active device base by nearly 6% and drove almost 45% of our Q1 sales through FMI, which is up 150 basis points over last year.

In short, more customers are using our on-site devices and solutions to manage inventory, which makes Fastenal Company a stickier and more efficient supply chain partner. Meanwhile, our e-business grew daily sales nicely, up almost 7% over last year. Electronic transactions account for close to 30% of our total sales, and we do anticipate digital adoption to continue to rise as more and more customers integrate their procurement systems with Fastenal Company. Our investments in technology are delivering measurable results. By expanding our digital footprint through FMI and e-commerce, we are winning new business and we are driving profitable growth.

I think our priorities here are very clear: we continue to invest in tools, technology, and analytics to drive operational excellence and deepen our customer relationships. The strength of our first quarter reflects our strategic focus. We are winning with large strategic customers, we are embedding ourselves deeper through technology and service, and we are doing it with financial discipline that drives both top-line growth and bottom-line leverage. With that, I will turn the call over to Max, who will walk through the financials in more detail. Max?

Max Poneglyph: Thank you, Jeff, and good morning, everyone. Overall, the quarter showed continuous progress against our strategy. We saw improving demand, solid execution across the business, and strong cash generation, even as the broader macro environment remains uneven and in some areas uncertain. I will start on the business trends and market drivers slide, slide five. During the first quarter, the industrial environment showed signs of stabilizing. U.S. PMI averaged about or above 52 for the quarter. Industrial production was slightly positive year over year in January and February. This lines up with the gradual improvement we began to see last year.

As Jeff mentioned, our daily sales growth trends on a quarterly basis improved to 12.4% for the quarter from just over 11% in the fourth quarter of last year, and we continue to outperform the market. This growth was driven by a combination of new customer wins, increased share of wallet with existing customers, and pricing. Importantly, the market was not concentrated in any single customer type or end market. Customer sentiment remained generally favorable throughout the quarter. While trade and tariff uncertainty continues to be part of the backdrop, most customers are viewing this uncertainty primarily as a cost and planning issue rather than a demand issue.

As a result, activity levels remained healthy and we continue to see solid engagement across our customer base. From an end market perspective, growth was broad based. Manufacturing activity remains solid, particularly in heavy manufacturing, which continues to benefit from our fastener expansion and momentum in key accounts. Heavy manufacturing represented 44% of total sales, and average daily sales growth in that segment was near the mid-teens, consistent with what we saw in the fourth quarter of last year. Construction saw 17% growth, marking a strong turnaround from previous quarters. This increase was widespread, with both large national contractors and regional firms benefiting, and activity rising across key metro areas, especially in markets with infrastructure and commercial development.

We also saw jumps from other non-manufacturing end markets, including transportation, warehousing, data centers, and other industrial services, as demand improved across a range of customer types. Across materials, both direct and indirect categories grew in the low to mid-teens. Direct materials slightly outpaced indirect, supported by higher fastener penetration, improved product availability, and pricing actions. Categories like hydraulics, pneumatics, welding and abrasives, and material handling also outperformed the company average, reflecting improving underlying activity levels. Overall, while the macro environment remains unpredictable, our diverse customer base, focus on key accounts, and ongoing strategic initiatives allowed us to capture growth opportunities and continue to strengthen our market position. Turning now to slide six, margin performance and drivers.

We were approximately 40 basis points below our own Q1 gross margin target, as pricing actions did not keep up with cost increases as the quarter played out. As a reminder, we said in our previous earnings call that roughly 50 basis points of margin pressure within Q4 was timing related and should be added back into our run rate, and that played out as we had expected. You may recall that these items related to timing of inventory-related working capital and supplier rebates. What impacted us this quarter in Q1 was pricing versus cost.

Tariff-related costs moved through the P&L faster than our pricing, leaving us, as I said, approximately 40 basis points short of our own target, and 50 basis points year over year. On pricing, we realized approximately 3.5% year over year, and that compares to 3.3% in the fourth quarter. Not enough to offset inflation. While our pricing execution progressed during the quarter, we did not move quickly enough, related mostly to tariffs and some other items. As you can imagine, tariff uncertainty added additional challenges. In many cases, customer conversations and pricing actions took longer than usual as customers worked through their own planning assumptions.

In others, these conversations were delayed as customers and suppliers await further direction on tariff changes and potential refunds. Importantly, we remain focused on maintaining pricing discipline over time. We focus on continuing to manage toward price/cost neutrality. We also experienced smaller headwinds from fuel and transportation costs and customer rebates during the quarter. Customer mix remained a structural headwind to gross margin as growth skewed toward larger customers that typically carry lower margins. On the growth side, however, these accounts are positive to operating margin due to strong fixed cost leverage, higher volumes, and improved operating efficiency.

We continue to be comfortable with this trade-off given the long-term value of these relationships, and we continue to see the net positive impacts on our P&L. Fastener expansion benefits continue to provide a partial offset to gross margin pressure. As expected, these benefits will anniversary early in the second quarter, while we continue to pursue additional sourcing, pricing, and productivity opportunities across the business. As a reminder, our fastener expansion project did a number of things: it helped us capture higher-margin business and it drove cost savings initiatives. At the operating margin line, performance improved year over year. SG&A declined to 24.3% of sales compared to 25% in the same quarter last year, reflecting continued cost discipline and leverage.

Importantly, we more than offset the reload of incentive compensation as well as our ongoing investments in tech, analytics, and sales support. In addition to our strong sales growth and cost management, we increased our return on invested capital by 180 basis points on a trailing twelve-month basis, which shows our continued approach to capital allocation and maximizing asset productivity. In total, our P&L performance shows that we can invest for growth while maintaining a sharp focus on profits, even as our mix evolves and we pursue larger, more complex accounts. Turning to the cash flow and capital allocation slide. Operating cash flow was approximately $378 million, representing 111% of net income.

Cash generation remains strong, even as we added working capital to support growth. Accounts receivable reflects our expanding customer base and growth with existing customers. Our inventory levels show increasing efficiencies as we continue to find opportunities to optimize inventory while maintaining high availability to meet our customers' needs. Accounts payable increased more than inventory, primarily as a result of some timing items associated with both inventory and non-inventory payments. Net capital spending for the first quarter was approximately $58 million, with investments focused on strengthening our hub automation capacity, Fastenal Managed Inventory hardware capabilities, and advancing our IT infrastructure.

For full year 2026, we continue to expect net CapEx of approximately $320 million as we invest in hub capacity, FMI devices, automation, and technology. These investments are designed to drive efficiency, stability, and customer value. To provide context, our average capital spending relative to sales over the last five years was about 2.5%, compared to roughly 4% in the preceding ten-year period, meaning that we go through periods of different investment run rates. As we mentioned last quarter, 2026 is a year in which we will invest at the higher end of our historical range.

If you compare our 2026 estimate to the consensus revenue estimate for full year 2026, our capital expenditure range approximates 3.5% of net sales, reflecting our continued focus on investing to grow our business. We returned $296 million to shareholders during the quarter through dividends and a small amount of share repurchases, which offset dilution, totaling 87% of net income, reflecting our confidence in cash generation and our commitment to returning value to shareholders. Our capital allocation approach remains unchanged. We prioritize investing in the business where we see strong returns while returning excess cash to shareholders and maintaining a conservatively capitalized balance sheet. In closing, I will summarize my slides before turning it to Dan.

The first quarter reflected steady execution across the business. We delivered strong sales growth, disciplined cost management, and solid cash generation. Operating margin expanded year on year despite higher bonuses and continued investments, demonstrating strong SG&A leverage within our P&L. This reflects our ability to effectively manage costs while supporting growth, and we continue to improve our return metrics that we believe reflect the strength and durability of our business model. That wraps up my section. Thank you, and I will turn it over to Dan.

Dan Florness: Thanks, Max, and good morning, everybody, and welcome to our earnings call. I am on page eight of the flipbook. From a market outlook standpoint, as we talked about in January, we have seen some improvements in what the market is willing to give us versus create obstacles for us, although they are only now starting to be realized. After being at Fastenal Company for thirty years, blue was always my favorite color. It has become even more so in the last thirty years, and despite the fact I am from Wisconsin, red is not high on my list of favorite colors.

If you look at the purchasing managers index, we have an internal grid that we have shared in the past at our annual meeting. We look at it in any month where the ISM is below 50, we color that month red. If you look at the last decade or so, you do not see much red on it until the last three years, and that was pretty constant. In fact, it was every month constant. We have had three months now where we are above 50. That generally gives us confidence of what we are going to be seeing three and four months out. From that standpoint, our outlook is positive.

The other thing for me personally that stands out when I look at this quarter is that over the last six or so years, we really changed the focus of Fastenal Company and kept diving into being a supply chain partner to support businesses. Ever since we started the vending initiative about eighteen years ago, and we slowed down our openings, we have been really in that mode. We just did not always say it out loud. One of the things that struggled as we were changing our format, our public go-to-market, was our non-res construction business really suffered. If I think of it coming out of COVID, it was growing in the mid-single digits.

In the 2023 to 2024 timeframe, it was actually negative mid-single digits. Through 2025, it grew about 4%. We exited the year growing almost 10%, and in the first quarter that business is growing 17%. Now, it is only 8% of our revenues. I do not want to overstate it. But it tells me a great supply chain partner is relevant to every industry out there, that we are that partner, and we can get traction in any end market. All we have to do is understand that end market, and frankly, our end market has to understand why Fastenal Company can be special for their business. It is really exciting to see.

The second bullet in the market outlook talks about ongoing focus on price neutrality and managing tariff impacts. One of the things we touched on in January is a wave of cost we saw coming in late last year and early part of this year. In some ways it relates to tariffs, but I am not sure it does. It was our branded suppliers.

Branded suppliers have a unique market power in that if a customer wants Brand X, that supplier can push pretty hard and say, here is where the cost is, and we will share that with the end customer to really allow them to make the decision: do you want Brand X at this price, or do you want Brand Y at maybe a different price? The branded suppliers have been very aggressive in the last six or seven months raising costs. Some of it, I am sure, is related to tariffs. They are doing some catch-up. Some of it is maybe related to true inflation.

There are some commodities right now—if you are trying to source nitrile gloves, good luck, because the cost of that has gone through the roof in the last sixty days as a result of what is going on in the Middle East. What we are really aggressively doing in the marketplace is arming our customers and our teams with information to make trade-offs. We are arming them with examples of where a brand has raised the cost of their product by 6%, 7%, 8%. Maybe it is well defined, maybe it is a generic spread-across-everything type cost increase.

Our job, and one of the conversations we had with our team early this morning, is I really challenged them from the standpoint of what I have seen from this group in the decade that I have been in this role. When this group needs to rise to the occasion and have communications—sometimes discussions—that are challenging, that is what we are good at, because that is being bluntly honest with your business partners.

We are having some of those conversations right now, and those conversations were really challenged in the first quarter—partly challenged because of uncertainty around what the Supreme Court was going to rule as it relates to tariffs, partly challenged by fatigue of the last twelve months of the pricing actions that have been happening as supply chains have become more costly. The real challenge to the group is we need to have those tough discussions every day. Sometimes it is about price, sometimes it is about changing product, sometimes it is about changing from Brand X to Brand Y, and getting through this with our customer. Moving on to the second item, financial discipline.

This organization never ceases to impress me on their ability to perform. I am really impressed with the strong cash generation in the first quarter—Max touched on that. Our capital allocation will always be focused on growth of the business, infrastructure to support that growth, technology to support the efficiency of our teams, and the information available for our customers, and ultimately strong shareholder returns. To that extent, our ROIC came in at 31% on a trailing twelve-month basis, a nice improvement over where it was a year ago and a nice improvement over where it has been for the last decade.

From organizational priorities, we will continue to invest in supporting the future of our business and our customer, with an eye towards technology investments that enhance our ability to be more efficient. You saw that play out in our SG&A this quarter, despite the fact this is our final quarter of reloading bonuses because we reward heavily based on earnings growth, and that ramped up dramatically in Q2 of last year. We have now anniversaried that going into Q2 of this year. It is also about being more efficient—that puts us in a position to do special things for our customers without wearing out our teams and being able to reward those teams appropriately.

Strategic progress: as Jeff mentioned, our key account strategy is performing really well. New contract wins are strong. We continue to expand our FM technology deeper and deeper into our customer supply chains, and we find success in a wide range of industries. One thing that should not be lost on anybody looking at that table on page three of our earnings release, where we look at customer sites and sales segmentation: we have really strong growth with our customer groups. Interestingly enough, even though manufacturing is 75% of our revenue, from a percentage standpoint we are seeing stronger growth in the non-manufacturing from the pure number of customers doing $50 thousands-plus.

While the company might have grown at 16%, our non-manufacturing customers grew at 25%. We are discovering success across a wide range of industries and a wide range of geographies. With that, we will now open the call for questions.

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

David Manthey: Thank you. Good morning, everyone. First question: when you say pricing actions will continue at a slower pace, two questions on that. One, does that imply sequential gains of this sort of 20 basis points or less sequentially quarter to quarter from here, or should we expect that to accelerate? And then number two, if 2025 we are kind of using as a baseline, I think you talked about 5% to 8% ultimately. Is that still the case? And when would you expect to achieve price/cost neutrality?

Max Poneglyph: Dave, this is Max. I will take the first part. Because we continue to drive price actions, this does not stop. We were behind where we wanted to be in Q1. Those actions will continue. Although we are not guiding toward Q2, we would do everything in our power to not see the same sequential move from Q1 to Q2. You can use that as a starting point, but it is in our ability to change that trajectory. That would come with our statements from our prepared remarks that, as Dan said, we have a team that knows how to overcome some challenges.

Regarding your second question, we do not have a reason to believe that the 5% to 8% cumulative pricing estimate changes. On timing, we feel like around midyear we are going to start to see some of that plateau. We have work to do to make up for some of the traction that we lost through Q1—again, a timing item. What we cannot tell you is exactly when we recover that, but we are going after it.

Dan Florness: Dave, you might notice a little trepidation on our part to answer. We probably over-answered in January a little bit and underestimated what it would be like to push a string through Q1, and it has been a slog—maybe a slug too. The 5% to 8% is a cumulative number. That will eat some into that. What we report on a year-over-year basis is not a quarter-over-quarter figure. As we anniversary going into Q2, it might not be that 5% on a year-over-year basis in any given month, but it is a cumulative piece. The real challenge we have with our folks is we need to have conversations with our customers.

We have customers that had business that turned on at different points in time, so it might be some new business that turned on and the facts have changed. It is always guiding that customer to what is happening with their supply chain and how we can address that. Sometimes it is substitution, sometimes it is price changes, but it is being candid with your customer.

David Manthey: Got it. Okay. As it relates to the improvement you are seeing, in the past Fastenal Company has tried to ramp headcount in anticipation of, or concurrent with, an improving macro backdrop. Should we expect a similar ramp if the backdrop continues to gain strength for you this time, or is there something different this time around?

Dan Florness: I think we have really developed some nice efficiencies. We have gotten really focused on identifying role specificity within our network, and I think our teams really have good capacity built in. One of the things we have done in the last several years coming out of COVID—one part of our employee ranks that really was hollowed out was the part-time ranks. When schools go remote, it is hard to find that help, and it really dropped off. We have reloaded that portion. Our local district leaders are having conversations to understand who on their team is ready to step up and take that next opportunity on business that is turning on.

Everybody is looking out and saying what business is turning on, because that is where the biggest need for headcount is. It is not always a customer whose business is up 5% or 10% because we have taken on some new products. We are really efficient at turning that kind of business on locally.

Jeffery Watts: I would just add the technology and solutions we are adding, and also our customer mix, are making customers more efficient and we are making ourselves more efficient. Going back in the past, if you looked at our ramp-up in revenue and then our ramp-up in headcount, I do not think that same number correlates today as it did back then, especially with all the technology we have and the efficiencies that we are adding in. I think that is part of the reason our SG&A leverage is so good.

Max Poneglyph: As a follow-on to that, Dave, we know where we need to add. We feel pretty comfortable because there are a lot of pluses and minuses—meaning we have a lot of reasons for efficiency gains, and we know where we want to plug to drive further growth. What you are seeing in the P&L in Q1 from leverage should be an expectation. We should be able to continue in that general trajectory.

Operator: Thank you. Our next question is coming from the line of Ryan Merkel with William Blair. Please proceed with your questions.

Ryan Merkel: Hey, everyone. Thanks for the question. I want to start on the topic of pricing and being slower to pass that on to customers. What are you doing to fix this issue? Because this is the second time in the past year that we are dealing with this. Thanks.

Dan Florness: First off, I am pleased to say it is only the second time. Our goal has never been to be great at adjusting prices. Our goal is to be really great at informing our customer what is happening in their supply chain. With the chaos of the last twelve months or more, maybe that is a win. The biggest thing is really fine-tuning some of the things we are doing and quantifying it. Kevin Fitzgerald, who leads our analytics team, has been going through with our regional leaders some very specific outcomes that are needed from pricing actions we are taking.

It is dividing and conquering a bit—here is where you have some flexibility, and here is where we do not. When you get pushed against the wall a little bit, you push back.

Ryan Merkel: I appreciate it. It is difficult. It is a unique environment for pricing. Are you seeing suppliers continuing to push pricing? Do you expect higher inflation because of oil?

Dan Florness: Yes. Are we seeing that price increase or expecting? As I mentioned in my commentary about nitrile gloves—this is not the biggest product line we sell, but it is meaningful. That price is going crazy because it is petroleum-based. It really depends on the energy or petroleum content in the product—that directly moves it. You are seeing percentages that make some of these tariff percentages we talked about in recent years look small. Again, it is a smaller category, but it is an example.

Max Poneglyph: As you can imagine, it is very volatile. In a typical year, sitting here in Q1, we would at least internally know that we have had 99% of the supplier increases, if they are coming, come through. This is just unusual times.

Dan Florness: I think our biggest challenge in a time like this—thinking of our supply chain teams more than our discussions with customers—is knowing where you push back and how aggressively you push back. We understand the cost components of products we source for our customers, and we can share that understanding. Where there is a commodity that is going up and it is linked to tariffs or linked to energy prices, we can assess quickly if that is real or if it is not. That determines how much you push back. Once you find the pieces that are truly legitimate, acknowledging that portion of the supply chain has become more expensive and conveying that to your customer is key.

We are not delivering something unique to our customer here—they are seeing it in a lot of commodities they are sourcing outside of the Fastenal Company universe, too.

Ryan Merkel: Okay. Very helpful. I will pass it on. Good luck.

Operator: Thank you. Our next question comes from the line of Stephen Volkmann with Jefferies. Please proceed with your questions.

Stephen Volkmann: Great. Good morning, guys. Thanks. I am not going to ask about tariffs and pricing. Let us shift to the growth side. It sounds like, from your commentary around end markets, that growth is broadening out. Are you expecting growth to continue to accelerate? We do have a little bit tougher comp in the second quarter. How should we think about the growth side going forward?

Jeffery Watts: It is hard to tell right now with everything going on. We are still cautiously optimistic about the growth continuing. We are seeing that across the board. We have not seen any pullback. If you look at our April numbers, the market has continued to expand—our markets. It is hard to say what the rest of the year will look like, but right now we are cautiously optimistic.

Dan Florness: I will add a piece, a data point we put in our monthly sales release: the percentage of our locations that are growing. There is always a customer or a group of customers that are down somewhere. One of our regional leaders was talking about two of his largest customers who were down 20%. There are always specific reasons. But when I look at the percentage of our locations growing, that has been stuck in the mid-60s, and that is a good place. It has been in the mid-60s consistently since last fall, whereas a year ago or more that was probably in the low 60s or upper 50s.

The closer that is to 70, life gets a lot easier because you are seeing broad-based support from a geographic standpoint, which typically translates into an end-market standpoint as well.

Max Poneglyph: Let me add one more quick point. If you break down our DSR run rates, you will know we are coming up on some headwinds from a pricing perspective when we comp the prior year. We are very confident in our share gain opportunities because we believe we have a great business in that space. Internally, we expect share gains to continue as they are or increase, but at the same time, when you model out, everyone is thinking about pricing as well. We started pricing in Q2 of last year, so we will start to encounter a bit of a comp item on the top line in that regard.

It does not impact operating profit because our pricing mechanics were there to offset cost increases. Keep that in mind.

Dan Florness: The one thing I have always counseled over the years is to focus on the sequential patterns of the business. Jeff talked about the fact that we are having really strong customer acquisition patterns. Despite adding customers at a rapid clip—which historically would pull down our dollars per customer a little bit because newer customers are not as mature as existing customers—that is not what is happening. We are adding customers at a very rapid pace, and we are also adding wallet share at the same time. Our ultimate number is expanding, and Jeff touched on that earlier. That makes me more bullish on the future. The economy is going to give or take what it gives or takes.

What we take from others—from a market share gains standpoint—those are pure wins.

Stephen Volkmann: Great. That is great color. I appreciate that. And Dan, you mentioned slog when you have these customer conversations. Are there competitors out there that are not raising prices as they should, or is anyone doing anything competitively that is holding this back?

Dan Florness: We are all swimming in the same water, and that water has a current to it and has become more expensive. That is a lousy analogy, but we are all impacted by the same economics. Are there examples where a competitor might get really aggressive with a customer circumstance? That is always true, and there is some of that. By and large, our industry is a rational industry. The only time you see weird things—I was recently traveling in Indiana, and there is a long-term competitor that was not doing anything irrational; their business is really struggling. You see signs of that—when organizations get squeezed too much, some competitors have to downsize their operations. I saw some of that.

That is one data point. I do not think there is anything irrational going on, but that does not mean we do not have circumstances where somebody is trying to elbow somebody else in a customer situation. That is the exception, not the rule.

Operator: Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your questions.

Nigel Coe: Thanks. Good morning. I wanted to turn attention to the tariffs. How do we think about all the changes to AIPA, Section 122, and the changes to Section 232 tariffs? How does that actually go for Fastenal Company?

Max Poneglyph: Nigel, if we think first of AIPA, which is making the most noise, we have said in the past that is a much smaller portion of the total tariff landscape for us. Those are largely replaced by 122 anyway, so we do not see much activity within our P&L to speak to on that one. Even the refund noise—once again, it is a very small amount of our total business and our total tariffs. From our vantage point, it is not immaterial simply because it creates so much noise and it creates, as we said, the slog of pricing, and part of that slog is driven by the uncertainties in tariffs. I hope that gives you the context.

Dan Florness: The point Max just made about the impact—it is the headline impact. When the Supreme Court ruling came out, if you are a casual observer or not really dialed in, you can look at it and say, “I thought the tariffs were ruled illegal.” It becomes an education endeavor and then a negotiation discussion, as opposed to just a negotiation discussion. The headline impact slows things down.

Max Poneglyph: Just because you asked also, on 232—there was no change. Any discussion about changing it does not impact us. Section 232 does not impact us.

Nigel Coe: That is helpful—so no change to 232, that is what I was asking about really. On price/cost, obviously the inventory unit cost inflation embedded in inventory coming through the P&L is a factor as well. Are we now at a point where the headwind from the inventory conversion is behind us?

Max Poneglyph: We are getting close. That is what I was referring to when I was talking about the wave of costs. We have a little bit left in there, but around midyear we will have pushed all that through essentially.

Nigel Coe: Okay. Thank you very much, guys.

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

Tommy Moll: Good morning, and thanks for taking my questions. Contract signings have gone pretty well. Pricing discussions are behind plan. Are these two linked? As you are bringing on new contract business, do pricing discussions not proceed as fast as they might otherwise?

Jeffery Watts: No, I do not think so. I think it is more the current contract customers. When we go to raise pricing, a lot of the contracts we have today have set terms in place, so we cannot change pricing for 30 or 60 days. When the Supreme Court came out with their ruling, a lot of those conversations almost got put on hold—our customers really pushed back hard. I do not think the newer business is the issue—we are pricing that in when we get the business. It is more the current contracts we have in place.

Tommy Moll: Got it. That is helpful. Thank you, Jeff. A follow-up on capital allocation. On the repurchases, the dollar amount was modest this quarter, but it has been some time since you deployed capital there. Any update you can provide on the philosophy, or what was behind the decision to deploy those dollars?

Max Poneglyph: Yes. First of all, it was small. We just felt as a management team that we want to start to offset dilution, and that is what you are seeing. That would be our approach going forward for a bit here. We can change our mind overnight, but what you are seeing is a simple mathematical offset of dilution. We will, as we always say, remain opportunistic—when the time comes, we will do something else.

Operator: Thank you. Our next question is coming from the line of Chris Snyder with Morgan Stanley. Please proceed with your questions.

Chris Snyder: Thank you. On the fastener side, the company turns inventory very slowly, and that has provided visibility into future COGS. It felt like you were always able to use that visibility or lag to appropriately balance price/cost through prior inflation up cycles—whether in 2022, 2023, or even last year. It seems more difficult now to match that price/cost for the company. Is there a reason why? Is it more education this time around because tariffs keep moving? Is that why it is more difficult to execute and realize the price, because it has been falling short of expectations for almost a year now? Thank you.

Dan Florness: First off, we recently changed some of our reporting. We talk more about our direct material side of the business and our indirect material side of the business. We also challenged our analytics team to follow suit and do that in how we think about gross margin and parse out maybe the fastener business a little differently, and some product lines a little differently. What I can tell you is the struggles we have right now are not in fasteners—our margin is doing just fine there. Where some of the struggles are is in areas that have a little bit more of a branded presence, because fasteners do not really have a branded presence.

There is some, but that is not where the dollars are. Our safety margin is challenged because of some of the branded presence. Our cutting tool margin is challenged because of some of the branded presence. The things you have known from us historically are true: in our fastener business, we have great insight because we have time on our side, and we can have those types of conversations with the customer. We can talk about an OEM fastener where we have four months of inventory and here is what the price is going to do at the end of that four months.

You can have a different discussion because our customers know we are about managing price/cost; we are not about inventory profits in the short term. Where we are getting squeezed is on some of those branded products, where our timeline to understanding the cost change and how fast it occurs in our FIFO inventory is much different than what it is in our fastener inventory. That is where we are getting squeezed.

Chris Snyder: Thank you. That is really helpful. If I could ask one on Q2: it sounds like price/cost will start getting better maybe into the back half of the year. Does Q2 get worse before it gets better? I would imagine some of the headwinds that came through on the fuel side will be bigger in Q2. Is there a little more pressure coming before we get into the recovery, or do you think Q1 is the trough of price/cost?

Dan Florness: I will answer this one. As you know, we are in a leadership transition here, and Max is relatively new in his role. Based on thirty years of experience: Q2 is challenging. Q1 was challenging. Our message to our teams is: here is what is happening, here is what we need to do. I believe this team will react, but Q2 will be challenging. I personally feel good when I look out to Q3 and Q4 because I know how long it takes to do certain things. There are price discussions we have had going on since December. There are price changes that we have made—some in effect March 1, some April 1, some May 1, some June 1.

As Jeff touched on, sometimes it is about contractual obligations, sometimes it is just about negotiating and finally agreeing on a price. It might be from the customer's perspective, where they have some ability on pricing and what they can do on their end. In January, the only place in my gut I did not feel good was Q1. Once we had some certainty on the Supreme Court ruling, it allowed us to understand a piece. We still do not understand some other aspects and what other challenges there will be to tariffs coming down the road. Q2 is challenging, and I believe the Fastenal Company team can pull it off.

That is not a mathematical answer—that is an honest answer.

Operator: Thank you. Our next questions come from the line of Patrick Baumann with JPMorgan. Please proceed with your questions.

Patrick Baumann: Thank you for fitting me in. On incremental margin expectations for this year: last quarter, in response to a question, Dan suggested that high 20s on incremental margins would be possible this year. Has enough changed to alter your thinking there? You still lap incentive comp headwinds in the second quarter, which should be a nice tailwind for the business from an SG&A leverage perspective. Have the price timing dynamics had enough of an impact to change your thinking on incremental margin expectations for this year?

Max Poneglyph: No, Patrick. We do not believe that is the case. There are enough efficiencies—structural, we would say—in the SG&A space. Plus, as Dan said, there are actions that we are taking to mitigate the gross margin headwind that will be in an incremental space that we had expected in the past. Short answer: we confirm our previous statement.

Patrick Baumann: Thanks. One follow-up on tariffs. On Section 232, it sounds like Fastenal Company was already charging for the full customs value. Did you observe any noncompliance in the industry that would impact market dynamics in fasteners going forward regarding how competition approached charging for tariffs on imports?

Dan Florness: No. The answer is no. Nothing came to our attention.

Dan Florness: I see we are at four minutes to the hour. If you have any follow-up questions, I know Max is available through the balance of the day. Thank you again for joining our call today, and thanks for your support of the Blue Team. Have a good day, everybody.

Operator: Thank you, ladies and gentlemen. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

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