Fastenal Aktie

Greetings, and welcome to the Fastenal Q2 2026 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions]

It's now my pleasure to turn the call over to Dray Schreiber. Please go ahead, Dray.

Welcome to the Fastenal Company 2026 Second Quarter Earnings Conference Call. This call will be hosted by Dan Florness, our Chief Executive Officer; Jeff Watt, our President and Chief Sales Officer; and Max Tunnicliff, our Chief Financial Officer. The call will last for up to 1 hour, and we'll start with a general overview of our quarterly results and operations, with the remainder of the time being open for questions and answers. Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission or distribution of today's call is permitted without Fastenal's consent. This call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage, investor.fastenal.com. A replay of the webcast will be available on the website until September 1, 2026 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. Jeff Watts.

Thank you. Good morning, everyone. Welcome to Fastenal's Second Quarter 2026 Earnings Call. I'm Jeff Watts, Fastenal's President and Chief Sales Officer, and I appreciate you joining us all today. Before I turn to the results, I would like to take a moment on something that I think matters to everyone on the line. And that is that today will be Dan Florness' final earnings call as our CEO. And Dan joined Fastenal, joined the Blue team back in June of 1996, and he's been the steady voice explaining our business to this community for the past 3 decades, first as our Chief Financial Officer and then as our President and CEO.

Through multiple cycles, multiple recessions, a pandemic trade shift, stock splits, through all of it, Dan's always had the same candor, the same humility and the same unwavering respect for our people and for our shareholders. So to Dan, on behalf of every employee at Fastenal and every shareholder on the line, thank you for the leadership, thank you for the discipline and thank you for handing us a business that's as stronger today than it's ever been.

Now with that said, today isn't a farewell speech, it's an earnings call, and the best way to know how to honor Dan's last call is to walk you through a business that's executing.

So moving to our results. Q2 is a very strong high-quality quarter for the company, solid double-digit daily sales growth, operating margin expansion, return on invested capital a decade-plus high and strong cash generation deployed with the discipline that defines this company. Our strategy is working, and it's showing in the numbers.

So turning to Slide 3. Now on the top line, daily sales grew 14.7% in the quarter, extending the path we built in Q1. Market conditions improved at a pace similar to last quarter. But what's important to point out is that our outperformance continues to be driven by share gains and not by the market backdrop. And that share gain is showing right up across all 3 of the pillars you see on the slide. First, increasing sales effectiveness, share gains driven by our key account strategy and by continued new contract wins; second, enhancing our services, expanding our FMI device space and our digital footprint, improving the customer experience driving retention and creating operating efficiencies in the process. And then third, expanding our addressable market, growth driven by new customer site wins and deeper penetration across every one of our end market segments.

Now on pricing, and we realized approximately 2.9% in the quarter or about 4.5% on a stack basis versus roughly 3.5% in Q1. Now the sequential step down is not a change in posture, it's simply lapping the onset of pricing actions we took in Q2 of last year. And our pricing actions to mitigate cost and tariff inflation continue and our pricing discipline continues right alongside them. I know Max is going to touch a little deeper on this later in the deck.

So now one number I'm wanting to focus on this quarter, and it's the customer side that on the right side of the slide. And our contract count in Q2 was up over 7% year-over-year and a number of customer sites spending $50,000 or more per month grew 16.5% over last year, with revenues growing over 26%. Now that's the shape of durable, high-quality revenue larger customers, deeper contracts and higher productivity per site. It's exactly what our key account strategy is designed to produce and it's the foundation of the momentum we're using to carry into the second half of this year. And that momentum being reinforced and scaled by our technology platform.

So moving to Slide 4, which is our technology update. And this is where the enhancing our services pillar comes to life in the numbers. And starting with digital footprint. Digital footprint DSR grew 16.2% in Q2, outpacing total company DSR and now represents 61.6% of total sales, up 60 basis points from last year. Our estimate for '26 is 63% to 64%, modestly below our original target of 66%. I want to be clear though on what this reflects. We're not slowing down on digital adoption. We're still driving customers to digital at a very strong pace. It's really the denominator is simply moving faster because our nondigital sales are growing right alongside digital as we take share and add larger and larger customer sites. And to me, I guess that's a healthy problem to have. Inside that, though, e-business DSR grew 12.6%, steady and disciplined digital engagement that continues to broaden our reach with both new and existing customers.

Now turning to FMI, the engine of our services strategy. FMI technology signings were up 8.3% at 109 weighted devices signed per day in Q2, just under 7,000 total for the quarter versus $101 per day or just under 6,500 in total same time period last year. FMI now -- sales now represent 44.6% of total sales, up roughly 60 basis points from a year ago. When I think about this, every one of these technology metrics, it's really a leading indicator. Devices installed today are deposits into next quarter's sales, into next year's retention and into the operational rigor and efficiency that show up in our margin structure.

Now Fastenal has never had more contract customers, more large customer sites, more devices in the field or more digital engagement than we do today. This is what durable, scalable growth looks like and why we're so confident in our pathway forward.

And with that, I'll turn it over to Max.

Thank you, Jeff, and good morning, everyone. As in the past, I'll review 3 areas with you this morning, the business trends we saw in the quarter, the key drivers of margin performance and how those results translate into cash flow and capital allocation. Overall, the quarter showed continued progress against our strategy, improving demand trends, solid execution across the business and strong cash generation, even with continued uncertainty in the broader economy.

I'll start on the business trends and market drivers slide. During the second quarter, the industrial environment remained stable and modestly positive, consistent with the trend we saw in the first quarter. U.S. PMI averaged slightly above 53% for the quarter, up from 52% last quarter. and industrial production was slightly positive year-over-year in April and May. This lines up with a gradual improvement that started late last year. Our daily sales growth improved to 14.7% for the quarter, up from 12.4% in the first quarter, reflecting continued market outperformance.

Growth was supported by new customer wins, increased share of wallet with existing customers pricing and improved industrial production. Importantly, the improvement was not concentrated in any one area. It showed up across customer types and markets. Customer sentiment remained favorable throughout the quarter while trade and tariff uncertainty stayed in the picture, its impact this quarter showed up through cost planning and pricing discussions rather than demand. As a result, activity levels remained healthy, and our teams continue to see strong customer engagement. From an end market perspective, this slide shows the breadth of that improvement.

Manufacturing activity remains solid, led by heavy manufacturing where our Fastenal expansion and key account momentum continued to pay off. Heavy manufacturing represented 44% of total sales, an average daily sales growth in that segment was 18%, continuing the upward trend that began last year. Construction grew approximately 17% for the second quarter in a row, representing a meaningful improvement from weaker trends we saw in prior periods. Within construction, electrical, utility, infrastructure and data center-related activity were among the strongest areas of demand during the quarter. Non-manufacturing end markets also contributed with gains across transportation, warehousing and other industrial services as demand improved across customer types.

Across materials, both direct and indirect categories grew in the mid-teens, with direct materials slightly outpacing indirect. That mix reinforces that growth was tied to customer production activity and supported by higher fastener penetration improved product availability and pricing actions. The common thread across the strongest areas was larger customer engagement and project-related activity, which continues to support our key account strategy. That said, conditions were not perfectly uniform across all markets while manufacturing and construction remain healthy, certain other end markets, particularly those tied to discretionary consumer spending continued to lag.

Overall, demand conditions were stable to modestly positive, while cost inflation remained less predictable. In that environment, our diverse customer base, key account focus and strategic initiatives helped us convert market stability into stronger growth and continued share gains.

Turning now to margin performance and drivers. The key margin story this quarter is that we maintain operating margin, including a 5 basis point improvement despite inflation-driven pressures. Strong sales growth SG&A leverage and disciplined cost control more than offset net price cost headwinds. At the gross margin line, we contracted approximately 75 basis points year-over-year with price costs representing roughly 40 basis points headwind.

On price/cost, we improved approximately 10 basis points from the first quarter. Our pricing actions helped offset the ongoing impacts of tariffs and other inflation. We remain focused on pricing discipline and we'll continue managing toward price cost neutrality over time.

Beyond price/cost, we also experienced smaller gross margin headwinds from customer mix transportation costs and customer rebates during the quarter. Customer mix impacts are important to emphasize. As we discussed previously, our customer mix continues to shift toward larger customers by design as this is part of our strategy. While these customers typically carry lower gross margins, they generate attractive incremental profit dollars and remain accretive to operating margin.

The higher volumes associated with these relationships drive fixed cost leverage, improve asset utilization and create operating efficiencies across our network. As a result, although the mix shift can moderate gross margin percentage. It supports our broader objective of growing absolute profitability and expanding operating margins over time.

At the operating margin line, SG&A improved to 23.5% of sales compared to 24.4% in the same quarter last year, reflecting disciplined cost control and operating leverage. That leverage was more than -- that leverage more than offset the gross margin headwinds and drove margin consistency year-over-year, even with continued investment in tech, analytics and sales support. In addition to strong sales growth and cost management, return on invested capital increased 180 basis points on a trailing 12-month basis, reflecting strong sales growth, good cost control and disciplined capital allocation. In total, our P&L performance shows that we can invest for growth while staying focused on profitability even as our mix strategically shifts toward larger and more complex accounts.

Turning to the cash flow and capital allocation side. Operating cash flow was $266 million, representing approximately 70% of net income. While the second quarter conversion rate was lower than last year, year-to-date cash generation remains strong, as inventory efficiency helped offset the working capital needs associated with growth. Our second quarter conversion rate was driven specifically by higher accounts receivable, primarily driven by our strong June sales improvement of 20% year-over-year.

Additionally, we continued to run inventory more efficiently, finding ways to optimize inventory levels while keeping availability high for our customers. The increase in accounts payable outpaced inventory this quarter, largely a function of payment timing.

Net capital spending this quarter was approximately $60 million, with investments focusing on strengthening our hub or distribution center and automation capacity, advancing our IT infrastructure and investing in Fastenal managed inventory hardware capabilities. For full year '26, we continue to expect net capital expenditures of approximately $320 million as we invest in hub capacity, FMI devices, automation and technology. These investments are made to drive efficiency, scalability and customer value.

Based on current consensus revenue estimates for full year '26, our expected CapEx range represents approximately 3.5% of sales, reflecting our continued focus on investing to grow the business. To put this in context, our average capital spend relative to sales over the past 5 years was approximately 2.5 percentage points compared to roughly 4 in the preceding 10-year period, meaning that we go through periods of different investment run rates. '26 is a year in which we will invest a little bit toward the higher end of that investment range.

We returned $305 million to shareholders during the quarter, mostly through dividends alongside modest share repurchases. Together, these returns represented approximately 80% 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, returning excess cash to shareholders and maintaining a conservatively capitalized balance sheet.

I'll summarize as I close my section. The second quarter showed strong top line execution, continued share gains and disciplined cost management. And importantly, operating margin was consistent year-over-year as SG&A leverage and cost discipline offset gross margin pressures. That performance, together with ROIC expansion and strong capital allocation demonstrates the durability of our business model.

Thank you, everyone, and I'll turn it over to Dan.

Thanks, Max, and good morning, everybody. My page is still Page 8 on the foot book, so I'll touch on a few points. I'll look through that. From a market outlook perspective, the broader market conditions continue to improve similar to the first quarter. We've now had 6 months of [indiscernible] PMI. That, combined with some key leadership changes that we made back in 2023 and 2024 are really key to what you're seeing shine through. So the inherent growth of Fastenal is shining through because of the market not giving us headwinds. But what you're really seeing is -- Jeff stepped into the Chief Sales Officer role, I believe it was 2023 and I hope he doesn't change -- take his head and say [indiscernible] different year. But he made some other -- he made some changes in personnel at that time, and you're really seeing the outcome of those changes and incredibly powerful as we've moved into 2026.

There is an ongoing focus on price neutrality. And it's no secret they may listen to this call that if I was being 100% candid and you know that I'm always 100% candid, I would have felt a hell a lot better about the quarter if our incremental margin would have been 24%. Coming into the quarter, we had a gross margin trend that was challenging. And one of the things I told Jeff, the hardest -- when you have a trend that your -- that's your friend, you love that trend. You cherish trend. You convince everybody to do the things necessary to keep that trend going and you don't sit there and enjoy what's happening right now, you focus on where the [indiscernible] you're going and making that trend better. And if the trend gets disturbed by the economy, that's life. If the trend gets disturbed because you took your eye off the ball, that's us. And so really focused on charting a good trend and changing a bad trend.

Coming in the quarter, we had a bad trend with gross margin. That ultimately prevented us from being at that 24% incremental margin that I thought was achievable. With that said, the group changed the trend and our gross margin sequentially improved despite the fact that there is more gross margin headwinds during the quarter than there was before, we just are fighting and clawing our way back, and that's how you saw the quarter play out.

From a financial discipline perspective, we touched on ROIC and when I think about ROIC, 20 years ago, our ROIC was in the mid-20s. Actually, if you go back far enough, and I'm going to take you back far enough for a second, when we went public in the late '80s, our ROIC was in the low 30s. What changed as we went through the '90s and into the 2000s is we were selling more than just [indiscernible]. We need to stack more product. We started importing directly. We stock a lot more product. And our ROIC went down into the mid-20s, and it was still there a decade ago, and I'm really pleased to say, over the last decade between some really strong discipline on the part of the team.

Holden Lewis, our prior CFO, did a wonderful job of really showing us what we could do from an ROIC standpoint. But the group made it happen. And today, we're in the low 30s. So incredible financial discipline. There's one item that I don't know that everybody appreciates how good the performance is. But if I -- if you read our proxy, you will quickly see -- how we get paid? And what you read in the proxy about we get a piece of pretax growth. It's [indiscernible] very deep into the organization. So in the second quarter of 2025, our operating earnings grew -- and I calculated this morning. So if I'm wrong by $1 million or $2 million, I apologize. It's how good my skills are with my phone calculator.

But I think we grew $49.2 million in operating income. In the second quarter of 2026, we grew 65.7%. That's a 33% increase in our pretax dollar growth for good percentages for a second, just the dollar growth. In the first quarter of this year, our operating earnings grew $45.3 million. In the second quarter, again, we grew 65.7%. That's a 45% increase in the dollar growth. We all get a piece of that action. You know what? There's a lot of folks in Fastenal that had a nice second quarter bonus. They had what they thought was a pretty darn good first quarter bonus, and we just crushed that number because the bonuses in the second quarter, I did my math right, are probably about 45% higher than they were in the first quarter.

When I look at all that and I look at our SG&A and how we manage SG&A, the number that just impresses the heck out of me, is our head count growth and how we're managing -- and that's because we're not squeezing it to death. We're investing for where we're going, just like we always have. We're just getting progressively better. And some of that is -- the team is better today than they were 2 and 5 and 10 years ago. Some of that is some of the AI tools. We're implementing large account business faster today than we would have 1, 2 and 3 years ago because we can do quotes faster. We're just really good. And so I'm really impressed with the SG&A leverage because I know how much bonuses grew, Q1 to Q2 and Q2 to Q2. That's really hard to get that kind of leverage on SG&A. My kudos to the group.

Strong cash generation, our capital allocation continues to be very focused on growth, technology and a thoughtful look at shareholder returns as measured in ROIC. To that end, I want to thank Max. Earlier in the year, I said to Max, our stock price is approaching $50 a share. We've been maintaining a 2% yield for quite some time. It'd really be nice to do a $1 a share in dividend. He started out a little bit less than that because he wanted to dedicate some dollars to buying back some shares and consistently do that cover things like dilution. I took [indiscernible] swing at the pitch in the -- here in few weeks ago and I said, raising it to 26% would get us to $1 for the year. You wouldn't mind considering that. I appreciate it. Maybe 2x is the charm. But the thought process there is simply this, $1 dividend for the year will allow us whatever the Street does. It allows us to have a decent return -- dividend yield. So that's the thinking behind that. Don't read anything more into it than that. And when you think about the dollar this year, think about where that perhaps goes in the future, but that's a different group that will be making that decision.

From an organizational priorities, from a capital allocation, we talked about it, but continued investment in tools, technology and analytics to support and scale growth. And a lot of companies are talking about AI. We don't talk a lot about it. We just do a bunch of things behind the scenes to have better tools to support our people and ultimately, our customers and how we deliver a business. But we're being very thoughtful from a financial fiscal discipline and what we're spending in AI relative to what kind of return is it generating for us and what kind of productivity is it giving us because we spent about -- if you add up all of our labor costs and Max is going to give me a dirty look for sharing this number. But if you add all of our labor costs in the second quarter, base, bonus, social taxes, health insurance, our school of business, you add all that up, we spent about $400 million. So we spent about $1.6 billion a year in people costs.

And the question we will ultimately need to ask ourselves is how much are you willing to spend for that group to be 5%, 10% more productive? And that's how we'll gauge what we do or don't do in the future. At least I believe that's how the group will do it. From a strategic progress standpoint, I'm not going to list out all the things other than to say, well, I think the team is executing at an incredible level, and I'm really proud of the group.

Finally, and it's not on the bullet list, but I'll add, I think you've come to know that I probably tell stories that are too long. And -- but I'm also pretty transparent in how we share the business. And I thought I'd share some internal messaging had for the group this morning, both in our video that goes to 25,000 employees as well as our conversation with our regionals and folks have been talking to -- when I think about the pieces, we always talk about year-to-date sales versus goal, what quarter 2, 2026 and June sales details tell me, one thing that really stands out when I look at the June set of percentages is everything, whether it's geographic or its end market or its customer use everything is double digit. We haven't been in that situation for quite some time.

And the only thing on that page that isn't double digit is our noncontract customer sales growth of that group and that isn't our priority of going to market. However, we love that customer group, too, and we want to grow that customer group. And I'm pleased to say that the growth in that group is double what it was 12 months ago because we're building a better mouse trap. We're building a better machine to serve the market. A better machine to serve the market grows, whether you're putting people energy behind it or not to drive it and you're seeing that come into fruition.

The other things talked about on it, and this is -- I'm a milestone person. And I always highlight milestones and -- we -- in the second quarter, we have 4 district [indiscernible] that are due, averaging more than 8 million a month. That's 4 districts that are either north of $100 million a year or they're on the verge of being, they're close. That was 0 a decade ago. That was 0 5 years ago. There's 59 district managers. So 25% of our district managers in the second quarter, we're doing more than $4 million a month. That's a $50 million a year business.

For folks that have owned Fastenal long time, you remember a $100 million Fastenal or a $50 million Fastenal. We have 25% of our districts are that big now. And that's an incredibly talented group of people. And with [indiscernible], it was really nice for the group -- for my final month as CEO to grow north of 20%. So to the sales team, thank you for that. And if you take that $844 million, because we're over $833 million, our run rate on a 30-day basis is a $10 billion company. Nice touch.

With that, I'm going to stop talking to you and see what questions you have.

[Operator Instructions] Our first question today is coming from David Manthey from Baird.

Dan, what do you say, it was an absolutely stellar run. Congratulations and thanks for everything. We also appreciate it.

So I guess that means that Jeff and Max get the tough questions here. Sales growth, obviously, terrific at 15%. And the team has recently been signaling kind of 25% plus incrementals at this level of growth. And I know that Dan went through a couple of the items that affected that. But I'm wondering if you can crystallize that for us and talk about the puts and takes that sort of drove that contribution margin this quarter. And more importantly, as you're looking out to the second half, which of those do you think persists and which of those may alleviate as we get to the back half of the year and lead to stronger contribution margins?

Sure, Dave. This is Max. I'll take that one to start. So if we think back to the first quarter of this year, where we were disappointed in our net price cost position of 50 basis points. It's important to keep that component into context with the rest of my comments. And the reason I say that is because as we move forward, as we said in our prepared remarks and as Dan reiterated, we did eat into that $50 million by 10 basis points. And so we're focused there, at the same time, growing at significantly fast levels. So balancing and optimizing both of those, we feel was a success mark on the quarter for us.

With that being said, it doesn't mean that we dismiss the 50 and now negative 40 basis points. But that negative 40 basis points that we still sit with today, if you think about that from an incremental perspective, is going to be 3 or 4 percentage points on the incremental. So you get to the mid-20s when that net negative goes away, number one. And then number two, we did, as Dan iterated paid some bonuses on that growth. And that also has -- that is a contributing factor.

Now those are -- the way you think about those is if we continue to grow like we want to and we're always going to have some bonus paid. So that one you could dismiss out of the incremental walk. But that gross margin, our position is to maintain price cost neutrality.

And so the second part of your question was when do you get there? At this moment, we're going to keep shipping away fighting as fast as we can. But the trajectory is it's not something that we're expecting to be completely closed in the second half. We're going to continue to look at a lot of things we're doing from a growth perspective. and we're going to continue to chip away at that net negative price cost position. And as we move through the year and ship that away, our incrementals will naturally improve back to where like we say, if we're growing this fast, we should be mid-single digits. We are not backing off of that statement, I guess, you'd say, I don't want to say commitment, maybe that's a little too strong, but that we believe this business is set to drive the mid-20s when we're growing this fast. And so we'll get back to that over time.

Got it. And then, Jeff, I dislike the question, what will you do differently? Because I don't think that that's really applicable here at Fastenal anyway. But when I think about the past couple of CEO eras, I mean, the [indiscernible] era of store growth [indiscernible] era, I don't know, FMI and national accounts, et cetera. When you think about the range of tools that Fastenal has today, what are the strategic growth engines that you plan on leaning on to start the [indiscernible]?

That's a good question. First, I'd say that this isn't a transition. We're sticking with the strategy and the strategy that we've dealt with in the last 2 years. The 3 strategic pillars, they're going to be unchanged, increasing sales effectiveness, enhancing our service expanding markets. But I think what changes is every day, it seems like the AI portion and the tools that we're developing are helping us increase speed. I think one thing that's important as you saw it in June, June kind of shocked us a little bit on our revenue as far as our sequentials go and really digging in, there was some one-off orders that we were able to get that we wouldn't normally have gotten just from new business signing some one-off type orders.

But a lot of the business that we're turning on, we're turning it on faster now because of the tools that we've built. And I think that is -- it's part of our strategic planning, but it's happening a lot faster than I thought it would. And like I said, June was a little bit of a surprise to us. I think the sequentials are still in place. But moving forward in the direction, I don't see a lot of change with what Fastenal -- who Fastenal is as a whole. Blue team first to centralized decision-making, P&L accountability promoting from within. That's all cultures been built over the last 30, 40, 50 years. That's not going to change. What I do think is going to -- we're going to look at harder and faster is the speed in which we go out and attain new business, grab new contracts and expand our markets globally.

Dave, I'll throw in one little tidbit there. If you characterize an era is the Florness era, that was actually -- Jeff had an incredibly big voice as did Casey, as did Bill. When I think of -- from what we are doing from a revenue from a sales growth standpoint. And you might characterize the last decade with a different name than Florness. You might say it was a Blue team effort. And I think Blue team effort continues.

The next question is coming from Ryan Merkel from William Blair.

And Dan, I want to echo Dave's comments. I can't believe this is your last call. It's been a great run my friend, and I wish you all the best.

Ryan, [indiscernible] 121 calls now.

Yes, 20 years, Dan, we've been doing this, I can't believe it, but it's been a great run. I appreciate all your help. So I want to start on price cost. You made progress, but more to go. When do you think you'll get to neutral? I know that's kind of a hard question. And then also comment on gross margins in the third quarter, should we be thinking flat sequentially from the second quarter?

Yes, Ryan, I'll take that question to start at least. The chipping away at the negative 40 will continue. It has to for our business. But as I said, we need to continue to grow. At our ROIC level growth is first and foremost, but I want to reiterate, it's healthy growth. It's its operating margin accretive growth. So it's all those healthy things that you would expect us to push on as we have in the past decades. But this chipping away is an important term because we might come into Q4 and be there, but it's not something that we are predicting. So give us some time, we're going to make some progress, but it will be small on this net price cost position.

Importantly, there continues to be cost increases in the marketplace. And it's -- everyone knows that it's the headline. And so keeping up with the new inflow of cost and chipping away at the old is a lot of effort. As I said, we're pleased with our 10 bps of chipping away. And so we'll continue to do that. Our commitment is to continue to offset cost to the best extent possible while growing this business very, very fast.

As we think about gross margin profile because at the end of the day, those questions just modeling the gross margin and -- and so your point -- you're spot on with the gross margin question as well. At this moment, we don't forecast or -- sorry, I shouldn't say forecast, we do not provide guidance on gross margin unless there's some big up or down movement, we don't want to surprise you. At this moment, we don't see a big up or down movement. So the gross margin profile should be fairly consistent with historical trends.

And as you probably know, and I'll just remind the audience, because of our, I should say, primarily because of our focus on growing large strategic accounts for all the reasons that probably makes sense, efficiencies and leverage and those types of things, those accounts carry less gross margin as a percentage than our weighted average. This is nothing different than has happened in the past 10 to 20 years. And so we will continue -- if you look at that 10-year pattern, you see about a 60 basis point contraction in gross margin, albeit maintaining to improving operating margin, which is our focus area. And so that 60 basis points improvement, as you know from your modeling, it's roughly 15 bps of sequential decline every quarter.

And so if you look back between Q2 and Q3, you get roughly that you get between 10 and 20 bps drop just on a normal year when Fastenal is performing well and when Fastenal is maintaining or growing operating margins. So our commitment to ourselves and our shareholders is grow fast and continue to maintain and grow operating margins. And so that's what we see for -- as we move through the rest of this year.

Got it. Okay. No, that's all fair. I appreciate that. Just a follow-up maybe to Dave's questions on incremental margins. Should we be calibrating to maybe low 20s incremental margins for 2026 at this point? And if you make faster progress on the price cost than maybe you get in the mid-20s?

I -- Q2 is -- this is hope, but we seeing 21.5% on our P&L with this much growth is not -- I would just say we hope that's our low point, but it's hard to predict with the cost inflation coming through. I think that's a safe bet. I think it's safe to do it that way. But as we chip away, we should be able to expand. I mean we have a low point, and we'd be heading toward the normal run rate business of mid-20s. It's just -- it's tough to predict whether that's the end of Q3, if that's Q4, but in that ballpark, expect improvement as we move throughout. But yes, it's not going to -- I wouldn't necessarily expect a Q3 jump all the way up to the mid-20s. It's your model...

Your next question is coming from Tommy Moll from Stephens.

First question on SG&A. Point taken, you paid some pretty healthy bonuses and commissions this quarter given the strong top line performance. At the same time, I would think you might still expect to see some leverage, just thinking about those items as a percentage of sales rather than deleverage? And so could you help us unpack some of the items that delevered this quarter? I wouldn't think that at this rate of sales growth, we should expect those to continue to delever. But any context would help.

Keep in mind, SG&A did lever about 90 basis points.

Oh, yes, yes, point taken.

Yes, sorry, go ahead.

Yes. I was more specifically talking about the items you referenced that did delever this quarter. I think it was fuel transportation, travel, bonuses, commissions, there are a number of things mentioned on the call and your materials that did delever. That's specifically what I was curious about.

Yes, sure. So -- and I'll speak a little bit about, but we started just on fuel -- as you can imagine, it's extremely volatile. If you would have asked me 2 weeks ago what I thought the future would hold, I would give you a different answer, of course. First of all, the fuel component in our SG&A, we don't talk about the amount, but it sits in that remaining 30%. Dan, we've historically in the past referenced 70% of our SG&A are people-related costs. So you do have a component fuel in there that we started to see in Q1 as the as the conflict escalated, we experienced about a month of that headwind, and now we have 3 months of that headwind.

And that's one of those areas where even from the question of incrementals, I mean if those fuel costs in associated oil-related costs dive more toward the second half of this year, we're going to start to see even some improvement in incrementals there. But fuel is one of those that were actually given the amount of volatility, we're managing very well on the fuel side. It's still a headwind. And then we mentioned the bonus and the bonus is just the pure -- we grew profit dollars extremely fast. And we like the fact that, that's a headwind is a good thing for us, but it's part of our business modeling as well. So aside from that, there's not anything else that would be delevered in our SG&A is very small. And we keep a keen -- a very keen eye. I think you know us well, Tommy, we are frugal operators, and we don't see -- we don't intend to change that frugality approach in our business because it does well for our business.

For instance, I'll give you -- I was talking to Barry McGrath. Barry runs our distribution center here in Winona -- a few days ago, and I said, Barry, I know when I look at my window, how many trucks I see, but how many routes do we have the [indiscernible] a given day. And he said, depending on the day, anywhere from 25 to 30, depending on what day of the week it is. And that's how many trucks. And so we have -- when owner routes, there's probably about 470 routes when you start looking at all the different places, the trucks go. And we drive about 95,000 miles a week just in this one service area in the Midwest, out of Winona, Minnesota. And so the reality of it is, a semi-tractor gets over 7 miles to the gallon, you're going to spend -- if the price is up 10%, 20%, 30%, you pick the number, we're going to spend that much more. That's the bad news.

The good news is that burden falls a lot heavier on competitors we have in this space. And quite frankly, it sells pretty high on our customers. And so we become a better value proposition because even though our costs have gone up, our costs are at a discount to any other option that's out there because so much of our industry ships small person. And so it actually -- chaotic times like this, we want to manage through the SG&A of it. And most of that diesel that I'm talking about is actually in gross margin, not in SG&A whereas our small fleets in SG&A. But it positions us to be more successful and bring a better value proposition to the customer. And I was in a customer meeting yesterday, a really productive meeting, and it's a typical [indiscernible] meeting [indiscernible] to a large customer of ours and find out that our business could be 2 or 3x larger as we turn on more opportunities. But we had a lot of discussion about how we go to market, how our network works our trucking network works. And it's a really compelling advantage when you're having that discussion.

As a follow-up, Jeff, I wanted to circle back to a comment you made regarding a priorities ahead here. One item you mentioned specifically was expanding markets globally. You've obviously got a lot of experience ex U.S. with the Fastenal business and linking that to the comment you made today, I'm just curious for whatever thoughts you can share there.

On the future outside of North America?

That's right.

Yes. I mean I was just -- actually, I was just in our Italian business last month. I mean, right now, I would say we're just in the beginning stages of exponential growth. And we have such a talented team think the focus we need to look at as a company is speeding up the transition of certain tools that we need, that we were lucky with Canada and Mexico. We kind of got to piggyback on the supply chain of the United States business unit when we first got going we look at international.

One thing when we talk about M&A or acquisitions in the future, trying to take that time frame from -- we could build it in 10 years, we could buy it and have that supply chain built in 2 to 3, 4, maybe, is really a focus for us moving forward. We have such a huge opportunity when we look at the tools on a global scale. I always use the example of -- you have a manufacturing facility in Chicago. We have one in Romania, Italy, China, we have the same tools, the same solutions in all of the countries that we're in today, all in the same platform.

In our industry today, that doesn't exist. It's just us today. Our customers want it. They want it fast and we just need to be able to keep up with the demand. And I think that's where we're at right now. We're trying to keep up with the demand from our customer base internationally. It's a good problem to have.

Our next question is coming from Christopher Snyder from Morgan Stanley.

I wanted to ask about just the strategy and approach to pricing. Has there been any change there? And maybe do you guys think at this point in time or even maybe going forward, it's better to prioritize volumes over price cost? Because it just seems that you guys would be able to drive higher price if you need it. Demand is improving. I think the cost of the inflation out there, I think it's very clear to everybody. You mentioned advantages on the cost to deliver. So is it a matter of like hard to get it? Or you just think that no, it's better to prioritize volumes?

I have 5 things I was going to close with on this call. I think I'll use them in answering this question. And these are -- if Jeff asked my opinion on something, these are the 5 things that always guide me. The first one is I love the people that are part of this team and this year's chosen family. And that means you challenge the heck. I won't say they hell out of it. The heck out of everybody to grow the skill set. The second one is love growth. And this is an accountant saying this to a sales guy, but love growth because it's -- every problem can be addressed in a simpler way, if you're growing.

The third one is incrementals matter, and it should frustrate the heck out of you if you're not getting incrementals, especially when you're growing double digits. The fourth one is be really special. Figure out how to be special to your customers. And then finally, getting back to your chosen family, Go Blue.

But Christopher my point of running through all that is we love growth, but right behind it is incremental. So you got to find a balance in that every day. because that balance gives you discipline throughout your organization. that you're not sacrificing one for the other. Does that mean if a district manager had a customer call up right now and they had a $100,000 sale at 20% or 25%, would they take that and you're basically pushing paper, will they take that sale?

I know, I would. And even if that meant that hurt my incremental margin a little bit in my district and absolutely hurt my gross margin in my district because you take those opportunities to serve your market and your market came to you because you're special. But long term, we have incredible discipline because we want to support a great business that will have great growth prospects in ROIC deep into the future. And as we grow, especially the international piece that from a standpoint of outside North America, we'd be really disciplined in North America what we're doing because it's going to take some financial capital to support that business in the years to come.

Just like 20 years ago, it took financial capital to support the coastlines of the United States. I remember when California was losing money, and we were supporting it. because we saw what the future was when we were losing money in the Southeast, up in Canada because we saw what the future was. And you need discipline to do that wherever you go.

I really appreciate all that perspective. If I could follow up with another margin question on SG&A. Is there any way to think about or maybe separate the drivers in Q2 year-on-year SG&A expansion from the variable comp reset in general or sorry, variable comp and general inflation, which should remain in the model versus fuel and freight, which could potentially ease depending on some of the Middle East resolution. I'm just trying to get a sense for how we could see that line item shift as the year goes on.

Yes. Christopher, we don't historically break down into that level of detail. I don't want us to think that these are massive impacts on SG&A. They're sizable. But if you think about combined, if you take bonuses and transportation headwinds on the incrementals. It's a couple of points. So it's not nothing for sure. It's a couple of points. But I won't break out further than that because these things are moving parts and the bonus, although it it's primarily heavily weighted on pretax. The bonus is a bit more complicated when you look across our business because, of course, some individuals and teams are a little bit more balanced between top line and pretax and some are ROIC. So there's not a real precise way to model it. But I'll just give you that for context. You look at it, if you didn't have the incremental bonus or the higher bonus as a percent year-over-year of growth and if you didn't have the inflation, you'd be looking at a couple of points of incrementals.

Our next question today is coming from Chris Tanker from D.A. Davidson.

Dan, speaking of milestone, congratulations. I mean 30 years, it's really, really impressive. I just -- I would echo the congratulations of everyone else here. So thank you very much for everything. I guess the biggest question I've got walking away from the call today, the FTE growth has been, I mean, really, really impressively constrained. I guess, has the formula really changed here? What kind of head count growth do we need sort of long term? Is this an aberration? Is this kind of the new normal? Maybe just any kind of comments on what sort of energy is required to keep driving double-digit growth here?

I'm going to -- [indiscernible] and I are still trying to figure out who's taking what questions on this call. And what I'll say is I don't know if I'd use the word constrained because I don't know that we constrained it. Our district leaders add people because they need to support business that's turning on today and in the future. Our distribution personnel do the same thing. And throughout the organization, that's true. What you're seeing is this is the natural number that's falling out based on executing in 240 business units across the planet. And I'm surprised at the number because I figured if you can get 10% productivity gains, that's pretty good. And so I would have seen it closer to 4 or 5 at the field of just based on that logic.

Now keep in mind, that doesn't translate into 4% or 5% more cost because the entry level coming in -- they're coming in a different -- they're coming in for what they're building for the future. So it's -- 4% or 5% there would be a different number.

The other thing that's happening is, and this has been going on for a couple of years, but we're reloading the portion of our field population, especially that is part time. And we do that not for a lower-cost labor. We do that to build a pipeline of talent for the future. And one of the reasons we can add at a slower pace right now is because if 20% of your head count is part time and you need to add some folks, you're adding a lot of external folks, and you're spending a lot more to make those ads and they're not as productive right away. So you actually need to add people faster and you need to add full FTEs faster.

If you have folks that are working [indiscernible] when they're a full-time student and they're working part time, when they come on board, and if that's closer to 30% of your workforce versus closer to 20%, when they're coming on board, they're just a lot more productive. So we talk about some stuff on AI here and some of the tools we're coming up with are really stunning as far as productivity on some of the quoting aspects of what we're able to do today versus even a year ago. But a lot of it is, as we reloaded our part-time ranks, we have a more productive group out of the [indiscernible] when they come full time. And you're seeing that. So I don't know if we can grow at 15% and be in low single digits forever, but I think we can do it for a little while.

Yes. I appreciate the color there, Dan. And it really is impressive leverage. So thanks for kind of the breakdown. I guess just my follow-up really simply, any change in kind of expectations for pricing into the back half of the year? Or should we assume it's still kind of low singles, maybe even as high as mid-single? Just any color on pricing would be great.

I think, Chris, you're -- what you suggested is in the realm, I would say, of what we would expect. So you can also look back at stacked pricing, and you can see that we added roughly 1 percentage point stack coming across Q1 and Q2. So yes, we're going to keep pushing. A lot of this is -- and we said this before, we're customer-centric. And so we don't -- especially with our strategic accounts, we don't just push the button and ran pricing through. So it's also a little bit harder to predict and commit to where we might land, but we're going to look at this strategically through the continued conversations as we move forward. But anyway, your estimates are not too far off from where we probably would land.

So there were 2 things that Jeff accented on the call this morning with the regional leadership. Traditionally, Max has a call, CFO has a call, with all of our regional and VP group just kind of explain what the -- a little bit about the earnings release and what some of the things we're going to talk about. And Jeff closed with a couple of things and he pushed hard on what are you doing with your EB percentage, an EB as exclusive brands, and it's really where we have some of our branded partners that have gotten maybe too aggressive at just pushing that button and jamming a price increase in. You push too hard and you give somebody a reason to look at something else. And so continue to look at the exclusive brands as a percentage of our mix. We're better at that today than we were 5 and 10 years ago and will be better 5 and 10 years into the future.

And the other one was continuing to drive FMI because FMI as we continue to drive that, especially in the production world, is driving a lot of our labor efficiencies to the last question.

With that, I see we're at 2 minutes to the hour for a minute to the hour. Thanks for joining the Fastenal earnings call today and thanks for allowing me to share the story over the years, and I'm excited to see where Jeff and the team take this business in the future. Thanks, everybody.

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.

Good morning, everybody, and welcome to Fastenal's 2026 Annual Meeting of Shareholders. My name is Scott Satterlee, Chair of the Board. And first off, I'd like to thank and appreciate the global Fastenal Blue Team for that intro video. Before we move on to official business, actually, I want to make sure I thank everybody here for taking the time as well as those watching on the webcast. We appreciate your connection and your investment in Fastenal. So thank you very much.

Before we move on to official business, I would like to introduce Pastor Mark Dumke, the retired pastor of Faith Lutheran Church to lead the invocation.

Thank you, Scott, for the invitation. And friends, it's good to be here with you again this morning. I'm thinking of 2 words this morning, gratitude and confidence. Dan, I've known you since you moved to town in 1996. And with your wife, Jenny, and your 4 wonderful kids who have now grown to be outstanding adults. It's been a pleasure to watch you and Fastenal and your family grow. Likewise, it's been a pleasure, along with all of you to watch the growth of Fastenal all of these years. I am grateful for your integrity and for your leadership and stewardship of the Fastenal company, especially as CEO these past 10 years. Congratulations.

I'm also confident in the ability of Fastenal to continually raise up leaders who are the best in the industry. I'm confident in your successor, Jeff Watts, who will build on your legacy of excellence, bringing out the very best of all the coworkers of Blue Team. I invite you all to reflect on your confidence and gratitude as we offer our prayer. Creator God, your goodness and bounty of your creation are the rich soil that blesses and nourishes and holds firm the roots of our gratitude and confidence.

As we gather to review our accomplishments, challenges and plans for the future, bless the work of this assembly and this corporation. bless the hands of those who labor, bless the minds of those who devise strategies and creative solutions, bless the vision of leaders who bring out the best in their coworkers, bless the faithfulness and trust of shareholders who provide encouragement and accountability, let our work be done not only for our gain but for the betterment of all.

Thank you, Paster. Okay. This Annual Meeting of Shareholders of Fastenal Company is now convened. Again, I'm Scott Satterlee, Chair of the Board of the company, and I will act as Chair of the meeting. Mr. John Milek, who is Vice President and General Counsel for the company, will act as the Secretary of the meeting. We'd like to recognize the founders of the company led by Robert A. Kierlin, Henry K. McConnon, John D. Remick, Stephen M. Slaggie and Michael M. Gostomski. We also have our entire Board of Directors here today, so I'd like to recognize them. We have Michael J. Ancius, Stephen L. Eastman, Brady D. Ericson, Daniel L. Florness, Rita J. Heise, Hsenghung Sam Hsu, Daniel L. Johnson, Sarah N. Nielsen, Irene A. Quarshie and Reyne K. Wisecup.

I will now ask Mr. Milek to report on the number of shares present at this meeting and to conduct the voting on the proposals to be considered at this meeting. Following the vote, our President and Chief Sales Officer, Jeffery M. Watts; and our Chief Executive Officer, Daniel L. Florness, will report to you on the company. John?

Thank you, Mr. Satterlee, and good morning, everyone. Before starting, I want to remind shareholders of the rules of this meeting, copies of which are available at the registration desk in the back. Most importantly, if you wish to speak, please raise your hand and a microphone will be brought to you. Upon being recognized, please state your name clearly and limit your statements to no more than 3 minutes. There are 5 management proposals and 1 shareholder proposal to be voted on. A designee of the sponsoring shareholder proponent is in attendance and will have 3 minutes to introduce the proposal and make a statement in support.

The Board of Directors have already made available the position in the proxy statement that you have received. The record date for the determination of the holders of the company's common stock entitled to receive notice of and to vote at this meeting was fixed by our Board of Directors is February 23, 2026. I present to this meeting a certified list of the holders of shares of the company's issued and outstanding stock as of the close of business on the record date. This list will be kept open and subject to inspection by any shareholder during this meeting.

I also present to this meeting an affidavit of a manager of Broadridge Financial Solutions, Inc., attesting that the notice of the meeting, together with a proxy statement, a proxy card and certain other documents were mailed on or about March 13, 2026, to each holder of record of the company's common stock as of the close of business on the record date. The affidavit of mailing of the notice of this meeting will be attached to the minutes of this meeting as Exhibit A. The certified list of holders of the company's common stock will be filed with the books and records of the company. As of the close of business on the record date, there are outstanding and entitled to vote at this meeting 1,148,328,513 shares of common stock.

Each share of common stock is entitled to 1 vote. For a quorum to be present, a majority of the 1,148,328,513 votes entitled to be cast must be present in person or by proxy at this meeting. On a preliminary count, they are represented at this meeting, either in person or by proxy, a majority of the votes entitled to be cast at this meeting. Therefore, a quorum is present for the transaction of business. A record of the proxies submitted to this meeting and the ballots of the individuals appointed as proxies and of the shareholders voting in person in this meeting will be filed with the books and records of the company.

Ellen Stolts has been appointed to act as the Inspector of Election with respect to all matters to be voted upon at this meeting or any adjournment thereof. The oath of the Inspector of Election has been administered and will be attached to the minutes of this meeting as Exhibit B. We are hereby making available to the Inspector of Election the list of shareholders, the registration forms and the record of all proxies submitted to this meeting. Copies of the minutes of the last annual meeting of the company held on April 24, 2025, are available at the registration desk. We will, therefore, dispense with the reading of the minutes of that meeting. All shareholders of records as of the close of business on February 23, 2026, are eligible to vote on the matters to be considered today.

We will now take up the business of the meeting. We have 6 matters to be considered by our shareholders today. The first is the election of directors for this coming year. The Board of Directors of the company has nominated the following 11 persons for election to the Board to serve until the next regular meeting of shareholders or until their successors are elected and qualified. Scott A. Satterlee, Michael J. Ancius, Stephen L. Eastman, Brady D. Ericson, Daniel L. Florness, Rita J. Heise, Hsenghung Sam Hsu, Daniel L. Johnson, Sarah N. Nielsen, Irene A. Quarshie and Reyne K. Wisecup. I will now open the floor to a motion to formally place before this meeting the nomination of these individuals. I recognize Mr. Pat Jolliffe.

I'm supposed to have a microphone available to me [indiscernible]. My name is Pat Jolliffe and I am a shareholder of the company. I move to formally place before this meeting the nomination of the 11 individuals -- I place before the -- excuse me, I place before the meeting the nomination of the 11 individuals identified for election to the Board of Directors to serve until the next regular meeting of shareholders and until their successors are elected and qualified.

Thank you. As no other nominations have been made in accordance with the procedures established in the company's bylaws, I declare the nominations to be closed. The next matter for consideration today is the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for fiscal year 2026. I would like to introduce Mr. Ryan Lepper, a partner with PwC LLP and Ms. Lauren Carew, a Director with PwC LLP, who are here today to answer any questions that you may have. I will now open the floor to a motion to formally place before this meeting a resolution concerning the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for fiscal year 2026. I recognize Mr. Ken Lyons.

My name is Ken Lyons. I'm a shareholder of the company. I move that the following resolution be adopted. Resolved that the appointment of PricewaterhouseCoopers LLP as independent registered public accounting firm for the company for the fiscal year ending December 31, 2026, be and hereby is ratified.

Thank you. Is there any discussion of this motion? It has been moved that the appointment of PricewaterhouseCoopers LLP as independent registered public accounting firm for the company for the fiscal year ending December 31, 2026, be ratified. I will now open the floor to a motion to formally place before this meeting a resolution concerning the approval of executive compensation. I recognize Mr. Dan Norris.

My name is Dan Norris, and I'm a shareholder of the company. I move that the following resolution be adopted. Resolved that the shareholders of the company approve on an advisory basis, the compensation of the company's named executive officers as disclosed in the compensation discussion and analysis. Compensation tables and related disclosures contained in the section of the proxy statement for 2026 Annual Meeting of Shareholders captioned Executive Compensation.

Thank you. Is there any discussion of this motion? It has been moved that the compensation of certain of our executive officers be approved. I will now open the floor to a motion concerning the approval of the Fastenal Company employee restricted stock unit plan. I recognize Ms. Kate Hazelton.

My name is Kate Hazelton. I am a shareholder of the company, and I move that the following resolution be adopted. Resolved that the shareholders of the company approve the Fastenal Company employee restricted stock unit plan.

Thank you. Is there any discussion of this motion? It has been moved that the Fastenal Company employee restricted stock unit plan be approved. I will now open the floor to a motion concerning the approval of the Fastenal Company nonemployee director stock and restricted stock unit plan. I recognize Ms. Betsy Derby.

My name is Betsy Derby, and I am a shareholder of the company. I move that the following resolution be adopted. Resolved that the shareholders of the company approve the Fastenal Company nonemployee director stock and restricted stock unit plan.

Thank you. Is there any discussion of this motion? It has been moved that the Fastenal Company nonemployee directors stock and restricted stock unit plan be approved. The last matter for consideration today is the shareholder proposal relating to EEO-1 report disclosure policy if the shareholder proposal is properly presented at this meeting. This shareholder proposal was submitted by the Comptroller of the City of New York, Mr. Brad Lander, on behalf of the New York City Employees' Retirement System, the New York City Teachers' Retirement System, the New York City Policy Pension Fund and the New York City Board of Education Retirement System and was included in the proxy statement. The Board makes no recommendation on this proposal. I understand that the designee for the sponsor of the proposal is in attendance and will present the shareholder proposal. Please begin and limit your remarks to 3 minutes.

Good morning, Mr. Chairman, members of the Board and fellow shareholders. My name is Andrew Elcock. I'm a senior investment analyst for the New York City Comptroller's Office. I'm presenting Proposal 6 on behalf of the New York City Comptroller and 4 New York City Pension Funds, which are substantial long-term shareholders with roughly 1 million shares of the company worth approximately $47 million. Proposal 6 as is the Board to adopt a policy requiring the company to disclose on its website a consolidated EEO-1 report, which is a comprehensive breakdown of its workforce by race, ethnicity and gender that the company is required to submit annually to the EEO-C.

Fastenal website states, -- because we value people, we prioritize safety, we foster a culture of diversity, equity and inclusion, and we strive to improve communities and the planet, we remain strongly committed to promotion from within, creating pathways for employees to branch out, build rewarding careers and become leaders in our organization. We commend the company on its commitment to racial and equity diversity.

However, without robust and comparable disclosure of its workforce demographics, shareholders have no way to benchmark the company's diversity performance and hold it accountable for its commitments. We appreciate our engagement with management this year, but we urge you to go further to provide shareholders with consistent and comparable decision useful information. I would like to point out also that the Board elected not to take a position on this proposal. We urge shareholders to vote for proposal #6. Thank you.

Thank you. I remind shareholders that the Board makes no recommendation in regards to voting on this proposal. Shareholders of record who wish to vote on these motions by ballot had an opportunity to vote in person at the registration desk. The polls are now closed and the ballots will be counted. While the ballots are being counted, Mr. Jeffery M. Watts, our President and Chief Sales Officer; and Mr. Daniel L. Florness, our Chief Executive Officer, will report to you on the company. After the conclusion of the report, we will answer any questions that you may have relating to the company and its activities. Thank you.

Good morning, everyone. I'm Jeff Watts, Fastenal's President and Chief Sales Officer, and it's an honor to stand before you today to review our company's performance and share our vision for the road ahead. Let me first start by saying just how proud I am of what Fastenal achieved in 2025. We navigated a challenging environment, and we delivered remarkable results. But even more than that, I'm excited about where we're headed and the strong foundation we've built for our future growth and our value. So getting started, if I had to sum up 2025 in one word, it would be execution. Now last year, it demanded discipline and focus.

And throughout the year, we faced uneven industrial demand, continued tariff pressures and customers who are understandably cautious of trying to control their risk in their supply chains. The Purchasing Managers' Index or the PMI, it ended the year had spent 36 of the previous 38 months below 50, indicating contraction in the industrial sector. In other words, the environment was far from simple. And yet Fastenal rose to the challenge. We stayed close to our customers. We concentrated on the factors that we could control, and we executed our game plan with consistency across the organization. In a difficult climate, our disciplined execution, it protected our margins and really positioned us to resume our growth, benefiting both our customers and our shareholders.

Now our performance last year, it wasn't really just about the numbers. It was about how we delivered them and where we got the growth from. As you can see, Fastenal delivered approximately $8.2 billion in total sales, fueled by strong contributions from across our geographies, across our customer base and our product lines. United States remains our core market, accounting for $6.8 billion, roughly 83% of company sales. This business unit, it grew revenues over 9% and remains the engine driving our growth. Internationally, our business continues to expand. Canada and Mexico generated $1.1 billion or about 14% of sales and our other global markets, including Europe and Asia, it provided about $250 million or 3% of total revenues.

And while our U.S. business is strong, these international gains, particularly in Canada and Mexico, it shows that Fastenal's value proposition resonates globally. We have a significant runway for growth in our international markets. Now when we look at our customer site spend data, what really stands out is the scale and strength across our customer spend tiers. We're accelerating our growth by deepening relationships with our largest customers. Last year, there were just over 19,000 customer sites, each doing over $5,000 per month with Fastenal. Collectively, these larger accounts generated about $7.3 billion, 11% more than the previous year. But within this group, almost 2,700 sites spent over $50,000 per month, contributing $4.3 billion to the company.

The number of sites in the 50,000-plus tier grew by 12% with revenue surpassing 15% growth. The takeaway is clear. Our largest customers are expanding with us and a strong indicator of customer trust and the value that we deliver. This consistent momentum across tiers, not just at the top, it shows strong durable demand and a healthy pipeline for our future expansion. Now when it comes to product lines, our mix spans both direct and indirect categories. Fastenal's product offering continues to diversify. And in 2025, almost 40% of our sales were direct materials. Those are like the production components and supplies that become part of our customers' finished goods or products directly consumed in that production like cutting tools and abrasives.

Manufacturing customers now represent about 76% of our sales and roughly 50% of that subset is direct materials. On the other side, indirect materials, the MRO type items like safety supplies and nonproduction type items, they make up 60% of our revenues. And this balanced mix between direct and indirect product shows how we've evolved into a broad spectrum supply chain partner. This diversification, its strategic strength. It expands our market opportunity and makes us more valuable to each customer by fulfilling a wider range of their needs. In summary, we succeeded by growing the right way through trust, through partnership and delivering real value to our customers. Now let's take a step back and look at the year in a longer-term type context.

Now this chart on the slide, it shows Fastenal's key financial metrics in 2015, 2020 and 2025, alongside our future milestones of $10 billion and $15 billion in revenues. These figures, they reflect 10 years of strong sustainable growth. In 2015, Fastenal's annual sales were $3.8 billion. By 2020, we'd reached $5.6 billion and in '25, we've reached $8.2 billion. That's an annual growth rate of approximately 8% over the past decade. Essentially, we doubled our revenue in 10 years, turning the vision we all had of an $8 billion Fastenal into reality. And this consistent growth, it reflects our ability to gain market share and expand our range of products and services.

Our aspiration looking ahead is to continue this trajectory towards $10 billion and eventually $15 billion in sales. Hitting $10 billion will represent roughly a 22% increase from last year and reaching $15 billion will nearly double '25's revenues again. And these are ambitious goals, but achievable with the large market opportunity that we see and our track record of growth. Now importantly, we've grown profitably. Operating income reached nearly double over the past decade, reaching $1.6 billion in 2025. Our operating margin has held steady at around 20% every year even as we scaled. I think that's a testament to our productivity and our cost discipline.

Our return on invested capital rose to 31% in '25, up from 25.6% in '15, demonstrating again how efficiently we're deploying capital to generate returns. And most importantly, for you, our shareholders. And we've returned significant value. In 2025, we paid over $1 billion in dividends, the first time our regular dividend crossed that milestone. That's about 80% of our net income. Over the past 5 years, we've generated $5.6 billion in net income and returned more than $4.5 billion of that, over 80% through dividends and share repurchases, all while continuing to invest in our people, technology and inventory for future growth. This is what balanced growth looks like, expanding our business, maintaining strong margins and delivering meaningful returns to our shareholders.

So how do we continue this momentum? Our strategy is built on a simple powerful idea from our founder, Bob Kierlin. Organizations succeed to the extent that all their members pursue a common goal. Now that's a shared purpose is what drives us forward. Supply chains grow more complex, our customers need more reliability, visibility and efficiency. We're meeting that challenge, not by reinventing Fastenal, but by sharpening how we win. We've aligned our entire organization around 3 core objectives: increase sales effectiveness, enhance our services and expand our total addressable market.

And these goals are supported by key accelerators that are already starting to deliver results like leveraging artificial intelligence to work smarter and more efficiently by expanding our reach through e-commerce and empowering our customers with Fast 360, which is our digital front door for analytics and visibility and control and scaling our on-site and Fast [indiscernible] service models to embed Fastenal directly into customers' entire operations. This isn't just a strategy on paper. It's a living game plan. It's guided us through last year's challenges, and we'll continue to shape how we grow and invest and create value in the future.

Now by deepening customer relationships, expanding our offerings and driving innovation, we're building a stronger, more valuable Fastenal for our customers and for you, our shareholders. Before I close, I want to highlight an example of our strategy in action. And it was this year's the 2026 Customer Expo. We had over 3,000 customers there, over 4,400 total attendees, and it was more than an event. It was a showcase of partnership and innovation and the value that we deliver. We hosted sessions tailored to evolving customer needs, and we created space for collaboration between customers and employees and our supplier partners. The focus wasn't on immediate sales. It was on deepening relationships and accelerating solution adoption and building long-term value.

That's how we grow with our customers. We believe efforts like this will pay dividends for years to come, fueling growth, strengthening loyalty and reinforcing Fastenal's role as a trusted supply chain partner. And with that, I want to finish up by saying thank you. Thank you for your continued trust and investment in Fastenal. We're proud of what we've accomplished, and we're even more excited about what's already -- what's coming in the future.

Now before I turn it over to Dan, as many of you know, this is Dan's last Annual Shareholder Meeting as a CEO with a planned leadership transition later this year. And before he begins, I want to say publicly what I've told him privately, and it's been extraordinary to work with you. Thank you for your steady leadership through every challenge and opportunity and for your clarity of vision and for really guiding this company with integrity. It's truly an honor to have been your colleague and to now following your footsteps. And so on behalf of our entire team and the shareholders, again, thank you. Congratulations on an incredible tenure.

Jeff, thank you for the comment. And I'll tell you, I don't know -- there were moments and for what it's worth 30 years ago when I started, I did have hair. So -- but I did want to address one of the first questions I heard today. And I was -- and I repeated the question to my team because I was -- I had the same question. There are chocolate chip cookies. I don't know what box they're in. So the day started kind of interesting. My wife and I moved up to Lake Pepin area a couple of years ago after our youngest -- our daughter graduated. We still have a home here in Monona, so I stayed down here the last couple of days. And this morning, I get up and my wife is up in Lake Pepin area. I get up, first off, I couldn't find the keys to my truck. I get in my truck and I'm driving to work, the low gas light comes on.

And I'm thinking, boy, this is a great start to the day. And then I get a call from my wife and she says, "Okay, Florness, what suit are you wearing? Does it have wrinkles? And I can't see wrinkles. When we're 85 to 90 years old, that's a good thing. But I can't see wrinkles. So my wife did show up in my office at 8:00 with a steamer. And I do have a burn on my left leg because you should take your pants off when you use a steamer. As always, past to Mark, thank you for the last 30 years. Thank you what you did to help Jen and I raise, I think, 4 great kids, and it's great to see you once again. And Mark, I'm not sure if I'm doing it because I'm driving it.

So first off, one of the pleasures of this annual meeting and one of the pleasures of being in this role, I get to recognize folks that have given to the Blue Team over a long career. And as you can see, we were quite a much smaller organization 25 and 30 and 40 years ago. The folks that joined saw something special in the people they met, and they decided to stick around. And I'd like to start by recognizing 5 people who have been here for 40 years. And after I run through the list, if they would stand and be recognized, I'd appreciate it. Dan Norris, Jim Stanick, Pat Jolliffe, Ken Lyons and John Beckman. And this comment is no slight to those 5 individuals, but I would ask the room to recognize their guests.

We are successful based on who we choose to surround ourselves with, and we're blessed for that in life. So after -- when I was -- trying to figure out what I was going to talk about this year, my wife reminded me, Florness, nobody is here to hear you talk. They're actually here for lunch. And -- but I thought I'd share a view of what these individuals have seen in their 40 years. So I went back to the first annual report I could find. It was from 1987. And I remember making a comment to Bob when I first saw this annual report many years ago when I joined the organization. I said, Bob, by 1987, you had the big 10 covered. Because if you notice those states, that's the original big 10 states.

And -- but I popped into Casey Miller this morning, and I said, Casey, I need to apologize you upfront. I noticed something that I never mentioned to Bob, but there was an error in our 1987 annual report. We had 2 locations in Kentucky. And you can see them right there south of the Ohio River. And -- but in the years that I've been in this role, I've had the opportunity to discuss the business with a lot of individuals within the company because we're not an $8 billion organization. Jeff, with all due respect, I disagree, we're not an $8 billion organization. We're actually 240 district business units that average about $35 million a year. That's where our business -- the strength of our organization comes from.

And 30% of my time over the last decade has been spent in one-on-one discussions with those district managers, understanding their business, how they go to market and how do they discover ways to be special for the customers in their market and how they grow. And I want to also thank -- it was a discussion back in 2019 before the world got weird in the COVID year. But in 2019, I was having a conversation with our district manager in Southwestern Minnesota. And it was one of those kind of lightbulb moments, and because I was looking at this district, and Jason, I don't know if you're in the room, but if you're listening, but Jason Knudson, thank you for that conversation, by the way.

But I was looking at his district, and he had moved from Nebraska up to Southwestern Minnesota in around the 2017 time frame. And quite frankly, that district, that area for Fastenal had grown 2% to 4% for a decade. Now it was nicely profitable. It was a nice business, but it wasn't special. And in a few short years, Jason turned that business into a business growing in the teens. And it really came from the standpoint, he had about 30 customers doing more than $10,000 a month in that business. And over about a 5-, 6-year period, he grew that $30 to about $80 million. And that $20 million district became a $60-plus million district. And we discovered something that was really special in one of our oldest business units of, yes, we can make a difference for our customers and be really successful by being a supply chain partner to them, not merely a purveyor of goods.

And it changed a lot of how the business has developed ever since. But getting back to the premise, so back in 1987, this was the organization that these 5 individuals would have experienced back in the day. I want to show you how it's changed a little bit. And I normally don't have notes in front of me. I have the slide deck because when I'm up here, I really can't see what's on that screen with lights coming in. But back in 1987, we did about $20 million in revenue. And for Casey's benefit, I flagged that there was $1 million in Kentucky. We probably opened those 2 branches in December, and it was probably $10,000, but we'll round up. And -- but by 1995, that organization had grown to $223 million. And you can see -- we had to kind of estimate because we didn't have the actual detailed numbers by state, but you can see those 8 states that were the big 10 circa 1990 when Penn State joined.

We had about $100 million in revenue in that area. It had grown fivefold in those 8 years. And then we'd added about another $120 million in the rest of the United States as we've expanded. But we expanded beyond the United States in that time frame. We opened up in 1994 in Southern Ontario. It was a couple of years later that Jeff Watts joined the organization in Southern Ontario. And you can see we grew to about a $1.5 billion organization. But look at the growth that's happening in those oldest business units. Even though we've been there for years, the market was immense. We had to figure out how to tap into that market. And by 2015, we were a little over $3.5 billion.

And here's what it looked like last year. So again, $8.2 billion organization, almost $7 billion in the United States, $1.1 billion outside the United States and the rest of the Americas and about a $250 million business between Europe and Asia, incredible opportunity to grow the business. The market is immense. And the thing that's most important to me when I look at this is to this day, we figured out how to grow in those original 8 states, which gives me confidence. And this isn't a forward-looking statement, so I don't want to get in trouble with the SEC here, but it gives me confidence in Fastenal's ability to grow in the future because the market exists. We have to decide if we're going to go take it, but the market exists for us to keep expanding for years to come if we so choose.

Also thought I'd take a quick look at the business from the standpoint of -- in our earnings release last week, we mentioned that our return on invested capital was just over 30% in the first quarter. And for 2025, it was just over -- it was in the low 30s as well. When I had that 1987 annual report out, I looked at it and said, I wonder what it was back then. We were in the high 20s. I was surprised it was that high because we weren't as profitable back then. But we also didn't have as much capital deployed in business. And so we had a really attractive business. Probably one of the reasons the marketplace embraced us when we decided to go public back in 1987. And here's what it looks like in between. In the '90s, we actually expanded into the low 30s.

Again, I was surprised by that. But I learned from one of our Board members a number of years ago, and it's a Board member where English is a second language. And he taught me a piece of English language I didn't appreciate. And it was a concept. It was strategy, and strategy is about choice. And we chose, as we went through the '90s and into the 2000 to expand the breadth of products that we distribute. We chose to expand the breadth of customers we sell to. In the mid-90s, we added national accounts. And that's a different game from what we were doing prior to that. We also decided to start sourcing more product directly, which meant we needed a lot more working capital because you're not buying weeks and months of supply, you're buying months, maybe a year of supply in order to source that item at a different cost point.

And so we allowed the return on invested capital to move down into the mid-20s because that was the right long-term decision for Fastenal and its shareholders, its customers and its employees. Pleased to say in the last decade, we were able to, again, through choice, move the return on invested capital back up into the low 30s. And that's a testament to Bob Kierlin and the original founders and the ability of the Blue Team to execute and choose a path for them that was different than the path we had. It also required a lot of change in the organization in that time frame, and I'll touch on that in a few minutes. But if you're curious, here's a few more. And again, this is my last time to talk.

So I want to share some of this stuff because I find this fascinating. And I hope everybody isn't sitting like when is this guy going to shut up so we can have lunch. But fixed assets to sales, we didn't have a lot back in the '80s and '90s. But we needed more distribution capacity to do the things we wanted to do. We needed more trucking capacity to do the things we wanted to do. And you can see how that third column in the middle section there, 9% of sales, 10% of sales, 14%. We actually had for every dollar in sales, $0.20 in fixed capital a decade ago. Now I put that little 17% in there. A decade ago, we were really in the early innings of this thing we call Fastenal managed inventory or vending is what it started as. And if you would have gone down to Des Moines, Iowa, you would have found a warehouse full of vending machines because we had bought a bunch, and we weren't deploying them quite as fast as we thought we would.

And we had about $130 million worth of vending machines stacked to the ceiling in this warehouse. And we were kind of looking around kind of like, oh, God, what did we do? We decided, again, strategy is about choice. We decided we need to pick up the pace and deployment. And I'm pleased to say we worked that capital off. But if I remove that, we didn't really have 20% of sales. We had about 17%. But look how that number has dropped over the last decade because of the Blue Team going to market in a responsible way. We also made a choice to close about 40% of our branch locations over the last decade because we moved where we do business. It wasn't strictly out of a Fastenal branch. Today, over 50% of our business is with customers doing more than 50,000 a month in that location.

And most of that business goes through what we call an on-site where we're physically in their facility. And it changed our real estate needs, and it allowed us to accomplish that. And then on the far right, you can see again our invested capital and what that is. It's kind of funny when I look back to 1987 to think our total invested capital in the organization was $7 million. And today, it's just over $4 billion. If you want an exercise in finance, that is the definition of compounding your growth over a long period of time. So what have the last 10 years taught me? And one of the things I tried to do in the President's letter or in more recent years, the shareholders' letter in general, is try not to use the word iron me.

But if you would allow me, I'd like to share a few things I've learned over the last 10 years. One of them was these 10 rules that Bob had carried a lot more meaning when you're the CEO than when you're the CFO, especially rule #1, challenge rather than control. And the adversity of the situation really challenges to leaders to emerge. And I'm particularly impressed with the folks on the Blue Team on the leaders that have emerged over the last decade to assist me in the cause and to assist the organization in the cause. To get us through periods of uncertainty, COVID is a perfect example, and you're not sure if the step you're taking is the right step and you rely on the folks around you. Rule #9, let people learn.

A key to a leader is what are you -- what is your habit every day to develop yourself and to develop those around you, so you continually make the organization and everybody better and bring more ideas to the customer and the marketplace. That's what allows us to grow for the last 40 years. So this year, maybe you've seen this chart if you participated in some of our earnings calls, it's -- there's an index out there called the Purchasing Managers' Index, and it's a survey that's done of purchasing managers where they look at the backlog in their business. And being the Blue Team, we consider red bad. And those periods that you see that are red are bad. And I remember when stepping into the role back in the fall of 2015, you can see a few months there of red. We actually went negative in sales growth for the last 4 months of 2015.

There was a lot of uncertainty. There was a lot of folks wondering, geez, what's happening to Fastenal? And if you would allow me, I would like to add 5 rules to Bob's list that I learned over the last decade. Rule #11, don't be a victim. And I think Jeff's letter to shareholders this year said it well. He said, we didn't wait for the market to lift us. We leaned into our strengths, our people, our service and our ability to solve problems for our customers. The other thing about not being a victim is you need to have empathy, but you have to have a plan and you have to decide to execute on that plan.

Then it's our destiny, not what we're victims of. Rule #12, own everything that goes wrong. 13, share the rewards on everything that goes right. 14, always understand the math and the story behind it, and you can replicate success in many different places because you can share that story throughout the Fastenal organization. And finally, I learned this from Bob, believe in people. All else fails, believe in people. They'll surprise you and impress you every time. Life has some special phrases. I'm wrong is a good phrase. I'm sorry is a good phrase. If you don't have a phrase, maybe a simple smile because that is a phrase in and of itself. Usually, it means hello or you're trying. I believe in you as a great phrase, but I don't think there's anything better than the phrase thank you.

So to the shareholders in the room, thank you for placing your trust in the Blue Team. Since 1987, for me more personally in the last decade, thanks for cutting a slack on the things we messed up and believing that having a plan for the long term works for the long term. Although I do have to say every year when we're doing the vote, you get updates to the voting, and I saw the update this morning. And I was thinking in the final year, I wonder if the directors will get more votes than our external auditors. We didn't make it. And I guess that's just life, but I just thought I'd share that.

But thank you for everything you've done as far as allowing us the opportunity to take the investment you entrusted us with and growing it into something special. I got going ahead of myself there. To the Board and Scott, in particular, thank you for the partnership over the last decade. And thanks for allowing me to vent. I was probably a pain to have around most of the time. And -- but thank you for -- we all need a shoulder to cry on sometimes or to vent with. And so thank you for providing that shoulder. From a mentors and peer standpoint, 2 that stand out early in my career, Mike Dolan, one of our former directors, when I first was out of college, I worked for Mike. I learned a lot from Mike over the last 40 years of knowing him. So thank you for that.

And for Bob Kierlin, thank you for the opportunity of a lifetime, and the mentorship you provided to me over the last 30 years. From a peer standpoint, when I first stepped into this role, Nick Lundquist and Reyne Wisecup could have chosen to look at it and say, okay, we'll do our job. But we won't do more than that. And they did just the opposite. They pushed me in, pushed us in every way they could to make Fastenal a better organization until the last day they were in the office. I thank them for that. A few of the Fastenal folks are going to laugh when I mention this next one, when I say selfless leader because if you know the person, he has kind of an in your face persona, maybe a little bit of an arrogant persona, but he's an incredible teacher of people. And that's Randy Miller.

Randy joined us back in February of 1987. He lived in Winona for a number of years, and then we asked him to relocate down to Indianapolis to lead our business down there. Randy has developed more leaders within Fastenal. We often talk about our tree and who's spraying from your tree. And if I think about our regional and district leaders, nobody has developed and mentored more people in this organization from Randy Miller. And Randy will be hitting 40 years next year. And I hope he comes to the annual meeting and be recognized. I'm coming to see Randy recognized a year from now. But he's been an incredible person for me to talk to over the last decade of bouncing stuff off of and getting some very blunt feedback, which is well appreciated. So Randy, thank you for that. In the letter to shareholders this year, I generically mentioned 4 people, and I'd like to call those 4 people out by name.

In 2014, I asked Bill Drazkowski to step out of a regional leadership role and lead our national accounts. Nothing was more eye-opening for me than working with Bill in that -- in roughly a year directly in national accounts because we -- I really realized in a lot of discussions with customers, how truly big the opportunity was and what some of our priorities should be in the decade that followed. So Bill, thank you for that. First decision that was presented to me is I chose a leader for the Eastern United States. And Casey Miller was originally from Kentucky. I tapped him on the shoulder and I said, "Hey, Casey, can you move up to this cold area for a few years? What you've done in Kentucky and Tennessee is special in the organization, and we need to bring that special to more places.

Casey assisted from the standpoint of if all my decisions over the last decade would have been as good as that, we've been a lot bigger today. But Casey made me look smarter than I actually am. And Casey, thank you for everything you've done for the Blue Team in the last decade. In 2016, John Soderberg, John started in a branch for us in the East Coast. And John once showed me this app on his phone where you can pull up at the sky and it will tell you what you're looking at. Hey, there's Jupiter, there's Mars. This is that constellation. So I came to John in the summer of 2016, and I said, "John, how would you like to run IT?"

And I said, we have great people in IT. They're not close enough to the business. And we need a great leader to bring them closer to the business. And John didn't say -- didn't give me the sideways look. He said, "What do you need me to do?" And John has led that group for the last decade and done amazing things for Fastenal, Fastenal's employees, our shareholders and our customers. John, thank you for that. Jeff and I, we actually met in the late 1990s. He was a district manager out, I think, in British Columbia at the time. And we've had a close relationship ever since because he always asked really good questions, even if sometimes there were questions I didn't want to hear.

And I'm really excited for what the next decade means with Jeff and this leadership team going after an incredibly large opportunity in the marketplace. And finally, to the 25,000 people on the Blue Team, thank you for cutting me slack on the dumb decisions and supporting me on the ones that were better and fixing again the dumbest decisions I made. Finally, what Fastenal has taught me over the last 30 years, recruiting is hard work, but it's really simple. Just find great people, ask them to join and give them a reason to stay. And always remember, regardless of where you go in life, no culture or geography has a monopoly on talent or ambition. You can find it everywhere.

In fact, if you were talking to a bunch of leaders here today, you discover a lot of them are native Spanish speakers, not because we're trying to teach Spanish to everybody in the organization, because we found some incredibly talented people down there as we did in every place else we went, and we asked them to take a step forward and bring their leadership to more people within the organization. And finally, I've talked about quite a few people today, and hopefully, everybody isn't sitting here like, okay, does this mean it's almost done because, yes, it does mean I'm almost done. Surround yourself with people better than you. That's the biggest advice I can give to the leadership team for the next decade. And on that note, and I'll try to keep my composer on this one.

Jen, thanks you for the last 30 years. My wife and I got married. I met Jenny and Gustafson in late in 1993 time frame. We got married in the fall of 1995. We celebrated 30 years last year. Thanks, and thanks for our 4 great kids. And in case you're wondering, so we got the chocolate chips covered. In case you're wondering what Florness is doing next, I have a plan. So in February, we sponsor NASCAR. And in the NASCAR, our team, the [ Fenley Kozlowski ] team gave me a fire suit. And that's the suit, the pit crew wears when they're doing the things they do on that stuff that takes a split second. So yes, I put my name in to join the pit crew, although I talked to them in February, and I haven't heard back yet. So I'm not sure what that means.

With that, thank you, and I'll turn it back over to Scott.

So I promised Dan that we weren't going to embarrass him too much. But after that last slide, I realized he has no problem embarrassing himself. Dan Florness has had an exceptional career at Fastenal. For those of you who don't know, he joined the organization in 1996 coming from the public accounting sector. And like most CFOs, Dan's great with numbers. In his case, he'll tell you a long story about them sometimes, but he's exceptional with numbers, like most CFOs. But Dan did something very different. He embraced Fastenal's culture.

And what I mean by that is, early on in his career as CFO, he started visiting offices, getting out to the field, going to distribution centers, interacting with customers, talking to employees at all levels, understanding the business and then applying his financial acumen to be able to produce solutions that could be delivered out in the field. For that reason, he was promoted to CEO in 2016, that ability to be able to embrace the culture and learn the business and be part of the Blue team. Now there are a number of key milestones, both financially and strategically, and I'm only going to touch on a couple for you actually because both Jeff and Dan mentioned a number of them.

So doubling revenue, operating margin, our operating income, providing the dividends, consistent dividends over the years, achieving market capitalization beyond $50 billion and a number of others as well as some strategic milestones that are critical. Thinking about adjusting the network. Like Dan said, there's been a shift. There's been an expansion of physical offices and on-sites, but mainly on-sites and that infrastructure to get closer to customers and provide growth through customer service. As well, one of the things that wasn't mentioned is during this time period, things like e-commerce, the international business, vending all surpassed $1 billion in revenue.

But most importantly, and Dan alluded to it, Dan was critical in working with the leadership team to help shift Fastenal from a transactional distributor to a data-informed supply chain partner. So Dan has many skills, many achievements during his career, but I want to focus on one that I think goes a little bit underrated. One of his skills, one of his strongest skills, and you can see it when he presents. And if you spend enough time with them, you can see how he interacts, but he has a tremendous ability to connect with people. I wrote down a number of comments as I kind of prepare for this from employees that I've interacted with. From the very start, Dan has prioritized the importance of customers and employees through interaction and recognition.

One of the things he regularly does for the Board and for employees is provide updates via video. And every single one of those videos outside of the information that he's presenting recognizes key individuals just like he did for the 40-year employees. It's a signature component of Dan's leadership style. During COVID, as we all know, a very difficult time for society. His message always prioritized employees' health and safety while also emphasizing that Fastenal's goal was helping customers to do the same. Dan believes in people and their ability to do great things when given the chance. He also cares more about employees' success and well-being than his.

It comes out when you listen to him. He also leads by example with practical frugality that doesn't mean he's cheap. He's frugal practically. He also insisted that honesty and integrity are nonnegotiable leadership qualities. The founder of Fastenal, Bob Kierlin, wrote a book called the Power of Fastenal people. I'm probably guessing many you have read it, it's an exceptional read. The book outlines the core cultural pillars that make Fastenal a special company. Within it, as you saw from Dan's slides, Bob outlines the 10 key leadership characteristics, now maybe 15, that embody the culture. Dan embraces these leadership characteristics. And it's one of the many reasons he is so admired in the field and why he's going to be very missed, not only from the organization, but also at the Board. He's been an exceptional Board member and provided the same sort of integrity and guidance and cultural understanding to all of us.

Dan is leaving the organization in the very capable hands of an exceptional leadership team, led by Jeff Watts, all of whom also embody the power of Fastenal people. Unfortunately, Bob Kierlin is no longer with us. But if he were, Bob would be very proud. Please join us in thanking Dan Florness for everything he has accomplished for Fastenal.

So now with that, we're going to make Dan take some Q&A actually. Probably good if Jeff leads it right now. I think both of you are going to do it, right?

[indiscernible] ruin that moment by having Florness and Watts answer some questions. Are there any questions from the room? Okay. There's one person over here on this side.

Dan, you're a numbers guy. Nice to see you. Over the tenure that you put in the 10 years, the revenues have grown about double.

Just over doubled. It was about [indiscernible].

What has the stock done in 10 years?

We're off a little bit in last week. We were almost up fivefold, but a little bit over fourfold. Yes, we were about $11 billion in market cap back in the fall of 2015, and we're just over $50 billion today.

Any other questions? I like your question right to say yes. One here in front.

I have a question about the vending machines. Over the last 5 years, how has the projection been on the growth of the vending machines?

So I'll take it -- I'll answer it in pieces. So if I go back to a decade ago, and then I'll kind of plug in halfway because I don't have the exact number from 5 years ago. But if I go back a decade ago, about 24% of our revenue went through either a vending machine or through e-commerce. And it was probably about 18 and 6 making up that 24%. Today, that number is 62% -- I think last October, we were about 62%. Maybe we're 63% now. But -- and inside of that, the vending is about 46%, 47%. So it's gone from about 18% of sales to about 47%. Biggest piece of that increase is vending. So if I kind of walk that back, you're probably looking around 30% to -- 25% to about 45% is what the vending is as a percentage of our business.

Not all of that is pure growth. A lot of it is growth. A lot of it is introduced into existing customer relationships, and it makes the business more efficient because one of the challenges in supply distribution -- in supply chain is knowing what's on the different shelves and what's close to the point of use, which is the person working in that manufacturing plant or that distribution center. And what the vending machine does as well as all the adjacent things we do like the RFID and all these different systems, it puts a gas gauge on that supply of inventory that's inside your customers' facility.

And it's like my car this morning. If I wouldn't have had a gas gauge, I wouldn't have made it to work. And I would have called my wife and I would have said, "Hey, Jen, when are you getting down here? I'm somewhere on county 17 out of gas. So by having that in our customers' facility, our replenishment becomes very efficient from a labor perspective, and we can actually lower the amount of inventory that our customer needs in their facility. But to get back to your question, it's gone from mid-20s to mid-40s as a percentage of our business.

Thank you. Thank you for all your service, too.

Thank you. Anybody else? There's one question over here. There's a mic coming up right behind you.

I agree. Thank you for your service. This last year has been a lot of ups and downs with tariffs and what's good and what's bad and what's been converted. What's the process for Fastenal with the tariffs that have been extended to you? And what's the future going to hold?

The future changes about every 15 minutes. And so that one I can't -- I can say it will be interesting. As far as what we try to do as an organization is we immediately -- we have a great team that goes about studying what was just announced. And we communicate as quickly as possible with our customer of what this means for their supply chain. And we try to give them as much time as possible to make decisions because when you do that, you create optionality for your customer. And I believe our customers really value that aspect of us because when tariffs come along, we're not raising prices. We're sharing with our customer, their supply chain has just become more expensive.

And then we're giving them options of how to reduce some of that increase or eliminate it altogether by modifying source supply, by modifying the product selection, by being creative with our solutions. And our team in the field are particularly good at that. And since 2018, they've had a lot of practice. But that's the biggest thing to do is give information so people can make decisions. And Jeff, I don't know if you want to add anything to that.

All right. Any other questions? Before we switch it back over -- I'm going to close out the question part then. Before we switch it back over to the final part of the meeting, the voting results, I do have a gift for Jeff. Now Jeff is Canadian. Now normally, I would say Jeff is Canadian so when I talk to him, I use small words, but I'm not going to say that today and we're good friends as well. But I don't have a baton to pass off to Jeff. So I thought I'd get something that resonated more for this circumstance. So give me one second. I don't know much about hockey, but -- and Jeff will agree with that. But I'll make 2 comments. One is [indiscernible] are known for maybe being -- having a screw loose once in a while. And so it's okay to have some crazy ideas once in a while. Vet it with the team. Secondly, I always remember, and this is as funny as I get, the Puck Stops Here. Thanks, everybody.

Okay. The ballots have now been counted, and the report of the Inspector of Elections indicates that Scott A. Satterlee, Michael J. Ancius, Stephen L. Eastman, Brady D. Ericson, Daniel L. Florness, Rita J. Heise, Hsenghung Sam Hsu, Daniel L. Johnson, Sarah N. Nielsen, Irene A. Quarshie and Reyne K. Wisecup have received the required number of votes and are hereby elected directors of the company.

The report of the Inspector of Election also indicates that, one, the resolution for the ratification of PricewaterhouseCoopers LLP as the independent registered public accounting firm for the company for the fiscal year ending December 31, 2026, has received the required number of votes and has been adopted.

Two, the resolution for the approval on an advisory basis of the compensation of certain of our executive officers has received the required number of votes and has been adopted.

Three, the resolution for the approval of the Fastenal Company employee restricted stock unit plan has received the required number of votes and has been adopted.

And four, the resolution for the approval of the Fastenal Company nonemployee director stock and restricted stock unit plan has received the required number of votes and has been adopted.

And five, the resolution for the consideration of the shareholder proposal related to an EEO-1 report disclosure policy has not received the required number of votes and has not been approved. All ballots and a record of all proxies will be filed with the books and records of the company. The certificate of the Inspector of Election will be attached to the minutes of the meeting as Exhibit C.

The meeting is now adjourned. Thank you. Thank you all for coming, and we invite you to join us for lunch, which is available outside in the tent. Thank you.

Greetings, and welcome to the Fastenal 2026 Q1 Earnings Results Conference Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to our host, Dray Schreiber. Dray. Thank you. You may begin.

Welcome to the Fastenal Company 2026 First Quarter Earnings Conference Call. This call will be hosted by Dan Florness, our Chief Executive Officer; Jeff Watts, our President and Chief Sales Officer; and Max Tunnicliff, our Chief Financial Officer.

This call will last for up to 1 hour, and we'll start with a general overview of our quarterly results and operations with the remainder of the time being open for questions and answers. Today's conference call is a proprietary Fastenal presentation 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, 2026 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. Jeff Watts.

Good morning, everyone. Welcome to Fastenal's First Quarter 2026 Earnings Call. I'm Jeff 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're 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 3,000 customers from around the globe and the turnout and engagement, it was 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 that were being strengthened. Events like these really demonstrate why we keep gaining market share. We help customers improve their efficiency. We help them improve their productivity, all becoming a trusted partner. Overall, like I said, it was just a great event and one of our best ones yet.

So moving into the quarter, Slide 3. 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. And what's important is where this came from. Industrial economy remains somewhat challenging with U.S. manufactured PMI averaging around 52.6%, which is an improvement, but still moderate overall. We really didn't see much of a tailwind. We gained share through focused execution.

So 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 3 strategic drivers, the first being increasing sales effectiveness. And we're 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. And our total contract count grew by almost 8% year-over-year to just over of 3,600 contracts, and about 75% of our Q1 sales came from these customers, which today we're deeply embedded with. When we look at our customer site spending $50,000-plus per month, they increased 16.3% year-over-year to just over 2,900 sites, a 21% revenue growth. These sites now account for just over half of 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 just focusing on a one-size-fits-all approach. By focusing more on our $10,000 to $50,000-plus sites, it enables us to have greater direct integration within their facilities, deeper insights to deliver better solutions to fit their needs. This targeted focus really allows us to implement and develop -- deliver more tailored solutions to all of our customers regardless of their size. Kind of think of it like a trickle-down effect. Smaller customers may not need all of our solutions will be able to take advantage of the pieces where and when they need them.

And the impact of this approach can really be seen in our average monthly sales per our $50,000-plus sites. Not only are we adding new sites, but we're selling more of them as we increased the average monthly sales by $5,700 per site per month.

Now lastly, expanding our markets. As our international sales teams have become increasingly more aligned, their growth continues to accelerate. In March, the International business, primarily Europe and Asia, grew almost 24%. Even though today, they're a smaller piece of the pie, this performance is exactly what we want to see as we continue to invest in our global expansion. And after speaking with just 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's really why our growth internationally is so important to our future. So 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. That improvement was primarily the result of strong leverage of the SG&A expenses, which -- now 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 4. In the first quarter, our digital initiatives continue 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 7,000 new FMI device agreements, about 110 per day, an 8% increase over last year. This helped expand our active device space 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 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 the procurement systems with Fastenal.

Our investments in technology are delivering measurable results. By expanding our digital footprint through FMI and e-commerce, we're winning new business, and we're driving profitable growth. Now I think our priorities here are very clear. We continue to invest in tools and technology and analytics to drive operational excellence and deepen our customer relationships. The strength of our first quarter reflects our strategic focus. We're winning with large strategic customers, we're embedding ourselves deeper through technology and service and doing it financial discipline that drives both top line growth and bottom line leverage.

With that, I'll turn the call over to Max, who will walk through the financials in more detail. Max?

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'll start on the business trends and market drivers slide, Slide 5. During the first quarter, the industrial environment showed signs of stabilizing. U.S. PMI averaged about or above 52% for the quarter and industrial production was slightly positive year-over-year. in January and February. This lines up with the gradual improvement we began to see late 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, an 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 and 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 nonmanufacturing 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, faster 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.

Okay. Turning now to Slide 6, 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, Q1 was pricing versus cost. Tariff-related costs move to 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 because of 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 work 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, and 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 gross 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 productive 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 from 24.3% of sales from -- sorry, 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 12-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 and 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 5 years was about 2.5% compared to roughly 4% in the preceding 10-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 '26 estimate to the consensus revenue estimate, for full year '26 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. These totaled 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'll just 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 cost while supporting growth. And we continue to improve our return metrics, which we believe reflect the strength and durability of our business model.

That wraps up my section. Thank you, and I'll turn it over to Dan.

Thanks, Max, and good morning, everybody, and welcome to our earnings call. So I'm on Page 8 of the foot book. And from a market outlook standpoint, first off, as we talked about in January, we've seen some improvements in what the market is willing to give us versus create obstacles for us, although they're only now starting to be realized. If you -- after being at Fastenal for 30 years, blue was always my favorite color, it's become even more so in the last 30 years. And despite the fact that I'm 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've shared in the past at our annual meeting, where we look at it in any month where the ISM is below 50. We cover that month red.

And if you look at the last decade or so, you don't see much read on it until the last 3 years, and it was pretty constant. And in fact, it was every month constant. And we've had 3 months now where we're above 50. That generally gives us confidence of what we're going to be seeing 3 and 4 months out. So from that standpoint, our outlook is positive.

The other thing for me personally that stands out when I look at this quarter is, over the last years, we really changed the focus of Fastenal and kept diving into being a supply chain partner to support businesses. And really, ever since we started the vending initiative about 18 years ago, and we slowed down our openings. We've been really in that mode. We just didn't always say it allowed. But one of the things that struggled as we were changing our format of how we go to market was our nonres construction business really suffered.

If I think of it coming out of COVID, it was growing in the mid-single digits. In that '23 to '24 time frame, 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 that's only 8% of our revenues, so I don't want to overstate it. But it tells me a great supply chain partner is relevant to every industry that's out there. And that we can -- 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, that end market has to understand why Fastenal could be special for their business. But 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. And in some ways, it relates to tariffs, but I'm not sure if it does. And it was our branded suppliers and branded suppliers have a unique market power. In that if a customer wants brand X, that supplier can push pretty hard and say, hey, here's 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, you want brand Y at maybe a different price. And the branded suppliers have been very aggressively, in the last 6, 7 months, raising costs. And some of it, I'm sure, is related to tariffs than they're doing some catch-up, some of it may be related to true inflation.

There are some commodities right now if you're trying to source nitro gloves, good luck because the cost of that has gone through the roof in the last 60 days as a result of what's going on in the Middle East. But what we're really aggressively doing in the marketplace is arming our customers and our teams with information to make trade-offs. We're arming them with here's examples of brand X has raised their price of -- the cost of their product by 6%, 7%, 8%. Maybe it's well defined, maybe it's kind of a generic spread across everything, type cost increase. Our job -- and one of the conversations we had with our team earlier this morning is that really challenge them from the standpoint of what I've seen from this group in the decade that I've been in this role.

When this group needs to rise to the occasion and have communications, sometimes discussions that are challenging. That's what we're good at because that's being bluntly honest with your business partners. And so we're 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 tariff, partly challenged by, frankly, fatigue of the last 12 months of the pricing actions that have been happening as supply chains have become more costly. And the real challenge to the group is we need to have those tough discussions every day. Sometimes it's about price, sometimes it's about changing products, sometimes about changing from brand X to brand Y and get 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'm 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 12-month basis, a nice improvement over where it was a year ago and a nice improvement over where it's been for the last decade.

From an organizational priorities, I touched on this a second ago, but we'll 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 driven based on earnings growth, and that ramped up dramatically Q2 of last year. So we've now anniversaried that going into Q2 of this year. But it's also about being more efficient because 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.

And then 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. And one thing that is shown to be lost on anybody looking at that table on Page 3 of our earnings release, where we look at customer sites and sales segmentation. We have really strong growth with our customer groups. But interestingly enough, even though manufacturing is 75% of our revenue. From a percentage standpoint, we're actually seeing stronger growth in the nonmanufacturing from the sheer number of customers doing $50,000-plus because while the company might have grown at 16%, our nonmanufacturing customers grew at 25%. We're discovering success across a wide range of industries, a wide range of geographies.

With that, we'll turn it over to Q&A.

[Operator Instructions] Our first questions come from the line of David Manthey with Baird.

The first question, when you say pricing actions will continue at a slower pace. The 2 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 the first quarter of '25, we're 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.

Dave, this is Max. I'll take the first part. And so because we continue to drive price actions, this doesn't stop. And we were behind where we wanted to be in Q1. Those actions will continue. And so although we're not guiding toward a Q2, we would do everything in our power to not see the same sequential move from Q1 to Q2. So you can start at that as a starting point, but it's in our ability to change that trajectory. And so I think that would come with just our statements from our prepared remarks that we -- as Dan said, we've got a team that knows how to overcome some challenges.

And then if you could repeat the -- could you repeat the second part of your question, please?

Yes. I was just wondering about the baseline. I know there's been changes in the tariff landscape, but you originally were saying sort of 5% to 8% would be the peak level of pricing that you would see. And I'm also wondering, number one, is that still the case? Number two, when would you expect to achieve price cost neutrality if it's that 5% to 8% or if it's something less today?

Yes. We don't have a reason to believe that, that estimate changes. I think it's -- [indiscernible] gets replaced essentially by 122. So we don't -- in the timing, we feel like around mid-year-ish, we're going to start to see some of that plateau. And so we're well -- we feel like we got a good estimate on that part. We just have work to do to make up for some of the traction that we lost through Q1, again, a timing item. What we can't tell you is when we recover that, but we're going after it.

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 strength through Q1. And it's been a slug or a slog, excuse me, maybe a slug too. But -- the 5% to 8% was -- that's a cumulative number. That's not quarter-over-quarter. So as we're anniversarying we go into Q2, that will eat some into that. So what we report on a year-over-year might not be that 5% to 8%, but it's a cumulative piece.

But the real challenge 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's always guiding that customer to what is happening with their supply chain and how we can address that. And sometimes the substitutions [indiscernible] price changes. But it's being candid with your customer.

Got it. Okay. And then also as it relates to the improvement you're seeing. In the past, Fastenal has tried to ramp headcount in anticipation or concurrent with an improving macro backdrop. I'm just wondering, 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?

I'll throw out a piece and then Jeff and Max, correct me on what I messed up on. But I think we've really developed some nice efficiencies we've 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've done in the last several years -- come out of COVID, one part of our employee ranks that really were hollowed out was the part-time ranks. Because when schools go remote, it's hard to find that and it really dropped off.

We've reloaded that portion. And what that is always about is our local district leaders, having conversations to understand who in their team is ready to step up and take that next opportunity on business that's turning on because everybody looking out and saying, what business is turning on because that's where the biggest need for headcount is. It isn't always on that customer that business is up 5% or 10% because we've taken on some new products. We're really, really efficient at turning that kind of business on locally. And I don't know, Jeff, if you want to add anything to that?

I would just say that the technology and solutions we're adding and also our customer mix, we're making them more efficient. We're also making ourselves more efficient. So going back in the past, if you look at our ramp up in revenue and then our ramp-up in head count, I don't think that same number correlates today that it did back then, especially with all the technology we have and efficiencies that we're adding in. I think that's part of the part of the reason our SG&A leverage is so good.

Just as a follow-on to that, Dave, we -- as you can imagine, we know where we need to add -- and so we feel pretty comfortable because there's a lot of pluses and minuses, meaning we have a lot of reasons, efficiency gains, and then we know where we want to plug to drive some further growth. So what you're seeing in the P&L in Q1 from leverage should be an expectation we should be able to continue in that general trajectory.

Our next questions come from the line of Ryan Merkel with William Blair.

I to start off on the topic of pricing and being slower to pass that on to customers. My question is, what are you doing to fix this issue? Because this is the second time in the past year that we're dealing with this? Yes.

Well, first off, I'm pleased to say it's only the second time because -- and our goal has never been to be great at adjusting prices. Our goal is to be really great at informing our customer, what's happening in their supply chain. And so with the chaos of the last 12 months or more, maybe that's a win.

The biggest thing is really fine-tuning some of the things we're doing and quantifying it. I was in a conversation this morning and Kevin Fitzgerald is individual in the organization who leads our analytics team, and he was going through with our regional leaders. Some very specific outcomes that are needed from pricing actions we're doing. So it's really dividing and countering a little bit of saying, here's where you have some flexibility, and frankly, Here's where we don't. And I think it's like anything when you get pushed against the wall a little bit, you push back. I don't know, Jeff or Max, do you want to add anything to that?

I think it's good.

Okay. And look, I appreciate it's difficult. It's a unique environment for pricing. And then I had a follow-up to Dave's question. I guess, are you seeing suppliers continuing to push pricing, do you expect higher inflation because of oil?

Yes.

[indiscernible] are you seeing a slight increase or you expect.

Well, I mentioned it in my commentary about Nitro gloves. I mean that's not the biggest product line we sell, but it's a meaningful product line that we sell. That price is going crazy because it's all petroleum based. So it really depends on what energy or petroleum content there isn't a product that directly moves it. But there, you're seeing percentages that make some of these tariff percentages we talked about in recent years looks small. But again, it's a very small. I don't want to overstate a smaller category, but it's just an example.

And as you can imagine, just so volatile on a typical year, sitting here in Q1, we at least internally know that we have had 99% of the supplier increases if they're coming come through, but it's just -- this is just unusual times.

I think our biggest challenge, Ryan, in a time like this, and I'm thinking of our supply chain teams more so than our discussions as with our customer. But our supply chain teams are knowing where you push back and how aggressively you push back from the standpoint of -- you can look at -- we understand the cost components of products we source for our customers. And we can share that understanding with our customers and where there is a commodity that's going up in its linked tariffs or it's linked to energy prices. We can assess really quickly if that's real or if it's BS.

And that determines how much you push back. So part of it is the art of how much you push back. And then once you find the pieces that are truly legitimate of acknowledging that, that portion of the supply chain has become more expensive, and conveying that to your customer because we're not delivering a unique message to our customer because they're seeing in a lot of commodities or a lot of items are sourcing outside of the Fastenal universe too.

Our next questions come from the line of Stephen Volkmann with Jefferies.

I'm not going to ask about tariffs and pricing. But let's maybe shift to the growth side of the equation. It sounds like Max from your commentary around end markets that growth is sort of broadening out. I don't want to put too many words in your mouth, but are you expecting sort of growth to continue to accelerate. We do have a little bit tougher comp in the second quarter? Just how should we think about the growth side going forward?

Well, I'll take that, Max. Okay. You see you looking over my way. I think it's hard to tell right now with everything going on. I haven't checked the news this morning, but we're still cautiously optimistic about the growth continuing. And we're seeing that across the board. We haven't seen any pullback. In fact, if you look at our -- we don't like to give guidance, but if you look at our April numbers, that market is continuing to expand our markets. So overall, it's hard to say what the rest of the year is going to look like. But right now, we're, like I said, cautiously optimistic.

I'll add one piece on there and it's a data point we put in our monthly sales release and that is the percentage of our locations that are growing. There's always some somewhere, where a customer is down or a group of customers are down. I know I was watching our regional leaders pulled together videos for our board each quarter. And we'll have 2 or 3, and one of them was watching yet this weekend, this individual is leading a mature part of our business in the Central United States, and he was talking about what's happening in his overall business, but he was also talking about 2 customers, its 2 largest customers who are down 20%.

And so there's always specific reasons for customers. But when I look at the percentage of our locations growing, that's been stuck in the mid-60s. And that's a good price. That's been in the mid-60s consistently now since last fall. And whereas a year ago or more, that was probably down in the low 60s or upper 50s. And so the closer that is the 70, life just gets a lot easier because you're seeing broad-based support from a geographic standpoint, which typically translates into from an end market standpoint as well.

And Stephen, let me just add 1 more quick point. if you break down essentially our DSR, as you know, run rates and you're an analyst, you'll know that we're coming up on some headwinds from a pricing perspective when we comp the prior year. So we are very confident in our share gain opportunities because we believe we have a great business in that space. So our internally, we expect share gains to continue as they are to increase. But at the same time, when you model out, you got -- everyone is thinking about pricing as well. We started pricing in Q2 of last year. And so we're going to start to encounter a little bit of a comp item on the top line in that regard. Of course, it doesn't impact operating profit because our pricing mechanics were there to offset cost increases. So just keep that mind.

The one thing I've always counseled over the years is focus on the sequential patterns of the business. Jeff talked about the fact that we're having really strong customer acquisition patterns -- and despite the fact that we're adding customers at a rapid clip, that historically would pull down our dollars per customer a little bit because the newer customers aren't as mature as existing customers -- that's not what's happening. So we're adding customers at a very, very rapid pace, but we're also adding wallet share at the same time. and our ultimate number is expanding, and Jeff touched on that in his commentary earlier. That makes me more bullish on what the future looks like because the economy is going to give or take what it gives or takes. What we take from others and from the standpoint of market share gains, that's -- those are just pure wins.

Great. That's great color. I appreciate that. And then, Dan, you mentioned slog or slug when you have these customer conversations. I'm curious, though, are there competitors out there that are kind of not raising prices as they should? Or is anyone doing anything competitively that's kind of holding this back?

We're all swimming in the same water. And that water has the current to it and that water has become more expensive. And that's a really lousy analogy. Sorry about that. But we're all impacted by the same economics. Are there examples where a competitor might get really aggressive with the customer circumstance. That's all. That's always true, and there is some of that. I think, by and large, our industry is a rational industry.

And the only time you see weird things, I was recently traveling in Indiana. And there's a long-term competitor that -- it wasn't that they were doing anything irrational. It was their business is really struggling. And you see some signs of that of when organizations get squeezed too much, you see some competitors that either disappear or they have to downsize their operations. And we're seeing -- I saw some of that. And again, 1 data point was on a recent trip down to Indiana. But I don't think there's anything irrational going on, but that doesn't mean we don't have circumstances where somebody is trying to elbow out somebody else in a customer situation. But that's the exception, not the rule.

Our next question has come from the line of Nigel Coe with Wolfe Research.

I just wanted to -- just to kind of intention to the tariffs. How do we think about all the changes to [indiscernible] section 122, the changes to the Section 232 tariffs. Just how does that shake out for Fastenal?

Yes, Nigel. We -- just if we think first of [indiscernible], which is making the most noise, we've said in the past that that's a smaller, much smaller portion of the total tariff landscape for us. And so those -- because they're largely replaced by 122 anyway, we don't see much activity within our P&L to speak to on that one. And even the refund noise, once again, it's a very small amount of our total business and our total tariffs. So from our vantage point, it's not in material simply because it creates so much noise and it creates, as we said, the slog of pricing part of that slug is driven by the uncertainties in tariffs. But I hope that gives you the context.

The point Max just made about the impact, it's the headline impact. When the Supreme Court ruling came out, if you're a casual observer or if you're not really dialed in to tariffs, you can also look at it and say -- I'm sure there's conversations that have occurred where -- well, I thought the tariffs were ruled illegal. And so it becomes an education endeavor, and then it becomes a negotiation discussion as opposed to just a negotiation discussion. So it's the headline impact, it just slows things down.

And Nigel, just one more point just because you asked also, I did not comment on 232. 232 does not impact us.

There was not [indiscernible].

No, no, sorry, any discussion about changing it does not impact us. 232 has been with us for a while [indiscernible].

That's helpful. So no change today too. That's kind of what I was asking about really. And then just -- I mean, the price cost, it seems -- obviously, the pricing conversation, we've had that already. But obviously, the inventory -- the unit cost of inventory, the inflation embedded inventory coming through the P&L is certainly a factor as well. So I'm just wondering are we now at a point where the headwind from the inventory conversion is now behind us?

We're getting close. That's a bit what I was referring to when I was talking about the plateau of the costs. So yes, we've got a little bit left in there, but we're -- around midyear, we'll be -- we'll have pushed all that through essentially.

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

So contract signings have gone pretty well. Pricing discussions are behind plan. My question is whether these 2 are linked. Is it the case that as you're bringing on new contract business, the pricing discussions don't proceed as fast as I might otherwise?

No, I don't think so. I think it's 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 can't change pricing for 30 days or 60 days. And when the new -- when the Supreme Court came out with the ruling, a lot of those conversations almost got put on hold from our customers, really pushed back hard. But I don't think a lot of the newer business, that's really not the case. I mean we're pricing in a lot of that already when we get the business. It's more of the current contracts we have in place.

Got it. That's helpful. And then follow-up question on capital allocation. I wanted to ask about the repurchases. The dollar amount was pretty modest this quarter, but it has been some time since you've deployed capital there and I would like any kind of update you can provide on a philosophy that may be emerging here? Or what was behind the decision-making process to deploy those dollars?

Yes. First of all, I do second your point. It's small, but we just felt as a management team that we wanted to start to offset dilution. And so that is what we've done, and we'll see that would be our approach, go forward for a bit here. we can change our mind overnight, but that's what you're seeing. It's just a simple mathematical offset of dilution. And we'll -- as we always say, we remain opportunistic, meaning when the time comes, we'll do something else.

Our next questions come from the line of Chris Snyder with Morgan Stanley.

Fastenal, particularly, I guess, on the fastener side, the company turns the inventory very slowly. And that has always provided a lot of visibility into the future cost. And it felt like you guys were always able to use that visibility or lag to very appropriately balance price cost through prior inflation up cycles, whether it was '22, '23 or even last year. It seems like that is more difficult now to kind of match that price cost for the company. So I guess is there a reason why -- you were talking earlier, I think, to Nigel, about maybe a little bit more education that's needed this time around just because tariffs keep moving. Is that why it's more difficult to kind of execute and realize the price because it's obviously been kind of falling sort of expectations for almost a year now.

So first off, we recently changed some of our reporting. And in that, we talk more about our direct materials side of the business and our indirect material side of the business, and really challenged our analytics team to follow suit, and do that on how we think about gross margin and parse -- maybe the fastener business a little differently parcel from the product lines 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, you start looking at some of the areas of the business that maybe have a little bit more of a branded presence because Fasteners don't really have a branded presence. There's some don't be wrong, but that's not where the dollars are.

Our safety margin is challenged because some of the branded presence. Our cutting tool margin is challenged because some of the branded presence. So the things that you've known from us historically is true. 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, and we can really talk about this OEM fastener. We have 4 months of inventory and here's what the price is going to do at the end of that 4 months. So you can really have a different discussion because our customers know we're about managing price cost. We're not about inventory profits in the short term because that's the relationship we have with our customer. Where we're getting squeezed is on some of those branded products where our time line 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. And that's where we're getting squeezed.

That's really, really helpful. I appreciate all that color. If I could just ask one on Q2. It sounds like price cost will start getting better maybe into the back half of the year, if I'm kind of understanding the commentary, right? But 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, just because in Q1, maybe only a month or so was impacted. So is there a little bit more pressure that's coming before we kind of get into the recovery? Or do you think Q1 is really kind of the trough of that price cost.

So I'm going to answer this one only because I want Jeff and Max to take a step back. So as you know, we're in a leadership transition here. And Max is relatively new in his role. And -- so I'm going to answer this based on 30 years of experience. Q2 is challenging. Q1 was challenging. Our message to our teams is, here's what's happening. Here's 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's price discussions we've had going on since December that there are price changes that we've made and some went into effect first of March, some are first of April. There's some in first of May, first of June.

And again, as Jeff touched on it, sometimes it's about the contractual obligation. Sometimes, it's 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 from the standpoint of their marketplace. But Q1, we knew was -- in January, that's the only place in my gut, I didn't feel good, was Q1. And then once we have some certainty on the Supreme Court ruling, at least it allowed you to understand a piece. We still don't understand some other aspects and what other type of challenges there will be the tariffs coming down the road. But Q2 is challenging. And I believe the Fastenal team can pull it off. That's not a mathematical answer. That's just an honest answer.

Our next questions come from the line of Patrick Baumann with JPMorgan.

So I just wanted to touch on incremental margin expectations for this year now. I think 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? I mean I think you still lap incentive comp headwinds in second quarter, which should be a nice tailwind for the business from an SG&A leverage perspective. But I guess I'm just wondering if the price timing dynamics had enough of an impact to change your thinking on incremental margin expectations for this year?

No, Patrick, we don't believe that is the case. There's enough efficiencies, we would say, structural down in the SG&A space plus as Dan said, there are actions that we're taking to mitigate the gross margin headwind that will be in an incremental space that we had expected in the past. So just a short answer to say we confirm our previous statement.

Okay. I just had one follow-up on the tariffs. So on Section 232. So it sounds like Fastenal was already charging for the full customs value based on your statements. Did you observe any noncompliance in the industry that would have any impact on market dynamics in fasteners going forward regarding the competition and how they were approaching charging for tariffs on imports?

No. The answer is no on that. Nothing came to our attention.

I see we're at 4 minutes to the hour. So 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 on the Blue Team. Have a good day, everybody.

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.

Greetings and welcome to the Fastenal Fourth Quarter and Annual 2025 Earnings Results Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to Trey Schreiber. Please go ahead.

Welcome to the Fastenal Company 2025 Annual and Fourth Quarter Earnings Conference Call. This call will be hosted by Dan Florness, our Chief Executive Officer; Jeff Watt, our President and Chief Sales Officer; and Max Tonagliff, our Chief Financial Officer. This call will last for up to 1 hour, and we'll start with a general overview of our annual and quarterly results and operations with the remainder of the time being open for questions and answers. Today's conference call is a proprietary Fastenal presentation 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 March 1, 2026, 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. Jeff Watts.

Good morning, everyone, and thank you for joining Fastenal's Fourth Quarter 2021 Earnings Call. And before I get started, I do want to take a moment to thank the Fastenal Blue Team and and our employees across the world for their performance and dedication both this quarter and throughout the year. Your commitment and attention to customer needs have played a major role in making 2025 such an exceptionally successful year for Fastenal. So for that, thank you very much.

Now let's jump into our results. Now Fastenal delivered a strong fourth quarter, capping an impressive 2025 recovery. We achieved double-digit growth in Q4 with daily sales up just over 11% and and we continue to gain market share despite a sluggish industrial economy. This marks our second consecutive quarter of double-digit growth, but our success is not just about favorable comparisons. It's driven by continued progress on our strategic objectives and they start with increasing our sales effectiveness. And we're winning with key accounts and new contracts. Our focused sales strategy is yielding share gains, we're signing more national and global contracts and we're deepening relationships with existing large customers.

In 2025, our total contract customer count grew by 241% or just over 7%, reflecting solid new customer signings and expansions. These partnerships with big customers are a core driver of our growth. When we think about enhancing our services, we've continued to expand our suite of value-added services, particularly our digital and site solutions. In 2025, we significantly grew our installed base of FMI devices and strengthen our digital footprint, which combines our e-commerce and industrial spending within programs. But by focusing and investing in these platforms, we're improving the customer experience and increasing retention. In fact, nearly half of our Q4 sales were transacted through FMI technology or other digital channels really underlying how crucial these services will be done to our customers. And this is a key competitive advantage for Fastenal and that makes us stickier with our customers and more operationally efficient. It also provides our customers with ongoing insight regarding product [indiscernible] we're uniquely able to provide in a wide range of locations.

And then lastly, expanding our market reach. During Q4 and -- and really, over the course of the year, we continue to win new sites and new markets, and we strengthened our presence in manufacturing, construction, government in the transportation sectors. We've also continued to grow the range of services and products we delivered through our solutions suite. Thanks to these strategic efforts, Fastenal's Q4 financial performance -- it was strong. We grew net sales to $2.3 billion in the quarter, like you said, an increase of 11% of Q4 of last year. The top line growth, combined with disciplined cost management led to strong bottom line results. And Q4 net income increased 12.2% year-over-year to $294.1 million, with earnings per share of $0.26. For the full year of 2025, we achieved record annual sales of $8.2 billion, up close to 9% versus $24 million and net income of $1.26 billion, up 9.4%.

We also generated robust cash flow and improved our operating margin slightly in 2025, even as we invested in growth and technology. Even more important, we accomplished this while maintaining a balanced approach to pricing and cost. In Q4, we saw pricing contribute roughly 310 to 340 basis points of our sales growth. Pricing actions that helped to offset inflationary pressures, but still kept us essentially neutral on price cost for the year, but Max will touch a little bit more on this later in the deck. We also leverage our operating expenses and -- for example, SG&A as a percentage of sales declined to 25.4% in Q4 from 25.9% a year ago. Now this cost discipline, along with volume growth allowed us to improve our operating margin year-over-year despite a different gross margin due primarily the timing factors.

The bottom line is that we're controlling what we can control pricing, cost, capital allocation to deliver more profitable growth.

Now turning to Slide 4. Now this momentum with our customers is clearly reflected in our [indiscernible] growth metrics for Q4. The number of active 500-plus sites rose 14% year-over-year, and those ultra-high spend sites now account for just over half of our revenues. And we also saw solid growth in the 10k plus customer category, which was up roughly 8% to just over 11,700 sites in the quarter. Now these figures demonstrate that we're growing with our largest and most strategic customers, exactly what we're focusing our efforts on. At the same time, though, we did see a decline in the count of the smaller customer sites, the under 5k, which was not unexpected. But I do think it's important to point out that we did see growth in our 2 to 5k customer sites, but 94% of the under 5k decline was in the under $500 per month customer sites and almost 55% came from the under $100 customer sites for the year.

And our strategy deliberately emphasizes key account growth and driving deeper engagement at large accounts with significant spend potential rather than chasing low-volume transactional business. And this strategy is paying off in higher growth, more resilient performance against the weak backdrop and really more efficient focus on our sales talent. In manufacturing end markets, for instance, are heavy in other manufacturing customers, they grew double-digit rates in Q4 far outpacing general industrial production. We're winning with big manufacturers because of our service model, including the FMI technology and on-site service, our extensive product range that really creates value for them.

Likewise in construction and other segments, our focused approach, it's led to share gains where competitors are just more constrained. And we're going to continue to develop these customer partnerships and expand the Fastenal footprint customer sites as it's a proven format for sustainable growth.

Now on to Slide 5. So this slide highlights how our investments in technology are contributing to our performance. Fastenal's long been the leader in industrial vending. We continue to expand those capabilities while also showing great progress on our new business further strengthening our bonds with customers and also enhancing our efficiency. In Q4, we installed thousands more in online technology devices at customer locations. We signed over 5,900 weighted FMI devices in the quarter and that signing pace was slightly below the exceptionally strong Q4 of last year, but it was still roughly 14% above our 5-year average signing rate. And for the full year of '25, we signed approximately 25,900 devices and as a result, our installed base of active devices grew 7.6% year-over-year to about 136,600 units. We have a great team leading this initiative and our capabilities keep getting stronger. The impact on our sales is significant, though. In Q4, 46.1% of our sales were dispensed or managed through FMI technology, and that's up from 43.9% in Q4 of last year.

Nearly half of our Q4 revenue flowed through Fastenal pending or BIN device at a customer site. This is a powerful indicator really how deeply embedded Fastenal has become our customers' daily operations. And it creates a sticky relationship, and this is a key part of our long-term growth model. The more we integrate with customers through on-site and digital solutions, the more indispensable we become. Our digital footprint, it extends beyond physical devices as well. We offer a robust suite of e-business solutions from EDI integrations with large enterprise customers to our e-commerce web platform. In Q4, our [indiscernible] business sales, it grew 6.4% year-over-year. E-business now accounts for about 30% of our sales [indiscernible] actually in Q4 to be exact.

But when you combine the e-business and FMI, which together for what we call our digital footprint, these digitally enabled channels represent 62.1% of total Q4 sales. Over the past decade, we've steadily grown this number now roughly 2/3 of our business comes through this high-tech efficient channel. And the remaining 1/3 is really to be through traditional branches in direct sales, which is still very important, but the trend is clearly toward a more digital and connected service model. And overall, for the year, Fastenal gained market share. We grew much faster than the industrial sector, and we strengthened our foundation for years ahead. And we closed out the year aligned as an organization with strong momentum, thanks to our focus on customers and the hard work of our people. And I'm really incredibly proud of our team's dedication and the trust we build with our customers.

Now with all that said, I'm pleased to introduce our new Chief Financial Officer, Max Tunnicliff. As many of you know, Max joined Fastenal [indiscernible] and this is his first earnings call as a CFO. Max, he brings a tremendous amount of experience and fresh perspective to our finance and leadership team. And with that said, Max, welcome aboard and the floor's yours.

Thank you very much, Jeff, and I'm excited and thankful to be part of this team. Good morning, everyone. Today, I'll cover our business and market trends, our fourth quarter results as well as a few points about where we're thinking on 2026. Let's start with the business trends and market drivers slide. Looking at the broader operating environment in the fourth quarter, the U.S. economy continued to see mixed signals, especially in the industrial sector. While some areas showed resilience, others faced continued headwinds that impacted demand and supply chains. U.S. PMI and industrial production remained mixed in Q4 with heavier manufacturing segment showing relative weakness. PMI average was in the low 48 for the quarter while industrial production was close to flat compared to last year, although with some improvement late in the quarter.

Despite the softness, as Jeff mentioned, our daily sales rate remained strong in Q4, up slightly over 11%. This growth was driven by several factors: new customer wins, increased share of wallet with existing customers and our continued focus on operating more effectively overall. Importantly, customer sentiment remained favorable, even against the backdrop of trade and tariff uncertainty that is characterized much of 2025. As in prior years, the timing of the December holidays had a meaningful impact on our Q4 results. Just like last year, Christmas and New Year's fell midweek, resulting in a similar pattern of extended customer shutdowns and compressed shipping windows. This led to for a second year in a row, below normal sequential growth in December, as the industrial customers paused operations for longer stretches around the holidays.

Sales to our manufacturing end markets outperformed other markets on a relative basis, led by growth in key accounts. Other segments such as construction, education, health care, transportation and data centers also saw positive momentum. Our Fastenal product line growth outpaced non-fastener categories again this quarter. This was driven by several factors: successful signings of large customers, improved product availability due to strategic and thoughtful inventory investments and targeted pricing actions that balance competitiveness with profitability. Turning now to pricing. Our approach during the fourth quarter remained disciplined and responsive to the market. We implemented targeted price adjustments across select product categories, bringing our year-over-year price increase impact to approximately 3% for the quarter on matched product. These actions were designed to offset higher input costs, which they did while remaining competitive in a challenging environment.

We also continue to use data-driven pricing tools to identify opportunities for tailored increases. Interesting, we maintained customer loyalty and minimized volume attrition. To summarize this slide, while the macro environment remains unpredictable, our diverse customer base, our focus on key accounts and specific strategic initiatives allowed us to capture growth opportunities and strengthen our market position.

Now I'll move to our margin performance and driver slide to talk about profitability. Gross margin decreased 50 basis points in the fourth quarter of 2025 compared to last year, driven by timing elements within our cost of goods sold. These timing factors included the relief of certain inventory-related working capital, which caused related cost to move through the P&L more heavily in the fourth quarter. Additionally, the timing of supplier rebates negatively impacted gross margins. It's important to note that these effects do not indicate a change in our underlying cost structure. Related to tariffs and pricing, our net price cost impact was nearly neutral for the quarter, coming in at 10 basis points negative. Our teams actively manage tariffs and input cost to defend the profitability using a combination of data analytics and sourcing strategies.

Throughout the year, our fastener expansion project was our largest positive contributor to gross margin, allowing us to maintain flat gross margin levels year-over-year on a full year basis. This project will anniversary in the second quarter of 2026. As a reminder, this project did a number of things. It helped us capture higher-margin business, and it drove cost savings initiatives such as price negotiations, consolidating purchases with preferred partners and optimizing sourcing. These actions directly reduced costs and increased efficiency. The benefits from the fastener expansion project mitigated the dilutive effect on gross margin of the ongoing shift to our larger customers. As discussed in the past, these accounts tend to generate higher volumes but at lower gross margin rates. We're comfortable with this trade-off as these relationships provide long-term stability and open doors for cross-selling and deeper integration.

And the negative impact of the gross margin level is offset at the operating margin level through efficiency gains and cost leverage. Regarding 2026 gross margin. Please remember that our Fastenal expansion project will anniversary after Q1. And so the modest annual gross margin contraction that we've seen historically should be considered in thinking about our 2026 performance. However, we believe this modest contraction will be offset within SG&A as we find efficiencies and further leverage our fixed costs.

Now back to 2025. SG&A was 25.4% of net sales in Q4 of '25 compared to 25.9% in the previous period. This demonstrates strong ongoing cost discipline as we more than offset the reload of incentive compensation and our ongoing investments in technology, analytics and sales support. In addition to our strong sales growth and disciplined expense management, we increased our return on invested capital by 90 basis points on a trailing 12-month basis. reflecting our approach to capital allocation and our commitment to maximizing asset productivity. In total, our performance demonstrates that we can invest for growth while maintaining a sharp focus on profitability, 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 $370 million, representing 125% of net income. Cash generation remains strong even as we added working capital to support growth, but on a more efficient basis year-over-year. Accounts receivable and inventory rose 8.7% from last year, reflecting our expanding customer base, growth with existing customers and our Fastenal expansion project. Accounts payable increased primarily due to inventory growth. Net capital spending for 2025 was $230 million, which was 2.8% of sales with investments focused on strengthening our Fastenal managed inventory or FMI, hardware capabilities, upgrading facilities, advancing IT infrastructure and expanding our vehicle fleet to support field operations and deliver efficiency.

Regarding CapEx for 2026, we will increase our investments to support our growth expectations. We plan to invest in hub capacity, additional FMI device purchases and IT enhancements, with CapEx expected to be approximately 3.5% of net sales. These investments are designed to drive efficiency, scalability and customer value. During 2025, we returned just over $1 billion in dividends for the full year, accounting for approximately 80% of net income, reflecting our confidence in cash generation and our commitment to returning value to shareholders. Overall, our capital allocation follows the same framework you've seen from us. We invest in FMI hardware and hub automation to drive throughput and accuracy. We invest in IT and digital capabilities to improve customer experience and sales productivity, and we invest in fleet and facilities to sustain service levels. We returned cash through a consistent dividend, and we remain opportunistic on buybacks. Our balance sheet remains conservatively capitalized, preserving flexibility to continue investing in growth.

So in closing, I'll just summarize my portion before turning it over to Dan. In 2025, we delivered continued share gains through our key account strategy and new contracts, expanded our FMI technology and digital footprint and deepened our business in manufacturing and nonmanufacturing segments. Gross margin was protected mainly due to our fastener expansion in supplier initiatives, while operating margin benefited from disciplined SG&A management. We generated strong cash flow with capital allocation focused on growth, technology and shareholder returns. These accomplishments put us in a good position for a continued success in 2026.

Thank you. And with that, I'll turn it to Dan.

Thanks, Max, and good morning, everybody, and thanks for joining our call. Before I run through the summary and recap. On Page 9. I just wanted to share a couple of thoughts. First off, for Jeff Watts. I suspect all of you saw the announcement we made in late December. I want to say congratulations to Jeff on being named our next CEO, taking effect in July. Max, you just heard from, congrats being named Fastenal's CFO and welcome to the Blue Team. .

Just to let Max get off to a calm start on his first earnings call and for Jeff to be CEO elect. We decided to do a different type of call. Some of you may have noticed that our scheduled earnings early date was yesterday, Monday, about 10 days ago, using that keen tool called the calendar, we realized we were releasing earnings that we had set up 1.5 years ago. We realized we had selected Martin [indiscernible] Junior Day, and the market would not be open. So we delayed it the day -- the problem is that means Jeff is on his way to Europe. So he's sitting in Kitchener, Ontario. Dan had a commitment, and he's sitting down in Southeastern [indiscernible] states and Max is by himself in Winona. So we hope the Q&A is not too [indiscernible] because we're not sitting in a room together.

With that said, from a market outlook standpoint, as Max touched on and Jeff touched on, the broader market conditions remain mixed. We see ongoing challenges in industrial production. Max did note a possible uptick in industrial production during the quarter. In all calendar, we haven't seen it in our numbers. However, we did see some signs of positive just from disciplined by some of our suppliers. I'll touch on that in a few minutes. But if there's a green shirt or two that's popping up, we able to welcome it. It'd be nice to have the market give us a little lift as opposed to the fast organization doing at Solo. If I look at pricing, neutrality and managed tariff impacts, we've continued to defend profitability through the year. Struggle a little bit with that in the fourth quarter, and you see that in our numbers, it's really in the non-Fastenal's part of our business. Yes. As we talked earlier in the year, and we were talking about how we're managing through the tariffs and the price cost perspective, our covenant with our customer is we provide them a great resilient supply chain, great products, the visibility to price the cost in that supply chain. When there are things that drive costs up, our obligation to our customer is to let them know what we're seeing in their pipeline to help them plan for the future.

With Fastenal's, we are sourcing from the ultimate manufacturers and it gives us a tremendous amount of visibility to manage that with our customer. As we touched on in our October earnings call, with the non-fasteners, there's a piece where we have that same kind of visibility. However, there's a big piece where we don't. And that's where branded suppliers come into play, particularly in the fastener and cutting tool arena where there's a much different dynamic in the marketplace and there was a question asked on the call last quarter about how we react to that and how we see that where suppliers really focused on by [indiscernible], what they're seeing based on the source supply of that part. The relationship works really well, where customers -- where suppliers try to smooth that across their landscape of products, that's where it becomes more problematic and our lead time is different.

So in the fourth quarter, we did feel a bit of a squeeze on that. And what I could tell you as we exit the quarter and move into the new quarter, a lot of things have been in motion in the latter half of the quarter. Things are in motion currently. And they really center on a few things. One, from our supplier perspective, pushback like crazy especially when the increase in cost we're seeing isn't intuitive to the known source of supply by geography. In other words, don't blend it across everything when you have products that aren't tariff impacted as others. That's one. So pushback from the flyer base really hard.

Second is have frank conversations with our customers. And in that, we talk about this brand just raised their price x and having that frank conversation. And the third component is a really firm push towards product substitution where there's not willingness to move on price and the supplier is not willing to move on cost. So it's really balancing that.

We have our work cut out for us. What I found in my 30-year career with Fastenal is I always bet on the blue team to perform in circumstances like this. As Max and Jeff also touched on, we have great momentum as we exit 2025, and we anticipate double-digit net sales growth in 2026, supported by FMI technology and digital solutions and feel really good about momentum. And I know there's some probably some consternation about some of the sequential patterns in November and December. What I would tell you, regardless of the November, December sequentials being strong or weak, 30 years of experience in Fastenal has told me, November and December don't matter. It's all about where we'll be in January, what did we grow to in the September, October time frame because that really tells me where we're going to start off the new year in January. And in that regard, we had incredibly strong progress throughout the year.

October -- September, October was up double digit from where we were in January. Frankly, they were in the low teens from where we were in January, but January was a softer number. And feel really good about momentum coming into the new year. From a financial discipline standpoint, really pleased with the way the organization managed our SG&A and I'll say it this way, and this is how I shared it with the Board. A few of the analysts have talked about our shock absorbers in our SG&A, the incentive comp and how we reward for earnings growth. And if you read through our proxy, you could really see how that story works. And that thought process works throughout the organization. And so when I look at -- at a year like 2024, our financial statements say our earnings were down $18 million. That's really not the case. We delevered in 2024, and our earnings were down about 40%, but our incentive comp compressed and we funded 55% of that and only reported 18 down. This year, if you look at the leverage in our business, our earnings on the financial statements say we grew about 145. That's actually not true. Our earnings grew just over $200 million, and we shared about 29% of that as our incentive comp expanded.

So it really aid into our ability to get incremental margin in '25, we only have 1 quarter of that as we move into '26. So I feel really good about our ability, but my complements to the Blue team on managing SG&A despite the fact we had a reload of incentive comp. As Max pointed out, strong cash generation and our capital allocation is focused on growth, technology and returning to shareholders cash that we don't need today in the business because our cash generation capability is so strong. And I'm pleased to say our return on invested capital increased year-over-year by 90 basis points coming in at around 31%. From a priority standpoint, continued investment in tools, technology and analytics, focusing on operational excellence, our customers' experience in the innovation and employee engagement we can bring to the marketplace. And finally, from a strategic progress standpoint, I think what one thing Fastenal does really well, and Jeff does particularly well to our internal teams, we point out the possible. If you think about Fastenal, we're really not an $8.2 billion organization. There's 240 districts within Fastenal that averaged around $34 million a year.

We look at the business from the standpoint of those 240 business units and we see excellence and strength in that group, and we share the story with all that we see. And what always is the growth differentiator from district to district is who has the best key account strategy. And we impress upon everybody. That's why our bucket reporting is so key. We impress on everybody the importance of that. The -- and I'm really excited about the new customer site wins that Jeff talked about earlier in his talk.

Finally, you see a sheet in there you've never seen before. This is an internal document and you know at Fastenal, we're transparent. We share internal documents with our investors. This is how we think about the future. And as Jeff leads this next chapter of Fastenal, his challenge to the group is what do we look like when we're a $15 billion organization and what do we need to do to achieve double-digit market share gains in the marketplace. So regardless of what the market is doing to push us, how do we push ourselves into the future and it really centers on 3 key objectives: increasing our sales effectiveness every day, enhancing our service and expanding the total addressable market. Most of that is through geography and products we'll see what tous things like services might influence on that. You see a thing on their Blue ops/rib. We're not going to touch on that today, but look for us talking about in the months and years to come, we see that as another leg growth driver for Fastenal in the future. With that, we'll turn it over to Q&A.

[Operator Instructions] Our first question is coming from David Manthey from Baird.

First off, double-digit net sales growth in 2026. It looks an awful lot like guidance. I'm just wondering you guys feeling okay up there?

It's not guidance, Dave. It is -- we look at momentum, and that's what -- that's how we're thinking about the year.

Well, so along those lines, Dan, let me peel that back a bit. You've given us -- of course, you're looking for large customer wins. You've given us this machine equivalent unit goal that you have -- but I guess when we see that type of target, I guess, putting it together with the 10% share gain and the price you're getting -- could you just sort of peel it back for us and talk about the -- just the broader economic assumption that underpins that as well as what type of price contribution you're expecting I hope that's not going too far. That's sort of fundamental to what you're talking about here?

Yes. As we move -- I'm not going to get too deep into the pricing piece, Dave, because we've done such an excellent job of being wrong every time we talk about it in 2025, that at some point, you learn the wisdom of not talking about it. With that said, there are cost increases that are flowing through the P&L. There are discussions we're having with our customers every day about price. And once -- as we move through the year, that piece will normalize. But -- the piece we laid out there on that company strategy is really about gross margin and revenue growth is about having a great plan, but it's also about having the attitude that this is what we're going to do and feel really good when I look at the pieces of alignment with our sales team of our ability. The market is big. We've talked about that in the past, but feel really good about our ability to execute, and we really have aligned the pieces, I believe, to execute well in 2026.

And we're probably like anything you get a little bit -- after going through '23 and '24, I mean, it's stuck. We were struggling to get our traction. We have our traction now, and we feel really good about momentum coming into the new year. In fact, I was startled this morning because I had an e-mail from Casey Miller that scared me. And I was actually searching for something Kevin Fitzgerald has sent me because I was preparing for the call and not being in the room, you're feeling a little naked. And I was reading this message from Casey and it had one sentence. Weather is killing us this month. Now we have snow in Houston and New Orleans. And all of a sudden, I looked at it, and it was an e-mail I saved from January 20 of 2025. I just say that sometimes you have these things you save for weird reasons. I'm glad to say we're not seeing that kind of weather issue. Now there's still time left in the month, but we feel good about our momentum. Now I'm going to stop talking before I dig my hole any deeper.

That's good to hear, Dan. All right. And then my follow-up on this -- the rebate timing factors, could you talk about what exactly that is? What would the impact do you think on the fourth quarter? And then does that unwind in the first quarter, just the dynamics around that factor?

That's still in 2 parts. I'm going to help Max on this. I'll talk about what it is, Max can tell about impact. And if I -- if you think about what it is, obviously, depending on growth, you -- there is rebate programs that different suppliers have, and you estimate that as you go through the year. And in all honesty, it came in a little bit lower than we were expecting. Now part of that is it's not exact science. The other part is we saw something. I don't want to say unique because we've seen it before, but usually it's more of a bad thing and and maybe not an optimistic thing. Oftentimes, we get through the end of the year, and we'll have certain suppliers come to us because maybe a salesperson, maybe a division is trying to make a number, and they come to us sometimes with a deal. You just can't say no to. And I know we'll consider anything if we can get a return on it, and we have the cash to do it. It was crickets this year. And I asked our product -- our supply chain folks, I said, I said, why was it crickets? Because in my mind, there's 2 reasons it's crickets. One is our suppliers are so far from hitting their numbers that they just throw in the tile and don't try to claw their way to a finish.

The other is, they've hit their numbers and they're keeping their gunpowder dry for next year. The impression I received it was more the latter than the former. Now that's anecdotal, Dave. But I think part of it is, we didn't see a few of the deals in the third and fourth quarter that maybe we would some years see. And -- and that's probably a good thing for the health of our supply chain and the health of what our suppliers and customers are seeing. Max, do you want to touch on a little bit about the impact?

I will. Yes. So Dave, there's a couple of things to consider, first of all, this supplier rebate was a positive true-up last year, and it was a negative [indiscernible] this year. And additionally, compared to the previous couple of quarters, this is a -- typically, these are annual amounts that we estimate earlier on in the year, and we bake those into our run rates. And so we had a little bit of a call it, a little slight overstatement in Q2 and Q3 as well. So this is, again, just the timing element is an estimate, but just to characterize the amount or the size for you. I mentioned in my talking points that the year-over-year drop of 50 basis points is made up of this as well as some inventory timing cost flows. The supplier rebate is the bigger of the two portion. And so with that, we expect that -- this to completely normalize going forward.

Next question is coming from Ryan Merkel from William Blair.

I wanted to start off on incremental margins for '26. I hate to lead the witness, but I was thinking high 20s with double-digit top line and then lapping the reload of incentive comp. But curious for any color.

Ryan, from my perspective, that's not an unreasonable number. Once we get -- first quarter, we still have the anniversary-ing of our bonus ramp-up. And our incremental margin, obviously, it's predicated on top line doing what we're thinking about. It's also predicated on our ability to manage the gross profit side of the equation, and we felt some pain to that in the fourth quarter. But your number doesn't make me uncomfortable.

That's great to hear. And then my second question is just back to price. It has built slower than I think you and we expected. And I just want to be clear on why that's the case. Is it that the suppliers aren't raising as fast as you expected? Or is there other reasons?

Part of it is, frankly, [indiscernible]. Part of it is this last piece being a little bit more heavily skewed towards the nonfastener is problematic. And part of it is it's not an exact science. And the dangerous part about us, sometimes being so candid and telling you exactly what we think is that we don't know. And we're speculating based on what we see and what we think is going to happen. And as you saw, some of the things we thought about in the July and October time frame, we were just wrong. p.

Our next question is coming from Tommy Moll from Stephens.

Dan, you made a comment that you would welcome a green shooter [indiscernible]. I think it's safe to say we all would. But let me ask a question in a different way here. Are you seeing any of your large heavy manufacturing markets, let's say, stabilizing or not getting worse. I'm just thinking auto, machinery maybe would be too worth unpacking.

I'm going to pivot that one. It's on over to Jeff. So I'm going to surprise them on the spot.

No, we're not seeing any real decline. It's really flat. We're not seeing a lot of -- I mean, I did get the note that someone was mentioning that the economy was slightly improving. We're not really seeing that, but we're also not seeing any declines in our manufacturing as far as the year-over-year usage.

Yes. Max, welcome to the call. I appreciate your commentary on some of the capital allocation framework. What I heard in very similar, maybe identical to what we've heard previously from Fastenal, but I'm just curious to the extent you can comment on any different priorities or frameworks you might bring to the role. We appreciate hearing a little bit.

No. I would say at this point, you heard me exactly correct. There is not an adjustment in our thinking, but at the same time, on 2 months into the role. And so these are things that we'll look at, but I feel very comfortable, and we feel comfortable with our approach to capital allocation. There will always be tweaks. If I wasn't here, there would still be tweaks. And so we would continuously monitor and assess as we go. And then we'll share -- to the extent that those are material changes, we'd always want to share those.

Your next question is coming from Ken Newman from KeyBanc Capital Markets.

Maybe first, Dan, I think you may have touched on this a little bit in your prepared remarks, but I remember correctly last quarter, one of the takeaways there was you did give up maybe a little bit of price to support some stronger volume growth and support some market share gains here. Just to clarify, is it correct to assume that you saw that a similar dynamic this quarter as well? And if so, maybe just some help on quantifying what that impact was.

I think we'd struggle to quantify that. Max might have some insight on that, but I'm not going to -- maybe he can offer it up if he chooses, but don't want to put him on the spot, but I will tell you philosophically we love to grow first and foremost. And we love to figure things out. And there's -- when we're taking on new business and growing, we'll take in the short term that we have to challenge ourselves to figure out the supply chain for that customer. And we'll take that opportunity on every day. Where you feel the frustration side sometimes is where you have existing business and we get squeezed a little bit and we need to step it up and push our team and push the market to readjust that. And I don't know, Max, if you want to add anything. And if you don't, at this point, we'll have to punt on a little bit [indiscernible] -- sorry about that.

No, maybe to the extent I'm just summarizing a little bit of what Dan says, we don't need to right now. So this is a time and place assessment for us as we create value. So we're feeling very good with our current approach and no need to get aggressive in that area.

Okay. That's helpful. And then for my follow-up here. Max, just I think someone had mentioned a headwind to December sales just due to holiday timing. That's not too unsurprising since I think one of your other public peers had mentioned something similar. But I'm curious, Max, if you had any color on what that impact on holiday timing or extended shutdowns were to ADS in the month of December? And how we should think about that maybe normalizing out in January? .

Yes. I wouldn't say we quantified it other than if you just take if you just take the sequentials, and Dan did a nice job of explaining why we don't get overly worked up, particularly with the sequentials in November, December. But if you just take those sequentials last year was like an [indiscernible] and I think this year, sequentially, November, December is like a 9.3% in that ballpark, you can back into that potential element there. But we also just saw less activity in the very latter part of December. And so we feel like that will just come back into play in January. I don't -- we don't look at this as a structural change or touching on our confidence on where our sales are heading.

One other thing I'll add, and we did this analysis last year. We did it again this year, where we looked at the first 2 weeks of December, -- and we looked at our vending activity. And what we've tried to understand is what was our vending activity telling us, when you have a facility with 1,000 employees, 500 employees, you pick a number. We know on a given day, in a given week, how many swipes of a badge we expect to see that indicates there's activity in that facility. What we saw a year ago is we had Christmas and New Year falling midweek. So it wasn't touching on the weekend because it's on Monday or Tuesday, it wasn't touching on Friday, it was that Wednesday, Thursday, which is just purgatory for us because you have these partial weeks.

And what we saw this year is Christmas week was a little bit better as far as what percentage of customers were shut down Christmas week. And anecdotally, what we heard was a lot of companies that normally are shut down to 24th and 25th, they operated a Monday, Tuesday, Wednesday and shut down 25th and 26th. The week of New Year's was totally different. We saw the number of customers that were shut down double from what it was in 2025 -- or 2024, excuse me. And when I say double, that's going from, say, 10% of customer shutdown to 20% of customers shut down. That's the bad news. And that was -- that cursed the end of our month. However, I'm pleased to say, in the first 2 weeks of January, we've seen a complete normalization of shutdown facilities from what we saw in '22, '23, '24 and '25 back to low single digits. So a big shutdown over New Year's week, it's normalized.

Your next question is coming from Chris Snyder from Morgan Stanley.

I wanted to talk a little bit about price expectations in '26. It seems like there will be incremental price coming. And I know you guys maybe don't want to speak to specific numbers like the prior couple of quarters. But could you provide some color just on how material this potential next round of price asks is we'd obviously see metal prices pushing higher here? And I mean, is it fair to think '26 price like for the full year average would be above '25 levels.

Yes. I'll take that one. Dan already said why we don't want to get very specific on this guidance. But I would just -- I guess I'd invite you to look back at our '25 trends. And just you can mathematically back into the fact that we will have some carryover pricing impacts. And yes, will that be substantial? No, and then we can also just say that -- and Dan alluded to this already, we will continue to go after pricing. But at this point, it's just such -- there's so many moving parts. And based on the way that we've talked about strategizing how we actually put price through the market. It depends on a lot of things. It's the input cost and it's the customer behavior.

So I would just, again, suggest if you look mathematically, we are going to have a positive compare. And then we'll, of course, go for more pricing as well. And so I think that's where we'll leave it for now. And as we go in through each quarter, I think we'll get a little bit better view of the world, and we'll try to share that as much as we can to the extent we have the confidence on the estimate.

I appreciate that. And then maybe if I could follow up just on the macro. Obviously, a lot of choppiness in the data, whether weather, holiday timing, channel dynamics the last couple of quarters. But when you kind of think back and look at the macro or customer end demand, do you feel like things in January are materially better or worse than they were 3 to 6 months ago? Are we kind of still in this mostly sideways pattern, looking through some of the monthly volatility?

I would tend towards sideways. I don't think we're seeing anything one [indiscernible] another. You're hearing some optimism from us probably because we internally beat ourselves up so much in '23 and '24 as we were struggling, that it feels good to be achieving success. And frankly, it feels good to be paying bonuses to our employees again.

Next question is coming from Stephen Volkmann from Jeffries.

Maybe just a couple of quick follow-ups. I'm curious on Slide 5, as you look at your e-business those -- that trend has been decelerating now for a while, and I guess it's been fairly flat as a percent of total. Do you expect that to start to reaccelerate going forward? .

Yes. I mean that's -- this is Jeff. Yes, that's definitely our thought process. I mean, we put a lot of time and resource into relaunching our website. We've put a lot of time not only in the business, but how it actually relates to our FMI and our solutions side. So I mean, it's a big focus for us next year, and we definitely see that to be becoming an increasing number as we move forward, especially in the latter half of '26.

And how should I think about that impacting gross margin or EBIT margin going forward? .

I'll help on that one. If -- so within our e-business, the vast majority of it is what we call e-procurement, which is things like EDI, things punch out, it's where we have established larger customers that are sourcing it. It's really, in many cases, it's the extension of a great key account program. The piece that Jeff just touched on, though, is on the e-commerce piece of it, things like website. That's actually a pretty small piece of our business. That component, it's going to depend on which customer is using it. But even if that component starts to -- even when it starts accelerating, it's still a relatively small piece that it doesn't really have that much ability to move gross profit up or down.

Your next question is coming from Chris Dankert from Loop Capital Markets.

I guess, first one here, I'd point more at Max. I guess, just as we look at the first quarter gross margin, typically, we see a slight seasonal step up. Anything to keep in mind that would kind of not just off that typical seasonal movement and gross margin here? .

No. It's -- this is an important topic because there are a couple of things. So when you just -- the step-up is fine, just keep bear in mind that some of what we talked about in our Q4 margins, the timing-related items. So you take that as a factor in Q4 of '25 and then you take your normal step-up. And then you can also compare against the prior year Q1 as well. And so that all should triangulate fairly well for you to give you a general idea, at least where we're thinking. Even the bonus reset, which can be a little -- potentially be a little confusing is only a year-over-year impact, but not a sequential. I think you're thinking about it right.

Got it. That's helpful. And then I'm not sure if it's more a Jeff or a Max question here, but thinking about some of the investment spending and investment into 2026. I guess anything onetime you need to call out maybe is the fleet refresh in good shape? How do we think about vending? -- anything kind of in the SG&A line to think about for '26 year?

Some of our bigger -- our bigger investments will be in the distribution space just as we increase both a bit the size of our footprint but also the throughput. We definitely have some truck fleet items that we need to push through as well, but that would be less in size. And of course, we -- obviously, we distribute through a lot of tech areas like the FMI space. So I would just say, to answer your question at the top side, it's getting distribution capacity and throughput ready for our future, which is here.

So with that, we're 4 minutes before the hour. Thank you for tuning in on today's earnings call. I suspect a few of you might have watched the National Championship game last night for football. I would like to give a call out, and that's to the University of Wisconsin River Falls. On January 4 [indiscernible]. On January 4, day 1, the Division 3 National Title in football. So my congratulations to them. And best of luck to the women's hockey team. They won the national title over the last 2 years running, and good luck on a [indiscernible]. Thanks, everybody. Have a great week. .

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

Greetings, and welcome to the Fastenal 2025 Q3 Earnings Results Conference Call.

[Operator Instructions]

As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Dray Schreiber, Director of Investor Relations. Please go ahead, Dray.

Welcome to the Fastenal Company 2025 Third Quarter Earnings Conference Call. This call will be hosted by Dan Florness, our Chief Executive Officer; Jeff Watts, our President and Chief Sales Officer; and Sheryl Lisowski, our Interim Chief Financial Officer, Chief Accounting Officer and Treasurer. The call will last for up to 1 hour, and we'll 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 proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission or distribution of today's call is permitted without Fastenal's consent. This call is being audio simulcast on the Internet via the Fastenal Investor Relations home page, investor.fastenal.com. A replay of the webcast will be available on the website until December 1, 2025 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. Jeffery Watts.

Thank you. Good morning, everyone, and thank you for joining us today. To start, Q3 was a strong quarter, and more importantly, it was a consistent one, and we delivered double-digit growth, expanded margins and continue to gain share in a flat market. And that's not easy to do, and it speaks to the strength of our strategy and the execution of our teams. But before jumping into it, I'd like to extend a big thank you to our entire Blue team for their hard work this quarter. And when I travel to branches and Onsites and DCs. I'm always struck by the pride and energy and our people, and I'm happy to say that the Fastenal's culture of service, legacy, Bob Kierlin left us is alive and well. So to every employee, thank you for your focus and commitment, the work you do every day in front of our customers behind the scenes. It's what's really driving this performance.

Also to all of our employees up in Canada, I just want to wish them a happy Thanksgiving, and I hope you're getting to spend some quality time with your friends and family. Now let's get started and turn to Slide #3. In the third quarter, we delivered net sales of $2.13 billion, which is an 11.7% increase over Q3 of last year. This is our second consecutive quarter above the $2 billion mark, which demonstrates the effectiveness of our plan and Fastenal's growing partnership with our customers. It's also worth mentioning that the growth this quarter came with the same number of selling days. So it's a clean comparison. And overall, again, it's a strong result. Now let's discuss the case of the growth through the quarter. One thing we pride ourselves on at Fastenal is solid execution quarter in and quarter out. And Q3 is a good example of this. Despite a couple of timing quirks, we pretty much met or beat our typical seasonal patterns each month. And in July, we saw daily sales growth of 12.8% with -- with sequential dip from June of about 2.7%, and that's actually better than our historical benchmark, which typically sees about a 3.5% drop from June. So July came in stronger than expected. Now 1 nuance here is the timing of the July 4 holiday and landed on a Friday this year, which is important, is it pulled some activity into the first week of July. If it were to fall on a Wednesday or Thursday, kind of like it did last year, we wouldn't see that same activity and our vending data confirm this. We saw about an 8% increase in vending activity that week compared to when the holiday falls midweek; didn't materially impact the quarter, but it did shift some inter-month cadence. When you add in what we saw in August, September, our Q3 daily sales growth actually came in a bit stronger than our benchmark would have predicted. That was around 11.2%, which is an encouraging sign.

And looking at the year-to-date picture, our daily sales from January through September, they're up 15.9% compared to historical benchmark above 9.5. Now that's a big delta. But even when we consider the weather-related issues stated in January and the price/cost for September, we're still showing double-digit sequential growth well ahead of our historic pattern. I think the big takeaway is our underlying growth remains strong and steady. We have a phrase we use internally, plan the work and work the plan. And the team did exactly that in Q3, and it shows in the results. And when we're looking at where the growth came from, the broader market wasn't much help. The industrial economy remains sluggish, essentially flat. I think the PMI averaged about [ 48.6 ] in the quarter, which indicates contraction. But I think I'd characterize our growth is mostly self-help in market share gains rather than any particular macro lift.

Pricing did contribute roughly 2.5 percentage points to growth somewhere in the 240, 270 basis points, a bit lighter than we anticipated earlier in the year. But I think Sheryl is going to dive into this in a little bit more detail later in the presentation. I would just add though that our team has done an excellent job communicating with customers on pricing. The one thing I hear consistently from customers is the appreciation of Fastenal's transparency and partnership and managing these cost changes. And we're not just passing on increases, we're working side-by-side with their customers to find solutions or alternatives and efficiencies. That kind of responsiveness, it builds trust, and it's a big reason we're continuing to gain share. Aside from price, the rest of our growth, roughly 8 to 9 points came from volume and share gains. And we saw meaningful wins with key accounts, a steady stream of new contract signings and deeper penetration in existing accounts. Our national accounts and Onsite signings over the past year are now ramping up in revenue and it showed this quarter. And in fact, our national account sales were up double digits in Q3, slightly higher than the company, reflecting those new contracts really coming into fruition.

Now we turn to Slide 4. In terms of our customer category results from our strategy, and we continue to see success with large accounts. Our aim has been to deepen relationship with big customers and in Q3, it showed the number of active customer sites spending over $10,000 per month with us, those sites grew over 8.1%. And those spending over $50,000 per month, what we call onset like locations, the number of those sites grew 15.4% and those are significant gains in penetration. In fact, some long-standing customers are now utilizing us in more plants for more product categories than ever before and I was just down in Texas for some regional VP meetings, and I had a region tell me a story, one of a major manufacturer in this area has been a Fastenal customer for 20 years just expanded Fastenal's program from 2 sites with them to 5 sites, essentially making us their primary supplier nationally. And that didn't just happen by accident, it was our team proving themselves and offering new solutions and new product lines. It's a great example of earning more with existing customers by enhancing our services. I also want to highlight the growth we're seeing in what we call nontraditional markets, and that speaks to expanding our total market.

In the quarter, for example, our business with health care, education, government customers grew nicely and our sales to warehousing and logistic companies, they were up significantly. These segments are outside of heavy manufacturing and they help diversify our base. We've also signed several new on-site contracts with universities and school districts this year. It's an area we target after the pandemic. Those are now kicking in and contributing to growth and the resilience in our mix. As Dan noted, earlier in the year, institutions and warehouses, they might not boom like manufacturing, but they don't bust as hard either, paraphrasing. So bringing them into the fold makes us a stronger company long term.

The bottom line is our strategy is delivering. We set out to align the organization behind those 3 pillars, increasing sales effectiveness, enhancing our services and market expansion. And in Q3, we can see tangible results, faster growth in our core product, fasteners more spend from big customers and entering the new pockets of business.

Moving on to Slide 5. When I look at Slide 5, a few takeaways for me on this slide: First, is we continue to speak about alignment in our strategy. But most of that has been around just our sales departments. I think it's -- I think pointing out that this is a company-wide strategy, it's very important. And our fastener expansion initiative is a good example of this. This was a company-wide effort, not just a product push, but a coordinated strategy across sales, supply chains and operations. We improved availability in our DCs. We aligned our teams around some key SKUs and most importantly, we made it easier for our customers to get what they need. And the result, the Fastenal sales grew over 15% in September, outpacing overall company growth. It resulted in a meaningful lift in not just sales, but the gross margin as well. This is what company alignment looks like and it's driving results.

Second thing on this slide, for me, Q3 was a quarter of profitable growth. We achieved double-digit top line growth in the soft market and converted to even faster bottom line growth, net income up 12.6%, EPS up 12.3%. Our margins expanded and costs were well managed, resulting in a 20.7% operating margin. The scenario -- that's really the scenario we aim for. The only cost of this success was really higher performance pay and our team definitely earned that, definitely, [indiscernible] get the way of that. This combination of growth, profitability and returns is exactly what we set out to deliver. It speaks to the strength of our strategy and more importantly, to the execution of the Blue Team. It also gives us confidence as we head into the end of the year, knowing that we're growing the right way, profitably and sustainably while creating value for our customers, our employees and our shareholders.

Now moving on to Slide 6, which highlights our digital engines. This is an area where we've been investing for years. And in Q3, we saw continued momentum. We averaged about 110 FMI signings per day, slightly below last year's pace, but still an extremely strong level of activity. It's over 7,000 weighted FASTBin and FAST [indiscernible] devices signed in the quarter, bringing our total installed base to over 134 -- just under 134,000 devices globally, up 8.7% year-over-year. The sales through FMI technology represented 45.3% of our total sales in the quarter. This was 43% a year ago. And when you look at the daily sales through FMI, they grew just shy of 18% year-over-year, well above company average and a clear sign that this program is not just expanding, it's accelerating. On the e-business side, we saw 8% growth in daily sales. This includes both e-procurement and e-commerce activity. All those numbers is not where we want it, we believe the relaunch of fastenal.com will help improve this growth as we move into 2026.

When you combine FMI and e-business, our digital footprint accounted for 61.3% of total sales in the quarter and reflects our long-term strategy to drive growth through technology automation and customer integration. And further -- it really furthers our motto of growth through customer service. So before I hand it up to Sheryl, maybe a quick summary, we're winning with large customers. We're deepening customer relationships with technology and on-site and we're aligning around the right priorities. We did it by investing in the right things, our customers' technology and the development of our people. I'm very proud of the teams and how they've embraced and executed the strategy over the last year. And I believe we're really starting to fire on all cylinders. We're aligned, we're adaptive and we're customer-driven. With that, I'll pass over to Sheryl.

Thanks, Jeff, and good morning, everyone. Now I'll turn to Slide 7. Sales in the third quarter of 2025 were up 11.7%. That's the strongest quarterly daily sales rate since the first quarter of 2023. Despite sluggish end market demand and caution related to trade policy and tariffs, margin pressures, government shutdowns and the potential for longer than normal holiday shutdowns in the fourth quarter due to the Christmas holiday falling in the middle of the week, regional and other sales leadership expectations are generally favorable for continued strong growth due to share gains. In the absence of much external help, the improvement in our sales reflects 2 other variables: First, even as the market has stabilized, our comparisons have gotten easier, particularly in the cyclical parts of our business. This factor helped produce our third quarter of growth for fasteners since the first quarter of '23 and acceleration in manufacturing end markets. Second, contributions from our strong contract signing since early 2024 continue to build. We continue to experience a healthy pace and mix of signings in the third quarter of 2025 and in our total national, regional and government contracts grew in the high single digits. The quarterly sales growth rate is a fair representation of our performance, and we did see acceleration through the period. It was another solid self-help driven result in a soft market. The pricing outlook warrants some discussion.

Year-to-date, significant tariffs have been applied to products from China as well as steel, including steel-derived products like fasteners on a global basis. We continue our long-term trend on diversifying our supply chain where possible to the size and timing of our suppliers' pricing actions and we added some inventory to our own balance sheet. That said, supply chains have gotten more expensive and a part of our response over time has been incremental pricing. We have been proactively engaging with our customers for several months. We measure price on the sale of identical parts to the same customers in both periods. This represents approximately 50% of our business, and we refer to this as like-for-like pricing.

During the third quarter, we implemented 1 pricing action in the month of August, which addressed the reciprocal tariffs that were finalized in July of 2025. Our previously stated goal was for price to contribute 3% to 5% by the end of the third quarter of 2025. The phased approach to this rollout resulted in 240 to 270 basis points of additional impact in the third quarter with momentum building as we ended the quarter. Additional pricing actions will be necessary in the fourth quarter of 2025 with the potential to increase the impact of pricing on like-for-like parts to be in a range of 3.5% to 5.5% depending on where the tariff litigation ultimately settles and the pace and execution of our actions. Our revised goal for pricing on like-for-like parts in the fourth quarter of 2025 reflects the reduction from our previously stated goal of 5% to 8%. The other 50% of parts sold to customers exist in the current period, but do not exist in the prior period, making it hard to measure price impact on that group. That said, it has to be acknowledged that had we sold that part to that customer in the prior period, it would have been likely sold for less due to inflation.

Therefore, in periods of inflation, there is an inherent price component that flows into share contribution. It is likely pricing is contributing to share contribution in the range of 1% to 2%. We are encouraged by the easier comparisons, the improved sentiment and particularly our internal momentum. That said, we have limited visibility and share our customers' uncertainty over how current trade policy may impact demand in the fourth quarter of 2025. However, Fastenal has historically been able to win market share during periods of disruption on the strength of our nimble sales, our frugal and adaptive culture and the weight of the technologies and global supply chain resources we can apply to finding solutions to customers' challenges. That is our expectation in the current environment.

Now turning to Slide 8. Operating margin in the third quarter of 2025 was 20.7%. This is up 40 basis points year-over-year. Gross margin in the third quarter of 2025 was 45.3%, up 40 basis points from the year ago period. The improvement was primarily driven by our fastener expansion project, other supplier focused initiatives and improvements in customer and supplier incentives. These benefits were partly offset by continued customer mix dilution and higher organizational overhead cost. Price/cost had a neutral impact on our gross profit percentage in the third quarter of 2025. We anticipate our gross profit percentage for 2025 will be relatively flat with 2024. This will be dependent upon our effectiveness in managing price cost and the degree of macro improvement will also influence this scenario. SG&A was 24.6% of sales in the third quarter of 2025, which was consistent with the year ago period. Employee-related expenses increased faster than the rate of growth in sales, largely due to the reset of bonus and commission programs due to improved financial performance.

This increase was partially offset by leverage achieved in all other SG&A costs. We continue to invest in key areas of our business to support growth while managing other costs more tightly to reflect the sluggish business conditions. Putting it all together, we reported third quarter 2025 EPS of $0.29 per share up from $0.26 per share in the third quarter of 2024. Reminder, we executed a 2:1 stock split in May of 2025. The prior year EPS has been adjusted for this change.

Now turning to Slide 9. We generated $386.9 million in operating cash in the third quarter of 2025 or 115.3% in net income. Despite our investment in inventory, cash generation was above traditional third quarter levels. The 5-year average from 2020 to 2024 was 104.2%. We remain comfortable with the cash generation of our model and continue to carry a conservatively capitalized balance sheet with quarter-end debt being 4.8% of total capital. Accounts receivable were up 12.2%, reflecting sales growth, relatively faster growth to larger customers that tend to carry longer terms and an uptick in quarter end deferred payments from our customers. Inventories were up 10.5%, which was an improvement from the preceding quarter. We have increased inventory as part of our effort to improve product availability in our selling locations and improved picking efficiency in our hubs. We have added stock to support customer growth, and we accelerated some inventory scheduled for future delivery in the current periods ahead of tariffs.

Inventory growth may remain elevated in the fourth quarter of 2025 as we continue to navigate tariffs and more inflation builds in. Accounts payable were up 14.3%, primarily reflecting the increase in inventories. Net capital spending in the third quarter of 2025 was $54.7 million, down slightly from $55.8 million in the third quarter of 2024. This increase is consistent with our expectations for the full year where we anticipate capital spending in the range of $235 million to $255 million, which is up from $214 million in 2024. This increase is from higher FMI device spending, distribution center outlays to reflect spending on our Utah and Atlanta hubs and automated picking additions across our hub network, higher IT spend which includes projects aimed at developing additional digital capabilities and higher spend on vehicles. The increased spend was partially offset by an increase in proceeds from sales of vehicles and properties. With that, I will turn it over to Dan.

Thanks, Sheryl, and good morning, everybody. And I'll sit in thinking, as Jeff and Sheryl were talking, what's kind of nice for me right now is we put up a great quarter. And Jeff and Sheryl, a few quarters ago, would have been really nervous about what they just did, like they did a wonderful job talking about the quarter, talking about where we're going and giving insight to our shareholders on the call as well as our employees on the call. I think -- as I was reading through some stuff last night, a few things dawned on me. One was, it was 10 years ago today that we put out the third quarter of 2015. And the PMI was plus [ 50 ]. We've gone through a year where we've seen diminishing success and the afternoon before I've been named President and CEO. And the first message I had to deliver was a tough quarter. Our sales went negative in September. And as it turned out, they were negative for the balance of the year. And we needed to kind of regroup and figure out where we're going, not the co sub today. And there were some simple themes that began to emerge when we settle down. It's a great organization, great capabilities, great people, but we lost our way a little bit. Some other things that emerged over time was the idea of thinking big about where you're going, taking steps towards the future, being willing to change and never cling to the past, because it's comfortable and safe, figure out where you're going and get there.

It eventually chimed into some mantras, find great people, ask them to join, give them a reason to stay. And we just -- Jeff just introduced the new one, I liked his phrase, plan the work, work the plan. I don't know if that's a Canadian thing or a hockey thing. It -- I don't think it is there with growth in customer service, but it's pretty darn good, and I love it. I would like to say thank you to the Blue team for the quarter we just put up -- frankly, the last 2 quarters we just put up. It was nice couple of quarters above $2 billion, where we're enjoying growth again, but I would like to give special mention to several people to Bill Drazkowski. Thanks for thinking about the organization first and stepping into the role of leading our national accounts, our contract sellers team 2.5 years ago, a big part of the turnaround is the work of your team in collaboration with the network they serve.

To Casey Miller, thanks for taking a big load on your shoulders when Bill stepped out of his role. I'm glad we were able to add some resources here in the last 3, 4 months to assist the effort. But thanks for everything you've done. So Tony Borsa, thank you for the improvements we've seen in our supply chain over the last 1.5 years. It helped us tremendously navigating the tariffs of 2025 because it gave us a little bit of a cushion to make mistakes or as we did here in the third quarter to delay a pricing action because of some uncertainty going on with, okay, what are the court is going to do, what's going to happen next, heck, even over the weekend, there was some noise about what's going on, but the work of our supply chain team gave us a little wiggle room in which to navigate. And then finally, to Jeff Watts. He stepped into a role, the first thing you did is our sales team pursuing a common goal, challenge us to maybe stop being stupid some of the time on the things we were doing and remember, we all serve our customers and we serve each other. Nobody serves us. It's never about us. It's never about I., it's about the customers and the market we serve. The -- I did like the other quote Jeff had in his prepared remarks, drive growth through technology. A decade ago on that call, we couldn't have made that statement because we didn't have a technology to present -- we didn't have a technology team to present. And my complements to John Soderberg on your efforts over the last decade to get us to where we are today and the resources we have to assist our sales team.

The Page 10 of the field message on third quarter, talks about an item that we mentioned actually on Page 2 of our earnings release. If you look at Page 2 of the earnings release, we've historically talked about 3 categories of products: fasteners, safety and other. Within fasteners, we further break it down to OEM fasteners and MRO fasteners. So we started doing that some years ago, and we did it by guesstimating the mix. We didn't have great reporting to tell us, but we did know that if it's a manufacturing transaction, we aren't charging sales tax, it's an OEM fastener and so in there, you'd see about 19.8% of our sales, our -- an OEM fastener. That's really predicated on looking at the U.S. business and estimating it.

On Page 10 of the foot book, what you see is our folks, we have better reporting systems now, and we can look at things differently, and we can look at it globally rather than kind of faking it because we're looking at nontech sales. That [ 19.8% ] is actually 20.9%. And that's looking at it globally in places like Mexico bring the average up in -- as we've gone through the year, 1 of the things we've talked about is our Americas business outside the U.S., particularly our business in Mexico is having a tough year. That business is more heavily skewed towards OEM business, especially OEM fasteners than the rest of the company. And when you have a sub-50 ISM, it beats them up, but we have great people down there, doing great things, and I know we're building for the future, and that future will shine through. What we learned in this process of really going through. We want to understand the non-fastener business because we had no visibility to that in the past. If you'd ask me 6 months ago, what percentage of our business do you think is OEM. I would say, it's probably about 30%. And the difference between the 20 and the 30 would be -- about half of it would be metalworking and abrasives and half of it would be everything else.

As you can see from the information here, I was woefully understated in my number. And so as we move towards year-end and each of the steps between now and then and ask I have with the analyst community, when you're having conversations with Sheryl and Kevin about our monthly sales, about the follow-up of this call. Challenge us on what you want to see from this information. It's our intent to replace that table on Page 2 -- or to supplement that table on Page 2, I'm not sure which at this point, with a thought process of our business of, here's our direct business, i.e., OEM. Here's our indirect business, i.e., MRO and give better visibility to what we're doing and where is our success taking us as we move forward. We're going to move forward, I'm -- we can switch over to the questions. I've used up my 10 minutes. And I would -- and as mentioned, please limit your questions to one with a follow-up. Thank you.

[Operator Instructions]

Our first question is coming from David Manthey from Baird.

My question is on pricing out of the gate here. So the gross margin looked good. I assume there's no issue with you passing on price. But with the pricing being below expectations, I was wondering if you could just talk about the mechanics there the housing-wise that is panning out slower than you originally thought?

Dave, as I mentioned, we -- when we -- we were stepping into the quarter, we thought our cadence could be a little different than it played out and every time we have a conversation like this, we're answering based on what we know at that point in time. And as you know, it's a pretty fluid environment. We ended up delaying it about 30 days, our third quarter step and in doing that, 2 things happen. Obviously, the benefit or the impact on the quarter is muted. And however, by delaying it 30 days, I think we have better discussions with our customers. We had better options for them to have. I believe when you're pushing things too fast, you kind of negotiate differently. You have discussions that are different. And there's probably some territory you'd see in that discussion that 30 days later when you have a little more insight and can have a more thoughtful conversation, you're probably more effective at your pricing, but more importantly, you're more effective at providing counter options to avoid part of the price through substitution, but it did slow down our cadence in Q3.

As we step into Q4, as Sheryl mentioned, we've lowered that number a little bit. Part of it when we gave that number for Q4 in the July time frame, part of it is you're doing the straight-line look and you don't really know what it is. The only difference between now and then is we know what we know now, and that is it's going to be a little bit lower than we thought, which frankly, is a good thing because it tells me we've probably put in more substitutions in place. And I cautioned in July about we might get a little bit of a margin squeeze in the third quarter. Part of the reason for putting that message in the call is I thought it could happen, and I wanted everyone of the Fastenal employees to hear it. I'm going to make the same comment again. We can get a little margin squeeze in the fourth quarter because costs are continuing to rise, we've had some wiggle room because of what we talked about on the expansion of fastener products that we stock in inventory that gave us some margin on some other products unrelated to the price, but we could get a little squeezed in the fourth quarter. We're going to work to avoid it like ever. And -- but we think the number is a little bit lower. Most of that is because we have better information now than we did 3 months ago.

Got it. And so when you're saying the numbers coming in a little bit lower, you're talking about the fourth quarter down from the 5% to 8% you thought previously. But is there a change in how you're thinking about peak pricing ultimately? Or does that 5% to 8% just get pushed into 2026 at some point?

I don't know if we know that answer at this point, Dave. There's going to be things that happen. We're going to do pricing actions every quarter. If the situation dictates it, the optimist in me would say that things are coming. We had an economist come in and talk to our board the other night, and she was running through some of that stuff. And and talking about what their expectation is coming into 2026. And as you asked [indiscernible] the question you're going to get 12 opinions. But I think there is a feel and I think there's a political will, that's some of this stuff calm down. Obviously, over the weekend, there was some noise going different directions. We'll see how that plays out as we move into November. The optimist in me would say maybe the point we get to by -- as we exit the year is the point we've gotten to. And now the real challenge is the fatigue on pricing is there. doesn't mean there will be some price changes after the first of the year because I believe there will be. There might be some that didn't agree to a price change 3 months ago or 6 months ago that we have to go back and have that discussion again.

Hopefully, the end result is we're better at pivoting source of supply and the product served because I believe we're better at that than our peers because we have direct conversations with our customers and we have great line of sight to supply chain.

Your next question today is coming from Ryan Merkel from William Blair.

The question wanted to start with the bonus reset. Can you just explain why was the bonus reset so much larger in 3Q versus 2Q?

So there's a few aspects to that. One is the -- part of its bonus reset in early August, when we had our -- after we've got in the July numbers, we had a bit of a discussion with our leadership team that said, "Hey, SG&A is getting ahead of where we need to be", and there's a number of things that kick in. In fact, this morning on the -- we always have a call at 07:00 in the morning with our leadership team. And Sheryl runs through some analysis she provides for our Board and shares it with our leaders. And in that discussion, I was doing some ad hoc calculating and for the Fastenal leadership listing, I was wrong on my ad hoc because I was doing it on the fly. Matt Ransburg, reminded me afterwards that, hey, Dan, we split our stock. So your math was off by a factor of 2. So if you think about it on a district manager, by district manager basis, we spent about $8,000 a month too much because that would have gotten us closer to $0.30 if you do the reverse engineering on the math. And our district managers have been under incredible pressure for the last 2 years to manage expenses. They probably had some pay increases they needed to do. And there's probably some pay increases that were occurring as we were going through -- I'm talking about base pay that we're going through the year. And we probably underestimated that a little bit as we went through the second quarter and we were realizing more success.

There was also some changes that we talked about on some pay programs we were making. And most -- those programs center on the field, and they center on at what line you're measuring for pay purposes. Are you measuring at the sales line, the gross margin line, the operating margin line, what we internally refer to as the ROA, which is our internal P&L and asset document. It was a little bit more of an impact from some of those changes because we were discovering success than maybe we estimated. And then -- but the final mechanical piece is we have a lot of programs that are linked to performance of P&L growth and we pay out a meaningful piece and you know how our proxy works, we all get a piece of the earnings growth. We had a few more months of success because we have better participation across the network. So you had a few more district managers that programs are kicking in district or programs are kicking in. And we underestimated a number a little bit. If there's nothing in there that I'm going to lose sleep over other than cautioning already in August to slow that down because it doesn't do anything for Q3. It really doesn't do much for Q4. It really matters for Q1 of '26 because it's a big ship and it requires a little more time to do some steering on the rudder. But part of it was there was some base pay changes going on. We probably underestimated a little bit the impact of some of the new programs. And then the rest is we're finding success and we're paying and we think that's a great thing.

Okay. Yes, makes sense. And then the follow-up is SG&A in the fourth quarter. Is it going to be similar 11% year-over-year growth that we saw in 3Q?

Sorry, I'll defer that a little bit to some of the follow-up questions when you're going through your model. But we anticipate from the profit growth perspective, that will continue to kick in until we anniversary that as we move into the second quarter of next year, but you're going to see similar expense growth, what you're thinking.

Our next question is from Tommy Moll from Stephens.

I want to start off with a question on demand. Clearly, the broader market conditions remain sluggish. You called out trade and policy uncertainty as reasons. I'm curious what you're picking up from the field? Does it seem like if we had greater policy uncertainty, there's some pent-up demand that can unlock relatively quickly or is it more -- we're already talking about calendar issues in December production plans feel pretty well set and even best case, we're probably talking about a 2026 potential tailwind here.

Yes, I would just add into that, that we're not seeing a lot of, obviously, the tailwind today. And from everything we're hearing from our customers, everything we see we're probably looking into -- obviously, into '26. We're not going to get that in Q4. But most of -- the nice part about it, almost all of our customers are telling us the same thing that this year is what it is, but they're spending even in Mexico, they're really looking at that Q1, Q2 time frame. And actually, Dan mentioned the economist, everybody is right and they said the same thing to us so.

Thank you. And then just a question on the fastener stocking initiatives that you've talked about? Maybe this is too simplistic, but is the rationale here share gain through better service levels? And if that's a fair characterization and everything goes right, should this be accretive to ROIC? And what's a reasonable time frame for that to unfold?

Well, I'll talk about the share gain on it. And really, if you think of it this way, we we got a little tied on our inventory models. And what it did was it made it very difficult in the field for the branches to get standard inventory. They weren't efficient at it. And we started to lose some share. So we brought back the standard inventory that we were missing. We've actually increased it and it just made it a lot more efficient for our branches and our customers to get that inventory. I'll let Dan answer the second part.

On the ROIC, actually, the Phase 1 and most of the Phase I is accretive to ROIC. And because what we -- what happened is, to Jeff's point, having the inventory on the shelf. I just meant that if it's easier for our folks to perform, it's easier for us to folks to give a quick answer to a customer of, yes, I can get it in as opposed to doing a sourcing exercise and then calling the customer back because a lot of things can happen during that sourcing exercise like maybe talking to other suppliers because they need stuff. And if I can just answer the question, it puts it to bed. So there's a capture of market share you get. The other thing that happens is when you buy it in an orderly fashion, you always purchase it better. And so we're getting a nice return. When I look at the inventory dollars we added, the return on that is much better than ROIC as a company. The reason I say accretive and not ridiculously accretive is there's always a trade-off on efficiency. So we've given Tony and his team the ask of saying, keep looking at this kind of stuff. Bob Kierlin always taught us, it's not about the P&L, it's not about the pretax, the percentage of sales.

Now that really matters, don't get me wrong, it's about the returns. That's what our long term. That's what our shareholders will reward us for is the returns on the investments on the decisions we're making. And if we're adding inventory and it's enhancing our returns. We will continue to add inventory, even if we add a few days to our inventory. If we can get a return on that, that's a better use of excess cash than a dividend. A dividend is you're throwing in the towel because you have more cash than you can deploy in a useful fashion. And what we've always believed in is that companies that have too much cash and they look for places to deploy it, usually destroy shareholder value. They don't create it. So we would rather dividend everything out unless we have a known need for it and count on future cash flow to fund the ideas that we have.

Next question is coming from Nigel Coe from Wolfe Research.

Okay. Great. Sorry about that. I'm not sure what happened there. Dan, can you maybe just expand on the price fatigue comments? I mean I don't think it's particularly surprising, but I'm just wondering is this really just the uncertainty around tariffs? You mentioned the kind of litigation around that. So is there a sort of a pickup in competition here and you're seeing some of your competitors are not pushing through price perhaps?

Our competitors are pushing through price. The marketplace is pushing through price. We actually prefer not to push through price, we prefer to push through growth. We prefer to have conversations about technology we can deploy to your point of use that lowers your consumption, expanding the universe of what we're selling. The price conversation is only about costs are going up in your supply chain and price is how a customer realizes that. And so we've always been reticent. On the flip side, we have great line of sight to our needs, and we have open candid discussions with our customers about what's happening in their supply chain, and that price is part of it.

The biggest, I think, complexity to the conversation is things like what's the court system going to say about it? What's the pivot in the political wind of chaos or settled down, it isn't so much what the prices reset to. It's -- are the prices done resetting. So customers can make decisions about what they want to do because they know the economics of what they want to do. And in the meantime, what happens is you get kind of a pause. And I think that shines through in the comments The Economist said to us and Jeff was alluding to is that customers are doing what they need to do, but they aren't necessarily doing more than they need to do because they aren't building for the future because they're not sure what their cost structure is going to be and if they want to do that thing. But price fatigue is we all get tired of talking about that because we'd rather talk about growth.

Yes. Okay. That's really helpful. And then just a quick one maybe for Sheryl. Just maybe can you just put some boundaries around 4Q gross margins? I mean, Dan, you mentioned the potential of a little squeeze in the fourth quarter. I'm just wondering if there's any sort of more refined comments around that.

Yes. So in the fourth quarter, we are expecting that we'll see a drop in our gross margin, which is consistent with quarter 4 performance historically. But we are still targeting that we will be flat on our gross profit percentage for 2025 when compared to 2024, and that's really driven by the fastener expansion project promoting our gross margins.

If somebody would have asked me in January with all the [indiscernible] going on. What's a win in 2026. I would have said getting our growth to double digit as it moves through the year. And if we can maintain a gross margin, a flat gross margin in this environment I think that's a huge win. And part of that was I didn't appreciate how chaotic the year would be on tariffs. I don't know if any of us really did. And secondly, I knew mathematically, how much the fastener expansion could help us. But knowing mathematically how much it's going to help and realizing that in actual activity aren't always the same 2 things.

Our next question today is coming from Stephen Volkmann from Jefferies.

Dan, maybe can we go to your Slide 10, and I'm curious how you use this data this percentage something that you're trying to manage to, to either grow it faster or not, I guess, to the overall business? And I'm curious if there's any -- I'm assuming the margins are higher in this area, but any commentary there would be great.

Actually, the margins in direct materials are lower, but your cost structure is lower because it's planned activity. Here's how I use it. And I'm going to think out loud -- and Stephen, thank you for that question, by the way. But I'm going to think out loud. So if you're writing these down, use a pencil instead of a pen because as the information becomes more available to you and frankly, to us, some of these things might be conceptually dead on, but they may be off by a little bit. So when I think of the PMI going sub-50 in November of 2022 and our business falling off as we got into the second quarter of 2023, there's obviously a cause and effect there. And the PMI and the industrial production subset of information that we've historically talked about internally. When I look at that, the even we didn't really understand how much of this was production shutting down versus what is not executing or we need to get our head out of somewhere and get executing? And what this gives us insight, if we appreciate that 40% of our business -- or 38.8%, excuse me, but almost 40% of our business is direct material production related. The story that subset of information tells, I suspect we'll have a strong correlation to industrial production and to the PMI in general. I also believe that close to -- we talk about [ 45.3% ] of our sales go through FMI. I suspect on that piece of our business, probably 50% of that business goes through FMI. We don't know the answer to that right now, but that's what I suspect it will be when the dust settles.

Then the other 60% are indirect, it's truly MRO spend. That's really a good comparison benchmark to some of our peers that are more MRO centered businesses. It's a good comparison to the things we're doing to broaden our breadth of customer base because that's less impacted by the PMI less -- it's impacted but less so as far as industrial production as well because 8% of that business is going into supplying e-commerce distribution. 8% of that business is going into the government and sector where we're supplying their needs and it really has nothing to do with PMI. And we believe about -- of that 60% that's indirect, we believe about 40% of that is going through FMI. So if you melt those 2 together, do your math, it's about 45% is the mix. Now time will tell if Dan is [indiscernible] on that, and if the number is coming a little bit differently, we'll learn that in the weeks and months to come. And as we learn that in November with our monthly release, we'll put out some insight on it.

If we learn some new things in December, we'll put it -- or in November, we'll put it out with our December release and then talk about it a bit more in January and a bit more in our annual report because our goal is to provide you with better information for understanding our business where we're discovering our success, where we're struggling and are the factors of struggle internal, i.e., execution or external, and we're going to focus on growing our business long term always. But we think it provides better insight than purely, hey, here's fasteners and here's everything else.

Great. Okay. That's helpful. And maybe from long term to super short term, anything in October to call out relative to how we should think about top line for the fourth quarter?

Whenever I use October on the 13th of the month, I'm always wrong. So I'll defer that to our November release in early November.

Next question today is coming from Chris Snyder from Morgan Stanley.

I like to follow up on the conversation about price. Is the softer -- is there any impact here from that the producers are maybe just pushing less on you guys than you thought previously? And then -- or when we kind of see the Q4 step down, is it just that the company is comfortable being underwater for maybe a short period of time on price cost? And does that tell us that it's getting more competitive in the market?

We're never comfortable being underwater on price/cost. Sometimes that happens. We're never uncomfortable if we're growing double digits, we don't like our incremental margin to be below 25, but I'm not going to lose any sleep over this quarter where we're closer to where we're at essentially 24. I don't think the -- here's what I'd like to think, but this is me just giving an opinion and that and $3 to buy you a cup of coffee, a quick trip in Winona. But I believe our duty to our customers is the push back on supply base.

Now in the case of things like tariffs, that's a mechanical thing. Now we can push back on our supply base and get price concessions or cost concessions potentially or we can move business to other geographies and avoid some of the tariffs but there's trade-offs. You might be paying more to save tariff, and that more might be in the cost of the product as a -- we've diverted product going directly into Canada. So it doesn't come through the U.S. and get the toll -- come through the U.S. But it's more expensive for us to break shipments down and divert it to the West Coast of Canada and bringing it in that way. But that might be 8% more expensive, but if tariffs are x -- or multiples of that you choose to do that because it makes the most sense. I would like to think that producers also realize that if you use tariffs as a means to, we're very, very surgical with our tariffs. Some companies aren't so surgical. They're just like, hey, we're just going to raise prices x to everybody. And when somebody does that, a supplier of ours does that, we'll say, "You know what, you can set your pricing where you want to set it", the marketplace is going to decide where it wants to source its product. And if you're not being surgical, we're going to punch you in the face, and we want to take that product sourcing somewhere else.

And I'd like to think some of those activities, and I'm not being literal with that comment. I'd like to think some of those activities causes pause of our supplier base to the old adage, pigs get -- fat hogs get slaughtered, don't be a hog. Figure out what you need, surgically buy product based on cost components, but don't do a broad brush on this. And perhaps we're seeing some of that but we will never be comfortable with price/cost being anything but neutral.

Really appreciate that thoughtful answer. Maybe just following up. You mentioned earlier about making investments in inventory and not providing a great return. Do you think customers did anything similar in the first half of the year? There's very well-flagged telegraphed price increases coming. Do you think there was any pulling forward of inventory at the customer level? Just to get ahead of that.

I can't speak to supply chains that don't come through Fastenal because I'm sure there's customers that bought some components because they knew what their needs are and they bought some, assuming they can get them in and they can get produced and get them in before the toll started charging. But I don't believe they did any of that activity through us because we're a real-time supply chain partner for them. That's the value we bring. And what we do broadcast to our customers is things we're doing, so we can tell them, "hey, here's how many weeks of supply we have of your part. And here's where the cost increase is going to kick in and the price increase to you." So I don't think our customers did in the products we sell. I can't speak to products outside of that.

And -- but with that, I see we are 2 minutes to the hour, so that will be our last question. Thanks to the blue team for everything you did. I would share with the group -- sorry, if I've been a little bit unavailable in the last couple of weeks. My 95-year-old mother passed away a couple of weeks ago, and she lived a wonderful life. Time takes its toll on all human beings, and I'm really glad that my 4 children, particularly our daughter Anna, who was 20 years old had a grandmother lived long enough that she was part of her life, and she knew her as a human being. Thanks, everybody. Have a good day.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.