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F500-2021-479-Fastenal

<p class="xmsonormal">Duct tape. Faucets. Power tools. When companies need to remodel their buildings, fix their office toilets, or repair broken desks, they head to Fastenal to buy their industrial and construction supplies. Fastenal is a distributor for big manufacturers like 3M, DeWalt, and Honeywell; some of its rivals include the larger and older W.W. Grainger and ecommerce giant Amazon.</p>

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Future-50-2020-Fastenal

<p class="p1">When the coronavirus emerged in early 2020, the company, based in Winona, Minn., had a head start. A distributor of factory floor supplies, including personal protective equipment, Fastenal reacted quickly to the virus’s rise in China, adapting its supply chains and becoming a major supplier of PPE. That helped it set itself apart even as industrial activity softened amid lockdowns. Its next challenge will be whether it can manage both a surplus of PPE and a still-soft industrial base going into 2021.</p>

The Future 50

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Fastenal Company provides industrial and construction supplies in the U.S., Canada, and Mexico through wholesale distributors. In addition to an array of hardware and manufacturing supplies, Fastenal offers threaded fasteners, bolts, nuts, screws, studs, and related washers that are used in manufactured products and construction projects, as well as in the maintenance and repair of machines.

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Fastenal (FAST): Company Profile, Stock Price, News, Rankings

legacy

Fastenal

fastenal

Greetings and welcome to the Fastenal Q1 twenty twenty five Earnings Results Conference Call. At this time, participants are in a listen only mode.

question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Dre Schreiber of Fastenal. Please go ahead, Dre.

Welcome to the Fastenal Company twenty twenty five 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 Holden Lewis, our Chief Financial Officer. The call will last for up to one 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 this webcast will be available on the website until 06/01/2025 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 these anticipated.

Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission, and we encourage you to review those factors carefully. I would now like to turn the call over to Mr. Dan Florness.

Good morning, everybody, and thank you for joining us for our Q1 earnings call. As you can see from the flipbook on Page three, Bob Kerlin, our founder passed away on February 10. He was 85 years of age. I just thought I'd open with a few thoughts on Bob, if you'd indulge me. So Bob was born in June of nineteen thirty nine in Winona, Minnesota.

It's a town of about 25,000 people in Southeastern Minnesota on the banks of the western banks of the Mississippi River. His first memory as a child was the World War II victory parade going across the interstate bridge coming into Winona. In his obituary, it said Bob's Compass a true North Bob's Compass had a true North with a belief in people, free minds and free markets. And he indiscriminately respected others, seeing the best in everyone without desiring reciprocation himself. I had the good fortune.

I knew Bob for just over thirty years. I met him in the second quarter of nineteen ninety four. And I had a number of across the country road trips. Bob preferred to travel by van and visit faster locations. And I remember my first trip with him, we left on a Sunday morning at about 07:00.

We drove to Denver, visited some locations, met with some investors. We drove to Salt Lake City. We drove to Vegas. We drove to LA, San Francisco, Rock Springs, Wyoming and made our way back to Winona on Friday evening. In that, I learned how well read Bob was.

And one thing I observed over the years is there was not a day that Bob Kerlin did not read The Wall Street Journal from cover to cover. And thought it appropriate based on my travels with him that in his obituary, it said Bob's sense of humor was kindled from old Mad magazines, Bob and Ray comedy shows, which I might be older than most of the folks at Festival, I'm not sure what that is. Steve Martin and Bob Newhart, I do know the latter two and I do know the Mad Magazine reference. About sixty years ago, Bob convinced four friends to invest in a vending company selling nuts and bolts. The idea didn't work.

And he but he after calling on customers, understanding what they needed as far as helping their supply chain needs with fasteners, he went with Plan B. And that's the organization you know today and that the investing public first became aware of in 1987 when we went public. Forty years after our start in around 02/2007, '2 thousand and '8 timeframe, we revisited Bob's spending idea. Today, about 25% of our revenue goes through a vending machine. And we've added a lot of other technologies to that since.

And if you look at our broadly defined FMI or Fast Snow Managed Inventory, which is really point of use technologies that we've deployed, over 43% of our revenue today goes through some type of technology platform. And there's been a number of articles written on Bob over the years and recently. I remember the first one after a trip I'd done with Bob. He was regarded as frugal, the cheapest CEO in America. The fact that he shares hotel rooms with other Pastel employees when he travels.

On all my trips with Bob, I shared hotel room. And he wore used suits and they painted somewhat of a character about Bob. But I think in many ways they missed the point. And so what our flipbook includes is an excerpt from a book Bob wrote in the late 1990s titled The Power of Fastenal People. And he talked about philosophy on leadership within the organization.

And he had 10 rules about leadership he had coined over the years. And I'm sharing that with our folks on the call today, whether that be shareholders, analysts, employees of Fastenal, others, in hopes that more of society can capture some of the ideas that Bob shared with us. I was very blessed to have met Bob, as I said, 30 ago. Like many others at Fastenal, he changed the course of my life. For me, the ones that stand out, particularly when I think of Bob is the first rule about challenge rather than control, treating everyone as your equal, see the unique humanness in all persons, let people learn and we've tweaked that a little bit to challenge people to learn and ask them to consider changing when they learn something new.

And then finally, remember how little you know. We have a lot of tenure within Fastenal. A lot of people choose to spend their start their career young with Fastenal and spend their career here. Whether you've been here five years or thirty years, you always have things to learn. And Bob carried that mantra through his entire life and he will be sorely missed.

Was personally blessed in that couple of weeks before he passed away, I had a nice visit with Bob and we served on the Board of another organization together and we had a nice conversation afterwards. And he is sorely missed in the organization and in the community at large. Thanks, Bob. Flipping to Page four, some thoughts on the quarter. From a quarterly perspective, our sales grew about 3.5%.

We had one less day, so our daily growth grew about 5%. The marketplace we operate in is still sluggish. I deem what's happening in our growth as mostly self help, things that we're doing from an execution standpoint. And there's an element of comps in there too. But it's mostly self help.

And I make that comment when I look at the sequential patterns of our business, because that's about how we're executing new customer relationships we're creating and expansion of existing customer relationships that we're creating. We're executing at a very high level. And when I think of we made a lot of changes to two point five years ago within the organization. As we came through COVID, we had drifted apart a little bit. And we weren't as focused on a common goal as we should have been.

As travel resumed, we saw signs of that and we made leadership changes in our sales side of the organization. And everybody has been in their roles now a couple of years and you're really seeing it gel and it's shining through in our numbers. The quarter is a little odd to look at if you think about it from a monthly perspective, but don't be misled by that either. January was a bit understated because of weather and March is a bit overstated because of the timing of Easter. I don't know if Holden will agree to my number here, but I estimate about 2%, two point five % of the growth in March It's a bit about Good Friday being in April.

And but regardless of that, even if you adjust for the weather in January and you adjust for the Easter timing in March, the sequential pattern is quite strong and it's strong in all of our geographies, which is really good to see. And again, I deem that to be about what Fastone is doing and engaging with the marketplace rather than what the marketplace is asking us to help with because of their business patterns because it's still sluggish. The as is typical of April, we held our customer expo. A few of us actually traveled back yesterday. The expo was on finished on Wednesday evening and flew back on Thursday morning.

We had similar to what we witnessed in 2024, record attendance by customers at the event. It last year surprised us a bit because coming out of COVID, the first two years in 2022 and 2023 that we had to show, it was a very subdued event because a lot of organizations either weren't traveling yet or they were doing limited traveling. And it was so difficult to travel internationally that we weren't getting international folks. And so folks weren't coming from Canada or up from Mexico for the event. This year, I can tell you firsthand that we had a record number of attendees from our business unit in Mexico because I had the opportunity to speak to a large group that was gathered.

And it was exciting to see the types of questions they were asking about and the way they were approaching the relationship. The other thing, and I'll probably touch on this a couple of times through my commentary. It was a unique week because in talking to various groups, the one thing there wasn't a lot of discussion on was tariffs. That's not to say it didn't come up. But the way we address the conversation in every group I talked to, there was a few sessions we had where it was a Q and A and Bill Draskowski was the moderator.

He led off with a question on tariffs and he pointed it at me each time. And what I really impressed upon our customers is the way a supply chain partner approaches any kind of chaos. I shared some stories about the lead up to COVID, the vetting of suppliers that we did for safety products before the world got weird and how that put us in a position to be a better supply chain partner. The tactical decisions we made to go out and buy inventory to get ahead of the onslaught of everybody else because of the strength of our balance sheet and our financial resources, a lot of that attributed to things we do, but really the foundation that Bob Kirtland laid many years ago in priorities in an organization and what you do with cash. But what I can tell you is we shared with them the tactics we're taking right now of, in some cases, fattening our balance sheet a little bit to it doesn't solve any issue other than it gives you time to have options.

Talked about products we're bringing directly into Canada and Mexico that we would have brought through The United States before because some of the new tariffs are not eligible for duty drawback. And while it might be more expensive to bring it directly into that market from a logistics perspective, it's a lot less expensive than a tariff that gets layered on top of maybe a tariff going into Canada or Mexico as well. So we're being very thoughtful about that because about 15% of our revenue is in Canada or Mexico. From the standpoint of The U. S.

And all markets, we talked a lot about how we've changed our sourcing patterns in the last five years on diversifying where we're sourcing from to provide a better supply chain, but we also talked about the fact that when we diversify our sourcing practices, we don't just play whack a mole and try to avoid a problem. We try to improve the supply chain in every step we take, And we try to be relevant to the new manufacturing partners we join with, regardless of where they're located. In that we're a top one, two, three, four, five customer with that manufacturer, Because if you're a significant customer to a manufacturer and they get tight on capacity or they need to expand their capacity, they're going to help their largest partners first when they're prioritizing their efforts. And the fact they know we have financial resources to match with dollars what our commitments are, we often get in line ahead of everybody else. And that serves our customers in the marketplace really well.

We've added a bunch of customer site information to our disclosures this quarter, three years' worth of history. We had a recent Investor Day where we talked about it. We touched on it in our January earnings call to really give better visibility to some of the strategies we have deployed and are deploying to broaden the size of our market opportunity. When I think of stepping into this role a decade ago, one of the points I've made to the to our Board was coming from my old role, had the advantage of I'd studied the numbers of Fastenal for years and I'd had a lot of conversation with our regional leaders over the years. So I understood maybe better how they thought about things, where they discovered success.

There was a few people for me that stood out that had been very successful in their business. When I think of our business in Minnesota and Wisconsin, I took a lot of stuff out of that playbook. When I think about our regional leaders, the two millers, Randy, who led our business down in Indianapolis and Casey who led our business down in what we referred to the Southeast Central at the time, which was Kentucky and Tennessee. Our team in Mexico, our team in international more broadly, Jeff Watts at the time, had a lot of discussions to really understand their tactics for growing because they had consistently discovered the success, maybe sometimes when others hadn't. Bob Hopper is another one on that list where I'd touch with and he covered our Florida market, incredible success.

And you learn and you ask people, how are you doing it? And what I shared with the Board is our most successful regions have a great key account program. If you put me in this role, I'm going to drive the business towards where they're discovering success, because I think it broadens the market for Fastenal, but we have to lower our cost structure to go after that kind of business. And I'm pleased to say we've done that. And you see the success that shines through in some of those customer site information statistics.

Finally, Page four, we inched up our dividend from $0.43 to $0.44 and it's a dumb reason. Yes, I'll give you a little historical perspective. In 02/2003, our sales total sales, we needed 10.5% growth to break $1,000,000,000 that year. We came in at 9.9 and we reported $995,000,000 in sales. That was cool, but $1,000,000,000 plus would have been neater.

But we can't change our sales. We can influence it by our activities, but we can't change it, at least not legally. In 2018, our operating income came we needed 13.4% growth to break $1,000,000,000 that year. We only got 13,300,000,000.0 We came in at $999,200,000 of operating income. We can't change that one either.

Holden did get a dirty look from me, but we can't change that one. But we can change our dividend. So in the first quarter, we paid out $246,000,000 and I looked at Holden, I said, we bumped that up a penny. If our board goes along with it and we continue this dividend through the year, we'll break $1,000,000,000 in regular dividend for the first time. Dumb reason, sorry about that.

Flipping to Page five, FMI, we continue to execute at a high level there. Given the comment I just made about dividend, I'd feel a lot better if we had 130,000 devices, not 1,125,000, but I'm going to round it and say we have 130,000 devices deployed in 25 countries. Our device count grew 12.5%. When you look at our safety sales growth of almost 10% in March, that's about execution in FMI and our vending more generally, but FMI more broadly. Going down the page, digital footprint, 61% of total sales versus 59% and fifty four percent one and two years ago.

Our goal remains in October, '60 '6 percent to 68% of sales is going through digital footprint. And that's what we're working towards. And then again, the customer site data, success in our 10 ks plus sites. And what that means is, this is a customer, it's a building, it's a campus, where we provide more than $10,000 a month in product and services. A subset of that is what we call on-site like customer sites and that's where we do more than $50,000 a month with that customer.

That group grew 7%. So that's about executing and engaging with customers at a high level. There's one category that you'll see that doesn't shine so strongly and that's our under five ks and it's really our under two ks, a subset of that. And if you're on our e commerce team right now or if you're in IT, if you're in supply chain, you're getting a lot of pressure and dirty looks from Dan right now because we need to get better at the e commerce side. We solved the problem with that group not by adding resources and sales teams to go after $500 and $800 a month customers.

We want those customers. That marketplace has chosen to buy more in the online channels and that accelerated during COVID. We're not great at that piece of the business. We're great at a lot of things. That's not on the list, but we can be.

And the reason that matters is when you look at through some of the customer site data, I believe a great e commerce platform enhances our ability to be successful in all groups, because I believe there's probably a 20% lift and this is just this is the belief. This is not based on any data. I believe there's a there can be a 20% lift in every category if we have a great e commerce strategy, because there's random MRO spend we don't necessarily get even when we have a great relationship with that customer, because some department in that organization might find it easier to order somewhere else. We need to get better at that. I'll shut up now and flip it over to Holden.

All right. Thanks, Dan, and good morning, everyone. Before digging into the results for what will be my final call, I did want to mention a few things. First to Dan, who nearly nine years ago, based on the response of many of the people on this call, took a chance on a relatively unorthodox hire. It's been an unbelievable experience working with a great leader, and I sure have enjoyed being your partner in this.

To the entire Blue team, I know I got this opportunity in part because of my outsider's perspective, but at the same time, you all have challenged me to earn your trust and respect and you deserve that. I've tried to do that for nine years, but it wouldn't have been possible if not for your passion for learning, teaching and collaboration. That's the foundation of our culture. So I've surely enjoyed being your CFO and I couldn't ask for 24,000 better friends. And to our investors, you probably don't realize how often I've actually used your observations, perspectives and questions in my own work here.

And for that, I thank you. I hope I've been able to provide a deep and differentiated view into our business. I could go on, but if I do, I suspect the musical start. So why don't I just jump into Slide six. Sales in the first quarter of twenty twenty five were up 3.4% with daily sales up 5%.

That's our strongest daily sales rate since the second quarter of twenty twenty three. Feedback from regional leadership continues to reflect sluggish end market demand despite generally favorable outlooks. Customer tone did seem to shift from the steady improvement we've seen since the election to plateauing as trade policy created some caution. Notwithstanding this uncertainty, we did not discern any meaningful pre buying ahead of tariffs. In the absence of much external help, the improvement in our DSR reflects two 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 first quarter of growth for fasteners since the first quarter of twenty twenty three and acceleration in manufacturing end markets. Second, contributions from our strong contract signings over the past two years continues to build. We continue to experience a healthy pace and mix of signings in the first quarter of twenty twenty five and our count of national, regional and government contracts has grown at a double digit rate for twelve consecutive months. Now the monthly cadence during the quarter warrants some discussion.

I feel like Dan covered much of that. So I agree with his numbers about the impact of Good Friday having fallen in March of last year. What I will say is the quarterly daily sales rate growth is a fair representation of our performance and we did see acceleration through the period. It was a solid self help driven result in a soft market, but even so as you interpret our results, please take stock of the discrete factors that affected each period. The pricing outlook also warrants some discussion.

Year to date significant tariffs have been applied to products from China as well as steel including derivative products like fasteners on a global basis. We continue our long term trend of diversifying our supply chain where possible, questioning the size and timing of our suppliers' pricing actions and we have added some inventory to our own balance sheet. That said, supply chains have gotten more expensive and a part of our response over time will be incremental pricing. We have been proactively engaging with our customers for several months and in April, we took our first actions, which we believe will contribute 3% to 4% of price in the second quarter of twenty twenty five, with the potential for that to double in the second half of twenty twenty five, depending on the pace and execution of our actions. We have taken no actions on the deferred portions of the reciprocal tariffs, but may need to should those ultimately go into force.

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 over the course of 2025. However, Fastenal has historically been able to win market share during periods of disruption on the strength of our nimble sales force, our frugal and adaptive culture and the weight of the technologies and global supply chain resources we can apply to finding solutions to customer challenges. That is our expectation in the current environment. Now to Slide seven.

Operating margin in the first quarter of twenty twenty five was 20.1%, down 50 basis points year to year. We had one less selling day in the period versus the first quarter of twenty twenty four, which is worth roughly $31,500,000 in sales. Had the first quarters of twenty twenty four and 2025 had the same number of selling days, we would likely have leveraged SG and A and our operating margin would have been down a more measured 10 basis to 20 basis points. Gross margin in the first quarter of twenty twenty five was 45.1%, down 40 bps from the year ago period. Product and customer mix was the usual contributor.

We also saw higher costs from third party freight providers and higher hub vehicle lease costs, both coming against relatively flat freight revenue. Price cost was neutral in the period. We anticipate easier gross margin comparisons in the latter half of the year, though our effectiveness managing price cost and the degree of macro improvement will influence this scenario. SG and A was 25% of sales in the first quarter of twenty twenty five, up from 24.9% from the year ago period. As described above, we believe we would have leveraged in the period had the current and year ago quarters had the same number of selling days.

All major cost categories either leverage or deleverage very modestly with none standing out. We continue to manage cost effectively. Total SG and A expenses were up 3.6% year to year, consistent with what has been a stable 2% to 4% rate of increase over the last nine quarters. 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 first quarter twenty twenty five EPS of $0.52 flat with the first quarter of twenty twenty four.

Now turning to Slide eight. We generated $262,000,000 in operating cash in the first quarter of twenty twenty five or 88% of net income. This is a lower conversion rate than we might typically achieve in the first quarter, reflecting our current investment working capital. Otherwise, we remain comfortable with the cash generation of our model and continue to carry a conservatively capitalized balance sheet with quarter end debt being 5.1% of total capital. Accounts receivable were up 5.4%, 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 11.9%. Not different than the preceding quarter, we have increased inventory as part of our effort to improve product availability in our in market locations and improve picking efficiencies in our hubs. We have added stock to support customer growth, including expected incremental growth in the warehousing space And we accelerated some inventory scheduled for future delivery in the current periods ahead of potential tariffs. Inventory growth may remain elevated in 2025 as we continue to navigate tariffs and as more inflation builds in inventory. Accounts payable were up 23.9%, reflecting the increase in inventories and the timing of payments associated with certain capital projects.

Net capital spending in the first quarter of twenty twenty five was $53,800,000 up from $48,300,000 in the first quarter of twenty twenty four. This increase is consistent with our expectations for the full year, where we anticipate capital spending in a range of $265,000,000 to $285,000,000 up from $214,000,000 in 2024. This increase is from higher FMI device spending in anticipation of higher signings, higher IT spend, which includes projects aimed at developing additional digital capabilities and distribution center outlays to reflect spending on our Utah and Atlanta hubs and automated picking additions across our hub network. With that operator, we'll turn it over to begin the Q and A.

Thank you. We'll now be conducting a question and answer session. Our first question is coming from David Manthey from Baird. Your line is now live.

Thank you. Good morning, and Holden, thanks for everything and best of luck.

Good morning. So your customers may not be talking about tariffs, but that's all we talk about here on Wall Street. So I'll start there. If you could just, Dan, maybe talk about the 145%. I don't know how realistic that is, but if that type of tariff is actually implemented even for a short period of time, are your customer contracts set to absorb the timing and magnitude of that kind of increase?

Just any other thoughts you have around if that should transpire?

Yes. So you're talking about specifically the China non steel tariff because for us the China steel is with all the recent noise is a total of 70%, but 45% of that is new. And but going to your question, do our contracts have the capability to adjust pricing?

The question you have to look at is, what optionality do you have as far as alternative sourcing?

Because if we move steel based product out of China, there's the 25% Section two thirty two that's on steel and metal products essentially. But it changes quite dramatic because you don't have the other duties that have been put in place, both back in 2018 and earlier this year. So it becomes an optionality. And so most of our discussions with customers is frankly on optionality and things we're doing. And but our contracts do allow for that.

You have to then you have to ask yourself what demand gets destroyed. But keep in mind, for most of our customers, every dollar they spend with us, they're probably spending $10 somewhere else, whether that be products if it's in an OEM setting products they're directly sourcing. So you have to look at it and say what businesses become not economical when you have that type of steel based tariffs. From a non steel where the actual total duty is 170% of which 145 is new with all the pieces that have been added in, Again, same fact pattern, but there are in many cases some optionality again for how you can direct the spend depending on the willingness of the customer and the availability of alternatives. The other wildcard and the piece that we have no control over is a lot of products that we source are branded products that are coming from suppliers in country that are having product manufactured with their name on it somewhere else in the planet.

And the question is what their ability is to change sourcing and to manage through it. But Dave, getting back to your question, yes, we do have the ability to raise prices.

Probably the only other thing I would probably add to that is, the ability includes not only the contract terms, but frankly, I think at the customer expo, a lot of the discussion was about visibility, clarity, certainty. And the fact that we have direct sourcing capabilities, gives us a degree of knowledge about what's happening, sort of in the source markets that a lot of our competitors frankly might be buying from master distributors may not have the same visibility. The pricing review tool that we developed in 2018 in response to that round of tariffs, provides a tremendous amount of granularity to our customers.

And so when you're starting off and your opening conversation is very detailed about the whys and the whats and the wheres. You never say this is an easy conversation and the order of magnitude is somewhat something we haven't navigated before. But we start off in a much stronger position because of the capabilities we've created to communicate effectively.

Dave, you know where a lot of the conversations went with customers was actually to tactics that we're taking. We're very transparent with our customer of things we're doing and have done, because we've been modifying our sourcing teams quite dramatically over the last five years.

If you go back to 2019, the year before COVID hit and right after the tariffs, if I look at other sourcing we have in Asia, for example, our teams outside of China are 10 times larger today, sourcing teams. Now that's working off a pretty small base than they were in 2019, because we wanted to move the way you move faster as you get closer to the manufacturer. A lot of discussions with customers, and know we're taking this question in a lot of tangents in our answer, but hopefully it's answering maybe some other questions that might be out there, sharing those tactics with our customers, because in some cases they're searching for answers too, because they have to solve the other $9 to spend for every dollar they have with Fastenal where they're sourcing directly. And in some cases, we might help them find some manufacturing capability. That's what a supply chain partner does.

And I believe we're poised to be more successful in this type of environment, just like we were in during COVID and the reemergence of the global economy after COVID, because we sourced in so many places and we know our customers on a first name basis locally and a lot of that sourcing is done locally too.

And then perhaps the last piece of that, I would say talking to Bill Drazekowski, who heads up National Accounts, he said that where dialogue went at the show was much more about show me the math so I can understand what's happening and then don't shut me down. And that seemed to be the mindset of our partners and customers at the show around this.

That's very helpful. Usually the analyst asks four questions. This time I asked one and got four answers. So I'll pass it on. Thanks a lot guys.

Thank you. Next question is coming from Stephen Volkmann from Jefferies. Your line is now live.

Great. Good morning, everybody. Guess I'll ask the next one here. How do you I mean, the magnitude of these increases is pretty unprecedented. Do you try to sort of smooth this out for your customers?

Or does it just become very I hope we're still here.

The question cut off there. That's why I was wondering. As Holden mentioned, we do so much direct sourcing because of our scale of operation. It gives us much more visibility to communicate with our customer and transparency. And we do have some buffers in that we have some inventory.

So it allows you to step into things in a different way because we don't want to our goal here isn't to profit on the inventory on the shelf. Our goal profit because of tariffs, the inventory on the shelf. Let me rephrase that. Our goal is with that natural hedge, how can we use that to our customers' advantage as we manage through this? And it gives us time for some optionality on certain products.

In some cases, that when the tariff situation is changing daily, in fact, this was every week starting February 10, Kevin Fitzgerald and our team that provide communication to the field and guidance to the field. We've been putting out an updated video. In fact, it was just a new one that came out this morning, because it's been a moving target. And even during the course of our conversations, numbers were moving around, because the week started and ended in two different places. There's no way to cushion 145% tariff.

There's no math that you can make that work. The question is what optionality you have because on non steel product, if we source it out of Taiwan, the math changes from 145% of new tariff to 10%. And or if we source it in other places in Asia or other places around the world, then the number goes to 10%. But it might be 30% more expensive or more, depending on their ability to produce it and to produce it in a chaotic environment where there's a lot of change going on. And so but there is no silver bullet that will cause something where you have a tariff that was declared on Wednesday or Thursday, Wednesday, I guess it was, that's 145%.

We do try to align the timing of cost being hitting our COGS in terms of thinking about how we're going to affect pricing. When you talk about smoothing it, we to align with where the market is. The one thing I would point out though, I think everyone's aware that we have turns about 2.5 times. As it relates to this matter, once something actually hits The U.

S. Shores, our turns are obviously much faster with all of our products, right. And so in the case of tariffs, when those go in, it's really only a couple of few months before the costing is beginning to catch up with the P and L. And so that's why when you think about the cadence of tariff conversations are really heavy in February and March and we took our first steps in April, even though we have a very long supply chain with 2.5 turns, that was because tariffs begin to hit much faster than generalized inflation. And so to Dan's point, we are timing this to pull margin in ahead of costing.

It's just tariffs move through the P and L a little quicker.

Thank you, guys. I'll pass it on as well.

Thank you. Next question is coming from Ryan Cook from Wolfe Research. Your line is now live.

Good morning and thank you for taking my questions.

Maybe we could spend some time on SG and A. I know you called out some elevated freight expense again within that other category that was up double digits. Could you maybe just quantify that impact in the quarter and share how we should think about things trending for the rest of the year?

And I guess just more broadly, it does sound like you expect to be leveraging SG and A in the remaining quarters, given you would have been there without the loss of a selling day in 1Q. So just making sure, is that the correct way to be interpreting your outlook?

Yes. On the freight, nature of the freight was different this quarter than it was last quarter. Last quarter, we had some expedited shipments that we paid for.

You're talking freight and SG and A, you're talking more vehicles, more Got it.

Sorry. I was anticipating a different question. Yes. On SG and A, so we are cycling through our fleet of pickups and that pace has accelerated in the last, call it six, twelve months.

And that's because one of the sort of afterglows of the pandemic was it took a while for the vehicle supply chain to catch up. And we had several years where we were probably not cycling as quickly as you normally would during which those things were inflating. And we'd be that is continuing to move through. I think as you get into the second and fourth quarter in particular, the comps do start getting somewhat easier. And so I do think you have that working in your favor on the SG and A.

But to your broader point, look, I've always argued that when we grow at a mid single digit rate, we should be able to defend the margin. And I think this quarter, if we hadn't lost the day compared to last quarter or the year ago quarter, we would have grown it at 5% and that's where our DSR was at. And at that level, we were pretty close to sustaining our operating margin and would have leveraged SG and A. And so I think the answer to the question is it depends on what you think demand is going to do. If you think that we're going to grow, continue to grow at a mid or better than mid single digit rate, then I would expect that we should be able to leverage SG and A at that level, particularly with the way that we're managing our cost today.

Fastenal Q1 2025 Earnings Call Transcript | Fortune

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