FAST - NASDAQ

Greetings, and welcome to the Fastenal Company Fourth Quarter and Annual 2025 Earnings Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. We ask you to please ask one question and one follow-up. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Dre Schreiber. Please go ahead.

Welcome to the Fastenal Company 2025 Annual and Fourth Quarter Earnings Conference Call. This will be hosted by Dan Florness, our Chief Executive Officer, Jeffery Watts, our President and Chief Sales Officer, and Max Poneglyph, our Chief Financial Officer. This call will last for up to one 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 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 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. We encourage you to review those factors carefully. I would now like to turn the call over to Mr. Jeffery Watts.

Good morning, everyone, thank you for joining Fastenal's fourth quarter 2025 earnings call. Before we get started, I do want to take a moment to thank the Fastenal Blue team 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. 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 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. We are 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 improved 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 insight solutions. In 2025, we significantly grew our installed base of FMI devices and strengthened our digital footprint, which combines our e-commerce industrial within programs. 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 have become to our customers. This is a key competitive advantage for Fastenal. It makes us stickier with our customers and more operationally efficient. It also provides our customers with ongoing insight regarding product consumption, insight uniquely able to provide in a wide range of locations. Lastly, expanding our market reach. During Q4 and really over the course of the year, we continued to win new sites, new markets, and we strengthened our presence in manufacturing, construction, government, and the transportation sectors. We've also continued to grow the range of services and products we deliver through our solutions suite. Thanks to these strategic efforts, Fastenal's Q4 financial performance was strong. We grew net sales to $2.3 billion in the quarter, like I said, an increase of 11% from Q4 of last year. The top-line growth combined with disciplined cost management led to strong bottom-line results. 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, 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 in technology. More importantly, we accomplished this while maintaining a balanced approach to pricing and cost. In Q4, we saw pricing contribute roughly 310 million 340 basis points of our sales growth. The pricing actions helped to offset inflationary pressures but still kept us essentially neutral on price cost for the year. Max will touch a little bit more on this later in the deck. We also leveraged our operating expenses. For example, SG&A as a percentage of sales declined to 25.4% in Q4 from 25.9% a year ago. This cost discipline, along with volume growth, allowed us to improve our operating margin year over year despite a different gross margin due primarily to timing factors. The bottom line is that we're controlling what we can control: pricing, costs, capital allocation to deliver more profitable growth. Now turning to slide four. This momentum with our customers is clearly reflected in our site growth. Site growth metrics for Q4. The number of active 50k+ sites rose 14% year over year, those ultra-high spend sites now account for just over half our revenue. We also saw solid growth in the 10k+ customer category, which was up roughly 8% to just over 11,700 sites in the quarter. 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 smaller customer sites, the under 5ks, which was not unexpected. But I do think it's important to point out that we did see growth in our 2ks to 5ks customer sites. But 94% of the under 5ks decline was in the under $500 per month customer sites and almost 55% came from the under $100 customer sites for the year. 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. 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, our heavy and other manufacturing customers 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, on-site service, and our extensive product range that really creates value for them. Likewise, in construction and other segments, our focused approach has led to share gains where competitors are just more constrained. We're going to continue to develop these customer partnerships and expand the Fastenal footprint of customer sites as it's a proven formula for sustainable growth. On to Slide five. This slide highlights how our investments in technology are contributing to our performance. Fastenal has long been a 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 FMI technology devices at customer locations. We signed over 5,900 weighted FMI devices in the quarter, and that signing pace is slightly below the exceptionally strong Q4 of last year, but was still roughly 14% above our five-year average signing rate. For the full year of '25, we signed approximately 25,900 devices. As a result, our installed base of active FMI 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. That's up from 43.9% in Q4 of last year. Nearly half of our Q4 revenue flowed through Fastenal's vending or bin device at a customer site. This is a powerful indicator of how deeply embedded Fastenal has become in our customers' daily operations. 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 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 e-business sales grew 6.4% year over year. Our e-business now accounts for about 30% of our sales, 29.6% actually in Q4 to be exact. When you combine e-business and FMI, which together form 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, and now roughly two-thirds of our business comes through this high-tech efficient channel. The remaining one-third is through traditional branch and direct sales, which is still very important. But the trend is clearly toward a more digital and connected service model. Overall for the year, Fastenal gained market share, grew much faster than the industrial sector, and we strengthened our foundation for years ahead. 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. I'm really incredibly proud of our team's dedication and the trust we've built with our customers. With all that said, I'm pleased to introduce our new Chief Financial Officer, Max Poneglyph. As many of you know, Max joined Fastenal in November, and this is his first earnings call as CFO. Max brings a tremendous amount of experience and fresh perspective to our finance and leadership team. With that said, Max, welcome aboard, and the floor is yours.

Thank you very much, Jeffery, 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 send 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 segments showing relative weakness. PMI average was in the low 48s 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 Jeffery 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 has 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 mid-week, 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, healthcare, transportation, and data centers also saw positive momentum. Our fastener 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 balanced 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, ensuring we maintained customer loyalty and minimized volume attrition. To summarize this slide, while the macro environment remained 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 drivers slide to talk about profitability. Gross margin decreased 50 basis points in 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 costs 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 costs to defend 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 2026. As a reminder, this project did a number of things: 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 toward 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, open doors for cross-selling, and deeper integration. The negative impact at 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 fastener expansion project will anniversary after Q1, 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 twelve-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 is 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 fastener 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. We invest in fleet and facilities to sustain service levels. We return cash through a consistent dividend, and we remain opportunistic on buybacks. Our balance sheet remains capitalized, preserving flexibility to continue investing in growth. 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 non-manufacturing segments. Gross margin was protected mainly due to our fastener expansion and 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 continued success in 2026. Thank you. 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 yield summary and recap on Page nine, I just wanted to share a couple of thoughts. First off, for Jeffery Watts, I suspect all of you saw the announcement we made in late December. I want to say congratulations to Jeffery on being named our next CEO, taking effect in July. Max, we just heard from, congrats on 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 Jeffery to be CEO-elect, we decided to do a different type of call. You may have noticed that our scheduled earnings release date was yesterday, Monday. About ten days ago, using that keen tool called the calendar, we realized we were releasing earnings that we had set up a year and a half ago. We realized we had selected Martin Luther King Jr. Day, and the market would not be open. So we delayed it a day. The problem is that means Jeffery is on his way to Europe. So he's sitting in Kitchener, Ontario. Dan had a commitment, and he's sitting down in Southeastern United States. Max is by himself in Winona. So we hope the Q&A is not too jagged because we're not sitting in a room together. With that said, from a market outlook standpoint, as Max touched on and Jeffery 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 candor, we haven't seen it in our numbers. However, we did see some signs of positivity from some of our suppliers. I'll touch on that in a few minutes. But if there's a green shoot or two that's popping up, we would welcome it. It'd be nice to have the market give us a little lift as opposed to the Fastenal organization doing it solo. If I look at pricing neutrality and managed tariff impacts, we have continued to defend profitability through the year, struggling a little bit with that in the fourth quarter, and you see that in our numbers. It's really in the non-fasteners part of our business. As we talked earlier in the year, 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, visibility to price, and 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 fasteners, 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, it's a piece where we have that same kind of visibility. However, there is 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. There was a question asked on the call last quarter about how we react to that and how we see that. Where suppliers really focus on Q by Q what they're seeing based on the source supply of that part. The relationship works really well. Where customers, where suppliers try to move 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. They really center on a few things. One, from our supplier perspective, push back 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 push back on the supplier base really hard. Second is to have frank conversations with our customers. In that, we talk about this brand just raised their price X. Having that frank conversation. 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 thirty-year career with Fastenal is I always bet on the blue team to perform in circumstances like this. As Max and Jeffery also touched on, we have great momentum as we exit 2025. We anticipate double-digit net sales growth in 2026, supported by FMI technology and digital solutions, and feel really good about the momentum. I know there's probably some consternation about some of the sequential patterns in November and December. What I would tell you, regardless of the November and December sequentials being strong or weak, thirty years of experience in Fastenal has told me November and December don't matter. It's all about where we will be in January, what did we grow to in the September, October timeframe because that really tells me we're going to start off the New Year in January. In that regard, we had incredibly strong progress throughout the year. 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. I feel really good about momentum coming into the New Year. From a financial discipline standpoint, I'm really pleased with the way the organization managed our SG&A. 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. If you read through our proxy, you could really see how that story works and that thought process works throughout the organization. When I look 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 million. 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 million. 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 ate into our ability to get incremental margin in 2025. We only have one quarter of that as we move into '26. So I feel really good about our ability. But my compliments 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. 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, any innovation, and employee engagement we can bring to the marketplace. Finally, from a strategic progress standpoint, I think one thing Fastenal does really well and Jeffery does particularly well is to our internal teams we point out the possible. If you think about Fastenal, we're really not an $8.2 billion organization. There are 240 districts within Fastenal that average around $34 million a year. We look at the business from the standpoint of those 240 business units. We see excellence and strength in that group, and we share the story with all that we see. What always is the growth differentiator from district to district is who has the best key account strategy. We impress upon everybody. That's why our bucket reporting is so key. We impress upon everybody the importance of that. I'm really excited about the new customer site wins that Jeffery 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 Fastenal. Transparent. We share internal documents with our investors. It's how we think about the future. As Jeffery leads this next chapter of Fastenal, his challenge to the group is what do we look like when we're a $15 billion organization? 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? It really centers on three 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 possible things like services might influence that. You see a thing on there, Blue Ops Fast Crib. We're not going to touch on that today. But look for us talking about it in the months and years to come. We see that as another leg growth driver for Fastenal in the future. With that, I'll turn it over to Q&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, guys.

Hey, Dave.

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

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

Well, so along those lines, Dan, let me peel that back a bit. You know, 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, the 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. 2025, 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 customer every day about price. Once as we move through the year, that piece will normalize. The piece we laid out there on that company strategy is really about gross margin and revenue growth. It's about having a great plan, but it's about having the attitude that this is what we're going to do. I 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. We really have aligned the pieces, I believe, to do well in 2026. You know, we're probably, you know, like anything, you get a little bit after going through '23 and '24, it stunk. 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 email from Casey Miller that scared me. I was actually searching for something Kevin Fitzgerald had sent me because I was preparing for the call and not being in the room, you're feeling a little naked. 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. All of a sudden, I looked at it, and it was an email I saved from January 20, 2025. I just saved it. Sometimes you have these things you save for weird reasons. I'm glad to say we're not seeing that kind of weather issue, and others 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. Alright. Thank you. And then my follow-up on this, the rebate timing factors, could you talk about what exactly that is? What would be the impact, do you think, on the fourth quarter? And then does that unwind in the first quarter? Just the dynamics around that factor?

Let's do a two-part. I'm going to help Max on this. I'll talk about what it is. Max can tell, but impact. If you think about what it is, obviously, depending on growth, there are rebate programs that different suppliers have, and you estimate that as you go through the year. In all honesty, it came in a little bit lower than we were expecting. Now part of that is it's not an 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 maybe not an optimistic thing. Oftentimes we get to 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. I know we'll consider anything if we can get a return on it. We have the cash to do it. It was crickets this year. I asked our product, our supply chain folks, I said, "Why was it crickets?" Because in my mind, there's two reasons it's crickets. One is our suppliers are so far from hitting their numbers that they just throw in the towel 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 was 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. 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; it was a negative true-up this year. Additionally, compared to the previous couple of quarters, typically these are annual amounts that we estimate earlier on in the year, and we bake those into our run rates. We had a little bit of a, call it, slight overstatement in Q2 and Q3 as well. This is, again, just a timing element; it's an estimate. 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 portions. With that, we expect this to completely normalize going forward.

Alright, appreciate it. Thank you both.

You're welcome. Thank you. Next question is coming from Ryan Merkel from William Blair. Your line is now live.

Hey, everyone. Thanks for the question. I wanted to start off on incremental margins for '26. I hate to lead the witness, but 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 to the first quarter, we still have the anniversarying of our bonus ramp-up. Our incremental margin obviously is predicated on the top line doing what we're thinking about. Also predicated on our ability to manage the gross profit side of the equation, and we felt some pain of that in the fourth quarter. But your number doesn't make me uncomfortable.

Okay. 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. 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 are there other reasons?

Part of it is frankly fatigue. Part of it is this last piece being a little bit more heavily skewed towards the non-fastener is problematic. 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. We're speculating based on what we think is going to happen. As you saw, some of the things we thought about in the July and October timeframe, we were just wrong.

Okay. Alright. Thanks. I'll pass it on.

Thank you. Next question is coming from Tommy Moll from Stephens. Your line is now live.

Good morning and thanks for taking my questions.

Good morning.

Dan, you made a comment that you would welcome a green shoot or two. I think it's safe to say we all would, but let me ask the question 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 two worth unpacking.

I'm going to pivot that one. This one over to Jeffery. So I'm going to surprise him 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.

Max, welcome to the call. We appreciate your commentary on some of the capital allocation framework. What I heard sounds 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'd appreciate hearing a little bit. Thank you.

No, I would say at this point, you heard me exactly correct. There's not an adjustment in our thinking, but at the same time, I'm two months into the role. 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. We would continuously monitor and assess as we go. We'll share to the extent that those are material changes, we'd always want to share those.

Sure. Thank you. I'll turn it back. Appreciate the time.

Thank you. Next question is coming from Ken Newman from KeyBanc Markets. Your line is now live.

Good morning, guys. Thanks for taking the question.

Good morning.

Maybe first, Dan, I think you may have touched on this a little bit in your prepared remarks. But if 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.

You know, I think we've struggled to quantify that. Max might have some insight on that, but I'm not going to put him on the spot. But I will tell you philosophically, we love to grow first and foremost. We love to figure things out. When we're taking on new business and growing, we'll take in the short term, you know, that we have to challenge ourselves to figure out the supply chain for that customer. We'll take that opportunity on every day. Where you feel the frustration side sometimes is where you have existing business, and we could squeeze a little bit, and we need to step it up and push our team and push the market to readjust that. 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 that a little bit, Ken. Sorry about that.

No, maybe at least 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. We're feeling very good with our current approach. No need to get aggressive in that area.

Okay. That's helpful. And then for my follow-up here, Max, just you know, 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?

Yeah. I wouldn't say we quantified it other than if you just take the sequentials. Dan did a nice job of explaining why we don't get overly worked up, particularly with the sequentials in November and December. But if you just take those sequentials, last year was like an 8.7%, 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. We feel like that will just come back into play in January. We don't look at this as a structural change or touching on our confidence on where our sales are heading.

One thing I'll add, and we did this analysis last year, and we did it again this year. We looked at the first two weeks of December, and we looked at our vending activity. What we try to understand is what was our vending activity telling us? You know, when you have a facility with a thousand employees, 500 employees, you pick a number. We know on a given day and 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, you know, 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. 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. Anecdotally, what we heard was a lot of companies that normally are shut down the 24th and 25th operated Monday, Tuesday, Wednesday, and shut down the 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. When I say double, that's going from, say, 10% of customers shut down to 20% of customers shut down. That's the bad news. That cursed the end of our month. However, I'm pleased to say in the first two 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 big shutdown over New Year's week, it's normalized.

Very helpful. Thanks.

Thank you. Next question is coming from Chris Snyder from Morgan Stanley. Your line is now live.

Thank you. I wanted to talk a little bit about price expectations in 2026. It seems like there will be incremental price coming. 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 to ask is? We obviously see metal prices pushing higher here. Is it fair to think 26 price, like, you know, for the full year average would be above 25 levels? Thank you.

Yeah. 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. Yes, will that be substantial? No. 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. 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. At that, I think that's where we'll leave it for now. 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.

Thank you. I appreciate that. Then maybe if I could follow-up just on the macro. Obviously, a lot of choppiness in the data, whether 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 three to six months ago? Are we kind of still in this mostly sideways pattern looking through some of the monthly volatility? Thank you.

Yes. I would tend towards sideways. I don't think we're seeing anything one direction or another. You're hearing some optimism from us probably because internally, we beat ourselves up so much in 2023 and 2024 as we were struggling. It feels good to be achieving success. It feels good to be paying bonuses to our employees again.

Thank you. I appreciate that.

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

Hi, good morning, guys. Maybe just a couple of quick follow-ups. I'm curious on Slide five, as you look at your e-business, those trends have 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?

Yeah. I mean, 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 e-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 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. Within our e-business, the vast majority of it is what we call your eProcurement. 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 an extension of a great key account program. The piece that Jeffery just touched on, though, is on the e-commerce piece of it. Things like the 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 when that component 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.

Okay. Thank you.

Thank you. Next question is coming from Chris Tinker from Loop Capital Markets. Your line is now live.

Hey, good morning. Thanks for taking the questions, guys. 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 nudge us off that typical seasonal movement in gross margin here?

No, this is an important topic because there are a couple of things. The step up is fine. Just bear in mind that some of what we talked about in our Q4 margins, the timing-related items. You take that as a factor in Q4 of '25, and then you take your normal step up. Then you can also compare against the prior, you know, prior year Q1 as well. That all should triangulate fairly well for you to give you a general idea, at least where we're thinking.

Because even the bonus reset, Chris, 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. Then I'm not sure if it's more a Jeffery or Max question here, but thinking about some of the investment spending and investment into 2026, I guess anything one-time you need to call out? Maybe is the fleet refresh in good shape? How do we think about vending? Just anything kind of, you know, in the SG&A line to think about for '26 here?

Some of 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. Of course, distribute through a lot of tech areas like the FMI space. I would just say, to answer your question, a top side, it's getting distribution capacity and throughput ready for our future. Which is here.

Got it. Well, thank you, and best of luck in twenty June.

Thanks.

Thank you. So with that, we're four 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, the University of Wisconsin River Falls, my alma mater, won the Division III national title in football. So my congratulations to them. Best of luck to the women's hockey team. They won the national title the last two years running, and good luck on a three-peat. Thanks, everybody. Have a great week.