Patrick Baumann: Thanks so much for the color. Best of luck.
Holden Lewis: Thanks.
Dan Florness: Thank you.
Operator: Thank you. Next question is coming from Tommy Moll from Stephens. Your line is now live.
Tommy Moll: Good morning and thanks for taking the questions. I wanted to start on fasteners and ask whether it’s possible to parse the down 2% DSR into an MRO versus OEM component. And it’s really the OEM side that’s the crux of the question. But any context you could give there and then I’ll have one follow-up on OEM. Thanks.
Holden Lewis: Yeah. So what we’re seeing in the quarter is you continue to have MRO fasteners down and we actually had OEM fasteners that were still rising. The perspective you need to have though is, we continue to see our OEM fasteners grow as a proportion of the mix because they tend to benefit from the growth in our Onsite. So today, a lot of our growth is coming through Onsites, and therefore, a lot of those new signings, those new implementations also bring in OEM fasteners. And so in the past, we’ve talked about OEM, and I think people have been surprised that OEM hasn’t gotten negative given sort of the behavior. But if you go back to like mid last year, OEM fasteners were growing mid-20s. If you come to current period, it’s growing low-single digits.
And so you’ve seen significant moderation in OEM fasteners as the production environment has softened over the past 12 months, but it’s still growing because of the success we continue to have signing and implementing Onsites.
Tommy Moll: That’s helpful. Thanks, Holden. I guess, to keep going with the same theme, some of the commentary you’ve offered today on the OEM side has sounded similar to recent quarters. And recently, you talked about the destocking dynamic at customer locations, particularly for the OEM business. Is there anything you can do to parse real underlying demand there versus shorter product delivery cycles and maybe customers are just ordering later in their production cycle.
Dan Florness: Yeah. If you think about what we do, in a perfect world, where we’re supplying OEM fasteners. The customer isn’t ordering it per se. We’re supplying it when they need it. And that shouldn’t change depending on the cycle because the question is, if you peer downstream from the manufacturing activity to our customer or their supply chain to the end market. How much inventory is there because if – there shouldn’t be a different stage of where you’re ordering OEM fasteners. The pull-through is what the pull-through is. Now some of the changes from what Holden talked about a year ago, there was elements of inflation in there. But there was also elements of folks had such an unstable supply chain for everything else.
Fortunately, they were partnered with Fastenal, and their supply chain for fasteners was great. And I’m having a little fun with you there, but they might have had other stuff or their end markets, possession is [indiscernible] so they just ordered it because they were worried about getting it. And so I think you do have cases of downstream from our manufacturer customers. There’s some stuff that piled up, but I think that’s worked through. I think the poll right now is to poll. I was talking with our leader in Continental Europe the other day, and his business has ticked up, and I was just asked them some components about it. And he was talking about some of these transportation customers that picked up. He said their business is pulling through what they’re selling, but they’re being very, very cautious about not getting ahead of anything.
So I think there, it’s just true demand coming through.
Holden Lewis: Yeah. Maybe another anecdote as well. At the end of any given year, particularly years where demand is poor. Oftentimes, we get suppliers that approach us to say, hey, we sold just something for a discount. Would you take some of this stuff off our hands, so we can normalize our own production rates, and that’s fairly typical. And I’ll say that the — it’s still early, and we don’t know what December is going to look like in many respects, but we haven’t seen as much activity from our suppliers, inquiring about our willingness to enter into those kind of sort of year-end types of deals. And what that might suggest to you is that a lot of our suppliers might have inventories that are pretty close to where they need to be. Those are anecdotes. We’re not even in November, December yet. But I’m probably feeling somewhat encouraged about where the inventory levels within and throughout our supply chain are getting to.
Tommy Moll: That’s all very helpful. Thank you, both.
Operator: Thank you. Next question is coming from Ryan Merkel from William Blair. Your line is now live.
Ryan Merkel: Hey, guys. Thanks for fitting me in. I had a couple of questions on gross margin. So usually gross margins kind of flat sequentially into 3Q, and obviously, it was up 40 bps. Can you just unpack what the drivers are there, just because that was the surprise factor.
Holden Lewis: Yeah. As I indicated in my preamble, mix wasn’t quite the headwind that I expected it was going to be. And price-cost was more of a tailwind than I expected it to be relative to the guidance that I gave at the Q2 call. Those are the two pieces.
Ryan Merkel: And when you say price cost, you’re talking on product, you’re talking on freight because it sounds like freight was the thing that you mentioned first driving the gross margin.
Holden Lewis: Yeah. But in many cases, freight rolls into our product costs, right? The biggest reason why there’s been inflation and deflation over the past three or four years isn’t the cost of steel, there’s a bit of that. It has a lot more to do with what the cost of moving product has been. So the price-cost in our — when we talk about price-cost, in many cases, elements of freight are moved into product price.
