Greetings, and welcome to the Fastenal 2022 Third Quarter Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Taylor Ranta of Fastenal Company. Thank you. You may begin.

Welcome to the Fastenal Company 2022 third quarter earnings conference call. This call will be hosted by Dan Florness, our President and Chief Executive Officer; and Holden Lewis, our Chief Financial Officer. The call will last for up to one hour and we will start with a general overview of our quarterly results and operations, with the remainder of the time being open for questions-and-answers. Today’s conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission or distribution of today’s call is permitted without Fastenal’s consent. This call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage investor.fastenal.com. A replay of the webcast will be available on the website until December 1, 2022 at midnight Central Time. As a reminder, today’s conference call may include statements regarding the company’s future plans and prospects. These statements are based on our current expectations and we undertake no duty to update them. It is important to note that the company’s actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company’s latest earnings release and periodic filings with the Securities and Exchange Commission and we encourage you to view -- 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 third quarter earnings call. The -- we had a good quarter. We -- when I look at the performance of the team, I am proud to be a member of the Blue Team. The 16% daily sales growth that we experienced in the quarter, we were able to translate that into 19% operating profit growth, and ultimately, we were also able to translate it into strong operating cash flow growth. We grew our cash flow 54% from the third quarter of 2021 to third quarter of 2022. And in the expansion of our ability to generate operating cash relative to our level of earnings, we haven’t been able to lay claim to that for over year and a half, as I believe you have to go back to prior to 2021 where you can see that. And it was really great execution throughout the organization and the fact that supply chains have become a bit more stable and that doesn’t mean they have become easier. It just means they have become more stable, and you can rely on what you are seeing in your level of safety stock, doesn’t be quite as deep. As far as customer demand, that was stable throughout the quarter. Now September’s 2.7% sequential growth versus August does lag the way we look at the historic pattern and history would say we should be up 3.4%. The real driver of that is if you look at the storms that hit the Southeastern United States, Hurricane Ian late in the quarter and essentially pushed some business out of September and into October. The storms likely reduced our sequential DSR by about 0.5% and so you can do the math on what it would be if that’s…

Great. Thank you, Dan. I will start on slide five. Total and daily sales increased 16% in the third quarter of 2022. Growth did decelerate by 200 basis points from the second quarter of 2022 and September’s DSR growth was below the historical norm. However, a lot of that was due to comparisons. Price contribution in the period was 110 basis points below the second quarter, which we expected. Relative to the second quarter of 2022, we also saw difficult government comps that cost us about 20 basis points, foreign exchange cost us about 10 basis points and the impact of Hurricane Ian on our Atlantic coastal region cost us about 20 basis points, as well as 50 basis points in September. At the same time, we experienced robust 22.6% daily growth in our manufacturing end market, 18.2% daily growth in our fastener product line and 20.8% growth in national accounts. Regional VP feedback had a more -- had a few more pockets of forward-looking caution sprinkled in, but overall they also judged business activity in the third quarter to have been very similar to the second quarter, which we believe is a fair characterization of the period. Pricing contributed 550 to 580 basis points to growth in the third quarter of 2022, moderating from the second quarter as we began to grow over the pricing actions that started in the third quarter of last year. While many commodity indexes have recently fallen from their peaks, global supply chains are filled with product where costing reflects the higher commodities of a number of months ago. It will take several quarters for lower cost product to find its way to the point of use and we continue to see supplier letters seeking to recover these costs. These variables have supported stable…

Mask write-down.

Mask -- sorry, mask write-down that we had in the first quarter of 2021 in that it derives from decisions that we made during the pandemic to support our customers and with the stresses of the pandemic waning, the value of our inventory relative to the market became inflated. We believe this is a discrete event specific to the third quarter. The third piece is customer and product niche -- mix, which was 40 basis points dilutive based mostly on relative growth from our national accounts and Onsite Customers, which I believe everyone understands is an anticipated byproduct of our growth strategies. These three impacts were partly offset by continued strong growth in freight revenues of 30.6%, which is narrowing losses related to maintaining our captive fleet and leverage of organizational expenses as higher volumes absorbed overhead. We achieved 110 basis points of operating expense leverage in the third quarter of 2022. The largest contributor to this leverage was occupancy expenses, which reflects our branch rationalization. We also achieved leverage over employee related costs due to primarily lower health care expenses, and to a lesser degree, moderating annual growth in total compensation expense. We also leveraged other operating expenses with lower bad debt expense, lower general insurance costs and higher asset sales being only partly offset by higher selling related transportation costs driven mostly by higher fuel prices. Putting it all together, we reported third quarter 2022 EPS of $0.50, up 17.4% from $0.42 in the third quarter of 2021. Turning to slide seven, we generated $258 million in operating cash in the third quarter of 2022 or approximately 91% of net income in the period. This still trails the conversion we might normally expect in the third quarter, reflecting the ongoing impact of steps taking with working capital to…

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

Good morning. Hi, Dan and Holden. How are you guys doing?

Good morning, Dave. Fine.

Hi.

Thanks, Dave.

Good. Hey, so as you are thinking about gross margin into 2023, if pricing remains flat like you say it is right now, what margins -- gross margins that is come under pressure as you cycle through rising cost of goods sold because of your FIFO inventory method? And on Slide 5, you say the material prices have started to decline while market prices remained flat. I am just trying to understand how you are thinking about gross margin here and where those lines intersect?

So as you know, through most of this cycle, we have been fairly flat from a price/cost standpoint and that reflected our ability to kind of match the cadence of our price increases with how we are seeing costs come through. As you pointed out, we have a long supply chain and we are at the point now where, on one hand, pricing levels are stable, but we are still seeing some product come through that was bought months ago that was at a higher cost in the marketplace that’s impacting us and that’s where the 30 basis point drag from price/cost sort of evolved to in Q4. But what we are also seeing is that and you look at the same indices we do, right? I mean we are starting to see that material costs, things like steel, have come off from prior peaks. And what we are therefore seeing is as product is now getting on boats in Asia and it won’t be here for months and months, right, it won’t flow through our supply chain, it takes time. You are starting to see that the inflation in that product has begun to come off. In fact, if I think about September, September and August cost levels of product that we are purchasing was fairly flat. It’s the first time that’s been true in a long time. We have been seeing sequential increases as things have flowed through. This is the first time that we have seen that number flatten out. And so I think that what that tells you is that, we were a little bit shy of all of the cost in our pricing actions, we had that impact us in Q3. As that less inflated or non-inflated product begins to work through several quarters from now, with price levels being where they are, that should all stabilize. So we had a 30 basis point drag in Q3. I think in Q4, perhaps, in Q1, there will still be some of that, but I don’t expect it to get worse. I think it will be basically at or better than that level. And then by the time you get into the middle part of next year, we are going to see some of that product that looks like it’s moderating in terms of cost coming back into our system.

All right. Holden, thanks for the color. Appreciate it.

Sure.

Thank you. Our next questions come from the line of Jake Levinson with Melius Research. Please proceed with your questions.

Good morning, everyone.

Good morning.

Hi. Just on the non-res construction side, I know you -- it seems like sales have slowed a little bit there and you made some cautious comments in the release. Just curious and I am sure there’s storm impacts in September there, but just curious what you are hearing from the field in terms of trends in that market, if there are any particular regions or verticals that seem better…

Yeah.

… of course.

Yeah. I think there could be a few things that are playing out in construction. One is, as you said, weather probably wasn’t our friend as it relates to the most recent months in certain parts of the southern markets. But I think there’s a few other things playing out, too. We tend to be a little bit later in the construction cycle as opposed to being early in the construction cycle, because we don’t really supply a lot of the high volume, high bulk, but very low margin type of product. We tend to come in as the project is proceeding and we sort of step in to sort of fill in spot buys that they might need for product or supply sort of folks who are involved in the later stages of the project with their reflective vests and things of that nature. So I think that there is an element of timing. So as we get further away from the pandemic and more projects that restarted coming out of it get deeper into it, I think, that tends to favor us from a cycle timing standpoint. And so there may be some elements of timing that’s in there. I think the other element of it, though, is recall, we have altered our branch model in certain respects and that branch model has used to be very much an open showroom for people to come in and buy a lot of product. In many respects, we have reduced the size of that showroom and tried to get a lot of that walk-in business to go online. And in many cases, that’s been successful, again, you see the eComm business is growing the way it is, part of that is because of that. But at the same time, a lot of construction business tends to walk in the front door. And I wouldn’t be surprised if our shift to focusing on larger key accounts, which includes by the way larger construction accounts. I wouldn’t be surprised if some of the walk-in business we might normally have entertained in our branches isn’t as prevalent in our model today as it was then. And so I think those are probably the variables that are impacting that.

The other one would be the fact that and this isn’t unique to this quarter or this year. But over a number of years, we have reduced the physical number of locations and that has a place too.

Yeah.

But that doesn’t have a lot of relevancy to what we are seeing right now in the patterns.

Yeah.

Okay. That’s helpful. I think that’s it from me today. Good luck, guys.

Thank you.

Thanks.

Thank you. Our next questions come from the line of Chris Dankert with Loop Capital Markets. Please proceed with your questions.

Hey. Good morning, guys. Thanks for taking the question.

Hi.

Holden, we have talked about this in the past, I guess, given the very high sales growth and kind of the necessary preoccupation with finding and sourcing alternative products and re-pricing. As some of that starts to moderate, does that mean we can refocus more on Onsites and can kind of help drive some of these kind of more organic growth initiatives. And was that part of the productivity improvement and the SG&A leverage we saw in the quarter here, I guess?

The stability in the supply chain removes an incredible distraction to the entire organization, because if we don’t have product -- if either we don’t have product on the shelf in our distribution centers or we are having difficulty locating product, the fallback for everything is our branch and Onsite. They are the first line to the customer and if a customer needs something, they will find it. But the thing is, from a time standpoint, it takes them more time to source and locate than it takes to push a button on your computer and request it from your distribution center. So the energy loss is there and that energy is coming back. And so that puts us in a position where we can grow the business, we can grow our intensity and we don’t -- and we can leverage the payroll side better because you don’t need to add people as fast, because all of a sudden, that burden time is disappearing from your day. And again, this is for folks at the branch and the Onsite and it does provide for a less tension environment, too.

Yeah. I don’t think that you can underestimate the amount of energy that has been diverted over the last 15 months towards conversations with customers about raising prices, as opposed to conversations about increasing what we can do for them, right? And how we can solve an additional or incremental levels of challenges that our customers may have. As all of that normalizes, I think, that our conversations will shift from playing defense to playing offense to an even greater degree than it has been, and I think that that’s useful and I think that is going to help on the productivity side. And if we weren’t doing the things that we were doing to prioritize the Digital Footprint, to rethink kind of the structure of our Physical Footprint and how we prioritize our time, I think, that we would have been much more challenged than we turned out to be.

Thank you both so much for the color.

Sure.

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

Good morning and thanks for taking my questions.

Good morning.

Good morning.

We appreciate the insight you gave from your RVPs in terms of some of the cautious comments that you have picked up there and I was curious if we could maybe go one level deeper. To what extent does that caution apply to the manufacturing end markets or are you picking up anything different there versus construction and maybe some of the others tied to consumer that have been weak even earlier this year, appreciate it.

Yeah. I think that the elements of manufacturing that faces capital spending or commodity markets being stronger than manufacturers that are touching consumer markets. That dynamic has persisted to some degree for the last two quarters and it existed in September as well. So that still is a thing, that hasn’t changed. But I think that the feedback that we are getting from the RVPs, and again, it’s not universal. There are some RVPs that said, no, things are really still good, right? So I am taking sort of a holistic consensual view from some 20-plus individuals and not all of them are seeing weakening markets. But I am seeing a few more comments from a few more people and it’s not about specific markets. It’s just about the mindset and the outlook of the customers, generally speaking, has gone from, look, I am just trying to get this massive backlog work through to, yeah, my backlog is pretty good, but I am a little bit concerned about the orders, right? And so I can’t relate it to specific markets. I am -- it’s been true in the consumer side. The fact that it’s picking up, I assume means that there’s been some change in the customer sentiment on some level and that’s probably a little bit more broad than simply the consumer side of things. But again, I want to emphasize, and again, we don’t have a lot of visibility. It’s not universal. I mean, we are not facing a sales force and a customer set that has seen a major inflection. It’s just the tone of some of the conversations have taken on a little bit more of a cautious tone.

That’s helpful. Thanks, Holden. To a more strategic question around Onsites, are we through most of the access issues that you faced at the peak of the pandemic where you can now get the access you need to have those conversations? And then to the extent you are and that we do enter into a recession that’s spilled over into the industrial economy, should that accelerate decision making around Onsites, does it put a hold on a lot of those decisions or no impact really?

To the extent your business is in the Americas or in Europe, access is completely there. To the extent your business is in Asia, particularly China, part of Asia, it’s very, very restricted. Fortunately, for us, 99% of our revenue is in the areas that access is really good. As far as history has shown when you are really busy, sometimes decision processes slowed down a little bit, because you just don’t have the time to change from a strategy standpoint. You don’t have time to change that and that can hurt the Onsites. A little bit weaker environment probably helps our ability, because we are bringing, at the end of the day, our Onsite model is about a more efficient model for supply chain and there’s a noted cost advantage from the standpoint of, when we are in there, we have the tools to provide the supply chain in a way the customer can’t. So, I think, generally speaking, an average or a slower environment is probably a little bit helpful.

Yeah. One thing to bear in mind, we just answered a question related to how we have to spend what is a limited amount of energy, right? And how we are looking forward to shifting from spending a lot of energy in playing defense to be able to put a lot of energy into playing offense and it’s really very similar in our customer set, right? I mean if you have a fairly stable environment, it’s not that difficult to predict and plan and take on an implementation process that can be fairly involved as you are getting these things set up. If you are in an environment that’s cascading -- frankly, either cascading lower or cascading higher and your energy in an organization is being spent on managing those inflections and those significant changes, then your ability to spend a lot of energy on an implementation process becomes a challenge. So that would probably suggest that there’s a great case to be made for Onsites when people are trying to be cost conscious and working capital conscious and that certainly is the case in a downturn. But it’s going to -- it would depend on the magnitude of what you are talking about. I would say in a modest downturn, we probably are in a better position to be able to sell what we do. If you have a dramatic growth or dramatic downturns, I think, that our customer’s energy can be moved into other things.

Very helpful. I appreciate the time and I will turn it back.

Thanks.

Thank you.

Thank you. Our next questions come from the line of Chris Snyder with UBS. Please proceed with your questions.

Thank you. So I understand the commentary that fast -- the fastener price/cost drag will narrow over the next few quarters as lower unit costs flow through the P&L. But I guess my question is, how should we think about fastener price into our revenue forecast for next year, is the expectation that price will hold or that price will go down but maybe not to the same level as the cost deflation you are expecting?

The -- as you know, we have, I think, 55%, 60% of our business today is national accounts and those are contract pieces of business. Many of those contracts have terms and conditions in it, which when raw material costs go up, we can adjust. When they come down, we need to adjust as well. So as we get to the point where our costs are beginning to reflect less inflation and that sort of thing, then I would fully expect that there are going to be customers that we are going to have to make good on contractual terms and so I think you would see pricing decline in those circumstances. Now bear in mind, of course…

Right.

Bear in mind, of course, that even within contract relationships, there’s spot buys and things like that, that aren’t going to be as reactive to the contract terms. And of course, we do have a significant amount of business that isn’t necessarily contract that may not be as responsive either. And so I think there certainly will be cases, I think, our responsibility is to make sure that we reduce price as we see our costs coming down, that will be our goal. And then have the same conversations with our customers that we had on the way out.

No. I really appreciate all that color. And then, Holden, to prior commentary you made about, I think you said, unit costs are the price, I guess, you guys are paying from the producers flattened out in August and September, really for the first time since the pandemic. I guess my question is, is that -- are fasteners down and everything else is still kind of inching higher or is it kind of really across the Board cost of finding out. I will ask you again, it just feels like fasteners are a bit different of a cost…

Yeah.

… kind of trajectory?

Yeah. There’s not a meaningful difference at this stage of the game, whether it be fasteners or other things. It’s not -- there’s not a meaningful delta between those things. And bear in -- bear something in mind and I think that we are at a point where we are seeing a little bit of a change in the market, but it’s very early in. We actually are still -- when I talk about how the boats are still filled with products that are expensive from price levels existed months ago, we are still receiving letters from suppliers that are asking for price increases on certain products, because of that FIFO effect on their own supply chains, right? So let’s -- it’s an exciting change I suppose. But we have to see some strength of these trends before we can start thinking about what actions need to be taken.

Part of it, Chris, stems from what was the ultimate cause of the inflation. If you think of the product, and I will speak to fasteners, but the logic could be true to anything. There’s a cost of the underlying steel. There’s a cost of the energy to convert that underlying steel to the finished product. As you know, that cost of that energy has only gone up and that’s not coming down. The next piece is the cost of the human capital, the human resources, to be involved in that endeavor of converting it, of transporting it, of running it through distribution. That has appreciated as well and that’s not coming down. Once a cost element there increases, it has incredible sticking power. The third one is the physical cost of moving it. That cost has moderated. I mean it had gone ridiculously high. It has moderated and but I don’t see that coming back. And so if you look at those four pieces, there’s really one of the four that you can see some -- that you can -- just looking at it mechanically and see, yeah, there’s opportunity for that in the future, but the cost of the energy, the cost of the people and the cost to move it.

Yeah.

Those are what they are and they really don’t deflate per se.

Yeah. No. No. I really appreciate that. That was kind of really the genesis of the question on fasteners. So it just feels like if we look at those cost buckets, the one that is deflating the most is metal, which fasteners are more exposed to them than the other product lines. But I really appreciate all that color.

Thank you. Our next questions come from the line of Ken Newman with KeyBanc Capital Markets. Please proceed with your questions.

Hey. Good morning, guys.

Good morning.

So I just have a follow-up question on the non-res side of the business. I appreciate that the operating strategy for that business maybe a bit different versus prior cycles. But is it fair to assume that the 500 basis points, call it, 565 basis points of price that you took in the quarter, is that equally weighted across all your sort of end markets? I guess I am ultimately trying to get to whether volumes in non-res were down, call it, 4% or 5% in September or is that not really a fair assessment?

Yeah. And I guess the frank answer is I don’t know the answer to that question. We haven’t broken down price/cost elements by end market. I just don’t have a good answer for you.

But there’s nothing that would lead us out intuitively to say there would be a difference.

I mean fasteners are made of the same steel, whether you are selling it into a construction application or manufacturing applications, same underlying raw material, right?

Right.

But whether or not the pricing behavior in those two markets are the same or different, I just don’t have a good answer for you on that.

Okay. And then for my follow-up here, the Onsite and the FMI growth looks pretty solid in the quarter. As you kind of think about past down cycles and just elevated levels of uncertainty, is there a change in how you think about the rate of deceleration in the macro, whether it’s PMI or year-over-year industrial production versus the rate of change in Onsite signings. Is that different from prior cycles you think, because the value prop is different or would you expect kind of similar versus past cycles?

Well, if you think about it, historically, we could look at our established business and our business that was coming from new branch openings. I am going back 15 years, 20 years when I make this comment. So you had this constant wave of pushing. But we still sell into a cyclical end market and so where you have a meaningful presence in a market, you get headwind and it’s how much of that headwind is offset by the things you are doing. And Onsite is a cousin to branch openings from the standpoint of -- I feel better about 2023, the fact that we have signed a whole bunch of Onsites in the first month -- nine months of this year, because the customer activity at our existing branches, at our existing Onsites is going to be impacted by the economic cycle. That’s just the reality. We have a customer that’s spending $10,000 with us and it goes to $11,000, it goes to $11,000, if it goes to $9,000, it goes to $9,000. So it’s how many new customers, how many expanded relationships are you adding? And I take a lot of comfort in the fact that we have a lot of pent-up growth, market share gains in our hopper right now, because of all those Onsites we have signed and because of the vending and the FMI devices that we have signed. It gives you incredible ability to take market share. When we are looking at it internally, we always look at it from the standpoint, okay, here’s our growth. How much is the market giving to us and how much are we taking? And the number you are focused on is how much are you taking and what are you doing to take? And then the number that’s how much is being given, that’s what you use to pull levers to manage your business, because those are things that impact you. The other is things you impact. I hope that’s helpful.

Yeah.

And I might, if you think about our value prop, it hasn’t changed that much, right? It’s always been about getting really well-trained people close to the customer and empowering them to make great decisions to solve customer issues and that has been the proposition. That remains the proposition. The only thing that’s changed is the tools we have at our disposal to achieve that have gotten better and more sophisticated in advance. But the value proposition, I don’t think has changed. But one thing that does excite me is, as you do go Onsite, as you do put in those bins, not only is there a greater ability to add value through data that I think becomes even more important when people are looking for how to become more efficient themselves, but it also ensures that we always have a reason to be there. That Onsite might be down 20% because of the market, but we are still there every day and we are looking for other opportunities to expand our ability to gain more business. When we are primarily branch-driven, we would have to gain entrance to it. And there might be people that are say, we don’t have time right now. We are managing this. And now we are there every day, filling those bins that are part of the Digital Footprint and the vending machines and even Onsite and I think that that’s going to that’s going to make our ability to gain market share resilient regardless of cycle.

When you think -- to that end, you think about when we are going through the pandemic, there’s a number of reasons why we found success. One, we just have a team that’s really good at finding stuff and are really, really focused on quality and so people could buy stuff from us and they knew it was what it was, and they could trust that they were going to get it. But because of our vending footprint, because of all the bin stocks we do, because of all those things that we have been doing for years, to Holden’s point about access granted, we were getting into customer’s facilities. One of the reasons we closed the front door of all of our branches. We didn’t want to be the weak link. If this customer is shutting down access to their building but they are letting us in, well, our building becomes an extension of theirs and we shut down access to that, too. And so it puts us in a unique spot of we still get to come in and engage as opposed to being an Internet connection away or a phone call away.

Very helpful color. Appreciate it.

Thanks.

Thank you. Our next questions come from the line of Nigel Coe with Wolfe Research. Please proceed with your questions.

Thanks. Good morning and I hope all is well.

Thanks.

So at the risk of beating a dead horse here, I do want to go back to the non-res, because that’s a topic of interest for a lot of investors here, and I guess, the fact that manufacturing has benefited from the FMI initiatives and the vending Onsites and all that, whereas you clearly stated that non-res is much more around stores, so I think the bifurcation makes sense. But is there anything unusual happening in that non-res category, in terms of, I don’t know, projects getting delayed or moving to the right, I don’t know, customers buying less, anything unusually to call out there over and above what you just described?

I don’t think so. But, again, I mean, given some of the things that I described being perhaps a little bit later in the cycle in terms of where we hit our sweet spot in construction, some of the changes I made. I am just not sure we are a great proxy for the overall non-res market trends, right? But when I query the RVPs, nothing particularly special has come out of the discussion around non-res for us.

Okay. No. That’s very clear. I just wanted to make sure that was the case. And then when you say preparing for a softer 2023 into the back half of the year perhaps. What does that actually mean? I understand maybe not hiring for growth. But are you actively in the process now of managing down inventories, managing sort of discretionary costs, are we in that phase yet? And any comments you have on 4Q gross margins, Holden, would be appreciated?

So, Nigel, as far as the -- we are always in the phase of managing down costs. We are always in the phase of looking at everything and rationalizing everything every day and that just keeps us agile and fresh. What it means is sometimes it’s reminding everybody we have been through -- you think of the last four year, five years. You had -- we were impacted very directly by all the tariffs a few years ago. We along with everybody else on the planet was impacted by COVID. We along with everybody else on the planet were impacted by supply chains being just gnarled up. The only benefit we had was we are better at unsnarling that than anybody else. And part of that, we were willing to do just with hard work. Some of that we were willing to do because we just know a lot of manufacturers, a lot of potential suppliers. And part of it we were willing to do because we were willing to use our balance sheet. You think back to the spring of 2020, I remember some of the POs we were cutting for mass. I sleep really well at night. There were a few nights from I am kind of like, oh, my God. And as we went forward, if it’s taking an extra 30 days or 60 days to get product in, all of a sudden, we are adding $250 million of inventory, because that’s just mathematically what it takes, because at the end of the day, we have a covenant with our customer. We are their supply chain partner. They will get it from us, and they trust us to do that. Now we have been in the process for some months of looking at that and saying, okay,…

And with regards to Q4, I will just give you a sense of sort of how I see the moving pieces. Product and customer mix is going to continue to be a drag. Is it the same 40 bps as it was in Q3 or is it 50 bps or whatever? That will be determined by the relative growth of national account versus non-national account and relative growth of the fasteners versus non-fasteners. But I don’t necessarily expect that to -- I don’t expect that 40 basis points to be less. It could be slightly more. I don’t expect the write-down, of course. I don’t expect price/cost to get worse. It could get a little bit better, frankly, than what we saw in the third quarter. Seasonal -- from a seasonal standpoint, it’s not unusual for the fourth quarter to be 30 bps lower than the third quarter and I think that that’s reasonable and I think there will be a little bit of a challenge on the organizational expenses. We had -- in some areas, we had some difficult comps are going to come up against the fourth quarter. So run all that math together it is, I think, normally, you would expect seasonality to play through for about 30 bps and I think when you get all those pluses and minuses all blended together, it probably comes in down 20%, down 40% kind of range.

Yeah. We are…

Right.

We are about two minutes to the hour. So I will just share a couple of closing thoughts. One is, Holden talked briefly here about the fourth quarter, but also about some of the expense components that are fixed or that are variable. We are in a position where a lot more of our expenses are variable than we have ever been in for the last 50-plus years of our existence. And that couldn’t be more true than what we see today. If you take a step back -- read our proxy, and you will see how people in Fastenal are paid. There’s a lot of incentive comp at the branch level, at the support level, at the distribution level throughout the organization. A piece of that’s related to sales and gross profit growth, a piece of that’s related to expense management, a piece of that is related to earnings growth. It’s no secret that for the year, we will have pretty good earnings growth. And if you think a chunk -- a big chunk of folks are paid off that earnings growth, I think, and I will put it shout out to Dave Manthey, he coined this phrase, I think, 15 years, 18 years ago about the shock absorbers in the Fastenal expense model. Those shock absorbers -- they are fully flexed right now, and what that means is, unfortunately, as an employee, it means you will probably get some contraction in pay, and I am an employee, so that could be unfortunate, the fortune is you had a pretty good 2022. But it puts us in a position to invest to grow the business in the future without cutting any muscle. You -- there are some things that just naturally contract if earnings growth contracts. So it puts us in a great position to do the thing that we have proven for decades we can do quite well and that’s to take market share.

Thanks, everybody. Have a good day.

Thank you.

Thank you. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.