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Good morning, and welcome to the MSC Industrial Supply Fiscal 2024 First Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that today's event is being recorded. I would now like to turn the conference over to Ryan Mills, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to our first quarter fiscal 2024 earnings call. Erik Gershwind, our Chief Executive Officer; and Kristen Actis-Grande, our Chief Financial Officer are both on the call with me today. During today's call, we will refer to various financial data and the earnings presentation and operational statistics that accompany our comments, both of which can be found on our Investor Relations web page. Let me reference our safe harbor statement, a summary of which is on Slide 2 of the earnings presentation. Our comments on this call as well as the supplemental information we are providing on the website, contain forward-looking statements within the meaning of the U.S. securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks is noted in our earnings press release and our other SEC filings. In addition, during this call, we may refer to certain adjusted financial results, which are non-GAAP measures. Please refer to the GAAP versus non-GAAP reconciliations in our presentation or on our website, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. I now turn the call over to Erik.

Thanks, Ryan. Good morning, everybody, and thank you for joining us today. I'll begin by wishing everyone a happy and a healthy new year. As we look back on the first quarter of our fiscal 2024, which is the first step in our next mission critical chapter, the headline that comes to mind is strong execution in a challenging environment. On today's call, I'll provide more color on both our execution and the environment. Kristen will then give more specifics on our financial results and expectations for the year. And I'll then wrap things up before we open up the call for questions. I'll now begin with the environment. On our last call, which was midway through October, we described the sequential softening in demand that began in September. The causes included reduced spending due to sustained high interest rates, the ripple effects of the UAW strikes, inventory burn down and an overall caution among our customer base. Following our call, we experienced an even softer back half of October, resulting in another sequential step down in our growth rate. At the time of our last call, which again, was roughly halfway through our fiscal month. We estimated October sales growth of 1% to 2% over prior year. As you can see on the op stats, we ended the month down over 1%, which demonstrates just how soft demand was in the back half of October versus our expectation, that softness carried into November and as you can see on the op stats into December as well. The root causes were largely the same as identified last quarter, along with belt tightening and inventory burn down heading into the holidays of calendar year end. While the UAW situation did resolve itself, most of our customers were slow to bring spending back on -- excuse me, back online due to high finished goods inventories. December was compounded by a slightly higher than normal holiday shutdown schedule, which is typical when demand is soft. All of this has been evidenced in IP readings distributor surveys and most acutely in metalworking related end markets, as demonstrated by recent MBI readings. As we look ahead to calendar 2024, the outlook on the ground from customers, suppliers and our own sales team is more encouraging, particularly after the first calendar quarter. End user demand while light has remained fairly stable. We've not seen the precipitous drops that many had feared. We're hearing that automotive related customers should ramp up early in calendar 2024. At the same time, stronger end markets like aerospace and defense should remain strong. In addition, the prospect for stable or even lower interest rates is giving customers more confidence in future capital spending. All of this bodes well for a more positive view of the back half of our fiscal 2024 and into fiscal 2025. With respect to pricing, the environment has remained stable. We did see some select supplier cost increases, which go into effect early in calendar '24. As a result, we'll be taking a small price increase during our fiscal Q2 to pass these along. I'll now turn to our execution, I’m pleased with our team's ability to remain focused on what's within our control and to make progress in any market scenario. Focused execution has been a theme for the past three years with progress spanning our strategic growth pillars, our productivity initiatives and now our sustainability efforts as well. As this progress continues, it sets us up for a strong rebound when the macro environment improves, and it makes for a better world in which to operate. I'll show you what this looks like on the next few slides, and I'll start with our sustainability progress on Slide 5. In December, we just reaffirmed MSC's commitment to environmental, social and governance principles with the release of our 2023 ESG report. Within this document, we demonstrate how MSC is enabling a better world and a better tomorrow. For example, we've recycled over 20,000 pounds of carbide since 2021 through our regrind services, and we've recycled 1,500 tons of corrugated packaging just in 2023 at our CFCs. We're also creating a better world by providing sustainable products and services to our customers as we reached over 20,000 environmentally preferred products within our offering. Additionally, our metalworking solutions enabled customers to reduce electricity consumption by 32 million kilowatt hours during the fiscal year. On the social and governance front, as you're aware, we strengthened MSC's corporate governance practices through the elimination of our dual class share structure, but we did more than that. Our community relations program is a vibrant part of our culture. We support many not-for-profits across the country, examples of which can be found in our ESG report. In summary, we're proud of our ESG achievements in fiscal '23, and we're focused on building on this momentum in fiscal '24. I'll now turn to progress on the three strategic pillars we outlined for this next mission critical chapter, maintaining momentum of existing growth drivers, adding a couple of new elements to our growth formula, and driving further profit improvements through three productivity initiatives. I'll now take you through performance against each of these. First, on Slide 6, maintaining momentum on existing growth drivers. We continue gaining traction in the public sector with high-single digit growth during the quarter. We saw a similar level of growth in our CCSG business, which primarily consists of Class C consumable products, and we did so despite a softening demand environment. Metalworking, while soft due to manufacturing conditions made important strides for future progress with the formal launch of the Machining Cloud relationship, extending our reach to tooling engineers who are configuring new machining jobs. Despite our metalworking market leadership, we continue to see ample opportunities to expand in various regions across North America. Most significant was our solutions performance. During the quarter, we achieved vending signings growth of more than 25%, while our installed base grew 10% year-over-year. For implants, we achieved a record rate in signings and grew our program count by more than 35% compared to prior year. It's also worth noting that VMI installations were up year-over-year in the low-teens as well. These numbers are indicative of market share gains and bode well for our future growth outlook. As a reminder, signings take roughly three months to convert to revenue generation depending upon the solution and the size of the win. As a result, the costs associated with these wins occur before the revenues do. I'll now discuss progress on the two new elements to our growth formula, which are shown on Slide 7. First is reenergizing our core customer growth. On the last call, I highlighted two foundational priorities for unlocking the growth, realigning our public facing web pricing and implementing the new product discovery functionality on our website. With respect to pricing, our goal is to provide market competitive prices to smaller core customers while remaining roughly gross margin neutral through better discounting disciplines. We are currently 30% of the way through the realignment, and we're on track to achieve that goal. In addition, we're seeing encouraging early indicators such as improved web conversion rates, and more favorable levels of growth compared to non-piloted SKUs. We plan to complete the balance of the portfolio by the end of our fiscal second quarter. With respect to the new product discovery platform, it's now in market in the form of a pilot program and will be fully deployed before the end of our fiscal second quarter. Early indicators are also promising for search. We're watching conversion rates and other performance measures carefully, and we're pleased with what we're seeing. More exciting is what's yet to come in the following quarters as we build on the base functionality being launched now with significant enhancements such as new table views and schematics, customer self-service analytics, and AI-driven personalization. We will more aggressively market the pricing and the web improvements in the back half of our fiscal year after both projects are complete. The other new element to our growth strategy is building on our OEM fastener foundation of AIS and Tower. We plan to do so by capitalizing on the cross-selling blueprint that we've proven out with CCSG. While we're still in the early innings, initial indications are promising, with the build-out of a large funnel and several early wins. These efforts will allow us to significantly expand our share of wallet across our customers. I'll now touch on our third mission critical priority, improving profitability through productivity. And here, we highlighted three initiatives: improving category management, accelerating supply chain efficiencies, and upgrading our digital core systems and business processes. Our category management efforts, which include line reviews, portfolio optimization, and product mix and margin management helped us to exceed our first quarter gross margin expectations. As you may recall, we shared on the last call that gross margins for the year should be flat to slightly down versus fiscal 2023's 41.0%. We also felt that Q1 and Q2 would be the most challenging due to the worst of the price cost dynamics. So we were pleased to come out of the gate strong at 41.2%, which provides some potential upside for the year. Supply chain improvements are noteworthy and are just getting started. Martina has built a strong team with a mix of existing MSC performers and some new talent from the outside. This team is bringing a fresh perspective to many areas within supply chain. During Q1, we saw improvements in freight expenses both in absolute terms and as a percentage of revenues and in inventory efficiency. As inventory levels dropped $17 million despite end of calendar year buying, for rebate opportunities. We anticipate more improvements to come as the team is conducting a thorough review of our supply chain end to end. Finally, with respect to our digital core systems upgrade, the project is on time and on budget. We expect to launch sometime around the end of fiscal 2025 and which will unlock further productivity gains across the order to cash and procure-to-pay value streams. All-in-all, despite the subdued growth rate in our fiscal first quarter, our execution remains at high levels and supports future profitable growth. I'll now pass things over to Kristen to discuss our first quarter performance and annual outlook in greater detail.

Thank you, Erik and good morning, everyone. Please turn to Slide 8, where you can see key metrics for the fiscal first quarter on both a reported and adjusted basis. Fiscal first quarter sales of $954 million declined 0.4% year-over-year with the same number of business days in both periods. The year-over-year decline was mainly driven by lower volumes due to the demand softness experienced in the second half of the quarter that Erik mentioned earlier. This was partially offset by ongoing momentum in our mission critical growth drivers as well as more modest tailwinds from price and acquisitions. Foreign exchange was also a slight top line benefit to the tune of 30 basis points. By customer type, we experienced 9% growth in the public sector as we continue to further penetrate that portion of the market. Sales to national account customers improved 4% compared to the prior year period, while core and other customers declined approximately 5% year-over-year. As it relates to national accounts and core customer base, impact from the UAW strike and acute demand softness in metalworking related end markets at quarter end were the primary drivers to the step down. From a solutions standpoint, we continue to take share during the quarter. In vending, Q1 average daily sales improved 5% year-over-year and represented approximately 17% of total company net sales, an improvement of roughly 80 basis points compared to the prior year. Sales through our implant program continued growing in the double-digit range with 10% growth and improved more than 200 basis points year-over-year to 15% of total sales. Signing rates across both solutions remained healthy during the quarter, especially in implants where we achieved quarterly signings at a record rate. Moving on to profitability for the quarter. Our gross margin of 41.2% declined 30 basis points year-over-year. As expected, price/cost is a larger drag on margin during the quarter, which will be the case for 2Q before leveling off in the second half of the year. That said, I’m pleased with our gross margin countermeasures, which offset the majority of price cost headwinds during the quarter. Reported operating expenses during the quarter were approximately $291 million, up $11 million year-over-year. On an adjusted basis, operating expenses were approximately $289 million, up $10 million year-over-year. Combined with sales being essentially flat year-over-year, this resulted in adjusted operating expenses increasing roughly 115 basis points as a percentage of sales. This step-up in operating expenses was largely driven by elevated costs associated with our strategic investments of roughly $10 million. To give some perspective, more than half of this investment was associated with payroll related costs to support implant growth, web price realignment initiatives and upgrades to our digital core. Outside of costs associated with strategic investments, payroll and payroll related costs were up primarily due to merit and higher health care costs, which were largely offset by productivity. On a sequential basis, Q1 adjusted operating expenses were roughly flat with Q4 levels. Revenues were down in the neighborhood of $50 million sequentially after backing out the non-recurring public sector orders, which came with very little operating expense. All else being equal, one would have expected Q1 operating expenses to flex down by a few million dollars. The GAAP and the reason they did not was primarily the investments I just described which support solutions growth, web price realignment initiatives and upgrades to our digital core. We are pressing on with those investments because our confidence in their ability to create long-term value for stakeholders and our constructive outlook for the back half of the fiscal year, which I will describe in just a bit. Reported operating margin was 10.6% compared to 12.1% in the prior year period. On an adjusted basis, operating margin of 10.9% declined 140 basis points compared to the prior year. The year-over-year decline was primarily due to the previously mentioned step-up in operating expenses combined with lower sales volumes. GAAP earnings per share was $1.22 compared to $1.45 in the prior year period. On an adjusted basis, EPS was $1.25 versus $1.48 in the prior year. Turning to Slide 9 to review our balance sheet and cash flow performance. We continue to maintain a healthy balance sheet with net debt of approximately $513 million, representing 0.94 times EBITDA. Share repurchases during the quarter to offset share reclassification dilution was the largest contributor to the sequential increase in net debt. We made progress on our working capital during the quarter, including roughly $17 million in inventory reductions. This resulted in first quarter operating cash flow conversion of 117% keeping us on track to achieve our target of greater than 125% for the full year. Capital expenditures during the quarter of $18 million declined approximately $7 million year-over-year. Together, this drove free cash flow generation of approximately $63 million compared to $51 million in the prior year. The strength of our balance sheet and cash generation supports our capital allocation priorities shown on Slide 10. As you can see, our decision to deprioritize special dividends continues creating significant room for strategic optionality such as the investments currently being made this fiscal year. Looking forward, this will likely gravitate towards other organic investment opportunities, bolt-on M&A with a focus on metalworking and OEM fasteners and further deployment to shareholders. As it relates to the ordinary dividend, we will target moderate and consistent increases. Moving to Slide 11 for an update on our repurchasing efforts. I’m pleased to announce that we repurchased all the dilution from the share reclassification, which was approximately 1.9 million shares. This was achieved by approximately 1.4 million shares repurchased during the first quarter following the 650,000 shares repurchased in fiscal Q4. With this buyback initiative complete, we have approximately 2.4 million shares remaining on our current authorization. Looking forward, we will look to offset annual stock-based compensation dilution and look for windows of opportunity to be more aggressive. Turning to Slide 12. We are maintaining our outlook for the fiscal year despite the slow start. As a reminder, this entails average daily sales growth of 0% to 5% and adjusted operating margin in the range of 12% to 12.8%. I would like to provide additional color on the expected cadence of our performance for the remainder of the fiscal year. Starting with revenues, the midpoint of our outlook assumes that average daily sales improved meaningfully as we move through the back half of the fiscal year. This expectation is based on the following assumptions: first, improving macroeconomic conditions beginning in early calendar 2024, as Erik described earlier. Second, the recent surge in solution signings continued to produce a growth tailwind as it takes roughly three months to convert to revenue generation, depending on the solution and the size of the win. Third, our strategic investments, such as the pricing realignment and new web search platform will begin yielding benefits as we move through the back half of the fiscal year. On the profitability side, our gross margin performance during the quarter was better than expected and at a rate higher than our annual assumptions. We expect second quarter gross margin to be similar to the first quarter with some potential upside later in the fiscal year, given easing price cost headwinds, increasing contributions from category line reviews and the small pricing actions during fiscal 2Q. As it relates to adjusted operating expenses, we expect to see the typical seasonal lift in dollar terms for 2Q related to the timing of merit increases. From there, we would expect any step-up in adjusted operating expenses to be more modest with the increases being driven by variable costs associated with volumes as strategic investments begin to ease. As a result, we would expect to see strong operating leverage in Q3 and Q4. With that, I will now turn the call back over to Erik for closing remarks before we open the line for Q&A.

Thank you, Kristen. I'm proud of our team's execution in a challenging environment during the fiscal first quarter. We demonstrated high levels of performance throughout our previous three-year mission critical journey, and that is carrying into this next chapter. We're focused on maintaining momentum on existing initiatives, investing into new ones that will accelerate performance, and creating new productivity levers to drive margin expansion. The work we are doing now will yield dividends, particularly as macro conditions improve. Our Board and our management team are confident in our people, our plan and our future. I'll close by thanking our entire team of 7,000 plus associates for their hard work and commitment to our mission. And we'll now open up the line for questions.

Thank you. [Operator Instructions] Today's first question comes from Tommy Moll with Stephens. Please go ahead.

Good morning and thank you for taking my questions.

Good morning, Tommy.

Good morning, Tommy.

I wanted to start on the demand environment, and you've both provided some helpful context on how you see the year shaping up and improving as we go forward. But there were two points that, I wanted to circle back on. First is just on the macro improving as we get into the first calendar quarter, any additional insight you can provide there on what you're seeing or assuming. And then the related point, you've describe some of the benefits from strategic investments in the second half. You've got a slide today that provided a lot of positive early updates, but what confidence or visibility do you have that when you continue to lean in there that will really move the needle in terms of the ADS? Thank you.

Hi, Tommy. It's Erik. So I'll let you take both. So let me start with the demand environment and you heard in the prepared remarks, what we've seen over the past three months or so, particularly since the call. And really, in speaking to customers, you've got a few things going on. Certainly, high interest rates catching up with the industrial economy in terms of lower capital spending and we saw that evidenced in some acute softness in certain of our product lines that would be more akin to a capital type purchase, very typical. The second thing, certainly, the UAW situation, which -- while the situation itself resolved itself, our customers were slow to come back online. And then the third factor, the closer we got to the end of the year, the calendar year, the more we saw what we described as belt tightening and inventory burn. Again, pretty typical in a slow environment that customers would use end of year to take more than typical time off, so you saw that in our December numbers. As we look forward, what informs our outlook is pretty much the same process that we go through on a normal basis. We'll look at macro indicators, look at what's going on around us and then lean heavily on what we hear on the ground. And what we hear on the ground is from our customers, from our sales team who are interfacing with our customers every day and from our supplier community. And I would say, in general, a couple of things. One is, we would expect that part of what happened at the year-end here with the belt tightening, the holiday schedule and the burn down, that sort of falls off as we move into the calendar year. But as -- particularly what we're hearing on the ground as we move past the first month or two of the calendar year that with interest rates stable, hopefully coming down, confidence is building among our customer base. And again, we're hearing this from our reps, our customers and our suppliers. All of that feeds into -- you look to the back half of our fiscal year and into '25, what seems like a more encouraging constructive environment. So that would be the first thing I'd say on the demand side, Tommy. And yeah, you're right. If you look at our framework for the back half of the year, certainly, it's back-end loaded now given the way the slow start we came out of the gate. So some of that is environment and then some of that is initiatives, and that was the second part of your question. With respect to the initiatives, I'd sort of break it into two pieces as we did in the prepared remarks on the slide. The first tranche is the stuff that's already been in motion that's maintaining momentum on existing growth drivers. So that would particularly what we call out there is the solutions performance where we have seen a nice step-up in the growth rate of some of these growth drivers. And as Kristen mentioned, we see a lag somewhere plus or minus three months from the time that we get a new signing, whether it's a vending or an implant to the time that we start to see meaningful revenue contribution. So that would be one of the things that gives us confidence. And then the other is the newer growth initiatives, and particularly the two foundational elements that we highlighted directed at reenergizing the core customer. What I'd say on both is while it's still relatively early stages on both particularly on the web pricing realignment, we do have enough experience there under our belt to feel pretty good about the metrics that we're seeing and that it's doing what it's expected to do. So certainly, that factors into our constructive outlook for the back half of the year as well.

Thank you. That's all helpful. And for my second question, I wanted to follow up on gross margins. Kristen, maybe to just make sure that I heard you correctly and then give you an opportunity to give any additional insight here. But what I think I heard you say first quarter was better than you would have expected, second quarter should be roughly similar to first quarter in terms of the margin rate and then second half versus second quarter potentially higher. So if you could just step us through all those, make sure we're tight and then any of the drivers you'd like to call out would be helpful as well? Thank you.

Yeah. Sure, Tommy. So let's start with Q1 and to your point, we were definitely pleased with where we saw gross margin land in the first quarter. I'll break it down on a year-over-year basis. So we did see a sizable headwind from price cost as expected, that was offset by a combination of things, the largest being the gross margin countermeasures that we've been working on. So think about things here like inventory efficiency driving improvements in our variances, our rebates influencing favorable product mix. And then we also started to get a bit of benefit from the category line reviews in Q1. Then as we think about Q2, to your point, expecting that to be roughly flattish, a slight easing in price cost into Q2, but not really notable until the second half. And then, as we think about the second half, in addition to price cost using we see additional benefit from category line reviews coming online in the second half, and that's really -- the combination of those things is really what's giving us confidence in gross margins for the full year, and that's what you're hearing reflected in our tones being and our tone being a little bit more bullish about that for the year.

Thank you. I’ll turn it back and appreciate the insight.

Thanks, Tommy.

Thank you. And our next question today comes from Ken Newman KeyBanc Capital Markets. Please go ahead.

Hey. Good morning, guys.

Good morning, Ken.

Good morning, Ken.

Good morning. Sorry if I missed this in the prepared remarks, but I'm curious if you could just quantify, what the UAW headwind was to ADS this quarter. I think you mentioned last quarter it was a low-single digit impact and any color you have on how we think about that volume normalizing here into the second fiscal quarter?

Yeah, Ken. So the first quarter impact from UAW hard to precisely pinpoint it, but what we did similar to what we had looked at in the Q4 call, when we shared what we're seeing in September, we're really looking at the end markets that we know are either directly auto-related or are kind of adjacent to auto, so things like primary metal, fabricated metals, places where we see machine shops and job shops selling into and when you look at the growth rate that we saw in those end markets kind of relative to the broader business, I size the impact at kind of the high end of low-single digits, and that would be both on a sequential and a year-over-year basis.

Okay. And maybe just a clarification there. Go ahead.

Sorry. Go ahead. Go ahead, Ken.

Yeah. Maybe if you could just also just talk a little bit about the normalizing cadence here into 2Q?

Yeah. So we had originally indicated an early 2Q pickup related to UAW and we did the guidance, Ken. And while we were pleased that we saw the strike resolved earlier than we had expected, we really didn't see a snapback at all in the customer base. A lot of that, our understanding is it has to do with the high inventory positions and a resulting inventory burn down at the end of the calendar year. So what we're hearing on the ground from our customers and from the field, from our suppliers that we expect that to start to improve in calendar Q1, not sure how much of it is immediate in January or maybe kind of second half of calendar Q1, but that's definitely -- that improvement is definitely contemplated in our full year guidance.

Got it. And then just my clarification question there is, is there any good way to parse out how much of auto is at the core customer versus the national account? Because obviously, the core customers where you're kind of seeing the big volume headwind here this quarter?

There's not a great way to do it. I mean, generally, what I'd say is, we see a lot of our core customers map into fabricated metals, primary metals and machinery and equipment. So what I would probably feel confident in saying core is more weighted in those end markets than national accounts, but there's no perfect kind of rule of thumb as how I think about that.

Got it. That's helpful. My second question here is, I think your prior guide suggested, call it, 1 points to 2 points of price in fiscal '24. It sounds like you're expecting another price increase here into the second quarter. Just high level, is there any real change to the pricing outlook as we think about the top line? And how do you think about the contributions to price and price cost as we just move through the year? Obviously, if that cap will be a little bit easier on the price cost side.

Yeah. So I think we will see a very slight improvement in price expectations for the year, Ken, like within that 1 point to 2 point range that we gave for the contribution to growth from price, I'd say we're feeling more comfortable in the upper end of that range because of the pricing action that Erik had discussed here in calendar Q2 and that is one of the things within price cost that's giving us more confidence in pushing up and being a bit more bullish on the gross margin projection for the year.

Understood. Thanks. I’ll get back online.

Thank you. And our next question today comes from Stephen Volkmann with Jefferies. Please go ahead.

Hi. Good morning, everybody. Sorry to be a little bit annoying with the short-term question here. But Kristen, you gave some sequential thoughts around how the year progresses but you didn't really comment on second quarter sales relative to first. Usually, that's kind of flattish, but I know you have a bunch of growth kind of initiatives that maybe start to kick in? Just any thoughts on sort of how the year progresses on the top line.

Yes, Steve. So I'll take that one. So for the second quarter, what I'd say, if you look at the ops debt, you'll see that December, we were below our historical month-over-month decline, which is typically about 8% from November to December. So we're off to a slower start in the second quarter. And I'd say, it's driven by the things Erik highlighted in his prepared remarks, particularly the extended shutdowns and the clamping down in spend that we really saw accelerate in December. Historically, if you look at Q1 to Q2 ADS sequentially, we are down slightly. And then I think given what we saw in December, it's likely that, that would be the case. But I'll say it's really too early to tell at this point. It really depends how fast that ramp comes back online in early calendar Q1, like, this time last year, we saw a sort of a surprising dynamic with December, and then we saw a really nice snap back in January. So how quickly that comes online is probably the biggest variable at this point and we don't know exactly what that's going to look like. What is in our control when we look forward is the growth that we can drive, particularly in the second half tied to the strategic initiatives. We're very optimistic about that. And then obviously, any tailwind we're getting from macro, the earlier that starts the better.

Okay. Great. And then sort of longer term, is there any way to ballpark, I don't know, maybe on an ADS basis or something, the kind of business wins that you think you have for the second half so that we can get some sort of comfort in how that progresses?

I wouldn't size it specifically, Steve. What I can -- what I'll give you color to maybe when we look at the strategic initiative progress in the second half and how we pressure test that internally, we're basically looking at all of what I kind of call our core growth initiatives, our existing growth initiatives and one inflection opportunity we see there. So we are pressure testing the wins that we already have, the growth that we expect in our largest customers what inclusion opportunities we see that to come online. And then we're looking at where we think public sector sales will sustain and then where like our Class B sales will sustain. So we're pressure checking all of that. And then within the newer things that Erik touched on in the prepared remarks, like what kind of benefit do we think we'll see from the web enhancements or the list price repositioning. What we're really looking at is a range of outcomes, particularly in the core customer segment and how quickly we could see an inflection in that slice of the business. And so obviously, we went into the pilots with some assumptions on what that would look like, and we're proving those things out through the pilots so it's still early days, but we are reassured by what we're seeing. We're happy with how the pilots are going and that's giving us confidence in the second half.

Okay. Fair enough. We'll see how that goes. Thank you so much.

Thank you. And our next question today comes from Chris Dankert with Loop Capital. Please go ahead.

Hey. Good morning. Thanks for taking the question. I guess to kind of pull the -- I guess to kind of pull the thread on that last question a little bit more here. Is it too early to give us a glimpse that’s kind of what level of sales acceleration you're seeing on those repriced SKUs versus those that haven't been repriced yet?

Chris, good morning. I would say, so look, as Kristen described and maybe just zooming out for a second, looking what we're seeing now versus back half? Obviously, when you do the math on what has to happen to ADS and growth rates in the back half, it's a significant step-up. I think you're looking at sort of three buckets. One is, economic improvement. Two is, the existing -- overlaying the existing growth drivers, which do have a proven path to them in terms of implant and vending and their contribution to growth. And then three, what you're hitting at now, which is some of the newer ones. I would say, look, on the web price realignment, we're 30% of the way through the process. It's -- look, it's still, I would say, a bit early. And I say it's a bit early, Chris, particularly because one thing I did want to highlight we really weren't expecting, I mentioned in the prepared remarks that until we're through the entire offering, we're not really marketing this actively to customers because it's hard to market a pricing realignment for some SKUs and not others. And so the expectation out of the gate wasn't to see a massive lift. I think in the early going, the hypothesis we were proving out here was particularly around the ability to be margin neutral, which has proven out. So I think the fact that we're actually seeing a discrepancy in performance and it's a couple of areas. One is just, in general, the SKUs that have been touched versus the ones that haven't. I would call that a modest difference but a difference, but it's a difference. And the second thing being some more operational metrics like web conversion rates, which just give us a sense as to how customers are responding to the changes when they see them. So I would say the results that we're seeing now are encouraging, but still relatively small compared to where we anticipate them going once we actively market this in the back half of the year. The other thing, Chris, I would say is, we're not hinging the entire back half on this initiative by itself because our expectation is this pricing combined with the product discovery on the web will take time and will continue building. So it's a combination, the back half improvement that we need to see and that we're assuming in our outlook is based on all three of those factors I mentioned, economy plus current growth drivers that have been accelerating plus these new ones that then build as we move through '24 to '25.

Got it. That's really helpful. Thanks so much, Erik. And then just touching on the profitability improvement kind of opportunity wrapped up in mission critical here. I know we're getting away from explicit dollar targets, but maybe you can just kind of walk us through some of the initiatives on the profitability improvement piece there and just kind of the confidence level in driving SG&A leverage that kind of hitting the incremental margin target nearer term?

Yeah, Chris. So in the prepared remarks, we hit on three, in terms of the productivity. And what I would say is, mission critical 1.0 for the last three years was capitalizing on some of the low-hanging fruit that we saw and that led into the productivity target. I would say, we feel at least as good as we did for the last round, as we do for this round in terms of productivity. It's just -- it's different kinds of stuff. And so the three anchors are, number one is category management. So the category management improvements, we hit on over the last few quarters, we've talked about line reviews. But line reviews are really just one tactic in what is a bigger objective here to improve category management performance and excellence. And we mentioned a few of the other factors like looking at margin and mix management and portfolio optimization, kind of all feed into category management. Most of the benefit we're going to see there is going to be on the gross margin line more so than the OpEx line. And look, I mean, obviously, it was one quarter Q1, but we were encouraged because we had telegraphed Q1 was kind of the depths of the price/cost negativity based upon timing and our average costing. So the fact that we could come out of the gate strong as we did, we felt good about it and we track back to category management. So I think that one you're going to see play out on the gross margin line for the most part. The second one is the supply chain area. And it's long been a strength of MSCs, particularly in the spot buy arena, supply chain that is. And what I'm excited about is the team that Martina has assembled that's now taking just a fresh look, and it's a combination of some people that have been here a long time and know the ropes at MSC with some new people bringing fresh thinking and fresh ideas and we had two data points on the supply chain front this quarter, freight expense as a percent of sales that came down as it should, given rates, but we saw a nice improvement there. And then the second being inventory efficiency. I think you're going to see more from us in the quarters to come on the supply chain front. I mentioned the team is really doing an end-to-end look at everything from how we're operating inside the buildings to how we move things across the building. So that would be the second one. And then third, this digital core, the systems project, which is really beyond the systems project, it's going to unlock for us. We mentioned order to cash and procure to pay, which are two of the just the core value streams, how things move through MSC that there's a lot to unlock there. That one will be in the later stages of this next chapter. I mentioned that the launch of the new system will be sometime around the end of fiscal '25 so that will be a fiscal '26 event. For the back half of '24 and '25, you can expect category management to influence gross margin and supply chain on the OpEx line.

Got it. Yeah. Thanks so much for the color there. I’ll jump back in queue here.

Thank you. And our next question comes from David Manthey with Baird. Please go ahead.

Yeah. Good morning, everyone. Happy New Year.

Good morning, Dave.

Happy New Year, Dave.

First off, could you give us your mindset on headcount for fiscal '24?

Yeah. Sure, Dave. What we've talked about so far is, we saw the softening beginning last quarter and that we were going to temper hiring. And that's essentially what you saw from us in the first quarter. So if you look, headcount in total is up more than 100% of the increase came in sales. So the rest of the business headcount and support function headcount was actually down up in sales. And being up in sales is really a function of two things. One was supporting the growth in the vending and the implant signings specifically. As you can imagine, the more of those we have, the more support there is. So we view that as a good thing. And the second was some other select basically investment opportunities on the front end of the business to drive growth. The rest of the business was down. I would say the MO we're following right now, Dave, is reflective of the environment in which we are operating. So we're viewing the current step down in growth as fairly shallow and fairly temporary as evidenced by our outlook for the back half of the year. And so we're taking an approach to headcount that's moderating. And certainly, I think you'll continue to see that temper but not a dramatic drop. I think if we were operating in a different sort of environment, you'd see a different playbook.

Got it. And then could you discuss your thoughts on growth versus IP this quarter? And related to that, you clearly are expecting some economic improvement as you move through the year, but does your outlook also assume that you reestablish 400 basis points of outgrowth later this fiscal year?

Yeah, Dave. That is certainly, yes. The short answer is, yes. And definitely, we saw it compress here. From everything we can see, Dave, we don't see a change in relative market share position in terms of what's behind the compression and growth relative to IP. And a lot of it was a function of some spend contraction, some inventory burn things beyond just output that disproportionately affected us. So the short answer is, yes, our expectation and our focus is still on outgrowing IP by at least 400 bps.

Thank you very much.

Thank you. And our next question today comes from Patrick Baumann with JPMorgan. Please go ahead.

Hi. Good morning. Thanks for taking my questions.

Good morning, Pat.

Good morning, Pat.

Just on the web pricing realignment, can you talk program and what it entails? And the reason I'm asking is I just remember in the past, you had some pilot programs you've done four things like sales force changes you had made and then when it rolled out more broadly the impacts were different than what you had seen on the pilot. So I just wanted to check your confidence on the accuracy of the read on the sales lift and the neutral margins versus the control group.

Yeah, Pat. Sure. So what I would tell you is, so first of all, what we're doing, the goal is to present, we've had web pricing for a while. But for customers that don't interact with us often and have a structured discount program, there's cases where those aren't competitive. So the goal is to create a market competitive price for any customer that wants to come to us. So that's the objective. I mentioned we're 30% of the way through it. And I think where you're going is how accurate or REIT is the 30%. Look, I think it's pretty good. It's not 100% for sure. So there's still -- it's certainly -- is their uncertainty, of course, but I would say that in terms of the degree to which we're managing this project, the rigor that we're bringing is really sound. So this sits with Martina and her team, I can tell you that we're getting Kristen mentioned some expenses related to that. Most of that is getting some outside in expertise from folks who have -- are specialists in this, but our team has met with a combination of our own team and some help managing this on a daily standup basis. So the visibility, the transparency is really high and so my confidence is high.

And so what percentage of the business is actually going off at the printed web price these days?

It's still a relatively low percentage, but it's not something that we -- you could imagine competitively sensitive. It's not something that we share publicly.

In terms of the price changes on the 30% of the SKUs, was it timing-wise, did that happen late in the first quarter? And is the net price on those SKUs negative after the changes? Are there an equal or is there like an equal number of SKU price increases and decreases?

So what I would say is, yeah, it happened a little more than halfway through our fiscal first quarter. And in terms of -- there was a balance, so you can imagine there were some prices that went down some went up. I would say there were more that went down, that went up. But along with that, came in the past, if the pricing were higher, our sales people, our inside salespeople would really have to jump through hoops for the customers. So along with that came some discounting guardrails and that's how you get to a margin-neutral outcome.

Got it. Okay. And then it seems like you’ve given the 1% to 2% price outlook that you're maintaining and seems like tracking favorably too. There isn't much drag from this initiative that you would expect and then there also isn't much deflation coming through. It seems like maybe you could provide some color on, are there any product categories where you're seeing customers push back on pricing at all or is it basically just kind of a stable outlook and some further pockets of cost increases?

Yeah. Sorry to interrupt you. I would describe in the environment and the word I used in the prepared remarks are stable. It's been unusual in our history to see meaningful price deflation on our products. And I would say, we're not seeing it now. If anything, there's more going up than anything, but it's relatively stable. I mean the price increase is not going to be a major event, but we did want to share it as noteworthy because I think any concern about price deflation. We're not seeing it. In terms of the price drag from the web pricing initiative, again, our goal for the whole program, beginning with the first tranche was roughly margin-neutral. So what that means is any drag from where there were more prices down coming up gets buffered by improvements to discounting disciplines we made, and that’s what we saw.

Understood. Okay. Thank so much for the color. Best of luck.

Thanks Pat.

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Ryan Mills for closing remarks.

Thank you for your time and interest this morning. As a reminder, our 2Q fiscal '24 earnings call date is set for March 28. We look forward to seeing you in person at conferences and other investor events in the coming months. Again, thank you for your time. This now concludes our call.