Good morning, and welcome to the MSC Industrial Supply Fiscal 2024 First Quarter Conference Call. All participants will be in listen-only mode. The operator will provide instructions for the presentation and the question-and-answer session. 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 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 at calendar year end. While the UAW situation did resolve itself, most of our customers were slow to bring spending back 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 2024. 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 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, we saw 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 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 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 of 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 improve 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. 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 described 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. 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. The second factor was the UAW situation, which, while the situation itself resolved, our customers were slow to come back online. And then the third factor was that the closer we got to the end of the year, the more we saw belt tightening and inventory burn. It's pretty typical in a slow environment that customers would use year-end to take more than typical time off, so you saw that in our December numbers. As we look forward, what informs our outlook is the process we normally use: we look at macro indicators, what's going on around us and we lean heavily on what we hear on the ground. 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. In general, a couple of things: one, we would expect that part of what happened at year-end with belt tightening, the holiday schedule and the burn down will fall off as we move into the calendar year. Second, particularly what we're hearing as we move past the first month or two of the calendar year is that with interest rates stable, and hopefully coming down, confidence is building among our customer base. 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. Regarding the initiatives, I'd break it into two pieces as we did in the prepared remarks. The first tranche is the items already in motion maintaining momentum on existing growth drivers. That particularly includes solutions performance where we have seen a nice step-up in the growth rate of some of these growth drivers. 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. That gives us confidence. The other is the newer growth initiatives, particularly the two foundational elements directed at reenergizing the core customer. On both, while it's still relatively early — especially for the web pricing realignment — we have enough experience to feel good about the metrics we're seeing and that it's doing what it's expected to do. So that factors into our constructive outlook for the back half of the year as well.

Thank you. That's all helpful. 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.

Sure, Tommy. Let's start with Q1 — we were pleased with where gross margin landed in the first quarter. Breaking it down year-over-year, we did see a sizable headwind from price cost as expected; that was offset by a combination of factors, the largest being the gross margin countermeasures we've been working on. Think about inventory efficiency driving improvements in our variances, our rebates influencing favorable product mix, and we also started to get a bit of benefit from the category line reviews in Q1. For Q2, we expect gross margin to be roughly flat; a slight easing in price cost into Q2, but nothing notable until the second half. In the second half, in addition to further easing in price cost, we expect additional benefit from category line reviews coming online. The combination of those things is what's giving us confidence in gross margin for the full year, and that's reflected in our more constructive tone 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 with 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?

Ken, the first quarter impact from UAW is hard to precisely pinpoint, but similar to what we looked at in the Q4 call, we focus on end markets that are directly auto-related or adjacent to auto, such as primary metal, fabricated metals and machine shops. When you look at the growth rate we saw in those end markets relative to the broader business, I size the impact at 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. Could you just also talk a little bit about the normalizing cadence here into Q2?

We had originally indicated an early Q2 pickup related to UAW and we did in our guidance. While we were pleased the strike resolved earlier than expected, we didn't see a snapback in the customer base. A lot of that appears due to high inventory positions and resulting inventory burn down at the end of the calendar year. What we're hearing from the field is that we expect that to start to improve in calendar Q1, though it's unclear how immediate that will be in January or more in the second half of calendar Q1. That improvement is contemplated in our full year guidance.

Got it. And maybe if you could just clarify how much of auto is at the core customer versus the national account? The core customers were seeing the big volume headwind this quarter.

There isn't a perfect way to parse it, but generally our core customers map more into fabricated metals, primary metals and machinery and equipment. So core is more weighted in those end markets than national accounts, though it's not a perfect rule of thumb.

Got it. My second question: I think your prior guide suggested roughly 1 to 2 points of price in fiscal '24. It sounds like you're expecting another price increase here into Q2. Any real change to the pricing outlook as we think about the top line? How do you think about the contributions to price and price cost as we move through the year?

We expect a very slight improvement in price expectations for the year within that 1% to 2% contribution range for growth from price. We're feeling more comfortable in the upper end of that range because of the pricing action Erik discussed for calendar Q2, and that is one of the things within price cost giving us more confidence in being a bit more bullish on gross margin projection for the year.

Understood. Thanks. I'll get back in queue.

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 initiatives that maybe start to kick in. Any thoughts on how the year progresses on the top line?

Steve, for Q2, if you look at the op stats, you'll see December was 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, driven by extended shutdowns and the clamping down in spend we saw accelerate in December. Historically, Q1 to Q2 ADS sequentially is slightly down, and given what we saw in December, that is likely the case again. It's too early to be definitive — it depends how fast that ramp comes back online in early calendar Q1. This time last year we saw a surprising dynamic with December followed by a nice snap back in January, so the timing is the biggest variable. What is in our control is the growth we can drive in the second half tied to the strategic initiatives. We're optimistic about that and about any earlier macro tailwinds.

Okay. Great. And longer term, is there any way to ballpark on an ADS basis the level of sales acceleration you're seeing on those repriced SKUs versus those that haven't been repriced yet?

I wouldn't size it specifically, Steve. When we look at strategic initiative progress in the second half, we pressure test the wins we already have, growth expected in our largest customers, inclusion opportunities, public sector sustainability and Class B sales. For the newer initiatives like web enhancements and list price repositioning, we're looking at a range of outcomes in the core customer segment and how quickly we could see an inflection. We went into the pilots with assumptions and we're proving those out; it's early, but the pilots are reassuring and giving us confidence in the second half.

Okay. Fair enough. Thanks 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. Is it too early to give us a glimpse of what level of sales acceleration you're seeing on those repriced SKUs versus those that haven't been repriced yet?

Chris, good morning. Broadly, when you do the math on what needs to happen to ADS in the back half, it's a significant step-up. You're looking at three buckets: economic improvement, existing growth drivers (which have a proven path such as implant and vending), and the newer initiatives. On the web price realignment, we're 30% of the way through. It's still early, and we didn't expect a massive lift initially because we weren't actively marketing the change while the rollout is incomplete. The early hypothesis is around margin neutrality and that has proven out. We're seeing a modest but noticeable difference in performance between SKUs that have been touched versus those that haven't, and we see encouraging web conversion rate improvements. However, the larger impact will come once we actively market this in the back half of the year. We are not hinging the entire back half on this initiative alone; it's a combination of economy, current growth drivers and these newer initiatives as they build through '24 to '25.

Got it. Thanks, Erik. And touching on the profitability improvement initiatives: I know you're not giving explicit dollar targets, but can you walk through the initiatives and your confidence in driving SG&A leverage and incremental margin nearer term?

Chris, in the prepared remarks we highlighted three productivity anchors. First is category management — line reviews, portfolio optimization and mix and margin management. Most of the benefit there will show up in gross margin. Second is supply chain. Martina has assembled a team blending long-time MSC performers and new talent to take an end-to-end look. We already saw improvements in freight expense as a percent of sales and inventory efficiency, and you should expect more from supply chain in coming quarters. Third is the digital core systems project, which will unlock order-to-cash and procure-to-pay productivity and is expected to launch around the end of fiscal 2025, so benefits from that will be more apparent in fiscal '26. For the back half of '24 and '25, expect category management to influence gross margin and supply chain to influence OpEx.

Got it. Thanks so much for the color. I'll jump back in queue.

Thank you. And our next question today 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?

Dave, we saw the softening last quarter and tempered hiring, which is what you saw in Q1. Headcount in total is up and more than 100% of the increase came in sales. The rest of the business headcount and support function headcount were down. The sales headcount increase supported vending and implant signings growth and other selected front-end investments to drive growth, which we view positively. The rest of the business moderated headcount. Our approach to headcount reflects the environment: we view the current step down in growth as fairly shallow and temporary, and we are moderating hiring rather than making dramatic cuts.

Got it. Could you discuss your thoughts on growth versus IP this quarter? Related to that, you clearly are expecting some economic improvement; does your outlook also assume that you reestablish 400 basis points of outgrowth later this fiscal year?

Yes, Dave. The short answer is yes. We saw compression here, and from everything we can see, we don't see a change in relative market share position. Much of the compression was due to spend contraction and inventory burn that disproportionately affected us. We remain focused on outgrowing IP by at least 400 basis points.

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.

On the web pricing realignment, can you talk about the program and what it entails? In the past, some pilot programs had different impacts when rolled out more broadly, so I wanted to check your confidence on the accuracy of the read on sales lift and margin neutrality versus the control group.

Pat, the goal is to present market competitive prices to customers who don't have structured discount programs. We're 30% of the way through. While it's not 100% certain, the rigor and project management are sound — Martina and her team oversee it, and we've engaged outside expertise where needed. Early results are encouraging on margin neutrality and on web conversion metrics, so my confidence in the program is high.

What percentage of the business is actually buying at the printed web price these days?

It's still a relatively low percentage, and that's competitively sensitive, so we don't share that publicly.

On the timing of the 30% tranche, did that happen late in the first quarter? Is the net price on those SKUs negative after the changes? Were there roughly equal numbers of SKU price increases and decreases?

It happened a little more than halfway through our fiscal first quarter. There was a balance: some prices went down and some went up. There were more that went down than up, but we implemented discounting guardrails and other controls to achieve a margin-neutral outcome overall.

Understood. It seems you're maintaining the 1% to 2% price outlook and you're tracking favorably. There isn't much deflation coming through. Any product categories where customers are pushing back on pricing or is it mostly stable with pockets of cost increases?

The environment is stable. It's unusual in our history to see meaningful price deflation on our products, and we are not seeing it now. If anything, there are more price increases than decreases, but it's relatively stable. The web pricing initiative was designed to be roughly margin neutral, and that's what we're observing.

Understood. Thanks 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 Q2 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.

Thank you. Ladies and gentlemen, you may now disconnect your lines, and have a wonderful day.