Let me know when you're good. I'm ready. Oh, ready? Okay. Good morning, everyone. Thanks for joining us here in Nashville for the Stephens Conference. I'm Tommy Moll, an analyst here at Stephens. One of the companies I cover is MSC Industrial Direct. We're delighted to host them today, specifically two members of the management team. To my immediate left is CEO Erik Gershwind. To his left is Ryan Mills, Head of Investor Relations. Erik and Ryan, good to see you both, and thanks for coming. Thanks for having us, Tommy. Great to be here. We've got about 45 minutes together. I have Q&A prepared for roughly half of that time. If you have a time-sensitive question during the first half, by all means, shoot up a hand. Once we get to the back half of our time together, though, please, anyone and everyone, feel free to ask any question you have directly. We'll foster a good back-and-forth dialogue today. I want to start with some very high-level questions. For For those of you who may be new to the story, that's kind of how we design this conference sometimes. You can pop in and get up the curve quickly with these firesides. Let's just start very high-level, Erik, with the spot-buy to mission-critical evolution. These are terms that probably don't mean much to those who aren't in the weeds on distribution, but give us a sense of what that initiative looked like at the company years ago. Sure. And good morning, everybody. You hear me okay? Good. Yes, I'm getting that. So yeah, maybe what I'll do is just start at the beginning. The company, MSC, grew up as what Tommy referred to as a spot-buy or long-tail supplier. In the industry, we were known as a catalog house. Of course, catalogs are not all that present anymore, but the spirit behind it was that for industrial customers, MSC would play the role of keeping their plant running. The industrial supplies, or MRO, marketplace is very large and very fragmented. You're talking about literally millions of SKUs that keep plants running, dispersed among thousands of suppliers. Oftentimes, these are low-dollar value parts. The customer, who are mostly, in our case, manufacturers, have not historically spent a lot of time worried about them. Yet, if one of these parts is not in stock, it can shut down a line. The role for really the better part of two decades that MSC played was to be their backstop. We carried well in excess at the time of a million SKUs. Today, that number is up to two and a half million SKUs. Most of them were stocked in one of four large centralized warehouses, or DCs, that range in size between 700,000 and 1 million sq ft, all located near UPS hubs. Basically, the gist of it was get product to customers next day with a seamless, wonderful customer service experience. That was the crux of the business for a long time. Tommy referenced this pivot that we made, if you will, a transformation from being a catalog house to being something more. That was coincident with my tenure as CEO. I grew up in this business. I'm 54. I've been in the business for basically 53 years. It was started by my grandfather. I took over as president in 2011, CEO in 2013. Bit by bit, we started to see changes happening in the industry. Certainly, one was the advent of the internet or Google search, which made shopping for our customers much easier, much more transparent. We saw the entry of single-channel online players like Amazon declaring their intent to get into B2B. That caused us to take a step back. The other thing, Tommy, I would say we saw was our customer base. 70% of our revenues are tied into manufacturing and markets in North AmErika. It began, I would say, after the global financial crisis of 2008, 2009, where bit by bit, there has been a drumbeat that persists to this day about the need for help in U.S. manufacturing, help in running their businesses better. That could mean help in finding productivity because most of our customers are under margin pressure. It could mean help in freeing up capital because they have limited working capital and want to grow. It could be help in getting products into their customers' hands faster. We saw this interesting opportunity to pivot what MSC did, that for two decades, basically, our role ended when we would drop stuff off at our customer's loading dock. We decided that we were going to play a bigger role and reach inside of our customers and actually help them on the plant floor to achieve all of those objectives I described. During my tenure, there was a really aggressive build-out of our product offering. It was moving it from just carrying everything to we continue to carry everything, but to focus and specialize on product categories that are either technical or high-touch in nature that would be needle-moving for the customer's manufacturing process. It led to a build-out of inventory management services. Beyond just shipping in products, if you go to an MSC customer today, you'll find vending machines. You'll find vendor-managed inventory programs that are outsourced to us, so we help our customers manage their inventory better. You'll find technical experts. We had an aggressive build-out, a network of well in excess of 150 technical experts. These are people with deep roots in manufacturing and machining who could have done the job that the customer is doing and can help them find productivity opportunities. The last one I'll call out, and then I'll stop talking, is our implant program. We reached the point where we're actually placing MSC associates, as we call them, or employees, full-time inside of our larger customer's operations. These folks are playing a role anywhere from sourcing, procurement, put-away, kitting. They'll do lean walks. They'll bring in technical experts. This one has been of particular note because we feel like we're tapping into something. Nearly every one of our customers that we speak to, if you ask them, "Name your two biggest challenges or obstacles," access to qualified labor is always one of the two. This program seems to be tapping into that. For instance, our implant program went from more or less 1% of sales pre-COVID, we decided to hit the foot on the accelerator. It is now at 20% as of our most recent quarter. That is growing quarter over quarter. In essence, I would say, Tommy, that is a summary of the pivot that we made. Yeah. One of the product categories that's consistent through the whole history there, Erik, is metalworking, which is the largest for you, not always the largest for your peers. It's not as well understood, I think, by investors. Can you frame for us what kind of contribution it delivers to your overall revenue pie? Then just give us a sense of some of the value-add and the compare and contrast in metalworking specifically versus other product categories that folks may be more familiar with. Yeah, Tommy, it's actually a good call out that I should have mentioned as part of the pivot. When we were listening to our customers, we looked inside of MSC and said, "Beyond logistics capability and a broad product offering, what else do we have to bring to the table?" Just by virtue of my grandfather growing up selling cutting tools, roughly 45% of our business today is what we call metalworking. If you take the total North American market for the products we sell, MRO, or industrial supplies, you're looking somewhere, depending upon the estimates, $220 billion-$250 billion. Of that, metalworking represents north of $15 billion and approaching $20 billion of it. Metalworking, think primarily cutting tools, abrasive supplies that would finish, anything that would help form, cut, shape metal, machine tool accessories, and such. What's really interesting about that product category for us, Tommy, and that's really where our expertise comes in, is unlike some of the products we sell that are kind of in and around the plant floor, janitorial products or a power tool that's repairing something, cutting tools, you're actually influencing the final output. They are really important to the customer. We found that as our pivot. We do think it's a big part of the moat. It's not the only moat, but it's a big part of what we lean into. It's interesting. We are sitting today, we're still at just touching 10% of the metalworking market. It's still a very fragmented market. We still see plenty of room for growth here. It's a big part of our advantage that we want to keep pressing on. Erik, you mentioned the company was started by your grandfather. I want to give a quick sketch of the family history here and then give us the latest on the transition. Founded by your grandfather, you have been CEO, I think you said, since 2013, officially. Recently, it was announced that you will transition to an executive chairman role. You have named your successor CEO, who is not a family member. I have kind of hit on the themes there. Give us what additional context you think is important for folks who want to underwrite a potential investment idea here. Yeah, I think so. So a couple of things I'll say. The family ownership. So it's 1941 the company was founded. And through me, we've only had four CEOs in company history. Martina McIsaac, who I've been grooming for the better part of three years now, will be the fifth. We've had one other non-family member in between me and my uncle, Mitch, David Sandler, who groomed me, as I've done with Martina. I mean, it's a pretty unique culture. If you think about over 80 years, only four CEOs, and three of the four of us are from the same family, you could imagine a couple of things. One is, I think the values and the culture inside the company. It's a very values-driven company as a result. We've been an interesting blend because we certainly have all of the governance of your typical public company. If you look at our board of directors, we always say we fight above our weight. We've got board members that I feel fortunate to be surrounded by. There is something different. Like when you walk the halls, it does feel a little bit different. I will say, speaking of governance, a couple of years ago now, we made the decision to collapse. We had a dual-share structure in which a 10-to-1 voting right for B shares that were held by the family. We made the decision to collapse that. It was really about looking at sort of reading the tea leaves, looking at where the world was going, looking at good governance. We collapsed. The family today has a little over 20% of the economics of the company. Although as part of the agreement, we did cap our voting rights at 15%. Whatever difference there is, we vote pro rata. I think even with Martina coming on, I think if you went inside the company, most would tell you and dealt with customer supplier, it is a net competitive advantage for us. Just in terms of, number one, a very long institutional memory, a strong sense of culture and values, and the ability to think long-term, which I think is paying off for us. In some of the pivots that we made, I think it would have been tough for me to do without the benefit of the family influence. Yep. One more personnel-related topic, and then we'll dig into the operating environment. In terms of the CFO, where are you in the process, the search process for a new CFO? We're right in the midst of it. Martina, over the past three years, Martina joined us as Chief Operating Officer. We had not had one in the company since me, actually, before I was CEO, and felt it was the right time. Martina got promoted over a year ago to President. Over the course of the three years, she's really put together a strong management team. I would say that's a balance of some fresh thinking that she brought in from the outside, a couple of people recently in sales, in supply chain, along with giving opportunity to long-standing MSC people who understand the culture and the heritage. It's been a nice blend. This, Tommy, is the last piece of the puzzle, the CFO search. Our former CFO, Kristen Actis-Grande, left beginning of August. We are in the midst of a search. We do expect to go outside. Interest seems really good. I think about prior searches, it generally takes a couple of quarters to find Mr. and Ms. Right. I will say we have a lot of confidence in the meantime in the team here. Greg Clark, our Interim CFO, has been Controller for a long time. The man to my left here, Ryan Mills, does a terrific job with the investment community. We feel like it is solid. We are right in the midst of the search. That should really be the last piece of the puzzle to the team. Let's dive in on the operating environment here. Erik, on your recent earnings call, you used terms like stable to describe demand. You talked about some pockets of improvement, but really still highlighting an overhang from some of the uncertainty. Reflecting on a lot of the conversations I've had with investors, particularly before last earnings season, there was a lot of hope about short-cycle recovery. Basic elements of the thesis, including a rate cut, one big beautiful bill, this idea that we're kind of due for it, just given how long PMI has been sub-50. Are there any signs of life that you can point to about a recovery? Or does it feel like we may be sliding into a pretty slow end of calendar 2025 here? I would say we feel, Tommy, for the most part, that there's been some notable improvement. I would call the improvement more stabilization than inflection upwards. Realize we're coming off of 70% of our business into manufacturing, 50% into heavy manufacturing. Think heavy machinery and equipment, ag-type equipment. Think metal fabrication, auto, aero. Other than aero, for the last two years, it's been brutal. I mean, really brutal. To your point, we look not only at PMI. There's another index that if you want to track us that's highly correlated. It's called MBI, the Metalworking Business Index. It's run by the Gartner Group. Very similar to a PMI sentiment survey. That index, I think, Ryan, it's like 26, 27 months now and going of being negative. I asked the team to say, "Can you go back and show me what happens with this kind of protracted negative reading?" They said, "We can't because it's never happened before." This is uncharted water. It has been a rough couple of years. I would say all of us had hopes. I think the way the tariffs played out, there is just an overhang of uncertainty. The rate cut is not that significant. We have seen some stabilization. I would describe it that for those who are on webcast, they will not be able to see this. Instead of just going like this down, it has been level. When you have been down so long, it feels like up. We felt like in our business, with our goals at a flat industrial production index, we ought to be able to grow mid-single digits. That is starting to come to fruition. Of course, we are getting the benefit of some price. I would say we still feel, Tommy, it has been one thing after another. Obviously, the tariff situation, the government shutdown, the prolonged government shutdown for us. Public sector is around 10% of companies' revenues. There is a little bit of a ripple effect you get with those selling into the government, take a defense contractor. It has kind of been one thing after another. I think as we look out, we are cautious. I would say cautiously optimistic that the worst is behind us. Perhaps there is more upside than there is downside. I think for us, we are particularly encouraged because we actually have started to see, which I am sure we will touch on, important parts of our business inflect positively due to some of the work that we have done. I think our feeling is even if it's just a leveling and a stabilization, that we ought to be able to grow and are starting to do so. Yep. We will certainly address some of those trends you referenced. First, just to stick on some of the high-level themes here, you mentioned pricing, Erik. What details can you share about the increases that you pushed through in June and September? What are you seeing in terms of supplier price notifications? If you run all this together, would you characterize what you have seen lately as the kind of inflation that should, all things equal, be a tailwind to margins? Is there some reason that that might not be the case this time around? It's a two-part answer. I think to date, what we've seen to date has actually surprised us to the negative and not been a margin tailwind. I think as we look forward, it's beginning to feel more like the kind of inflation cycle that would be a tailwind. Let me put more color on that. When the tariff noise began after election, early in the calendar year, we were really surprised at how slow the industry, and by industry, as a distributor, price movement is typically triggered by what the manufacturers who are suppliers, what they do. No one was moving. It took us by surprise because we were expecting a wave of inflation that didn't come. What we were hearing was no one had enough conviction and confidence that the tariff environment would remain stable and were afraid about having to move and pull back. What happened was there came a period, and it was right around our last earnings call. I thought we had a good fiscal fourth quarter. Gross margin was a disappointment to the tune of 50 basis points. There was 10 or 20 basis points that were kind of noise in one-time items. Thirty basis points was price cost performing worse than we expected. For us, we're on an average costing system. Usually, early in an inflation cycle, we'll take price right away. The cost bleeds in, and we see a benefit. We got caught by surprise. A couple of things happened. One, it was like an avalanche. For all of this time of not moving, suppliers moved in a hurry. Just to put some data to that, we went back and looked. We got in supplier cost increases in a two-month period, and it was right around our earnings call, the equivalent of nearly a year's worth of inflation post-COVID, which was a robust time. It was crazy. The other thing that happened was it became like a mad scramble. We typically have the ability to work and partner with our suppliers to say, "Hey, give us 30 days notice. Give us 60 days notice so we can buy ahead of it and plan." We were getting like three days notice, four days notice, like, "Hey, starting on Monday." It was a bit of like a 100-year flood. What ended up happening was price cost flipped negative. Really because we took more cost than we expected. I think if there is a good news story there, what I was most pleased about, I was concerned about when margins turned negative, but pleased to see the outcome, we got price. We got exactly what we felt we got for price. The lesson learned was we did not take enough. What we did, we did not knee-jerk. We took it on the chin a little bit in August and September. The reason we did that is we have developed a pretty good cadence with our customers about giving them time and felt like that is more important than a month's worth of margin drag, the integrity, the transparency, and consistency. What we mentioned on our October call is end of September, early October, we took pricing moves. Those were intended really to catch up for what has happened. What we expect, we gave a gross margin guide for our fiscal Q1 of September to November that was up 30 basis points from Q4. It was kind of like a tale of two quarters in that our month of September looked pretty lousy. It would look more like Q4. We were expecting better performance after pricing in October, November. I will say one other point on pricing, Tommy, we are beginning to, I mentioned it is a two-part answer, we are beginning to see the signs that would make this cycle look more like a typical inflation cycle. What I mean by that, the tariff-driven increases have been really, really wonky. There has kind of been a knock-on effect here, which is the tariffs had led to commodities inflation in certain instances. The one, it's funny, we've been following tungsten forever in our business, but it's starting to get mainstream headlines. Tungsten is the single biggest ingredient in carbide. Carbide is the biggest material for cutting tools, our cutting tool assortment. Tungsten prices, and we've been talking to our suppliers about this, up something like 90% year on year. To the extent that sustains, what we would expect to happen is our suppliers raise their list prices. That would look more like a normal cycle to us where we can get ahead of it, plan for it, buy into it, and be able to see the kind of price cost dynamic we expect. Yep. Let's tick through some of the different types of customers and the initiatives you have to attack each type. I've got core, national, and public sector. We'll take them in that order. On the core customer side, first of all, just a level set on the language. When you guys talk about core customer, what does that mean? In terms of the substance here, why did the trends there diverge for a while from IP? What were some of the corrective actions that you took? These are pretty broad categories. What we try to do for the public is make it specific enough to be able to explain differences, but simple enough to keep it simple, stupid. Core, national, accounts, government. Let me start with the other two, our public sector. Public sector is pretty straightforward. I mentioned it's 10% of our revenues. Those would be sales to any federal or state agency or organization. There, the 10% is broken up roughly two-thirds federal, so think military bases, for instance, and one-third state government. The second bucket, national accounts, would be where we have a larger organization, typically has a centralized purchasing function and disparate kind of dispersed plants that would have large amounts of spend that function more like a corporate relationship where we're putting a contract in place as opposed to a one-off. That is about, Ryan, I'm 35% of revenues. The balance, which is around 55%, is what we call core. Core is a big bucket, but it's made up primarily of manufacturing businesses and small and medium-sized operations. I'm overly simplifying here. For the most part, our core customers will behave less like a large corporate that has a large purchasing team and contracts and more on a one-off basis. The really important thing about core to note is that, number one, because as you can imagine, smaller customers, not as strong an ability to plan, these tend to be our highest margin customers. Number two, we have underperformed here, I'm going to say, for the better part of a decade. I think the reason for that, there's probably one sort of structural industry issue, which is just smaller businesses have not fared as well as larger. Some of it is our own doing, which is that a lot of our resources and effort went into that mission-critical pivot I described. Those value-added services play really well for larger organizations who are thinking about total cost of ownership, who are willing to sit down and negotiate. For a smaller shop, first of all, they do not play as well. Second of all, they are not always as cost-effective to introduce into the customer. There, what we were left with was a back-to-our catalog house value proposition that I would say was still fine. At one point, it was industry-leading. If you do not move forward, others do. We needed to play some catch-up. This was actually, I've been really encouraged to see. Martina came in. This was probably the biggest issue. She's had a few big imprints on the company. Her diagnosis was, this is the economic engine of the business. We've got to get the core customer back and came up with basically a four-part plan to do so. Number one was to realign our public-facing web pricing. If you're a customer that logs on to our website and you don't have a negotiated discount, our pricing had drifted up, which was kind of similar with how the industry pricing structure worked. Add in, I mentioned earlier on, an Amazon or some other single-channel models. We looked out of whack. That was one. Two, we needed to upgrade our e-commerce experience, which was really good for the sophisticated large buyers, not as good, and at one point was industry-leading. We needed to play catch-up for the smaller customer. Three was marketing. Really, our feeling was once our pricing was realigned and the web experience was back to industry-leading, we wanted to hit the foot on the accelerator with respect to marketing, but in a different way from our legacy, which was mostly print, which in some, there are some great things about print, but it tends to be costly, it is slow, and it is not personalized. We built out a much more aggressive digital tech stack that allowed us to get more timely and more personalized and targeted in our marketing. The fourth leg of the stool around sort of reinvigorating the core customer was optimizing our seller coverage. What Martina came in and diagnosed was we had a large concentration of our sales force focused on these big relationships where we're doing great, not enough coverage in the smaller guys. She took a look and broadened. I know you referenced this on your note, but sales is a science. I mean, Martina comes from an organization called Hilti that was really a selling machine. She actually brought somebody in from Hilti recently, who seems terrific. They're bringing a science-based approach to how you, number one, expand reach. Number two, construct the portfolio of customers the right way. Number three, look at compensation. Number four, look at the tools that are surrounding the salesperson. All of these four bodies of work, long-winded way of saying, have come to fruition between basically, we're early in our fiscal 2026, the end of fiscal 2024, with the big pieces in the middle of fiscal 2025. Think early this calendar year, February and March. Sure enough, we launched the website, we upgraded the website, the marketing. Bit by bit, we have begun to see the core customer improve. That core customer was in decline in the first part of our fiscal 2025 or about a year ago. Hefty numbers, high single digits, low double digits. We saw a continued steady climb to the point where Q4, again, is June through August. The company grew 2.7. The core customer grew 4. We'd mentioned that we actually saw it continue to improve in September and October. We think we're on the right track there, which opens up a lot of market share capture, but also margin expansion for us. Erik, if you could compare and contrast the core value prop that you bring to the national account versus the core, I used core twice there, to the core customer. With national account, as you've referenced, it's more of a total cost of ownership type pitch. There are all different ways, largely service-based, that you can deliver a lower cost of ownership to the customer. In the core category, what would be the equivalent there? I mean, buying experience has to be part of it. You talked about some of the web experience there. Do a better job than I am right now of summarizing what is it you're attempting to construct to capture the core. Yeah. It's a great question, Tommy, because some of the things I described, like getting your pricing right and a web experience, are table stakes. What's been interesting is what we found along this journey is that even the small and medium-sized customers, they care about the same things. They're not as sophisticated in how they go about it, but they care about making their business better, which means, how do I take cost out? How do I increase throughput? What we've done is looked at how we deliver a similar kind of value that we do at the high end to a medium and even a smaller customer. I'll give you an example. We have a technical team that is an inbound technical team. These are people who spent years or decades working in a machine shop and no longer wanted the grind of that and are now sitting in one of our call centers. We are opening up access to small shops to this group. That changes the value proposition from just, hey, it is price and transact to these people with FaceTime. I mean, they are actually able to help the customer save money and find productivity. There are other examples like that, Tommy, that are kind of like the difference maker in the small and medium. National accounts, we've hit on several times. Maybe give us the latest and greatest on how you're bringing that total cost of ownership solution. The on-site location is part of it. You've had some of these initiatives in place for some time. Where are you spending most of your time today on the national account side? For the national accounts, what I would say is the whole model is anchored in how do we improve customers' output, cost down, or revenue up. For our national accounts program, there is a regular cadence where we will sit. We will go in early on, diagnose what we see happening, and come back with a recommendation to the customer that will identify a total size of price of what we think we could help them achieve in either revenue up or cost down. It has to be in the customer's math. We will use that as our anchor. We call that a business needs analysis. That turns into a plan. That is kind of our North Star with the customer. We will have a regular cadence, depending upon the size of customer, monthly, quarterly, of kind of rinse and repeat of looking at how we are doing against it. We deploy a whole number of tools on how we actually bring the savings to light. Obviously, we talked about implants. We talked about our vending initiative, which is bringing shrinkage down and improving tool usage. Our technical team, we also have people that will go in and walk plant floors and help customers identify opportunities to use a different tool, to use technology that we have that helps them run machines faster so they can save time and not have to invest in more capital. It is a very rigorous process. Yeah, that has been fueling our national account success. Along those lines, could you just give us a little context of how you've gone from a catalog company to providing all these additional value-added services? Structurally, how much higher should margins be given the value you're bringing to customers that you previously wanted? I would say right now, we're sitting at high single digits EBIT or operating margin. We see that has been a combination of some heavy investments and fixed costs that we've made, whether it's digital, our e-commerce upgrade and such, along with two years of contraction. We feel like there's a path back. I mean, what our stated goal is at least mid-teens on the operating margin front. We haven't time-bound that. A lot of that will be a function of the pace of revenue recovery. For instance, our fiscal 2026, as a kind of rule of thumb, we had shared that we expect a mid-single-digit revenue growth to produce around 20% incremental margins. We would expect, if I look out over the next three years, that would be in a flat environment. If either the environment inflects or our share capture picks up pace or we get more price than we're getting now, that revenue number should improve. If the revenue number improves, the incremental margin number should lift. The incremental margin, so the mid-teens operating margin target is really going to be fueled by a couple of things. Number one is revenue growth and leverage. Number two is going to be, if I look back over the last 10, 15 years for us and most of our peers, there's been a gross margin headwind in the business of, call it, 30 to 50 basis points because the big customers grow faster than the small ones. We're kind of encouraged here that this could eat into that gap and stabilize gross margins if the core continues to outperform. The third lever is productivity. Martina's really brought, I would say, a sharper edge to productivity inside the company that would overlay on top of just leveraging a fixed cost base, but actually eat into the cost base. She's looking at, there's a couple of big areas. Supply chain is one. We've highlighted some numbers that we're expecting to achieve in run rate basis right now. Seller optimization, I mentioned, is another. She's got some things cooking on just general SG&A as well. That would be our outlook. Could you talk to these value-added services? Is there a way to look at just what it's done for customer satisfaction scores or churn or however we do the best way to measure what these initiatives have done? Those are exactly the metrics. If you're sitting in our boardroom, you'd hear a push. I'll be transitioning to being out on management. Maybe I'll start giving this push. Hey, why aren't we charging for these services if they're so valuable? There are elements where we can. The biggest levers we see to value creation are not a service fee. It's share capture and revenue growth, particularly for an existing account. If we get share of wallet, that's a very strong incremental margin and retention. As a case in point, when we put in a vending machine, there's an expectation we have the customer will sign a letter of understanding. I mean, it's not a legally binding document, but saying, hey, in exchange for this, I will divert X amount of spend to you, MSC, from one of your competitors. Depending upon how big the machine is and how many machines, that number will vary. With implants, retention is another thing we look at. If you looked at our retention rates for our core customer that does not have any sales relationship, they are going to be rather low or getting better, but still low. If I go to the other end of the spectrum, an implant, we have 411-ish implant locations. I could probably count on one hand the number that we have lost. They are extremely, extremely sticky. Any other questions from the audience? I mean, take that 411. Where were you a year or two years ago? Can that number be 1,000? Yeah. North of that. Yeah. We were at 287 at the beginning of last fiscal year for 411. Our implant program count has been growing at a 20%-25% year-over-year clip for quite some time. Vending's been growing at a high single-digit clip for quite some time as well. Is every national account a potential? I would say not every, but a lot. A lot. With the implant program, different from a national account, the agreement is generally signed at the corporate level. The implant decision is made at a site level because what you are bringing the resources in at a site. We could have a national account that has 20 sites. It could have two or three implants. There is typically a break-even number of revenue that we need to justify putting somebody in there full-time. Usually, it is a person, and we are bringing vending machines in. The cost becomes the cost of a person or people and then the depreciation on the vending machines that are in the plant. It is a side-by-side. Let me put it this way. I mean, if we look out over time, the runway is in the thousands. Do national accounts try a site or two, and then you've seen them roll it out to most sites? Yes. Yes. Yes. Thanks for the questions. Anyone else that wants to shoot up a hand, please do. I've got more topics, but certainly welcome anything from the audience. Yeah? A couple of questions. One is, it looks like about 60%-70% of business is related to manufacturing, heavy manufacturing. If there's an extended downturn, what's the impact? What could you do about it? And then a follow-up. Okay. To that one, I would say, yeah, look, we made a choice that we're going to lever into manufacturing and heavy manufacturing because we think our competitive advantage is strong. We think the long-term end markets, for the most part, are sound, that the growth outlook is good. I think if you want to understand what would happen in a heavy downturn, the last two years are evidence of that. It does make us a bit more cyclical. The last two years, heavy manufacturing has been really soft. We saw negative revenues. Our thesis is that if we look over long periods of time, we are in, number one, manufacturing for the most part. As I said, we feel good about the long-term outlook. Number two, the distribution market is so fragmented. At the top of the $200+ billion in North America, the top 50 distributors have around 35% of the market. You are talking about a lot of regional and local distributors that, when things get soft, they struggle. Interestingly, if there is a strong recovery or a snapback, they actually struggle even more because in our business, a snapback means working capital. They do not have lines of credit to fund inventory build-out to extend receivables. Our premise over time is that, yeah, we are going to be a bit more cyclical, but it gives us an opportunity to widen the lead in downturns. The other thing I would say is we are spending time. I do not see us straying away from manufacturing, but looking more carefully in our manufacturing portfolio to say, what are some of the fastest-growing end markets? I mean, aerospace is an obvious one where it's been strong and the backlog is a decade plus. And that's an area where we actually have increased our concentration. There's a couple of others we have our eye on. I would also add that we are probably better positioned for a downturn than we were in this past one. Due to the seller effectiveness and optimization work we have done, last quarter, selling heads were down about 100 quarter-over-quarter and about 60 year-over-year. Customer touches were up low double digits year-over-year. We are being more effective and efficient with our sellers too. If you think about the enhancements to the website as well, there is a mixed benefit there from sales on the website. I would say we are better positioned to attack a downturn if it does occur. One more question on. Looks like you have, correct me if I'm wrong, about 18% in implant. Not that. If you look ahead, let's say three years, five years, where do you see that? That's going to increase? Yeah, we think it increases. The rate limiter on implant as a percentage of total will be how our core customer fares. Because if we're able to grow the implant, it will not make sense for most of our core customers because they're simply not big enough and there's not enough spend. I am hopeful that we can keep that rate down, not because implant doesn't grow, but because the core customer grows faster. I would say if you looked at our count, so we're at 411, as I said, I mean, that number in a few years should be well into the thousands. We don't see a runway there. The interesting thing about implants, so it's 20% today. If you look at the economics on an implant, the gross margin on an implant will be several hundred basis points lower than our core customer. That is because bigger customer, better ability to negotiate, one. Two, we are penetrating deeper and deeper into the customer, which tends to mean lower margins. What we do see on an operating margin basis, particularly by the time you get to year three, and I can describe why, at or above company average, and certainly at or above our target. If we want to get to mid-teens operating margins over time, implant is not a barrier to that when you get to year three. What happens is we put the person, we put the vending machines, all the cost goes in upfront. The revenue, it generally takes a good two years before you hit kind of like a steady state. It's a trade-off between your gross margins and maybe long-term operating margin. Yes. Yes. Because it is a higher degree of fixed cost than the rest of our business. We actually experienced that in the last two years with the softness Ryan refers to as a coiled spring effect that our implant program, so if you look, this last quarter, implant count was up 20-something%. Revenues were up 10%. On a per-implant basis, revenues were actually down. Part of that is because we are signing newer accounts that have a lower average spend with us. Also part of it is we have some really good implant accounts in the heavy truck sector, which is just getting killed. How much does it cost for an implant at, let's say, an average Fortune 2,000 company? Depending upon the size of the site, it could be between one and three people. One in three people, like a CapEx associated? Depending upon vending machines, 10-20 vending machines, and then our average. What I'd say is when an implant gets to about $2.5 million in sales, it's closer to company average op margin to give you a little bit of perspective there. The revenue through that implant program, to Erik's point, we have pretty much the maximum share of all we could have. The revenues from the implant programs match whatever the production rates are. If we see a customer go from two shifts to one, that implant program's really going to feel that because consumption rates are lower. It's the same machine going in different places? I'm just looking at scalability. I mean, do you have a custom get out of this? Our customs would be more on the vending machines because they're more catered towards metalworking. You can't have a pop vending machine because if you drop that cutting tool, you're going to chip it. I'd say we're differentiated on the vending side because it's more catered towards metalworking. Okay. One last question. Talk about customer experience and how the larger customers, they know how to go through your system, but then you revamp the system. What kinds of general things did you all do other than website redesign? Did you have to go change the backends, invest in the backend? I mean, can you talk about the? Most of the customer experience improvements have been what I'll call either front-end or technology foundation. If you're thinking backend, our service level, our fill rates to customer, our product offering, our delivery model is good. We track net promoter scores every week, so we see we're really good at getting product to customers. The biggest thing was the experience. If you're a customer and you call one of our what we call our customer care associates, you're going to get, this goes back to the culture and the family feel, pretty great experience. You get people who will jump over backwards to delight a customer and do whatever it takes. There's that kind of mentality. Our e-commerce experience, it wasn't good enough. It didn't match what we did offline. I would say the easiest, what we did first is we upgraded the tech platform and we modernized the stack just to make it much simpler, cleaner. That work is done. What's involved in upgrading the tech? I mean, other than how it looks? I mean, number one, it's actually reevaluating the technology platform rather than looking at one monolithic platform. We broke it into pieces, which is a more modern modular way to go. Two is search. That's really the Holy Grail, if you will, when there's this many SKUs, the ability to find stuff fast. That actually leads me. We upgraded our search model and the way we present products. The other thing we're doing now that has still got a ways to go, I would say, is content, the build-out of data and content. I think what's exciting is that this is an area where technology, I mean, in particular, AI, opens up so many avenues to build content faster. Because you could have the greatest search engine in the world, but if the data behind the search engine is not robust enough, organized properly, it'll be tough to find. I think there's still an unlock for us there. I would say our e-commerce experience is the biggest thing about the customer experience upgrade. I would call us good now. I would say we were mediocre. I think we're good, but we need to be great. And we're not great yet. In this last fiscal quarter, web average daily sales turned positive for the first time in quite a while. We’re seeing improvement in the conversion rates, average order size, and the direct traffic. We also streamlined our checkout experience too. What we saw is within the first zero to five minutes, somebody adding an item to their cart improved year-over-year for the first time in a while. That’s telling us, one, our search is working, and two, the checkout experience is working as well. Erik, you mentioned AI, and that's the theme I want to end on today. Where are you in that journey? What are any examples you can share where you've deployed the technology internally? We're very early stages. Let me start by saying, Tom, I don't know that there's a better industry that's ripe for AI than distribution because we talked about millions of SKUs, thousands of suppliers, hundreds of thousands of customers, so all these permutations. We think it's going to change the company and the industry in very fundamental ways. I mean, we're in the very beginning stages, but we've taken a few steps and we've got a pretty robust roadmap right now. The first thing we did is we brought somebody, and this was during COVID. This was before generative AI, actually. We brought somebody to our board of directors who had lived in the AI early-stage venture space for 15 years. She was in it well before generative AI because we wanted to have somebody with a network and a knowledge, a working base on our board. The second thing we've done is we plucked somebody out of our company who, she's really strong engineering and data science background. She's in Melville where I'm located. She's really smart and eager, and she's getting a lot of support from our board, and she's got a team. Basically, that team is chartered to build a roadmap along three vectors, if you will, but look at every possible use case and catalog and prioritize for customer experience, revenue generation, and productivity. We have a game board, if you will, on what we've prioritized. In most cases, I mean, there's some obvious things that we're doing with whether it's Copilot or the real basic stuff. In most cases, we're trying to be humble enough to say we don't need to go build this stuff. There's people way smarter than us that are building new things every day. We're trying to partner with companies outside of us who are in that ecosystem. I mean, I'll give you a couple of examples. One is cross-selling and upselling. We've been partnered with somebody for a few years. When a customer calls into us or visits our website, we are serving up highly relevant recommendations and the numbers. We had tried this on our own before using AI, and the numbers were just leaps and bounds ahead. We're marketing. We've been talking about some of the success in our core customer was driven by, and I'll just be careful for competitive reasons, the marketing efforts. We mentioned we're stepping up investment where it's working. AI-driven marketing, which is getting more personalized and more targeted and more real-time, is a big one. On the productivity front, you can imagine it's probably not that dissimilar to many of our peers looking at rote repetitive functions where there's cost-down opportunity. All are in flight now. I want to thank everyone for your attention and interest in MSC. I want to thank Erik and Ryan for their time and insight. We appreciate it. Thanks, everybody.