Good day, and welcome to the MSC Industrial Supply Fiscal 2022 Third Quarter Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note today’s event is being recorded. I would now like to turn the conference over to John Chironna, Vice President of Investor Relations and Treasurer. Please go ahead sir.

Thank you and good morning everyone. 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 and management data in the presentation slide that accompany our comments as well as our operational statistics both of which can be found on our investor relations webpage. Let me reference our Safe Harbor statement under the Private Securities Litigation Reform Act of 1995, a summary of which is on Slide 2 of the accompanying 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, including statements about the high inflationary environment and globally economic conditions on our operations, results of operations and financial conditions, expected future results, expected benefits from our investment and strategic plans and other initiatives and expected future growth and profitability. 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 the risk factors and the MD&A sections of our latest Annual Report on Form 10-K filed with the SEC as well as in other SEC filings. These risk factors include our comments on the high inflationary environments and global economic conditions. These forward-looking statements are based on our current expectations and the company assumes no obligation to update these statements except as required by applicable law. Investors are cautioned not to place undue reliance on these forward-looking statements. 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’ll now turn the call over to Erik.

Thanks, John. Good morning and thank you for joining us today. I hope you remain safe and healthy. On today's call, I'll reflect on our recent performance, provide color on Q3 and also share our perspective on the current environment. Kristen will provide more specifics on our financial performance and outlook. And I'll then wrap things up before we open up the line for questions. We're now three quarters of the way through fiscal 2022 and our drive to improve execution and financial performance is in full swing. Each passing quarter is another proof point of progress on our Mission Critical journey. During our fiscal third quarter, we achieved revenue growth of roughly 500 basis points above the IP index. We demonstrated continued gross margin expansion both sequentially and year-over-year and we translated the growth into strong operating leverage. Adjusted incremental margins for the quarter were just over 33% and adjusted operating margins expanded 200 basis points. Our fiscal third quarter represented the highest revenue in the history of our company and the lowest operating expense to sales ratio since fiscal 2013. While we're encouraged with progress, we are far from satisfied. On the growth front, we're seeing historically high contribution from realized price in light of the inflationary environment. And so we still expect more growth above IP and we're focused on capturing it. On the profitability front, operating margins are improving but we strive for consistent margin expansion before we declare victory. Turning now to our performance, I'll begin with revenue growth. We remain focused on the same five growth levers that have had our attention all year. And those are metalworking solutions, selling the portfolio, digital and customer diversification with an emphasis on the public sector. Today, I'll highlight metalworking, selling the portfolio, and the public sector.…

Thank you Erik. I’ll begin on slide 4 of our presentation where you can see key metrics for the fiscal third quarter on a reported basis. Slide 5 reflects the adjusted results, which is where I'll focus most of my comments today. Our third quarter sales were up 10.7% versus the same quarter last year, and came in at $959 million. Our non-safety and non-janitorial product lines grew nearly 13% and sales of safety and janitorial products improve sequentially to flat. Looking at growth rates for our sales by customer type, government sales declined nearly 10% due to the difficult janitorial and safety comps. The comps have forgotten to ease and we do expect government sales to return to growth in Q4. National Account growth with high teens and core customers grew low double digits. Moving to more technical and solutions oriented business remains an integral part of our Mission Critical strategy. Sales to customers with solutions now represent roughly 55% of the total company sales. Within that solutions umbrella, our in-plant program moved to nearly 10% of total company sales in Q3. You may recall that our goal was to reach 10% by the end of fiscal 2023, so progress is accelerating faster than anticipated. The remaining approximately 45% of company sales to solutions customers are made up primarily of our vending and vendor managed inventory channels. As Erik mentioned, our gross margin for the fiscal third quarter was 42.9% up 40 basis points sequentially from our second quarter and up 60 basis points from last year's fiscal Q3. Reported operating expenses in the third quarter were $271 million versus last year's reported operating expenses of $257 million. Adjusted for acquisition related costs, adjusted operating expenses were $271 million, or 28.3% of net sales versus last year adjusted operating…

Thank you, Kristen. Our Company remains firmly in growth and execution mode. With each passing quarter, we are gaining traction. We look forward to closing the fiscal year strong with double digit top line growth, gross margin expansion and adjusted incremental margins in the mid-20s. I want to thank our entire team for their dedication and their hard work. And we'll now open up the line for questions.

Thank you This first question comes from Tommy Moll with Stephens. Please go ahead.

Good morning, and thanks for taking my questions.

Hey, Tommy, good morning. How are you?

Doing well, thanks. I had planned to ask if you had seen any sign of a slowdown in the business. But now having Erik and Kristen on the record that you're not I will instead of asking a third time, I'll go a different direction. And ask have you seen anything change? So compared to last quarter, when we had this conversation, have any of your end markets gotten better or worse? Has the patience with customers changed at all you highlighted Erik, some patient fatigue? Maybe that's a little bit different. Anything that's changed would be helpful?

Tommy, I would say that, for the most part, most of the factors you just referenced. So demand, outlook, inflation, the shortages, the lead times are fairly similar to last quarter. I think in some ways, the changes that these headwinds that our customers and suppliers are feeling continue. And I think what that's doing is just sharpening the focus on need for productivity, and need for help on our customers. There is a drumbeat for sure that, hey, that we understand, price increases, they're coming fast and furious from every line of the P&L. We need help offsetting them with productivity. And we need help offsetting the labor shortages we're facing, which have not abated either. And they're still, despite some of the headlines on supply chains, easing, there's still real shortages and lead time delays, so we need product. So I think all of those are playing well into our favor because we can deliver on some of those things for customers. But I think it's more or less a lot of the same things that are just kind of sharpening this need for the customer.

Following up on Mission Critical, you're ahead of plan currently. So if we, if we think this through as it continues to evolve, do you end up with a more run rate repeatable kind of operating framework? I mean, Mission Critical was a very specific plan for a very specific starting point. But do we evolve into a more -- process in years, and if the answer is yes, in -- any of the contours? Is there a implied incremental that you end up in, hypothetically, if you have an operating -- production growth low single digits in a given year? Is there a rough range from why?

Yes, I'll break it down a few parts. I think first part of your question on Mission Critical. So we've got the official sort of originally stated Mission Critical goals ending in fiscal 2023. I mean that's the guidance that we gave back in, the kind of the beginning of this journey where we're going to deliver greater, greater than $100 million cost savings. So absolutely on track to meet and exceed that target so you can kind of assume at least $15 million more of savings in 2023, to kind of bring us across the finish line for the originally stated Mission Critical goals. But, then to your point it's not really going to end in 2023. What Mission Critical is ultimately about is kind of changing the culture, changing the mind-set in the company to generate continuous productivity, how much productivity I think you can ask, but how to think about that in the context of a framework. I'd say a lot of it has to do with how much we think we need to offset in terms of what's coming out of from an inflationary perspective. And also, how much do we want to be able to invest every year. So no specific guidance at this point beyond 2022, we'll give a little more color in our fiscal 2023 framework that will come up next quarter. And at that point, hopefully, we'll have a little bit more of an understanding of what might be coming at us from a macroeconomic perspective. But generally, we feel really well poised for next year, we're on track for all the Mission Critical targets, not just the cost now targets, so feel very confident about continuing to grow at least 400 basis points above IT. We feel very good about delivering the OpEx savings and we're already on track and ahead of schedule on the ROIC improvement. So feeling very good about where we are to close out 2022. And right now feeling, feeling optimistic about 2023.

Stay tuned, and I'll turn it back for now.

Thank you. And our next question today comes from Ryan Merkel with William Blair. Please go ahead.

Hey, good morning, everyone. Nice quarter.

Hey Ryan, good morning.

So my first question was on inflation. I'm curious do you think prices are starting to peak here or is that not clear yet?

Ryan, I would say not clear yet. Certainly today we continue to see, we mentioned in the prepared remarks that we took an increase as recently as late May in response to what we're seeing from suppliers. So I would say we have not yet seen a slowdown in the rate and pace of increases coming from our suppliers, which Ryan, as you know, is sort of, for us the leading indicator, and I think that's because this inflation wave is driven beyond just commodities. It's driven by so many other factors, oil and fuel wage rates and what's going on, there's multiple variables here. So so far, no slowdown.

That's kind of what I thought you'd say. And then turn into gross margin, how much did price cost health gross margin in the quarter? The increase here at 60 bps?

Yes. So year-over-year, the way to think about the margin improvement of 60 bps is that attribute about half of it to favorable price offsetting purchase cost inflation in any mix headwind and then about the other half, from increased vendor rebates.

Got it. So I'm just trying to get a sense for this year, how much price cost is helping your gross margin? Could you help us there? And should we view that as one time because COGS will eventually catch up, so it might be a little give back as we look out at 2023? Is that the right framework?

Let me make take you maybe Q3 to Q4 and kind of cap how to think about fiscal 2022. So if you're, if you're thinking about sequential gross margin, from Q3 to Q4, the first thing I tell you is you've got to account for the seasonal mix headwind that we typically see at this time of year. And that has to do with the product mix of summer goods. So think about 50 to 60 basis points roughly, of headwind from that dynamic. Then you've got pricing, which we do expect to remain positive, we'll get a little bit of boost from that small May increase that we took. But then you have offsetting that increased purchase cost inflation, and a decrease sequentially and vendor rebates. And so that's kind of the organic Q3 to Q4 changes. And then on top of that, I would layer in a headwind from Engman-Taylor, about 30 basis points approximately.

Okay…

Then for 2023 I’d say too early right now to guide Ryan. I mean, like Erik just commented, we don't know what's going on with inflation yet. And really, of all the variables that we're looking at to understand how fiscal 2023 might shake out price cost is definitely one of the biggest ones. And much of that is contingent on what happens with the timing of the inflation cycle.

Okay, now, that all makes sense, and I was I was really just trying to get a sense my feeling is, price has helped the business but not maybe as much as we've seen in the past. So is that the right it's been sort of a modest boost? Not something that was overly impactful to gross margins?

Well, I think organically if you think about being able to improve margins, fiscal 2022 versus fiscal 2021 so we're going a few years now actually with keeping flat or slightly up margins. And that is a change in trajectory from what we've seen the business do in the last several years. And to be able to do that, it basically means we're getting enough of a favorable spread from price cost that it offsets that mix headwind that we've kind of been seen in the business steadily over the past several years as some of our growth initiatives, which are margin headwinds as those continue to grow. So we're off, we're getting enough price cost, but it's covering that mix headwind. So in that regard, I would say, we do feel really good about the price contribution in the business. I don't know how far back you'd have to go to really see price maybe doing better than that. I don't know if Erik wants that at any context, from the, kind of era before I got here. But we're, we're really pleased with the price cost outcome.

I think the only other thing I'd add, Ryan is there, this time around there is look obviously, we're benefiting from a macro environment, the inflation that's out of our control. But I would say relative to past cycles, there is more work going on in the company to control our destiny. So, we've talked about there's a big pricing initiative inside the company to sort of build up the muscle in our sales organization on how to have that discussion with customers and how to sell through price so that even if, at some point inflation is going to slow. How do we still make sure we're extracting value because we are delivering the goods for the customer in terms of productivity and product availability, so that's one initiative. CCSG, we mentioned in the prepared remarks, it's getting amped up focus under Kim and team in the field, that is a margin accretive piece of our business, that we're starting to see momentum. There's focus going on private brands, inside the company and moving the mix of business there. So there were things on the self-help front. I think, probably more so than I would have said during the past pricing cycle, Ryan.

Very helpful. Thank you. I’ll pass it on.

And our next question today comes from David Manthey of Baird. Please go ahead.

Thank you. Good morning, everyone. I was wondering if you could give us some insight into your thinking, as you're developing the fiscal 2023 framework, potentially, I know you're not going to give us details. But is the plan regardless of what you see, out in the market, you'll have a category for sales declines? Or will you just base the buckets on how you're budgeting and then adjust later if conditions change like you did with the upside this year?

Yes and I should say, I think it's high, we're not high…

No, that's Dave.

It’s Dave.

Dave, it didn’t sound like you.

Yes, it’s me sorry.

So fiscal 2023 framework Dave, a couple of thoughts. We're obviously going to be modeling a lot of scenarios. There's a lot of uncertainty out there right now. We talked a little bit about, what happens with the inflationary cycle, and price costs being one of the biggest factors that could move the needle for us in 2023. But generally, we're trying to understand, what is going to happen with the industrial production index, what is being representative of what we would say, is market growth, and then what's our ability to gain share and take price on top of that. So that's, that's like some of the really big buckets that we're modeling and thinking through. And we have a lot of momentum heading into 2023 that we feel really good about allowing us to capture share, regardless of what happens to the market. So we're very focused on controlling our own destiny and delivering that at least 400 basis points of growth above IP, regardless of what the IP index actually does. And obviously, if we were to head into a down scenario, some of our ability to continue expanding margin gets a little bit harder than if we get some favorable IP growth. But generally, again, very optimistic right now with what we see the momentum in the business, and definitely committing to hitting those Mission Critical goals for 2023 regardless of the circumstances.

Okay, so it sounds like you're you'll base the buckets on some outlook for IP and then adjust from there is sort of the view.

Yes, yes. Big building blocks IP is a benchmark for market. What do we think is going to happen on price cost, share gain, and then productivity and inflation?

Yes. Okay. Great. And then, as it relates to Mission Critical and some of these cost savings, in a recent general investor deck, you cited that you still have 26 branch locations, and I'm wondering, does that number gravitate to zero over time? And if not, could you talk about why if so, could you talk about the timeframe and then if the savings from those closures is included in your Mission Critical targets?

Yes. So Dave, the 26 now is we feel pretty good about that number, we would imagine that stay stable. Obviously, we did a lot of big work around the branch restructuring last year, which took out many of our branches, the ones that are left behind are really supporting some of the different kinds of businesses within MSC. And we feel like 26 is the right number, so not contemplating any more savings from any kind of material branch restructuring or branch closures.

Perfect. All right. Thank you.

And our next question today comes from Chris Dankert at Loop Capital. Please go ahead.

Hey Morgan, thanks for taking the question. I guess you mentioned there's on-going lead time extension supply chain issues kind of continuing a pace here. I guess, how do we translate that for MSC, kind of what's the fill rate today looks like versus that near 98% level we were seeing kind of pre pandemic?

Yes, Chris so what I would say is, there's definitely still supply chain issues, we're seeing a difference in our compared to sort of pre-COVID fill rates, but the difference for us is very marginal. Whereas compared to the local distributors, it's it's a really wide gap between pre-pandemic and now. So we actually feel in some ways, like on a relative basis, the advantage has grown. Although yes, when we look at our flow rate, and our service metrics are, as you could see, the difference, we're still not back, we're up from where we were at the lows a few quarters ago. But still not back to pre-pandemic. I will point out one nuance, which is we look at it a couple of different ways, what we call, first pass and second pass. So first pass would be is the product located in the location that's closest to the customer. And there we see a pretty sizable difference. The second metric would be second pass, which is do we have the item anywhere in our network. And for that second pass measure, the difference is very marginal. And this has been the case through COVID. So while there's some freight expense to be borne by moving things around, we're generally more often than not able to deliver for the customer.

Got it. And that's certainly been such an issue, which I -- having product on hand in terms of market share convergence so glad to hear that that kind of continues to recover we're not quite there yet. And just kind of a point of clarification, I didn't see it in the deck, in plant growth in the quarter; I assume that's still kind of 9% of total sales. We're still seeing, near 70% growth in that that business today.

It's approaching 10% of sales actually this quarter.

Oh, perfect. Thanks so much guys, really appreciate the color.

Yes, no problem.

And our next question today comes from Hamzah Mazari with Jefferies. Please go ahead.

Hi, this is Hans Hoffman filling in Hamzah Mazari. I know you guys touched on it a bit in your prepared remarks. But could you just talk about what you're seeing in metalworking markets from a growth perspective? And then just maybe talk about some of the competitive dynamics there?

Yes, sure. So in terms of end markets, the general comment I would say is, we're seeing pretty much broad base strength across most of the verticals that are metalworking related. Certainly, you can imagine with oil and gas, oil prices being high, that area of the business is doing a lot better than it was years ago. Auto and aero are certainly on their way back and growing. And we still feel like there's plenty of room in both of those general machining strong, so environment is good. And then in terms of competitive, dynamic, your metalworking, it's a lot like the rest of the industrial supplies in the MRO market space, which is that it's highly fragmented. So you think about it across this is now beyond metalworking. But across the entire industrial landscape, the top 50 distributors have roughly 30% share. The metalworking would sort of be an analog to that. And so it's fragmented. And there's a lot of market share to be had from local and regional distributors that aren't faring quite as well right now.

That's helpful. And I know you guys, you mentioned the Engman-Taylor acquisition, but could you just talk about your M&A pipeline going forward? And if you're seeing any changes to private company valuations, and then how you're thinking about capital allocation going forward?

Yes, sure. So on the M&A front, I would say in terms of our outlook, and we've been pretty consistent for a while now, which is that, particularly as it relates to anything really big, and really sort of outside of our core business the bar would have to be really high that we are focused on a pipeline within our core business here. And we have a couple of things that we consider to be in our core. The one change I call out is it does feel like the pipeline and the degree of conversations are more robust. I think there's probably a lot of private owners just thinking about life, about the future of the business, etcetera. So I think the pipeline is pretty robust. Again, they would be over the more or less of a smaller variety inside of our core, I mean, Engman-Taylor is a great example. It's a great team -- in an MSA, where we'd like to see more penetration, they've been a leading competitor for a long time, the values line up between Rick and MSC. So a great example of what we would hope to find and continue to build on. In terms of capital allocation, look, we're sitting now, at about one and a half times leverage, which is a very comfortable place to be, particularly as Kristen had mentioned, we would expect to start to see cash generation, really picking up as working capital kind of stabilizes. So we think we have plenty of dry powder here, we're going to stay pretty disciplined, first priorities for us, our organic reinvestment into the business to the extent, we like what we see in terms of the return prospects. And of late, our confidence is really building based on the performance. Closely, close second would be the ordinary dividend, and then from there, we look at M&A, we'll look at return of cash to shareholders, i.e. buyback on a risk adjusted basis. And the only other comment I'll make is we are mindful of rising interest rates. So from our standpoint, in a high interest rate environment it doesn't change anything other than that the hurdle, the hurdle rate effectively goes up if we're going to deploy cash.

Got it. Thanks. I'll turn it back over now.

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

Hey, good morning, guys.

Good morning, Ken.

Hi. So first question, Erik, I appreciate the comments about the macro uncertainty and your ability to adjust quickly if the environment changes. We talked a little bit about, I think there's an earlier question about what structural incremental margins could look like, just given all the work you've done in Mission Critical. But I'm also curious if you have a viewpoint on what structural decrementals could look like relative to past down cycles.

Ken, I can take that one. So at this point, we're not even modeling a scenario where we need to worry about decrementals for next year. If things were to really erode before we give the framework for 2023, we would provide some guidance on that. But right now, it's not something that we're even looking at.

But I guess to the point, though, you would expect that even in a downturn, an eventual downturn in the cycle, you'd expect those decrementals to be better than what you've experienced in the past, right? Just given on a structural cost out over the last two or three years.

Yes, absolutely. Yes, I think that's where we'll really see a benefit from all the Mission Critical work that's been done over the last couple of years already in terms of structural cost takeout. We're at $85 million roughly at the end of -- as of the end of this year approximately. That will certainly help us. And then Erik also mentioned before, just a lot of things that we're doing differently inside the business now that are going to allow us to weather that storm differently than MSC has in the past. So I think a big one that we're really excited about Erik brought up earlier, but just the work we've been doing around capability development in the field, things that benefit our ability to add value to the customer kind of regardless of what the macro environment is. That would definitely make a down cycle look quite different for us than it has in the past.

Is there any way that you can maybe just provide just a little bit more color as to maybe give us a framework of if decrementals were making up a number here in the 20%, is it more of like a mid-teen type of range? Or is that you're still kind of doing work on that?

We'll give you a look at that next quarter.

Okay. And then for my follow-up here, I know inflation is still a very real impact on the market today. And obviously, you're already putting in some price increases to address that here. I do think we've seen some pullback in raw material costs for some key materials though, like steel and copper. Just any color on how you think about decisions on inventory? And how do you think about the potential price cost normalization when inflation does roll?

Ken, look at some point, inflation -- obviously, we track commodities very carefully. And that is part of the buying formulas. We look our buyers are tracking commodities and indexes. What I will say is, as I mentioned earlier, relative to prior cycles there's other factors beyond just the commodities that are influencing our suppliers raising prices for now. Look, at some point, no question, the music will stop. And the inflation cycle, that could be next quarter, it could be next year, it could be in three years, five years. We have no idea. At some point, that will stop. And certainly, price cost will come under more pressure than it is now. And look, I think it's why one of the comments we made earlier was we're focused on initiatives in our control, that even in an environment where we're not capturing as much in price, that we have the ability to offset more pressure on price cost through our own initiatives. And I mentioned a few of those earlier.

Understood. Appreciate the time.

And our next question today comes from Pat Baumann at JPMorgan. Please go ahead.

Good morning, Erik. Good morning, Kristen. Congrats on the strong quarter.

Good morning.

Hey, Pat. Good morning. Thank you.

Hey. How are you doing, Erik? Just a first question is on price. When you look in the fourth quarter, I think you said you put through late May increase. I'm just curious what do you expect that price contribution to be to sales? Will it be up from the 6% you just put up in the third quarter given that increase? And then as you look into next year, what's the carryover now based on kind of what you've announced? And then I'm sorry, this is kind of a little bit of a long question, just along those lines, as you think about next year, is there some bucket of your product offering that could see pricing move down to that last question if commodities deflate from here? Or is all of that price you put through considered by you to be kind of sticky such that you wouldn't give any of that back in that scenario? Sorry for the long question.

Good. Good. It’s okay, so it's like an ABC, so let me start off with the -- we'll go near term, how about -- so near term, your first question, Pat, was about Q4. Look so you could do the math on. And what we show in the Op stats, we give you a sense of price. And we always call it price mix because it's tough to decouple the two all the time, but it's in that growth decomposition. And in our Q3, I think it was in the five, five and a half percent something like that range. Where does it go for Q4? It's hard to predict precisely because mix does play into it. This is sort of a living organism here and things change. But that being said, all else being equal, sure yes, we took -- so the increase we took in late May was low single digit. So it's not like it was huge. But yes, if realization does what we think it should do, one would expect the price contribution in Q4 to be all else being equal, slightly higher than it was in Q3. That's right. So I think that was the first part of your question. The second part is the carryover. I think the way to think about that is we will get a part of the year. So for the larger increase we took in January, we are going to get that for the first sort of carry over the first part of fiscal 2023. And then for the late May increase, we will get a carryover for roughly three-quarters of fiscal 2023. And then of course, the other contribution would be any additional price increases that happen, which will be a function of what we see between now and September or, quite frankly, through the course of fiscal 2023. I think that was the second one. The third one was about deflation. And certainly, commodities are going to come down. I will say, Pat, and you never say never, right? But if I look back over the course of my history in this industry, because the finished goods, the parts that we sell, the raw materials generally are a relatively small percentage of the finished product. We have not really seen cases where deflation leads to mass price reductions, which is to say, generally, pricing is sticky. I think what certainly would happen is if prices commodities come down, the prospect of further price increases goes away. But it would be unlikely. And certainly, it would be a break in pattern from the past to see prices in mass come down.

Understood. That's helpful color. Thanks for accommodating all of those questions. I have one follow-up and then this one is on gross margin. I guess what surprised you in the quarter? It just seemed to me like sales were kind of in line with how you thought they would play out in the quarter. So I guess I'm curious why did volume rebates come in as it well, maybe you had -- maybe that was planned to be where it was. I guess that's the question. What surprised you? Because you call out price cost, you call volume rebates, but I feel like the gross margin was better sequentially than maybe internally or maybe externally people thought maybe internally as well. Just curious what surprised you. And then I think you said at one point recently, you saw enough momentum that gross margins could be flat next year. I may have that wrong. If I'm wrong, just tell me you never said that. If I'm right, I guess, I'm just curious, is that still the case?

So Pat, I can take the first part. I sort of start, and then I'll turn it over to Kristen. That's good. I think what surprises, look, I think if you go back, we were thinking at the time last quarter, we were coming off of a strong sequential lift from Q1 to Q2. We felt good about that. And we felt like, hey, gross margin should be up a little bit from Q2 to Q3, but not a lot. So I would say you are correct. The 40 bps was a little more, probably a little more than we expected. I'd say two things. One is, look, I mentioned we have this initiative in the field on pricing to improve realization. The results have been quite good. So I think that's one. And then two is, yes, look, we did a heavy amount of purchasing. That resulted in outsized rebates. And to some degree, we expected it, but we probably did even a little bit better there, is the two things I'd call out. And then the other point was about 2023. Kristen, do you want to jump in?

Sure. Yes. I don't believe we've commented on that specifically, Pat. I think we're looking at a variety of potential outcomes for margin next year. And obviously, the length of the inflation cycle would be a really big driver of the guidance we would provide for gross margins next year. But I'd say, given what we know of for 2023, it would be a very good outcome if we were able to hold margins flat. There's certainly a set of conditions under which that could happen. But that would be a really good outcome for us for next year, I would say. And we'll give some more guidance on some ranges and kind of what would affect that on the margin side when we head into the outlook for next year. But -- and your comment was specifically on gross margins to be clear, right, Pat?

Yes, you got it. That's exactly right, yes. That's what your answer was in response to, right?

Yes. Just checking. As I finished talking, I was like I got to make sure that was a gross margin question. Yes, that was gross margin answer.

Great. Great. And I mean I have one little modeling one, too. Just on the fourth quarter, you said OpEx to sales on that extra week is 20%. What do you expect the extra week to carry for absolute sales contribution related to the extra week?

Yes. Just roughly, whatever you're modeling for Q4 is whatever five days is worth. I just -- that's the easiest way doing it, then to supply 20% OpEx on that typical gross margins.

Perfect. Thanks so much. Appreciate the time.

No problem.

Thanks, Pat.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to John Chironna for any closing remarks.

Thank you, Rocco. Before we end the call, a quick reminder that our fiscal 2022 fourth quarter earnings date is now set for October 20, 2022. We plan to attend several investor conferences and perhaps a few road shows before then. So we look forward to seeing you in person. Thanks for joining us today.

Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.