Good morning, ladies and gentlemen, and welcome to the MSC Reports Fiscal 2018 Fourth Quarter and Full-Year Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. John Chironna, Vice President of Investor Relations and Treasurer. Sir, please go ahead.

Thank you, Jamie, and good morning, everyone. I'd like to welcome you to our fiscal 2018 fourth quarter conference call. In the room with me are Erik Gershwind, our Chief Executive Officer; and Rustom Jilla, our Chief Financial Officer. During today's call, we will refer to various financial and management data in the presentation slides that accompany our comments as well as our operational statistics, both of which can be found on the Investor Relations section of our website. Let me reference our Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. 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 guidance about expected future results, expectations regarding our ability to gain market share, and expected benefits from our investment and strategic plans, including expected benefits from recent acquisitions. 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 our other SEC filings. These forward-looking statements are based on our current expectations and the company assumes no obligation to update these statements. Investors are cautioned not to place undue reliance on these forward-looking statements. In addition, during the course of 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, which contain the reconciliation of the adjusted financial measures to the most directly comparable GAAP measures. I'll now turn the call over to Erik.

Thank you, John. Good morning, everybody, and thanks for joining us today. As we've now completed fiscal 2018 and launched into fiscal 2019, I'd like to begin this call with the state of the company and offer some perspective on our progress. From there, I'll provide more specifics about the environment and our recent performance. I'll then turn it over to Rustom, who will review the details of the fiscal fourth quarter and our full year, who will provide our first quarter guidance and also our fiscal 2019 annual operating margin framework. I'll briefly wrap up before we open up the line for questions. Over the past several years, we've repositioned MSC from a spot buy supplier to a mission-critical partner on manufacturing plant floors across North America. We have done so by focusing on products and services that are technical and high touch. We have cemented our leadership into our core business of Metalworking. We've gained solid traction in the Class C VMI space, and established a new platform in OEM Fasteners through our acquisition of AIS. At the same time, we've built upon our success in inventory management channels by continued expansion of vending and VMI. The last leg of this journey was to redesign our sales force to better serve our customers as a mission-critical partner. We've migrated our sales force from one design to sell a spot buy value proposition to one that is prepared to deliver upon the new, more complex and high-touch role that we play for our customers, enabling them to achieve higher levels of growth, productivity and profitability. This was the work that was completed during fiscal 2018. As we implemented these changes, our organic growth rate underperformed due to account transitions, sales rep transitions into new roles and declining sales head…

Thank you, Erik. Good morning, everyone. Before getting into the details, let me remind you that we had provided Q4 guidance to both our total company results and for our base business, which is total company excluding acquisitions. For the fourth quarter, our total average daily sales were $13.1 million, an increase of 9.5% versus the same quarter last year. DECO and AIS, between them contributed 500 basis points of acquisitive growth and base business growth was 4.5%. Our reported gross margin was 42.9% for the quarter, at the top of our guidance range, and down 130 basis points from last year with roughly 100 basis points of this coming from the acquisitions. Excluding these acquisitions from both periods, our gross margin was 44.3%, down roughly 30 basis points. In Q4, lagged impact of product cost increases from earlier in the year exceeded the benefits of higher realized pricing and supplier rebates. We still ended fiscal 2018 with base business gross margin essentially flat with the prior year. But until our mix price increase, which will likely be during our fiscal Q2, the net impact of price and cost should be a slight headwind. And you'll see this reflected in our fiscal 2019 first quarter guidance. We continue to drive productivity in Q4 with OpEx to sales reduced 90 basis points from last year to 30.1%. Total OpEx was $252 million, up $18 million from last Q4, with about half of this increase coming from the acquired businesses. Of the base business year-on-year increase, roughly $5 million is attributable to volume-related variable costs, such as pick, pack, ship, freight and commissions. The balance is mostly from personnel limited costs and investments. Base business OpEx to sales improved to 30.6%, roughly 50 basis points below last year's Q4. So once again,…

Thank you, Rustom. As you've heard me say many times, technical expertise is an important element of our competitive advantage and one way this manifests itself is in documented customer cost savings. We delivered roughly $400 million in documented cost savings to our customers in fiscal 2017 and I'm happy to share that we did the same in fiscal 2018, delivering another $400 million. These savings represent meaningful productivity gains for our customers. There's another equally important, though, element of our competitive advantage and that's our high-touch customer service culture. Put simply, every single associate in our company puts the customer first. But before I close, I want to share a quick example that brings this to life. Couple of weeks ago, on a Sunday, an important Midwest-based customer that manufactures marine engines called their MSC salesperson early in the afternoon desperately needing help to keep their shop floor running. They had an important job to get out by the end of the next day, but were in need of a pretty obscure part that, if not in hand, would cease production. Our team mobilized within 20 minutes of the call and by 5:00 P.M., we had opened up one of our warehouses, found the part and shipped it. It arrived at the customer's dock first thing Monday morning, ensuring that they meet their production deadline. Our role with our customer was bigger than next-day availability. We helped them get a critical job out the door, and in doing so, helped them satisfy their customer. Examples like this happen all the time across our company and speak to our entire team's dedication to our customers and to our mission. We'll now open up the line for questions.

And our first question today comes from Hamzah Mazari from Macquarie. Please go ahead with your question. Mario Cortellacci - Macquarie Capital (USA), Inc.: Hi, this is actually Mario Cortellacci filling in for Hamzah. So if I heard correctly, it sounds like you guys plan on passing through your cost increases that are due to the tariffs. Just want to clarify, I guess, do you plan on passing through this price increases to cover 100% of the increase? And do you think there'll be any lag in this process? And maybe you can provide any color on how those conversations are going with clients?

Yeah, Mario, it's Erik. So, look, the short answer is, yes, we plan on passing along all of the increases that we're seeing. As we said, there's really two effect – the direct effects where MSC pays the tariff where we're doing direct importing, and an indirect effect from suppliers who are doing the importing. What I would say is it's still relatively early. So as it relates to the direct effect where MSC is directly affected by a tariff, we are passing that along. We are doing so right away and do expect to recoup all of the costs. With respect to the indirect, what I would say, as I mentioned, it is still early. So while there have been some select suppliers that have moved, most has not yet. And that really speaks to the timing lag that Rustom talked about earlier as it relates to gross margin, where we are beginning to realize through our P&L right now cost increases from earlier in the year. Many of these price increases that we likely expect to see have not yet happened and would most likely occur in the form of the manufacturer who makes lots of parts and the input may only be a portion of the final product that this would likely make its way through to the market in the form of a list price increase. Our expectation would be, like in a typical year, that would occur early in calendar, meaning January 2019 where we see the bulk. So, I would anticipate over the next month or two, we're going to have a lot more discussions. Mario Cortellacci - Macquarie Capital (USA), Inc.: Great. And maybe you can also comment on how you think about your head count growth longer term, given the current demand environment and maybe you can touch on any existing capacity within your sales force as you guys approach your new sales force strategy?

Yeah. Sure, Mario. So, look, the first thing I'll say is – and hopefully, you can tell by the tone, I am encouraged by the progress that we're seeing under the covers in terms of the sales effectiveness changes taking route, particularly with what we're seeing in the trends in the core business, which is an important part of the business for us. It's one that's lagged and it's starting to pick up momentum. So, I think that's speaking to progress being made. As it relates to – look, the whole rationale behind these changes was to move the sales force and keeping with the strategy and to create a more efficient model so that, over time, we expect to add head count, but not at the rates that we have been adding in the historical formula. What you saw, from the fourth quarter to the first quarter, quite frankly, was the result of a really strong recruiting effort. Yeah, we have plans and projections, and then there's the reality that hiring is not a precise science and you never know exactly how many are going to translate in one quarter. So that plus 35 from Q4 to Q1 is a bigger step up than you're likely to see from us for the balance of the fiscal year, with the one caveat being what you mentioned, which is there are sort of two variables that we would look at to assess whether we – I had shared, from here on out, somewhere in the neighborhood of plus 50 over the remaining three quarters. That could move up or down based on two variables. One being the environment, as you mentioned; and the second being the performance of the new reps under the new model. Meaning, if we really like what we're seeing in terms of performance, we could potentially move that up. Mario Cortellacci - Macquarie Capital (USA), Inc.: Great. Thank you so much.

Our next question comes from Evelyn Chow from Goldman Sachs. Please go ahead with your question. Evelyn Chow - Goldman Sachs & Co. LLC: Good morning, guys.

Hi, Evelyn.

Good morning. Evelyn Chow - Goldman Sachs & Co. LLC: Maybe just touching upon your expected price increase in fiscal 2Q. I understand that some of your suppliers have yet to sort of take incremental price actions thus far to calendar year end. But what are the potential prospects you're seeing in earlier-than-expected price increase? And also with the 25% step up in mind on Jan 1, what the magnitude of that price increase for you business, perhaps, exceed the 1.5 point you put up this quarter?

So, Evelyn, look, I think as we – the closer we get to year end here, the less likely it is, although possible, that our pricing action would precede Jan 1. It's possible. So, it could happen even earlier in Q2, meaning December. It would really be a function of what happens with our manufacturers. As you've heard me say now – excuse me, by the way, struggling with this little northeast cold here. But as you've heard me say, the inflation has been slower to move than I would have expected. I will tell you that there is a lot of discussion occurring, obviously, because of the tariffs. So, we are expecting there to be meaningful supplier moment, but we'll see. I mean I think the next one to two months are going to really bear it out. And then, obviously, the next key will be once we take an increase, which we would expect to, how we do on realization. And look, the environment right now is becoming more and more right for achieving solid levels of realization, because certainly all suppliers, all customers are talking about input cost rising. Evelyn Chow - Goldman Sachs & Co. LLC: Makes sense, Erik. And then turning to the government declines, could you just elaborate on the nature of the contract losses? And maybe give us some insight into the actions you're taking to recover this business and the line of sight into doing so in the next couple of quarters?

Yeah. Sure, Evelyn. So, our government business, which we described is in the neighborhood of 10% of sales, is made up of a lot of contracts across a lot of different entities in the government. So, it's pretty well diversified and spread out across this entity called government. The contracts generally are multiyear terms with renewals at varying dates. And over time, here and there, we lose one. Generally, we've done well in government and we win more than we lose. But just recently, and the reason I called it out, we lost a couple, which is not a usual event for us. And it's why you saw the growth rate I mentioned and wanted to flag, the growth rate in Q1 stepping down from Q4. We made a couple of adjustments. To be perfectly frank, the most significant is leadership. We changed that pretty quickly. In addition, we're taking some other countermeasures to go after some new business, to mitigate some of this headwind and recapture share there. So, what I described is I think we'll probably see government as a headwind for the next couple of quarters. But if some of these countermeasures do their job, that it would lessen. Evelyn Chow - Goldman Sachs & Co. LLC: Great. And then, finally, one last quick clarification from my end. Just on AIS and that impact to gross margins in 1Q. Could you go into a little more detail as to what you're seeing there? Because I thought that inventory step-up was probably supposed to roll off from 4Q to 1Q.

Yes, the inventory step-up has – the amortization, Evelyn, that's finished. I mean that took place in the fourth quarter. What you're seeing is just, fundamentally, the impact of AIS being a business that comes in at a much lower gross profit – gross margin number than MSC's. I mean the gross margin is in the mid-30s, basically, in the low- to mid-30s. Evelyn Chow - Goldman Sachs & Co. LLC: Understood, Rustom. Thanks. Thanks, guys, and feel better, Erik.

Thank you, Evelyn.

Our next question comes from Ryan Merkel from William Blair. Please go ahead with your question. Ryan J. Merkel - William Blair & Co. LLC: Hey, guys. Good morning.

Hey, Ryan. Ryan J. Merkel - William Blair & Co. LLC: So, first on first quarter 2019 core gross margin guidance down roughly 100 basis points. Can you quantify the impact of negative price/cost for us?

Ryan, are you talking about our guide? Ryan J. Merkel - William Blair & Co. LLC: Yeah, the guide for first quarter of 2019.

To be honest, not yet. We'll do it after the – given that it's – look, it's still moving, we generally like to wait for the quarter before we give you price/cost. Ryan J. Merkel - William Blair & Co. LLC: Okay.

So, look, it will be slightly – as Rustom said, what's happening, Ryan, and maybe just – would it be helpful just to talk about – just step back and talk about the margin dynamic and what we see happening right now. Ryan J. Merkel - William Blair & Co. LLC: Well, I think it would, especially in the context that you got a 1.5% (42:46) increase in the big book, yet you're negative on price/cost. So, maybe just explain all that.

Yeah, so really, just to be clear, price realization has been fine. So based on the price increase, what you're seeing, and I'm sure you're reacting to, is from Q4 to Q1 you're seeing a sequential movement of a minus 20 basis points; whereas, typically, you'd expect to see flat to up from us. Price realization is fine and has been solid. What you're seeing is three things going on. One is, as Rustom mentioned, purchase cost escalating. And this is the timing issue that we generally have when – these are going back to the start of calendar 2018, when the cost come in and we get pricing ahead of cost. Two is we have a handful of national accounts that are lower-margin national accounts that happened to be growing robustly and are creating a bit of a mix issue within national accounts for the moment. And then the third issue is web pricing, which slight – and I say slight headwind to gross margin. But of course, it's helping fuel growth in the small accounts, which over time we see as a tailwind actually. But that's what's going on. So, the price realization getting pricing, and it's been fine. It's those three factors that are accounting for the 20 basis points. Ryan J. Merkel - William Blair & Co. LLC: Okay. And then to follow up, 2019 framework, you have scenarios where gross margins expand year over year. So, what would you need to assume for that to happen? Obviously, you need to put through a midyear. Do you also need to assume that mix is positive so the core outgrows national accounts? Is that a possible outcome?

So, Ryan, fundamentally, it's pricing, right. I mean, pricing would be the big one, so broad-based inflation with us putting through price increases. Now with mix, I mean, yeah, the core businesses has been doing much better and the core businesses inherited (44:48) there. And so, mix would be a factor, but the fundamental is pricing. Ryan J. Merkel - William Blair & Co. LLC: Okay.

Ryan, one point to clarify in the framework, and Rustom hit this in the prepared remarks. Just want to make it clear. So, the midpoint of that – a little different from last year, the midpoint of that framework, if you go on the vertical gross margin axis, so if you go to last year's – and let's take AIS out and talk base business, if you go to last year, fiscal 2018's gross margin, for the year, it averaged 43.7%. The midpoint of that line is not 43.7%, it's 43.3%. We chose 43.3% because it is the most recent data point we have our Q1 guide. But in other words, to get to that top half of the framework, we don't need to be above last year's average. We need to be above Q1's 43.3%. And if you look back in time, look, you see some years where from Q1, it just – margins just drift down, those are typically years where there is no pricing and kind of the natural headwinds in the business go down. But you'll see other years, where gross margins in couple of years back, where from Q1, gross margins are flat or even up a bit and those would particularly be in years where there is a solid midyear. So, I just wanted to make that point that it's not off of last year's average, it's off of Q1.

Well, it's the first time that we provided gross margin on the Y axis. And so, we decided looking at that – better to go off where we're seeing ourselves running currently versus going off last year's number. You could do one or the other, we just happened to choose that. Ryan J. Merkel - William Blair & Co. LLC: Got it. Okay. And just lastly, you mentioned general inflation could help your gross margins in 2019. And I think you're one of the only distributors I've heard so far say that tariffs, I guess, indirectly could help your gross margins. So, can you just explain how this works exactly? Because it feels like achieving positive price/cost is tougher these days just given transparency.

So, Ryan, here's the dynamic. And what I would split out is direct – what we characterize as direct versus indirect. And I think on the direct – I think one of the things that the company, MSC, has a relatively low percentage compared to other distributors of direct China sourcing right at around – we said around 5% of total. And I think there – the difference is, in that case, we're paying the tariff. In that case, I think you're right. I think it's a challenge. And sort of best case is you get all of the tariff through, which is what we're going to aim to do. And best case is it's a net neutral, right? The other side is where they're branded industry suppliers, who in most cases, it's some, but not all of their product line is coming from China. And while they're realizing tariffs, unlikely that these companies are going to go along and take to market a 25% increase. That more likely – in discussions that we're having with many industry partners, what we're likely to see is that gets blended in, and that gets blended in the form of an industry increase. If that's the case, it's really not all that much different from when we see a normal list price increase from a manufacturer, except that the amount could be bigger. And I think there'll be more air cover around price realization. Our customers, our suppliers, everybody acknowledges that input costs are going up. So, that's the difference between the direct and the indirect.

Just one point to add there. We can also address sourcing. Just like suppliers – just like suppliers with a particularly exclusive brand, all the rest, we can offer our customers alternative products. They're not affected; work on our supply chains, all the rest of that. So, it is still early days. And the biggest part of the tariffs are, I guess, not due to kick in for another couple more months, but there's multiple ways to address that. Ryan J. Merkel - William Blair & Co. LLC: Very helpful. Thanks.

Our next question comes from David Manthey from Baird. Please go ahead with your question. David J. Manthey - Robert W. Baird & Co., Inc.: Hi. Good morning, guys.

Hi, David. David J. Manthey - Robert W. Baird & Co., Inc.: First off, Erik, can you outline what specific changes were made with sales force effectiveness? Why they had such a negative impact on your growth? And what are the key factors that are expected to drive productivity in the coming year?

Yeah. Sure, Dave. So, looking back on the last year, as I mentioned in the prepared remarks, put very simply, if I had to describe our old, our prior sales model, which was really tied to a spot buy value proposition, it was more of a one-size-fits-all model. Meaning that we would hire the same profile of sales rep and that sales rep would have accounts on his or her portfolio that would span the range of lifecycle with MSC, meaning brand-new accounts, all the way to highly penetrated complex accounts on the same portfolio. The fundamental gist of the changes was to cluster and segment out our sales force so that we have a few different roles tied to specific different types of accounts, (49:47) more focus. At its simplest level, that was the change made. It was a lot of disruption last year, Dave, because what we had to do to make that happen to get from where we were to where we are is there was movement of people into new roles. There was moment of salespeople across customer relationships. And as we went through these changes, our head of sales rightfully called out and said, hey, I've got a slowdown. I've got to take sales head count down because we were hiring into an old selling model which would not have made sense. So, we took a pause on hiring to – as we segmented, so sales head count came down, which was sort of a double whammy on top of the disruption. We are now on the other side of it. And I would say, we are starting to find our sea legs and see the kind of progress that the pilot – test market would suggest. So, we had a pilot market here. Before…

So Dave, one quick point here. I mean, first of all, it's a quarter, and quarters do move around. I mean we've had quarters in the past that have been almost 30% and I've said, hey, don't walk away thinking it's 30%. It's an annual framework and you kind of run annually. Actually, if you also look back at last year's Q1, just interest, I mean, that was – again, it was probably around 10%, I think, from memory, the incremental margin in Q1 of last year. So take the quarter factor out of there. So really – so how do we deliver that 20%? I mean, first of all, we're constantly driving productivity. Our OpEx to sales has improved 180 basis points over the last three years. We're driving functional productivity. We're reducing our cost to serve and, yeah, in 2019, we're going to see the cost impact in Q1, as it comes in, in particular, of the increased investments in sales and service head count. We're continuing to do that and we're spending on marketing as well, right? So, we'll continue to see that. And I mean, that's the range there. But the other point that Erik made was really important, so I'm just going to repeat it. I mean, it's that to deliver those 20%-type incremental margins, we don't have to actually expand our gross margin. Provided there's decent sales, we've got to come in relatively close to the gross margin, the midpoint, if you would, that we have in there, but we're not really looking for expansion, per se. So, I mean, it's a combination of those factors as we go through the year. And I guess, the final one, I'll just repeat that again, because it's important. It's realized pricing. I mean, that's going to be a huge determinant and the flow through that it has, because we – to quite an extent, we know what our costs are anyway at this point in time, certainly in the early months, because we've got a lot of cost increases that have come through. Others will happen, but as those cost increases occur, it's a lag, just like you know in our business, the average pricing, the fact that we buy ahead, all the rest of it, so the cost increases that come through to us later this year will take a while to work their way through our P&L. So, pricing is huge as well. Erik, anything to add?

I think that was pretty comprehensive. The only thing I'll add, Dave, is that the OpEx – so with respect to OpEx, there's a step up from Q4 to Q1. There's a bit of it in there that doesn't repeat. But then the other part of the step up is growth investments. And if we look out across the balance of the year, it's not like OpEx goes down. So, OpEx goes up modestly through the year. But OpEx as a percentage of sales, assuming we do on the revenues what we'd expect to do on the revenues, OpEx as a percentage of sales comes down, so we actually do get leverage as we move through the year. That's the plan.

Yeah. David J. Manthey - Robert W. Baird & Co., Inc.: Okay. All right. Thanks, guys. See you next week.

Yes, take care, Dave. See you then.

Thanks, Dave.

Our next question comes from Ryan Cieslak with Northcoast Research. Please go ahead with your question

Can you hear me?

Now we can, Ryan.

Okay. Great. Sorry about that. Yeah, so I just wanted to make sure I understand maybe the impact from this loss of government contracts on the first quarter organic sales guidance you guys are giving as well as the framework for the full year. Can you quantify, ultimately, how much of an impact that may be dragging on organic sales?

Yeah. So look, in Q1, Ryan, just without getting too specific for competitive sensitivity, you can get a sense. So, we had a step down from mid-single digits and then we talked about mid-teens. What I'll tell you is not all of that – there is a portion of that that is a change in year-end spend activity year-on-year. But a decent portion of that is the headwind from the losses. I mentioned that a headwind will likely continue for the next couple of quarters. But look, there's a lot of countermeasures going on, number one. So, there is a decent chance that the headwind moderates from where it is in Q1. And sort of zooming out and looking big picture here, what I've been talking about, Ryan, is the expectation that the business should be performing in the high-single digits and that we would expect, as we move through the year, that it wouldn't get there overnight, but that we would see improvement and that we'll be able to get there. And look, there are a lot of tailwinds that I see with the ability to offset this headwind and still get there. So, those are – look, we're just settling into the new sales changes. We're making sales hires that are not yet having an impact. We added new SKUs that are just starting to have an impact. Rustom mentioned we increased direct marketing investment because of the performance of the small accounts. We see momentum building there. So, these are the tailwinds that have me pretty encouraged.

Okay. And just to be clear, they rolled off at the end of last quarter, was it – are they fully reflected rolled off in the September number, in October numbers you guys gave, just want to make sure?

They're fully reflected in Q1.

Okay. Got you. As I look at the October sales, look like – when you look at it on a two-year stacked trend or you take into account the comps were easier in October, the growth rate seem like it moderated a little bit. Is some of that from these government contracts or is there anything else, Erik, that you'd point out of maybe how things are looking the last 30 days or so within the environment, in overall demand? Has anything changed significantly?

No Ryan, I would say environment seems solid and progress, again on the core account, the small accounts, kind of the bread and butter of the business, if anything, is doing better. So just take mid-teens and say, government, ballpark 10% of sales and say, hypothetically, but we're just flat, what does that mean to the overall growth? Now, obviously, look, we don't own it all. But my point with the bread-and-butter of the business here, I'm encouraged that the sales changes that we made last year is starting to take hold. So, nothing else I'd note in the environment or other parts of the business, no.

Okay. And then for my follow-up, and I'll get back into queue, I was a little surprised that right now you guys are sort of facing price/cost headwinds. And I get the lag in realizing the cost, but it seems like just on the surface that price realization maybe has fallen below what you were expecting. At least that's how it comes off. I just wanted to, maybe Erik, get a sense of why would your price/cost dynamics actually improve into next year, based on what we've seen so far here year to date? Just really considering it's been a strong environment, supply chain's tight, lead times are extending. If you were able to really sort of may be offset some of these cost headwinds that have rolled into this quarter, why or how can you offset that and maybe get some more into fiscal 2019? Thanks.

So one quick point before Erik comes in there. I mean, if you just take Q4 as a guide, I mean our price mix, the realization, as we call it there, was 0.5% basically, rounded to 0.5%. So, I mean, we continue to see price realization. Ryan, the really important point would be – of what you see with our cost is, we moved, we took a price increase back in, I think, it was July, right, and we've had cost increases come through. Some of those cost increases we actually deferred the impact of by pre-buying, okay. And with some of those – and with all of them, in any case, with the way the average costing system works, it takes a while for them to actually start showing up in our P&L. That's what's behind my other point. If you look for several months out, we've got a pretty good sense of – provided our sales mix remains relatively the same, we have a pretty good sense of how our cost will trend. Erik?

Yeah. Only thing to add there, Ryan, is sort of in an inflationary cycle, and Rustom described the dynamic as to why, what typically happens is – again, as I always say, the trigger for us is – other than the tariff situation is manufacturer list price movement, and that gives us the opportunity to pass along pricing. We take a timing benefit where we get – we realize the price ahead of costs, primarily because of the average costing system that Rustom mentioned, and you saw that from us. So if you go back to a couple of quarters ago, we had a couple of quarters there where price turned from negative to positive and cost were still in the flat range and that created positive variance. Over time what happens is, the costs work their way through our P&L. And in an inflationary cycle, what then happens is there's a next round of pricing, and we get another benefit, and then the cost catch up, et cetera, et cetera. So, that's basically what you're seeing here. Look, our summer increase here at 1.5% was not as big as I would have thought, given the headlines. But the opportunity – hopefully, this is temporary and, specifically, temporary if the tariff stimulate manufacturers to move as we suggested. That's really the story.

(1:01:07) Back to me for a second. I mean, we're pretty focused on gross margin stability, if you can think about it. I mean, just want to make sure it doesn't get lost in this. If you look at our base business over fiscal 2018, right, our gross margins for the year are pretty much in line with 2017. I mean I think in this environment that's actually being not too bad at all. And that gets achieved by a bunch of discipline in how we approach business, I mean the focus on mix, the focus on customer profitability. That's the gross margin end of it. So cost of serve doesn't impact that, but we also sort of spend a lot of time and efforts on cost to serve. That shows up in our productivity and helps us in our operating margin. So, I just want to make sure that that out there as well as we focus on Q1, how we've done in 2018.

No, that's fair and I appreciate the color. I just want to be clear, though, so there's nothing that you think, Erik, that is impacting your ability to get price today, maybe related to some of the sales force initiatives. And certainly, there has been a balance between top-line growth and margin. But as you move forward, as this is now behind you with the sales force initiatives, you have some new guys coming in, that should not impact your ability, ultimately, to continue to get price and offset these costs you're rolling through. Thanks.

No, Ryan, the only other two factors I called – the answer is no, it shouldn't. The new sales model should not impact our ability to get price. The only two other factors that I mentioned in the gross margin walk Q4 to Q1, beyond the purchase cost that we talked about, were; one, national account, so we did have a handful of accounts that are lower margin accounts that grew a lot, okay. Two is web pricing, which we've been working on and we talked about it the last couple of quarters, which is a slight – it's not a major needle-mover, a slight headwind. But a slight headwind near term, it is helping to fuel the growth in the small accounts that we've been talking about, the direct marketing channel which, if that continues, actually, over time, becomes a tailwind for us. But those are the only two other factors I called out.

Okay. Thanks, guys.

And our final question today comes from Steve Barger from KeyBanc Capital Markets. Please go ahead with your question.

Good morning, guys. This is Ryan Mills on for Steve.

Hey, Ryan.

Yeah. My first question, you added 35 field reps this quarter and, Erik, I believe you said you're going to add 50 more by the end of the year. Can you maybe talk about the impact on your operating margin framework in regards to that? Because I assume there's a fixed cost component tied to that, where you start them as a salary and then transition them on a commission-based pay structure. So, is there any impact to your operating margin framework from adding field reps?

So, let me take that actually. It's already built in there. Yes, it does add to our costs. And the way this works is the – so like the people that we hired in Q4, for the most part, they come in during Q4. They fully, obviously, hit for all of Q1, right. Like that, for the remaining 50 or whatever number it is that we actually bring on board, and the service people, you have that factored through. But all of that is already factored into our sort of plans for the year and our operating margin framework. Now, one other point that we made and we've made it in prior calls and remember is that the sales impact of this. So when you hire, there is always a lag when you bring in field salespeople, there's always a lag before they actually start to drive enough sales to pay for themselves and then start to really do well. So, we've assumed the hiring that we started with at the end of Q4 and that's ongoing today, it's not really going to show up too much in our revenue until the latter part of fiscal 2018 – or fiscal 2019, and then, of course, definitely in fiscal 2020, right. So, all the stuff, by the way, is factored into the op margin framework.

Okay. And then, going to your September and October trends, I know you called out government as a headwind. Sorry, if I missed this in your prepared remarks, but were there any impacts that you could point out from hurricanes?

Minor – yeah, it's a good question, Ryan. Yeah, I mean, look, there was probably – it gets really tricky to try to quantify, so we didn't bother. Look, there's probably some headwind in September and October, to be honest, but we didn't make too much of it.

Okay. And then my last question. You reaccelerated your SKU count growth. Can you talk about the decision-making process there? Is it more focused on high-turnover products or higher-margin products?

So, we will generally look at new – so the new SKU program, which has been – you can see our SKU count has been growing for quite a while. We are generally – it's a pretty data-driven process where we are looking at products that are selling in the market that customers are requesting, that we may be sourcing ad-hoc, and looking to bring those in and create a more formal marketing program around them. We'll look – in terms of financial criteria, we look across a number of metrics. Primarily, we're looking at returns on capital. These tend to be efficient ways to add products because we will market them and bring them into inventory only after we see line of sight into revenue. Of course, we'll look at margins, but primarily return on capital, and tend to be very strong. So what we did in the fourth quarter, by the way, is we saw an opportunity where we saw some recent success in certain pockets and we hit the accelerator, so there was some Q4 expense. A little trickled over expenses in Q1 that doesn't repeat, not that much. And from there, beginning this quarter, there is a little bit of contribution in Q1 and, you imagine, it builds over time as we move through the year.

Thanks for taking my questions.

Thank you, Ryan.

And ladies and gentlemen, at this time, that will conclude today's question-and-answer session. I'd like to turn the conference call back over to Mr. Chironna for any closing remarks.

Thank you, Jamie, and thanks everyone for joining us today. We'll be on the road over the next coming months before the holidays, attending some conferences and road shows. So, we look forward to seeing you out there. And if not, we'll report our next earnings on January 9, 2019. Have a good day.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.