Chris Dankert: Got it. Thank you. That’s very helpful. And then maybe just to put a fine point on the cost front. Again, it seems like we’re moving away from an absolute cost of dollars coming out of the business, that $100 million that we had in the last mission-critical program. Should we now just kind of keep our eyes on hitting that $20 million – or the 20% incremental margin and think about that, as kind of the target for continuous improvement going forward?
Kristen Actis-Grande: Yes. Chris, longer term, I would say that’s a fair way to think about it ’24 is going to be a bit challenging on hitting 20% incrementals, because of what’s happening on price cost and margins and then what’s happening in terms of fixed cost and OpEx step-up. So longer term, yes, I would agree with that. And then the way I would think about productivity within the year though, and maybe this sort of just helps the kind of OpEx sequencing also. As we mentioned in the prepared remarks, there’ll be a step-up in Q1 on OpEx costs related to D&A and incentive compensation. I would also factor in the sequential volume change and how we gave that. But so you – based on what we’re targeting for Q1, if you infer like a midpoint on what’s happened in September and October.
You stepped down based on volume-related costs and OpEx. That would be offset by the step-up in D&A and incentive compensation expense. And then I would think about OpEx dollar sequencing through the year as basically being roughly flat with the exception of your volume fluctuations. So basically, what that means is we’re leveraging productivity, to cover things like our merit increase, fund some of the investments. And then just to kind of size what that’s worth, our merit is typically around $20 million alone each year.
Chris Dankert: Got it. That’s all very, very helpful. Thanks so much and best of luck in the New Year.
Erik Gershwind: Thanks, Chris.
Kristen Actis-Grande: Thanks, Chris.
Operator: Thank you. And our final question today comes from Patrick Baumann with JPMorgan. Please go ahead.
Patrick Baumann: Hi. Good morning. Thanks for taking my questions.
Erik Gershwind: Good morning.
Patrick Baumann: Hi, how is it going? First one, I guess, just a quick cleanup from the quarter. I think you said, Kristen, something about rebates and COGS adjustments offsetting price cost in the fourth quarter. What is that exactly?
Kristen Actis-Grande: Yes. So, we saw favorability in Q4, Chris, related to both vendor rebates and customer rebates. And then the other item that we had in there was around – so we’ve been doing a lot of work. I think we’ve alluded to it on previous calls in terms of countermeasures on working capital and kind of composition of inventory, and some of that work started to yield the benefit in Q4 in terms of requiring a lower inventory provision than we’ve been seeing. So that was the other thing that benefited us in Q4. And those items combined allowed us to offset, the price cost headwind. So it was a meaningful contribution, and we talk about countermeasures for fiscal ’24. That’s the type of stuff that we’re looking to as well.
Patrick Baumann: What – can you quantify what that was in terms of basis points that offset?
Kristen Actis-Grande: Yes. So, if you look at Q4, we had about 130 basis points of impact tied to the public sector contract. And then price cost was down 120 basis points, and it was totally offset by the improvements in those other cost of goods sold areas.
Patrick Baumann: Super helpful. Thanks for the color. And then my follow-up, maybe for Erik, is if you could give us some more color on the pricing strategy, the changes you’re making for that for the core customer like what it entails? And after you’re done with this, how should we think about gross margin for this group? Can it remain above the company average by the same spread it is today? And can you remind us how much higher the gross margin is for core customer versus, what you booked for large customers. I recall in the past, a number given in the range of like 500 to 700 basis points. But that might have been a couple of years ago, so I just wanted to confirm? Thanks.
Erik Gershwind: Yes, Pat, sure. So maybe I’ll touch on the strategy. Kristen can follow-up just on the growth differential, but I’ll give you the punchline. So, what we’re doing here and look, our pricing strategy has always been around a list price as a jump-off point to get to a net price for our customer. We feel very good about our pricing. And first, I’d say our value proposition is a high price value prop. And don’t intend on changing that. We bring a lot of value in the way of technical expertise to our customers. We do command a premium relative to the traditional distributor that’s warranted and that’s not changing. What isn’t a change, is as we look in any case where we’re touching a customer consistently, with a salesperson and a relationship, our pricing is competitive.
What we have found, and I think we’ve alluded to this before that there’s cases where we’re not touching a customer as regularly with a salesperson. It may be a direct marketing relationship, and there are times where our pricing is not competitive. And with that – certainly, it’s not competitive without jumping through some hoops on discounting. And so, what we’re looking to do, is identify and isolate those cases. Both in terms of SKUs and customers and make adjustments, so that we’re presenting out of the gate a more competitive price. The work is – basically, this will be going out. The work most of the heavy lifting, again, is done. It will be coming in flight in the next one to two quarters. And basically, we feel we’re doing this as we’ve modeled out with minimal, if any, margin dilution.
Because of the way, we’ve structured this and the idea is just bringing a better price to the customer out of the gate. Our feeling is absolutely that along with the web improvements, this will reenergize the core customer. And you are correct, we absolutely feel that post this adjustment, the core customer gross margin will still be healthily above company average and certainly, well above the growth drivers that have been driving most of the growth. So your estimate is certainly not out of the ballpark in terms of basis points. But that’s one of the reasons, we’re excited as we move past. Kristen talked about some of the challenges in the first couple of quarters, you get past the first couple of quarters of ’24 into the back half into ’25.
This gets to be a pretty exciting picture.
Kristen Actis-Grande: Yes. So it’s a good range that you gave. And the other thing I’ll just – I’ll add a little color on what Erik said too, in terms of profitability of sort of the – kind of customers we’re talking about here, it’s also lower cost to serve. So really benefits the P&L in a couple of places.
Patrick Baumann: So if you – just to follow-up to that, I guess that’s embedded in the 1% to 2% price you mentioned earlier for the year. If you reduce the price for this group of customers in select instances, how do you maintain the same gross margin spread that, that group had in the past?
