Q2 2024 MSC Industrial Direct Co Inc Earnings Call
Operator: BF-WATCH TV 2021 Good day, and welcome to the MSC reports fiscal second quarter 2024 results conference call. All participants will be in listen-only mode.
Good day and welcome to the I'm not sure your reports fiscal second quarter of 'twenty 'twenty four results conference call.
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Operator: To adjourn your question, please press star then 2. Please note, today's event is being recorded. I'd now like to turn the conference over to Ryan Mills, Head of Investor Relations. Please go ahead, sir.
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I'd now like to turn the conference over to Ryan Mills head of Investor Relations. Please go ahead Sir.
Ryan Thomas Mills: Thank you and good morning, everyone. Welcome to our second quarter fiscal 2024 earnings call. Erik Gershwind, our Chief Executive Officer, and Kristen Actis-Grande, our Chief Financial Officer, are both on the call with me today. During today's call, we will refer to various financial data in the earnings presentation and operational statistics that accompany our comments, both of which can be found on our investor relations webpage. Let me reference our safe harbor statement, a summary of which is on slide two of the earnings presentation. Our comments on this call, as well as the supplemental information we're providing on the website, contain forward-looking statements within the meaning of the U.S. securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements.
Ryan Thomas Mills: Thank you and good morning, everyone welcome to our second quarter fiscal 'twenty 'twenty four earnings call Erik Gershwin, Our Chief Executive Officer, and Christian access Grande our Chief Financial Officer are both on the call with me today.
Ryan Thomas Mills: During today's call, we will refer to various financial data and the earnings presentation and operational statistics that accompany our comments both of which can be found on our investor Relations webpage.
Ryan Thomas Mills: Let me reference our safe Harbor statement, a summary of which is on slide two of the earnings presentation. Our comments on this call as well as the supplemental information we're providing on the website contain forward looking statements within the meaning of the U S security laws.
Ryan Thomas Mills: These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements information about these risks is noted in our earnings press release and our other SEC filings. In addition, during this call we may refer to certain adjusted financial results, which are in.
Ryan Thomas Mills: Information about these risks is noted in our earnings press release and our other SEC filings. In addition, during this call, we may refer to certain adjusted financial results, which are non-GAAP measures. Please refer to the GAAP versus non-GAAP reconciliations in our presentation or on our website, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. I will now turn the call over to Erik.
Ryan Thomas Mills: 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 will now turn the call over to Eric.
Erik David Gershwind: Thank you, Ryan, and good morning, everybody. Thanks for joining us today. As we move past the halfway point of fiscal 2024, our performance to date has been mixed. Our high-touch programs, such as vending and implant solutions, continue capturing share, and they're performing ahead of expectation. On the other hand, growth has not yet inflected in our core customer base, in the face of a sluggish macro environment, particularly in our heavy manufacturing and markets. This can be evidenced in the performance of our top 100 national accounts. We're only 45, and we're growing last quarter. As a result, revenue growth to date has been below our expectations.
Eric: Thank you Ryan and good morning, everybody.
Eric: Joining us today.
Eric: As we move past the halfway point of fiscal 'twenty 'twenty four.
Eric: Our performance to date has been mixed.
Eric: Our high touch programs, such as vending and implant solutions continue capturing share and they are performing ahead of expectations.
On the other hand.
Growth has not yet inflected in our core customer base.
In the face of a sluggish macro environment, particularly in our heavy manufacturing end markets.
Eric: This can be evidenced in the performance of our top 100 national accounts.
Eric: We're only 45 were growing last quarter.
Eric: As a result revenue growth to date has been below our expectations.
Erik David Gershwind: At the same time, I'm pleased with how we've been managing the business in a challenging environment. Gross margin performance, our productivity efforts, and cash flow generation have been strong, and they're expected to continue. And while our performance to date has been mixed, my conviction in our plan is as high as ever.
Eric: At the same time.
Eric: I'm pleased with how we've been managing the business in a challenging environment.
Eric: Gross margin performance, our productivity efforts and cash flow generation has been strong and they are expected to continue.
Eric: And while our performance to date has been mix Mike.
Eric: My conviction in our plan is as high as ever.
Erik David Gershwind: We expect to improve the trend in revenues during the back half of our fiscal year and into fiscal 2025. And this belief is grounded in several factors. First, while macro conditions have not materially improved since the start of the calendar year, we continue to hear a more positive overall sentiment about the coming months from our team on the ground. Second, as I mentioned, our implant and vending signings continue to outpace our expectations. These signings should yield incremental growth through the balance of the fiscal year and beyond. Third, we successfully completed our web pricing realignment initiative as planned in late February, and the benefits are just starting to be felt. Fourth, our website improvements, which are running slightly behind schedule, are expected to roll out during the back half of the year and should yield further benefits.
Eric: We expect to improve the trend in revenues during the back half of our fiscal year and into fiscal 2025.
Eric: And this belief is grounded in several factors.
Eric: First while macro conditions have not materially improved since the start of the calendar year.
Eric: We continue to hear a more positive overall sentiment about the coming months from our team on the ground.
Eric: Second as I mentioned, our implant and vending signings continued to outpace our expectations.
Eric: These signings should yield incremental growth through the balance of the fiscal year and beyond.
Eric: Third we successfully completed our web pricing realignment initiatives as planned in late February.
Eric: And the benefits are just starting to be felt.
Eric: Fourth our website improvements, which are running slightly behind schedule are expected to roll out during the back half of the year.
Eric: And should yield further benefits.
Erik David Gershwind: And fifth, we've increased our marketing efforts to generate awareness and demand by featuring the recent enhancements to our value proposition. My conviction is also derived from our ongoing gross margin execution and, as you'll soon hear, a growing pipeline of productivity initiatives that provide runway for operating margin expansion as the business returns to growth. Before I turn it over to Kristen, I'll walk through our performance in more detail and provide a key initiative update along the way. And I'll begin with our first mission critical priority, which is maintaining momentum in our high-touch programs that mainly serve our larger customers. We grew implant programs by 39%, and our vending install base by 11% as compared to the prior year. Public sector sales have also held up nicely with slight year-over-year growth due to Temporary Budget Constraints.
Eric: And fifth we've increased our marketing efforts to generate awareness and demand by featuring the recent enhancements to our value proposition.
Eric: My conviction is also derived from our ongoing gross margin execution.
And as you'll soon hear a growing pipeline of productivity initiatives.
Eric: They provide runway for operating margin expansion as the business returns to growth.
Eric: Before I turn it over to Christian.
Christian Grande: I'll walk through our performance in more detail and provide a key initiative update along the way.
Christian Grande: And I'll begin with our first mission critical priority, which is maintaining momentum in our high touch programs that mainly serve our larger customers.
Christian Grande: We grew implant programs by 39%.
Christian Grande: In our vending installed base by 11% as compared to prior year.
Christian Grande: Public sector sales have also held up.
Christian Grande: Nicely with slight year over year growth.
Christian Grande: Spike temporary budget constraints.
Erik David Gershwind: Moving to our metalworking offering on the next slide, we strengthened our leadership position during the quarter with two exciting additions to the portfolio. The first is Car Industrial, a distributor supplying metalworking and related MRO supplies into Eastern Canada.
Christian Grande: Moving to our metalworking offering on the next slide.
Christian Grande: We strengthened our leadership position during the quarter with two exciting additions to the portfolio.
Christian Grande: The first is car industrial.
Christian Grande: The distributor supplying metalworking and related MRO supplies into eastern Canada.
Erik David Gershwind: This acquisition brings in a highly technical sales force and strengthens our presence in the region, which currently represents 2% of sales. We'll look to drive top line synergies by providing the car and e-commerce sales channel and equipping it with MSC's large breadth of products. The second deal is exciting from a longer-term perspective with the recently announced acquisition of the intellectual property assets from SMART, or S-M-R-T, which consists of technology assets developed by Dr. Tony Schmitz and his wife Christine. This transaction brings to us one of the nation's foremost manufacturing minds in Tony. And it brings us new capabilities, such as the next generation of predictive milling technology, which underpins MSC Millmax.
Christian Grande: This acquisition brings in a highly technical sales force and strengthens our presence in the region, which currently represents 2% of sales.
Christian Grande: We will look to drive topline synergies by providing car in E Commerce sales channel.
Christian Grande: And equipping it with M. A c's large breadth of product.
Christian Grande: The second deal is exciting from a longer term perspective with.
Christian Grande: With the just recently announced the acquisition of the intellectual property assets from smart breast that Marty.
Christian Grande: Which consist of technology assets developed by Doctor, Tony Smith, and his wife Christine.
Christian Grande: This transaction brings to us one of the nation's foremost manufacturing minds and Tony.
Christian Grande: And it brings us new capabilities such as the next generation of predictive milling technology.
Christian Grande: Which underpins M S email Max.
Erik David Gershwind: I'll now turn to our second growth priority on slide seven, which is re-energizing our core customers. And clearly, that did not happen in the fiscal second quarter, as seen by core customer average daily growth. That said, the Q2 numbers did not reflect the benefits of the initiatives being put into action. The web pricing reset we've been describing was completed for the remaining 70% of SKUs near the end of February, with early indications voting well for future growth rates.
Christian Grande: I'll now turn to our second growth priority on slide seven which is re energizing our core customer.
Christian Grande: And clearly that did not happen in the fiscal second quarter as seen by core customer average daily growth rates.
Christian Grande: That said Q2 numbers did not reflect the benefits of the initiatives being put into action.
Christian Grande: The web pricing reset we've been describing was completed for the remaining 70% of Skus near the end of February.
Christian Grande: With early indications boding, well for future growth rates.
Erik David Gershwind: We're already seeing improvements in customer net promoter scores and improvements across several leading indicators on our website, such as how often customers click on an item page, how often they add to cart, and how often those carts convert to orders. All of these metrics are showing a nice uptick over the pre-launch baseline. Moving to e-commerce, we prioritized several improvements to the platform in the second quarter to enhance the customer experience. This delayed the full launch of the new search engine, which was planned for late in Q2, and the rollout of subsequent search enhancements, which are now all expected to launch in the back half of the year.
Christian Grande: We're seeing improvements already in customer net promoter scores.
Christian Grande: And improvements across several leading indicators on our websites such as how often do customers click on an item page.
Christian Grande: How often do they add to cart and how often do those carts convert to order.
Christian Grande: All of these metrics are showing a nice uptick over the prelaunch baseline.
Christian Grande: Moving to e-commerce.
We prioritize several improvements to the platform in the second quarter to enhance the customer experience.
Christian Grande: So this delayed the full launch of the new search engine, which was planned for late in Q2.
Christian Grande: And the rollout of subsequent search enhancements, which are now all expected to launch in the back half of the year.
Erik David Gershwind: On the marketing front, as I mentioned earlier, we've launched a program introducing customers to the exciting changes happening at the company. This initiative is aimed at generating awareness about our new web pricing and what's to come on the website. Our final mission critical growth priority is expanding our OEM fastener offering by leveraging the successful cross-selling formula developed through CCSG. However, OEM sales remain down year over year due to acute customer softness.
Christian Grande: On the marketing front as I mentioned earlier, we've launched a program introducing customers to the exciting changes happening at the company.
Christian Grande: This initiative is aimed at generating awareness on our new web pricing and what's to come on the website.
Christian Grande: Our final mission critical critical growth priority is expanding our OEM fastener offering by leveraging the successful cross selling formula developed through C. C. S. G.
Christian Grande: And while OEM sales remained down year over year due to acute customer softness.
Erik David Gershwind: We're encouraged by early cross-selling results. For instance, during the quarter, we achieved a sizable win from an existing MSC in-plant customer serving the consumer leisure market by significantly improving their ability to manage inventory. I look forward to updating you on continued success as we build on this early momentum. I'll now switch gears to profitability and begin with gross margin. We performed well again in Q2 due to a combination of maintaining strong price discipline, realizing benefits from our category line reviews, and sound management. Additionally, our refreshed purchasing approach is yielding results in the form of improved inventory efficiency and reduced inbound freight expense as a percentage of sales.
Christian Grande: We're encouraged by early cross selling results.
Christian Grande: For instance, during the quarter, we achieved the sizeable win from an existing MSC implant customer.
Christian Grande: Serving the consumer leisure market by significantly improving our ability to manage inventory.
Christian Grande: I look forward to updating you on continued success as we build on this early momentum.
I'll now switch gears to profitability and begin with gross margin.
Christian Grande: We performed well again in Q2 due to a combination of maintaining strong price discipline.
Christian Grande: Realizing benefits from our category of line reviews and mixed management efforts.
Christian Grande: Additionally, our refreshed purchasing approach is yielding results in the form of improved inventory efficiency and reduced inbound freight expense as a percentage of sales.
Erik David Gershwind: With respect to operating expenses, we're taking a continuous improvement approach to increase our productivity. This is going to play a crucial role in our path to mid-teens adjusted operating margins under our new set of mission-critical objectives. And I want to highlight for you this morning four proof points that demonstrate how momentum inside the company is accelerating on this front. First, on the next slide, you'll see that, after extensive analysis, we made the decision to close our Columbus Distribution Center. Well, there are two factors that made this decision clear-cut. But it was nonetheless a difficult one because of our culture that places people as our top priority.
Christian Grande: With respect to operating expenses.
Christian Grande: We're taking a continuous improvement approach to increase our productivity.
Christian Grande: This is going to play a crucial role in our path to mid teens adjusted operating margins under our new set of mission critical objectives.
Christian Grande: And I want to highlight for you. This morning for four proof points that demonstrate how momentum inside the company is accelerating on this front.
Christian Grande: First on the next slide you'll see that after extensive analysis.
Christian Grande: We made the decision to close our Columbus distribution Center.
Christian Grande: Well there are two factors that made this decision clear cut.
Christian Grande: It was nonetheless, a difficult one because of our culture.
Christian Grande: Places people is our top priority.
Erik David Gershwind: The first factor was the explosion in our solutions business, and that was vending VMI and implants. That business went beyond what we could have envisioned when we opened the building just over a decade ago. Today, customers with solutions represent nearly 60% of our revenue. The implication here is that a greater portion of our business can be staged out and planned. And as a result, the operational needs of our distribution center footprint evolved as our revenue mix shifted. The other enabler of the move was the automation investments that we've made in recent years, primarily into our Elkhart, Indiana, and Harrisburg, Pennsylvania facilities. As you can see on slide 8, these investments not only allowed us to scale while easing the hiring burden, but they enhanced efficiency and expanded throughput capacity in both facilities. The closure of the Columbus facility will begin producing annualized operating savings of an expected $5 to $7 million in fiscal 25, with upfront expenses during the back half of fiscal 24 in order to execute the plan while maintaining our highest customer service level.
Christian Grande: The first factor was the explosion in our solutions business and that being vending via mine and plant.
Christian Grande: That business went beyond what we could have envisioned when we opened the building just over a decade ago.
Christian Grande: Today customers with solutions represent nearly 60% of our revenues.
Christian Grande: The implication here is that a greater portion of our business can be staged out and plan and as a result, the operational needs of our distribution center footprint evolve as our revenue mix shifted.
Christian Grande: The other enabler of the move was the automation investments that we've made in recent years.
Primarily into our Elkhart, Indiana, and Harrisburg, Pennsylvania facilities.
Christian Grande: As you can see on slide eight these investments not only allowed us to scale, while easing the hiring burden.
Christian Grande: But they enhanced efficiency and expand throughput capacity in both facilities.
Christian Grande: The closure of the Columbus facility will begin producing annualized operating savings of an expected $5 million to $7 million in fiscal 'twenty five.
Christian Grande: With upfront expenses during the back half of fiscal 'twenty four in order to execute the plan, while maintaining our highest customer service levels.
Erik David Gershwind: Second, on the productivity front, we've recently launched an end-to-end supply chain network study, which is analyzing the entire flow of goods through our network. We're in the process of sizing the total profit improvement target from this, and we'll return with more details on it by fiscal year end.
Christian Grande: Second on the productivity front, we've recently launched an end to end supply chain network study.
Christian Grande: Which is analyzing the entire flow of goods to our network.
Christian Grande: We're in the process of sizing the total profit improvement target from this.
Christian Grande: We will return with more details on it by fiscal year end.
Christian Grande: Third.
Erik David Gershwind: We've opened the new Shared Services Center in Correctoral, Mexico, to reduce labor costs while maintaining talent across many of our key functions. Our early hires are in place, and we're pleased with initial progress. And fourth, during our fiscal second quarter, we offered a voluntary separation package to associates across the company. The operating stats posted on the Investor Relations section of our website show a slight tick down in associate headcount from Q1. This is due primarily to departures from the voluntary separation, which were offset by headcount additions from the acquisition of Cargill, the Shared Service Center in Mexico, and continued support of implant growth. Moving from our P&L, I'll now turn to our balance sheet and cash flow, which remains strong. I've been particularly pleased with our inventory reductions of $25 million during the quarter, which, most importantly, was accomplished while maintaining our high customer service level.
Christian Grande: We've opened a new shared services center and correct aeromexico.
Christian Grande: To reduce labor costs, while maintaining talent across many of our key functions.
Christian Grande: Our early hires are in place and we're pleased with initial progress.
Christian Grande: And fourth during our fiscal second quarter, we offered a voluntary separation package to associates across the company.
Christian Grande: The operating stats posted on the Investor Relations section of our website show a slight tick down in associate head count from Q1.
Christian Grande: This is due primarily to departures from the voluntary separation, which were offset by head count additions from the acquisition of car.
Christian Grande: A shared service center in Mexico.
Christian Grande: And continued support of implant growth.
Christian Grande: Moving from our P&L I'll now turn to our balance sheet and cash flow, which remains strong.
Christian Grande: I've been particularly pleased with our inventory reductions of $25 million during the quarter, which most importantly was accomplished while maintaining our high customer service levels.
Erik David Gershwind: Our balance sheet remains at low levels of leverage, providing us with plenty of flexibility to pursue the investments that I've just outlined. I'll now turn things over to Kristen to discuss our results and our updated guidance in more detail. Thank you, Erik, and good morning, everyone. Please turn to slide nine, where you can see key metrics for the fiscal second quarter on both a reported and adjusted basis. Fiscal second quarter sales of $935 million declined 2.7% year over year, with the same number of business days in both periods.
Christian Grande: Our balance sheet remains at low levels of leverage providing us with plenty of flexibility to pursue the investments that I've just outlined.
Christian Grande: I'll now turn things over to Christian to discuss our results and our updated guidance in more detail.
Christian Grande: Thank you, Eric and good morning, everyone.
Christian Grande: Please turn to slide nine where you can see key metrics for the fiscal second quarter on both a reported and adjusted basis.
Christian Grande: Fiscal second quarter sales of 935 million declined 2.7% year over year with the same number of business days in both periods.
Kristen Actis: Despite the sequential improvement in our sales within the quarter off a particularly soft December, volumes remain negative year over year through the quarter. This was partially offset by ongoing solutions momentum and more modest benefits from price and acquisition. By customer type, National Accounts performed the best, with average daily sales up 1.1%.
Despite a sequential improvement in our sales within the quarter off a particularly soft December volumes remain negative year over year through the quarter.
Christian Grande: This was partially offset by ongoing solutions momentum and more modest benefits from price and acquisitions.
Christian Grande: By customer type National accounts performed the best with average daily sales up one 1%.
Kristen Actis: 45 of our top 100 national account customers grew in 2Q. When considering the macro challenges and significantly tougher comps in the first half of the year, I am encouraged by the resiliency displayed here. The public sector had slight year-over-year growth of 0.6%, driven by mid-single-digit growth from our federal customers. We experienced softness in the state and local portions of the public sector due to temporary budget constraints.
Christian Grande: 45 of our top 100 national account customers grew into Q.
When considering the macro challenges and significantly tougher comps in the first half of the year I am encouraged by the resiliency displayed here.
Christian Grande: The public sector had slight year over year growth, 0.6% driven by mid single digit growth from our federal customers we.
Christian Grande: We experienced softness in the state and local portions of the public sector due to temporary budget constraints.
Kristen Actis: Core and other customers, average daily sales were challenged during the quarter, declining 5.7%. From an end market perspective, we experienced acute demand softness in heavy manufacturing verticals, including end markets and tiered suppliers that support the earlier stages of production and automotive. From a solution standpoint, we continue to take share during the quarter despite a challenging market. In vending, Q2 average daily sales improved 6% year over year and represented 17% of total company net sales. Sales through our in-plant program grew approximately 10% year-over-year and represented approximately 16% of total company net sales.
Christian Grande: Core and other customers. The average daily sales were challenged during the quarter declining five 7%.
Christian Grande: From an end market perspective, we experienced acute demand softness and heavy manufacturing verticals, including end markets and tier suppliers that support the earlier stages of production and Automotives.
Christian Grande: From a solution standpoint, we continued to take share during the quarter, despite a challenging market.
And then Dean Q2 average daily sales improved 6% year over year and represented 17% of total company net sales.
Christian Grande: Sales to our implant program grew approximately 10% year over year.
Christian Grande: And represented approximately 16% of total company net sales. Despite only 46 of our top 100 implants shelling growth and QQ.
Kristen Actis: Despite only 46 of our top 100 plants showing growth in two, signing rates across both solutions remained at healthy levels during the quarter, especially in implants where fiscal year-to-date signings are exceeding our internal targets. Moving to profitability for the quarter, our gross margin of 41.5% improved 20 basis points year over year. The improvement in gross margin was largely driven by continued benefits from our countermeasure efforts, including category line review. However, these efforts were partially offset by price, cost, headwinds, and acquisition. Both reported and adjusted operating expenses for the quarter were approximately $291 million.
Christian Grande: Tiny rates across both solutions remained at healthy levels during the quarter.
Christian Grande: Especially in implants or fiscal year to date signings are exceeding our internal targets.
Christian Grande: Moving to profitability for the quarter, our gross margin of 41.5% improved 20 basis points year over year.
Christian Grande: The improvement in gross margin was largely driven by continued benefits from our countermeasure efforts, including category line reviews. These.
Christian Grande: These efforts were partially offset by price cost headwinds and acquisition.
Christian Grande: Both reported and adjusted operating expenses for the quarter were approximately 291 million.
Kristen Actis: We recorded roughly $6 million in restructuring expenses, primarily related to the voluntary separation that Erik mentioned. On an adjusted basis, operating expenses were up $11 million compared to 2Q of last year. Combined with lower sales year over year, this resulted in a 200 basis point increase in adjusted operating expense as a percentage of sales. The year-over-year step up in operating expenses was largely driven by a $6 million and approximately $10 million of costs associated with our strategic investment. Roughly a third of this expense is associated with headcount to support our solutions growth and digital initiatives. Sequentially, adjusted operating expenses increased by a couple million dollars, as expected due to a full quarter of merit. Reported operating margin for the quarter was 9.7% compared to 11.9% in the prior year. On an adjusted basis, operating margin was 10.5 percent, a decline of 170 basis points compared to the prior year. The previously mentioned step-up in operating expenses, combined with lower sales, were the largest contributing factors to the year-over-year decline. Gap earnings per share were $1.10 compared to $1.41 in the prior year period.
Christian Grande: We recorded roughly 6 million in restructuring expense primarily related to the voluntary separation that Eric mentioned.
Christian Grande: On an adjusted basis operating expenses were up $11 million compared to two Q of last year.
Christian Grande: Combined with lower sales year over year.
Christian Grande: This resulted in a 200 basis point increase in adjusted operating expense as a percentage of sales.
Christian Grande: The year over year step up in operating expenses was largely driven by merit of 6 million and approximately $10 million of costs associated with our strategic investments.
Christian Grande: Roughly a third of this expense is associated with head count to support our solutions growth and digital initiatives.
Christian Grande: Sequentially adjusted operating expenses increased by a couple of million dollars as expected due to a full quarter of merit.
Christian Grande: Reported operating margin for the quarter was nine 7%.
Christian Grande: Compared to 11, 9% in the prior year.
Christian Grande: On an adjusted basis operating margin was 10, 5% a decline of 170 basis points compared to the prior year.
Christian Grande: The previously mentioned step up in operating expenses combined with lower sales were the largest contributing factors to the year over year decline.
Christian Grande: GAAP earnings per share was $1 10, compared to $1 41 in the prior year period.
Kristen Actis: On an adjusted basis, EPS was $1.18 versus $1.45 in the prior year. Turning to slide 10, we review our balance sheet and cash flow performance. We continue to maintain a healthy balance sheet with net debt of approximately $530 million, representing roughly one times EBITDA. We made progress on our working capital during the quarter, including roughly $25 million in inventory reductions. This resulted in a second quarter operating cash flow conversion of 128% and 122% fiscal year to date, keeping us on track to achieve our target of greater than 125% for the full year. Capital expenditures during the quarter of $25 million increased approximately $10 million year-over-year, primarily driven by investments tied to digital and ongoing solutions growth.
Christian Grande: On an adjusted basis, EPS was $1 18 versus $1.45 in the prior year.
Christian Grande: Turning to slide 10 to review, our balance sheet and cash flow performance.
We continue to maintain a healthy balance sheet with net debt of approximately 513 billion, representing roughly one times EBITDA.
Christian Grande: We made progress on our working capital during the quarter, including roughly 25 million and inventory reductions.
Christian Grande: This resulted in second quarter operating cash flow conversion of 128%.
Christian Grande: 122% fiscal year to date, keeping us on track to achieve our target of greater than 125% for the full year.
Christian Grande: Capital expenditures during the quarter of $25 million increased approximately $10 million year over year, primarily driven by investments tied to digital and ongoing solutions growth.
Kristen Actis: Together, this drove strong free cash flow generation of approximately $53 million in fiscal 2Q and $116 million in fiscal year-to-date. Our balance sheet and cash generation remain strong and continue to fuel our capital allocation priorities, as shown on slide 11. We deployed cash in several of these buckets during the quarter, including the strategic acquisitions of Carr Industrial and the intellectual property assets from SMART that Erik alluded to earlier. We also repurchased 16 million shares in the second quarter.
Christian Grande: Together this drove strong free cash flow generation of approximately $53 million in fiscal two Q and 116 million fiscal year to date.
Our balance sheet and cash generation remains strong and continues to fuel our capital allocation priorities.
Christian Grande: On slide 11.
Christian Grande: We deploy cash and several of these buckets during the quarter, including the strategic acquisitions of car industrial and the intellectual property assets from smart that Eric alluded to earlier, we also repurchased $16 million of shares in the second quarter.
Kristen Actis: Moving to our full-year outlook on slide 12, given our performance halfway through the fiscal year, it is likely we will be at the bottom end of the range in both average daily sales and adjusted operating margin. However, there is some downside risk if the expectations for the remainder of the year, which I am about to outline, provide benefits later than anticipated. Starting with revenue, to achieve the lower end of our outlook, it would imply ADS improves meaningfully throughout the remainder of the year. This confidence is based on the following assumption. Starting with what's not in our control is macro conditions, which we expect will begin to improve off of fiscal 2Q levels, particularly in heavy manufacturing verticals. Additionally, we expect budget constraints in the public sector to ease as we progress through the fiscal year.
Christian Grande: Moving to our full year outlook on slide 12, given our performance halfway through the fiscal year. It is likely we will be at the bottom end of the range in both average daily sales and adjusted operating margin.
Christian Grande: There is some downside risk if the expectations for the remainder of the year, which I am about to outline provide benefits later than anticipated.
Christian Grande: Starting with revenue to achieve the lower end of our outlook. It would imply a D S improves meaningfully throughout the remainder of the year.
Christian Grande: This confidence is based on the following assumptions.
Christian Grande: Starting with what's not in our control as macro conditions, which we expect will begin to improve off of fiscal two Q levels, particularly in heavy manufacturing verticals.
Christian Grande: Additionally, we expect budget constraints and the public sector to ease as we progress through the fiscal year.
Kristen Actis: Within our control, there are several factors driving expectations of improvement. First, the rate of signing for our solutions, especially in implants, where momentum is particularly strong. This should drive growth in the second half as our recent wind ramps up revenue. Second, we will benefit from our strategic investments as they begin rolling out in the second half. As Erik previously mentioned, our new web price strategy went into full effect at the end of February and is yielding favorable early results. Additionally, our enhanced product discovery platform will be fully launched in the second half.
Christian Grande: Within our control there are several factors driving expectations of improvement.
Christian Grande: First is the rate of tie ins for our solutions, especially in implants, where momentum is particularly strong.
This should drive growth in the second half as our recent wins ramp in revenue.
Christian Grande: Second our benefits from our strategic investments as they begin rolling out in the second half.
Christian Grande: As Eric previously mentioned, our new web price strategy went into full effect at the end of February and is yielding favorable early results.
Christian Grande: Additionally, our enhanced product discovery platform will be fully launched in the second half.
Kristen Actis: The effectiveness of both will be supported by our marketing campaign that kicked off this month. On the profitability side, our growth margin performance during the first half was better than expected and above our annual assumption. We expect second half gross margin to continue at or be slightly above 2Q levels. As it relates to operating expenses, we see benefits from our fixed costs and productivity being leveraged on higher volume. Driving Improved Profitability in the Second Half. Before I move on to expectations on other line items, the effectiveness of some of these second half drivers will increase throughout the remainder of the year. As a result, it will likely be the case that our second half doesn't follow historical patterns and will instead be more weighted towards the fourth quarter.
Christian Grande: The effectiveness of both will be supported by our marketing campaign that kicked off this month.
Christian Grande: On the profitability side, our gross margin performance during the first half was better than expected and above our annual assumption.
Christian Grande: We expect second half gross margin to continue at or be slightly above Q2 levels.
Christian Grande: As it relates to operating expenses, we see benefits from our fixed cost and productivity being leverage on higher volumes driving improved profitability in the second half.
Christian Grande: Before I move on to expectations on other line items the effectiveness of some of these second half drivers will increase throughout the remainder of the year.
Christian Grande: As a result, it will likely be the case that our second half doesn't follow historical patterns and will instead be more weighted on the fourth quarter.
Kristen Actis: As it relates to the relationship between sales growth and profitability, the way that we're thinking about fiscal 24 is that every point of revenue growth is worth approximately 20 basis points of adjusted operating margin. Regarding other assumptions in our updated outlook, I will highlight two minor adjustments. DNA expense will likely come in at the lower end of prior guidance of approximately $85 million.
Christian Grande: As it relates to the relationship between sales growth and profitability the way that we're thinking about fiscal 'twenty four.
Christian Grande: Every point of revenue growth is worth approximately 20 basis points of adjusted operating margin.
None: Regarding other assumptions in our updated outlook I will highlight two minor adjustments.
None: D&A expense will likely come in at the lower end of prior guidance of approximately $85 million.
Kristen Actis: And lastly, our tax rate is now expected to be between 24 and 24 and a half percent. With that, I will now turn the call over to Erik for closing remarks. Thank you, Kristen.
None: And lastly, our tax rate is now expected to be 24% to 24.5%.
None: With that I will now turn the call over to Eric for closing remarks.
Eric: Thank you Kristen.
Erik David Gershwind: Our performance thus far in fiscal 2024 is mixed, and both are not yet meeting our expectations. Despite this, I remain confident. I see evidence of solid execution across our mission-critical initiatives, providing optimism for the back half of fiscal 2024 and longer term. We remain squarely focused on our objectives.
Eric: Our performance thus far in fiscal 'twenty 'twenty four is mixed.
Eric: Growth not yet meeting our expectations.
Eric: Despite this I remain confident.
Eric: I see evidence of solid execution across our mission critical initiatives.
Eric: Providing optimism for the back half of fiscal 2024.
Eric: And longer term.
Eric: We remain squarely focused on our objectives.
Operator: 400 basis points or more of outgrowth above IP and operating margins in the mid-teens. I want to thank our entire team for their dedication to supporting our customers and our mission. And we'll now open up the line for questions. Thank you. To ask a question, you may press star and then one on your telephone keypad.
Eric: 400 basis points or more of outgrowth above IP.
Eric: Operating margins in the mid teens.
None: I want to thank our entire team for their dedication in supporting our customers and our mission.
None: Well now open up the line for questions.
Thank you.
None: I'll ask a question you May press Star then one on your telephone keypad.
Operator: If you are using a speakerphone, we ask that you please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Today's first question comes from David Manthey with Baird. Please go ahead. Thank you. Erik, Kristen, good morning.
None: If you're using a speaker phone we ask you. Please pickup your handset before pressing the keys.
None: Anytime a question has been addressed and you would like to withdraw your question. Please press Star then two.
None: Today's first question comes from David Manthey with Baird. Please go ahead.
David John Manthey: Thank you Eric Christian good morning.
David John Manthey: Good morning.
David John Manthey: The first question is on..., your outlook. What is the IP growth that you're assuming as you say the acceleration into the back half? What's the underlying assumption for second half IP growth? Yeah, Dave, so for the second half, I'll give you kind of an overall.
David John Manthey: First question is on.
David John Manthey: Your outlook what is the I P growth that you're assuming as you say the acceleration into the back half what what's the underlying assumption for second half IP growth.
David John Manthey: Yeah, Dave so for the second half and I'll give you kind of overall, we're not expecting a significant inflection off where we've seen IP some steady improvement, but the more meaningful thing to note is expected IP improvement, particularly in machinery and equipment and fabricated metals and.
Kristen Actis: We're not expecting a significant inflection off where we've seen IP, some steady improvement. But the more meaningful thing to note is expected IP improvement, particularly in machinery and equipment and fabricated metals. In 2Q, machinery and equipment was down about 5%, and the sub index of IP and fabricated metals was down a little bit over a point.
David John Manthey: Into Q machinery and equipment was down about 5%. That's the index of IP and fabricated metals was down a little bit over a point. So when we look at sort of our exposure to given end markets. Our top five end markets, which are roughly 50% of our revenue.
Kristen Actis: So, when we look at sort of our exposure to given and markets, our top 5 and markets, which are roughly 50% of our revenue, 4 of those 5, we're declining their IP index declined in our fiscal second quarter. And then, if you think about how the IP index is weighted, well, that's 50% of our revenue, but it only makes up about 10 to 20% of the IP index.
David John Manthey: Four of those five were declining are there I P index declined in our fiscal second quarter.
David John Manthey: And then if you think about how the IP index is weighted while that 50% of our revenue it only makes up about <unk>.
David John Manthey: 10% to 20% of the IP index. So you know when we think about composition of improvement in macro we are looking particularly within those top five and I guess just to add the one that is growing up our topside unsurprisingly at arrow.
Erik David Gershwind: So, you know, we think about composition of improvement and macro. We are looking particularly within those top 5, and I guess, just to add the 1 that is growing out of our top 5, unsurprisingly, is arrow. Dave, I'll add that Kristen summarized it beautifully. Just one other point to add, which is beyond the IP assumption. I'd say another factor going on is inventory burn and that we do expect that to be easing through the back half of the year. We've seen evidence of that, particularly in our national accounts area. And, you know, when we win accounts, for instance, a little bit of a slower ramp on implants that we expect to accelerate in the back half as inventory burning eases.
None: Hey, David Oh, Yeah, Kristen summarized it beautifully just one other point to add which is beyond the IP assumption.
None: Another factor going on is inventory burn and that we do expect that to be easing through the back half of the year, we've seen evidence of that particularly in our national accounts area and you know when we win accounts for instance, a little bit of a slower ramp on implants that we expect to accelerate in the back half as inventory burning uses.
None: Okay.
Kristen Actis: Can you also help us bridge OPEX from where you sit today in the second quarter into the second half? You mentioned benefits from leverage, but there are a lot of moving parts here. You talked about Columbus DC, voluntary separation, acquisitions, merit, other investments. I mean, from the level we're at right now, can you sort of bridge us into the back half with the puts and takes? Yeah, sure. So, obviously, you're going to put in a variable OPEX assumption, depending on how you're flowing revenue through the year of roughly 8 to 10%.
None: Can you also help US bridge Opex from where you sit today in the second quarter into the second half you mentioned benefits from leverage, but there's a lot of moving parts you talked about the Columbus D. C voluntary separation acquisitions Merit other investments I mean from the level, we're at right now.
None: You sort of bridge us into the back half with the puts and takes.
None: Yeah sure. So I'm, obviously youre going to put in a variable opex assumption, depending on how you're flowing revenue through the year.
None: Roughly let's call it 8% to 10%.
Kristen Actis: And then, if you're, I'm not going to give quarterly OPEX guidance, but I will give a little guidance on how we're thinking about the cadence throughout the year, because there are some differences there too. As you mentioned, there are a lot of things that are happening in OPEX. So, as we think about moving into the third quarter, we are going to be a little bit more weighted on investments in 3Q. Some of that is due to the timing of expenses associated with the Columbus shutdown, which are not technically qualified restructuring expenses.
None: And then if you're not.
None: I'm not going to give quarterly opex guidance, but I will give a little guidance on how we're thinking about the cadence throughout the year because there are some differences there too as you mentioned there are a lot of things that are happening in opex.
As we think about moving into the third quarter, we are going to be a little bit more weighted on investments and three Q.
None: Some of that is due to timing of expenses associated with the Columbus shut down which are not technically unqualified restructuring expenses and then there's also a heavier investment left in <unk> tied to some of the efforts around advertising on air.
Kristen Actis: And then there's also a heavier investment lift in 3Q tied to some of the efforts around advertising and solutions growth. In 4Q, if you move from Q3 to Q4, what I would tell you to think about is you'll obviously have a step up in variable expense that will offset a good chunk of that sequentially based on investments that don't repeat in the fourth quarter, and we have a bigger productivity target in 4Q. So if I step back, you know, broadly and think about expectations for OPEX on a year-over-year basis for the full year, to your point, there are a lot of moving pieces. The way that I would try to simplify the explanation, the two tallest candlesticks are merit, which is about half of the increase, and strategic investments, which is the other half.
None: And are the solutions growth.
None: Q4, if you if you move from Q3 to Q4, what I would what I would tell you to think about it you'll have obviously a step up in variable expense will offset a good chunk of that sequentially based on investments that don't repeat in the fourth quarter and we have a bigger productivity target in <unk>.
None: Q.
None: So if I step back broadly and think about expectations on opex on a year over year basis for the full year to your point there are a lot of moving pieces the way that I would try to simplify the explanation the two tallest candle sticks are merit.
None: Which is about half of the increase and strategic investments, which is the other half to your point a lot of moving pieces on DNA on acquisition, we're covering those with productivity you sort of simplify the story and the things that emerge are merit and strategic investments that make up the year over year lift.
Kristen Actis: To your point, a lot of moving pieces on DNA, on acquisitions, we're covering those with productivity. So to simplify the story, the things that emerge are merit and strategic investments that make up the year-over-year list. Thank you. Thank you. And our next question today comes from Tommy Moll with Stevens Inc. Please go ahead. Morning, and thank you for taking my questions. Hey, Tom. Morning, Tommy.
None: Okay.
None: Thank you.
None: Thank you.
Speaker Change: So that comes from Tommy Moll Stephens, Inc. Please go ahead.
None: Morning, and thank you for taking my questions Hey.
Speaker Change: Hey, Tim Martin County.
Thomas Allen Moll: I wanted to drill down a bit on the revenue progression, or more precisely, the average daily sales progression you expect for the second half versus the first half. And as you mentioned, it does imply a pretty significant step up on our math. It's approaching 10% for the second half versus the first half.
Speaker Change: Wanted to drill down a bit on the revenue progression or more precisely the average daily sales progression you expect for the second half versus the first half and as you mentioned it does imply a pretty significant step up on our mouth, it's approaching 10%.
Speaker Change: Second half versus first half. So if there's anything you can quantify for us for that bridge or even just again run through qualitatively the the drivers there and in particular on the macro.
Erik David Gershwind: So if there's anything you can quantify for us about that bridge, or even just, again, run, part of that bridge, what more can you tell us that gives you reason to be optimistic that you're going to see some improvement there, particularly given the March trend? Thank you. Yeah, Tommy.
Speaker Change: Part of that bridge.
Speaker Change: What more can you tell us that gives you reason to be optimistic that you're going to see some improvement there, particularly given the March trend. Thank you.
None: Yeah, Tommy So let me let me start and then Christian Christian will give you a more detailed breakout and a bridge because your your your numbers are exactly right.
Erik David Gershwind: So let me start and then Kristen will give you a more detailed breakout and a bridge, because your numbers are exactly right. You know, our confidence, obviously, Q2 came in softer than we expected. Primarily weighed down by macro, but clearly, you could see it in the core customer number. I mean, the numbers came down across the board, which to us was mostly macro, but obviously, we're not satisfied with what we're seeing in the core customer. I think the confidence is coming from, certainly, we'll touch on, and Kristen mentioned, the assumptions behind some moderate improvements in the macro, but also the execution of the growth initiatives that we have that are tracking to plan. So we do have confidence that they're going to work. Obviously, there's a timing element and how quickly things come online, but Kristen will take you through the math.
None: Our confidence obviously Q2 came in softer than we expected primarily weighed down by macro but clearly you could see it in the core customer number I mean, the numbers came down across the board, which to US was mostly macro but obviously, we're not satisfied with what we're seeing in the core customer I think the confidence is coming.
None: From certainly will touch on them and Christian mentioned, the assumptions behind some moderate improvements in the macro.
None: But also the execution of the growth initiatives that we have that are tracking to plan. So we do have confidence that they're going to work obviously, there's a timing element that how quickly things come online.
None: But Christian will take you through the math, but one other thing I'll say anytime you just a little color on March because obviously the March number thus far is not a great data point, but a couple of things. One is obviously, there's still just a reminder, that we have through next week. So we're giving you an estimate with still a pretty good ways to go in the month of the color that I gave on.
Erik David Gershwind: The one other thing I'll say, Tommy, just a little color on March, because obviously, the March number thus far is not a great data point, but there are a couple of things. One is obviously there's still just a reminder that we have through next week. So we're giving you an estimate with still a pretty good ways to go in the month. The color that I give on March is a couple of things.
Erik David Gershwind: One is it started out slower than it has been in the last part of the month. Obviously, again, we still have another week, but it started out slower and did pick up some momentum. Two was, interestingly, what we saw in March was actually a bit of an improvement in our core customer base performance, and where we saw the step down was in national accounts and the public sector.
March is a couple of things one is it started out slower than it's been in the last part of the month, obviously again, we still have another week, but it started out slower and did pick up some momentum would be one two was interestingly what we saw in March was actually a.
None: A bit of an improvement in our core customer base performance and where we saw the step down was national accounts and public sector. I would say those are the two areas, where our confidence is greatest given performance and given our ability to sort of clearly size market share and what's going on so we don't we're not concerned about either of those areas, but they did come.
Erik David Gershwind: I would say those are the two areas where our confidence is greatest, given performance and given our ability to sort of clearly size market share and what's going on. So we don't, we're not concerned about either of those areas, but they did come down in March, whereas the core got a little bit better. So that is a little, yeah, obviously, it's early, but a little sign of life there. I think I'm going to turn it over to Kristen, who can do the math for you on the walk. In the second half, I'll walk you through some of the big buckets and then elaborate a little bit on the growth side.
None: Down in March, whereas the core got a little bit better. So that is a little yeah. Obviously, it's early but a little signs of life. There I think I'm going to turn it over to Christian who can do the math for you on the walk.
Christian Grande: Sure Yeah. Thanks, Eric.
Christian Grande: Tommy the way that I would think about the 10% to your point on the second half I'll I'll walk you through some of the big buckets, and then elaborate a little bit on the growth side and some seasonality. We typically do you have a stronger second half I think last time, we talked we sized that at about four to six points of inflection based on what we're seeing in March we certainly think thats going to be on.
Kristen Actis: So, seasonality, we typically do have a stronger second half. I think last time we talked, we sized that at about four to six points of inflection. Based on what we're seeing in March, we certainly think that it's going to be on the lower end. So, apply about a four point assumption there. On the macro side, what we're thinking about there, we touched on a little bit on this with Dave's earlier question on the IP indices, but what we're looking at there is a one to two point improvement. On pricing, we do get a small benefit on price in the second half. Again, that's tied to the increase that we took in early 2Q. That's about a point. So, the balance becomes the growth initiatives, which would be three points. I'm going to put those in kind of three buckets for you.
Christian Grande: The lower end.
Christian Grande: Apply about a four four point assumption there on the macro side, what we're thinking about there I think we touched a little bit on this with Dave's earlier question on the IP and to seize them.
But what we're looking at there is a one to two point improvement.
Christian Grande: On pricing, we do get a small benefit on price in the second half again, that's tied to the increase that we took in early two Q. That's about a point so the balance becomes the growth initiatives, which would be three points and.
Christian Grande: I'm going to put those in kind of three buckets for you. The first is around solutions.
Kristen Actis: The first is around solutions, which is about half of the three points. So if you look at our signings that we've had in FY23 and FY24, and we look at the maturity that is yet to come on those accounts, that would have contributed roughly $20 million more in Q2 if they were fully ramped up. So when we think of the kind of progression around solutions, we're looking at benefits still to come on more recent signings, as well as things that were signed in the first half of 24 and not yet implemented, and those that we expect to sign in the second half of 24 that would have some in-year benefits. The next third of that I put on the demand generation efforts that Erik spoke about in the prepared remarks.
Christian Grande: <unk>, which is about half of that three point. So if you look at our signings that we've had in FY2023 in FY 'twenty four and we look at the maturity that is yet to come on those accounts that would've contributed roughly 20 million more in Q2, if they were fully ramped up so when we think it kind of progression around solutions.
Christian Grande: We're looking at.
Christian Grande: Benefits still to come on more recent signings as well as things that were signed in the first half of 'twenty four it not yet implemented and those that we expect to sign in the second half of 'twenty four that would have some in your benefit still.
Christian Grande: The next third of that I'd put on the demand generation efforts that Eric spoke about in the prepared remarks, and that's highlighting all the things that we're doing around web pricing around enhancements to the website and then the balance of that is based on things that we have line of sight to public sector.
Kristen Actis: And that's highlighting all the things that we're doing around web pricing, around the enhancements to the website. And then the balance of that is based on things that we have line of sight to within the public sector, both the kind of things that we do have, that we're able to track in the pipeline, and then expectations around some improvements in those state and local budgets. But what I want to be clear on, too, is it's not like we're sitting here waiting for the macro to improve or relying on seasonality. Internally, you know, when we target growth for our team, we don't say, "go get four points of seasonality." Everything that we're doing internally is based on a set of initiatives. So the ones I've given you are the ones that we have the highest degree of confidence in.
Christian Grande: Those kind of things that we do have a well that we're able to track in the pipeline and then expectations around some improvements on the state and local budgets.
None: But what I want to be clear on too is it's not like we're sitting here waiting for that macro to improve or like relying on seasonality internally you know when we target growth for our team. We don't say go get four points of seasonality everything that we're doing internally is based on a set of initiatives. So the ones that I've given you are the one.
None: So we have the highest degree of confidence on but there are a lot of other great things happening inside the company that have inflection targets like OEM fasteners. For example, Eric touched on progress. There you know I just don't want to leave you with the idea that we're sitting here waiting on the economy to improve and not doing anything else from a countermeasure perspective on growth.
Kristen Actis: But there are a lot of other great things happening inside the company that have inflection targets like OEM fasteners, for example. Erik touched on progress there. You know, I just don't want to leave you with the idea that we're sitting here waiting for the economy to improve and not doing anything else from a countermeasure perspective on growth. Thank you for the comprehensive answer there.
None: Thank you for the comprehensive answer there.
Thomas Allen Moll: As a follow-up, I wanted to ask about the web pricing realignment, which seems like you're discussing as a largely successful initiative. Completed in February, the KPIs you offered all sound pretty positive. But my question is just to drill a little bit deeper, because there's often more than meets the eye in these kinds of initiatives, and execution is not easy. So has there been anything that surprised you?
None: As a follow up I wanted to ask about the web pricing realignment, which.
None: It seems like you're you're discussing as a largely successful initiative completed in February the Kpis you offered all sound pretty positive.
None: But my my question is just to drill a little bit deeper because there's often more than meets the eye and these kinds of initiatives and execution is not easy. So has there been anything that surprised you or is there some risk that the the trends we're seeing for the core customer are reflecting.
Erik David Gershwind: Is there some risk that the trends we're seeing for the core customer are reflecting some of the challenges with this initiative, or is that not the case in your mind? So, Tommy, let me take those in reverse order.
None: Some of the challenges with this initiative.
None: Or is that not the case in your mind.
None: So Tommy let me take those in reverse order so the challenges in the core customer.
Erik David Gershwind: So, the challenges with the core customer, I absolutely would not link to this, if anything, because realize that the bulk of the SKUs and the awareness campaign hit at the very end of Q2. If anything, early signs, given that March got a tick better so far with core customers, we see it as a net positive. Look, you're right to drill in here. It's easy for us sitting on a call to let this roll off the tongue, and it sounds like it's the flick of a switch. This is a heavy effort inside the company. It was led by Martina and her team.
Tommy: We would not linked to this if anything because we realize that the bulk of the skus and the awareness campaign hit at the very end of Q2, if anything early signs given that March got a tick better so far with with core customers.
Tommy: We see it as a net positive.
Tommy: Look you're right to drill in here, it's easy for us sitting on the call to let those roll off the tongue and it sounds like it's the look of a switch it is a heavy effort inside the company. It was led by Martina and her team I mean, there are twice a day stand ups on this this has gotten a heck of a lot of attention I think what we're saying is I.
Erik David Gershwind: I mean, there are twice-a-day stand-ups on this. This has gotten a heck of a lot of attention. I think what we're saying is I hesitate to declare anything a success because it is such early days. We are clearly encouraged by what we're seeing, and I think the execution has been really good. Have there been any surprises? Sure, there's always going to be surprises. I would say nothing, though, that rises to the level of kind of a big-picture surprise, but in this kind of effort, the devil is in the details, and what I mean by details is down to, you know, we're managing this project at a SKU and a customer level to make sure that there'll be constant fine-tuning that gets done through the balance of the fiscal year. So again, this is not a light switch that goes on and it's done.
Tommy: To declare anything a success because it is such early days, we are clearly encouraged by what we're seeing and I think the execution has been really good have there been any surprises.
None: Sure, there's always going to be surprised I would say nothing go that rises to the level of kind of a big picture surprise, but in this kind of effort. The devil is in the details and what I mean by details is down to you know we're managing this this project at a SKU at a customer level.
None: To make constantly there'll be fine tuning that gets done through the balance of the fiscal year. So again. This is not a light switch that goes on and it's done. This is an ongoing effort of refinement.
Erik David Gershwind: This is an ongoing effort of refinement. But what you're hearing from us is early encouragement when we look across, you know, we have a scorecard that, you know, goes into a lot of detail but gives us a very clear dashboard of how we're doing in terms of growth prospects, profitability measures, leading indicators like I talked about in terms of early customer behavior and the voice of the customer and what they're telling us. What you're hearing is encouragement that the early signs are good, but by no means is it done. Thank you, Erik. I'll turn it back.
None: But what youre hearing from US is early encouragement when we look across we have a scorecard.
That goes into a lot of detail, but gives us a very clear dashboard of how we're doing in terms of growth prospects profitability measures, leading indicators like I talked about in terms of early customer behavior and voice of customer and what they're telling us what you're hearing us encouragement that early signs are good but by no means saying it's done.
None: Yeah.
None: Thank you Eric I'll turn it back.
Stephen Edward Volkmann: Thank you. And our next question today comes from Stephen Volkmann with Jeffries. Please go ahead.
None: Thank you and our next question today comes from Stephen Volkmann with Jefferies. Please go ahead.
Stephen Edward Volkmann: Great. Good morning, guys. Thanks for taking my question. Kristen, you gave a pretty long laundry list of sort of what the inflection might be in the second half. But I was curious because you didn't mention the D-stock that Erik kind of called out. So is that part of the – is that a fifth thing, or is that part of the four things?
Stephen Edward Volkmann: Great. Good morning, guys. Thanks for taking my question Kristen you gave them pretty well pretty long laundry list of sort of what are the inflection might be in the second half, but I was curious because you didn't mention the destock that Eric kind of called out. So is that part of the is that a fifth thing or is that part of the <unk>.
Stephen Edward Volkmann: Four things.
Kristen Actis: No, I think we're putting that in with macro, Steve. Okay, so macro up one to two points, even with the end of a de-stock. Maybe that's... Yeah, and you know, I guess the other thing I'd add is like, we have seen the last year or two, I don't know if I'd call it just de-stocking, but sort of an end-of-calendar-year sales pattern that seems like it's sort of becoming the new normal. So I suppose if that's in your first half, the second half seasonality assumption, like, It's probably just not be stocking necessarily in prior years as much as just like you're in the process of belt tightening. Got it.
Kristen: No I'd say, we're putting that in with macro Steve.
Okay. So macro up one to two points, even with the end of a destock, maybe that's yeah and you know that I guess the other thing I'd add is like we have seen in the last year or two.
Kristen: If I'd call it just destocking, but sort of a and end of calendar year sales pattern that it seems like it's sort of becoming the new normal so I suppose if that's.
Kristen: And your.
Kristen: <unk> first half the second half seasonality of Sunshine like when we calculate that looking back at prior years, you probably are inherently picking up some of that and the seasonality number two it's probably just not destocking necessarily in prior years as much as just like your own belt tightening.
None: Got it okay, great and then slightly differently, just any evolution in how you're thinking about price cost for the rest of the year.
Kristen Actis: Okay, great. And then, slightly differently, just any evolution in how you're thinking about price and cost for the rest of the year? Yeah, so broadly, we still expect price costs to be more favorable in the second half of the year, and we feel really good about pricing assumptions in the second half. And then if you kind of run out gross margin for the full year, which we now expect to be at Q2 levels or slightly above, really, with the countermeasures that we've had in place, we've been largely successful at offsetting the transactional price cost headwind. So, I am certainly happy that the worst of that headwind is behind us.
None: Yeah. So broadly we still expect price cost to be more favorable in the second half of the year.
None: Really good about pricing assumptions in the second half and then if you kind of run out gross margin for the full year, which we now expect to be at Q2 levels or slightly above the really with the countermeasures that we've had in place.
None: We've been largely successful in offsetting the transactional price cost headwind. So certainly happy that the worst of that headwind is behind us, but then broadly just really pleased with how the countermeasures had been performing.
Kristen Actis: But then, broadly, just really pleased with how the countermeasures have been performing. Great, that's all I have. Thank you. Thank you. And our next question comes from Chris Dankert with Loop Capital. Please go ahead. Hey, good morning.
None: Great. That's all I got thank you.
None: Thanks, Steve.
Thank you My question comes from Chris Dankert with loop capital. Please go ahead.
Christopher M. Dankert: Hey, good morning, Thanks for taking the question.
Christopher M. Dankert: Thanks for taking the question. I guess I'm hoping to dig in a little bit more on product discovery and that digital revamp here. I mean, you highlighted what the overall benefit is, I guess, but just what gives you confidence in that expected benefit into the back half and 25? Maybe what's been driving some of the delays there? If you just give us a little bit more fleshed-out color on that digital rollout, that'd be great. Yeah, you got it, Chris.
Christopher M. Dankert: Great.
Christopher M. Dankert: I guess, hoping to dig in a little bit more on the product discovery digital revamp here I mean, any you highlight what the overall benefit as I guess, but just what gives you confidence in that expected benefit into the back half and 25, maybe what's been driving some of the delays. There can you just give us a little bit more fleshed out Colorado on that digital rollout that would be great.
None: Yeah, you got it Chris So where there's basically two fronts that were moving on in terms of our digital experience our website in particular and those two fronts. Our the platform, meaning the transactional engine that customers go through and the search or product discovery function and we have improvements lined up on both.
Erik David Gershwind: So there are basically two fronts that we're moving on in terms of our digital experience, our website in particular. And those two fronts are the platform, meaning the transactional engine that customers go through, and the search or product discovery function. And we have improvements lined up on both. They're really aimed and anchored in two overarching principles.
None: They're really aimed and anchored in two overarching principles. One is continuing to make the website to customer experience more frictionless more seamless and just a great it better and better experience as time goes on and the second thing is to make it more personalized for the customer those are the overarching principles and those are the two areas in which we're moving on.
Erik David Gershwind: One is continuing to make the website, the customer experience, more frictionless, more seamless, and just a great, better and better experience as time goes on. And the second thing is to make it more personalized for the customer. Those are the overarching principles, and those are the two areas in which we're moving. On the platform front, we actually got a bunch of stuff over the finish line this month, through Q2 and into this month. What we're tracking there. Chris is metrics such as, we're looking at basically conversion rate. So we're looking at customer satisfaction numbers, and then we're looking at conversion rate, which is for every thousand customers, 10,000 customers that come to the website, how many converts would order, which is a good barometer for us that ultimately leads to revenue improvement. On search, we are slightly delayed.
None: The platform front, we actually.
None: Got a bunch of stuff over the finish line this month.
None: Through Q2 and into this month, what we're tracking there Chris.
None: Chris is metrics such as we're looking at basically conversion rate. So we're looking at customer sat numbers and then we're looking at conversion rate, which is for every thousand customers 10000 customers that come to the website, how many convert to a quarter, which is a good barometer for us that ultimately leads to revenue improvements.
None: On search we are slightly delayed we had expected all of the search changes or the bulk of the search changes to be in by Q2. Those are pushed out and will be done basically over the next quarter and into Q4, it's going to be a series of improvements I would say there.
Erik David Gershwind: We had expected all of the search changes or the bulk of the search changes to be in by Q2, but those are pushed out and will be done basically over the next quarter and into Q4. There are really two principles, Chris.
None: Really two principles, Chris first was we focused we saw some opportunities on the platform to make the experience better wanted to nail those first and the second kind of overarching principle that we have what timelines are important quality is more important we've always felt that way and what we found with search is the architecture is good we're confident in it.
Erik David Gershwind: First, we focused; we saw some opportunities on the platform to make the experience better, and we wanted to nail those first. And the second kind of overarching principle that we have, while timelines are important, quality is more important. We've always felt that way.
Erik David Gershwind: And what we found with search is that the architecture is good, we're confident in the new platform, but there were refinements that we could do to make it better. And so we went with the mantra of quality over timeline. And so that will be rolling out in the back half. What we're going to be looking for internally there is we're going to be looking at the conversion metrics, because we can get a close line of sight, Chris, from conversion metrics to revenue performance. That's really helpful. Thanks so much for the color there.
None: A new platform, but they will refinements that we could do to make it better and so we went with the mantra of quality over time line and so that will be rolling out in the back half what we're gonna be looking for internally. There is we're going to be looking at the conversion metrics because we can get close line of sight, Chris from conversion metrics into revenue performance.
None: Yeah.
That's really helpful. Thanks, so much for the color there.
Christopher M. Dankert: And then, I guess following the DC closure in Columbus, just what level of sales is the business currently set up for? Obviously, there's still some efficiency programs and adjustments going on there, but it makes general sense for like, what level of sales can we serve today following that closure? Yeah, Chris, so what I would say is this, this closure, obviously, a decision like this takes a lot of time with a very long time horizon in mind. The business with the four primary distribution centers that will remain post-Columbus, plus the rest of the network, can support substantial growth, and really, we had already had, from a geographic coverage standpoint, a pretty good situation. Columbus was around throughput, and I mentioned the two So with those two factors, i.e.
None: I guess following the D C closure in Columbus, just what level of sales of the business currently set up for after there's still some more efficiency programs and adjustments going on there, but just a general sense for like what level of sales can we serve today following the closure.
None: Yes, Chris So what what I would say is this disclosure obviously a decision like this takes a lot of time with a very long time horizon in mind the business with the four primary distribution centers that will remain post close.
Chris: Columbus, plus the rest of the network can support substantial growth and really that we had already had from a geographic coverage standpoint, a pretty good situation Columbus was around throughput and I mentioned the two factors that had changed so with those two factors I E. One being the mix of solutions business and tubing automate.
Erik David Gershwind: One being the mix of solutions business and two being automation, which there's plenty of still opportunity to go on the automation front, that there is a lot of room for throughput capacity. The other point I would say is that, you know, we are this network. I mentioned, in addition to Columbus, we've launched a network study. So that network study really has two goals in mind. One is going to be around productivity.
Chris: <unk>, which there's plenty of still opportunity to go on there on the automation front that there is a lot of room for throughput the throughput capacity of the other point I would say is that we are these networks I mentioned in addition to Columbus, We've launched a network study. So that network study really has two goals in mind one is <unk>.
Chris: Going to be around productivity. So you can expect us to come back with productivity targets and go gets that will be part of our self help story here towards.
Erik David Gershwind: So you can expect us to come back with productivity targets and go-gets that will be part of our self-help story here towards, you know, mid-teens operating margins. The other part of that study, though, is how do we provide better customers? So we expect productivity opportunities. We also expect opportunities to provide even better service and allow the network to support us way into the future. So the punchline is we feel good about where we are now to support continued growth. I think we're gonna get more opportunities coming out of the network study. understood. Thanks so much there, Erik.
Chris: Mid teens operating margins. The other part of that study, though is how do we provide better customer service. So we expect the productivity opt.
Chris: Opportunity. We also expect opportunities to provide even better service and allows the network to support us way into the future. So punch line is we feel good about where we are now to support continued growth and I think we're going to get more opportunities coming out of the network study.
None: Understood. Thanks, so much the earth.
Erik David Gershwind: Thank you. And our final question today comes from Ken Newman with KeyBank Capital Markets. Please go ahead.
None: Thank you and our final question today comes from Ken Newman with Keybanc capital markets. Please go ahead.
Ken Newman: Hey, good morning, guys. Thanks for squeezing me in. Thank you. Boring.
Ken Newman: Hey, good morning, guys. Thanks for squeezing me in.
Ken Newman: Okay.
Ken Newman: Good morning.
Ken Newman:
Ken Newman: You know, I just wanted to take the Batcaps bridge maybe a little bit differently. You know, if you look in the operation... You do have that historical monthly seasonality table in there. And I think if you just follow it from where you've got the preliminary March numbers, it does take you below the low end if you follow your guide. You know, just outside of the stuff that you kind of highlighted from the first half to the second half, I'm just curious if there's anything else in there that we should kind of be aware of, whether it's just the timing of holidays. I think, you know, Good Friday is going to be here in March versus April. Typically, I don't know if there's a way you can help us quantify that impact or if there's anything else there that we should be aware of from a monthly seasonality. Yeah, Ken, so maybe I'll start with the second part of your question first on Good Friday. Because of our lovely fiscal calendar, Good Friday was actually in the fiscal month of March both last year and this year.
Ken Newman: Wanted to take the back half bridge, maybe a little bit differently. If you look in the operational statistics that you do have that historical monthly seasonality table in there and I think if you just follow it from where you've got the preliminary March numbers. It does take you below the low end of your full year.
Ken Newman: Right.
Ken Newman: You know just outside the stuff that you kind of highlighted from first half second half I'm. Just curious if there's anything else in there that we should kind of be aware of whether it's just timing of holidays.
Ken Newman: I think you know good Friday is gonna be here in March versus April typically I don't know if there's a way you can help us quantify that impact or if there's anything else. There that we should be aware of from a monthly seasonality perspective.
None: Yeah, Ken So maybe I'll start with the second part of your question first on good Friday because of our.
Ken Newman: Central calendar good Friday was actually in the fiscal month of March both last year and this year. So yeah. There's always all the noise depending on whether it's the last day of the month or not but I'd say largely a non event with March.
Kristen Actis: So, you know, there's always a little bit of noise depending on whether that's the last day of the month or not, but I'd say it's largely a non-event with March. To the first part of your question, yeah, if you run out of seasonality, kind of normal average seasonality for the year, to your point, you would end up at a number that's below the bottom of the guidance. And, you know, there are really two main buckets of things that we are looking at improving upon that would drive that inflection differently sequentially first half to second half than the normal seasonality month over month would imply if you run that out. First is the macro recovery we talked about, kind of lumping, I guess the de-stocking thing that Steve mentioned into that. And then there are the growth initiatives. And again, it's tough to... It's tough to peg exactly when and which month they come online.
None: Tier two to the first part of your question. Yeah. If you if you run out like the seasonality kind of normal average seasonality for the year to your point you would end up at a number that's below the bottom of the guidance and you know theres.
None: There's really two main buckets of things that we are looking at improving upon that would drive that inflection differently sequentially first half to second half than the normal seasonality month over month would imply if you run that out first is the macro recovery, we talked about what kind of lumpy.
None: <unk>.
None: A long time I guess, the Destocking thing that Steve mentioned into that and then two is the growth initiatives and again, it's tough to it.
It's tough to peg exactly when which month they come online. If you think about all the items, we outlined solutions. Good line of sight to public sector, a pretty good line of sight to demand Gen. We obviously have some assumptions on when that times, but.
Kristen Actis: If you think about all the items we outlined, solutions, good line of sight to the public sector, and pretty good line of sight to demand gen, we obviously have some assumptions on when that happens. But if you think about the core customer energy or the core, reenergizing the core customer initiative and what you get on volume lift from the list price repositioning and then the improvements from the web, those are really the two toughest to model from an inflection perspective because we don't have anything in our historical baseline that tells us how to think about those. So when you, you know, when you think about modeling the kind of range of assumptions that you're putting on different initiatives. We have to make a pretty wide set of assumptions about those two. So it does make the second half modeling tricky.
None: But if you think about the core customer energy or the courthouse Reenergizing the core customer initiative and what you get on volume lift from that list price repositioning and then the improvements from where those are really the two toughest to model from an inflection perspective, because we don't have anything in our historical baseline that tells us how.
None: To think about those so when you you know when you think about modeling kind of a range of assumptions that youre putting on.
None: Different initiatives, we have to make a pretty wide set of assumptions about those students. So it does make the second half modeling tricky and it's also why we're.
Kristen Actis: And it's also why we're over-focusing on those three parts of the growth initiatives that I outlined earlier. Again, the solutions that demand gen and the public sector line of sight, but yeah, you absolutely have to have macro improvement and the inflection from the growth initiatives to drive a different expectation. If you were to just, I know, I know what you're saying, run out the month over month projection. Yep. Okay. That's, that's very helpful. For my follow-up, you know, obviously others have touched on it earlier in the call, but obviously you've got a lot of things going on in the OPEC line. I am curious if there's any expected impact from any supply chain friction, you know, whether that's from Skipping Lane dynamics from stuff coming over the water or maybe even this Baltimore bridge, which I'm guessing, still, you know, maybe a non-e Yeah, Ken, so I'll take it. You know, I would, obviously, the Baltimore situation is so new and so tragic, too early there to say, but you know, obviously, we're monitoring closely like events in the Middle East and some of the supply chain disruptions. I would say, so far, the impact is projected to be modest.
None: Over rotating on those three parts of the growth initiatives that I outlined earlier again the solution the demand Gen and the public sector a line of sight, but yeah, you absolutely have to have a macro improvement and our inflection from the growth initiatives.
None: To drive a different expectation if you were to just I know I know, what you're saying run out the month over month projection.
None: Yep Okay.
None: That's helpful.
None: For my follow up.
None: Yeah.
None: Others have touched on it earlier in the call, but obviously, you've got a lot of things going on in the Opex line.
None: I am curious if there's any expected impact from any supply chain friction you know whether that's from <unk>.
None: Shipping lane dynamics from stuff coming over the water or maybe even this Baltimore bridge, which I'm guessing is still.
None: Bill maybe a non event for you guys as of now but how.
None: How do you think about transport logistic costs kind of flowing through the income statement.
None: To the back half.
Bill: Yeah, Ken So I'll take it.
Bill: Obviously, the Baltimore situation is so new and so tragic.
Ken Newman: Too early there to say, but you know obviously, we're monitoring closely like events in the middle East and some of the supply chain disruptions you know I I would say so far impact is projected to be modest.
Erik David Gershwind: You know, obviously that could change, but to date, the impact has been modest, and, you know, sort of counterbalancing that, we have a lot of focus on freight. You heard us talk about some of the performance improvements there, the network study. We see a lot of opportunity for freight. So, it's possible that the headwinds could grow.
Obviously that could change but to date the impact modest then you know sort of counter balancing that we have a lot of focus on freight you heard us talk about some of the performance improvements there. The network study, we see a lot of opportunity on freight so it's possible that the headwinds could grow at this point, it's sort of modest in size, but we got a lot.
Erik David Gershwind: At this point, it's sort of modest in size, but we have a lot to offset it. Double. Thanks. Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Ryan Mills for closing remarks. Thank you, everybody, for joining us today. Our next earnings call will be on July 2nd, and I look forward to seeing you at the upcoming conferences this quarter. Goodbye. Thank you, sir. 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. BF-WATCH TV 2021
Ken Newman: Offset it.
None: Got it.
None: Double play.
None: Thank you.
None: A question and answer session.
None: Turn the conference back over to Ryan Mills for closing remarks.
Ryan Thomas Mills: Thank you everybody for joining us today, our next earnings call will be on July 2nd and I look forward to seeing you at the upcoming conferences this quarter.
Ryan Thomas Mills: Goodbye.
Ryan Thomas Mills: Sure.
None: Conference call and thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
None: [music].