Q3 2024 MSC Industrial Direct Co Inc Earnings Call

Good morning and welcome to the MSC Third Quarter Fiscal 2024 Earnings Call.

Operator: 24 Earnings Call. All participants will be in listen-only mode.

Operator: 24 Earnings Call. All participants will be in listen-only mode.

Operator: Should you need assistance, please signal a conference specialist by pressing star, then zero on your telephone keypad.

Operator: Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad.

Speaker Change: All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad.

Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two.

Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note, this event is being recorded.

Operator: Please note, this event is being recorded.

Operator: To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ryan Mills, Head of Investor Relations. Please go ahead.

Ryan Mills: I would now like to turn the conference over to Ryan Mills, Head of Investor Relations. Please go ahead.

Speaker Change: I would now like to turn the conference over to Ryan Mills, Head of Investor Relations. Please go ahead.

Ryan Mills: Thank you and good morning, everyone. Welcome to our third quarter fiscal 2024 earnings call. Erik Gershwind, our chief executive officer, and Kristen Actis Grande, our chief financial officer, are both on a call with me today. During today's call, we will refer to various financial data in the earnings presentation and operational statistics document that accompany our comments, both of which can be found on our Investor Relations website.

Ryan Thomas Mills: Thank you and good morning, everyone. Welcome to our third 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 the operational statistics document that accompany our comments, both of which can be found on our investor relations website.

Ryan Thomas Mills: Thank you and good morning, everyone. Welcome to our third quarter fiscal 2024 earnings call.

Ryan Thomas Mills: Erik Gershwind, our Chief Executive Officer, and Kristen Actis-Grande, our Chief Financial Officer, are both on a call with me today.

Ryan Thomas Mills: During today's call, we will refer to various financial data in the earnings presentation and operational statistics document that accompany our comments, both of which can be found on our investor relations website. Let me reference our safe harbor statement found on slide two of the earnings presentation.

Ryan Mills: Let me reference our safe harbor statement found on slide two of the earnings presentation. Our comments on this call, as well as the supplemental information we are providing on the website, contain forward-looking statements within the meaning of US security laws. 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 non-GAAP measures. Please refer to the GAP versus non-GAP reconciliations in our presentation or on our website, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAP measures.

Ryan Thomas Mills: Let me reference our Safe Harbor Statement found on slide 2 of the Earnings Presentation. Our comments on this call, as well as the supplemental information we are providing on the website, contain forward-looking statements within the meaning of 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 forward-looking statements. Information about these risks is noted in our earnings press release and our other SEC filings.

Ryan Thomas Mills: Our comments on this call, as well as the supplemental information we are providing on the website, contain forward-looking statements within the meaning of 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.

Ryan Thomas Mills: Information about these risks is noted in our earnings press release and our other SEC filings.

Ryan Thomas Mills: In addition, during this call, we may refer to certain adjusted financial results, which are non-GAAP measures. Please refer to the GAAP versus non-GAAP reconciliations in our presentation or on our website, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. I'll now turn the call over to Erik. Thank you, Ryan. Good morning, everyone, and thank you for joining us today.

Ryan Thomas Mills: In addition, during this call, we may refer to certain adjusted financial results, which are non-GAAP measures.

Speaker Change: Please refer to the GAAP versus non-GAAP reconciliations in our presentation or on our website, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. I'll now turn the call over to Erik.

Ryan Mills: Now turn the call over to Erik. Thank you, Ryan.

Erik Gershwind: Good morning, everyone. And thank you for joining us today. During today's call, I'll provide an update on the progress of the corrective actions that we outlined on our preliminary third-quarter call. I'll then pivot to current trends in the macro environment before passing it over to Kristen, who will cover our fiscal third-quarter results and our full-year outlook in greater detail. Over the past couple of weeks, our team has been heads-down and focused on getting MSC back to the high standards demanded by our mission statement and regaining the momentum from our first mission-critical chapter. Though there is still much work to be done, I am encouraged by how our team is rallying.

Erik: Thank you, Ryan. Good morning, everyone, and thank you for joining us today.

Erik David Gershwind: During today's call, I'll provide an update on the progress of the corrective actions that we outlined on our preliminary third quarter call. I'll then pivot to current trends in the macro environment, before passing it over to Kristen, who will cover our fiscal third quarter results and our full year outlook in greater detail over the past couple of weeks. Our team has been heads down, and focused on getting MSC back to the high standards demanded by our mission statement and regaining the momentum from our first Mission Critical chapter.

Erik: During today's call, I'll provide an update on progress of the corrective actions that we outlined on our preliminary third quarter call.

Erik: I'll then pivot to current trends in the macro environment.

Erik: Before passing it over to Kristen, we'll cover our fiscal third quarter results and our full year outlook in greater detail.

Erik: Over the past couple of weeks,

Erik: Our team has been heads down and focused on getting MSC back to the high standards demanded by our mission statement and regaining the momentum from our first mission-critical chapter.

Erik David Gershwind: Though there is still much work to be done, I am encouraged by how our team is rallying. We remain committed to the strategy that we outlined at the start of the fiscal year, which is our second mission critical chapter.

Erik: So there is still much work to be done.

Erik Gershwind: We remain committed to the strategy that we outlined at the start of the fiscal year, which is our second mission critical chapter. And, as a reminder, this strategy has three components. First, to maintain momentum on our high touch and technical solutions. Second, to re-energize our core customer growth. And third, to drive productivity and reduce cost to serve, enabling expansion to mid-teens adjusted operating margins over time. During our preliminary results release, we describe that our biggest disappointment impacting this fiscal year's result. has been re-energizing our core customer due in large part to delays in our website improvements.

Erik: I am encouraged by how our team is rallying.

Erik: We remain committed to the strategy that we outlined at the start of the fiscal year, which is our second mission-critical chapter.

Erik David Gershwind: And as a reminder, this strategy has three components: to maintain momentum on our high-touch and technical solutions; second, to reenergize our core customer growth; and third, to drive productivity and reduce cost to serve, enabling expansion to mid-teens adjusted operating margins over time. During our preliminary results release, we describe that our biggest disappointment impacting this fiscal year's results has been re-energizing our core customers, due in large part to delays in our website improvement.

Erik: And as a reminder, this strategy has three components.

Erik: First...

Erik: to maintain momentum on our high-touch and technical solutions.

Erik: Second, to re-energize our core customer growth.

Erik: and third, to drive productivity and reduce cost to serve, enabling expansion to mid-teens adjusted operating margins over time.

Erik: During our preliminary results release,

Erik: We describe that our biggest disappointment impacting this fiscal year's results

Erik: has been re-energizing our core customer.

Erik Gershwind: We also experienced some unexpected gross margin pressure in our fiscal third quarter following the full rollout of Web Price Realignment.

Erik David Gershwind: We also experienced some unexpected gross margin pressure in our fiscal third quarter, following the full rollout of web price realignment. Let me jump right into the steps taken and the progress made since our preliminary results call, starting with web price realignment. The corrective actions that we took during May are working.

Erik: due in large part to delays in our website improvements.

Erik: We also experienced some unexpected gross margin pressure in our fiscal third quarter following the full rollout of web price realignment.

Erik Gershwind: Let me jump right into the steps taken and the progress made since our preliminary results call. Starting with Web Price Realignment, the corrective actions that we took during May are working. This has resulted in gross margin improvement through the fiscal month of June compared to the 3Q lows we experienced in April and early May. With these issues resolved, our Web Price Realignment initiative is performing as planned. However, we remain in a heightened state of awareness and will continue monitoring performance closely.

Erik: Let me jump right into the steps taken and the progress made since our preliminary results call.

Erik: Starting with web price realignment.

Erik David Gershwind: This has resulted in gross margin improvement through the fiscal month of June, compared to the three Q lows we experienced in April and early May, with these issues resolved. Additionally, our Web Price Realignment Initiative is performing as planned. However, we remain in a heightened state of awareness, and we'll continue monitoring performance closely. With respect to MSCDirect.com, we are also making progress. The recent executive changes have given me a chance to get even closer to our team and to our development efforts.

Erik: The corrective actions that we took during May are working.

Erik: This has resulted in gross margin improvement through the fiscal month of June compared to the three Q lows we experienced in April and early May.

Erik: With these issues resolved...

Erik: Our Web Price Realignment Initiative is performing as planned.

Erik: However, we remain in a heightened state of awareness and will continue monitoring performance closely.

Erik Gershwind: With respect to MSC Direct.com, we are also making progress. The recent executive changes have given me a chance to get even closer to our team and to our development efforts. I'm passionate about this part of the business as building one of the initial iterations of MSC Direct.com was one of the more exciting times in my career. We have a capable, experienced, and tenured team working on this initiative, many of whom I've worked with for well over a decade. I'm confident that we're taking the right steps, and we'll bring MSC's e-commerce efforts to new heights. We have taken a few recent steps to improve execution under the newly formed team.

Erik: With respect to MSCDirect.com, we are also making progress.

Erik: The recent executive changes have given me a chance to get even closer to our team and to our development efforts.

Erik David Gershwind: I'm passionate about this part of the business, as building one of the initial iterations of MSCDirect.com was one of the more exciting times in my career. We have a capable, experienced, and tenured team working on this initiative, many of whom I've worked with for well over a decade. I'm confident that we're taking the right steps and will bring MSC's e-commerce efforts to new heights. And we have taken a few recent steps to improve execution under the newly formed team. First, as I mentioned a couple of weeks ago,

Erik: I'm passionate about this part of the business.

Erik: as building one of the initial iterations of MSCDirect.com.

Erik: was one of the more exciting times in my career.

Erik: We have a capable, experienced, and tenured team working on this initiative.

Erik: many of whom I've worked with for well over a decade.

Erik: I'm confident that we're taking the right steps.

Erik: and will bring MSC's e-commerce efforts to new heights.

Erik: And we have taken a few recent steps to improve execution under the newly formed team.

Erik Gershwind: First, as I mentioned a couple of weeks ago, we've added third-party expertise. This was done to validate our architecture and to provide the arms and legs to move production along more swiftly. We've also implemented twice per week executive reviews, and those include make. These reviews are bringing more transparency, collaboration, and energy to the program. We expect to deliver enhancements to search and product discovery beginning this month. These include improvements to search accuracy and relevance, and the introduction of a new presentation of results, which will begin with a narrow slice of our product offering and roll out on a broader scale in the upcoming quarters.

Erik David Gershwind: We've added third-party expertise. This was done to validate our architecture and to provide the arms and legs to move production along more swiftly. We've also implemented twice-per-week executive reviews, and those include me.

Erik: First, as I mentioned a couple of weeks ago,

Erik: We've added third-party expertise.

Erik: This was done to validate our architecture.

Erik: and to provide the arms and legs to move production along more swiftly.

Erik: We've also implemented twice-per-week executive reviews, and those include me.

Erik David Gershwind: These reviews are bringing more transparency, collaboration, and energy to the program. We expect to deliver enhancements to search and product discovery beginning this month. These include improvements to search accuracy and relevance and the introduction of a new presentation of results, which will begin with a narrow slice of our product offering and roll out on a broader scale in the upcoming quarter. We are targeting to have the site ready to support the launch of our marketing campaign during the second quarter of fiscal 2025.

Erik: These reviews are bringing more transparency, collaboration, and energy to the program.

Erik: We expect to deliver enhancements to search and product discovery beginning this month.

Erik: These include improvements to search accuracy and relevance.

Erik: and the introduction of a new presentation of results.

Erik: which will begin with a narrow slice of our product offering.

Erik Gershwind: We are targeting to have the site ready to support the launch of our marketing campaign during the second quarter of fiscal 2025. At that point, we would expect to realize the benefits of the three initiatives aimed at reenergizing our core customer, which works synergistically together, and those are the new web pricing, the new web platform, and our marketing program to attract new customers and achieve higher attention and growth of existing customers.

Erik: and roll out on a broader scale in the upcoming quarters.

Erik: We are targeting to have the site ready to support the launch of our marketing campaign.

Erik David Gershwind: At that point, we would expect to realize the benefits of the three initiatives aimed at re-energizing our core customers, which work synergistically together. Those are the new web pricing, the new web platform, and our marketing program to attract new customers and achieve higher retention and growth of existing customers. Given the hiccups we've experienced with the web enhancements and the web price realignment, we're taking a fresh look across our other technology initiatives, including the upgrade and timing of our digital core and Backoffice Values. We'll provide an update of our findings next quarter, following the completion of this review. On the operations side,

Erik: during the second quarter of fiscal 2025.

Erik: At that point, we would expect to realize the benefits of the three initiatives aimed at re-energizing our core customer.

Erik: which work synergistically together.

Erik: And those are the new web pricing.

Erik: the new web platform.

Erik: and our marketing program to attract new customers.

Erik: and achieve higher retention and growth of existing customers.

Erik Gershwind: Given the hiccups we've experienced with the web enhancements and the web price re-alignment, we're taking a fresh look across our other technology initiatives, including the upgrade and timing of our digital core and back office value streams. We'll provide an update of our findings next quarter following the completion of this review. On the operation side, we are on track with our key initiatives, including the timing of our Columbus CFC closure.

Erik: Given the hiccups we've experienced with the web enhancements and the web price realignment.

Erik: We're taking a fresh look across our other technology initiatives.

Erik: including the upgrade and timing of our digital core.

Erik: and Backoffice Value Streams.

Erik: We'll provide an update of our finding next quarter following the completion of this review.

Erik David Gershwind: We are on track with our key initiatives, including the timing of our Columbus CFC closure. Additionally, we're pleased with the progress of our network study, and we'll provide more information next quarter. Turning to slide six.

Erik: On the operations side, we are on track with our key initiatives.

Erik Gershwind: Additionally, we're pleased with the progress of our network study, and we'll provide more information next quarter.

Erik: including the timing of our Columbus CFC closure.

Erik: Additionally, we're pleased with the progress of our network study.

Erik Gershwind: Turning to slide six, we had two exciting additions to the portfolio in Premier Tooling and aptX, supported by our strong balance sheet. These two acquisitions build upon our history of both on M&A and the metalworking space. Premier Tooling Group designs, manufactures, and reconditions cutting tools through a state-of-the-art facility and a talented team located in Goodyear, Arizona. This acquisition strengthens our regrined and special tooling service offering that was recently enhanced through the acquisition of True Edge by expanding our reach to western parts of the US. The second addition is aptX, a production-oriented industrial distributor with a heavy focus on cutting tools located in Makisha, Wisconsin.

Erik: And we'll provide more information next quarter.

Erik David Gershwind: We had two exciting additions to the portfolio in Premier Tooling and AppTech, supported by our strong balance sheet. These two acquisitions build upon our history of bolt-on M&A in the metalworking space. Premier Tooling Group designs, manufactures, and reconditions cutting tools through a state-of-the-art facility and a talented team located in Goodyear, Arizona.

Erik: Turning to slide six.

Erik: We had two exciting additions to the portfolio in Premier Tooling and AptX.

Erik: supported by our strong balance sheet.

Erik: These two acquisitions build upon our history of bolt-on M&A in the metalworking space.

Erik: Premier Tooling Group designs, manufactures, and reconditions cutting tools through a state-of-the-art facility and a talented team located in Goodyear, Arizona.

Erik David Gershwind: This acquisition strengthens our regrind and special tooling service offer, that was recently enhanced through the acquisition of TruEdge, by expanding our reach to western parts of the U.S. The second acquisition is AptX, a production-oriented industrial distributor with a heavy focus on cutting tools, located in Waukesha, Wisconsin. Aptek's strong team of sales engineers, combined with our breadth of products and best-in-class metalworking offers, strength in our technical expertise, and ability to gain market share.

Erik: This acquisition strengthens our regrind and special tooling service offering.

Erik: that was recently enhanced through the acquisition of TruEdge.

Erik: by expanding our reach to western parts of the U.S.

Speaker Change: The second edition is AptX.

Speaker Change: a production-oriented industrial distributor with a heavy focus on cutting tools located in Waukesha, Wisconsin.

Erik Gershwind: Attacks strong team of sales engineers combined with our breadth of products and best in class metalworking offering strength in our technical expertise and ability to gain market share. We plan to seamlessly integrate aptX and further strengthen our regional market position as we did with the fiscal 22 acquisition of England Taylor. The entire MSC team welcomes both Premier Tooling Group and aptX, and we're looking forward to our future success. As it relates to the car industrial, which we acquired in the fiscal second quarter, I'm pleased to share that integration is going as planned. In fact, we've already begun receiving proposal requests from some of cars' largest customers to cover the entirety of their MRO and metalworking needs as Car now has access to MSC's full breadth of products.

Speaker Change: Aptek's strong team of sales engineers combined with our breadth of products and best-in-class metalworking offering.

Speaker Change: strengthen our technical expertise

Erik David Gershwind: We plan to seamlessly integrate AptX and further strengthen our regional market position, as we did with the fiscal 22 acquisition of Ingman Taylor. The entire MSC team welcomes both Premier Tooling Group and AptX, and we're looking forward to our future success as it relates to car industrial, which we acquired in the fiscal second quarter. I'm pleased to share that integration is going as planned. In fact, we've already begun receiving proposal requests from some of Carr's largest customers to cover the entirety of their MRO and metalworking needs, as CAR now has access to MSC's full breadth of products. Before I hand it over to Kristen,

Speaker Change: and Ability to Gain Market Share.

Speaker Change: We plan to seamlessly integrate aptX.

Speaker Change: and further strengthen our regional market position.

Speaker Change: as we did with the fiscal 22 acquisition of Ingman Taylor.

Speaker Change: The entire MSC team welcomes both Premier Tooling Group and AptX.

Speaker Change: And we're looking forward to our future success.

Speaker Change: As it relates to car industrial.

Speaker Change: which we acquired in the fiscal second quarter.

Speaker Change: I'm pleased to share that integration is going as planned.

Speaker Change: In fact, we've already begun receiving proposal requests from some of CAR's largest customers.

Speaker Change: to cover the entirety of their MRO and metalworking needs.

Speaker Change: as CAR now has access to MSC's full breadth of products.

Erik Gershwind: Before I hand it over to Kristen, I'll spend a few moments discussing the current environment. As we mentioned a couple of weeks ago, conditions remained soft, especially in metalworking-related end markets, such as heavy machinery and equipment and fabricated metals. This softness is reflected in recent readings of the IP, sentiment surveys such as the MBI, and in our estimated June growth rate, which is in line with our revised outlook. Looking at growth by customer types, the softness is most notably felt in our core customer base. and many of whom are heavily exposed to mental-working manufacturing. Our National Accounts Program continues to show resiliency, aided by the success of solutions, including our vending and implant programs. With that, I'll now turn things over to Kristen.

Erik David Gershwind: I'll spend a few moments discussing the current environment. As we mentioned a couple of weeks ago, conditions remain soft, especially in metalworking-related end markets, such as Heavy Machinery and Equipment and Fabricated Metal.

Speaker Change: Before I hand it over to Kristen.

Speaker Change: I'll spend a few moments discussing the current environment.

Kristen Actis: As we mentioned a couple of weeks ago,

Kristen: Conditions remain soft.

Kristen: especially in metalworking related end markets.

Kristen: such as Heavy Machinery and Equipment and Fabricated Metals.

Erik David Gershwind: This softness is reflected in recent readings of the IP, sentiment surveys such as the MBI, and in our estimated June growth rate, which is in line with our revised outlook, looking at growth by customer types. The softness is most notably felt in our core customer base, many of whom are heavily exposed to metalworking manufacturing. Our National Accounts Program continues to show resiliency, aided by the success of Solutions, including our Vending and Implant Program. With that, I'll now turn things over to Kristen.

Kristen: This softness is reflected in recent readings of the IP.

Kristen: sentiment surveys such as the MBI

Kristen: and in our estimated June growth rate.

Kristen: which is in line with our revised outlook.

Kristen: Looking at growth by customer types.

Kristen: The softness is most notably felt in our core customer base, many of whom are heavily exposed to metalworking manufacturing.

Kristen: Our National Accounts Program continues to show resiliency.

Kristen: aided by the success of solutions including our vending and implant programs.

Kristen Actis: Thank you, Erik, and good morning, everyone. Please turn to slide seven where you can see key metrics for the fiscal third quarter on both a reported and adjusted basis. Fiscal third quarter sales of 979 million declined 7.1% year over year on an average daily sales basis and includes an approximately 300 basis point headwind related to non-repeating public sector orders in the prior year. The remaining 400 basis points of the year-over-year decline was primarily driven by lower volumes, which was partially offset by benefits from acquisitions. Sequentially, we experienced an improvement of approximately 3%, largely driven by higher volumes.

Kristen Actis: Thank you, Erik, and good morning, everyone. Please turn to slide seven, where you can see key metrics for the fiscal third quarter on both a reported and adjusted basis. Fiscal third quarter sales of $979 million declined 7.1% year-over-year on an average daily sales basis and included an approximately 300 basis point headwind related to non-repeating public sector orders in the prior year.

Kristen: With that, I'll now turn things over to Kristen.

Kristen: Thank you, Erik, and good morning, everyone.

Kristen: Please turn to slide 7 where you can see key metrics for the fiscal third quarter on both a reported and adjusted basis.

Kristen: Fiscal third quarter sales of $979 million declined 7.1% year-over-year on an average daily sales basis and includes an approximately 300 basis point headwind related to non-repeating public sector orders in the prior year.

Kristen Actis: The remaining 400 basis points of the year-over-year decline was primarily driven by lower volumes, which was partially offset by benefits from acquisition. Sequentially, we experienced an improvement of approximately 3 percent, largely driven by higher volumes. However, this performance was below our expectations due to lower pricing benefits related to the issues from our web price realignment, which have been addressed, and a slower ramp in our core customer base. By customer type, national accounts declined 1% year over year when considering continued softness in the larger portions of our end market exposure, and only 43 of our top 100 accounts showed growth.

Kristen: The remaining 400 basis points of the year-over-year decline was primarily driven by lower volumes, which was partially offset by benefits from acquisitions.

Kristen: Sequentially, we experienced an improvement of approximately 3 percent, largely driven by higher volumes.

Kristen Actis: However, this performance was below our expectations due to lower pricing benefits related to the issues from our web price re-alignment, which have been addressed, and a slower ramp in our core customer base. By customer type, National Accounts declined 1% year over year. When considering continued softness in the larger portions of our end market exposure, and only 43 of our top 100 accounts showing growth, I'm encouraged by the resiliency displayed here. Core and other customers declined approximately 7%, driven by macro softness and delays in the rollout of our web enhancement, which are expected to re-energize this customer base in conjunction with our web price re-alignment actions.

Kristen: However, this performance was below our expectations due to lower pricing benefits related to the issues from our web price realignment, which have been addressed.

Kristen: and a slower ramp in our core customer base.

Kristen: By customer type, national accounts declined 1% year-over-year.

Kristen: When considering continued softness in the larger portions of our end market exposure and only 43 of our top 100 accounts showing growth, I'm encouraged by the resiliency displayed here.

Kristen Actis: I'm encouraged by the display of resiliency. Core and other customers declined approximately 7%, driven by macro softness and delays in the rollout of our webinar, which are expected to re-energize this customer base in conjunction with our web price realignment. The public sector declined approximately 25% due to large non-repeating orders in the prior year; excluding this impact, the public sector would have shown year over year growth in the quarter.

Kristen: Core and other customers declined approximately 7% driven by macro softness and delays in the rollout of our web enhancements.

Kristen: which are expected to re-energize this customer base in conjunction with our web price realignment actions.

Kristen Actis: The public sector declined approximately 25% due to large non-repeating orders in the prior year. Excluding this impact, public sector would have shown year-over-year growth in the quarter. Sequentially, average daily sales improved across all customer types, including public sector in the mid to high teams. From a solution standpoint, we continued momentum in the quarter, despite ongoing manufacturing softness. In vending, Q3 average daily sales improved 2% year over year and represented 17% of total company net sales. Sales through our implant programs grew approximately 4% year over year and represented approximately 16% of total company net sales. This was supported by healthy rates of signing across both solutions during the quarter, as seen by the year-over-year growth in our install base.

Kristen: The public sector declined approximately 25% due to large non-repeating orders in the prior year.

Kristen: Excluding this impact, public sector would have shown year-over-year growth in the quarter.

Kristen Actis: sequentially, average daily sales improved across all customer types, including public sector in the mid to high. From a solution standpoint, we continued momentum in the quarter, despite ongoing manufacturing challenges. In vending, Q3 average daily sales improved 2% year-over-year and represented 17% of total company net; self-served through our implant programs grew approximately 4% year-over-year and represented approximately 16% of total company net. This was supported by healthy rates of signing across both solutions during the quarter, as seen by the year-over-year growth in our installed base.

Kristen: Sequentially, average daily sales improved across all customer types, including public sector in the mid-to-high teens.

Kristen: From a solution standpoint, we continued momentum in the quarter, despite ongoing manufacturing softness.

Kristen: In vending, Q3 average daily sales improved 2% year-over-year and represented 17% of total company net sales.

Kristen: Sales through our in-plant programs grew approximately 4% year-over-year and represented approximately 16% of total company net sales.

Kristen: This was supported by healthy rates of signing across both solutions during the quarter as seen by the year-over-year growth in our installed base.

Kristen Actis: Moving to profitability for the quarter, our growth margin of 40.9% improved 20 basis points year over year. Sequentially, however, growth margin declined 60 basis points from 2Q levels and was the lower expectation. This was driven by two primary factors that were roughly the same in size: the first being customer mix that was predominantly public sector driven, and headwinds stemming from issues related to our web price re-alignment that we believe have been addressed. Both reported and adjusted operating expenses for the quarter were approximately 289 million. On an adjusted basis, operating expenses declined by approximately 1 million year-over-year, primarily driven by productivity and lower variable incentives compensation that more than offset labor inflation and strategic investments.

Kristen Actis: Moving to profitability for the quarter, our gross margin of 40.9% improved 20 basis points year over year. However, sequentially, however, gross margin declined 60 basis points from two Q levels and was below our expectations. This was driven by two primary factors that were roughly the same in size.

Kristen: Moving to profitability for the quarter, our gross margin of 40.9% improved 20 basis points year over year.

Kristen: Sequentially, however, gross margin declined 60 basis points from two Q levels and was below our expectations.

Kristen: This was driven by two primary factors that were roughly the same in size.

Kristen Actis: The first being customer mix that was predominantly public sector driven, and Edwin stemming from issues related to our web price realignment that we believe have been. Both reported and adjusted operating expenses for the quarter were approximately $289 million. On an adjusted basis, operating expenses declined by approximately $1 million year-over-year, primarily driven by productivity and lower variable incentive compensation that more than offset labor inflation and strategic investment. Reported operating margin for the quarter was 10.9% compared to 12.8% in the prior year. On an adjusted basis, operating margin of 11.4% declined 170 basis points compared to the prior year. Gap earnings per share were $1.27 compared to $1.69 in the prior year period.

Kristen: The first being customer mix that was predominantly public sector-driven.

Kristen: and Hedwin stemming from issues related to our web price realignment that we believe have been addressed.

Kristen: Both reported and adjusted operating expenses for the quarter were approximately $289 million.

Kristen: On an adjusted basis, operating expenses declined by approximately $1 million year-over-year, primarily driven by productivity and lower variable incentive compensation that more than offset labor inflation and strategic investments.

Kristen Actis: Reported operating margins for the quarter was 10.9 percent compared to 12.8 percent in the prior year. On an adjusted basis, operating margin of 11.4 percent declined 170 basis points compared to the prior year. Gap earnings per share was $1.27 compared to $1.69 in the prior year period. On an adjusted basis, EPS was $1.33 versus $1.74 in the prior year. Turning to slide 8 to review our balance sheet and cash flow performance, we continue to maintain a healthy balance sheet with net debt of approximately 480 million, representing roughly one time EBITDAF. Working capital was a favorable source of cash in the quarter, including a contribution of roughly 20 million from inventory reductions.

Kristen: Reported operating margin for the quarter was 10.9% compared to 12.8% in the prior year.

Kristen: On an adjusted basis, operating margin of 11.4% declined 170 basis points compared to the prior year.

Kristen: Gap earnings per share was $1.27 compared to $1.69 in the prior year period.

Kristen Actis: On an adjusted basis, EPS was $1.33 versus $1.74 in the prior year. Turning to slide 8 to review our balance sheet and cash flow performance, we continue to maintain a healthy balance sheet with net debt of approximately $480 million, representing roughly one times EBITDA. Working capital was a favorable source of cash in the quarter, including a contribution of roughly $20 million from inventory reductions.

Kristen: On an adjusted basis, EPS was $1.33 versus $1.74 in the prior year.

Kristen: Turning to slide 8 to review our balance sheet and cash flow performance, we continue to maintain a healthy balance sheet with net debt of approximately $480 million, representing roughly one-time EBITDA.

Kristen: Working capital was a favorable source of cash in the quarter, including a contribution of roughly $20 million from inventory reductions.

Kristen Actis: This resulted in another strong quarter of operating cash flow with conversion of 201 percent in free queue, and 160 percent fiscal year-to-date, keeping us on track to exceed our full-year target of greater than 125 percent. Capital expenditures during the quarter of approximately 30 million increased 6 million year-over-year, primarily driven by strategic investments and ongoing solutions growth. Together, this drove strong free cash flow generation of approximately 114 million in fiscal 3Q and 230 million fiscal year-to-date. Our balance sheet and cash generation remains strong and continues to fuel our capital allocation priorities shown on slide 9. We deployed cash in several of these buckets during the quarter, including the strategic acquisitions of Premier Tooling Group and aptX that Eric mentioned earlier.

Kristen Actis: This resulted in another strong quarter of operating cash flow with conversion of 201% in free Q and 160% fiscal year to date, keeping us on track to exceed our full year target of greater than 125. Capital expenditures during the quarter of approximately $30 million increased $6 million year-over-year, primarily driven by strategic investments and ongoing solutions growth. Together, this drove strong free cash flow generation of approximately $114 million in fiscal 3Q and $230 million in fiscal year.

Kristen: This resulted in another strong quarter of operating cash flow with conversion of 201% in free Q and 150% fiscal year-to-date, keeping us on track to exceed our full-year target of greater than 125%.

Kristen: Capital expenditures during the quarter of approximately $30 million increased $6 million year-over-year, primarily driven by strategic investments and ongoing solutions growth.

Kristen: Together this drove strong free cash flow generation of approximately 114 million in fiscal 3Q and 230 million fiscal year to date.

Kristen Actis: Our balance sheet and cash generation remains strong and continues to fuel our capital allocation priorities shown on slide nine. We deployed cash in several of these buckets during the quarter, including the strategic acquisitions of Premier Tooling Group and AptX that Erik mentioned earlier. We also have approximately 2.1 million shares remaining on our current authorization.

Kristen: Our balance sheet and cash generation remains strong and continues to fuel our capital allocation priorities shown on slide 9.

Speaker Change: We deployed cash in several of these buckets during the quarter, including the strategic acquisitions of Premier Tooling Group and AptX that Erik mentioned earlier.

Kristen Actis: We also have approximately 2.1 million shares remaining on our current authorization. Turning to slide 10, we are maintaining the updated outlook we presented during our preliminary call in June. As a reminder, this revised outlook assumes average daily sales declining 4.7 to 4.3 percent year-over-year, adjusted operating margin of 10.5 to 10.7 percent, and includes impacts from recent acquisitions. Other items embedded in our Outlook are included on the slide.

Speaker Change: We also have approximately 2.1 million shares remaining on our current authorization.

Kristen Actis: Turning to slide 10, we are maintaining the updated outlook we presented during our preliminary call in June. As a reminder, this revised outlook assumes average daily sales declining 4.7 to 4.3% year-over-year, an adjusted operating margin of 10.5 to 10.7%, and includes impacts from recent acquisitions. Other items embedded in our Outlook are included on the Before I turn the call back over, I will spend a few moments discussing what the midpoint of our annual outlook implies for the fourth quarter.

Speaker Change: Turning to slide 10, we are maintaining the updated outlook we presented during our preliminary call in June .

Speaker Change: As a reminder, this revised outlook assumes average daily sales declining 4.7 to 4.3 percent year-over-year, adjusted operating margin of 10.5 to 10.7 percent, and includes impacts from recent acquisitions.

Speaker Change: Other items embedded in our Outlook are included on the slide.

Kristen Actis: Before I turn the call back over, I will spend a few moments discussing what the midpoint of our annual outlook implies for the fourth quarter. Starting with sales, we have one fewer selling days to punchily in 4Q, and expect average daily sales to fall within a range similar to 3Q levels. As we discussed during our June call, we expect 4Q gross margins to perform at or slightly better than the historical 3Q to 4Q sequential decline of approximately 40 to 50 basis points. As Erik previously mentioned, following our corrective actions, June's gross margin trend is performing in line with this expectation.

Speaker Change: Before I turn the call back over, I will spend a few moments discussing what the midpoint of our annual outlook implies for the fourth quarter.

Kristen Actis: Starting with sales, we have one fewer selling day sequentially in 4Q and expect average daily sales to fall within a range similar to 3Q levels. As we discussed during our June call, we expect 4Q gross margins to perform at or slightly better than the historical 3Q to 4Q sequential decline of approximately 40 to 50 basis points. As Erik previously mentioned, following our corrective actions, June's gross margin trend is performing in line with this expectation. Adjusted operating expenses are expected to step up $8 to $10 million from the third quarter.

Speaker Change: Starting with sales, we have one fewer selling day sequentially in 4Q and expect average daily sales to fall within a range similar to 3Q levels.

Speaker Change: As we discussed during our June call, we expect 4Q gross margins to perform at or slightly better than the historical 3Q to 4Q sequential decline of approximately 40 to 50 basis points.

Speaker Change: As Erik previously mentioned, following our corrective actions, June's gross margin trend is performing in line with this expectation.

Kristen Actis: Adjusted operating expenses are expected to step up 8 to 10 million from the third quarter. This is driven by an increase in variable competition expense due to non-repeating benefits that occurred in the third quarter of roughly 4 million. Cost from strategic investments, higher depreciation and amortization, and recent acquisitions represent the remaining 4 to 6 million.

Speaker Change: Adjusted operating expenses are expected to step up $8 to $10 million from the third quarter. This is driven by an increase in variable compensation expense due to non-repeating benefits that occurred in the third quarter of roughly $4 million.

Erik David Gershwind: This is driven by an increase in variable compensation expense due to non-repeating benefits that occurred in the third quarter of roughly $4 million. Costs from strategic investments, higher depreciation and amortization, and recent acquisitions represent the remaining four to six million. And with that, I will now turn the call back over to Erik. Thank you, Kristen.

Speaker Change: Ross from Strategic Investments.

Speaker Change: Higher depreciation and amortization, and recent acquisitions represent the remaining $4 to $6 million.

Erik Gershwind: And with that, I will now turn the call back over to Erik. Thank you, Kristen. This was a challenging quarter in what has been a tough fiscal year for MSC. Since our update call a little over two weeks ago, we've been head down driving corrective actions to improve performance. And I've been encouraged by how our team is rallying in response.

Speaker Change: And with that, I will now turn the call back over to Erik.

Erik David Gershwind: This was a challenging quarter in what has been a tough fiscal year for MSC. Since our update call a little over two weeks ago, we've been heads down driving corrective action to improve performance, and I've been encouraged by how our team is rallying in response.

Erik: Thank you, Kristen.

Erik: This was a challenging quarter.

Speaker Change: in what has been a tough fiscal year for MSC.

Speaker Change: Since our update call a little over two weeks ago, we've been heads down driving corrective actions to improve performance.

Erik Gershwind: We believe this progress will begin bearing fruit during fiscal 2025 and strengthen our position to achieve our long-term targets, which include sales growth of at least 400 basis points above IP over the cycle and adjusted operating margins in the midteens.

Speaker Change: And I've been encouraged by how our team is rallying in response.

Speaker Change: We believe this progress will begin bearing fruit during fiscal 2025.

Speaker Change: and strengthen our position to achieve our long-term targets.

Speaker Change: which includes sales growth of at least 400 basis points above IP over the cycle.

Operator: With that, we'll now open up the line for questions. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two.

Operator: We believe this progress will begin bearing fruit during fiscal 2025 and strengthen our position to achieve our long-term target, which includes sales growth of at least 400 basis points above IP over the cycle and Adjusted Operating Margins in the mid-teens. With that, we'll now open up the line for questions. To ask a question, you may press star then 1 on your telephone keypad.

Speaker Change: and Adjusted Operating Margins in the mid-teens.

Speaker Change: With that, we'll now open up the line for questions.

Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.

Operator: If you're using a speakerphone, 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. At this time, we will pause momentarily to assemble our roster. The first question comes from Tommy Moll with Stevens Inc. Please go ahead. Good morning, and thank you for taking my question. Good morning, Tommy.

Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time we will pause momentarily to assemble our roster. The first question comes from Tommy Moll with Stevens Inc. Please go ahead.

Operator: At this time, we will pause momentarily to assemble our roster.

Tommy Mole: The first question comes from Tommy Mole with Stevens Inc. Please go ahead.

Erik Gershwind: Good morning, and thank you for taking my question. Morning, Tommy.

Tommy Mole: I wanted to follow up on some of the end-market commentary, particularly around heavy manufacturing, and just see if there's any way to get a sense of when we might bottom here. I think it's fair to say going into 2024, across the market, volumes were set to decline, but just given some of the high-profile reductions and outlooks from big public bellwethers is recently as May, plus just observing the sales trend that you've seen more recently. It feels like we took another step down the spring, and so I'm just curious for any insight you have from your customers or Salesforce.

Thomas Allen Moll: Good morning and thank you for taking my questions.

Thomas Allen Moll: I wanted to follow up on some of the end market commentary, particularly around heavy manufacturing, and just see if there's any way to get a sense of when we might bottom here. I think it's fair to say going into 2024, across the market, volumes were set to decline. But just... given some of the high profile cuts, reductions, and outlooks from big public bellwethers as recently as May.

Speaker Change: Morning, Tommy. Morning, Tommy.

Thomas Allen Moll: I wanted to follow up on some of the end-market commentary, particularly around heavy manufacturing, and just see if there's any way to get a sense of when we might bottom here. I think it's fair to say going into 2024,

Thomas Allen Moll: across the market volumes were set to decline but just given some of the high profile

Thomas Allen Moll: reductions and outlooks from from big public bellwethers as recently as May plus just observing the sales trends that you've seen more recently it feels like we took another step down this spring and so I'm just curious for any insight you have from your customers or Salesforce.

Thomas Allen Moll: Plus, just observing the sales trends that you've seen more recently, it feels like we took another step down this spring. And so I'm just curious about any insight you have from your customers or Salesforce. Tommy, look, I think you summed it up well.

Erik Gershwind: Tommy, I look; I think you summed it up well. It does feel like things have softened further, and you can look no further than yesterday's MBI reading as another proof point in line with what you're saying. I would say, in terms of visibility, Tommy. And by the way, definitely what we're seeing and experiencing is that the softness is more acute in metal working-related end market. So you think machinery, equipment, metal fabrication, kind of like our core, which is part of what's going on with our core customer; the closer you get to the core, the softer things appear.

Erik David Gershwind: It does feel like things have softened further. And, you know, you can look no further than yesterday's MBI reading as another proof point in line with what you're saying. I would say in terms of visibility, Tommy, and by the way, definitely what we're seeing and experiencing is that the softness is more acute in metalworking-related end markets. So you think machinery, equipment, metal fabrication, kind of like our core, which is part of what's going on with our core customers. The closer you get to the core, the softer things appear.

Thomas Allen Moll: Tommy I look I think you've summed it up well it does feel like things have softened further and you know you can look no further than yesterday's

Speaker Change: MBI reading as another proof point in line with what you're saying.

Speaker Change: I would say in terms of visibility, Tommy, and by the way, definitely what we're seeing and experiencing is that the softness is more acute.

Speaker Change: in metalworking related end markets. So you think machinery, equipment, metal fabrication, kind of like our core, which is which is part of what's going on with our core customer, the closer you get to the core, the softer things appear. I would say, Tommy, visibility is

Erik David Gershwind: I would say, Tommy, visibility is generally pretty limited because we are such a short cycle business. It's probably more limited than usual. You know, certainly gearing up towards an election probably isn't helping things.

Erik Gershwind: I would say Tommy, visibility is... is, you know, in our business, it's generally pretty limited because we are such a short cycle business. It's probably more limited than usual. You know, certainly gearing up towards an election probably isn't helping things. You've got a lot of people in wait-and-see Motami, and that combined with interest rates not being reduced. People are cautious. So, you know, not a lot of visibility. Be certainly beyond November. I think that'll be the next big milestone.

Speaker Change: is it, you know, in our business, it's generally pretty limited, because we are such a short cycle business, it's probably more limited than usual. You know, certainly gearing up towards an election probably isn't helping things. You've got a lot of people in wait and see mode, Tommy, and that combined with interest rates.

Erik David Gershwind: You've got a lot of people in wait and see mode, Tommy, and that combined with interest rates not being reduced, people are cautious. So, you know, not a lot of visibility. Certainly beyond November, I think that'll be the next big milestone. Look, what I will say is, in the bigger picture, if you zoom out, things are soft right now. We still feel really good about where we are positioned with North American manufacturing. All the things that we talked about coming out of COVID, the reshoring trends, the strengthening North American manufacturing footprint, we still feel very confident in.

Speaker Change: Not being reduced, people are cautious.

Speaker Change: So, you know, not a lot of visibility, certainly beyond November , I think that'll be the next big milestone. I mean, look, what I will say is a bigger picture if you zoom out.

Erik Gershwind: I mean, we'll look at what I will say is bigger picture if you zoom out. Things are soft right now. We still feel really good about where we're positioned with North American manufacturing. All the things that we talked about coming out of COVID, the reshoring trends, the strengthening of North American manufacturing footprint. We still feel very confident in near term, though, for sure, there is more softness and limited visibility.

Speaker Change: Things are soft right now. We still feel really good about where we're positioned with North American manufacturing. All the things that we talked about coming out of COVID, the reshoring trends, the strengthening North American manufacturing footprint, we still feel very confident in. Near term, though, for sure, there is more softness and limited visibility.

Erik David Gershwind: Near term, though, for sure, there is more softness and limited visibility. And I suppose a related topic here is pricing, where after the pre-announcement, I think you intended to communicate that some of the hiccups you experienced in the quarter were purely driven by execution factors and not a broader marketplace pressure on pricing. But I did just want to double click on the latter there and anything you've seen in the market that says, Yeah, sure, Tommy. And yeah, look, you're right.

Tommy Mole: And I suppose a related topic here is on pricing where, after the pre-analysis, I think you intended to communicate that some of the hiccups you experienced in the quarter were purely driven by execution factors and not a broader marketplace. Pressure on pricing, but I did just want to double-click on the ladder there and anything you've seen in the market that might suggest something broader than what you just experienced internally. Thank you. Yeah, sure, Tommy. And yeah, look, you're right. Q three. We had identified of that 60 bits just as a refresh for you and the rest of the callers.

Speaker Change: And I suppose a related topic here is on pricing where...

Speaker Change: after the pre-announcement.

Speaker Change: I think you intended to communicate that some of the hiccups you experienced in the quarter

Speaker Change: were purely driven by execution factors and not a broader marketplace pressure on pricing. But I did just want to double click on the latter there and anything you've seen in the market that might suggest something broader than what you just experienced internally.

Erik David Gershwind: In Q3, we had identified of that 60 bps, just as a refresher for you and the rest of the callers, it was about 50-50 between, roughly, between a mixed factor and then execution on the list price repositioning. So the work that I've been describing in the company that Kristen talked about, we're seeing in June, that's execution and shoring things up, and we feel good about that. In terms of the pricing environment more generally, it's interesting because you sort of have two competing factors going on, I'd say. On the one hand, inflation has proven to be a bit stickier than expected.

Speaker Change: Thank you. Yeah, sure, Tommy. And yeah, look, you're right. Q3, we had identified of that 60 BIPs, just as a refresh for you and the rest of the callers, it was about 50-50 between, roughly between a mixed factor and then execution on the list price repositioning. So the work that I've been describing in the company that Kristen talked about, we're seeing in June .

Erik Gershwind: It was about 50 50 between roughly between a mixed factor and then execution on the list price repositioning. So the work that I've been sort of describing in the company that were that Kristen talked about, we're seeing in June, that that's execution, ensuring things up. We feel good about that in terms of the pricing environment more generally. It's interesting because you should have had two competing factors going on. I'd say on the one hand, no question inflation has proven to be a bit stickier than expected. So there are some pockets where costs remain elevated, and look, we'll plan to react accordingly where those pockets exist.

Speaker Change: Execution ensuring things up and we feel good about that. In terms of the pricing environment more generally it's interesting because you sort of have two competing factors going on I'd say. On the one hand no question inflation has proven to be a bit stickier than expected.

Erik David Gershwind: So there are some pockets where costs remain elevated, and look, we'll plan to react accordingly where those pockets exist. At the same time, we're seeing a phenomenon that we've seen, I've seen pretty much through my career. It happens like clockwork, every time the demand environment softens, customers have more time to shop, and so they're more scrutinous of everything that goes out the door.

Speaker Change: So, there are some pockets where costs remain elevated, and look, we'll plan to react accordingly where those pockets exist.

Erik Gershwind: At the same time, we're seeing a phenomenon that we've seen. I've seen pretty much through my career every, it happens like clockwork every time the demand environment softens. Customers have more time to shop. And so there's more scrutiny of everything that goes out the door. There's more reopening of RFPs. So, on the one hand, you have a little bit stickier inflation, which should buoy the pricing environment; on the other hand. The competitive environment is intense when it's soft. I will say, in a lot of ways, that plays really well into our value proposition. So all of the high touch.

Speaker Change: At the same time, we're seeing a phenomenon that we've seen, I've seen pretty much through my career, it happens like clockwork every time the demand environment softens.

Speaker Change: Customers have more time to shop.

Erik David Gershwind: There's more reopening of RFPs. So on the one hand, you have a little bit of stickier inflation, which should buoy the pricing environment. On the other hand, the competitive environment is intense when it's soft. I will say, in a lot of ways, that plays really well into our value proposition. So all of the high touch. MSWordDoc Word

Speaker Change: And so they're more scrutinous of everything that goes out the door. There's more reopening of RFPs.

Speaker Change: So, on the one hand, you have a little bit stickier inflation, which should buoy the pricing environment. On the other hand, the competitive environment is intense when it's soft. I will say, in a lot of ways, that plays really well into our value proposition. So, all of the high-touch...

Erik Gershwind: Stuff that we talked about that's working and you could see the proof points there and implant and bending. A lot of those wins happened because our customers right now are starved for productivity and tangible cost savings, and that's where we can shine and we can deliver. So right now, even our bending and implant numbers, those growth numbers are really subdued compared to what we're used to. And I think that's reflective of the environment. When things turn, we should see that left. But hopefully that gives you a flavor of how we would size up the pricing environment.

Erik David Gershwind: Document.8, Thanks, Erik. I'll turn it back. The next question comes from David Manthey with Baird. Please go ahead. Hi, good morning, everyone.

Speaker Change: Stuff that we talked about that's working and you could see the proof points there and implant and bending

Speaker Change: A lot of those wins happen because our customers right now are starved for productivity and tangible cost savings. And that's where we can shine and we can deliver. So, you know, right now, like even our vending and implant numbers, those growth numbers are...

Speaker Change: Really subdued compared to what we're used to and I think that's reflective of the environment when things turn We should see that lift, but hopefully that gives you a flavor of what you know, how we would size up the pricing environment

Tommy Mole: Thanks, Eric.

Erik Gershwind: I'll turn it back.

David Manthey: The next question comes from David Manthey, with Beard. Please go ahead.

Speaker Change: Thanks Erik, I'll turn it back.

Speaker Change: The next question comes from David Manthey with Baird. Please go ahead.

David Manthey: Hi, good morning, everyone. We're referencing Live number four. You note the conditions were worse in the metal working and machinery elements of IP. But looking at the data, it doesn't seem like MSC really out before those subcomponents of the index by 400 basis points either.

David John Manthey: Referencing slide number four, you note that conditions were worse in the metalworking and machinery elements of IP. But looking at the data, it doesn't seem like MSC really outperformed those subcomponents of the index by 400 basis points either. And I understand the web pricing situation and the government's year-to-year comp, but it seems like something changed between the fourth quarter of last year and the first quarter of this fiscal year when the company suddenly stopped outperforming the IP benchmark.

David John Manthey: Hi, good morning everyone. Referencing slide number four, you note the conditions were worse in the metalworking and machinery elements of IP

Speaker Change: But looking at the data, it doesn't seem like MSC really outperformed those subcomponents of the index by 400 basis points either.

Erik Gershwind: I understand the web pricing situation and the government year-to-year comp, but it seems like something changed between the fourth quarter last year and the first quarter of this fiscal year when the company suddenly stopped outperforming the IP benchmark. Is there anything you can point to that changed in terms of your approach or something at the company that's different relative to that outperformance expectation? Dave, I would point to two. Look, there's no question you're right that you look at the past three quarters and growth relative to IP, even relative to the sub-indices, is not what we would expect and not consistent with the performance we had.

Speaker Change: And I understand the web pricing situation and the government year-to-year comp, but it seems like something changed between the fourth quarter of last year and the first quarter of this fiscal year.

Speaker Change: When the company suddenly...

Speaker Change: Stopped outperforming the IP benchmark and is there anything you can point to that changed in terms of your approach or Something at the company that's different relative to that that outperformance expectation

David John Manthey: And is there anything you can point to that changed in terms of your approach or something at the company that's different relative to that outperformance expectation? Dave, I would point to two things. Look, there's no question you're right that you look at the past three quarters, and growth relative to IP, even relative to the sub-indices, is not what we would expect and not consistent with the performance we've had. I think there are two things going on, and one is macro and one is micro.

Dave: Dave, I would I would point to two things. Look, there's no question you're right that you look at the past three quarters and growth relative to IP, even relative to the sub-indices, is not

Erik Gershwind: I think there's two things going on, and one is macro and one is micro. The macro factor is the heavier rotation for us into markets that are particularly soft. The recent MBI readings are pretty breathtaking, and I think indicative of softness and customers pulling back on spend. I think that's one. And then to no question that where we're under performing, Dave, is in the core customer where we look to reenergize. And I would go back to there if the what changed would just be the execution on the couple of initiatives we called out during the preliminary release that we were relying on to improve a turbocharged performance that had been delayed.

Dave: What we would expect and not consistent with the performance we've had I I think there's two things going on and one is macro and one Is micro the macro factor is the heavier rotation for us into markets that are particularly soft like the recent MBI readings are

Erik David Gershwind: The macro factor is the heavier rotation for us into markets that are particularly soft. The recent MBI readings are pretty breathtaking and, I think, indicative of softness and customers pulling back on spend. I think that's one.

Erik David Gershwind: And then two, no question that where we're underperforming, Dave, is in the core customer, where we look to re-energize. And I would go back to there. What has changed would just be the execution on the couple of initiatives we called out during the preliminary release that we were relying on to improve our turbocharged performance, which has been delayed. So, you know, from our standpoint, this is a timing issue. I think we've taken some good steps here, but those are two things. I think one is macro.

Dave: Pretty breathtaking, and I think indicative of softness and customers pulling back on spend. I think that's one. And then two, no question.

Speaker Change: that where we're underperforming, Dave, is in the core customer where we look to reenergize. And I would go back to, you know, there, if the what changed would just be the execution on the couple of initiatives we called out during the preliminary release.

Speaker Change: that we were relying on to improve our turbocharged performance.

Erik Gershwind: So, from our standpoint, this is a timing issue. I think we've taken some good steps here, but I know those are the two things. I think one is macro and one is micro.

Speaker Change: that have been delayed. So, you know, from our standpoint, this is a timing issue. I think we've taken some good steps here, but those are the two things. I think one is macro and one is micro.

David Manthey: Okay, thanks for that, Eric.

Erik David Gershwind: Okay, thanks for that, Erik. Second, on the acquisitions that you've announced, could you address the multiples you're paying for them? I assume you're paying less than your own EBITDA multiple for these acquisitions. And just a broader question, why are you making acquisitions while you're in the midst of this sort of mission-critical playbook and having some issues and things? It seemed like it'd be a good time to focus internally; could you just talk about that relative to share repurchase, for instance? Yeah, sure, Dave.

David Manthey: Second, on the acquisitions that you've announced, could you address the multiples you're paying for these? I assume you're paying less than your own EBITDA multiple for these acquisitions? And just the broader question, why are you making acquisitions while you're in the midst of this sort of mission-critical playbook and having some issues and things? It seemed like it'd be a good time to focus internally. Could you just talk about that relative to share repurchase, frankly?

Dave: Okay, thanks for that, Erik.

Speaker Change: Second, on the acquisitions that you've announced,

Speaker Change: Could you address the multiples you're paying for these? I assume you're paying less than...

Speaker Change: your own EBITDA multiple for these acquisitions. And just a broader question, why are you making acquisitions while you're in the midst of this sort of mission-critical playbook and having some issues and things? It seemed like it'd be a good time to focus internally. Could you just talk about that relative to share repurchase, frankly?

Erik Gershwind: Yeah, sure Dave, so let me let me address M&A first and then I'll address share repurchase, and I think your broader question on capital allocation. So why M&A now? I think your look, your point is a fair one, and certainly I think, you know, at the moment, given the fixes going on inside of the company, I don't think you should expect to see us do anything that's really big and outside of our core business. So where you're seeing us acquire is tuck-in businesses that are into our core where we do feel like we have a good playbook and a good track record that's building.

Erik David Gershwind: So let me address M&A first, and then I'll address share repurchase. And I think your broader question on capital allocation. So why M&A now? I think your point is a fair one.

Dave: Yeah, sure, Dave. So let me let me address...

Speaker Change: M&A first, and then I'll address share repurchase and I think your broader question on capital allocation. So why M&A now? I think your look, your point is a fair one. And certainly, I think, you know, at the moment, given the

Erik David Gershwind: And certainly, I think, you know, at the moment, given the changes going on inside of the company, I don't think you should expect to see us do anything that's really big and outside of our core business. So, what you're seeing us acquire is tuck-in businesses that are into our core, where we do feel like we have a good playbook and a good track record that's building, really building over the past several years now with many of the recent ones, and we mentioned one or two on the call. So, these are businesses that we know, spaces that we know.

Speaker Change: fixes going on inside of the company. I don't think you should expect to see us do anything that's really big and outside of our core business.

Speaker Change: So, where you're seeing us acquire is tuck-in businesses that are into our core, where we do feel like we have a good playbook and a good track record that's building.

Erik Gershwind: Really building over the past several years now, with many of the recent we mentioned one or two on the call. So these are businesses that we know spaces that we know. Regarding multiples, obviously it's tricky to talk public on the multiples, but from a financial standpoint, suffice it to say that when we're doing these deals, we look at a couple of different criteria. One is we would like to see earnings accretion within the first full year. The second is we want to see returns on capital in excess of our weighted average cost of capital in three years or less.

Speaker Change: really building over the past several years now with

Speaker Change: Many of the recent, we mentioned one or two on the call.

Erik David Gershwind: Regarding multiples, obviously, it's tricky to talk publicly about multiples, but from a financial standpoint, suffice it to say that when we're doing these deals, we look at a couple of different criteria. One is we would like to see earnings accretion within the first full year. The second is we want to see returns on capital in excess of our weighted average cost of capital in three years or less.

Speaker Change: So, these are businesses that we know, spaces that we know. Regarding multiples, obviously, it's tricky to talk publicly on the multiples, but from a financial standpoint, suffice it to say that when we're doing these deals, we look at a couple of different criteria. One is we would like to see earnings accretion within the first...

Speaker Change: The second is we want to see returns on capital in excess of our weighted average cost of capital in three years or less.

Erik David Gershwind: So, if we're going to be doing an acquisition, it's going to have to meet those hurdles. Financially, as I said, operationally, the playbook here is pretty good because these are right into our core. They're giving us market share. They're giving us talent.

Erik Gershwind: So if we're going to be doing an acquisition, it's going to be meeting those hurdles financially. As I said, operationally the playbook here is pretty good because these are right into our core. They're giving us market share; they're giving us talent; they're enabling us to leverage current customer relationships; they're enabling us to leverage our product offering. So these are right in our sweet spot. So I think if this were something that were really bigger and outside what we know how to do, I think I would agree with you.

Speaker Change: So if we're going to be doing an acquisition, it's going to be meeting those hurdles financially.

Speaker Change: The playbook here is pretty good because these are right into our core. They're giving us

Erik David Gershwind: They're enabling us to leverage current customer relationships. They're enabling us to leverage our product offering. So, these are right in our sweet spot. So, I think if this were something that was really bigger and outside what we know how to do, I think I would agree with you. But these are good.

Speaker Change: market share, they're giving us talent, they're enabling us to leverage current customer relationships, they're enabling us to leverage our product offering. So these are right in our sweet spot. So I think if this were something that were really bigger and outside what we know how to do, I think

Erik Gershwind: But these are good relative to share repurchase. Look, we have articulated a handful of priorities on capital allocation. Kristen mentioned our cash generation has been strong this year. I think that's one area where we have executed well. So I wouldn't be given the size of these deals that we're doing, that they need to come at the expense of an alternative use of capital.

Erik David Gershwind: Relative to share repurchase, look, we've articulated a handful of priorities on capital allocation. Kristen mentioned our cash generation has been strong this year. I think that's one area where we have executed well. So, I wouldn't view, given the size of these deals that we're doing, that they need to come at the expense of an alternative use of capital. Thanks, Erik. Have a good fourth, all. You too,

Speaker Change: I would agree with you, but these are good. Relative to share repurchase, look, we've articulated a handful of priorities on capital allocation. Kristen mentioned our cash...

Speaker Change: generation has been strong this year. I think that's one area where we have executed well, so I wouldn't view, given the size of these deals that we're doing, that they need to come at the expense of an alternative use of capital.

David Manthey: Thanks, Eric. Have a good Fourth, all.

David Manthey: You too, Dave.

Speaker Change: Thanks, Erik. Have a good fourth, all.

Ken Newman: The next question comes from Ken Newman with KeyBank Capital Markets.

Ken Newman: The next question comes from Ken Newman with KeyBank Capital Markets. Hey, good morning, guys. Thanks for taking the question. Good morning, Ken.

Erik David Gershwind: You too, guys.

Speaker Change: The next question comes from Ken Newman with KeyBank Capital Markets. Please go ahead.

Ken Newman: Please go ahead. Hey, good morning, guys. Thanks for asking the question.

Ken Newman: Good morning, Ken. Good morning. I just started to circle back to the sequentially stable ADS guy from 3Q to 4Q.

Ken Newman: Hey, good morning, guys. Thanks for taking the question.

Erik David Gershwind: Morning. I just wanted to circle back to the sequentially stable ADS guide from 3Q to 4Q. You know, just to clarify, Erik, I mean, you did highlight some of the deterioration that we're seeing in the macro, whether it's ISM or the MBI here earlier this week. What gives you confidence in that guide kind of being stable from 3Q to 4Q, given some of that macro deterioration? Is that primarily just reflecting the web price issues being fixed, or is there something else? I think, Ken, it's really just a function of what we're seeing in the trending in the business. So when we're giving a forecast, we're looking, and we're not banking on any massive change.

Speaker Change: Good morning, Ken.

Ken Newman: Good morning.

Ken Newman: I just wanted to circle back to the Sequentially Stable ADS Guide from 3Q to 4Q. You know, just to clarify, Erik, I mean, you did highlight some of the deterioration that we're seeing in the macro, whether it's ISM or the MBI here earlier this week.

Erik Gershwind: You know, just to clarify, Eric, I mean, you did highlight some of the deterioration that we're seeing in the macro, whether it's ISM or the MBI here earlier this week. What's gives you confidence in that guide kind of being stable from 3Q to 4Q, given some of those macro deterioration? Is that primarily just reflecting the web price issues being fixed, or is there something else there? I think, Ken, it's really just a function of what we're seeing in the trending in the business, to be honest. So when we're giving a forecast, we're looking; we're not banking on any massive change.

Speaker Change: What gives you confidence in that guide kind of being stable from 3Q to 4Q given some of those macro deterioration? Is that primarily just reflecting the web price issues being fixed or is there something else there?

Erik: I think, Ken, it's really just a function of what we're seeing in the trending of the business, to be honest. So when we're giving a forecast, we're not banking on any massive change.

Erik Gershwind: So the web, the pricing, corrective actions, where you're going to see that evidence, there's instability and gross margin. The Kristen talked about, in terms of having a counting on, if you will, a major inflection in our core customer absent the macro. In the prepared remarks, I really pointed to Q2 where you see a convergence of what we expect to have the website really ready for prime time, combined with a marketing campaign that will then feature the web pricing, and all these things should work synergistically. So we're not counting on anything, any massive change in Q4, but more looking at trending and typical seasonal patterns.

Erik David Gershwind: The pricing corrective actions, where you're going to see that evidence is instability and gross margin that Kristen talked about. You know, in terms of having a count on, if you will, a major inflection in our core customer, absent the macro, in the prepared remarks, I really pointed to Q2, where you see a convergence of what we expect to have the website really ready for prime Time combined with a marketing campaign that will then feature web pricing, and all these things should work synergistically. So, we're not counting on anything, any massive change in Q4, but more looking at trends and typical seasonal patterns. Okay.

Speaker Change: The pricing corrective actions where you're going to see that evidence is instability and gross margin that Kristen talked about. You know in terms of

Speaker Change: having a counting on, if you will, a major inflection in our core customer absent the macro. In the prepared remarks I really pointed to Q2 where you see a convergence of what we expect to have the website really ready for prime time combined with a marketing campaign that will then feature the web pricing and all these things.

Speaker Change: should work synergistically. So we're not counting on anything, any massive change in Q4, but more looking at trending and typical seasonal patterns.

Ken Newman: Okay.

Kristen Actis: And then for my follow-up, you know, Kristen, I think in the past you've talked about this idea that every point of ADS growth is around 20 basis points of EBIT margin. There's obviously some impact on the fourth quarter that makes that math a little fuzzier, but from a higher level, I'm just curious if that framework still holds true as we think about fiscal 25 and whatever that recovery may look like. Yeah, Ken.

Kristen Actis: And then from my follow-up, Kristen, I think in the past, you've talked about this idea that every point of ADS growth is around 20 basis points of EBIT margin. There's obviously some impact on the fourth quarter that makes that math a little fuzzier, but from a higher level, I'm just curious if that framework still holds true as we think about fiscal 25 and whatever that recovery may look like. Yeah, Ken, so for the year that is what we communicated back in the Q2 release. Obviously, we're pretty far off of that with the revised guidance, and that, of course, has to do with the web pricing challenges we've had, the timing of the core ramp up.

Speaker Change: Okay.

Speaker Change: And then for my follow-up, you know, Kristen, I think in the past you've talked about this idea that every point of ADS growth is around 20 basis points of EBIT margin.

Speaker Change: There's obviously some impact on the fourth quarter that makes that math a little fuzzier, but from a higher level, I'm just curious if that framework still holds true as we think about fiscal 25 and whatever that recovery may look like.

Kristen Actis: So, for the year, that is what we had communicated back in the Q2 release. Obviously, we're pretty far off of that with the revised guidance. And that, of course, has to do with the web pricing challenges we've had, and the timing of the core ramp up. Beyond 24, it's really too early to say.

Kristen: Yeah, Ken, so for the year, that is what we had communicated back in the Q2 release. Obviously, we're pretty far off of that with the revised guidance, and that, of course, has to do with the web pricing challenges we've had, the timing of the core ramp-up.

Kristen Actis: Beyond 24, it's really too early to say. You know, I know there's going to be a strong demand out there for insight around FY25, especially just given what's happening in the macro environment, what kind of what we can see and what we have line of situ. But generally, it's really still too early for us to say. On the top line, of course, we are very short cycle, and that's, I'd say, even in a normal demand environment condition certainly in the situation we're in today with the macro uncertainty that makes it even a little bit harder to predict.

Kristen Actis: You know, I know there's going to be a strong demand out there for insight around FY25, especially just given what's happening in the macro environment, what kind of what we can see, and what we have line of sight to. But generally, it's really still too early for us to say. On the top line, of course, we are in a very short cycle, and that's, I'd say, even in a normal demand environment. Certainly, in the situation we're in today with the macro uncertainty, that makes it even a little bit harder to predict.

Speaker Change: Beyond 24, it's really too early to say, you know, I know there's there's a going to be a strong demand out there for insight around FY 25, especially

Speaker Change: Just given what's happening in the macro environment, what kind of what we can see and what we have line of sight to, but generally, it's really still too early for us to say.

Speaker Change: On the top line, of course, we are very short cycle, and that's, I'd say, even in a normal demand environment condition, certainly in the situation we're in today with the macro uncertainty that makes it even a little bit harder to predict.

Kristen Actis: And then on gross margins, like if I just kind of walked down the PNL to try to at least get some color into 25, we are really pleased with the way that gross margins have been trending in 4Q, especially the recovery that we're seeing post-web price realignment issues. But again, it's a lot of moving pieces. We've got the stabilization of the web price; timing of core customer recovery is a big piece of that. and then, of course, what happens with mixed with respect to the customer type growth in public sector and national accounts.

Kristen Actis: And then on gross margins, like if I just kind of walk down the P&L to try to at least get some color into 25, we are really pleased with the way that gross margins have been trending in 4Q, especially the recovery that we're seeing post-web price realignment issues. But again, there are a lot of moving pieces.

Speaker Change: And then on gross margins, like if I just kind of walk down the P&L to try to at least get some color into 25, we are really pleased with the way that gross margins have been trending in 4Q, especially the recovery that we're seeing post-web price realignment issues.

Kristen Actis: We've got the stabilization of the web price. Timing of core customer recovery is a big piece of that. And then, of course, what happens with mix with respect to customer type growth. One thing I can give you is a little bit more direct color on OPEX, though, specific to 25 in the first quarter.

Speaker Change: But again it's a lot of moving pieces. We've got the stabilization of the web price, timing of core customer recovery is a big piece of that.

Speaker Change: And then, of course, what happens with mix with respect to the customer-type growth.

Kristen Actis: One thing I can't give you a little bit more direct color home with OPEX, though specific to 25 in the first quarter. I do think it's important to note that we have line of sight to a sequential step up in OPEX Q4, Q1. And that has to do with the resetting of the variable compensation programs to the new fiscal year and a step up in DNA. So, you know, I know that's a small bit of specific information for 25, but hopefully that least helps put a finer point on OPEX for the first quarter.

Speaker Change: in Public Sector and National Accounts. One thing I can give you is a little bit more direct color on with OPEX though, specific to...

Kristen Actis: I do think it's important to note that we have line of sight to a sequential step up in OPEX from Q4 to Q1, and that has to do with the resetting of the variable compensation programs to the new fiscal year and a step up in DNA. So, you know, I know that's a small bit of specific information for 25, but hopefully, that at least helps put a finer point on OPEX for the first quarter.

Speaker Change: I do think it's important to note that we have line-of-sight to a sequential step-up in OPEX Q4 to Q1, and that has to do with the resetting of the variable compensation programs. Thank you.

Speaker Change: to the new fiscal year and a step up in DNA. So, you know, I know that's a small bit of specific information for 25, but hopefully that at least helps put a finer point on OPEX for the first quarter. And then we will follow up with more insight on the year when we do the Q4 release.

Kristen Actis: And then we will follow up with more insight on the year when we do the Q4 release and try to share as much as we can about guidance for 25 at that time.

Kristen Actis: And then we will follow up with more insight on the year when we do the Q4 release and try to share as much as we can about guidance for 25 at that time. Got it. Simple. The next question comes from Chris Dankert with Loop Capital. Please go ahead.

Speaker Change: and try to share as much as we can about guidance for 25 at that time.

Ken Newman: Got it, double.

Ken Newman: Thanks.

Christopher Dankert: The next question comes from Chris Dankert with Loop Capital.

Speaker Change: Got it. It's helpful.

Christopher Dankert: Please go ahead. Any morning, I'll first off, you know, Eric, I know it's not the, you know, it's not the largest deal in recent memory here, but congrats on adding APTX and a really solid team there and walking show.

Speaker Change: The next question comes from Chris Dankert with Loop Capital. Please go ahead.

Christopher M. Dankert: Hey, morning all. First off, Erik, I know it's not the largest deal in recent memory here, but congrats on adding AptX and a really solid team there in Waukesha. I guess, you know, just first off here, thinking about the big marketing push after we kind of get through the web reset here. Is there any historical precedent or any kind of reading from pilot programs in terms of how long it takes to kind of get the juice from that marketing push? Yeah, Chris, that's a good question. You know, so I can tell you that there is no direct analogy to draw from.

Christopher M. Dankert: Hey, good morning all. First off, Erik, I know it's not the largest deal in recent memory here, but congrats on adding AptX and a really solid team there in Waukesha.

Erik Gershwind: I guess, you know, first off here, thinking about the big marketing push after we kind of get through the web reset here, is there any historical precedent or any kind of read from pilot programs in terms of how long it takes to kind of get the juice from that marketing push. Yeah, Chris, that's a good question. You know, so I can tell you that there is no direct analogy to draw from, and I know what you're getting at is what can we expect in a lift. What I will tell you is from a marketing standpoint, while the campaign will be new, many of the tactics that will use in terms of digital marketing, print marketing, and personal outreach are tried and true.

Speaker Change: Here, thinking about the big marketing push after we kind of get through the web reset here, is there any historical precedent or any kind of reads from pilot programs in terms of how long it takes to kind of get the juice from that marketing push?

Erik David Gershwind: And I know what you're getting at is what can we expect in a lift. What I can tell you is, from a marketing standpoint, while the campaign will be new, many of the tactics that we'll use in terms of digital marketing, print marketing, and personal outreach are tried and true. It'll be a new combination and a new message, but the means by which we're getting to customers are means that we are very familiar with and do have a track record with. If what you're looking for is more of a specific quantitative inflection, it's a tough one to give you.

Christopher M. Dankert: Yeah, Chris, that's a good question. You know, so I can tell you that there is no direct analogy to draw from. And I know what you're getting at is what can we expect

Christopher M. Dankert: in a lift. What I will tell you is, from a marketing standpoint,

Christopher M. Dankert: While the campaign will be new, many of the tactics that we'll use in terms of digital marketing, print marketing,

Erik Gershwind: It'll be a new combination and a new message, but the means by which we're getting to customers are means that we are very familiar with and do have a track record with if what you're looking for is more kind of a specific quantitative inflection.

Christopher M. Dankert: and Personal Outreach.

Erik David Gershwind: And it's tough in particular, because who knows what the world's going to look like by the time we get to Q2. And it's sort of tough to predict. But I do think, you know, I think the other thing I'll say, by the way, Chris, beyond the marketing campaign is we do expect, Improvements in the website, you know, there's some betting on the come with marketing, but improvements in the website should, you know, there are quantitative measures that we're tracking daily that you could see when we, when we see improvements in site effectiveness that yields a higher conversion rate, meaning for every hundred people coming to the website how many convert into a sale and how big is the sale.

Christopher M. Dankert: are tried and true. It'll be a new combination and a new message. But the means by which we're getting to customers are means that we are very familiar with and do have a track record with. If what you're looking for is more kind of a specific quantitative inflection, it's a tough one to give you. And it's tough in particular because

Erik Gershwind: It's a tough one to give you, and it's tough and particular because who knows what the world's going to look like by the time we get to queue to. And it's sort of tough to predict, but I do think, you know, I think the other thing I'll say, by the way, Chris, beyond the marketing campaign, is we do expect improvements in the website. You know, there's some betting on the come with marketing, but improvements in the website should, there are quantitative measures that we're tracking daily that you could see when we see improvements in side effectiveness that yields a higher conversion rate, meaning for every hundred people coming to the website.

Christopher M. Dankert: Who knows what the world's going to look like by the time we get to Q2? And it's sort of tough to predict, but I do think, you know, I think the other thing I'll say, by the way, Chris, beyond the marketing campaign is we do expect...

Christopher M. Dankert: improvements in the website you know there's some betting on the come with marketing

Christopher M. Dankert: But improvements in the website should there are quantitative measures that we're tracking daily

Christopher M. Dankert: that you could see when we see improvements in site effectiveness that yields a higher conversion rate, meaning for every hundred people coming to the website, how many convert into a sale and how big is the sale?

Erik Gershwind: And how many convert into a sale, and how big is the sale? Those are metrics that we're tracking carefully, and we would fully expect to see read-through into revenue improvements on the existing basic business.

Erik David Gershwind: Those are metrics that we're tracking carefully, and we would fully expect to see read through into revenue improvements on the existing base of business. The marketing campaign re-energizing new customers is a bit trickier to quantify.

Christopher M. Dankert: Those are metrics that we're tracking carefully and we would fully expect to see read-through into revenue improvements on the existing base of business. The marketing campaign re-energizing new customers is a bit trickier to quantify.

Erik Gershwind: The marketing campaign re-energizing new customers a bit trickier to quantify.

Kristen Actis: Got it, got understood, and then just a lot to follow up here. I guess moving to in plants nicely, you know, the growth is better than kind of overall. I guess maybe just any comments on what the cost to serve, you know, looks like in that business relative to, you know, what your expectations were, how the profit of ability progressing in that piece of the business perhaps. Yeah, Chris, so broadly we're seeing stable performance in the profit for the implant customers. There's definitely a difference depending on how mature the implant customer is, and that's one of the things that we've been kind of dealing with on the PNL in 24. Because the growth has been so high, we have to make that up front investment in the implant resource. It takes time for the account to ramp up, but generally we've continued to see performance as we expected on those accounts. And then really once you hit like the six to nine month mark, we see really nice stabilization of profit there. The accounts start to reach maturity, and if you look back like kind of by class at the implants, which is how we look at things internally, once you hit that point of stability, we see a nice contribution margin from the implant customer.

Erik David Gershwind: And then just, you know, as a follow-up here, I guess, moving on to InPlant, nice to see the growth is better than kind of overall. I guess maybe just any comments on what the cost to serve looks like in that business relative to, you know, what your expectations were. How's the profitability progressing in that piece of the business, perhaps? Yeah, Chris, so broadly, we're seeing stable performance in profit for the in-plant customers.

Speaker Change: Got it, got it, understood. And then just, you know, a follow-up here, I guess, moving to in-plant, nice to see the, you know, the growth is better than kind of overall, I guess, maybe just any comments on what the cost to serve, you know, looks like in that business relative to, you know, what your expectations were, how's the profitability progressing in that piece of the business, perhaps?

Speaker Change: Yeah, Chris, so broadly we're seeing stable performance in the profit for the in-plant customers. There's definitely a difference depending on how mature the in-plant customer is and that's one of the things that we've been, you know, kind of dealing with on the P&L and 24 because the growth has been so high. We have to make that upfront investment in the in-plant resource.

Erik David Gershwind: There's definitely a difference depending on how mature the in-plant customer is. And that's one of the things that we've been, you know, kind of dealing with on the P&L and 24, because the growth has been so high, we have to make that upfront investment in the in-plant resource, which takes time for the account to ramp up. But generally, we've continued to see performance as we expected on those accounts. And then, really, once you hit the six to nine month mark, we see really nice stabilization of profit there; the accounts start to reach maturity.

Speaker Change: [inaudible]

Erik David Gershwind: And if you look back, like kind of by class at the in-plants, which is how we look at things internally, once you hit that point of stability, we see a nice contribution margin from the in-plant customer. Hey Chris, one thing I'll add just for commentary.

Speaker Change: Stabilization of profit there. The accounts start to reach maturity and if you look back like kind of by class at the implants, which is how we look at things internally, once you hit that point of stability we see a nice contribution margin from the implant customer.

Kristen Actis: Hey Chris, one thing I'll add, just on an I'll add for commentary, I think Kristen nailed it on the profitability front. On the growth side, you mentioned, here's a while implant without performing the company nicely. I think we said growth in the implant program in the quarter was 4%. I mean, if you look at the first, Kristen mentioned that there's a ramp in classes of customers, the first year or two with an implant we see explosive growth. So if you go back to our mature classes of customers, growth is well below that, and these are our best customers. Again, I think indicative of market softness that as we continue signing more implants, we're building an embedded base of business that as things turn should give us a nice lift.

Erik David Gershwind: I think Kristen nailed it on the profitability front. On the growth side, you mentioned, so while Implant is outperforming the company nicely, I think we said growth in the Implant program in the quarter was 4%. I mean, if you look at the first, Kristen mentioned that there's a ramp in classes of customers. The first year or two with an Implant, we see explosive growth.

Speaker Change: Hey Chris, one thing I'll add for commentary, I think Kristen nailed it on the profitability front. On the growth side, you mentioned, while Implant is outperforming the company nicely, I think we said growth in the Implant program in the quarter was 4%. If you look at the first, Kristen mentioned that there's a ramp in classes of customers.

Erik David Gershwind: So if you go back to our mature classes of customers, growth is well below that. And these are our best customers. Again, I think it's indicative of market softness that as we continue signing more Implants, we're building an embedded base of business that, as things turn, should give us a nice lift. Got it. Thanks a lot for the call there.

Speaker Change: The first year or two with an implant, we see explosive growth. So if you go back to our mature classes of customers, growth is well below that. And these are our best customers. Again, I think indicative of market softness that as we continue signing more implants, we're building an embedded base of business.

Christopher Dankert: Got it, thanks for the color there.

Speaker Change: that, as things turn, should give us a nice lift.

Kristen Actis: Yeah, and Chris, one more thing clarifies: I said nice contribution margin, but to be clear, it is at or above company operating margin at that point.

Christopher M. Dankert: Yeah, Chris, one more thing to clarify. I said a nice contribution margin, but to be clear, it is at or above company operating margin at that point. Got it. The next question comes from Ryan Merkel with William Blair. Please go ahead.

Speaker Change: Got it. Thanks a lot for the color there.

Speaker Change: And Chris, one more thing to clarify, you said nice contribution margin, but to be clear, it is at or above company operating margin at that point.

Ryan Merkel: The next question comes from Ryan Merkel with William Blair. Please go ahead. Hey, everyone. Morning, Ryan. Morning, Ryan.

Speaker Change: Got it.

Speaker Change: The next question comes from Ryan Merkel with William Blair. Please go ahead.

Ryan James Merkel: Hey, everyone. Good morning, Ryan. I had a couple of questions on the web realignment. I guess, first off, Erik, what percent of sales are going to see a lower price? And then can you give us a rough range of how much lower prices would be for that group of customers? So, Ryan, in terms of what percentage, if you looked at today's base of business, Okay, it would be under half of our business because many of our customers already have negotiated prices.

Ryan James Merkel: The opportunity here is, number one, for that base of existing customers who don't have a negotiated price, and then, number two, tapping into a whole new set of business and customers that we don't have. So I think that's point one. Point two, in terms of what price the customer will see, it's hard to get, you know? Averages are really deceiving, right? So I could give you an average, but the average would be entirely misleading.

Ryan Merkel: I had a couple of questions on the web alignment. I guess first off, Eric, what percentage sales are going to see a lower price, and then can you give us a rough range of how much lower prices are that I could the customers? So Ryan, in terms of what percentage, if you looked at today's base of business, it would be under half of our business because many of our customers already have negotiated pricing. The opportunity here is both number one, for that base of existing customers who don't have a negotiated price, and then number two, tapping into a whole new set of business and customers that we don't have.

Ryan James Merkel: Hey, everyone.

Speaker Change: Morning, Ryan.

Ryan James Merkel: I had a couple questions on the web realignment. I guess first off, Erik, what percent of sales are going to be a lower price? And then can you give us a rough range of how much lower prices are for that group of customers?

Erik: So, Ryan, in terms of what percentage, if you looked at today's base of business,

Ryan: Okay, it would be under half of our business because many of our customers already have negotiated pricing. The opportunity here is both, number one, for that base of existing customers who aren't, don't have

Ryan: a negotiated price, and then number two,

Erik Gershwind: So I think that's point one, point two. In terms of what price the customer will see, it's hard to get; you know, averages are really deceiving, right? So I could give you an average, but the average would be entirely misleading. Let me explain what I mean by that. Basically, what we've done is, on an item-by-item basis, identified what the range of market looks like, and we wanted to make sure that for all of our items, we were in that range. And so, in some cases, that meant that we had to take pricing down considerably. There were other cases where we actually found we were below the range. Obviously, there were more that we were above the range than below the range, but an average would be tricky.

Ryan: tapping into a whole new set of business and customers that we don't have.

Ryan: So I think that's point one. Point two, in terms of what price the customer will see, it's hard to get, you know, averages are really deceiving, right? So I could give you an average, but the average would be entirely misleading. Let me explain what I mean by that.

Erik David Gershwind: Let me explain what I mean by that. Basically, what we've done is, on an item-by-item basis, identified what the range of the market looks like, and we wanted to make sure that for all of our items, we're in that range. And so, in some cases, that meant that we had to take prices down considerably. There were other cases where we actually found we were below the range. Obviously, there were more times that we were above the range than below the range, but an average would be tricky.

Ryan: Basically what we've done is on a item-by-item basis identified what the range of market looks like and we wanted to make sure that for all of our items we're in that range.

Ryan: And so, in some cases, that meant that we had to take...

Ryan: Pricing down considerably.

Ryan: There were other cases where we actually found we were below the range. Obviously, there were more that we were above the range than below the range, but an average would be tricky. I think what we

Erik Gershwind: I think what we do feel good about is that our customers can feel confident that we're going to have a market-credible price, if you will, and be within some band of reason.

Erik David Gershwind: I think what we do feel good about is that our customers can feel confident that we're going to have a market-credible price, if you will, and be within some band of reason. Again, the strategy here was not to win business on price. It was to take away cases where we were losing business on price. Okay. No, that makes sense.

Ryan: What we do feel good about is that our customers can feel confident that we're going to have a market-credible price, if you will, and be within some band of reason. Again, the strategy here was not to win business on price. It was to take away cases where we were losing business on price.

Erik Gershwind: Again, the strategy here was not to win business on price. It was to take away cases where we were losing business on. Trust.

Ryan Merkel: Okay, now that makes sense, and really where I'm going with the question is you know what the opportunity, what are we going to get? So it sounds like we'll give up a little bit of price B to D where we were before, but you think you're going to get the core customers growing high single digits, and then the core customers are also higher gross margin.

Erik David Gershwind: And really, where I'm going with the question is, you know, what's the opportunity? What are we going to get? So it sounds like we'll give up a little bit of price vis-a-vis where we were before, but you think you're going to get the core customers growing in high single digits, and then the core customers are also higher gross margin. Just talk about when you get this right, what it means for the P&L. Yeah, I Ryan, I think you teed it up probably better than we did.

Ryan: Okay.

Speaker Change: Now, that makes sense, and really where I'm going with the question is, you know, what's the opportunity? What are we going to get? So, it sounds like we'll give up a little bit of price, B2B, where we were before, but you think you're going to get the core customers growing high single digits, and then the core customers are also higher gross margin. Just talk about when you get this right, what it means for the Q&L.

Erik Gershwind: Just talk about when you get this right, what it means for the community now. Yeah, Ryan, and I think you teed it up probably better than we did. I think that's exactly right, and it's why so much of our focus here is on reenergizing the core customer. These customers are certainly higher margin than our average customer, lower cost to serve, and it's not just. And that was where we wanted to go back to kind of the trifecta of the initiatives of the web pricing, which is really an enabler, if you will, to put us in a, as I said, sort of a reasonable range, and then combine that with a marketing effort and a website.

Erik David Gershwind: I think that's exactly right, and it's why so much of our focus here is on re-energizing the core customer. These customers are certainly higher-margin than our average customer, and they have a lower cost to serve. And that was where we wanted to go back to kind of the trifecta of the initiatives of the web pricing, which is really an enabler, if you will, to put us in a, as I said, sort of a, you know, a reasonable range, and then combine that with a marketing effort and a website.

Speaker Change: Yeah, Ryan, and I think you teed it up probably better than we did. I think that's exactly right. And it's why so much of...

Speaker Change: Our focus here is on re-energizing the core customer. These customers are certainly higher margin than our average customer, lower cost to serve.

Speaker Change: And it's not just, and that was where we wanted to go back to.

Speaker Change: kind of the trifecta of the initiatives of the web pricing, which is really an enabler, if you will.

Erik David Gershwind: And it was why at the last pre-release, Ryan, we were, you know, we were really disappointed and sort of pointed to the website, because without the website being really ready for prime Time, if you will, it sort of held us back on the other two initiatives.

Speaker Change: to put us in a, as I said, sort of a, you know, a reasonable range and then combine that with a marketing effort and a website. And it was why on the last, on the pre-release, Ryan, we were, you know, we were really disappointed and sort of pointed to the website because without the website being really ready for prime time, if you will.

Erik Gershwind: And it was why, on the last, on the pre-release, Ryan, we were really disappointed and sort of pointed to the website because, without the website being really ready for prime time, if you will, it sort of held us back on the other two initiatives. So we're pointing to Q2. We feel pretty good right now about progress that's going on on the website. So you combine those three efforts, and all of a sudden, we take a portion of the business, a big portion of the business that has been diluted to growth rate, even bringing it to company average.

Speaker Change: It held us back on the other two initiatives. So we're pointing to Q2. We feel pretty good right now about progress that's going on on the website. So you combine those three efforts.

Speaker Change: And, you know, all of a sudden we take a portion of the business, a big portion of the business that has been diluted to growth rate, even bringing it to company average.

Erik David Gershwind: So we're pointing to Q2. We feel pretty good right now about the progress that's going on on the website. So you combine those three efforts. Number one, it massively improves the growth rate. And then number two, to your point, you know, our company for the last whatever number of years you've been following us, there's been this built-in gross margin customer mix headwind because the larger accounts that have been growing faster or lower margin, if that goes away, it opens up a whole new world in terms of incremental margins because all of a sudden, there's no longer gross margin dilution.

Erik Gershwind: Number one, massively improves the growth rate, and then number two, to your point, our company, for the last, however many years you've been following us, there's been this built-in, growth margin, customer mix headwind, because the larger accounts that have been growing faster are lower margin. If that goes away, it opens up a whole new world in terms of incremental margins, because all of a sudden there's no longer a growth margin solution. We're leveraging top-line growth, and then layering in some productivity, like the supply chain study we mentioned. So thank you for the question. Yeah, I'll make sense.

Speaker Change: number one massively improves the growth rate and then number two to your point you know our company for the last however many years you've been following us there's been this built-in gross margin customer mix headwind

Speaker Change: because the larger accounts that have been growing faster or lower margin, if that goes away...

Speaker Change: It opens up a whole new world in terms of incremental margins because all of a sudden there's no longer gross margin dilution. We're leveraging top-line growth and then layering in some productivity like the supply chain study we mentioned. So, thank you for the question.

Erik David Gershwind: We're leveraging top-line growth and then layering in some productivity, like the supply chain study we mentioned. So thank you for the question. Yeah, it all makes sense. Thank you. Best of luck. Thanks, Ryan. The next question comes from Chirag Patel with Jeffreys. Please go ahead. Thank you.

Erik Gershwind: Thank you. Bethel, look. That's right.

Speaker Change: Yeah, all makes sense. Thank you. Best of luck.

Shirag Patel: The next question comes from Chair Patel with Jeffries. Please go ahead. Thank you. I just wanted to circle back on the M&A for a quick second here. One is to get a sense for how much revenue contribution we can think of on an annual basis for the two businesses that were acquired in June, and then whether or not those businesses also are currently performing at the current MSE margin, and maybe the initiatives that are anticipated to maybe even have an outgrip of the form over time.

Ryan: Thanks, Ryan.

Speaker Change: The next question comes from Chirag Patel with Jeffreys. Please go ahead.

Chirag Patel: I just wanted to circle back on the M&A for a quick second. I wanted to get a sense for how much of a revenue contribution we can think of on an annual basis for the two businesses that were acquired in June, and then whether or not those businesses are also currently performing at the current MSC margin, and maybe the initiatives that are anticipated to maybe even have an outgrow over time. Yeah, morning, I can take that one.

Chirag Patel: Thank you. I just wanted to circle back on the M&A for a quick second here. I wanted to get a sense for how much revenue contribution we can think of on an annual basis for the two businesses that were acquired in June , and then whether or not those businesses also are currently performing at the current MSC margin, and maybe the initiatives that are anticipated to maybe even have an outgrowth perform over time.

Kristen Actis: Yeah, Maureen, I can take that one. So the annualization of the two we just acquired is a little bit over 20 million. And I think the second part of your question was, are they at or above the company operating margin? One is currently above. One is below, which is not atypical on the initial acquisition for some of our bolt-ons, but we are able to quickly bring synergies in place, both on the cost side that usually get that up, depending on the degree to which we have to do the work. Some are faster than others. But the longer-term synergy play, Shirag on the M&A bolt-ons, is on the growth side, and there's typically things that we do kind of on day one to initiate, like cross-sell with the acquired company, for example.

Kristen Actis: So the annualization of the two we just acquired is a little bit over $20 million. And I think the second part of your question was, are they at or above the company operating margin? One is currently above, and one is below, which is not atypical on the initial acquisition for some of our bolt-ons. But we are able to quickly bring synergies in place, both on the cost side that usually gets that up. Depending on the degree to which we have to do the work, some are faster than others.

Speaker Change: Yeah, Marni, I can take that one. So the annualization of the two we just acquired is a little bit over $20 million.

Speaker Change: And I think the second part of your question was, are they at or above the company operating margin? One is currently above, one is below, which is not atypical on the initial acquisition for some of our bolt-ons.

Speaker Change: But we are able to quickly bring synergies in place, both on the cost side that usually get that up.

Speaker Change: Depending on the degree to which we have to do the work, some are faster than others.

Chirag Patel: The longer-term synergy play, Chirag on the M&A bolt-ons, is on the growth side.

Kristen Actis: But the longer-term synergy play, Chirag, on the M&A bolt-ons is on the growth side. And there's typically things that we do kind of on day one to initiate, like cross-selling with the acquired company, for example. That's an area I think we talked about in the prepared remarks that we were having early success with CAR. But then the growth synergy benefit tends to grow incrementally each year the more that we mature where we are post-acquisition, like with all of the initiatives that are in place.

Chirag Patel: And there's typically things that we do kind of on day one to initiate like cross-sell with the acquired company, for example. That's an area I think we talked about in the prepared remarks that we're having early success with CAR.

Kristen Actis: That's an area I think we talked about in the prepared remarks that we're having early success with CAR, but then the growth synergy benefit tends to grow incrementally each year, the more that we mature, where we are post-acquisition, like with all of the initiatives that are in place. So every acquisition we do is a little bit different; even on the bolt-ons, but these two, I'd say, are very much kind of aligned to the playbook that we run, and really low risk in terms of our confidence in getting synergies in line. Yeah, that's right.

Chirag Patel: But then the growth synergy benefit tends to grow incrementally each year, the more that we mature where we are post-acquisition, like with all of the initiatives that are in place.

Kristen Actis: So every acquisition we do is a little bit different, even on the bolt-ons. But these two, I'd say, are very much kind of aligned to the playbook that we run and really low risk in terms of our confidence in getting synergies in line.

Chirag Patel: Every acquisition we do is a little bit different, even on the bolt-ons, but these two, I'd say, are very much kind of aligned to the playbook that we run and really low risk in terms of our confidence in getting synergies in line.

Erik David Gershwind: And actually, on that playbook front, it's a nice slide to have where it kind of shows you what you're kind of hitting on as far as the M&A criteria go. We're kind of missing this high growth and market piece of the pie. I wanted to touch on that for a second. One, just the idea of how much of your business currently is kind of in what you would qualify as these high-end growth markets, and then maybe even identifying a couple of them would be helpful as you kind of look at growth going forward. Yeah, sure. I'm happy to take that one.

Shirag Patel: And actually on that staple front, it's a nice slide to have what it kind of shows you what you're kind of hitting on as far as the MMA criteria go. We're kind of missing on this high growth and market piece of the pie. I wanted to touch on that for a second. One, just the idea of how much of your business currently is kind of in what you would qualify as these high-end growth markets, and then maybe even identifying a couple of them would be helpful as you kind of look at growth going forward, I guess.

Chirag Patel: And actually, on that playbook front, it's a nice slide to have where it kind of shows you what you're kind of hitting on as far as the M&A criteria go. We're kind of missing on this high growth and market piece of the pie. I wanted to touch on that for a second.

Speaker Change: Just the idea of how much of your business currently is kind of in what you would qualify as these high-end growth markets, and then maybe even identifying a couple of them would be helpful as you kind of look at growth going forward, I guess.

Erik David Gershwind: So, first of all, what I'd say is there are a number of criteria on that slide that we wanted to get across. So, the high-growth end markets are one, but there are several others, and the last two and the last several we've done check a number of boxes. In terms of the high growth end markets, look, the first thing I'll say is, as I mentioned a little earlier on, we feel pretty good about being positioned in North American manufacturing.

Erik Gershwind: Yeah, sure, I'm happy to take that one. So, first of all, what I'd say is you see a number of criteria on that slide that we wanted to get across. So the high growth and markets is one, but there's several others. And the last two, and the last several we've done, check a number of boxes. In terms of the high growth and markets, look, I the first thing I'll say is I mentioned a little earlier on, we feel we feel pretty good about being positioned in North American manufacturing. At the moment, it doesn't feel so good when you look at the MBI, and we look at maybe the next couple of months here, but if we zoom out and look at the next few years, we do feel like North American manufacturing as a whole is going to be a secular grower.

Speaker Change: Yeah, sure. I'm happy to take that one. So, first of all, what I'd say is you see a number of criteria on that slide that we wanted to get across. So, the high growth end markets is one, but there's several others, and the last two and the last several we've done check a number of boxes. In terms of the high growth end markets, look, I...

Speaker Change: The first thing I'll say is I mentioned a little earlier on we feel we feel pretty good about being positioned in North American manufacturing

Erik David Gershwind: At the moment, it doesn't feel so good when you look at the MBI, and we look at maybe the next couple of months here, but if we zoom out and look at the next few years, we do feel like North American manufacturing as a whole is going to be a secular grower, is going to benefit from the post-COVID reshoring trends. So we feel like it's a pretty good place to be.

Speaker Change: Well, at the moment, it doesn't feel so good when you look at the MBI and we look at maybe the next couple of months here, but if we zoom out and look at the next few years, we do feel like North American manufacturing as a whole.

Erik Gershwind: It's going to benefit from the post-COVID reshoring trends. So we feel it's like it's a pretty good place to be. Within that, there's obviously pockets that are growing faster and are projected to grow faster than others. I mean, one certainly would be aerospace that comes to mind that has been since COVID on a good trajectory and is projected to continue on a good trajectory. And there, you know, an example would be an acquisition that we did a few years ago, WM Hurst, which is in Wichita, which was is heavily aerospace exposed. So that would be an example of one in our portfolio that does check the high growth and market.

Speaker Change: is going to be a secular grower, is going to benefit from the post-COVID reshoring trends.

Erik David Gershwind: Within that, there are obviously pockets that are growing faster and are projected to grow faster than others. I mean, you know, one certainly would be aerospace that comes to mind that has been, since COVID, on a good trajectory and is projected to continue on a good trajectory. And there, you know, an example would be an acquisition that we did a few years ago, WM Hearst, which is in Wichita, which was, is heavily exposed to aerospace.

Speaker Change: So we feel like it's a pretty good place to be. Within that, there's obviously pockets that are growing faster and are projected to grow faster than others. I mean, you know, one certainly would be aerospace that comes to mind.

Speaker Change: that has been, since COVID, on a good trajectory and is projected to.

Speaker Change: Continue on a good trajectory and there you know an example would be an acquisition that we did

Speaker Change: a few years ago, W.M. Hearst, which is in Wichita, which is heavily aerospace exposed. So that would be an example of one in our portfolio that does check the high growth and market bucket, if you will. So it definitely is, it's in our mind, it's part of what we look at, but not the only thing we look at.

Erik David Gershwind: So that would be an example of one in our portfolio that does check the high growth and market bucket, if you will. So it definitely is, it's in our minds, it's part of what we look at, but not the only one.

Erik Gershwind: So it definitely is; it's in our mind, it's part of what we look at, but not the only thing we look at. Understood. And then if you were to qualify the idea high growth and markets, how much of a portfolio currently addresses that and how much. What do you think would be a good mix long return? So I would say today the majority of our, we talked in the prepare remarks a little bit about the majority. If you look at so, so MSC today is roughly 70% manufacturing. Of that, a good chunk is sitting in end markets that right now are weighed down disproportionately and probably not considered high necessarily outgoing the rest of manufacturing.

Erik David Gershwind: And then, if you were to qualify the idea of high growth and markets, how much of your portfolio currently addresses that? And how much?

Speaker Change: We'll be right back.

Speaker Change: Understood. And then, if you were to qualify the idea of high growth and markets, how much of your portfolio currently addresses that, and what do you think would be a good mix long-term?

Erik David Gershwind: What do you think would be a good mix long term? So I would say today, the majority of our, we talked in the prepared remarks a little bit about the majority. If you look at MSC today, roughly 70% of it is manufacturing. Of that, a good chunk is sitting in end markets that right now are weighed down disproportionately and probably not considered necessarily to be outgrowing the rest of manufacturing. So today, the high growth end markets would be a minority of the 70%, certainly less than half of the 70%. So think aerospace, think medical, think there's a couple of other ones that, just for sensitivity reasons. We're not going to call out on the call.

Speaker Change: So I would say today the majority of our, we talked in the prepared remarks a little bit about the majority, if you look at, so MSC today is roughly 70% manufacturing.

Speaker Change: Of that, a good chunk is sitting in...

Speaker Change: and markets that right now are weighed down disproportionately.

Speaker Change: and probably not considered.

Erik Gershwind: So today, the high growth and markets would be a minority of the 70%; certainly less than half the 70%. So think aerospace, the medical thing. There's a couple of other ones that just said the pivot reasons we're not going to call out on the call, but what I say is over time, given the goals that we have for market share capture for MSC. So maybe you know what one would think it would be fair to say that our portfolio of business should be somewhat reflective of what the market looks like. So today, it's a little bit more heavily weighted towards heavy equipment and machinery, metal fabrication, which would be reflective of our job shop type customer.

Speaker Change: I'm necessarily outgrowing the rest of manufacturing. So today, the high growth end markets would be

Speaker Change: a minority of the 70%, certainly less than half the 70%. So think aerospace, think medical, think there's a couple of other ones that.

Erik David Gershwind: But what I'd say is, over time, given the goals that we have for market share capture for MSC, you know, one would think it would be fair to say that our portfolio of business should be somewhat reflective of what the market looks like. So today, it's a little bit more heavily weighted towards heavy equipment and machinery, and metal fabrication, which would be reflective of our job shop type customers, and over time, we'd like to see the portfolio kind of mirror what the market looks like. understood. I appreciate it.

Speaker Change: just sensitivity reasons, we're not going to call out on the call. But what I'd say is over time, given the goals that we have for market share capture for MSC, you know, one would think it would be fair to say that our portfolio of business should be somewhat reflective of what the market looks like.

Speaker Change: So today it's a little bit more heavily weighted towards heavy equipment and machinery, metal fabrication, which would be reflective of our job shop type customer, and that over time we'd like to see the portfolio kind of mirror what the market looks like.

Erik Gershwind: And that over time, we'd like to see the portfolio kind of mirror what the market looks. like.

Shirag Patel: I just would appreciate it. Thank you, guys.

Patrick Baumann: Our last question comes from Patrick Baumann with JP Morgan. Please go ahead. Oh, hi. Good morning. I had a couple here. One for Kristen. Good morning, Kristen. How are you? I'm good. Just had a first one for you, maybe, on the OpEx. The 8 to 10 million sequential increases is a bit more than we would have expected. Can you talk about the drivers again into the fourth quarter? And I thought that the Columbus closure impacts things starting in June, but maybe I'm off on timing. And then you mentioned OpEx up again in the first quarter because of merit.

Speaker Change: Understood. I appreciate it. Thank you, guys.

Chirag Patel: Thank you, guys. Our last question comes from Patrick Baumann with J.P. Morgan. Please go ahead. Oh, hi. Good morning. I had a couple here. One for Kristen. Good morning, Kristen. How are you?

Speaker Change: Our last question comes from Patrick Baumann with J.P. Morgan. Please go ahead.

Patrick Michael Baumann: Oh, hi. Good morning. I had a couple here. One for Kristen. Good morning, Kristen. How are you?

Patrick Michael Baumann: I'm good. I just had a first one for you, maybe on OPEX. The 8 to 10 million sequential increase is a bit more than we would have expected. Can you talk about the drivers again in the fourth quarter? And I thought that the Columbus closure would impact things starting in June, but maybe I'm off on timing. And then you mentioned OPEX coming up again in the first quarter because of merit. What type of pay increase are you getting?

Kristen: Good, how are you?

Patrick Michael Baumann: I'm good. Just had a first one for you maybe on the OPEX. The 8 to 10 million sequential increase is a bit more than we would have expected. Can you talk about the drivers again into the fourth quarter? And I thought that the Columbus closure impacts things starting in June , but maybe I'm off on timing.

Kristen Actis: What type of pay increase are you doing?

Patrick Michael Baumann: And then you mentioned OPEC's up again in the first quarter because of merit. What type of pay increase are you doing?

Kristen Actis: And I thought maybe you would get some headcam reductions from that CFC closure, which would offset some of that. But maybe just some insight into the moving parts on their quarter to fourth quarter, fourth quarter to first quarter. And then the magnitude to think about in terms of step-up marketing costs from first quarter to second quarter because you said something about the second quarter of marketing expenses. Yeah, yeah, happy to walk you through that.

Patrick Michael Baumann: I thought maybe...

Patrick Michael Baumann: You would get some headcount reductions from that.

Patrick Michael Baumann: CFC closure which which would offset some of that but maybe just some insight into the moving parts on

Patrick Michael Baumann: And I thought maybe you would get some headcount reductions from that CFC closure, which would offset some of that. But maybe just some insight into the moving parts from third quarter to fourth quarter, fourth quarter to first quarter. And then the magnitude to think about in terms of stepped-up marketing costs from first quarter to second quarter. Yeah, yeah, happy to walk you through that.

Speaker Change: 3rd quarter to 4th quarter, 4th quarter to 1st quarter, and then the magnitude to think about in terms of stepped up marketing costs from 1st quarter to 2nd quarter, because she said something about 2nd quarter marketing expenses.

Kristen Actis: So let's start, let's start with the Q3 to Q4 sequential. So the first factor in there is that we had a benefit in the third quarter related to the variable compensation programs that that benefit is not going to repeat in Q4. So that's a step up of $4 million. And then the balance of the expense sequentially stepped up is, well, I'm going to break it down in a few buckets. So we've got increased DNA.

Kristen Actis: So let's start, let's start with the Q3 to Q4 sequential. So the first factor in there is that we had a benefit in the third quarter related to the variable compensation programs. That benefit is not going to repeat in Q4. So that's a step-up of $4 million. And then the balance of the expense sequentially stepped up is, well, I'm going to break it down a few buckets. So we've got increased DNA. There's incremental strategic investment tied to primarily the solutions programs. So think like the implant headcount, for example. And then we have a step-up coming in from the acquisitions that were brought online in June.

Speaker Change: Yeah, happy to walk you through that. So let's start with the Q3 to Q4 sequential.

Speaker Change: The first factor in there is that we had a benefit in the third quarter related to the variable compensation programs. That benefit is not going to repeat in Q4, so that's a step up of $4 million.

Speaker Change: And then the balance of the expense sequentially stepped up is, well, I'm going to break it down in a few buckets. So we've got increased DNA.

Kristen Actis: There's incremental strategic investment tied to primarily the solutions programs, so think about the implant headcount, for example, and then we have a step-up coming in from the acquisitions that were brought online in June. So, the net of all those is four to six million. However, when we talked in the third quarter, we had not included the acquisition expense in the sequential step-up.

Speaker Change: There's incremental strategic investment tied to primarily the solutions programs, so think like the implant headcount, for example, and then we have a step-up coming in from the acquisitions that were brought online in June . So, the net of all those is four to six million.

Kristen Actis: So the net of all those is 4 to 6 million. When we talked in the third quarter, we had not included the acquisition expense in the sequential step-up. So if you're thinking that the Q4 number is a little bit higher, it is a bit higher than what we articulated in Q3 pre-release call. We did not want to get ahead of ourselves on the acquisition announcement, but that was contemplated in the revised full-year operating margin outlook, just to be totally clear. And then your next question, I think, that was on the Q4 to Q1 change in OpEx.

Speaker Change: When we talked in the third quarter, we had not included the acquisition expense and the sequential step-up. So, if you're thinking that the Q4 number is a little bit higher, it is a bit higher than what we articulated in Q3 pre-release call.

Kristen Actis: So, if we're thinking that the Q4 number is a little bit higher, it is a bit higher than what we articulated in the Q3 pre-release call. We did not want to get ahead of ourselves on the acquisition announcement, but that was contemplated in the revised full-year operating margin outlook, just to be totally clear. And then your next question, I think, Pat, was about the Q4 to Q1 change in OPEX. So, the increase that I mentioned earlier actually does not have to do with kind of typical labor inflation, although that obviously is an element that we'll have to deal with heading into 25.

Speaker Change: We did not want to get ahead of ourselves on the acquisition announcement, but that was contemplated in the revised full-year operating margin outlook, just to be totally clear.

Pat: And then your next question, I think Pat was on the Q4 to Q1 change in OPEC. So the increase that I mentioned earlier actually doesn't, does not have to do with kind of typical labor inflation, although that obviously is an element that we'll have to deal with heading into 25.

Kristen Actis: So the increase that I mentioned earlier actually does not have to do with kind of typical labor inflation, although that obviously is an element that we'll have to deal with heading into 25. The item I had called that was really specific to the reset of the variable compensation programs. So, not surprisingly, we're not having a good year. Most of the variable comp programs are not paying out, you know, really much at all. So thank you yourself, commissions programs, your corporate bonus program. When those things reset in 25, that becomes a sequential step-up for Q4 to Q1.

Kristen Actis: The item I had called out was really specific to the reset of the variable compensation program. So, not surprisingly, we're not having a good year. Most of the variable comp programs are not paying out, you know, really much at all.

Pat: The item I had called out was really specific to the reset of the Variable Compensation Program.

Pat: Not surprisingly, we're not having a good year. Most of the variable comp programs are not paying out, you know, really much at all. So thank your sales commissions programs, your corporate bonus program. When those things reset in 25, that becomes a sequential step up for us Q4 to Q1.

Kristen Actis: So, think about your sales commission programs, your corporate bonus program. When those things reset in 25, that becomes a sequential step up for us from Q4 to Q1. The typical merit increase that we do goes into effect in November, so you don't have as much of an impact on that in Q1 as you do in the later, the Q1 to Q2 sequential step up. And I think the last thing you'd ask about in there was some of the productivity initiatives. I think Columbus, you called out, and then the voluntary, and you're right.

Kristen Actis: The typical merit increase that we do goes into effect in November, so you don't have as much of an impact in Q1 on that as you do in the later, the Q1 to Q2 sequential step-up. And I think the last thing you'd ask about in there was some of the productivity initiatives. I think Columbus, you called out, and then the voluntary. And you're right; those will benefit. 25 Columbus is shutting down in Q4. So not you'll get a little pickup in Q1 tied to Columbus. And, as a reminder, that's got five to seven million on annualized savings.

Pat: The typical merit increase that we do goes into effect in November , so you don't have as much of an impact in Q1 on that as you do in the later, the Q1 to Q2 sequential step-up.

Pat: And I think the last thing you'd ask about in there was some of the productivity initiatives. I think Columbus you called out, and then the voluntary. And you're right, those will benefit 25 Columbus.

Kristen Actis: Those will benefit 25. Columbus is shutting down in Q4. So, not, you'll get a little pickup in Q1 tied to Columbus. And as a reminder, that's about 5 to 7 million in annualized savings.

Pat: is shutting down in Q4, so you'll get a little pick up in Q1 tied to Columbus. And as a reminder, that's about $5 to $7 million on annualized savings. And then the voluntary, we're seeing that savings already in the Q4 number, so not as much of an impact Q4 to Q1 sequentially.

Kristen Actis: And then the voluntary. We're seeing that savings already in the Q4 number. So not as much of an impact Q4 to Q1 sequentially.

Kristen Actis: And then the voluntary, we're seeing that savings already in the Q4 number. So, not as much of an impact from Q4 to Q1 sequentially. And then, and then kind of beyond that, the real big one on productivity for us is the rest of the work on the network optimization initiatives. Columbus comes online first.

Kristen Actis: And then kind of beyond that, the real big one on productivity for us is the rest of the work on the network optimization initiatives. Columbus comes online first. The other initiatives will start to kick in more throughout the year, and we'll give some added color on how to think about productivity when we do the Q4 release.

Pat: And then, and then kind of beyond that, the real big one on productivity for us is the rest of the work on the network optimization initiatives. Columbus comes online first.

Kristen Actis: The other initiatives will start to kick in more throughout the year, and we'll give some added color on how to think about productivity when we do the Q4 release. And is that impacted by the re-evaluation of digital initiatives, that last thing in terms of network optimization, or is that something different? No, no, no. That's different.

Pat: The other initiatives will start to kick in more throughout the year and we'll give some added color on how to think about productivity when we do the Q4 release.

Kristen Actis: Is that impacted by the re-evaluation of digital initiatives that last thing in terms of the network optimization, or is that something different? No, no, no, that's different. So this really has to do. It's think more supply chain and operations focus than network optimization. This is kind of everything from physical footprint, which is where something like Columbus comes into kind of how we fulfill customer orders. Okay, and the re-evaluation of the other digital initiatives is really like is that were there benefits expected from that that are being pushed out or elaborated on what you said in the preamble on the re-evaluation of the other digital initiatives?

Speaker Change: And is that impacted by the re-evaluation of digital initiatives, that last thing, in terms of the network optimization, or is that something different?

Kristen Actis: So this really has to do, I think, more with supply chain and operations than network optimization. This is kind of everything from the physical footprint, which is where something like Columbus comes in, to kind of how we fulfill customer orders. Okay, and the re-evaluation of the other digital initiatives is... is related, like, were there benefits expected from that that are being pushed out, or elaborate on what you said in the preamble to that?

Speaker Change: No, no, no, that's different. So this really has to do, I think, more supply chain and operations focused than network optimization. This is kind of everything from physical footprint, which is where something like Columbus comes in, to kind of how we fulfill customer orders.

Speaker Change: Okay, and the re-evaluation of the other digital initiatives is...

Speaker Change: Were there benefits expected from that?

Speaker Change: are being pushed out, or elaborate on what you said in the preamble on that. Yeah, on the re-evaluation of the other digital initiatives, no. Nothing that would drive benefit in 2025, I would say. The big one here is really just around looking at the progress in the digital core program, which is a reminder, that's the expenses you're seeing in, we kind of call it out in our CapEx guidance, but it's actually...

Kristen Actis: Yeah, on the re-evaluation of the other digital initiatives, no, nothing that would drive benefit in 25. I would say that the big one here is really just around looking at the progress in the digital core program, which is a reminder, that's the expenses you're seeing in, we kind of call it out in our CAFX guidance, but it's actually, it's actually in CCA on the balance sheet, so you're going to see, you're not going to see any impact to the P&L in 25 because of that re-evaluation, and again, it is just a re-evaluation, so it doesn't necessarily mean we're doing anything differently, but I think what you're getting at is, is there productivity at all tied to that or even investment specific to 25 and on the P&L, there's really nothing related to digital core contemplated at this point.

Kristen Actis: No, nothing that would drive benefit in 25. I would say that the big one here is really just around looking at the progress in the digital core program, which is a reminder that’s the expense that you’re seeing in and we kind of call it out in our CAPEX guidance, but it’s actually, it’s actually in CCA on the balance sheet. So you're going to see, you're not going to see any impact to the PNL in 25 because of that re-evaluation. And again, it is just a re-evaluation. So it doesn't necessarily mean we're doing anything differently, but I think what you're getting at is there productivity at all tied to that or even investment specific to 25 and on the PNL.

Speaker Change: It's actually in CCA on the balance sheet, so you're going to see...

Speaker Change: You're not going to see any impact to the P&L in 2025 because of that re-evaluation. And again, it is just a re-evaluation, so it doesn't necessarily mean we're doing anything differently. But I think what you're getting at is, is there productivity at all tied to that or even investment?

Kristen Actis: There's really nothing related to digital core contemplated at this.

Speaker Change: Specific to 25 and on the P&L, there's really nothing related to digital core contemplated at this point.

Kristen Actis: So that's the last slide. Thanks.

Kristen Actis: Thanks. And then a couple of post-mortem questions for Erik, maybe, just trying to understand the timing of this stuff. I mean, it seemed from the outside that the core customer had been underperforming for a long time now.

Erik Gershwind: And then a couple, I guess, post-mortem questions for Eric, maybe just trying to understand timing of this stuff. I mean, it seemed from the outside that the core customer has been underperforming for a long time now. So maybe just help us understand why the website investment has been so stale for such a long period of time when it's, you've lagged leaders like Granger on this front probably for many years. And then also looking back, why you didn't think you needed to address the web price issue when they did it back in 2017, when you clearly had exposure with the non-contract business within the company.

Speaker Change: Thanks. And then a couple, I guess, post-mortem questions for Erik, maybe.

Speaker Change: I'm just trying to understand timing of this stuff.

Erik David Gershwind: So maybe just help us understand why the website investment has been so stale for such a long period of time when it's... You know, you've you've lagged leaders like Granger on this front probably for many years, and then also, you know, looking back why you didn't think you needed to address the web price issue when they did it back in 2017, when, you know, you clearly had exposure to the non-contract business within within the Pat, good questions.

Speaker Change: I mean, it seemed from the outside that the core customer has been underperforming for a long time now. So maybe just help us understand why the website investment has been so stale for such a long period of time when it's...

Speaker Change: Yeah, you've you've you've lagged leaders like Granger on this front probably for many years and then also

Speaker Change: You know, looking back, why you didn't think you needed to address the web price issue when they did it back in 2017, when, you know, you clearly had exposure with, you know, the non-contract business within the company.

Erik Gershwind: Pat, good questions. I think that, first of all, what I would say is I think there has been some degree on the web, in particular, investment all along. I think what we're looking at now is a step function. And I think what you're seeing is a reflection of choices that we made. We, we, we, we proactively and consciously made a pretty hard pivot, if you recall, over the past several years to move the value proposition into a high touch technical one. And so, you know, like every company, there are choices that we make about where we're going to invest.

Erik David Gershwind: I think that, first of all, what I would say is that there has been some degree of investment on the web, in particular, investment all along. I think what we're looking at now is a step function, and I think what you're seeing is a reflection of choices that we made. We proactively and consciously made a pretty hard pivot, if you recall, over the past several years to move the value proposition into a high-touch technical one.

Pat: Pat, good questions. I think that...

Speaker Change: First of all, what I would say is I think there has been some degree on the web, in particular, investment all along. I think what we're looking at now is a step function, and I think what you're seeing

Speaker Change: is a reflection of choices that we made. We proactively and consciously made a pretty hard pivot, if you recall, over the past several years to move the value proposition into a high-touch technical one.

Erik David Gershwind: And so, you know, like every company, there are choices that we make about where we're going to invest. We're mindful of how much we invest at any one time and the need to produce financial performance. And so a lot of our investments went into the areas that we're now highlighting are actually doing quite well. And we did those by design.

Speaker Change: And so, you know, like every company, there's choices that we make about where we're going to invest. We're mindful of how much we invest at any one time and the need to produce financial performance. And so a lot of our investments went into the areas.

Erik Gershwind: We're mindful of how much we invested any one time, and the need to produce financial performance. And so a lot of our investments went into the areas that we're not highlighting; are actually doing quite well. And we did those by design. And so, you know, I think for us now we're turning our attention, knowing that that portion of the business, the high touch, is working and it's now the tip of the spear for us and how we went in account. This is now where, you know, we're now following it up behind that with the core customer.

Speaker Change: that, you know, we're now highlighting are actually doing quite well. And we did those by design. And so, you know, I think for us now, we're turning our attention knowing that that portion of the business, the high touch is working, and it's now the tip of the spear for us, and how we win an account.

Erik David Gershwind: And so, you know, I think for us now, we're turning our attention knowing that that portion of the business, the high touch, is working. And it's now the tip of the spear for us and how we win an account. This is now where, you know, we're now following it up behind it with the core customers. I make, you know, cadence-wise, obviously, the solutions business is performing really well, so totally understand that, and those investments are bearing fruit.

Speaker Change: This is now we're you know, we're now following it up behind it with the core customer

Erik Gershwind: I mean, I mean, you know, cadence-wise, obviously, the solutions business is performing really well. So totally, totally get that, and those investments are bearing fruit. So this was more of kind of a prioritization of things as opposed to you not recognizing that, you know, there were things that needed to be addressed with the core. I think that's right. I think both from a capacity inside the company of how much would we get done at one time and a capacity on the PNL of how much can we absorb in terms of investment, those were choices we made.

Speaker Change: I make, you know, cadence-wise obviously the solutions business is performing really well so totally totally get that and those investments are bearing fruit. So this was more of kind of a prioritization of things as opposed to you not recognizing that, you know, there were things that needed to be addressed with the Corps.

Erik David Gershwind: So this was more of kind of a prioritization of things, as opposed to you not recognizing that, you know, there were things that needed to be addressed with the Corps. No, I think that's right. I think both from a capacity inside the company of how much we can get done at one time and a capacity on the P&L of how much we can absorb in terms of investment.

Speaker Change: No, I think that's right. I think both from the capacity inside the company of how much would we get done at one time and a capacity on the P&L of how much can we absorb in terms of investment. Those were choices we made.

Erik Gershwind: Okay, it makes sense.

Erik Gershwind: Best of luck, and thanks for the time. Thanks, Pat.

Speaker Change: Okay, makes sense. Best of luck and thanks for the time. Thanks, Pat. Thanks, Pat.

Ryan Mills: This concludes our question and answer session.

Erik David Gershwind: Those were choices we made. OK, that makes sense. Best of luck and thanks. Thanks for your time. Thanks, Pat. Thanks, Pat. This concludes our question and answer session. I would like to turn the conference back over to Ryan Mills for any closing remarks. Thank you for joining today's call, and please reach out with any questions or follow-up requests. Our fiscal fourth-quarter earnings call is scheduled for Thursday, October 24th, and we look forward to seeing you on the road and at conferences in the coming months.

Ryan Mills: I would like to turn the conference back over to Ryan Mills for any closing remarks. Thank you for joining today's call, and please reach out with any questions or follow-up requests.

Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Ryan Mills for any closing remarks.

Ryan Thomas Mills: Thank you for joining today's call and please reach out with any questions or follow-up requests. Our fiscal fourth quarter earnings call is scheduled for Thursday, October 24th, and we look forward to seeing you on the road and at conferences in the coming months. Goodbye.

Operator: Our fiscal fourth quarter earnings call is scheduled for Thursday, October 24th, and we look forward to seeing you on the road and at conferences in the coming months. Goodbye. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. .

Ryan Thomas Mills: Goodbye. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Transcript Emily Beynon, BF-WATCH TV 2021, Transcript Emily Beynon

Speaker Change: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Speaker Change: [inaudible]