Q1 2025 MSC Industrial Direct Co Inc Earnings Call
Consistent with our fiscal first quarter performance.
December was heavily weighed down by the last two weeks as.
As the timing of the Christmas and new year's holidays.
Along with the timing of our fiscal calendar.
Proved to be a significant headwind.
The last week of our fiscal month was particularly weak on a year over year basis.
This year.
With new year's falling on a Wednesday.
The final week perform like a holiday week.
Whereas last year with new year's falling on a Monday.
The comparison was against a more typical business week.
Christian will provide more detail on what this implies for our second quarter outlook.
While we remain in a transition period during fiscal 'twenty five.
We are fully committed to restoring our companys growth trajectory as we look past the near term.
Let me now provide more specifics behind the factors that give us confidence in our ability to do so.
First.
Future prospects for North American manufacturing are promising.
Driven by increased focus on re shoring and incremental manufacturing investment into the U S.
Second.
We are well positioned to help our customers navigate any pressures that arise from tariff policy.
We see benefits from our lower non domestic exposure.
For reference.
Approximately 10% of our cost of goods sold are sourced from China.
And we have low single digit exposure in Mexico and Canada.
Additionally.
We have a strong and then see specific made in USA product offering.
Spans well over 100000 sku's occur.
Cross a number of categories.
As an example.
Our accu pro brand of high performance cutting tools is sourced domestically.
And represents a great option for customers looking for performance tooling, well being shielded from tariff impacts.
Beyond our product offering.
These technical expertise.
And ability to drive operational savings on the plant floor.
Our powerful tools, helping customers offset cost pressures.
We saved our customers over $500 million in our fiscal 2024.
And plan to build on that success this fiscal year.
Third we.
We see runway to continue growing well we've already been successful.
This includes our inventory management and implant solutions offering.
And targeted high growth end markets.
Such as aerospace.
Medical.
Department of defense branches of the federal government.
And more.
Fourth.
The MSC growth and productivity initiatives.
That we outlined for you on these calls.
Or not yet realized in current results.
And are poised to improve our performance.
As we move through the fiscal year and into fiscal 'twenty six.
Martina: And with that I'll turn things over to Martina.
Martina: Thank you, Eric and good morning, everyone.
Martina: As Eric mentioned, we outlined a series of initiatives for this fiscal year during our fourth quarter earnings call even.
Martina: These initiatives are aimed at driving productivity in our distribution network and selling operation and I'm pleased with the progress made during the first quarter.
Martina: Let's start with selling operation, we've launched a series of initiatives designed to maximize the coverage and effectiveness of our sales team are.
Martina: A major element of this work focuses on sharpening the deployment of our highly trained team to better characterize design and maximize their potential.
Martina: We launched the first changes prior to the start of the fiscal year with the redesign of our public sector coverage the effects of which are starting to be seen in the first quarter results in that market.
For National account, we completed this work at quarter end.
Martina: For our core customers our territory design is complete and we expect to complete implementation by the third quarter.
Martina: Early findings support our expected results.
Martina: For example, we estimate that in the first seven weeks of the program. We now have expanded coverage for 20000 active buying customers our location.
Martina: In December we saw an increase of over 2500 customer touches for those newly engaged accounts.
Martina: Additionally, we're routes have been optimized we're making better use of our time by freeing up a minimum of two selling hours per week.
Martina: All of this work is supported by changes in our training and Onboarding processes are all well design.
Martina: Designed to maximize hands on learning and accelerate independent premium sellers.
Martina: Moving on to network optimization, we remain on track with the expected savings of 10 to 15 million to go out to the fiscal year and achieved full run rate in fiscal 2020.
Martina: As a reminder, these efforts are centered on the following three initiatives.
Martina: Sure.
Martina: It's a streamline the supply chain of our OEM fastener and fee part category by consolidating demand planning and procurement.
Martina: Second we are upgrading our use of technology in our system wide inventory planning and allocation function to ensure that we have the right inventory as close to the customer as possible.
Martina: And lastly, we're optimizing our management of inbound and outbound freight to reduce split shipments and lower reliance on higher cost airfreight.
Martina: All initiatives are on track to deliver planned savings.
Martina: As it pertains to our OEM and C part consolidation, having its breaking progress puts us in an excellent position to navigate the potential impact of tariffs.
As Erik said roughly 10% of Cogs.
Martina: In China and this team is already working to consolidate volume for procurement synergy.
Martina: We began taking proactive measures to ensure that we are well protected.
Martina: On the larger karat question, we've taken a series of actions, including stocking inventory of our highest turn product that would be impacted by tariffs.
Martina: And developing marketing campaigns of our made in the USA product.
We have a cross functional Swat team in place to oversee these efforts and plan to treat any tariff related costs as a supplier price increase.
Martina: I'm afraid and planning initiative, we continue to make progress adjusting and balancing inventory.
Martina: Work, we have done on statistical planning is reflected in the year over year reduction in inventory of approximately 73 million.
Martina: Especially pleased with the sequential reduction in our inventories of roughly 7 million, especially given that Q1 also reflects actions associated with year end buys and early tariff action.
Martina: Lastly, I would like to highlight that we continue to strengthen our leadership team. We're happy to welcome Derek Collier as our new VP of supply chain operations, Derek brings over 20 years of experience and distribution operations.
Martina: <unk> 13 years at Walmart and Amazon.
Martina: I'm confident that Derek will play its part in driving efficiencies throughout our network.
And with that I will turn the call over to Christian to cover our financial results in more detail.
Christian: Thank you Martina and good morning, everyone.
Please turn to slide six where you can see key metrics for the fiscal first quarter on both a reported and adjusted basis.
Christian: Fiscal first quarter sales of 928 million declined two 7% year over year and exceeded our prior expectations of a 4.5% to 5.5% decline.
Christian: Lower volumes were the primary driver of the year over year decline, which was partially offset by benefits from acquisitions.
Christian: Sequentially average daily sales declined 90 basis points and underperformed the historical quarter over quarter average as conditions moderated across our primary manufacturing end markets.
Christian: By customer type, we are pleased by the return to growth in the public sector with a nine 8% improvement year on year.
Christian: National accounts declined one 6% year over year, while core and other customers declined five 3%.
Christian: Sequentially average daily sales were roughly flat for core and other customers, while national accounts and public sector sales declined a little less than 2%.
Christian: From a solution standpoint, as Eric mentioned, we continued to expand our footprint in the first quarter.
However, the average daily sales performance of these solutions reflected the current demand environment.
The growth of our installed base was largely offset by lower levels of activity.
And then Dean first quarter average daily sales were up 5% year over year and represented 18% of total company net sales.
Christian: Sales to our implant programs grew 5% year over year and represented approximately 17% of total company net sales.
Christian: As a reminder, this information can be found in the operating statistics posted on our website.
Christian: Within the off gas. Please note that we reclassified our customer end markets to align with the North American industry classification system.
Christian: Moving to profitability for the quarter gross margin declined 50 basis points year over year to 47% as expected.
Christian: This was driven by higher priced inventory working through the P&L and the.
Christian: A headwind from acquisitions of approximately 20 basis points.
Christian: Operating expenses in the first quarter were approximately $304 million on both a reported and adjusted basis.
On an adjusted basis operating expenses were up approximately 14 million year over year, primarily driven by the combination of personnel related cost investments and carryover operating expenses from acquisitions, which were partially offset by productivity.
Combined with lower sales year over year. This resulted in a 240 basis point step up in adjusted operating expense as a percentage of sales for the quarter.
Christian: Sequentially adjusted operating expenses were up 7 million as expected. This is primarily related to the reset of variable incentive compensation programs entering the fiscal year other personnel related costs and modestly higher D&A.
Christian: Reported operating margin for the quarter was seven 8% compared to 10, 6% in the prior year.
Christian: On an adjusted basis operating margin of 8% declined 290 basis points year over year.
Christian: We delivered GAAP EPS of <unk> 83 cents.
Christian: <unk> to $1 22 in the prior year quarter.
Christian: On an adjusted basis EPS was <unk> 86 cents compared to $1 25 in the prior year.
Christian: Now, let's turn to slide seven to review, our balance sheet and cash flow performance.
Christian: We continue to maintain a healthy balance sheet with net debt of approximately $463 million.
Christian: Representing roughly one one times EBITDA.
Christian: Working capital continues to be a favorable source of cash during the quarter. This resulted in another strong quarter of operating cash flow to the tune of $102 million.
Christian: Capital expenditures of 20 million increased approximately $2 million year over year, resulting in free cash flow of 82 million.
This represented approximately 179% of net income.
Christian: Turning to capital allocation on slide eight our priorities remain unchanged with organic investment to fuel growth in our operational efficiencies being first in the pecking order.
Christian: Additionally, we will continue to pursue our strategic bolt on M&A strategy and allocate capital to shareholders.
The repurchase of roughly 150000 shares combined with the dividend resulted in returns to shareholders in excess of $60 million during the quarter.
Moving to our expectations for the fiscal second quarter on slide nine.
The timing of holidays and heightened customer shutdown activity resulted in average daily sales decline of approximately 8% in the month of December.
Christian: Given the slow start to the quarter and limited visibility on trends in the new calendar year.
Christian: We are taking a wider approach to our quarterly sales outlook and expect Q2 average daily sales declined 3% to 5% year over year.
Christian: This range assumes January and February average daily sales performed similar to the first quarter at the low end of the range and to November levels at the high end of the range.
Christian: Additionally, our midpoint of our outlook implies that January and February avs are down approximately 2% year over year.
Christian: We expect our adjusted operating margin for the second quarter to be largely influenced by our sale of outperformance and ultimately fall in the range of six five to seven 5% under the following assumptions.
Christian: Gross margins up 48% plus or minus 20 basis points.
Christian: And within operating expenses productivity to partially offset sequential increases in personnel related expenses and depreciation and amortization.
Christian: Turning to slide 10, our expectations on certain line items for the full year remain unchanged.
Christian: As a reminder, this includes depreciation and amortization expense of $90 million to $95 million or an increase of $10 million to $15 million year over year.
Christian: Interest and other expense of roughly $45 million.
Christian: Capital expenditures, including cloud computing arrangements of $100 million to $110 million.
Christian: A tax rate between 24, 5% to 25%.
Christian: And lastly, free cash flow generation of approximately 100% of net income.
Christian: To assist in modeling the cadence of sales for the remainder of the fiscal year. The bottom of this slide provides historical quarter over quarter averages and key considerations.
Christian: And with that we will open the line for Q&A.
Christian: We will now begin the question and answer session.
Christian: To ask a question you May Press Star then one on your Touchtone phone.
Christian: If you are using a speakerphone please pick up your handset before pressing the keys.
Christian: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Christian: At this time, we will pause momentarily to assemble our roster.
Christian: Okay.
Speaker Change: The first question today comes from Stephen Volkmann with Jefferies. Please go ahead.
Speaker Change: Great. Thank you for taking my question Christian I'm, sorry, I just missed your commentary around gross margin plus or minus 20, bips, but can you just say that again.
Yes, Steve are you referring to the Q2 commentary on gross margin.
Speaker Change: In the prepared remarks.
Speaker Change: Yeah, so for the second corner and what's really stands for the year. When we had said previously we expect throughout the year gross margin to be roughly plus or minus plus or minus 20 basis points.
Speaker Change: For the second quarter, specifically I would expect it to be fairly flat to Q1.
Speaker Change: In the second half there is some potential for improvement there.
Speaker Change: Actually for the top end of that range.
Speaker Change: What we would be looking for in order for that to happen a few things I'd say first neutral price cost potentially even slightly positive.
Speaker Change: Second item, we're looking at carefully is productivity improvements sequentially through the year Martina covered some detail on what those programs, where some of that hits Opex of course, but some of it also does hit cost of goods sold wild.
Speaker Change: Wild cards against that now that we don't have great line of sight to our the mix impact.
Which as you know has been a headwind lately.
Speaker Change: There is the potential for that to improve depending on the inflection in core.
Speaker Change: And then the other thing that's hard to predict as the top line the stronger the topline the easier it is to expand gross margins.
Speaker Change: And really beyond the second quarter, we had better insight on those last two we'd be giving more specific guidance.
Speaker Change: But as Martina mentioned on the productivity initiatives like we're really focusing the team internally on what we can control within that which is the price cost management delivering the productivity executing on the initiatives that drive the core core growth inflection.
Speaker Change: And maybe last item to point out Steve to put a finer.
Speaker Change: Final point on the end of the gross margin discussion for forward looking none of this includes impact from tariffs, which if that happens and of course, we don't know size or timing.
Speaker Change: Would anticipate moving on price similar to startup of an inflationary cycle. So all.
Speaker Change: All of that comment excludes tariff.
Speaker Change: Okay understood.
Speaker Change: Just pulling on that thread a little bit.
Speaker Change: Presumably it.
Speaker Change: Insulation.
Speaker Change: And that should actually be a gross margin tailwind for you normally.
Speaker Change: Would it be different given the situations.
Speaker Change: No we wouldn't we wouldn't see any reason that would be different.
Speaker Change: Okay. Thanks, I'll pass it on.
Speaker Change: The next question comes from Ken Newman with Keybanc capital markets. Please go ahead.
Ken Newman: Hey, good morning, guys.
Hey, guys good morning, Ken.
Speaker Change: Good morning.
Maybe for my first question Kristen Oh, sorry, if I missed this could you just remind us how much in savings from our productivity initiatives youre expecting on SG&A dollars into Q and then just a follow up with that as it.
Speaker Change: Maybe just some color on how you think about opex as we move through the back half of the year, just because the easy comp start to show up in your fiscal third quarter, but you know I'm. Just curious if there were some items that we should be aware of on how SG&A levers if that revenue does start to stabilize in the second half.
Speaker Change: Sure Yeah, so specific to Q2, I'm expecting productivity to improve slightly.
Speaker Change: We delivered about $5 million of productivity in the first quarter in the Opex line. So I think we'll do a little bit better than that in Q2.
Speaker Change: Beyond that what we've said for the year is a range of productivity between 15, and 25 million and operating expense.
Speaker Change: The initiatives that Martina covered.
Speaker Change: As we talked about last quarter on an annualized basis, those initiatives, specifically, our worth $10 million to $15 million, but theyre going to ramp inside the second half so not sure. If your question was specific to some of that newer stuff, but on a full year basis. If you think about where we are expecting opex to land, we're anticipating $15 million to $25 million of productivity.
Speaker Change: Right I guess the question is really kind of driving towards what you think.
Speaker Change: What the core incremental margins could be.
Speaker Change: You know because again youre down I think Ats is down like high single digits of the comp is starting in the third quarter.
Speaker Change: I know the Decrementals don't really make sense this quarter than last quarter, but is it fair to assume that you're not necessarily expecting a reverse in those in that operating leverage decremental to incremental here in the second half.
Speaker Change: Yes, I mean, it's really noise into your planning you look at Decrementals incrementals in the year because of a lot of that is because of actually opex level. So I think to answer it differently. Ken I think how you originally asked if you're trying to think about modeling opex in the second half I would still use kind of the general rule of thumb of taking 8% to 10% of variable.
Speaker Change: Cost on top of whatever revenue number you're modeling for second half and then we will get more specific as the quarters roll forward here, but I think you know.
Speaker Change: We've got a 48% gross margin plus or minus 20 basis points and then you use that rule of thumb is second half opex being tied to really just where are you putting your topline based on that variable opex rate that should get you close to what we're what we do have line of sight to at this point and of course as we've talked about the revenue was really the bigger.
Speaker Change: Bigger unknown for us that we're watching carefully.
Speaker Change: Then I would say that 8% to 10% variable opex, that's whatever your growth assumption is in the second half relative to the first half. So first half versus second half is that 8% to 10% variable opex, we're talking about.
Speaker Change: Got it that's that's.
Speaker Change: Helpful.
Speaker Change: And then just my last question here.
Speaker Change: I understand that visibility is clear as mud right now, but maybe that's what you're seeing from your larger customers on the OE automotive and OE Aerospace side I know that's about 20% of your sales today.
Just any color on the pull rates relative to last quarter and is there any commentary on their visibility.
Speaker Change: Yeah, Ken it's Eric So good morning look I would say in the prepared remarks.
Speaker Change: <unk> is the <unk>.
Speaker Change: Additionally, in our world of metalworking and heavy manufacturing are still soft.
Speaker Change: So.
Most of the end markets automotive certainly has been soft, but I would say that word can carry through all end markets.
Probably with the exception of aerospace, which has has been strong it remained positive for us definitely a little a little choppy over the last quarter because of the residual effects of the strike, which have since sorted themselves out. So we would expect aerospace the outlook to be good that notwithstanding generally soft conditions I mean, two data points I'll give you.
Speaker Change: You just put a finer point on it. So if you look we've talked about our vending growth on our implant growth, we feel really good about those two programs, but if you parse them out and look at an average daily sales per machine. So if you normalize for signing vending. So these are our best customers some of our largest customers vending average daily sales per <unk>.
<unk> down mid single digits implant, where our penetration and our market share position is perhaps the best average daily sales per program down in the low double digits. So that'll give you a feel for conditions and you know customers clamping down on spend.
Speaker Change: I will say, though that Theres certainly post election, there is some more optimism weaving into the discussions and the outlooks that we're having we're hearing about from customers. So you'll look we're cautious as you said visibility is clear as mud, especially for US. This call is always a tricky one we're coming off of this was a really wonky.
Speaker Change: Holiday period, which I'm sure we'll touch on at some point during the Q&A and we barely have any window into January so we're cautious.
Speaker Change: But I will say there is there is some more optimism weaving into our conversations with customers about 25 outlook.
Speaker Change: That's really helpful. Thanks, Eric.
Tommy Moll: The next question comes from Tommy Moll with Stephens. Please go ahead.
Tommy Moll: Good morning, and thank you for taking my question.
Jeremy: Hey, Jeremy.
Christian: Christian one last maybe last item on Opex just to make sure everyone's on the same page.
Christian: Can you can you just bridges from the three or four that you just reported.
Christian: When Chile in the past you've given us some helpful bridging items through the pluses and minuses on the fixed.
Christian: Items, it'll change and then I assume that eight to 10 variable assumption holds for Q1 to Q2 as well, but anything you can do to provide granularity theres always helpful.
Tommy Moll: Yeah, So Tommy Q2, Opex sequentially from Q1, we're expecting to be roughly flat.
Tommy Moll: Within that there's a couple of moving pieces. So we do have another step up coming and personnel related expenses, which is typical for us at this time of year. Another small increase coming in DNA and then we do expect that to be offset by two things one is a little bit more productivity than we saw in the first quarter and then the second would be.
Tommy Moll: The decrease on the top line, if you apply that 8% to 10% and variable opex on that.
Tommy Moll: The puts and takes to get you back to basically flat to Q1.
Kristen: And then just going forward from there Kristen.
Kristen: Other than the eight to 10 variable, which will be a function of revenue in the second half are there any other personnel DNA whatever other items.
Kristen: You would call out.
Kristen: Yeah. So DNA does continue to increase sequentially I think without going into more.
Kristen: Of a specific.
Tommy Moll: Number for the third quarter and the fourth quarter, Tommy maybe what you're thinking.
Tommy Moll: Thinking about some some color we gave on a full year around sort of certain categories of expenses that we know on a full year basis aren't going to go up.
Tommy Moll: Which is one of the big challenges we're facing in 'twenty five is just a large body of historic.
Tommy Moll: <unk> closed six opex, that's going to increase in the year and what we had touched on there which may be helpful. In filling in some of the blanks for the second half.
Tommy Moll: And again. This is this is full year year over year expectations on certain items.
No, we typically face about a $20 million to $25 million increase in <unk>.
Tommy Moll: Personnel related costs, that's typically in conferences.
Tommy Moll: Salary inflation for the associates and the benefit any benefits inflation.
Tommy Moll: This year one of the unique items that we were facing with the headwind from the variable compensation programs resetting in 'twenty five and that was of course, because there was almost no payoffs on the variable comp programs in 24 that creates about a 30% to 35 million dollar headwind year over year.
Tommy Moll: G&A for the full year, we're expecting to increase 10% to $15 million.
And then we've got about $5 million of acquisition carryover that will see until we lap.
Tommy Moll: In the fourth quarter of our fiscal year.
Tommy Moll: And then what we had signaled on investments in productivity, we touched on the productivity just a few questions about 15% to $25 million of productivity in opex for the year.
Tommy Moll: We're expecting about $10 million to $15 million of investment to offset some of that and that's really largely the investment into the implant growth and into the marketing program that'll be launching here soon.
Tommy Moll: Those sort of like fixed buckets would get you to $60 million to $65 million of increase and then.
Tommy Moll: I think we've talked about you'd want to manoeuvre your volume based expenses at 8% to 10%.
Tommy Moll: And if we really.
Tommy Moll: <unk> seen much of a.
Tommy Moll: Proven in a normal sequential patterns in the second half than you probably start to inch down some of that variable compensation increase.
Tommy Moll: Without being overly specific for what's going to drive the <unk> and <unk>, specifically that give some more color into some of the headwinds that we're facing within operating expenses.
Speaker Change: Yes, indeed in and thank you for the details.
Speaker Change: Unrelated question I wanted to pivot to just the end market trends.
Speaker Change: Eric you called out on.
Speaker Change: Slide five I'm going to exclude Earth, the aerospace and defense.
Number just for the reason you already decided on the strikes just focusing on the other four.
Speaker Change: The market for you it seems like the message there.
Speaker Change: The underlying demand environment.
Speaker Change: Maybe.
Speaker Change: Flattish same there's no real change to call out versus last quarter, just correct me if I'm wrong, there and then help us understand.
Speaker Change: Thinking that up to the guidance you provided for daily sales in the second quarter, you do talk to daily.
Speaker Change: Daily sales improving as the quarter progresses, maybe that's just simply a function of the comp from December and some catch up but.
Tommy Moll: I think all of that of course, if you get a quick. Thank you, yes sure Tommy I think whats Youre looking at I think your assessment is right that end markets remained soft no major change. So if your question is just going from Q1.
Speaker Change: Yes.
Speaker Change: Down $2 seven why is the range worse in Q2.
Tommy Moll: Really Tommy comes down to December which was a really funky month, so I mean, basically what we do.
Tommy Moll: Tried to do with Christian tried to do in the prepared remarks is give you a view into what does that guidance range imply for January and February and we tried to compare that on a sequential basis relative to similar to the <unk>.
Tommy Moll: Somewhere in the first quarter range and then.
Tommy Moll: Year over year Youre looking at two percentage.
Tommy Moll: Down really the story about the Q2 guidance, it's weighed down by December end, and I know, we touched on it in the prepared remarks, but it probably is worth a minute here.
Tommy Moll: It's a pretty nuanced thing our December because we're on a fiscal calendar, we've got a five week month and the first four weeks of December.
Tommy Moll: Yeah in the prepared remarks, I said on an EPS standpoint, they looked a lot in the first three weeks looked a lot like Q1 on a rate year over year growth rate basis. The first four weeks of the fourth week of the Christmas week looked a lot like Q1.
Tommy Moll: So and I know, we're always one of the first ones out and everybody tries to get a read off of December our situation is going to be more acute in that fifth week and the reason is our fifth week, which was new year's week. This year was really a holiday week. The fifth week last year will be tried on slide nine to put this visually showing the calendar.
Tommy Moll: The comp was.
Tommy Moll: <unk> a full week because you had four days after new year. So we're lining up a holiday week against the full week that really weighed on the December growth rates. So in essence, what you're getting for Q2. If you look past December look at January February it isn't much different from Q1.
Speaker Change: Thank you Eric I'll turn it back.
Speaker Change: The next question comes from David Manthey with Baird. Please go ahead.
David Manthey: Yeah, good morning, and happy new year everyone.
David Manthey: Yes.
First question.
I guess I'm going to go back to the the Opex.
David Manthey:
David Manthey: Laundry list here the one thing that hasn't been mentioned was the savings from the Columbus distribution Center.
Speaker Change: Is that five to 7 million accrue to the first quarter as expected or the benefits greater in the second quarter or is that already incorporated in the run rate and then.
Speaker Change: Our refining question here on the compensation I think you said merit.
Speaker Change: Increased $7 million I think thats the variable compensation component, but then Christian you mentioned.
Speaker Change: Higher personnel expenses, which sounded different whether that's wages or health care or whatnot.
Speaker Change: Could you talk about those things and then on that personnel expense does that also step up I think you get a full quarter of the merits. So that's going to be a little bit higher sequentially, what about the other personnel costs. Thanks.
Speaker Change: Yeah sure Dave the first part of your question on Colombia, Yes, still tracking comfortably in that $5 million to $7 million range now it was about half of the product activity that we saw in Q1, and that's really at run rate by quarter now.
Speaker Change: Most of that work was kind of wrapped up at the end of our fiscal Q4, So we see a pretty equal benefit for each quarter of fiscal 'twenty five.
Speaker Change: And then second part of your question on the Opex you touched on the personnel related expense so.
Speaker Change: We're wrapping up a few things in that bucket.
Speaker Change: And I think the 7 million.
Speaker Change: We recorded a $7 million sequential increase Q4 to Q1, Opex, which I think that what you were referring to within that.
The largest kind of candle stick in the bridge is the personnel related expense increase of 9 million sequentially and then to your point that includes a few things. So it does include the Merit increase you mentioned, which we have one month's adds incrementally in our first quarter. We also had a slight step up from benefits inflation and then the biggest piece, though within that 9 million.
Speaker Change: <unk> is the reset of the variable compensation program, that's a little bit more than half of it.
Speaker Change: And then I think I heard you comment on Merit increase in Q2, yes, you're correct, we would see another step up sequentially in the second quarter of about $4 million.
Speaker Change: Perfect. Thank you.
Speaker Change: Then.
Speaker Change: With all of the administration change and the Saber rattling one of the key themes, we heard a lot about is government efficiency and.
Speaker Change: Seems like if the government is looking at streamlining or consolidating purchasing that might be an opportunity for MSC.
Speaker Change: Kind of Blue Sky, but maybe you could comment on.
Speaker Change: How you see that opportunity if at all.
Speaker Change: Sure. Thanks, Dan Good morning, it's Martina so when you think about our public sector business about two thirds of it is federal today now the majority of that is weighted towards military and defense. So we don't see a lot of a lot of change and we don't anticipate that the administration would die.
Speaker Change: A whole lot of change there.
Speaker Change: We do see that base.
Speaker Change: Based on our own public sector restructuring, what we have done is specialized sellers now at all levels of the government and increased our level of investment there as part of our sales effectiveness programs. So I think we are poised to take advantage of any change.
Speaker Change: So we don't really see any downside risk and as you say, we see that there might be some upside.
Speaker Change: Yeah.
Speaker Change: Thanks again appreciate it.
Okay.
Speaker Change: The next question comes from Chris Dankert with loop capital. Please go ahead.
Chris Dankert: Hey, good morning, Thanks for taking the questions.
Speaker Change: Okay, Great I guess, just how many.
Speaker Change: Just going back to the tariff conversation I think last time around a lot of those tariffs are treated as discrete surcharges you mentioned in the prepared remarks that petition you can treat that of supplier price increases any reason for the shift in applicability here.
Speaker Change: Yeah.
Speaker Change: Chris I'll take it no I think when you look what we wanted to get across was that I think well first of all there's still a lot of uncertainty something is likely coming we don't know how much and we don't know when.
Speaker Change: What we wanted to get across is we're prepared we have a playbook.
Speaker Change: We've dusted off the playbook of team is ready to go.
Speaker Change: Well, we'll see how it plays out Chris, but more or less we would follow a similar playbook.
What we were trying to convey was that we would move in whatever form we will move on price as warranted.
Remember, Chris there is sort of like if I think back to last time around there is theres two inflationary effects from the tariff.
Speaker Change: Situation the direct and then the knock on effect the direct effect is any imported products going up and that's where you're referencing surcharges as the more likely means the secondary effect is more broad based industry wide inflation. So.
Speaker Change: Something like 75% of our sales are through industry branded products, where we're not directly affected by a tariff, but certainly you could imagine tariffs are going to influence list price changes from our manufacturers and there that would trigger more broad based pricing actions and that's what we were referring to.
Speaker Change: Got it.
Speaker Change: Helpful color. Thank you Eric.
Speaker Change: And then I guess when it comes to the enhanced marketing that's going on in the back half of the year. I guess are you able to kind of bucket out where that investment spend is going generally are we talking about your keyword search isn't it more will there be any kind of discounting with dish to drive traffic, but we're just kind of help flush out that that marketing investment, but that would be great.
Speaker Change: Sure. So what I'll do when you can imagine this one's a little sensitive competitively, particularly before we are in market, but I'll sort of give you the broad strokes. So.
Speaker Change: The way we're thinking about this is we've got two objectives.
Speaker Change: With our marketing efforts, so I'll talk about the two objectives and then give you a feel for what sort of programs that we're looking at to achieve those objectives. So the objectives are basically top of but it's not rocket science, but top of funnel and bottom of funnel top of funnel, meaning generating more awareness and demand for <unk> product and services.
Speaker Change: Bottom of funnel would be taking customers, who we already have a relationship and increasing retention rates and share of wallet of folks who already know us and come to us.
Speaker Change: So you can imagine the programs to achieve those are a bit different I would tell you that theres going to be a pretty healthy mix in the media used Christian it it'll be a combination of digital marketing along the lines youre, suggesting.
Speaker Change: In terms of pricing and discounting what I would say there is we already have in our arsenal promotional programs and tools that will use and leverage more extensively, but it's not like we're making them up brand new.
And it'll be a combination of digital print.
Speaker Change: As you know some some heavy focus on website improvements in merchandising and then also some purchase personal outreach between our.
Speaker Change: Our sales force both inside and outside.
Speaker Change: Prospecting and follow up calls so that's the color I'd give you is we said it'll be beginning and don't think of this as big Bang necessarily it will more be sort of iterative and incremental in market beginning late in Q2.
Speaker Change: For Q2.
Speaker Change: Very helpful color. Thanks, so much Eric it and best of luck to everyone at 25 here.
Chris Dankert: Thanks, Chris.
Speaker Change: The next question comes from Patrick Baumann with Jpmorgan. Please go ahead.
Speaker Change: Alright, good morning, happy New year quick one on this.
Speaker Change: Thank you quick quick one on the sequential daily sales performance in the first quarter. It was down 1% and I think Kristian said.
Speaker Change: Or was flattish and national account in public sector was down to what what's surprised you within those customer groups on a sequential basis that drove the upside versus your guidance.
Speaker Change: Pattern I would say, so I'm not sure I'm going to answer it sequentially overall, what I would say is if.
Speaker Change: If you look at the exceeding guidance and where it came from it there's a couple of things I'd call out.
Speaker Change: Number one clearly public sector.
Speaker Change: Public sector looking sequentially is really tricky to do because their fiscal timing is all off at the end of September. So the sequential view on public sector is not great look that team is really performing well.
Speaker Change: And I give kudos to the leadership team it's been momentum that's been building for a while and then add on top of that Martina touched on some of the early stage cell of effectiveness work safe.
Speaker Change: Sales optimization work that went directly to public sector, just turbocharged what is already a strong team. So we feel really good about that and back to Dave's questions about further opportunities.
Speaker Change: Feel like strong team well position there the second thing I'd call out is salute.
Speaker Change: <unk> solutions momentum clearly vending and implant.
Speaker Change: Look our while our national accounts growth rate is not where we want it and that number is nothing to write home about I will tell you under the covers we feel good about execution there.
Speaker Change: A lot of that is driven by macro softness and then look the first thing I'll say about Q1, and we did mention this in the permit prepared remarks is that we did benefit November was particularly strong in there we had some large order activity. We do think the timing of the Thanksgiving.
Speaker Change: Holiday being pushed almost a week later in the month probably.
Speaker Change: Boosted November and came back to bite is sold in December but I would say those are the big drivers behind the Q1 and November performance.
Speaker Change: Helpful and maybe as Martina on the selling side of things can you talk about that territory redesign a bit more you mentioned.
Speaker Change: I think some things about timing across public sector national accounts and core in terms of when that redesign would be completed maybe rehash some of that and then the.
Speaker Change: The 20000 accounts you referenced that.
Speaker Change: I guess are.
Speaker Change: Our new because of the redesign I guess that's across public sector and that's you also mentioned something about 'twenty 700, new touches.
Speaker Change: Any color on what percentage of underlying accounts. This represents for our public sector like how much of an expansion is that on an account basis and then.
Speaker Change: What is the opportunity across national accounts and core from this redesign in terms of new touches or account expansion.
Speaker Change: Sure. So there's a lot in there let me unpack it let me, let me kind of pull up to big picture and and and.
Speaker Change: And we view, what we're doing and thank you for the question because it's something embarrassing.
Speaker Change: So.
Speaker Change: We are basically.
Speaker Change: Well, our goal and the whole redesign across all the customer segments of public sector National account and core we want to deploy our sales force as efficiently as possible. So we wanted to put train people in front of the best potential and that obviously has a slightly different flavor in each customer segment, but fundamentally our goal is to look at.
Speaker Change: At growth, we believe in the equation that says growth comes from coverage and capacity, which is related to time and competency. So there are pieces of the program that touch on all three for all three segments.
Public sector with where we moved first and it was fully deployed as we started Q1. So that's what we're sort of seeing the results, but I I did not mean to create the impression that that 20000 accounts with particularly to public sector that is so far overall, what we have done is we've been looking at territory design. So.
Speaker Change: We're trying to design all territory now to cover efficiently maximize seller capability maximize customer coverage and some of that result.
Speaker Change: And then in the time saving like I shared with you. So essentially we believe that coverage Simon patches are gonna have improved sales development. It's too early yet for me to give you any kind of flavor to forecast impact, but I did want to share the specifics because we're very encouraged with the progress and as we implement now.
Speaker Change: Fully implemented national accounts and implement over the next sort of quarter and a half encore will be able to share more.
Speaker Change: Design is all done.
And implementation is starting now in the others.
Speaker Change: So just to be clear I, just I'm a little confused on what is the 20000 accounts represent and what was the 2700 new touches you represent you you've mentioned.
Speaker Change: Yeah. So the 20 20000 accounts have now been pulled into what I would call active coverage they've been assigned to sellers.
Speaker Change: And.
Speaker Change: That doesn't mean, they weren't actively buying from M. A C. In the past that we've designed the territory to include them now we havent may be implemented in every case the seller teams yet, but we know that that design is coming.
Speaker Change: And on the touches that in what has been implemented already we've been able to engage with new customers and new relationships and we do keep track of customer touches and in December we saw that increase.
Speaker Change: Okay. That's helpful.
Speaker Change: Thanks, I'll leave it there I appreciate the time.
This concludes our question and answer session I would like to turn the conference back over to Ryan Miller for any closing remarks.
Ryan Miller: Thank you for joining us on today's call. We look forward to interacting with you and seeing you guys at our investor events in the upcoming conferences in our next earnings call is on April 3rd Thank you.
Ryan Miller: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Ryan Miller: Okay.
Ryan Miller: Yeah.
Ryan Miller: Yes.
Ryan Miller: Yes.
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Ryan Miller: Okay.
Ryan Miller: [music].
Ryan Miller: Yes.