Q2 2025 MSC Industrial Direct Co Inc Earnings Call
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Unknown Executive: © The University of Georgia College of Agricultural and Environmental Sciences © BF-WATCH TV 2021 © transcript Emily Beynon © transcript Emily Beynon Good morning and welcome to the MSC Industrial Supply Fiscal 2025 second quarter conference call. All participants will be in a listen-only mode.
Good morning, and welcome to the M. S C industrial supply fiscal 'twenty twenty-five second quarter conference call.
All participants will be in a listen only mode.
Unknown Executive: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star then 2.
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After todays presentation, there will be an opportunity to ask questions.
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Unknown Executive: Please note, this event is being recorded. For webcast listeners, we have become aware of an issue accessing the three supporting files, including the earnings presentation and the operating statistics. We are currently working on resolving the issue.
Please note this event is being recorded.
For webcast listeners, we have become aware of an issue accessing the three supporting files, including the earnings presentation and the operating statistics.
We are currently working on resolving the issue.
Unknown Executive: Please email ryanmills at rmills at mscdirect.com to request materials.
Speaker Change: Please email Ryan Mills at our mills at N S C direct dotcom to request materials.
Ryan Mills: I would now like to turn the conference over to Ryan Mills, Head of Investor Relations. Please go ahead. Thank you and good morning, everyone.
Speaker Change: I would now like to turn the conference over to Ryan Mouse head of Investor Relations. Please go ahead.
Ryan Mouse: Thank you and good morning, everyone welcome to our second quarter fiscal 2025 earnings call Erik Gershwin, Chief Executive Officer, Martina Mcisaac, President and Chief operating Officer, and Kristin access Grande Chief Financial Officer on the call with me today.
Ryan Mills: Welcome to our second quarter fiscal 2025 earnings call. Erik Gershwind, Chief Executive Officer, Martina McIsaac, President and Chief Operating Officer, and Kristen Actis Grande, Chief Financial Officer, are on the call with me today. During today's call, we will refer to various financial data in the earnings presentation and operational statistics documents, both of which can be found on our investor relations website.
Ryan Mouse: During today's call, we will refer to various financial data and the earnings presentation and operational statistics documents, both of which can be found on our investor Relations website, let.
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 the U.S. security laws. These board-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements.
Ryan Mouse: Let me reference our safe Harbor statement found on slide two of the earnings presentation.
Ryan Mouse: Our comments on this call as well as the supplemental information, we're providing on the website contain forward looking statements within the meaning of the U S security laws.
Ryan Mouse: 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 are noted in our earnings press release and our other SEC filings.
Ryan Mills: Information about these risks are noted in our earnings press release and our other SEC filing. Lastly, 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.
Ryan Mouse: Lastly, 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 and now I'll turn the call over to Eric.
Erik Gershwind: I'll now turn the call over to Erik. Thank you, Ryan. Good morning, everyone. And thank you for joining. On today's call, I'll briefly cover our fiscal second quarter performance.
Eric: Thank you Ryan good morning, everyone and thank you for joining us.
Eric: On today's call I'll briefly cover our fiscal second quarter performance.
Erik Gershwind: then offer my perspective on the state of the company and the current macro environment before turning things over to Martina and Kristen. Our fiscal second quarter results highlight that while the demand environment remains soft, We are taking measured steps towards improving execution. and returning the company to growth. Average daily sales declined 4.7% year over year. though we were encouraged to see trends improve through the quarter. January and February, outperforming historical sequential average. Gross and adjusted operating margins both came in towards the high end of our expectations. Driven by Solid Execution. and some favorability and supplier rebates during the quarter.
Eric: Then I'll offer my perspective on the state of the company and the current macro environment.
Eric: Before turning things over to Martina and Kristen.
Eric: Our fiscal second quarter results highlight that while the demand environment remains soft.
Eric: We are taking measured steps towards improving execution.
Eric: And returning the company to growth.
Eric: Average daily sales declined four 7% year over year.
Eric: We were encouraged to see trends improved through the quarter with.
Eric: With January and February outperforming historical sequential averages.
Eric: Gross and adjusted operating margins both came in towards the high end of our expectations.
Eric: Driven by solid execution.
Eric: And some favorability in supplier rebates during the quarter.
Erik Gershwind: that Kristen will speak to in more detail.
Eric: That Christian will speak to in more detail.
Eric: Yeah.
Erik Gershwind: I'll begin by focusing on what is most in our control. Execution. There is certainly more wood to chop. or in our case, more metal to grind. We are making progress in improving execution along several dimensions. which I'll describe in more detail.
Eric: I'll begin by focusing on what is most in our control.
Eric: Execution.
Eric: They were certainly more wood to chop or.
Eric: Or in our case more metal to grind.
Eric: But we are making progress and improving execution, along several dimensions, which I'll describe in more detail.
Erik Gershwind: We set out to complete a handful of important initiatives in the second quarter. And I'm pleased with how our team rose to the occasion and delivered. We continue to maintain momentum in our high-touch solution. on a year-over-year basis. We improved our in-plan program count by 24% to 387 programs. and Total Installed Vending Machines. by 9%. to over 28,000 machines. While growth rates in many of these customers are suppressed due to soft demand conditions. We believe that the ongoing expansion of our solutions footprint. positions us to benefit with a strong volume rebound. when the demand environment improves.
We set out to complete a handful of important initiatives in the second quarter.
Eric: And I'm pleased with how our team rose to the occasion and delivered.
Eric: First.
Eric: We continue to maintain momentum in our high touch solutions.
Eric: On a year over year basis, we improved our implant program count by 24% to 387 programs.
Eric: And total installed vending machines by.
Eric: By 9%.
Eric: Over 28000 machines.
Eric: While growth rates in many of these customers are suppressed due to soft demand conditions.
Eric: We believe that the ongoing expansion of our solutions footprint.
Eric: Positions us to benefit with a strong volume rebound.
Eric: When the demand environment improves.
Erik Gershwind: Second, we took important steps to re-energize our core customer growth.
Eric: Second.
Eric: We took important steps to reenergize, our core customer growth.
Erik Gershwind: I'll begin with the website upgrades that were completed during the latter half of our fiscal second quarter. As a reminder, these enhancements were focused on making it faster and easier for customers to do business with us. improving our product discovery platform. Streamlining Our Customer's Buying Journey. and increasing personalization. The recent upgrades serve as a strong foundation that will build upon. We've included several slides in the presentation to highlight these changes. Starting with slide four, one of our biggest priorities was improving search or product discovery. We want the site experience. to reflect the technical expertise that MSC delivers to our customers every day.
Eric: I'll begin with the website upgrades that were completed during the latter half of our fiscal second quarter.
Eric: As a reminder, these.
Eric: These enhancements, we're focused on making it faster and easier for customers to do business with us.
Eric: Improving our product discovery platform.
Eric: Streamlining our customers' buying journey.
Eric: And increasing personalization.
Eric: The recent upgrades serve as a strong foundation that will build a park.
Eric: We've included several slides in the presentation.
Eric: Highlights these changes.
Eric: Starting with slide four.
Eric: One of our biggest priorities was improving search or product discovery.
Eric: We want the site experience to reflect the technical expertise that MFC delivers to our customers every day.
Eric: Achieving this requires a search platform that is built by technical experts who understand the product.
Erik Gershwind: Achieving this requires a search platform that is built by technical experts who understand the product. Customers Buying Journey. and their native language and industry. And that is our objective with the new search function. Based on customer sentiment and early indicators, we're off to a good start. We're also aiming to make the search experience more visual, as we did with MSC's print catalog, The Big you see here is our newly created table view that we began rolling out across our good, better, best off. to make it easier for customers to compare products. when making a purchasing decision.
Eric: The customers buying journey.
Eric: And their native language and industry terms.
Eric: And that is our objective with the new search function.
Eric: Based on customer sentiment and early indicators, we're off to a good start.
Eric: We're also aiming to make the search experience more visual as we did with M. A c's print catalog the big book.
Eric: What you see here is our newly created table view that we began rolling out across our good better best offerings.
Eric: To make it easier for customers to compare products.
Eric: When making a purchasing decision.
Erik Gershwind: Customers also want the experience to be fast and simple. We made significant improvements towards that end to our checkout experience. As you can see on slide five. Our new single page checkout has reduced the average number of clicks to complete a purchase. by about 50%. in conjunction with the completion of our web upgrade.
Eric: Customers also want the experience to be fast and simple.
Eric: We made significant improvements towards that end to our checkout experience.
Eric: As you can see on slide five.
Eric: Our new single page checkout.
Eric: Has reduced the average number of clicks to complete a purchase right.
Eric: Probably about 50%.
Eric: In conjunction with the completion of our web upgrades.
Erik Gershwind: We also launched our enhanced marketing efforts during the quarter.
Eric: We also launched our enhanced marketing efforts during the quarter.
Erik Gershwind: which Martina will cover in more detail. And while it's still early days. were encouraged by initial progress on several leading indicators. We're seeing increases in new customer acquisition. in mscdirect.com traffic. Average Daily Website Revenues and improvements in several website KPIs.
Martina Mcisaac: Which martina will cover in more detail.
Martina Mcisaac: And while it's still early days.
Martina Mcisaac: We're encouraged by initial progress on several leading indicators.
Martina Mcisaac: We're seeing increases in new customer acquisition.
Martina Mcisaac: In MFC direct dotcom traffic.
Martina Mcisaac: Average daily website revenues.
Martina Mcisaac: And improvements in several website kpis.
Erik Gershwind: We also continued momentum in one of our other growth priorities. expanding the OEM product line. Average daily sales grew 4% in our fiscal second quarter. aided by a growing cross shell pipe.
Martina Mcisaac: We also continued momentum in one of our other growth priorities.
Martina Mcisaac: Spanning the OEM product lines.
Martina Mcisaac: Average daily sales grew 4% in our fiscal second quarter.
Martina Mcisaac: Aided by a growing cross sell pipeline.
Erik Gershwind: Switching to the macro environment. As you can see on slide six. the IP readings across most of our top manufacturing end markets. continue to contract. and weigh on our performance against the overall. Customer sentiment and future outlook have been improving. as is evidenced by recent MBI reading. which have hovered around 50 for the past couple of months. For now, though, there remains hesitancy and caution among our customer base around future production levels. Due to tariff uncertainty. Potentially Looming Inflation and Sustained High Interest Rates. We feel well positioned, however. Navigate This Uncertain Environment. for a number of reasons.
Martina Mcisaac: Switching to the macro environment.
Martina Mcisaac: As you can see on slide six.
The I P readings across most of our top manufacturing end markets.
Martina Mcisaac: Continue to contract and.
Martina Mcisaac: And weigh on our performance against the overall index.
Martina Mcisaac: Customer sentiment and future outlook has been improving.
Martina Mcisaac: This is evidenced by recent N V I readings.
Martina Mcisaac: Which have hovered around 50 for the past couple of months.
Martina Mcisaac: For now though.
Martina Mcisaac: There remains hesitancy and caution among our customer base around future production levels.
Martina Mcisaac: Due to tariff uncertainty.
Martina Mcisaac: Potentially looming inflation.
Martina Mcisaac: And sustained high interest rates.
Martina Mcisaac: We feel well positioned however to.
Martina Mcisaac: Navigate this uncertain environment.
Martina Mcisaac: For a number of reasons.
Erik Gershwind: that Martina will explain in just a second. In summary. while the near term remains choppy.
Martina Mcisaac: That Martina will explain in just a second.
Martina Mcisaac: In summary.
Martina Mcisaac: While the near term remains choppy.
Erik Gershwind: Combination of a Solid Long-Term Manufacturing Outlook. Proving Execution. and a robust portfolio of tools to help our customers during these uncertain times. leaves us feeling encouraged about our future process.
Martina Mcisaac: The combination of a solid long term manufacturing outlook.
Martina Mcisaac: Proving execution.
Martina Mcisaac: And a robust portfolio of tools to help our customers during these uncertain times.
Martina Mcisaac: Leaves us feeling encouraged about our future prospects.
Martina Mcisaac: And with that, I'll turn the call over to Martina. Thank you, Erik, and good morning, everyone. I'll begin by describing how we're navigating the tariff landscape. As a reminder, our direct COGS exposure to China is approximately 10%, and we have low single-digit exposure in Mexico and Canada. While the tariff situation remains fluid, we are confident that we have a playbook in place which covers all aspects, including purchasing, pricing, assortment management, and productivity tools for customers. We continue to execute on all areas of that playbook. First, in purchasing, we took advantage of our strong balance sheet and accelerated purchases ahead of tariffs on our higher-turn products during the quarter.
Martina Mcisaac: And with that I'll turn the call over to Martina.
Martina Mcisaac: Thank you, Eric and good morning, everyone.
Martina Mcisaac: I'll begin by describing how we're navigating the tariff landscape.
As a reminder, our direct Cogs exposure to China is approximately 10% and we have low single digit exposure in Mexico and Canada.
Martina Mcisaac: While the tariff situation remains fluid we are confident that we have a playbook in place, which covers all aspects, including purchasing pricing assortment management and productivity tools for customers.
Martina Mcisaac: We continue to execute on all areas of that playbook.
First.
Martina Mcisaac: In purchasing we took advantage of our strong balance sheet and accelerated purchases ahead of tariffs on our higher return products during the quarter.
Martina Mcisaac: Second, in pricing, we've taken select tariff-related price increases in late March and will continually evaluate additional moves as warranted. In assortment, our intentional sourcing efforts over the years have resulted in a diverse product offering that we will lean on now as we assist customers in working through impacts from tariffs. As shown on slide 7, we offer over 200,000 made-in-USA products that are in stock and ready to ship. Of those, 40,000 are our own exclusive branded products, including well-known brands such as Acupro and Hertel. Not only are these products at lower price points than most industry brands, they're also gross margin accretive.
Martina Mcisaac: Second in pricing, we've taken select tariff related price increases in late March and we will continually evaluate additional moves as warranted.
Martina Mcisaac: In assortment, our intentional sourcing efforts over the years have resulted in a diverse product offering that we will lean on now as we assist customers in working through impacts from tariffs.
Martina Mcisaac: As shown on slide seven we offer over 200000 made in USA products that are in stock and ready to ship.
Martina Mcisaac: Of those 40000 are our own exclusive branded products, including well known brands, such as Accu Pro and hurdle.
Martina Mcisaac: Not only are these products at lower price points than most industry brands, they're also gross margin accretive.
Martina Mcisaac: We believe that our Made in USA product offerings, combined with our technical expertise and proven track record of delivering productivity to our customers, will further differentiate MSC in the marketplace as our customers seek to navigate this changing landscape. As Erik previously mentioned, we also kicked off our enhanced marketing efforts this quarter and our Made in USA portfolio is featured as a component of that messaging. We're expanding our reach through several high return marketing outlets, resulting in increased traffic to our website. As it pertains to our productivity support to customers, the traffic has exceeded our expectations.
Martina Mcisaac: We believe that our made in USA product offering combined with our technical expertise and proven track record of delivering productivity to our customers well further differentiate MSP in the marketplace as our customers seek to navigate this changing landscape.
Martina Mcisaac: Although I previously mentioned, we also kicked off our enhanced marketing efforts. This quarter and are made in USA portfolio is featured as a component of that messaging.
Martina Mcisaac: We are expanding our reach through several high return marketing outlets, resulting in increased traffic to our website.
Martina Mcisaac: As it pertains to our productivity support to customers. The traffic has exceeded our expectation. For example, you used in the first three months of our new cost savings case studies page on M. S. C direct dot com increased around 60 times compared to the prior three months before launch.
Martina Mcisaac: For example, views in the first three months of our new cost savings case studies page on mscdirect.com increased around 60 times compared to the prior three months before launch.
Martina Mcisaac: Now, let me turn to an update on our productivity initiative. First, progress on the initiatives designed to maximize coverage and seller effectiveness remains on track. In the public sector, we completed this work prior to the start of the fiscal year and were pleased with the double-digit growth we achieved in the second quarter. This work was completed for national accounts just prior to the quarter's start. Implementation and field sales targeting the core customer was completed last month and is ahead of schedule. However, given the unusually soft December and our typical 2Q sequential decline, benefits from the completion of these actions are difficult to see in our quarterly results.
Martina Mcisaac: Now, let me turn to an update on our productivity initiatives.
Martina Mcisaac: First progress on the initiatives designed to maximize coverage and seller effectiveness remains on track in the public sector. We completed this work prior to the start of this fiscal year and we're pleased with the double digit growth we achieved in the second quarter.
Martina Mcisaac: This work was completed for a national account just prior to the quarter start.
Martina Mcisaac: Implementation and field sales targeting the core customer was completed last month and is ahead of schedule.
Martina Mcisaac: However, given the unusually soft December and our typical <unk> sequential decline benefits from the completion of these actions are difficult to see in our quarterly result.
Martina Mcisaac: However, I have confidence when looking at our national account and core customer performance during the last two months of the quarter and into March. In addition to structural change, as we focus on core growth, we're increasing our use of marketing automation and AI to support our sellers. Our customer care center, for example, is harnessing advanced technology to better execute on opportunities to both upsell and cross sell.
However, I have confidence when looking at our national accounts and core customer performance during the last two months of the quarter and into March.
Martina Mcisaac: In addition to structural change as we focus on core growth, we're increasing our use of marketing automation and AI to support our sellers our customer care Center. For example is harnessing advanced technology to better execute on opportunities, both upsell and cross sell.
Martina Mcisaac: And lastly, we're pleased with the progress of our network optimization initiatives and remain on track to deliver $10 to $15 million in annualized savings by fiscal year 26. As a reminder, this will be achieved through three critical actions. Consolidating demand planning and procurement functions to streamline the supply chain of our OEM and CPARC categories, upgrading our use of technology in our system-wide inventory planning and allocation to ensure that we have the right inventory close to the customer, reducing working capital cost and carbon, and third, acting on opportunities to optimize our management of inbound and outbound freight by reducing split shipments and reliance on air freight through more sophisticated demand planning.
Martina Mcisaac: And lastly, we're pleased with the progress of our network optimization initiatives and remain on track to deliver $10 million to $15 million in annualized savings by fiscal year 'twenty six.
Martina Mcisaac: As a reminder, this will be achieved through three critical action.
Martina Mcisaac: Consolidated and demand planning and procurement functions to streamline the supply chain of our OEM and C part category.
Martina Mcisaac: Upgrading our use of technology in our system wide inventory planning and allocation to ensure that we have the right inventory close to the customer where do you think working capital cost and carbon and third acting on opportunities to optimize their management of inbound and outbound freight by reducing split shipments and reliance on airfreight through more.
Martina Mcisaac: Sophisticated demand planning.
Kristen Actis: And with that, I'll turn the call over to Chris. Thank you, Martina, and good morning, everyone. Please turn to slide eight where you can see key metrics for the fiscal second quarter on both a reported and adjusted basis. Fiscal second quarter sales of $892 million declined 4.7% year over year. Sequentially, average daily sales declined 5.5% despite January and February exceeding historical month over month trend. By customer type, we were pleased with another quarter of strong growth in the public sector with 13.2% improvement year over year. National accounts declined 5.4% year over year, while core and other customers declined 6.8%.
Kristin: And with that I'll turn the call over to Kristin.
Kristin: Thank you Martina and good morning, everyone.
Kristin: Please turn to slide eight where you can see key metrics for the fiscal second quarter on both a reported and adjusted basis.
Kristin: Fiscal second quarter sales of 892 million declined four 7% year over year sequentially.
Kristin: Sequentially average daily sales declined five 5% despite January and February exceeding historical month over month trends.
Kristin: By customer type, we were pleased with another quarter of strong growth in the public sector with 13.2% improvement year over year.
Kristin: National accounts declined five 4% year over year, while core and other customers declined six 8%.
Kristen Actis: However, as Martina mentioned, both customer types improved as the quarter progressed. We continue to expand our solutions footprint in the second quarter. Despite soft industrial demand and a particularly weak December from a shift in holiday timing, We are encouraged by the continued growth in our installed In vending, second quarter average daily sales were up 1% year over year and represented 18% of total company net sales. Sales through our in-plant programs also grew 1% year over year and represented approximately 18% of total company net sales. Moving to profitability for the quarter, gross margin of 41%, declined 50 basis points year over year, driven by higher priced inventories working through the P&L.
Martina Mcisaac: However, as Martina mentioned, both customer types improved as the quarter progressed.
Martina Mcisaac: We continue to expand our solutions footprint in the second quarter.
Martina Mcisaac: Despite soft industrial demand and a particularly weak December from a shift in holiday timing.
Martina Mcisaac: We are encouraged by the continued growth in our installed base.
Martina Mcisaac: And bending second quarter average daily sales were up 1% year over year and represented 18% of total company net sales.
Martina Mcisaac: Sales through our implant programs also grew 1% year over year and represented approximately 18% of total company net sales.
Martina Mcisaac: Moving to profitability for the quarter gross margin of 41% declined 50 basis points year over year, driven by higher priced inventories working through the P&L cut.
Kristen Actis: Customer Mix, and a slight headwind from acquisition. The 30 basis points of sequential improvement in our gross margin was driven by a greater-than-expected benefit from supplier rebates due to accelerated purchases at calendar year-end. Operating expenses in the fiscal second quarter were approximately $302 million on both a reported and adjusted basis. On an adjusted basis, operating expenses were up approximately $11 million year over year as productivity improvements were more than offset by the combination of personnel related costs, investments, and higher depreciation. Combined with lower sales year over year, this resulted in a 270 basis points step up in adjusted operating expense as a percentage of sales for the quarter.
Martina Mcisaac: Customer mix and a slight headwind from acquisitions.
Martina Mcisaac: The 30 basis points of sequential improvement in our gross margin was driven by a greater than expected benefit from supplier rebates due to accelerated purchases at calendar year end.
Martina Mcisaac: Operating expenses in the fiscal second quarter were approximately $302 million on both a reported and adjusted basis.
Martina Mcisaac: On an adjusted basis operating expenses were up approximately $11 million year over year as productivity improvements were more than offset by the combination of personnel related cost investments and higher depreciation.
Martina Mcisaac: Combined with lower sales year over year. This resulted in a 270 basis point step up in adjusted operating expense as a percentage of sales for the quarter.
Kristen Actis: Sequentially, adjusted operating expenses were down $2 million and performed better than expected. This decline was primarily driven by lower variable expenses associated with the decline in sales and benefits from productivity that were partially offset by an increase in personnel related expenses. reported operating margin for the quarter was 7% compared to 9.7% in the prior year. On an adjusted basis operating margin of 7.1% declined 340 basis points year over year. We delivered GAAP earnings per share of $0.70 compared to $1.10 in the prior year quarter. On an adjusted basis, earnings per share was $0.72 compared to $1.18 in the prior year.
Martina Mcisaac: Sequentially adjusted operating expenses were down $2 million and performed better than expected.
This decline was primarily driven by lower variable expenses associated with the decline in sales and benefits from productivity that were partially offset by an increase in personnel related expenses.
Martina Mcisaac: Reported operating margin for the quarter was 7% compared to nine 7% in the prior year.
Martina Mcisaac: On an adjusted basis operating margin of seven 1% declined 340 basis points year over year.
Martina Mcisaac: We delivered GAAP earnings per share of <unk> 70 cents compared to $1 10 in the prior year quarter.
Martina Mcisaac: On an adjusted basis earnings per share was <unk> 72 cents compared to $1 18 in the prior year.
Kristen Actis: Now let's turn to slide nine to review our balance sheet and cash flow performance. We continue to maintain a healthy balance sheet with net debt of approximately 498 million, representing roughly 1.2 times EBITDA. Working capital was a use of cash in the quarter with the step up in inventory being one of the primary drivers. However, operating cash flow conversion remained strong in the quarter coming in at 139%. Capital expenditures increased approximately 4 million year over year to 30 million.
Martina Mcisaac: Now, let's turn to slide nine to review, our balance sheet and cash flow performance.
Martina Mcisaac: We continue to maintain a healthy balance sheet with net debt of approximately 498 million.
Martina Mcisaac: Representing roughly one two times EBITDA.
Martina Mcisaac: Working capital was a use of cash in the quarter with the step up in inventory as being one of the primary drivers. However, operating cash flow conversion remained strong in the quarter coming in at 139%.
Martina Mcisaac: Capital expenditures increased approximately 4 million year over year to $30 million.
Kristen Actis: This resulted in free cash flow conversion of approximately 63% in the fiscal second quarter and 125% fiscal year to date, keeping us on track to achieve our 100% target for the full year.
Martina Mcisaac: This resulted in free cash flow conversion of approximately 63% in the fiscal second quarter and 125% fiscal year to date, keeping us on track to achieve our 100% target for the full year.
Kristen Actis: Turning to capital allocation on slide 10, our priorities remain the same with organic investment to fuel growth and operational efficiencies being first in the pecking order. Additionally, we will continue to pursue our strategic bolt on M&A strategy and return capital to our shareholders. We repurchased approximately 158,000 shares during the quarter, following the 219,000 of shares repurchased last Combined with the dividend, we returned approximately $60 million to shareholders in fiscal 2Q and $125 million year-to-date.
Martina Mcisaac: Turning to capital allocation on slide 10, our priorities remain the same with organic investment to fuel growth and operational efficiencies being first in the pecking order.
Martina Mcisaac: Italy, we will continue to pursue our strategic bolt on M&A strategy and return capital to our shareholders.
Martina Mcisaac: We repurchased approximately 158000 shares during the quarter following the 219000 of shares repurchased last quarter.
Martina Mcisaac: Combined with the dividend, we returned approximately $60 million to shareholders in fiscal <unk> and $125 million year to date.
Kristen Actis: Moving to our expectations for the fiscal third quarter on slide 11. We expect average daily sales to be down 2% to flat compared to the prior Our expected range takes into consideration sales in March that improved approximately 1.3% year over year, inclusive of an estimated benefit of 200 basis points from the timing of Easter that will become a headwind in April.
Martina Mcisaac: Moving to our expectations for the fiscal third quarter on slide 11.
Martina Mcisaac: We expect average daily sales to be down 2% to flat compared to the prior year.
Martina Mcisaac: Our expected range takes into consideration sales in March that improved approximately one 3% year over year inclusive of an estimated benefit of 200 basis points from the timing of Easter that will become a headwind in April.
Kristen Actis: Under this revenue assumption, we expect our adjusted operating margin in the fiscal third quarter to be between 8.7 percent and 9.3 percent and reflects the following quarter over quarter or sequential assumption. fiscal Q3 gross margin of 40.9% plus or minus 20 basis points. As second quarter benefits from supplier rebates won't likely repeat in the third quarter and largely offset any benefits from price sequential.
Martina Mcisaac: Under this revenue assumption, we expect our adjusted operating margin in the fiscal third quarter to be between eight 7% and nine 3% and reflects the following quarter over quarter or sequential assumptions.
Martina Mcisaac: Fiscal Q3, gross margin of 49% plus or minus 20 basis points.
Martina Mcisaac: Second quarter benefits from supplier rebates won't likely repeat in the third quarter.
Martina Mcisaac: And largely offset any benefits from price sequentially.
Kristen Actis: and a sequential step-up in adjusted operating expenses primarily driven by higher variable expense associated with the expected sequential lift in sales in our pre-Q out.
Martina Mcisaac: And a sequential step up in adjusted operating expenses, primarily driven by higher variable expense associated with the expected sequential lift in sales in our <unk> outlook.
Kristen Actis: Turning to slide 12, our expectations on certain line items for the full year remain unchanged. As a reminder, this includes depreciation and amortization expense of 90 to 95 million for an increase of 10 to 15 million year over year. interest and other expense of roughly 45 million capital expenditures, including cloud computing arrangements of 100 to 110 million A tax rate between 24.5% and 25% And lastly, free cash flow generation of approximately 100% of net income. to assist in modeling the cadence of sales for the remainder of the fiscal year.
Martina Mcisaac: Turning to slide 12, our expectations on certain line items for the full year remain unchanged.
Martina Mcisaac: As a reminder, this clued depreciation and amortization expense of $90 million to $95 million or an increase of $10 million to $15 million year over year inch.
Martina Mcisaac: Interest and other expense of roughly 45 million.
Martina Mcisaac: Capital expenditures, including cloud computing arrangements of $100 million to $110 million.
Martina Mcisaac: A tax rate between 24.5 and 25, 5%.
Martina Mcisaac: And lastly, free cash flow generation of approximately 100% of net income.
Martina Mcisaac: To assist in modeling the cadence of sales for the remainder of the fiscal year. The bottom of the slide provides historical quarter over quarter averages and other key considerations.
Kristen Actis: The bottom of the slide provides historical quarter over quarter averages and other key considerations.
Unknown Executive: And with that, we will open the line for Q&A. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing. If at any time your question has been addressed and you would like to withdraw your Please press star then.
Martina Mcisaac: And with that we will open the line for Q&A.
Martina Mcisaac: We will now begin the question and answer session.
Martina Mcisaac: To ask a question you May Press Star then one on your Touchtone phone.
Martina Mcisaac: If you were using a speakerphone please pick up your handset before pressing the keys.
Martina Mcisaac: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Unknown Executive: At this time, we'll pause momentarily to assemble our roster.
Martina Mcisaac: At this time will pause momentarily to assemble our roster.
Martina Mcisaac: Okay.
Ryan Cook: The first question today comes from Ryan Cook with Wolfson . Please go ahead. Morning, and thank you for taking my question. Morning, Ryan.
Speaker Change: The first question today comes from Ryan Cook with Wolfe Research. Please go ahead.
Martina Mcisaac: Good morning, and thank you for taking my questions.
Martina Mcisaac: Maybe start on the top line guide good morning, maybe we could start on the top line guide and just how you're thinking about the back half. So we have marched down about 70 basis points adjusting for Easter, which I think implies kind of flattish eds and <unk> based on normal April maybe seasonality.
Ryan Cook: Maybe we can start on the top line guide. Morning. Maybe we can start on the top line guide and just tell you what you're thinking about the back half. So we have marched down about 70 basis points just for Easter, which I think implies kind of flattish ADS and 3Q based on normal April-May seasonality. So the kind of down 0% to 2% guidance assumes some softening in the end markets at the low end. And it's a bit reasonable for us to be thinking of 4Q as getting back to positive year-over-year growth based on normal seasonality.
Martina Mcisaac: This is the kind of down <unk> to 2% guidance assume some softening in the end markets at the low end.
Martina Mcisaac: Usable for us to be thinking of <unk> as getting back to positive year over year growth based on normal seasonality.
Kristen Actis: Yeah, I can start with that. And Erik, feel free to jump in with any color more broadly that you want to add. So I agree with your comment, Ryan, on how to think about March and your comment about the implication on the midpoint guide for April and May. We're not necessarily assuming significant further erosion anywhere at this time. I think we're very cautious about the end markets. If you look at how the sequencing in the quarter would play out relative to Q1, it basically assumes that we're fairly flat with Q2 into Q3. Obviously, some things that we would expect to come online that are going our way with the share gain initiatives, we're not contemplating much improvement in the top line from pricing related to tariffs at this point.
Speaker Change: Yeah, I can I can start with that and Eric feel free to jump in with any color more broadly that you want to add so.
Ryan Mouse: So I agree with your comment Ryan on how to think about March and your comment about the implications on the midpoint guide for April and May.
Ryan Mouse: We're not necessarily assuming significant further erosion anywhere at this time I think we're very cautious about the end markets.
Ryan Mouse: If you look at how the sequencing in the quarter would play out relative to Q1. It basically assumes that were fairly flat.
Ryan Mouse: With Q2 into Q3 are obviously, some things that we would expect to come online that are going our way with the share gain initiatives.
Ryan Mouse: We're not contemplating a much improvement in the top line from pricing related to tariffs at this point and so I think we are leaving some room for some potential softening in the macro but we're very focused on delivering on the share gain initiatives right now, which we're feeling confident about coming out of the second quarter.
Kristen Actis: So I think we are leaving some room for some potential softening in the macro, but we're very focused on delivering on the share gain initiatives right now, which we're feeling confident about coming out of the second quarter.
Ryan Cook: Okay, that all makes sense. And it's very clear.
Ryan Mouse: Okay that all makes sense and is very clear and maybe if you could just touch on the moving pieces for margins in the back half next I know you called out the 20 basis points sequential headwind for supplier rebates that won't be repeating but just anything else you would note in the bridge I think you had previously mentioned a framework for kind of 8% to 10% incremental opex on the first half.
Kristen Actis: And maybe we could just touch on the moving pieces for margins in the back half next. I know you called out the 20 basis points sequential headwind for supplier rebates that won't be repeating. But I guess anything else you'd note in the bridge, I think you had previously mentioned a framework for kind of eight to 10% incremental OPEX on the first half for second half sales. So would that still be the case? And I think that pencils out to about 8% operating margin this year. Yeah, that's so roughly, I would think about the big moving driver in OPEX as you sequence it through 3Q and 4Q to be the variable expense.
Ryan Mouse: Second half sales, so would that still be the case and I think that pencils out to about 8% operating margin this year.
Ryan Mouse: Yeah, that's so roughly I would think about the big movie and driver in Opex as you sequence it through <unk> and <unk> to be the variable expense I'll put maybe a little bit more color on this there are some other things moving up and down to be clear, but if youre trying to net out a simple way to model. It back so that would be it.
Kristen Actis: I'll put maybe a little bit more color on this. There are some other things moving up and down to be clear, but if you're trying to net out a simple way to model OPEX, that would be it. One thing I'll clarify, Ryan, on how you cast out 4Q is that 8 to 10% variable expense associated with your top line change would be excluding anything that you add on for paris at this point. That's how we're still thinking about the guide on OPEX. Although we're not giving a specific number out into Q4, if that provides some helpful coloring on sequencing.
Speaker Change: One thing I'll clarify Ryan on on you know how you cast out for Q is that that 8% to 10% variable expense associated with your topline change would.
Speaker Change: Would be excluding anything that you would go out on for tariffs at this point that we're that's how we're still thinking about the guide on Opex.
Speaker Change: Although we're not giving a specific number out into Q4, if that provides some helpful. Colorado on sequencing.
Ryan Cook: Yes, that does.
Speaker Change: Yes that does thank you I'll turn it over.
Unknown Executive: Thank you.
Unknown Executive: I'll turn it over.
Tommy Moll: The next question comes from Tommy Moll with.
Tommy Moll: The next question comes from Tommy Moll with Stephens. Please go ahead.
Tommy Moll: Please go ahead. Good morning, and thank you for taking my question. Morning. You mentioned some price increases announced in late March. And I was hoping to just get more detail there. Magnitude, scope, likelihood after yesterday's announcement that you'll need to circle back for more. Anything you can give there would be helpful.
Tommy Moll: Good morning, and thank you for taking my questions.
Speaker Change: Good morning, Tommy.
Speaker Change: You mentioned some price increases.
Tommy Moll: In late March.
Tommy Moll: And I was hoping to just get more detail there.
Tommy Moll: Magnitude scope likelihood after yesterday's announcements that you'll need to circle back for more anything you can give there would be helpful. Thank you.
Kristen Actis: Thank Yes, so maybe, Erik, do you want to start broadly and I can talk about some sizing on Marsh or Martina? Anyone want to jump in?
Tommy Moll: Yes, so maybe Eric do you want to start broadly and I can I can talk to me about the sizing on March 13th.
Tommy Moll: Jonathan I'll, let me start by answering your question Tommy.
Erik Gershwind: Let me start by answering your question, Tommy, first. And then Martin, I'll turn it over to you a little bit on what we're what we're doing. Your direct question, Tommy, I think was about the March increase first. So Obviously, this entire thing is very fluid. And we got a lot of new information yesterday. The increase that we took in late March was small, and it was mainly covering items where we are the importer of record. And that's primarily in this case on product that's coming in from China. And if you're trying to size that, I'd say it's about a half a point of price benefit on the top line.
Tommy Moll: And then Marty I'll turn it over to you a little bit on what we're what we're doing.
Tommy Moll: Of your direct question Tommy I think was about the March increase first so.
Tommy Moll: Obviously this entire thing is very fluid and we got a lot of new information yesterday.
Tommy Moll: The increase that we took in late March was small and it was mainly covering items, where we are the importer of record.
Tommy Moll: And that's primarily in this case on product that's coming in from China.
Tommy Moll: And if you're trying to size that I'd say, it's about a half a point of price benefit on the topline.
Kristen Actis: And we don't expect to see much of that in the third quarter. But again, all of this is evolving. The modeling is challenging right now. I think fluid is probably the best word to describe the situation. And I'll let Martina share some color on this. But we don't have a lot of firm information from our suppliers yet on cost or timing, which is obviously a key variable in our modeling. We've been running a pretty robust process on scenario planning, monitoring what's happening, and then decisioning, of course, in response to what increases become clear. We'll keep providing color right on the road in May, so we can add more detail as it becomes available.
Tommy Moll: We don't expect to see much of that in the third quarter.
Tommy Moll: But again all of this is evolving on the modeling is is challenging right now I think fluid is probably the best word to describe the situation and I'll, let martinez share some color on this but we don't have a lot of firm information from our suppliers yet on costs or timing, which is obviously a key.
Tommy Moll: Variable in our modeling.
Tommy Moll: Where we've been running a pretty robust process on scenario planning.
Tommy Moll: Monitoring and what's happening and then Decisioning of course in response to what increases become clear.
Tommy Moll: Well, we'll keep providing color right on the road in May So we can add more detail as it becomes available.
Kristen Actis: But that's really color specific to how to think about cost and price related to tariffs. What makes this even more challenging is you have a lot of second order derivatives here that are harder to predict. And that's, I think, pretty obvious things. But like, is there a mixed shift that results from this across products? Is there any change in underlying demand levels? Those are some things that we really need to continue working through on scenario planning.
Tommy Moll: But that's that's really color specific to how to think about cost and price related to tariffs what makes us even more challenging as you have a you have a lot of second order derivatives here that are harder to predict and Thats I think pretty obvious things, but like is there a mix shift that results from this across products is there any change in underlying <unk>.
Martina Mcisaac: <unk> levels are those are some things that we really need to continue working through on scenario planning and Martina I think you are running a pretty tight playbook on how we're managing this maybe you can jump in and add some color.
Martina Mcisaac: And Martina, I think you're running a pretty tight playbook on how we're managing this. Maybe you can jump in and add some color.
Tommy Moll: Sure.
Martina Mcisaac: So, maybe just in light of the news from yesterday, let me recap our mix. So, I think we've said some of this before, but just to review, more than half of our product is sourced in the U. S. We have roughly 10% coming from China. We have another about the same amount coming from Europe. Low single digits from Canada and Mexico. And then, beyond that, it's low single digits from a number of countries. What's important, though, to understand is we're not the importer of record on all of that. So, about 75% of our sales are industry brands that are coming from other suppliers.
Martina Mcisaac: So maybe just in light of the news from yesterday, let me recap our mix. So I think we said some of this before but just to review more than half of our product is sourced in the U S.
Martina Mcisaac: We have roughly 10% coming from China, we have another about the same amount coming from Europe.
Martina Mcisaac: Low single digits from Canada, and Mexico, and then beyond that it's low single digits from a number of country. What's important though to understand is we're not the importer of record on all of that so about 75% of our sales are industry brands that are coming from other suppliers and right now the way suppliers.
Martina Mcisaac: And right now, the way suppliers are handling this, it sort of falls into a few buckets. So, as Kristen said, we're the importer of record. That's very clear. We know what the tariff is. That's the price increase that we pushed through at the end of March. Then we have a group of suppliers who are importing finished goods. They up until now had a relatively clear line of sight and are communicating to us kind of in more of a surcharge format. So it's a little clearer for us to model. But the bulk of our suppliers are looking at multiple overlapping tariffs that are impacting them.
Martina Mcisaac: Our handling this it sort of falls into a few buckets. So as Kristian said, where we're the importer of record that's very clear we know what the tariff is that's the price increase that we pushed through at the end of March.
Martina Mcisaac: Then we have a group of suppliers, who are importing finished goods. They up until now had it relatively clear line of sight and are communicating to us kind of in more of a surcharge format. So it's it's a little clearer for us to model, but the bulk of our suppliers are I'm looking it at multiple overlapping tariffs that are.
Martina Mcisaac: Are impacting them and so you know to the.
Martina Mcisaac: And so, you know, to simplify it, they're still doing the math. And of course, now we have new information as of yesterday. So while we're in negotiations with them, they haven't given us size or timing yet. But what they're implying is it will come in the form of a general price increase across their whole product line, not in a visible surcharge. So in the meantime, you know, we're working the playbook, as Kristen said, and we're working with customers on how to understand their mix and how their mix could be shifted to a Made in America framework and how we can help them with productivity to offset any tariffs.
Martina Mcisaac: To simplify it they're still doing the math and of course now they have we have new information as of yesterday. So while we're in negotiations with them they haven't given our size or timing yet.
Martina Mcisaac: So, but what theyre, implying is it will come in the form of a general price increase across their whole product line not in in a visible surcharge. So in the meantime.
Speaker Change: We're working to playbook as Kristian said, and we're working with customers on how to understand their mix and how their mix could possibly be shifted to a made in America framework and how we can help them with productivity to offset any kara.
Tommy Moll: Thank you both.
Speaker Change: Thank you both as a follow up I wanted to touch on the <unk>.
Tommy Moll: As a follow up, I wanted to touch on the web enhancements and recent marketing initiatives. Correct me if I'm wrong, but it seems like the takeaway there for this quarter is on track.
Speaker Change: Web enhancement and recent marketing initiatives.
Speaker Change: Correct me, if I'm wrong, but it seems like the takeaway there for this quarter is on track.
Tommy Moll: But I wanted to go a little bit deeper, if there are specific areas of the programs that you could highlight as progressing ahead of plan, and then the flip side up, are there any areas that are proving a little more difficult than anticipated, maybe behind plan?
Speaker Change: But I wanted to go a little bit deeper if there are specific areas of the programs that you could highlight as progressing ahead of plan and then the flip side of it.
Speaker Change: Are there any areas that are proving a little more difficult than anticipated maybe behind plan.
Tommy Moll: And if you just think ahead, what would you frame for us as the what's to come?
Speaker Change: And if you just think ahead.
Speaker Change: What would you frame for us as to what's to come here.
Speaker Change: Yeah.
Erik Gershwind: Tommy, good morning. It's Erik.
Speaker Change: Tommy Good morning, it's Eric I'll take this one so I think you're right I would say I would characterize progress is on track and.
Erik Gershwind: I'll take this one. So I think you're right. I would say I would characterize progress as on track. And, you know, you heard in the prepared remarks that we were pleased. We had a bunch of things that we wanted to get over the finish line in Q2. We did. So across the board, the overwhelming headline is on track. I would not call out anything where we're behind. Look, last year, we had areas to call out behind. I think we're doing what we said we were going to do as of now, Tommy. Progress has generally been encouraging.
Speaker Change: You heard in the prepared remarks that we.
Speaker Change: We were pleased that we had a bunch of things that we wanted to get over the finish line in Q2, we did.
Speaker Change: So across the board the overwhelming headline is on track.
Speaker Change: I would not call out anything where we're behind look last year, we had areas to call out behind I think we're doing what we said we were going to do as of now Tommy Prague.
Speaker Change: Progress has generally been encouraging and obviously this is going to we're going to be our performance is going to be influenced by the macro we've talked about a lot of uncertainty now, but what we're focused on is what can we control and that's do we deliver what we say we're going to deliver and then how does the leading indicators look and that's in terms of the web marketing. We gave you a sense of some of the case.
Erik Gershwind: And, you know, obviously, this is going to we're going to be our performance is going to be influenced by the macro. We've talked about a lot of uncertainty now. But what we're focused on is what can we control? And that's do we deliver what we say we're going to deliver? And then how do the leading indicators look? And that's in terms of the web marketing, we gave you a sense of some of the KPIs we're tracking internally. They're on track. So, you know, as far as we're concerned, it was a solid quarter. Each one of those tracks, you know, it's not like it's one and done.
Speaker Change: Were tracking internally that we're on track so you know as far as we're concerned.
Speaker Change: It was a solid quarter.
Speaker Change: Each one of those tracks, it's not like it's one and done there's continue what we talked about with the web upgrades. We got a good foundation in place that we're going to build upon with a with a product roadmap now on the marketing front. We got started we're seeing some nice traction and momentum I mentioned in the prepared remarks, seeing new customer acquisition tick up which is encouraging there is a.
Erik Gershwind: There's continue what we talked about with the web upgrades. We got a good foundation in place that we're going to build upon with a with a product roadmap.
Erik Gershwind: Now, on the marketing front, we got started. We're seeing some nice traction and momentum. I mentioned in the prepared remarks, seeing new customer acquisition tick up, which is encouraging. There's a lot more to come there. And then, of course, Martina hit sales optimization, which is running ahead of plan in terms of executing on the actions. Now it's about translating those into results. So I think in general, what I would say is we're on track. We expect core customer growth to improve. Of course, obviously, we'll be influenced by stuff that's outside of our control here. But in terms of how we execute and perform, you know, we expect to see some improvement.
Martina Mcisaac: A lot more to come there and then of course Martina hit sales optimization, which.
Martina Mcisaac: <unk> is running ahead of plan in terms of executing on the actions now it's about translating those into results. So I think in general what I would say is we're on track we expect core customer growth to improve of course, obviously will be influenced by stuff that's outside of our control here, but in terms of how we execute and perform.
Martina Mcisaac: We expect to see some improvement.
Tommy Moll: Thanks, Erik.
Speaker Change: Thanks, Eric I'll turn it back.
Unknown Executive: I'll turn it back.
Martina Mcisaac: [laughter].
Ken Newman: The next question comes from Ken Newman with KeyBank Capital Markets.
Speaker Change: The next question comes from Ken Newman with Keybanc capital markets. Please go ahead.
Ken Newman: Please go ahead. Hey, good morning, guys. Morning, Ken. Good morning. Morning.
Ken Newman: Hey, good morning, guys.
Speaker Change: Hi, Ken good morning.
Martina Mcisaac: Good morning.
Erik Gershwind: You know, so for my first question, Erik, it doesn't seem like you guys are seeing any pre-buy activity, at least through the quarter, but I'm curious if you're getting a sense that some of these customers may have been trying to get ahead of yesterday's announcement and if that's being reflected in the preliminary March numbers. And we have not and you know, our stuff, it's tricky because our spent, you know, our customer spend with us is fragmented across so many skews, but we we've seen to date and I would I would include March in that no evidence of outsized pre buying to speak of.
So for my first question.
Martina Mcisaac: Erik It doesn't seem like you guys are seeing any pre buy activity at least through the quarter, but I'm curious if you're getting a sense that some of these customers. We have been trying to get ahead of yesterday's announcements.
Martina Mcisaac: And that's being reflected in the preliminary March numbers.
Martina Mcisaac: And we have not and you know our stuff. It's tricky because our spent you know there are customer spend with us is fragmented across so many skus, but we've seen to date and I would include marching that no evidence of outsized pre buying.
Martina Mcisaac: To speak of.
Okay.
Erik Gershwind: And then maybe quickly for my for my follow up here. totally get that the visibility on the cycle is limited, just given all the moving pieces. But maybe if we could just dig a little deeper into the individual end markets from a manufacturing perspective. You know, I know automotive and aero are two of your larger ones. I think they're both 10% each direct. Obviously, we've got some news on the tariff side from automotive, some incremental stuff there yesterday as well. Any, you know, high level thoughts on how you're thinking about those end markets in particular, and how you're looking to navigate some of these, these moving pieces?
Martina Mcisaac: And then maybe quickly for my for my follow up here.
Martina Mcisaac: Totally get that the visibility in the cycle is is limited just given all the moving pieces, but maybe if we could just dig a little deeper into the individual end markets from a manufacturing perspective, I know automotive and aero or two of your larger ones I think they are both 10% each direct.
Martina Mcisaac: Obviously, we've got some news on the tariff side from automotive some incremental stuff there yesterday as well.
Martina Mcisaac: Any.
Martina Mcisaac: High level thoughts on how youre thinking about those end markets in particular and how.
Martina Mcisaac: How you are looking to navigate some of these these moving pieces.
Erik Gershwind: Yeah, sure, Ken, I'll take I'll take that one as well. So look, I'll give you look, the headline was Q2 remains soft for heavy manufacturing. And you can see that in the IP metrics that we referenced. I think another headline, though, is we saw continued improvement through the quarter. And that improvement continued into March, for the most part, across our heavy manufacturing and markets. So while soft, progressive improvement with pretty much all of them, with the exception of automotive and heavy truck, which still remain really soft. Now, obviously, trying to predict what's to come is nearly impossible right now.
Ken Newman: Yeah sure Ken I'll take I'll take that one as well so look I'll give you look the headline was.
Ken Newman: Q2 remained soft for heavy manufacturing and you could see that in the in the IP metrics that we.
Ken Newman: The debt that we referenced I think another headline though is we saw continued improvement through the quarter.
Ken Newman: And that that improvement continued into March for the most part across our heavy manufacturing end markets.
Ken Newman: So while soft progressive improvement with pretty much all of them with the exception of automotive and heavy truck, which still remain really soft now.
Ken Newman: Obviously trying to predict what's to come is nearly impossible right. Now one would think that you know automotive has been really soft one would think that.
Erik Gershwind: One would think that, you know, automotive has been really soft. One would think that yesterday's news and the recent events could weigh on that segment further. The flip side is, aerospace, the outlook continues to be robust. But I would say the general tone would be soft, but improving over the past few months, and just a lot of uncertainty around how recent events are going to shake out.
Ken Newman: Yesterday's news and the recent events could weigh on that segment further the flip side is you know aerospace the outlook continues to be robust but.
Ken Newman: But I would say the general tone would be soft, but improving over the past few months and just a lot of uncertainty around how recent events are going to shake out.
Ken Newman: Yeah.
Stephen Volkmann: Very helpful, thanks. The next question comes from Stephen Volkmann with Jeffries. Please go ahead. Hi, good morning, guys. Thanks for taking the question.
Ken Newman: Very helpful. Thanks.
Speaker Change: The next question comes from Stephen Volkmann with Jefferies. Please go ahead.
Stephen Volkmann: Hi, Good morning, guys. Thanks for taking the question.
Stephen Volkmann: I'm, just a less serious I'm, a little surprised to see that your pricing was down slightly in the quarter can you just talk about sort of what's happening there and what you expect maybe for the third quarter.
Kristen Actis: I'm just a little surprised to see that your pricing was down slightly in the quarter. Can you just talk about sort of what's happening there and what you expect maybe for the third quarter? Yeah, in the second quarter, Steve, we saw a pretty healthy amount of mix within that price number. And some of that has to do with how customer sector mix, for example, comes into the calculation. There's a few different ways that we look at the price measurement. If we look at it on sort of a lower level of detail, same customer, same item, we had a more favorable price number.
Speaker Change: Yeah in the second quarter, Steve we saw a pretty healthy amount of mix within that price number and.
Speaker Change: Some of that has to do with how customer sector mix for example comes into the calculation.
Speaker Change: There's a few different ways that we look at the price measurement. If if we look at it on sort of a lower level of detail same customer same item.
Speaker Change: We had a more favorable price number it was washed out in the way we reported overall because of mix within customer types.
Kristen Actis: It was washed out in the way we reported overall because of mix within customer type. So that was 2Q, and I think you asked about 3Q on price cost. So I'll remind everyone, 3Q last year, we were, this is when we'll comp the issues we had with the web price realignment in the third quarter of last year. So that creates a tailwind for us in a year-over-year basis of about 30 basis points. So if you think about the midpoint guide of 40.9% on gross margin, that would imply flat to prior year. And to break that down, you've got 30 basis points of tailwind on the price cost lapping from web price realignment.
Speaker Change: So I was <unk> and then I think you asked about <unk> on price cost. So I'll remind everyone. Three two last year. We were Oh. This is one more comp the issues, we had with the web price.
Speaker Change: Realignment in the third quarter of last year, so that creates a.
Speaker Change: A tailwind for us on a year over year basis about of about 30 basis points. So.
Speaker Change: If you think about the midpoint guide of 49% on gross margin that would imply flat to prior year and to break that down and you've got 30 basis points of tailwind on the price cost lapping from web price realignment.
Kristen Actis: We're expecting some additional improvement from productivity and very slight benefit on the tariff. That's probably worth about 10 to 20 basis points. But we're also expecting continued mixed headwinds.
Speaker Change: We're expecting some additional improvement from productivity and.
Speaker Change: Very slight benefit on the tariffs that's probably worth about 10 to 20 basis points, but we're also expecting continued mix headwinds and then we have some headwind from acquisitions completed since the prior year that largely offset that to get you to about flat at the midpoint gross margin number for free.
Stephen Volkmann: And then we have some headwinds from acquisitions completed since the prior year that largely offset that to get you to about flat at the midpoint gross margin number for 3Q. Great. Okay, that's super helpful. Thank you.
Speaker Change: Hugh.
Speaker Change: Great. Okay. That's super helpful. Thank you and I apologize if this question might be a little bit too theoretical but I've been trying to think about price costs from a bigger.
Stephen Volkmann: And I apologize, this question might be a little bit too theoretical. But I've been trying to think about price costs from a bigger perspective. And obviously, you and lots of distributors benefited in terms of gross margin from our last bout of inflation. However, that was also against the backdrop of very strong demand. So I'm trying to figure out sort of how you look at price costs, assuming that we're headed into an inflationary period. Are you going to be able to sort of get ahead of that and get a little bit of gross margin benefit from this as it happens?
Speaker Change: Perspective, and obviously, you and lots of distributors benefited in terms of gross margin from our last out of inflation.
Speaker Change: However that was also against the backdrop of very strong demand. So I'm trying to figure out sort of how you look at price cost assuming that we're headed into an inflationary period are you going to be able to sort of get ahead of that and get a little bit of gross margin benefit from this as it happens or is that going to be tough.
Erik Gershwind: Or is that going to be tougher this time, because we're not in quite as big a demand environment? Yes, Steve, I'll take that one. And look, you and everybody else are trying to figure it out, right? It's fluid, as Kristen said, but in all seriousness, here's what I'd say. We have always said and continue to believe that in general, inflation and particularly the early stages of an inflation cycle is constructive and positive for a distributor and for us. And we continue to believe that. So, particularly, as I said, early stages of an inflation cycle, we do expect to be able to pass pricing along, as we did in the past.
Speaker Change: For this time, because we're not in quite as big a demand environment.
Speaker Change: Yes, Steve I'll take that one and look at you and everybody else are trying to figure it out right. It's fluid as Kristian said, but in all seriousness, here's what I'd say.
Speaker Change: We have always said and continue to believe that in general inflation and particularly the early stages of an inflation cycle.
Speaker Change: Is constructive and positive for a distributor for us and you know that.
Speaker Change: We continue to believe that.
Speaker Change: So, it's particularly as I said early stages of an inflation cycle, we do expect to be able to pass pricing along.
Speaker Change: As we did in the past.
Erik Gershwind: Martina referenced, we're going to lean hard on two things, this go around in particular, that are tools at our disposal, even more so than they were kind of in tariffs 1.0, if you will. One is our product offering, which is we have made some moves, certainly reducing China exposure. And we've got a really strong made in USA offering. And then two is our playbook, in terms of productivity, to deliver for customers. So, we think all of those things, even notwithstanding what happens in the demand environment, support our ability to get pricing through, we're going to have to.
Speaker Change: Martina referenced we're going to lean hard on two things. This go around in particular.
Speaker Change: That our tools at our disposal, even more so than they were kind of in tariffs. One point. If you will one is our.
Speaker Change: Our product offering which is.
Speaker Change: We have made some moves.
Speaker Change: Certainly, reducing China exposure and we've got a really strong made in USA offering and then two was our playbook.
Speaker Change: In terms of productivity to deliver for customers. So we think all of those things he even notwithstanding what happens in the demand environment support our ability to get pricing through we're going to have to and those are supportive of it and we will help with customers.
Erik Gershwind: And those are supportive of it and will help with customers.
Speaker Change: That said.
Erik Gershwind: That said, Steve, it's really difficult to go back to prior cycles here, because this is a little bit of uncharted water in terms of, number one, the fluidity and just how fast things are moving and changing. Number two, the scope. Obviously, we're looking at, at least as of yesterday's announcement, far reaching beyond China. So, there's a lot of uncharted water here. But if I pull it back to the headline, we would expect to get price through, we're going to lean on our inflationary and tariff playbook here, and particularly early stages of an inflation cycle, we would expect to be price cost positive, as we have been in other cycles.
Speaker Change: Steve It's really difficult to go back to prior cycles here because this is a little bit of unchartered water in terms of number one the fluidity and just how fast things are moving and changing number two the scope. Obviously, we're looking at you know at least as of yesterday's announcement.
Speaker Change: Far reaching beyond China, So there's a lot of unchartered water here, but if I if I pull it back to the headline we would expect to get price through we're going to lean on our playbook are inflationary and tariff playbook here and particularly early stages of an inflation cycle, we would expect to be price cost positive.
Speaker Change: As we have been in other cycles.
Speaker Change: Much appreciate it thanks.
Stephen Volkmann: Appreciate it. Thanks.
Speaker Change: Yes.
Christopher Dankert: The next question comes from Chris Dankert with Loop Capital Markets. Please go ahead. Hey, morning, thanks for taking the questions.
Speaker Change: The next question comes from Chris Dankert with loop capital markets. Please go ahead.
Chris Dankert: Hey, good morning, Thanks for taking the questions.
Christopher Dankert: I guess, Erik, maybe just to dig in a little bit more on the, you know, the digital KPIs, any update on the conversion ratio, order size, something that can kind of put a little more meat on the bone for what we can expect sales in the future, maybe here? Yeah, yeah, Chris, good question. You heard us reference some of the indicators that we're looking at. And then we kind of said some website KPIs, which obviously we're sensitive to how much we share on a call like this for competitive reasons. But you could imagine you hit on two of them that we're looking at very carefully, conversion rate and average order value.
Chris Dankert: I guess, maybe just to dig in a little bit more on the digital kpis any update on the conversion ratio order size something that can kind of put a little more meat on the bone for what we can expect sales in the future maybe here.
Chris Dankert: Yeah, Yeah, Chris Good question, you heard us reference.
Chris Dankert: Some of the indicators that we're looking at and then we kind of said some website kpis, which you obviously were sensitive to that.
Chris Dankert: How much we ship.
Chris Dankert: On a call like this for competitive reasons, but you could imagine you hit on two of them that we're looking at very carefully conversion rates and average order value conversion rate in particular out of average order value has some other moving parts, but conversion rate does give us a good indication of how the site is doing and we are seeing we referenced some improvements and obviously, it's still early days.
Erik Gershwind: Conversion rate in particular out of average order value has some other moving parts. But and we are seeing, we referenced some improvements. And obviously, it's still early days here, because the most of the meaningful upgrades, the ones that you saw on the slide happened fairly late in Q2. But we are starting to see positive momentum in those indicators, which would bode well. We are seeing sequential increases in website revenues as well. But I would call the revenue a trailing indicator, whereas the conversion rate, the average order value is one of two other things that we look at are leading indicators.
Chris Dankert: Here because the most of the meaningful upgrades the ones that you saw on the slides happened fairly late in Q2, but we are starting to see positive momentum in those indicators, which would bode well.
Chris Dankert: We are seeing sequential increases in website revenues as well, but I would call. The revenue wanted a trailing indicator where is the conversion rate. The average order value, there's one or two other things that we look at our leading indicators we are starting to see some movement there.
Erik Gershwind: We are starting to see some movement there. Got it, got it. Good news there, I guess.
Chris Dankert: Got it got it good news there I guess and then.
Erik Gershwind: And then I'm going to ask an unfair question, I guess, just conceptually, is there any way to size? What percent of yourself are tied to customers who are exporting product here? I mean, it's been a bit but it seems like trade wars are just going to accelerate. What's the risk of those customers having to pull back? Just any way to size the export exposure here? That would be so a tough one to size. Chris, I see where you're going. If things were to escalate, look, I think that's one of the unknowns. So the short answer is it's tough to size.
Chris Dankert: But that's an unfair question I guess, just conceptually is there any way to size what percent of your sales are tied to customers who are exporting product here.
Chris Dankert: Then a bit but it seemed like trade wars or just could accelerate what's the risk of those customers are going to pull back.
Chris Dankert: Put aside the export exposure here.
Chris Dankert: That would be so it's a tough one to size.
Speaker Change: Chris I I, I see where you're going is if things were to escalate.
Chris Dankert: I think that's one of the unknowns.
The short answer is it's tough to size we.
Erik Gershwind: We do know that I'm thinking back to prior cycles. If there were a trade war, would there be impact on demand? Would there be impact on production in the US? Yeah, there would. We've seen it in other cycles where there's been massive, I mean, I'm thinking of past cycles where it's less about tariffs, more about currency. Does that impact production? It does. So there would be an impact. I, you know, sort of directionally, and this is qualitative, not quantitative, but since prior cycles, you know, there has been a shift back to made in USA, meaning putting production closer to end markets to shrink lead times, which might buffer some of the impact because there'd be more stuff here that's going to this market as opposed to being exported.
Chris Dankert: We do know that I'm thinking back to prior cycles. If there were trade war would there be impact on demand would there be impact on production in the U S. Yeah, there what we've seen it in other cycles, where there's been massive I mean, I'm thinking of past cycles, where it's less about tariffs more about currency does that impact production. It does so there would be.
Chris Dankert: And impact.
Chris Dankert: I, you know sort of Directionally and this is qualitative not quantitative but since prior cycles. You know there has been a shift back to made in USA, meaning putting production closer to end markets to shrink lead times, which might buffer some of the impacts because there'll be more stuff here.
Chris Dankert: That's going for this going to this market as opposed to being exported but in general if export demand softens, we would feel it here.
Erik Gershwind: But in general, if export demand softens, we would feel it here. Understood. I really appreciate your thoughts. I'm sorry, I couldn't give. I realized that's qualitative, not quantitative. No, I knew it was. It was an unfair question at the beginning. So thanks for your thoughts.
Speaker Change: Understood I really appreciate Chris Im sorry, I Couldnt get.
Chris Dankert: I realize that's that's qualitative not quantitative.
Speaker Change: I knew it was a it was an unfair question at the beginning so thanks for your thoughts.
Ryan Mills: And Chris, going back to your previous question on the web enhancements, just to give you a size, if you look in the e-commerce dot stats, we have the e-com sales, about half of that is website sales, just to give you an idea on the size of our website. Thanks, Ryan.
Chris Dankert: And Chris going back to your previous question on the web enhancements just to give you a size. If you look in the e-commerce. The op stats, we have the E. Comm sales about half of that is as website sales just to give you an idea on the size of our website.
Speaker Change: Thanks, Brian.
Okay.
David Manthey: The next question comes from David Manthey with Baird. Please go ahead. Thanks.
Speaker Change: The next question comes from David Manthey with Baird. Please go ahead.
Speaker Change: Thanks May you live in interesting times right.
David Manthey: May you live in interesting times, right? You ain't kidding, Dave, especially the timing of this call. Well, good morning. My question is on performance versus IP. It looks like it took another step back this quarter. And even relative to your the the five heavy industries of IP, it seems like you're losing share measurably currently. And Kristen, in your comments, you said you're confident in your share gain efforts.
Speaker Change: [laughter] Hugh you Ain't Kidding, Dave a special group aside because it's cool.
Speaker Change: Well. Good morning. My question is on performance versus IP. It looks like it took another step back this quarter and even relative to your.
Speaker Change: Five heavy industries of IP, it seems like Youre, losing share measurably currently in Christian in your comments you said you're confident in your share gain efforts I'm wondering if you can outline sort of from a timeline perspective, which of the initiatives are going to start to chip away at that gap.
Kristen Actis: I'm wondering if you can outline sort of from a timeline perspective, which of the initiatives are going to start to chip away at that gap the soonest, maybe in the next quarter or Yeah, David, maybe I'll take it. So and and let me parse out sort of two things, which is if confidence in executing on on what we said we were going to do, and beginning to see early leading indicators that those initiatives are going to make a difference. Dave, Dave, you're absolutely right. The one thing I would call out is, and Martina mentioned this in her prepared remarks, looking at the quarter on an average, what part of what we are encouraged about is seeing sequential improvement through the quarter and into March.
Speaker Change: Soon this maybe in the next quarter or two.
Speaker Change: Yeah, David maybe I'll take it so and let me parse out sort of two things, which is if confidence in executing on what we said we were going to do.
Speaker Change: And beginning to see early leading indicators that those initiatives are going to make a difference.
Speaker Change: Dave you're absolutely right. The one thing I would call out is and Martina mentioned this in her prepared remarks looking at the quarter on an average.
Speaker Change: What part of what we are encouraged about is seeing sequential improvement through the quarter and into March. So for instance, if you look at performance.
Erik Gershwind: So for instance, if you look at performance. the last two months, let's say February and March, you're going to get a much different story. You know, it was sort of a tale of two quarters. December was heavily weighed down by holiday timing. The first part of January was really lousy. And we think some of that may have been weather or whatever. But the second, the back half of January into February, now into March, a bit of a different story. Look, I would say from the start here, we have underperformed in part portfolio mix and in part our own doing.
Speaker Change: The last two months, let's say February or March you are going to get a much different story with sort of a tale of two quarters December was heavily weighed down.
Speaker Change: By holiday timing. The first part of January was really lousy and we think some of that may have been weather or whatever but the SEC at the back half of January into February now into March.
Speaker Change: A bit of a different story look I would say from the start here, we have underperformed in part portfolio mix and in part of our own doing and where it's our own doing it was around the core customer predominantly and we've outlined four things Dave to get done web pricing e-commerce marketing and sales.
Kristen Actis: And where it's our own doing, it was around the core customer predominantly. And we've outlined four things, Dave, to get done. Web pricing, e-commerce, marketing, and sales optimization. And if I think about those four, you know, web pricing pretty much behind us and complete. E-commerce, the heavy lifting portion of it, now complete, just complete, but now complete. Marketing, now in market and in flight will build sales optimization winding down. So we feel like we are just at the beginning stages of seeing the fruits from the labor. So what we're encouraged by is from an execution standpoint, we're on track with what we said we're going to do and the leading indicators seem encouraging.
Speaker Change: Optimization, and if I think about those four web pricing pretty much behind us and complete e-commerce. The heavy lifting portion of it now complete just complete but now complete marketing now in market and in flight will build sales optimization winding down. So we feel like we are just at the beginning stages of.
Speaker Change: Seeing the fruits from the labor so.
Speaker Change: What we're encouraged by is from an execution standpoint, we're on track with what we said, we're going to do and the leading indicators seeing seem encouraging we now need to see that and again February and March may have been early signs, we got to see more of that.
Kristen Actis: We now need to see that. And again, February and March may have been early signs. We got to see more of that. And one point of clarification from what Erik said to like, if you go and you look at that year over year performance that Erik referenced, like in January, February and into March, that that's a true statement for core and national accounts like within that, which obviously are two areas that we're really focused on right now. Yeah, thanks, Kristen.
Speaker Change: Great. Thank you.
Vacation from what Eric said to like if you go and you look at that year over year performance that Eric referenced like in January February and into March that that's a true statement for core and national accounts like within that which obviously are two areas that we're really focused on right now.
Speaker Change: Okay. Yeah. Thanks, Kristen that leads me to my next question I know, it's hard to think about anything in a vacuum right now but.
Kristen Actis: That leads me to my next question. I know it's hard to think about anything in a vacuum right now. But could you talk about the effect on gross and operating margin as the shift towards vending and implant happen? And then you also have this effect of core customer reacceleration you just mentioned. Where should we think these things net out over the next, say, two to three years, not just near term? Yeah, so just to make sure I understand your question, Dave, you're you're saying long term impact from growth of implant and you said something else after was it implant vending?
Speaker Change: Could you talk about the effect on gross and operating margin as the shift towards blending and in plant happen and then you also have this effect of core customer Reacceleration you just mentioned where should we think these things net out over the next say two to three years not just near term.
Speaker Change: Yeah. So just to make sure I understand your question, Dave Youre, saying long term impact from them.
Speaker Change: Grocers in plan and he said something else or after with it and planned vending.
Kristen Actis: Yeah, implant vending and then there's the impact also of the core customer reacceleration, I would imagine. Yep, gotcha. Yeah, so in-plant and vending, I'll start with gross margin and then go to operating margin. We tend to see on the gross margin line that you see more national accounts participating in those programs. National accounts, as we've talked about, tend to have a lower gross margin than the average of the company. So from a gross margin perspective, there's some pressure there. And then the profile of those accounts, though, the longer that they're in place and the more they mature, we see that impact start to neutralize and eventually will benefit operating margin, especially relative to where we are today.
Speaker Change: Yeah implant vending and then there is the impact also of.
The core customer Reacceleration I would imagine.
Speaker Change: Gotcha, Yeah, so implant and vending when we I'll start with gross margin and then go to operating margin we tend to see on the gross margin line that I'm on the.
You see more national accounts participating in those programs national accounts as we've talked about tend to have a lower gross margin than the average of the company. So from a gross margin perspective theres. Some pressure there and then the profile of those accounts so the longer that they're in place and the more they mature we see that impact start to neutralize and <unk>.
Speaker Change: Eventually we will benefit operating margin, especially relative to where we are today.
Kristen Actis: But core customer is the one that we're really the most focused on. that, you know, you have the opposite effect on core customer gross margin, and that it's higher than the company average, typically has a lower cost of support in a lot of cases. So, very accretive on the operating margin side, and that's really one of the areas that have been challenging our operating profit levels today. Also, the area where we've chronically kind of undergrown the most in the last, you know, 18 to 24 months. So, as we think about how those 2 elements move together, we haven't necessarily guided like a desired mix of revenue across the 2, but we would expect core.
Speaker Change: Our core customer is the one that were really the most focused on.
Speaker Change: That you have the opposite effect on core customer gross margin and that is higher than the company average typically has a lower cost of support and a lot of cases, so very accretive on the operating margin side and that's really one of the areas that have been challenging our operating profit levels. Today also the area, where we've chronically kind of undergrown.
Speaker Change: The most in the last.
Speaker Change: 18 to 24 months, so as we think about how those two elements move together, we haven't necessarily guided like a desired mix of revenue across the two.
Speaker Change: But we would expect core.
Kristen Actis: As these initiatives come online to start growing at a faster rate than some of the underlying in plant and vending businesses where we've continued to do fairly well, despite the overall growth declines in the company.
Speaker Change: These initiatives come online to start growing at a faster rate than some of the.
Speaker Change: Underlying implant and vending businesses, where we've continued to do fairly well despite the overall.
Speaker Change: Growth declines in the company.
Erik Gershwind: And Dave, I'm just going to chime in with one more point on implant and vending. And particularly this impacts like our outlook, which hopefully what you're hearing from us is obviously some near-term caution in terms of the environment, but encouraged by improving execution. And if we get past 25 and the end market outlook is sound, the picture for 26 and 27, why we're encouraged. So implant and vending, Kristen mentioned the gross margin percentage headwind. When these programs are fully in place, the op margins are strong. They are, though, subject to when you put an implant program in or a vending program into a customer and the economy softens and their spend reduces, there's an element of fixed cost there.
Speaker Change: And Dave I'm, just going to chime in with one more point on an implant and vending and particularly this this this impacts like our our outlook, which hopefully what you're hearing from US is obviously some near term caution in terms of the environment, but encouraged by improving execution and if we get past 'twenty five and the end market outlook.
Speaker Change: It sounds the picture for 'twenty six 'twenty seven why we're encouraged so implants and vending.
Speaker Change: Christian mentioned, the gross margin percentage.
Speaker Change: Headwind.
Speaker Change: When these programs are fully in place the op margins are strong they are though subject to when.
Speaker Change: When you put in an implant program in our vending program into a customer and the economy softens in their spend reduces theres an element of fixed cost there.
Erik Gershwind: because you have a person you have depreciation on a machine. These are very sticky relationships. And so what we're living with now is the fixed cost for those programs. And you could hear like, the program counts are way up and yet the program revenues are up 1%. Obviously, on a per machine on a per site basis, they're down because things are soft right now. It is part of the bullishness, if you will, for us looking out because beyond core customer reacceleration, we should get a the cost structure on those accounts is pretty fixed, you know, other than a little bit of variable cost, we get, you know, we get the benefit of existing accounts coming back online with the same costs in place.
Speaker Change: Because you have a person you have depreciation on a machine these are very sticky relationships.
Speaker Change: And so what we're living with now is the fixed cost for those programs and you could hear like the program counts are way up and yet the program revenues were up 1%, obviously on a per machine on a per site basis Theyre down because things are soft right. Now it is part of the bullishness. If you will for us looking out because beyond <unk>.
Speaker Change: Core customer Reacceleration, we should get a strong rebound here and the cost structure on those accounts is pretty fixed you know other than a little bit of variable cost we get we get the benefit of existing accounts coming back online with the same cost in place and we get the benefit of an expanded footprint and so on.
Erik Gershwind: And we get the benefit of an expanded footprint. So all of that is what has us sort of encouraged and excited about the outlook when we get beyond 25.
Speaker Change: All of that is what has us sort of encouraged and excited about the outlook when we get beyond 25.
Unknown Executive: Thank you and good luck. Thanks, Dave.
Speaker Change: Thank you and good luck.
Dave: Thanks, Dave.
Patrick Baumann: The last question today comes from Patrick Baumann with J.P. Morgan. Please go ahead. Hi, good morning. Morning, Pat. Good morning, Pat. I just had a couple, I guess, cleanups here. First, on on the price that you put through in March, I just wanted to get a sense of what tariff rates you're pricing to offset. And I'm asking because you said it was China related. But before yesterday, I think there's been 20% tariffs on China and also like the Section 232 tariffs, which were 25%. So I guess I'm wondering why it only provides a half a percent impact if China's 10% of COGS.
Speaker Change: The last question today comes from Patrick Baumann with Jpmorgan. Please go ahead.
Patrick Baumann: Hi, good morning.
Speaker Change: Good morning, Pat Good morning, Pat.
Patrick Baumann: Hum.
Patrick Baumann: I just had a couple of cleanups here.
Patrick Baumann: First on on the price that you put through in March.
Patrick Baumann: I just wanted to get a sense of what tariff rates youre pricing to offset.
Patrick Baumann: And I'm asking because you said it was China related.
Patrick Baumann: But before yesterday, I think theres been 20% tariffs on China and.
Patrick Baumann: Also like the section 232, tariffs, which were 25%.
Patrick Baumann: So I guess I'm wondering why it only provides a half a percent impact.
Patrick Baumann: If china's 10% of Cogs, but I'm sure, it's like simple math and I'm missing something but just wanted to clarify that.
Kristen Actis: I'm sure it's like simple math and I'm missing something, but just wanted to clarify that. And then also kind of relatedly what... And then also kind of relatedly like what's the type of products you're importing from China? Is it like a certain type of MRO? Is it metal working skewed? Any color on that? Yeah, so on the first part of your question, Pat, you're right, that was sort of like the known tariffs at the time. But just to clarify, the 10% of COGS in China is looking at total COGS with a country of origin from China, not necessarily where we are the importer of records.
Patrick Baumann: And then also kind of Relatedly, what and then also kind of Relatedly like what's the what's the type of products. You are importing from China is it like a certain type of MRO is a metalworking skewed any color on that.
Speaker Change: Yeah. So on the first part of your question Pat Youre right Thats, the that was sort of like the known tariffs at the time, but just to clarify the 10% of Cogs in China is is looking at total.
Speaker Change: Cogs with the country of origin from China, not necessarily where we are the important for a record. So there are more things that we will likely be responding to you as our suppliers provide information for us as we just get our arms around the whole picture.
Kristen Actis: So there are more things that we will likely be responding to as our suppliers provide information for us. As we just get our arms around the whole picture, there will likely be more to come. And that kind of leads you into that bucket of what is yet to be quantified that I alluded to earlier in response to one of the first questions. And then your, can you clarify the question again?
Speaker Change: There will likely be more to come and that kind of leads you into that bucket of what is yet to be quantified that I alluded to.
Speaker Change: Earlier in response to one of the one of the first questions.
Speaker Change: And then your.
Speaker Change: Can you clarify the second part of your question again.
Speaker Change: Oh what products.
Speaker Change: Sure sure sure I can clarify, but so basically youre, saying that youre left less than 5% of your Cogs is where youre an importer of record from China is basically what you're saying.
Kristen Actis: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show. That would be the way to interpret that. and then the type Yeah, the types of products you're bringing in from there? Yeah, it's a broad spectrum, Pat, which is probably not a surprise just considering how much is coming out of China. Martina or Erik, if you want to jump in on anything, we're more overweighted too, but it really is about every product line, there's some portions of that coming out of China. Yeah, and I would say more more towards MRO than metalworking.
Speaker Change: That would be the way to interpret that.
Speaker Change: Okay.
Speaker Change: And then the Tigers yes.
Speaker Change: Yeah, the types of products, you're bringing in.
Speaker Change: Yeah.
Speaker Change: It's a it's a broad spectrum of pad, which is probably not a surprise. It just considering how much is coming out of China Martina Eric you might jump in on anything where more overweighted to but it really is about every product line or some portion of that coming out of China.
Speaker Change: Yeah, and I would say more towards MRO, then metalworking, you heard Martina reference or our private brands and metalworking, which are pretty robust a good portion of which are sourced domestically. So it would be more MRO.
Kristen Actis: You heard Martina reference our private brands in metalworking, which are pretty robust, a good portion of which are sourced domestically. So it would be more MRO, Pat. Okay, that's helpful.
Speaker Change: Okay. That's helpful. And then my second question is on.
Kristen Actis: And then my second question is on the econ sales down 4% in the quarter. I think you said in response to a question that website is half of that category. I don't know if you provide a color on how website sales are tracking year-over-year within that, or if you could, that would be useful. And then maybe also... In the operating stats stack, there's like an other category, and it was 10% of sales in the quarter was 13% last year, 14% in the fourth quarter in the first quarter, I think. So that implies like it was down 25% year over year, 30% sequentially.
Speaker Change: The E com sales down 4% in the quarter I think you said in response to a question that website is half of that category.
Speaker Change: I don't know if you provided color on how website sales are tracking year over year within that or if you could that'd be useful and then maybe also.
Speaker Change: And the operating stats stack, there's like an other category and it was 10% of sales in the quarter.
Speaker Change: <unk> was 13% last year, 14% in the fourth quarter and the first quarter I think.
Speaker Change: So that implies like it was down 25% year over year, 30% sequentially, what what is happening in that other category and the apps that stack.
Kristen Actis: What, what is happening in that other category in the app stats? Yeah, so let me take the the I can take the first part of your question on e-commerce and I'll answer the op stats question. Pat, so on the on the e-commerce number, a couple things I would reference in there. I won't go specifically into like MSCDirect.com performance through the quarter necessarily, but particularly in the end of December, beginning of January, we saw some movement in e-com that was pretty depressed that would have impacted that number. And then because there is quite a lot of things that actually are considered e-commerce.
Speaker Change: Yeah, So let me take the.
Speaker Change: Yes, I can take the first part of your question on E Commerce and I'll answer the <unk> question, Pat So on the on the ecommerce number a couple of things I would reference in there I won't go specifically into like MSC director stock comp performance through the quarter necessarily but particularly in the end of December beginning of January we.
Speaker Change: We saw some movement in E com that was pretty depressed that would've impacted that number and then because there is quite a lot of things that actually are considered E. Commerce, one thing to keep in mind is that when we see really strong growth in public sector. For example, or in businesses that are not as weighted to an e-commerce transaction that creates a movement in the <unk>.
Kristen Actis: One thing to keep in mind is that when we see really strong growth in public sector, for example, or in businesses that are not as weighted to an e-commerce transaction, that creates a movement in the numbers since we're reporting it as a percentage of total revenue. The public sector probably being the most notable one, there is not as much electronic ordering that happens in that or not as much e-com exposure within public sector. and then your question on other in the operating statistics. So two things, there's a lot of industries that map in there where we're like, have very low weighted exposure.
Speaker Change: Remember since we are reporting it as a percentage of total revenue.
Speaker Change: On the public sector, probably being the most notable one there is not as much electronic ordering that happens in that.
Speaker Change: Or not as much E com, it's furniture within public sector.
Speaker Change: And then.
Speaker Change: On your question on <unk>.
Speaker Change: Other than the operating statistics.
Speaker Change: So two things there's a lot of industries that map in there where we're like have very low weighted exposure I believe we say under 2% to 3% of the operating statistics.
Kristen Actis: I believe we say under 2%, under 3% of the operating statistics. But the other thing that can happen in there is, as we clarify certain end markets that customers belong to, they may move. They may move out of other, if we can more clearly assign them somewhere. So there's a lot of paths through in and out of that bucket. So I would not. I would encourage you not to draw any strong conclusions from the other being down that much.
Speaker Change: The other thing that can happen and there is a <unk>.
Speaker Change: As we clarify certain end markets that customers belong to they may move.
Speaker Change: They may move out of other we can more clearly assign them somewhere so theres a lot of pass through in and out of that bucket. So I would not I would encourage you not to draw any strong conclusions from the other being down that much.
Unknown Executive: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show. Thanks, Pat.
Speaker Change: Okay. Okay. So don't look at like that got it understood. Okay. Thanks, a lot best of luck I appreciate the time.
Patrick Baumann: Thanks Pat.
Ryan Mills: This concludes our question and answer session.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Ryan Miller for any closing remarks.
Ryan Mills: I would like to turn the conference back over to Ryan Mills for any closing remarks. Thank you for joining us today. As Kristen mentioned earlier, we'll be on the road in May at the WIP Research Conference and the KeyBank Capital Markets Conference, and we'll host our fiscal third quarter 2025 earnings call on Tuesday, July 1st. Thank you.
Speaker Change: Thank you for joining us today as Christine mentioned earlier will be it will be on the road in May at the Wolfe Research Conference and the Keybanc capital markets Conference and we'll host our fiscal third quarter 2025 earnings call on Tuesday July one thank you.
Unknown Executive: The conference is now concluded. Thank you for attending today's presentation.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Unknown Executive: You may now disconnect.
Speaker Change: [music].
Unknown Executive: © transcript Emily Beynon © The Bulletproof Executive 2013