Q2 2026 MSC Industrial Direct Co Inc Earnings Call

April 1, 2026

Speaker #1: Good morning and welcome to the MSC Industrial Supply Fiscal 2026 Second Quarter conference call. At this time, all participants are in a listen-only mode.

Operator: Good morning, and welcome to the MSC Industrial Direct Fiscal 2026 Q2 conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this event is being recorded. I would now like to turn the conference over to Ryan Mills, VP of Investor Relations and Business Development.

Speaker #1: A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

Speaker #1: Please note, this event is being recorded. I would now like to turn the conference over to Ryan Mills, VP of Investor Relations and Business Development.

Speaker #2: Thank you, and good morning, everyone. Welcome to our fiscal 2026 second quarter earnings call. Martina McIsaac, President and Chief Executive Officer, and Greg Clark, Interim Chief Financial Officer, are on the call with me today.

Ryan Mills: Thank you and good morning, everyone. Welcome to our fiscal 2026 Q2 earnings call. Martina McIsaac, President and Chief Executive Officer, and Greg Clark, Interim 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 document, both of which can be found on our investor relations website. Let me reference our safe harbor statement found on slide 2 of the earnings presentation. Our comments on this call, as well as the supplemental information we are providing on the website, contain forward-looking statements within the meaning of the US securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks are noted in our earnings press release and our other SEC filings.

Speaker #2: During today's call, we will refer to various financial data and the earnings presentation and operational statistics document, both of which can be found on our Investor Relations website.

Speaker #2: 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. securities laws.

Speaker #2: These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks is noted in our earnings press release and our other SEC filings.

Speaker #2: 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 on our presentation or on our website, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures.

Ryan Mills: 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 on our presentation or on our website, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. I'll now turn the call over to Martina McIsaac.

Speaker #2: I'll now turn the call over to Martino.

Speaker #1: Thank you, Ryan, and good morning, everyone. On today's call, I will briefly cover our performance in the fiscal second quarter, then share my thoughts on the progress of our initiatives and the current state of underlying industrial demand.

Martina McIsaac: Thank you, Ryan, and good morning, everyone. On today's call, I will briefly cover our performance in the fiscal Q2, then share my thoughts on the progress of our initiatives and the current state of underlying industrial demand. I will then turn the call over to Greg to provide greater detail on our quarterly performance and outlook for the fiscal Q3. Starting with our performance in fiscal Q2, ADS growth of 2.9% fell short of 4.5% growth at the midpoint of our outlook. While we did experience modest headwinds from weather and the partial government shutdown, the change in our service organization, which represents the last structural phase of our sales optimization work, created some noise in the quarter that's worth digging into.

Speaker #1: I will then turn the call over to Greg to provide greater detail on our quarterly performance and outlook for the fiscal third quarter. Starting with our performance in fiscal Q2, EDS growth of 2.9% fell short of 4.5% growth at the midpoint of our outlook.

Speaker #1: While we did experience modest headwinds from weather and the partial government shutdown, the change in our service organization, which represents the last structural phase of our sales optimization work, created some noise in the quarter that's worth digging into.

Speaker #1: As we previously shared, at the end of Q1 and early Q2, we completed the last round of structural changes and accompanying headcount reductions related to our sales optimization work.

Martina McIsaac: As we previously shared, at the end of Q1 and early Q2, we completed the last round of structural changes and accompanying headcount reductions related to our sales optimization work. To recap, in fiscal year 2025, we took actions designed to bring headcount levels more in line with an efficient territory design. Those actions primarily impacted our core sellers. Then in December, as we shared, we had a final round of changes which involved all of our remaining customer-facing roles. Prior to this change, for legacy reasons, it was possible that an MSC customer was serviced by two, three, four, or even five MSC representatives, creating overlap of multiple sales and service activities and resulting in multiple MSC reps supporting the same revenues. These inefficiencies caused our cost to serve to become inflated over time, particularly within national account customers, where customer needs are the greatest.

Speaker #1: To recap, in fiscal year '25, we took actions designed to bring headcount levels more in line with an efficient territory design. Those actions primarily impacted our core sellers.

Speaker #1: Then in December, as we shared, we had a final round of changes which involved all of our remaining customer-facing roles. Prior to this change, for legacy reasons, it was possible that an MSC customer was serviced by two, three, four, or even five MSC representatives, creating overlap of multiple sales and service activities and resulting in multiple MSC reps supporting the same revenues.

Speaker #1: These inefficiencies caused our cost to serve to become inflated over time, particularly within national account customers, where customer needs are the greatest. In the action taken at the beginning of our fiscal Q2, this resource model was greatly simplified to create a geographically aligned service organization that matches our sales structure and is appropriately sized to customer potential.

Martina McIsaac: In the action taken at the beginning of our fiscal Q2, this resource model was greatly simplified to create a geographically aligned service organization that matches our sales structure and is appropriately sized to customer potential. Total impacted customer-facing headcount was approximately 130 associates. This consolidation was complex and could not be achieved without some level of relationship change in the field. We anticipated this and intentionally calendarized this change in fiscal Q2 when demand is seasonally low. Impact varied by customer, but was most felt in our national accounts and larger core customers who have the largest service teams. Those customers saw some level of phase change as responsibilities were handed off through the consolidation of the team that supports them.

Speaker #1: Total impacted customer-facing headcount was approximately 130 associates. This consolidation was complex and could not be achieved without some level of relationship change in the field.

Speaker #1: We anticipated this and intentionally calendarized this change in fiscal Q2, when demand is seasonally low. Impact varied by customer, but was most felt in our national accounts and larger core customers who have the largest service teams.

Speaker #1: Those customers saw some level of face change as responsibilities were handed off through the consolidation of the team that supports them. The new structure now clarifies responsibilities and will result in greater ownership and accountability in our teams, driving focus across all of MSC's product offerings.

Martina McIsaac: The new structure now clarifies responsibilities and will result in greater ownership and accountability in our teams, driving focus across all of MSC's product offerings. It's important to note that these changes did not impact the momentum of our vending and in-plant programs as reflected in our ops stats for the quarter. Now, under Jahida Nadi's leadership, we are accompanying these organizational enhancements with a strong sales management process and improved pipeline management. While these actions weighed on our results in the quarter, this change was necessary. We are enhancing MSC's ability to produce sustained levels of profitable growth for the future by taking measured steps to optimize our cost structure and improve our effectiveness in the field.

Speaker #1: It's important to note that these changes did not impact the momentum of our vending and implant programs, as reflected in our ops stats for the quarter.

Speaker #1: Now, under Jidenati's leadership, we are a company in these organizational enhancements with its strong sales management process and improved pipeline management. While these actions weighed on our results in the quarter, this change was necessary.

Speaker #1: We are enhancing MSC's ability to produce sustained levels of profitable growth for the future by taking measured steps to optimize our cost structure and improve our effectiveness in the field.

Speaker #1: We have greatly simplified and aligned our sales and service organizations, and though it takes time for a change like this to take hold, month to date in March we are seeing the year-over-year trend in the sales to impacted customers continue to improve compared to levels in January and February, as new relationships are developed.

Martina McIsaac: We have greatly simplified and aligned our sales and service organizations, and though it takes time for a change like this to take hold, month to date in March, we are seeing the year-over-year trend in the sales to impacted customers continue to improve compared to levels in January and February as new relationships are developed. Following these changes, growth acceleration is our primary objective. Supporting my confidence is the momentum I see building across the organization from our Supplier Growth Forum. By intentionally bringing more than 1,000 MSC associates and 400 suppliers together, we strengthened relationships, aligned priorities, set the foundation for meaningful long-term growth, and created a defining moment for our company. We facilitated over 3,000 prescheduled meetings to discuss whitespace overlap and joint growth opportunities that we identified using AI, and I couldn't be more pleased with the outcome.

Speaker #1: Following these changes, growth acceleration is our primary objective. Supporting my confidence is the momentum I see building across the organization from our Supplier Growth Forum.

Speaker #1: By intentionally bringing more than 1,000 MSC associates and 400 suppliers together, we strengthened relationships, aligned priorities, set the foundation for meaningful long-term growth, and created a defining moment for our company.

Speaker #1: We facilitated over 3,000 pre-scheduled meetings to discuss white space overlap and joint growth opportunities that we identified using AI, and I couldn't be more pleased with the outcome.

Speaker #1: In just three days, these strategic conversations translated into nearly 10,000 opportunities totaling close to $500 million in combined near-term and long-term potential, creating tremendous energy both internally and externally, as shown in the quote from a supplier on slide four.

Martina McIsaac: In just 3 days, these strategic conversations translated into nearly 10,000 opportunities, totaling close to $500 million in combined near-term and long-term potential, creating tremendous energy, both internally and externally, as shown in the quote from a supplier on slide 4. Strong execution like that seen in the growth forum can be seen across MSC. A good example is the year-over-year margin expansion that our team achieved in the quarter. Gross margin of 41.1% performed better than expected and improved 10 basis points year over year. This improvement is the result of price actions taken in fiscal Q1 and Q2 in response to inflation, as well as the continued professionalization of our pricing processes and margin management. The combined impact of these activities resulted in price contributing approximately 6.5% to our daily sales performance in the quarter.

Speaker #1: Strong execution, like that seen in the growth forum, can be seen across MSC. A good example is the year-over-year margin expansion that our team achieved in the quarter.

Speaker #1: Gross margin of 41.1% performed better than expected and improved 10 basis points year over year. This improvement is the result of price actions taken in fiscal Q1 and Q2 in response to inflation, as well as the continued professionalization of our pricing processes and margin management.

Speaker #1: The combined impact of these activities resulted in price contributing approximately 6.5% to our daily sales performance in the quarter. In addition to gross margin, I'm encouraged by how the team managed operating expenses more closely to sales during the quarter.

Martina McIsaac: In addition to gross margin, I'm encouraged by how the team managed operating expenses more closely to sales during the quarter. Adjusted operating expenses improved 20 basis points compared to the prior year as a percentage of sales. This was primarily driven by the combined benefits of our headcount reductions and the productivity actions associated with our network optimization strategy, which is beginning to show through in our financial performance as you can see on slide 5. Our planning and procurement team, led by Cathy Mauck, has been focused on improving our planning processes, embracing AI, and embedding it into our daily work to produce the improved inventory metrics shown on the slide.

Speaker #1: Adjusted operating expenses improved 20 basis points compared to the prior year as a percentage of sales. This was primarily driven by the combined benefits of our headcount reductions and the productivity actions associated with our network optimization strategy, which is beginning to show through in our financial performance, as you can see on slide five.

Speaker #1: Our planning and procurement team, led by Kathy Muck, has been focused on improving our planning processes, embracing AI, and embedding it into our daily work to produce the improved inventory metrics shown on the slide.

Speaker #1: Our operations teams, led by Derek Collier, continue to optimize within the four walls of our distribution centers, as seen by the favorable trends in their headcount and compensation expenses.

Martina McIsaac: Our operations teams, led by Derek Collier, continue to optimize within the four walls of our distribution centers, as seen by the favorable trends in their headcount and compensation expenses. Both cases are perfect examples of the results a data-driven focus on continuous improvement can have, and I'm looking forward to the greater impact it will have on MSC as this mentality takes shape across the company. Progress made in both these areas of the P&L resulted in adjusted operating margin of 7.5%, a 40 basis point year-over-year improvement, and within the range of our outlook. Together, this allowed us to achieve Q2 adjusted incremental margins of 21% towards the upper end of our expectations. Switching to the macro environment, I would describe the current state as a tale of two realities. On one hand, signs of a potential industrial recovery are encouraging.

Speaker #1: Both cases are perfect examples of the results a data-driven focus on continuous improvement can have, and I'm looking forward to the greater impact it will have on MSC as this mentality takes shape across the company.

Speaker #1: Progress made in both these areas of the P&L resulted in adjusted operating margin of 7.5%, a 40 basis point year-over-year improvement, and within the range of our outlook.

Speaker #1: Together, this allowed us to achieve two Q2 adjusted incremental margins of 21%, towards the upper end of our expectations. Switching to the macro environment, I would describe the current state as a tale of two realities.

Speaker #1: On one hand, signs of a potential industrial recovery are encouraging. As you can see on slide six, the IP readings across most of our top manufacturing end markets are beginning to form more favorable trends.

Martina McIsaac: As you can see on slide 6, the IP readings across most of our top manufacturing end markets are beginning to form more favorable trends. Customer sentiment has been improving also, as seen by recent MBI readings, which have produced consecutive monthly readings above 50 for the first time in a multiyear period. However, on the other hand, geopolitical tensions, the war with Iran, and rising fuel costs present heightened uncertainty. While we haven't seen any meaningful disruption yet, we are in constant communication with customers and are taking proactive steps to secure supply. Looking at our performance against the IP index, our average daily sales have outperformed for the third consecutive quarter. That said, outgrowth remains below our stated goal of 400 basis points and has been primarily supported by price.

Speaker #1: Customer sentiment has been improving also, as seen by recent MBI readings, which have produced consecutive monthly readings above 50 for the first time in a multi-year period.

Speaker #1: However, on the other hand, geopolitical tensions, the war with Iran, and rising fuel costs present heightened uncertainty. While we haven't seen any meaningful disruption yet, we are in constant communication with customers and are taking proactive steps to secure supply.

Speaker #1: Looking at our performance against the IP Index, our average daily sales have outperformed for the third consecutive quarter. That said, outgrowth remains below our stated goal of 400 basis points and has been primarily supported by price.

Speaker #1: I am encouraged, however, by our volume performance in February that began showing modest year-over-year improvement in core customer daily sales. The changes to our sales structure were the right ones.

Martina McIsaac: I am encouraged, however, by our volume performance in February that began showing modest year-over-year improvement in core customer daily sales. The changes to our sales structure were the right ones and were necessary to set MSC up to achieve higher levels of growth. We see encouraging signs of improvement, and this momentum is captured in our outlook for the fiscal Q3, as seen by the accelerated growth that is implied in April and May. We are making progress on our strategic initiatives. We are operating with greater focus and discipline, and we have a leadership team committed to building a stronger business. Looking ahead, this gives me confidence in MSC's ability to execute and create long-term value for shareholders. With that, I will now turn the call over to Greg to cover our financial results in greater detail and expectations for the fiscal Q3.

Speaker #1: And were necessary to set MSC up to achieve higher levels of growth. We see encouraging signs of improvement, and this momentum is captured in our outlook for the fiscal third quarter, as seen by the accelerated growth that is implied in April and May.

Speaker #1: We are making progress on our strategic initiatives; we are operating with greater focus and discipline, and we have a leadership team committed to building a stronger business.

Speaker #1: Looking ahead, this gives me confidence in MSC's ability to execute and create long-term value for shareholders. And with that, I will now turn the call over to Greg to cover our financial results in greater detail and expectations for the fiscal third quarter.

Speaker #2: Thank you, Martina, and good morning, everyone. Please turn to slide seven where you'll find key metrics for the fiscal second quarter on both a reported and adjusted basis.

Greg Clark: Thank you, Martina, and good morning, everyone. Please turn to Slide 7, where you'll find key metrics for the fiscal Q2 on both a reported and adjusted basis. Fiscal Q2 sales of $918 million improved 2.9% year-over-year, primarily driven by benefits from price of 6.6%. Volumes in the quarter declined 4% year-over-year and included a combined headwind of approximately 100 basis points related to the weather and the partial government shutdown. Sequentially, average daily sales declined 6.5%. By customer type, we remain encouraged by core customer daily sales that continued to grow above total company and improved approximately 6% this quarter compared to the prior year. National account daily sales were essentially flat compared to the prior year.

Speaker #2: Fiscal second quarter sales of $918 million improved 2.9% year over year, primarily driven by benefits from price of 6.6%. Volumes in the quarter declined 4% year over year, and included a combined headwind of approximately 100 basis points related to the weather and the partial government shutdown.

Speaker #2: Sequentially, average daily sales declined 6.5%. By customer type, we remain encouraged by core customer daily sales that continue to grow above total company and improved approximately 6% this quarter compared to the prior year.

Speaker #2: National account daily sales were essentially flat compared to the prior year. In the public sector, daily sales declined roughly 1% due to tougher comps and impacts felt later in the quarter from the partial federal government shutdown.

Greg Clark: In the public sector, daily sales declined roughly 1% due to tougher comps and impacts felt later in the quarter from the partial federal government shutdown. In solutions, we were pleased by the continued expansion of our footprint in Q2. In vending, the number of machines installed at quarter end increased 8% year-over-year to approximately 30,400 machines. The number of customers with an in-plant program improved 9% year-over-year to a total of 423 programs. As you recall, last quarter, our in-plant program count growth moderated as we strengthened financial discipline in the field and sharpened the quality of our decision-making. This is prompting us to transition certain existing in-plant programs with suboptimal returns to more cost-effective service options that are better scaled to customer needs.

Speaker #2: In Solutions, we were pleased by the continued expansion of our footprint in Q2. In Vending, the number of machines installed at quarter-end increased 8% year over year, to approximately 30,400 machines.

Speaker #2: The number of customers with an in-plant program improved 9% year over year, to a total of 423 programs. As you recall, last quarter, our in-plant program account growth moderated as we strengthened financial discipline in the field and sharpened the quality of our decision-making.

Speaker #2: This is prompting us to transition certain existing in-plant programs with suboptimal returns to more cost-effective service options that are better scaled to customer needs.

Speaker #2: As a result, signings in the second quarter were higher than the sequential increase in total program count. Looking at the sales through these solutions, average daily sales through vending were up 8% year over year and represented 20% of total company net sales.

Greg Clark: As a result, signings in Q2 were higher than the sequential increase in total program counts. Looking at the sales through these solutions, average daily sales through vending were up 8% year-over-year and represented 20% of total company net sales. Sales to customers with an in-plant program were also up 8% year-over-year and represented approximately 20% of total company net sales. Moving to profitability for the quarter, we were pleased with gross margins of 41.1%. That improved 10 basis points year-over-year, or roughly 40 basis points sequentially. This gross margin performance was better than expected and primarily driven by favorable price cost as a result of our pricing actions and the continued professionalization of our pricing processes. Operating expenses in the fiscal Q2 were approximately $310 million on a reported basis.

Speaker #2: Sales to customers with an in-plant program were also up 8% year over year, and represented approximately 20% of total company net sales. Moving to profitability for the quarter, we were pleased with gross margins of 41.1%, which improved 10 basis points year over year, or roughly 40 basis points sequentially.

Speaker #2: This gross margin performance was better than expected, and was primarily driven by favorable price-cost as a result of our pricing actions and the continued professionalization of our pricing processes.

Speaker #2: Operating expenses in the fiscal second quarter were approximately $310 million on a reported basis. On an adjusted basis, operating expenses were $308.5 million, down approximately $3 million versus the prior quarter.

Greg Clark: On an adjusted basis, operating expenses were $308.5 million, down approximately $3 million versus the prior quarter. Up approximately $7 million year-over-year as ongoing productivity improvements and headcount actions were more than offset by the combination of personnel-related cost increases, investments, and higher depreciation. When combined with higher sales year-over-year, this resulted in year-over-year improvement of 20 basis points in adjusted operating expenses as a percentage of sales for the quarter. Reported operating margin for the quarter was 7.1% compared to 7% in the prior year. On an adjusted basis, operating margin of 7.5% was within our outlook range of 7.3% to 7.9%, and compared favorably to 7.1% in the prior year. We delivered GAAP EPS of $0.76 compared to $0.70 in the prior year.

Speaker #2: But up approximately $7 million year over year, as ongoing productivity improvements and headcount actions were more than offset by the combination of personnel-related cost increases, investments, and higher depreciation.

Speaker #2: When combined with higher sales year over year, this resulted in year-over-year improvement of 20 basis points in adjusted operating expenses as a percentage of sales for the quarter.

Speaker #2: Reported operating margin for the quarter was 7.1%, compared to 7.0% in the prior year. On an adjusted basis, operating margin of 7.5% was within our outlook range of 7.3% to 7.9%.

Speaker #2: And compared favorably to 7.1% in the prior year. We delivered GAAP EPS of $0.76 compared to $0.70 in the prior year. On an adjusted basis, we delivered EPS of $0.82 compared to $0.72 in the prior year.

Greg Clark: On an adjusted basis, we delivered EPS of $0.82 compared to $0.72 in the prior year, an improvement of 14%. Turning to slide 8 to review our balance sheet and free cash flow performance. We continue to maintain a healthy balance sheet with net debt of approximately $466 million, representing roughly 1.2 times EBITDA. As a reminder, during the quarter, we amended our AR securitization facility and increased its capacity by $50 million. Excluding this $50 million reduction in AR, working capital was a use of cash in the quarter with the proactive build of inventory being the primary driver. Together, this resulted in operating cash flow conversion of 224% for the quarter. Capital expenditures of roughly $21 million were down approximately $9 million year-over-year and similar to levels last quarter as expected.

Speaker #2: An improvement of 14%. Turning to slide eight to review our balance sheet and free cash flow performance. We continue to maintain a healthy balance sheet with net debt of approximately $466 million, representing roughly 1.2 times EBITDA.

Speaker #2: As a reminder, during the quarter, we amended our AR securitization facility and increased its capacity by $50 million. Excluding this $50 million reduction in AR, working capital was a use of cash in the quarter, with the proactive build of inventory being the primary driver.

Speaker #2: Together, this resulted in operating cash flow conversion of 224% for the quarter. Capital expenditures of roughly $21 million were down approximately $9 million year over year, and similar to levels last quarter, as expected.

Speaker #2: This resulted in free cash flow conversion of approximately 173% in the fiscal second quarter and 86% fiscal year to date, keeping us on track to achieve our target of approximately 90% for the full year.

Greg Clark: This resulted in free cash flow conversion of approximately 173% in the fiscal Q2 and 86% fiscal year to date, keeping us on track to achieve our target of approximately 90% for the full year. Looking at our capital allocation strategy on slide 9. Our highest priorities remain organic investment to fuel growth and advancing operational efficiencies across the business. Returning capital to shareholders also remains a priority with approximately $49 million returned to shareholders in fiscal Q2 and $110 million fiscal year to date in the form of dividends and share repurchases. Moving to our expectations for the Q3 on slide 10. We expect average daily sales to grow 5% to 7% compared to the prior year.

Speaker #2: Looking at our capital allocation strategy on slide nine, our highest priorities remain organic investment to fuel growth and advancing operational efficiencies across the business.

Speaker #2: Returning capital to shareholders also remains a priority, with approximately $49 million returned to shareholders in fiscal Q2 and $110 million fiscal year-to-date in the form of dividends and share repurchases.

Speaker #2: Moving to our expectations for the third quarter on slide 10, we expect average daily sales to grow 5 to 7 percent compared to the prior year.

Speaker #2: The range of our outlook takes into consideration our daily sales estimate for fiscal March of approximately 4%, when including the anticipated headwind of 100 basis points for Good Friday.

Greg Clark: The range of our outlook takes into consideration our daily sales estimate for fiscal March of approximately 4% when including the anticipated headwind of 100 basis points from the timing of Good Friday. Under this revenue assumption, we expect our adjusted operating margin for the fiscal Q3 to be between 9.7% and 10.3%. Driving this expected range are the following assumptions for the quarter. Gross margin of approximately 41% and a sequential step-up in the adjusted operating expenses, primarily driven by higher variable expense associated with the expected increases in sales. Together, these assumptions result in an implied adjusted incremental margin of approximately 25% at the midpoint of our outlook, keeping us on track to achieve our expectation of roughly 20% adjusted incremental margins for the full year and a mid-single-digit growth outcome. Turning to slide 11.

Speaker #2: Under this revenue assumption, we expect our adjusted operating margin for the fiscal third quarter to be between 9.7% and 10.3%. Driving this expected range are the following assumptions for the quarter.

Speaker #2: Gross margin of approximately 41%, and the sequential step-up in the adjusted operating expenses primarily driven by higher variable expense associated with the expected increases in sales.

Speaker #2: Together, these assumptions result in an implied adjusted incremental margin of approximately 25% at the midpoint of our outlook, keeping us on track to achieve our expectation of roughly 20% adjusted incremental margins for the full year in a mid-single-digit growth outcome.

Speaker #2: Turning to slide 11, our expectations on certain line items for the full year remain unchanged. As a reminder, this includes depreciation and amortization expense of $95 million to $100 million, interest and other expense of roughly $35 million, capital expenditures including cloud computing arrangements of $100 million to $110 million, a tax rate between 24.5% and 25.5%, and lastly, free cash flow generation of approximately 90% of net income.

Greg Clark: Our expectations on certain line items for the full year remain unchanged. As a reminder, this includes depreciation and amortization expense of $95 to 100 million, interest and other expense of roughly $35 million, capital expenditures including cloud computing arrangements of $100 to 110 million, a tax rate between 24.5% and 25.5%, and lastly, free cash flow generation of approximately 90% of net income. 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 key considerations. With that, we will open the line for Q&A.

Speaker #2: 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 key considerations.

Speaker #2: And with that, we will open the line for Q&A.

Operator: Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the keys. One moment please while we poll for questions. Your first question for today is from Ryan Merkel with William Blair.

Speaker #1: Certainly. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad.

Speaker #1: A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue.

Speaker #1: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the keys. One moment, please, while we pull for questions.

Speaker #1: Your first question for today is from Brian Merkel with William Blair.

Speaker #3: Hey, everyone. Thanks for the question. I wanted to start with the sales trends. Can you just talk about why you're confident that average daily sales is going to accelerate to 7% plus in April and May?

Ryan Merkel: Hey, everyone. Thanks for the question. I wanted to start with the sales trends. Can you just talk about why you're confident that average daily sales is gonna accelerate to 7%+ in April and May? In your answer, can you talk about is price gonna build more? Then what are you assuming for the national account recovery? Because I think it was sort of flat in the quarter. Thank you.

Speaker #3: And in your answer, can you talk about—is price going to build more? And then, what are you assuming for the national account recovery?

Speaker #3: Because I think it was sort of flat in the quarter. Thank you.

Speaker #4: Hi, Ryan. Good morning. Yeah. Let me start by digging in a little bit to the second quarter impact, which is then driving our confidence in the third quarter.

Martina McIsaac: Hi, Ryan. Good morning. Yeah, let me start by digging in a little bit to the Q2 impact, which is then driving our confidence in the Q3. In the Q2, as we tried to explain on the call, we made changes across our indirect sales force, basically. Many of our customers had phase changes, which led to some volume contraction. Let me explain what was happening in that time. You're talking about the people that have to be on the plant floor every day, understanding the customer's business, capturing all of the unplanned demand at the account, managing our VMI programs. It takes a little while for somebody new to come up to speed to understand those responsibilities, to rebuild their network.

Speaker #4: So in the second quarter, as we tried to explain on the call, we made changes across our indirect—basically our indirect sales force. And many of our customers had face changes, which led to some volume contraction.

Speaker #4: So, let me explain what was happening in that time. You're talking about the people that have to be on the plant floor every day, understanding the customer's business, capturing all of the unplanned demand at the account, managing our VMI programs.

Speaker #4: So it takes a little while for somebody new to come up to speed, to understand those responsibilities, to rebuild their network. So we had guided softer in the second quarter because we knew there would be a disruption in volume.

Martina McIsaac: We had guided softer in Q2 because we knew there would be a disruption in volume. As we started to make the change, we saw two effects. We planned a very detailed, warm handoff and transition of our, you know, from one team member to another. If you can imagine what was happening, you might have been taking on more responsibilities in your current customers, or you might have been moving to take on responsibilities in a new portfolio of customers, or you might have been moving to an uncovered customer. There's a lot to learn in that process, and we had planned an overlap of resources so that the incumbent associate could work with the new associate over a period of time.

Speaker #4: And as we started to make the change, we saw two effects: we planned a very detailed, warm handoff and transition of our work from one team member to another.

Speaker #4: So, if you can imagine what was happening, you might have been taking on more responsibilities in your current customers, or you might have been moving to take on responsibilities in a new portfolio of customers, or you might have been moving to an uncovered customer.

Speaker #4: So, there's a lot to learn in that process. And we had planned an overlap of resources so that the incumbent associate could work with the new associate over a period of time.

Speaker #4: And what happened to us in the second quarter, which caused us to have a softer result than we had anticipated, is that the weather shut a lot of our customers down in that overlap period.

Martina McIsaac: What happened to us in Q2, which caused us to have a softer result than we had anticipated, is that the weather shut a lot of our customers down in that overlap period. If your role is to get into a new facility, learn it, understand it, make new contacts, take over that business, and you can't get there because the facility is buried in snow or you can't get out of your driveway, then essentially what happened is it pushed the, let's call it recovery for a lack of a better word; it pushed it out in the calendar farther than we anticipated. We're seeing in March what we had hoped to see in February and so on. We lost some time. We had an impact to volume due to timing.

Speaker #4: So, if your role is to get into a new facility, learn it, understand it, make new contacts, take over that business, and you can't get there because the facility is buried in snow or you can't get out of your driveway, then essentially what happened is it pushed the—let's call it recovery, for lack of a better word—it pushed it out in the calendar farther than we anticipated.

Speaker #4: So we're seeing in March what we had hoped to see in February, and so on. So we lost some time; we had an impact to volume due to timing.

Speaker #4: The other thing that happened in the quarter is, as we made these changes, hunting and complacency are no longer part of our compensation plan.

Martina McIsaac: The other thing that happened in the quarter is as we made these changes, you know, hunting and complacency is no longer part of our compensation plan. We changed, we're raising the bar on expectations. We changed compensation. We changed responsibilities. We're raising standards. We had a higher percentage of attrition than we expected to have. A lot of you have asked me about, do I expect attrition as we sort of drive a performance culture in MSC, and we do, and we did expect to see attrition as a result of this change. Again, we had calendarized it a little more gently. Like, we expected that it would happen later in the cycle, and we had quite a lot of attrition immediately.

Speaker #4: We changed; we're raising the bar on expectations. We changed compensation. We changed responsibilities. We're raising standards. And we had a higher percentage of attrition than we expected to have.

Speaker #4: So, a lot of you have asked me about, 'Do I expect attrition as we sort of drive a performance culture in MSC?' And we do.

Speaker #4: And we did expect to see attrition as a result of this change. But again, we had calendarized it a little more gently. We expected that it would happen later in the cycle.

Speaker #4: And we had quite a lot of attrition immediately. So then we had customers that were uncovered for a period of time, and so we were missing some of that unplanned demand.

Martina McIsaac: We had customers that were uncovered for a period of time, and so we were missing some of that unplanned demand. If you look at our op stats, you'll see that despite the fact that this plan intended a reduction in sales headcount of 130, I think we're down 158 heads quarter over quarter. You see the residual impact as we've been filling those roles. All that to say, we're starting now to see the volume recovery that we expected, and that's what's giving us confidence in April and May. We're just pushed out from where we had intended to be because of those two impacts.

Speaker #4: So if you look at our ops stats, you'll see that despite the fact that this plan intended a reduction in sales headcount of 130, I think we're down 158 heads quarter over quarter.

Speaker #4: You see the residual impact as we've been filling those roles. So, all that to say, we're starting now to see the volume recovery that we expected.

Speaker #4: And that's what's giving us confidence in April and May. We're just pushed out from where we had intended to be because of those two impacts.

Speaker #4: So, as you look at March—I can use March as an example—we were looking for two volume effects as we went through this change.

Martina McIsaac: As you look at March, I can use March as an example, we were looking for two volume effects as we went through this change. The first one was we wanted to see a greater integration of all the parts of our business. For example, we consolidated legacy sales forces from, you know, 10-year-old acquisitions. We brought our OEM fastener business now into the main responsibility of our core field sales and field service teams, and we wanted to see acceleration in those businesses, and we are seeing it. For example, OEM, our OEM business is growing mid-teens in February, even higher in March. We're having the behavior change that we wanted to see, which makes us confident in volume.

Speaker #4: The first one was we wanted to see a greater integration of all the parts of our business. So, for example, we consolidated legacy sales forces from 10-year-old acquisitions.

Speaker #4: We brought our OEM fastener business now into the main responsibility of our core field sales and field service teams. And we wanted to see acceleration in those businesses.

Speaker #4: And we are seeing it. So, for example, our OEM business is growing mid-teens in February, and even higher in March. So we're having the behavior change that we wanted to see, which makes us confident in volume.

Speaker #4: And then we just wanted to see that hunting mentality start to show up, which we are also seeing across the board. So, we're seeing month-over-month improvement.

Martina McIsaac: We wanted to see that hunting mentality start to show up, which we are also seeing across the board. We're seeing, you know, month-over-month improvement, as I said in the prepared remarks, on customers that were impacted. Our core customer exited Q2 with positive volume. National accounts was up low single digits in February and now mid-single digits month to date in March. If you wanted to size the impact of volume, or this change on volume in Q2, I'll walk you from our outlook. If the midpoint of our outlook was 4.5%, we had anticipated a bigger negative impact for our Growth Forum, which we really didn't see, and we got a little more price than we thought.

Speaker #4: As I said in the prepared remarks, on customers that were impacted, our core customer exited Q2 with positive volume. National accounts was up low single digits in February, and now mid-single digits month to date in March.

Speaker #4: So the biggest, if you wanted to size the impact of volume, or this change on volume in the second quarter, I'll walk you from our outlook.

Speaker #4: If the midpoint of our outlook was 4.5%, we had anticipated a bigger negative impact for our growth forum, which we really didn't see, and we got a little more price than we thought.

Speaker #4: So, add 100 basis points to that—that puts us at 5.5. Then take another 100 basis points off for the impact of weather and the public sector, and you're looking at a gap of about 150 basis points.

Martina McIsaac: Add 100 basis points to that puts us at 5.5. Take another 100 basis points off for the impact of weather in the public sector, and you're looking at a gap of about 150 basis points. We had what we believe was, you know, an outsized impact on volume, which is transitional, which is behind us. About two-thirds of that impacted national accounts. That gives you kind of a feeling of why we feel national accounts will recover and we can count on the outlook for March and April.

Speaker #4: So, we had what we believe was an outsized impact on volume, which is transitional, which is behind us. About two-thirds of that impacted national accounts.

Speaker #4: So that gives you kind of a feeling of why we feel national accounts will recover, and the volume we can count on the outlook for March and April.

Speaker #1: Got it. All right. Thanks for that answer, Martina. That's actually very helpful, and good to hear the national accounts is recovering. Just a follow-up on price, then.

Ryan Merkel: Got it. All right. Thanks for that answer, Martina. That's actually very helpful. Good to hear the national accounts is recovering. Just to follow up on price then, are you expecting more price increases from your suppliers? Maybe, talk about tungsten, 'cause it sounds like there might be another price increase there.

Speaker #1: Are you expecting more price increases from your suppliers? And maybe talk about tungsten, because it sounds like there might be another price increase there.

Speaker #3: Yes. So when we talked since we talked to you in January about Tungsten, we've taken about we've seen price increase notices that range from between 7 to 15 percent.

Martina McIsaac: Yes. Since we talked to you in January about tungsten, we've seen price increase notices that range from between 7% to 15%. The prices continue to climb. Even the market for scrap carbide has gone up 500% since we talked to you last. We're definitely seeing pressure. Those price increases probably will become effective sort of May, June. We will likely have another pricing action around that time. We're, you know, we don't know where this will end. I still would say what I said in January, I don't think the suppliers have captured all of it. We're starting to see a little bit of supply constraint now.

Speaker #3: So the prices continue to climb. Even the market for scrap carbide has gone up 500% since we talked to you last. So there's definitely some pressure.

Speaker #3: Those price increases probably will become effective sort of May, June. So we will likely have another pricing action around that time. We don't know where this will end.

Speaker #3: I still would say what I said in January. I don't think the suppliers have captured all of it. We're starting to see a little bit of supply constraint now.

Speaker #1: And Ryan, this is Ryan just coming over the top. We took a little surgical price increase in March, less than a percent. But as you think about Q3 year over year, the price benefit should be pretty similar to what we saw in Q2, just to give you a little color on that.

Ryan Mills: Ryan, this is Greg Clark. Just come over the top. We took a little surgical price increase in March, less than 1%. As you think about Q3 year over year, the price benefit should be pretty similar to what we saw in Q2, just to give you a little color on that.

Speaker #2: All right. Thanks, pass it on.

Ryan Merkel: All right. Thanks. Pass it on.

Speaker #3: Thank you.

Martina McIsaac: Thank you.

Speaker #4: Your next question is from Ken Newman with KeyBank Capital Markets.

Operator: Your next question is from Ken Newman with KeyBanc Capital Markets.

Speaker #2: Hey, good morning, guys.

Ken Newman: Hey, good morning, guys.

Speaker #3: Good morning.

Martina McIsaac: Morning.

Speaker #2: Morning. So, maybe to follow up on the pricing question, it sounds like you feel pretty confident in improving volume trends here in March to date.

Ken Newman: Morning. Maybe to follow up on the pricing question. You know, it sounds like you feel pretty confident in improving volume trends here in March to date. You know, just given all the uncertainty in the macro, I'm curious if there's a way for you to decipher if you know, the customer conversations have suggested that you know, there's been a negative impact on the uncertainty, and is there a risk that starts to get pushed out to the right?

Speaker #2: But just given all the uncertainty in the macro, I'm curious if there's a way for you to decipher if the customer conversations have suggested that there's been a negative impact on the uncertainty, and is there a risk that starts to get pushed out to the right?

Speaker #3: We are, as I said, in deep conversations with customers. So we're at the phase where they're starting to assess potential risks, and they want to understand supply security—security of supply.

Martina McIsaac: We are, as I said, in deep conversations with customers. We're at the phase where they're starting to assess potential risks, and they wanna understand supply, you know, security of supply. We haven't seen any change that would suggest that the demand is slowing down. It's the opposite. They see demand picking up, and they wanna make sure that their supply is secure. That's what we've seen so far.

Speaker #3: But we haven't seen any change that would suggest that demand is slowing down. It's the opposite. They see demand picking up, and they want to make sure that their supply is secure.

Speaker #3: That's what we've seen so far.

Speaker #2: Understood. And then maybe for the follow-up, I understand that the tungsten-oriented inventory is only about 15% of the portfolio. But maybe could you just give us a little bit of color on, one, how much of that is going through the core customer versus national accounts as we think about that price/mix dynamic?

Ken Newman: Understood. You know, maybe for the follow-up, you know, I understand that the tungsten-oriented inventory is only about 15% of the portfolio, but maybe could you just give us a little bit of color on one, how much of that is going through the core customer versus national accounts as we think about that price mix dynamic? Secondly, Can you remind us just how you source that tungsten? I'm guessing it's index-based, but is there an inherent lag relative to how that prices versus the spot?

Speaker #2: And then secondly, what is can you remind us just how do you source that Tungsten? Is there I'm guessing it's index-based, but is there an inherent lag relative to how that price is versus the spot?

Speaker #3: So we don't source tungsten, right? We source carbide cutting tools. So, what you're seeing—I mean, some of our suppliers do have some level of backward integration to tungsten.

Martina McIsaac: We don't source tungsten, right? We source carbide cutting tools. What you're seeing, I mean, some of our suppliers do have some level of backward integration to tungsten, but what we're tracking obviously is the price of tungsten as an input to carbide cutting tools, but we're monitoring the supply for that. I'm not sure if I understood the question, Ken.

Speaker #3: But what we're tracking, obviously, is we're tracking the price of tungsten as an input to carbide cutting tools. But we're monitoring the supply for that.

Speaker #3: I'm not sure if I understood the question, Ken.

Speaker #2: Yeah. I guess the ultimate question I'm trying to get a sense of is, what is, maybe, deciphering how much of the pricing is coming from Tungsten-oriented inventory versus the broader portfolio?

Ken Newman: Yeah. I guess the ultimate question I'm trying to get a sense of is what is maybe deciphering how much of the pricing is coming from tungsten-oriented inventory versus the broader portfolio.

Speaker #1: Yeah, Ken, I'll give you a little color on that. The price increase we took on in mid-January, we said low single-digit range. A good portion of that was on the cutting tool side.

Ryan Mills: Yeah. Ken, you know, I'll give you a little color on that. You know, the price increase we took on in mid-January, you know, we said low single digit range. A good portion of that was on the cutting tool side. You know, as you heard Martina in the last question from Ryan, you know, we anticipate some further pricing moves in the May to June timeframe. I would say it'd be a similar, you know, it'd be a good portion on the cutting tool side.

Speaker #1: And as you heard Martina in the last question from Ryan, we anticipate some further pricing moves in the May to June timeframe. I would say it’d be similar—it’d be a good portion on the cutting tool side.

Speaker #2: Got it.

Ken Newman: Got it.

Speaker #3: We have started to get we have started to get notices from other suppliers as the conflict continues. So anything that has I mean, you can imagine the portfolio that might be impacted.

Martina McIsaac: We have started to get

Ken Newman: Great. Well

Martina McIsaac: We have started to get notices from other suppliers, you know, as the conflict continues. Anything that has, you know, I mean, you can imagine the portfolio that might be impacted, there's fuel surcharges and discussions. It's not only gonna be carbide, I think, that we'll see going forward. That up until this point, that's been the big mover.

Speaker #3: The fuel surcharges and discussions—so it's not only going to be carbide, I think, that we'll see going forward. But up until this point, that's been the big mover.

Operator: Your next question for today is from Tommy Moll with Stephens.

Speaker #4: Your next question for today is from Tommy Mall with Stevens.

Speaker #2: Good morning and thank you for taking my questions.

Tommy Moll: Good morning, and thank you for taking my questions.

Speaker #3: Good morning.

Martina McIsaac: Good morning.

Ryan Mills: Good morning.

Speaker #2: Martina, I want to make sure I heard you correctly. December was the last planned round of significant headcount actions. And assuming the answer there is yes—that I heard you correctly—what's your confidence level in the disruption from all the sales organization changes fading as quickly as it sounds like you're assuming?

Tommy Moll: Martina, I wanna make sure I heard you correctly. December was the last planned round of significant headcount actions, and assuming the answer there is yes, that I heard you correctly, what's your confidence level in the disruption from all the sales organization changes fading as quickly as it sounds like you're assuming? I mean, noted that the most recent quarter, perhaps the headwinds were a little bit worse than expected, but that you've seen some more recent signs that are really encouraging. Progressions tend to not be linear, and so I'm just curious what your conviction level is that it's all clear from here or all better from here.

Speaker #2: I mean, noted that in the most recent quarter, perhaps the headwinds were a little bit worse than expected. But you've seen some more recent signs that are really encouraging.

Speaker #2: These progressions tend to not be linear. And so, I'm just curious what your conviction level is that it's all clear from here, or all better from here.

Speaker #3: I appreciate the question, and I appreciate the comment that this is disruptive. We believe that it was 100% necessary, so we had to bring into balance indirect resources versus direct resources.

Martina McIsaac: I appreciate the question, and I appreciate the comment that this is disruptive. We believe that it was 100% necessary. We had to bring into balance indirect resources versus direct resources. We had to change the sales culture back to a hunting culture and enable people to do that. There are a lot of positives going on right now in our sales force. You know, new tools, new support, like the growth forum, new compensation plan, which is very lucrative to the hunting behavior that we want. If...

Speaker #3: We had to change the sales culture back to a hunting culture and enable people to do that. So there are a lot of positives going on right now in our sales force.

Speaker #3: New tools, new support. The Growth Forum new compensation plan, which is very lucrative to the hunting behavior that we want. And I'm not going to share too many details for competitive reasons.

Martina McIsaac: I'm not gonna share too many details for competitive reasons, but when you look inside the portfolio and you take out maybe the customers who had a later introduction to the changes because of the attrition that we mentioned, we're seeing growth rates that are very exciting. I do believe we'll still have attrition. Selling right now in MSC doesn't feel like it did six months ago, and it doesn't feel like it's going to six months from now. We're building an engine that will deliver sustainable organic growth for the long term. I feel very confident that we're on the right track.

Speaker #3: But when you look inside the portfolio, and you take out maybe the customers who had a later introduction to the changes because of the attrition that we mentioned, we're seeing growth rates that are very exciting.

Speaker #3: And so, I do believe we'll still have attrition. Selling right now in MSC doesn't feel like it did six months ago, and it doesn't feel like it's going to six months from now.

Speaker #3: But we're building an engine that will deliver sustainable, organic growth for the long term. And I feel very confident that we're on the right track.

Speaker #1: And Tommy, maybe I'll give a little bit more detail on February and March. February, that growth rate is a little masked by public sector, who's down mid to high teens.

Ryan Mills: Tommy, maybe I'll give a little bit more detail on February and March. You know, February, that growth rate is a little masked by public sector. It was down mid to high teens. Reason being is the partial government shutdown delayed funding, and we had a tough comp there. As you heard Martina say, in February, core was up at mid to high single digits. National accounts was up low single digits. Then as we look at March month to date, before we go against that Good Friday headwind, core is growing at a similar rate, and national accounts is up a little bit more than low single digits. We're starting to see that improvement now that Martina's alluding to.

Speaker #1: The reason being is the partial government shutdown and delayed funding. And we had a tough comp there. As you heard Martina say, in February, core was up at mid to high single digits.

Speaker #1: National accounts was up low single digits. And then as we look at March month to date, before we go against that Good Friday headwind, core is growing at a similar rate.

Speaker #1: And national accounts is up a little bit more than low single digits. So we're starting to see that improvement now that Martina's alluding to.

Speaker #2: So, pivoting to a broader demand discussion, to the extent you can exclude all the MSC-specific factors that you've already identified that impacted recent results, is it possible to just benchmark the tone of some of the end market dynamics or customer conversations?

Tommy Moll: Pivoting to a broader demand discussion, to the extent you can exclude all the factors, the MSC-specific factors that you've already identified that impacted recent results, is it possible to just benchmark the tone of some of the end market dynamics or customer conversations, I don't know, year to date, quarter-over-quarter, however you wanna slice it? Does it feel like things have gotten a little better or stayed the same?

Speaker #2: I don't know. Year to date, quarter over quarter—however you want to slice it. Does it feel like things have gotten a little better or stayed the same?

Speaker #3: Yeah, thanks for the question. I mean, we do. That's why we said it's a little bit of a mixed picture right now. But we're looking for improvement and recovery in fabricated metals and primary metals.

Martina McIsaac: Yeah. Thanks for the question. I mean, we do. That's why we said it's a little bit of a mixed picture right now. But we're looking for, you know, improvement and recovery in fabricated metals and primary metals, and we are seeing it. We are outgrowing IP in both of those end markets. That gives us confidence for the continued core customer recovery. Then even some of the other segments, I mean, let's leave aerospace to the side, but even some of the other segments where we're heavily indexed in national accounts, like ag and automotive, they're definitely not getting worse. We're seeing some beginning signs of life. Some of it may not impact us in our fiscal year because it'll be.

Speaker #3: And we are seeing it. And we are outgrowing IP in both of those end markets. That gives us confidence for the continued core customer recovery.

Speaker #3: And then even some of the other segments—I mean, let's leave aerospace to the side—but even some of the other segments where we're heavily indexed in national accounts, like ag and automotive, they're definitely not getting worse.

Speaker #3: We're seeing some beginning signs of life. Some of it may not impact us in our fiscal year because there's sort of projecting changes and investments that will impact the back half of the calendar year.

Martina McIsaac: You know, they're sort of projecting changes and investments that will impact H2 of the calendar year. We're definitely things are waking up and shaking up with some of our biggest national accounts.

Speaker #3: But we're definitely seeing things are waking up and shaking up with some of our biggest national accounts.

Speaker #2: Thank you. I'll turn it back.

Tommy Moll: Thank you. I'll turn it back.

Speaker #4: Your next question is from Patrick Baumann with JPMorgan.

Operator: Your next question is from Patrick Baumann with J.P. Morgan.

Speaker #5: Hi. Good morning. Thanks for taking my questions. Morning.

Patrick Baumann: Hi. Good morning. Thanks for taking my questions.

Speaker #3: Yeah. Good morning.

Speaker #5: Just wanted to follow up on a couple of things. Just on the pricing comment, so I think I heard you say that there was a surgical increase in March, in addition to what you did in January.

Martina McIsaac: Hi.

Patrick Baumann: Morning.

Martina McIsaac: Yeah. Good.

Patrick Baumann: Just wanted to follow up on a couple things. Just on the pricing comment. I think I heard you say that there was a surgical increase in March in addition to what you did in January, and then there's more to come in May. I thought you said that the year-over-year price in the H2 would be, like, similar to what it is in Q2, which I guess makes some sense because of the year-over-year comps maybe. Maybe just clarify. I just wanna make sure I heard that right. You know, so maybe, like, 6.5% to 7% price in the H2 is kinda what you're thinking at this stage, or is that off?

Speaker #5: And then there's more to come in May. But then I thought you said that the year-over-year price in the back half would be, like, similar to what it is in the second quarter.

Speaker #5: Which I guess makes some sense because of the year-over-year comps, maybe. But maybe just clarify—I just want to make sure I heard that right.

Speaker #5: So maybe like 6.5% to 7% price in the back half is kind of what you're thinking at this stage? Or is that off?

Speaker #3: Yeah, I think yes. We're going to start to comp some of the actions that we took last year when the tariffs first started to roll out.

Martina McIsaac: Yeah. I think, yes. We're gonna start to comp some of the actions that we took last year when the tariffs first started to roll out. Maybe for modeling purposes, Ryan, you can, you know, maybe-

Speaker #3: And maybe for modeling purposes, Ryan, you can kind of lean in.

Speaker #1: Yeah, yeah, Patrick. Yeah. So we start comping against some of our pricing actions here in Q3. Depending on the timing of the late May or May–June price increase, the comps get tougher in Q4.

Ryan Mills: Yeah. We start comping against some of our pricing actions here in Q3. Depending on the timing of the late May or May-June price increase, you know, the comps get tougher in Q4. As you model the H2, you're exactly right. I'd stick in that 6.5% to 7% range on the pricing front.

Speaker #1: So, as you model the back half, I think you're exactly right. I'd stick in that 6.5% to 7% range on the pricing front.

Speaker #5: And is there any impact from the evolving tariff situation on that, in terms of the changes that have been talked about with Alibaba versus Section 122 or what have you?

Patrick Baumann: Is there any impacts from, like, the evolving tariff situation on that in terms of the changes that have been talked about with IEEPA versus Section 232 or what have you?

Speaker #3: No, the math on that works out to be fairly stable for us right now. And remember, we're not the importer of record for three-quarters-plus of what we bring in.

Martina McIsaac: No. The math on that works out to be fairly stable for us right now. Remember, we're not the importer of record for three-quarters plus of what we bring in. We haven't seen any meaningful movement from our suppliers right now. Right now, sort of modeling stability.

Speaker #3: So, we haven't seen any meaningful movement from our suppliers right now. So right now, we're sort of modeling stability.

Speaker #5: Understood. And then a follow-up on the headcount. So I know we talked about, I think, the field associate side. But if you look at total heads, they were down about 240 in the quarter.

Patrick Baumann: Understood. A follow-up on the headcount. Like, I know we talked about, I think the field associates side, but if you look at total heads, they were down about 240 in the quarter, sequentially, which is more than I think we were expecting, like, 100 people, and you talked about some attrition in field associates as well. Just curious, as you look forward, like in the near to medium term, like, do you see potential for, you know, cost cuts from, like, redundancies similar to what you found in Q2? Do you think that this will be an ongoing lever in terms of OpEx opportunity? Or are we kind of like, you know, I'm asking 'cause like you had a slide there for supply chain heads.

Speaker #5: Sequentially, which is more than I think we were expecting—like 100 people. And you talked about some attrition in field associates as well. Just curious, as you look forward, in the near to medium term, do you see potential for cost cuts from redundancies, similar to what you found in the second quarter?

Speaker #5: Do you think that this will be an ongoing lever in terms of Outback's opportunity? Or are we kind of, like—I'm asking in the context, you had a slide there for supply chain heads.

Speaker #5: I don't know what's in the other headcount, so just trying to understand a little bit better how you think the total headcount will evolve over the next, I don't know.

Patrick Baumann: You know, I don't know what's in the other headcount. Just trying to understand a little bit better, like, how you think the total headcount will evolve over the next, I don't know, 6 to 12 months or 24 months or, you know, however long you're willing to talk about it.

Speaker #5: 6 to 12 months or 24 months? However long you're willing to talk about it.

Speaker #3: Yeah. Thank you. So our ambition, Patrick, which we've stated publicly—we want to restore MSC to the mid-teens level of operating margin. And in order to do that, we have to accelerate organic sales growth, which is behind this first range of initiatives.

Martina McIsaac: Yeah. Thank you. Our ambition, Patrick, which we've stated publicly, we wanna restore MSC to the mid-teens level of operating margin. In order to do that, we have to accelerate organic sales growth, which is behind this first range of initiatives, and we've got to challenge all of our cost structures. That includes some legacy structures, like we collapsed in this last change of the sales force. There are other places in the business where we will look to, you know, change the way that we perform work. We'll look at automation and AI in the facilities and in the office. I do think you'll see us continue to try to challenge that cost structure for greater leverage as we continue to grow, with mid-teens being kind of the target.

Speaker #3: And we've got to challenge all of our cost structures. And that includes some legacy structures, like we collapsed in this last change of the sales force.

Speaker #3: And there are other places in the business where we will look to change the way that we perform work. And we'll look at automation and AI in the facilities and in the office.

Speaker #3: And I do think you'll see us continue to try to challenge that cost structure for greater leverage as we continue to grow, with mid-teens being kind of the target.

Speaker #3: So, if you look, we've brought the headcount down by more than 400 heads in the last 12 months. The sales changes are done now.

Martina McIsaac: If you look, we've brought the headcount down by more than 400 heads in the last 12 months. The sales changes are done now, but we are making, you know, improvements in productivity within the CFCs, which is allowing us to bring headcount down. We're deploying AI across the business, which is letting us not replace attrited headcount for the moment. Yes, we're absolutely committed to challenging our cost structure.

Speaker #3: But we are making improvements in productivity within the CFCs, which is allowing us to bring headcount down. We're deploying AI across the business, which is letting us not replace attrited headcount for the moment.

Speaker #3: But yes, we're absolutely committed to challenging our cost structure.

Speaker #5: Thanks for the color. Best of luck.

Patrick Baumann: Thanks for the color. Best luck.

Speaker #3: Thank you.

Martina McIsaac: Thank you.

Speaker #4: Your next question for today is from Steven Volkman with Jefferies.

Operator: Your next question for today is from Stephen Volkmann with Jefferies.

Speaker #2: Hello. Good morning. Just a couple of quick follow-ups from me. One, I'm trying to think about, since this whole tungsten explosion has happened in terms of pricing, how much do you think pricing is up since, I don't know, two years ago or something?

Stephen Volkmann: Hello, good morning. Just a couple quick follow-ups from me. One, I'm trying to think about since this whole tungsten explosion has happened in terms of pricing, how much do you think pricing is up since, I don't know, two years ago or something? I'm trying to think about whether there is gonna be some demand destruction because this stuff's getting really expensive or maybe some sort of, you know, different product, maybe substitution or something. Just anything in those lines we should be thinking about.

Speaker #2: I'm trying to think about whether there is going to be some demand destruction because this stuff's getting really expensive. Or maybe some sort of different product, maybe substitution or something.

Speaker #2: Just anything in those lines we should be thinking about.

Speaker #3: I mean, as the leading metalworking distributor, we are always working with customers to look at substitutions to take cost out of their business. We took $500 million out of customers' operations last year.

Martina McIsaac: I mean, you know, as the leading metalworking distributor, we are always working with customers to look at substitutions to take cost out of their business. We took $500 million out of customers' operations last year, and if it were to become an extreme situation, we could always support. But you know, it's not easy to change a cutting tool once a customer is working with certain technology, and it depends on what you're doing and what you're cutting. I think obviously there's a limit where anything would create demand destruction. But I think right now, we're supporting customers where they're asking for help, and we'll continue to do that. On the two-year stack, maybe, Ryan, I don't know if I can throw that one over to you.

Speaker #3: And if it were to become an extreme situation, we could always support. But it's not easy to change a cutting tool once a customer is working with certain technology.

Speaker #3: And it depends on what you're doing and what you're cutting. So, I think obviously there's a limit where anything would create demand destruction. But I think right now we're supporting customers where they're asking for help.

Speaker #3: And we'll continue to do that. On the two-year stack—maybe, Ryan, I don't know if I can throw that one over to you. Do you have any additional comments?

Speaker #1: No, I would just say for the cutting tool side, there might be an opportunity to switch to a high-speed steel cutting tool. I mean, it varies by customer—whether it’s a custom tool.

Martina McIsaac: Do you have any additional comments?

Ryan Mills: No, I would just say, you know, for like the cutting tool side, there might be an opportunity to switch to a high-speed steel cutting tool. I mean, it varies by customer, whether it's a custom tool. That being said, you know, I think it provides a good opportunity for us to leverage our technical expertise and ability to drive savings in customers' facilities to offset that inflation. You know, we look at it as more as an opportunity. Also, you know, you heard Martina talk about us building our inventory. You know, availability is number one priority of our customers, so we're also, you know, taking advantage of that as well.

Speaker #1: That being said, I think it provides a good opportunity for us to leverage our technical expertise and ability to drive savings in customer facilities to offset that inflation.

Speaker #1: So we look at it more as an opportunity. And also, Martina talked about us building our inventory—availability is the number one priority of our customers.

Speaker #1: So we're also taking advantage of that as well.

Speaker #2: Okay, great. And then I think last year, we were sort of comping against some destock, if I remember correctly. I assume that's kind of ended.

Stephen Volkmann: Okay, great. I think last year, we were sort of comping against some destock, if I remember correctly. I assume that's kind of ended, but is there any sign of like a restock, or is anybody trying to get ahead of some of these price increases with some inventory build? Just any commentary there, and I'll pass it on. Thanks.

Speaker #2: But is there any sign of a restock? Or is anybody trying to get ahead of some of these price increases with some inventory build?

Speaker #2: Just any commentary there, and I'll pass it on. Thanks.

Speaker #3: So it's interesting when you think about our business and you have 60%—or say a majority—of our business is planned demand. There's really no restocking happening there.

Martina McIsaac: It's interesting when you think about our business and you have 60% or say, a majority of our business is planned demand, there's really no restocking happening there. That's more of a negotiation where we're taking the responsibility to keep the customer stocked, so they're not acting there. The triggers we look for in terms of pre-buy, you know, exceptionally large orders, anything that would signal a change, we're really not seeing a lot of that. There's been some increased pull for certain products. You know, now that as the conflict is escalating, obviously, you could imagine the end markets that might have a bit more demand right now. In general, we haven't seen the big.

Speaker #3: That's more of a negotiation where we're taking the responsibility to keep the customers' stock, so they're not acting there. And the triggers we look for in terms of pre-buy, exceptionally large orders—anything that would signal a change—we're really not seeing a lot of that.

Speaker #3: There's been some increased pull for certain products now that, as the conflict is escalating, obviously you could imagine the end markets that might have a bit more demand right now.

Speaker #3: But in general, we haven't seen the big, if we were expecting a big restock and return to inventories anticipating that customers were anticipating an increase in demand, we haven't seen that yet.

Martina McIsaac: You know, if we were expecting a big restock and return to inventories anticipating you know, that customers were anticipating an increase in demand, we haven't seen that yet.

Speaker #3: So, neither pre-buy for price nor restock.

Stephen Volkmann: Great. Thank you.

Martina McIsaac: Neither pre-buy for price or restock.

Speaker #2: Appreciate it.

Stephen Volkmann: Appreciate it.

Speaker #4: Your next question is from Nigel Koh with Wolf Research.

Operator: Your next question is from Nigel Coe with Wolfe Research.

Speaker #5: Oh, thanks. Good morning. Obviously, we covered a lot of the topics here. On the field office headcounts, so just to be clear, are we assuming that the headcount from here is fairly stable in the back half of the year?

Nigel Coe: Oh, thanks. Good morning. Obviously, we covered a lot of the topics here. On the field office headcounts, just to be clear, are we assuming that the headcount from here is fairly stable in H2? Could you just quantify, you know, kind of the cost reduction and what that does to SG&A in H2?

Speaker #5: Maybe, could you just maybe quantify kind of the cost reduction and what that does to SG&A in the back half of the year?

Speaker #3: Yeah, I'll throw the SG&A question to Greg. But the sales headcount is not stable in the sense that we are going to fill those attributed positions, and then we expect to be adding direct sellers, Nigel.

Martina McIsaac: Yeah. I'll throw the SG&A question to Greg. But the sales headcount is not stable in the sense that we are gonna fill those attrited positions, and then we expect to be adding direct sellers, Nigel. Like, our goal was to bring into balance direct and indirect. When you have too many indirect sellers, you have too many people being paid on the same sales dollar. But as we see sales acceleration, we hope to be able to be adding sellers and covering more customers, which is something MSC has not done for a very long time. But in general, we're not projecting massive changes, you know, to the size of what we just cut. But Greg, do you wanna share any additional color there?

Speaker #3: Our goal was to bring into balance direct and indirect. When you have too many indirect sellers, you have too many people for the same sales dollar.

Speaker #3: But as we see sales acceleration, we hope to be able to add sellers and cover more customers, which is something MSC has not done for a very long time.

Speaker #3: But in general, we're not projecting massive changes to the size of what we just cut. But Greg, you want to share any additional color there?

Speaker #1: Yeah, I think what I can do is give you some color on just what happened in Q2 on the OPEX. And then, if there's anything more you want to talk about regarding Q3, Ryan can jump in.

Greg Clark: Yeah. I think what I can do is I can give you some color on just what happened in Q2 on the OpEx. If there's anything more I wanna talk Q3, Ryan can jump in. Just to give you some color on the OpEx, just on a year-over-year basis, we did see the OpEx step up about $7 million. This was driven primarily by an increase in personnel-related costs of about $9 million. Of that merit and the fringe benefit inflation are the big drivers there, followed by stock compensation, stock-based compensation, about $1 million. We had an increase in depreciation and amortization as well of about $2 million related to our digital and e-com spend, which is what we use for enhancements to the web.

Speaker #1: But just to give you some color on the OPEX on a year-over-year basis, we did see the OPEX step up about $7 million. This was driven primarily by an increase in personnel-related costs of about $9 million.

Speaker #1: And of that, merit and the fringe benefit inflation were the big drivers there, followed by stock-based compensation, about $1 million. We had an increase in depreciation and amortization as well.

Speaker #1: About $2 million related to our digital and e-com spend, which is what we use for enhancements to the web. We also saw $2 million of additional outbound freight due to rate increases.

Greg Clark: We also saw $2 million of additional outbound freight due to rate increases. We also did some spend on the investments which are geared towards solutions growth and other items such as the growth forum for about $1 million. This is partially offset by the productivity that we've talked about, including the network optimization benefits as well as some of the headcount actions that were taken.

Speaker #1: We also did some spend on the investments, which are geared towards solutions growth and other items such as the Growth Forum, for about $1 million.

Speaker #1: And this is partially offset by the productivity that we've talked about, including the network optimization benefits, as well as some of the headcount actions that were taken.

Speaker #5: Okay, and that's great color. I think maybe we'll dive into the weeds even deeper offline. I just want to have another crack at the pricing question.

Nigel Coe: Okay. No, that's great color. I think maybe we'll dive into the weeds even deeper and, offline. I just wanna have another crack at the pricing question. First of all, the March price increase that you referred to, did that hit in March, or was that effective in April? I know it's a small point, but fairly important. Because when we think about the sequentials, if we take March as a good run rate, you know, account for the Good Friday timing, if we use normal seasonality month over month, we're kinda getting to the high end of your range. I'm just wondering, you know, the 5% to 7%, obviously a lot better than what we saw in Q2.

Speaker #5: First of all, the March price increase that you referred to—did that hit in March, or was that effective in about the sequentials? If we take March as a good run-rate account for the Good Friday timing, I think we're using—if we use normal seasonality, month over month—we're kind of getting to the high end of your range.

Speaker #5: So I'm just wondering, the 5% to 7%, obviously, a lot better than what we saw in Q2. But does that assume that some of this volume attrition continues into the third quarter?

Nigel Coe: Does that assume that this, some of this volume attrition continues into the Q3?

Speaker #1: Yeah, Nigel, this is Ryan. The March price increase—that was mid-March. And keep in mind that we have to give a notice period to our contract customers.

Ryan Mills: Yeah, Nigel. This is Ryan. The March price increase, that was mid-March. Keep in mind that we have to give notice period to our contract customers. I'd say it really didn't provide that much of a benefit in March. As we look into April and May, you know, the midpoint of our guidance assumes growth of about 7%. That would imply a little bit of volume growth year-over-year, and then low single digits, you know, call it 2, 3% on the top end of the range. I feel good about where we're at right now. You know, still had a little bit of some of this sales force optimization noise in March, but it's easing.

Speaker #1: So I'd say it really didn't provide that much of a benefit in March. As we look into April and May, the midpoint of our guidance assumes growth of about 7%.

Speaker #1: So that would imply a little bit of volume growth year over year, and then low single-digit—call it 2–3 percent—on the top end of the range.

Speaker #1: Feel good about where we're at right now. Still had a little bit of some of this Salesforce optimization noise in March, but it's easing.

Speaker #1: That's giving us confidence. We talked about the growth rates. We saw, in March, in core national accounts, that's improving. As Martina mentioned, the impact of customers.

Ryan Mills: That's giving us confidence. We talked about the growth rates we saw in March in core national accounts. That's improving. As Martina mentioned, the impact to customers were improving both month-over-month and year-over-year, modestly in March. This is all month to date. But we feel good where we're at right now.

Speaker #1: We're improving both month over month and year over year, modestly in March. This is all month to date. But we feel good about where we're at right now.

Speaker #5: That's great color. Thanks.

Nigel Coe: That's great color. Thanks.

Speaker #4: Your final question for today is from David Manthe with Baird.

Operator: Your final question for today is from David Manthey with Baird.

Speaker #1: Thank you, Greg. Good morning, everyone. First off, Martina, you mentioned that you expect volumes to improve through the year. As we look at the year-over-year trends, the comps are pretty easy.

David Manthey: Thank you. Good morning, everyone. First off, Martina, you mentioned that you expect volumes to improve through the year. As we look at the year over year trends, the comps are pretty easy. I think they're low single digit negative in April and May. Effectively, this statement on the fiscal year is a bet on June, July, and August.

Speaker #1: I think they're low single-digit negative in April and May. So, effectively, this statement on the fiscal year is a bet on June, July, and August.

Speaker #1: And I know we've asked you about your conviction in the outlook a number of times here. But given the fact that your customer event was in February, which was sort of ahead of the conflict—and I think there was some optimism growing then—have you gotten early reads from customer attitudes since the conflict began?

David Manthey: I know we've asked you about your conviction in the outlook a number of times here, but given the fact that your customer event was in February, which was sort of ahead of the conflict, and I think there was some optimism growing then, have you gotten early reads from customer attitudes since the conflict began, like in the last month, for example, that still gives you confidence in that growth through the end of the fiscal year?

Speaker #1: Like in the last month, for example, does that still give you confidence in that growth through the end of the fiscal year?

Speaker #3: Yeah. I mean, I think as we shared before, customers are mostly asking us right now to secure supply against an increasing demand that they feel they're going to see.

Martina McIsaac: Yeah. I mean, I think as we've shared before, customers are mostly asking us right now to secure supply against an increasing demand that they feel they're gonna see. They wanna make sure that we are planning volumes that they're imagining and understanding. We haven't seen dampening of sentiment, and of course, the indexes wouldn't show it yet.

Speaker #3: So they want to make sure that we are planning volumes that they're imagining and understanding. So we haven't seen dampening of sentiment. And of course, the index wouldn't show it yet.

Speaker #1: Yeah, Dave, the thing I'd add too is it's encouraging to see the MBI be above 50 for two consecutive months. That's the first time over a multi-period.

Ryan Mills: Yeah. Dave, the thing I'd add, too, is, you know, encouraging to see the MBI be above 50 for two consecutive months, that's the first time over a multi-period. You know, not seeing anything too concerning from a demand destruction standpoint, as of today, due to conversations we're having in the field and with customers. I'd say we're probably cautiously optimistic on the end market fundamentals for the remainder of the fiscal year.

Speaker #1: Not seeing anything too concerning from a demand destruction standpoint. As of today, due to conversations we're having in the field and with customers, I'd say we're probably cautiously optimistic on the end market fundamentals for the remainder of the fiscal year.

Speaker #1: That's good to hear. And then finally, I too am trying to dimensionalize the impact of these headcount changes. So, could you tell us when in the quarter the RIF happened?

David Manthey: That's good to hear. Finally, I too am trying to dimensionalize the impact of these headcount changes. Could you tell us when in the quarter the RIF happened? I mean, I guess you're down 158 field sales heads sequentially. If I heard you correctly, you said you're going to refill those positions. I'm just thinking about you know, how we thread the needle between you know, 9 percent-

Speaker #1: I mean, I guess you're down 158 field sales heads sequentially. And if I heard you correctly, you said you're going to refill those positions. I'm just thinking about how we thread the needle between 9% less salary year over year and then adding those people back, and then what's the cost impact, and you're assuming no sales impact.

Martina McIsaac: Yeah.

David Manthey: less sales year-over-year and then adding those people back, and then what's the cost impact, and you're assuming no sales impact. I'm sorry to ask it again, I'm just trying to really dimensionalize these changes.

Speaker #1: So, I'm sorry to ask it again. I'm just trying to really dimensionalize it.

Speaker #3: Yeah. No, thank you. Thank you, Dave, for the question. And, like I said, we didn't give you a lot of details in our January call for competitive reasons.

Martina McIsaac: Thank you, David, for the question. We, you know, like I said, didn't give you a lot of details in our January call for competitive reasons. I'm happy to share a little bit more now. The action was the sellers impacted service people were notified right before Thanksgiving, and the action took place throughout the month of December and into January because we did plan that overlap period. When I say we're gonna backfill those roles, I mean some of the attrited roles. We permanently contracted the sales force by 130 people. You're talking about a couple of tens of roles that are vacant that we intend to fill so that we can have the complete complement of sellers that we planned for in this change.

Speaker #3: I'm happy to share a little bit more now. So the action was, the sellers-impacted service people were notified right before Thanksgiving, and the action took place throughout the month of December and into January.

Speaker #3: Because we did plan that overlap period. And when I say we're going to backfill those roles, I mean some of the attrited roles. We permanently contracted the Salesforce by 130 people.

Speaker #3: So, you’re talking about a couple of tens of roles that are vacant that we intend to fill so that we can have the complete complement of sellers that we plan for in this change.

Speaker #3: So, depending on the role, the handoff happened quickly. And sellers left the company in the month of December. Some of them hung on a little bit longer.

Martina McIsaac: Depending on the role, the handoff happened quickly and sellers left the company in the month of December. Some of them hung on a little bit longer. We had planned a longer transition period. I would say that, you know, by mid-January, all of those heads were out. Those were only a very few exceptions that we had to make just because of the longer handover period. It mostly happened in, you know, sort of early December.

Speaker #3: We had planned a longer transition period. But I would say that by mid-January, all of those heads were out. And there were only a very few exceptions that we had to make, just because of the longer handover period.

Speaker #3: It mostly happened in sort of early December.

Speaker #1: Okay. Thanks for the detail.

Speaker #3: You're welcome.

David Manthey: Okay. Thanks for the detail.

Speaker #4: We have reached the end of the question and answer session. I will now turn the call over to Ryan Mills for closing remarks.

Martina McIsaac: Welcome.

Operator: We have reached the end of the question and answer session, and I will now turn the call over to Ryan Mills for closing remarks.

Speaker #1: Thank you for joining us on today's call. We look forward to seeing you on the road at NDRs and upcoming conferences. Our next earnings call for the fiscal third quarter will be on July 1.

Ryan Mills: Thank you for joining us on today's call. We look forward to seeing you on the road at NDRs and upcoming conferences. Our next earnings call for the fiscal Q3 will be on 1 July. Have a good day.

Speaker #1: Have a good day.

Operator: This concludes today's conference, and you may disconnect your phone lines at this time. Thank you for your participation.

Q2 2026 MSC Industrial Direct Co Inc Earnings Call

Request DemoDemo

MSC Industrial Direct

Earnings