Good day, and welcome to the MSC Reports Fiscal Second Quarter 2024 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be opportunity to ask questions. [Operator Instruction]. Please note, today's event is being recorded. I'd now like to turn the conference over to Ryan Mills, Head of Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to our second quarter fiscal 2024 earnings call. Erik Gershwind, our Chief Executive Officer; and Kristen Actis-Grande, our Chief Financial Officer, are both on the call with me today. During today's call, we will refer to various financial data in the earnings presentation and operational statistics that accompany our comments, both of which can be found on our Investor Relations web page. Let me reference our safe harbor statement, a summary of which is 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 U.S. securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks is noted in our earnings press release and our other SEC filings. In addition, during this call, we may refer to certain adjusted financial results, which are non-GAAP measures. Please refer to the GAAP versus non-GAAP reconciliations in our presentation or on our website, which contain the reconciliation of the adjusted financial measures to the most directly comparable GAAP measures. I will now turn the call over to Eric.

Thank you, Ryan, and good morning, everybody. Thank you for joining us today. As we move past the halfway point of fiscal 2024, our performance to date has been mixed. Our high-touch programs such as vending and implant solutions continue capturing share and they're performing ahead of expectations. On the other hand, growth has not yet inflected in our core customer base in the face of a sluggish macro environment, particularly in our heavy manufacturing end markets. This can be evidenced in the performance of our top 100 national accounts, where only 45 were growing last quarter. As a result, revenue growth to date has been below our expectations. At the same time, I'm pleased with how we've been managing the business in a challenging environment. Gross margin performance, our productivity efforts and cash flow generation have been strong, and they're expected to continue. And while our performance to date has been mixed, my conviction in our plan is as high as ever. We expect to improve the trend in revenues during the back half of our fiscal year and into fiscal 2025. And this belief is grounded in several factors. First, while macro conditions have not materially improved since the start of the calendar year, we continue to hear a more positive overall sentiment about the coming months from our team on the ground. Second, as I mentioned, our implant and vending signings continue to outpace our expectations. These signings should yield incremental growth through the balance of the fiscal year and beyond. Third, we successfully completed our web pricing realignment initiative as planned in late February, and the benefits are just starting to be felt. Fourth, our website improvements which are running slightly behind schedule are expected to roll out during the back half of the year and…

Thank you, Erik, and good morning, everyone. Please turn to Slide 9, where you can see key metrics for the fiscal second quarter on both a reported and adjusted basis. Fiscal second quarter sales of $935 million declined 2.7% year-over-year with the same number of business days in both periods. Despite the sequential improvement in our sales within the quarter off a particularly soft December, volumes remained negative year-over-year through the quarter. This was partially offset by ongoing solutions momentum and more modest benefits from price and acquisitions. By customer type, national accounts performed the best, with average daily sales up 1.1%, and 45 of our top 100 national account customers grew in 2Q. When considering the macro challenges and significantly tougher comps in the first half of the year, I am encouraged by the resiliency despite here. The public sector had slight year-over-year growth of 0.6%, driven by mid-single-digit growth from our federal customers. We experienced softness in the state and local portions of the public sector due to temporary budget constraints. Core and other customers, average daily sales were challenged during the quarter, declining 5.7%. From an end-market perspective, we experienced acute demand softness in heavy manufacturing verticals, including end markets and tiered suppliers that support the earlier stages of production and automotive. From a solution standpoint, we continue to take share during the quarter despite a challenging market. In vending, Q2 average daily sales improved 6% year-over-year, and represented 17% of total company net sales. Sales through our implant program grew approximately 10% year-over-year and represented approximately 16% of total company net sales despite only 46 of our top 100 implants showing growth in 2Q. Signing rates across both solutions remained at healthy levels during the quarter, especially in implants where fiscal year-to-date signings are exceeding our…

Thank you, Kristen. Our performance thus far in fiscal 2024 is mixed, both not yet meeting our expectations. Despite this, I remain confident, I see evidence of solid execution across our mission-critical initiatives, providing optimism for the back half of fiscal 2024. And longer term, we remain squarely focused on our objectives of 400 basis points or more of outgrowth above IP and operating margins in the mid-teens. I want to thank our entire team for their dedication in supporting our customers and our mission. And we'll now open up the line for questions.

[Operator Instructions] Today's first question comes from David Manthey with Baird. Please go ahead.

Erik, Kristen, first question is on your outlook. What is the IP growth that you're assuming as you say, the acceleration into the back half? What's the underlying assumption for second half IP growth?

Yes, Dave. So for the second half, I'll give you kind of overall, we're not expecting a significant inflection of where we've seen IP, some steady improvement, but the more meaningful thing to note is expected IP improvement particularly in machinery and equipment and fabricated metals. In 2Q, machinery and equipment was down about 5%, the subindex of IP and fabricated metals was down a little bit over 1 point. So when we look at sort of our exposure to given end markets, our top 5 end markets, which are roughly 50% of our revenue four of those 5 were declining. Their IP index declined in our fiscal second quarter. And then if you think about how the IP index is weighted, while that's 50% of our revenue, it only makes up about 10% to 20% of the IP index. So when we think about composition of improvement in macro, we are looking particularly within those top 5. And I guess just to add the 1 that is growing of our top 5 unsurprisingly is arrow.

Dave, I'll add Kristin summarize it beautifully. Just one other point to add, which is beyond the IP assumption. I'd say another factor going on is inventory burn and that we do expect that to be easing through the back half of the year. We've seen evidence of that, particularly in our national accounts area. And when we win accounts, for instance, a little bit of a slower ramp on implants that we expect to accelerate in the back half as inventory burning eases.

Okay. Can you also help us bridge OpEx from where you sit today in the second quarter into the second half? You mentioned benefits from leverage, but there's a lot of moving parts here. You talked about the Columbus DC, voluntary separation, acquisitions, merit, other investments. I mean from the level we're at right now, can you sort of bridge us into the back half with the puts and takes.

Yes, sure. So obviously, you're going to put in a variable OpEx assumption depending on how you're flowing revenue through the year, roughly, let's call it, 8% to 10%, and then if you're -- I'm not going to give quarterly OpEx guidance, but I will give a little guidance on how we're thinking about the cadence throughout the year because there are some differences there, too. As you mentioned, there are a lot of things that are happening in, so as we think about moving into the third quarter, we are going to be a little bit more weighted on investments in 3Q. Some of that is due to timing of expenses associated with the Columbus shutdown, which are not technically qualified restructuring expenses, and then there's also a heavier investment lift in 3Q tied to some of the efforts around advertising and the solutions growth. Q4, if you move from Q3 to Q4, what I would tell you to think about is you'll have obviously a step-up in variable expense, will offset a good chunk of that sequentially based on investments that don't repeat in the fourth quarter, and we have a bigger productivity target in 4Q, so if I step back broadly and think about expectations on OpEx on a year-over-year basis for the full year, to your point, there are a lot of moving pieces. The way that I would try to simplify the explanation, the two tallest candle sticks are merit, which is about half of the increase and strategic investments, which is the other half. To your point, a lot of moving pieces on G&A, on acquisitions. We're covering those with productivity, so to simplify the story, the things that emerge are merit and strategic investments that make up the year-over-year lift.

And our next question today comes from Tommy Moll with Stephens Inc. Please go ahead.

I wanted to drill down a bit on the revenue progression or more precisely the average daily sales progression you expect for the second half versus the first half. And as you mentioned, it does imply a pretty significant step-up on our math, it's approaching 10%., second half versus first half. So if there's anything you can quantify for us for that bridge or even just again, run through qualitatively the drivers there? And in particular, on the macro part of that bridge, what more can you tell us that gives you reason to be optimistic that you're going to see some improvement there, particularly given the March trend?

Yes, Tommy. So let me start and then Kristin will give you a more detailed breakout and a bridge because your numbers are exactly right. Our confidence, obviously, Q2 came in softer than we expected, primarily weighed down by macro. But clearly, you could see it in the core customer number. I mean the numbers came down across the board, which taught us was mostly macro. But obviously, we're not satisfied with what we're seeing in the core customer. I think the confidence is coming from, certainly, we'll touch on, and Kristen mentioned the assumptions behind some moderate improvements in the macro, but also the execution of the growth initiatives that we have that are tracking to plan. So we do have confidence that they're going to work. Obviously, there's a timing element on how quickly things come online. But Kris will take you through the math. The one other thing I'll say, Tommy, just a little color on March because obviously, the March number thus far is not a great data point. But a couple of things. One is, obviously, there's still just a reminder that we have through next week. So we're giving you an estimate with still a pretty good ways to go in the month. The color that I give on March is a couple of things. One is it started out slower than it's been in the last part of the month. Obviously, again, we still have another week, but it started out slower and did pick up some momentum would be one. Two was interestingly, what we saw in March was actually a bit of an improvement in our core customer base performance. And where we saw the step-down was national accounts and public sector, I would say those are the two areas where our confidence is greatest, given performance and given our ability to sort of clearly size market share and what's going on. So we don't -- we're not concerned about either of those areas, but they did come down in March, whereas the core got a little bit better. So that is a little -- yes, obviously, it's early but a little sign of life there. I think I'm going to turn it over to Kristen who can do the math for you on the walk.

Sure. Yes. Thanks, Erik. So Tommy, the way that I would think about the 10%, to your point on the second half, I'll walk you through some of the big buckets and then elaborate a little bit on the growth side. So seasonality, we typically do have a stronger second half. I think last time we talked, we sized that at about 4 to 6 points of inflection. Based on what we're seeing in March, we certainly think that's going to be on the lower end. So apply about a 4-point assumption there. On the macro side, what we're thinking about there, we touched a little bit on this with Dave's earlier question on the IP indices. But what we're looking at there is a 1-to 2-point improvement. On pricing, we do get a small benefit on price in the second half. Again, that's tied to the increase that we took in early 2Q. That's about a point, so the balance becomes the growth initiative, which would be 3 points, and I'm going to put those in kind of 3 buckets for you. The first is around solutions, which is about half of that 3 points. So if you look at our signings that we've had in FY '23 and FY '24, and we look at the maturity that is yet to come on those accounts, that would have contributed roughly $20 million more in Q2 if they were fully ramped up. So when we think of kind of progression around solutions, we're looking at benefits still to come on more recent signings as well as things that were signed in the first half of '24 and not yet implemented and those that we expect to sign in the second half of '24 that would have some in-year benefit still.…

Thank you for the comprehensive answer there. As a follow-up, I wanted to ask about the web pricing realignment, which it seems like you're discussing as a largely successful initiative completed in February. The KPIs you offered all sound pretty positive. But my question is just to drill a little bit deeper because there's often more than meets the eye in these kinds of initiatives and execution is not easy. So has there been anything that surprised you, is there some risk that the trends we're seeing for the core customer are reflecting some of the challenges with this initiative? Or is that not the case in your mind?

So Tommy, let me take those in reverse order. So the challenges in the core customer, I absolutely would not link to this, if anything, because we realize that the bulk of the SKUs and the awareness campaign hit at the very end of Q2. If anything, early signs given that March got to tick better so far with core customers, we see it as a net positive. Look, you're right to drill in here. It's easy for us sitting on a call to let this roll off the tongue, and it sounds like it's the click of a switch. It is a heavy effort inside the company. It was led by Martina and her team, I mean there are twice-a-day stand-ups on this. This has gotten a heck of a lot of attention. I think what we're saying is, I hesitate to declare anything of success because it is such early days. We are clearly encouraged by what we're seeing. And I think the execution has been really good. Have there been any surprises sure, there's always going to be surprised. I would say nothing though that rises to the level of kind of a big picture surprise. But in this kind of effort, the devil is in the details. And what I mean by details is down to -- we're managing this project at a SKU, at a customer level to make constantly there'll be fine-tuning that gets done through the balance of the fiscal year. So again, this is not a light switch that goes on and it's done. This is an ongoing effort of refinement. But what you're hearing from us is early encouragement when we look across -- we have a scorecard that goes into a lot of detail, but gives us a very clear dashboard of how we're doing in terms of growth prospects, profitability measures, leading indicators like I talked about in terms of early customer behavior and voice of customer and what they're telling us, what you're hearing is encouragement that early signs are good, but by no means saying its done.

And our next question today comes from Stephen Volkmann from Jefferies. Please go ahead.

Kristen, you gave a pretty long laundry list of sort of what the inflection might be in the second half. But I was curious because you didn't mention the destock that Erik kind of called out. So is that part of the -- is that a fifth thing? Or is that part of the 4 things?

No, I'd say we're putting that in with macro, Steve.

Okay. So macro up 1 to 2 points, even with the end of the destock. Maybe that's .

Yes. And I guess the other thing I'd add is like we have seen the last year or two I don't know if I'd call it just destocking but sort of an end of calendar year sales pattern that it seems like it's sort of becoming the new normal. So I suppose if that's in your first half, the second half seasonality assumption, like when we calculate that, looking back at prior years, you probably are inherently picking up some of that in the seasonality number, too. It's probably just not destocking necessarily in prior years as much as just like year-end belt tightening.

And then slightly differently, just any evolution in how you're thinking about price cost for the rest of the year?

Yes. So broadly, we still expect price cost to be more favorable in the second half of the year. Feeling really good about pricing assumptions in the second half. And then if you kind of run out gross margin for the full year, which we now expect to be at Q2 levels or slightly above the -- really, with the countermeasures that we've had in place we've been largely successful in offsetting the transactional price cost headwind. So certainly happy that the worst of that headwind is behind us, but then broadly, just really pleased with how the countermeasures have been performing.

And our next question comes from Chris Dankert with Loop Capital. Please go ahead.

I guess hoping to dig in a little bit more on the product discovery and that digital revamp here. I mean any -- and you highlighted what the overall benefit is, I guess, but just what gives you confidence in that expected benefit into the back half and '25? Maybe what's been driving some of the delays there? If you could just give us a little bit more fleshed out color on that digital rollout, that would be great.

Yes, you got it, Chris. So we're -- there's basically two fronts that we're moving on in terms of our digital experience, our website, in particular. And those two fronts are the platform, meaning the transactional engine that customers go through and the search or product discovery function. And we have improvements lined up on both. They're really aimed and anchored in two overarching principles. One is continuing to make the website the customer experience more frictionless, more seamless and just a great -- better and better experience as time goes on. And the second thing is to make it more personalized for the customer. Those are the overarching principles and those are the two areas in which we're moving. On the platform front, we actually got a bunch of stuff over the finish line this month through Q2 and into this month. What we're tracking there Chris is metrics such as we're looking at basically conversion rate. So we're looking at customer sat numbers and then we're looking at conversion rate, which is for every 1,000 customers, 10,000 customers that come to the website, how many converts to an order, which is a good barometer for us, that ultimately leads to revenue improvements. On search, we are slightly delayed. We had expected all of the search changes or the bulk of the search changes to be in by Q2. Those are pushed out and will be done basically over the next quarter and into Q4, it's going to be a series of improvements. I would say there really two principles, Chris, first was we focused -- we saw some opportunities on the platform to make the experience better, wanted to nail those first. And the second kind of overarching principle that we have, while time lines are important, quality is more important. We've always felt that way. And what we found with search is the architecture is good. We're confident in the new platform, but there were refinements that we could do to make it better. And so we went with the mantra of quality over time line. And so that will be rolling out in the back half. What we're going to be looking for internally there is we're going to be looking at the conversion metrics because we can get close line of sight, Chris, from conversion metrics into revenue performance.

And then I guess, following the DC closure in Columbus, just what level of sales of the business currently set up for us is there's still some more efficiency programs and adjustments going on there. But make just a general sense for like what level of sales can we serve today following that closure?

Yes, Chris. So what I would say is this closure, obviously, a decision like this takes a lot of time with a very long time horizon in mind. The business with the 4 primary distribution centers that will remain post Columbus plus the rest of the network can support substantial growth, and really, we had already had from a geographic coverage standpoint, a pretty good situation. Columbus was around throughput. And I mentioned the two factors that had changed. So with those two factors, i.e., 1 being the mix of solutions business and two being automation, which there's plenty of still opportunity to go on the automation front that there is a lot of room for throughput capacity. The other point I would say is that we are -- this networks, I mentioned in addition to Columbus, we've launched a network study. So that network study really has two goals in mind. One is going to be around productivity. So you can expect us to come back with productivity targets and go gets that will be part of our self-help story here towards mid-teens operating margins. The other part of that study though is how do we provide better customer service. So we expect the productivity opportunity. We also expect opportunities to provide even better service and allow the network to support us way into the future. So punchline is, we feel good about where we are now to support continued growth, and I think we're going to get more opportunities coming out of the network study.

And our final question today comes from Ken Newman with KeyBanc Capital Markets. Please go ahead.

Good morning. I just wanted to take the back half bridge maybe a little bit differently. If you look in the operational statistics deck, you do have that historical monthly seasonality table in there. And I think if you just follow it from where you've got the preliminary March numbers, it does take you below the low end of your full year guide. Outside of the stuff that you kind of highlighted from first half to second half, I'm just curious if there's anything else in there that we should kind of be aware of, whether it's just timing of holidays. I think Good Friday is going to be here in March versus April typically. I don't know if there's a way you can help us quantify that impact? Or if there's anything else there that we should be aware of from a monthly seasonality perspective?

Yes, Ken. So on the -- maybe I'll start with the second part of your question first on Good Friday. Because of our lovely since calendar, Good Friday was actually in the fiscal month of March, both last year and this year. So there's always a little bit of noise depending on whether that's the last day of the month or not, but I'd say largely a nonevent with March. To the first part of your question, yes, if you run out like the seasonality, kind of normal average seasonality for the year, to your point, you would end up at a number that's below the bottom of the guidance. And there's really two main buckets of things that we are looking at improving upon that would drive that inflection differently, sequentially, first half to second half than the normal seasonality month-over-month would imply if you run that out. First is the macro recovery we talked about kind of lumpy, I guess, the destocking thing that Steve mentioned into that. And then two is the growth initiatives. And again, it's tough to peg exactly when -- which month they come online. If you think about all the items we outlined, solutions, good line of sight to public sector, pretty good line of sight to demand gen, we obviously have some assumptions on when that time, but if you think about the core customer energy or the reenergizing the core customer initiative and what you get on volume lift from the list price repositioning and then the improvements from web, those are really the two toughest to model from an inflection perspective because we don't have anything in our historical baseline that tells us how to think about those. So when you think about modeling kind of range of assumptions that you're putting on different initiatives, we have to make a pretty wide set of assumptions about those two. So it does make the second half modeling tricky, and it's also why we're over-rotating on the 3 parts of the growth initiatives that I outlined earlier, again, the solutions, the demand gen, and the public sector line of sight. But yes, you absolutely have to have macro improvement and the inflection from the growth initiatives to drive a different expectation if you were to just -- I know what you're saying run out the month-over-month projection.

From a follow-up, obviously, others have touched on it earlier in the call, but obviously, you've got a lot of things going on in the OpEx line. I am curious if there's any expected impacts from any supply chain friction, whether that's from shipping lane dynamics, from stuff coming over the water or maybe even this Baltimore bridge, which I'm guessing is still maybe a nonevent for you guys as of now. But how do you think about transport logistic cost kind of flowing through the income statement into the back half?

Yes, Ken, it's -- so I'll take it. Obviously, the Baltimore situation is so new and so tragic, too early there to say. But obviously, we're monitoring closely like events in the Middle East and some of the supply chain disruptions. I would say so far, impact is projected to be modest. Obviously, that could change. But to date, the impact modest and sort of counterbalancing now, we have a lot of focus on freight. You heard us talk about some of the performance improvements there, the network study, we see a lot of opportunity on freight. So it's possible that the headwinds could grow at this point, it's sort of modest in size, but we got a lot to offset it.

This concludes our question-and-answer session. I'd like to turn the conference back over to Ryan Mills for closing remarks.

Thank you, everybody, for joining us today. Our next earnings call will be on July 2, and I look forward to seeing you at the upcoming conferences this quarter. Goodbye.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.