Title

Presentation

MSC Industrial Direct Co., Inc. misses on earnings expectations. Reported EPS is $0.82 EPS, expectations were $0.84.

Operator: Good morning, and welcome to the MSC Industrial Supply Fiscal 2026 Second Quarter Conference Call. [Operator Instructions] 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.

Ryan Mills: 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. 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 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 are noted in our earnings press release and our other SEC filings. 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.

Martina McIsaac: 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. 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 2Q. 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.

As we previously shared, at the end of 1Q and early 2Q, we completed the last round of structural changes and accompanying head count reductions related to our sales optimization work. To recap, in fiscal year ’25, we took actions designed to bring head count 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 2, 3, 4 or even 5 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.

In the action taken at the beginning of our fiscal 2Q, 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 head count 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 2Q 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 face change as the 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. It’s important to note that these changes did not impact the momentum of our vending and In-Plant programs as reflected in our op 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.

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 white space overlap and joint growth opportunities that we identified using AI, and I couldn’t be more pleased with the outcome. 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 1Q and 2Q 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. 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 head count 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 Kathy Mauch, 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 this slide.

Our operations teams, led by Darrick Collier, continue to optimize within the 4 walls of our distribution centers as seen by the favorable trends in their head count and compensation expenses. Both cases are perfect examples of the results a data-driven focus on continuous improvement could 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 2Q 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 2 realities.

On one hand, signs of a potential industrial recovery are encouraging. 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 has 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. 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 third quarter 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.

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.

Gregory Clark: Thank you, Martina, and good morning, everyone. Please turn to Slide 7, where you’ll find key metrics for the fiscal second quarter on both a reported and adjusted basis. 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. 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. 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. In solutions, we were pleased by the continued expansion of our footprint in 2Q. 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.

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. 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 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, but up approximately $7 million year-over-year as ongoing productivity improvements and head count 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% and 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. 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 1.2x 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.

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. 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 2Q and $110 million fiscal year-to-date in the form of dividends and share repurchases. Moving to our expectations for the third quarter on Slide 10. We expect average daily sales to grow 5% to 7% compared to the prior year. 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 third quarter 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 the sequential step-up in the adjusted operating expenses primarily driven by higher variable expense associated with the expected increases in sales. Together, these assumptions resulted 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. 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. 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. And with that, we will open the line for Q&A.

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Operator: [Operator Instructions] Your first question for today is from Ryan Merkel with William Blair.

Ryan Merkel: 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? 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 because I think it was sort of flat in the quarter?

Martina McIsaac: Ryan, yes, let me start by digging in a little bit to the second quarter impact, which is then driving our confidence in the third quarter. 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 faced changes, which led to some volume contraction. 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 customers’ business, capturing all of the unplanned demand at the account, managing our VMI programs. 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. And as we started to make the change, we saw 2 effects. We planned a very detailed warm handoff and transition of our — from one team member to another. 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. 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. 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.

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. 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 volumes due to timing. The other thing that happened in the quarter is, as we made these changes, 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. And we had a higher percentage of attrition than we expected to have. 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, and we did expect to see attrition as a result of this change. But 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. So then we had customers that were uncovered for a period of time, and so we were missing some of that unplanned demand. So if you look at our op stats, you’ll see that despite the fact that this plan intended a reduction in sales head count of 130, I think we’re down 158 heads quarter-over-quarter. 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, and that’s what’s giving us confidence in April and May were just pushed out from where we had intended to be because of those 2 impacts. So as you look at March, I can use March as an example, we were looking for 2 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. So for example, we are — we consolidated legacy sales forces from 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. So for example, OEM — our OEM business is growing mid-teens in February, even higher in March.

So we’re having the behavior change that we wanted to see, which makes us confident in volume. And then we just — we 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, as I said in the prepared remarks, on customers that were impacted. Our core customer exited 2Q with positive volume, National Accounts was up low single digits in February and now mid-single digits month-to-date in March. 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. 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.

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 in the public sector and you’re looking at a gap of about 150 basis points. So we saw — we had what we believe was an outsized impact on volume, which is transitional, which is behind us, about 2/3 of that impacted National Accounts. 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.

Ryan Merkel: Got it. All right. That’s actually very helpful. And good to hear the National Accounts is recovering. Just a follow-up on price then. 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.

Martina McIsaac: 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%, 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 — we’re definitely seeing pressure. Those price increases probably will become effective sort of May, June. So we will likely have another pricing action around that time. We’re — 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.

Ryan Mills: And Ryan, this is Ryan. Just come over the top. We took a little surgical price increase in March, less than 1%, but as you think about 3Q year-over-year, the price benefit should be pretty similar to what we saw in 2Q, just to give you a little color on that.

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

Kenneth Newman: 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. 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?

Martina McIsaac: 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 of supply, but 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 want to make sure that their supply is secure. That’s what we’ve seen so far.

Kenneth Newman: 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? 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?

Martina McIsaac: So we don’t source tungsten, right? We resource carbide cutting tools. So 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 we’re tracking 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.

Kenneth Newman: Yes. 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?

Gregory Clark: Yes, Ken, I’ll give you a little color on that. The price increase we took in mid-January, we said low single-digit range. A good portion of that was on the cutting tool side. And as you heard Martina in the last question from Ryan, we anticipate some further pricing moves in the May to June time frame. I would say it would be a similar — it’d be a good portion on the cutting tool side.

Martina McIsaac: 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, there’s fuel surcharges and discussions. So it’s not only going to be carbide, I think, that we’ll see going forward. But that — up until this point, that’s been the big mover.

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

Thomas Moll: Martina, I want to make sure I heard you correctly, December was the last planned round of significant head count 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. 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.

Martina McIsaac: I appreciate the question, and I appreciate the comment that this is disruptive. We believe that it was 100% necessary. So we have to bring it to balance indirect resources versus direct resources. 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. New tools, new support like the growth forum, new compensation plan, which is very lucrative to the hunting behavior that we want. And it’s — I’m not going to 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.

And so I do believe we’ll still have attrition. Selling right now in MSC doesn’t feel like it did 6 months ago, and it doesn’t feel like it’s going to 6 months from now. 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.

Ryan Mills: 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. 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 mid- to high single digits. 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, the core is growing at a similar rate and National Accounts is up a little bit more than low single digits. So we’re starting to see that improvement now that Martina is alluding to.

Thomas Moll: So 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 want to slice it? Feel like things have gotten a little better or stay the same?

Martina McIsaac: Yes. 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, 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. 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. We’re seeing some beginning signs of life. Some of it may not impact us in our fiscal year because it will be — they’re sort of projecting changes and investments that will impact the back half of the calendar year, but we’re definitely — things are waking up and shaking up with some of our biggest National Accounts.

Operator: Your next question is from Patrick Baumann with JPMorgan.

Patrick Baumann: 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, 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, 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. 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?

Martina McIsaac: Yes. 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 and maybe for modeling purposes, Ryan, you can…

Ryan Mills: Yes, Patrick. Yes. So we start comping again some of our pricing actions here in 3Q, depending on the timing of the late May — May, June price increase. The comps get tougher in 4Q. So as you model the back half, I would — you’re exactly right, I’d stick in that 6.5% to 7% range on the pricing front.

Patrick Baumann: And is there any impact from like the evolving tariff situation on that in terms of the changes that have been talked about, IEEPA versus Section 122 or what have you?

Martina McIsaac: No. That — the math on that work out to be fairly stable for us right now. And remember, we’re not the Importer of Record for 3/4 plus of what we bring in. So we haven’t seen any meaningful movement on — from our suppliers right now. So right now, sort of modeling stability.

Patrick Baumann: Understood. And then a follow-up on the headcount. So 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 cost cuts from like redundancies similar to what you found in the second quarter? Do you think that this will be an ongoing lever in terms of OpEx opportunity? Or are we kind of like — I’m asking in context, you had a slide there for supply chain heads. I don’t know what’s in the other head count. So just trying to understand a little bit better like how you think the total head count will evolve over the next, I don’t know, 6 to 12 months or 24 months or however long you’re willing to talk about it?

Martina McIsaac: Yes, 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, 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. 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. 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.

So if you look, we brought the head count down by more than 400 heads in the last 12 months. The sales changes are done now, but we are making improvements in productivity within the CFCs, which is allowing us to bring head count down. We’re deploying AI across the business, which is letting us not replace attritted head count for the moment. But yes, we’re absolutely committed to challenging our cost structure.

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

Stephen Volkmann: Just a couple of quick follow-ups for 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, 2 years ago or something? I’m trying to think about whether there is going to be some demand destruction because the stuff is getting really expensive or maybe some sort of different product, maybe substitution or something? Just anything in those lines we should be thinking about?

Martina McIsaac: 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. 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, and it depends on what you’re doing and what you’re cutting. So I think, obviously, there is 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 2-year stack, maybe Ryan, I don’t know if I can throw that one over to you, do you have any additional comments?

Ryan Mills: 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. That being said, I think it provides a good opportunity for us to leverage our technical expertise, an ability to drive savings in customers’ facilities to offset that inflation. So we look at it as more as an opportunity and also you heard Martina talk about us building our inventory, availability is #1 priority of our customers. So we’re also taking advantage of that as well.

Stephen Volkmann: 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, 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.

Martina McIsaac: 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. 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 prebuy, 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. Now that as the conflict is escalating, obviously, you could imagine the end markets that might have a bit more demand right now. 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. So neither prebuy for price or restock.

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

Nigel Coe: Obviously, we covered a lot of the topics here. On the field office headcount, so just to be clear, are we assuming that the head count from here is fairly stable in the back half of the year? 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?

Martina McIsaac: Yes. 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 attritted 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 to the size of what we just cut. But Greg, do you want to share any additional color there?

Gregory Clark: Yes. I think what I can do is I can give you some color on just what happened in Q2 on the OpEx and then if there’s anything more I want to talk about Q3, Ryan can jump in. But just to give you some color on the OpEx, on a year-over-year basis, we did see the OpEx stuff up about $7 million. This was driven by — primarily by an increase in personnel-related costs of about $9 million. And 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 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. 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. 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.

Nigel Coe: Okay. That’s great color. Maybe we’ll dive into that weeds even deeper offline. I just want to 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 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. So I’m just wondering the 5% to 7%, obviously, a lot better than what we saw in 2Q, but does that assume that some of this volume attrition continues into the third quarter?

Ryan Mills: Yes. Nigel, this is Ryan. The March price increase, that was mid-March and keep in mind that we have to give notice period to our contract customers. 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%. So that would imply a little bit of volume growth year-over-year and then low single digits, call it, 2%, 3% on the top end of the range. Feel good about where we’re at right now, still had a little bit of some of this sales force optimization noise in March, but it’s easing. That’s giving us confidence. We talked about the growth rates we saw in March in core and National Accounts, that’s improving. As Martina mentioned, the impact of customers. We’re improving both month-over-month and year-over-year modestly in March. This is all month-to-date, but feel good where we’re at right now.

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

David Manthey: 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. So effectively, this statement on the fiscal year is a bet on June, July and August. 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 is 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?

Martina McIsaac: Yes. I mean I think, as I shared before, customers are mostly asking us right now to secure supply against an increasing demand that they feel they’re going to see. So they want to make sure that we are planning volumes that they’re imagining and understanding. So we haven’t seen a dampening of sentiment. And of course, the indexes wouldn’t show it yet.

Ryan Mills: Yes. Dave, the thing I’d add to is encouraging to see the MBI be above 50 for 2 consecutive months. That’s the first time over a multi-period. 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.

David Manthey: That’s good to hear. And then finally, I too, I’m trying to dimensionalize the impact of these headcount changes. So could you tell us when in the quarter the rift happened? 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 [Technical Difficulty] year-over-year and then adding those people back and then what’s the cost impact and you’re assuming no sales impact. So I’m sorry to ask it again, I’m just trying to really dimensionalize the changes.

Martina McIsaac: No. Thank you, Dave, for the question. And we — like I said, we 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. 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 because we did plan that overlap period. And when I say we’re going to backfill those roles, I mean, some of the attritted roles. We permanently contracted the sales force by 130 people. 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 planned for in this change.

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. We had planned a longer transition period, but I would say that by mid-January, all of those heads were out, and those were only a very few exceptions that we had to make just because of the longer handover period. It mostly happened in sort of early December.

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.

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 third quarter will be on July 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.

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