Good morning, and welcome to the MSC Industrial Supply Fiscal 2025 Second Quarter Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. For webcast listeners, we have become aware of an issue accessing the three supporting files, including the earnings presentation and the operating statistics. We are currently working on resolving the issue. Please email Ryan Mills at [email protected] to request materials. I would now like to turn the conference over to Ryan Mills, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to our second quarter fiscal 2025 earnings call. Erik Gershwind, Chief Executive Officer; Martina McIsaac, President and Chief Operating Officer; and Kristen Actis-Grande, Chief Financial Officer, are on the call with me today. During today's call, we will refer to various financial data in the earnings presentation and operational statistics documents, both of which can be found on our Investor Relations website. 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. Lastly, during this call, we may refer to certain adjusted financial results, which are non-GAAP measures. Please refer to the GAAP versus non-GAAP reconciliations in our presentation or on our website, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. I'll now turn the call over to Erik.

Thank you, Ryan. Good morning, everyone, and thank you for joining us. On today's call, I'll briefly cover our fiscal second quarter performance, then offer my perspective on the state of the company and the current macro environment before turning things over to Martina and Kristen. Our fiscal second quarter results highlight that while the demand environment remains soft, we are taking measured steps towards improving execution, and returning the company to growth. Average daily sales declined 4.7% year-over-year although we were encouraged to see trends improve through the quarter, with January and February outperforming historical sequential averages. Gross and adjusted operating margins both came in towards the high end of our expectations, driven by solid execution and some favorability in supplier rebates during the quarter, that Kristen will speak to in more detail. I'll begin by focusing on what is most in our control, execution. There is certainly more wood to chop or in our case, more metal to grind, but we are making progress in improving execution along several dimensions which I'll describe in more detail. We set out to complete a handful of important initiatives in the second quarter, and I'm pleased with how our team rose to the occasion and delivered. First, we continue to maintain momentum in our high-touch solutions. On a year-over-year basis, we improved our in-plant program count by 24% to 387 programs, and total installed vending machines by 9% to over 28,000 machines. While growth rates in many of these customers are suppressed due to soft demand conditions, we believe that the ongoing expansion of our solutions footprint positions us to benefit with a strong volume rebound when the demand environment improves. Second, we took important steps to reenergize our core customer growth. I'll begin with the website upgrades that were completed during the latter half of our fiscal second quarter. As a reminder, these enhancements were focused on making it faster and easier for customers to do business with us, improving our product discovery platform, streamlining our customers' buying journey, and increasing personalization. The recent upgrades serve as a strong foundation that we'll build upon. We've included several slides in the presentation to highlight these changes. Starting with Slide 4, one of our biggest priorities was improving search or product discovery. We want the site experience to reflect the technical expertise that MSC delivers to our customers every day. Achieving this requires a search platform that is built by technical experts who understand the product, the customers' buying journey, and their native language and industry terms. And that is our objective with the new search function. Based on customer sentiment and early indicators, we're off to a good start. We're also aiming to make the search experience more visual, as we did with MSC's print catalog, the Big Book. What you see here is our newly created table view that we began rolling out across our good, better, best offerings, to make it easier for customers to compare products when making a purchasing decision. Customers also want the experience to be fast and simple. We made significant improvements towards that end to our checkout experience. As you can see on Slide 5, our new single-page checkout has reduced the average number of clicks to complete a purchase by about 50%. In conjunction with the completion of our web upgrades, we also launched our enhanced marketing efforts during the quarter, which Martina will cover in more detail. And while it's still early days, we're encouraged by initial progress on several leading indicators. We're seeing increases in new customer acquisition, in mscdirect.com traffic, average daily website revenues, and improvements in several website KPIs. We also continued momentum in one of our other growth priorities, expanding the OEM product line. Average daily sales grew 4% in our fiscal second quarter, aided by a growing cross-sell pipeline. Switching to the macro environment, as you can see on Slide 6, the IP readings across most of our top manufacturing end markets continue to contract and weigh on our performance against the overall index. Customer sentiment and future outlook have been improving as is evidenced by recent MBI readings, which have hovered around 50 for the past couple of months. For now though, there remains hesitancy and caution among our customer base around future production levels due to tariff uncertainty, potentially looming inflation, and sustained high interest rates. We feel well positioned, however, to navigate this uncertain environment for a number of reasons that Martina will explain in just a second. In summary, while the near-term remains choppy, the combination of a solid long-term manufacturing outlook, improving execution, and a robust portfolio of tools to help our customers during these uncertain times leaves us feeling encouraged about our future prospects. And with that, I'll turn the call over to Martina.

Thank you, Erik, and good morning, everyone. I'll begin by describing how we're navigating the tariff landscape. As a reminder, our direct COGS exposure to China is approximately 10% and we have low single-digit exposure in Mexico and Canada. While the tariff situation remains fluid, we are confident that we have a playbook in place, which covers all aspects, including purchasing, pricing, assortment management and productivity tools for customers. We continue to execute on all areas of that playbook. First, in purchasing, we took advantage of our strong balance sheet and accelerated purchases ahead of tariffs on our higher turn products during the quarter. Second, in pricing, we've taken select tariff-related price increases in late March and will continually evaluate additional moves as warranted. In assortment, our intentional sourcing efforts over the years have resulted in a diverse product offering that we will lean on now as we assist customers in working through impacts from tariffs. As shown on Slide 7, we offer over 200,000 Made in USA products that are in stock and ready to ship. Of those, 40,000 are our own exclusive branded products, including well-known brands such as Accupro and Hertel. Not only are these products at lower price points than most industry brands, they're also gross margin accretive. We believe that our Made in USA product offerings, combined with our technical expertise and proven track record of delivering productivity to our customers will further differentiate MSC in the marketplace as our customers seek to navigate this changing landscape. As Erik previously mentioned, we also kicked off our enhanced marketing efforts this quarter, and our Made in USA portfolio is featured as a component of that messaging. We are expanding our reach through several high-return marketing outlets resulting in increased traffic to our website. As it pertains to our productivity support to customers, the traffic has exceeded our expectations. For example, views in the first three months of our new cost savings case studies page on mscdirect.com increased around 60 times compared to the prior three months before launch. Now, let me turn to an update on our productivity initiatives. First, progress on the initiatives designed to maximize coverage and seller effectiveness remains on track. In the public sector, we completed this work prior to the start of the fiscal year, and we're pleased with the double-digit growth we achieved in the second quarter. This work was completed for national accounts just prior to the quarter's start. Implementation in field sales targeting the core customer was completed last month and is ahead of schedule. However, given the unusually soft December and our typical 2Q sequential decline, benefits from the completion of these actions are difficult to see in our quarterly results. However, I have confidence when looking at our national account and core customer performance during the last two months of the quarter and into March. In addition to structural change as we focus on core growth, we're increasing our use of marketing automation and AI to support our sellers. Our customer care center, for example, is harnessing advanced technology to better execute on opportunities to both upsell and cross-sell. And lastly, we're pleased with the progress of our network optimization initiatives and remain on track to deliver $10 million to $15 million in annualized savings by fiscal year '26. As a reminder, this will be achieved through three critical actions. Consolidating demand planning and procurement functions to streamline the supply chain of our OEM and C part categories, upgrading our use of technology and our system-wide inventory planning and allocation to ensure that we have the right inventory close to the customer, reducing working capital cost in carbon. And third, acting on opportunities to optimize our management of inbound and outbound freight by reducing split shipments and reliance on air freight through more sophisticated demand planning. And with that, I'll turn the call over to Kristen.

Thank you, Martina, and good morning, everyone. Please turn to Slide 8, where you can see key metrics for the fiscal second quarter on both a reported and adjusted basis. Fiscal second quarter sales of $892 million declined 4.7% year-over-year. Sequentially, average daily sales declined 5.5% despite January and February exceeding historical month-over-month trends. By customer type, we were pleased with another quarter of strong growth in the public sector with 13.2% improvement year-over-year. National accounts declined 5.4% year-over-year, while core and other customers declined 6.8%. However, as Martina mentioned, both customer types improved as the quarter progressed. We continued to expand our solutions footprint in the second quarter. Despite soft industrial demand and a particularly weak December from a shift in holiday timing, we are encouraged by the continued growth in our installed base. In vending, second quarter average daily sales were up 1% year-over-year and represented 18% of total company net sales. Sales through our in-plant programs also grew 1% year-over-year and represented approximately 18% of total company net sales. Moving to profitability for the quarter. Gross margin of 41% declined 50 basis points year-over-year, driven by higher priced inventories working through the P&L, customer mix, and a slight headwind from acquisition. The 30 basis points of sequential improvement in our gross margin was driven by a greater than expected benefit from supplier rebates due to accelerated purchases at calendar year-end. Operating expenses in the fiscal second quarter were approximately $302 million on both reported and adjusted basis. On an adjusted basis, operating expenses were up approximately $11 million year-over-year as productivity improvements were more than offset by the combination of personnel-related costs, investments, and higher depreciation. Combined with lower sales year-over-year, this resulted in a 270 basis point step-up in adjusted operating expense as a percentage of sales for the quarter. Sequentially, adjusted operating expenses were down $2 million and performed better than expected. This decline was primarily driven by lower variable expenses associated with the decline in sales, and benefits from productivity that were partially offset by an increase in personnel-related expenses. Reported operating margin for the quarter was 7% compared to 9.7% in the prior year. On an adjusted basis, operating margin of 7.1% declined 340 basis points year-over-year. We delivered GAAP earnings per share of $0.70 compared to $1.10 in the prior year quarter. On an adjusted basis, earnings per share was $0.72 compared to $1.18 in the prior year. Now, let's turn to Slide 9 to review our balance sheet and cash flow performance. We continue to maintain a healthy balance sheet with net debt of approximately $498 million, representing roughly 1.2 times EBITDA. Working capital was a use of cash in the quarter with the step-up in inventories being one of the primary drivers. However, operating cash flow conversion remained strong in the quarter coming in at 139%. Capital expenditures increased approximately $4 million year-over-year to $30 million. This resulted in free cash flow conversion of approximately 63% in the fiscal second quarter, and 125% fiscal year-to-date, keeping us on track to achieve our 100% target for the full year. Turning to capital allocation on Slide 10. Our priorities remain the same, with organic investment to fuel growth and operational efficiencies being first in the pecking order. Additionally, we will continue to pursue our strategic bolt-on M&A strategy and return capital to our shareholders. We repurchased approximately 158,000 shares during the quarter, following the 219,000 of shares repurchased last quarter. Combined with the dividend, we returned approximately $60 million to shareholders in fiscal 2Q and $125 million year-to-date. Moving to our expectations for the fiscal third quarter on Slide 11, we expect average daily sales to be down 2% to flat compared to the prior year. Our expected range takes into consideration sales in March that improved approximately 1.3% year-over-year, inclusive of an estimated benefit of 200 basis points from the timing of Easter that will become a headwind in April. Under this revenue assumption, we expect our adjusted operating margin in the fiscal third quarter to be between 8.7% and 9.3%, and reflects the following quarter-over-quarter or sequential assumptions. Fiscal Q3 gross margin of 40.9%, plus or minus 20 basis points as second quarter benefits from supplier rebates won't likely repeat in the third quarter, and largely offset any benefits from price sequentially and a sequential step-up in adjusted operating expenses, primarily driven by higher variable expense associated with the expected sequential lift in sales in our 3Q outlook. Turning to Slide 12, our expectations on certain line items for the full year remain unchanged. As a reminder, this includes depreciation and amortization expense of $90 million to $95 million for an increase of $10 million to $15 million year-over-year, interest and other expense of roughly $45 million, capital expenditures including cloud computing arrangements of $100 million to $110 million, a tax rate between 24.5% and 25% and lastly, free cash flow generation of approximately 100% of net income. To assist in modeling the cadence of sales for the remainder of the fiscal year, the bottom of the slide provides historical quarter-over-quarter averages and other key considerations. And with that, we will open the line for Q&A.

The first question today comes from Ryan Cooke with Wolfe Research. Please go ahead.

Good morning, and thank you for taking my questions.

Good morning, Ryan.

Maybe we can start on the top-line guide. I'm curious about your thoughts on the second half of the year. In March, we saw a decline of about 70 basis points when adjusting for Easter, which suggests that ADS will likely be flat in the third quarter, reflecting typical seasonality in April and May. Does the guidance indicating a decline of 0% to 2% take into account any softening in the end markets at the lower end? Additionally, can we expect the fourth quarter to show positive year-over-year growth, consistent with normal seasonal patterns?

Yeah, I can start with that, and Erik, feel free to jump in with any color more broadly that you want to add. So, I agree with your comment, Ryan, on how to think about March and your comment about the implication on the midpoint guide for April and May. We're not necessarily assuming significant further erosion anywhere at this time. I think we're very cautious about the end markets. If you look at how the sequencing in the quarter would play out relative to Q1, it basically assumes that we're fairly flat with Q2 into Q3. Obviously, some things that we would expect to come online that are going our way with the share gain initiatives, we're not contemplating much improvement in the top line from pricing-related to tariffs at this point. So I think we are leaving some room for some potential softening in the macro, but we're very focused on delivering on the share gain initiatives right now, which we're feeling confident about coming out of the second quarter.

Okay. That all makes sense and it's very clear. And maybe we could just touch on the moving pieces for margins in the back-half next. I know you called out the 20 basis point sequential headwind for supplier rebates that won't be repeating, but I guess anything else you'd note in the bridge? I think you had previously mentioned a framework for kind of 8% to 10% incremental OpEx on the first half or second half sales. So, would that still be the case? And I think that pencils out to about 8% operating margin this year.

I see the main factor influencing operating expenses as we move through the third and fourth quarters is the variable expense. There are other elements fluctuating, but if you're looking for a straightforward way to estimate operating expenses, that's it. I want to clarify that the 8% to 10% variable expense related to changes in your revenue excludes any additional costs for tariffs at this stage. This is our current approach to guiding on operating expenses, although we are not providing a specific number for the fourth quarter. I hope this gives you some useful context regarding the sequencing.

Yes, that does. Thank you. I'll turn it over.

The next question comes from Tommy Moll with Stephens. Please go ahead.

Good morning, and thank you for taking my questions.

Good morning, Tom.

Good morning, Tommy.

You mentioned some price increases announced in late March. And I was hoping to just get more detail there. Magnitude, scope, likelihood after yesterday's announcement that you'll need to circle back for more? Anything you can give there would be helpful. Thank you.

Yes, Erik, would you like to start broadly, and I can provide some details about March or Martina, whoever wants to jump in? I'll begin by addressing your question, Tommy. Then, Martina, I'll hand it over to you to discuss what we're doing. Your direct question regarding the March increase is noted. This situation is quite fluid, and we received considerable new information yesterday. The increase we implemented in late March was minor, primarily covering items where we are the importer of record, specifically for products coming in from China. To quantify that, it provides about a 0.5 point price benefit on the top line. We do not anticipate seeing much of that benefit in the third quarter, but everything is still evolving. The modeling right now is challenging, and "fluid" is the best way to describe the current situation. Martina will provide some additional insights, but we lack firm information from our suppliers concerning costs or timing, which are crucial variables for our modeling. We have been running a thorough scenario planning process while keeping an eye on the developments, making decisions based on when increases become clear. We will continue to update you as more information becomes available. As for the cost and price considerations related to tariffs, it is further complicated by second-order derivatives that are difficult to forecast, such as potential changes in product mix or demand levels. These are aspects we need to analyze further in our scenario planning. Martina, I know you are coordinating our efforts closely, so please chime in for additional details.

In light of the recent news, let me summarize our product sourcing. Over half of our products are sourced in the US, with around 10% coming from China and a similar amount from Europe. We also have low single-digit percentages from Canada and Mexico, along with a few other countries. It's important to note that we are not the importer of record for all of these products. Approximately 75% of our sales are from industry brands supplied by others. Currently, suppliers are managing this situation in a few different ways. As Kristen mentioned, we are clearly the importer of record and know the applicable tariff, which was reflected in the price increase enacted at the end of March. Some suppliers are bringing in finished goods and have been clear in their communication, using a surcharge format that helps us model their impact. However, most suppliers are dealing with multiple overlapping tariffs, which complicates their pricing. They are still calculating the potential effects, and we received new information yesterday. While negotiations are ongoing, they haven’t provided us with specifics on size or timing yet, but indicate that a general price increase across their entire product range is likely, rather than a visible surcharge. In the meantime, we are following our established plans and helping customers evaluate their product mix and explore potential shifts towards American-made products, as well as assisting them in improving productivity to counteract any tariffs.

Thank you both. As a follow-up, I wanted to touch on the web enhancements and recent marketing initiatives. Correct me if I'm wrong, but it seems like the takeaway there for this quarter is on track. But I wanted to go a little bit deeper if there are specific areas of the programs that you could highlight as progressing ahead of plan and then the flip side, are there any areas that are proving a little more difficult than anticipated, maybe behind plan? And if you just think ahead, what would you frame for us as to what's to come here? Thank you.

Good morning, Tommy. It’s Erik. I think you’re right. I would say progress is on track. As mentioned in the prepared remarks, we were pleased to accomplish many objectives in Q2. Overall, everything is on track, and I wouldn't point out any areas where we’re falling behind. Last year, we had some issues to address, but I believe we’re executing our plans well. Progress has generally been encouraging, and while our performance will be affected by macroeconomic factors, our focus remains on what we can control. We aim to deliver on our promises and monitor key performance indicators, which are currently favorable. This quarter has been solid for us. Each area we’re working on is ongoing; for example, the web upgrades created a strong foundation for our product roadmap. On the marketing side, we've started strong and are gaining traction, with new customer acquisitions showing positive signs. There’s more growth ahead. Additionally, in sales optimization, we’re ahead of schedule in implementing our strategies, and now it’s about turning those efforts into results. Overall, I believe we’re on the right path and expect core customer growth to improve, though external factors will still play a role in that improvement.

Thanks, Erik. I'll turn it back.

The next question comes from Ken Newman with KeyBanc Capital Markets. Please go ahead.

Hey, good morning, guys.

Good morning, Ken.

Good morning.

Good morning. So, for my first question, Erik, it doesn't seem like you guys are seeing any pre-buy activity at least through the quarter, but I'm curious if you're getting a sense that some of these customers, they've been trying to get ahead of yesterday's announcement, and if that's being reflected in the preliminary March numbers?

Ken, we have not seen any evidence of significant pre-buying activity to date, including in March, partly because our customer spending is spread across many different SKUs.

Okay. And then maybe quickly for my follow-up here. Totally get that the visibility in the cycle is limited just given all the moving pieces. But maybe if we could just dig a little deeper into the individual end markets from a manufacturing perspective, I know automotive and aero are two of your larger ones. I think they're both 10% each direct. Obviously, we've got some news on the tariff side from automotive, some incremental stuff there yesterday as well. Any high-level thoughts on how you're thinking about those end markets in particular and how you're looking to navigate some of these moving pieces?

Sure, Ken. I'll address that as well. The main point is that Q2 has been weak for heavy manufacturing, which is evident in the IP metrics we mentioned. However, it's important to note that there has been steady improvement throughout the quarter, extending into March across most heavy manufacturing end markets. While the overall situation is soft, we are seeing gradual improvements in nearly all areas except for automotive and heavy trucks, which remain quite weak. Predicting future trends is extremely challenging at this moment. Automotive has been struggling, and recent news might negatively impact that sector further. Conversely, the aerospace outlook appears to be strong. Overall, the mood is soft but has shown improvement over the last few months, with significant uncertainty regarding how recent events will unfold.

The next question comes from Stephen Volkmann with Jefferies. Please go ahead.

Hi, good morning, guys. Thanks for taking the question. I’m just, I was curious…

Hey, Steve.

A little surprised to see that your pricing was down slightly in the quarter. Can you just talk about sort of what's happening there and what you expect maybe for the third quarter?

In the second quarter, we observed a healthy mix affecting our pricing figures, influenced by how customer sector mix plays into the calculations. We analyze pricing in several ways, and when looking at the same customer and same item, we found more favorable pricing. However, this was obscured in our overall reporting due to customer type mix. Regarding the third quarter, last year we faced challenges with the web price realignment, which will provide us with a year-over-year tailwind of around 30 basis points. This means that with a gross margin midpoint guidance of 40.9%, we would expect it to be flat compared to the prior year. Specifically, we have a 30 basis point tailwind from the price/cost lapping due to the web price realignment, and we anticipate some additional improvements from productivity and a slight benefit from tariffs, estimated at about 10 to 20 basis points. However, we also expect ongoing mix headwinds, and there are some challenges from acquisitions made since last year that will largely offset these gains, resulting in a midpoint gross margin that is expected to be about flat for the third quarter.

Great. Okay. That's super helpful. Thank you. And I apologize, this question might be a little bit too theoretical, but I've been trying to think about price/cost from a bigger perspective. And obviously, you and lots of distributors benefited in terms of gross margin from our last bout of inflation. However, that was also against the backdrop of very strong demand. So, I'm trying to figure out sort of how you look at price/cost assuming that we're headed into an inflationary period. Are you going to be able to sort of get ahead of that and get a little bit of gross margin benefit from this as it happens or is that going to be tougher this time because we're not in quite as big a demand environment?

I appreciate the question, Steve. Everyone is trying to understand the situation, and it’s definitely fluid, as Kristen mentioned. However, we still believe that inflation, especially in the early stages of a cycle, is generally beneficial for distributors like us. We expect to be able to pass on pricing as we have in the past. Martina pointed out that this time we are focusing on our product offering, which includes a reduced exposure to China and a strong Made in USA portfolio, as well as our productivity strategies to serve our customers. Despite the demand environment, we believe these aspects will support our ability to implement pricing. That said, it’s challenging to compare to previous cycles because we are navigating unfamiliar territory, especially with how quickly things are changing and the broad scope of the situation. Nevertheless, we do expect to achieve positive price-to-cost margins, as we have in past cycles, particularly in the early stages of inflation.

Much appreciated. Thanks.

The next question comes from Chris Dankert with Loop Capital Markets. Please go ahead.

Hey, good morning. Thanks for taking the questions.

Good morning, Chris.

I guess, Erik, maybe just to dig in a little bit more on the digital KPIs, any update on the conversion ratio order size, something that can kind of put a little more meat on the bone for what we can expect sales in the future maybe here?

Yes, Chris, that's a great question. We mentioned some of the indicators we're monitoring, including certain website key performance indicators, which we prefer to keep confidential for competitive reasons. However, you highlighted two critical ones we’re focusing on: conversion rate and average order value. Conversion rate, in particular, provides valuable insight into our site's performance, and we have observed some improvements. It's still early in the process since most significant upgrades, which you noted in the slides, were implemented late in Q2. We are beginning to notice positive momentum in these indicators, and we're also seeing sequential increases in website revenues. However, I would consider revenue to be a trailing indicator, whereas conversion rate and average order value serve as leading indicators, and we're starting to see some progress there.

Got it. Got it. Good news there, I guess. And then I'm going to ask an unfair question, I guess, just conceptually, is there any way to size what percent of your sales are tied to customers who are exporting product here? I mean, it's been a bit, but it seems like trade wars are just going to accelerate. What's the risk of those customers having to pull-back? Just any way to size the export exposure here?

That would be a tough one to size. I understand your concern if things were to escalate. The short answer is that it’s difficult to quantify. Reflecting on previous cycles, if there were a trade war, we would see an impact on demand and production in the US, which we have observed before. In past cycles, it hasn't only been about tariffs; currency fluctuations have also affected production. Therefore, there would indeed be an impact. Generally speaking, there has been a shift back to producing in the USA to bring production closer to end markets, which may help reduce some of the effects because more products would be made for this market rather than being exported. However, if export demand weakens, we would definitely feel that here.

Understood. Really appreciate your thoughts there.

I'm sorry. I realize that's qualitative, not quantitative.

Chris, going back to your previous question on the web enhancements, just to give you a size. If you look in the e-com stats, we have the e-com sales. About half of that is website sales, just to give you an idea on the size of our website.

Thanks, Ryan.

The next question comes from David Manthey with Baird. Please go ahead.

Thanks. May you live in interesting times, right?

You ain't kidding, Dave, especially with the timing of this call.

Good morning. My question is about performance compared to IP. It seems like there has been a further decline this quarter. Even when looking at the five major industries in IP, it appears that your market share is shrinking significantly. Kristen, you mentioned in your comments that you are confident in your efforts to gain market share. Could you provide an outline of which initiatives are expected to start making an impact on reducing that gap in the upcoming quarter or two?

Sure, I'll take that. Let me break it down into two parts: confidence in executing on our commitments and the early signs indicating that our initiatives will have a positive impact. You're correct in noticing that we have seen some improvements, particularly as we moved through the quarter and into March. For example, if we focus on our performance in the last two months, you would notice significant differences. December was heavily impacted by holiday timing, and the start of January was particularly challenging, possibly due to weather-related issues. However, the situation improved in the later part of January through February and now into March. I acknowledge that we have underperformed partly due to our portfolio mix and our own actions, particularly concerning our core customer base. We've identified four key areas to address: web pricing, e-commerce, marketing, and sales optimization. We're nearing completion on web pricing, and the major work for e-commerce is now done. Marketing efforts are currently underway, and we are wrapping up sales optimization. We believe we are just beginning to see the benefits of our efforts. From an execution perspective, we are on track with our plans, and the leading indicators look promising. February and March may show early signs, but we need to see continued progress moving forward.

That's great, Erik. Thank you. Yeah.

One point of clarification from what Erik said too, like if you go and you look at that year-over-year performance that Erik referenced like in January, February and into March, that's a true statement for core and national accounts like within that, which obviously are two areas that we're really focused on right now.

Yeah. Thanks, Kristen. That leads me to my next question. I know it's hard to think about anything in a vacuum right now, but could you talk about the effect on gross and operating margin as the shift towards vending and in-plant happen? And then you also have this effect of core customer reacceleration you just mentioned. Where should we think these things net out over the next, say, two to three years, not just near-term?

Yeah. So, just to make sure I understand your question, Dave, you're saying long-term impact from growth of in-plant and you said something else after, was it in-plant vending?

Yeah, in-plant vending and then there's the impact also of the core customer reacceleration, I would imagine.

Yes, I understand. Starting with gross margin, in the in-plant and vending sectors, we observe an increase in participation from national accounts. However, these national accounts typically have a lower gross margin compared to our company average, which creates some downward pressure on gross margins. As these accounts mature, their impact on margins begins to stabilize and can eventually enhance operating margins, particularly in relation to our current situation. Our primary focus remains on core customers, who typically enjoy a higher gross margin and lower support costs, making them beneficial for operating margins. This has been an ongoing challenge affecting our operating profit levels, and it represents the area where we've experienced the most sluggish growth over the past 18 to 24 months. While we haven't provided specific guidance on the desired revenue mix between these segments, we anticipate that core customer growth will accelerate more quickly than that of the in-plant vending businesses, which have continued to perform relatively well despite overall declines in company growth.

And Dave, I'm just going to chime in with one more point on in-plant and vending. And particularly, this impacts like our outlook, hopefully what you're hearing from us is obviously some near-term caution in terms of the environment, but encouraged by improving execution. And if we get past '25 and the end-market outlook is sound, the picture for '26 and '27, why we're encouraged. So, in-plant and vending, Kristen mentioned the gross margin percentage headwind. When these programs are fully in place, the op margins are strong. They are though subject to when you put an in-plant program in or a vending program into a customer, and the economy softens and their spend reduces, there's an element of fixed cost there, because you have a person, you have depreciation on a machine. These are very sticky relationships. And so, what we're living with now is the fixed cost for those programs and you could hear like the program counts are way up and yet the program revenues are up 1%. Obviously, on a per machine, on a per site basis, they're down because things are soft right now. It is part of the bullishness, if you will, for us looking out because beyond core customer reacceleration, we should get a strong rebound here and the cost structure on those accounts is pretty fixed. Other than a little bit of variable cost, we get the benefit of existing accounts coming back online with the same costs in place, and we get the benefit of an expanded footprint. So, all of that is what has us sort of encouraged and excited about the outlook when we get beyond '25.

Thank you, and good luck.

Thanks, Dave.

The last question today comes from Patrick Baumann with JPMorgan. Please go ahead.

Hi, good morning.

Good morning, Pat.

Good morning, Pat.

I just have a few quick questions regarding the price increase implemented in March. I would like to understand the tariff rates you were aiming to counter. You mentioned it was related to China, but prior to yesterday, there were 20% tariffs on Chinese goods and 25% Section 232 tariffs. Therefore, I'm curious why this results in only a 0.5% impact if China accounts for 10% of costs of goods sold. I might be missing something straightforward here and would appreciate clarification. Additionally, could you provide some details on the types of products you import from China? Are they specific to maintenance, repair, and operations, or is there a focus on metalworking? Any insight on that would be helpful.

On the first part of your question, Pat, you are correct about the known tariffs at the time. To clarify, the 10% of COGS in China refers to the total COGS tied to the country of origin, not necessarily where we are the importer of record. We will likely need more information from our suppliers, which means there may be additional updates as we better understand the overall situation. This relates to the aspects that are still being quantified, which I mentioned earlier in response to one of the prior questions. Can you please repeat the second part of your question again? What products did you import from China?

Sure. I can clarify. But, so basically, you're saying that you're less than 5% of your COGS is where you're an importer of record from China is basically what you're saying?

That would be the way to interpret that.

Okay. And then the types of products you're bringing in from there.

Yeah, the types of products, yeah, it's a broad spectrum, Pat, which is probably not a surprise just considering how much is coming out of China. Martina or Erik, do you want to jump in on anything we're more overweighted to, but it really is about every product line or some portion of that coming out of China.

Yeah. And I would say more towards MRO than metalworking. You heard Martina reference our private brands in metalworking, which are pretty robust, a good portion of which are sourced domestically. So, it would be more MRO, Pat.

Okay. That's helpful. My second question is regarding the 4% decline in e-commerce sales for the quarter. You mentioned earlier that the website accounts for half of that category. Could you provide some insight on how website sales are performing year-over-year? Additionally, in the operating statistics, there's an "other" category that made up 10% of sales this quarter, compared to 13% last year and 14% in the first quarter. This suggests it was down 25% year-over-year and 30% sequentially. What is going on with that "other" category in the operating statistics?

Sure, let me address the first part of your question regarding e-commerce and then I'll discuss the operating statistics. Regarding the e-commerce numbers, I won’t get into the performance specifics of mscdirect.com for the quarter. However, I can say that at the end of December and beginning of January, we noticed some declines in e-commerce which affected those figures. It's important to remember that e-commerce encompasses a wide range of areas. For instance, when we experience significant growth in public sector transactions or in businesses that rely less on e-commerce, this affects our reported numbers since we present them as a percentage of total revenue. The public sector, in particular, sees less electronic ordering and thus less e-commerce activity. Now, concerning your question about the operating statistics, there are many industries that contribute to the 'other' category with very low exposure, which we estimate to be below 3%. Additionally, as we refine the classification of certain end markets, some customers may be reassigned, leading to fluctuations in that category. Therefore, I would advise against making strong conclusions about the decline in the 'other' category without considering these factors.

Okay. Understood. Thanks a lot. Best of luck. I appreciate the time.

Thanks, Pat.

Thank you for joining us today. As Kristen mentioned earlier, we will be on the road in May at the Wolfe Research Conference and the KeyBanc Capital Markets Conference, and we will host our fiscal third quarter 2025 earnings call on Tuesday, July 1st. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.