Good morning, and welcome to the MSC Industrial Supply Fiscal 2025 Third Quarter Conference Call. Please note this event is being recorded. 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 Fiscal Third Quarter 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 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 is 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 will now turn the call over to Erik.

Thank you, Ryan. Good morning, everyone, and thanks for joining us. On today's call, I'll cover our Fiscal Third Quarter performance. I'll provide an update on our strategic initiatives and the state of MSC before wrapping up with my perspective on the operating environment. I'll hand the call over to Martina, who will give a progress update on our sales optimization initiative, our productivity efforts to lower our cost to serve and our tariff management plan. Kristen will then review our Fiscal Third Quarter financial performance in more detail and provide our outlook for the fiscal fourth quarter before opening up the line for questions. As a reminder, throughout fiscal 2025, we've been focused on strengthening execution in three critical areas: one, reenergizing the core customer; two, maintaining momentum in our high-touch solutions; and three, optimizing our cost to serve. Our fiscal third quarter results reflect progress across these fronts. Average daily sales or ADS for the fiscal third quarter declined 0.8% year-over-year, which was slightly above the midpoint of our outlook. Additionally, average daily sales improved 7% quarter-over-quarter, exceeding historical 2Q to 3Q sequential averages. Gross margins also came in at the higher end of our expectations as we navigated tariff-driven inflation to produce positive price/cost. This resulted in reported and adjusted operating margins of 8.5% and 9.0%, respectively. Our adjusted operating margin was up 190 basis points sequentially and at the midpoint of our outlook. While there is certainly plenty of room for improvement, our fiscal third quarter performance reflects progress in several areas. This includes an encouraging start to our newly launched growth initiatives and sustained momentum in our high-touch solutions. I'll now provide some more color. First, reenergizing the core customer was one of our highest priorities entering fiscal '25. Early evidence began to emerge in fiscal 3Q as core customer daily sales were down 0.8% year-over-year, in line with results for the total company and our best performer sequentially. This was also supported by our recent web enhancements which were aimed at making it faster and easier for customers to do business with us, enhancing our product discovery platform, streamlining our customers' buying journey, and increasing personalization to better meet specific customer needs. Additionally, we're seeing encouraging progress in our site conversion rate metrics. These improvements were supported by our enhanced marketing and sales force optimization efforts, which Martina will cover in more detail momentarily. Second, as I mentioned earlier, we are maintaining momentum in high-touch solutions. On a year-over-year basis, we improved our In-Plant program count by 23% and the installed base of our vending machines by 9%. Additionally, expanding our OEM product line remains a focus area where we continue to make progress. Average daily sales in OEM improved low single digits year-over-year. Moving on from the numbers. I'll highlight another priority, which is building out our leadership depth. During the quarter, we added John Reichelt to the MSC team as our Senior Vice President and Chief Information Officer. Given John's track record at TriMark USA, Aramark and Procter & Gamble, I'm confident that he will play a successful part in advancing MSC's business technologies and our overall capabilities. Switching now to the macro environment, conditions in our manufacturing end markets remain subdued. Most of our primary end markets remain soft, including automotive and fabricated metals that continue to contract as reflected in the IP index. Aerospace remains a bright spot with continued growth and a strong outlook. The more broad-based softness we're seeing is reflected in sentiment readings, such as the MBI. After turning positive in March for the first time in nearly 2 years, MBI readings returned to negative numbers in April and May, reflecting customer caution around tariffs and general uncertainty. While this short lull in activity was followed by improving trends in May and those that continued into June, there remains hesitancy and caution among our customer base around future production levels. That said, we are encouraged to see our performance gap improve against the overall IP index as we outperformed in three of our top five end markets. Regardless of the macro conditions, we remain confident in the opportunity in front of us and steadfast in the commitment to our plan. With that, I'll now turn the call over to Martina.

Thank you, Erik, and good morning, everyone. I will begin by covering our growth initiatives in greater detail. As Erik mentioned, the expansion of our solutions footprint continued in the fiscal third quarter. The biggest change in our fiscal third quarter was in the expanded coverage in core field sales. The number of customer location touches logged by field sales grew low double digits year-over-year and low single digits quarter-over-quarter. Improvement in these areas is reflected in our sales per rep per day trend, which was down low single digits year-over-year compared to down high single digits in the first half of the fiscal year. Our marketing campaign, which encompasses both digital and personal outreach is also off to a positive start. The return on digital product marketing spend showed an improvement in the 20% range quarter-over-quarter. We are also confident in our ability to mitigate the potential impact of tariffs. Since our tariff-related price increase in late March, we took minimal further actions during the quarter. We continue to view tariffs as an opportunity to strengthen our relationships with customers and MSC's position in the marketplace. As a result, our Made in USA offering is beginning to gain traction as the daily sales of these products were up year-over-year and outperformed total company sales on a sequential basis. We intend to continue using this as a lever to gain share of wallet and attract new customers. We remain on track to deliver $10 million to $15 million in annualized savings by fiscal year '26. And with that, I will turn the call over to Kristen.

Thank you, Martina, and good morning, everyone. Please turn to Slide 6, where you can see key metrics for the fiscal third quarter on both a reported and adjusted basis. Fiscal third quarter sales of $971 million declined 0.8% year-over-year as lower volumes were largely offset by benefits from price of 80 basis points, and acquisitions, which contributed another 60 basis points. On a sequential basis, average daily sales improved 7% quarter-over-quarter and outperformed historical sequential averages. Looking at average daily sales by customer type, we were encouraged to see improvement in both the year-over-year and 2-year stack performance of our core and national account customers. Core customers declined 0.8% year-over-year, while national accounts declined 1.7%. Public sector continued its trend of delivering year-over-year growth and improved 2.4% in the quarter. Moving to profitability for the fiscal third quarter. Gross margin of 41% improved 10 basis points year-over-year as benefits from price, inclusive of mix, more than offset headwinds from higher cost inventories working through the P&L and lower-margin acquisitions. Reported operating margin for the quarter was 8.5% compared to 10.9% in the prior year. On an adjusted basis, operating margin came in at the midpoint of our outlook at 9% and declined 240 basis points compared to the prior year. On a percentage of sales basis, adjusted operating expenses decreased 180 basis points sequentially. Moving to our expectations for the fiscal fourth quarter, we expect average daily sales to be down 0.5% to up 1.5% compared to the prior year, and to be approximately flat compared to 3Q at the midpoint. We expect our adjusted operating margin in the fiscal fourth quarter to be between 8.5% and 9%. And with that, we will open the line for Q&A.

The first question comes from Ryan Cooke with Wolfe Research.

I'm hoping we could start with the price outlook for 4Q and into next year. You called out 80 basis points of contribution this quarter. So how should we be thinking about incremental price from those actions that you took late in 3Q? And I think that the tariff exposure as you share on Slide 5, would pencil out to roughly a mid-single-digit increase across the portfolio to offset current tariff rates. So I'm curious if that's the right way to be thinking about price acceleration from here.

So I'll talk about the outlook and then Kris can give some of the numbers. So look, overall, what you're hearing from us is, since we last spoke to you, we had taken some surgical increases. In general, we are seeing inflationary pressures build from our suppliers. There has been a more broad-based increase in price, which is the first time we've taken a more broad-based increase. In terms of the outlook beyond that, it's tough to give you a longer-term perspective because it does feel like things are regularly changing. We're staying in constant contact with customers and suppliers. And if there is opportunity and/or need to move again, we will. In terms of size, I'll let Kristen add any color, but it's more like a low single-digit increase as opposed to mid-single-digit.

Yes. And Ryan, that's totally agreed with everything Erik said. If you look at the midpoint of the guide, that's up 50 basis points year-over-year and about flat sequentially. So ahead of the historical Q3 to Q4 averages. And then a couple of points to add some details on that. If you think about where that puts volume in the guide, we're very encouraged by what we saw in Q3. We're going to talk about some of the green shoots that we're seeing but definitely trying to take an overall cautious approach given the broader uncertainty that's out there.

Okay. That's very clear and all makes sense. Then I guess maybe we could pivot over to the 4Q margin outlook, which implies a bit better than usual seasonality with op margins flat to down 50 basis points Q-over-Q. I think the historical trend is down at least 1 point. Can you talk about the moving pieces there? Anything we need to think about in terms of timing for price versus cost?

Yes, sure. To your point, we're expecting gross margins to be 40.9%, plus or minus 20 basis points, which is flattish to the Q3 gross margin number of 41%. A few points within that to think about. One of the drivers of why we're typically down sequentially is customer mix, specifically the public sector business, which we are expecting to be strong in the fourth quarter. We have some small price-cost improvement, but we are also starting to see cost increases come online in the fourth quarter. So a pretty narrow price-cost spread sequentially from Q3. To summarize, you've got a mix headwind, you've got small price-cost improvement, and we're assuming some productivity that would come online sequentially within the fourth quarter in the gross margin line.

The next question comes from Tommy Moll with Stephens.

You referenced supplier price increases a few times. I'm just curious if you can share more there. What do those conversations look like today?

Yes, Tommy, I'll start, and then certainly, Martina can fill in anything that I don't cover. The first thing I'd say, I'd hesitate at any point during this process to say that we have a clear line of sight into what's coming. What I would say is that the discussions with suppliers are ongoing and they're fluid. If you go back to where we were a quarter ago, we were looking at more surgical increases specific to products related to sourcing from tariff-driven countries. What's happening now is we are seeing more general inflationary pressures. Many of our suppliers are feeling cost pressures as they source products all over the world.

Sure. I'll ask a follow-up here probably for Kristen on this one. We're a quarter ahead of when you'll guide for fiscal '26, but can you level set us on margin compares for '26 over '25? Any big OpEx drivers, positive or negative, that you can already identify for next year?

Yes. Tommy, maybe I'll start here, and I'll let Kristen add color specifically on gross margin. But sort of like if I zoom out from gross margin and just look at the drivers. We're cautious right now to not give too much color on anything that could happen even a quarter out but if I sort of walk down the P&L lines and give you some perspective there. I think what you're seeing from us right now is stabilization in revenues, particularly in the core customer, and the initiatives that we're executing, and maybe the dust settling on the macro. I'd characterize it as stabilization.

The next question comes from Ryan Merkel with William Blair.

So the first question I have is just on the average daily sales trends. When I look at April down 3, and then July, August kind of guidance implies up 1, this is average daily sales. How much of it was the macro, and how much was pricing and initiatives?

I'll start, Ryan. Pricing wouldn't be a major variable, so what you're left with, if pricing is not a wild swing there, you're looking at macro and initiatives. It wasn't surprising that April was soft, coupled with an Easter timing headwind. We think that there has been some influence on those numbers on the macro, but not shocking that April would have been soft.

Yes, I knew that was a hard question so thanks for entertaining it. And then my second question on the core accounts, it's great to see some of the improvement there. How aggressively have you started to market the web pricing yet? Where do you think core account growth can get to?

We're in full swing with marketing, and we feel like it's in market. We have a value proposition that's focused on saving our customers time and money. We feel encouraged by progress in Q3 on the core, but obviously, getting company average up to our goal of 400 basis points or more in terms of outgrowth above IP.

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

First question for me. Maybe just going back to the comments that Martina touched on the USA product set. How confident are you that that isn't reflecting a pull forward ahead of price increases?

We really have not seen a lot of meaningful pull forward in any of the months since the tariff activity has started. So we're actually seeing the growth come more directly from our cost-out programs with customers. I wouldn't attribute it to prebuy.

Understood. Okay. And then for my follow-up, Kristen, I think your target is around 20%. Is there a way to kind of help us think about what is the right level of volume growth to keep margins stable or growing relative to the flow-through on price?

What I'd rather do is come back. We'll give you full color next quarter in terms of specifically for '26. But we would expect starting in '26, that you could expect a more typical incremental margin picture for the company.

The next question comes from Patrick Baumann with JPMorgan.

On the website metrics, can you talk about the marketing that's required to drive that? Are you seeing that lift in the quarter sustained?

We're really looking at conversion rates, and we're seeing some encouraging green shoots. The marketing influence is getting customers to the site. In terms of timing, it's been fairly consistent, and we've made significant strides in enhancements. That said, we can be better in all areas.

What have been the pushback on changes? What have people said, like now that you've made improvements?

We've made significant strides, but we have a team focused on constant improvements really on a weekly, monthly basis.

And then on the new hire in tech that you called out, can you remind us what digital core is? Is that initiative moving ahead now?

Yes, the digital core is intended to be an upgrade to our core order-to-cash, procure-to-pay systems. We have reshaped the digital core initiative and are gearing it back up at a faster pace now to move at a faster pace. This will form part of our productivity unlock in future years.

The next question comes from David Manthey with Baird.

First off, Erik, why is 20% the incremental target today? What about the business structure today gives you confidence that you can get back to that level of contribution margin once growth resumes?

First of all, we feel that the 20% or better is achievable over the cycle. We see a lot of latent leverage in the business. We have a better focus on productivity. We talked about that $10 million to $15 million in productivity projects, but that's just the beginning of what we see in terms of opportunities to get better.

And the last question today will come from Chris Dankert with Loop Capital Markets.

For Martina, on the sales force efficiency and productivity gains, can you talk through what some of the actual actions are being taken there?

So what we have done over the past couple of quarters is taken a look at where the customer potential is relative to how our sellers are deployed. We have redesigned territory. What we look at is how often we're touching these customers with these new relationships and how is the sales per rep per day starting to grow.

Got it. And then just as a follow-up, Kristen, what was your comment on the price cost spread into the fiscal fourth quarter?

Yes, we have a pretty narrow price-cost spread sequentially from Q3, so overall, it's a pretty narrow, though favorable, price-cost spread for Q3 to Q4.

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

Thank you for joining us.

Okay. His line has disconnected. So this conference has now concluded. Thank you for attending today's presentation. You may now disconnect.